Articles Posted in Miscellaneous

The US Securities and Exchange Commission has filed fraud charges against Rio Tinto and its ex-CFO Guy Robert Elliot and former CEO Thomas Albanese. The defendants are accused of hiding the Mozambique coal business’s swift and steep drop in value soon after they acquired it for $3.7B. The mining company later would go on to sell Rio Tinto Coal Mozambique for $50M—a much lower figure than the buying price.

The SEC contends that following the acquisition of the coal assets in 2011, the project experienced problems right away because there was “less coal and of lower quality” than what Rio Tinto, Elliot, and Albanese had anticipated. Also, the country of Mozambique, which is where the acquisition occurred, had turned down the barge application. This means that there was no infrastructure to transport the assets. All of this “significantly eroded” the acquistion’s value.

Rio Tinto and the two ex-executives purportedly knew that publicly disclosing the acquisition as a failure, after a previous acquisition of Canadian company Alcan had rendered big losses, would create doubts over their ability to identify and develop mining assets that were “long-term, low cost, and highly profitable.” This purportedly compelled them to hide the problems that arose with the Mozambique acquisition and issue misleading financial statements prior to a number of US debt offerings.

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Penn West Petroleum is Accused of Accounting Fraud

The US Securities and Exchange Commission has charged Penn West Petroleum Ltd., now called Obsidian Energy Ltd., and three of its ex-finance executives with involvement in an alleged accounting fraud. According to the regulator, the Canadian-based oil and gas company fraudulently transferred hundreds of millions of dollars in expenses to capital expenditure accounts from its operating expense accounts. As a result, Penn West was able to artificially lower operating expenses by up to 20% during some periods, as well as falsely enhance the metrics having to do with profitability and oil extraction efficiency. These metrics are important for selling barrels of oil.

The SEC is accusing ex-Penn West CFO Todd Takeyasu, ex-VP of Accounting and Reporting Jeffery Curan, and ex-Operations Controller Waldermar Grab of running the accounting fraud. The regulator claims that the three men violated federal securities laws related to antifraud, books and records, reporting, and internal controls provisions.

New York Life Settles Self-Dealing Allegations
New York Life Insurance Company has settled a 401(K) lawsuit accusing the company of self-dealing in its 401(k) plans. The case involved a MainStay-branded S&P 500 index mutual fund that plaintiffs believe was retained out of the insurer’s self-interest even as participants saved less money than they would have if they had been able to invest in non-proprietary funds that were less expensive.

The lawsuit alleged that class members had paid about $3.9M in excessive fees. The plaintiffs accused the mutual life insurer of committing breach of fiduciary duty under ERISA.

New York Life and its subsidiaries own and run the MainStay funds.

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A Brazilian-based petrochemical maker that trades its stock in US markets has arrived at a $95M global settlement with the US Securities and Exchange Commission, the US Justice Department, and authorities in Switzerland and Brazil. Braskem SA is accused of violating the Foreign Corrupt Practices Act and generating fake books and records to hide millions of dollars in bribes that it allegedly paid government officials in Brazil for the purposes of either keeping or winning business.

Braskem is accused of making about $325M in profits because of these purported bribes that were made via intermediaries and off-book accounts run by its biggest shareholder. The SEC believes that the petrochemical manufacturer lacked the internal controls to stop it from executing these bribes, which allegedly occurred over eight years.

As part of the settlement, Braskem will pay $325M in disgorgement—$65M of that will go to the SEC and $260 will go to authorities in Brazil. Another $632M will go toward criminal penalties and fines. Braskem will have to work with an independent corporate monitor for a minimum of three years.

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Another group of plaintiffs is suing Edward Jones, accusing the firm of charging excessive fees and self-dealing in its 401(K) Plan. In the complaint, the brokerage firm and a number of its employees, including managing partner James Weddle and financial adviser Brett Bayston, are accused of breach of fiduciary duty related to their decision to choose costlier mutual funds when there were less expensive, equivalent funds available. Edwards Jones and its employees are also accused of choosing an “unreasonable” amount of risky investment choices and engaging in self-dealing.

The purported self-dealing allegedly occurred through its distribution deals with a number of fund companies, including Franklin Templeton Investments, American Funds, BlackRock (BLK), and Goldman Sachs (GS). The plaintiffs claim that the fund companies paid Edward Jones revenue-sharing fees for access to its “captive market,” which included 401(K) participants, and “shelf space” in its brokerage business that targeted retail investors. As part of the distribution relationship, Edward Jones offered the fund companies’ investment options in its Edward D. Jones & Co. Profit Sharing and 401(K) Plan.

The plaintiffs believe that these distribution relationships affected the decisions made by the fiduciaries and ended up costing participants millions of dollars in excessive fees. An Edward Jones spokesperson says that the allegations are false and that the broker-dealer would mount a “vigorous defense.”

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Xerox HR Solutions is now the defendant in an alleged pay-to-play scam involving Financial Engines, Inc., which offers investment advice services through subsidiary Financial Engines Advisors. According to the proposed class action securities case, the “conspiracy” involving the two companies compelled participants of Ford Motor Co.’s retirement plans to pay unreasonable and excessive fees. The plaintiffs are three participants in the Ford plan. The 401K-related lawsuit is Chendes et al v. Xerox HR Solutions.

According to the complaint, Xerox allegedly was paid a “kickback” by Financial Engines in exchange for including the investment adviser/managed-account provider on its record-keeping platform. The plaintiffs believe that this deal between the two companies “wrongfully” inflated the price that Financial Engines charged for its professional investment advice services. They noted that even without the excessive fees, Xerox was already getting paid a record-keeping fee.

Plaintiffs said that of the $5.8M that participants paid Xerox HR for Financial Engines Services in 2015, 31% of that—$1.8M—was paid to Xerox. The plaintiffs are alleging that similar payments also occurred in 2012. They contend that the fees in question were not for any “substantial services” that either company provided to plan participants.

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Voya Financial Inc. (VOYA) is the defendant in a 401(k) lawsuit alleging excessive fees. According to a Nestle 401(k) Savings Plan participant, Voya and managed-account provider Financial Engines came up with an arrangement that allowed Voya to collect excessive fees for service related to investment advice, but without disclosing that this was part of their deal. In Patrico v. Voya Financial, Inc. et al., the plaintiff is claiming breach of fiduciary duty under ERISA.
 
The proposed class action lawsuit contends that Voya offered participants an advice program via the Voya Retirement Advisers but subcontracted to have Financial Engines give      the advice.  The plaintiff contends that even though Voya didn’t provide “material services” related to the advice that participants were given through the program, the company collected a fee to which it purportedly had no right. Voya allegedly keeps a “substantial” part of the fee, while giving some of the fee to Financial Engines.
 
Voya denies any wrongdoing. 
 

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The deferred prosecution deal between a HSBC Holdings PLC (HSBC) unit and the US government is now at risk as prosecutors consider whether to file a criminal charge against the bank. It was in 2012 that the HSBC said it would pay $1.92B to resolve a money laundering investigation involving its top executives and lax oversight that allowed drug cartels and terrorists entry into the U.S. financial system. HSBC admitted that it did business with sanctioned countries, such as Iran, and helped Mexican drug cartels launder funds.

As part of the deal to avoid prosecution, the bank agreed to retain an independent monitor to make sure that it complied with anti-money laundering requirements. HSBC is still on probation.

Now, however, the Justice Department is looking into whether the bank has broken any U.S. laws since the deferred prosecution deal was put in place. That deal includes a section stating that HSBC could still be held responsible for its conducted related to the money laundering charges.

Two more 401(K) lawsuits alleging self-dealing have been brought against asset management firms. In Cryer V. Franklin Resources, Inc. et al, the employees of Franklin Resources Inc. are suing their employer. Franklin Resources (BEN) operates under the name Franklin Templeton Investments.

According to the plaintiffs, the asset management firm engaged in self-dealing in its 401(k) plan. They believe that individuals overseeing the retirement plan were in breach of duty under ERISA when they chose costly, proprietary funds that performed poorly instead of selecting less expensive funds that performed better. The plaintiffs are also accusing their employer of charging excessive fees for administrative services.

In the lawsuit, they noted that the 401K had invested in hundreds of millions of dollars in mutual funds that Franklin Templeton and its subsidiaries managed even though there were many other choices available. These entities manage all of the mutual funds in the Franklin Templeton 401(K) retirement plan. The plaintiffs said that Franklin Templeton chose these funds so that it could receive fees and make money.

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Another two asset management firms are the subject of separate (401)K lawsuits filed by their employees . The plaintiffs claim that American Century and New York Life, respectively, charged excessive fees in their retirement savings plans.

In Andrus et al v. New York Life Insurance Company et al , a class action lawsuit, plan participants in the the Employee Progress-Sharing Plan and the Agents Progress-Sharing Plan contend that New York Life and affiliated fiduciaries engaged in self-dealing when they kept a MainStay-branded S&P 500 index mutual fund i both retirement plans. New York Life and the subsidiaries own the MainStay brand fund.

The plaintiffs believe that they improperly benefited from “excessive fees and expenses.” They argued that because the defendants have a financial interest in the mutual fund, they neglected to look for lower-cost funds between ’10 and now. Instead, they kept the MainStay fund, which cost 35 basis points, in the two 401(k) plans. They say that this cost participants more than $3M. The plaintiffs are alleging breach of loyalty and prudence under ERISA.

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