Doral Financial Scandal: Sammy Levis Guilty of Wire Fraud
Mario S. Levis, aka “Sammy Levis,” was found guilty on securities and wire fraud charges after a five-week jury trial before U.S. District Judge Thomas P. Griesa for his role in a scheme to defraud investors and potential investors in the stock of Puerto Rico-based Doral Financial Corporation (Doral) that took place while he was the Treasurer and Senior Executive Vice President of Doral, Preet Bharara, the U.S. Attorney for the Southern District of New York, announced today. The scheme, occurring between 2001 and 2005, involved misrepresentations that Levis made regarding certain core assets of Doral. An aggregate decline in shareholder value of approximately $4 billion followed the unraveling of the scheme.
According to the superseding indictment and the evidence at trial:
Doral, with mortgage banking operations in Puerto Rico and New York City, was a leading residential mortgage lender in Puerto Rico. Between 2001 and 2005, Levis corrupted the process by which Doral determined the publicly reported value of certain non-cash assets carried on Doral’s financial books called “interest-only strips” (IOs). Doral represented to the public, in its annual financial statements, that the aggregate value of its IOs, and company earnings associated with those IOs, were increasing substantially year after year. By the beginning of 2005, Doral publicly announced a streak of 28 quarters of “record earnings” based in significant part on the stated value of its IOs.
During the same time, Doral’s stock price steadily increased from approximately $10 per share in early 2000 to almost $50 at the end of 2004. Also during this time frame, Levis and other members of his family were substantial holders of Doral securities. Between 2001 and 2004, the value of Levis’s stock in Doral tripled to over $60 million.
In its public filings with the U.S. Securities and Exchange Commission (SEC), Doral represented that the value of its IOs was based, in part, on two “outside” and “independent” expert valuations provided to Doral on a quarterly basis. According to Doral’s filings with the SEC and representations by Levis to investors, these outside independent valuators were performing the valuation using their own economic and portfolio assumptions.
In fact, however, Levis thoroughly corrupted those valuations. For example, the valuation provided by a Morgan Stanley trader in fact involved the trader merely recopying numbers provided by Levis without any other work whatsoever, and then subsequent attempts by Levis to conceal that fact from Doral’s auditors and lawyers. The other valuation from Popular Securities (Popular) actually involved Levis dictating key assumptions for Popular to use in performing its valuation analysis. In both cases, Levis failed to inform the valuators that Doral was treating their valuations as independent or citing their work in Doral’s SEC filings.
In March 2005, when an executive at Popular directly asked Levis whether Popular’s valuation was being used as an independent valuation, Levis denied that Popular was one of the independent valuations. Later, when investors pressed Levis to identify the sources of the independent valuations described in Doral’s SEC filings, he falsely told investors that he could not identify the sources due to confidentiality agreements.
Levis also materially misrepresented to the investing public — in direct communications with investors, investor representatives, and market analysts — certain specific characteristics of the Doral IO portfolio. Specifically, among other things, Levis falsely claimed provision in Doral’s loan-sale agreements called “caps,” which would purportedly function to prevent substantial write-downs of the IOs if interest rates continued to rise.
Beginning in mid-January 2005, when Doral announced an approximate $97.5 million write-down of the stated value of its IOs attributed to rising interest rates, and Levis’ scheme concerning the IO valuations began to unravel, the market price of Doral’s common stock began to drop steadily from its high of almost $50 per share. By the time Levis resigned from Doral in late August 2005, the price of Doral’s shares had fallen more than 70 percent to approximately $14.13 per share. In total, the company’s shareholders had suffered an aggregate decline in shareholder value of approximately $4 billion.
Levis was found guilty of one count of securities fraud (Count One) and two counts of wire fraud (Counts Three and Five). The jury found Levis not guilty of one count of wire fraud (Count Four), and the Court dismissed an additional count of wire fraud (Count Two). Levis faces a maximum sentence of 20 years in prison on the securities fraud count and a fine of the greatest of $5 million or twice the gross gain or loss from the offense. For each of the wire fraud counts on which he was found guilty, Levis faces a maximum sentence of 20 years in prison and a fine of the greatest of $250,000 or twice the gross gain or loss from the offense.
Levis, 46, of San Juan, P.R., is scheduled to be sentenced by Judge Griesa on Sept. 14, 2010.
U.S. Attorney Preet Bharara stated: “Senior executives of publicly traded companies have to tell the investing public the truth, even when it hurts. It’s that simple. Today, a Manhattan jury found that Mario Levis of Doral intentionally flouted this bedrock principle, causing a colossal $4 billion loss to his company’s shareholders. Our office, working more closely than ever with the FBI and the SEC, will continue to pursue corrupt professionals in the financial services industry whose greed-driven misconduct hurts honest investors and threatens our markets.”
U.S. Attorney Bharara praised the work of the FBI and thanked the SEC for its assistance in the case.
This case was brought in coordination with President Barack Obama’s Financial Fraud Enforcement Task Force, on which Mr. Bharara serves as a Co-Chair of the Securities and Commodities Fraud Working Group. President Obama established the interagency Financial Fraud Enforcement Task Force to wage an aggressive, coordinated, and proactive effort to investigate and prosecute financial crimes. The task force includes representatives from a broad range of federal agencies, regulatory authorities, inspectors general, and state and local law enforcement who, working together, bring to bear a powerful array of criminal and civil enforcement resources. The task force is working to improve efforts across the federal executive branch, and with state and local partners, to investigate and prosecute significant financial crimes, ensure just and effective punishment for those who perpetrate financial crimes, combat discrimination in the lending and financial markets, and recover proceeds for victims of financial crimes.
The case is being prosecuted by the Securities and Commodities Fraud Task Force of the U.S. Attorney’s Office. Assistant U.S. Attorneys William J. Stellmach and Daniel A. Braun and Special Assistant U.S. Attorney Jason M. Anthony, are in charge of the prosecution.
2 Crimes for the Price of 1: Woman Scams Man Who Gets Shot
Sometimes even the best of plans go awry. Almost right out of a movie, Brandi Bradley enticed a casino customer to leave the casino to “party.” The plan was simple. Once Brandi got the victim, – in the words of the Court, “a Mr. Mataya, [who] wore enough gold, diamond, and ruby jewelry to mark him as the right kind of target” liquored up and into his car, two men planned to jump in the car at a predesignated spot to rob him, stuff him in the trunk and leave him there.
Unfortunately, Mataya was either so drunk or just couldn’t pull it together that when the time came to put him in the trunk, he couldn’t get it open. Frustrated, the two men pumped eight shots into Mataya and sped away.
Fortunately for Mataya, he survived. Unfortunately for Brandi, she got caught – as if we couldn’t figure out that was going to happen given her brilliant planning.
This case is more interesting for its facts, but here’s the actual holding: previously depublished, but certified for publication today, the California Court of Appeal found that although Brandi could be convicted of two crimes, she could not be consecutively sentenced for both crimes because she only intended to commit one: rob Mataya.
Kind of reminds me of my first appellate case, Hajek v. Iowa Board of Parole regarding sentence enhancements for committing two, separate consecutive crimes. While in law school as a student, I succeeded in reversing the Iowa Court of Appeal and the Iowa Attorney General.
The moral of these stories is that it never pays to commit a crime twice, or for that matter, two crimes.
[thanks to j. craig williams and tiffa130 via cc]
Might Anti-Counterfeiting Trade Agreement Affect Libraries?
With the release of leaked versions of the proposed Anti-Counterfeiting Trade Agreement (ACTA), opposition to the drafting process continues to grow. Recently IFLA issued a statement arguing that while it is appropriate for governments to act to stop commercial counterfeiting, the copyright and patent issues at stake in ACTA would be better addressed through the World International Property Organization (WIPO). They also object to the secrecy of the negotiations. The Library Copyright Alliance (LCA) has also been active in its opposition to ACTA, most recently joining in a letter complaining about provisions in the leaked text and issuing a statementof LCA concerns. Earlier, Janice Pilch had prepared an issue brief on ACTA for the LCA.
One thing that I have not seen in the library association statements is any mention of the border control measures found in Article 2 of the draft text. In spite of the assurance of the U.S. Trade Representative that ACTA would not require alterations to U.S. law, the draft border measure provisions seem in conflict with Section 602 of the Copyright Act. For example, the draft Article opens with the assurance that travelers may import copyrighted material when it is for non-commercial purposes and included in their personal baggage. This mirrors part of the exception found in 602(a)(3)(B) of the Copyright Act, which allows people to import or export personal copies in their baggage. Some of the proposed language in ACTA, however, would limit such importation to the duty-free allowance, a limitation not found in U.S. law. More importantly, there appears to be no provision that would allow individuals to import books and movies directly from abroad, as the current law does; there would be no more ordering books from Amazon.de or Amazon.fr for your personal use.
In addition, the leaked text contains no exception for libraries. Under 602(a)(3)(C), non-profit libraries may import up to 5 copies of a foreign book or record for lending and archival purposes, and 1 copy of a foreign movie for archival purposes. As it stands, ACTA would eliminate the ability of libraries to purchase foreign material directly from foreign distributors unless those distributors had been expressly authorized by the copyright owner to distribute the work in the U.S.
In the leaked text, the sections jump from Article 2.x to Article 2.6. We can hope that library exceptions are included in the missing articles. But the border measures section are just one more example why the secret ACTA negotiations are a bad idea.
UPDATE: Jonathan Band was kind enough to explain to me that “border measures” are different than “copyright exemptions.” If I understand the distinction properly in theory even under the current law, the Customs Bureau could seize a shipment of books or movies to a library as being an importation violation. The library could then petition for the release of the material, using its exemption in 602. Jonathan argues, probably correctly, that nothing in ACTA would change this. The 602 exemptions will still exist.
I won’t argue with him as a matter of law. I am more worried about whether ACTA may lead to a change in practice. For example, the current “border measures” found in 19 CFR 133 authorizes the Customs Bureau to seize “infringing copies.” These are narrowly defined: pirated copies that “are unlawfully made (without the authorization of the copyright owner).” Could ACTA encourage a broader definition, one that might encompass the marketing behaviors of publishers, and hence encourage more seizures at the border (even if eventually the law would allow that content to enter)? If there is no need to specify the library exemptions in ACTA, why are the drafters including the personal exemptions found in 602?
Jonathan is probably right that my worries are unfounded – but I am going to read closely the promised full draft treaty when it is released.
[thanks to rachel kramer and peter hirtle via cc]
