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Forensic Accounting: Corporate Fraud

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Fraud Examples

Prosecuting Corporate Criminals

Prosecutors and agency attorneys who are part of the Task Force have brought charges for accounting fraud, securities fraud, insider trading, market manipulation, wire fraud, obstruction of justice, false statements, money laundering, Foreign Corrupt Practices Act violations, stock option backdating and conspiracy, among others.

The following cases highlight just a sample of the exhaustive prosecutorial efforts of the U.S. Attorneys’ Offices and the Criminal and Tax Divisions of the Department of Justice and investigators of the Federal Bureau of Investigation, the U.S. Postal Inspection Service, and the Internal Revenue Service–Criminal Investigation:

  • Enron: Criminal charges were brought against 36 defendants, including 27 former Enron Corporation executives. Eighteen of those charged pleaded guilty or were found guilty after trial, including Enron’s former chief executive officer, who was sentenced to 292 months in prison. The guilty verdicts against the former chairman/CEO in two cases were dismissed by abatement following his death. The Task Force seized over $100 million in ill-gotten gains and the Department of Justice worked jointly with the Securities and Exchange Commission to obtain orders directing the recovery of more than $450 million for the victims of the Enron frauds.

  • Enterasys: Eight former officers of Enterasys Network Systems, Inc., including the chairman and the chief financial officer, have pleaded guilty or have been found guilty at trial of charges stemming from a scheme to artificially inflate revenue to increase, or maintain, the price of Enterasys stock. The fraud caused Enterasys to overstate its revenue by over $11 million in the quarter ending Sept. 1, 2001. The fraud and its public disclosure resulted in a loss to shareholders of about $1.3 billion. As a result, Enterasys Chief Financial Officer Robert J. Gagalis was sentenced to 11 and a half years in prison. Bruce D. Kay, formerly Enterasys’s Senior Vice President of Finance, was sentenced to nine and a half years in prison. Robert G. Barber, a former Enterasys business development executive, was sentenced to eight years in prison and fined $25,000. Hor Chong (David) Boey, former finance executive in Enterasys’s Asia Pacific division, was sentenced to three years in prison.

  • Qwest: The former CEO of Qwest Communications International, Inc., was convicted on insider-trading charges stemming from his sale of more than $100 million in Qwest stock while in possession of material, non-public information regarding Qwest’s financial health. A former CFO pleaded guilty to insider trading. The CEO will be sentenced on July 27, 2007.

  • AEP: AEP Energy Services, Inc. (AEPES), a wholly owned subsidiary of American Electric Power, Inc. (AEP), one of the nation’s largest electric utilities, entered into a deferred prosecution agreement in which it admitted that its traders manipulated the natural gas market by knowingly submitting false trading reports to market indices. AEPES agreed to pay a $30 million criminal penalty. In separate actions, the Commodity Futures Trading Commission filed a civil injunction against AEP and AEPES. The companies also agreed to pay $21 million to the Federal Energy Regulatory Commission.

  • PNC: PNC ICLC Corporation, a subsidiary of the PNC Financial Services Group, Inc., the seventh largest bank holding company in the nation, was charged with conspiracy to violate securities laws by fraudulently transferring $762 million in mostly troubled loans and venture capital investments from PNC ICLC to off-balance-sheet entities. PNC entered into a deferred prosecution agreement and PNC ICLC agreed to pay a total of $115 million in restitution and penalties.

  • Cendant: The former chairman and vice-chairman of Cendant Corp. were sentenced to 12 and a half years and 10 years respectively on conspiracy and securities fraud convictions arising out of a complex decade-long accounting fraud scheme. The fraud and its public disclosure caused a market capitalization loss of $14 billion in one day, the largest market capitalization loss ever at that time. Both defendants were ordered to pay $3.2 billion in restitution, which is believed to be the largest restitution order ever imposed.

  • Mercury Finance: Senior executives of Mercury Finance Company, a subprime lending company, were convicted on charges stemming from an accounting fraud scheme designed to inflate the company’s revenues and to understate its delinquencies and charge-offs. The market capitalization of the company decreased by nearly $2 billion in one day after the fraud was made public. The former CEO, treasurer and accounting manager each pleaded guilty and were sentenced to 10 years, 20 months, and 12 months, respectively. The former CFO admitted his role and cooperated, but died before being charged.

  • Hollinger: Four former executives of Hollinger International, Inc., a newspaper holding company, including its CEO, chief operating officer, CFO, executive vice president and corporate counsel were recently found guilty of charges arising from a scheme to defraud the company and others primarily by misappropriating funds from non-compete agreements as part of the sale of newspaper publishing groups. The COO pleaded guilty and cooperated.

  • Homestore: Eleven executives and employees of Homestore.com, Inc., an Internet company, were convicted for their roles in a complex revenue inflation scheme. Homestore fraudulently paid itself millions of dollars in bogus “round trip deals” to meet quarterly revenue expectations. The defendants were convicted of conspiracy, insider trading, wire fraud, and other securities violations. The former CEO was found guilty, sentenced to 15 years in prison, and ordered to pay $13 million in fines and restitution.

  • Adelphia: Following a four-month trial, the former CEO and CFO of Adelphia Communications Corp. were convicted of fraud charges arising from their participation in a complex financial-statement fraud and embezzlement scheme that defrauded Adelphia’s shareholders and creditors of billions of dollars. The former CEO and CFO were sentenced to 15 and 20 years in prison, respectively. Forfeitures netted over $715 million for distribution to victims.

  • WorldCom: The former WorldCom CEO was convicted on charges of conspiracy, securities fraud, and making false statements in SEC filings, and was sentenced to 25 years’ incarceration.

  • Refco: The former CEO of Refco, a commodities brokerage firm, its former CFO, and a former 50 percent Refco owner were indicted for their roles in a scheme to hide massive losses sustained by the company in the late 1990s. Public investor losses exceed $2 billion. The trial is scheduled for October 2007.

  • Impath: The former president and COO of Impath, Inc., a biotechnology company, was convicted for his role in an accounting fraud that caused a decline in the company’s market capitalization in excess of $260 million. He was sentenced to 42 months in prison and repayment of $50 million in restitution and $1.2 million in forfeiture.

  • Monster: The former general counsel of recruitment services giant MonsterWorldwide, Inc. pleaded guilty in connection with a scheme to fraudulently backdate millions of dollars’ worth of employee stock option grants by creating the appearance that the options had been granted on dates when Monster’s stock price had been at a periodic low point.

  • Imclone: The former CEO of Martha Stewart Living Omnimedia was convicted of conspiracy, obstruction of justice and false statement charges and sentenced to five months in prison and five months of home confinement. The charges arose from the former CEO’s efforts to obstruct federal investigations into her trading in the securities of ImClone Systems, Inc. The former Inclone CEO pleaded guilty to insider trading and was sentenced to seven years in prison.

  • Bayou: Three principals of Bayou Hedge Funds pleaded guilty to fraud and conspiracy charges based on their substantial and prolonged misrepresentation of the value of the assets of the funds, to which investors had entrusted over $450 million. Forfeitures netted $106 million for distribution to victims.

  • Prudential Securities: Three suspects at the Boston office of Prudential pleaded guilty, and under a deferred prosecution agreement, Prudential agreed to pay a total of $600 million in penalties and restitution in connection with a “market timing” scheme. Using in-and-out deposits and withdrawals of mutual funds, Prudential increased investors’ gains by following the rise and fall of foreign markets, which are several hours ahead of U.S. markets.

  • Network Associates: The former CFO of Network Associates, Inc. was convicted by a jury on securities fraud and related charges stemming from a revenue recognition scheme in which Network Associates’ revenue was overstated by more than $470 million.

  • DVI: The CFO of DVI, a medical office finance company, was sentenced to 30 months in prison for defrauding DVI’s finance companies and banks of $50 million through the use of false corporate books and the double pledging of assets.

  • Beacon Rock: In the first U.S. prosecution of a market timing scheme, hedge fund Beacon Rock Capital and its broker pleaded guilty to defrauding mutual funds and their shareholders of $2.4 million. The defendants used multiple account names and numbers, structured trades to avoid detection, and lied to mutual funds about the activity in order to market time trades.

  • Comverse: The former CFO of Comverse Technology, Inc., pleaded guilty to fraud charges arising from the backdating of option grants and granting of option grants to fictitious employees at Comverse from 1998 to 2006. The former general counsel also was convicted of participating in the backdating scheme. The former CEO was arrested in Namibia in September 2006. The U.S. seeks his extradition.

  • Dynegy: Three former executives of energy firm Dynegy were convicted of charges stemming from an accounting scheme in which they misrepresented the proceeds of $300 million in loans as revenue from operations rather than debt.

  • El Paso: Four traders of energy firm El Paso Corporation and six traders of its Merchant Energy subsidiary were convicted on charges relating to false reporting of natural gas trading information.

Information from: https://www.justice.gov/opa/pr/2007/July/07_odag_507.html