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Cyprus Banks Gamble Away Russian Billions

Posted by Pratap Chatterjee on April 2nd, 2013
CorpWatch Blog
Bank sign in Limassol, Cyprus. Photo: Leonid Mamchenkov. Used under Creative Commons license.

A few years ago Yiannis Kypri and Andreas Vgenopoulos, senior executives at the two biggest banks in Cyprus, were on top of the financial world. Kypri courted wealthy Russian investors in Moscow while Vgenopoulos handed out millions in loans to companies in Greece, the country of his birth.

Both Kypri, the former CEO of the Bank of Cyprus, and Vgenopoulos, the former CEO of Laiki Bank, were fired when their financial institutions collapsed, bringing down with them the economy of the tiny Mediterranean island country. Last week anyone who had deposited more than €100,000 ($129,000) in the two Cypriot banks was forced to write off between 40 to 80 percent cut of their holdings in order to finance a €10 billion international bailout of the country.

Cypriots are understandably angry although the people who will lose the most appear to be expatriates, notably from the former Soviet Union who have been flocking to the country over the last decade. “There is a generation of Russian businessmen like me who have lost faith in the Russian government, in Russian banks and in Russian laws. That is why we are in Cyprus,” Sergey Ivanov, a Russian wine merchant in Cyprus told the New York Times.

Many of these Russians were attracted to Cyprus when it decided to become a “respectable” tax haven inside the European Union and shake off its prior reputation as a center for money laundering for arms traffickers and druglords. Starting in 2008 the country swapped its local currency - the pound - for euros and built up a major offshore banking industry.

Thousands of companies that existed just on paper were set up in Cyprus over the last few years by accountants and lawyers for wealthy expatriates in order to help them avoid taxes. (There are 320,000 registered companies for just 860,000 residents) Andreas Marangos, a Cypriot lawyer, says he alone set up 6,000 shell companies for Russian and Ukranian investors. Michalis Papapetrou, another Cypriot lawyer, told National Public Radio that one of his Russian clients deposited €100 million in the island.

Indeed one in three rubles that left Russia in 2011 went to Cyprus, and almost as much came back, according to the International Monetary Fund. Why? “They were overwhelmingly Russian cash “round-tripping” through Nicosia shell companies and re-entering as foreign investment,” writes Ben Judah, author of the forthcoming book “Fragile Empire: How Russia Fell In and Out of Love With Vladimir Putin.” This even included money state entities like Rosneft, the oil giant, Sberbank and VTB, both major banks, and of course the Russian billionaires who control the steel companies.

Bank of Cyprus acquired 80 percent of Uniatsrum, a Russian bank, in 2008 in order to cash in on this bonanza. “We are utterly convinced as to the huge potential of the Russian economy,” Kypri, who was then group chief general manager of Uniatsrum, told a Moscow press conference in 2010. “Once Uniastrum securities are accepted for trading on the Russian stock market, the bank’s appeal will increase, providing it with access to equity in rubles and further solidifying its position as one of Russia’s foremost banking institutions.”

At the same time, tens of thousands of ordinary Russians also flocked to the southern Cypriot town of Limassol to take advantage of the sunny weather, the banking system and a welcoming mayor who coincidentally speaks fluent Russian. A Russian radio station and two Russian-language newspapers, as well as dozens of shops selling Russian products have sprung up. Indeed, some have taken to calling the city “Limassolgrad” because of the overwhelming Russian presence.

Unfortunately Kypri, Vgenopoulos and their staff squandered the deposits that they were entrusted with on a variety of questionable schemes ranging from a property boom in Cyprus to large bets on Greek bonds, which they bought at 70 percent of their original value. Those bonds sank to a quarter of the original value under a deal engineered by the European Union in late 2011. Laiki alone lost €2.3 billion, an amount equal to an eighth of the national gross domestic product, while the Bank of Cyprus lost €1.6 billion.

Vgenopoulos, for example, used Marfin Popular Bank (a precedecessor to Laiki) to lend money to the monks of Vatopedi Monastery on Mount Athos to buy prime state-owned land in sweetheart deals which they then re-invested in his financial schemes.

Foolish ventures aside, some say the European Union deliberately forced Cyprus to the brink in order to break up the money laundering and tax dodging schemes on the island. “If we knew at the time what might eventually happen, we might not have been so willing to join,” Afxentis Afxentiou, former governor of Cyprus’s central bank from 1982 to 2002, told the Financial Times. “It seems they wanted to punish Cyprus.”

A committee of former Cypriot Supreme Court judges is scheduled to start work this week to attempt to discover who was responsible for the financial mess – presumably investigating the work of senior executives like Kypri and Vgenopoulos. They are expected to report back in three to six months.

Mind you such questions have been asked for a while with no answers forthcoming. "How could (the Cypriot authorities) be fooled by a man who took the capital of Cypriot depositors to Greece and turned it into thin air?" Zacharias Koulias, a Cypriot independent member of parliament asked his colleagues last May. "Is it even possible for a man to come to our country, grab the capital and leave, and all these managers didn't realize what was going on?

Another scandal is also brewing over a list published by a news website of 132 individuals and companies who were allegedly tipped off to the terms of the bailout and withdrew €700 million just before the bailout, incuding relatives of Cypriot President Nicos Anastasiades.

“Alchemy” Investigation Alleges Wall Street Fraud at Standard & Poor’s

Posted by Pratap Chatterjee on February 5th, 2013
CorpWatch Blog
Standard & Poor's photo: TreyDanger. Dollar bills photo: Adam Kuban. Used under Creative Commons license

The medieval alchemists claimed they could turn ordinary metals into gold. Analysts at Standard & Poors (S&P), Wall Street’s top ratings agency, claimed that bad loans to poor people were wildly profitably. A U.S. government investigation alleges that S&P financial analysts are no different from the hucksters of yore.

On Monday, the U.S. Department of Justice sued S&P for $5 billion for misleading the Western Federal Corporate Credit Union, the first federally chartered credit union, which collapsed in 2008.  Sixteen states have joined the lawsuit while the U.S. Securities & Exchange Commission has also launched an investigation. S&P has offered to settle for $100 million instead without admitting any guilt.

The lawsuits are based on a special government investigation named “Alchemy” into top ratings provided by S&P for “collateralized debt obligations” (CDOs) composed of sub-prime mortgages. The federal officials allege that analysts knew that the loans were likely to go sour.

Sub-prime mortgages are a name for loans made to people who have bad credit and cannot borrow money to buy houses under normal circumstances. A flood of such loans from U.S. banks that lasted till 2006 created over $1 trillion in debt, typically for poor people, whose property values crashed when the housing bubble burst in 2007.

Two dozen government lawyers spent several years, conducting over 150 interviews, to find out how much the ratings agency knew about the quality of the CDOs. Some of the documents they uncovered were pretty damning.

“This market is a wildly spinning top which is going to end badly,” wrote David Tesher, an S&P managing director in an email on December 11, 2006, according to documents released by the government. “Let’s hope we are all wealthy and retired by the time this house of cards falters,” another S&P employee wrote four days later, according to documents released by the U.S. Senate.

"Watch out // Housing market went softer // Cooling down // Strong market is now much weaker // Subprime is boi-ling o-ver // Bringing down the house,” sang an analyst in a parody video of Talking Heads' 1983 song "Burning Down the House" that he recorded for his colleagues in March 2007.

“In effect, rating agencies like S&P greased the assembly line that allowed banks to package and sell risky mortgages that generated huge profits,” wrote the Huffington Post in a summary of the findings.

“We allege that S&P falsely claimed that its ratings were independent, objective, and not influenced by the company’s relationship with the issuers who hired S&P to rate the securities in question,” said Eric Holder, the U.S. attorney general, at a press conference on Tuesday. “When, in reality, the ratings were affected by significant conflicts of interest, and S&P was driven by its desire to increase its profits and market share to favor the interests of issuers over investors.”

“Claims that we deliberately kept ratings high when we knew they should be lower are simply not true. S.&P. has always been committed to serving the interests of investors and all market participants by providing independent opinions on creditworthiness based on available information,” the Wall Street firm said in a statement released to the press.

S&P has also tried to claim in court that its ratings are protected under the first amendment to the U.S. constitution, which guarantees the right to free speech. Federal judges have been skeptical like Shira A. Scheindlin, who recently ruled against the argument.

S&P is one of three major agencies on Wall Street. No federal action has been announced yet against the other two agencies – Fitch and Moody’s – despite evidence gathered two years ago that suggest they knew of the problem too.

Other lawsuits have also uncovered evidence that Wall Street firms were aware of the problems with sub-prime loans as far back as 2005, according to documents just released in a New York court under a lawsuit against Morgan Stanley, a major U.S. investment bank, that was brought by the China Development Industrial Bank (CDIB) from Taiwan.  The bankers cracked jokes about the quality of the CDO that they sold to the Taiwanese suggesting that it should be called “Subprime Meltdown,” “Hitman,” “Nuclear Holocaust” and “Mike Tyson’s Punchout” or “Shitbag.”

Construction Company Bribery Scandal Threatens Spanish Ruling Party

Posted by Pratap Chatterjee on February 4th, 2013
CorpWatch Blog
Protest outside Partido Popular headquarters in Madrid. Photo: Popicinio. Used under Creative Commons license

Top executives from three major Spanish construction companies - Fomento de Construcciones y Contratas (FCC) from Barcelona, Obrascón Huarte Lain (OHL) and Sacyr Vallehermoso from Madrid -
are in the limelight for allegedly contributing money to Partido Popular, the Spanish ruling party.

The conservative Partido Popular was in power from 1996 until 2004 when they were ousted in part because of popular anger against the war in Iraq. During - and even after their time at the helm - a series of undisclosed payments were allegedly made to senior party officials listed in handwritten notes kept by Luis Bárcenas, the party’s former treasurer and his colleague Álvaro Lapuerta, that were revealed in El País newspaper last week.

El País lists chief executives of the three companies as having contributed to the slush fund: José Mayor Oreja, the CEO of FCC allegedly paid out €165,000, Jose Miguel Villar Mir, the chairman of OHL, is said to have contributed €530,000 euros while Luis del Rivero, the former chairman of Sacyr Vallehermoso allegedly donated €380,000.

The cash transfers appear to have begun in 1997, which coincides with the real estate and development boom in Spain. “During those giddy years few wielded more power in Spain than its lords of construction, a group of men who used the country’s post-dictatorship economic miracle to build their companies into behemoths feared more than they were loved,” wrote Miles Johnson in the Financial Times in an account of the era. “Of these, Sacyr Vallehermoso was arguably the brashest.”

In fact, all three companies won billions of euros in Spanish government contracts and concessions during the boom times – Sacyr’s toll road projects were once worth €7.9 billion. OHL reported €3.87 billion euros in road construction work in its 2008 annual report while FCC recently estimated that it is still owed €1.7 billion by Spanish local governments. (Both Sacyr and OHL  have revenues of about €5 billion a year while FCC is approximately twice as big)

Questions are now being raised about the possible connections between the lucrative public sector contracts and the Bárcenas payments, which came to light when the former party treasurer submitted details of a secret Swiss bank account to the tax authorities under an amnesty program set up shortly after Rajoy came to power. The account, which was operated by Bárcenas, held as much as €22 million at times.

Mariano Rajoy, the current Spanish prime minister, has been accused of personally receiving €25,200 ($34,100) a year from the slush fund over a period of 11 years starting in 1997 when he served first as minister of public administration and later as deputy prime minister.

Rajoy has denied receiving the money. "Never, I repeat, never, have I received undeclared money," he told an emergency gathering of the party's executive committee on Saturday. "It is not true that we received cash that we hid from tax officials.”

The payments have also been linked to a similar bribery scandal involving Francisco Correa, a Partido Popular political “fixer” and businessman, who has been accused of paying some seven million euros in cash bribes, Jaguar cars, designer clothing, expensive Franck Muller watches and Caribbean holidays to win development contracts with local governments in Madrid, Castilla-La Mancha and Valencia.

Attorney General Eduardo Torres-Dulce has ordered the anti-corruption prosecutor to investigate the links between the Correa (known in Spain as the Gürtel scandal) and the Bárcenas payments.

Meanwhile close to a million people have signed an online petition on change.org demanding that Rajoy resign, while thousands of Spaniards have also taken to the streets of Madrid, holding nightly demonstrations in front of the party’s headquarters.


Morgan Stanley Knew About “Nuclear Holocaust” Mortgage Loans, Taiwanese Lawsuit Reveals

Posted by Pratap Chatterjee on January 23rd, 2013
CorpWatch Blog
Protest outside San Francisco Federal Reserve. Photo: Steve Rhodes. Used under Creative Commons license.

Morgan Stanley, a major U.S. investment bank, was well aware of the problems in the sub-prime mortgage market as far back as 2005, according to documents just released in a New York court under a lawsuit brought by the China Development Industrial Bank (CDIB) from Taiwan.

Sub-prime mortgages are a name for loans made to people who have bad credit and cannot borrow money to buy houses under normal circumstances. A flood of such loans from U.S. banks that lasted till 2006 created over $1 trillion in debt, typically for poor people, whose property values crashed when the housing bubble burst in 2007.

On July 15, 2010, CIDB brought a lawsuit in New York State Supreme Court in Manhattan over a $275 million portion of a collateralized debt obligation (CDO) sold to them by Morgan Stanley which contained large quantities of mortgage-backed securities that were built on pools of such loans. “The complaint asserts claims for common law fraud, fraudulent inducement and fraudulent concealment,” wrote Morgan Stanley in a summary of the legal charges it was facing in its annual filings. The plaintiffs alleged that the bank “knew that the assets backing the CDO were of poor quality when it entered into the credit default swap with CIDB.”

The court allowed CIDB to examine Morgan Stanley’s emails which have just been made public. Jesse Eisinger of ProPublica, an investigative website, has written an excellent article explaining the scam. The documents reveal that the Wall Street bankers even cracked jokes about the quality of the loans that they packaged and resold to the Taiwanese suggesting that the CDO be called “Subprime Meltdown,” “Hitman,” “Nuclear Holocaust” and “Mike Tyson’s Punchout” or “Shitbag.”  Instead they played it safe and named the financial instrument STACK 2006-1.

Ha ha. Those hilarious investment bankers,” writes Eisinger sarcastically. “We are never going to have a full understanding of what bad behavior bankers engaged in the years leading up to the financial crisis. We are left with what scraps we can get from those private lawsuits.”

“We are pleased that the court in this case is ordering Morgan Stanley to turn over damning evidence, so that the jury will get to see what Morgan Stanley really knew about the troubled nature of its supposedly ‘higher-than-AAA’ quality product,” Jason Davis, a lawyer representing CIDB, told ProPublica. “While investors and taxpayers all over the world continue to choke on Wall Street’s toxic subprime products, to this day not a single major Wall Street executive has been held accountable for misconduct relating to those products.”

The bank has not denied the emails. “While the e-mail in question contains inappropriate language and reflects a poor attempt at humor, the Morgan Stanley employee who wrote it was responsible for documenting transactions,” the bank wrote in a statement to ProPublica. “It was not his job or within his skill set to assess the state of the market or the credit quality of the transaction being discussed.”

But even more damning is the fact that Morgan Stanley had already laid bets in the markets that such CDOs would fail. Howard Hubler, who set up an internal hedge fund named the Global Proprietary Credit Group at the bank in April 2006, where he “shorted” the sub-prime mortgage market. Hubler, however, made a costly mistake though by insuring other mortgages to pay for his bet, a tale told in Michael Lewis’s book – The Big Short, which costs Morgan Stanley $9 billion.

Thanks But No Thanks: Insurance Company Considers Suing Uncle Sam After Rescue

Posted by Puck Lo on January 9th, 2013
CorpWatch Blog
Code Pink protest against AIG. Photo: codepinkhq. Used under Creative Commons license.

The video advertisement launched just before Christmas was stirring - a montage of devastated communities from Joplin, Missouri to New York city after Hurricane Sandy. Insurance officers of every race from the American Insurance Group (AIG), the world’s largest insurance company, conveyed a simple message that they were back in business helping communities recover.

It’s a remarkable turnaround for the company which received a massive $182 billion bailout from the U.S. government in September 2008 after facing certain collapse when it became obvious that the risky mortgages that it had insured were likely to fail. At the time the federal government took a 80 percent ownership stake in the company in return for the loan.

“We’ve repaid every dollar America lent us. Everything plus a profit of more than $22 billion,” intone the AIG officials in the video. It ends with the words: “Now let’s bring on tomorrow.”

Well, tomorrow is here, and now the board of directors of AIG have been asked to consider suing the federal government over the terms of the bailout.

The lawsuit against the government is not new. It was originally filed in 2011 on behalf of AIG’s shareholders by AIG’s former CEO and chairman, 87-year-old Maurice “Hank” Greenberg. The plaintiffs allege that the U.S. government deprived AIG shareholders of tens of billions of dollars by charging the company an interest rate of 14 percent on the bailout loan. The basis of the claim is that other bank were bailed out on more favorable terms than the insurance giant received. It asks for $25 billion to compensate AIG and its shareholders.

Until now AIG’s board has been silent about whether they would join the lawsuit but earlier this week, the board of directors of AIG held an unusual private mock-trial-like session about the matter, in which they heard from attorneys, representatives from the U.S. Treasury and the Federal Reserve.

What the AIG board was asked to decide was whether or not they would like to join the lawsuit, take it over and pursue the claims independently, or if they would try to stop Greenberg’s lawyers from pursuing the case on the company’s behalf. If they tried to prevent Greenberg from continuing with the suit, AIG would potentially lose out on any lucrative potential settlement.

After the board meeting was reported Monday night, the backlash from legislators, regulators and the financial press was swift and scathing.

"Don't even think about it," wrote Peter Welch, a Congressman from Vermont, in a letter to Robert S. Miller, AIG’s chairman: "AIG became the poster company for Wall Street greed, fiscal mismanagement, and executive bonuses—the taxpayer and economy be damned. Now, AIG apparently seeks to become the poster company for corporate ingratitude and chutzpah."

But former CEO Greenberg, who helped built AIG up from its beginnings in the 1960s, believes he has a case. “The (g)overnment loaned billions of dollars to numerous other financial institutions without taking any ownership in those institutions; it loaned billions of dollars to domestic and foreign institutions at interest rates that were a fraction of those charged to AIG; and it guaranteed hundreds of billions of dollars to institutions like Citigroup, Inc,” the lawsuit states. “AIG and its (c)ommon (s)tock shareholders, by contrast, were singled out for differential - and far more punitive – treatment.”

The lawsuit also accuses the government of violating the fifth amendment to the U.S. constitution which prohibits “taking private property for public use without just compensation” when it took the majority of the company’s shares in return for the loan.

The plaintiffs contend that the government used AIG as “a vehicle to covertly funnel billions of dollars to other preferred financial institutions, including billions of dollars to foreign entities, in a now well-documented ‘backdoor bailout.’”

(Greenberg, it should be noted, was forced to resign in 2005 after being accused of misrepresenting the company’s finances.)

“There is no merit to these allegations,” said Jack Gutt, spokesman for the Federal Reserve Bank of New York in response to the news of the AIG’s board discussion. “A.I.G.’s board of directors had an alternative choice to borrowing from the Federal Reserve, and that choice was bankruptcy,” he told the New York Times.

The terms of the other bailouts were different, says commentators, because AIG was not a bank. “Those institutions were either banks that were already closely regulated by the Fed or became bank holding companies and submitted themselves to Federal Reserve regulation in return for access to the Fed’s lending facilities,” Time magazine reported.

Others note that AIG got a really good deal for the price, give the size and the nature of the loan. "Warren Buffett loaned Goldman Sachs $5 billion at 10 percent annual interest, plus upside in the form of warrants," writes Daniel Indiviglio of Reuters. "He ended up booking an annual return of 14 percent without exercising the warrants - far better than the government has managed from AIG on the same basis." (The government ended up with about four percent in interest a year.)

Federal regulators also stress that the massive bail out of AIG was necessary because AIG was selling credit-default swaps that were intended to protect against subprime mortgage default - a major cause of the 2008-2009 financial crisis. If the insurance company had collapsed, the other banks and financial systems that it has insured would have gone down with it also.

“(W)e have no choice but to stabilize, or else risk enormous impact, not just in the financial system, but on the whole U.S. economy,” Ben Bernanke, the chairman of the U.S. Federal Reserve, told CBS television in 2009.

On Wednesday the AIG board decided not to join the lawsuit. “The majority of directors decided that the reputational damage was greater than the possibility on a long-shot lawsuit,” John Coffee, a professor at Columbia Law School, told the Washington Post.

Now Greenberg, whose lawsuit was initially thrown out of the courts in November 2012, will have to proceed without the insurance giant’s backing to an appeal court, which has agreed to review the case.

U.S. Banks Win Mortgage Fraud Settlement, Borrowers Lose

Posted by Pratap Chatterjee on January 8th, 2013
CorpWatch Blog
Protest outside San Francisco Federal Reserve. Photo: Steve Rhodes. Used under Creative Commons license.

Ten major U.S. banks settled charges of illegally kicking people out of their homes for pennies on the dollar, under two agreements with the government announced this week. The biggest beneficiary is Bank of America which will win a get-out-of-jail free card for selling fraudulent loans to two government-sponsored mortgage finance companies.

Bank of America sold bad mortgages that led to numerous foreclosures via subprime mortgage lenders Countrywide Financial Corporation and Countrywide Home Loans, Inc. that it acquired in 2008. “Through a program aptly named ‘the Hustle,’ Countrywide and Bank of America made disastrously bad loans and stuck taxpayers with the bill,” said Preet Bharara, the U.S. Attorney for the Southern District of New York when he sued the company for $1 billion on behalf of the government last October.

Under the new settlement Bank of America will buy back $6.75 billion in residential mortgage loans sold to the Federal National Mortgage Association (Fannie Mae) and give the government an additional $3.6 billion in cash. The other banks - which include Citigroup Inc, JPMorgan Chase and Wells Fargo - will pay out $3.3 billion in direct payments to people who lost their homes plus another $5.2 billion to others who are threatened with possible eviction for not being able to pay their loans. This is in addition to the $26 billion that many of the same banks agreed to pay out last February under a separate deal with 49 state attorneys general, the Justice Department and the Department of Housing and Urban Development.

Despite the large sums involved, most consumer advocates say that the settlements are far too little for those who lost the most. “Communities of color were particularly hard hit by abusive mortgage practices,” said Debby Goldberg, special project director at the National Fair Housing Alliance. "The $8.5 billion and other settlements are not comparable to the trillions of dollars in wealth sucked from communities," added Sasha Werblin, senior program manager at the Greenlining Institute.

The two new settlements were drawn up after the effective failure of the Independent Foreclosure Review  – a 2011 program set up by the banks to review bad mortgages and compensate those who were eligible. Only about one in ten of the potential 3.8 million beneficiaries signed up for the program because they were skeptical of the effort that was widely perceived as biased towards the lenders. They were probably not wrong – the consultants running the program was billing as much as $250 an hour for 20 hours for each case, according to the New York Times.

"It has become clear that carrying the process through to its conclusion would divert money away from the impacted homeowners and also needlessly delay the dispensation of compensation to affected borrowers," said Thomas Curry, the federal Comptroller of the Currency. "Our new course of action will get more money to more people more quickly."

But the activists say that the government had bungled the whole process. “If the reviews had been done right the first time, banks would have been on the hook to pay far more to homeowners,” said Alys Cohen, staff attorney for the National Consumer Law Center.

David Lazarus of the Los Angeles Times put the numbers in context – he estimates that the average amount that most borrowers will get is just $2,000.  On the other hand, Lazarus notes that the banks have done quite a bit better in 2011 - the year covered by the settlement: “Citigroup pocketed $11.3 billion in profit. JPMorgan Chase saw record profit of $19 billion. Wells Fargo posted almost $16 billion in profit. (Bank of America) was the poor relation of the family. It earned only $1.4 billion in profit.”

Taiwanese Display Manufacturer Fined $500 Million for Price-Fixing

Posted by Puck Lo on October 22nd, 2012
CorpWatch Blog
LCD Assembly. Photo: Gdium. Used under Creative Commons license.

Taiwanese company AU Optronics and its U.S. subsidiary were fined $500 million by a U.S. judge for conspiring to artificially inflate the prices of liquid crystal display (LCD) screens in a verdict handed down last month. Two former AU Optronics executives were also given three-year prison sentences.

AU Optronics is the fourth-largest LCD producer in the world, supplying computer, phone and TV screens to many major electronic manufacturers. Between 2001 and 2006, the company held 60 secret meetings with LG, Samsung, Sharp, Hitachi, Toshiba, Epson and several other electronics producers in luxury hotels, tearooms and karaoke bars, according to detailed notes and legal documents from AU Optronics executives.

High-ranking executives made deals on production levels and set prices of LCD screens used in “almost every laptop computer and computer monitor sold in the U.S.,” smart phones and other electronic devices, according to a statement issued by the U.S. Department of Justice. A third of the $74 billion made by the cartel’s LCD sales came from U.S. companies like Apple, Dell, HP and other electronics and television manufacturers, the New York Times reported.

“This long-running price-fixing conspiracy resulted in every family, school, business, charity and government agency who bought notebook computers, computer monitors and LCD televisions during the conspiracy to pay more for these products,” said Scott Hammond, deputy assistant attorney general for the Department of Justice’s antitrust division’s criminal enforcement program.

In early 2006 the group meetings stopped due to fear of detection, according to legal documents filed by the Department of Justice. But AU Optronics continued to meet one-on-one with its supposed competitors in karaoke bars around Taipei to coordinate production and set prices.

“Only when the FBI raided AUOA’s [AU Optronic’s U.S. subsidiary] offices in Houston in December 2006 did AUO and AUOA cease their participation in the cartel,” an earlier statement filed by the Department of Justice on September 11 stated.

“The defendants, unlike their coconspirators, are remorseless, having refused to accept responsibility or provide any assistance that would justify a reduction in their sentence,” the government lawyers said.

Several other LCD producers charged with price-fixing by the U.S. have previously pled guilty. In 2008 LG Electronics agreed to pay a $400 million fine to avoid trial. Hitachi, Sharp and Samsung, agreed in December to pay a total of $538 million in settlement fees. Only AU Optronics denied the allegations and took their case to a jury trial.

After AU Optronics and its executives were found guilty this past March, the Department of Justice petitioned Judge Ilston to impose maximum penalties upon the company.

“A $500 million fine would be a cost-of-doing-business fine for a large-scale, highly successful cartel like the one proven in this case,” the Department of Justice statement said. “It is possible that even a $1 billion fine will not deter the type of pernicious conduct before the court, but it is the maximum deterrent message that can be sent in the most serious price-fixing cartel ever prosecuted by the government.”

Wall Street law firm Skadden, Arps law issued a warning to clients that the size of the fine should serve as a warning to collaborate with the goverment: “(T)he case leaves room for companies to continue to negotiate resolutions based on the many factors that bear on a final penalty — from the level of affected commerce to mitigating circumstances and proportionality in sentencing.”

Had the judge imposed a $1 billion penalty and ten-year prison sentences, as requested by the government lawyers, the fine would have set a record and could have represented a “watershed moment in antitrust law,” the Wall Street Journal reported.

AU Optronics issued a statement on September 21, saying it “regrets” the judgment and intends to appeal the decision. The company added that there were “important, yet unresolved, legal questions surrounding this matter.” In a previous statement it said that the U.S. government wanted "to punish AUO for its temerity in electing to subject the validity of the government's charge to the test of a jury trial."

AU Optronics and other coconspirators in the LCD cartel have also been sued by retailers and consumers in class-action lawsuits. All together, eight companies have paid $1.39 billion in criminal fines, and twelve executives have been convicted and sentenced to a total of 4,871 days in prison.

Payments to Saudi Generals Investigated in UK Military Contract Bribery Case

Posted by Pratap Chatterjee on August 29th, 2012
CorpWatch Blog
Saudi security forces. Photo: Omar Chatriwala, Al Jazeera English. Used under Creative Commons license

Four cars worth £201,000 were allegedly gifted to Saudi generals and £278,000 paid out to rent a villa to win a military IT contract for a major European military contractor. Altogether at least £11.5 million ($18 million) in bribes were allegedly paid out via two Cayman Island companies.

The £2 billion ($3.2 billion) contract to build a military intranet as well as internet monitoring and jamming systems for Sangcom, the communications arm of the Saudi National Guard, was awarded in 2010 to GPT Special Project Management, a British subsidiary of European Aeronautic Defence and Space Company N.V. (EADS).

A UK Serious Fraud Office investigation is underway after Ian Foxley, a former project manager in Riyadh, Saudi Arabia, blew the whistle in 2011. “I have had first hand experience of the pernicious effects of corruption. My father was a high ranking civil servant who was convicted of corruption in defence procurement in the 1980s and pursued by the MoD Solicitor for a further 22 years,” wrote Foxley in a letter dated January 9, 2012, to Vince Cable, the UK Business Secretary.

“You may also imagine my utter horror and repugnance at the rank hypocrisy of the MoD’s obscene participation in similar corrupt practices throughout the whole period whilst relentlessly pursuing my father until 2002,” added Foxley. “Here is an organization whose officers are taught from the outset at RMA (Royal Military Academy) Sandhurst that the foundations of their profession rest on honesty, integrity and moral courage, yet which so duplicitously condones and complies with corruption for commercial gain.”

The story begins in 1977 when Sir Frank Cooper, a senior bureaucrat at the U.K. ministry of defence, issued a secret order allowing bribes to be paid out on government to government deals. Anything above ten percent or exceeding a certain amount had to be personally authorized by him.

A memo discovered in the UK national archives from Lester Suffield, then head of defence sales at the ministry, stated: “(T)he percentages commonly charged in Saudi Arabia for the sort of service being offered, which, although described as 'technical consultancy', amounts in practice to the exertion of influence to sway decisions in favour of the client." Cooper replied: “I see no difficulty about what you propose.”

The contract is now managed by EADS, a Netherlands-based company which was created in 2000 by the merger of French, German and Spanish arms manufacturers. EADS generated revenues of over €49 billion ($61.5 billion) in 2011 and is best known as the manufacturer of the Airbus passenger jets.

Mike Paterson, then financial controller of GPT Special Project Management, first noticed unusual payments to Simec International and Duranton International in the Cayman islands. He reported the matter to his managers in 2007 but no action was taken.

Emails seen by the Financial Times suggest that the bribes continued till at least December 2010. At least £11.5 million ($18 million) or about 12 per cent of a specific contract were paid out for questionable “bought-in services.”

EADS has kept relatively silent about the scandal. “Certain allegations have been made in connection with the company’s contracts with a subcontractor group. These allegations have been notified to the UK authorities with whom EADS is maintaining a dialogue,” the company wrote in a statement to the Financial Times. “The relevant subcontracts were terminated. This termination has led recently to an unquantified claim from the subcontractor group for monetary damages.”

Similar investigations into Saudi contracts in the past have been quashed. The most controversial was a £43 billion ($68 billion) deal signed in 1985 by BAE, a British arms manufacturer, to supply Hawk warplanes, Tornado aircraft and other military equipment. The deal, which was named Al-Yamamah (Arabic for "dove"), allegedly included quarterly payments of £30 million that were paid out to Prince Bandar of Saudi Arabia for at least 10 years.

A UK fraud investigation was halted in 2006 and Tony Blair, the prime minister, took “full responsibility.” Later BAE agreed to pay out over $400 million in fines after the U.S. launched an investigation into multiple instance of corruption in several countries including Saudi Arabia.

Today critics question whether the EADS case will be properly investigated by UK authorities. “(T)here appears to be prima facie evidence of bribery. Will the SFO break the trend of decades by fully investigating the allegations and, if appropriate, charge the corporate entity and the individuals responsible?” asks Andrew Feinstein, a former South African member of parliament and author of the book “The Shadow World: Inside the Global Arms Trade.”

“Or will this be another whitewash to protect the British defence industry, the government and its munificent Saudi client?” Feinstein wrote in the Guardian.

Hanwha CEO Jailed for Four Years

Posted by Pratap Chatterjee on August 17th, 2012
CorpWatch Blog
Hanwha building photo: riNux Kim Seung-youn photo: Πρωθυπουργός της Ελλάδας. Used under Creative Commons license.

Kim Seung-youn, the CEO of the Hanwha group in South Korea, has been sentenced to four years in prison and fined 5.1 billion won ($4.5 million). The jail time marks an unusual departure for the Korean judiciary who typically issue suspended sentences when prominent business bosses are found guilty.

Hanwha is the tenth largest “chaebol” or business conglomerate in South Korea. Started by Kim Chong-Hee as Korea Explosives Inc. in 1952, it now has an annual revenue of $30 billion and interests as diverse as dairy farming, finance and petrochemicals.

Kim Seung-youn, the son of the founder, has been in trouble with the law several times. In 1993 he was found guilty of smuggling cash to buy a large mansion in Los Angeles and then in 2004 he was found guilty of bribing a politician. In 2007, he was given a suspended sentence for assaulting workers with a steel pipe after his son got in a fight.

This time Kim has been accused of buying and selling shares in employees names to avoid taxes, bailing out his brother’s failing business and forcing his affiliates to sell shares in an oil company to his sister at below market prices.

"As a controlling shareholder of Hanwha Group, the defendant is passing on his responsibility to working-level officials and he has not shown remorse," said Seo Kyung-hwan, one of the three judges on the panel that decided the case. “Considering this, he needs to be strictly punished.”

Most chaebol got their start after the end of the Second World War when the government of Syngman Rhee encouraged entrepreneurs to rebuild the country. During the administration of General Park Chung Hee in the 1960s, the favored chaebol were given easy access to loans, foreign technology and large government contracts in order to rapidly industrialize the country. Today these elite companies – some of which have become global players like Hyundai, LG and Samsung – control much of the South Korean economy.

The chaebol bosses have operated beyond the reach of the law for many years. Take Lee Keun-hee of Samsung who was found guilty in July 2008 of operating a slush fund to bribe politicians, prosecutors and government officials. Lee was fined $109 million and given a five year suspended sentence.

Or Chung Mong-koo of Hyundai who was found guilty of embezzling funds that were funneled to politicians in February 2007 and sentenced to three years in jail. Chung had his sentence suspended on appeal. "The court has been agonising over whether to put the accused in jail or keep him out of prison," said Lee Jae-Hong, the chief judge. "But in consideration of the huge economic impact that could result from imprisonment, it decided to suspend the sentence."

A few brave whistleblowers have risked their careers to speak out against the chaebol. "Our society is so corrupt, and people are blindfolded because everyone is living well and people are greedy,” says Kim Yong-chul, a Samsung whistleblower. “I am not a revolutionary, an ideologue or a revenge. But I am against business as usual.”

Kim wrote a book about his experiences: "Thinking of Samsung" ("Samsungul Sanggak Handa"). The book was never reviewed by the South Korean media and he has been ostracized by the business establishment. “Isn’t this a comedy?” Kim told the New York Times. “I am challenging them to slap my face, to file a libel suit against me, but they don’t. They treat me like a nut case, an invisible man, although I am shouting about the biggest crime in the history of the nation."

Despite the news blackout, his book has become a best seller, promoted solely by Twitter and word-of-mouth. And distrust of the chaebol has been growing among ordinary citizens – indeed a recent poll by a major think tank found that 74 percent of people believed that the conglomerates were not moral.

It is this change in the political mood in the country that anti-corruption advocates are hoping will make sure that Kim Seung-youn serves his sentence

Pfizer Admits Bribery in Eight Countries

Posted by Pratap Chatterjee on August 8th, 2012
CorpWatch Blog
Pfelon t-shirt by Zazzle. Dollar bill photo: Adam Kuban. Photo of pills: e-magineart.com. Used under Creative Commons license

For three years, Pfizer Italy employees provided free cell phones, photocopiers, printers and televisions to doctors, arranged for vacations (such as “weekend in Gallipoli,” “weekend with companion” and “weekend in Rome”) and even made direct cash payments (under the guise of lecture fees and honoraria) in return for promises by doctors to recommend or prescribe Pfizer’s products.

Today, the New York headquarters of the pharmaceutical giant has agreed to pay a total of $60.2 million in penalties to settle the documented charges of bribery. The Securities and Exchange Commission (SEC) says that Pfizer Italy employees went out of their way to “falsely” book the expenses under “misleading” labels like “Professional Training,” and “Advertising in Scientific Journals.”

The penalty is roughly half a percent of the company annual profits that exceed $10 billion a year on global sales of $67.4 billion in 2011.

Italy was not the only country where Pfizer has been accused of bribing doctors and local officials. “Pfizer took short cuts to boost its business in several Eurasian countries, bribing government officials in Bulgaria, Croatia, Kazakhstan and Russia to the tune of millions of dollars,” says Mythili Raman, the principal deputy assistant attorney general of the U.S. Department of Justice’s (DoJ) criminal division.

“Pfizer H.C.P. admitted that between 1997 and 2006, it paid more than $2 million of bribes to government officials in Bulgaria, Croatia, Kazakhstan and Russia,” notes a press release issued by the DoJ. “Pfizer H.C.P. also admitted that it made more than $7 million in profits as a result of the bribes.”

Amy Schulman, executive vice-president and general counsel for Pfizer, said: “The actions which led to this resolution were disappointing, but the openness and speed with which Pfizer voluntarily disclosed and addressed them reflects our true culture and the real value we place on integrity and meeting commitments.”

In a criminal complaint issued by the SEC, investigators laid out detailed charges for a total of eight countries: Bulgaria, China, Croatia, Czech Republic, Italy, Kazakhstan, Russia, and Serbia.

For example for almost six years, Pharmacia Croatia made monthly payments of approximately $1,200 per month into the Austrian personal bank account of a Croatian doctor. In 2003, Pfizer bought Pharmacia Croatia but allowed the payments to continue for three months.

A memo from a senior manager noted that the doctors was “a member of the Registration Committee regarding pharmaceuticals, I do expect that all products which are to be registered, will pass the regular procedure by his assistance. . . . He is a person of great influence in Croatia in the area of pharmaceuticals, and his opinion is respected very much; that’s the reason he is so important to us.”

In Russia, from the mid-1990s through 2005, Pfizer Russia had a special sales initiative called the “Hospital Program” under which employees were allowed to pay hospitals five percent of the value of certain Pfizer products. Some of this money was paid out in cash to individual Russian doctors “to reward past purchases and prescriptions and induce future purchases and prescriptions of Pfizer products.”

Government officials were also cultivated. On November 19, 2003, a Pfizer Russia employee sent in an invoice requesting “payment for the (motivational) trip of [the First Deputy Minister of Health] for the inclusion of [a Pfizer product] into the list . . . of medications refundable by the state.”

In another email June 27, 2005, a Pfizer Russia employee noted that a government doctor “should be assigned the task of stretching the amount of the purchases . . . to US $100 thousand” as an “obligation” in exchange for a trip to a conference in the Netherlands or Germany.

Federal officials have forced Pfizer to pay much higher fines in the past, based on the damage assessed in each case (typically a multiple of the damages). For example in 2009, Pfizer paid out $2.3 billion to settle allegations of criminal and civil liability arising from the illegal promotion of Bextra, an anti-inflammatory drug.

All told U.S. government regulators are expected to hand out $8 billion in fines this year to multinational corporations, estimates the New York Times. “Critics remain, however, arguing that the practice of settling fraud cases with companies while not charging any employees might be giving executives an incentive to push the limits of the law,” notes the newspaper.

“If you are an executive, you know that the chances of getting caught are infinitely small, and the chances of getting caught and prosecuted are even smaller,” Dennis M. Kelleher, president of Better Markets, told the New York Times.

Questions are being raised by some members of Congress. “A lot of people on the street, they’re wondering how a company can commit serious violations of securities laws and yet no individuals seem to be involved and no individual responsibility was assessed,” Jack Reed, a Rhode Island senator, said at a recent hearing.

Hospital Corporation of America Allegedly Profited From Questionable Cardiac Procedures

Posted by Pratap Chatterjee on August 7th, 2012
CorpWatch Blog
Richard Bracken, HCA CEO, speaking at Tulane university. Photo: Tulane publications. Used under Creative Commons license.

Hospital Corporation of America (HCA) – the world’s largest operator of private clinics and hospitals – has come under the spotlight for performing unnecessary cardiac procedures, notably in Florida.

Based in Nashville, Tennessee, the company has 163 hospitals and 110 surgery centers, and an annual revenue of $ $29.682 billion in 2011 with profits of $2.465 billion. About a fifth of its income comes from Florida, which has a large retiree population.

HCA previously paid out $1.7 billion in fines and repayments to settle charges of defrauding the government in 2000. One of the key agreements was “to resolve lawsuits alleging that HCA hospitals and home health agencies unlawfully billed Medicare, Medicaid and TRICARE for claims generated by the payment of kickbacks and other illegal remuneration to physicians in exchange for referral of patients.” (Medicaid, Medicare and TRICARE are U.S. government healthcare plans for poor people, elderly people and military personnel and their dependents respectively)

The company also signed a special eight year agreement from 2000 to 2008 with the U.S. Department of Justice that required them to promptly report fraud or face harsher penalties that other companies because of the previous fraud claims.

The new charges suggest “that a defendant, already caught once defrauding the government, has apparently not changed its corporate culture,” Michael Hirst, a former assistant United States attorney in California, told the New York Times.

The procedures that are being questioned today are diagnostic catheterization (insertion of a tube into the heart) and cardiac stents (a tube inserted into cardiac arteries). Medicare normally pays the hospitals about $3,000 and $10,000 for each procedure respectively.

The newspaper revealed that internal investigations at HCA showed that between 2002 and 2010, company doctors were “unable to justify many of the procedures they were performing,” write Reed Abelson and Julie Creswell. “Questions about the necessity of medical procedures — especially in the realm of cardiology — are not uncommon. But the documents suggest that the problems at HCA went beyond a rogue doctor or two.”

A catheterization laboratory at the Lawnwood Regional Medical Center in Fort Pierce, Florida, accounted for 35 percent of the hospital’s net profits. There Dr. Abdul Shadani and Dr. Prasad Chalasani at Lawnwood are named by the New York Times as being quick to perform catherizations. Some 1,200 procedures were found to be unnecessary in a 2010 review.

Also singled out was Dr. Sudhir Agarwal who practiced at the Regional Medical Center Bayonet Point in the town of Hudson, also in Florida. An internal review found that his “style of clinical practice leads to unnecessary procedures and unnecessary complications.”

Dr. Agarwal and the other eight doctors have sued HCA for defamation in county court. Anthony Leon, a lawyer for the nine doctors, issued a statement that said: “There is absolutely no merit to any allegation that any of these doctors were performing unnecessary procedures or performing procedures that led to unnecessary complications as a style or pattern of practice.”

HCA is hardly alone in being accused of defrauding the government. A quick scan of the official press release index of the Department of Justice suggests that it is a rare week when the authorities fail to catch someone who has milked the taxpayer for $10 million or more.

For example, in December 2010 three companies – Abbott Laboratories, B Braun Medical, and Roxane Laboratories – agreed to pay $421 million to settle allegations of overcharging. (The companies were billing the government up to 20 times more than the actual consumer costs for products like intravenous drugs and solutions.)

In 2009, Pfizer paid out $2.3 billion to settle allegations of criminal and civil liability arising from the illegal promotion of Bextra, an anti-inflammatory drug. And less than a month ago, GlaxoSmithKline to pay $3 billion in a civil and criminal settlement to settle allegations of illegal marketing of Paxil and Wellbutrin which was prescribed to treat depression as well as failure to report safety data for Avandia, a diabetes drug.

One of the problems in the U.S. is the staggering sums involved: the government is expected to spend a trillion dollars, or seven percent of GDP, on Medicare and Medicaid, which, in turn, have become a gold mine for the private companies that provide the care. (An interesting statistical note: the UK National Healthcare Services which covers all citizens costs roughly five percent of national income)

“If you are a hospital that wants to boost its bottom line though, performing more surgeries — even those that aren’t necessary — is pretty much the way to go,” writes Sarah Kliff at the Washington Post blog. “Right now, doctors get paid for each service they provide. The cardiologist that inserts more stents and performs more surgeries tends to net a higher salary.”

Congo Copper Mine Deals Questioned

Posted by Pratap Chatterjee on August 2nd, 2012
CorpWatch Blog
Women copper miners in the Congo. Photo: FairPhone. Used under Creative Commons license.

Eurasian Natural Resources Corporation (ENRC), a global mining company that got its start in Kazakhstan, has won a new $101.5 million license to dig for copper at the Frontier mine in the Democratic Republic of Congo. The company has been criticized by Global Witness for its purchases of rights from offshore companies connected to Dan Gertler, a controversial Israeli diamond merchant. http://www.globalwitness.org/library/possible-new-enrc-deal-raises-fresh-corruption-risks

“The Congolese state has foregone billions of dollars in revenues by secretly selling off its assets on the cheap to offshore companies,” Daniel Balint-Kurti, campaigner for the Democratic Republic of Congo at Global Witness said in a press release issued last month. “With so much at stake in one of the poorest countries on the planet, ENRC must do the right thing and shed full light on its dealings.”

Per-capita income in the Congo is under $300 a year and experts at the Carter Centre, which was founded by former US president Jimmy Carter, say there is a reason. "In a mining sector defined by irregularities and mismanagement, large industrial mining projects can earn huge profits for investors and government officials,” Sam Jones, associate director of the centre's human rights program, told the Guardian. “(L)ittle revenue finds its way back into desperately impoverished Congolese communities for schools, healthcare, or other social services.”

The Frontier copper mine is located near the town of Sakania in the Congo, about a mile from the Zambian border. It is located in the copper belt that straddles the border of the two countries that has been exploited commercially from the days of Belgian colonization to this day. Indeed the profits from the Union Minière du Haut Katanga, the original mining company in the region, was a major source of wealth for Belgium at the beginning of the 20th century.

First Quantum, a Canadian company, acquired the rights to mine for copper at Frontier in 2001 but was forced to turn it over to Sodimco, a state owned company in 2010 by the Congolese government. The licences were then sold to Fortune Ahead, a Hong Kong shell company. Meanwhile First Quantum filed multiple legal claims demanding $4 billion in compensation for Frontier and other assets nationalized by the Congolese government.

In January this year First Quantum agreed to turn over all its prior mineral rights to ENRC for $1.25 billion. ENRC had already bought rights to the giant Kolwezi tailings project for $175 million and purchased CAMEC, yet another Congolese company that owned a half share in the SMKK copper and cobalt mine.

But exactly who paid whom how much for mining rights in the Congo is up for debate. “ENRC’s purchase of its stake in Kolwezi was structured through a deal between itself and at least seven companies registered in the British Virgin Islands, all connected to Dan Gertler,” states a Global Witness fact sheet. “When ENRC bought the remaining 50 per cent stake in SMKK, it purchased it from another British Virgin Islands company linked to Mr Gertler. Even ENRC’s acquisition of CAMEC involved sale purchase agreements with several offshore companies linked to Dan Gertler which held shares in CAMEC.”

Gertler, an Israeli diamond merchant, has been doing business in Congo for over a decade, working first with Laurent-Désiré Kabila, the former president of the Congo, and now with his son, Joseph Kabila, the current president.

“The nature of these deals raises serious questions about whether corrupt Congolese officials could be benefitting from Congo’s considerable mineral wealth at the expense of the Congolese people,” says Balint-Kurti. “Global Witness has been calling for ENRC to publish the full results of an external audit into its dealings in Congo, conducted by the law firm Dechert.”

It is certainly not the first time Gertler and the Kabila clan have been linked. A lawsuit filed in Israel by Yossi Kamisa, a former Israeli fighter who worked for Gertler, says that the diamond tycoon had offered the elder Kabila military aid to the Congolese army in 2000.

“At the time, the Second Congo War (1998-2003) was raging - one of the most brutal conflicts in the history of the African continent, involving eight countries, dozens of guerrilla organizations and a horrific human toll that included large-scale rape and even cannibalism,” write Gidi Weitz, Uri Blau and Yotam Feldman in Haaretz newspaper. “This did not deter Gertler from realizing his plan to penetrate the lucrative diamond market in the DRC.”

Kamisa’s lawsuit charges that he “witnessed Gertler's method of operation, involving paying considerable sums of money as bribery to different individuals in the Congo government ... all in order to pave the way to a meeting with the president of Congo and to improve the terms of the future agreement that was to be struck between him and the state.”

Gertler denied these allegations, calling them vengeful and baseless, says the newspaper.

Nomura CEO Resigns Over Insider Trading Scandal

Posted by Pratap Chatterjee on July 26th, 2012
CorpWatch Blog
Photo: MJ/TR (´・ω・) Used under Creative Commons license.

Kenichi Watanabe and Takumi Shibata, the CEO and chief operating officer of Nomura, have resigned to take responsibility for several recent insider trading scandals at the Japanese multinational conglomerate. The company, which once was once the world’s largest securities firms with holdings of $76 billion in 1987, is now valued at $12.3 billion.

"It is difficult at this stage to numerically estimate the possible damage,” Junko Nakagawa, chief financial officer of Nomura. “All we want to do is make efforts to regain trust."

In 2010 Nomura underwrote new share offerings for Inpex (an oil and natural gas exploration company), Mizuho Financial Group (one of Japan’s largest banks) and Tokyo Electric Power Company. Such offerings typically have an impact on share prices, so any advance knowledge of such plans allows traders to cash in.

Nomura employees allegedly secretly told a First New York Securities fund manager about the plans for the Tokyo Electric Power Company allowing the manager to take out a “short position” days before the utility company made a share offering in September 2010. First New York Securities made 7.2 million yen ($85,000 at the time) profit as a result.

Likewise Nomura employees gave out nonpublic information on Mizuho and Inpex to fund managers at Chuo Mitsui Asset Trust (now called Sumitomo Mitsui Trust Bank, Japan's biggest trust bank). Chuo sold Inpex holdings a higher price on behalf of foreign investors and bought them back a lower price to make a profit of ¥10 million ($119,000).

In March 2012, Japanese regulators handed out a fine of 8,000 yen (about $600). “The amount was so tiny—it would cover the cost of a fancy dinner for four in a Tokyo restaurant—that some critics questioned whether it would have any deterrent effect,” scoffed the Wall Street Journal at the time.

Japan's Securities and Exchange Surveillance Commission (SESC) has historically been fairly timid in imposing fines on insider trading. All told it has levied just ¥268 million ($3.2 million) in fines for 121 cases of insider trading since 2005. By comparison the Financial Services Authority in the UK imposed a £59.5 million fine (($93.5 million) on Barclays bank in June for fixing rates and the Securities and Exchange Commission levied a $550 million fine on Goldman Sachs in 2010 for the misleading investors on subprime mortgages.

Despite the small fines, the scandal has had a huge impact on Nomura. The Journal reports that Nomura has been dropped from underwriting deals for at least eight Japanese companies including one to act as joint global coordinator for a $6 billion share issue by Japan Airlines, expected to the biggest deal of the year. The company also says its profits for the second quarter have plunged 90 percent.

The scandal on insider trading in Japan may widen, as the SESC is investigating several other firms. Tadahiro Matsushita, the Japanese financial services minister, has asked 12 top brokers in Japan to submit reports by early August on how they handled nonpublic information.

The scandal at Nomura is also just one of a wave of global scandals in recent months that have shone an welcome light on seamier side of the financial industry. Robert Diamond resigned as CEO of Barclays bank earlier this month following a scandal on rigging global interest rates. The Securities and Exchange Commission (SEC) has fined Goldman Sachs researchers for passing on stock tips to investment bankers and traders while a recent a New York Times investigation has uncovered a questionable new phenomenon that suggests that some of the biggest brokerage firms in the U.S. “appear to be giving a handful of top hedge funds an early peek at … research analysts’ views — allowing them to trade on the information before other investors get the word.”

HSBC Bank Apologizes for Laundering Mexican Drug Cartel Money

Posted by Pratap Chatterjee on July 20th, 2012
CorpWatch Blog
HSBC protest in Hong Kong. Photo by twak. Used under Creative Commons license. Photo of David Bagley testifying at the Permanent Subcommittee on Investigations taken from official video feed.

HSBC, one of the world’s largest banks, has been accused of laundering money for Mexican drug cartels. At a hearing conducted by the U.S. Senate earlier this week, David Bagley, HSBC's head of compliance, apologized and resigned.

"I recognize that there have been some significant areas of failure. Despite the best efforts and intentions of many dedicated professionals, HSBC has fallen short of our own expectations and the expectations of our regulators," Bagley told the U.S. Senate Permanent Subcommittee on Investigations.

HSBC traces its origins back to the Hong Kong Shanghai Banking Corporation that was set up in 1865. Today it is one of the largest financial institutions in the world, with over $2.5 trillion in assets, 89 million customers, 300,000 employees, and 2011 profits of nearly $22 billion. The CEO is still based in Hong Kong but the bank is run out of London.

In 2002, HSBC bought up a Mexican bank named Banco Internacional, S.A. from Grupo Financiero Bital, S.A. de C.V. “A pre-purchase review disclosed that the bank had no functioning compliance program, despite operating in a country confronting both drug trafficking and money laundering,” noted a report prepared for the U.S. Senate. “It opened accounts for high risk clients, including Mexican casas de cambios and U.S. money service businesses, such as Casa de Cambio Puebla and Sigue Corporation which later legal proceedings showed had laundered funds from illegal drug sales in the United States.”

HSBC officials, however, treated the new Mexican unit as low risk. Paul Thurston, chief executive of retail banking and wealth management, who was dispatched to Mexico in 2007 to look into the matter, told Congress that he was "horrified" by what he found. "I should add that the external environment in Mexico was as challenging as any I had ever experienced. Bank employees faced very real risks of being targeted for bribery, extortion, and kidnapping – in fact, multiple kidnappings occurred throughout my tenure," he said.

Other HSBC staff also raised the alarm. “The AML (anti-money laundering) Committee just can’t keep rubber-stamping unacceptable risks merely because someone on the business side writes a nice letter. It needs to take a firmer stand. It needs some cojones. We have seen this movie before, and it ends badly,” wrote John Root, a senior HSBC Group Compliance expert, wrote in an email to Ramon Garcia, the compliance director in Mexico, on July 17, 2007.

All told, the Senate report estimates that HSBC’s Mexican affiliate transported $7 billion in physical dollars to the U.S. between 2007 and 2008 alone, outstripping other Mexican banks, even one twice its size. One Cayman islands subsidiary set up by the Mexican division of HSBC handled 50,000 client accounts and $2.1 billion in deposits, but neither staff nor offices. (Pro-Publica has a nice annotated summary of the 335 page report here.)

“Due to poor AML controls, HBUS exposed the United States to Mexican drug money, suspicious travelers cheques, bearer share corporations, and rogue jurisdictions,” said Senator Carl Levin of Michigan, the chairman of the subcommittee. “If an international bank won’t police its own affiliates to stop illicit money, the regulatory agencies should consider whether to revoke the charter of the U.S. bank being used to aid and abet that illicit money.”

While Bagley was taking the bullet, his former boss, Lord Stephen Green, who was chief executive of HSBC between 2003 and 2006 and chairman until 2010, has been avoiding calls to testify. An ordained priest and the author of a book titled "Serving God? Serving Mammon?" he is now the UK Trade minister.

“No one should raise questions about Mr Green's integrity. Au contraire. The cerebral businessman and part-time preacher turned minister isn't the type to play silly games with regulators,” wrote James Moore, the deputy business editor of the Independent newspaper. “But he does have questions to answer. Such as whether time spent on books would have been better spent on business. Or whether he was just asleep at the wheel.”

Barclays Bank Fine Reveals Global Rate Setting Scandal

Posted by Pratap Chatterjee on July 6th, 2012
CorpWatch Blog
Photo: Alex Milan Tracy. alexmilantracy.com

A record £290 million ($450 million) fine for fixing rates at which banks lend to each other has been levied on Barclays bank in the UK by U.S. and U.K. authorities. The scandal has forced Bob Diamond, the Barclays CEO who had ignored activist protests over his sky-high $28 million salary, to resign on Tuesday.

Perhaps even more importantly, the scandal has shone a light into how banks set – and manipulate - rates at which $360 trillion in international deposits are loaned out every day. While most of these loans are overnight transfers between banks, they affect the price of consumer loans like mortgages, car loans and credit card loans.

Minos Zombanakis, a Greek banker who worked at Manufacturers Hanover Trust, invented a system in 1969 to estimate “market” rates for lending money when he was asked to work on a $80 million loan to Iran. “We had to fix a rate, so I called up all the banks and asked them to send to me by 11 a.m. their cost of money,” he told the New York Times. “We got the rates, I made an average of them all and I named it the London interbank offer rate.”

In subsequent years, the British Bankers Association took on the daily task of setting “LIBOR” rates for as many as 150 different kinds of loans. These BBA-determined rates are now considered the global benchmark says Donald MacKenzie, a sociologist at the University of Edinburgh, who wrote a fascinating article in 2008 about how they are set.

“This can now be done on-screen, but – especially if large sums are involved or market conditions are tricky and changing rapidly – it’s often better to use the ‘voicebox’. This is a combination of microphone, speaker and switches that instantly connects each broker by a dedicated phone line to each of his clients in banks’ dealing rooms.”

“A broker needs to pass information to his clients as well as to receive it: that’s a major part of what they want from him, and a good reason to use the voicebox rather than the screen. The brokers’ code of conduct prohibits passing on private knowledge of what a named bank is trying to do (unless a client is about to borrow from it or lend to it), but that restriction leaves plenty of room for brokers to tell traders what has just happened and to convey the ‘feel’ of the market.”

What Barclays brokers did was to claim that they could borrow money more cheaply than anyone else to mask their financial problems. “This is a big deal,” writes Dylan Matthews in the Washington Post. “Remember that JP Morgan scandal a few months back? That was mostly JP Morgan hurting itself. The LIBOR scandal was Barclay’s making money by hurting you.”

Matthews goes on to add: “The direct effect for consumers here was to make loans cheaper, but the indirect effect, or the intended one at least, was to lessen chances of government action against the banks.”

For example, one trader is reported to have told a Barclays employee: "Coffees will be coming your way either way, just to say thank you for your help in the past few weeks". The reply came back: "Done, for you big boy."

Public speculation that the rates were being fixed date back to at least 2007. Libor rates could “be manipulated if contributor banks collude or if a sufficient number change their behaviour” concluded a 2008 study by the Bank for International Settlements. So did a paper published on the Social Science Research Network which found evidence of “questionable patterns.”

Heads are continuing to roll. Marcus Agius, the chairman of the British Bankers’ Association, resigned Monday over the scandal. By coincidence, or perhaps not, Agius was also chairman of Barclays.

But that may not be enough, say some. “(T)oday’s leaders must be for finance but against banking behemoths. The instruments of finance, from risk models to derivatives, are useful when used responsibly,” concludes Sebastian Mallaby in the Financial Times. “But the structure of modern finance – vast institutions that borrow cheaply because taxpayers are on the hook to save them – is an abomination that must stop.”

Whale Wars: Hedge Funds Rob Banks, and the Poor Suffer Most

Posted by Pratap Chatterjee on May 30th, 2012
CorpWatch Blog
Jamie Dimon cartoon: DonkeyHotey. $100 bills. Photo: Adam Kuban. Used under Creative Commons license.

Boaz Weinstein took as much as $2 billion from Jamie Dimon and Bruno Iksil. That is to say a hedge fund named Saba Capital Management in New York bet against the London office of an investment bank named JP Morgan and won. These men - known as “whales” because of the size of their bets in the financial markets – have triggered a major outcry over the lack of regulation of Wall Street, mostly because of the $2 billion loss by JP Morgan, a public company and bank.

“(I)t’s not O.K. for banks to take the kinds of risks that are acceptable for individuals, because when banks take on too much risk they put the whole economy in jeopardy — unless they can count on being bailed out,” wrote an outraged Paul Krugman, a Nobel Prize winning economist.

Wonderful sentiments, but what about when these banks make huge profits? Are they supporting the economy then? Or are they also taking money from some one else on those occasions?

Certainly hedge funds – a secretive group of financiers – often make a killing, though sometimes they lose their shirts. Much of the money is made in ways that are very hard to understand, but in simple words: by stealing legally from the rich like the investment banks, but also from the working class and the poor. (They don’t discriminate)

Here’s an extreme example: George Soros, the hedge fund billionaire, bet against Asian currencies in 1997 and plunged the region into crisis. Millions lost their jobs, major riots ensued, and entire countries went into severe recession. Soros argues - with some accuracy – that the governments were to be blamed for their economic policies that led to artificial currency rates but the fact of the matter is he took advantage of it to make a lot of money for himself.

Here’s a more common example: Splunk, a data company, recently went public at $17 a share. A month later the stock had doubled to $35. The banks and hedge funds who bought the shares initially are happy because they can sell now and make a tidy profit, but it means that the company raised only half the money it wanted. Still that’s the way the world works and the financial community loves it. (Thanks, Joe Nocera, for that example)

Wall Street was not as happy when Facebook also recently went public at $38 and then the price dropped. Facebook walked off with extra money but many of the institutional buyers were the ones who lost out. (Perhaps Wall Street should have been less critical of a 28 year old with a hoodie who outsmarted them. He didn’t need a sharp suit to take their money away from them)

Now back to the hedge funds robbing the banks. Weinstein noticed that Iksil (known as the London Whale) was making large bets on credit derivatives that didn’t make sense and he bet against him. Weinstein, according to a recent New York Times profile who had himself lost $2 billion at Deutsche Bank when doing whale-sized bets, recognized the problem and moved quickly to profit out of it.

So who cares? One rich bank lost money to a rich hedge fund. Surely that is a zero sum game: They swap mansions and yachts, their partners swap diamonds and butlers, and it makes no difference to the rest of us. Or does it?

One of the biggest problems is that the world of finance is that it is actually awash in cash. And the owners of that cash want to make even more cash. “(C)orporate money has been flooding into JPMorgan, as companies pull their money out of eurozone banks,” notes Gillian Tett at the Financial Times who says that roughly $2 trillion is available for investment at any given time. “Somehow you have to stash that money in an incredibly safe place, but also produce some returns. So where do you put it? In Treasuries, which carry negative real returns and are becoming riskier by the day? In eurozone bonds or corporate credit? Or can you find something else, without creating new risk?”

Remember also that even in these lean times, the titans of the hedge fund world are still mostly minting money: Raymond Dalio of Bridgewater Associates was paid an estimated $3 billion in 2011, Carl Icahn of Icahn Capital Management earned $2 billion. The top European hedge fund manager in 2011 was Alan Howard of Brevan Howard Asset Management, who earned $400 million last year. All told, the 40 highest paid hedge fund managers were paid a combined $13.2 billion in 2011, according to a Forbes magazine survey.

Same with the banks and CEOs.

Where did this money come from if the world economy is in a recession?

Well, the simple answer is that every day, both the banks and the hedge funds are taking little chunks of our money, although not in the extreme way that Soros did in Indonesia back in 1997. Higher interest rates; lower wages by moving factories; buying up farmland etc. etc.

The good news about the Jamie Dimon/JP Morgan debacle is that the U.S. Congress is taking notice about money being used rashly and may force the banks to make some changes. “We had too many regulators, too many gaps and too much overlap…we added more,” Jamie Dimon told a U.S. Chamber of Commerce conference in Washington in 2011. “It’s even more complicated now.” (See here for a video compilation)

Dimon’s remarks are being used to roast him now and it’s high time. We need better regulation of both banks and hedge funds. One important reform is to make sure that investment banks and regular banks are separated. If the rich want to trade mansions, they can do so. But the investment banks and hedge funds should not be bailed out. And if they want to take money from the rest of us, they need to be kept in check.

Unfortunately that may be the opposite of what happens. As the Washington Post’s Dana Milbank notes: “The trading scandal at JPMorgan highlighted the urgent need for tougher regulation of Wall Street, but (Alabama Congressman’s) Shelby’s harangue was part of a larger effort to use the scandal as justification to repeal regulations.”

Bailing out Germany: The Story Behind the European Financial Crisis

Posted by Pratap Chatterjee on May 28th, 2012
CorpWatch Blog
Translation: The Rich Get Richer. Stop Poverty Wages! (Photo of Blocupy poster: linkskreativ. Photo of Euro: Slolee. Used under Creative Commons license)

Bankia, Spain’s fourth largest bank, asked the government for a €19 billion ($24 billion) bail out on Friday night.  Four Greek banks - Alpha Bank, Bank of Piraeus, Eurobank and National Bank of Greece – were together given €18 billion ($23 billion) from their government last week also.

The sudden economic crash in several southern European countries: Greece, Italy, Portugal and Spain as well as Ireland (sometime called the PIIGS, a rather dubious and perjorative name); is commonly blamed on lazy workers, a bloated social security system and unwise borrowings by greedy governments. This is why lenders like the European Central Bank (ECB) and the International Monetary Fund (IMF) are now asking these governments to cut social spending (austerity measures) and pay ever higher interest rates, despite the fact that only serves to make the situation worse.

"As far as Athens is concerned, I … think about all those people who are trying to escape tax all the time. All these people in Greece who are trying to escape tax," Christian Lagarde, the French head of the IMF told the Guardian.

In reality, a large chunk of the bailouts are for debts created by private banks in Greece, Ireland, Italy, Portugal and Spain borrowing abroad – for speculative real estate schemes and such like - not by shopkeepers, small entrepreneurs and ordinary citizens. And a surprisingly big chunk of the rash loans were handed out by private (and some public) banks in just four countries: France, Germany, the UK and Belgium (in that order).

Peter Böfinger, an economic advisor to the German government, put his finger on it when he told Der Spiegel last year: “[The bailouts] are first and foremost not about the problem countries but about our own banks, which hold high amounts of credit there.”

Let’s dig a little deeper. First were all the borrowing countries wildly spendthrift? Here are some very instructive numbers: before 2008, the Irish and Spanish governments had borrowed less than Belgium, France, Germany and the UK. The Irish owed owed roughly 25 percent of gross domestic product (GDP) in 2007, the Spaniards owed 36 percent. Meanwhile the Belgians had borrowed 84 percent, the French and German government had taken out 65 percent while the UK was at 44 percent. The Portugese were at about 65 percent – same as the Germans – and Greece and Italy admittedly were at over 100 percent.

The BBC’s Laurence Knight notes “Madrid was in the process of paying its debts off - it earned more in tax revenues than its total spending. In contrast, Berlin regularly broke the maximum annual borrowing level laid down in the Maastricht Treaty of three percent of GDP.” Interestingly, so did France and the UK (the latter isn’t bound by the treaty).

Second, who was lending the money that is now so difficult to pay back? After all it takes two to tango, as they say. Borrowers and lenders share in the risk and the blame.

Well, Bloomberg took a look at statistics from the Bank for International Settlements and worked out that German banks loaned out a staggering $704 billion to Greece, Ireland, Italy, Portugal and Spain before December 2009. Two of Germany’s largest private banks - Commerzbank and Deutsche Bank – together loaned $201 billion to Greece, Ireland, Italy, Portugal and Spain, according to numbers compiled by BusinessInsider. And BNP Paribas and Credit Agricole of France loaned $477 billion to Greece, Ireland, Italy, Portugal and Spain.

How much of these loans were to the government? The Economist has some interesting numbers  – just $36 billion went to the governments of Greece, Portugal and Spain. The rest was loaned out by banks like Munich based Hypo Real Estate that distributed over $104 billion for property schemes.

(For more details the BBC has an excellent graphic tool that shows which country was borrowing from whom: Spain’s biggest creditor is Germany at €131.7 billion ($171.2 billion) and Portugal’s biggest creditor is also Germany €26.6 billion ($34.6 billion). The Greeks owed most to France at €41.4 billion ($53.8 billion).

Finally, who profits out of this? Well, the German banks have since taken their money out: Bloomberg estimates that $590 billion was taken back after December 2009. But the debt remains so that is why the borrowing countries are forced to go to lenders like the ECB which in turn is getting it from the Bundesbank (the German central bank). The German government only has to pay an interest rate of 1.42 percent to borrow money for 10 year bonds, apparently the lowest they have ever paid. (The French are also doing fine at 2.42 percent)

The ECB money comes with strings attached – severe austerity. It is true the borrowing countries don’t have to take these conditional loans, they can also borrow at market rates but this can be very expensive: they have to pay between 5.5 percent (Italy) to an astronomical 30 percent (Greece) in interest for 10 year bonds.

“The euro-zone crisis is often framed as a bailout that rich, responsible countries like Germany have extended to poor, irresponsible countries like Greece,” writes Ezra Klein in the Washington Post.

In reality this crisis is at least partly (perhaps mostly) the fault of the banks in the wealthy countries like France and Germany and it is these banks that have really been bailed out by the ECB and the IMF.

The Indignados in Madrid, Blockupy in Frankfurt and Occupy Wall Street have it right.

Budweiser's Buddies in Brussels

Posted by Pratap Chatterjee on May 16th, 2012
CorpWatch Blog
Jean-Luc Deheane. Photo: European Movement Belgium. Used under Creative Commons license

“This Bud’s for you,” is a popular Budweiser ad jingle. Apparently Jean-Luc Dehaene, a Member of the European Parliament from Belgium, takes it personally, since he recently accepted shares worth $4.2 million in the company that makes the beer. What’s remarkable is that he forgot to mention this as a potential conflict of interest.

Dehaene is a former prime minister of Belgium and now a Member of the European Parliament. In this position, he has the ability to vote on regulations on the European food and drink industry, including the brewery sector.

When Dehaene served on the board of Anheuser Busch InBev – a Belgian company which manufactured and sold $39 billion worth of goods last year including Budweiser, Stella Artois and Beck’s beer – he was given stock options worth as much as €3 million. He left the board in March 2011 and as of April 30th is now able to cash in.

Yet Dehaene has failed to mention the shares in his official declaration of interests which he filed on February 12 of this year, despite the official rules that state that “a conflict of interest exists where a Member of the European Parliament has a personal interest that could improperly influence the performance of his or her duties as a Member.”

In a letter issued Tuesday and addressed to Martin Schulz, the president of the European Parliament, four activist groups – Corporate Europe Observatory, Friends of the Earth Europe, Lobby Control and SpinWatch – drew attention to this discrepancy. They write: “How will the parliamentary authorities guarantee that proper safeguards are put in place to avoid potential situations of conflict of interest in this particular case?”

Dehaene has come under scrutiny in the past as chairman of Dexia bank, which was bought up by the Belgian government for €4 billion euros ($5.4 billion) last October when it was on the verge of collapse because of its purchases of Greek government bonds and U.S. sub-prime mortgages. Dehaene refunded his compensation from the company to prevent any appearance of impropriety although he “signaled” that he did not wish to resign from his position.

“Jean-Luc Dehaene and Pierre Mariani, the chief executive officer, are responsible for the fiasco at Dexia,” Paul de Grauwe, a member of the economic advisory group to Jose Manuel Barroso, president of the European Commission, told the Mail on Sunday. “It is dangerous to speculate, to gamble with the money of ordinary citizens. The big problem is that Dexia abandoned traditional banking and started speculating to earn more. That ended miserably.”

“Known as ‘the plumber’ during his time as Prime Minister of Belgium, due to his ability to resolve crises, this time he appears to have drilled through the main standpipe,” commented the Mail.

Dehaene was also heavily criticized as prime minister for ordering the retreat of Belgian troops in Rwanda in 1993 just prior to the mass slaughter of the minority Tutsis.

A number of MEPs have recently come under close scrutiny for conflicts of interest after four of their number agreed to put forward “amendments” for fictitous clients in exchange for cash, by a team of reporters at the Sunday Times newspaper.

You send me the amendment and what your client wants to change. Yes?” Ernst Strasser, former Austrian interior minister, told the reporters. “Of course I’m a lobbyist, yes, and I’m open for that, yes?” Strasser was forced to resign after the report was published.

Under a new code of conduct, approved last December, the politicians are now expected to list potential conflicts of interest that amount to over €5,000 a year. There is no law against such conflicts, however, and several have been discovered.

For example EuroPolitics notes that Klaus-Heiner Lehne, earns over €10,000 as a lawyer and partner at international law firm Taylor Wessing, while he chairs the  Committee on Legal Affairs. Elmar Brok, who earns between €5,001 and €10,000 per month as an advisor at Bertelsmann AG, the media conglomerate,  is chair of the Committee on Foreign Affairs.

That’s small beer compared to what Dehaene might make from selling his Anheuser Busch InBev stock.

Hedge Funds Handed New Loophole to Make Money

Posted by Pratap Chatterjee on May 7th, 2012
CorpWatch Blog
$100 bills. Photo: Adam Kuban. Used under Creative Commons license

Hedge funds, a publicity-shy sector of the financial industry where the super wealthy invest their money in the hope of making above-average profits, were just handed an opportunity to make even more money under a new law signed by President Barack Obama. Consumer advocates say that unsophisticated investors may be at risk as a result.

Most U.S. investment funds are regulated under the Securities Exchange Act of 1934 and the Investment Company Act of 1940 which restrict how much the fund managers are paid and what they do in order to protect naïve investors. Many hedge funds are designed to get around these restrictions by raising money from a select few sophisticated investors.

For example, big hedge funds seek “qualified purchasers” – who have at least $5 million in money – who are exempt from these restrictions under section 3(c)(7) of the 1940 Securities Exchange Act. Smaller hedge funds seek as many as 100 “accredited investors” - those with a net worth of over $1 million (not including their houses) or a minimum annual income of $200,000 (or $300,000 for married couples) – under the 3(c)(1) of the Investment Company Act of 1940.

Like any other exclusive club for the wealthy, hedge funds tend to be very secretive. Some of this is the law: “private placements” of securities are banned from advertising publicly but also because companies with less than 500 shareholders are exempt from publishing annual reports under the Securities Exchange Act of 1934.

In “More Money Than God: Hedge Funds and the Making of a New Elite” Sebastian Mallaby estimates that the hedge funds make some 11 percent profit, more than double other investment vehicles. This allows fund managers to ask for higher fees than regular bankers – typically they take between one and four percent of the investment every year as well as between 10 and 50 percent of profits in return for attempting to beat the stock market.

Some hedge fund managers mint money:  Raymond Dalio of Bridgewater Associates was paid an estimated $3 billion in 2011, Carl Icahn of Icahn Capital Management earned $2 billion. The top European hedge fund manager in 2011 was Alan Howard of Brevan Howard Asset Management, who earned $400 million last year. All told, the 40 highest paid hedge fund managers were paid a combined $13.2 billion in 2011, according to a Forbes magazine survey.

Under the Jumpstart Our Business Startups (JOBS) Act, signed into law by Obama on April 5, 2012, the threshold for publishing annual reports has been raised to 2,000. It also allows hedge funds to conduct “general advertising” although specifics will have to be spelt out by the Securities and Exchange Commission (SEC) within 90 days.

Barbara Roper, director of investor protection at Consumer Federation of America told Reuters that she was worried that hedge funds might exploit unwary people. “Accredited investors are not necessarily sophisticated investors,” she said. “It will do more harm than good.”

Writing in the Financial Times Robert Pozen, a senior lecturer at Harvard Business School and Theresa Hamacher, president of the National Investment Company Service Association, recommend that the SEC should take two specific steps to protect these smaller investors. “First, it should update the definition of accredited investor, which was established 30 years ago, in 1982. To be a realistic proxy for sophistication in the present age, accredited investors should have an annual income of $600,000 and net worth of at least $3m, again excluding their home.

“Second, the SEC should establish uniform standards for reporting performance by hedge funds. Because reporting hedge fund returns is voluntary, managers can hide the performance of a poorly performing fund—either by not reporting it or by closing down the fund. As a result, the average reported return of hedge funds is overstated by more than three percentage points per year, according to several studies.”

The SEC, for its part, says it is intent on cleaning up the industry with the help of data that hedge funds have to provide under new disclosure rules enacted into law by the Dodd-Frank Act of 2010. "Pick your fraud of the day and the question is, 'Can we extract information from this data system together with the other databases we have access to and home in on problems before they do damage?'" Robert Plaze, deputy director in the division of investment management for the Securities and Exchange Commission, told the Wall Street Journal.

Bribing Mexico: Walmart Accused of Corruption

Posted by Pratap Chatterjee on April 21st, 2012
CorpWatch Blog
Wal-Mart: The High Cost of Low Price movie poster

Eduardo Castro-Wright, the former CEO of Walmart Stores USA, has been accused of leading a $24 million scheme to pay off Mexican city governments in return for permission to open supermarkets around the country.

Walmart, based in Bentonville, Arkansas, runs giant discount retail stores that sell consumer goods at rock bottom prices. It has grown to become the world’s largest private employer with 2011 sales of $421.85 billion.

Company bosses turned a blind eye to the scheme of Mexican bribes (called “gestores” in Mexico) when informed about it in 2005, according to an investigation just published in the New York Times.  Michael T. Duke, now Walmart’s CEO, was also informed at the time but did nothing.

Castro-Wright was described by Forbes magazine at the time as “one of the sharpest executives in the land watching over his 3,250 U.S. stores” in a fawning write-up in January 2006.

The Texas A&M graduate took over the Mexico operations in 2002. Over the next four years, Forbes cited his ability to grow Walmart’s Mexican business by slashing “prices and expenses, squeez(ing) suppliers” and a “knack for public relations … when merchants protested the construction of a Wal-Mex store near an archaeological site.”

The magazine did not mention bribes.

In reality, the company grew quickly mostly because of a bribery scheme that was run by Sergio Cicero Zapata, a former executive, according to the New York Times investigation. Cicero, who was in charge of obtaining construction permits for the new stores, called the scheme “the dark side of the moon.”

The money was typically paid out to local governments via two of Cicero’s friends from law school: Pablo Alegria Con Alonso and Jose Manuel Aguirre Juarez. These bribes “bought zoning approvals, reductions in environmental impact fees and the allegiance of neighborhood leaders” according to the New York Times. “Permits that typically took months to process magically materialized in days.” The “gestores” helped catapult Walmart into becoming the largest employer in the country with 209,000 workers.

Cicero blew the whistle in September 2005 when he felt he was not promoted fast enough. When H. Lee Scott Jr. - then Walmart’s CEO - was informed, he covered up the matter and “rebuked internal investigators for being overly aggressive.”

José Luis Rodríguezmacedo Rivera, the general counsel of Wal-Mart de Mexico, who allegedly authorized the bribes, was hired to investigate the matter. Not surprisingly he found his colleagues innocent.

Castro-Wright left Mexico in late 2005 and returned to the U.S. The bribes stopped. But instead of being suspended or fired, Castro-Wright was promoted to vice-chairman of Walmart in 2008.

Paying bribes anywhere in the world is illegal for U.S. companies under the Foreign Corrupt Practices Act and Walmart is required to inform the Department of Justice of any violation. Walmart did not do this until December 2011, six years later, when it learned of the New York Times investigation

Walmart has not denied the charges. In a press release issued as soon as the New York Times article came out, David Tovar, Walmart's vice president of corporate communications says: "Many of the alleged activities in The New York Times article are more than six years old. If these allegations are true, it is not a reflection of who we are or what we stand for. We are deeply concerned by these allegations and are working aggressively to determine what happened."

None of Walmart’s aggressive expansion tactics in Mexico will come as a total surprise to activists in the U.S. like Food & Water Watch and the Institute for Local Self-Reliance (ILSR). The two groups issued a new report last week titled “Top 10 Ways Walmart Fails on Sustainability.”

“Walmart … forces smaller farmers and companies to get big or get out of business,” said Wenonah Hauter, executive director of Food & Water Watch. The activists noted that the company added 1,100 new stores in the U.S. since 2005, ignoring environmental objections, such as paving over land with endangered species.

Walmart has also been accused of “greenwashing” –  a tactic by which companies “preserve and expand their markets by posing as friends of the environment and enemies of poverty.”

In 2005 Walmart hired public relations advisers and teamed up with the Environmental Defense Fund (EDF) in 2005, an NGO that has a history of working with big business.

With the help of EDF, the company released a report last week that touted numbers such as a claim that Walmart had kept “80.9 percent of all waste generated by our U.S. operations out of landfills. This has the potential to prevent 11.8 million metric tons of CO2 emissions annually.”

In reality, the company’s energy use has increased greenhouse gas emissions by 14 percent since 2005. In fact Food & Water Watch and ILSR note that barely one percent of Walmart’s Chinese suppliers have actually implemented waste reduction programs; that most of its products are so shoddy that they actually increase waste; that the company only sources four percent of its energy from renewable sources (other retailers like Whole Foods are already at 100 percent)

Bribery and greenwashing do make a business grow more quickly, after all.

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