December 5, 2023

Italian Tax Police Seize Documents From JPMorgan in Milan

The arrival of the police at the central Milan office of the U.S. bank came two days after Italian prosecutors moved to seize as much as €1.95 billion, or $2.55 billion, from Nomura, the largest broker in Japan.

“The tax police are here to acquire documents, and we are handing them over to them,” Giorgio Perroni, a lawyer for the U.S. investment bank, told reporters. JPMorgan has repeatedly denied any wrongdoing, and a person close to the investigation said the U.S. bank was not itself under investigation.

“They have given the documents that were asked for, they are cooperating,” the person said.

JPMorgan helped Monte dei Paschi finance its €9 billion purchase in 2007 of a rival, Banca Antonveneta, through a €1 billion hybrid bond.

JPMorgan is also one of the foreign banks, along with Nomura and Deutsche Bank, that entered into derivatives deals that imposed huge losses on Monte dei Paschi after the Antonveneta deal. Nomura and Deutsche also deny wrongdoing.

The Italian authorities have said Monte dei Paschi was brought to the verge of collapse by overpaying for Antonveneta and making bad trades with foreign banks, in deals that were often hidden from regulators and intended to camouflage losses.

Prosecutors are investigating whether the missteps, which forced the government to bail out the 500-year-old bank with a €4 billion loan, were the result of fraud or kickbacks paid under former Monte dei Paschi management.

Two people involved in the investigation said Thursday that prosecutors in Siena had asked the tax police to visit JPMorgan’s offices in central Milan to seek documents relating to Monte dei Paschi’s acquisition of Antonveneta.

Italy is seeking the help of other European countries to carry out its seizure of cash from Nomura, with assets held in accounts at other banks in Frankfurt and London.

Prosecutors said their goal is to block Monte dei Paschi from losing more money to Nomura in connection with a deal called “Alexandria,” a bet on Italian government bonds that were made more costly by an interest rate swap that became unfavorable when rates fell. Monte dei Paschi has posted losses of €730 million from bad derivatives deals.

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The Agenda: Fraud and Loopholes Deliver Small-Business Contracts to Big Firms

The Agenda

How small-business issues are shaping politics and policy.

It’s been a busy season for combating fraud in government contracts for small business, for prosecutors enforcing the law as well as the legislators trying to improve it. But for both, it appears to be an uphill battle.

In June, the federal government charged two men with creating a fake small business to win a $100 million Defense Department contract. Two months later, a businessman pleaded guilty to obtaining to false citizenship papers, which he used to get a security clearance from the Department of Defense so that he could receive preferential small-business contracts.

In October, one man pleaded guilty to a scheme in which he and a partner vouched for the small-business status of each other’s company. That, in turn, led the Justice Department to uncover an alleged ring of bribery and kickbacks centered at Eyak Technology, or EyakTek, nominally a small business based in Virginia with a $1 billion contract to provide information and security technology to government agencies. An indictment announced on Oct. 4 claims that the company’s contracting director conspired with officials in the Army Corps of Engineers to steer federal purchases to an unnamed subcontractor. That subcontractor then inflated its bills — by $20 million, according to the indictment — and used part of the proceeds to pay off the Eyak and Army Corps officials.

The federal government is the world’s largest buyer of goods and service, and it is supposed to make sure that 23 percent of those purchases go to small businesses. In the case of economically disadvantaged businesses, government agencies can often set aside contracts and award them without putting them up for a competitive bid. The government perennially misses those goals, but most observers believe that the amount of small-business contracts the government does report masks a share that have in fact been diverted to larger companies. Fraud is an important, though unquantified, culprit.

Observers say government officials in charge of procurement are often too busy to look closely at a company’s small-business credentials. But the Small Business Administration’s inspector general, Peggy E. Gustafson, testifying in a Congressional hearing last week, said that her agency often did not effectively oversee the contracting programs and did not aggressively pursue companies that misrepresented themselves as small. The S.B.A., Ms. Gustafson said in her prepared statement, “needs to change its culture so that employees understand that their mission includes not only assisting small businesses but also ensuring accountability and integrity to prevent fraudulent and improper actions from depriving procurement opportunities for legitimate firms.”

Ms. Gustafson also said that despite the recent legal victories, seeking justice in a courtroom was difficult because a company that fraudulently identifies itself as small in order to win a federal contract usually fulfills the contract. “Without an associated and definable loss to the government, criminal prosecutors are sometimes reluctant to pursue action against these companies, or if they do pursue them, may only be able to obtain limited sentences,” she said.

That is not the case in the EyakTek case, where the government allegedly paid for the conspirators’ BMWs, first-class airfares and Cartier watches. But while the company itself was not implicated in wrongdoing — charges were only brought against its head of contracting — the allegations surrounding EyakTek raised other troubling questions about small-business contracting, because the company had a legally sanctioned leg up in the competition for small-business contracts. Eyak is what’s known as an Alaska Native Corporation, and with that designation, it is able to compete for contracts set aside for companies that participate in the S.B.A.’s 8(a) program. This is a program intended to help small, disadvantaged businesses — particularly those owned by minorities — by providing business training coupled with opportunities for no-bid contracts set aside just for them.

In the 1970s, Congress made Alaska Native Corporations a special class of 8(a) business. Unlike most businesses in the program, the Alaskan companies are not subject to a limit to the size of a no-bid contract. And while a typical 8(a) business must be managed by someone who meets the program’s definition of disadvantaged, that’s not the case with Alaska Native Corporations, which  tend to recruit executives with broad and deep ties across government agencies and pay handsomely for their experience.

These features have made Alaska Native Corporations very popular with government bureaucrats because they offer an easy way to meet small-business quotas. In 2009, according to the S.B.A.’s inspector general, Alaskan firms took in 26 percent of total 8(a) contract dollars. EyakTek and other subsidiaries of the Eyak Corporation together took in at least $338 million, according to a search of the federal contracting records performed by the American Small Business League, which lobbies for integrity in small-business contracting. (If a native company gets too big to participate in the program, the parent corporation can simply create a new company — another advantage not afforded other program participants.)

Any effort to change the rules for Alaskan companies is likely to meet stiff resistance in Congress. (Alaska’s representative, Don Young, is the second-ranked Republican in the House in terms of seniority and the sixth most senior of all representatives.)

Surprisingly, even trying to pass legislation to curb fraud is more difficult than one might expect. In her testimony, Ms. Gustafson proposed measures to make it easier to prosecute fraud and stiffen penalties for conviction, in part by defining a loss to the government as equal to the size of the contract.

A bill containing these provisions has passed the Senate, but Rep. Sam Graves, the chairman of the House Small Business Committee, faulted the Senate bill for, among other things, not including an exemption for honest errors. “The small-business affiliation rules are complex and are not intuitive, so I’m hesitant to potentially trigger jail time for companies that make a mistake,” he said in an interview with VetLikeMe, a newsletter for business owners who are wounded veterans, “although I agree that we need to more vigorously enforce the certification rules.” The House has not yet taken up the Senate bill.

Mr. Graves also expressed skepticism about a separate House bill, introduced last month, that would exclude the subsidiaries of publicly traded companies from the definition of a small-business contractor. The law already requires that recipients of small-business contracts must be independently owned and operated, but a American Small Business League spokesman, Brian Reeder, said a clarification was necessary. “Common sense says that independently owned means not publicly traded,” he said, “yet publicly traded companies and their subsidiaries receive contracts that government agencies put towards their small business goals.”

The bill was introduced by Rep. Hank Johnson, a Georgia Democrat, with support from 16 other Democrats. No Republicans sponsored the legislation, and Mr. Graves, the Small Business Committee chairman, opposes the bill “because it places further restrictions on how a small business can be organized and the source of its investment,” said a spokesman, Darrell Jordan. “At a time of record unemployment, Chairman Graves wants to support measures that help small businesses grow.”

Opposition to Mr. Johnson’s measure isn’t strictly partisan. The Georgia congressman introduced an identical bill last year, while Democrats were in charge. It died in committee.

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Drug Makers’ Feared Enemy Turns Tables as Their Lawyer

He racked up numerous convictions and mega-settlements in nearly a quarter-century, using whistle-blowers and secret grand juries to pressure major pharmaceutical and health companies into ending illegal practices like kickbacks to doctors and misuse of blockbuster drugs.

Once described as a cross between a firebrand preacher and a charismatic litigator, Mr. Loucks burnished a reputation aptly captured in a Fortune magazine headline: “Why Do Drug Companies Fear This Man? Maybe because he’s declared all-out war on cheats in the drug industry.”

But a year and a half ago, Mr. Loucks, a Republican, left the United States attorney’s office in Boston after he was passed over for the top post and President Obama appointed a Democrat. Instead, Mr. Loucks joined Skadden, Arps last July, and has startled former allies by emerging in recent months as zealous a corporate defender as he was a prosecutor, complete with proposals seeking more lenient treatment for the medical companies he once vilified.

In a six-page memo last month to clients in his portfolio, which may include some of the very same corporations he prosecuted repeatedly, Mr. Loucks bemoaned strategies he had embraced.

“The government and the whistle-blower have an advantage,” he wrote, complaining that federal investigators were now using the law unfairly. “While prosecutors often assert the company has engaged in ‘serious’ misconduct, they keep the company in the dark, often for years, as to the specific allegations.”

Those who have known him are quick to recall that his crowning achievement was a $2.3 billion settlement against Pfizer that capped a four-year secret investigation.

“We’re all disappointed that he’s gone over to the dark side because it seemed that he was a good prosecutor,” said Shelley R. Slade, a whistle-blowers’ lawyer in Washington and a former senior counsel for health care fraud at the Justice Department.

“I looked upon it with sadness,” Patrick Burns, spokesman for the whistle-blower advocacy group Taxpayers Against Fraud, said of Mr. Loucks’ change. “He’s a good and honorable person. He did great work in the Boston office. He’s a good lawyer. It’s just too bad.”

Federal ethics rules prohibited Mr. Loucks from any dealings with the United States attorney’s office in Boston for a year after his resignation, and he can never be involved in cases he investigated directly. But he is not barred from representing clients he once prosecuted on other matters, and his law firm’s roster includes some of the biggest companies he once investigated, including Pfizer, Merck, Schering-Plough, Bristol-Myers Squibb and Medtronic.

He defends his newfound friendship with former foes, and notes that he’s still wearing cowboy boots native to his Oklahoma childhood even though he’s now working in the white-collar division of a prestigious law firm.

“While everyone calls it ‘the other side,’ I’m doing the same thing I’ve always done, which is zealously representing my clients,” he said.

And while he used to call some of those people’s actions “evil,” today he argues that drug and medical device companies are making strides in complying with federal billing, fraud and kickback laws. “They make products that have huge benefits to a number of people,” he said. Skadden, a 2,000-lawyer firm, has made several hires in recent years to amplify its health care practice.

In interviews and a lengthy e-mail exchange, Mr. Loucks said his views on the whistle-blower law had evolved.

The False Claims Act, with its triple damages, has been the government’s most powerful weapon against health care fraud since Congress in 1986 increased the rewards for whistle-blowers. Since then, taxpayers have recovered an estimated $28 billion from drug and medical companies.

As a federal prosecutor in Boston, Mr. Loucks created a health care fraud unit and used the law, as well as the tools of secrecy and surprise, to reap major awards. The unit’s victories are renowned, starting with an $875 million payment in 2001 by TAP Pharmaceuticals. Whistle-blowers shared $95 million in that case, alerting companies and informants to the stakes involved.

For years, Mr. Loucks has argued that whistle-blowers are paid far too much in health care fraud cases — bounties up to 30 percent, totaling $650 million in just the last two years, he said. These people would blow the whistle for much less money, he argued both inside the prosecutor’s office and more recently in a paper titled “the Great American Giveaway.” While that hostility toward what he considers the greed of some whistle-blowers is old news, Mr. Loucks’ views on unsealing their complaints are new.

In his May 12 memo to clients, Mr. Loucks urged some companies to press judges to unseal complaints more quickly. That way, he says, they can learn the scope of complaints sooner, identify witnesses and fight back harder.

“If Mike was still with the Justice Department, he could give you 10 reasons why this is a bad idea,” said Suzanne E. Durrell, a whistle-blowers’ lawyer in Boston who worked with Mr. Loucks for a decade when she was chief of the civil division for the United States attorney in Massachusetts.

Mr. Loucks says more openness would let companies clean up their own acts, even if it meant adverse publicity.

He points to new statistics that he says support his argument. The Justice Department reported to Congress that 885 False Claims Act cases involving health care fraud were pending under seal at the beginning of this year, with only about 200 prosecutors to juggle them. On average, a case was sealed for more than a year, and some much longer.

“That the government doesn’t have adequate resources to handle the cases is not a good cause to keep them under seal,” Mr. Loucks said in an interview, comparing it to a sports game where only one team is allowed to try to score. In these cases, that would now be his former team.

“I knew what I was doing on behalf of the government,” he said. “I don’t know if lawyers on the other side felt they were not able to adequately represent their clients while the case was under seal.”

Nicholas C. Theodorou, chairman of Foley Hoag’s business crimes defense group in Boston, said Mr. Loucks’ argument made sense from a corporate defense standpoint, and possibly would sit well with some federal judges who have questioned why cases remain under seal so long.

For his part, Mr. Loucks uses a baseball reference to explain his switching sides. Johnny Damon left his beloved Boston Red Sox in late 2005 to sign with “the evil empire, the New York Yankees,” Mr. Loucks said. Both teams won World Series with help from Mr. Damon.

Asked whether the “evil empire” analogy fit the Justice Department or Skadden, Mr. Loucks said, “One man’s evil empire is another’s home team.”

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UBS to Pay $160 Million to Settle Bid-Rigging Claims

WASHINGTON (AP) — The Swiss banking giant UBS has agreed to pay $160 million to resolve accusations of rigging the bidding process to win investment business from cities and towns in 36 states.

Federal and state officials announced the settlements Wednesday. The Justice Department said that UBS had admitted and had accepted responsibility for illegal, anticompetitive conduct by former employees from 2001 through 2006.

The local governments were looking to invest their proceeds from municipal bond sales. The former UBS employees manipulated the bidding process and at times paid kickbacks to bidding agents who collect proposals for government business, the Justice Department and the Securities and Exchange Commission said.

The $160 million is being paid as restitution and penalties to federal and state agencies. Because UBS admitted to the conduct and cooperated, it will nott being prosecuted.

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