Sec. 807. Criminal Penalties For Defrauding Shareholders of Publicly Traded Companies

Section 807 of the Sarbanes-Oxley Act of 2002 imposes a fine and imprisonment of not
more than 25 years on whoever executes, or attempts to execute, as scheme or artifice to

defraud any person in connection with listed securities. The same penalty is imposed on any
person who obtains, by means of fraud or fraudulent pretenses, money or property from a person
in connection with the purchase or sale of any listed security.
SEC. 807. CRIMINAL PENALTIES FOR DEFRAUDING SHAREHOLDERS OF
PUBLICLY TRADED COMPANIES.
(a) in general.chapter 63 of title 18, united states code, Is amended by adding at the end the
following:
1348. Securities fraud
whoever knowingly executes, or attempts to execute, a scheme or artifice
(1) to defraud any person in connection with any security of an issuer with a class of securities
registered under section 12 of the Securities Exchange Act of 1934 (15 u.s.c. 78l) or that is
required to file reports under section 15(d) of the Securities Exchange Act of 1934 (15 u.s.c.
78o(d)); or
(2) to obtain, by means of false or fraudulent pretenses, representations, or promises, any
money or property in connection with the purchase or sale of any security of an issuer with a
class of securities registered under section 12 of the Securities Exchange Act of 1934 (15 u.s.c.
78l) or that is required to file reports under section 15(d) of the Securities Exchange Act of 1934
(15 u.s.c. 78o(d)); Shall be fined under this title, or imprisoned not more than 25 years, or both..
(b) clerical amendment.the table of sections at the beginning of chapter 63 of title 18, united
states code, is amended by adding at the end the following new item:
1348. Securities fraud..
TYCO International Ltd.

Tyco International Ltd. is a security systems company incorporated in Ireland,
with United States operational headquarters inPrinceton, New Jersey (Tyco International (US)
Inc.).
Corporate Scandal of 2002
The executives at Tyco ensured that 2002 would be an unforgettable year for stocks.
Before the scandal, Tyco was considered a safe blue chip investment, manufacturing electronic
components, health care and safety equipment. During his reign as CEO, Dennis Kozlowski,
who was reported as one of the top 25 corporate managers by BusinessWeek, siphoned hordes of
money from Tyco, in the form of unapproved loans and fraudulent stock sales.
Along with CFO Mark Swartz and CLO Mark Belnick, Kozlowski received $170 million
in low-to-no interest loans, without shareholder approval. Kozlowski and Belnick arranged to
sell 7.5 million shares of unauthorized Tyco stock, for a reported $450 million. These funds were
smuggled out of the company, usually disguised as executive bonuses or benefits. Kozlowski
used the funds to further his lavish lifestyle, which included handfuls of houses, an infamous
$6,000 shower curtain and a $2 million birthday party for his wife. In early 2002, the scandal
slowly began to unravel and Tyco's share price plummeted nearly 80% in a six-week period. The
executives escaped their first hearing due to a mistrial, but were eventually convicted and
sentenced to 25 years in jail.
HealthSouth Corporation
HealthSouth Corporation, based in Birmingham, Alabama, is the United States' largest
owner and operator of inpatient rehabilitative hospitals. Operating in 33 states across the country
and in Puerto Rico, HealthSouth serves patients through its network of inpatient rehabilitation
hospitals (120), outpatient rehabilitation satellite clinics (29), and home health and hospice
agencies (165).
Accounting Scandal
Accounting for large corporations can be a difficult task, especially when your boss
instructs you to falsify earnings reports. In the late 1990s, CEO and founder Richard Scrushy
began instructing employees to inflate revenues and overstate HealthSouth's net income. At the
time, the company was one of America's largest health care service providers, experiencing rapid
growth and acquiring a number of other healthcare-related firms. The first sign of trouble
surfaced in late 2002 when Scrushy reportedly sold HealthSouth shares worth $75 million, prior
to releasing an earnings loss. An independent law firm concluded the sale was not directly related
to the loss, but investors should have taken the warning.
The scandal unfolded in March, 2003, when the SEC announced that HealthSouth exaggerated
revenues by $1.4 billion. The information came to light when CFO William Owens, working
with the FBI, taped Scrushy talking about the fraud. The repercussions were swift, as the stock
fell from a high of $20 to a close of 45 cents, in a single day. Amazingly, the CEO was acquitted
of 36 counts of fraud, but was later convicted on charges of bribery. Apparently, Scrushy
arranged political contributions of $500,000, allowing him to ensure a seat on the hospital
regulatory board.
Refco
Refco was a New York-based financial services company, primarily known as a broker
of commodities and futures contracts. It was founded in 1969 as "Ray E. Friedman and Co."
Prior to its collapse in October, 2005, the firm had over $4 billion in approximately 200,000
customer accounts, and it was the largest broker on the Chicago Mercantile Exchange.
The Scandal
Refco said that through an internal review over the preceding weekend it discovered a
receivable owed to the company by an unnamed entity that turned out to be controlled by Mr.
Bennett, in the amount of approximately US$430 million. Apparently, Bennett had been
buying bad debts from Refco in order to prevent the company from needing to write them off,
and was paying for the bad loans with money borrowed by Refco itself. Between 2002 and 2005,
he arranged at the end of every quarter for a Refco subsidiary to lend money to a hedge
fund called Liberty Corner Capital Strategy, which then lent the money to Refco Group
Holdings, an independent offshore company secretly owned by Phillip Bennett with no legal or
official connection to Refco. Bennett's company then paid the money back to Refco, leaving
Liberty as the apparent borrower when financial statements were prepared. It is not yet clear if
Liberty knew it was hiding scam transactions; management of the fund has claimed that they
believed it was borrowing from one Refco subsidiary and lending to another Refco sub, and not
lending to an entity that Mr. Bennett secretly controlled. On October 20, they announced plans to
sue Refco.
On October 27, 2005, shareholders of Refco filed class action lawsuits against
Refco, Thomas H. Lee Partners, Grant Thornton, Credit Suisse First Boston, and Goldman
Sachs. On March 2, 2006, a lawyer representing Refco's unsecured creditors began steps to sue
the IPO underwriters for aiding and abetting the fraud, or for breach of fiduciary duty. In April
2006, creditors sued Bawag P.S.K. Group for more than $1.3 billion.
On February 15, 2008, Phillip R. Bennett pleaded guilty to 20 charges of securities fraud
and other criminal charges. On July 3, 2008, Bennett was sentenced to 16 years in federal prison.
Bayou Hedge Fund Group

The Bayou Hedge Fund Group was a group of companies and hedge funds founded
by Samuel Israel III in 1996. Approximately $450m was raised by the group from investors. Its
investors were defrauded from the start with funds being misappropriated for personal use. After
poor returns in 1998, the investors were lied to about the fund's returns and a fake accounting
firm was set up to provide misleading audited results
The Scandal
According to federal prosecutors, Bayou had lied about its operations since the
beginning, by overstated gains, understated losses, and reported gains where there were losses.
Court documents show that Bayou never made any money. In mid-2004, Bayou sent a letter to
investors, claiming that its assets valued in excess of US$450 million.
In 2004, Samuel Israel III and Daniel Marino, the CEO and CFO, respectively, stopped
trading fully and spent all resources on covering losses. Over the course of six days in July 2004,
Bayou withdrew about $161 million from five bank accounts. They were eventually caught,
wiring US$100 million overseas.
In 2005, it was discovered that Bayou capital was responsible for one of the most
publicized hedge fund frauds in history. On September 29, 2005, the Commodity Futures Trading
Commission (CFTC) filed a complaint in the United States District Court for the Southern
District of New York, alleging misappropriation and fraud involving Connecticut hedge fund
manager Bayou Management, LLC (Bayou Management), its principals, Samuel Israel III and
Daniel E. Marino, and Richmond Fairfield Associates, Certified Public Accountants PLLC
(Richmond Fairfield).
Over $100 million seized by authorities after the collapse had not yet been distributed to
victims as of June 24, 2008.
On 14 April 2008, Israel was sentenced to 20 years in prison and ordered to forfeit $300
million after pleading guilty to defrauding investors in his now-bankrupt firm. On 10 June 2008,
it was reported by the press that Israel may have committed suicide after a car registered to Israel
was found abandoned on the Bear Mountain Bridge that spans one of the deepest stretches of
the Hudson River in New York. It was the same day that Israel was supposed to begin serving his
20-year prison sentence.
Israel later turned himself in to federal authorities in Southwick, Massachusetts on July 2,
2008. NBC aired a Dateline segment about him on September 5, 2008

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Sec. 807. Criminal Penalties For Defrauding Shareholders of Publicly Traded Companies

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Section 807 of the Sarbanes-Oxley Act of 2002 imposes a fine and imprisonment of not

more than 25 years on whoever executes, or attempts to execute, as scheme or artifice to

TYCO International Ltd.

Bayou Hedge Fund Group

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