RICHMOND FRAUD EXAMINERS

Cell Phones and Money Laundering

A judge has ordered the arrest of Silvio Scaglia, one of the founders of Italian broadband company Fastweb SpA, and another 55 people for alleged money laundering as part of a wider investigation into accounting fraud and false invoices.

Italian anti-mafia police said illegally obtained money was laundered through fictitious international phone-service bills worth more than €2 billion ($2.7 billion) over several years. Italian authorities alleged fake invoices were issued with the knowledge of executives from Fastweb and Telecom Italia SpA's Sparkle unit.  The Rome judge ordered the arrest of Mr. Scaglia as well as other executives from Fastweb and Sparkle on charges of money laundering, the police said. They included former Fastweb chief financial officer Mario Rossetti.

In an emailed statement, a lawyer acting for Mr. Scaglia said his client denies any wrongdoing and is ready to be questioned as soon as possible by the authorities. The same statement said Mr. Scaglia was on an overseas business trip. Mr. Rossetti's attorney couldn't immediately be reached.  In addition to the 56 suspects accused of money laundering, Fastweb Chief Executive Stefano Parisi and two other managers at the company were under investigation in the same probe, Fastweb said Tuesday.

As part of the money-laundering probe, the Rome judge has ordered the arrest of Nicola Di Girolamo, a senator from Premier Silvio Berlusconi's party, on allegations of money laundering. The party declined to comment on Mr. Di Girolamo, who couldn't be reached. Authorities haven't detailed allegations against any individuals. The investigation has involved authorities in the U.K., Switzerland, Austria and Singapore.

The U.K.'s Serious Organised Crime Agency said Tuesday that four men were arrested in West London and Devon in connection with an international operation into Italian organized crime and will appear at an extradition court in London. The U.K. agency said simultaneous raids were also carried out in Italy relating to the investigation.  Mr. Scaglia was a board member of Fastweb and was chief executive from 1999 until 2003. From 2003 to 2007, Mr. Scaglia was the chairman of Fastweb and handled its sale to Swiss peer Swisscom AG in 2007. That year he also founded Babelgum, a Web-TV platform, in which he no longer holds a management role.

Telecom Italia in a statement said it was a "damaged party." It added that it had been aware of the allegations in 2007 and Telecom Italia Sparkle ended all commercial relations with the subjects under investigation at that time and offered to cooperate with investigators.  Swisscom said it had been aware of the allegations against Fastweb when it acquired the company for about 6 billion Swiss francs ($5.6 billion), adding: "The risks were included in the value assessment of the company."

Swisscom said it was cooperating fully with Italian authorities. The Swiss company isn't accused of any wrongdoing as the allegations of money laundering are centered on the four years before it acquired Fastweb.

Cuomo Takes on Bank of America

New York Attorney General Andrew M. Cuomo filed fraud charges against Bank of America and two of its former top executives, alleging that they lied not only to investors but also to government officials who were orchestrating a massive bailout of the bank in the final months of 2008.

The company and two former executives -- chief executive Kenneth D. Lewis and Chief Financial Officer Joseph Price -- were accused of misleading federal officials about the size of losses at Merrill Lynch, the troubled investment bank that Bank of America was in the process of buying. The lawsuit alleges that the deception was part of a successful effort to trick the officials into providing an additional infusion of bailout money.

Cuomo also charged the bank and the former executives with lying to investors about mounting financial losses at Merrill Lynch and concealing billions of dollars in bonuses paid to employees. The bank and executives denied the charges.

Bank of America separately agreed to pay $150 million to settle two earlier lawsuits brought by the Securities and Exchange Commission charging that the company lied to shareholders. The SEC's legal action, which was less aggressive than Cuomo's, did not include fraud charges and cleared individual executives of wrongdoing.

Cuomo's lawsuit raises the prospect that senior federal officials, both former and current, could be called to provide courtroom testimony for the first time about their role in rescuing the financial system. The lawsuit names former Treasury secretary Henry M. Paulson Jr., Federal Reserve Chairman Ben S. Bernanke and other federal officials as participants in discussions about the merger between Bank of America and Merrill Lynch.

These officials have already been called before a congressional committee looking into the deal. Some lawmakers have said the officials, who were worried that the U.S. economy would be in peril if the deal fell through, conspired with company executives to hide information that Bank of America was required to disclose under federal securities laws.

The actions taken represent the culmination of long-running investigations by Cuomo, the Securities and Exchange Commission, and the Treasury Department's special inspector general for the financial bailout, Neil Barofsky.

"Bank of America, through its top management, engaged in a concerted effort to deceive shareholders and American taxpayers at large," Cuomo said. "They committed an enormous fraud, and American taxpayers ended up paying billions for Bank of America's misdeeds."

Bank of America first settled SEC allegations by agreeing to pay $33 million last summer. But a federal judge rejected the settlement, saying it left too many questions unanswered, punished the very shareholders who were injured and let top executives off the hook.

The SEC announced Thursday that the bank has now agreed to pay $150 million to settle the charges and make a host of changes in how the company is run. The agency said it would come up with a plan to ensure that the money goes to injured investors. A judge must still sign off on the agreement.

The new fraud charges, however, may complicate matters. The SEC had said in previous court filings that it could find no evidence that executives at Bank of America did anything illegal. Cuomo's suit says the opposite.

"We're proceeding with the case. . . . The SEC is settling," Cuomo said. When you settle a case, "the upside is you implement immediate regulatory reforms. . . . Our case I believe will bring individuals to justice. . . . The downside of a litigation is it often takes time. . . . When you put both together, it's a comprehensive approach."

The Bank of America case is the first major legal case to stem from the unprecedented response -- involving mergers and government intervention -- to the breakdown of the financial system in fall 2008.

Questions about Merrill

Cuomo's allegations turn on the question of whether bank executives recognized the size of Merrill Lynch's losses before or after Bank of America shareholders approved the merger. Cuomo's complaint says that the bank and Price, in particular, "knew or were reckless or negligent in not knowing" that Merrill's losses had reached at least $16 billion by the end of the day on Dec. 5, when shareholders voted on the deal. Bank executives did not report such losses before the vote, depriving shareholders of information they needed to evaluate the merger, the attorney general said.

The lawsuit also claims that bank executives told the federal government less than two weeks later that they were considering pulling out of the merger because of surprisingly large losses at Merrill Lynch that had come to light only after the shareholder vote. But from Dec. 5 to Dec. 17, when Bank of America officials told the government that they might back out, Merrill incurred an additional loss of $1.4 billion, the complaint alleges.

Cuomo said the bank's expressions of concern were a ploy to win more government assistance. Federal officials were eager to see the merger proceed, since it could help stabilize the financial system.

"Bank of America and its officials defrauded the government and taxpayers at a very difficult and sensitive time. There was a perception that the financial system was teetering. And I believe Bank of America officials exploited this fear," Cuomo said.

In a statement, Bank of America said that it was pleased with the SEC settlement but that "we find it regrettable and are disappointed that the [New York Attorney General] has chosen to file these charges, which we believe are totally without merit."

A lawyer for Lewis called the fraud suit a "badly misguided decision without support in the facts or the law," and a lawyer for Price called the allegations "false."

The fraud charges come after Cuomo's investigators took more than 75 days of testimony from Bank of America and Merrill Lynch officials and reviewed more than 1 million documents, according to David Markowitz, the special deputy attorney general who heads Cuomo's investor protection division.

Searching for the Next Madoff

Bernard L. Madoff haunts the corridors of the S.E.C like the He-Who-Must-Not-Be-Named of Wall Street.  In the headquarters of the Securities and Exchange Commission, Mr. Madoff’s name is rarely spoken. More than seven months after he was sentenced to prison for orchestrating a global Ponzi scheme, shaken S.E.C. employees are still struggling to come to grips with how they failed to catch him before it was too late.

Many here refer to the scandal — a $65 billion fraud that, despite several red flags, went undetected by the S.E.C. for more than two decades — as “the event” or “the incident.” It is the job of Robert S. Khuzami, the S.E.C. head of enforcement, to unmask the next Madoff — and, equally daunting, to convince skeptics that the commission can reassert itself and adequately police Wall Street.

Since arriving at the S.E.C. a year ago this month, just as the Madoff scandal was grabbing headlines, Mr. Khuzami has cut red tape, created specialized teams to plumb hedge funds and other worrisome areas and tried to make the S.E.C. quicker and more nimble. Unlike some at the commission, Mr. Khuzami, 53, talks openly about the Madoff fiasco. “For a group of people committed to investor protection and prevention, the tragedy of investors’ losses are not lost on anyone,” he said in an interview in his bright, corner office in Washington. While Mary L. Schapiro, the chairwoman, is the public face of the commission, Mr. Khuzami and his lieutenants are the officers on the beat. Their first challenge is to shake off the psychic blow of the Madoff affair. Not since the 1950s, when budget cuts and deregulation defanged the commission, have its stature and influence sunk so low. Mr. Khuzami, a straight-talking former federal prosecutor and Wall Street executive, says he wants to infuse the S.E.C. with the ethos of a start-up company, making it faster, more proactive and even a bit entrepreneurial.

The practical challenges are formidable. Wall Street vastly outdoes the S.E.C. in terms of people, money and, many in the financial industry argue, talent. The administration has requested a budget of $1.3 billion for the S.E.C. for 2011. Hedge fund stars can make that in a year. Big banks usually pull in the equivalent in revenue in a single week.

On Monday, what S.E.C. officials had hoped might be a quick victory in a prominent case instead turned into another potential headache. Mr. Khuzami and a squadron of S.E.C. lawyers filed into a New York courtroom where the commission was trying to end its long investigation into the takeover of Merrill Lynch by Bank of America. But District Judge Jed S. Rakoff — who last September rejected as too low an earlier $33 million settlement that the S.E.C. had reached with Bank of America — again raised questions about the commission’s handling of the case. If he rules against the second settlement, for $150 million, the case is set to go to trial on March 1.

At the heart of Mr. Khuzami’s effort is the commission’s new Office of Market Intelligence, a clearing house for the tips and referrals that stream into the S.E.C. The head of that unit is Thomas A. Sporkin, son of Stanley Sporkin, the outspoken retired federal judge who earned national recognition in the 1970s for his investigations of corporate malfeasance as director of enforcement at the commission.
The S.E.C. also has established five investigative units, hoping to transform some of its many generalists into specialists. One of those units focuses on so-called structured products and securitization, which spawned some of the most dangerous instruments of the financial collapse. The others focus on the market in municipal securities, cases stemming from the Foreign Corrupt Practices Act, market abuses like insider trading, and asset management, including hedge funds.

The S.E.C. has been criticized for meting out relatively light punishments in some recent cases. The commission also has not satisfied critics on Capitol Hill — and many ordinary Americans — who had hoped to see charges leveled at banking executives after the financial collapse.

Mr. Khuzami recognizes that the cases the S.E.C. brings, or does not bring, will define his tenure and, possibly, the future of the commission. “It’s all about the cases in the end,” he said. It may surprise many just how difficult it has been for the S.E.C. to act. Under Ms. Schapiro’s predecessor, Christopher Cox, investigators had to get approval from the five S.E.C. commissioners to negotiate financial penalties against corporations. She lifted that restriction. Enforcement lawyers had always had to get permission from the commission to open an investigation involving subpoenas. She has authorized the enforcement division to do that on its own.

Team Khuzami hardly comes across as the Untouchables, but members say they are energized and up to the job. Kenneth Lench, a lawyer who heads the structured products group, is trying to become an expert in an arcane corner of Wall Street. He totes heavy textbooks on securitization law and says he now reads trade publications like Derivatives Week, the bible of the market in financial derivatives. He also attended an industry conference last month with 10 other S.E.C. lawyers. “It is a real challenge to keep up with the street in developing these products,” Mr. Lench said. He said he hoped to recruit people from Wall Street, and to acquire technology that would put the S.E.C. on a more equal footing with the industry.

Daniel M. Hawke, head of the market abuse unit, is also looking for outside talent. He said he recently received an e-mail message that read: “I know where the bodies are buried. I’ve been on the Street for 20 years.”  Still, Mr. Hawke is particularly excited about the prospect of applying the expertise gained in one case to others. For instance, he recalled a case stemming from a tip about unusual stock trading before a merger of two drug companies.

The S.E.C. has hired some talent from Wall Street. Norm Champ, the former general counsel of Chilton Investment Company, a multibillion-dollar hedge fund, was named last year as an associate director in the examinations group in New York. Richard Bookstaber, a former Wall Street risk manger, joined the new division of risk, strategy and financial innovation.

But a relatively tight budget and antiquated technology still pose major challenges for the S.E.C., outsiders say.

INTEL Discloses Cyber Attack

The Intel Corp. said it was hit by a "sophisticated" cyber attack in January 2010, around the same time as the incident reported by Google Inc. The chip giant made the disclosure in its annual filing with the U.S. Securities and Exchange Commission. The company said it "regularly faces attempts" by outsiders to access its information technology systems.

Intel spokesman Chuck Mulloy said the company doesn't know if there is a connection to the Google incident and hasn't uncovered any evidence that the attack was successful.  "We have no knowledge of any lost [intellectual property] or damage to the systems. We have very robust controls," Mr. Mulloy said. "We did not see, and have not seen the kind of broad-based attack as was described with the Google situation," he added.

The disclosure by Intel comes as U.S. investigators work to identify the perpetrators of recent attacks on the computer systems of Google and as many as 33 other companies. In January, Google reported that hackers attacked its systems, resulting in the loss of intellectual property. Juniper Networks Inc. and Adobe Systems Inc. have both said publicly that they were targets of the same attack.

2010 Tax Refund Fraud

What is it that unites all U.S. citizens? Is it freedom? Democracy? The Stars and Stripes? Perhaps, but it may also be our mutual love and appreciation for refunds. Tax season is officially here in the U.S., and amidst the flood of 1040s and W-2s, there is the hope of a potential tax refund to keep the spirits up. However, there are scams you should be aware of – especially with the 2008 stimulus package guaranteeing taxpayers a check in the mail, you can be sure that fraudsters will be looking to take advantage of government generosity. Unfortunately, similar schemes occur in almost every country.

Identity thieves have learned that scams are more successful when they mimic respected institutions like the Internal Revenue Service. Be aware of phishing e-mails from people alleging to be from the IRS informing you of an unclaimed tax refund. The e-mail will look legitimate and usually directs the receiver to a link that connects to a page asking you to submit personal information such as a Social Security Number (SSN) or credit card information. The e-mail may state that the only way to claim the refund is by clicking the link in the e-mail. This is a classic phishing scam, and a good one, too. Oftentimes, the site created by the fraudsters will look nearly identical to the IRS webpage! If you fall for it, a criminal can access your financial accounts, run up credit card bills, apply for loans or new credit cards, and even file fraudulent tax returns.

The link you are directed to will look very similar to the IRS website. Be sure to always verify the URL, as the fraudulent website will be slightly off, sometimes by only a letter or a symbol.

You should be aware of the following information to help avoid falling prey to a phishing scam:

The IRS never offers refunds through e-mail or sends out unsolicited e-mails to taxpayers

When the IRS needs to contact a taxpayer, they send notice via U.S. Mail, and every such notice includes a telephone number that the recipient can call for confirmation

If you need to visit the IRS web site go to www.irs.gov rather than via an e-mail link
Another problem tax-payers face this year is the prospect that someone may have used their SSN, already filed their taxes, and claimed the refund. Typically, a perpetrator will use false W-2 forms reflecting phantom wages and withholding credits. To secure the fraudulent refund, the perpetrator will usually direct the IRS to transmit the refund electronically to a bank account under his control. Later, when the identity theft victim attempts to file his tax return, the IRS flags it as a "duplicate" return and freezes the refund. Although the IRS is required to notify a taxpayer when a refund claim is denied, the IRS does not systemically notify a taxpayer when a refund claim is frozen in identity theft cases, despite the fact that a refund freeze can have the same economic effect as a refund denial.

Identity theft, already a serious problem, is exacerbated during tax season. One example is 53-year-old Marie Mendoza from Michigan. She received a call from a representative of a nearby office of H&R Block Inc., the tax-preparation firm that had prepared her returns in the past. The Block representative asked her to bring back some paperwork that she had accidentally taken with her two days earlier after she had filed her return for 2007.

But Ms. Mendoza hadn't been to H&R Block, in fact, she hadn't filed anything yet. She soon discovered that someone had filed a fraudulent return in her name. The thief had arranged to collect $4,005 through an instant loan and had already pocketed the money. When she tried filing her tax return electronically, the IRS rejected it. That was the just beginning of a financial nightmare for Ms. Mendoza.

In a report to Congress early this year, IRS National Taxpayer Advocate Nina Olson said that identity theft has become one of the "most serious problems" facing taxpayers. The Federal Trade Commission received 20,782 complaints on tax-related identity-theft issues in 2007, up from the 15,442 in 2006. But Ms. Olson believes those numbers "significantly understate" the size of the problem. And we can expect a similar trend for 2008.

Prevention is always the best practice, so be careful and be safe with your refund this tax season.

March - April 2010 Lecture

 For our new members and  those of you who are unfamiliar with the way the virtual meetings work...at each virtual meeting, a password protected lecture is made available for downloading and reading.  The password was e-mailed you  with the meeting announcement.  To be able to open the lecture, you must have the Adobe Acrobat Reader installed on your computer.  If you don't have Adobe, you can download it for free at http://www.adobe.com/.  Chapter members  whose annual dues are current may receive credit for all twelve hours of CPE (2 hours for each of six annual meetings).   Invited guests who are not members of the Chapter but who have received a meeting announcement may download and receive credit for two lectures per year for a total of 4 CPE.   Guests who decide to join the Chapter may receive the entire 12 hours by paying the annual Chapter dues of $15.00. 

Click here to Join the Richmond Chapter Online!  

If you are a CFE or other professional interested in fraud investigation and prevention, we urge you to join our Chapter.  If you decide to do so you can join on line by clicking here.  Follow the directions on the form.  

• Members and invited guests should read the lecture material, then click on the link to the answers page below.  Answer the questions on the page and then submit the form by clicking on the button at the bottom of the page.   Don't forget to click on the submit button or we will not be able to receive your answers.

Your answers are graded  and, if you achieve a score of 75,  we will e-mail you a digitally signed certificate of completion.  Since our Chapter is certified by the Virginia Society of CPA's as a CPE provider, those taking our lectures will receive a certificate bearing the Chapter's provider number.  The number which appears on your certificate is the Virginia Society number for the Richmond Chapter of Certified Fraud Examiners.

Chapter members and invited guests can open this file and read it by clicking on the following link.  You will be asked by Adobe for a password...use the password we e-mailed or faxed you notifying you of the virtual meeting.  We will e-mail you a digitally signed certificate of completion after we receive and grade your answers." 

To open this month's lecture, click on the link at the top of the page.  When the lecture opens in Adobe, supply the password you were e-mailed....