White Collar Crime Exam 2

Campaign Finance Laws

"Personal use" v. "campaign-related" § John Edwards (charges of using illegal campaign donations to conceal his mistress from voters) § Jesse Jackson, Jr. (spent campaign money on personal expenses) § Donald Trump

How much money was actually stolen?

$17.5 Billion in principle investments

Cost of tax violators

$450-$500 billion annually

High Yield investment Fraud

("It's can't miss - you're guaranteed to make a killing!") - lure people in with high returns and use new investors money to pay off old investors

Criminal Enforcement of Insider Trading

DOJ, USAO in federal court § 20 years § $5 million fine ($25 million if defendant is company)

Ponzi Scheme

(aka "High Yield Investment Fraud") § Perpetrator embezzles investors' money (they just pocket it instead of actually investing it) § Recruits new investors to keep scheme afloat § Collapses when enough investors want to cash out § Difference between this and pyramid scheme is that investors don't recruit other investors

Two primary ways insider trading is uncovered

1. Market surveillance with sophisticated software (especially around important market events) 2. Tips to authorities (typically angry investors on "wrong" side of trade or other whistleblowers)

3 forms of a security

1. stock 2. bond 3. derivative

Average length of embezzlement scheme

7 years

Security

A fungible (interchangeable), negotiable financial instrument that holds some type of monetary value

Willfulness Defined

Aware of the tax laws + voluntarily and intentionally violated that duty (ex: they filed taxes for the past several years so they obviously know they need to)

White collar crime in religious system? What is most common?

Embezzlement (by far most common): fraudulent appropriation of property by a person to whom such property has been entrusted, or into whose hands it has lawfully come.

Enron

Energy Trader (specializing in energy derivative contracts) - Chief executives (while drawing $100 million each out of corporation) deliberately misrepresented profit picture. When the corporation collapsed $70 billion in investors equity was wiped out. - Used SPE's

Home Equity Fraud

ID Theft + Home Equity Line of Credit (HELOC) - someone poses as you and goes to bank and borrows against your home that has equity built up in it, bank gives the id theft a loan in your name against your house.

· WCC in the Housing System

Mortgage Fraud o Particularly prevalent since early 2000's (shift of political philosophy, i.e. "right to home ownership")

Pump and Dump

Knowingly misleading people - promote cheap stocks and sell them at high point. After you dump it, it goes back down. o Popular amongst small, thinly traded companies ("penny stocks") and in today's cryptocurrency market (e.g. Bitcoin. Litecoin, etc.) o Often coincides with insider trading

What did he do with it?

Lavish Lifestyles, Paid to early investors, etc.

Were there "red flags" that authorities missed?

Many! They ignored marcopolis

Did he act alone?

No

Parallel Proceedings

No double jeopardy (can you be criminally prosecuted for insider trading while being civilly prosecuted at the same time? Yes)

Short Selling

Normally people buy things hoping it will go up in value -> short selling is the opposite - it is when you expect the value of a security to go down in value so you sell it and plan to buy it back later for less money.

Manoj Jha

Received money to conduct research on highway use but used it for personal reasons instead.

white collar crime by police

Police Misconduct usually embezzlement (e.g. Baltimore Police Scandal)

Jim Bakker

Praise the Lord Ministries ("PTL") · 1970's-1980's: highest rated religious show in the country - followers donated millions of dollars that they thought was going to church · Heritage USA resort built: millions of people visited · Extravagant lifestyle paid for with church money · Sex scandal in 1980's ends show after public learns that Bakker paid hush money to Jessica Hahn (mistresses) · 1988: Indicted for fraud; convicted and sent to prison

Craig Grimes

Professor at Penn State - lied about medical research he was doing and received over $600,000 from government to do the research.

Federal Civil Service Act of 1883

Prohibited awarding city jobs in exchange for cash, gifts, or other services. (government jobs must be awarded on basis of merit)

Raj Rajaratnam

Rajaratnam was arrested in 2009 for insider trading through his activities at the Galleon Group, a New York-based hedge fund management firm. On October 13, 2011, he was sentenced to 11 years in prison.

Civil Enforcement

SEC Enforcement Division in federal court or ALJ § Sanctions: Fines + Disgorgement up to 3 times profit gained (or loss avoided)

Special Purpose Entities ("SPE's")

So losses aren't reflected on major companies books - if SPE goes bankrupt the parent company remains unaffected - legal if you do it the right way but enron was putting all their losses on SPEs which is not legal

Gregory Loles

Told people and his church that he would handle their investments and then used their money for personal use.

Churning

Unnecessary trading - the illegal and unethical practice by a broker of excessively trading assets in a client's account in order to generate commissions

Was it ever recovered?

Yes § Court appointed Trustee Irving Picard § Dept. of Justice § Accounts Seized § Lawsuits and settlements against early/favored investors that made lots of money § $7.2 billion from Jeffrey Picower estate (one of the early investors) § Virtually all lost principle returned to victims

are MBS still legal?

Yes but more closely regulated

Classic Insider

a director, officer or employee of a company

· Voluntary compliance system of paying taxes in U.S.

actually works better than other countries systems

advance fee fraud

any scam that, in exchange for a fee, Promises to send you money, products, or services

mortgage backed securities (MBS)

banks bundle mortgages into a pool and sells them to larger investment banks then investors buy MBS from investment banks- passed risk from banks who gave mortgages to investment banks (credit rating agencies rated MBS as good investments) o $700B bank bailout ("TARP") came from taxpayer dollars

Derivative

contract involving speculation of an asset's future price a. Options: give the holder the right, but not the obligation to buy or sell the underlying asset b. Futures: obligate the parties to transact an asset at a predetermined future date and price

securities and exchange act of 1934

created to govern securities transactions on the secondary market, after issue, ensuring greater financial transparency and accuracy and less fraud or manipulation

Bond

debt instrument (like a loan) to a company or government agency in exchange for periodic interest payments and return of principal amount when it matures

Criminal v. civil violations

determined by "willfulness" to violate tax code

Betty Fowler

embezzled from her church

Al Capone

finally went to prison because of tax crimes (they couldn't get him for anything else because of lack of witnesses, etc.)

predatory lending

financially weak individuals get higher interest rates than people who would traditionally be approved for loans - banks thought this would reduce their risk

Institutional fraud

fraud at university level o schools say they are accredited when they are not o Present false data to accreditation process so they can get accredited when they don't really deserve it

Televangelists

have religious programs in person or online and it is one person running it with no oversight which makes it easier for them to embezzle.

Two types of University level white collar crime

institutional fraud and professor fraud

subprime mortgages

loans made to financially weak individuals who did not qualify for prime-rate loans -> subprime market

Market Manipulation

o "Pump and Dump" o Short selling

Bernie Madoff Ponzi scheme

o 1960: Starts own investment company o 1990: Appointed Chair of NASDAQ o Early 1990's: Begins operating second management business that was hidden from regulators - where he would operate his scheme. o Becomes larger than initial business o Assets grow to $8 billion o 1992: SEC opens investigation; closed after Madoff provides records o Records were fraudulent (accomplices, including Frank DiPasacali and brother Peter Madoff, play pivotal role in deception). o 2000-2005: Henry Markopolos complains to SEC o 2005: SEC opens a second investigation, but then closes it because of limited resources and because they continue to trust Madoff documents o 2005: Investors get spooked and scheme almost collapses § Begins commingling money between businesses § Aggressively recruits new investors to keep scheme afloat o Scheme stays afloat... temporarily

Madoff: The End (2007-2009)

o 2008: Recession Causes Markets to Crumble and Investors begin cashing out o Money Dries Up (even after $250 million lifeline from friend!) o Dec. 4, 2008: Admits It's over to DiPascali and winds down operation o Dec. 10, 2008: Confesses to Sons Mark and Andrew ("one big lie") o Dec. 11, 2008: Madoff arrested o 2009: Madoff Pleads Guilty to All Charges; Sentenced to 150 years o Long term impact on financial services industry o Filed petition for compassionate release - it was denied

Ivan Boesky (thought greed was a good thing)

o Arbitrage specialist (sophisticated, simultaneous trades based on price inefficiencies) buy stocks cheap and sell higher - legal but takes a lot of time and resources o Amasses $200 million in 1980s acquiring stocks based on inside information about mergers and acquisitions o Arrested in 1986: sentenced to 3 ½ years in prison + $100 million fine o Cooperation with authorities results in other successful prosecutions (e.g. Michael Milken)

· David and Connie Reiter: Westminster Presbyterian Church, Upper St. Clair, PA (2019)

o David was the business manager at the church o Him and his wife were arrested for embezzling thousands of dollars a month for 7 years (2012-2019) o He also used the churches credit card for personal things o Sentenced to 5-10 years

Proof of Willfulness

o Dealing in cash o Double set of books o Ignoring advice/reminder from tax professional o Previous filing o Tax protestor letters (people write letters to IRS about how tax laws shouldn't apply to them) o Lying to investigators o Education and background o Large gross income o Use of nominees

Two main reasons why embezzlement is hard to detect

o Embezzler often in charge of the money o Theft often gradual (and relatively small)

WCC in Housing System: Other Fraud

o Home Equity Fraud o Foreclosure Rescue Schemes

Martha Stewart & ImClone

o ImClone Pharmaceutical Co. Founded in 1980's o 2001: Drug Fails to get approval from FDA o Company CEO tells family and friends about failed approval prior to public announcement o Family members sell and make millions o Waksal arrested for insider trading o Tip to authorities about Martha Stewart and her broker o 2003: Insider Trading charges dismissed o 2004: Found guilty of obstruction of justice and sentenced to 5 months Jail + 5 months home confinement

white collar crime in the political system

o Many Political "Scandals" (e.g. Watergate, Lewinsky Affair) Not WCC o But Political Corruption Scandals Often Are (i.e. fraud/deception, etc. for financial gain)

Professor fraud

o Most serious example: fraudulently obtaining/using grant money o Plagiarizing work to get published to get a promotion or raise o Professors sell complimentary textbooks that they get from publishers for free

Insider Trading

o Prohibited by securities and exchange act of 1934 - (passed after 1929 stock market crash) passed to restore peoples faith in stock market. o A form of "securities fraud" o "material, non-public information" o Classic insider o Temporary insider o Tippee - a person who learns about information from insider thereby making them an insider too - now they have material nonpublic information o "accidental" tippee ("outsider") - overhear someone else talking on accident - your still guilty if you know what you heard is not public info o Salmon vs US 2016 supreme court case - us supreme court rejected benefit requirement - tipper no longer needs to get financial benefit out of the deal - could just be a favor it is still illegal o There must be intent- prosecutor needs to establish that you knew it was material and nonpublic - not always easy to prove o They care about big cases with clear facts

· Dodd-Frank Act (2010)

o Purpose: Restore stability and oversight to the financial system and prevent a repeat of the crisis. o Key provisions: § Regulation of risky derivative investments, e.g. mortgage-backed securities § Eliminate "predatory lending" § Limitations on how banks can invest (e.g. speculative trading, proprietary trading)

Uncovering Insider Trading

o SEC (Division of Enforcement & Division of Trading and Markets) o FINRA: Financial Industry Regulatory Authority

Enron Aftermath

o Sarbanes-Oxley Act of 2002 § Tighter standards and increased oversight for publicly traded companies § Strict penalties for destroying, altering, or fabricating financial records

Luzerne County (PA) "Kids for Cash" Scheme: Judge Mark Ciavarella

o Sending kids to juvenile facilities all over the country for very minor things o Facilities paid him % for every kid he sent because the facilities made a lot of money for the kids they got

Broker Fraud

o Series 7 Exam o Financial Industry Regulatory Authority ("FINRA"): Regulates the financial industry and brokers. o High Yield investment Fraud ("It's can't miss - you're guaranteed to make a killing!") o Unnecessary Trading § "churning" o Unauthorized trades o Embezzlement o Third party fraud (fraudster posing as licensed broker to steal money) o Gregory Loles

examples of embezzlement in employee white collar crime

o Stealing money from company bank accounts o Taking out fake loan in company's name o Falsifying records o Paying phantom (nominee) employees or vendors o Use of company credit cards

· 2007-2008 Financial Crisis

o Subprime mortgages: loans made to financially weak individuals who did not qualify for prime-rate loans -> subprime market o Predatory lending - financially weak individuals get higher interest rates than people who would traditionally be approved for loans - banks thought this would reduce their risk o Mortgage-backed securities - banks bundle mortgages into a pool and sells them to larger investment banks then investors buy MBS from investment banks- passed risk from banks who gave mortgages to investment banks (credit rating agencies rated MBS as good investments) are MBS still legal? Yes but more closely regulated o $700B bank bailout ("TARP") came from taxpayer dollars o Federal legislation passed: Dodd-Frank Act

Why is embezzlement prevalent in religious system?

o Trust = Reduced Oversight o Reliance on Unprofessional Volunteers o Lack of vigilance (audits, etc.)

Unauthorized trades

occurs when a broker sells, buys, or exchanges, securities without the prior consent or authority from the investor-client (illegal)

accidental tippee

overhear someone else talking on accident - your still guilty if you know what you heard is not public info

Stock

ownership in a company

Broker embezzlement

pocket clients money for personal use

Foreclosure Rescue Schemes

saying you'll pay someone's mortgage for them so they don't get foreclose and then you pay them back later. You sign over deed to your home to foreclosure rescue company so they can legally make mortgage payments and once you have more money they sign it back over to you. If it's a scam or fraudster though they take your fees but don't pay your mortgage and it still gets foreclosed and you lose money. If you have equity in your home they also take your equity before its foreclosed.

one exception to "ignorance is not a defense"

since 1933, tax law is the exception to the rule! (because tax laws can be confusing)

Temporary Insider

somebody like a lawyer, insurance underwriter, bookkeeper, business efficiency expert, temporary executive, or other person who gains access to secret insider information

Eric Poehlman

tenured research professor at university of Vermont. First professor to get sent to jail for this - fabricated scientific data over ten years to receive millions of dollars of grant money.

Tippee

the person who knowingly uses such information to make a trade

tax avoidance (legal)

the use of legitimate methods to reduce one's taxes

Salmon vs US 2016 supreme court case

us supreme court rejected benefit requirement - tipper no longer needs to get financial benefit out of the deal - could just be a favor it is still illegal

Insurance Fraud

when you obtain an insurance benefit that you are not entitled to

Third party fraud

where an individual's identity or personal details are used without their consent or knowledge, to gain credit or products (fraudster posing as licensed broker to steal money)

tax evasion (illegal)

willful failure to pay taxes

How could so many smart people fall for this?

§ "Affinity fraud" theory - tricked people in his circle that knew and trusted him § Exploited trust § Exclusivity § Credibility § Investors' greed § Passed due diligence tests

Judicial misconduct

§ Bribery, Ticket Fixing (public official destroys or dismisses a pending traffic ticket as a favor to a friend or family member), etc. § Examples: Philadelphia Traffic Court (ticket fixing - doesn't exist anymore because of judges corruption)

Attorney misconduct

§ Comingling Funds (mixing client and personal funds - theft) § Tax Evasion

Auto insurance fraud

§ Exaggerated Claims § Staged accidents

common offenses (tax fraud)

§ False return § Failure to file § Tax evasion (breaking the law to avoid paying taxes) § Failure to collect or pay or over (typically committed by employers)

o Fraud for Housing

§ Misrepresenting income or assets to qualify for mortgage § Appraisal fraud - if seller is selling house for more than its worth but you want it anyway - you want higher appraisal so you can get the house to live in it § Occupancy fraud - when the borrower lies about the occupancy status of the property, stating it will be owner-occupied then uses it as an investment property instead. lenders offer lower rates for owner-occupied homes compared to investment properties

life insurance fraud

§ Murdering others § Faking one's own death § Isaac Aguigui case: killed wife to get life insurance money and planned violent acts with a group of guys - some of the other guys tried to backout so he killed them too (planned to assassinate Obama) § Julia Merfeld Case: killed her husband to get life insurance policy (told her coworker about her plan and they told the police) § Molly and Clayton Daniels Case: tried to fake his death but used a dead womans body and got caught

property insurance fraud

§ Overstating value § Intentional destruction (e.g. fire) § Marc Thompson Case: a stockbroker in Chicago who made millions. Had a very costly divorce. Went deep into debt. Convinces his mom to sell her house and live with him. Burns down his house to get property insurance money. Set it up to look like his mom burned the house to commit suicide. Burned it down and killed his mother. He got caught because he put the insurance money into offshore nominee accounts to hide it from bankruptcy court.

Pyramid Scheme

§ Profits based on recruitment of new investors - you pay to join and if you get new people to join you get % of what they pay § No actual product or service § Distinguished from multi-level marketing (legal) § 70 percent rule - must sell 70% of purchased inventory each month

bribery

§ Rod Blagojevich-governor of Illinois (when a senator dies or leaves the governor chooses the replacement) planned to auction off Barack Obama's senate seat when he left to take presidency to highest bidder and was recorded talking about it

o Fraud for Profit: Goal is not to secure housing, but rather to misuse the mortgage lending process to steal cash and equity from lenders or homeowners

§ Typically committed by industry insiders and professional scammers § Example: Straw Purchaser Illegal Flipping Scheme

How prevalent is embezzlement in religious system?

· Affects approximately 9% of all churches · Affects all religious institutions (e.g. synagogues and mosques, too).

is buying a house to flip it and resell illegal?

· Buying a house just to flip it and resell it is legal because there is no fraud involved

§ Example: Straw Purchaser Illegal Flipping Scheme

· Fraudster buys house for $100k · Fraudster gets property falsely appraised for $200k · Straw purchaser obtains $200k mortgage from bank · Property sold: fraudster gets $200k from bank and shares $100k illegal profit with straw purchaser (and appraiser) · Straw purchaser disappears and loan goes into default · Bank left holding property worth $100k (if FHA loan, government absorbs loss)

Is a priest molesting kids white collar crime?

· It could be because the priests used their trusted position from their occupation to commit the crime and the church used money that was meant for church purposes to pay off families of the victims (misuse of funds).

Employee WCC

· Linked to 30% of all U.S. business failures · Direct stealing (cash register, supplies, etc.) · Embezzlement o Stealing money from company bank accounts o Taking out fake loan in company's name o Falsifying records o Paying phantom (nominee) employees or vendors o Use of company credit cards

Athletic/Academic Cheating Scandal

· UNC's 20 year-long "shadow curriculum" of fake classes, no required attendance, falsified grades, etc.