This briefing note is only intended as a general statement of the law and no action should be taken in reliance on it without specific legal advice.

Mishcon Fraud Watch - August 2014
29 August 2014

Mishcon Fraud Watch - August 2014

Welcome to the August edition of Mishcon Fraud Watch. Its aim is to provide businesses and their advisors with a snapshot of what has been happening in the world of fraud in the last month.


Hewlett-Packard have announced they are preparing to launch a UK lawsuit against Autonomy's former chief executive Mike Lynch and former chief financial officer Shushovan Hussain. Hewlett-Packard acquired Autonomy in 2011 and suffered a more than $5b writedown due to alleged accounting misrepresentations. HP now considers Mr Lynch and Mr Hussain to be accountable for the deliberate fraud.
Richard Waters
Financial Times, 5 August 2014

The Serious Fraud Office (SFO) has launched a criminal investigation into the alleged fixing of rates on the foreign exchange market. The SFO has not commented in detail on the investigation, but other regulators, including in Switzerland and the United States, are already investigating the claims. The Financial Conduct Authority has been investigating since 2013.
Nathalie Thomas
Daily Telegraph, 22 July 2014


Bank of America has been ordered to pay $1.3bn for the sale of toxic mortgage to Fannie Mae and Freddie Mac. Judge Rakoff declared that the "high speed swim lane" mortgages, which were sold for 9 months from August 2007, were a" vehicle for a brazen fraud by the defendants." The penalty was less than the government's initial request but more than BoA had expected to be fined.
Tom Braithwaite, Kara Scannell and Camilla Hall
Financial Times, 31 July 2014

The Department of Justice announced that Jessie Tolbert, an unlicensed trader, pled guilty in federal court to participation in a conspiracy to solicit investments in a fraudulent high yield investment program.  According to the Department of Justice, Mr. Tolbert and his co-conspirators, Eriq Brye and Greg Preston, placed an online advertisement for a high yield investment opportunity, and solicited $500,000 from an undercover FBI agent as part of the scheme.  Mr. Tolbert also purportedly made numerous misrepresentations concerning the opportunity and his credentials.
Department of Justice Press Release, 21 July 2014

The Department of Justice announced charges against Anthony Blumberg, former CEO of ConvergEx Global Markets Limited, and Craig Marshall, a former senior vice president with ConvergEx, for concealing fees fraudulently charged to clients for the purchase and sale of securities.  ConvergEx is a former broker-dealer registered in Bermuda.  According to the indictment, which includes charges for securities fraud, wire fraud, and conspiracy, to hide the additional fees, false transaction reports were sent to clients with fabricated details.  The SEC also announced civil charges against Mr. Blumberg in a parallel proceeding.
Department of Justice Press Release, 7 August 2014

Securities and Exchange Committee (SEC)

The SEC has obtained a nearly $70m judgment from federal court in Tennessee against AIC Inc, a Richmond-based financial services holding company, Community Bankers Securities LLC, a subsidiary brokerage firm, and their CEO Nicholas D Skaltsounis.  The companies were found guilty of an offering fraud by misrepresenting the investments they offered to investors and omitting material information in their pitches to potential investors.
SEC press release, 2014-157, 1 August 2014

The SEC has charged LavaFlow Inc, a New York based subsidiary of Citigroup, with failing to protect the confidential trading data of its clients. LavaFlow has agreed to pay a $5m settlement. LavaFlow allowed an affiliate to access and use confidential information without adequate safeguards and procedures being in place.
SEC press release 2014-147, 25 July 2014

The SEC announced the institution of an administrative proceeding against Morgan Stanley & Co. LLC, Morgan Stanley ABS Capital I Inc., and Morgan Stanley Mortgage Capital Holdings LLC for misleading investors in relation to Residential Mortgage-Backed Securities (RMBS).  According to the SEC, Morgan Stanley misrepresented the current or historical delinquency status of mortgage loans underlying two subprime RMBS securitizations.  Morgan Stanley agreed to settle the charges by paying $275 million.
SEC Press Release, 24 July 2014

The SEC announced a final judgment against financial services holding company AIC Inc., subsidiary brokerage firm Community Bankers Securities LLC, and the companies’ CEO Nicholas D. Skaltsounis for fraud.  According to the SEC, the two companies and individual engaged in an offering fraud by misrepresenting and omitting material information while selling promissory notes and stock.  Following a three-week trial in federal court, a jury found each of the defendants liable.  The final judgment requires AIC to pay more than $35.5 million, Community Bankers Securities to pay more than $31 million, and Mr. Skaltsounis to pay more than $2.5 million.
SEC Press Release, 1 August 2014

The SEC announced charges against New York-based brokerage firm Linkbrokers Derivatives LLC.  According to the SEC, certain representatives of the firm defrauded customers by taking fees far in excess of what was represented, and hiding the fees by misrepresenting the prices at which securities were bought and sold.  The SEC claims that the firm reaped more than $18 million from customers through this scheme.  Linkbrokers agreed to settle the charges and pay $14 million.
SEC Press Release, 14 August 2014


The US SEC has been asked by the Argentinian government to investigate two hedge funds. Argentia, which is in a $1.5bn default, claims that the unnamed hedge funds used "fraudulent manoeuvres" to make "incredible profits"
Andrew Trotman
The Telegraph, 4 August 2014


After an investigation by the Italian police, investment bank Nomura International has had €104.5m of property and cash seized. 54 properties, the shareholdings of 13 companies, and cash have all been seized following allegations that Nomura defrauded the Sicilian regional government in 2002 over the sale of derivatives.
Rachel Sanderson
Financial Times, 28 July 2014


Cobalt International Energy has been issued with a Wells notice by the SEC, indicating that it may face charges over alleged corruption in Angola. The SEC has been investigating Cobalt's operations in Angola in 2011 following accusations that senior Cobalt officials secretly owned shares in a small company, Nazaki Oil and Gaz, which was chosen by authorities to be Cobalt's local partner when the US company was awarded Angolan oil rights.
Tom Burgis
Financial Times, 6 August 2014


Sudhir Jain, chairman of India's Syndicate Bank, has been taken into custody over allegations of having sought Rs5m ($82,000) in payments to help two companies increase their credit limit. The Reserve Bank of India governor Raghuram Rajan says that the arrest highlights a wider problem with governance in the Indian state sector.
James Crabtree
Financial Times, 5 August 2014

US firearms manufacturer Smith & Wesson has been fined $2m by the Securities and Exchange Commission for giving Pakistani officials £11,000 of guns and making further improper payments during S&W's bid to win a contract to supply the Pakistani police with guns.
Alexandra Frean
The Times, 29 July 2014