CORPORATE FRAUD I. General Overview As the lead agency investigating Corporate Fraud, the FBI has focused its efforts on cases which involve accounting schemes, self-dealing by corporate executives and obstruction of justice. The majority of Corporate Fraud cases pursued by the FBI involve accounting schemes designed to deceive investors, auditors and analysts about the true financial condition of a corporation. Through the manipulation of financial data, the share price of a corporation remains artificially inflated based on fictitious performance indicators provided to the investing public. In addition to significant financial losses to investors, Corporate Fraud has the potential to cause immeasurable damage to the U.S. economy and investor confidence. While the number of cases involving the falsification of financial information remains relatively stable, the FBI has recently observed a spike in the number of Corporate Fraud cases that involve the backdating of executive stock options. Stock options are corporate incentives that allow the holder to purchase stock at a fixed “strike” price sometime in the future, regardless of the prevailing market price. Generally, the strike price is the cost of the stock on the date the options were granted. The benefit to the options holder is the difference between the strike price and the later sales price. When stock options are backdated, however, the date of the options is set to a time in the past when the price of the stock was lower than on the date the options were actually issued. Backdating stock options inflates their value to the holder at the expense of regular shareholders. Some corporate executives have also changed their stock option exercise date (the date the option can be converted to stock) to avoid paying income tax. Currently, the FBI is investigating 59 cases involving the manipulation of executive stock options and anticipates that the number of cases will continue to grow. Corporate Fraud remains the highest priority of the Financial Crimes Section and the FBI is committed to dealing with the significant crime problem. As of the end of Fiscal Year (FY) 2006, 490 Corporate Fraud cases are being pursued by FBI field offices throughout the U.S., 19 of which involve losses to public investors that individually exceed $1 billion. Corporate Fraud investigations involve the following activities: (1) Falsification of financial information, including: (a) False accounting entries (b) Bogus trades designed to inflate profit or hide losses (c) False transactions designed to evade regulatory oversight (2) Self-dealing by corporate insiders, including: (a) Insider trading (b) Kickbacks (c) Backdating of executive stock options (d) Misuse of corporate property for personal gain (e) Individual tax violations related to self-dealing (3) Fraud in connection with an otherwise legitimately-operated mutual or hedge fund: (a) Late trading (b) Certain market timing schemes (c) Falsification of net asset values (d) Other fraudulent or abusive trading practices by, within, or involving a mutual or hedge fund (4) Obstruction of justice designed to conceal any of the above-noted types of criminal conduct, particularly when the obstruction impedes the inquiries of the Securities and Exchange Commission (SEC), other regulatory agencies, and/or law enforcement agencies. The FBI has formed partnerships with numerous agencies to capitalize on their expertise in specific areas such as Securities, Tax, Pensions, Energy, and Commodities. The FBI has placed greater emphasis on investigating allegations of these frauds by working closely with the SEC, National Association of Securities Dealers (NASD) Regulation, Internal Revenue Service (IRS), Department of Labor, Federal Energy Regulatory Commission, Commodity Futures Trading Commission (CFTC) and U.S. Postal Inspection Service (USPIS). As reflected in the statistical accomplishments of the Presidential Corporate Fraud Task Force (founded 2002), which includes the above-mentioned agencies, the cooperative and multi-agency investigative approach has resulted in highly successful prosecutions. The FBI has also worked with numerous organizations in the private industry to increase public awareness about combating Corporate Fraud, to include: Public Company Accounting Oversight Board, American Institute of Certified Public Accountants and the North American Securities Administrator’s Association, Inc. These organizations have been able to provide referrals for expert witnesses and other technical assistance regarding accounting and securities issues. In addition, the Financial Crimes Enforcement Network (FinCEN) and Dunn & Bradstreet have been able to provide significant background information on subject individuals or subject companies in an investigation. II. Overall Accomplishments During FY 2006, the FBI investigated 490 Corporate Fraud cases resulting in 171 indictments and 124 convictions of corporate criminals. Numerous cases are pending plea agreements and trials. The following notable statistical accomplishments are reflective in FY 2006 for Corporate Fraud: $1.2 billion in Restitutions, $41.5 million in Recoveries, $14.2 million in Fines, and $62.6 million in Seizures. The chart below is reflective of the number of pending cases from FY 2002 through FY 2006. Fiscal Year 2002 - 291pending cases Fiscal Year 2003 - 279 pending cases Fiscal Year 2004 - 332 pending cases Fiscal Year 2005 - 423 pending cases Fiscal Year 2006 - 490 pending cases Corporate Fraud Pending Cases, Fiscal Years 2002 to 2006 III. Significant Cases COMVERSE, INC. (NEW YORK): Comverse, Inc. (Comverse) is a New York-based designer and manufacturer of telecommunication systems and software, with reported revenues of $1.2 billion in FY 2005. In August 2006, former Comverse Chief Executive Officer Kobi Alexander, former Chief Financial Officer David Kreinberg, and former General Counsel William Sorin were charged with various types of fraud related to illegal compensation of Comverse executives. It is alleged that Comverse rewarded certain executives of the company through Executive Stock Option (ESO) backdating, a process that allows executives to set the grant date of the ESO at a time in the past when the market price of the stock was at its lowest. It is alleged that Alexander made $8 million, Kreinberg $1.5 million, and Sorin more than $1 million from the scheme. Kreinberg and Sorin surrendered to authorities in August 2006. As of December 1, 2006, Alexander is in the custody of law enforcement officials in the country of Namibia pending extradition to the U.S. The FBI conducted this case with assistance from the SEC and Department of Justice (DOJ). ENRON CORPORATION (WASHINGTON, DC): As a result of its deceptive accounting practices—including the creation of earnings, the manufacture of cash flow, and the concealment of debt—the Enron Corporation (Enron) generated financial statements that were misleading and wholly inaccurate. As of December 1, 2006, 35 individuals have been charged in connection with the energy corporation’s illegal accounting practices. Of these individuals, 23 have pled guilty or been convicted, including former Enron Chief Financial Officer (CFO) Andrew Fastow, former Chief Executive Officer (CEO) Jeffrey Skilling, and former Chairman and CEO Kenneth Lay (whose conviction was later vacated due to his death). Fastow has been sentenced to six years in prison for his role in the accounting scandal. Skilling was sentenced to 24 years, four months in prison, the largest term handed down in connection to the case. The case has been handled by the Enron Task Force, which is made up of members of the DOJ, FBI, and IRS. The SEC also provided considerable assistance in this investigation
Posted on: Mon, 12 Jan 2015 20:44:14 +0000
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