Financial Regulatory Forum

ANALYSIS-Madoff whistleblower tries new shield tactic in bank-fraud suits

19:09 03Feb11 -REFILE-ANALYSIS-Madoff whistleblower tries new shield tactic (Refiles to fix typo in headline) * Markopolos turns to Delaware law to protect whistleblowers * Markopolos boasts of more fraud cases “in pipeline” By Ross Kerber and Tom Hals BOSTON/WILMINGTON, Del., Feb 3 (Reuters) – Delaware touts itself as a business-friendly haven, but a new strategy by a well-known whistleblower takes the rules in an unexpected direction. Recent suits against major banks claiming they defrauded public pension funds were filed by Delaware partnerships tied to Harry Markopolos, an associate said. Markopolos is the Massachusetts fraud investigator best known for trying to tip authorities to Bernard Madoff’s massive Ponzi scheme. It is not unusual for companies to file suits seeking a share of damages that officials might recover in fraud cases. The twist is that by using Delaware entities that disclose few details about themselves, Markopolos has made it easier to shield the identities of the insiders who bring forward evidence of wrongdoing, said Patrick Burns, spokesman for Taxpayers Against Fraud, a Washington group Markopolos has worked with in the past. “This was something Harry figured out,” Burns said in an interview on the recent cases. “It’s to protect the anonymity of the whistleblowers who are still in their industries, and helped set up teams of whistleblowers who can work together.” Markopolos declined to comment via e-mail. Burns declined to discuss many more specifics. Another person who has worked with Markopolos, Los Angeles attorney Mark Labaton of Motley Rice, said the new partnerships also could be a way to protect whistleblowers from retaliation from companies whose fraud they are reporting, a concern Markopolos has expressed in the past. “That is something new and I think it reflects a certain amount of creative thinking,” Labaton said of the partnerships. Just how to protect the identity of whisteblowers has been a hot topic among like-minded attorneys in the past, he said. DELAWARE FILINGS The suits against the banks claim they overcharged public pension funds. They include one filed in Fairfax County, Virginia, circuit court by a Delaware partnership, FX Analytics, against Bank of New York Mellon Corp <BK.N>, in which Virginia Attorney General Kenneth Cuccinelli has intervened; and one unsealed in 2009 by then-California Attorney General Jerry Brown against State Street Corp <STT.N>, which states it was built on a suit first filed by another Delaware corporation Associates Against FX Insider Trading. Also, on Thursday Florida Attorney General Pam Bondi filed a motion to intervene in and unseal a case that FX Analytics had filed against Bank of New York Mellon. [ID:nN03280263] The two large custody banks deny wrongdoing. Neither partnership provided many details in filings, a common omission permitted by state rules. They were created in 2008 and 2009. The partnership strategy fleshes out some details that Markopolos has left vague in past interviews, and shows the growing power of investigators and attorneys to leverage laws such as the False Claims Act and state statutes. Broadly these allow individuals who bring forward evidence of fraud to share in money recovered by the government. Such cases are on the rise. Last fall a former GlaxoSmithKline PLC <GSK.L> employee was awarded about $96 million after reporting problems at a drug-making plant in Puerto Rico, believed to be a record recovery. Also, in a Jan. 24 letter to U.S. Sen. Charles Grassley of Iowa, officials noted the number of new Justice Department healthcare fraud investigations — often sparked by whistleblowers — had risen 10 percent in fiscal year 2010 from 2009, after rising 17 percent that year compared with 2008. It is not unusual for these suits to be brought by companies rather than individuals. Just on Tuesday, for instance, a Texas jury ordered a unit of Iceland’s Actavis to pay $170 million for overcharging the state’s Medicaid program, in a case first brought by the owners of Florida pharmacy Ven-a-Care, themselves a group of former healthcare workers. LEGAL SECRECY Ven-a-Care has been quite public about its role. Delaware laws allow partnerships like FX Analytics much secrecy, however, under a state effort to get companies to register themselves under its business-friendly laws. The state says it has attracted more than 50 percent of all U.S. publicly traded companies, including nearly two-thirds of the Fortune 500. Lately the lack of transparency has itself come under fire as potentially aiding tax fraud or terrorism. Michigan Sen. Carl Levin has criticized the state and Nevada for allowing businesses to set themselves up with “less information than is required to open a bank account or get a driver’s license,” as Levin told a Senate hearing in 2004. SHADOWY IMAGE Markopolos himself has cultivated a somewhat shadowy image, an approach he has said in interviews was needed to help protect employees rooting out fraud. Markopolos discussed some of his thinking in the book he published last spring, “No One Would Listen,” about his unsuccessful efforts to get securities regulators interested in Madoff years before his scheme blew up. In it Markopolos described how matters he unearthed became the basis of the fraud suit filed by California against State Street Corp. “I have many other cases in the pipeline,” Markopolos wrote. He added, “In fact I intend to be in this business until I can’t find any more financial or Medicare frauds — which makes me think I’m going to be in the whistleblower business for a long, long time.” (Reporting by Ross Kerber; additional reporting by Tom Hals), editing by Matthew Lewis) ((Ross.Kerber@ThomsonReuters.com; + 1 617-856-4341; Ross.Kerber.Reuters.com@Reuters.net)) Keywords: WHISTLEBLOWERS/MARKOPOLOS Thursday, 03 February 2011 19:09:44RTRS [nN03135825] {C}ENDS

Harry Markopolos, a former financial executive, testifies before a House Financial Services Subcommittee on "Assessing the Madoff Ponzi Scheme and Regulatory Failures" in Washington February 4, 2009. Markopolos, who tried to blow the whistle on Bernard Madoff, told Congress that securities regulators had ignored his repeated pleas for a thorough investigation of the accused swindler's alleged $50 billion fraud. REUTERS/Jason Reed By Ross Kerber and Tom Hals

BOSTON/WILMINGTON, Del., Feb 3 (Reuters) – Delaware touts itself as a business-friendly haven, but a new strategy by a well-known whistleblower to pursue bank-fraud suits takes the rules in an unexpected direction.

Recent suits against major banks claiming they defrauded public pension funds were filed by Delaware partnerships tied to Harry Markopolos, an associate said.

Markopolos is the Massachusetts fraud investigator best known for trying to tip authorities to Bernard Madoff’s massive Ponzi scheme. (more…)

SEC cracks down on disclosure of lawsuit costs (Westlaw News & Insight)

By Carlyn Kolker

NEW YORK, Feb 3 (Reuters Legal) – The U.S. Securities and Exchange Commission is cracking down on corporate disclosure of litigation costs, a Reuters Legal analysis has found. In particular, the agency is targeting banks and other institutions that have reported large settlements of financial crisis-related lawsuits that they had not disclosed in prior regulatory filings. (more…)

SEC whistleblower rules raise risk for companies, lawyers say (Complinet)

By Emmanuel Olaoye

NEW YORK, Feb. 2 (Complinet) Proposed increases in federal rewards for whistleblowers who report securities violations to the Securities and Exchange Commission raise the risk that employees will go outside their firms to report trouble, according to industry officials. Firms can avoid being the victims of potential whistleblowers by better publicizing their internal channels for reporting wrongdoing and getting creative with incentives for using them, they said. (more…)

U.S. corporate shareholders gain more (frequent) say-on-pay (Westlaw Business)

Lloyd Blankfein (R) of Goldman Sachs and his wife Laura arrive for the state dinner hosted by U.S. President Barack Obama and first lady Michelle Obama for President of China Hu Jintao at the White House in Washington, January 19, 2011. REUTERS/Jonathan ErnstBy Erik Krusch

Feb. 2 (Westlaw Business) – Dodd-Frank and SEC-bolstered shareholders officially have a say on company pay. The SEC recently adopted rules requiring companies to hold say-on-pay, say-on-pay frequency, and golden parachute approval votes. Companies from Deere & Co. and Apple to Johnson Controls and Monsanto’s proxies are drafted, filed and poised to comply with the new rules. Companies and shareholders, however, still have plenty to hash out around the mechanics of executive compensation votes this proxy season. (more…)

US Fed cash-flow data called underused weapon in war on drugs (Complinet Special Report)

U.S. Attorney Jeffrey H. Sloman (C) of the Southern District of Florida speaks at a press conference in Miami, Florida March 17, 2010. Sloman announced a settlement that the Wachovia Bank unit of Wells Fargo & Company has agreed to pay $160 million as part of a deal to settle U.S. allegations that it laundered Mexican drug money. At left is Deputy Chief Counsel Daniel Stipano of the Office of Comptroller of Currency and at right is Mark Trouville, Special Agent in Charge, Drug Enforcement Administration, Miami Field Office. REUTERS/Joe SkipperBy Brett Wolf, Complinet

ST. LOUIS, Jan. 31 – The consumption of illegal drugs generates tens of billions of dollars for Mexico’s drug cartels each year, and the fight against it creates significant challenges for those who oversee and participate in the US financial system. The river of money flows into Mexico mostly in the form of cash, often hidden in secret vehicle compartments. The money feeds cartel operations and stokes conflicts with the government and with rivals that have killed an estimated 35,000 people during the past four years. US authorities have bolstered their efforts to halt the cross-border cash shipments, but their progress has been limited. Policymakers are desperately searching for better ways to fight the flow.

An investigation by Complinet has revealed details of how the money flows, and a potentially underused tool: the closely held “country flow” data maintained by the New York Federal Reserve Bank. The records, only recently made public, document the international flow of US cash and could help to illuminate the shadowy paths taken by drug money. They are so closely guarded, however, that experts say the ground-level investigators who could make the best use of it never see it, and the issue is so sensitive most government officials are unwilling to talk about it for attribution.

(more…)

Reputation risk may outweigh fines in UK financial regulator enforcements (Complinet)

A man is seen behind the entrance door of the offices of the Financial Services Authority (FSA) in Canary Wharf, London, November 19, 2010By Joanne Wallen (Complinet)

Jan. 25 – British firms continue to be referred to enforcement despite the best intentions of the Financial Services Authority’s thematic reviews and credible deterrence strategies. On the one hand it looks as though the risks are considered to be worth taking. On the other, reputational damage and loss of trust for the whole industry are at stake.

Last week was overshadowed by the large fine that Barclays received for giving unsuitable investment advice to retail clients about two funds in particular. The fine was 7 million pounds, and the firm is also likely to have to pay up to 60 million pounds in redress, as well as carrying out a past business review and employing a firm of accountants to review customer files. The total cost of the enforcement action will, therefore, be significant.

Compared with the amount of investment a large firm would have to make to consolidate all its legacy systems into one, to revamp all its systems and controls throughout the entire group, to beef up its compliance team and to ensure that every member of staff was properly trained, the costs may not be so high after all.

Equality provisions fail to add up in UK boardrooms (Westlaw Business)

 Burberry CEO Angela Ahrendts leads a discussion at the IHT Heritage Luxury conference in London 09/11/2010By Christopher Elias

Jan. 27 (Westlaw Business) With annual meeting season just around the corner in the UK, attention is once again turning to corporate governance issues and in particular, board composition, as a recent report from Cranfield University reveals that only 12.5% of FTSE 100 directorships are held by women.

With an overhaul of discrimination law provided by the Equality Act 2010, the importance of gender diversity in boardrooms has never been more profound and the new act strives to achieve better gender equality in companies among other things.

Recent developments seem to suggest, however, that the UK government has stepped back from imposing the full force of the act and will not be imposing mandatory gender quotas or compulsory gender pay reporting – bad news for Cranfield University who produced a damning report on gender diversity in FTSE 100 companies recently. (more…)

ANALYSIS-Companies could get caught in Asia as corruption rules tighten

By Rachel Armstrong

SINGAPORE, Jan 20 (Reuters) – Multinational firms trying to get a bigger piece of the Asia growth story face a rising risk of becoming embroiled in corruption scandals unless they enforce stricter compliance norms and new regulations.

The region may have moved centre stage in many companies’ growth strategies as developed economies struggle but firms are also scrutinising investment projects even more and stepping up due diligence before jumping into new joint ventures and M&A. (more…)

China-U.S. IPOs: China’s forex crackdown locks up currency (Westlaw Business)

Chinese 100 yuan banknote is seen in this picture illustration taken in Shanghai January 19, 2011. REUTERS/Aly SongBy Helen H. Chan

HONG KONG, Jan. 21 (Westlaw Business) – Excessive liquidity is becoming a hot potato for the State Administration of Foreign Exchange (SAFE), China’s forex regulator. Recently, SAFE announced that it would continue to crack down on “hot money” inflows through vigilant monitoring of cross-border transactions. In particular, China’s currency watchdog will examine whether foreign exchange destined for the PRC are being used in compliance with Chinese laws.

In its ongoing battle against inflation, the Chinese government has been scrutinizing compliance with existing forex regulations, many of which apply to the daily operations of overseas listed Chinese companies. In response to the clampdown, Sino-U.S. companies have highlighted a number of foreign exchange transfer risks in recent disclosure filings. (more…)

ANALYSIS-U.S. trading probe reveals the temptations for ‘experts’

By Emily Chasan and Liana Baker

NEW YORK, Jan 21 (Reuters) – Expert network firms, currently the focus of a major U.S. insider trading investigation, have never had to work too hard to find midlevel corporate executives willing to moonlight as paid consultants.

With consultants earning anywhere from $200 to $1,000 an hour for a meeting with hedge fund traders, working for an expert network firm — an intermediary company that matches industry consultants with hedge funds — is an easy way for executives to pad their bank accounts. (more…)

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