Friday, February 22, 2008

Immunity Deal's Global Implications

By Mark Brousseau

The proposal in the U.S. Senate to grant immunity to U.S. banks in the DataTreasury patent infringement lawsuit (see previous post) has drawn a lot of strong comments for many corners of the industry. Among those raising questions about the implications of granting immunity to the banks, is John V. Ashley, CEO of Cheq Information Technology, Inc. (

Ashley is concerned about the international implications of the U.S. Congress and the President signing off on this legislation, as well as the implications as it would relate to the World Intellectual Property Organisation (WIPO) in Geneva.

“We live in a global economy and can no longer think just about the United States when it comes to this kind of legislation,” Ashley told me. “Canada and India also are moving into a Check 21-type environment. The U.S. legislation would negate any potential revenues [for DataTreasury] from these countries. Are we thinking too parochially here?”

What do you think? Post your comments here.

Wednesday, February 20, 2008

Epic Scam At D.C. Tax Office

Posted by Mark Brousseau

An interesting article from today's Washington Post:

Tab in Scam At Tax Office In D.C. Nears $50 Million

By Carol D. LeonnigWashington Post Staff WriterWednesday, February 20, 2008; A01

Federal authorities think that nearly $50 million was stolen in an embezzlement scheme run out of the D.C. tax office, more than double the amount they had previously uncovered, four sources close to the investigation said.

The corruption at the D.C. Office of Tax and Revenue went undetected much longer than initially thought, the sources said, extending back almost 20 years. In addition to tracking the missing money, authorities are looking into gifts suspected of being provided to co-workers and others by the woman accused of leading the scam, former tax office manager Harriette Walters.

The scheme is the largest corruption case in the city's history. Witnesses have told investigators that Walters, who is accused of issuing larger and larger bogus tax refund checks over the years, lavishly spread the wealth, the sources said.

Security guards got cash, office mates got free meals and virtually anyone who made a request got something, said the sources, who spoke on condition of anonymity because the investigation is ongoing.

Two of the sources, who are familiar with the accounts of witnesses, said the gifts included $35,000 to a co-worker who wanted to remodel her house, $25,000 in cash and luxury gifts to an assistant whom Walters began mentoring and $15,000 each to help two co-workers' daughters pay for renovations and credit card bills.

Walters repeatedly lent huge chunks of cash to colleagues with no requests for repayment, the two sources quoted witnesses as saying. And, said the sources, citing witnesses, Walters paid for her goddaughter's college tuition and a New Jersey home for $855,000. The goddaughter's attorney declined to comment on the case.

Since Walters was arrested in November, authorities have issued subpoenas for financial records, interviewed dozens of witnesses and built a more complete picture of what happened, the sources said.

Prosecutors told a judge soon after Walters was arrested that they had confirmed she had helped steal $20 million in fraudulent refund checks since 2004. But the estimated losses have been growing as federal investigators have delved further into records at the Office of Tax and Revenue and found dozens more fraudulent checks made out to city employees. Sources said that the total is nearing $50 million.

In early December, a Washington Post analysis found that $44.3 million in suspicious property tax refund checks had been issued by the office from 1999 to 2007, the period for which computerized city records were available. The Post identified 160 checks that lacked court orders required for legitimate large refunds and were made out to companies that were either fictitious or were not due a tax refund.

The higher the official theft total, the greater the potential penalty faced by Walters and the nine other people charged in the case.

Authorities are scrutinizing the activities of at least 40 people who have not been charged and are trying to determine whether they received things of value or were involved in financial transactions with those accused of being conspirators, according to interviews and documents reviewed by The Post. Those people are largely city employees who signed off on refund paperwork and others who received the gifts in question.

Witnesses have told authorities in recent weeks that Walters and a small cadre of friends began issuing bogus refund checks for modest amounts and erasing property tax bills as early as 1989.

They told authorities that Walters told them that, by manipulating the manual, paper-based records of the office, they could prevent supervisors and computer tracking systems from checking behind them, the sources said.

Walters, 51, a 25-year tax office employee, remains jailed without bond on charges that she and others generated fraudulent property tax refund checks and used doctored paperwork and front companies to cash them. Her attorney, Steve Tabackman, declined to discuss the case.

"In the midst of an ongoing investigation, we're simply not in a position right now to comment on The Post's reporting," Tabackman said.

Only one other tax office employee has been charged in the case: Diane Gustus, 54, a tax specialist who worked under Walters. Gustus's attorney, A. Scott Bolden, said he has been independently researching who received things of value from Walters.

"The gift-giving and cash-giving was so prevalent, it should be embarrassing to the D.C. government that this culture was allowed to exist and expand," Bolden said.

Bolden confirmed that the Gustus family received cash and valuable gifts from Walters. He said that his clients weren't aware that the money and gifts were tainted and that Walters told co-workers she inherited considerable wealth from family in the Virgin Islands.

"The government says they got things," Bolden said. "My response is: Who didn't?"

The new details raise more questions about the level of supervision in the Office of the Chief Financial Officer, which failed to detect the fraud in the largest agency under its umbrella. In the past decade, mostly under the leadership of Natwar M. Gandhi, the office has spent more than $100 million on a new computer system for the tax office and at least $1 million a year on external city audits.

The potential penalties in the case are growing, even as lawyers say that some defendants are in plea negotiations. Those charged in a conspiracy to steal $20 million to $50 million would face an estimated 15 to 20 years in prison under federal sentencing guidelines. Those charged with helping to steal $50 million or more could face as much as 30 years.

Federal prosecutors in the District and Maryland, where many of the banking transactions took place, have said they are determined to get back as much of the missing money as possible.
Court records show that prosecutors are also trying to determine which city employees knew or should have known that they were close to a massive crime in progress.

William Sullivan, a criminal defense lawyer and former prosecutor, predicted that authorities will try to criminally charge some gift recipients under the legal theory of "willful blindness." In those cases, Sullivan said, prosecutors must show evidence that the defendants intentionally ignored "red flags" that would make a reasonable person suspect a crime.

Based on witness accounts, there were signs of trouble. Walters took young women in her office, even those she knew only casually, on four-figure shopping sprees at Saks and Neiman Marcus and picked up the tab, according to information provided to authorities. Witnesses have told investigators that Walters also gave hundreds of dollars, over time, to security guards outside the tax agency's North Capitol Street office, the sources familiar with the probe said.

It was not unusual, sources said, for Walters to give a wad of cash to her assistant to buy breakfast or lunch for her 15-member office -- two or three times a week.

Some of the missing city money went toward buying property in the Washington area, New Jersey and the Caribbean, prosecutors have said, as well as for luxury cars, Louis Vuitton handbags and gambling trips to Atlantic City and Las Vegas.

The houses and cars can be sold by the government to reclaim some of the money for taxpayers, and the designer goods will probably bring some fraction of their original purchase prices at public auction. Much of the money is gone forever, investigators said.

Alethia Grooms, a former D.C. government employee who is among those charged in the case, has told authorities about what might be the beginnings of the scheme, her attorney, Kevin McCants, confirmed.

As early as 1990, McCants said, Walters told Grooms and a few other friends about how they could get free city money through bogus tax refund checks. Walters said there was no backup computer system to notice the manipulated checks, McCants said.

Grooms got a check for a little more than $4,000 in 1990, records show. McCants said she is "very remorseful" but didn't continue taking city money or know about the ongoing scam until Walters contacted her in 2003 trying to cash another refund check.

"She was dumbfounded that Harriette had been doing it on a continuing basis all this time," McCants said. "She thought this was done a couple of times and then it was over. But then she learned it had been going on uninterrupted, and the stakes had grown obviously much higher."

Staff writer Paul Duggan, database editor Dan Keating and staff researcher Meg Smith contributed to this report.

Thursday, February 14, 2008

Immunity for Banks in DataTreasury Suit?

Posted by Mark Brousseau

An extremely interesting article in today's Washington Post:

Lawmakers Move to Grant Banks Immunity Against Patent Lawsuit

By Jeffrey H. BirnbaumWashington Post Staff WriterThursday, February 14, 2008; A22

Sen. Jeff Sessions (R-Ala.) has sponsored an unusual provision at the urging of the nation's banks granting them immunity against an active patent lawsuit, potentially saving them billions of dollars.

Adopted with little fanfare, the amendment would prevent a small Texas company called DataTreasury from collecting damages from banks for infringing on its patented method for digitally scanning, sending and archiving checks. The patents were upheld last summer by the U.S. Patent and Trademark Office after they were challenged.

The provision, passed without dissent by the Senate Judiciary Committee in July and inserted into legislation scheduled for a vote by the full Senate this month, is a rare attempt by Congress to intervene in ongoing litigation, congressional experts say.

Although the amendment would not invalidate DataTreasury's patents, it would spare the banks from paying for infringing them should courts decide that's warranted. If DataTreasury collected a royalty of just a couple pennies per check, the cost would run into billions of dollars.

The federal government would have to pay $1 billion to DataTreasury over 10 years as compensation for taking its property under the amendment, according to estimates by the Congressional Budget Office.

Banks process more than 40 billion checks each year. At one time, those checks had to be delivered physically to be drawn upon. But five years ago -- in the wake of the grounding of aircraft laden with billions of dollars in checks after the Sept. 11, 2001, attacks -- federal law was changed to allow electronic transfers as well.

Some major financial institutions, notably Merrill Lynch and J.P. Morgan Chase, have licensed DataTreasury's technology for the purpose. Lawsuits alleging infringement are pending against others, including Bank of America, Wells Fargo, Wachovia and Citigroup.

When the Judiciary Committee began to draft landmark legislation overhauling the country's patent laws last year, lobbyists for these banks jumped into action.

The Financial Services Roundtable, a lobby group that represents the nation's largest financial institutions, and the banks approached Sessions about sponsoring an amendment to protect them. They said they chose to work with Sessions because of his long-standing antipathy toward plaintiff's attorneys and his previous interest in the electronic check system.

Lobbyists for the Roundtable and the banks, including prominent free-lance lobbying firms Smith-Free Group, Bryan Cave Strategies and Quadripoint Strategies, conducted rush visits with Judiciary Committee members and their aides to advocate the measure. Sessions’ staff produced a three-page description of the amendment and its background with the help of the Roundtable and distributed it to the committee.

Commercial banks are considered a potent force on Capitol Hill, in part because of their heavy contributions to lawmakers. They are the 10th-largest donor to federal candidates among the industry groups followed by the Center for Responsive Politics. They also spend millions of dollars a year on lobbying.

Political action committees of financial institutions were the largest single category of industry donors to Sessions, with $52,300 in the current election cycle, the center said. That represented nearly a quarter of PAC contributions he received as of midyear 2007.

Sessions said the banks' support for him was not a factor in his decision to sponsor the amendment. Stephen Boyd, a spokesman for Sessions, said the provision “is designed to protect banking institutions complying with post-9/11 security requirements from the abusive practices of patent trolling trial lawyers seeking personal enrichment, which ultimately will be paid for by checking account customers across America.”

In addition, bank lobbyists say they are working with senators to alter the amendment so that it would not cost the government money.

The provision introduced by Sessions did not name DataTreasury but was carefully tailored to apply to that company and its “check collection” system.

The amendment was approved by the committee in minutes and without opposition. The measure received little news media attention outside the banking trade press.

Even Claudio Ballard, the founder of DataTreasury, which holds the patents, said he did not hear of the amendment until days afterward. He said he had been unaware that the Judiciary Committee was considering it and engaged lobbyists to help him only after it had passed.

Ballard did not know whom to turn to for help, so he relied on his law firm, Nix, Patterson & Roach, which recommended two prominent Washington lobbyists: John D. Raffaelli and Ben Barnes.

“I've always put my full faith in the courts and the patent office; that's all I thought I needed to do,” Ballard said. “But we were blindsided” by the Senate committee. “We had no notice, no opportunity to respond, to give our side of the case, nothing,” he said.

The banks allege that DataTreasury bought up patents for the system that underlies electronic transfers and is trying to shake down companies for licensing fees. But DataTreasury asserts that Ballard is the inventor of the system and built a company to sell it before being squashed by banks that stole his idea. Court battles have raged between the two sides for six years.

The banks are emphatic about the need for the protection. “This is a glaring example of the abuse of the system,” said former congressman Steve Bartlett (R-Tex.), president of the Financial Services Roundtable. “It's an example of what's wrong with patent law.”

He called the Sessions amendment a priority for the banking industry.

The Commerce Department has objected to the amendment, including in a letter last week to Sen. Patrick J. Leahy (D-Vt.), the Judiciary Committee chairman. “Limiting patent holders’ rights and remedies in this instance could reduce innovation in this technology area,” wrote Assistant Secretary Nathaniel F. Wienecke. “The Administration does not support exceptions to patent protection based on a particular technology.”

DataTreasury's patents were upheld by the patent office after a challenge by First Data, a provider of merchant processing services. The patent office concluded Ballard's patents were not predated by other patents and documents, as First Data had alleged.

Ballard asserts that he developed the basic architecture for the system in the mid-1990s, and applied for patents in 1997 and ‘98. He said he realized at the time that paper would one day be obsolete for financial transactions but that paper and electronic images would have to coexist for a while. His system helped make that possible, he said.

Ballard has a long history of working with databases. He was an early reseller of Oracle database products in the 1980s and later developed a method of adapting Oracle's software to complex computer applications for government and large corporations.

He said he talked to some bank officials at an early stage of the check system's development and, despite having signed nondisclosure agreements with them, soon lost control over his invention.

“We've struggled mightily,” Ballard said. “We almost went bankrupt at the end of 2001.” He said he brought in investors to remain afloat and, as a result, now owns 2 percent of the firm he founded. The company, located in the technology corridor near Plano, TX, once had 100 employees, he said. It now has two.

Monday, February 11, 2008

Reduce Trade Show Costs

By Mark Brousseau

Potential recession aside, exhibitors always are on the lookout for ways to get more bang out of their trade show buck. One strategy may be to minimize costs and avoid unnecessary charges on their material-handling bill. In the February issue of Exhibitor Magazine, exhibit-management consultant Candy Adams provides the following six ways to save money on material handling:

Stop shipping unnecessary items. Think: massive quantities of literature.

Consolidate small shipments. General services contractors typically charge exhibitors a weight minimum for each shipment they handle, which can add up.

Choose your shipping method carefully. Palletizing your pad-wrapped pieces can mean significant savings, for example.

Meet the inbound target dates and times. If your carrier misses the targeted window of time for its truck to arrive in the marshalling yard to unload your freight, you’ll be saddled with additional material-handling surcharges or penalties, Adams notes.

Verify weight slips. Adams recommends stopping at the service desk the day after your freight arrives on site and ask to see your inbound certified weight slips.

Audit your material-handling invoice. Review every line item of your general services contractor’s invoice to make sure your have been billed correctly.

Do you have any tips to pass along? E-mail me at

Sunday, February 10, 2008

Compliance Drives Automation

By Mark Brousseau

Many document automation vendors will tell you that compliance and audit issues are a major part of the business case for unstructured documents solutions, and the results of a recent Question of the Week on the TAWPI Web site confirm it.

Forty-nine percent of respondents to the online survey said that compliance and audit issues are playing a “very big” role in their need for unstructured documents solutions, while another 29 percent of respondents said compliance and audit issues were a “somewhat big” component. This means that compliance and audit issues were a significant factor in the need for unstructured documents solutions at 78 percent of the organizations that responded.

Just 18 percent of respondents said compliance and audit issues were a “somewhat small” issue in their need for unstructured documents solutions, while only 4 percent said they were a “very small” factor.

What is the story at your organization? E-mail me at

Firms Split on RDC Payback

By Mark Brousseau

Despite all the hoopla over remote deposit capture (RDC), it might surprise you to learn that just over half of the respondents to a recent Question of the Week on the TAWPI Web site said that their organization is actually benefiting from the technology.

Fifty-two percent of respondents (which included both corporate depositors and financial institutions) to the online survey said their organization was benefiting from RDC, while 45 percent of respondents said their organization wasn’t. Two percent of respondents said they didn’t know.

What has been your organization’s experience? E-mail me at

Friday, February 8, 2008

30 Billion And Dropping

By Mark Brousseau

During a presentation at this week’s BAI TransPay conference at the Gaylord Texan Resort & Convention Center in Grapevine, TX, Richard Oliver, executive vice president, Retail Payments Office at the Federal Reserve Bank, provided key results of the Fed’s latest three-year study of non-cash payments. The information helps define the markets for vendors, a leading provider of distributed capture solutions told me today. Oliver said there were about 30 billion checks written in 2006. The breakdown:

51 percent of the checks were written by consumers
... 32 percent of these were consumer to business remittance checks
... 6 percent were consumer to business remittance at point of sale (remote remittance)
... 13 percent were consumer to business point of sale (Back Office Conversion eligible)

25 percent of the checks were written by businesses to other businesses (includes governments)
... 16 percent were business to business (wholesale remittance)
... 5 percent were business to business remittance at point of sale
... 3 percent were business to business point of sale

17 percent of the checks were business to consumer (payroll, refunds, etc.)

7 percent were consumer to consumer casual

Note: the numbers don't add up to 100 percent because of Federal Reserve Bank rounding. Another key statistic that Oliver provided was that 2.6 billion checks were converted to ACH in 2006.

What do you think? E-mail me at

Punitive Fees Under Threat

By Mark Brousseau

Bank revenues generated by punitive fees, such as for overdrafts, may be under threat, analysts from New York-based First Manhattan Consulting Group (FMCG) write in the January/February issue BAI Banking Strategies.

FMCG estimates overdraft fees alone total almost $20 billion per year and have been growing quickly as many banks have allowed customers to overdraft in more complicated ways – such as through debit, online bill payment and automated teller machine (ATM) withdrawals.

But FMCG believes the growth of fee revenues will slow as punitive fees begin to draw the attention of Congress and as legislation is adopted that requires banks to notify customers before imposing an overdraft fee.

What do you think? E-mail me at

Sunday, February 3, 2008

Bank Relationships Are Key

By Mark Brousseau

A bank’s commitment to the customer relationship is the most important quality that finance executives from midsize companies look for in a cash management bank, according to Treasury & Risk’s 2008 Middle Market Survey. The price of cash management services and the quality of customer service were second and third most important, respectively.

In last year’s survey, the finance executives at midsize companies ranked the price of cash management services most important, followed by the bank’s commitment to the relationship.

What do you think? E-mail me at