whistle

7th Circuit decision limiting False Claims Act liability

August 30, 2017

Whistleblower case dismissed as based on public info Earlier this month, the Seventh Circuit Court of Appeals affirmed the dismissal of a former hospital employee’s claims under the U.S. and Illinois False Claims Acts. The 7th Circuit ruled that the whistleblower failed to identify independent knowledge of information that materially added to the publicly-available information. As a result, the court found that the whistleblower was not an original source of the allegations in his complaint and affirmed dismissal of his False Claims Act (“FCA”) and Illinois False Claims Act (“IFCA”) claims. In Bellevue v Universal Health Services of Hartgrove, Case No 15-3473 (Aug. 8, 2017), a whistleblower brought claims against a psychiatric hospital that primarily served children with mental illness. The hospital had submitted false certifications to Medicaid on behalf of patients who were identified as being placed in a patient room when they had been sleeping on rollout beds until patient rooms were available. Neither the federal nor state governments chose to intervene in the case. The court determined that the false certifications, audits, and other documents contained all the critical elements exposing the fraud. These documents were sufficient information for the government to infer that the hospital knew that its Medicaid certifications were false when they were filed. The court differentiated this case from other cases where the publicly disclosed information was not sufficient to show knowledge of falsity. http://media.ca7.uscourts.gov/cgi-bin/rssExec.pl?Submit=Display&Path=Y2017/D08-08/C:15-3473:J:Bauer:aut:T:fnOp:N:2007443:S:0

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Chicago real estate developer sentenced to 3 years in prison

August 29, 2017

Real estate developer defrauded business partner and banks Prominent Chicago real estate developer, Laurance Freed, was sentenced to three years in prison for a fraudulent scheme involving the Streets of Woodfield shopping center in Schaumburg, a Chicago suburb, and the redevelopment of the Goldblatt’s department store in the Uptown neighborhood of Chicago. Freed was well-known for his firm’s development of the former Carson Pirie Scott building and Block 37, both located in Chicago’s Loop. In February 2016, a jury found Freed guilty of “double-pledging” millions of dollars of city subsidies for the Goldblatt’s project. Freed used the same subsidies (assets) as collateral for loans from two different lenders. In addition, Freed was convicted of withdrawing millions from the Streets of Woodfield project without the knowledge and consent of his partner. http://www.chicagotribune.com/business/ct-developer-larry-freed-guilty-20160225-story.html https://www.chicagobusiness.com/realestate/20170821/CRED03/170829987/chicago-developer-laurance-freed-gets-three-years-in-prison

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Public accounting, private dispute

August 28, 2017

E&Y invokes arbitration to keep its secrets out of the public eye How did one of the biggest auditors in the world fail for years to detect its client’s fraudulent accounting? A receiver appointed after the SEC shut down the client (an investment fund) is trying to answer that question. The court-appointed receiver filed a complaint alleging that Ernst & Young was negligent, committed accounting malpractice, or was in on the fraud. One would think the public has an interest in knowing whether the allegations against a public accounting firm like Ernest & Young are true. It is unlikely the public will learn anything about this dispute because Ernst & Young has succeeded in convincing a Florida appellate court to uphold dismissal of the complaint. The appellate court ruled that claims against Ernst & Young must be dismissed because of a mandatory arbitration clause. The arbitration will undoubtedly take place behind closed doors with arbitrators granting Ernst & Young’s request that all documents and filings be kept confidential. So much for “public” accounting. http://cases.justia.com/florida/fourth-district-court-of-appeal/2017-16-2162.pdf?ts=1499267269  

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Suspended Milwaukee lawyer accused of investment fraud

August 28, 2017

Lawyer behaving badly Milwaukee lawyer Michael Krill is under investigation for allegedly fraudulently inducing clients and others to invest in bogus international financial transactions, according to court documents obtained by the Milwaukee Journal Sentinel. According to affidavits used to obtain warrants to raid and search Krill’s office, the financial transactions appear to be complete fabrications. Investors turned over hundreds of thousands of dollars allegedly to free up $16.2 million in Chinese money held in an English bank, according to the article. The money was allegedly for Eric Murray, a New York promoter and Krill client. Investors were told they would receive astronomical returns of up to 33 times their investment, according to the article. Krill’s law license was suspended by the state Supreme Court last week under a rule that allows emergency temporary suspensions. According to the Office of Lawyer Regulation, Krill being a licensed attorney lent credibility to the scam. Krill certified the authenticity of patently fraudulent documents like the one picture here — which has the signature of “John Hancock” that appears to have been copied from the Declaration of Independence. http://www.jsonline.com/story/news/crime/2017/08/28/suspended-milwaukee-lawyer-faces-fbi-investigation-into-alleged-international-fraud-scheme/595890001/

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Why it is NOT time to roll back Dodd-Frank regulations

August 25, 2017

US mega-banks that we call “too big to fail” (TBTF) are at it again. They are embracing mega-risky esoteric trading of the type that caused the devastation of the Great Recession not even 10 years ago. If you have been thinking that it might be time to roll back Dodd-Frank Act reforms — regulations that the TBTF banks say are too onerous — read further. The Financial Times reports that these “bespoke tranches” are bundles of credit default swaps that are tied to the risk of corporate defaults. Purchases of these products have more than doubled in the last 7 months as investors seek higher yields. A bespoke tranche is a customized product based upon a bundle of around 100 credit default swaps chosen by an investor. Those swaps are bundled together and sliced into tranches, offering different levels of risk and return. This is the same as what banks were doing ten years ago. Bundling together high risk mortgages and slicing them up into supposedly low-risk tranches that were sold to pension funds and other institutional investors. That is just how collateralized mortgage obligations (CMOs) and collateralized debt obligations (CDOs) were created. Those are the little goodies that brought financial devastation from which the US economy has not yet recovered. It is time to go back and review what brought us to the brink of disaster in 2007/2008. I cover that in another blog post available here: http://secdefenseattorney.com/blog/2017/08/24/almost-10-years-ago-the-beginnings-of-the-great-recession/ TBTF financial institutions are piling into this new generation of derivatives — weapons of financial mass destruction as Warren Buffett described them. We can only hope that as a significant holder of Goldman Sachs equity, Warren Buffett can be the voice of reason. Citigroup is the largest bank counterparty for these new instruments, with JPMorgan Chase close behind. Of course, these TBTF institutions say they are more cautious this time. Funny, they were supposed to have been cautious the last time. They swore up and down that they did not know that all those CMOs and CDOs were so risky. If we believe that highly unlikely story, then why should we trust them to recognize the risk in these strikingly similar products? They are selling the same story again — that they can spin a silk purse out of a sow’s ear. It gets worse. Pension funds in Canada and New Zealand are some of the institutional investors who have purchased these bespoke tranches. Could US pension funds desperate for high yields be far behind? Have we learned nothing from the last decade? https://www.ft.com/content/c4d815b2-86bc-11e7-bf50-e1c239b45787?ftcamp=engage%2Femail%2Fnewsletters%2Fsmart_brief%2Fsmartbriefnewsletterscontrafcf%2Fauddev&segid=0800933

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Virginia radio show host indicted for investment fraud

August 25, 2017

Daryl Gene Bank, Dominion Investment Group Investment Fraud Daryl Gene Bank, who styled himself a “financial guru and best-selling author,” was arrested on Thursday on federal criminal charges of fraud. Bank co-hosted the syndicated talk show “Daryl & the Bull,” which offered financial advice and appeared to be carried in at least 11 states. His show was sponsored by his companies. Bank and Raeann Gibson, fellow owner of Dominion Investment Group, have been indicted for promising large returns to hundreds of investors when they really were operating a Ponzi scheme and using investor funds to line their own pockets, according to an article in The Virginia Pilot. The paper reports that about 300 investors lost more than $20 million. Starting in 2012 Bank induced investors to invest in what they thought were $25,000 franchises for a chain of dentist offices as well as securities in Federal Communications Commission cellular spectrum licenses, according to the indictment. The indictment further reports that much of the money was diverted to accounts under Bank’s control or paid to early investors to make it appear as if the investment was solid. This is particularly egregious because many people trust someone who has a radio or television show. Please be aware that just because someone appears on a radio or television show, that does not mean you should trust them with your money. Bank’s radio program was sponsored by companies that he owned. You just can’t rely on your radio or television station to verify the trustworthiness of what they broadcast. Another reason this is particularly egregious is because this fraudster operated in a military community. It is highly likely that his victims include active and retired members of the military. As the sister of a retired Air Force officer, this drives me nuts. Fraud is never justified, but defrauding members of the military and their families is particularly galling. Members of the military have signed on to put their lives at risk to protect the rest of us. Many have been deployed overseas and they and their families have endured significant hardships while not making big salaries. There are so many fraudsters who target military and ex-military personnel. Please be skeptical of anyone asking you for money for investments, tuition, car loans, etc. Bank and Gibson have been charged with 15 counts of conspiracy to commit mail and wire fraud, mail and wire fraud and engaging in unlawful monetary transactions.  While the government has identified real estate, luxury cars, diamonds, and cash that the pair have, it does not look like enough to fully compensate investors. Before you invest with anyone, please do a background check. Sadly, Bank had been barred from acting as a representative of a broker-dealer since 2010, before this fraudulent scheme began. Bank settled, without admitting or denying, FINRA charges that he misappropriated over $160,000 of commissions belonging to his employer. Although he was not permitted to register as a broker-dealer representative, he continued to operate his Dominion-related companies through which he engaged in this fraudulent scheme. For more information, see the links below. Link to SEC’s Litigation Release: https://www.sec.gov/news/pressrelease/2015-57.html Link to […]

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Almost 10 years ago – the beginnings of the Great Recession

August 24, 2017

Periodically I go back to one of the best financial podcasts ever – The Giant Pool of Money podcast produced by WBEZ’s This American Life. In this program, public radio journalists relate in a clear and interesting way the causes of the housing crisis and subsequent financial collapse of 2008. They address questions like, what did the housing crisis have to do with the turmoil on Wall Street? Why did banks make half-million dollar mortgage loans to people with no job and no income? How did these risky no-doc (liar’s) loans get rolled into collateralized mortgage obligations (CMOs) that were marketed as low risk investments? As we are now approaching the ten year anniversary of the housing crisis/liquidity crisis/Great Recession, it is worth revisiting what happened and why Congress enacted Dodd-Frank. https://www.thisamericanlife.org/radio-archives/episode/355/the-giant-pool-of-money

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Direct vs. derivative claims – Minnesota rejects Delaware test

August 18, 2017

It is nice to see a state court take a skeptical look at Delaware corporate governance law. The Minnesota Supreme Court chose not to adopt Delaware law on an important corporate governance question — when is a shareholder’s claim “direct” as opposed to “derivative.” The decision is available here: In re Medtronic, Inc. Shareholder Litigation.  The test of whether a shareholder’s claim is “direct” or “derivative” is important to the outcome of a corporate governance case. As the Minnesota Supreme Court noted “when shareholders are injured only indirectly, the action is derivative; when shareholders show an injury that is not shared with the corporation, the action is direct.” There are procedural obstacles to bringing derivative claims that are not present in direct claims. In the decision, the Minnesota Supreme Court rejected the Delaware direct/derivative test set forth in Tooley v. Donaldson, Lufkin & Jenrette, Inc., 845 A.2d 1031 (Del. 2004), which had been applied by the district and appellate courts below. The Supreme Court noted “[w]e do not see a need to resort to Delaware law to answer the direct-versus-derivative question here given the guidance available from our own precedent. Moreover, the Tooley test has been limited to claims asserting breach of fiduciary duty.” The Minnesota Supreme Court concluded that claims alleging injuries to shareholders arising out of overpayments made in a business transaction were not derivative claims. In a derivative claim of overpayment, shareholders claim that their shares have diminished in value by reason of the decrease in value of the corporation’s assets. But here, the claims were that shareholder ownership interest and voting power were diluted by the overpayments made in the business transaction. Not only did the shareholders allege losses in the value of their individual shares, they also alleged an injury based on the loss of certain shareholder rights.  Thus, the Supreme court found the shareholders had sufficiently alleged individual shareholder injury. For more detail, see the analysis of Stephen Quilivan of Stinson Leonard Street LLP available here: https://www.lexology.com/library/detail.aspx?g=e180fb40-9907-4b3f-b13b-25bc6b88265f&utm_source=lexology+daily+newsfeed&utm_medium=html+email+-+body+-+general+section&utm_campaign=lexology+subscriber+daily+feed&utm_content=lexology+daily+newsfeed+2017-08-18&utm_term=

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Watch for fees lurking in 401(k) accounts

August 18, 2017

Watch those fees in your 401(k) account! There are numerous fees that you should be looking for in 401(k) accounts. This piece by John Wasik tells you about some of the biggies — surrender fees, back-end loads, front-end loads, and 12b-1 fees, which are marketing and distribution fees that you should not be paying. Paying 12b-1 fees for an investment fund is like paying Budweiser a separate advertising/marketing fee each time you purchase a six-pack. Who would stand for that?  https://www.forbes.com/sites/johnwasik/2017/07/17/4-ways-to-cut-fat-401k-retirement-fees/#76423f152135 There are other hidden fees and commissions. Your brokerage statement may report a sales commission for the purchase of an investment fund. That may not be all you are paying. Look closely at confirmation statements and account statements for more. You may find a note in small print disclosing a per share or per unit commission or fee of some type. Or you may see that the amount your broker invested for you is significantly less than the amount you sent to your broker to invest. That may be because your broker deducted the commission that is where it was buried — I mean “disclosed” —  without reporting it anywhere on your confirmations and account statements. Clients have been shocked to learn they paid commissions of hundreds or even thousands of dollars when all their confirmation and account statements reported was a $5 or $10 commission. Thank you John Wasik for covering this important issue. https://www.forbes.com/sites/johnwasik/2017/07/17/4-ways-to-cut-fat-401k-retirement-fees/#1fc186692135

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A rare treat! 7th Cir. decision in investor/broker case

August 15, 2017

It is unusual to get a federal court decision, much less a federal court of appeals decision, in an investor/broker case. The Seventh Circuit Court of Appeals issued just such an decision on August 9, affirming a jury verdict against a broker-dealer. The decision is by Judge Frank Easterbrook, who taught one of my law school constitutional law classes. Judge Easterbrook is one of the great writers of judicial opinions of our time. The decision is just five pages long and worth a read whether you are a securities law aficionado or not. A link to the decision is below. Ketan Patel v. Mahendra Wagha and Portfolio Diversification Group, No. 16-2905. In this case, the investor (Patel) parked $560,000 with a broker-dealer while he was waiting to purchase a 7 Eleven. When Patel was ready to close, just four months later, he discovered substantial losses from options trading in the account. Patel filed securities fraud and breach of contract claims in federal court. A jury awarded Patel $136,000 for breach of contract and $64,000 for securities fraud. The district judge remitted the $64,000 award on the grounds of lack of loss causation. The broker appealed the contract breach award; Patel did not appeal the dismissal of his securities fraud damages. The Seventh Circuit Court of Appeals rejected all the broker’s arguments. First, the 7th Circuit noted that the district court erred in dismissing the Rule 10b-5 claim. The district court had erroneously invalidated the securities fraud award of damages on the ground that there was no loss causation (citing Dura Pharmaceuticals). Citing US v. Naftalin (US 1979), SEC v Zandford (US 2002), and Holtz v JP Morgan Chase (7th 2017), the 7th Circuit noted that fraud can take many forms – including “procuring securities known to be unsuitable to a client’s investment goals, after promising to further those goals.” Because Patel did not file an appeal, the 7th Circuit did not reinstate the $64,000 securities fraud damages. The 7th Circuit rejected the broker’s argument that once the district court remitted the securities law award, it lacked subject matter jurisdiction over the breach of contract claim. The 7th Circuit held that even if dismissal of the Rule 10b-5 claim were proper, the district court still could have exercised supplemental jurisdiction to resolve the purely state law contract claims under 28 U.S.C. § 1367. Next, the 7th Circuit rejected the broker’s argument that the district court improperly admitted oral testimony about Patel’s investment goals. The broker argued that an “integration clause” in the account opening documents (the contract) meant that any oral testimony as to the meaning of the contract was barred by the parole evidence rule.  The broker argued that because the account agreement permitted the broker to purchase options in the account, Patel had consented to high-risk investments as consistent with his investment goals. The 7th Circuit did not agree, noting  that an agreement permitting the purchase of options does not mean that an investor has consented to high-risk investments. After all, options (and other derivatives) are not always instruments of speculation; they can be used to limit risk. Finally, in […]

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