DOJ and SEC – Aggressive Measures on Coronavirus Fraud

The Department of Justice (DOJ) and the Securities and Exchange Commission (SEC) have taken legal actions to combat fraud arising out of the COVID-19 health emergency.

DOJ Restraining Order

On March 23, 2020, the U.S. District Court for the Western Division of Texas issued a temporary restraining order to halt a predatory wire fraud scheme related to coronavirus treatment sales. The DOJ brought charges, pursuant to 18 U.S.C. § 1345, which permits the government to enjoin an ongoing fraud to prevent irreparable harm to the public.

In the case, United States of America v. John Doe a/k/a “coronavirusmedicalkit.com,” the government alleges that persons operating the website published statements fraudulently claiming that the World Health Organization is giving free away vaccination kits to immunize people from the COVID-19 outbreak. The website required visitors to enter credit card information and pay a $4.95 shipping fee to receive the free vaccine. The government alleged, “[t]he purpose of the website is to induce victims to pay Doe and those working in concert with him or her $4.95 for such non-existent kits, and/or to obtain credit card and other personal information from victims for purposes of engaging in fraudulent purchases and identity.”

Attorney General William Barr has signaled that coronavirus fraud is a top priority of the Justice Department. Federal prosecutors in United States v. Doe echoed this statement, warning

the Department of Justice will not tolerate criminal exploitation of this national emergency for personal gain. We will use every resource at the government’s disposal to act quickly to shut down these most despicable of scammers, whether they are defrauding consumers, committing identity theft, or delivering malware.

Deputy Attorney General Jeffrey A. Rosen recently sent a memo to all U.S. Attorneys directing them to appoint a COVID-19 Fraud Coordinator to “serve as the legal counsel for the federal judicial district on matters relating to the COVID-19, direct the prosecution of COVID-19 related crimes, and to conduct outreach and awareness activities.” The national Fraud Coordinator is establishing a web portal for all U.S. Attorneys to coordinate COVID-19 fraud litigation with 16 other federal agencies.

SEC Action

Another concern in this enforcement climate is the risk of publicly traded companies being used as “bait” in a time of pandemic by “pump and dump” fraudsters, according to recent guidance by the SEC. In such a scheme, scammers use targeted web advertising and other means to publish spurious rumors about a company to temporarily inflate the price of its stock. The SEC monitors this activity closely and can halt securities trading it believes may be artificially inflated by false rumors that a company is offering products that could help consumers during the COVID-19 pandemic. Companies will want to beef up internal monitoring to make sure that they are not being used in these schemes, and should also be cautious about making statements related to their ability to intervene in the pandemic. The government recently halted trading of several biotech firms. In one case, the SEC issued a halt on common shares trading of a pharmaceutical company when the company issued press releases suggesting that it had acquired a stockpile of N-95 medical masks.

In another case, a biotech company’s common shares trading was suspended when publically accessible information suggested that the company had acquired an international licensing agreement for a coronavirus cure. In addition, at least one medical equipment company appears to have been the victim of a pump and dump scheme; in halting trading, the SEC said that third party promoters disseminated statements about the viability of the company’s ability to treat or cure COVID-19.

Medicare Fraud

Medicare fraud cases related to COVID-19 also appear to be on the rise. In United States v. Erik Santos federal agents arrested a Georgia man who allegedly received kickbacks for referring patients for COVID-19 testing who were unlikely to test positive, but on whom an additional battery of respiratory tests could also be conducted and then billed to Medicare. Federal prosecutors noted that the crime was especially serious due to the shortage of COVID-19 testing.

List of Best Practices to Avoid Fraud

In addition, DOJ published a list of best practices individuals can follow to avoid falling victim to a predatory scheme during this unprecedented crisis. DOJ, SEC, and other agencies will continue to prioritize enforcement initiatives to prevent public fraud during this time. Aligned with the government’s guidance, businesses should encourage their employees to remain vigilant and follow internal protocols on reporting suspected fraudulent activity and/or suspicious phishing or other electronic solicitations. Given the unique nature of these crimes during this uncertain climate, it is also recommended that companies monitor and enforce employee compliance with policies and procedures, and assess internal controls for potential weaknesses. Effective compliance begins with understanding the enforcement environment and the risks particular to the company’s activities. Companies must be prudent and take appropriate steps to avoid negative impact to their business stemming from criminals seeking to exploit national emergencies.

Special Appearance Denied In Sanctions Criminal Case

By Kevin McCart and Dimitar Georgiev on April 7, 2020 Posted in Department of Justice, OFAC, US Department of Justice

A New York federal judge recently held that a foreign bank could not challenge U.S. federal criminal jurisdiction prior to arraignment.

US Allegation

Halkbank is a Turkish majority state-owned bank. The United States alleged that Halkbank developed an illicit scheme comprised “of fraudulent transactions intended to deceive U.S. regulators and foreign banks” through which the bank transferred $20 billion to Iran in violation of U.S. sanctions on Iran. Specifically, the government has charged that the Bank used Iranian oil proceeds to purchase gold and masked transactions to fall within the “humanitarian exception” of the sanctions regime. The effect of the scheme was to create a pool of funds in Turkey and the United Arab Emirates, which Iran used to make international payments in U.S. dollars, and which payments passed undetected through the foreign banks and ultimately the U.S. financial system, in violation of U.S. sanctions.

Special Appearance Requested

Halkbank sought a special appearance to challenge the court’s criminal personal jurisdiction because “the Bank’s incidental contacts with the U.S. [were] insufficient to establish either general or specific personal jurisdiction over the Bank.” Halkbank framed the issue as one of first impression within the Second Circuit: “whether [a federal court] has personal jurisdiction in a criminal case over . . . a foreign entity with no physical operations in the U.S.”

Minimum Contacts Doctrine

The Supreme Court created the minimum contacts doctrine in International Shoe, when the Court stated that to subject a non-resident defendant to a court’s personal jurisdiction “due process requires only that . . . he have certain minimum contacts with [the jurisdiction] such that the maintenance of the suit does not offend ‘traditional notions of fair play and substantial justice.’” In the context of foreign corporations, the Court held in Asahi that there needs to be a “substantial connection” between the defendant and the forum state, and that this “substantial connection” “must come about by an action of the defendant purposefully directed toward the forum State.” The Court exemplified this by stating that “[a]dditional conduct of the defendant may indicate an intent or purpose to serve the market in the forum State, for example, designing the product for the market . . ., advertising . . . , establishing channels for providing regular advice to customers . . . , or marketing the product through a distributor . . . .”

District Court Denial

In December, District Judge Richard Berman denied Halkbank’s request to make a special appearance, finding “no evidence of a longstanding historical practice of allowing special appearances in criminal cases.” The judge based his decision on 18 USC § 3231, which provides federal courts with original jurisdiction to try offences against the laws of the United States, and the amendments to Federal Rule of Criminal Procedure 4(c)(3)(D), which now provides for service on organizations “by any means that gives notice.” Thus, according to Judge Berman, “[w]hile minimum contacts challenges may be appropriate in civil cases, such challenges do not apply to criminal matters.” Instead, he ruled that the only requirement for a federal court to exercise jurisdiction in a criminal case is that a “party . . . appears before it, regardless of how his appearance was obtained.” Last month, the Second Circuit denied Halkbank’s Petition for a Writ of Mandamus, ruling that Halkbank had “not demonstrated that it lacks an adequate, alternative means of obtaining relief . . . .” In so holding, the Second concluded that “challenges to [subject matter and personal] jurisdiction may be fully vindicated on appeal from a final judgment.”

Judge Berman did not decide Halkbank’s jurisdictional claims on the merits. To the contrary, he ruled that Halkbank was entitled to litigate jurisdiction following arraignment. Indeed, according to multiple press reports, Halkbank’s lawyers stressed that the bank agreed to be arraigned only after it had been assured that do so would not result in a waiver of its right to challenge the court’s jurisdiction.

Possible Challenge to Extraterritorial Application

Judge Berman also recognized that Halkbank might challenge the extraterritorial application of the federal statutes charged, which he likewise did not address. As we have written in the past, the US government has increasingly sought to expand the extraterritorial application of federal criminal statutes, including the International Emergency Economic Powers Act (IEEPA), the primary U.S. sanctions law, often utilizing novel and untested legal theories. The Second Circuit recently held that the question of extraterritoriality is a merits question and “not an issue related to the court’s [personal] jurisdiction.” Thus, Judge Berman concluded, the bank must first appear and be arraigned—which it did when it pleaded not guilty to all counts at a March 31^st telephonic hearing—before challenging the extraterritorial application of the federal statutes charged in the indictment, which is far from a foregone conclusion.

Whistleblowers Watch Stimulus Money From Inside

By Joseph Walker, Rebecca Worthington, Thomas Zeno and Kristina Arianina on April 5, 2020 Posted in Fraud, Whistleblowing

Whistleblowers watch from inside when a business receives stimulus money. Whistleblowers, with their unique access to business operations, follow the money to learn whether the business abides by the strings attached to that money. Whistleblowers look for an opportunity to cash in on what they consider fraudulent conduct. What’s a business to do?

DOJ, FTC Pledge 7-Day Evaluation of Competitor Collaborations

By Barry Pupkin on April 2, 2020 Posted in antitrust, Department of Justice, Federal Trade Commission

handshake business meeting Information about an expedited procedure for obtaining guidance about the permissibility of certain collaborations between competitors, which have the effect of protecting Americans’ health and safety, was set forth in a joint statement issued March 24, 2020, by the US Department of Justice (DOJ) and the US Federal Trade Commission (FTC) (the Statement). The Statement makes clear that such procompetitive collaborations are permissible.

Barry Pupkin, a senior partner in our Competition-Antitrust Practice in Washington, takes a closer look at the guidance in a recent client alert.

Watchdogs Will Be Watching

By Margaret Daum, Clark Ervin, Joseph Walker and Kristina Arianina on April 1, 2020 Posted in COVID-19, Department of Justice, Fraud, U.S. Securities and Exchange Commission

healthcare money With governments around the world injecting trillions of dollars into the global economy to prevent a financial catastrophe, the first priority for companies is to figure out how to take advantage of the various stimulus packages to save themselves. This is not the time to take the money and run, however. Continue Reading

DOJ Civil Division Highlights False Claims Act Priorities for 2020

By David Maria and Trevor Garmey on March 30, 2020 Posted in Department of Justice, False Claims Act (FCA), US Department of Justice

Joseph “Jody” Hunt, Assistant Attorney General for the Civil Division, provided a glimpse of current civil enforcement priorities of the Department of Justice (DOJ). Speaking at the Federal Bar Association’s annual Qui Tam Conference on February 27, 2020, Hunt pledged that DOJ would pursue qui tam cases involving nursing homes, Medicare Advantage plans, and electronic health records. In this article, we provide a concise summary of these remarks, and discuss the implications for companies operating in this space.

Market Integrity Amid COVID-19 Pandemic

By Elizabeth Weil Shaw, Stacy Fresch (Forensic Risk Alliance) and Jenna Voss (Forensic Risk Alliance) on March 26, 2020 Posted in coronavirus, COVID-19, U.S. Securities and Exchange Commission

coronavirus cell render While the world and markets are reeling, dealing with and adapting to the COVID-19 pandemic, the Securities & Exchange Commission’s (SEC’s) Division of Enforcement wants companies and individuals to know that it’s business as usual at the SEC.

This week, Stephanie Avakian and Steven Peikin, Co-Directors of the SEC’s Enforcement Division, issued a statement regarding the enduring importance of market integrity and compliance. While acknowledging the dynamic circumstances, the statement “emphasize[d] the importance of maintaining market integrity and following corporate controls and procedures.”

In particular, the statement warns that the Enforcement Division is on the lookout for an increase in insider trading. As companies respond to the COVID-19 pandemic, a larger number of corporate insiders may have access to valuable “material nonpublic information.” Moreover, if earnings reports or other SEC disclosures are delayed due to the coronavirus, those insiders must refrain from sharing that material nonpublic information longer than usual. The SEC warned that those with such access must remain mindful of their obligations to keep this information confidential and to refrain from trading on it, in violation of the antifraud provisions of the federal securities laws.

Regardless of the impact of the COVID-19 on any given business, public companies must be “mindful of their established disclosures controls and procedures, insider trading prohibitions, codes of ethics, and Regulation FD and selective disclosure prohibitions.” Similarly, broker-dealers and other must comply with policies and procedures designed to prevent the misuse of material non-public information.

The cautionary statement concludes with a commitment by the Enforcement Division to dedicate “substantial resources” to ensuring that “investors are not victims of fraud” and to “maintaining confidence in the fairness and integrity of the markets.” Put simply, the SEC does not view the COVID-19 pandemic as an invitation to shirk compliance, ethics and disclosure obligations.

Jenna Voss and Stacy Fresch, both partners at Forensic Risk Alliance, contributed to this blog.

Recent Developments in AML/CTF Initiatives

By Rebecca Worthington on March 16, 2020 Posted in anti-money laundering, anti-terrorism financing laws, US Treasury

Financial institutions and other relevant entities should take notice of two recent developments in anti-money laundering and counter-terrorism financing initiatives. First, European Union member states had to transpose the EU’s Fifth Anti-Money Laundering Directive by January 10, 2020—that is, member states had to implement certain rules into their respective national legislations by that date. Second, in February the U.S. Department of Treasury issued its 2020 National Strategy for Combating Terrorist and Other Illicit Financing.

International Sweep Against Elder Fraud

By Thomas Zeno on March 10, 2020 Posted in Fraud, US Department of Justice

The US Department of Justice (DOJ) swept up more than 400 defendants for committing fraud against elder citizens this month. The sweep crossed international boundaries as DOJ attacked fraud against elders conducted by “transnational criminal organizations.” The sweep is part of DOJ’s overall attack against the five subtypes of elder abuse.

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Judge Tosses FCPA Jury Verdict

By Chase Goldstein, Elizabeth Weil Shaw and Thomas Zeno on February 27, 2020 Posted in Anti-corruption, anti-money laundering, bribery, Department of Justice, FCPA Jurisdiction, Foreign Corrupt Practices Act, Foreign Corrupt Practices Act (FCPA), US Department of Justice

On February 26, 2020, Judge Janet Bond Arterton, a federal judge for the District of Connecticut, overturned a former Alstom SA executive’s conviction under the Foreign Corrupt Practices Act (FCPA) relating to a project to build power plants in Indonesia. Judge Arterton found that, despite a jury verdict to the contrary, prosecutors failed to prove that Lawrence Hoskins, a British national who never set foot in the United States, was an agent of Alstom SA’s U.S. subsidiary subjecting him to liability under the FCPA. This case has been closely watched for its implications on Department of Justice’s (DOJ’s) and Securities & Exchange Commission’s (SEC’s) — the US regulators that enforce the FCPA — prosecutorial and extraterritorial reach.

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