US government sues security firm for fraud

The U.S. government joined a suit against a security firm involved in issuing security clearances to unqualified personalities.

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United States Investigations Services LLC (USIS) is the largest provider of background investigations to the federal government. Its security solutions are implemented for the Department of Homeland Security (DHS), Department of Justice (DOJ), Department of Defense (DOD), Office of the Personnel Management (OPM), and the intelligence community. The private firm was created as part of a process to reduce the size of the civil service.

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According to the complaint, the company did not go through its mandate of quality background investigations thus, violating the Federal False Claims Act. It was found that USIS issued a fraudulent clearance for National Security Agency leaker Edward Snowden. Snowden’s case is not part of the complaint, though, and is only one of among 665,000 known cases. Despite the alleged security lapses, USIS still sought payment for all of its supposed services. Its contract with the OPM in 2012 was for $253 million.

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Blake Percival, the whistle-blower and a former USIS employee, bared that the company “dumped” and “flushed” cases starting 2008. This practice was perceived to boost revenues for the company and meet its committed volume. USIS has cornered two-thirds of the volume allotted for contractors and more than one-half of background investigations performed by the OPM.

Evan Granowitz is an experienced litigator based in Los Angeles, Calif. Go to this Facebook page for more updates in the legal arena.

The alternatives to civil trials

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Civil cases arise due to disagreements between people, businesses, and other entities including the government. Lawsuits usually progress through a few steps from the pleadings, to the discovery, and then a trial. Sometimes, an appeal may be made. Apart from trials, however, there are other ways for two parties to deal with their disputes.

While the alternatives may not result in the final resolution of the dispute, they may still prove to be valuable to the parties involved because they can save on time and expenses. It is best to take into account the desirability of these alternatives in order to avoid any unnecessary expenses in seeking remedies for the quarrel and to allow for their timely implementation. 

The first alternative is a settlement. Even without outside help, the parties involved may be able to negotiate an out-of-court settlement. Many cases settle before they even reach the trial stage but the option is still available to both parties at any time during the litigation process.

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The second alternative is mediation. It is more common for entities involved in civil litigation to seek the involvement of a neutral third party to assist the settlement efforts of both sides. The mediator can help both parties identify the risks involved in pursuing their case and how those risks could affect their goals. Still, the mediator does not have any authority to force the parties to agree on the settlement.

The third alternative is arbitration. Less formal than a trial, arbitration is an adversarial proceeding wherein the entities involved select a neutral third party, present their evidence, and argue their case. The arbitrator then decides which party wins. When parties agree to settle their dispute with binding arbitration, the downside is that they cannot appeal the arbitrator’s ruling to a court.

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Evan Granowitz is a civil litigator who works for Wolf Group LA. For more news and articles about the civil litigation process, follow this Facebook page.

REPOST: SEC Wants You To Admit Wrongdoing---And It Will Cost You

According to this Forbes.com article, SEC policy could lead to higher defense costs. Read it here:

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These days the SEC wants some defendants not merely to pay, but also to admit guilt. Admitting guilt in a civil case rubs many defendants the wrong way. Besides, it is an about-face from the SEC’s longstanding practice of settling civil litigation without requiring the defendant to admit wrongdoing.

Exactly which cases will merit this special treatment will be determined case-by-case. But requiring admissions of guilt in stand-alone civil cases is a worry. Apart from public image issues, isn’t private civil litigation (often from shareholders) a certainty after such an admission? It would seem so.

Tax deductions may be impacted too, since some fines and penalties cannot be deducted. That makes paying them all that much more painful. Defendants often want language in settlement agreements confirming that a payment is not a penalty and is remedial in nature. In Fresenius Medical Care Holdings Inc. v. United States, the government made it clear that it would not agree to any tax characterization.

Fresenius (a medical device company) resolved claims for criminal and civil health care fraud. It paid a criminal fine of $101 million and a civil settlement of $385 million. The company deducted the civil settlement payments on its taxes, which the IRS later disallowed. Suing for a tax refund, Fresenius said there was no penalty. After all, this was a civil settlement.

The settlement agreement included a stock provision saying that, “Nothing in this Agreement constitutes an agreement by the United States concerning the characterization of the amounts paid hereunder for tax purposes.” Such provisions have become common at the insistence of the government. Yet in the later tax dispute, the government said the only way Fresenius could deduct the payment would be if the settlement agreement expressly allowed it.

Talk about a Catch-22! Sensibly, the court ruled that an advance agreement on deductibility is not necessary. Of course, whenever the settling parties can agree, they should. Indeed, the Fresenius court noted that a characterization agreed upon by the parties, and/or announced by a judicial officer, may well be determinative for tax purposes.

Tax language in settlement agreements may not bind the IRS, but it goes a long way to avoiding disputes. No one wants to be involved in a tax dispute. Companies concluding litigation want to pay the money, deduct it, and move on. And since there are always competing considerations in getting through a settlement, the government attitude displayed in Fresenius is chilling.

As it did in Fresenius, the government may refuse to include tax language in a settlement agreement, yet later claim the only way you can deduct the payment is with express language. You won’t want to go to court to defend a tax deduction, but you may have to. In any case, you should keep supporting correspondence and documents.

After all, something short of an agreement in writing in the settlement agreement may prove to be very helpful. It never hurts to go overboard in gathering your non-penalty evidence. You have control over what correspondence you send, and you will know what you have received. Try to gather what you can whenever you can.

There may be other items that will surface, such as internal DOJ communications, correspondence between the DOJ and the IRS, or other inter- and intra-agency materials. You may not have seen all the ammunition that will be used against you in a later tax dispute. As a result, consider creating some self-serving documents of your own.

You may want to record impressions, observations, and facts contemporaneously with the settlement. Lawyers and company officials can be appropriate signatories for those items. It is done far less frequently than it should be.

To give them added gravitas (and perhaps even admissibility in court), consider having them signed under penalties of perjury. Consider all these items early as you are negotiating the settlement of the case. Documents prepared at tax return time—or even worse, at audit time—are never as persuasive.

You can reach me at Wood@WoodLLP.com. This discussion is not intended as legal advice, and cannot be relied upon for any purpose without the services of a qualified professional.

Read more insights on law and litigation by following this Evan Granowitz  Twitter page.

REPOST: Government offers new approach to classroom discipline

The Obama administration is urging schools to abandon overly zealous discipline policies that discriminates against minority students. This FoxNews.com article has the details.

The Obama administration is issuing new recommendations on classroom discipline that seek to end the apparent disparities in how students of different races are punished for violating school rules.

Civil rights advocates have long said that a "school-to-prison" pipeline stems from overly zealous school discipline policies targeting black and Hispanic students that bring them out of school and into the court system.

Attorney General Eric Holder said the problem often stems from well intentioned "zero-tolerance" policies that too often inject the criminal justice system into the resolution of problems. Zero tolerance policies, a tool that became popular in the 1990s, often spell out uniform and swift punishment for offenses such as truancy, smoking or carrying a weapon. Violators can lose classroom time or become saddled with a criminal record.

"Ordinary troublemaking can sometimes provoke responses that are overly severe, including out of school suspensions, expulsions and even referral to law enforcement and then you end up with kids that end up in police precincts instead of the principal's office," Holder said.

This Atty. Evan Granowitz Facebook account keeps people up-to-date in terms of the latest in the legal arena. 

REPOST: Georgia banker who allegedly embezzled $17 million captured after years on lam

This article from CNN talks about the arrest of the Georgia banker who was accused of scam on money investments, amounting to $17 million. Read more:

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(CNN) -- A south Georgia banker accused of embezzling millions by defrauding scores of investors was captured Tuesday after one and a half years on the run, authorities said.

The FBI indicated online that 47-year-old Aubrey "Lee" Price -- whom it characterized as an investment adviser and former minister -- had been captured.

That agency website didn't provide further details, including how Price was detained or what he has been doing since June 2012.

Yet a Glynn County, Georgia, sheriff's office website showed that he was booked Tuesday and is being "held for federal authorities on a charge of giving a false name, address or birth date to a law enforcement officer." Officer Kay Jones said that Price was being held for federal marshals.

His capture ends a law enforcement saga that started in the town of Ailey, a community of about 430 people, and stretched to include parts of Florida, Latin America and the vast waters that separate them.

In late 2010, Price was being celebrated by his peers and written up in newspaper articles after a company that he controlled bought a controlling portion of the troubled Montgomery Bank & Trust in Ailey, which is located some 170 miles southeast of Atlanta.

He was supposed to invest the bank's capital. Instead, prosecutors say, Price used a New York-based "clearing firm" -- a dummy company set up to hide money -- to cover up fraudulent wire transfers and investments.

A complaint filed in federal court on July 2, 2012, claimed that Price and others "raised approximately $40 million from approximately 115 investors," mostly in Georgia and Florida, beginning in 2009, then committed fraud at the expense of those investors.

"The complaint alleges that, instead of investing the money as promised, Price fraudulently wired the bank's funds to accounts that he personally controlled at other financial institutions and provided bank management with altered documents to make it appear as if he had invested the bank's money in (U.S.) Treasury securities," the U.S. attorney's office for eastern New York said then.

In sum, the complaint alleges that Price hid the embezzlement by falsely stating that about $17 million had been deposited in the bank's name at a New York financial services firm.

By the time these charges came out, Price had been missing for several weeks, having told friends he had lost "a large sum of money through his trading activities," according to the complaint.

In the letter he'd purportedly written to acquaintances and business associates that June, Price indicated that he planned to kill himself by "jumping off a ferry boat" off Florida's coast, the complaint stated.

He was spotted -- alive -- in Key West, Florida, in the middle of that month, and the U.S. Coast Guard's subsequent search for his body found nothing.

By then, authorities hinted they believed Price was on the lam. He owns properties in Venezuela and Guatemala, and the FBI's wanted poster for him indicated that he also has a 17-foot boat. The federal agency offered a reward of up to $20,000 for information leading to his arrest; it wasn't immediately clear if anyone will recoup that reward, nor was it known how Price was taken into custody.

A federal grand jury in New York indicted him on wire fraud and securities fraud charges earlier this year. A conviction on the wire fraud charge carries a maximum prison sentence of 30 years, with a 25-year maximum for the other charge.

The bank Price took over -- which had been in operation for nearly 90 years -- was closed in summer 2012 by the state of Georgia, with the U.S. Federal Deposit Insurance Corporation named as its receiver.

Price's family members have been quiet publicly since news of the charges came out. And it was not immediately clear if he has legal representation following his detention.

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This Atty. Evan Granowitz Twitter page offers links to interesting articles about the legal arena.

REPOST: Insider Trading: Civil Or Criminal Crime?

This Forbes.com article give readers an insight on the difference between criminal and civil violations.

I suppose if you were looking to buy/sell publicly traded stocks based on inside information, you would probably want to do the kind that, if detected, would result in a civil penalty (fine) rather than a criminal one (jail and fine). Nobody wants the “Big F” (Felony). But what is the difference between a criminal violation of insider trading versus a civil one?

Raj Rajaratnam was sentenced to 11 years in prison as a result of trading on inside, confidential information related to publicly traded companies (namely Goldman Sachs). His profits were said to be over $80 million and his firm, Galleon Group, has since closed. William Marovitz, husband of then Playboy CEO Christie Hefner, traded on Playboy stock between 2004 and 2009 based on “pillow talk” inside information that allowed him to realize gains of over $100,000 trading on Playboy stock. For his infraction, Marovitz paid a fine without admitting wrongdoing. While Marovitz and Hefner have since divorced, he was never in jeopardy of spending a night in federal prison. So why is one person jailed and the other fined for essentially the same crime? It depends on a number of factors.

I reached out to Jordan Thomas, Labaton Sucharow partner and Chair of the Whistleblower Representation Practice and also a former Assistant Director and Assistant Chief Litigation Counsel in the Division of Enforcement at the SEC, for his perspectives. Thomas told me that in his experience the triggers for criminal insider trading charges were based on three primary factors:

1) Significance of wrongdoing (amount of money involved, the number of people affected by the trade and the duration of the activity)

2) Corroboration of others to prove a criminal case and provide evidence of wrongdoing (need someone to flip or have someone on tape)

3) Recidivists of any securities violations (always looking to clean up Wall Street)

The Department of Justice (DOJ) may get involved once the Securities and Exchange Commission (SEC) has initiated its investigation. Thomas said, “You can assume that there is regular communication between the SEC and the DOJ on cases. If the SEC believes there is enough information that could lead to a criminal conviction, the DOJ may undertake its own, independent, investigation to see if it leads to the same conclusion.”

The SEC is not the only organization feeding the DOJ with prospective criminal cases. The Financial Industry Regulatory Authority (FINRA), the largest independent regulator in the U.S., is also looking for insider trading activities and regularly makes inquiries on suspicious trades to brokerage firms and brokers. If those inquiries turn something up, they too share that information with either state or federal authorities.

As to whether prosecutors these days are more willing to go after criminal versus civil, Thomas said, “There is a quiet revolution in white collar criminal securities cases led by cooperators and whistleblowers. New enforcement tactics like wire taps, previously used in organized crime, has yielded powerful evidence of criminal intent.” One only has to look at the wire taps used in the prosecution of dozens of insider trading cases in the Southern District of New York to see how effective that has been in bringing cases and getting guilty pleas/verdicts. When the Feds had no tapes, there were plenty of cooperating witnesses willing to finger a defendant.

According to Thomas, both the SEC and FINRA now can analyze massive volumes of trades and detect red flags that start their investigations. With regard to Compliance departments within firms taking cases to authorities, Thomas said that his experience has been that while illegal actions are detected internally, those are rarely sent on to state or federal law enforcement. “Compliance departments who have discovered wrongdoing within the company, rarely report it to authorities. They typically give offenders their walking papers and allow them to go find a new job,” Thomas said, “which isn’t much of a consequence for someone who has seemingly been successful at making money on Wall Street.”

Michael Bachner, white collar defense attorney in New York who has seen his share of insider trading cases, also noted that both FINRA and the SEC are the stalking horses for criminal cases eventually taken over by the FBI or state criminal authorities. On why some cases go criminal, Bachner believes that the defendant’s role plays a big part. ”If the person targeted for insider trading [tips] is a lawyer or some fiduciary that had an obligation to keep information confidential, then criminal authorities will want to send a message to the profession that that type of behavior will not be tolerated,” Bachner said.

As to whether civil cases deter criminal behavior, both Thomas and Bachner said that those involved in insider trading cases that result in civil charges rarely offend again. As Bachner put it, “Insider trading crimes are typically crimes of opportunity with a rational person making an irrational decision to act.” If civil litigation is so effective, it makes one wonder what is the purpose of these long prison terms associated with criminal prosecution of insider trading? I’ll leave that one for another day.

In the meantime, there are so many people with access to inside information that need to stay diligent. Bankers, lawyers, analysts, and executives are all part of mergers, purchases, earnings preparation and operational strategies. Bachner’s observation is a one you should take to heart …. insider trading is a crime of opportunity, a crime of passion undertaken at a moment of weakness. If you trade on inside information, the chances that you will get caught have gone up significantly and your odds of going to prison are just a coin flip away.

Stay Strong!

Evan Granowitz was named as a Southern California Rising Star in 2009 and 2010 by the Super Lawyers magazine. Follow this Twitter page for more updates.

Winning smart: The advantages of litigation

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The United States is said to be a far too litigious society—a country where remedies for perceived injustices are commonly pursued through the legal system.

As a form of dispute resolution, litigation is based on taking action through the courts, which involves a formal process, formal rules of evidence, and formal discovery. Furthermore, it also takes into account public records and the decision of the judge and jury. During the process, the courts are concerned with the application of public policy and strict adherence to the law of the land.

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Although commonly perceived as expensive and time-consuming, the advantages of litigation are mainly related to its nature, which involves transparency, compliance, uniformity, and binding final resolutions.

In addition, litigation is also considered as an effective legal method for highly charged issues. It allows the plaintiff to file lawsuits under a structure of rules that require facts, evidence, and arguments in support of the claim. The methods can be extraordinarily effective in clearing up obfuscation during arguments or debates.

Many companies today litigate to protect and advance their business interest. One of them is the multinational technology corporation Apple Inc. that has been a participant in various legal proceedings and claims since it began operations.

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Evan Granowitz is a recognized civil litigator in Southern California who counsels and represents clients in all facets of litigation. Learn more about him by visiting this Twitterpage.