Commentaries

The $1.2 billion fraud alleged at Russia’s largest bank

Tucked away on page 4 of the Moscow Times today there is a remarkable article which made me wonder whether I wasn’t hallucinating.

The report states matter-of-factly that several branch managers are being investigated for defrauding $1.2 billion from Sberbank, Russia’s largest bank. That’s according to comments made by Sberbank’s regional manager for Moscow. The Moscow Times translated the article from Thursday’s edition of the Russian newspaper Vedomosti, where it appears on page 7.

According to this article, Sberbank suspects managers at three Moscow branches of doling out “thieving” loans, on the basis of “fictitious” documents, to “dubious” companies. The scale of the resulting losses at these three branches? “More than 35 billion roubles” ($1.2 billion).

When you include similar goings-on at other branches, the total figure for Sberbank’s “dubious” loans appears to be even higher still: 46.1 billion roubles, or some $1.6 billion. That it is more than double Sberbank’s total profits for last year.

This isn’t the first time that I have seen reports about fishy goings-on at the Sberbank. The fraud allegations first trickled out last summer (back then the allegations concerned just a single branch, and the figure for the losses was a mere $180 million). The news attracted so little attention it was hard to know what to make of it.

Welcome to the often surreal nature of modern Russia. The muted reaction brings to mind several other major fraud scandals over recent months that have been treated in an equally off-hand fashion.

Last April, for instance, a Moscow court convicted a certain Viktor Markelov for stealing 5.4 billion roubles ($180 million) from the Russian budget. Yet it wasn’t until December – seven months after Markelov’s conviction – that Russia’s state news agency RIA-Novosti reported on the case. It wouldn’t have attracted any attention at all, but for the scandalous death in prison in November of Sergei Magnitsky, a lawyer for the hedge fund Hermitage Capital, who had accused several police officers of complicity in the fraud.

Russia’s shocking corruption belies Medvedev’s tough rhetoric

Everyone knows that Russia is corrupt, but did you know just how corrupt? The short answer is: more than any other country. That, at least, is the conclusion of a survey just published by PricewaterhouseCoopers, which examines the level of economic crime around the world.

PwC canvassed more than 3,000 companies in 55 countries, 89 of them in Russia. It asked them if they had been the victim of frauds such as embezzlement, bribery and crooked accounting. Russia topped the list, with 71% of respondents reporting at least one instance of fraud during the previous twelve months.

The PwC report makes alarming reading for potential investors. The extent of fraud in Russia is even worse than in Kenya (67%) or South Africa (62%), the next countries down the list. Russia’s score was also far above the global average (30%), as well as the averages for Central and Eastern Europe (34%) and BRIC countries (34%). What’s more, there has been a “shocking” rise in the prevelance of fraud in Russia since the last PwC survey in 2007. 

Is UBS’s 8 million pound fine enough?

Not long ago, UBS was the pride and joy of its Swiss home. There it was, slugging it out with the big boys, and making a fair fist of joining the bulge bracket banks from New York.

That was before it all started to go wrong. The banking crisis produced a loss of $52 billion, but much worse has been the reputational damage done in that most Swiss of financial services, the discreet management of private fortunes.

The US authorities forced UBS to disgorge names of their citizens suspected of failing to pay enough tax on their hordes, squeezing a $780 million fine out of the bank in settlement.

Set next to that, the 8 million pounds that Britain’s Financial Services Authority has just extracted looks derisory. On Thursday the FSA revealed that UBS clients in London had lost 42 million dollars through the misuse of their accounts. The method was simple and old-fashioned; the employees would make a forex trade, and wait to see whether it was profitable before allocating it to an account. Heads they won, tails the client lost.

The bank has shut the stable door, and “deeply regrets” the affair (although not deeply enough to put a statement on its website). By 2007, when it took place, even the doziest compliance department should have long since ensured that this practice was impossible. Compliance at UBS was so fast asleep that they only woke up when a whistleblower told them. Bleating that the bank “has already taken full remedial steps” merely sounds pathetic.

Fining companies for the sins of their employees is always problematic, since the shareholders are footing the bill. In this case, the FSA might have insisted that UBS pursue the miscreants through the courts. That won’t bring back the $42 million, but it would force the bank to wash its dirty linen in public, as well as discouraging others who might be tempted to cheat this way elsewhere.

As it is, UBS is more likely to want to bury the affair with minimum publicity. A court case would cause even more of its valuable private clients flee to better-managed businesses, and who could blame them?.

The SEC’s animal house

Mary Schapiro wants her lawyers and investigators at the Securities and Exchange Commission to go back to school. Specifically, she wants them to enroll in something she calls “fraud college.”

From what I gather, the SEC’s “fraud college” will be an intensive training program to help the agency’s employees better detect fraud. It’s not the worst idea. But as Bess Levin at Dealbreaker points out it does sound a bit silly.

Question: Will Schapiro put any investigators who flunk out of “fraud college” on double secret probation?

SEC is still fumbling the ball

Maybe someday the Securities and Exchange Commission will figure out what to do when it gets a credible tip about potential wrongdoing. But judging by the agency’s handling of a recent investor complaint, the nation’s top securities cop has a long way to go.

This tale begins in March, when an investor in Britain sent an email to Bill Singer, a New York securities lawyer, complaining about a cold call he had received from someone purporting to be from a brokerage firm in Peoria, Illinois, calling itself AJ Witherspoon & Co. The call was an effort to interest him in a transaction involving shares in a company called SecureTee International.

For years, Singer says a number of apparently fictitious Illinois brokerage shops have been cold-calling European investors, trying to get them to buy and sell “pre-IPO” shares of SecureTee — a onetime Nevada-based company that has never filed an actual initial public offering registration statement with the SEC. Occasionally, Singer has been contacted by investors who say they have been scammed and he has usually passed on the information to the SEC.

In the past, Singer says the SEC hasn’t done much with the information. And he wasn’t expecting anything different this time around, after he forwarded the investor’s complaint to the SEC’s online whistle-blower and tips hotline.

But this week, Singer and the investor actually got a response back from the SEC. It came from Jim Daly, a lawyer in the SEC’s Office of Investor Education and Advocacy. In the emailed response, Daly informed the investor that “despite the alleged Peoria, Illinois address,” AJ Witherspoon probably isn’t located in the United States. And the cold call likely was part of a “scam/fraud.”

In light of the way the SEC dismissed all those tips about the hanky-panky going on at Bernie Madoff’s firm, the response from Daly clearly represents some progress. But the problem is there’s so much more the SEC should be doing in cases like this and regulators continue to miss an opportunity to crack down on scams in real time.

If the SEC has done enough research to determine that the regal-sounding AJ Witherspoon is probably nothing more than a sham, why is it only providing this guidance to potential victims on a one-on-one basis? The website for AJ Witherspoon is still up and running. The apparently faux brokerage has an active Chicago-area phone number. There’s every indication the would-be broker is still hunting for prey. Surely, other investors are getting calls and some may even be turning over money to AJ Witherspoon.

Alex on Stanford

Alex Dalmady, the man who got the ball rolling on R. Allen Stanford, has the last word of the day on the alleged $7 billion scamster.

Stanford: a little help from his friends

You can officially called R. Allen Stanford the alleged criminal mastermind of a giant multi-year Ponzi scheme.

Stanford’s name, of course, is all over the 21-count indictment. But the big shocker in the investigation into the $7 billion fraud involving those bogus certificates of deposit is an allegation that a top regulator in Antigua–where Stanford’s offshore bank was based–was on the take.

OK. Maybe that’s not such a shocker, given the fact that the former prime minister of Antigua basically gave Stanford a blank check to do whatever he wanted on the tiny island nation–including a chance to help write the country’s banking laws.

But in filing criminal charges against Leroy King, the former administrator and chief executive officer for the Antigua financial services regulatory commission, US prosecutors have a shed a lot more light on the years of deception that was at the core of Stanford’s sprawling financial empire. Prosecutors are charging King took bribes in excess of $100,000 from Stanford to help conceal the allegedly fraudulent activites at Stanford’s bank from the Securities and Exchange Commission.

Like Stanford, King is both a US citizen and a citizen of the double island nation of Antigua and Barbuda. Stanford was knighted by the former ruling party in Antigua.

Stanford also got some friendly help after the Securities and Exchange Commission filed civil fraud charges and effectively shutdown his high-pressured CD machine in February. Prosecutors seperately charged Bruce Perraud, a Stanford security specialist, with allegedly ordering the shredding of documents at a Stanford Financial Group office in Ft. Lauderdale.

 The shredding party took place on Feb. 23, six days after the SEC stepped in and the a court-appointed receiver ordered all of the company’s 4,000 employees to preserve documents.

Sir Allen arrested

Finally. R. Allen Stanford, the alleged mastermind of the second largest Ponzi scheme on record, was arrested by the FBI on Thursday evening and will be officially criminally charged on Friday.

The criminal charges against Stanford, the Texas financier with the offshore bank in Antigua, comes nearly four months after the Securities and Exchange Commission filed civil fraud charges against him, and moved to shut-down his sprawling Houston-based financial empire.

Stanford was arrested in Virginia at a relative of his girlfriend at around 9 p.m. True to form, Stanford’s legal team tried to spin the media by saying Stanford had turned himself him. But I’m told by sources that’s simply not true.

On Friday will learn a lot more when the federal indictment against Stanford is officially unsealed. Stay tuned, I’ll be updating throughout the day.

BofA and the fraudster

Ken Lewis spent much of the day on Capitol Hill getting grilled about Bank of America’s acquisition of Merrill Lynch during the heat of the financial crisis. But Lewis may have bigger things to worry about down the road, as his bank’s past dealings with a hedge fund fraudster just won’t go away.

A federal appeal court, in a little-noticed ruling, reinstated an aiding-and-abetting claim filed against BofA by some former investors of Michael Lauer, who master-minded a billon dollar hedge fund fraud. A federal trial court judge in New York had dimissed the case against Bofa, which was the prime broker for Laurer’s $1 billion Lancer funds. But the appeals court, without determining the merits of the allegations, says the investors should be able to press ahead with their claim against the big bank. 

Scott Berman, the lawyer representing the investors in the lawsuit, says the bank could be liable for hundreds of million in damages, if the lawsuit is successful. Berman’s clients claim that BofA, as prime broker, should have known that Lauer was falsifying his funds’ valuations in order to inflate management fees.

Lauer managed to garner a number of prominent investors for his domestic and offshore funds, including Britney Spears, the University of Montreal Pension Plan and Morgan Stanley.

The Securities and Exchange Commisssion, last September, prevailed in a lawsuit charging Lauer with defrauding investors by falsifying valuations and manipulating several of the penny stocks his fund had invested heavily in.

It’s too early to say how this lawsuit will turn out for Bofa. But one thing is certain: no one is claiming Bofa was pressured into serving as a prime broker for Lauer.