ANZ New Zealand CEO Leaves Bank After Disclosure of “Mischaracterized” Expenses

On June 17, ANZ Bank announced that the Chief Executive Officer (CEO) of its New Zealand business, David Hisco, was leaving ANZ reportedly “after concerns he ‘mischaracterised’ personal expenses including the use of corporate chauffeured cars and wine storage.”  ANZ Bank New Zealand’s Chairman (and former New Zealand Prime Minister) Sir John Key cited unspecified “’health issues’ and the board’s concern over the expenses, which were worth tens of thousands of dollars and spanned nine years.”

Key also stated, according to the Sydney Morning Herald, that Hisco “was not paying the money back to ANZ because he was ‘adamant’ he had the authority to spend it, and the bank’s main concern was not the money itself,” but that  “there had been a ‘lack of transparency’ in how the expenses were recorded in the bank’s books.”  In Key’s own words,

What is at the heart of this issue, though, is the way that that expenditure was recognised in our books, in other words, it was either in our view mis-characterised or there was a lack of transparency. So it’s not about the money itself, it’s the way it was recognised in the ANZ records . . . .

Hisco’s departure has not ended the controversy.  The New Zealand Reserve Bank is continuing to question ANZ, which the Reserve Bank regulates as a New Zealand incorporated bank, about Hisco’s hasty departure.

Note:  Ethical violations have become increasingly prevalent as a basis for CEO terminations.  A May 2019 PwC study of turnover among the top 2,500 global companies found not only that a record 18 percent of CEOs were replaced, but that 39 percent of the CEOs dismissed “had been accused of ethical lapses . . . the first time ethical lapses led the causes of CEO turnover in the study’s 19-year history.”

In ANZ’s case, the facts as reported indicate that ANZ in theory may have more than domestic regulatory concerns to take into account.  Given Sir John’s statements indicating that Hisco’s expenses were inaccurately recorded in ANZ’s books and records, ANZ should recognize that inaccurate books and records may bring the matter within the purview of the United States Securities and Exchange Commission (SEC).  Under the “books and records” provisions of the Foreign Corrupt Practices Act (FCPA), publicly traded entities – which includes foreign issuers, like ANZ, whose American Depository Receipts are traded on the over-the-counter market – can be held liable for failure to maintain accurate  records regarding the company’s transactions.

The SEC would be highly unlikely to pursue an FCPA investigation of ANZ on “mischaracterized” expenses of tens of thousands of dollars unrelated to foreign bribery.  Nonetheless, other companies whose shares or ADRs trade on U.S. securities markets should use the Hisco case as an opportunity to remind senior executives about the ethical and legal ramifications of their misrepresenting or falsely reporting the nature and basis of transactions benefiting themselves that involve company funds.

Insys Therapeutics Agrees to $225 Million Global Resolution of Criminal and Civil Investigations Into Fraudulent Marketing of Subsys, Then Declares Bankruptcy

On June 5, the U.S. Department of Justice announced that Insys Therapeutics, an Arizona-based pharmaceutical company, agreed to a global resolution to settle the federal government’s separate criminal and civil investigations into Insys’s marketing of Insys’s drug Subsys.  Under the terms of the criminal resolution, Insys agreed to enter into a five-year deferred prosecution agreement with the government, to have its operating subsidiary plead guilty to five counts of mail fraud, and to pay a $2 million fine and $28 million in forfeiture. Under the terms of the civil resolution, Insys agreed to pay $195 million to settle allegations that it violated the civil False Claims Act.

According to the Justice Department,

[b]oth the criminal and civil investigations stemmed from Insys’s payment of kickbacks and other unlawful marketing practices in connection with the marketing of Subsys. Insys’s drug Subsys is a sublingual fentanyl spray, a powerful, but highly addictive, opioid painkiller. In 2012, Subsys was approved by the Food and Drug Administration for the treatment of persistent breakthrough pain in adult cancer patients who are already receiving, and tolerant to, around-the-clock opioid therapy.

In connection with the criminal resolution, the United States Attorney’s Office in Boston filed an Information that charges Insys and its operating subsidiary with five counts of mail fraud.  The Information states that

from August 2012 to June 2015, Insys began using “speaker programs” purportedly to increase brand awareness of Subsys through peer-to-peer educational lunches and dinners. However, the programs were actually used as a vehicle to pay bribes and kickbacks to targeted practitioners in exchange for increased Subsys prescriptions to patients and for increased dosage of those prescriptions. One practitioner targeted by Insys was a physician’s assistant who practiced with a pain clinic in Somersworth, New Hampshire. During the first year that Subsys was on the market, the physician’s assistant did not write any Subsys prescriptions for his patients. In May 2013, the physician’s assistant joined Insys’s sham speaker program knowing that it was a way to receive kickbacks for writing Subsys prescriptions. After joining the sham speaker program, the physician’s assistant wrote approximately 672 Subsys prescriptions for his patients – many of which were medically unnecessary – and in turn, received $44,000 in kickbacks from Insys.

In addition, Insys entered into a five-year Corporate Integrity Agreement (CIA) and Conditional Exclusion Release with OIG.  The Department noted that “[b]ecause of the extensive cooperation provided by Insys in the prosecution of culpable individuals and its agreement to enhanced CIA requirements, OIG elected not to pursue exclusion of Insys at this time.” The CIA, which the Justice Department deemed “unprecedented,” includes several novel provisions.  Those include enhanced material breach provisions, designed to protect federal health care programs and beneficiaries.

Furthermore, Insys admitted to a Statement of Facts in relation to the CIA and acknowledged that the facts therein “provide a basis for permissive exclusion. OIG did not release its permissive exclusion authority, as it generally does for CIA parties in False Claims Act settlements. Instead, OIG will provide such a release only after Insys satisfies its obligations under the CIA.”

Shortly thereafter, on June 10, Insys filed for Chapter 11 bankruptcy protection, reportedly “amid mounting expenses driven by” the Department’s investigation.  Reuters stated that the Department “is now Insys’ largest unsecured creditor,” due to the criminal and civil resolution with the Department.  In a filing in the bankruptcy proceeding, Insys Chief Executive Officer Andrew Long “said that sales decline was more than Insys could withstand when coupled with the investigation and more than 1,000 lawsuits by municipal governments seeking to hold it responsible for the epidemic.”

Note:  On one level, the Insys criminal and civil resolution should be considered a significant victory for the Department of Justice in its litigation to combat the opioid crisis.  When considered with the May 2 criminal convictions of Insys funder John Kapoor and other former Insys executives for RICO conspiracy, the Insys corporate resolution appears to be a true example of a corporate criminal investigation in which both the company and responsible corporate officials were held accountable.

On another level, however, the bankruptcy filing, which took place only five days after the corporate settlement was reached, raises a serious question about the true value of the corporate settlement.  If the Department did not know, at the time of the settlement, about Insys’s plans to declare bankruptcy, Department prosecutors would have every right to be furious about the filing, which may place the Department in the status of an unsecured creditor and will likely delay the government’s receipt of at least some of the funds.  On the other hand, if the Department did know, prior to settlement, that Insys did plan to file for bankruptcy thereafter, that would create the appearance that the Department entered into the deferred prosecution agreement, knowing that actual receipt of the $255 million would be unlikely or impossible and therefore that Insys could not timely satisfy a material term of the DPA.

Although Insys has still more reasons for anxiety – for example, the drastic fall in its stock price after the bankruptcy filing and its anticipated delisting from NASDAQ as of June 19 – its decision to declare bankruptcy after the Justice Department resolution may prompt other pharma companies facing massive opioid-related litigation to consider bankruptcy more seriously as an option for forestalling or constricting potentially catastrophic damage awards.

Deputy Attorney General Rosen Extends Forbearance Period for Application of Wire Act to Non-Sports Gambling

On June 12, Deputy Attorney General Jeffrey Rosen issued a memorandum to all United States Attorneys, all Assistant Attorneys General, and the Director of the Federal Bureau of Investigation regarding the forbearance period for applying the Wire Act, 18 U.S.C. §1084(a), to non-sports gambling.

In 2018, the Department of Justice’s Office of Legal Counsel, in a reversal of that office’s 2011 memorandum on the Wire Act, had opined that three of the four clauses of the Wire Act could be applied to non-sports gambling.  On January 15, 2019, then Deputy Attorney General Rod Rosenstein issued a memorandum directing that federal prosecutors refrain from applying the Wire Act to persons whose conduct violated that Act for 90 days after issuance of the OLC opinion.  On February 28, another memorandum by Deputy Attorney General Rosenstein extended that forbearance period until June 14, 2019.

Subsequently, on June 3, the United States District Court for the District of New Hampshire issued an opinion holding that the Wire Act extended solely to sports gambling.  While the Department “is evaluating its options in response to this opinion,” Deputy Attorney General Rosen stated, the June 12 memorandum extended the forbearance period from June 14 to the later of December 31, 2019 or 60 days after entry of final judgment in the New Hampshire litigation.

Note: While the Deputy Attorney General’s memorandum does not represent any substantive change of position by the Department, its extension of the forbearance period effectively pushes potential enforcement of the Wire Act in non-sports gambling activities, including state lotteries and their vendors operating as authorized under state law, at least to 2020.

New European Banking Authority CEO: New Anti-Money Laundering Mandate Insufficient to Address Money Laundering Threat

On June 11, the Financial Times reported that the new chief executive of the European Banking Authority (EBA), José Manuel Campa, stated that the anti-money laundering (AML) mandate that the EBA received was insufficient to address the volume of money laundering in the European Union (EU).  That mandate, according to the Financial Times, “is limited to collecting, analysing and disseminating information to ensure that national authorities ‘effectively and consistently supervise the risks of money-laundering and that they co-operate and share information’.”

In an interview with the Financial Times, Campa said, “ I don’t think the mandate that the EBA has received is the mandate that will solve that problem . . . . It is not a mandate to harmonise AML, either regulation or practices, across the union.  Because to start that process you first need legislation.”  He reportedly also characterized that mandate as “a narrow, co-ordinating role rather than one that will ensure even defences across the EU against ill-gotten gains.”

Noting that the mandate carried with it only 10 additional EBA staff positions, Campa was careful to set expectations low.  In his words, “We need to be prudent on the expectations of the [AML] mandate . . . . It has been an evolutionary situation and we have a mandate to try to co-ordinate the single regulatory framework of AML.”

While there have been growing calls to establish a single AML regulator across the EU, Costa made plain his concern that the EU first needed to harmonize its AML directives, “which leave member states with flexibility on how to interpret directives.”  He maintained that

[y]ou need to start with regulation that is homogeneous. We don’t have that. AML as an activity in the EU is regulated by directives. By definition that does not provide a single rule book. If you have a single rule book you can start thinking about a single authority. So maybe the discussion has gone too fast.

With regard to the controversial April 2019 decision by the EBA Board of Supervisors to close an EBA investigation into the Danish and Estonian Financial Services Authorities’ oversight of Danske Bank, Campa

warned against “extrapolating” what that ruling by the EBA’s board of directors might mean about its appetite for tackling money laundering. “Because I think there is a strong record of the EBA coming forward with decisions that have been helpful in constructing the single market.”

Note:  Costa’s remarks may simply have been intended to temper EU expectations about how effective the EBA could be, with its current authority and resources, to exercise effective control over the money laundering problem across Europe.  They may also have been a subtle bid to the European Commission (EC) and EU legislators to consider conferring even more AML regulatory authority on the EBA.

In any event, Costa must now expect that, rightly or wrongly, EU legislators and the EC have heightened expectations about the EBA’s ability to exert greater authority in EU-wide AML oversight, and will judge him and the EBA in part on how well the EBA makes use of the mandate it already has.

Swiss Competition Commission Fines Five Financial Institutions for Participation in Forex Trading Cartels

On June 6, the Swiss Competition Commission (COMCO) announced that it had “detected several anti-competitive arrangements between banks in foreign exchange spot trading,” and had imposed total fines of CHF 90 million.  COMCO stated that traders of “several internationally active banks have partially coordinated their conduct in two separate cartels in foreign exchange spot markets regarding certain G10-currencies” (i.e., Australian dollar, Canadian dollar, Euro, Japanese yen, New Zealand dollar, Norwegian krone, Swedish krona, Swiss franc, United Kingdom pound, and U.S. dollar).

With regard to the first cartel, COMCO found that traders of five leading financial institutions — Barclays, Citigroup, JPMorgan, Royal Bank of Scotland (RBS), and UBS (listed in alphabetical order) — participated in the so-called “three way banana split” cartel from 2007 to 2013.  With regard to the second cartel, COMCO stated that traders of Barclays, MUFG Bank, RBS, and UBS were participants in the so-called “Essex express” cartel from 2009 to 2012, and coordinated certain G10 currencies in chatrooms.

COMCO declared that it had “concluded amicable settlements [regarding those two cartels] and imposed fines of around CHF 90 million,” and would therefore close those two investigations.  The sanctions for each bank were CHF 27 million for Barclays, CHF 28.5 million for Citigroup, CHF 9.5 million for JPMorgan, CHF 1.5 million for MUFG Bank, and CHF 22.5 million for RBS.  COMCO also noted that “[a] part of the banks has benefited from the leniency programme resulting in a reduction of the fine,” and that UBS was not fined because it revealed the cartels to the competition authorities first.

Finally, COMCO stated that it had closed its investigation against Bank Julius Bär & Co. AG and Zürcher Kantonalbank, but would continue an investigation against Credit Suisse.

Note: This action by COMCO is a followup to the European Commission’s May 16 action against Barclays, RBS, Citigroup, JPMorgan, and MUFG Bank for their participation in the same two cartels (i.e., the “Three Way Banana Split” and “Essex Express” cartels, as explained in a prior DTG post) in the spot forex market.  Since 2014, Singaporean, Swiss, United Kingdom, and U.S. authorities reportedly have imposed total fines of more than $12 billion on 15 banks for forex manipulation.