Former Pharma Chairman-CEO Convicted at Trial for $100 Million Fraud Scheme That Led to Bank Collapse

On February 5, the U.S. Department of Justice announced that on February 4, after a three-week trial, a federal jury in the Southern District of Florida convicted Jack Kachkar, former Chairman and Chief Executive Officer of Inyx Inc., on eight counts of wire fraud affecting a financial institution (18 U.S.C. §1343), for his role in a $100 million scheme to defraud Westernbank of Puerto Rico (Westernbank).  That scheme, according to the Department, set in motion a series of events that led to Westernbank’s insolvency and ultimate collapse.  Kachkar’s conviction also  included a $3 million scheme to defraud Mellon United National Bank of Miami (Mellon Bank).

As the Department summarized the trial evidence, from 2005 to 2007, Kachkar served as Chairman and CEO of Inyx., a publicly traded multinational pharmaceutical manufacturing company:

Beginning in early 2005, Kachkar caused Westernbank to enter into a series of loan agreements in exchange for a security interest in the assets of Inyx and its subsidiaries.  Under the loan agreements, Westernbank agreed to advance money based on Inyx’s customer invoices from “actual and bona fide” sales to Inyx customers, the evidence showed.

The trial evidence further showed that Kachkar orchestrated a scheme to defraud Westernbank, by causing numerous Inyx employees to create tens of millions of dollars’ worth of fake customer invoices that were purportedly payable by customers in the United Kingdom, Sweden, and elsewhere.  Kachkar then

caused these invoices to be presented to Westernbank as valid invoices.   Kachkar made false and fraudulent representations to Westernbank executives about purported and imminent repayments from lenders in the United Kingdom, Norway, Libya and elsewhere in order to lull Westernbank into continuing to lend money to Inyx, the evidence showed.  In fact, these lenders had not agreed to repay Westernbank’s loan.  Kachkar made false and fraudulent representations to Westernbank executives that he had additional collateral, including purported mines in Mexico and Canada worth hundreds of millions of dollars, to induce Westernbank to lend additional funds, the evidence showed.  In fact, this additional collateral was worth barely a fraction of that represented by Kachkar.

During the course of his scheme, Kachkar caused Westernbank to lend approximately $142 million, primarily based on the false and fraudulent customer invoices.  The evidence also showed

that he diverted tens of millions of dollars for his own personal benefit, including for the purchase of, among other things, a private jet, luxury homes in Key Biscayne and Brickell, Miami, luxury cars, luxury hotel stays, and extravagant jewelry and clothing expenditures.

In or around June 2007, Westernbank declared the loan in default and ultimately suffered losses exceeding $100 million on the Inyx loans.  According to trial evidence, these losses later triggered a series of events leading to Westernbank’s insolvency and ultimate collapse.  At the time of its collapse, Westernbank had approximately 1,500 employees and was one of the largest banks in Puerto Rico.

With regard to the second scheme involving Mellon Bank, the trial evidence showed that Kachkar “knowingly deposited a $3 million check at Mellon Bank from the purported sale of his private jet.”  At the time of its deposit, he knew that the check was worthless, and in fact agreed to sell his plane to a different buyer.   After receiving a provisional credit for the check from Mellon Bank, Kachkar “wired out all of the provisional credit, including a $1 million wire to Kachkar’s personal account in Canada.  Upon Mellon Bank’s request to reverse this $1 million wire, Kachkar refused to do so, resulting in at least a $1 million loss to Mellon Bank, the evidence showed.”

Kachkar is scheduled to be sentenced April 30.

Note: This trial and conviction underscore the importance of financial institutions’ maintaining a robust fraud compliance program that addresses both internal and external fraud.  As the evidence at Kachkar’s trial showed, fraud schemes are still capable of bringing down financial institutions if management fails to conduct enhanced due diligence on major borrowers from their institutions, and fails to invest the necessary compliance resources to safeguard their institutions.

Kachkar’s own prior history should have caused any financial institution to regard him with the utmost suspicion.  In 2005, Kachkar reportedly

was banned from acting as a director of any companies in Ireland for five years after a judge found he had not acted responsibly in connection with a transfer of about $4 million (Canadian) from a floundering Irish company, part of the Miza Group, out of the country to other companies within the group. He appealed, and Ireland’s Supreme Court upheld the judgment of not acting responsibly, but noted “no question of dishonesty arose.”

Later, 2011 media reports stated that Kachkar was convicted of fraud and attempted fraud in France, in connection with his 2007 attempted purchase of a French football club, Olympique de Marseille.  According to French media reports, the French court imposed a 10-month suspended sentence and a €50,000 fine in relation to his failed purchase of the club in 2007, as well as a €500,000 payment to the family of the then-Olympique owner who had since died.

U.S. Department of Justice Prosecutes Two Individuals for FCPA-Related Violations Involving Micronesia

Two related foreign-bribery enforcement actions by the U.S. Department of Justice in the last three weeks involve a jurisdiction not widely recognized as posing a corruption risk: the Federated States of Micronesia (FSM).  First, on January 22, the owner of a Hawaii-based engineering and consulting company, Frank James Lyon, pleaded guilty in the U.S. District Court for the District of Hawaii to a one-count information, charging him with conspiracy to violate the anti-bribery provisions of the Foreign Corrupt Practices Act and to commit federal program fraud.

Second, on February 11, Master Halbert,  a Micronesian citizen and a government official in the FSM Department of Transportation, was arrested in Honolulu, on the basis of a criminal complaint filed in the District of Hawaii that charged him with one count of conspiracy to commit money laundering.  Halbert, who administered FSM’s aviation programs, including the management of its airports, allegedly participated in a money-laundering scheme involving bribes made to corruptly secure engineering and project management contracts from the FSM government.

The complaint alleges that between 2006 and 2016, Lyon’s company

paid bribes to FSM officials, including Halbert, to obtain and retain contracts with the FSM government valued at nearly $8 million.  According to the complaint, Lyon entered into an agreement with Halbert to bribe Halbert in exchange for Halbert’s assistance in securing contracts for Lyon and his company.  Lyon and Halbert allegedly agreed that these bribes would be transported from the United States to FSM.

Halbert is scheduled for a preliminary hearing on February 22, and Lyon for sentencing on May 13.

Note:  This case provides a useful reminder that bribery and corruption risks do not arise only in more populous jurisdictions, or countries with global reputations for corruption.  The FSM is not even included in Transparency International’s Corruption Perceptions Index, and the TRACE International Bribery Risk Matrix for 2018 rates the FSM as only 90th of 200 jurisdictions worldwide.

Even qualitative assessments of the FSM do not identify it as a hotbed of corruption.  The 2014 Freedom House report on the FSM noted that “[o]fficial corruption is a problem and a major source of public discontent,” and the State Department’s 2016 Human Rights Report for Micronesia said that “some officials reportedly engaged in corrupt practices with impunity” and that “[t]here were numerous anecdotal reports of corruption.”  Nonetheless, as this case indicates, corruption can happen anywhere, and companies with operations in multiple countries should – consistent with a risk-based approach to their anti-bribery and corruption programs – bear that in mind as they update their risk assessments and internal controls.

European Commission Prohibits Siemens Acquisition of Alstom

On February 6, in a major rebuff to two leading global companies, the European Commission (EC) announced that it had prohibited the proposed acquisition of French transportation/mobility company Alstom by German conglomerate Siemens under the EC’s Merger Regulation.  The proposed merger, as the EC described it,

would have combined Siemens’ and Alstom’s transport equipment and service activities in a new company fully controlled by Siemens. It would have brought together the two largest suppliers of various types of railway and metro signalling systems, as well as of rolling stock in Europe. Both companies also have leading positions globally.

The EC recognized that the merger “would have created the undisputed market leader in some signalling markets and a dominant player in very high-speed trains,” but also concluded that it ”would have significantly reduced competition in both these areas, depriving customers, including train operators and rail infrastructure managers of a choice of suppliers and products.”

The EC reported that it “had serious concerns that the proposed transaction would significantly impede effective competition in two main areas: (i) signalling systems, which are essential to keep rail and metro travel safe by preventing collisions, and (ii) very high-speed trains, which are trains operating at speeds of 300 km per hour or more.”  It identified two sets of concerns for each of those product markets:

  • Signalling Systems: For this market, the EC stated that the proposed transaction “would have removed a very strong competitor from several mainline and urban signalling markets.”  In particular, it found that the merged entity

would have become the undisputed market leader in several mainline signalling markets, in particular in ETCS automatic train protection systems (including both the systems installed on-board a train and those placed along the tracks) in the EEA and in standalone interlocking systems in several Member States.

It also found that in metro signalling, “an essential element of metro systems, the merged entity would also have become the market leader in the latest Communication-Based Train Control (CBTC) metro signalling systems.

  • Very High-Speed Rolling Stock: For this market, the EC stated that the proposed transaction

would have reduced the number of suppliers by removing one of the two largest manufacturers of this type of trains in the EEA. The merged entity would hold very high market shares both within the EEA and on a wider market also comprising the rest of the world except South Korea, Japan and China (which are not open to competition). The merged entity would have reduced competition significantly and harmed European customers. The parties did not bring forward any substantiated arguments to explain why the transaction would create merger specific efficiencies.

“In all of the above markets,” the EC concluded, “the competitive pressure from remaining competitors would not have been sufficient to ensure effective competition.”

Responding to concerns that the merger was necessary to meet “the possible future global competition from Chinese suppliers outside of their home markets,” the EC also noted that it “carefully considered the competitive landscape in the rest of the world.”   With regard to signaling systems, it stated that its investigation “confirmed that Chinese suppliers are not present in the EEA today, that they have not even tried to participate in any tender as of today and that therefore it will take a very long time before they can become credible suppliers for European infrastructure managers.”  With regard to very high-speed trains, the Commission considered it “highly unlikely that new entry from China would represent a competitive constraint on the merging parties in a foreseeable future.”

Finally, the EC concluded that the companies’ proposed remedy package “did not adequately address [its] competition concerns” for either product category:

  • Mainline Signalling Systems: The EC determined that the proposed remedy “did not consist of a stand-alone and future proof business that a buyer could have used to effectively and independently compete against the merged company.” It commented that the remedy proposed “was a complex mix of Siemens and Alstom assets,” which would have required businesses and production sites to be split, and personnel to be transferred “in some cases but not others. Moreover, the buyer of the assets would have had to continue to be dependent on the merged entity for a number of licence and service agreements.”
  • Very High-Speed Rolling Stock: The parties reportedly offered to divest an Alstom train that is “currently not capable of running at very high speeds . . . . or, alternatively, a licence for Siemens’ Velaro very high-speed technology.”  The EC, however, concluded that the license “was subject to multiple restrictive terms and carve-outs, which essentially would not have given the buyer the ability and incentive to develop a competing very high-speed train in the first place.”

Note: Although the EC has not often rejected proposed mergers, this decision has strongly signaled the EC’s resolve in enforcing the Merger Regulation when it thinks it necessary, even in the face of intense political pressure from both the French and German governments.  The companies did not pursue a legal challenge to the decision, instead offering critical but muted reactions to the decision:

  • Alstom: Alstom stated its regret “that the remedies offered, including recent improvements, have been considered insufficient by the Commission,” and calling the decision “a clear set-back for Industry in Europe.”
  • Siemens: Siemens Chief Executive Officer Joe Kaeser blamed what he characterized as outdated legislation, saying, “We must not confuse antitrust laws with industrial policies, we need to respect that. But if the future of the world’s mobility is being determined with law that is 30 years old, that may have to be revisited — for the future, not for the past.”

French Finance Minister Bruno LeMaire echoed Kaeser’s theme of outdated law.  According to CNBC, LeMaire “call[ed] for competition rules to be changed to enable European firms to become stronger on the global stage,” and warned that “we are facing a huge challenge with the rise of the Chinese [rail] industry.”  In addition, the German Economic Minister, Peter Altmaier, declared that the two countries “were preparing a joint initiative which would make it easier to carry out cross-border deals.”

French production-line workers at Alstom, however, reportedly shed no tears about the decision.  In the view of one French union member at Alstom, “Alstom and Siemens are capable of looking after themselves, on their own, and of pushing back against China.”  In any event, Alstom has wasted no time in leaving the altar, and reportedly is now in talks to merge its rail business with Canadian firm Bombardier.

Geneva Prosecutor’s Office Reaches Agreement with Teodorin Obiang on Seizure of Luxury Cars, Release of Yacht

On February 7, the Geneva Public Prosecutor’s Office in Switzerland announced that it had decided to close its criminal investigation of Equatorial Guinea Vice President Teodorin Obiang and two other individuals, after reaching agreement with the defendants on the sequestration of 25 of Obiang’s luxury cars and the release of Obiang’s $100 million yacht.

The announcement (French only) stated that the Public Prosecutor’s Office had begun a criminal investigation of Obiang and two others in October 2016 for money laundering (Swiss Penal Code §305bis1) and misconduct in public office (Swiss Penal Code §314).  Shortly thereafter, Swiss authorities seized 11 high-performance luxury cars (reportedly including a Bugatti Veyron, several Ferraris, and a Koenigsegg), and ultimately seized a total of 25 cars belonging to Obiang.  In addition, at the request of Swiss authorities, Dutch authorities sequestered Obiang’s yacht, Ebony Shine, pursuant to a letter rogatory.  The subsequent pursuit of the investigation, according to the Public Prosecutor’s Office, “required the conduct of sending of letters rogatory to the United States, the Cayman Islands, France, the Netherlands, the Marshall Islands, Monaco, and Denmark.”

Under the terms of the resolution with the Public Prosecutor’s Office, the defendants agreed to the following actions:

  • Confiscation and sale of the 25 cars, with the proceeds of the sale “intended to be earmarked for a social program in the territory of Equatorial Guinea for the people of that country. The program is to be carried out in a transparent manner on the basis of an international agreement to be negotiated by the [Swiss] Federal Department of Foreign Affairs.”
  • Payment of CHF 1.3 million to the Canton of Geneva, particularly to cover the cost of the proceedings.

In return, the Public Prosecutor’s Office decided to close the proceeding and to lift the sequestration of the yacht.  The announcement explained that this action is based on article 53 of the Swiss Penal Code, “which provides that the Public Prosecutor may close the proceeding when the defendant has repaired the damage or has made all the efforts that one could expect of him to compensate for the harm that he has caused and restore a situation in conformity with the law.”

Note:  The Public Prosecutor’s announcement is of interest largely because it closes a chapter in the continuing saga of international efforts to hold Obiang accountable for his role in the massive corruption that has plagued Equatorial Guinea for decades.  The next significant chapter is likely to be the judicial response to Obiang’s challenge to his 2017 conviction in France.

In an article entitled, “Swiss Prosecutors Squander Opportunity to Counter Kleptocracy,” a Human Rights Watch staff member immediately criticized the Public Prosecutor’s decision.  She wrote that the case “presented a rare opportunity to puncture the absolute impunity for corruption Teodorin enjoys at home, while returning some of his vast sums of money to the people to whom it belongs. . . . Instead, [the Swiss prosecutors] settled for crumbs, while allowing Teodorin to keep the pie.”

It is more likely that the Public Prosecutor’s Office, after more than two years of investigation and gathering evidence from at least seven other jurisdictions relating to Obiang’s finances and ownership of the yacht, found that it had insufficient evidence to charge and convict Obiang on money laundering and misconduct in public office.  Not all criminal investigations, despite the best efforts of investigators and prosecutors, are guaranteed to produce convictions and lengthy prison sentences.  In this case, the Geneva prosecutors may simply have concluded that they had too weak a hand to play, and reluctantly chose to walk away from the table with the winnings they had.

Human Rights Watch also opined that “[a]t the very least, Switzerland should ensure the proceeds from selling the cars go to programs that promote transparency in Equatorial Guinea and help civil society hold their officials accountable for corruption.”  That is certainly a worthwhile and noble objective for the Swiss Department of Foreign Affairs.  Sadly, the likelihood of achieving that objective is nonexistent in a country in which most residents, as the Guardian stated,

remain in crushing poverty, with little or no access to decent healthcare or education [and o]pposition to the status quo . . . is virtually non-existent: torture and intimidation of the government’s critics is common place, while any attempts to organise outside official government channels are crushed.

Haitian Protests Grow Over Massive Embezzlement of Petro Caribe Funds

Even for seasoned observers of corruption around the world, Haiti is difficult to contemplate, as both the poorest country in the Western Hemisphere and “a constant and heart-rending site of recurring catastrophe.”  For more than half a century, the equation for Haitian life has been defined by three constants — poverty, corruption, and violence — with occasional revision by massive natural disasters.  During that period, one of the few variables in that tragic equation has been popular uprising, which succeeded in ousting “President-for-Life Jean-Claude “Baby Doc” Duvalier in 1986 after a 15-year reign in which he and his family and inner circle embezzled as much as $900 million from Haiti’s coffers.

Within the past year, popular uprising has again become a prominent feature of Haitian society, thanks largely to what may be even more massive embezzlement than the Duvalier regimes.  In 2005, Venezuela established Petro Caribe, an energy cooperation agreement to provide certain Caribbean and Latin American countries, including Haiti, with a preferential payment arrangement for petroleum and petroleum products.  Venezuela then signed a series of agreements with Haiti and other nations, providing those countries with a substantial flow of funds from low-interest loans.  Since 2017, however, Haiti learned that various Haitian authorities had apparently embezzled between $2 billion and $3.8 billion  of those Petro Caribe funds.

In November 2018, after several months of rising popular outrage expressed through social media and public protests, a special commission of the Haitian Senate issued a voluminous report that accused more than a dozen former government officials (including two former prime ministers and several former ministers) and the owners of private firms (including one allegedly owned by Haiti’s current President, Jovenel Moïse) of embezzling the Petro Caribe funds.  President Moïse, who originally had promised to pursue corruption when he took office in 2017, had promised in October 2018 to “get to the bottom of the scandal,” but showed no resolve in pursuing the matter.

This month, new developments reignited popular anger.  Last week, Haiti’s Superior Court of Auditors issued a report that connected “former ministers and senior officials to economic mismanagement and the possible misappropriation of [Petro Caribe] funds,” and identified “a company that was formerly headed by Moise as a recipient of funds from a road construction project that never had a signed contract.”  Yesterday, the intensity of popular protests reached as new peak, as thousands of protestors flocked the streets of Port-au-Prince, demanding President Moïse’s resignation for his failure to investigate the Petro Caribe scandal.  As those protests continued today, in the city of Gonaives police opened fire on protestors, and two people were killed and 18 others injured.

At this point, there is no indication that President Moïse intends to resign, that embezzling officials will be prosecuted, or that the protests will subside.  All that seems certain for the moment is the continuation of Haiti’s misery, with no relief in sight.