Cuomo planning fraud lawsuit against auditor in Lehman collapse

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New York attorney general Andrew Cuomo is reportedly planning on filing a lawsuit alleging securities fraud against accounting firm Ernst & Young in connection with the Lehman Brothers bankruptcy, the first such action against a major accounting firm for its role in the credit crisis.

E&Y has been under investigation for its role in standing by, while Lehman used certain tactics to temporarily shift debt of its balance sheet. A report issued in March by bankruptcy examiner Anton Valukas provided details of the scheme, called Repo 105, which was used to move about $50 billion in loans off its balance sheet, shortly before the firm collapsed.

The move was intended to show investors and regulators that the firm wasn’t carrying too much debt. The Repo 105 transactions were sale and repurchase agreements, meaning that Lehman was obligated to buy them back, increasing it liabilities again. At the time, Lehman classified the repos as securities sales.

“The balance sheet manipulation was intentional, for deceptive appearances,” Valukas concluded. He called Repo 105 “window dressing” and an “accounting gimmick” and said that E&Y had breached its “professional standards” by helping downplay the firm’s liabilities. Valukas predicted that  E&Y could face legal action over the transaction.

The report also pointed to a letter written by Mathew Lee, an accounting executive and a 14-year Lehman employee. In May 2008, Lee wrote that he was worried about the bank’s use of Repo 105; the bank collapsed four months later.

Harvey Miller, Lehman’s lead bankruptcy attorney said the Valukas report was “the spark that ignited” Cuomo’s interest in bringing a lawsuit.

Legal experts say that prosecutors may try to single out individual auditors rather than file a massive lawsuit against the accounting firm. The last time the government did so was in connection with the Enron collapse in 2001; the world’s largest accounting firm then, Arthur Andersen LLP, collapsed as well in its wake, leaving only four major accounting firms to handle audits of major companies in the U.S.

Lehman, once the fourth-largest investment bank, went under in September 2008, and set off a chain reaction in global financial markets.

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NYC employee timekeeping project used to funnel $80 million in bogus billings to consultants

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In what appears to be a combination of rampant fraud, and a gross failure to monitor a city-managed accounting project, the cost of a new automated employee timekeeping system has soared to over $700 million from its initial estimate of $63 million, and is at least six months behind schedule.

Earlier this year, Mayor Michael Bloomberg, called the CityTime program, which was supposed to save money by automating and consolidating employee time records, a “disaster.” Now it’s clear why the project was spinning out of control.

On Wednesday, federal prosecutors in New York filed criminal charges against the consultants involved in overseeing the project, claiming they used the CityTime project to steal $80 million in a long-running fraud and kickback scheme.

The alleged ringleader of the operation, Mark Mazer, was accused of funneling $76 million of contract monies to Dmitry Aronshtein, said to be a relative, and Victor Natanzon. Together with another co-conspirator, Scott Berger, the group submitted phony timesheets and contracts supporting the bogus payments.

Prosecutors say the fraud was initiated by Mazer who was hired by the city to supervise quality assurance on the project. Mazer was paid $4.4 million by the city to help coordinate the project. Mazer’s wife, Svetlana, and his mother, Larisa Medzon, received kickbacks from Aronshtein and Natanzon totaling $24.5 million, through a series of shell companies that were set up to look like legitimate vendors.

The fraud started to unravel when the city’s Department of Investigation learned in June that a CityTime consultant was being paid by an unauthorized company, DA Solutions, instead of the prime contractor, Science Applications International, according to court papers. DA Solutions was traced back to Aronshtein.

Another unauthorized company, Prime View, owned by Natanzon, was found to have also paid a number of consultants. Both Prime View and DA Solutions were hired by Mazer.  Even though Mazer was a subcontractor, he had substantial authority in the city’s department handling the project and was able to approve contracts and billings of consultants.

U.S. Attorney Preet Bharara pointed out the irony that “a project intended to prevent payroll waste, fraud and abuse was allegedly bilked in part by fraudulent timekeeping.”

The city official responsible for overseeing the project is Joel Bondy, executive director of the city’s Office of Payroll Administration. Before coming to work for the city in 2004, Bondy worked for Spherion, the company that hired Mazer and Berger on the project.

At a City Council meeting last year, Bondy praised the two men saying they “have proven themselves in the past and currently to be highly capable and competent in their jobs. The reason they are working in these positions is because of that competency.”

Bondy did not respond to requests for comments after news of the arrests were made.

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Rangel officially gets censured, back to business as usual

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Charles Rangel has now become the 23rd member of the U.S. House of Representatives in the nation’s history to be censured for misconduct.

The vote by the full House on Thursday was 333-79, and punished him by censure for failing to pay income taxes on a rental property, using his office to raise monies for a college center named in his honor, and accepting a rent-subsidized apartment in Manhattan from a developer who had official business with a committee led by the congressman.

The vote was expected in the matter, which consumed $2 million in legal costs and two years of his attention, and was recommended by a special panel in a trial two weeks ago that Rangel walked out on after asking for a delay so that he could raise more money for a legal defense fund.

Aside from the public reprimand, Rangel has evaded being charged with any crime for his wrongdoings. “I am at rest with myself, and I am convinced that when history of this has been written that people will recognize that the vote for censure was a very, very, very political vote,” Rangel said.

The Associated Press

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House Ethics Committee Urges Censure for Rangel

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House Ethics Committee voted to censure him

The House ethics committee has recommended by a vote of 9-1, that Representative Charles B. Rangel (D-N.Y.) be censured for unethical misconduct after a two-year inquiry into a number of alleged illegal activities. A censure is just one disciplinary step away from expulsion. A full vote in the House on the matter is the next step in the disciplinary process, and is expected to occur after the Thanksgiving recess.

Rangel was under investigation for tax evasion resulting from his failure to pay income taxes on rentals from a vacation home, using his Congressional office as a fundraising hub for a college center named after him, and illegally occupying a rent controlled apartment owned by a developer who had business dealings in Congress with Rangel. Read more

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Auto Czar Settles with SEC for $6.2 Million over Kickback Scheme

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Got Caught in New York State Pension Fund Kickback Scheme

The former Obama administration official charged with overseeing the restructuring of the auto industry has agreed to settle with the SEC on kickback charges involving New York state pension funds. Under the terms of the settlement, Steven L. Rattner has agreed to pay a fine of $6.2 million for violating the Martin Act, a state securities law.

Rattner was accused of paying Hank Morris, an aide to former state comptroller Alan G. Hevesi, for his help in securing business from the $135 billion fund. Morris pleaded guilty earlier this month to providing illegal access to the fund.

Rattner’s former firm, Quadrangle Group, settled with authorities in April over hiring Morris to get access to the pension fund. The firm paid the SEC a penalty of $12 million and, as part of its settlement, acknowledged Rattner’s actions were “inappropriate, wrong and unethical.” A lawyer for Rattner disputed the wording of the firm’s acknowledgement.

The SEC also charged Rattner with providing special favors to the brother of a senior pension fund official. The brother, a Hollywood producer, was helped by Rattner in securing distribution of a low-budget film called Chooch, through a DVD company owned by Quadrangle. Rattner also helped the brother secure a deal with IFC, a cable outlet partly owned by Quadrangle. Rattner was also a member of IFC’s board of directors.

Officials also accused Rattner of funneling $50,000 in campaign contributions to Hevesi’s reelection campaign for state comptroller through third parties to conceal the true identity of the donor. After making the illegal donations, Quadrangle’s state pension monies under management increased from $100 million to $150 million.

In a separate action Thursday, New York attorney general and governor-elect Andrew Cuomo sued Rattner over the same activities, seeking at least $26 million in fines and a lifetime ban from the New York securities industry. Rattner had been in settlement discussions with the attorney general’s office, and last month rejected a settlement offer of $20 million from Cuomo.

“While settling with the SEC begins the process of putting this matter behind me, I will not be bullied simply because the Attorney General’s office prefers political considerations instead of a reasoned assessment of the facts,” Mr. Rattner said in a statement. “This episode is the first time during 35 years in business that anyone has questioned my ethics or integrity—and I certainly did not violate the Martin Act. That’s why I intend to clear my name by defending myself vigorously against this politically-motivated lawsuit.”

Before founding Quadrangle, Rattner was a reporter for The New York Times and went on to become an investment banker for Lazard in New York. When he was appointed to the auto czar post in February 2009, he listed his net worth on federal disclosure firms as between $188 million and $608 million.

Wall Street Journal

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Rangel Found Guilty of 11 Ethics Violations

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A House panel found Rep. Charles B. Range (D-N.Y.) guilty on 11 counts of ethics violations, including failing to pay income taxes on a house he owned in the Dominican Republic, using his congressional office to raise monies for a college center named in his honor, and accepting a rent-subsidized apartment in Manhattan from a developer who had official business with a committee led by the congressman.

The quick decision comes only a day after the trial began which was marked by Rangel’s absence, due to a falling out with his attorneys over his mounting legal costs. Rangel asked for a delay in the case so that he could put together a legal defense fund, but panel members moved ahead.

The matter now moves to the House ethics committee for action. It is expected that Rangel will receive a public reprimand. The 80-year-old Rangel was just reelected for another term, and has been a House member since 1971. In 2007 he became the chairman of the powerful House Ways and Means Committee, a position from which he has since resigned.

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Rangel Walks Out On Own Corruption Hearing

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Rangel and Lawyers Split, and So Did He

After pleading with a House panel to delay his long-awaited trial on corruption charges, Rep. Charles B. Rangel (D-N.Y.) abruptly left the proceedings after he told the House ethics committee that he needed more time to raise monies for his legal defense, since his legal reps quit last month.

Rangel’s troubles began in 2008 amid reports that he failed to file reports on assets, failed to pay income taxes on rental property, violated rent-control laws on his housing in New York, and used his congressional office to raise funds for a college building named in his honor. The House Committee on Standards of Official Conduct charged him in July with 13 counts of ethics violations.

The trial was the first of its kind since 2002. The committee conducted a 21- month investigation including the interview of at least 50 witnesses. The last time the committee had independently investigated charges and held hearings on lawmaker misconduct was in 1987, making the current proceedings a high-profile event.

Rangel and his law firm, Zuckerman Spaeder LLP, parted ways in October during the final preparation work for the trail. The lawyers had already been paid $1.4 million but reportedly quit when advised that Rangel had depleted his campaign accounts and was not prepared to use to personal assets to pay for his defense.

As a member of Congress, Rangel could not accept pro bono defense work from a law firm, since it would be considered a gift, which would be illegal. Rangel asked the committee for more time so that he could launch a legal defense campaign, but the committee decided that it had already been delayed enough.

Since Rangel will not be presenting a defense to the charges, a verdict from the committee is likely to be forthcoming quickly. If he is found guilty, observers say the harshest punishment may only be a public reprimand. While some critics have asked for Rangel’s resignation from Congress, he has already issued a statement the he will refuse to resign.

Wall Street Journal

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