China’s whistle-blowers cashing in on SEC hotline

Reports on the GSK corruption scandal in China, Iraq and Poland have now extended to Jordan and cropped-fca-whistle-knives.jpgLebanon. According to reports, the allegations concerning Jordan and Lebanon are similar to those made about bribery in Poland. account, GSK allowed doctors to bring family members on paid business trips and in some instances swap business-class airline tickets for economy, with the doctor pocketing the difference, according to a Wall Street Journal report. It is further alleged that GSK staff paid certain doctors to attend lecture and presentations that may not have taken place.”  I asked GSK to confirm if the initial reports to the US government were made by a whistle-blower but they have so far declined to comment. I imagine they are rather busy at the moment. Anyhoo, it look like those with inside knowledge of how GSK operates in the jurisdictions named above did indeed take advantage of the US Securities and Exchange Commission‘s whistle-blower hotline to expose their employers and lift the lid on commonplace corrupt practices. The business of whistle-blowing is taking off in China, with one specialist law firm offering people the chance to “uphold justice and win a huge bounty too.” The rewards may be long in coming, one woman who exposed alleged wrong-doing at JP Morgan Chase has been dealing with ‘a morass of  lawsuits‘ with her former employer since 2009. That said, a man who exposed dodgy loan schemes at the same bank received a USD64m reward for his efforts in March this year. That is ten per cent of the USD614m fine the bank had to pay out.

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SEC warning on agents and controls in HP bribery case

The computer giant Hewlett Packard has come under fire from the US Securities and Exchange Commission for breaches of the Foreign Corrupt Practices Act, related to payments made by company subsidiaries in Mexico, Poland and Russia. Issuing a USD108m penalty to HP, the SEC took the opportunity to issue a reminder of its FCA - Magnifying glass womanexpectations and requirements under the FCPA.

(On a personal note, I bought a new HP laptop a few months ago, had I known about the bribery case then, I probably would not have gone with them. I doubt losing my sale is anything more than a speck of dust on the HP magnifying glass, but imagine if everyone thought like that?)..

Back to the story…

Commissions paid for services are under scrutiny by the SEC and abuses or attempts to hide bribes under ‘commissions’ in company accounts will be penalised.

Internal controls – including anti-bribery policies, procedures and training should be implemented across firms, including in subsidiaries. This post from yesterday has some useful resources on internal controls.

Agents used to facilitate operations and conduct business on behalf of the firm should be subjected to due diligence.

“The company’s books and records reflected the payments as legitimate commissions and expenses. Companies have a fundamental obligation to ensure that their internal controls are both reasonably designed and appropriately implemented across their entire business operations, and they should take a hard look at the agents conducting business on their behalf.” Karen Brockmeyer, SEC Enforcement

The FCPA is not the only extra-territorial legislation that firms need to be on alert for. The UK Bribery Act 2010 affects UK citizens and companies globally, as well as foreign firms that are carrying on business in the UK.

More information in this report from The Guardian.

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SEC policy expected to encourage whistle-blowers in Asia

ImageThe number of whistle-blowing cases in Asia, including China, is expected to continue rising with a new policy by the US Securities and Exchange Commission (SEC) to protect whistle-blowers, analysts say.

The global crackdown on corruption and greater financial incentives to report wrongdoing could lead to a spike in the number of whistle-blowing cases involving US and British companies in Asia, according to a report by AlixPartners, an international business advisory firm.

“Our firm has seen an increase in the number of whistle-blower matters raised within China as a result of an increased focus on governance as well as the Chinese government’s focus on corporations such as GlaxoSmithKline [Pharmaceuticals],” said Mike Murphy, managing director at AlixPartners.

The Chinese government is investigating GSK, the biggest British drug firm, for suspected bribery on the mainland.

“The allure of rewards through SEC represents a source of concern for companies,” the AlixPartners report said.

Under a US whistle-blower programme established by the Dodd-Frank Act, those who report wrongdoing may receive financial rewards of 10-30 per cent of the fines imposed on a company by US authorities if their tips lead to successful enforcement.

In November 2011, Britain’s Serious Fraud Office launched its whistle-blower hotline but does not offer financial rewards for tip-offs.

Hong Kong’s Independent Commission Against Corruption also encourages whistle-blowing in corruption cases, the report said.

In late January, Sean McKessy, chief of the SEC’s Office of the Whistleblower, said the US regulator may soon file cease-and-desist orders as well as impose penalties against companies that punish employees who blow the whistle on them.

This month, the SEC will file an amicus curiae brief – evidence that may change a court decision – in support of Taiwanese whistle-blower Liu Meng-lin, which may reverse an earlier US court ruling, Main Justice, a US anti-corruption publication reported.

Liu, a former compliance officer at Siemens’ health care unit in China, had accused the German conglomerate of making inflated bids for medical imaging equipment sales to public hospitals and then selling the equipment at lower prices to intermediaries who gave kickbacks to hospital officials.

Siemens fired Liu in March 2011, which he claimed was illegal under the Dodd-Frank Act.

In October last year, US judge William Pauley ruled that provisions to protect whistle-blowers under Dodd-Frank did not extend outside the United States. In that court case, Pauley threw out a lawsuit by Liu that alleged Siemens had funnelled kickbacks to Chinese and North Korean hospital officials.

Following similar cases last year, concerns were raised that whistle-blowers in subsidiaries of American companies outside the US would not be afforded protection from the anti-retaliation provisions of the Dodd-Frank Act.

“This was likely to make it much more difficult for an employee in a Chinese subsidiary of a US business to blow the whistle on inappropriate acts,” said Keith Williamson, head of forensic and dispute services for Asia at Alvarez & Marsal, an international professional services firm.

Given that McKessy recently indicated the regulator may take action against employers that retaliate against whistle-blowers, this threat appears to have receded, said Williamson.

“I expect this to embolden whistle-blowers in China in bringing matters to their employer or the SEC, knowing the SEC may protect them,” Williamson said.

The number of whistle-blowing tips the SEC received from China soared from 10 in 2011 to 27 in 2012 and 52 last year, according to the regulator. China was the third largest source of tips to the SEC outside the US last year, behind Britain and Canada.

Globally, the number of tips jumped from 334 in 2011 to 3,238 last year, according to the SEC’s annual whistle-blower report.

Source – SCMP

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Eighth ex-SAC employee convicted of securities fraud

Source: NY Times Dealbook

Mathew Martoma had been on his way to being another American success story. Today, he is the eighth person who once worked for the hedge fund titan Steven A. Cohen to be convicted of insider trading.

A federal jury in Manhattan on Thursday found Mr. Martoma guilty of seeking out confidential information related to a clinical trial for an experimental drug for Alzheimer’s disease — information that enabled Mr. Cohen’s SAC Capital Advisors to earn $275 million.

The son of immigrant parents from India, Mr. Martoma, 39, graduated from Duke, attended Harvard Law School and earned an M.B.A. from Stanford Business School before he landed a job as portfolio manager at SAC, one of the most successful hedge funds in the world.

Now, Mr. Martoma is expected to receive a sentence of seven to 10 years in prison, legal experts said

As a guilty verdict on two counts of securities fraud and one count of conspiracy was read in the courtroom in Lower Manhattan, Mr. Martoma’s wife, Rosemary, a pediatrician, cried, while he sat stone-faced.

“We’re very disappointed and we plan to appeal,” said Richard Strassberg, a lawyer for Mr. Martoma

Mathew Martoma with his wife, Rosemary, after his conviction.Eduardo Munoz/ReutersMathew Martoma with his wife, Rosemary, after his conviction.

For Mr. Cohen, meanwhile, it is business as usual, albeit on a somewhat reduced scale. He is moving ahead with plans to convert his 22-year-old firm into a family office that will manage no outside money, just his $9 billion in personal wealth. The firm will still employ more than 800 people and maintain offices in several cities. At one point during Mr. Martoma’s trial, Mr. Cohen, a noted art collector, attended a New York Knicks basketball game at Madison Square Garden with the art dealer Larry Gagosian.

The case against Mr. Martoma was notable because it was the first time that Mr. Cohen was linked to questionable trades at his firm. The two men had a 20-minute phone conversation on July 20, 2008, the day before SAC began selling two drug stocks. For more than two years, federal prosecutors and agents with the Federal Bureau of Investigation pressed Mr. Martoma to cooperate and tell them what he and Mr. Cohen had discussed.

Steven A. Cohen, the founder of SAC Capital, was not charged.Steve Marcus/ReutersSteven A. Cohen, the founder of SAC Capital, was not charged.

But with the conviction of Mr. Martoma, an investigation that lasted almost a decade of Mr. Cohen, 57, and his Stamford, Conn., hedge fund may have seen its last criminal prosecution.

When SAC was indicted last summer, federal prosecutors called the onetime $14 billion firm a breeding ground for inside trading activity and a “veritable magnet for market cheaters.” And federal authorities have said they are continuing to investigate accusations of insider trading in several other stocks SAC traded.

But there are no pending criminal cases against any former or current SAC employees. (The firm agreed in November to plead guilty to insider trading violations and pay a $1.2 billion penalty.) And prosecutors are not close to bringing any charges against Mr. Cohen, according to a person briefed on the investigation, who spoke anonymously because he was not authorized to speak publicly about it.

Still, Mr. Cohen faces a civil action over an administrative failure to supervise charge filed by the Securities and Exchange Commission, which arises largely from the insider trading charges on which Mr. Martoma was convicted.

“Cohen built fire walls between him and the illegal action that so far have protected him from criminal proceedings,” said Erik Gordon, aUniversity of Michigan business professor.

Jonathan Gasthalter, an SAC spokesman, declined to comment.

Until his arrest in November 2012, Mr. Martoma had seemingly checked off all the boxes on the path to success. At SAC, he earned a $9.3 million bonus in 2008, which enabled him and his wife to buy a $1.9 million home in Boca Raton, Fla., for themselves and their three young children.

But much of Mr. Martoma’s adult life was checkered with cheating.

In 1999, he was kicked out of Harvard for doctoring his law school transcript to try to gain a federal clerkship. Soon after, he changed his name from Ajai Mathew Thomas and was admitted to Stanford, where officials were apparently unaware that Mr. Martoma had been expelled from Harvard. His deception at Harvard remained a secret for years, even among those who worked alongside him at SAC.

Prosecutors said that in July 2008, two years after he began working at SAC, Mr. Martoma “seduced” and “corrupted” two doctors to provide him with confidential information about problems with a clinical trial for an experimental Alzheimer’s drug being developed by Elan and Wyeth, two pharmaceutical companies. SAC had amassed $700 million worth of shares in the two companies, based largely on Mr. Martoma’s recommendation.

After a secret meeting on July 19, 2008, with one of those doctors, who had disclosed the final results of the trial, Mr. Martoma called Mr. Cohen at his home on a Sunday, prosecutors said. The very next day, at Mr. Cohen’s instructions, the hedge fund began selling those stocks.

The jury convicted Mr. Martoma of charges that he used that inside information to recommend that SAC liquidate its position in those stocks.

Even though prosecutors introduced evidence that he played an instrumental role in the selling of those stocks over four days, Mr. Cohen was not charged with wrongdoing.

The sales enabled SAC to avoid losses and generate profits totaling $275 million by the time the drug companies publicly announced the results of the clinical trial on July 30, 2008.

“Martoma bought the answer sheet before the exam,” said Preet Bharara, the United States attorney in Manhattan.Chester Higgins Jr./The New York Times“Martoma bought the answer sheet before the exam,” said Preet Bharara, the United States attorney in Manhattan.

“Martoma bought the answer sheet before the exam,” said Preet Bharara, the United States attorney in Manhattan.

Dr. Sidney Gilman, a former University of Michigan medical professor and an expert in brain diseases, who provided Mr. Martoma with those final clinical trial results, testified that an F.B.I. agent told him in September 2011 that the real target of the investigation was Mr. Cohen.

“I am just a grain of sand, as is Mr. Martoma,” Dr. Gilman recalled the F.B.I. agent telling him.

Mr. Martoma’s lawyers sought to undermine the credibility of Dr. Gilman, while also raising questions about whether the information the doctor said he had passed on to Mr. Martoma was in fact secret.

The conviction of Mr. Martoma adds to the perfect record of the United States attorney’s office in Manhattan in prosecuting insider trading cases in the hedge fund industry. The office has now secured 79 convictions or guilty pleas since the current crackdown began with the October 2009 arrest of the Galleon Group founder Raj Rajaratnam, who was convicted of 14 counts of securities fraud and conspiracy in May 2011.

Throughout the trial, Mr. Martoma sat next to his lawyer, quietly taking notes. His calm demeanor was a stark contrast to his reaction when F.B.I. agents first approached him in 2011 to tell him they were investigating him for insider trading and wanted him to cooperate. Mr. Martoma briefly fainted and then refused to cooperate with the authorities.

The judge, Paul G. Gardephe of United States District Court in Manhattan, did not immediately set a sentencing date for Mr. Martoma, who has been free on bail since his arrest.

The trial began as Judge Gardephe unsealed information in the case revealing that Mr. Martoma had been expelled from Harvard in 1999 for changing several Bs to As on his transcript, including one for a course in criminal law. But the evidence of Mr. Martoma’s cheating at Harvard was not introduced at trial.

The jury of seven women and five men, which included the chief executive of a shoe and accessory company, a New York University professor and a lawyer, reached a verdict after a little more than two days of deliberations. Several jurors contacted immediately after the verdict declined to comment.

An alternative juror who was dismissed on Tuesday at the start of deliberations said he had initially thought that Mr. Martoma was not guilty, but had changed his mind.

“I don’t think there was one smoking gun or slam-dunk piece of evidence that would have swayed anyone 100 percent,” said the juror, Joseph Linksman, who is also a lawyer. “It was all the circumstantial evidence tied together that created a story that made a lot more sense.”

Prominent Bitcoin entrepreneur charged with money laundering

NEW YORK (Reuters) – The vice chairman of the Bitcoin Foundation, a trade group promoting the adoption of the digital currency, has been charged by U.S. prosecutors with conspiring to commit money laundering by helping to funnel cash to illicit online drugs bazaar Silk Road.

Charlie Shrem, who had financial backing from the Winklevoss twins and is well known as one of the bitcoin’s biggest global promoters, was arrested on Sunday at John. F. Kennedy International Airport in New York, the U.S. Attorney’s Office in Manhattan said on Monday.

Shrem, who was also charged with operating an unlicensed money transmitting business, appeared in U.S. District Court in Manhattan on Monday and was released on $1 million bond.

“At this point the allegations in the complaint are simply allegations, and Mr. Shrem is presumed innocent,” his lawyer Keith Miller said.

The 24-year-old entrepreneur, who lives above a bar he jointly owns in Manhattan that accepts bitcoins as payment, was CEO of BitInstant, a bitcoin exchange company that closed last summer. According to prosecutors, Shrem conspired with a Florida resident, Robert Faiella, who ran an illegal exchange, to sell more than $1 million in bitcoins to users of Silk Road, which was shuttered by authorities last year.

Faiella, 52, is also charged in the complaint filed in U.S. District Court in Manhattan with conspiring to commit money laundering and operating an unlicensed money transmitting business. He was arrested at his home in Coral Gables, Florida. At his court hearing on Monday in federal court in Florida, Faiella consented to detention until Wednesday, at which point there will be a bail hearing.

Shrem could not be reached for comment. A person who answered the phone at Faiella’s house and declined to be identified said, “Nobody wants to talk.”

Bitcoin is a digital currency that is not backed by a government or central bank and whose value fluctuates according to demand by users. Users can transfer bitcoins to each other over the Internet and store the currency in digital “wallets.”

The criminal complaint says that Shrem, in addition to knowing that Faiella’s business was funneling money into Silk Road, also used Silk Road himself to buy drugs, including marijuana-infused brownies.

“When Bitcoins, like any traditional currency, are laundered and used to fuel criminal activity, law enforcement has no choice but to act,” Preet Bharara, the U.S. attorney for Manhattan, said in a statement emailed to the press on Monday. “We will aggressively pursue those who would co-opt new forms of currency for illicit purposes.”

Bharara has said recently that prosecutors are not going after Bitcoin itself and view it as they view any other currency in which transactions are sometimes made illegally.

U.S. law enforcement officials have vowed to pursue any criminal activity in the nascent Bitcoin world as regulators try to formulate their approach to the digital currency.

The charging of a prominent Bitcoin Foundation official may be a blow to Bitcoin’s prospects, though it did not have a huge immediate impact on trading. Bitcoins were exchanging hands at $970 late on Monday, down from prices above $1,000 earlier this month but up from around $150 four months ago on the Tokyo-based exchange MtGox.

Winklevoss Capital, which is run by twin brothers Cameron and Tyler Winklevoss, invested in BitInstant in 2012 and led a capital-raising effort last May that raised $1.5 million. The twins, who are best known for their failed lawsuit against Facebook founder Mark Zuckerberg in which they had claimed he had stolen their idea for an online social networking platform at Harvard, have been seeking regulatory approval for a bitcoin exchange-traded fund.

“When we invested in BitInstant in the fall of 2012, its management made a commitment to us that they would abide by all applicable laws – including money laundering laws – and we expected nothing less,” the Winkelvoss twins said in a statement. “Although BitInstant is not named in today’s indictment of Charlie Shrem, we are obviously deeply concerned about his arrest,” they said. “We were passive investors in BitInstant and will do everything we can to help law enforcement officials.”

As part of the conditions of his bail, Shrem will be confined to his parents’ home in the Marine Park section of Brooklyn. A report prepared by the court for his bail hearing listed his net worth at $6 million, according to U.S. Magistrate Judge Henry Pitman. Serrin Turner, an assistant U.S. attorney, opposed bail, saying Shrem had a “strong incentive to flee” and the means to do so.

Bitcoin insiders said Shrem’s arrest showed just how hard it is to get away with illegal activity using Bitcoin, which has an ownership chain built into its software so that each unit can be tied to the users who have acquired or spent it.

“Using bitcoin for illicit transactions is really, really dumb,” said Patrick Murck, the Bitcoin Foundation’s general counsel. “Bitcoins are so easy to track.”


According to the charges, Faiella, going by “BTCKing” online, sold bitcoins to Silk Road users and passed on purchase orders he received from the site to Shrem, who filled them, transferring funds to Faiella’s account at an unidentified bitcoin exchange service based in Japan.

The charging document says that Shrem failed to report suspicious activity to regulators “with respect to numerous Bitcoin purchases” Faiella made from BitInstant.

The document contains email conversations between Shrem and BitInstant’s co-founder, who is not identified in the charges but is listed on BitInstant’s website as Gareth Nelson, in which Shrem tried to hide his dealings with Faiella by pretending to ban him from BitInstant’s exchange platform.

“You are hereby banned from our services,” he wrote in an email to BTCKing that he copied to Nelson.

According to the complaint, Shrem then privately wrote to BTCKing, without including Nelson. “Your email address is banned,” Shrem wrote, “but you can use a different one.”

Bitcoins have been gaining wider acceptance recently. The Sacramento Kings basketball team earlier this month became the first professional sports franchise to say it would allow purchases using bitcoins. Last month, ecommerce site announced its plan to become the first major U.S. retailer to accept the digital currency.

Created in 2009 by a developer or team of developers going by the name Satoshi Nakamoto, whose true identity remains unknown, the bitcoin’s earliest adopters have included people expressing a desire to conduct their affairs in a realm outside of government-sanctioned commercial spaces.

Some of that sentiment is visible in the charges against Shrem and Faiella. In one online interaction, Shrem tried to assure Faiella he was being discreet.

“The art of hiding is making people think you are someone else,” he wrote. Faiella replied: “You must understand that the people that we pay taxes to have a long reach and I like to stay away from that.”

(Reporting by Emily Flitter in New York; Additional reporting by Nate Raymond in New York and Brett Wolf in St. Louis; Editing by Leslie Adler)

Source: Reuters

The gift that keeps on giving: former ChinaCast execs charged with fraud and insider dealing


inside (Photo credit: ribarnica)

It seems like not a day goes by without some insider trading related charge hitting the newswires, much to the amusement of us observers. Hopefully the message is getting through to the practitioners – insider trading is a bad thing. Or perhaps I am a little naive. Perhaps insider trading deals and market manipulation is going on throughout the financial system. For each one successfully pursued by ever more aggressive regulators, there are a thousand more undetected cases of manipulation, collusion and sensitive information sharing flying under the radar.

Today’s insider story comes from the US Securities and Exchange Commission, which has charged the ex CEO of a Chinese firm with stealing tens of millions of dollars from US investors after the firm’s Initial Public Offering in and another executive with illegally dumping stock.

SEC allegations

Chan Tze Ngon, the former CEO and board chairman of ChinaCast Education Corporation allegedly ‘transferred $41 million out of the $43.8 million raised from investors to a purported subsidiary in which he secretly held a controlling 50 percent ownership stake.  From there, Chan transferred investor funds to another entity outside ChinaCast’s control.  Chan also secretly pledged $30.4 million of ChinaCast’s cash deposits to secure the debts of entities unrelated to ChinaCast.  None of the transactions were disclosed in the periodic and other reports signed by Chan and filed with the SEC.’

As for the insider trading charges Jiang Xiangyuan, ChinaCast’s former president for operations in China, allededly ‘avoided more than $200,000 in losses by illegally selling approximately 50,000 ChinaCast shares after participating in the ownership transfer of one of company’s revenue-generating colleges before it was publicly disclosed by a new management team.  ChinaCast had a market capitalization of more than $200 million before these alleged frauds came to light.  After Chan and Jiang were terminated and their misconduct was publicly disclosed by new management, ChinaCast’s market capitalization dropped to less than $5 million.’

The SEC has charged Chan  breaching Section 17(a) of the Securities Act of 1933 – dealing with fraudulent interstate transactions -, Section 10(b) – position limits and accountability – of the Securities Exchange Act of 1934 and Rule 10b-5 –  as well as violations of various corporate reporting, record-keeping, and internal controls provisions.  Jiang faces illegal insider trading charges under the same statutes.

The SEC’s investigation continues.

Market fraud: Thai trader settles USD5.2m case with SEC

pork butts on in the smoker

A Thai stock market trader has agreed to settle a market fraud charge worth USD5.2m and the Thai Ministry of Finance had nothing to do with it. The man allegedly made a 3,400 per cent return based on insider information, which the US SEC spotted, swooped down on and froze within a week of the trades taking place.  This interesting story highlights both the US government’s willingness to pursue insider traders and how efficiently they do it.
Sniffing out processed pork trades
Badin Rungruangnavarat, a trader based in Bangkok, allegedly bought thousands of call options and single stock futures contracts in Smithfield Foods, a pork processing firm based in the US, via the Interactive Brokers LLC, also based in the US. The SEC accused Rungruangnavarat of making these purchases based upon a tip he gleaned from a Facebook comment, from a friend who happens to work at an investment bank and had material and non-public information about the potential acquisition of Smithfield.
Rungruangnavarat was accused of buying the contracts and options between May 21 and 28. On May 29th, Smithfield announced its acquisition for USD4.7bn by a Chinese company. Following the announcement, Smithfield’s share value increased by almost 25 per cent, resulting in the whopping 3,400 per cent return on investment. The Thai trader tried to withdraw more than USD3m in profits from his brokerage account on June 3rd, according to the SEC’s announcement on the matter.
Such a high return, based on aggressive trading and made just before an acquisition announcement would raise red flags for potential market abuse. Perhaps the trader thought being in Thailand would mean the US authorities might not notice his trades, or might not bother to pursue them.
He could not have been more wrong. The US managed to freeze his assets within one week of the trades and, three months later, the trader has agreed to give up the USD3.2m he allegedly made from the trades and pay a USD2m while not admitting or denying wrongdoing, according to a report in the why would anyone cough up the extra USD2m if they were innocent?
Rapid action
One week after the acquisition went public, the SEC in the US had managed to obtain an order which effectively hogtied Rungruangnavarat from the other side of the world. The order froze the proceeds of his securities purchases, granted the authorities expedited discovery and made it illegal for Rungruangnavarat to destroy any evidence. In short, he could not touch his money, had the SEC’s investigators crawling all over his account, and was facing charges if he attempts to hide the electronic or paper trail.
Rungruangnavarat breached  s 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5, on Selective Disclosure and Insider Trading, according to the SEC.