HONG KONG-BASED AUDIT COMPANY CHARGED BY SEC WITH FAILURE TO PROPERLY AUDIT

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

The Securities and Exchange Commission imposed sanctions against a Hong Kong-based audit firm and two accountants for failing to properly audit year-end financial statements of a company that the SEC has charged with fraud.

An SEC investigation found that Baker Tilly Hong Kong Limited, its director Andrew Ross, and its former director Helena Kwok ignored red flags surrounding approximately $59 million in related-party transactions reflected in internal accounting records of China North East Petroleum Holdings Limited but not adequately disclosed in year-end 2009 financial statements.  Baker Tilly and the two accountants failed to plan and implement an appropriate audit response to the related-party transactions, which primarily involved the company, its then-CEO, and his mother.  Baker Tilly consequently issued an audit report containing an unqualified opinion on China North East Petroleum’s financial statements.

Baker Tilly, Ross, and Kwok agreed to settle the SEC’s charges.  Baker Tilly must disgorge its audit fees of $75,000 plus prejudgment interest of $9,101, and cannot accept any new U.S. issuer audit clients until an independent consultant has reviewed and certified that the firm’s audit policies and procedures are compliant with SEC regulations and PCAOB standards.  Ross and Kwok must pay penalties of $20,000 and $10,000 respectively and are barred from practicing as an accountant on behalf of any SEC-regulated entity for at least three years.    

“Auditors play a critical gatekeeper role in our financial markets, and Baker Tilly failed to uphold U.S. auditing standards and exercise appropriate professional care and skepticism with regard to numerous related-party transactions,” said Antonia Chion, an Associate Director in the SEC’s Division of Enforcement.

According to the SEC’s order instituting a settled administrative proceeding, the Baker Tilly audit team failed to adequately perform the audit of China North East Petroleum in light of 176 related-party transactions detailed in an independent forensic accounting report.  China North East Petroleum’s resulting financial statements failed to adequately disclose the magnitude of the related-party transactions and note they involved the company’s CEO and his mother.  Instead, the company only disclosed the year-end net balance due, thus masking the true scope of the related-party transactions.  The audit team also failed to properly obtain adequate evidential matter to support its audit report.  For example, the audit workpapers contain conflicting information regarding the source of a $4.6 million capital contribution to a company subsidiary.

The SEC’s order finds that Baker Tilly, Ross, and Kwok engaged in improper professional conduct under Rule 102(e)(2)(ii) of the SEC’s Rules of Practice, and violated Section 10A(a)(2) of the Securities Exchange Act of 1934.  They neither admitted nor denied the findings of the order, which censures Baker Tilly.

The SEC’s investigation was conducted by Ansu Banerjee, Delane Olson, Debra Russell, and Michael Semler.  The case was supervised by Melissa Hodgman.

OSHA CITES COMPANY IN DEATH OF 16 YEAR OLD

FROM:  U.S. LABOR DEPARTMENT 

OSHA cites Robertson Incorporated Bridge and Grading Division after 16-year-old laborer dies at Delta, Missouri, construction site

Wage and Hour Division assesses company penalties for violating child labor law

DELTA, Mo. — A 16-year-old laborer was fatally struck by the swinging cab and boom of a crane being disassembled by Robertson Incorporated Bridge and Grading Division at a construction site in Delta on June 18, 2014. A U.S. Department of Labor Occupational Safety and Health Administration investigation found the crane operator was unaware that the teen was directed to stand in an inadequately marked danger zone. The teen also was not provided required protective headgear. OSHA cited the company for 13 serious safety violations.

"This is a tragic death involving a teenager who should not have been allowed to work on the job site. Clearly, the law prohibits children from being involved in the disassembly of heavy-duty construction machinery," said Bill McDonald, OSHA's area director in St. Louis. "Robertson Incorporated Bridge has a responsibility to train workers in hazards, adequately mark hazardous operations areas and provide competent supervision and protective equipment."

In addition to the struck-by hazard that resulted in this young man's death, OSHA's investigation found a lack of employee hazard recognition training contributed to the fatality. The company also failed to document required inspections of the crane's wire rope and hook.

OSHA found multiple safety violations that included worker exposure to fall hazards of nearly 7 feet from unguarded machine platforms and failure to implement procedures, such as machine guarding that protects workers from contacting operating machinery parts, exposing workers to serious amputation risks and hazards. These violations are among the most frequently cited violations by OSHA and put workers at risk for amputation and injuries. Robertson Incorporated Bridge also failed to inspect portable fire extinguishers or train employees in their use.

A serious violation occurs when there is substantial probability that death or serious physical harm could result from a hazard about which the employer knew or should have known.

OSHA has proposed penalties of $44,730.

The department's Wage and Hour Division also assessed civil money penalties of $11,000 for violatingHazardous Order Number 7, which prohibits minors under age 18 from operating or assisting in the operation of power-driven hoists.

Robertson Incorporated Bridge has 15 business days from receipt of its citations and penalties to comply, request an informal conference with OSHA's area director, or contest the findings before the independent Occupational Safety and Health Review Commission.

U.S. BROKER-DEALER CEO AND MANAGING DIRECTOR PLEAD GUILTY TO INTERNATIONAL BRIBERY SCHEME

FROM:  U.S. JUSTICE DEPARTMENT 
Wednesday, December 17, 2014
CEO and Managing Director of U.S. Broker-Dealer Plead Guilty to Massive International Bribery Scheme
Senior Venezuelan Banking Official Received at Least $5 Million in Bribes in Exchange for Directing Business to U.S. Defendants

The former chief executive officer and former managing director of a U.S. broker-dealer (the Broker-Dealer), pleaded guilty to bribery charges arising from their scheme to pay bribes to Maria De Los Angeles Gonzalez De Hernandez, who was a senior official in Venezuela’s state economic development bank, Banco de Desarrollo Económico y Social de Venezuela (Bandes), in return for trading business that generated more than $60 million in commissions.

Assistant Attorney General Leslie R. Caldwell of the Justice Department’s Criminal Division and U.S. Attorney Preet Bharara of the Southern District of New York made the announcement.

“Benito Chinea and Joseph DeMeneses are the fifth and sixth defendants to plead guilty in connection with this far-reaching bribery scheme, which ranged from Wall Street to the streets of Caracas,” said Assistant Attorney General Caldwell.  “The guilty pleas and the forfeiture of assets once again demonstrate that the Department is committed to holding corporate executives who engage in foreign bribery individually accountable and to deny them the proceeds of their corruption.”

According to the allegations in the indictment and other documents previously filed in Manhattan federal court:

Benito Chinea, 48, of Manalapan, New Jersey, and Joseph De Meneses, 45, of Fairfield, Connecticut, working with others, arranged the bribe payments to Gonzalez in exchange for her directing Bandes’s financial trading business to the Broker-Dealer.  Previously, Gonzalez, along with two employees of the Broker-Dealer, Tomas Alberto Clarke Bethancourt (“Clarke”) and Jose Alejandro Hurtado (“Hurtado”), pleaded guilty for their involvement in this bribery scheme.  A managing director of the Broker-Dealer, Ernesto Lujan (“Lujan”), also pleaded guilty for his role in the scheme.

Background on the Broker-Dealer and Bandes

At all times relevant to the charges, Chinea was the chief executive officer and De Meneses was a managing director in the Broker-Dealer, which was headquartered in New York, New York, with offices in Miami, Florida.  In 2008, the Broker-Dealer established a group called the Global Markets Group, which included De Meneses, Lujan, and Clarke, and which offered fixed income trading services to institutional clients.  One of the Broker-Dealer’s clients was Bandes, which operated under the direction of the Venezuelan Ministry of Finance.  The Venezuelan government had a majority ownership interest in Bandes and provided it with substantial funding.  Gonzalez was an official at Bandes and oversaw the development bank’s overseas trading activity.  At her direction, Bandes conducted substantial trading through the Broker-Dealer.  Most of the trades executed by the Broker-Dealer on behalf of Bandes involved fixed income investments for which the Broker-Dealer charged Bandes a mark-up on purchases and a mark-down on sales.

             The Bribery Scheme

As alleged in court documents, from late 2008 through 2012, Chinea and De Meneses, together with three Miami-based Broker-Dealer employees, Lujan, Clarke and Hurtado, participated in a bribery scheme in which Gonzalez directed trading business she controlled at Bandes to the Broker-Dealer, and in return, agents and employees of the Broker-Dealer split the revenue the Broker-Dealer generated from this trading business with Gonzalez.  During this time period, the Broker-Dealer generated over $60 million in commissions from trades with Bandes.

In order to conceal their conduct, Chinea, De Meneses and their co-conspirators routed the payments to Gonzalez, frequently in six-figure amounts, through third-parties posing as “foreign finders” and into offshore bank accounts.  In several instances, Chinea personally signed checks worth millions of dollars that were made payable to one of these purported “foreign finders” and later deposited in a Swiss bank account.

As further alleged in court documents, as a result of the bribery scheme, Bandes quickly became the Broker-Dealer’s most profitable customer.  As the relationship continued, however, Gonzalez became increasingly unhappy about the untimeliness of the payments due her from the Broker-Dealer, and she threatened to suspend Bandes’s business.  In response, De Meneses and Clarke agreed to pay Gonzalez approximately $1.5 million from their personal funds.  Chinea and De Meneses agreed to use Broker-Dealer funds to reimburse De Meneses and Clarke for these bribe payments.  To conceal their true nature, Chinea and De Meneses agreed to hide these reimbursements in the Broker-Dealer’s books as sham loans from the Broker-Dealer to corporate entities associated with De Meneses and Clarke.

Chinea and De Meneses each pleaded guilty before U.S. District Judge Denise L. Cote of the Southern District of New York to one count of conspiracy to violate the Foreign Corrupt Practices Act and the Travel Act.  Chinea and De Meneses have also agreed to pay $3,636,432 and $2,670,612 in forfeiture, respectively, which amounts represent their earnings from the bribery scheme.  Sentencing hearings are scheduled for March 27, 2015.

Today’s announcement is part of efforts underway by President Obama’s Financial Fraud Enforcement Task Force (FFETF) which was created in November 2009 to wage an aggressive, coordinated and proactive effort to investigate and prosecute financial crimes.  With more than 20 federal agencies, 94 U.S. Attorneys’ offices and state and local partners, it is the broadest coalition of law enforcement, investigatory and regulatory agencies ever assembled to combat fraud.  Since its formation, the task force has made great strides in facilitating increased investigation and prosecution of financial crimes; enhancing coordination and cooperation among federal, state and local authorities; addressing discrimination in the lending and financial markets and conducting outreach to the public, victims, financial institutions and other organizations.  For more information on the task force, visit www.stopfraud.gov.

This case is being investigated by the FBI, and prosecuted Senior Deputy Chief James Koukios of the Criminal Division’s Fraud Section and Assistant U.S. Attorneys Harry A. Chernoff and Jason H. Cowley of the Southern District of New York.  Assistant U.S. Attorney Carolina Fornos of the Southern District of New York is responsible for the forfeiture aspects of the case.  The U.S. Securities and Exchange Commission also assisted with this investigation.

ACUTE CARE HOSPITAL WILL PAY $2.25 MILLION SETTLE FALSE CLAIMS ALLEGATIONS

FROM:  U.S. JUSTICE DEPARTMENT 

Friday, December 19, 2014

St. Helena Hospital Agrees To Pay $2.25 Million To Settle False Claims Act Allegations

SAN FRANCISCO – St. Helena Hospital, an acute care hospital within the Adventist Health System, has agreed to pay the United States $2,250,000 to settle allegations that it submitted false claims to Medicare for certain cardiac procedures and related inpatient admissions, United States Attorney Melinda Haag announced today.

The settlement resolves allegations that St. Helena Hospital knowingly charged Medicare for medically unnecessary percutaneous coronary interventions during the period Jan. 1, 2008 through July 31, 2011. Percutaneous coronary intervention, commonly referred to as angioplasty, is a procedure to open narrowed or blocked blood vessels that supply blood to the heart. The United States also alleged that St. Helena Hospital unnecessarily admitted angioplasty patients who should have been treated on a less costly, outpatient basis.

This settlement resolves a lawsuit filed in the U.S. District Court for the Northern District of California by Kacie Carroll, a former employee of St. Helena Hospital, under the qui tam or whistleblower provisions of the False Claims Act, which permit private citizens to bring lawsuits on behalf of the United States and obtain a portion of the government’s recovery. Carroll will receive $450,000.

Assistant U.S. Attorney Steven J. Saltiel handled the matter on behalf of the U.S. Attorney?s Office, with the assistance of Michael Zehr and Kathy Terry.

The case is captioned United States ex rel. Carroll v. Adventist Health Systems, et al., Case No. CV-10-4925 DMR. The claims resolved by this settlement are allegations only and there has been no determination of liability.      

REMARKS BY ASSISTANT AG CALDWELL REGARDING ALSTON BRIBERY PLEA

FROM:  U.S. JUSTICE DEPARTMENT 
Remarks for Assistant Attorney General Leslie R. Caldwell Press Conference Regarding Alstom Bribery Plea
Washington, DCUnited States ~ Monday, December 22, 2014

Today represents a significant milestone in the global fight against corruption.  It demonstrates the Department of Justice’s strong commitment to fighting foreign bribery and ensuring that both companies and individuals are held accountable when they violate the FCPA.  The guilty pleas and resolutions announced today also highlight what can happen when corporations refuse to disclose wrongdoing and refuse to cooperate with the department’s efforts to identify and prosecute culpable individuals.

Let me first explain how the scheme worked.  To conceal that it was the source of payments to government officials, Alstom funneled the bribes through third-party consultants who did little more than serve as conduits for corruption.  Alstom then dummied up its books and records to cover up the scheme.

Alstom’s corruption spanned the globe, and was its way of winning business.  For example, in Indonesia, Alstom and certain of its subsidiaries used consultants to bribe government officials – including high-ranking members of the Indonesian Parliament and the state-owned and state-controlled electricity company – to win several contracts to provide power-related services.  According to internal documents, when certain officials expressed displeasure that a particular consultant had provided only “pocket money,” Alstom retained a second consultant to ensure that the officials were satisfied.

In Saudi Arabia, Alstom retained at least six consultants, including two close family members of high-ranking government officials, to bribe officials at a state-owned and state-controlled electricity company to win two projects valued at approximately $3 billion.  As evidence that Alstom employees recognized that their conduct was criminal, internal company documents refer to the consultants only by code name.

Alstom similarly used consultants to bribe officials in Egypt and the Bahamas, and again Alstom employees clearly knew that the conduct violated the law.  In connection with a project in Egypt, a member of Alstom’s finance department sent an email questioning an invoice for consultant services and, in response, was advised that her inquiry could have “several people put in jail” and was further instructed to delete all prior emails regarding the consultant.

If approved by the court, Alstom’s criminal penalty of $772 million represents the largest penalty ever assessed by department in a FCPA case.  Through Alstom’s parent-level guilty plea and record-breaking criminal penalty, Alstom is paying a historic price for its criminal conduct -- and for its efforts to insulate culpable corporate employees and other corporate entities.  Alstom did not voluntarily disclose the misconduct to law enforcement authorities, and Alstom refused to cooperate in a meaningful way during the first several years of the investigation.  Indeed, it was only after the department publicly charged several Alstom executives – three years after the investigation began – that the company finally cooperated.  

One important message of this case is this:  While we hope that companies that find themselves in these situations will cooperate with the department of Justice, we do not wait for or depend on that cooperation. When Alstom refused to cooperate with the investigation, we persisted with our own investigation.  We built cases against the various corporate entities and against culpable individuals.  To date, the department publicly has charged four Alstom corporate executives in connection with the corrupt scheme in Indonesia, which also chose not to cooperate, and another company’s executive in connection with the scheme in Egypt.  Four of these individuals already have pleaded guilty.  In addition, Marubeni Corporation, a Japanese trading company that partnered with Alstom in Indonesia, pleaded guilty to conspiracy to violate the anti-bribery provisions of the FCPA and substantive violations of the FCPA, and paid an $88 million criminal penalty.

Another important message from this case is that the U.S. increasingly is not alone in the fight against transnational corruption.  Earlier this year, Indonesia’s Corruption Eradication Commission, the KPK, assisted the department in its investigation.  And, in turn, the department shared with the KPK information that federal investigators had obtained, which the KPK used in its prosecution of a former member of the Indonesian Parliament for accepting bribes from Alstom-funded consultants.  This past spring, that Indonesian official was found guilty and sentenced to three years in an Indonesian prison.  Our partnership with Indonesian law enforcement authorities in this case means that both the bribe payors and bribe takers have been prosecuted.  And our investigation is not over yet.

This case is emblematic of how the Department of Justice will investigate and prosecute FCPA cases – and other corporate crimes.  We encourage companies to maintain robust compliance programs, to voluntarily disclose and eradicate misconduct when it is detected, and to cooperate in the government’s investigation.  But we will not wait for companies to act responsibly.  With cooperation or without it, the department will identify criminal activity at corporations and investigate the conduct ourselves, using all of our resources, employing every law enforcement tool, and considering all possible actions, including charges against both corporations and individuals.

I especially would like to thank the prosecutors from the Criminal Division’s Fraud Section and the U.S. Attorney’s Office for the District of Connecticut, and the talented agents from the FBI, for their extraordinary work in this matter.  I also would like to thank the U.S. Attorney’s Office for the District of New Jersey and the U.S. Attorney’s Office for the District of Maryland for their work on related cases.  And I am grateful to the Criminal Division’s Office of International Affairs for the substantial and expert assistance that it provided.

In addition to our Indonesian counterparts, I would like to acknowledge the valuable assistance that our law enforcement partners in Switzerland, the United Kingdom, Singapore, Italy, Saudi Arabia, Taiwan, Cyprus, and Germany have provided in this matter.  We are grateful for their assistance and look forward to working with them and our other international partners in the future.

Component:

FDIC: Professional Liability Lawsuits

FDIC: Professional Liability Lawsuits

FTC REPORTS SHUTING DOWN PHONY MORTGAGE RELIEF SCAM

FROM:  U.S. FEDERAL TRADE COMMISSION 
FTC Shutters Wide-Ranging Operation That Perpetrated Phony Mortgage Relief Scam
Defendants Victimized Thousands of Consumers Facing the Possibility of Foreclosure
12-11-2014

A federal court has entered orders against 22 defendants who offered financially strapped consumers fake home-loan modification services that the FTC claims violated the FTC Act and the Mortgage Assistance Relief Services (MARS) Rule. The MARS Rule bans mortgage foreclosure rescue and loan modification services from collecting fees until homeowners have a written offer from their lender or servicer that they deem acceptable.

The orders collectively ban 21 of the defendants from advertising, promoting, or selling unsecured debt relief products and services; misrepresenting any material facts related to financial products or services; misrepresenting material facts related to any other types of services; and benefiting from any consumer information they collected through the scheme. The remaining defendant, Business Team, must turn over its proceeds from the defendants’ activities. The orders against all of the defendants impose monetary judgments in varying amounts to remedy the almost $51 million of consumer injury from the defendants’ activities.

“It’s appalling when scammers take money from people already struggling to pay their mortgages,” said Jessica Rich, Director of the FTC’s Bureau of Consumer Protection. “We shut down this phony mortgage relief operation, and we’ll continue to stick up for people in financial distress.”

The FTC filed its original complaint in this action in June 2013 against 10 defendants and an amended complaint in December 2013, adding another 12. According to the FTC's amended complaint, the defendants operated as two loan modification enterprises, each of which falsely claimed it would provide legal help to save consumers’ homes from foreclosure and lower their mortgage payments. The enterprises then charged up-front fees of between $2,500 and $3,500, but delivered little or no help, deepening the consumers’ financial distress.

Both enterprises marketed their scheme using an official looking mailer that urged consumers to act quickly before they “FORFEIT LEGAL RIGHTS,” or face a “statute of limitations and government program deadlines.” They falsely promised lower monthly payments and interest rates, and the conversion of adjustable-rate to fixed-rate mortgages.

The enterprises also marketed their scheme online, through telemarketing calls, and with television and radio ads. Their websites touted a range of services, including bankruptcy advice, credit counseling, and “forensic mortgage audits,” falsely claiming that such “audits” could uncover any “lending violations” committed by lenders.

Each defendant is subject to a court order, resulting from either a negotiated settlement, a default judgment (for the defendant’s failure to respond to the Commission’s amended complaint), or a sanction for failing to participate in the litigation:

A to Z Marketing, Inc.; Apex Members, LLC; Apex Solutions, Inc.; Expert Processing Center, Inc.; Smart Funding Corp.; Ratan Baid; and Madhulika Baid entered into a stipulated final order;
Top Legal Advocates, P.C., entered into a stipulated final order;
Backend, Inc., entered into a stipulated final order;
William D. Goodrich and William D. Goodrich Atty, Inc. had a judgment entered against them as a sanction. Both defendants answered the amended complaint but then failed to respond to discovery or otherwise participate in the litigation.
Evergreen Law Offices, PLLC, had a default judgment entered against it for its failure to respond to the Commission’s amended complaint;
Backend Services, Inc.; Emax Loans, Inc.; Legal Marketing Group, Inc.; Nationwide Law Center, Inc.; United States Law Center, P.C.; Interstate Law Group, LLC; Millennium Law Center, P.C.; and SC Law Group, P.C., had default judgments entered against them for their failures to respond to the Commission’s amended complaint;
Amir Montazeran had a default judgment entered against him for his failure to respond to the Commission’s amended complaint;
Business Team, LLC, had a default judgment entered against it for its failure to respond to the Commission’s amended complaint.
Business Team and Montazeran are appealing the judgments against them.

Each Commission vote approving the stipulated final orders was 5-0. The stipulated final orders were filed in the U.S. District Court for the Central District of California, and have now all been entered by the Court.

For consumer information about avoiding mortgage and foreclosure rescue scams, see Home Loans.

NOTE: Stipulated final orders have the force of law when approved and signed by the District Court judge.

NLRB News: NLRB Office of the General Counsel Issues Consolidated Complaints Against McDonald's Franchisees and their Franchisor McDonald's, USA, LLC as Joint Employers

NLRB News: NLRB Office of the General Counsel Issues Consolidated Complaints Against McDonald's Franchisees and their Franchisor McDonald's, USA, LLC as Joint Employers

SEC ALLEGES AVON PRODUCTS INC. VIOLATED FOREIGN CORRUPT PRACTICES ACT

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

December 17, 2014

The Securities and Exchange Commission today charged global beauty products company Avon Products Inc. with violating the Foreign Corrupt Practices Act (FCPA) by failing to put controls in place to detect and prevent payments and gifts to Chinese government officials from employees and consultants at a subsidiary.

Avon entities agreed to pay a total of $135 million to settle the SEC’s charges and a parallel case announced today by the U.S. Department of Justice and the U.S. Attorney’s Office for the Southern District of New York.

The SEC alleges that Avon’s subsidiary in China made $8 million worth of payments in cash, gifts, travel, and entertainment to gain access to Chinese officials implementing and overseeing direct selling regulations in China.  Avon sought to be among the first allowed to test the regulations, and eventually received the first direct selling business license in China in March 2006.  The improper payments also were made to avoid fines or negative news articles that could have impacted Avon’s clean corporate image required to retain the license.  Examples of improper payments alleged in the SEC’s complaint include paid travel for Chinese government officials within China or to the U.S. or Europe as well as such gifts as Louis Vuitton merchandise, Gucci bags, Tiffany pens, and corporate box tickets to the China Open tennis tournament.

“Avon’s subsidiary in China paid millions of dollars to government officials to obtain a direct selling license and gain an edge over their competitors, and the company reaped substantial financial benefits as a result,” said Scott W. Friestad, an Associate Director in the SEC’s Division of Enforcement.  “Avon missed an opportunity to correct potential FCPA problems at its subsidiary, resulting in years of additional misconduct that could have been avoided.”

According to the SEC’s complaint filed in U.S. District Court for the Southern District of New York, the improper payments occurred from 2004 to 2008.  Avon management learned about potential FCPA problems at the subsidiary through an internal audit report in late 2005.  Avon management consulted an outside law firm, directed that reforms be instituted at the subsidiary, and sent an internal audit team to follow up.  Ultimately, however, no such reforms were instituted at the Chinese subsidiary.  Avon finally began a full-blown internal investigation in 2008 after its CEO received a letter from a whistleblower.

The SEC alleges that Avon’s books and records failed to accurately record the details and purpose of the payments.  In some instances, payments were concealed by falsely recording the transactions as employee business expenses or as reimbursement of a third-party vendor.  In other instances, the records for the payments set forth almost no detail at all.  The resulting books and records did not allow a reviewer to ascertain the government official or state-owned entities that received the payments or the purpose for which the payments were made.

The SEC’s complaint charges Avon with violating Sections 13(b)(2)(A) and 13(b)(2)(B) of the Securities Exchange Act of 1934.  Avon, which neither admitted nor denied the allegations, agreed to pay disgorgement of $52,850,000 in benefits resulting from the alleged misconduct plus prejudgment interest of $14,515,013.13 for a total of more than $67.36 million.  In the parallel criminal matter, Avon entities agreed to pay $67,648,000 in penalties.  Avon also is required to retain an independent compliance monitor to review its FCPA compliance program for a period of 18 months, followed by an 18-month period of self-reporting on its compliance efforts.  Avon would be permanently enjoined from violating the books and records and internal controls provisions of the federal securities laws.  In reaching the proposed settlement, which is subject to court approval, the SEC considered Avon’s cooperation and significant remedial measures.

The SEC’s investigation was conducted by Paul W. Sharratt and Roger Paszamant and supervised by David Frohlich.  The SEC appreciates the assistance of the Fraud Section of the Department of Justice, the U.S. Attorney’s Office for the Southern District of New York, and the Federal Bureau of Investigation.

AIRCRAFT ENGINE MAINTENANCE CO. TO PAY $14 MILLION FOR PAYING BRIBES TO FOREIGN OFFICIALS

FROM:  U.S. JUSTICE DEPARTMENT 

Wednesday, December 10, 2014

Dallas Airmotive Inc. Admits Foreign Corrupt Practices Act Violations and Agrees to Pay $14 Million Criminal Penalty

Dallas Airmotive Inc., a provider of aircraft engine maintenance, repair and overhaul services based in Grapevine, Texas, has admitted to violations of the Foreign Corrupt Practices Act (FCPA) and agreed to pay a $14 million criminal penalty to resolve charges that it bribed Latin American government officials in order to secure lucrative government contracts.

Assistant Attorney General Leslie R. Caldwell of the Justice Department’s Criminal Division and Special Agent in Charge Diego Rodriguez of the FBI’s Dallas Division made the announcement.

A criminal information, filed today in federal court in the Northern District of Texas as part of the deferred prosecution agreement, charges Dallas Airmotive with one count of conspiring to violate the FCPA and one count of violating the FCPA’s anti-bribery provisions.

According to Dallas Airmotive’s detailed admissions in the statement of facts accompanying the deferred prosecution agreement, between 2008 and 2012, the company bribed officials of the Brazilian Air Force, the Peruvian Air Force, the Office of the Governor of the Brazilian State of Roraima, and the Office of the Governor of the San Juan Province in Argentina.  Dallas Airmotive used various methods to convey the bribe payments, including by entering into agreements with front companies affiliated with foreign officials, making payments to third-party representatives with the understanding that funds would be directed to foreign officials, and directly providing things of value, such as paid vacations, to foreign officials.

This case is being investigated by the FBI’s Dallas Field Office and is being prosecuted by Trial Attorney David M. Fuhr of the Criminal Division’s Fraud Section.  Assistant U.S. Attorney Michael C. Elliott from the U.S. Attorney’s Office for the Northern District of Texas has provided assistance in the case.  The department acknowledges the assistance of law enforcement counterparts in Brazil.  The Criminal Division’s Office of International Affairs also provided significant assistance.

DEFENSE CONTRACTOR PLEADS GUILTY TO FRAUD RELATED TO SUPPLYING TROOPS IN AFGHANISTAN

FROM:  U.S. JUSTICE DEPARTMENT 

Monday, December 8, 2014

Defense Contractor Pleads Guilty to Major Fraud in Provision of Supplies to U.S. Troops in Afghanistan

Supreme Foodservice GmbH, a privately held Swiss company, and Supreme Foodservice FZE, a privately-held United Arab Emirates (UAE) company, pleaded guilty today to major fraud against the United States and agreed to resolve civil violations of the False Claims Act, in connection with a contract to provide food and water to the U.S. troops serving in Afghanistan, the Justice Department announced today.  The companies pleaded guilty in the Eastern District of Pennsylvania (EDPA) and paid $288.36 million in the criminal case, a sum that includes the maximum criminal fine allowed.

In addition, Supreme Group B.V. and several of its subsidiaries have agreed to pay an additional $146 million to resolve a related civil lawsuit, as well as two separate civil matters, alleging false billings to the Department of Defense (DoD) for fuel and transporting cargo to American soldiers in Afghanistan.  The lawsuit was filed in the EDPA, and the fuel and transportation allegations were investigated by the Southern District of Illinois and the Eastern District of Virginia, respectively, along with the Department’s Civil Division.

“The civil resolutions and agreements reflect the Justice Department’s continuing efforts to hold accountable contractors that have engaged in war profiteering,” said Acting Assistant Attorney General Joyce R. Branda for the Justice Department’s Civil Division.  “The department will pursue contractors that knowingly seek taxpayer funds to which they are not entitled.”

“These companies chose to commit their fraud in connection with a contract to supply food and water to our nation’s fighting men and women serving in Afghanistan,” said U.S. Attorney Zane David Memeger for the Eastern District of Pennsylvania.  “That kind of conduct is repugnant, and we will use every available resource to punish such illegal war profiteering.”

The Criminal Fraud

In 2005, Supreme Foodservice AG, now called Supreme Foodservice GmbH, entered into a contract with the Defense Supply Center of Philadelphia (DSCP, now called Defense Logistics Agency – Troop Support) to provide food and water for the U.S. forces serving in Afghanistan.  According to court documents, between July 2005 and April 2009, Supreme Foodservice AG, together with Supreme Foodservice KG, now called Supreme Foodservice FZE, devised and implemented a scheme to overcharge the United States in order to make profits over and above those provided in the $8.8 billion subsistence prime vendor (SPV) contract.  The companies fraudulently inflated the price charged for local market ready goods (LMR) and bottled water sold to the United States under the SPV contract.  The Supreme companies did this by using a UAE company it controlled, Jamal Ahli Foods Co. LLC (JAFCO), as a middleman to mark up prices for fresh fruits and vegetables and other locally-produced products sold to the U.S. government, and to obscure the inflated price the Supreme companies were charging for bottled water.  The fraud resulted in a loss to the government of $48 million.

Supreme AG, Supreme FZE and Supreme’s owners (referred to in court documents as Supreme Owners #1 and #2) made concentrated efforts to conceal Supreme’s true relationship with JAFCO, and to make JAFCO appear to be an independent company.  They also took steps to make JAFCO’s mark-up on LMR look legitimate, and persisted in the fraudulent mark-ups even in the face of questions from DSCP about the pricing of LMR.

Even though the SPV contract stated that the Supreme food companies should charge the government the supplier’s price for the goods, emails between executives at the companies (referred to as Supreme Executive #1, #2, etc) reveal the companies’ deliberate decision to inflate the prices. Among other things, Supreme Owner #1 increased the mark-up that JAFCO would impose on non-alcoholic beer from 25 percent to 125 percent.  On or about Feb. 16, 2006, during a discussion about supplying a new product to the U.S. government, one Supreme executive wrote to another, “I am very sure the best option is to buy it from Germany and mark up via [JAFCO], like [non-alcoholic] beer.”

In early March 2006, after a DSCP contracting officer told the Supreme food companies that she wanted to see a manufacturer’s invoice for specific frozen products, Supreme Foodservice GmbH lowered its prices for those products to prices that did not include a JAFCO mark-up.  On March 14, 2006, instead of disclosing that the initial pricing had included a mark-up, a Supreme executive misled the DSCP representative by saying, “Based on more realistic quantities, we have been able to negotiate a better price,” to explain the change in pricing.

In June 2006, when a DSCP contracting officer raised questions about pricing focusing on four specific items, Supreme executives again misled the DSCP, claiming that the high prices were for a high quality of product, and offering to sell lower quality products for lower prices.  Supreme Foodservice GmbH did this even after analyzing its JAFCO margin on the four items in question and finding its profit margins were between 41 and 56 percent.

In September 2007, after a fired Supreme executive threatened to tell the DSCP about the fraud, his former employer entered into negotiation of a “separation agreement” with that executive to induce that executive not to disclose the ways in which the Supreme food companies were overcharging the DSCP.  The agreement stated that the executive would receive, among other things, a payment of 400,000 euros in September 2010, provided that the executive did not cause: a deterioration in the economic situation linked to the SPV contract; the termination of the SPV contract; or a decrease in the price levels for products, specifically including LMR and bottled water provided to the U.S. government.  

Defendant Supreme GmbH pleaded guilty to major fraud against the United States, conspiracy to commit major fraud and wire fraud.  Supreme FZE, which owns JAFCO, pleaded guilty to major fraud against the United States.  The Supreme companies agreed to jointly pay $48 million in restitution and $10 million in criminal forfeiture.  Each company also agreed to pay $96 million in criminal fines.  In addition, as a result of the criminal investigation, the Supreme companies paid $38.3 million directly to the DSCP as a refund for separate overpayments on bottled water.

The Civil Settlements

In a related civil settlement, Supreme Group agreed to pay another $101 million to settle a whistleblower lawsuit, filed in the U.S. District Court for the EDPA by a former executive, which alleged that Supreme Group, and its food subsidiaries, violated the False Claims Act by knowingly overcharging for supplying food and water under the SPV contract.  The payment also resolves claims that, from June 2005 to December 2010, the Supreme food companies failed to disclose and pass through to the government rebates and discounts it obtained from its suppliers, as required by its SPV contract with the United States.

“Today’s results are part of an ongoing effort by the Defense Criminal Investigative Service (DCIS) and its law enforcement partners to protect the integrity of the Department of Defense's acquisition process from personal and corporate greed,” said Deputy Inspector General for Investigations James B. Burch for the U.S. Department of Defense’s Office of the Inspector General.  “The Defense Criminal Investigative Service will continue to pursue allegations of fraud and corruption that puts the Warfighter at risk.”

“We are very pleased with this resolution, and are gratified that the public can now see what we've been aggressively investigating,” said Director Frank Robey of the U.S. Army Criminal Investigation Command's Major Procurement Fraud Unit (MPFU).  “Companies that do business with the government must comply with all of their obligations, and if they overcharge for supplying our men and women in uniform who are bravely serving this nation, they must be held accountable for their actions.”

Separately, Supreme Site Services GmbH, a Supreme Group subsidiary, agreed to pay $20 million to settle allegations that they overbilled for fuel purchased by the Defense Logistics Agency (DLA) for Kandahar Air Field (KAF) in Afghanistan under a NATO Basic Ordering Agreement.  The government alleged that Supreme Site Services’ drivers were stealing fuel destined for KAF generators while en route for which the company falsely billed DLA.

“It is important that government contractors supporting conflicts abroad be held accountable for their billings to the government,” said U.S. Attorney Dana J. Boente for the Eastern District of Virginia.  “The DoD investigating components are instrumental in protecting the interests of the government, and their efforts in this investigation are to be commended.”

Supreme Group’s subsidiary Supreme Logistics FZE also has agreed to pay $25 million to resolve alleged false billings by Supreme Logistics in connection with shipping contracts between the U.S. Transportation Command (USTRANSCOM), located at Scott Air Force Base in Illinois, and various shipping carriers to transport food to U.S. troops in Afghanistan during Operation Enduring Freedom.  The shipping carriers transported cargo destined for U.S. troops from the United States to Latvia or other intermediate ports, and then arranged with logistics vendors, including Supreme Logistics, to carry the cargo the rest of the way to Afghanistan.  The United States alleged that Supreme Logistics falsely billed USTRANSCOM for higher-priced refrigerated trucks when it actually used lower-priced non-refrigerated trucks to transport the cargo.

“The U.S. Attorney’s Office for the Southern District of Illinois is committed to protecting the integrity of all of the vital missions carried out at Scott Air Force Base, including the mission of the U.S. Transportation Command,” said U.S. Attorney Stephen R. Wigginton for the Southern District of Illinois.  “These vital services carried out by the brave men and women of the armed forces of the United States deserve, and will receive, our full support, and this office will do everything possible to protect their missions.”

“These settlements are victories for American taxpayers,” said Special Inspector General John F. Sopko for Afghanistan Reconstruction.  “It sends a clear signal that whether a case involves a mom and pop outfit or a major multinational corporation, we will work tirelessly with our investigative partners to pursue justice any time U.S. dollars supporting the mission in Afghanistan are misused.”

The EDPA lawsuit was initially filed under the qui tam or whistleblower provisions of the False Claims Act, by Michael Epp, Supreme GmbH’s former Director, Commercial Division and Supply Chain.  The False Claims Act prohibits the submission of false claims for government money or property and allows the United States to recover treble damages and penalties for a violation.  Under the Act’s whistleblower provisions, a private party may file suit on behalf of the United States and share in any recovery.  The case remained under seal to permit the United States to investigate the allegations and decide whether to intervene and take over the case.  Epp will receive $16.16 million as his share of the government’s settlement of the lawsuit.

The criminal and civil matters in the EDPA were the result of a coordinated effort by the Department of Justice’s Civil Division, the U.S. Attorney’s Office for the Eastern District of Pennsylvania, DCIS, U.S. Army’s Criminal Investigative Command’s MPFU and the FBI.

The investigation of Supreme Site Services ’ alleged false billings for fuel was conducted by the Civil Division and the U.S. Attorney’s Office for the Eastern District of Virginia, and the investigation of Supreme Logistics’ alleged false invoices for transportation was handled by the Civil Division and the U.S. Attorney’s Office for the Southern District of Illinois.  Both matters were investigated by the Defense Contract Audit Agency Office of Investigative Support, the Army Audit Agency, the International Contract Corruption Task Force, the U.S. Army’s Criminal Investigative Command’s Major Procurement Fraud Unit, the DoD Office of Inspector General’s DCIS, the Special Inspector General for Afghan Reconstruction, the U.S. Air Force Office of Special Investigations and the Naval Criminal Investigative Service.

The claims resolved by the civil settlements are allegations only, except for the conduct for which the Supreme food companies have pleaded guilty.

U.S. DOL UPDATES LISTS OF GOODS PRODUCED USING CHILD OR FORCED LABOR

FROM:  U.S LABOR DEPARTMENT 

US Labor Department announces updated lists of goods

produced by child labor, forced labor

WASHINGTON — The sixth edition of the "List of Goods Produced by Child Labor or Forced Labor," mandated by the Trafficking Victims Protection Reauthorization Act of 2005, was released today by the U.S. Department of Labor's Bureau of International Labor Affairs. In accordance with Executive Order 13126, ILAB also published an initial determination to add carpets from India to its "List of Products Produced by Forced or Indentured Child Labor." In addition to publishing this initial determination regarding Indian carpets, ILAB re-released its EO 13126 List from 2013 with additional specific information about the listed products.

"There's a story behind each item on these lists — a child facing back-breaking labor without education or other opportunities for a better life or an adult trapped in a dismal job through deceit or threats," said U.S. Secretary of Labor Thomas E. Perez. "These lists raise awareness about child and forced labor. Through collective efforts we can, and must, work together to end these cycles of exploitation."

New items can be added to the TVPRA List if they are made with child labor, forced labor or both. The 11 goods made with child labor that have been added to the sixth edition of this list are: garments from Bangladesh; cotton and sugarcane from India; vanilla from Madagascar; fish from Kenya; fish from Yemen; alcoholic beverages, meat, textiles, and timber from Cambodia; and palm oil from Malaysia. One good, electronics from Malaysia, has been added to the TVPRA List for being produced with forced labor.

Per the regulations implementing EO 13126, all updates to this list are first published as initial determinations in the Federal Register for public comment. ILAB welcomes public comments on the proposed addition of Indian carpets to the EO List. Comments can be made at http://www.regulations.gov, docket DOL-2014-0004, through Jan. 30, 2015.

The department also re-released its full EO 13126 List from 2013 featuring a new format, with short paragraphs elaborating on each item on this list. "We hope that these additional details provide a more complete picture of the forced child labor behind the listed products, enabling governments, nongovernmental organizations, businesses and consumers to better target their efforts to end these deplorable practices," Secretary Perez added.

"By publishing these lists, our goal is to shed light on the plight of the estimated 168 million child laborers and 21 million forced laborers around the world, especially as they relate specifically to goods we use every day," said Deputy Undersecretary of Labor for International Affairs Carol Pier. "Child labor and forced labor are fundamental human rights violations, and they are also bad business practices that stifle economic development. We look forward to continuing our engagement with these countries, and with stakeholders in the highlighted sectors, to help end this labor exploitation and promote inclusive economic growth."

The TVPRA List was first published on Sept. 10, 2009. The TVPRA of 2013 requires submission of this list to Congress not later than Dec. 1, 2014, and every two years thereafter. Executive Order 13126 was signed by President Bill Clinton in 1999, and ILAB updates this list periodically. Each list has its own mandates and requirements. The TVPRA List has broader coverage, including goods made by any form of exploitative child as well as forced labor of anyone — adults or children. The EO 13126 List covers the smaller sub-set of children working in forced labor conditions. The EO 13126 List is intended to ensure that U.S. federal agencies do not procure goods made by forced or indentured child labor. Under procurement regulations, federal contractors who supply products on the EO 13126 List must certify that they have made a good faith effort to determine whether forced or indentured child labor was used to produce the items supplied.

As part of its ongoing efforts to encourage businesses and industry groups around the world to address child labor and forced labor in their supply chains, in 2012 ILAB published an extensive online resource, Reducing Child Labor and Forced Labor: A Toolkit for Responsible Businesses.Today, ILAB is announcing the release of French and Spanish language versions of this Toolkit. These new translated versions will enable businesses and other interested parties in French- and Spanish-speaking countries to better understand how to identify and address child labor, forced labor and related practices wherever they occur.

ILAB's global mission is to improve working conditions, raise living standards, protect workers' ability to exercise their rights and address the workplace exploitation of children and other vulnerable populations so that workers around the world are treated fairly and able to share in the benefits of the global economy. ILAB has been producing reports to raise awareness globally about child labor and forced labor since 1993. Since 1995, ILAB has also funded projects that provide assistance to vulnerable children and their families. ILAB has funded 280 projects in more than 90 countries to combat the worst forms of child labor.

COMPANY AND CEO PLEAD GUILTY TO DISTRIBUTING FDA-REJECTED MEDICAL DEVICE

FROM:  U.S. JUSTICE DEPARTMENT 

Monday, December 8, 2014

OtisMed Corporation and Former CEO Plead Guilty to Distributing FDA-Rejected Cutting Guides for Knee Replacement Surgeries

OtisMed Corp. and its former chief executive officer (CEO) admitted today to intentionally distributing knee replacement surgery cutting guides after their application for marketing clearance had been rejected by the Food and Drug Administration (FDA), and the corporation agreed to pay more than $80 million to resolve its related criminal and civil liability, the Justice Department announced today.

OtisMed and its CEO, Charlie Chi, 45, of San Francisco, pleaded guilty in federal court in Newark, New Jersey.  OtisMed pleaded guilty before U.S. District Judge Claire C. Cecchi to an information charging it with distributing, with the intent to defraud and mislead, adulterated medical devices into interstate commerce in violation of the Food, Drug, and Cosmetic Act (FDCA).  Judge Cecchi also sentenced the company today, fining OtisMed $34.4 million and ordering $5.16 million in criminal forfeiture.  In a separate civil settlement, OtisMed agreed to pay $40 million plus interest to resolve its civil liability.  Chi pleaded guilty before U.S. Magistrate Judge Mark Falk to three counts of introducing adulterated medical devices in interstate commerce.  Chi will be sentenced by Judge Cecchi on March 18, 2015.

“Americans must be able to trust that they are treated with medical devices that have been shown to be safe and effective,” said Deputy Assistant Attorney General Jonathan Olin for the Justice Department’s Civil Division.  “The Department of Justice will not tolerate companies and individuals that cut corners when it comes to the public’s health.”

“It is vital that products like the OtisKnee are subjected to the appropriate level of scrutiny,” said U.S. Attorney Paul J. Fishman for the District of New Jersey.  “Patients seeking medical care are vulnerable; they are often afraid, and in pain.  They should be able to trust their doctors.  And they should be entitled to trust that the devices their doctors are using are safe, effective, tested and approved.  OtisMed and Charlie Chi betrayed that trust.”

The civil settlement resolves claims filed under the whistleblower provisions of the False Claims Act, which permit private parties to file suit on behalf of the United States and obtain a portion of the government’s recovery.  The civil lawsuit was filed in the District of New Jersey and is captioned U.S. ex rel. Adrian v. OtisMed Corp., et al.

OtisMed was a privately held company when OtisMed and Chi committed the criminal conduct, and was later acquired by Stryker Corp., a medical technology company based in Michigan, in November 2009.  At the time the shipments were made in September 2009, Stryker executives were not aware that OtisMed and Chi had shipped cutting guides after the FDA had rejected the company’s application for marketing clearance for the device.  Stryker, OtisMed’s parent corporation, cooperated with the government with regard to Otismed’s pre-acquisition conduct throughout the investigation.  In addition to the criminal pleas and civil resolution, OtisMed also agreed to be excluded from participating in all federal health care programs for a period of 20 years and Stryker separately agreed to a series of compliance measures aimed at preventing future misconduct.

According to documents filed in this case and statements made in court:

Chi was among the founders of OtisMed in August 2005, and conceived of the OtisKnee orthopedic cutting guide, its primary product.  Chi acted as OtisMed’s president, CEO and board of directors’ chairman until OtisMed was acquired by Stryker in November 2009.  The OtisKnee was used by surgeons during total knee arthroplasty (TKA), commonly known as knee replacement surgery.  The surgical procedure requires a surgeon to remove the ends of the leg bones and to reshape the remaining bone to accommodate the implantation of an artificial knee prosthesis.  The cuts to the bone must be made at precise angles because they are critical to the clinical result; failure to achieve the correct angle in TKA procedures can result in failure of the bones and/or the implanted prosthetic joint.

OtisMed marketed the OtisKnee cutting guide as a tool to assist surgeons in making accurate bone cuts specific to individual patients’ anatomy based on magnetic resonance imaging (MRI) performed prior to surgery.  None of OtisMed’s claims regarding the OtisKnee device were evaluated by the FDA before the company used them in advertisements and promotional material.

Between May 2006 and September 2009, OtisMed sold more than 18,000 OtisKnee devices, generating revenue of approximately $27.1 million.

On Oct. 2, 2008, OtisMed submitted a pre-market notification to the FDA seeking clearance to market the OtisKnee.  The company had not previously sought the FDA’s clearance or approval and had been falsely representing to physicians and other potential purchasers that the product was exempt from such pre-market requirements.

On Sept. 2, 2009, the FDA sent OtisMed a notice that its submission had been denied, noting that the company had failed to demonstrate that the OtisKnee was as safe and effective as other legally marketed devices.  The letter warned OtisMed that distribution of the OtisKnee prior to approval would be an FDCA violation, and indicated the FDA viewed the product as a “significant risk device system,” which is defined as presenting a potential for serious risk to the health, safety or welfare of a subject.  Chi and others at OtisMed received advice from legal and regulatory counsel confirming it would be unlawful for OtisMed to continue distributing the OtisKnee.

Though the board of directors unanimously decided to stop further shipments of the devices, Chi and others at OtisMed were concerned that inconveniencing surgeons planning to use the OtisKnee in scheduled surgeries would exacerbate the negative impact of the FDA letter on the reputation of OtisMed and the device.  Chi directed OtisMed employees to organize a mass shipment of all OtisKnee devices that had been manufactured but had not yet been shipped and suggested ways for the employees to hide the shipments from FDA regulators.

At Chi’s direction, OtisMed shipped approximately 218 OtisKnee guides from California to surgeons throughout the United States, including 16 to surgeons in New Jersey.  Both Chi and OtisMed admitted that Chi ordered the distribution a week after the FDA denied OtisMed’s request for clearance.

“Companies and individuals put the public health at risk by not complying with FDA regulatory requirements for the pre-market review of medical devices,” said Acting Director Philip J. Walsky for the FDA’s Office of Criminal Investigations.  “We will continue to assure consumer confidence in FDA-regulated products by investigating and bringing to justice those who endanger patient safety by distributing unapproved surgical devices.” “When OtisMed and its CEO, Charlie Chi, distributed medical devices that were not FDA-approved, they violated the trust that patients extend to health care professionals,” said Special Agent in Charge Thomas O’Donnell of the New York Regional Office of the U.S. Department of Health and Human Services Office of Inspector General (HHS-OIG).  “This outrageous behavior triggered our agency to exclude OtisMed from participating in Medicare and Medicaid for 20 years.  We will continue to work with our law enforcement partners to protect federally funded health care programs and the patients who rely on those programs.”

The civil settlement resolves allegations arising from the marketing and distribution of the OtisKnee without receiving approval or clearance from the FDA for the device.  Specifically, the settlement alleged that in May 2006, OtisMed, through co-promotion activities with Stryker Corporation, began commercially distributing the OtisKnee without having received clearance or approval from the FDA for the device.  OtisMed continued to distribute the device while its application was pending and even after the FDA informed OtisMed that the product could not be lawfully distributed until FDA approved the device.

The settlement also alleged that OtisMed encouraged health care providers to submit claims for MRIs that were not reimbursable because they were not performed for diagnostic use, but rather solely to provide data for the creation of the OtisKnee.  Except as admitted in the plea agreement, the claims settled by the civil settlement agreement are allegations only, and there has been no determination of liability as to those claims.

The company will pay approximately $41.2 million, including interest, to resolve its civil liability for submitting false claims to the Medicare, TRICARE, Federal Employees Health Benefits and Medicaid programs.  Of that amount, approximately $41 million will be paid to the federal government.  Medicaid is funded jointly by the states and the federal government and participating Medicaid states will receive approximately $376,700 of the settlement amount.  As part of today’s resolution, the relator will receive approximately $7 million.

In addition to agreeing to continue to cooperate with the government’s investigation and maintain a compliance program, Stryker agreed to conduct a review and audit regarding whether other marketed devices have the appropriate FDA approvals and share the results of that audit with the government.  Stryker also agreed to annual certifications from the president of Stryker’s orthopedics group and from Stryker’s board of directors regarding the effectiveness of the compliance program.

Chi faces a statutory maximum sentence of one year in prison and a $100,000 fine, or twice the gain or loss from the offense, for each of the three counts of introducing adulterated medical devices in interstate commerce.

The guilty pleas and civil settlement are the culmination of a long-term investigation conducted jointly by the FDA’s Office of Criminal Investigations, under the direction of Special Agent in Charge Antoinette V. Henry, and HHS-OIG, under the direction of Special Agent in Charge O’Donnell.  Counsel to the HHS-OIG and FDA’s Office of Chief Counsel to the FDA also assisted.  The National Association of Medicaid Fraud Control Units, along with the Medicaid Fraud Control Unit of the Massachusetts Attorney General’s Office, assisted in coordinating the settlements with the various states.

Additional assistance was provided by the Defense Health Agency and the Office of Personnel Management–Office of the Inspector General.

This resolution illustrates the government’s emphasis on combating health care fraud and marks another achievement for the Health Care Fraud Prevention and Enforcement Action Team (HEAT) initiative, which was announced in May 2009 by the Attorney General and the Secretary of Health and Human Services.  The partnership between the two departments has focused efforts to reduce and prevent Medicare and Medicaid financial fraud through enhanced cooperation.  One of the most powerful tools in this effort is the False Claims Act.  Since January 2009, the Justice Department has recovered a total of more than $23.2 billion through False Claims Act cases, with more than $14.9 billion of that amount recovered in cases involving fraud against federal health care programs.

The government is represented in the criminal case by Chief Jacob T. Elberg of the U.S. Attorney’s Office Health Care and Government Fraud Unit and Trial Attorney Ross S. Goldstein of the Civil Division’s Consumer Protection Branch, and in the civil settlement by Assistant U.S. Attorney Charles Graybow of the District of New Jersey’s Health Care and Government Fraud Unit and Trial Attorney Charles Biro of the Civil Division.

U.S. Attorney Fishman reorganized the health care fraud practice at the U.S. Attorney’s Office for the District of New Jersey shortly after taking office, including creating the stand-alone Health Care and Government Fraud Unit to handle both criminal and civil investigations and prosecutions of health care fraud offenses.  Since 2010, the office has recovered more than $620 million in health care fraud and government fraud settlements, judgments, fines, restitution and forfeiture under the False Claims Act, the FDCA and other statutes.

OtisMed Documents

DOL ANNOUNCES RECOVERY OF $4.5 MILLIN IN BACK WAGES FOR UNPAID OVERTIME IN NATURAL GAS EXTRACTION BUSINESS

FROM:  U.S. LABOR DEPARTMENT 

US Labor Department helps more than 5,300 Pennsylvania and West Virginia 

oil and gas workers recover $4.5M in back wages for unpaid overtime

Multi-year initiative finds widespread and significant violations

PHILADELPHIA — Thousands of workers employed by contractors engaged in natural gas extraction in the Marcellus Shale region of Pennsylvania and West Virginia are putting in a fair day's work but not receiving a fair day's pay. An ongoing multiyear enforcement initiative conducted by the U.S. Department of Labor's Wage and Hour Division offices in Wilkes-Barre and Pittsburgh from 2012 to 2014 found significant violations of the Fair Labor Standards Act which resulted in employers agreeing to pay $4,498,547 in back wages to 5,310 employees. Wage and Hour Division investigators attribute the labor violations in part to the industry's structure.

"The Department of Labor is committed to protecting working families who bear the greatest burden when labor standards are violated," said U.S. Secretary of Labor Thomas E. Perez. "Recovering wages for these workers will help them pay the rent, buy food for the table and clothing for their children. And it will help ensure that employers who play by the rules and pay their employees the wages they have earned are not undercut by those who gain advantage by cheating the system and their workers."

"The oil and gas industry is one of the most fissured industries. Job sites that used to be run by a single company can now have dozens of smaller contractors performing work, which can create downward economic pressure on lower level subcontractors," said Dr. David Weil, administrator of the Wage and Hour Division. "Given the fissured landscape, this is an industry ripe for noncompliance."

The majority of violations were due to improper payment of overtime. In some cases, employees' production bonuses were not included in the regular rate of pay to determine the correct overtime rate of pay. Under the FLSA, all pay received by employees during the workweek must be factored in when determining the overtime premium to be paid. Investigators also found that some salaried employees were misclassified as exempt from the FLSA overtime provision, and were not paid an overtime premium regardless of the number of hours they worked.

Large energy providers such as Chesapeake Energy, Citrus Energy and Anadarko Petroleum are engaged in site exploration and production in the Marcellus Shale region. These companies own the mineral rights and secure the technical and specialized workforce needed to identify natural gas well extraction sites, develop well sites, complete drilling and bring wells on-line for production. The providers then use subcontractors for the majority of the work performed on the extraction, or "well" site. The subcontractors include drilling and geological services, land leasing and acquisition service, and oilfield support services companies.

Secondary subcontractors are often hired for more specialized work and ancillary support services like welding, laboratory services, landscaping, pipeline maintenance, safety and traffic control, and water treatment. Frequently, this level of services does not take place directly at the well sites.

"The more fractured an industry is, the more likely there will be significant labor law violations," said Mark Watson, regional administrator for the Northeast. "Companies further down the contracting chain feel pressured to provide services at a competitive and often cut-rate price point. They are also more likely to cut corners and offer a low bid to secure a business opportunity."

The ongoing enforcement initiative began in 2012. In addition to investigations in Pennsylvania and West Virginia, the agency is examining potential wage and hour violations like these in other parts of the country.

The FLSA requires that covered employees be paid at least the federal minimum wage of $7.25 per hour, as well as time and one-half their regular rates for every hour they work beyond 40 per week. The law also requires employers to maintain accurate records of employees' wages, hours and other conditions of employment, and prohibits employers from retaliating against employees who exercise their rights under the law. The FLSA provides that employers that violate the law are, as a general rule, liable to employees for back wages and liquidated damages payable to the workers.

MEDICAL BILLING PROVIDER SETTLE WITH FTC OVER CONSUMER PERSONAL HEALTH DATA COLLECTION

Medical Billing Provider and its Former CEO Settle FTC Charges That They Misled Consumers About Collection of Personal Health Data

Respondents Failed to Inform Consumers They Would Seek Detailed Info From Pharmacies, Insurance Companies and Laboratories

An Atlanta-based health billing company and its former CEO have settled Federal Trade Commission charges they misled thousands of consumers who signed up for an online billing portal by failing to adequately inform them that the company would seek highly detailed medical information from pharmacies, medical labs and insurance companies.

In a pair of complaints, the FTC charges that PaymentsMD, LLC, and its former CEO, Michael C. Hughes, used the sign-up process for a “Patient Portal” -- where consumers could view their billing history -- as a pathway to deceptively seek consumers’ consent to obtain detailed medical information about the consumers.

“Consumers’ health information is as sensitive as it gets,” said Jessica Rich, director of the FTC’s Bureau of Consumer Protection. “Using deceptive tactics to gain consumers’ ‘permission’ to collect their full health history is contrary to the most basic privacy principles.”
According to the complaints, PaymentsMD operated a website where consumers could pay their medical bills. In 2012, the company and a third party began developing a separate service known as Patient Health Report, designed to provide consumers with comprehensive online medical records. In order to populate the medical records, though, the company first needed to acquire consumers’ medical information. The complaints allege that the company altered the registration process for the billing portal to include permission for the company and its partners to contact healthcare providers to obtain their medical information.

According to the complaints, consumers consented to the collection of their health information by signing off on four authorizations that were presented in small windows on the webpage, displaying only six lines of the extensive text at a time, and could be accepted by clicking one box to agree to all four authorizations at once. Consumers registering for the Patient Portal billing service would have reasonably believed that the authorizations were to be used for just that – billing, according to the complaint.

The complaint alleges that PaymentsMD used the consumers’ registrations to gather sensitive health information from pharmacies, medical testing companies and insurance companies to create a patient health report. The information requested included the prescriptions, procedures, medical diagnoses, lab tests performed and the results of the tests, and more. The complaints allege the company contacted pharmacies located near the consumers, without knowing whether the consumers in question were customers of the particular pharmacy.
According to the complaints, in all but one case, the healthcare companies contacted for data refused to comply with the requests, as they included requests for information about minors, as well for individuals who were not customers of the healthcare company contacted. Once PaymentsMD began informing customers that it was attempting to collect consumers’ health information, the company received numerous complaints from consumers angered because they believed they had signed up only for a billing portal and not an online health record.

Under the terms of the settlements, PaymentsMD and its former CEO, Hughes, must destroy any information collected related to the Patient Health Report service. In addition, the respondents are banned from deceiving consumers about the way they collect and use information, including how information they collect might be shared with or collected from a third party, and they must obtain consumers’ affirmative express consent before collecting health information about a consumer from a third party.

The Commission vote to issue the complaint and accept the proposed consent order for public comment was 5-0. The FTC will publish a description of the consent agreement package in the Federal Register shortly. The agreement will be subject to public comment for 30 days, beginning today and continuing through Jan. 2, 2015, after which the Commission will decide whether to make the proposed consent order final. Interested parties can submit comments electronically (PaymentsMD, LLC | Michael C. Hughes) by following the instructions in the “Invitation To Comment” part of the “Supplementary Information” section.

NOTE: The Commission issues an administrative complaint when it has “reason to believe” that the law has been or is being violated, and it appears to the Commission that a proceeding is in the public interest. When the Commission issues a consent order on a final basis, it carries the force of law with respect to future actions. Each violation of such an order may result in a civil penalty of up to $16,000.

FOREX TRADER TO PAY $819,000 IN COMMODITY POOL FRAUD AND MISAPPROPRIATION CASE

FROM:  COMMODITY FUTURES TRADING COMMISSION 

CFTC Orders Pennsylvania Resident Christopher A. Engel and Pinnacle Forex Group LLC to Pay Restitution and a Civil Monetary Penalty Totaling More than $819,000 for Engaging in Commodity Pool Fraud and Misappropriation

Washington, DC – The U.S. Commodity Futures Trading Commission (CFTC) today entered an Order requiring Respondents Christopher A. Engel and Pinnacle Forex Group LLC (Pinnacle), both of Glen Rock, Pennsylvania, jointly to pay a $414,000 civil monetary penalty and restitution totaling $405,378 to defrauded customers for committing fraud and misappropriation in connection with operating a commodity pool that traded leveraged or margined off-exchange foreign currency contracts (forex).

The Order also requires Engel and Pinnacle to cease and desist from further violations of the Commodity Exchange Act and CFTC regulations, as charged, and permanently bans them from registering, trading, and engaging in other CFTC-regulated activities. Engel owned and operated Pinnacle, and neither Engel nor Pinnacle has ever been registered with the CFTC.

Specifically, according to the Order, from approximately June 2011 to October 2012, Engel falsely told prospective pool participants that Pinnacle managed client accounts worth tens of millions of dollars and that Pinnacle was registered with the CFTC. Also, the Respondents solicited and obtained approximately $414,000 from at least 21 pool participants to participate in a commodity pool to trade leveraged or margined off-exchange forex. However, according to the Order, Engel only deposited approximately $137,000 into forex trading accounts, which he later withdrew and misappropriated. Engel fabricated profits and commissions in statements and emails sent to pool participants to conceal his misappropriation of their funds. Engel used the misappropriated funds to purchase automobiles, a natural foods store, and other personal items, the Order finds. The total loss to pool participants was approximately $405,378, according to the Order.

Additionally, the Order finds that between approximately July 2011 and October 2012, Engel and Pinnacle illegally operated as a Commodity Pool Operator without being registered as such with the CFTC.

The CFTC cautions victims that restitution orders may not result in the recovery of money lost because the wrongdoers may not have sufficient funds or assets. The CFTC will continue to fight vigorously for the protection of customers and to ensure the wrongdoers are held accountable.

The CFTC appreciates the assistance of the U.S. Attorney’s Office for the Middle District of Pennsylvania, the Federal Bureau of Investigation, and the National Futures Association in this matter.

CFTC Division of Enforcement staff members responsible for this case are Patrick Daly, Michael C. McLaughlin, Patryk J. Chudy, David W. MacGregor, Lenel Hickson, Jr., and Manal M. Sultan.

CFTC FILES NOTICE OF INTENT TO REVOKE REGISTRATIONS OF COMMODITY POOL OPERATOR

FROM:  U.S. COMMODITY FUTURES TRADING COMMISSION 
November 25, 2014

CFTC Seeks to Revoke the Registrations of John G. Wilkins and His Company, Altamont Global Partners LLC, Based on Court’s Permanent Injunction Order Prohibiting Them from Committing Further Fraud and on Wilkins’ Related Criminal Conviction

Washington, DC—The U.S. Commodity Futures Trading Commission (CFTC) today filed a Notice of Intent (Notice) to revoke the registrations of Altamont Global Partners LLC (Altamont), a registered Commodity Pool Operator with its principal place of business in Longwood, Florida, and its registered Associated Person, John G. Wilkins, formerly of Chuluota, Florida. Wilkins is a principal, managing member and approximate one-third owner of Altamont.

The Notice alleges that Altamont and Wilkins are subject to statutory disqualification from CFTC registration based on an Order for entry of default judgment and an amended Order of permanent injunction (together, Orders) entered by the U.S. District Court for the Middle District of Florida on February 20, 2014 (see CFTC Press Release 6869-14) and July 8, 2014, respectively. The Orders include findings that Altamont and Wilkins misappropriated commodity pool funds and issued false quarterly statements to pool participants. Among other sanctions, the Orders permanently enjoined Altamont and Wilkins from further violations of the anti-fraud provisions of the Commodity Exchange Act and a CFTC regulation, as charged, and from applying for registration with the CFTC.

In addition, the Notice alleges that Wilkins is subject to statutory disqualification from CFTC registration based on his conviction for conspiracy to commit mail fraud and wire fraud in connection with these same activities, as entered by the U.S. District Court for the Middle District of Florida on January 23, 2014. The District Court sentenced Wilkins to 108 months in federal prison.

CFTC Division of Enforcement staff members responsible for this registration action are Rachel Hayes, Peter Riggs, and Charles Marvine.

KOREAN COMPANY AGREES TO PLEAD GUILTY AND PAY $4 MILLION IN BID RIGGING CASE

FROM:  U.S. JUSTICE DEPARTMENT 

Monday, November 24, 2014

Continental Automotive Electronics and Continental Automotive Korea Agree to Plead Guilty to Bid Rigging on Instrument Panel Clusters

Continental Automotive Electronics LLC and Continental Automotive Korea Ltd. both have agreed to plead guilty and to pay a single criminal fine of $4 million for their roles in a conspiracy to rig bids of instrument panel clusters installed in vehicles manufactured and sold in the United States, the Department of Justice announced today.

According to a one-count felony charge filed today in U.S. District Court for the Northern District of Georgia, Newnan Division, Continental Automotive Electronics LLC, based in Cheongwon, South Korea, and Continental Automotive Korea Ltd., based in Seongnam-si, South Korea, conspired to rig bids for instrument panel clusters sold to Hyundai Motor Co., Kia Motors Corp. and Kia Motors Manufacturing Georgia in the United States and elsewhere.  In addition to the criminal fine, the companies have agreed to cooperate in the department’s ongoing investigation.  The plea agreement is subject to court approval.

“As the Antitrust Division’s prosecution of auto parts matters like this one demonstrates, we will prosecute those who participate in international cartels targeting U.S. businesses and consumers,” said Brent Snyder, Deputy Assistant Attorney General for the Antitrust Division’s criminal enforcement program.  “The Antitrust Division is working closely with competition enforcers around the world to ensure that companies and executives that engage in international cartel crimes find no refuge.”

The charged companies have acknowledged that they and their co-conspirators held meetings and conversations to discuss and agree upon allocation of sales of instrument panel clusters, and the bids and price quotations each would submit.  The charged companies’ involvement in the conspiracy began as early as March 2004 and continued until May 2012.

Instrument panel clusters are a set of instruments located on the dashboard of a vehicle that contain gauges such as a speedometer, tachometer, odometer, and fuel gauge, as well as warning indicators for gearshift position, seat belt, parking-brake engagement, engine malfunction, low fuel, low oil pressure and low tire pressure.

Including Continental Automotive Electronics LLC and Continental Automotive Korea Ltd., 32 companies and 46 executives have been charged in the Justice Department’s ongoing investigation into the automotive parts industry.  Each of the charged companies have either pleaded guilty or have agreed to plead guilty and have agreed to pay more than $2.4 billion in criminal fines.  Of the 46 individuals, 26 have been sentenced to serve time in U.S. prisons.

Continental Automotive Electronics LLC and Continental Automotive Korea Ltd. are charged with bid rigging in violation of the Sherman Act, which carries maximum penalties of a $100 million criminal fine for corporations.  The maximum fine may be increased to twice the gain derived from the crime or twice the loss suffered by the victims of the crime, if either of those amounts is greater than the statutory maximum fine.

The charges are the result of an ongoing federal antitrust investigation into price fixing, bid rigging and other anticompetitive conduct in the automotive parts industry, which is being conducted by each of the Antitrust Division’s criminal enforcement sections and the FBI.  Today’s charges were brought by the Antitrust Division’s Chicago Office and the FBI’s Montgomery, Alabama Field Office, with the assistance of the FBI headquarters’ International Corruption Unit.

CFTC COMMISSIONER GIANCARLO MAKES REMARKS BEFORE U.S. CHAMBER OF COMMERCE

Remarks of CFTC Commissioner J. Christopher Giancarlo before the U.S. Chamber of Commerce

Re-Balancing Reform: Principles for U.S. Financial Market Regulation In Service to the American Economy

November 20, 2014

Introduction

Thank you for that kind introduction and for the opportunity to speak to you today. It is an honor to address the U.S. Chamber of Commerce. I have enormous admiration and respect for this institution.

Let me start by saying that my remarks reflect my own views and do not necessarily constitute the views of the Commodity Futures Trading Commission (CFTC or Commission), my fellow CFTC Commissioners, or the hardworking CFTC staff.

Just a few years ago in the aftermath of the financial crisis and the rollout of the TARP program, the U.S. Chamber stood strong and dauntless in defense of American free enterprise and capital markets. The U.S. Chamber held the line though surrounded by fierce critics of American finance and capital formation. The U.S. Chamber’s CEO, Tom Donahue, took a very simple but symbolic action when he hung one word in giant letters from the rafters of this building: J-O-B-S.

By posting the word that is at the heart of what really matters to American voters, their jobs, Donahue was reminding our political leadership that, despite all the challenges it faced, the litmus test by which it would be judged would be job creation. Donahue knew that Americans – just as they always have been – were ready once again to work hard to bring our economy back from the brink provided barriers were not placed in their way.

Donahue was also reminding us that free enterprise remains the best path to job creation. Free enterprise and democratic capitalism remain the backbone of the American republic. They have always been and will always be the route to American prosperity.

Sadly, the job creation prowess of democratic capitalism is still baffling to many who should know better. One well-known, perennial Presidential candidate recently said, “Don’t let anybody tell you that corporations and businesses create jobs.”1 That may be true, under the current Administration, which has made private sector hiring much more expensive and burdensome.

Yet, this political statement is flatly incorrect as a matter of economic science. It is emblematic of a fundamental misunderstanding of basic economics from college campuses, to Hollywood, to Washington, DC. I believe it is the duty of all of us to help the public better understand the benefits of capital markets and the American industries they support. It is our duty to promote, rather than denigrate, financial markets for their health and service to the American economy. They are the key to American economic growth and job creation. We cannot have a prosperous U.S. economy without them.

The 2008 Financial Crisis: There is no question that the 2008 financial crisis presented an enormous challenge for American capital markets. In September of that year, Lehman Brothers filed for Chapter 11 bankruptcy protection. Lehman’s failure was a consequence of the bursting of a double bubble of housing prices and consumer credit as lenders anticipated a fall in home values and the inability of homeowners to repay mortgages. A full “run on the bank” ensued with rapidly falling asset values, preventing U.S. and foreign lenders from meeting their cash obligations. The 2008 financial crisis was devastating for far too many American businesses and families.

I remember the crisis very well. I was a senior executive of a U.S. wholesale brokerage firm that operated trading platforms for over-the-counter swaps transactions. I remember the panic in the eyes of bank executives and the tremor in the voices of financial regulators.

The experience confirmed my support, which has not waivered, for the core tenets of Title VII of the Dodd-Frank Act. I support more central counterparty clearing of swaps and reporting trades to centralized data repositories. I also support sensible regulation of swaps intermediaries to raise trading standards and bring swaps markets in line with regulation of intermediaries in other capital markets, like equities and futures.

However, I am also a firm believer that vibrant, open, and competitive markets are essential to a strong U.S. economy. Proper regulatory oversight can go hand-in-hand with open and competitive markets. But, if excessive regulation artificially increases the cost of risk management and stymies the legitimate use of derivatives, the overall economy will suffer – and American jobs will be lost.

My experience in the financial crisis also started me down a long path that led me to government service at the CFTC. I am one of three new commissioners sworn in this past spring. Chairman Timothy Massad, Commissioner Sharon Bowen, and I all come from law firm backgrounds outside of the futures industry. Along with existing Commissioner Mark Wetjen, I believe we bring to the Commission something of the collegial spirit of partners in a law firm. We may not always agree, but I am hopeful that we will engage in less of the internal warfare that characterized the Commission over the recent past. I am cautiously optimistic that we can change the tone at the Commission.

In fact, I believe the Commission has the opportunity to begin a new era in federal regulation. Over the past few years, the federal government has had a crisis-driven, headlong rush into law and regulation reaching deeply into the everyday affairs of all Americans, from the process of obtaining a home mortgage to visits with family doctors. As I will explain, this regulatory reach even extends to the price of cereal on the grocery shelves. Some of these regulatory actions serve a useful purpose. Others are unworkable. Some impede economic growth.

What is needed is a more thoughtful, steady, and less hectic approach to regulation. What is needed is a more careful weighing of the balance between regulatory benefit and economic cost. What is needed is greater respect for the impact of Washington’s mandates on the lives of everyday Americans. I believe the CFTC can take this more measured approach to regulation of the derivatives markets.

In this regard, today, I would like to lay out a set of principles that I will follow as I serve on the Commission. I believe these principles are well suited for financial market regulation in a new, more balanced regulatory era.

Six Principles for Financial Market Regulation

Regulation must:

1. Not Restrain the U.S. Economy;

2. Not Threaten American Jobs;

3. Be Impartial and Balanced;

4. Be Competent;

5. Be Accountable; and

6. Not Create the Next Crisis.

Principle One: Regulation Must Not Restrain the U.S. Economy.

In Washington recently, the Managing Director of the International Monetary Fund (IMF), Christine Lagarde, dubbed current economic conditions as the “New Mediocre.”2 That is actually a mild description for what is the worst U.S. recovery from any recession since the Great Depression. U.S. economic growth has averaged 2 percent in the New Mediocre, compared to 3.3 percent for most of the period since post-World War II.3

The U.S. has recovered from eleven other recessions before the current recovery. In those recessions, the economy took a little over a year to recover to the level of gross domestic product it had prior to the recession.4 But, in the current New Mediocre, it has us taken four years, to reach that point.5

Federal regulations have become a major drag on the U.S. economy. Regulations now cost the U.S. more than 12 percent of gross domestic product, or $2 trillion annually.6 The average manufacturing firm spends almost $20,000 per employee per year on complying with federal regulations. For manufacturers with fewer than fifty employees, the per-employee cost rises to almost $35,000.7 With this level of regulatory cost, it is no wonder that U.S. economic growth is so meager. In a recent, major survey of CEOs of American companies, over-regulation was overwhelming cited as a barrier to capital investment that would otherwise stimulate job creation and wage growth.8

Let’s look at regulation in my area of derivatives. Some of you know how the derivatives markets work, but I think a basic example will be useful. Let’s start with your local grocery store. We all take for granted an abundance of food on the shelves week after week, year after year. We never have to wonder how the weather is affecting the growing season or if it was a bountiful or lean harvest in thousands of rural counties all across our country.

Yet, visitors to America from the developing world are amazed by the constant bounty of food at relatively stable prices in our grocery stores. In many parts of the world, plentiful food depends on a good harvest. A bad harvest means there is little to eat. With little to no income from a bad harvest, farmers are unable to plant the next year causing further hunger and misery.

The use of risk hedging instruments, namely commodity futures and other derivatives, is one of the important reasons Americans have an abundance of food on the shelves. Many of our agricultural producers hedge their prices and costs of production in America’s futures markets. It is the same reason we usually can rely on enough electricity to run our homes and gasoline to fuel our cars. The health and efficiency of U.S. futures and derivatives markets have a direct impact on the price and availability of the food we eat, the warmth of our homes, and the energy needed to power our factories.

In keeping with the principle of not restraining the economy, I recently voted against a CFTC rule proposal that did not do enough to ease an unnecessary burden on participants in America’s futures markets. That proposal was a well-intentioned, but insufficient attempt to provide relief from unworkable CFTC data recording and recordkeeping requirements. Rather than facilitating the collection of useful records to use in investigations and enforcement actions, the rule imposes senseless costs that fall especially hard on small intermediaries between American farmers, manufacturers, and U.S. futures markets.

These intermediaries are known as futures commission merchants (FCMs). Their services are used by America’s farmers and producers to control costs of production. Yet, today we have around half the number of FCMs serving our farmers than we did a few years ago. FCMs, particularly smaller ones, are being squeezed by the current environment of low interest rates and increased regulatory burdens. They are barely breaking even.

We should not be squeezing them further with increased compliance costs if we can avoid it and still effectively oversee the markets. The stated purpose of the Dodd-Frank Act was to reform “Wall Street.” Instead, we are burdening “Main Street” by adding new compliance costs onto our farmers, grain elevators, and small FCMs. Those costs will surely work their way into the everyday costs of groceries and winter heating fuel for American families, adding an additional drag on the U.S. economy.

Principle Two: Regulation Must Not Threaten American Jobs.

The official U.S. unemployment rate has fallen steadily during the past few years. Yet, this recovery has created the fewest jobs relative to the previous employment peak of any prior recovery.9 The labor force participation rate recently hit a thirty-six-year low of 62.7 percent.10 The number of Americans NOT in the labor force recently hit a record high of 92.6 million.11 Part-time work and long-term unemployment are still well above levels from before the financial crisis.12

Worse, middle class incomes continue to fall during this recovery, losing even more ground than during the recession.13 The number in poverty has also continued to soar to about fifty million Americans.14 That is the highest level in the more than fifty years that the census has been tracking poverty.15 Income inequality has risen more in the past few years than at any recent time.16

Recently, my fellow New Jerseyan, Governor Chris Christie, pointed out that the bigger problem today is not income inequality, it is opportunity inequality.17 He is right. The opportunity in this country to work in a full-time job has been diminished over the past few years in the New Mediocre economy.

Unfortunately, federal regulators are not helping matters. One particular CFTC action poses a serious threat to jobs in the U.S. financial services industry in cities across the country. In November 2013, the CFTC issued a benign sounding “Staff Advisory,” which imposed complex U.S. trading requirements on swaps trades between non-U.S. businesses whenever anyone on U.S. soil “arranged, negotiated or executed” the trade.18 It is causing many trading firms to consider cutting off all activity with U.S.-based trade support personnel.

This Staff Advisory was hurriedly issued a year ago by agency staff without a vote of the full Commission. My fellow Commissioner and former Acting Chairman, Mark Wetjen, even said its issuance was not the “right decision.” The Staff Advisory jeopardizes the role of bank sales personnel in U.S. financial centers from New York and New Jersey, to Boston, Charlotte, and Chicago. It will likely have a ripple effect on technology staff supporting U.S. electronic trading systems, along with the thousands of jobs tied to the vendors who provide food services, office support, custodial services, and transportation needs to the U.S. financial services industry.

This CFTC Staff Advisory is a threat to American jobs. In September, I called for its withdrawal. Just last week the CFTC delayed it for the fourth time.19 When a regulatory action needs four delays, I think we all can admit that it is not workable and needs to be scrapped. With tens of millions of Americans falling back on part-time work, it is not in our economic interest for Washington regulators to cause good-paying full-time jobs to be eliminated.

Principle Three: Regulation Must Be Impartial and Balanced.

Early in 2009, while global capital markets were reeling, a new Administration was settling in. It brought with it a governing philosophy best expressed by Rahm Emanuel, then White House Chief of Staff. He told a conference of business leaders: “You never want a serious crisis to go to waste…. This crisis provides the opportunity for us to do things that you could not do before.”20

This crisis exploitation methodology was the catalyst for a whole slew of new legislation, from the gargantuan stimulus package to cash for clunkers to Obamacare, and, of course, the Wall Street Reform and Consumer Protection Act, better known as the Dodd-Frank Act. Crisis exploitation was a theme not only of the White House and Congress, but was also prevalent in many federal regulatory agencies, including the CFTC.

In just one example – and there are many – the CFTC took advantage of the crisis to amend its rules to assert jurisdiction over hundreds of previously excluded registered investment companies engaged in commodity trading activity above particular thresholds. Up until that point, mutual funds and other investment companies that manage American’s retirement and other investments had long been largely exempt from CFTC oversight. Instead, they were and continue to be comprehensively regulated by the Securities and Exchange Commission (SEC). Nevertheless, the CFTC narrowed the previous exclusion and required these SEC-registered investment companies to also register with the CFTC as commodity pool operators. This triggered burdensome reporting and disclosure requirements that are sometimes duplicative and, in other places, inconsistent with the reporting and disclosure requirements under the SEC’s rules.

In asserting jurisdiction over these investment companies, the CFTC claimed it was acting “consistent with the tenor” of the Dodd-Frank Act, which had given the agency “a more robust mandate to manage systemic risk and to ensure safe trading practices by entities involved in the derivatives markets.”21 Yet, nothing in the Dodd-Frank Act directed the CFTC to narrow the exclusions for SEC-registered investment companies. It was just regulatory opportunism by the CFTC. The CFTC’s burdensome requirements on registered investment companies means that higher costs are being passed onto the 401(k) plans and other retirement savings of millions of ordinary Americans. Never let a good crisis go to waste.

I believe the American people have grown wary of this regulatory explosion. They want all branches and agencies of the federal government to do their jobs well and without overreach.

Principle Four: Regulation Must Be Competent.

In 2008, President Obama undertook to provide a highly competent form of government that would be “cool again” as an “agent of change.”22 Yet, a constant stream of scandals has called into question the competence of many federal government agencies, including such previously esteemed institutions as the Secret Service, the Veterans Administration, and the Centers for Disease Control and Prevention.

These scandals have had an impact. Public trust in the federal government is at an all-time low according to a recent poll.23 Just 13 percent of Americans say that the government can be trusted to do what is right always or most of the time.24 That 13 percent compares to 36 percent during the Watergate crisis forty years ago.25

I believe there is a direct link between a government trying to do too much and a government doing things incompetently. In 2011 and 2012, respectively, MF Global and Peregrine Financial Group failed, causing huge losses for American agriculture producers who use futures to manage the everyday risk associated with farming and ranching. The failure of MF Global and Peregrine was a “black eye” for the CFTC and resulted in enormous political pressure to “do something.”

In October of last year, the CFTC responded with a misnamed, “customer protection” rule with the ostensible purpose of preventing another MF Global or Peregrine.26 While some aspects of the rule were needed and widely welcomed by market participants, the rule also required FCMs to pay futures clearinghouses at the start of trading on the next business day. The rule caused an outcry of opposition as it became clear that it would result in farmers and ranchers having to prefund their futures margin accounts. They argued that the CFTC rule would ensure that they would lose more of their hard-earned money, not less, the next time an FCM failed the way MF Global did. The rule would likely drive many small and medium-sized agricultural producers out of the marketplace along with the smaller FCM community that serves them.

The futility of the CFTC’s “customer protection” rule has now been partially addressed through a proposed rule amendment unanimously adopted by the new Commission a few weeks ago.27 Still, it stands as an example of flawed regulation rushed through in the wake of a crisis “to do something” without adequate analysis of its impact on those it is meant to help.

In my work at the CFTC, I want to make sure the rules we put forward actually solve real problems, not invented ones. I have developed an analysis formula contained in a simple mnemonic: “SMART-REG.”

It stands for:

S             Solve for real problems, not anecdotes of bad behavior;
M            Measure success through a rigorous cost benefit analysis;
A             Advance innovation and competition through flexible rules;
R             Represent the best approach among alternative courses of action;
T             Take into account evidence, rather than assumptions;


R             Realistically set compliance deadlines;
E             Encourage employment of American workers;
G             Grounded in law.    
My staff and I will to use this SMART REG standard to help evaluate whether rules are truly in service to the U.S. economy and the American markets.

Principle Five: Regulation Must Be Accountable.

I am sure most of you have now heard of a very talkative MIT Professor who claims that a “lack of transparency” was necessary to pass Obamacare.

As financial regulators, we at the CFTC seek increased transparency and accountability from our derivatives markets and from participants in those markets. The Commission must live up to the same standard. Yet, that has not been the case at the CFTC over the past few years.

A recent study by the Mercatus Center of George Mason University takes a thorough look at the way in which the CFTC went about implementing much of the Dodd-Frank regulatory framework.28 It shows how the CFTC failed to consistently employ a transparent, deliberative rulemaking process under the direction of the five commissioners with substantial input from all affected parties, oversight by Congress, and clear avenues for judicial review.29 Instead, it used a confusing, ad hoc rulemaking process that excluded important viewpoints, foiled oversight efforts, and aggravated regulatory compliance burdens.30 This ad hoc process included the issuance of an extraordinary number of no-action and other staff letters.31 None of these no-action and other staff letters – including 110 staff letters just in the first eight months of 2014 – benefitted from any cost benefit analysis. None were put through ordinary public notice and comment. None were voted on by the Commission. The Mercatus study argues persuasively that these failures eroded not only the public’s confidence in the CFTC as a regulator, but the CFTC’s ability to establish a compliance culture in the industry it regulates.32

I believe that such regulatory short-cuts must be curtailed. Regulation must not be produced in a vacuum with no oversight.

Fifty years ago, Ronald Reagan said: “This is the issue…: Whether we believe in our capacity for self-government, or whether we abandon the American Revolution and confess that a little intellectual elite in a far-distant capitol can plan our lives for us better than we can plan them ourselves.”33

Two weeks ago, the American people reasserted their preference to plan their own lives without dictates and opacity from Washington.

Principle Six: Regulation Must Not Create the Next Crisis.

I began my remarks today by recalling the times just after the financial crisis when many shrill voices were blaming American capital markets for the financial crisis. I noted that there has been little in the way of acknowledgement for the federal government’s role in the crisis. That includes the misbegotten policies that resulted in an unprecedented number of risky mortgages and other lending that was at the center of massive and unchecked housing and credit bubbles. There is still little acknowledgement today, let alone reform, of Freddie Mac and Fannie Mae, major agencies of those dangerous government policies.

Instead, we have had a shifting in attitude on how U.S. capital and financial markets should function. The arguments are that markets need to be made less risky. A large number of coordinated and uncoordinated initiatives are in place to limit market activity, from the Dodd-Frank Act’s Volcker Rule and swaps push-out provisions to the Federal Reserve’s rule imposing margin on uncleared swaps to increased capital requirements imposed by the Basel Committee on Banking Supervision.

The result is that financial institutions are building up large capital reserves. To do so, they have curtailed putting their capital to work on behalf of clients and economic growth. It has reached such a level that the IMF recently issued a report discussing the need for more not less economic risk-taking to help global recovery.34 The report calls on banks to revamp their business models to once again become engines of growth. Yet, it neglects to call out regulators for restricting the banks’ ability to put their capital to work efficiently.

The CFTC has put forth its share of bad rules in the name of market risk reduction. Those include a series of swaps “transaction level” rules based on the wrong template of the U.S. futures markets, including a host of peculiar and unprecedented swaps trading restrictions that are tangential to their stated purpose of shielding the U.S. from counterparty risk. I will soon be issuing a White Paper proposing improvements to these rules.

The CFTC then coupled the rules with “interpretative guidance” and “staff advisories” on their cross-border reach based on market participants’ U.S. personhood and employee location. The global response to the CFTC swaps trading regime has been swift and dramatic. Since the rules went into effect in October 2013, and accelerating thereafter, global swaps markets have divided into separate trading and liquidity pools between those in which U.S. persons are able to participate and those in which U.S. persons are effectively shunned. According to a survey conducted by the International Swaps and Derivatives Association, the market for U.S. and euro interest rate swaps, two of the most widely used products for hedging, has split into two over the past 12 months.35

Fragmentation of global swaps markets between U.S. person and non-U.S. person means smaller and disconnected liquidity pools and less efficient and more volatile pricing for market participants and their end-user customers. Fragmentation also means greater risk of market failure in the event of economic crisis. Market fragmentation increases the very systemic risk that the Dodd-Frank Act was predicated on reducing.

An American economy that is just starting to show signs of recovering from the “Great Recession” cannot bear the reduction in global trade in financial services and increased systemic risk that is a looming possibility.

In trying to stamp out risk, we are harming trading liquidity. The last crisis was one of counterparty credit risk. I fear that the next crisis could well be a liquidity crisis – a crisis in which capital-constrained banks and other market makers have little choice in a panic but to limit their exposure to increasingly fragmented markets. Such a pullback would leave America’s farmers, ranchers, and manufacturers without the means to fund their operations or hedge their operational risks. We are still fighting the last crisis. We must consider whether our regulations will land us in the next one.

Conclusion

I have set out six principles for financial market regulation in this post-post-financial crisis era. I believe that many Americans earlier this month expressed their dissatisfaction with Washington’s hasty and flawed regulations that seek to exploit crises and blame markets, while expanding the federal government’s reach to every aspect of American life.

Instead, I believe Americans want regulators to:

1. Promote and Boost the U.S. Economy;

2. Encourage the Creation of American Jobs;

3. Be Impartial and Balanced;

4. Be Competent (for goodness sake);

5. Be Accountable and Transparent; and

6. Not Create the Next Crisis.

It is now six years since the 2008 financial crisis. It is time we moved away from punishing U.S. financial markets. It is the job of market regulators like the CFTC to promote U.S. hedging markets with smart regulations rather than impede them with crisis-exploiting complexity. U.S. financial markets have long been the most fair, transparent, efficient, and innovative in the world. We must keep them so. Our goal in this new era must be the health of U.S. financial markets and the regeneration of the spirit of American enterprise that rekindles some of our lost prosperity and puts our people back to work. Yes, JOBS!

Thank you very much for your time. I look forward to taking a few questions.

Media Contact:
Jason Goggins
(202) 418-5713
jgoggins@cftc.gov

1 Maggie Haberman, Hillary Clinton clarifies jobs comment, Politico, Oct. 27, 2014, available at http://www.politico.com/story/2014/10/hillary-clinton-jobs-comment-112225.html.

2 Op-Ed, The New Mediocre, Wall Street Journal, Oct. 16, 2014, available at http://online.wsj.com/articles/the-new-mediocre-1413415600.

3 Peter Ferrara, What Obama's Growth Recession Is Stealing From Your Wallet, Forbes, May 2, 2014, available at http://www.forbes.com/sites/peterferrara/2014/05/02/what-obamas-growth-recession-is-stealing-from-your-wallet/.

4 Peter Ferrara, How Does President Obama's Economic Recovery Compare To Those Of Other Presidents?, Forbes, Aug. 4, 2013 (“Ferrara: How Does Recovery Compare”), available at http://www.forbes.com/sites/peterferrara/2013/08/04/how-does-president-obamas-economic-recovery-compare-to-those-of-other-presidents/.

5 Id.

6 W. Mark Crain and Nicole V. Crain, The Cost of Federal Regulation to the U.S. Economy, Manufacturing and Small Business, National Association of Manufacturers, at 1, Sep. 10, 2014, available at http://www.nam.org/Data-and-Reports/Cost-of-Federal-Regulations/Federal-Regulation-Full-Study.pdf.

7 Id. at 2-3.

8 PricewaterhouseCoopers LLP, “Good to Grow” 2014 Annual Global CEO Survey, at 4.

9 Ferrara: How Does Recovery Compare.

10 Steve Moore, Under Obama: One Million More Americans Have Dropped Out Of Work Force than Have Found a Job, Forbes, Oct. 6, 2014, available at http://www.forbes.com/sites/stevemoore/2014/10/06/under-obama-one-million-more-americans-have-dropped-out-of-work-force-than-have-found-a-job/.

11 News Release, The Employment Situation – September 2014, Bureau of Labor Statistics, at Summary Table A, Oct. 3, 2014, available at http://www.bls.gov/news.release/archives/empsit_10032014.pdf. It was reported that this number was a record high.

12 Id.

13 Ferrara: How Does Recovery Compare.

14 Id.

15 Id.

16 Id.

17 Interview with Governor Chris Christie, Fox News Sunday (Oct. 26, 2014).

18 CFTC Staff Advisory No. 13-69 (Nov. 14, 2013), available at http://www.cftc.gov/ucm/groups/public/@lrlettergeneral/documents/letter/13-69.pdf.

19 CFTC Letter No. 14-140 (Nov. 14, 2014), available at http://www.cftc.gov/ucm/groups/public/@lrlettergeneral/documents/letter/14-140.pdf.

20 Gerald F. Seib, In Crisis, Opportunity for Obama, Wall Street Journal, Nov. 21, 2008, available at http://online.wsj.com/articles/SB122721278056345271.

21 Commodity Pool Operators and Commodity Trading Advisors: Compliance Obligations, 77 FR 11252, 11253, 11275 (Feb. 24, 2012).

22 Interview with President Obama, Reno Gazette-Journal (Jan. 16, 2008), cited in Stephen F. Hayes, Failure Upon Failure: The disintegration of the Obama presidency, The Weekly Standard, Oct. 20, 2014, available at http://www.weeklystandard.com/articles/failure-upon-failure_810899.html.

23 Doug Mataconis, Public trust in government hits new lows, The Christian Science Monitor, Aug. 8, 2014, available at http://www.csmonitor.com/USA/DC-Decoder/Decoder-Voices/2014/0808/Public-trust-In-government-hits-new-lows.

24 Id.

25 Id.

26 Enhancing Protections Afforded Customers and Customer Funds Held by Futures Commission Merchants and Derivatives Clearing Organizations, 78 FR 68506 (Nov. 14, 2013).

27 Residual Interest Deadline for Futures Commission Merchants, 79 FR 68148 (proposed Nov. 14, 2014).

28 Hester Peirce, Regulating through the Back Door at the Commodity Futures Trading Commission, Mercatus Center, George Mason University, Nov. 2014, available at http://mercatus.org/sites/default/files/Peirce-Back-Door-CFTC.pdf.

29 Id.

30 Id.

31 Id. at 22 (167 no-action and other staff letters in 2012 and 2013).

32 Id. at 68-72.

33 Ronald Reagan, A Time for Choosing, Oct. 1, 1964, available at http://reagan2020.us/speeches/A_Time_for_Choosing.asp.

34 IMF Global Financial Stability Report, Policymakers Should Encourage Economic Risk Taking, Keep Financial Excess Under Control, Oct. 8, 2014, available at http://www.imf.org/external/pubs/ft/survey/so/2014/POL100814B.htm.

35 ISDA Research Note, Revisiting Cross-Border Fragmentation of Global OTC Derivatives: Mid-year 2014 Update, July 2014, available at http://www2.isda.org/functional-areas/research/research-notes/.

Last Updated: November 20, 2014