Grand Jury Busy in Milberg Weiss Probe

Justin Scheck
The Recorder
September 30, 2005

Federal prosecutors have taken a couple of strides forward in the investigation of former plaintiff firm Milberg Weiss and its star securities lawyer, William Lerach. Last week, a Los Angeles grand jury heard testimony from Melvyn Kinder, a Beverly Hills psychologist and author of "Smart Women/Foolish Choices." Kinder served as a lead plaintiff for Milberg Weiss in securities suits in the 1990s. Kinder and his attorney, Peter Morris, declined to discuss his testimony.

Thursday, the grand jury was scheduled to interview accountants from Milberg's New York office, said two lawyers familiar with the investigation who spoke on condition of anonymity. The witnesses include Milberg Weiss' head accountant, William Matschke. He didn't return messages left at his New York home or at his Los Angeles hotel room Wednesday.

Since 2000, prosecutors led by Assistant U.S. Attorney Richard Robinson have been looking into allegations that Milberg Weiss Bershad Hynes & Lerach paid illegal kickbacks to clients who served as lead plaintiffs in stock fraud suits. Lawyers for the firm and Lerach have denied any wrongdoing. Milberg Weiss split into two firms last year -- New York-based Milberg Weiss Bershad & Schulman, and California's Lerach Coughlin Stoia Geller Rudman & Robbins.

The investigation began in 2000, when former client Steven Cooperman -- who was then facing indictment on unrelated crimes -- told prosecutors of the alleged kickback scheme. Federal prosecutors in Philadelphia are also reportedly looking into business practices at Milberg Weiss and other securities firms, while D.C. prosecutors are investigating a former expert witness used by the firm in many of its cases.

The L.A. probe appeared to languish until earlier this year, when the grand jury indicted a former Milberg client, Palm Springs lawyer Seymour Lazar. He stands accused of taking illegal kickbacks from the firm funneled through his attorney, Paul Selzer. Such payments are illegal because they give the lead plaintiff a substantially larger stake in a case than other class members.

The Lazar indictment was seen by many securities lawyers as an attempt to force Lazar to testify against Milberg Weiss and breathe new life into the aging investigation. Absent Lazar's cooperation -- and with Cooperman's questionable credibility as a convicted felon -- it's no surprise that prosecutors are interviewing other Milberg plaintiffs, said attorneys familiar with the investigation. Those lawyers said prosecutors are likely interviewing the accountants as part of their efforts to trace money from the firm to clients like Lazar.

While former federal prosecutors say the stepped-up grand jury activity may indicate that an indictment of Milberg Weiss or Lerach is imminent, the probe has proceeded haltingly since the beginning, in part because of difficulties prosecutors face in subpoenaing attorneys and information that may be subject to attorney-client privilege.

Labels: Milberg

Report claims more Fannie Mae violations

September 29, 2005
By Annys Shin
The Washington Post

WASHINGTON — Shares of Fannie Mae fell nearly 11 percent yesterday after a news report that investigators looking into the mortgage company's finances have unearthed further accounting violations. The report by Dow Jones Newswire, citing anonymous sources "close to" or who "have been involved" in the investigation, said the company overvalued assets, underreported credit losses and misused tax credits.

Fannie Mae officials declined to comment, as did the company's chief regulator, the Office of Federal Housing Enterprise Oversight (OFHEO), which uncovered accounting violations at Fannie Mae last year. OFHEO, in a preliminary report of its findings, had said the company did not properly account for losses on derivatives, financial instruments Fannie relies on to protect the value of its assets from swings in interest rates.

In December, the Securities and Exchange Commission (SEC) ordered Fannie Mae to restate roughly $10.8 billion in previously reported earnings, leading to the ouster of Chief Executive Franklin Raines and Chief Financial Officer Timothy Howard.

The accounting scandal has prompted a move in Congress to more strictly regulate the mortgage-finance company, which buys mortgages from banks and other lenders and packages them into securities for sale to investors. OFHEO, which is still investigating Fannie's finances, is expected to issue its final report by March 31, an agency spokeswoman said.

The SEC and federal prosecutors also are investigating Fannie, in addition to an investigation ordered by the company's board and led by former Sen. Warren Rudman, R-N.H. Rudman has said he expects to release his findings by the end of the year.

Wall Street analysts found the Dow Jones report less alarming than did the markets. "As we've been saying for quite a while, we do think the accounting problems and operational problems are going to be significantly more dramatic than most have expected," said Josh Rosner of Medley Global Advisors in New York.

In a separate announcement, OFHEO said that as of June 30, Fannie had sufficient capital on hand to meet regulatory requirements and anticipated the company will come up with an additional $5.9 billion that OFHEO has mandated it put aside as a result of the accounting violations. Fannie Mae stock closed yesterday at $41.71, down $4.99.

Feds probe Delphi exec stock trades - Criminal investigation of accounting at auto supplier expands as firm considers bankruptcy.

September 29, 2005
By David Shepardson
The Detroit News

TROY -- Delphi Corp., already on the verge of bankruptcy and cooperating with a massive federal investigation into its accounting practices, now faces a new inquiry into stock trades made by more than a dozen former and current employees.

The U.S. Securities and Exchange Commission has subpoenaed the stock trading records of executives who left the company since March, including Chief Financial Officer Alan Dawes, Controller Paul Free, Treasurer Pam Geller, and John Blahnik, a former vice president of treasury, mergers and acquisitions, said four people familiar with the investigation.

At least another eight current and former executives and mid-level employees have received subpoenas for trading records dating back to the company's spinoff from General Motors Corp. in 1999, people familiar with the investigation said.

A separate criminal investigation into the huge Troy-based auto supplier's accounting practices led by the Justice Department's fraud section and the FBI is continuing...

Standby letters were warning in fraud case - Daryl Brown, chairman of the Vertical Group, LLC, was arrested Monday following a fraud investigation by the FBI.

September 28, 2005
By CHARLES BERMAN
Missourian News

The arrest of a Columbia businessman Monday for his alleged participation in an investment fraud scheme stemmed from a wide-ranging federal and state investigation that targeted several Columbia financial companies with overlapping managers.

In May, the state of Missouri sought an injunction against Vertical Group, LLC, a Columbia financial services firm, after an FBI investigation found evidence of a “prime bank fraud” the company had allegedly used to scam multiple investors. On Monday, the investigation produced its first criminal charge against Daryl Brown, who is described in court documents as the chairman of Vertical.

While conducting a mortgage fraud investigation involving Columbia-based Liberty Financial, FBI agents searched Vertical’s offices in Columbia on March 31, according to an affidavit from FBI Special Agent Andrew Ryder. Vertical was founded by former Liberty President Nathan Reuter in August 2003, according to documents from the Missouri Secretary of State. About 75 percent of Liberty’s staff moved to Vertical when Liberty closed in January 2004, according to Ryder’s affidavit.

The Vertical Group is involved in home mortgages, insurance, securities, real estate investment and corporate finance, according to documents from the Secretary of State. On April 15, former Vertical accountant Amy House told the FBI that “separate business” deals were being made through Vertical related to “diamonds and oil.” She said a “secretive” group of Vertical employees referred to as the “Ivory Tower” — Brown, Reuter, Rickey Williams and Charles Bowman — were involved in the deals. Reuter, Brown’s attorney and officials at Vertical all would not comment.

Multiple investors told the FBI they were solicited to invest in “standby letters of credit” by one or more members of Vertical’s management. The investors said they were told they would receive a high return on their investments with little risk. According to court documents, the investment and trading wing of Vertical went by the name of Cerberus.

Standby letters of credit are described on the U.S. Securities and Exchange Commission’s Web site as warning signs of prime bank fraud — a scheme intended to fraudulently guarantee large investment returns through the use of fictitious financial instruments.

Williams, who was described in court documents as the company’s placement manager, told the FBI that Brown was licensed to sell securities. But the FBI did not find a record of Vertical, Cerberus, Brown or any other Vertical officer licensed with the SEC or the state of Missouri.

The FBI affidavit also mentions wire transfers in and out of a bank account under the control of Daryl and Stephanie Brown. “This wire activity is consistent with the investment business activity gleaned through interviews of victims of the investment schemes sold through Vertical and Cerberus, Inc.,” the affidavit states.

One investor, Michael Trom of Columbia, said he was approached in November by his friend and neighbor, Reuter, about “the deal of his lifetime.” Trom transferred $175,000 Nov. 4, 2004, to an account in Texas that Reuter had set up. He said he was promised millions in return from the Vertical Group. Trom said he was first led to believe he was the only investor in this deal and that he would receive his original investment back in 14 days with monthly payments to follow. Trom said Reuter called the deal a “sure thing” and gave Trom a personal guarantee in front of his wife.

When the two weeks passed and no money was returned, Trom said Reuter told a series of stories in an attempt to smooth the situation over. He said Reuter tried to distract him from reporting the investment to authorities and said the funds would immediately be frozen if the government investigated the deal. “I really wanted to believe it was real, but the farther it went I knew it wasn’t,” Trom said.

Parmalat founder fraud trial opens

September 29, 2005
CNN.com
Alessio Vinci, Contributor

MILAN, Italy (CNN) -- The founder and former boss of Parmalat has appeared in a Milan court in the first major trial over the Italian dairy giant's collapse almost two years ago in one of Europe's biggest corporate fraud scandals. Calisto Tanzi and 15 others face charges of market rigging, false auditing and misleading Italy's stock market regulator and investors.

Dozens of those investors gathered outside the Milan courthouse hearing the trial as the proceedings opened. Tanzi arrived one hour late and assumed a seat in the front row. One of his lawyers said he had been caught in traffic. After about an hour in court, Tanzi left.

The trial was adjourned to December 2 to allow the court time to consider a request from investors to join a civil suit linked to the criminal case. Also on trial are three bank executives and two auditors from the Italian branch of Deloitte & Touche and the former Italian branch of Grant Thornton.

One of the defendants, Giovanni Bonici -- former chairman of Parmalat Venezuela and the Cayman Islands-based subsidiary at the center of the bankruptcy -- was one of the few of the other accused to appear in the court. "I am as much of a victim as the investors," he was quoted as saying by the ANSA news agency.

The defendants face up to 10 years in prison if found guilty. Defense lawyers said on Tuesday that Tanzi would cooperate during the trial. "He knows what his responsibilities are," Giampiero Biancolella, one of Tanzi's attorneys, told the Associated Press. "What we want is to help reconstruct faithfully what happened at Parmalat so the judge can make a decision based on that reconstruction."

The Parmalat scandal, dubbed "Europe's Enron", erupted in December 2003 when the company admitted that an account worth nearly &euro4 billion ($4.8 billion) it claimed it held in a Bank of America account in the Cayman Islands did not exist. Months of investigation followed, uncovering a tangle of offshore companies and accounts.

Prosecutors said Parmalat's old management created them to paper over a gaping debt of nearly 14 billion euros ($16.9 billion). Authorities declared the company bankrupt and overnight, tens of thousands of stocks and bonds holders were left holding worthless paper. Italian Prime Minister Silvio Berlusconi called an emergency cabinet meeting in the wake of the collapse, but measures agreed then have still not been passed into law.
Blame

As the trial began, Tanzi's lawyers submitted a list of witnesses to Judge Luisa Ponti which included the heads of such banks as Capitalia and Mediobanca, as well as market regulators Consob and the Bank of Italy. Reports had claimed Tanzi would try to shift blame for the scandal on to the banks, but Biancolella denied that. "We cannot transform ourselves from the accused into accusers," he said.

The banks have denied any wrongdoing. Earlier this year Tanzi asked for forgiveness from those who suffered as a result of the scandal. But Paolo Vivian, a pensioner who lost 25,000 euros, was not impressed. "It is ridiculous, he should have thought about it before the fraud," he said. "He could have spared us his apology because no-one has accepted it." As compensation, Vivian received shares in the new Parmalat worth around 10 percent of his original investment.

In June, 11 others including three of Parmalat's former chief financial officers, accepted plea bargains that saw them sentenced to two-and-a-half years in prison for their parts in the fraud. A fast track trial of two accountants from Grant Thornton began in January.

A government-appointed administrator, Enrico Bondi, now runs Parmalat. He has launched a series of lawsuits against banks aimed at recouping some of the investors' money lost in the crash. He also instigated a tough restructuring of the company that has seen it shake off the scandal and remain a prime player in the Italian dairy market.

Gabriel Kahn, Rome correspondent of the Wall Street Journal, told CNN: "Parmalat has come back stronger than many people might have expected. "The real hit was when the scandal broke two years ago so I'm not sure putting Tanzi on trial now will hurt the brand. It may even help by putting it back in the news."

Shares in Parmalat were suspended shortly after the collapse, but are due to be relisted next month. Anaylsts said they would be indicated to open between 2.38 euros and 2.45 euros.

Labels: Enron, Grant Thornton, Parmalat

Convicted Ad Exec Lectures on Ethics

By Ingrid Peritz
September 28, 2005
The Globe and Mail

MONTREAL -- Convicted ad executive Paul Coffin delivered his first university lecture yesterday on Business Ethics 101 -- although some argued that the more appropriate title should be Fraud 101. Mr. Coffin was convicted of defrauding the federal government of $1.55-million in the sponsorship scandal, but instead of landing behind bars, he was in front of a class of business undergraduates at a major Canadian university. He joined the ranks of university lecturers as part of his court-imposed sentence in the community, which called for sharing his insights about business ethics.

Rather than a how-to guide, Mr. Coffin, 63, offered undergrads a how-not-to guide. Standing before about 180 students at Montreal's McGill University, the businessman used a professor's tools of the trade, complete with PowerPoint presentation and an overhead projection that read: "Paul Coffin: A lesson in business ethics."

The lecture to business students was closed to the public -- security guards even papered over the classroom windows. However, in snippets overheard through the closed door, and in reports from students afterward, Mr. Coffin delivered some life lessons for budding executives. He described Ottawa's sponsorship funds as a "cookie jar" that kept on giving. "I seemed to just keep going back to the cookie jar that seemed to have no bottom and no lid," he said, according to several students.

He said the program failed to provide checks and balances. "The carte-blanche system played to my weakness." He warned the students they would encounter temptations. "Don't get sucked into mixing bad business with good," he admonished. "I fell into the trap of making easy money. Drawing a parallel to the Enron corporate scandal, he said crooked business practices "don't have to be sophisticated to be unethical and illegal."

Students said Mr. Coffin got choked up as he recalled the scandal's toll on his family. Several observers have said Mr. Coffin received a sentence that was too lenient. Quebec Superior Court Justice gave him a community sentence of two years less a day, plus a weeknight curfew of 9 p.m. Mr. Coffin has also repaid $1-million of the defrauded $1.55-million. Some students said Mr. Coffin should be in jail, not in a lecture hall. One protest poster read "What's Next? Tenure?" "To me, he's a criminal and he really shouldn't be in class," Samuel Coulombe, 20, said. "What can we learn from him? How to commit fraud?"

Labels: Enron

SEC Moves to Formal Investigation of Taser

September 27, 2005
By Alan Fein
Axcess News

Scottsdale AZ - The Securities and Exchange Commission has notified Taser International (Nasdaq: TASR), makers of stun-guns, that it was formally investigating the company's safety claims and sales. Taser announced the investigation Tuesday morning, which stunned investors who've tore out of the stock all day.

Shares of Taser closed at $6.36, down 95 cents, or 13%, on very heavy volume. The formal investigation gives the SEC subpoena power to obtain documents and testimony from all relevant parties, the company said.

Rick Smith, Chief Executive Officer of Taser said, "We continue to make all efforts to assist the SEC in completing their investigation as expeditiously as possible. We are hopeful that the expanded SEC investigation will address all pertinent issues."

The SEC is investigating impropriarities in the trading of Taser's stock. Smith said, "Recent data from ADP indicates there may be a large improper, naked short position in TASER International stock."

According to the Associated Press, the SEC has been looking into claims Taser has made about safety studies for its stun guns and has also been looking into a $1.5 million, end-of-year sale of stun guns to a firearms distributor in Prescott.

RenaissanceRe receives third SEC notice

September 27, 2005
Business Week

RenaissanceRe Holdings Ltd., a Bermuda-based reinsurance firm specializing in losses from natural disasters, said Tuesday it received another "Wells Notice" from the Securities and Exchange Commission in connection with the company's restatement of its financial results.

The notice indicates the SEC plans to take civil action against the company. Wells Notice recipients have a chance to respond to the SEC before any formal recommendation is made.

Albanian mob trial opens

By Timothy O'Conner
The Journal News
September 28, 2005

NEW YORK - The leaders of an Albanian organized-crime group learned their trade at the feet of traditional Italian Mafia families, then set out to establish a group that would rival the Five Families of the New York mob, prosecutors said yesterday.

The boss of the Albanian-led crime group was Alex Rudaj, 38, of Yorktown, federal prosecutors said during opening statements yesterday at Rudaj's trial in U.S. District Court in Manhattan. Rudaj and five other defendants are charged with racketeering, gambling, extortion, loan-sharking and other crimes. Nikola Dedaj, 42, of Yonkers and Nardino Colotti of the Bronx are accused of being the group's co-leaders. Federal prosecutors dubbed the group the Rudaj Organization. Members of the crime group referred to it simply as "The Corporation," prosecutors said.

Colotti was a protege of Phil "Skinny Phil" Loscalzo, a Gambino crime family soldier. He and his friend Rudaj broke off from the Gambinos after Loscalzo died in the early 1990s, prosecutors said. Their goal was "to become one day, they hoped, a sixth family," Assistant U.S. Attorney Benjamin Gruenstein said.

They started out running illegal gambling operations in the Bronx, in Morris Park and along Arthur Avenue, prosecutors said. From there, they pushed their way into Westchester County, federal authorities said, operating gambling dens in Port Chester and Mount Vernon, and forcing bar owners to install their illegal "Joker Poker" machines. From there, they pushed the Lucchese crime family out of Astoria, Queens, prosecutors said, taking over gambling clubs the Luccheses had run for years.

When one gambling club tried to operate in Astoria without their permission, a group of armed Rudaj members, including the three leaders, descended upon the club, known as Soccer Fever, and violently shut it down, beating the owner unconscious, prosecutors said.

The Gambino crime family grew concerned about the burgeoning power of the Rudaj Organization and asked for a meeting in 2001 to settle matters, Gruenstein said. They met at a gas station in New Jersey. The Gambinos, led by Arnold Squitieri, the acting boss of the family, pulled out their guns, prosecutors said.

But a Rudaj member did them one better, prosecutors said, when he pulled out a shotgun, pointed it at a gas pump and threatened to blow up the entire station. "The Gambino family simply could not stand in the way of the Rudaj Organization," Gruenstein said.

In addition to the three alleged leaders of the Rudaj Organization, three reputed associates of the family are on trial. Angelo DiPietro, formerly of Mount Vernon, is accused of being a salaried employee of the organization and is charged with racketeering. Prosecutors said he was fired for stealing from the crime group. Ljusa Nuculovic and Prenka "Frankie" Ivezaj are charged with racketeering.

Another defendant, Gjelosh Lelcaj, pleaded guilty to racketeering after jury selection was completed yesterday. The trial is expected to last about three months. Several other of the 22 defendants accused in October of being part of the group will be tried separately.

Labels: Louisiana

Why regulators are looking at hedge funds and derivatives -- and how they could affect you.

September 24, 2005
By Amanda Cantrell
CNN/Money staff writer

NEW YORK (CNN/Money) - In the summer blockbuster "War of the Worlds," ordinary Americans are forced to run for their lives when alien invaders wreak havoc on their planet. What the victims didn't know was that the seeds for the attack had been germinating beneath their feet for years.

While that was a movie, some financial regulators fear that a less dramatic but similar scenario could be developing in the nation's financial markets. Their target? Two key segments of the markets -- hedge funds and credit derivatives -- that have been mostly invisible to many ordinary investors but have grown to massive proportions in recent years.

What's making regulators take notice now? Many complex factors, but it boils down to this: those pieces of the capital markets have grown so big so fast, and are so complicated, that any problems could mushroom and spark big losses -- and huge volatility -- for investors around the world. Hedge funds now manage an estimated $1 trillion in assets worldwide, and in some cases, a single fund can account for a big chunk of the volume on some exchanges. (For more on hedge funds, click here).

The credit derivatives market has swelled to an estimated $8.4 trillion -- that's trillion with a 't' -- and regulators are concerned about trading in these largely unregulated investments. (For more on credit derivatives and how they work, click here.) "Credit derivatives and hedge funds have grown fairly spectacularly over the last five years," said Andrew Lo, director of the MIT Laboratory for Financial Engineering and a managing member at the hedge fund Alpha Simplex Group.

"There are enormous amounts of capital that have come in and are being deployed in fairly highly leveraged transactions. We don't know the exact amount of leverage being used, and there's even less data about credit derivatives market," he said. Because of this rapid growth, regulators are concerned that if something happens in the credit derivatives space, such as several companies defaulting on their debt at once, this would affect not just hedge funds but could unnerve financial markets, and affect interest rates and the broader economy.

To be sure, big losses from a series of credit defaults or hedge fund blowups would hurt mostly big investors on Wall Street, but with more and more pension funds putting money into hedge funds, average workers and investors could also suffer. Concerns about the credit derivatives, which derive their value from underlying corporate bonds, prompted the New York Federal Reserve to meet with several Wall Street firms recently.

The regulators want to make sure that if several companies default on their debt at once or in rapid succession, the financial markets could handle the losses and selling in the derivatives market, without sparking a broader round of panic selling on Wall Street. Two complex derivatives -- credit default swaps and collateralized debt obligations -- have become especially popular with hedge fund investors in recent years.

People familiar with the matter say regulators want to ensure that the players in the market have enough money to live up to their obligations. And they want to encourage orderly growth in these exotic investments to help curtail the risks of a "systemic" shock to the financial markets. While regulators are shining their lights on the credit derivatives market, this doesn't mean the regulatory scrutiny for hedge funds will lighten up any time soon.

Christopher Cox, the new chairman of the Securities and Exchange Commission, told the Wall Street Journal recently that he plans to forge ahead with a new rule requiring the funds to register with the SEC as investment advisers. While some on Wall Street had speculated Cox might reconsider the rule, many others weren't surprised. The new rule came from ex-SEC chief William Donaldson, who initiated a two-year review of hedge funds and pushed the rule through despite a divided commission, which narrowly passed it by a 3-2 vote.

Cox's decision to go ahead comes as federal and state officials investigate the collapse of Bayou Management, a Stamford, Conn.-based hedge fund. Federal prosecutors have accused the fund of raising $300 million from investors by lying to investors about returns and their funds' performance. Officials have seized $100 million believed to belong to Bayou investors.

Labels: Bayou Group

SEC gives Fidelity second notice in inquiry - Regulator sees more potential civil charges over gifts to traders

By Andrew Caffrey, Globe Staff
September 23, 2005
The Boston Globe

Federal investigators notified Fidelity Investments yesterday they are looking at a second area of potential charges that they may bring against the mutual fund giant in connection with its traders accepting gifts and lavish entertainment. The US Securities and Exchange Commission also notified an unspecified number of traders and other individuals that they also may face charges for alleged violations, including receiving improper compensation in the form of gifts from brokerage firms, an attorney for one of the traders said.

Fidelity spokeswoman Anne Crowley confirmed the company had received another so-called Wells Notice from the SEC -- the second in three months -- but declined to comment on the specifics of potential violations. Crowley said the SEC notice is not a determination of wrongdoing, but rather an indication of what charges investigators may recommend the agency's commissioners bring against the company. Charges would have to authorized by the SEC's five-member commission.

''We intend to vigorously defend ourselves against any allegations we believe are not supported by the relevant facts and data," Crowley said. She said Fidelity has cooperated with the SEC investigation. An SEC official, Walter Ricciardi, declined to comment.

In July, the SEC told Fidelity it is considering bringing a civil fraud charge for its alleged negligence involving the gift-giving scandal. But that notification involved a lesser fraud charge in which the alleged violation was considered unintentional. Crowley said Fidelity is still preparing its response to the SEC's first notification, and will also respond to the agency's latest matter. It is unclear how many individuals were also notified yesterday that they may face charges as well, but the attorney for one of the traders said it appeared to be at least a half-dozen people.

The notifications are a major escalation in the near yearlong probe of Fidelity's trading desk, and the relationship its traders forged with brokers who wanted a piece of the fund company's potentially lucrative daily trading business. A federal grand jury in Boston is also hearing testimony about whether crimes were committed in the course of the gift-giving and entertainment bashes.

Fidelity, which has long promoted an image of probity under the leadership of chairman Edward C. ''Ned" Johnson III, has been stung by the disclosures of bacchanalian-like pursuits of its traders, who have cavorted with their broker friends during trips to exclusive golf courses, choice sports games, casinos, and other entertainment venues. Among the more notorious events was a weekend-long bachelor party for a trader, Thomas Bruderman Jr., in Miami's South Beach that was paid in part by the firms of brokers who handled trades for the company, according to attorneys involved in the case.

Securities rules generally prohibit brokers and traders from giving or receiving gifts over a certain amount. The notices of potential violations the SEC sent yesterday to individuals suggest that investigators believe the gifts were large and frequent enough to constitute a form of compensation the traders were not allowed to receive. It is not known whether any brokers also received notices yesterday from the SEC.

Fidelity also yesterday said it has tapped Brian Conroy, a 41-year-old securities-industry veteran, as its new head of global equity trading. He succeeds Scott DeSano, who was reassigned in the midst of the government's investigation.

While he helped build Fidelity's trading operation into one of the most efficient and feared operations on Wall Street, DeSano was among the 14 employees whom Fidelity disciplined last year for violations of company gifts policies. He was reassigned in July to a senior position in the company's Strategic New Business Development Group. Around that time he also received a notice from the SEC that investigators are considering charges against him too. An attorney for DeSano could not be reached for comment.

Crowley noted that Conroy's appointment is one of a number of changes that Fidelity has made to its stock-trading operation since the scandal became known last year. In addition to strengthening procedures within the department to protect against future occurrences, Fidelity earlier this year installed five new managers to supervise its trading operation.

SEC probes Altera over analysts

By Matt Andrejczak
ept. 21, 2005

SAN FRANCISCO (MarketWatch) --The Securities and Exchange commission is investigating computer chipmaker Altera Corp.'s dealings with Wall Street analysts, according to an analyst who received a letter from the SEC as part of its inquiry.

According to the analyst, who said the letter came from the SEC's enforcement office in San Francisco, the agency is asking for records of communication with the company, and also whether the company sought to restrict such communication. The agency is seeking any letters, emails or phone call recordings with Altera, said the analyst, who requested anonymity.

An attorney with the SEC's San Francisco office declined comment. An Altera spokeswoman said she hadn't heard of the inquiry and declined further comment.

The probe, believed to be in the early stages, comes in the wake of a public apology Altera issued in July to a former Wells Fargo analyst who had accused the company of denying him access to conference calls and other forms of communication in retaliation for his negative stance on the company's stock...

SEC may probe Citigroup closed-end funds

By John Spence
MarketWatch
September 22, 2005

BOSTON -- Citigroup Inc. said the Securities and Exchange Commission staff is considering recommending administrative proceedings against two of its asset-management units that manage closed-end funds.

"The notification is a result of an industry-wide inspection by the Commission and is based upon alleged deficiencies in disclosures regarding dividends and distributions paid to shareholders of certain funds," Citigroup said in a statement Wednesday.

The SEC may seek a cease-and-desist order and/or monetary damages from Smith Barney Fund Management and Salomon Brothers Asset Management, Citigroup said.

The so-called Wells Notices, which came on Sept. 16, will not affect the sale of Citigroup's asset-management business to Legg Mason Inc., which is expected to close in the fourth quarter, Citigroup said.

"We have been cooperating with the SEC's industry-wide inquiry and believe the funds are currently in compliance with the regulations relevant to this matter," said Mary Athridge, a spokeswoman for Citigroup.

Five closed-end funds have received Wells Notices, she said Thursday.

Bad Treos? - Class action lawsuit filed against Palm

September 21, 2005
By James Hromadka
Trecocentral.com

A class action lawsuit has been filed against Palm alleging poor quality in Treo smartphones. The lawsuit claims that although Palm said the Treo 600 and 650 were "quick, dependable and reliable," the Treos "suffered from extremely poor sound quality and buzzing, choppiness, speakerphone problems, poor and broken screens, phone crashes, software crashes and electrical surges." Treos that were replaced would have similar issues.

Probation, Again, for HealthSouth

Stephen Taub, CFO.com
September 20, 2005

Upon further review, the original sentence pronounced on a former HealthSouth Corp. executive remains the same. U.S. District Judge U.W. Clemon again sentenced former senior vice president for tax, Richard Botts, to probation.

Botts had pleaded guilty to conspiracy, mail fraud, and falsifying records for his part in the health care company's $2.7 billion accounting fraud. Earlier this year, Judge Clemon had originally sentenced him to five years' probation and six months' home detention, plus a $10,000 fine and a forfeiture of $265,000. Prosecutors had sought a sentence of more than three years in prison.

In June, the 11th U.S. Circuit Court of Appeals vacated the sentences of Botts and former CFO Michael Martin, who also got probation. The appeals court ruled that Clemon did not give any reasons for his "extraordinary departure" from federal sentencing guidelines.

As it turns out, Clemon stuck with his original decision, which was his prerogative. This time, however, he explained his thinking. Botts "was a late-comer in an ongoing conspiracy," maintained the judge, according to Reuters, "not one of the inner circle."

Clemon also cited Botts's cooperation in the investigation of former chief executive officer Richard Scrushy, who was later acquitted of fraud charges related to the accounting scandal. "Where the head honcho is found not guilty," Clemon reportedly said, incarceration of a minor participant "might actually encourage disrespect of the law."

Martin is also scheduled for resentencing this week.

Original article appears here.

- MDT

Labels: 2006, Health South

Conrad Black's right-hand man pleads guilty to $32m fraud

David Teather in New York
September 21, 2005
The Guardian

David Radler, the former right hand man of disgraced media tycoon Conrad Black, pleaded guilty to fraud charges yesterday in a Chicago courtroom. The plea could prove a pivotal moment in the long-running investigation into the alleged looting of Hollinger International, the newspaper group that until last year owned the Daily Telegraph. "This is the first step in making amends for what has taken place," Mr Radler's lawyer, Anton Valukas, said after the hearing.

Mr Radler had been a business partner of Lord Black for 35 years and was the financier behind the flamboyant former press baron. But there were clear signs of a crack in the relationship last month when Mr Radler was indicted on seven fraud charges, each carrying up to five years in prison. The US attorney general, Patrick Fitzgerald, said at the time that Mr Radler would plead guilty and had agreed to cooperate with further investigations. Federal investigators disclosed in March that they were conducting a fraud inquiry into Hollinger, Mr Radler and Lord Black.

There were reports in the US media at the weekend that Lord Black could in turn be planning to point the finger of blame firmly at Mr Radler. According to the Wall Street Journal, Lord Black has been building a defence strategy arguing that he had not been a hands-on manager and that any alleged misdeeds were down to Mr Radler. The indictment alleges that Mr Radler and his "co-schemers" diverted more than $32m (£18m) of Hollinger funds to themselves and companies controlled by him, Lord Black and others. The funds were largely in the form of "non-competition" payments - money that is usually paid to the seller of a business to guarantee that it doesn't immediately re-enter the market it has just exited. In this case, the money was allegedly paid to individuals, instead of to Hollinger.

Lord Black was ousted as Hollinger chief executive in November 2003 after an internal inquiry sparked by a disgruntled shareholder. The investigation eventually uncovered hundreds of millions of dollars that had allegedly been taken by Lord Black, Mr Radler and others in unapproved bonuses and non-competition fees and excessive pay. The company has since sued for the return of $425m.

A 500-page internal report accused Lord Black of running a "corporate kleptocracy" and of pursuing an "endless quest" for cash. Lord Black denies all wrongdoing and has launched countersuits against Hollinger. Lord Black craved a British title so much he gave up his Canadian citizenship. But his reputation has been left in tatters by the financial scandal. He has been forced to sell his lavish London townhouse as well as a mansion in Palm Beach, Florida.

Lord Black and Mr Radler began their business relationship by acquiring a small newspaper in Quebec in 1969. They built an empire of more than 340 titles, including the Chicago Sun-Times, the Daily Telegraph and the Jerusalem Post. While Lord Black hobnobbed in London, Mr Radler worked behind the scenes in the company's offices in Vancouver and Chicago.

The new management at Hollinger has since broken the company up. The Telegraph was sold to the billionaire Barclay brothers in June last year for £665m. According to the indictment, in one instance Hollinger sold newspapers to a company controlled by Mr Radler and Lord Black. It then paid Mr Radler and Lord Black's holding company Ravelston $1.2m "not to compete with themselves".

In March 2003 a Hollinger annual report disclosed details of "non-competition" payments - in one case of $53m paid into a Black-controlled firm. The auditors had insisted on the disclosures. Eight months later, Radler resigned with an agreement to pay back unauthorised fees of $7.2m. On the same day, Conrad Black quit as chief executive.

Labels: Conrad Black, General Re, New York AG, Quest

SEC hard-pressed to examine funds

By Laurence Arnold
Bloomberg News

The Securities and Exchange Commission's expansion of mutual-fund oversight may leave some funds unexamined for a decade due to limited agency resources, a government report issued yesterday said.

The SEC, which used to conduct routine examinations of all funds over a roughly five-year period, is now targeting specific practices, including market timing, based on tips or other information, a report by the Government Accountability Office (GAO) said. Only funds considered at "higher risk" will still receive routine SEC inspections, according to the report.

The new focus raises "significant challenges," said the GAO, the investigative arm of Congress. "The tradeoffs may limit SEC's capacity to examine funds considered lower risk within a 10-year period," the report said. "This outcome could limit SEC's capacity to accurately identify which mutual funds pose relatively higher or lower risk and effectively target higher-risk funds."

The SEC revised its system of examinations in response to mutual-fund abuses, such as market timing, that came to light in 2003. While market timing isn't illegal, regulators say many fund companies allowed favored investors to trade in and out of their funds, reaping quick profits at the expense of other shareholders...

...SEC spokesman John Nester said yesterday that the agency is "seeking to maximize the efficiencies and benefits of our examination oversight." The SEC has about 495 staffers set aside for examination oversight of mutual funds and investment advisers.

...In a written response included in the report, SEC Director of Compliance Inspections and Examinations Lori Richards defended the shift away from random examinations of all mutual funds.

"Given the size and growth of the industry, it is not possible for the SEC to conduct comprehensive, timely, routine examinations of every registrant," Richards wrote. She said the agency developed a risk-mapping program and opened its Office of Risk Assessment to focus limited resources "on the highest-risk activities and firms, and on identifying emerging compliance risks."

The GAO warned in its report that the agency may become even more overtaxed in the near future as a result of its increased responsibilities in supervising hedge funds.

Labels: GAO

Curtains for Tycho's Thief Exec as he gets 25 Years

By Laura Italiano
September 20, 2005

The $6,000 shower curtain has finally fallen on Tyco marauder Dennis Kozlowski. The spend-a-holic former CEO — as infamous for his bizarrely pricey home furnishings as for his $600 million looting of his company — is heading up the river without a yacht for a grueling state prison stint of 8 1/3 to 25 years.

"He has committed theft and securities fraud on an unprecedented, staggering scale, exceeding anything ever prosecuted in this state," Assistant District Attorney Owen Heimer said during a sentencing hearing yesterday in Manhattan Supreme Court. "It was a shocking spree of self-indulgence," Heimer said.

But the 58-year-old Kozlowski — who showed so much gall at the helm of Tyco he kept two ex-mistresses on his payroll and even charged the company for his "yacht stylist" and his $80,000-a-year housemaid — remained dry-eyed as he was handcuffed by court officers and led out by the arm.

Just three years ago, the ruddy robber baron enjoyed a Colorado ranch, a Boca mansion, and a Nantucket beach home — multimillion-dollar residences financed through larcenous bonuses, shady employee loans and fraudulently inflated stock-sale windfalls.

Now, Kozlowski will spend the next 10 days in a 9-by-7 cell in lower Manhattan's Tombs, before being moved to Rikers Island, and, ultimately, to a yet-to-be-determined upstate prison. His dinner last night was a hamburger, mashed potatoes with gravy, and four ounces of chocolate pudding, city correction spokesman Tom Antenen said.

It will be 2013 before Kozlowski is eligible for parole. But he may be eligible for work release in 2011. Sentenced to the same time alongside Kozlowski was his former chief financial officer, Mark Swartz, derided by prosecutors as the "architect" of the pair's grand larcenies. Between them, the two must pay Tyco back $134,351,397 in restitution, with Kozlowski on the hook for $97 million of that money.

Kozlowski was additionally slammed with $70 million in fines. That brings his total Criminal Court financial hit to $167 million — although civil litigation by the company and its shareholders could empty his pockets still further...

...Assistant District Attorney Owen Heimer, who was speaking at the sentencing of former Tyco top executives L. Dennis Kozlowski and Mark H. Swartz, said the fraud may have resulted in the inflation of the Bermuda conglomerate's results by $1 billion.

...A prosecutor in the Manhattan District Attorney's office said Monday that the enforcement staff of the Securities and Exchange Commission has recommended the agency begin an accounting fraud investigation of Tyco International Ltd. (TYC).

Labels: Dennis Kozlowski, Tyco

Jury Orders Westar Executives to Turn Over Millions in Fraud Case

David Twiddy
The Associated Press
September 19, 2005

A federal jury on Thursday ordered two former Westar Energy Inc. executives convicted of looting the utility to relinquish millions of dollars in cash and assets. Former CEO David Wittig was told to hand over his Topeka, Kan., home, thousands of shares of stocks, a life insurance policy and $9.7 million in bonuses and other payments made while he worked at Westar, the state's largest electric utility.

His co-defendant, former chief strategy officer Douglas Lake of New Canaan, Conn., was ordered to turn over $2.5 million in stock dividends and sales, as well as several thousand stock shares. Both men also must forfeit any award they receive from an ongoing arbitration fight they're having with Westar over pay and benefits they say the company still owes them.

Prosecutors had sought $27.9 million from Wittig and $9.4 million from Lake, including all the salary and benefits they had received before being forced out of the company in late 2002. U.S. Attorney Eric Melgren, whose office prosecuted the case, had little comment on the verdict, beyond commending attorneys and investigators in the case.

Lake's attorney, Edward Little, said "we're obviously still disappointed in the main verdict and will vigorously appeal that to the 10th Circuit (Court of Appeals)." Wittig's attorney, Adam Hoffinger, didn't return a phone call seeking comment.

Jurors convicted the men of 39 counts, including conspiracy, wire fraud, money laundering and circumventing internal controls, part of a scheme prosecutors said was aimed at looting the company.

Sentencing was set for Jan. 9. The men face up to five years each for the conspiracy count, 10 years for each count of circumventing internal controls, 20 years for each count of wire fraud and 10 years for each count of money laundering.

Labels: money laundering

...Verizon claimed that Source Resources used personal information obtained from other sources in order to pose as individual customers and trick its service representatives into divulging additional data, including their phone numbers and calling records....

As part of its claim, Verizon submitted online marketing materials reportedly offered by Source Resources that detailed the company's ability to garner the names, addresses and social security numbers of individual cellular subscribers for $85 apiece. For $150, the data broker offered additional information, including wireless calling records and billing information.

"Accessing a person's personal telephone records without a valid court order or the customer's permission is illegal," Steven Zipperstein, general counsel at Verizon Wireless, said in a statement. "We will protect our customers against these kinds of assaults on their privacy and use every weapon in our legal arsenal to shut down identity-theft operations"...

Sources familiar with the case said that a private investigator named in the suit, Richard Childs, first informed the carrier of Source Resources' data acquisition practices when one of his own clients had their information obtained by the firm. Childs did not return calls seeking comment on the case, but Verizon stated in its filing that private investigators are also among the most frequent buyers of the services involved in the Source Resources suit...

...Superior Court Judge Harriet Derman granted a court order on Tuesday barring data provider Source Resources Inc. from acquiring, possessing or selling confidential information about Verizon's 45 million wireless customers. According to Verizon's claim, which was filed in early July, Source Resources was able to dupe the carrier's customer service representatives into supplying much of the data...

Accessing data in this manner is to the investigative industry as steroids are to professional sports. It is a shortcut that narrowly skirts legality while providing performance enhancement. And just like steroids, the results can ultimately be destructive for the individuals involved as well as the entities they represent. It will be extremely interesting to see if this case is be beginning of a trend, with other telecoms taking similar steps.

The full E Week article appears here. Many thanks the excellent Law Librarian Blog for the link.

-- MDT

Labels: identity theft

The SEC: Cracking Down On Spin - It's going after executives for skimpy or misleading disclosures in annual reports

September 26, 2005
Business Week

The Securities & Exchange Commission threw the book at two former top executives of Kmart Corp. (SHLD ) on Aug. 23. The agency requested unspecified penalties and a bar on the pair ever again serving as officers or directors of a public company. The executives -- former CEO Charles C. Conaway and former CFO John T. McDonald Jr. -- weren't accused of fudging Kmart's numbers. What incurred the SEC's wrath was their allegedly misleading explanation of the Troy (Mich.) retailer's finances in its 2001 quarterly reports. Lawyers for Conaway and McDonald say their clients contest the allegations and expect to be exonerated.

The civil suit is the latest sign that the SEC intends to turn the "management's discussion and analysis" (MD&A) section of quarterly and annual reports into a no-spin zone. Already, hundreds of companies have received letters exhorting them to tell the unvarnished truth. The reports are supposed to discuss the story behind the numbers, highlighting factors that could have a significant impact on company financials. But the SEC believes too many managers may be giving investors a skimpy or distorted picture of their business.

In Kmart's case, executives blamed a big spike in inventories on "seasonal fluctuations." In fact, the SEC alleges, they were hiding massive unauthorized purchases by one top official. The SEC also alleged that the executives lied about why Kmart was slowing payments to vendors and the impact the company's liquidity crisis had on its relations with vendors. Kmart filed for bankruptcy in 2002. After reorganizing, it acquired Sears, Roebuck & Co., now Sears Holdings Corp. (SHLD ), in March.

BUSY PIPELINE

Misleading MD&A reports also were at the heart of cases the SEC brought in April against Coca-Cola Co. (KO ) and Global Crossing Ltd. (GLBC ) Without admitting or denying wrongdoing, Coke settled charges that it failed to disclose shipments of excess beverage concentrate to bottlers in Japan from 1997 through 1999 to meet earnings expectations. Such "gallon-pushing" isn't illegal, but the SEC says Coke left investors in the dark about the impact on company finances. The SEC faulted Global Crossing and three former executives for inadequate disclosure of fiber-optic capacity swaps with other telecom carriers in 2001. Global Crossing and the executives -- who each paid penalties of $100,000 -- settled the charges without admitting or denying guilt.

Defense lawyers and compliance experts suspect more such cases are in the pipeline. Now that most companies have adjusted to the major reporting requirements in the Sarbanes-Oxley Act, there's a renewed focus on risk assessment and disclosure, says Scott S. Cohen, editor and publisher of newsletter Compliance Week. "Everyone, from regulators to institutional investors, has been calling on companies to provide more clear, forward-looking, transparent, 'plain English' MD&A," Cohen says.

CEOs, who must sign the reports, can't blame shoddy MD&A discussions on auditors or other gatekeepers. The MD&A "is specifically designed to let investors view the company's financial condition through the eyes of management," says Peter H. Bresnan, an associate director at the SEC's Enforcement Div.

Managers had ample warning about what the SEC expects. Agency staffers have issued repeated guidance on what MD&A should cover. "What we are looking for in MD&A is the fresh story," says SEC chief accountant Donald T. Nicolaisen. "Often management repeats the same old boilerplate again and again. There is high resistance to change."

BEEFED-UP REPORTS

Databases of SEC documents compiled by Global Securities Information Inc., a publisher of the SEC's electronic document filing service, reveal a constant stream of staff requests to companies to amend and expand their MD&A filings. On Aug. 9, Johnson Controls Inc. (JCI ) added 14 pages of information to its 2004 annual report in response to SEC requests. "We've gotten mixed messages from investors about it, though some say 'the more information, the better,"' says R. Bruce McDonald, Johnson Controls' CFO. In March, Dress Barn Inc. (DBRN ) beefed up its management discussion for its 2004 annual report after the SEC asked for an overview that would "identify the most important matters on which you focus in evaluating financial condition and operating performance."

Still, corporate arrogance remains an obstacle to candid, easy-to-read reports. "Many executives think they can get away with spoon-feeding investors whatever information they want them to have, not what they're entitled to," says former SEC chief accountant Lynn E. Turner, a managing director at investment researcher Glass, Lewis & Co.

Corporate lawyers argue that managers have valid reasons to parse their words. Saying too much could give rivals an edge; saying too little could invite shareholder suits. And there are tough calls. If a company's biggest customer is threatening to walk, must management disclose that? Lawyers say it depends on whether management believes it will lose the customer. "There are a lot of gray areas," says Brian Lane, a partner at Gibson, Dunn & Crutcher and a former director of the SEC's Corporation Finance Div.

So far, the agency has been vigilant about flushing out executives who try to hide bad news in those gray areas. If the Kmart case goes to trial, it will show just how much power the SEC has to deal harshly with those it thinks have given investors a whitewashed version of company finances.

Questions over jail time for white-collar crime

By Andrew Ross Sorkin
September 17, 2005
The New York Times

On Monday morning, L. Dennis Kozlowski, the former chief executive of Tyco, will learn his fate. Kozlowski, who has been convicted of grand larceny, falsifying business records, securities fraud and other charges, is to be sentenced in New York Supreme Court. He faces a maximum prison sentence of 30 years.

Recent lengthy sentences for white-collar crimes have been seen, by some, as desperately needed deterrents after a deluge of corporate scandals. But the sentencing of Kozlowski, 58, comes at a time when a number of lawyers, including former prosecutors, are questioning whether such sentences are justified.

Bernard Ebbers, the former chairman of WorldCom who was convicted of masterminding an $11 billion accounting fraud that bankrupted the company, was sentenced to 25 years in prison. Because Ebbers is 63, some have contended that the sentence amounts to a life term. Shortly before, John Rigas, the 80-year-old founder of Adelphia Communications, was sentenced to 15 years in prison for his role in looting and hiding debt, in a scandal that bankrupted the cable-television company.

"You have to ask yourself whether the proof in these cases warrants such a sentence," said Otto Obermaier, a former U.S. prosecutor who worked on white-collar crimes from 1989 to 1993. Unlike Ebbers or Rigas, Kozlowski - along with Mark Swartz, Tyco's former chief financial officer who was convicted of the same set of crimes - is being sentenced in a state court. As a result, the judge in the Tyco case, Michael Obus, may have more latitude in his sentencing than U.S. judges, who have a strict set of guidelines to follow.

No lawyer is suggesting that white-collar criminals should not serve time. The question in legal circles has become what is appropriate for white-collar crimes in a post-Enron world? Jonathan Simon, a professor of law at University of California, Berkeley, said: "The most obvious comparison for the emerging attitude toward white-collar criminals is the harsh punishment we give to people involved in the drug trade. But both represent increasingly irrational and inhumane levels of punishment."

The main argument for imposing lengthy sentences is that they serve as a warning to other executives. After Ebbers's conviction in July, Alan Hevesi, the New York state comptroller and court-appointed lead plaintiff in the WorldCom securities class action, said it was "important to send a strong message" because of the billions of dollars and thousands of jobs that were lost as a result of the fraud.

Yet Simon, for one, said he had doubts about whether an especially long sentence worked as a significantly greater deterrent to potential white-collar criminals than shorter periods. He said that "it would be far more effective to impose a lot of short sentences on a wider group of offenders rather than the example model of harshly punishing a few celebrity cases while most potential offenders know that they are unlikely ever to be caught and punished."

Still, some prosecutors and lawyers suggest that lessons that were supposedly learned during the crackdown on corporate crime in the late 1980s did not stick, in part because the sentences were too lenient. Michael Milken was sentenced to three and a half years and served less than two.

Lawyers for Kozlowski and Swartz are expected to emphasize on Monday how different their cases are from those of Enron, WorldCom and Adelphia, companies that were forced to file for bankruptcy protection as a result of the crimes. Tyco never filed for Chapter 11 bankruptcy protection, and its underlying business was relatively unaffected. The two Tyco officials were convicted of stealing about $150 million by paying themselves unapproved bonuses and conspiring to keep the thefts secret.

In addition to determining a sentence, Obus is expected to make Kozlowski and Swartz disgorge the money they stole. Prosecutors may also seek to have the men pay hundreds of millions of dollars that they say shareholders lost as a result of falsified business records and the hiding of information from investors, as well as possibly millions of dollars in fines.

The original article (which first appeared in the New York Times) can be found here.

Labels: Dennis Kozlowski, Enron, Tyco

Verizon Wireless Halts Data Theft

Tech News Daily
September 15, 2005

Verizon Wireless has secured a court order to halt a Tennessee-based company’s practice of obtaining and selling telephone records of Verizon Wireless customers.

Earlier this summer, Verizon Wireless sued Cookeville, Tenn.-based Source Resources Inc., in New Jersey State Superior Court in Somerset County, N.J., seeking among other things an injunction barring Source Resources from acquiring, possessing or selling confidential Verizon Wireless customer account information without a valid court order or the customer’s express consent.

Superior Court Judge Harriet Derman ordered a permanent injunction against Source Resources Tuesday as part of a settlement between Verizon Wireless and the company. Source Resources also agreed to cooperate with Verizon Wireless by surrendering records of its transactions and information about how it previously obtained customer records.

“Accessing a person’s personal telephone records without a valid court order or the customer’s permission is illegal,” said Steven Zipperstein, General Counsel and Vice President of Legal and External Affairs at Verizon Wireless. “Verizon Wireless will protect our customers against these kinds of assaults on their privacy, and we will use every weapon in our legal arsenal to shut down identity-theft operations.”

The lawsuit was filed by Verizon Wireless July 8th against Source Resources, which advertised on its Internet site the capability to secure confidential wireless telephone records for a fee. Verizon Wireless brought the lawsuit after one of its customers reported that his confidential wireless phone records had been secured without his permission by Source Resources.

Labels: identity theft

SEC Starts Probe into Ligand's acounting. Also, drug it discovered is rejected by the FDA

By Penni Crabtree
September 15, 2005
UNION-TRIBUNE STAFF WRITER

Ligand Pharmaceuticals, a biotechnology company whose questionable accounting has lead to a failing stock price, shareholder lawsuits and a delisting from the Nasdaq, is being investigated by the U.S. Securities and Exchange Commission. The San Diego company announced late Monday that the SEC has launched an official probe related to Ligand's proposed financial restatement for fiscal years 2002, 2003 and the first three quarters of 2004.

Ligand's accounting problems were made public in May, when the company said it had to restate various financial reports because of improper revenue reporting. But investors' fears of a potential accounting problem first emerged in August 2004, when Ligand's auditor abruptly resigned. Ligand spokesman Abe Wischnia said yesterday that the company intends to fully cooperate with the investigation.

While grappling with its latest accounting-related woes, Ligand and its investors had another dose of bad news this week. The U.S. Food and Drug Administration on Tuesday rejected the experimental osteoporosis drug Oporia, which was discovered by Ligand and licensed to drug giant Pfizer.

Though Ligand had nothing to do with the clinical development of the drug, the company was entitled to receive a milestone payment on FDA approval and royalty payments equal to 6 percent of the drug's global sales. The drug, also known as lasofoxifene, is similar to another Ligand-discovered compound that was licensed to Wyeth, under similar financial terms.

It is uncertain whether the FDA's concerns about Oporia, expressed in a "nonapprovable letter" but not disclosed by Pfizer, could weigh on the Wyeth drug. Wyeth is expected to file for FDA approval of its drug next year. Ligand's Wischnia said yesterday that the company is working hard to file the delinquent financial reports. Ligand's failure to meet several filing deadlines caused the Nasdaq to drop the company's stock from its exchange last week.

Ligand's shares now trade on the so-called Pink Sheets, a thinly regulated stock quotation service known for high-risk stocks. The company has less than 60 days to file the reports if it is to qualify for a speedier relistment process. Otherwise, Ligand will have to apply to be relisted as a new company, a much lengthier process.

Wischnia said the company remains delinquent because of the magnitude of the accounting task. Ligand's former accountant, Deloitte Touche, declined to be re-engaged for the job, so the company's new accounting firm, BDO Seidman, has had to do significant additional work, he said.

In addition, Ligand must develop and validate new accounting models for recognizing revenue. "All of these things have taken a whole lot longer than anyone imagined initially," Wischnia said.

Ligand estimated in August that its auditor and outside advisers had already logged 7,900 hours in dealing with the restatement and related issues. Company personnel had put 7,700 hours into the effort, the company said. Ligand has said that its former accounting policies did not meet requirements for reporting of sales as its products left Ligand's warehouse and were shipped to wholesalers.

Several shareholder lawsuits allege that Ligand practiced what is known as "channel stuffing." The company shipped lots of its top-selling product, the painkiller Avinza, to wholesalers to demonstrate to Wall Street that there was strong demand for the drug. But some of the booked sales evaporated after some of the product was returned because it had expired or was subject to steep rebates, the lawsuits allege.

Arrests at PwC Japan affiliate

By Mariko Sanchanta in Tokyo
September 13 2005
The Financial Times

Tokyo prosecutors on Tuesday arrested four accountants at a Japanese affiliate of PwC for allegedly helping Kanebo executives falsify accounting reports. Prosecutors also raided ChuoAoyama PricewaterhouseCoopers’s Tokyo office on Tuesday in connection with Kanebo, the embattled household goods and cosmetics conglomerate that is in the midst of a high-profile auction process...

PwC investigated over role in Mayflower collapse

KARL WEST, City Editor
September 15 2005
The Herald

BRITAIN'S biggest audit firm is being investigated by the accounting regulator over its part in the collapse of bus maker Mayflower, which owned Falkirk-based TransBus. Following an investigation, the Accountancy Investigation & Discipline Board yesterday said it had decided to file "disciplinary complaints" against PricewaterhouseCoopers and Mayflower's former finance director, David Donnelly...

Sycamore: Former employees falsified records

By Ed GubbinsSeptember 13, 2005

Sycamore Networks filed restated financial reports for the fiscal years 2000 through 2004 to increase net losses this week, after an internal investigation of stock option grants issued between 1999 and 2001 revealed that some employee records were deliberately falsified to affect the value of stock option grants. According to documents filed by Sycamore with the U.S. Securities & Exchange Commission, that internal investigation showed that the start dates on six employee records were “deliberately modified” to yield a lower exercise price for their stock options, Sycamore said, and six existing stock option grants were deliberately cancelled and reissued to allow a lower exercise price.

The investigation also focused on options that were granted under an April 14, 2000 program in which the number of options granted was probably not determined until April 26, 2000. The company also failed to record accurate charges for three stock option grants that continued to vest after the owner’s employment status changed. And one stock option grant was improperly reported in an inadvertent accounting error. “The employees directing the stock option program in the period from 1999 to 2001 are no longer employed by the company,” Sycamore said in the filing.

In June 2001, Sycamore offered its employees a chance to exchange their existing stock options for a tenth as much restricted stock. The company exchanged 17.6 million options for 1.7 million shares of restricted stock, recording $12.6-million in deferred compensation in the process. However, in the first and last quarters of its 2002 fiscal year, the company laid off a total of 464 employees, and some of that restricted stock was cancelled, as restricted stock was subject to forfeiture if an employee left the company before the stock vested. Therefore, the $12.6-million in deferred compensation was reduced to $7.3 million. Six months later, when the company expected to grant options to purchase 15.9 million shares, they instead granted 12.6 million, as a result of the workforce reductions.

When the original stock options were exchanged, the company stopped reporting compensation costs for them. The value of the restricted stock offered in exchange was calculated as of the dates they were granted and recognized over their vesting periods. “This treatment was incorrect since it failed to also include the unamortized stock compensation balance that remained on the original stock options,” Sycamore said. As a result, the company restated its compensation expenses for 2004, 2003 and 2002 with increases of $94.4 million, $110.1 million and $187.5 million, respectively.

The restatement had a negligible effect on Sycamore’s earnings for the 2004 fiscal year (which ended July 31, 2004), but it increased the company’s net loss for the fiscal years 2001, 2002 and 2003 by $29.9 million, $1.6 million and $0.8 million, respectively. Sycamore said it has taken several steps to correct the weaknesses in its accounting practices revealed by the investigation. It adopted a process to certify employee start dates, it revoked the stock administration group’s access to the stock option database and it rescinded the power of executive officers to authorize broad-based stock option grants. In addition, in July 2003, stock administration duties were placed under the direct supervision of the corporate controller.

Labels: database

Breeden, who has overseen scandal-plagued firms, seeks to profit from corporate cleanups

September 13, 2005
CNN/Money

NEW YORK (CNN/Money) - Richard Breeden, the former chairman of the Securities and Exchange Commission, is reportedly set to start a hedge fund that will focus on making money by pushing companies to improve their corporate governance practices.

The New York Times reported Tuesday that Breeden is seeking to raise between $500 million and $1 billion for the fund, which is to start Jan. 1. It is expected to hold large positions in the companies in which it invests, holding six to 12 investments at a time, according to marketing documents seen by the paper. The paper reports the fund will take an activist role pushing for corporate governance reforms.

Breeden has never headed an investment fund, but he has much experience pushing for reforms at the top of major companies. In addition to his time at the SEC, was appointed by a bankruptcy court to be monitor of WorldCom, now MCI (Research), the telecom that saw an accounting scandal cause the largest bankruptcy in history.

He was recently named corporate monitor for KPMG, the accounting firm that recently reached a $456 million settlement with federal prosecutors investigating the firm's role in questionable tax shelters. Breeden declined to comment on his investment plans Monday when contacted by the paper, though he did indicate that he would see through his role at KPMG.

The paper reports that Breeden Partners will get a 2 percent management fee and take 20 percent of profits, according to the marketing documents. That would mean that if the firm raises $500 million it would be paid at least $10 million, and significantly more if it able to make money on its investments.

While some hedge fund managers take a high-profile role in pushing companies to improve performances, Breeden's fund will "seek quiet reform where possible and become as actively involved as necessary to achieve desired transformations and prevent value-diminishing corporate actions," according to the marketing materials.

Labels: KPMG

Business booming for private security: Firms help escort supplies and rescue files

By Terri Langford
Houston Chronicle
September 12, 2005

Perhaps someone to get your cat and your Lamborghini out of the French Quarter? After Katrina's storm waters flooded New Orleans, the city's moneyed and corporate elite reached for their cell phones and called people like David Nicastro, who owns one of the many private security and risk management firms that have descended on the city.

"We're getting requests for all kinds of things," said Nicastro, president of Secure Source Inc., a risk consulting firm in Southlake, near Fort Worth. "We're lining up transportation services, any need you might have. Porta-Johns to fuel and other things. Everything needs to be escorted in."

As federal troops and rescuers struggled to get to New Orleans and other ravaged Gulf Coast areas last week, convoys of private security and risk consulting firms, many made up of ex-military and former law enforcement officers, quickly arrived on the scene.

"We're actively engaged in New Orleans," said Jodie Rosenbloom, spokeswoman for Kroll Inc., the New York-based risk management consulting firm, which has a mix of corporate clients and the "high-net-worth individual." The company, which stresses it is not a private armed security firm, has offered all clients storm damage assessments of their office buildings.

Computer data retrieval has been a large part of Kroll's job. "Since the storm hit, we're offering free evaluations, we're telling them not to power up their waterlogged hard drives," Rosenbloom said. "We've been busy."

Private security guards, many armed, are doing everything from checking on individuals' houses to retrieving damaged computer files to pulling out luxury cars and photographing storm damage. "We're chartering aircraft and getting people into their homes," Nicastro said. "We're protecting large companies."

Most of the private security consultants have been hired by Louisiana and Mississippi businesses. "You're looking at energy companies, critical infrastructure type of calls, real estate management to provide security for the owner," said former FBI agent Bob Doguim, president of Safeguard Security Holdings Inc. in Houston.

Some companies are working with the government as volunteers and contractors as well as with individuals. North Carolina-based Blackwater USA, like other companies, took about a day to get in place in Louisiana, a lightening-speed mobilization compared with the one organized by local, state and federal governments.

"We're working with the Coast Guard as well as some private sector clients," Blackwater spokeswoman Ann Duke said. Some companies are providing individual homeowners with protection against looters. For $150, Secure Source will check on your house.

"They want someone to drive by a few times a day and make sure it's not being looted," Nicastro said. "Some have us actually sitting on property to protect it. Some we are escorting in and want to get back into their home." Armed security stationed at the home costs between $700 and $2,000 a day, Nicastro said.

Before Katrina hit, Louisiana had about 185 private security companies licensed in the state, according to Wayne Rogillio, executive secretary for the Louisiana State Board of Private Security Examiners. By Friday, 33 more companies had registered.

John Moritz, who owns Moritz and Associates, a security firm in Houston, said Louisiana officials have been helpful and welcoming to private security personnel. "If you're properly licensed and all of your ducks are in a row, you can get over there," said Moritz, whose security personnel were hired to guard Gulf Coast casinos.

Until New Orleans engineers are able to pump out the floodwaters, security companies will continue to pour into the city and work with businesses and homeowners in retrieving and protecting their belongings.

"We're getting requests for all kinds of things," Nicastro said. "We've had one person who called to say, 'I've got my Lamborghini in the French Quarter, and I have to get it out.' " The client told Nicastro he only cared about his cat and car.

Labels: Kroll, Louisiana

S&P Ratings a Zero - The credit rating agency ends its corporate governance evaluation service.

By Rich Duprey
The Motley Fool
Sept. 12, 2005

In the wake of the scandals that ultimately engulfed and ruined investors in Enron and WorldCom, "corporate governance" became the watch phrase of the new millennium. This new attention to corporate governance, the manner in which a public company treats its shareholders, gave us Sarbanes-Oxley, a tough, costly, and perhaps overly burdensome means of keeping a closer eye on corporate management.

Yet the need for oversight was not lost on the private sector, either, as a number of companies and organizations developed criteria for sizing up and grading management behavior. Standard & Poor's, the credit rating agency, set up its own system but is now shutting down the service, which had long been struggling.
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Other ongoing services include the Corporate Governance Quotient (CGQ) that Institutional Shareholder Services (ISS), a proxy service provider, created its for 7,500 companies, including those in the Russell 3000. Individual investors, who are probably already familiar with ISS because of its pronouncements on company mergers, can check out a company's CGQ for free on the profile page at Yahoo! Finance.

The Corporate Library also created standards by which they also could keep tabs on management, as did GovernanceMetrics International, which rates more than 3,200 firms. When GMI released its latest ratings earlier this year, companies as diverse as Air Products & Chemicals(NYSE: APD), Cooper Industries(NYSE: CBE), and twin Inside Value recommendations 3M(NYSE: MMM) and Mattel(NYSE: MAT) had all earned top honors. Of the 34 companies that earned a 10 rating, fully 27 of them were U.S. corporations.

S&P's corporate governance effort was perhaps one of the more notable. Rather than apply a standardized list of metrics to the universe of stocks, S&P created a service whereby the companies requested they be rated. S&P would then go in and analyze those companies based on criteria in four broad categories: ownership structure and influence, financial stakeholder rights and relations, financial transparency and information disclosure, and board structure and process.

The first U.S. company to be rated was Fannie Mae(NYSE: FNM), the national home mortgage enterprise, which earned a corporate governance score (CGS) of 9 out of a possible 10. Interestingly, it was the only U.S. CGS ever made public, and it was also S&P's most controversial. Following Fannie Mae's high score, the government-sponsored enterprise became embroiled in an accounting scandal of a type that the score suggested should not have arisen.

The other U.S. companies -- and there were only a handful -- did not allow their scores to be made available. In January 2002, British firm BP(NYSE: BP) was the first public company to release its S&P score -- a 9.6.

The unique nature of S&P's effort, however, was made untenable because of cost. While a dollar amount was never revealed, a rating was estimated to cost a company between $20,000 and $100,000, depending upon how intensive an analysis was performed. With the advent of Sarbanes-Oxley, and the high cost of compliance associated with that federal regulation, the ability of companies to pay for additional ratings was sorely tested. As a result, S&P also pulled its rating of Fannie Mae, which had fallen as low as CGS-6, reflecting a "deterioration in the timeliness of disclosure as the company works to complete its financial restatement."

S&P's CGS ratings formed a part of its broader credit rating analyses, and the company will roll the service up into that portion of its business. It will still monitor corporate governance issues. Considering that it was up to the end user to decide whether to make S&P CGS ratings public, the ratings' value to the investing public was probably minimal. I mean, what company earning a CGS-1 would actually publicize it? But as one of the earliest efforts in holding management accountable for how it treated shareholders, the S&P system was a worthy effort that should be recognized.

Labels: Enron