January 21, 2020
Accounting fraud, insider trading focuses in 2020 prosecutions
Although it’s relatively uncommon for federal prosecutors to bring accounting fraud prosecutions, this area is one with new activity, according to a New York Times review of recent white-collar crime prosecutions. This type of fraud, along with insider trading, could be a major focus of the Justice Department in the upcoming year.
Federal prosecutors brought several new accounting fraud prosecutions late last year, which could indicate a new focus on the offense.
Two of the companies accused of accounting fraud were healthcare organizations.
Several officials at Outcome Health were indicted for money laundering, mail and wire fraud in December. They allegedly made false statements to a bank in an effort to obtain nearly $1 billion in equity investments and loans.
The other healthcare organization involved in a fraud indictment was MiMedx. Executives from the firm are accused of “channel stuffing,” or falsely inflating orders in by distributors in order to “juice” corporate sales numbers.
BMW was also accused of accounting fraud. The SEC is currently investigating whether BMW falsely reported vehicle sales data in an effort to mislead investors into believing the company was healthier than it actually was. This hearkens back to a settlement in September by Fiat Chrysler, which was similarly accused of misleading investors. The SEC determined that the company had provided inaccurate information to those investors, and Fiat Chrysler agreed to pay $40 million to settle the claim.
Depending on Congress, insider trading prosecutions may take off
The Times notes that the U.S. House of Representatives recently passed the Insider Trading Prohibition Act, which defines – for the first time – what constitutes insider trading. The offense would be committed if any person “while aware of material, nonpublic information relating” to a particular company, communicated the information to others. The offense would apply if the tip “would reasonably be expected to have a material effect on the market price” of a security.
The Act also prohibits obtaining confidential information by “theft, bribery, misrepresentation or espionage” and “conversion, misappropriation, or other unauthorized and deceptive taking of such information.” This might expose people to insider trading prosecution, depending on how the information was obtained.
In the past, the crime of insider trading was defined exclusively by the courts. It is unclear whether the Senate will pass its companion bill, or whether the Act would be signed into law.
In any case, a federal appeals court decision has made it somewhat easier to prosecute insider trading. It ruled that a securities fraud component of the Dodd-Frank Act does not require proof that a tipper received a personal benefit from the tippee. In other words, no quid pro quo exchange is required to prove insider trading.