New Jersey Federal Criminal and Regulatory Alert

September 2016

Cybercrime, Bridgegate and healthcare fraud have been the focus of New Jersey federal prosecutors over the past few months. In this issue of Herrick’s New Jersey Federal Criminal and Regulatory Alert, we consider prosecutions by the U.S. Attorney’s Office in New Jersey and the SEC that are of note to companies based in New Jersey or doing business in the state.

Within this issue we summarize several major cybercrime cases being handled by the U.S. Attorney’s Office, which has made prosecuting cybercrime a top priority. We also focus on, among other cases, the upcoming Bridgegate trial, the recent guilty plea by former Port Authority Chairman David Samson to bribery charges, and a healthcare kickback case involving Olympus Corporation of the Americas.

Updates to Previously Reported Cybercrime Cases:

Cybercrime - Ukrainian Citizen Admits to Using 13,000 Infected Computers to Loot Log-In Credentials, Payment Card Data
After pleading not guilty at his federal court arraignment on October 19, 2015, Sergey Vovnenko pled guilty on January 20, 2016, to one count of wire fraud conspiracy and one count of aggravated identity theft. According to court documents and the press release of the U.S. Attorney’s Office, Vovnenko and his associates operated an international criminal organization that hacked into the computers of individuals and companies located in the U.S. and elsewhere, stealing usernames and passwords for bank accounts and other online services. The wire fraud conspiracy charge carries a maximum penalty of 20 years in prison and a $250,000 fine, while the aggravated identity theft charge carries a mandatory two-year sentence, to be served consecutively to the conspiracy charge.  Sentencing is scheduled for December 5, 2016.

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Cybercrime - Russian National Admits Role in Largest Known Data Breach Conspiracy Ever Charged
Sentencing for Russian cybercriminal Vladimir Drinkman has been adjourned several times, and is currently scheduled to take place on December 14, 2016. On September 15, 2015, Drinkman pled guilty to one count of conspiracy to obtain unauthorized access to protected computers and one count of conspiracy to commit wire fraud. The wire fraud charge carries a maximum penalty of 30 years in prison and a fine of the greater of $1 million or twice the gain or loss from the offense. The unauthorized computer access charge carries a maximum penalty of five years in prison and a fine of the greater of $250,000 or twice the gain or loss from the offense.

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Trends in Cybercrime Cases:

Protecting Your Business from Cyber Attacks
“Ransomware” attacks, one of the fastest growing types of cybercrimes, have been occurring more and more frequently in 2016. In a typical ransomware scenario, a hacker installs malware that encrypts and “locks” the victim’s digital files and holds them “ransom” until the victim pays, usually with untraceable currency like Bitcoins. The virus is typically launched through an infected e-mail that appears official in nature, so companies must remain vigilant and continuously educate employees about the risks. Security audits by preventive cybersecurity firms are one way of protecting businesses against cybercrime.

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Cyber Attacks on Small Businesses on the Rise
Hackers are increasingly targeting small businesses, rather than just large national and multinational companies and government agencies. According to the cybersecurity firm Symantec, cyber hackers view small businesses as soft, easy targets, as opposed to larger companies that have ramped up their cyber firewalls. Last year, 43% of cyber-attacks worldwide were against businesses with less than 250 employees.

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Current Criminal Cases:

Upcoming Bridgegate Trial for Former Associates of New Jersey Governor Chris Christie
The trial of two former associates of Governor Chris Christie, William Baroni and Bridget Anne Kelly, accused of involvement in the George Washington Bridge lane closures, is scheduled to begin on September 12. Baroni and Kelly are charged with a number of conspiracy, fraud and civil rights charges for allegedly orchestrating the lane closures to punish Fort Lee Mayor Mark Sokolich for not endorsing Christie’s re-election in 2013. In recent months, defense attorneys have argued that the George Washington Bridge lane closures did not amount to a federal crime. Kelly’s attorney, Michael Critchley, argued that the federal anti-corruption statute used against Kelly and Baroni was intended as an anti-bribery and anti-theft statute, and that neither defendant profited from the lane closures.

With respect to another key issue, it is still unclear whether the identities of the unindicted co-conspirators in the case will be made public, as news organizations have sought. There is also a sealed list of individuals that prosecutors believe were aware of the scheme, but are not named as unindicted co-conspirators. 

Finally, earlier this year, defense attorneys served a subpoena to compel Governor Christie to produce his cell phone records and emails.  A defense brief filed in June compared the Bridgegate scandal to Watergate, stating that President Nixon’s tapes were not immune from a subpoena, and Christie’s phone should not be immune either. U.S. District Judge Susan Wigenton ultimately quashed the defense’s request for Christie’s cell phone, stating that the request was too broad, and needed to be more specific and show “that the information sought was clearly relevant and would be admissible at trial.”

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Former Port Authority Chairman Samson Pleads Guilty to United Airlines Bribery Charges
On July 14, 2016, David Samson, former chairman of the Port Authority of New York and New Jersey, a former New Jersey attorney general, and a close confidant of Governor Christie, pled guilty to allegations that he bribed United Airlines to reinstate a regularly scheduled non-stop flight to an airport near his South Carolina weekend home. Samson pled guilty to one charge of bribery for accepting a benefit of more than $5,000 from the airline. 

In doing so, Samson admitted to meeting with United Airlines’ officials in September 2011 to discuss reinstating a discontinued flight from Newark Liberty International Airport to Columbia, South Carolina. After United Airlines indicated that it would not reinstate the flight, Samson withdrew from the Port Authority’s next meeting agenda a plan submitted by United to build a hangar at Newark for wide-bodied airplanes. Subsequently, the hanger plan reappeared on the agenda, and United reinstated the South Carolina flight. Samson is facing a sentence ranging from probation to 24 months in prison, although his crime has a maximum penalty of 10 years in prison, and a fine of up to $250,000, according to prosecutors. His sentencing is scheduled for October 20. 

Shortly after Samson’s plea, U.S. Attorney Paul Fishman announced that Jamie Fox, a former New Jersey transportation commissioner, had been charged with assisting Samson in strong-arming United into resuming the flight to South Carolina. Fox is charged with conspiracy to commit bribery, which carries a sentence of up to five years in prison.

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Olympus Corp. to pay at least $646 million to end U.S. probes
On March 1, 2016, Olympus Corp. of the Americas (OCA), a medical equipment company, was charged in a federal criminal complaint filed in Newark with conspiracy to violate the Anti-Kickback Statute, which prohibits payments to induce purchases paid for by federal health care programs. OCA will pay $623.2 million to resolve criminal charges pursuant to a three-year deferred prosecution agreement that allows it to avoid a conviction if it complies with the requirements set forth in the agreement. In addition, a subsidiary of OCA will pay $22.8 million to resolve criminal charges under the Foreign Corrupt Practices Act pursuant to a separate deferred prosecution agreement.  U.S. Attorney Fishman attributed the action to OCA’s failure to enforce compliance policies that would have prevented the kickbacks and bribes.

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Three Charged in Hacking Case
On June 2, two men pled guilty to their roles in a high-profile hacking and identity theft scheme that involved hacking corporate computer systems and stealing personal identification documents.  The scheme generated more than $2 million in illegal profits, according to U.S. Attorney Fishman.

Tomasz Chmielarz of Rutherford, New Jersey pled guilty to conspiracy to commit fraud in connection with computers, and conspiracy to commit fraud in connection with electronic mail, each of which carries a maximum penalty of five years in prison and $250,000 fine, or twice the gain or loss from the offense. Devin McArthur, 28, of Ellicott City, Maryland, pled guilty to conspiracy to commit wire fraud, which carries a maximum penalty of 20 years in prison and a $250,000 fine, or twice the gain or loss from the offense. Sentencing for both defendants is scheduled for September 13. The alleged ringleader, Timothy Livingston, who is accused of perpetuating the scheme through his spam email company “A Whole Lot of Nothing,” is scheduled to begin trial on October 13 before U.S. District Judge William Martini in Newark. 

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Former Bank Asiana Assistant Vice President Admits to Embezzling More than $1 Million
On March 22, Miye Chon, a/k/a “Karen Chon,” of Englewood Cliffs, New Jersey, pled guilty in U.S. District Court to an indictment charging her with bank fraud, embezzlement or misapplication of funds by a bank officer, and aggravated identity theft. Chon was employed by Bank Asiana as an operations officer and later as an assistant vice president and operations officer until the bank was acquired by Wilshire Bank in October 2013. Chon is accused of transferring funds from customer accounts to the bank vault cash account, and then removing cash from the bank’s vault. Chon faces a maximum sentence of 30 years in prison and a $1 million fine, as well as mandatory restitution.

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Trader Pleads Guilty in Large-Scale Computer Hacking and Securities Fraud Scheme Involving Business Newswires
On January 19, 2016, Igor Dubovoy pled guilty to conspiracy to commit wire fraud as a result of his role in an international scheme to hack into the computer systems of business newswires (“Victim Newswires”) to steal yet-to-be published press releases containing non-public financial information relating to hundreds of companies traded on the NASDAQ and NYSE.  This information was then used to generate approximately $30 million in illegal trading profits.  Dubovoy was arrested on August 11, 2015, in connection with a federal indictment filed on August 6, 2015, and brought in the District of New Jersey. 

In addition to the charges against Igor Dubovoy, the 23-count indictment also charged Ivan Turchynov, Oleksandr Ieremenko, Pavel Dubovoy and Arkadiy Dubovoy with wire fraud conspiracy, securities fraud conspiracy, wire fraud, securities fraud, and money laundering conspiracy. Turchynov and Ieremenko were also charged with computer fraud conspiracy, computer fraud and aggravated identity theft. 

Igor Dubovoy’s plea included the entry of a Forfeiture Money Judgment in the amount of $11,495,323.00, and waiver of the right to file an appeal.  On February 18, 2016, the U.S. Attorney’s Office for the District of New Jersey entered into a plea agreement with Arkadiy Dubovoy in which Arkadiy agreed to be jointly and severally liable with Igor for the total amount of the Forfeiture Money Judgment.  Arkadiy also pled guilty on February 18th.  Proceedings against the remaining defendants are ongoing.

In a separate, but related case, a three-count Information (waiving Indictment) dated May 16, 2016, was filed in New Jersey federal court charging Vadym Iermolovych with conspiracy to commit wire fraud, conspiracy to commit computer hacking and aggravated identity theft.  Iermolovych was arrested on November 12, 2014, in connection with other charges related to computer hacking and credit card fraud.  Iermolovych entered his plea on May 16, 2016.

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SEC Charges Nine Additional Defendants in Hacked News Release Scheme
A suit filed by the SEC on August 10, 2015, charged 34 defendants with taking part in the scheme against the Victim Newswires.  The defendants were charged with violating federal antifraud laws and related SEC antifraud rules.  The complaint seeks a final judgment ordering the defendants to pay penalties, return their allegedly ill-gotten gains with prejudgment interest and be subjecting them to permanent injunctions from future violations of the antifraud laws.  Several of the defendants have entered into settlements with the SEC.

On February 17, 2016, the SEC filed fraud charges in the District of New Jersey against nine defendants in addition to the 34 defendants charged in the complaint filed in August 2015.  The court entered an asset freeze and other preliminary relief against the new defendants. The complaint seeks a final judgment ordering the defendants to pay penalties, return their allegedly ill-gotten gains with prejudgment interest and be subject to permanent injunctions from future violations of the antifraud laws. 

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Cybercrime - Pakistani Citizen Admits Laundering Millions from Massive Computer Hacking and Telecommunications Fraud Scheme
On February 11, 2016, Muhammad Sohail Qasmani pled guilty before U.S. District Judge Katharine Hayden to one count of conspiracy to commit wire fraud. Qasmani acknowledged his role in an international scheme that hacked into the telephone networks of certain U.S. companies and then ran up millions of dollars in bogus charges. The hackers targeted the telephone systems of various corporations, identifying and reprogramming unused telephone extensions to make long distance calls to premium chat lines and adult entertainment and psychic hotlines.  The calls were ultimately charged back to the companies, but no actual services were provided. Qasmani also admitted to moving over $19 million in illicit proceeds across 10 countries to compensate dialers and hackers involved in the scheme. The wire fraud conspiracy count carries a maximum sentence of 20 years in prison and a $250,000 fine.  Sentencing is scheduled to take place on October 5, 2016. Qasmani remains detained without bail.

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SEC Cases:

SEC Charges Microcap Company CEO for Touting Bogus “Clean Energy” Contracts with Foreign Governments
The SEC filed a Complaint on March 14, 2016, in New Jersey federal court against RVPlus, Inc. and it’s CEO Cary Lee Peterson, claiming that the company made false claims in its public filings and in statements to private investors.  The SEC had previously suspended trading in RVPlus securities in July 2013, citing “material deficiencies” in the company’s financial records.  The SEC’s complaint charges RVPlus and Peterson with violating the antifraud provisions of the securities laws and an SEC antifraud rule.  The SEC is seeking relief in the form of a civil money penalty and the return of all ill-gotten gains.  An initial conference before Magistrate Judge Cathy Waldor is scheduled for August 31, 2016.

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For more information about the issues in this alert, or white collar defense & investigations generally, please contact:

Victor J. Rocco at +1 212 592 1422 or [email protected]

© 2016 Herrick, Feinstein LLP. This alert is provided by Herrick, Feinstein LLP to keep its clients and other interested parties informed of current legal developments that may affect or otherwise be of interest to them. The information is not intended as legal advice or legal opinion and should not be construed as such.