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Goldman Sachs’s Newest Employee Knows All About Stealing and Lying


Credit Suisse Group AG (CSGN) sued its former vice president of emerging markets, Agostina Pechi, claiming she stole the bank’s trade secrets in a bid to win clients for her new employer, Goldman Sachs Group Inc (GS).

In February and March, Pechi secretly sent e-mails with client lists and other confidential bank information from her work account to her personal inbox, and printed “critical transaction documents” late at night from her office, when she was supposed to be on vacation, Credit Suisse (CSGN) said in a complaint filed yesterday in state court in Manhattan.

Pechi, who made $950,000 last year and lives in New York, resigned from the Zurich-based bank on April 2, telling Credit Suisse’s human-resources department she was accepting a position at New York-based Goldman Sachs (GS), according to the complaint.

“Pechi decided to steal confidential Credit Suisse information and contacts that she had learned during the course of her employment for Credit Suisse,” according to the complaint. She plans to use the data “to compete with Credit Suisse, and intends to provide this information to her new employer to specifically target Credit Suisse’s clients.”

A message left on a mobile phone listed for Pechi, seeking comment on the lawsuit, wasn’t immediately returned yesterday. Michael DuVally, a Goldman Sachs spokesman, declined to comment on the lawsuit.

Sensitive Deal

Credit Suisse, the second-biggest Swiss bank, alleges Pechi started systematically taking secret bank data by at least Feb. 4, when she e-mailed “highly confidential deal-structuring documents” related to a sensitive deal with a client.

Around March 19, Pechi allegedly sent an e-mail to herself containing databases that she had helped build with the bank’s emerging markets team. She’s also accused of sending her client list from Credit Suisse, as well as client lists that she didn’t personally cover and other “important contacts in the emerging markets space,” according to the complaint.

“There is no question that the databases that Pechi mailed to herself were and are the property of Credit Suisse, developed by Credit Suisse using its own resources,” the bank said in the complaint.

Credit Suisse (CSGN) also claims Pechi deliberately obscured the status of deals with a critical client and in one case, told the bank the client had a “flagging” interest in current and future business while meeting with them on her own.

Departure Prep

“Pechi held these in-person meetings in an effort to shore up her relationship with the client in preparation for her departure, and to explicitly discuss moving its business to Pechi’s new firm,” according to Credit Suisse’s complaint. “Based upon Pechi’s representations, senior Credit Suisse employees did not meet with the client.”

The Swiss bank claims that after Pechi resigned, she cooperated with a probe into her activities, including allowing Credit Suisse’s third-party investigators to search some of her personal effects at her home on April 12, and granting them access to her personal e-mail and work BlackBerry.

When about 60 bank e-mails were located in her personal account, she agreed to let investigators review them the next day, and then allegedly deleted them before they had a chance, Credit Suisse claims.

“Less than 24 hours later, the e-mails had been deleted from Pechi’s personal e-mail account and could not be recovered, despite the fact that Pechi was aware that Credit Suisse’s investigators had returned solely to extract these 60 emails,” the bank said.

The case is Credit Suisse Securities (USA) LLC v Pechi, 651617/2013, Supreme Court of the State of New York, County of New York (Manhattan).

via Credit Suisse Sues Ex-Vice President Who Left for Goldman – Businessweek.

via Credit Suisse Sues Ex-Vice President Who Left for Goldman – Businessweek.

Can You Really Patent A Gene?


The question of whether genetic material can or should be patented by pharmaceutical companies is being tested in courts both in the U.S. and overseas.

On Monday, the U.S. Supreme Court heard an appeal by the American Civil Liberties Union and the Public Patent Foundation against Myriad Genetics Inc., a Utah-based private biotechnology company that holds patents on the BRCA1 and BRCA2 genes, two genetic mutations associated with breast and ovarian cancer.

The case pits groups that want freer access to gene mutations against companies who argue that they need patent protection to recoup research and development costs.

According to Myriad’s website, approximately 7 percent of breast cancer cases and up to 15 percent of ovarian cancer cases are caused by mutations in the BRCA1 and BRCA2 genes. It says people with mutations of either gene have “risks of up to 87 percent for breast cancer and up to 44 percent for ovarian cancer by age 70.” The company’s $3,340 BRACAnalysis test identifies the mutations.

The Supreme Court decision is expected by June, and Credit Suisse analysts have said other firms would quickly enter the market if the company loses patent protection, forcing Myriad to lower prices.

“The frustration that many in the medical community have toward the way (Myriad) has profited from its BRCA patents should not be underestimated when they are given an opportunity to help find an alternative to using (Myriad) for their BRCA tests going forward,” Credit Suisse analysts Vamil Divan and Jeremy Joseph wrote in a note entitled “Assessing How SCOTUS May Move MYGN.”

Under U.S. law, a DNA sequence can be considered for patenting by the U.S. Patent and Trademark Office if the patentee alters its environment or structure. Myriad’s patents were approved because the BRCA genes were isolated from their natural environment, giving Myriad the right to prevent anyone else from testing, studying or even looking at the genes.

The American Civil Liberties Union (ACLU), which represents the Association for Molecular Pathology, argues that patents on human genes violate the First Amendment and U.S. patent law because genes are “products of nature” and therefore can’t be patented.

“By patenting the genes, Myriad obtained the rights to exclude all other medical and scientific work on the genes,” ACLU attorney Sandra Park told The Financialist. “It enforced its patents to create a monopoly on BRCA genetic testing offered to patients.  It therefore faces no competition for its genetic testing services, even when other laboratories could provide testing that is more comprehensive or lower-priced.”

Myriad declined to comment, but argued on its blog that patent protection encourages innovation. In its most recent quarterly earnings report, Myriad said revenue from the BRACAnalysis test, which represented 74 percent of the company’s total quarterly revenue, was $110.3 million, a 9 percent increase over the same period of the prior year.

“Without the patents, our work would not have been possible,” the company said. “We would not have been able to raise the funds necessary to decode the genes, design and deliver the tests, interpret the results, and help patients.”

“We did not patent the genes in your body, and neither does any other company,” it continued. “Instead, we patented synthetic molecules based on the genes that were created in the lab in order to deliver life-saving tests to patients.”

In February, Australian Federal Court Justice John Nicholas dismissed a 2010 lawsuit brought by advocacy group Cancer Voices Australia and breast cancer patient Yvonne D’Arcy against Melbourne-based Myriad and Genetic Technologies, which has exclusive rights to the testing in Australia and New Zealand. The plaintiffs attempted to block the companies’ Australian patent, which covers mutations of BRCA1. No Australian court had ever been asked to consider the question of whether isolated human genes are patentable, and Justice Nicholas decided that the process of isolating the BRCA1 gene for testing constitutes a patentable action. But in his ruling, Nicholas said there was “no doubt that naturally occurring DNA and RNA as they exist inside the cells of the human body cannot be the subject of a valid patent.”

The ruling means that in Australia, only Myriad can continue carrying out tests with the gene mutation. Genetic Technologies is not currently enforcing its ownership rights under patent laws, though it could at any time, potentially halting medical research and testing in Australia.

Lawyer Rebecca Gilsenan, who represented Cancer Voices Australia and D’Arcy, has said her clients would appeal. That appeal is likely to be heard later this month.

The ACLU contends that unless gene patents are overturned, scientists at universities, laboratories, and biotechnology companies will continue to face difficulty developing new tests, drugs and other information based on genetic information and sequencing.

Genetic tests currently exist to screen the multiple genes now associated with breast and ovarian cancer, but these clinical tests cannot include the BRCA genes because geneticists would be legally liable,” Park said. “Scientists are aware of which genes are patented and choose not to pursue research on those genes for fear of patent liability.  Moreover, gene patents allow a single laboratory to use its patents to control most of the data about a gene.”

Steven L. Salzberg, Professor of Medicine, Biostatistics, and Computer Science at

Johns Hopkins University, told The Financialist the argument that isolating DNA means it’s somehow different is a “very unscientific argument.”

Salzberg said there are patents on thousands of human genes already, but only a few have such a significant influence on the chance of developing cancer.

“The outcome of this case might see a whole lot of companies come out and enforce [their patents],” said Salzberg.

via Can You Really Patent A Gene? | The Financialist.

via Can You Really Patent A Gene? | The Financialist.

“Pervasive” Fraud by our “Most Reputable” Banks


A recent study confirmed that control fraud was endemic among our most elite financial institutions

The key conclusion of the study is that control fraud was “pervasive” (PSW 2013: 31).

“[A]lthough there is substantial heterogeneity across underwriters, a significant degree of misrepresentation exists across all underwriters, which includes the most reputable financial institutions” (PSW 2013: 29).

Finance scholars are not known for their sense of humor, but the irony of calling the world’s largest and most harmful financial control frauds our “most reputable” banks is quite wondrous.  The point the financial scholars make is one Edwin Sutherland emphasized from the beginning when he announced the concept of “white-collar” crime.  It is the officers who control seemingly legitimate, elite business organizations that pose unique fraud risks because we are so loath to see them as frauds.

The PSW 2013 study confirmed one form of control fraud and provided suggestive evidence of two other forms that I will discuss in a future column.  The definitive evidence of control fraud that PSW2013 identifies is by mortgage lenders who made, or purchased, mortgages and then resold them to “private label” (non-Fannie and Freddie) financial firms who were creating mortgage backed securities (MBS).  The deceit they documented by the firms selling the mortgage loans consisted of claiming that the loans did not have second liens.  The lenders knowingly sold mortgages they knew had second liens under the false representations (reps) and warranties that they did not have second liens.  (The authors confirm the point many of us have been making for years – the banks that fraudulently sold fraudulent mortgages did have “skin in the game” because of their reps and warranties.  The key is that the officers who control the banks do not have skin in the game – they can loot the banks they can control and walk away wealthy.)  The PSW 2013 study documents that the officers controlling the home lenders knew the representations they made to the purchasers as to the lack of a second lien were often false (pp. 2, 5 n. 6), that such deceit was common (p. 3), that the deceit harmed the purchasers by causing them to suffer much higher default rates on loans with undisclosed second liens (pp. 20-21), and that each of the financial institutions they studied – the Nation’s “most reputable” – committed substantial amounts of this form of fraud (Figure 4, p. 59).

The most interesting reaction to the PSW 2013 study is that of a fraud denier, The Economist’s “M.C.K.”  In his January 25, 2013 column, (“Just who should we be blaming anyway?”)

M.C.K. argued that we should blame the victims of the fraud (“the real wrongdoers were not those who sold risky products at inflated prices but the dupes who bought them….”).

Only three weeks later, in his February 19, 2013 column discussing the PSW 2013 study, M.C.K. admitted that fraud by banks had played a prominent role in the crisis.

“BUBBLES are conducive to fraud. Buyers become less careful about doing their due diligence when asset prices are soaring and financing for speculation is plentiful. Unscrupulous sellers exploit this incaution. The victims are none the wiser as long as the bubble continues to inflate.”

I will explain in a later column why I believe this passage is badly flawed, but my point here is that the fraud denier and “blame the victim” columnist has recanted.

“During America’s housing bubble, mortgage originators were told to do whatever it took to get loans approved, even if that meant deliberately altering data about borrower income and net worth. Many argue that the banks that bundled those loans into securities deliberately and systematically misled investors and private insurers about the risks involved. It is easy to be unsympathetic in the absence of hard evidence. As I argued in a previous post , ‘investors were not forced to take the losing side of so many trades.’

While I stand by that view, a new paper by Tomasz Piskorski, Amit Seru, and James Witkin convincingly argues that banks deliberately misrepresented the characteristics of mortgages in securities they pitched to investors and bond insurers. The misrepresented loans defaulted at much higher rates than ones that were not—a result that would not be produced by random errors. Moreover, the share of loans that were misrepresented increased as the bubble inflated. The authors estimate that underwriters may be liable for about $60 billion in representation and warranty damages (emphasis in original).”

These two paragraphs are worth savoring in some detail.  The central point we have been arguing for years is now admitted – and treated as a universally known fact: “mortgage originators were told to do whatever it took to get loans approved, even if that meant deliberately altering data about borrower income and net worth.”  The crisis was driven by liar’s loans.  By 2006, half of all the loans called “subprime” were also liar’s loans – the categories are not mutually exclusive (Credit Suisse 2007).  As I have explained on many occasions, we know that it was overwhelmingly lenders and their agents (the loan brokers) who put the lies in liar’s loans.

The incidence of fraud in liar’s loans was 90% (MARI 2006).  Liar’s loans are a superb “natural experiment” because no entity (and that includes Fannie and Freddie) was ever required to make or purchase liar’s loans.  Indeed, the government discouraged liar’s loans (MARI 2006).  By 2006, roughly 40% of all U.S. mortgages originated that year were liar’s loans (45% in the U.K.).  Liar’s loans produce extreme “adverse selection” in home lending, which produces a “negative expected value” (in plain English – making liar’s home loans will produce severe losses).  Only a firm engaged in control fraud would make liar’s loans.  The officers who control such a firm will walk away wealthy even as the lender fails.  This dynamic was what led George Akerlof and Paul Romer to entitle their famous 1993 article – “Looting: the Economic Underworld of Bankruptcy for Profit.”  Akerlof and Romer emphasized that accounting control fraud is a “sure thing” guaranteed to transfer wealth from the firm to the controlling officers.

M.C.K. now admits that liar’s loans were endemically fraudulent and that it was lenders and their agents who “deliberately” put the lies in liar’s loans.   Given the massive number of liar’s loans and the extraordinary growth of liar’s loans (roughly 500% from 200-2006) it is clear that that they were the “marginal loans” that caused the housing markets to hyper-inflate and created the catastrophic losses (in the form of loans, MBS, and CDOs) that drove the financial crisis.  The key fact that must be kept in mind is that once a fraudulent liar’s loan begins with the loan officer or broker inflating the borrower’s income and suborning the appraiser into inflating the home appraisal the subsequent sales of that mortgage (or derivatives “backed” by the mortgage) by private parties will be fraudulent.

The authors of the PSW 2013 study expressly cautioned that their data allowed them to examine only two of the varieties of fraud.  Lenders’ frauds in originating and selling liar’s loans were far more common, and far more harmful, than the two forms of fraud the PSW study was able to study.  The many forms of mortgage frauds by lenders and their agents, of course, were cumulative and the frauds interact to produce greatly increased defaults.

The greatest importance of the PSW 2013 study is that even the fraud deniers have to admit that our most prestigious banks were the world’s largest and most destructive financial control frauds.  Given this confirmation that the banks engaged in one form of control fraud in the sale of fraudulent mortgages (false representations about second liens), there is no reason to believe that their senior officers had moral qualms that prevented them from becoming even wealthier through the endemic frauds of liar’s loans and inflated appraisals.  Appraisal fraud is almost invariably induced by lenders and their agents.  Given the “pervasive” willingness of the officers controlling our most prestigious banks to enrich themselves personally by lying about the presence of second liens, they certainly cannot have any moral restraints that would have prevented them from creating the perverse incentives that caused loan officers and brokers to put the lies in liar’s loans and to induce appraisers to inflate appraisals – two other control fraud schemes that were far more “pervasive” (and even likelier to produce severe losses) than the two forms of fraud studied by the PSW 2013 authors.

Once the fraud deniers have to admit that one form of control fraud involving mortgages was “pervasive” among our most prestigious banks, it becomes untenable to ignore the already compelling evidence that other forms of control fraud involved in the fraudulent origination and sale of mortgages and mortgage derivatives were even more pervasive at hundreds of financial institutions.  The PSW 2013 study destroyed the myth of the Virgin Crisis.  It also exposes the falsity of the ridiculous “definition” of mortgage fraud that the Mortgage Bankers Association (MBA) foisted on the FBI and the Department of Justice that implicitly defines control fraud out of existence for mortgage lenders.  Attorney General Holder and President Obama have no excuse for their faith in the Virgin Crisis, conceived without fraud and should repudiate the MBA definition immediately and train the regulators and agents to spot and prosecute the epidemic of control frauds that drove this crisis (and the S&L debacle and Enron-era frauds).

via “Pervasive” Fraud by our “Most Reputable” Banks | New Economic Perspectives.

via “Pervasive” Fraud by our “Most Reputable” Banks | New Economic Perspectives.

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