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.