Enforcement actions by criminal and supervisory authorities are settled regularly. In light of these developments, companies are advised to take appropriate measures. This month we highlight some notable settlements that were reached in the US in August and September. The Department of Justice entered into a settlement with two Missouri healthcare clinics which allegedly submitted false claims to the Medicare program. The Securities and Exchange Commission settled with Citigroup Global Markets, which was accused of failing to implement adequate compliance programmes for preventing misuse of non-public information. The Office of Foreign Assets Control reached a settlement with a marine insurer which allegedly covered insurance claims related to sanctioned countries. In addition, auditor BDO USA paid a fine of USD 1.5 million and an additional USD 600,000 disgorgement to the SEC for failing to respond adequately to red flags during its General Employment Enterprises audit.

Mercy Health Springfield Communities and Mercy Clinic Springfield Communities

On 13 August 2015, Mercy Health Springfield Communities and Mercy Clinic Springfield Communities settled alleged violations of the False Claims Act by paying USD 5.5 million to the US government. The settlement centred on two Southwest Missouri health care providers which allegedly submitted false claims to the Medicare program for services rendered to patients. The patients were allegedly referred by physicians who, in turn, received a bonus. Federal law prohibits financial relationships where doctors refer patients to hospitals. A physician employed by Mercy Clinic Springfield Communities initiated the investigation; the physician will receive USD 825,000 from the amount recovered. Under the False Claims Act, private citizens can sue on behalf of the government for false claims and share in any recovery.

Citigroup Global Markets Inc.

The SEC announced on 19 August 2015 that Citigroup Global Markets Inc. (CGMI) had agreed to pay USD 15 million to settle charges of alleged failure to implement adequate compliance and surveillance mechanisms for preventing and detecting misuse of non-public information. CGMI also allegedly failed to implement a policy and procedural framework for preventing and detecting principal transactions conducted by an affiliate. The Securities Exchange Act of 1934 requires brokers and dealers to create policies preventing the misuse of material non-public information, as well as a procedural framework to enforce these policies. The Investment Advisers Act of 1940 requires registered investment advisors to implement policies and procedures necessary for the detection and prevention of principal transaction execution through affiliates. Although CGMI did implement policies to comply with these statutory requirements, the SEC deemed them inadequate. CGMI did not adhere to these policies and was therefore unable to detect that it had inadvertently routed more than 467,000 transactions on behalf of advisory clients to an affiliated market maker between 2002 and 2012, according to the SEC order. During the ten-year period, CGMI reviewed trades on a daily basis using electronically generated reports, but relied on a report that was unable to capture the principal transactions through this affiliate. CMGI voluntarily donated its total profits from the principal transactions (a sum of USD 2.5 million) to the advisory clients who were affected by the misuse of the information. At CGMI’s request and in addition to the penalty, a consultant will review CGMI’s trade surveillance and advisory account order and handling routes to recommend improvements to the system.

Navigators Insurance Company

On 6 August 2015, the OFAC announced a settlement of USD 271,815 with Navigator Insurance Company, which specialises in marine insurance and related lines of business, regarding potential civil liability for 48 alleged violations of several OFAC regulations. According to the OFAC, Navigator had provided global protection and indemnity (P&I) insurance policies covering North Korean vessels and had covered potential incidents in or relating to Cuba, Sudan and Iran for three years (2008 until 2011). The company provided 24 P&I insurance policies to North Korean vessels, collecting over USD 1 million in insurance premiums; covered eleven claims related to Iran; five claims related to Sudan and one incident involving a Cuban national.

In setting the fine, the OFAC took into account that the managers and supervisors knew or should have known that most of the policies and payments made involved OFAC-sanctioned countries. Also, Navigator did not have a formal OFAC compliance programme in place and had insufficient knowledge of OFAC sanctions which led the company’s UK branch to misinterpret the regulation. On the other hand, the voluntary self-disclosure of the apparent violations and that all information was provided in a responsive manner resulted in mitigation of the fine.

The settlement shows that insurers and reinsurers should take adequate measures to integrate OFAC regulations into their compliance procedures. 

BDO USA

BDO USA, a US audit firm, was charged by the SEC on 9 September 2015 for dismissing red flags, and issuing false and misleading, unqualified audit opinions for staffing service company General Employment Enterprises (GEE).  BDO admitted wrongdoing and agreed to pay a USD 1.5 million penalty and a USD 600,000 disgorgement of the audit fees and interest.

GEE had informed BDO in the final phase of the audit that USD 2.3 million was supposedly invested in a 90-day non-renewable certificate of deposit which was not repaid by the bank in time. According to a bank employee, there was no record of a certificate of deposit being purchased from the bank. The USD 2.3 million represented approximately half of the company’s assets and substantially all of its cash. BDO submitted questions to company management and board members about these events and, not having received a clear answer on why USD 2.3 million had gone missing, it demanded an independent investigation. Remarkably, this demand was then withdrawn without any obvious reason. Instead of performing an investigation, BDO issued unqualified opinions on the financial statements included in General Employment’s annual reports of 2009 and 2010.

Five of BDO’s partners were also charged for their roles in the audits. Furthermore, charges of fraud were brought against the former chairman of the board and majority shareholder of the company. The five partners did not admit or deny the SEC’s findings, but did agree to being suspended from practicing public company accounting for varying periods. Three partners agreed to pay USD 10,000. The other two partners paid USD 30,000 and USD 15,000, respectively. The case against BDO’s former chairman is still pending. The two former CEOs of GEE were separately charged. They did not commit wrongdoing, but consented to pay USD 150,000 each.

The Director of the SEC’s Division of Enforcement stated: “Audit firms must train their audit and national office professionals not only to recognize red flags but also to have the resolve to refuse signing off on an audit if there are unresolved material issues. (…) BDO failed to do that here, even though these issues were elevated to the highest levels of its audit practice.”