Consumer Protection

SAN FRANCISCO- California Attorney General Edmund G. Brown Jr. today announced that he has reached a settlement with Citibank after a three-year investigation into the company’s use of an illegal “account sweeping” program. Nationally, the company took more than $14 million from its customers, including $1.6 million from California residents, through the use of a computer program that wrongfully swept positive account balances from credit-card customer accounts into Citibank’s general fund.

“The company knowingly stole from its customers, mostly poor people and the recently deceased, when it designed and implemented the sweeps,” Attorney General Brown said. “When a whistleblower uncovered the scam and brought it to his superiors, they buried the information and continued the illegal practice.”

Between 1992 and 2003, Citibank employed a computerized “credit sweep” process to automatically remove positive or credit balances from credit-card customer accounts. An account could show a credit balance if a customer double-paid a bill or returned a purchase for credit. The credit sweeps were done without notifying the customer and without regard for whether the customer had any unpaid balances or other charges owed to Citibank.

The credit sweeps targeted more than 53,000 customers nationwide. All of the affected accounts were in a recovery status, which includes accounts of customers who have died, sought bankruptcy protection, or been the target of litigation or other collection efforts by Citibank.

In July of 2001, a Citibank employee uncovered the practice and brought it to the attention of his superiors. The employee was later fired for discussing the credit sweeps with an internal audit team. In the words of a Citibank executive, “Stealing from our customers is a business decision, not a legal decision.” The same executive later said that the sweep program could not be stopped because it would reduce the executive bonus pool.

The Attorney General launched its investigation of Citibank in 2005 to determine whether the company violated the California False Claims Act by filing false holder reports with the California State Controller that omitted any reference to the swept funds. The 3-year investigation led to today’s settlement.

The settlement includes:
• Permanent injunction – Citibank will be permanently prevented from re-initiating the credit sweeps.
• Refunds to victims – Citibank will refund all improperly swept funds to customers who were victimized by the sweeps. Citibank will also pay California customers 10% interest on the amount taken.
• Penalties – Citibank will pay $3.5 million in damages and civil penalties to the State of California.
• Compliance audit – After Citibank’s refund process is complete, an independent auditor will review Citibank’s work to ensure that it has lived up to its obligations.

Citibank has affirmed that it can identify most of the victims of the credit sweeps and has begun the process of reviewing archived account data and refunding the improperly swept funds going back to 1992.

A copy of the settlement is attached

From The Wall Street Journal
August 11, 2008
Opinion Journal

Two weeks ago The Wall Street Journal kicked off a debate on how best to allocate scarce resources to solve the world's problems. Bjorn Lomborg offered a summary of the latest findings from his Copenhagen Consensus project, where he has enlisted some of the world's top economists to address the issue. Now we're offering views on the subject from top political and business leaders. How would you spend $10 billion of American resources (either directly or through regulation) over the next four years to help improve the state of the world?

Saving $10 Billion With Efficiency
By Jerry Brown
August 11, 2008

The cost of energy in the United States, on an annual basis, has now soared beyond $1 trillion. Our massive purchases of foreign oil represent perhaps the greatest transfer of wealth from one people to another in all human history. And, paradoxically, this wealth transfer is from a far more technologically advanced nation to poorer countries -- some unstable and hostile -- whose only claim is the oil that lies under their ground. Wake up America! We must stop the hemorrhaging of our national treasure, and we need to do it now.

I propose that we take the $10 billion and invest it in curbing our energy appetite through efficiency programs and incentives. The efficiency I envision would allow us to enhance our quality of life, but do so in ways that reduce the huge quantities of oil, gas and coal that we now consume.

California has kept its per capita electrical consumption flat for the past 25 years -- in significant part through appliance and buildings standards and incentives to adopt ways that get more work out of less energy. I am not talking about some collective hair shirt, but rather about a wide variety of new technologies and designs.

The world is facing a triple threat of unprecedented dimensions: First, the loss of cheap and easily discovered oil; second, explosive energy demand from China, India and other emerging countries as they rapidly improve their standard of living; and third, the climate disruptions caused by CO2 and other greenhouse gases. None of the three will go away. In fact, each will get progressively worse unless we take decisive action, without delay. America must take the lead in dealing with global energy and climate challenges, and at the same time vastly strengthen its own economy and security.

For too long, the federal government has been slow and unimaginative in setting efficiency standards for appliances and equipment, and in many cases it has set no standard at all. We know from the example of California's energy commission that huge financial savings can be generated through efficiency standards consistent with the best available technology. Billions of dollars and large quantities of fossil fuel could be saved if the federal government would set tough but practical standards for lighting, refrigerators, stoves, computers and other products and pieces of equipment.

Congress provided the legal authority to do so in the 2007 energy bill, but the Department of Energy currently lacks the trained personnel and engineers needed to create such a sophisticated regulatory framework. This will require additional funding -- perhaps as much as several hundred million a year. The next president should engage the appliance and equipment manufacturers and provide the kind of leadership that has so far been totally lacking.

Next, the federal government should establish a financial grant program, encouraging the states to craft efficiency standards for new buildings. Again, the example of California is instructive. Its detailed and regional building standards have saved Californians tens of billions of dollars in lower energy bills. A significant part of the proposed $10 billion could be spent on this type of effort. Each state would be asked to craft their own rules in response to the differing conditions found in various regions of the country.

A third type of program could be modeled on California's current system of rebates, tax credits and other incentives that encourage businesses and consumers to adopt efficiency measures that exceed the mandatory standards. This program is financed through the investor-owned utilities and established under the authority of the state utilities commission.

The federal government could provide a matching program for each state's efforts consistent with standards that are technically feasible, and that provide an economic return on the investment. In California, all the electric and gas utilities have added conservation investments to their historic practice of dealing with energy shortages only though building new plants.

Just as new sources of energy require vast sums spent on R&D, so do new efficiency technologies. They will emerge only if there is adequate investment in research and development. Some of the $10 billion should go for this. Needless to say, overall investment in both energy and efficiency R&D is pathetically and dangerously underfunded.

While military, medical and pharmaceutical research has steadily grown over the past two decades, R&D to increase our national energy efficiency and provide the full gamut of new fuels and power sources has fallen by 50% in real terms. In the early 1980s, energy companies invested more in R&D than drug companies; today, drug companies invest 10 times as much in R&D as do energy firms. To secure our energy and economic future, America must reverse this shameful neglect. Physicist and University of California professor Dan Kammen estimates that we must increase our level of energy and energy efficiency R&D five to tenfold, spending $15 billion to $30 billion per year to develop new fuels, new sources of energy and more efficient technologies.

America is at a crossroads. Total U.S. financial and nonfinancial debt rose to $44.7 trillion in 2006, from $2.4 trillion in 1974. This does not even count longer-term liabilities such as Social Security and Medicare. Oil and gas are consuming more and more of our national wealth. It is time for our political and business leaders to tap into America's unspent creativity and entrepreneurial genius. Many times $10 billion will be needed. But it can be done. It must be done.

Mr. Brown, a Democrat, is attorney general of California.

Contact: Abraham Arredondo: (916) 324-5500 or Ed Weil (510) 622-2149

Atty. Gen. Brown Settles Potato Chip Lawsuit With Heinz, Frito-Lay & Kettle Foods

LOS ANGELES--California Attorney General Edmund G. Brown Jr. today settled lawsuits against Heinz, Frito-Lay, Kettle Foods and Lance Inc. after the companies agreed to slash levels of the cancer-causing chemical acrylamide in their potato chips and french fries.

“The companies agreed to reduce this carcinogenic chemical in fried potatoes--a victory for public health and safety in California,” Attorney General Brown said. “Other companies should follow this lead and take steps to reduce acrylamide in french fries and potato chips,” Brown added.

In 2005, the attorney general sued McDonald’s, Wendy’s, Burger King, KFC, Frito-Lay, Kettle Foods, Lance, Procter & Gamble and Heinz, for selling potato chips and french fries containing high levels of acrylamide, a chemical known to the state to cause cancer. Acrylamide is a by-product of frying, roasting and baking foods--particularly potatoes--that contain certain amino acids. In 2002, Swedish scientists discovered high levels of cancer-causing acrylamide in fried potato products.

The attorney general sued french fry and potato chip companies under Proposition 65, the Safe Drinking Water and Toxic Enforcement Act, which requires companies to post warnings of any cancer-causing chemicals in their products unless they can prove that the levels do not pose a significant health risk.

Last year, restaurant chains including KFC, McDonald’s, Wendy’s and Burger King agreed to post acrylamide warnings at their restaurants and to pay civil penalties and costs. In January, Procter & Gamble agreed to reduce acrylamide in Pringles potato chips by 50 percent so that no warning would be required.

Under today’s settlements, Frito-Lay, Inc., which sells most of the potato chips sold in California, Kettle Foods, Inc., maker of “Kettle Chips,” and Lance, Inc., maker of Cape Cod Chips will reduce acrylamide over a period of three years to 275 parts per billion. For Frito Lay, this is about a 20% reduction, while for Kettle Chips, which contain far more acrylamide; this is an 87% reduction in acrylamide. Most Cape Cod chips are already near the compliance level, but one product, “Cape Cod Robust Russets,” contains over 7,000 parts per billion of acrylamide, and immediately will either carry a warning label on the package or will be removed from the market. Frito-Lay will pay $1.5 million in penalties and costs, $550,000 will be forgiven if it can reduce acrylamide in its products in half the time required by the settlement. It will pay an additional $2 million if it fails to reduce acrylamide in the required time. Kettle Foods will pay $350,000 in penalties and costs, while the much smaller Lance, Inc., will pay $95,000 in fees and costs.

Last week the Attorney General reached agreement with Heinz, Inc., the manufacturer of Ore-Ida frozen french fries and tater tots, will pay $600,000 in penalties and costs and will change its fried potatoes to contain 50 percent less acrylamide.

The settlements were approved today by Los Angeles Superior Court Judge William F. Highberger. A trial had been scheduled before Judge Highberger on July 28, but today’s settlement marks the end of the state’s litigation. Had the lawsuit gone to trial it would have been a legal battle with scientific experts debating the extent of the cancer risk posed by acrylamide.

The U.S. FDA is studying the problem of acrylamide in fried potatoes but has not taken formal action. The FDA’s website advises consumers that acrylamide can be reduced by not over-browning potatoes during cooking. For more information visit: http://www.cfsan.fda.gov/~dms/acryfaq.html

Brown said he will work with the companies to find a way to effectively give consumers information about the acrylamide in their products, while at the same time preventing undue public alarm and unnecessary warning signs concerning foods that contain insignificant amounts of the chemical.

For more information on acrylamide and Proposition 65 please visit:
http://ag.ca.gov/prop65/

SISKIYOU--Attorney General Edmund G. Brown Jr. today warned Nestle that California will challenge the environmental plan for a bottled water plant in Siskiyou county if the company does not revise its contract to pump water from the McCloud River.

“It takes massive quantities of oil to produce plastic water bottles and to ship them in diesel trucks across the United States,” Attorney General Brown said. “Nestle will face swift legal challenge if it does not fully evaluate the environmental impact of diverting millions of gallons of spring water from the McCloud River into billions of plastic water bottles,” Brown added.

Although Nestle publicly offered to reduce its annual water take to 195 million gallons of spring water per year--enough to fill 3.1 billion 8-ounce plastic bottles--the company has not yet agreed to change the terms of its contract with the McCloud Community Service District. The current fifty-year contract permits the company to draw 520 million gallons of spring water each year and also to pump unlimited amounts groundwater.

In a letter sent to the Siskiyou County Planning Department, Attorney General Brown said that “the environmental review for the previously proposed project had serious deficiencies,” yet “the proposed changes have not been memorialized in a formal document.” Brown also said “the suggested changes would require significant revision of the contract between Nestle and the McCloud Community Services District, a new, formal project proposal, and circulation of a new Draft Environmental Impact Report.”

Brown also said the environmental analysis fails to consider the global warming impacts of producing and transporting millions of gallons of water including:

* Greenhouse gases from producing the plastic bottles
* Electrical demand for the project
* The diesel soot and greenhouse gas emissions from truck trips.

Ninety-six percent of bottled water in the United States is sold in plastic bottles produced from fossil fuels, typically natural gas and petroleum. It took 17 million barrels of oil, not including transportation energy, to produce all the plastic bottles for American consumption in 2006. It took 900,000 tons of the chemical polyetheylene terephathalate and produced 2.5 million tons of carbon dioxide to produce all this plastic.

According to data from the Pacific Institute, it would take 1.768 million barrels of oil annually to manufacture 3.1 billion 8-ounce plastic bottles, caps and packaging to hold 195 million gallons of water.

The McCloud River is unique among California’s larger rivers in that most of its water derives from springs and underground lava aquifers rather than from rainfall or snowfall. The river and its associated riparian area provide habitat for over 200 wildlife specifies. The Lower McCloud has been designated a Wild Trout Stream by the state Department of Fish and Game.

Attorney General Brown has asked the County of Siskiyou to revise its environmental impact report and circulate a new draft of the environmental impact report.

The bottling plant is proposed for construction at 909 Mill Street in McCloud California. For a copy of the state's letter please contact the Attorney General's Press Office at 916-324-5500.

LOS ANGELES--California Attorney General Edmund G. Brown Jr. and the California Department of Food and Agriculture today announced that Bombino Express Worldwide has been sued for importing unmarked packages of mangos and yams from India that had not been treated to prevent the spread of the destructive Oriental Fruit Fly.

"Bombino Express Worldwide is charged with smuggling untreated and unlabeled fruit that can carry invasive insects like the Oriental Fruit Fly into the United States,' Attorney General Brown said. 'When foreign shipping companies disobey California’s quarantine laws they put the state’s growers at risk. County, state and federal inspectors should be commended for catching this illegal shipment and isolating its contents.'

Attorney General Brown alleges that Bombino Express Worldwide violated the Food and Agriculture Code and engaged in unfair business practices by failing to label and treat packaged mangos to kill any fruit fly larvae before exporting the products to the United States. Female Oriental Fruit Flies lay eggs in groups of 3 to 30 under the skin of host fruits and vegetables like those imported by Bombino Express Worldwide.

A single fruit fly lives approximately 90 days and can travel up to 30 miles in search of food and sites to lay eggs. The threat of agricultural destruction from invasive species like the Oriental Fruit Fly is so great that there was a complete ban on importing Indian mangos and yams until May 2006 when federal law was amended to allow limited importation of Indian mangos. Under the new rules, shipping companies must attach documentation affirming that mangos are treated to kill any fruit fly larvae.

The Department of Food and Agriculture launched an investigation into Bombino Express Worldwide after an inspector at a facility near Ontario International Airport found several unmarked packages of produce being imported to California from India. A parcel inspection dog named C.C., working for the San Bernardino County Agricultural Commissioner’s office, sniffed out the mislabeled box of mangos. Contra Costa County is also using dogs for parcel inspections in the Bay Area and there are plans to assign dogs in San Diego, Sacramento and Fresno counties.

The Attorney General’s Office seeks $10,000 per violation of the Food and Agricultural Code and California’s unfair competition statute. The company could face up to $1.67 million in penalties for its 167 violations of California law.

Oriental fruit flies have wreaked havoc on Hawaiian agriculture since the species was introduced to the island in 1946. According to the California Department of Food and Agriculture, failure to eradicate Oriental Fruit Flies in California could cost the state up to $176 million in crop losses, pesticide use and quarantine requirements.

Bombino Express Worldwide appears to be part of a large network of companies that import various products including fruit, spices and other products from India and Southeast Asia.

California’s First Amended Complaint was filed on July 9, 2008 and was served on Mohmed Yasin Latiwala July 15, 2008 in New Jersey. Latiwala was served with the lawsuit in his individual capacity as CEO and on behalf of Bombino Express, Inc., Bombino Express (Worldwide) Inc. The lawsuit was also served on the California office of Bombino Express in Hawthorne.

A copy of the state’s lawsuit is available from the attorney general's press office at: 916-324-5500. For more information from the California Department of Food and Agriculture visit: http://www.cdfa.ca.gov/exec/Public_Affairs/Index.html

SACRAMENTO--California Attorney General Edmund G. Brown Jr. today announced a $150,000 settlement for aspiring homeowners who had their entire down payments unlawfully seized by Lease2OwnHomes for missing rent on a lease-to-own agreement.

"We have obtained restitution for renters who were ripped off by an unscrupulous landlord who illegally seized down payments that were part of a lease-to-own home scam,' Attorney General Brown said.

Under California law, if a renter misses a monthly payment in a lease-to-own program, the landlord may only seek eviction and unpaid rent. In this case, the landlord unlawfully seized the entire down payment for the purchase of the home in addition to seeking the eviction and unpaid rent. In April, the attorney general sued the company in Sacramento County Superior Court, for allegedly violating section 17500 of the Business and Professions Code, by:

* Providing a lease and option to purchase agreement when the company knew that consumers were not financially capable of meeting monthly payments required to successfully purchase a home. The company also sometimes ignored its own $70,000 minimum annual income requirement for consumers participating in the program

* Falsely claiming that consumers would have time to clean up any bad credit before purchasing their Lease2OwnHome

* Falsely claiming a “Over 96% Success Rate” in helping consumers purchase homes, when virtually no one was able to purchase a home as they described

Lease2OwnHomes knew that many of the renters who signed up for homeownership would never be able to afford the monthly payments. In one case, Lease2OwnHomes sold a large house in Stockton to a divorced mother of four who was unemployed and attending school part time. After the woman missed a $1,650 monthly payment, the landlord seized her entire $9,000 deposit on the house in addition to seeking eviction.

The company told consumers that “Bad credit is OK because you will have time to clean up any credit issues like bankruptcy, chargeoffs, low credit scores, and foreclosures before purchasing your Lease2OwnHome.” The company also promised to assist with credit repair although the company was not properly registered as a credit repair company.

The attorney general is currently aware of at least 75 renters in Sacramento and San Joaquin County who signed up for the program. Company president Quentin Hazell, claimed to work exclusively with the market of “untapped future home buyers” who were within a year or two of purchasing homes but who needed “extra time to get financing in place, improve credit or save for a larger down payment.”

Under the settlement approved today by the Sacramento Superior Court, the company must pay $300,000 in civil penalties if they do not provide consumers with $150,000 in refunds for the down payments they seized.

Consumers who have filed a complaint with the Attorney General’s Office or who file a complaint on or before September 15, 2008 may be eligible for a partial refund. Consumers should file a complaint in writing to the Attorney General’s Office Public Inquiry Unit, PO Box 944255, Sacramento, CA 94244-2550 or send an online complaint to piu@doj.ca.gov.

For a copy of the settlement agreement and the state’s original lawsuit please contact the press office at (916) 324-5500.

LOS ANGELES--California Attorney General Edmund G. Brown Jr. today disclosed “shocking new details” about Countrywide Financial’s deceptive business practices which included ignoring their own underwriting guidelines and rewarding employees for selling risky home loans.

"These shocking new details provide further evidence of Countrywide's dangerous lending practices, which included ignoring borrowers' low credit scores and rewarding employees for selling risky loans,' Attorney General Brown said. 'In one case the company approved an adjustable rate mortgage to an 85-year-old disabled veteran with such a low credit score and high debt that he defaulted in less than six months.'

On June 20, 2008 Attorney General Brown sued Countrywide for engaging in deceptive advertising and unfair competition by pushing homeowners into risky loans for the sole purpose of reselling the mortgages on the secondary market. Today Brown filed an amended lawsuit in Los Angeles Superior Court which reveals twenty new details about the company's scheme to deceive consumers into taking out dangerous mortgages. The information had been previously withheld from the complaint.

Some of the new information includes the fact that Countrywide’s wholesale lending officers received higher commissions for selling Pay Option Adjustable Rate Mortgages--loans that entice consumers with a very low initial 'teaser' rate--and loans with weak underwriting standards. Countrywide also paid higher commissions for putting borrowers into loans with higher rates and fees than they qualified for based upon credit scores and other factors.

Countrywide ignored factors that it identified as having negative impacts on underwriting including: high debt ratios, low credit scores, and minimal down payments. Company employees regularly overrode warnings from Countrywide's computerized underwriting system, known as CLUES, which issued loan analysis reports rating consumer credit, purported ability to repay, and whether a proposed loan complied with underwriting guidelines.

The following examples describe new details about how Countrywide granted exceptions to sound business practices. These examples represent a small percentage of the large number of California residents who are facing foreclosure due to Countrywide’s dangerous practices:

• A Countrywide loan officer convinced a borrower to take a Pay Option ARM with a 1-month teaser rate and a 3-year prepayment penalty plus a full-draw piggyback home equity line of credit based on the loan officer’s representation that the value of the borrower’s home would continue to rise and he would have no problem refinancing. The borrower’s debt-to-income ratio was 47 percent and credit score was 663. The loan officer offered the loan even though the company’s CLUES report and an underwriter review indicated strong doubts about the borrower’s ability to repay. The loan closed in January 2006, and a Notice of Default issued in June 2007.

• The CLUES report issued for a loan applicant in February 2005 stated that the consumer had too much debt for the loan program and identified other elements of risk including a low credit score. The CLUES report raised doubts about the borrower’s ability to repay the loan but Countrywide approved a 3/27 adjustable rate mortgage with a 3-year prepayment penalty, to an 85-year old disabled veteran with a credit score of 509 score and an debt-to-income ratio of nearly 60 percent. The loan closed in February 2005, and a Notice of Default issued in July 2005.

• The CLUES report for a proposed loan identified multiple risks that created doubts about the borrower’s ability to make the payments, including the fact that a borrower had an open collection account. In January 2006, however, Countrywide granted exceptions for these risks and approved a reduced documentation Pay Option Adjustable Rate Mortgage loan for $352,000 with a 3-month teaser rate and a 3-year prepayment penalty, as well as a Piggyback home equity line of credit for $22,000. The loan closed in January 2006, and a Notice of Default issued in October 2006.

Many borrowers who obtained Pay Option and Hybrid ARMs did not understand that their initial monthly payment would at some point 'explode,' that their initial interest rate would increase and become adjustable, or that the principal amount of their loans could actually increase. Countrywide received numerous complaints regarding these practices from borrowers, including over 3,000 complaints per year handled by the Office of the President between January 2005 and August 2007.

Countrywide gave branch managers commissions or bonuses based on the net profits and loan volume generated by each branching, thereby creating intense pressure to sell as many loans as possible, as quickly as possible, at the highest prices possible. Branch managers were rewarded for meeting production goals set by corporate management, increasing the number of loans sold per loan officer, and reducing the time periods between the loan application stage and funding--or penalized for failing to do so.

Today’s amended lawsuit also contains updated data about Countrywide's staggering foreclosure rates. As of April this year, 21.11% of the mortgages owned by Countrywide Home Loans were in some stage of delinquency or foreclosure, including 47.97% of originated non-prime loans, and 21.23% of Pay Option ARMs. In January and March, 2008, Countrywide recorded 3,175 notices of default in Alameda, Fresno, Riverside, and San Diego counties alone, representing an aggregate total of delinquent principal and interest of more than $917 million.

The state's amended complaint is attached. For more information about California’s lawsuit against Countrywide please visit: http://ag.ca.gov/newsalerts/release.php?id=1582&

LOS ANGELES--Attorney General Edmund G. Brown Jr. today announced that California will receive $23 million of a $515 million nationwide settlement with Bristol-Myers Squibb. The settlement resolves allegations that the company reported “grossly inflated” drug wholesale prices to California’s Medicaid program in an effort to maintain its market share of prescription drugs.

“The Medi-Cal system requires companies to accurately report drug prices to the state,” Attorney General Brown said. “Bristol Myers-Squibb grossly inflated its reported drug prices and then used the artificially high price to increase its market share. The Bureau of Medi-Cal Fraud and Elder Abuse will continue to investigate and prosecute any alleged fraudulent conduct by any health care provider whose services or products are paid for by Medi-Cal,” Brown added.

The settlement agreement follows a drug-price investigation into Bristol Myers-Squibb and former subsidiary Apothecon that was launched in 2001 by California, the federal government, and other state attorneys general. The investigation was triggered by various whistle blower lawsuits filed around the United States. During the inquiry, Bristol Myers-Squibb voluntarily disclosed potential violations of state and federal anti-kick back law.

California found evidence of violations including: reporting artificially high average wholesale prices for prescription drugs to shut out competitors, organizing kickback schemes to lure pharmacies and wholesalers, illegally marketing an adult anti-psychotic drug as a treatment for children, and hiding the lowest sale price for Serzone to underpay Medicaid. Details of those allegations include:

* Reporting inflated average wholesale prices for physician-administered drugs:

The average wholesale prices for drugs were substantially higher than the prices for which the company sold these products, a scheme designed to maintain market share in the face of competing generic alternative drugs. The company’s sales force would “market the spread” or sell drugs based on the profit margin between the reported average price, which is the basis for Medicare and Medicaid reimbursement, and the actual costs for the same drugs, which were dramatically less than the reported price.

Medi-Cal, which is California’s Medicaid program, reimburses pharmacies and doctors based on prices reported by pharmaceutical manufacturers whose drugs are dispensed to beneficiaries. Because government health insurance programs such as Medi-Cal rely on reported prices to set reimbursement amounts, the company’s conduct caused the state to overpay for drugs.

* Engaging in an array of kickback activities to enhance their market share:

The investigation revealed that Apothecon paid millions of dollars to lure pharmacies and wholesalers to switch from competitors’ generic drugs to the company’s generic products. The payments to doctors included physician consulting programs consisting of trips to luxury resorts, meals at expensive restaurants, and tickets to sports events where doctors allegedly listened to pharmaceutical sales pitches. The kickback schemes targeted payments to doctors to keep generic competitors out of the market.

* Illegally marketing its atypical antipsychotic drug Abilify:

The Food and Drug Administration approved Abilify in November 2002 for the treatment of adult schizophrenia and later for adult bi-polar disorder. The investigation revealed that the company promoted the drug for treatment of children and dementia-related psychosis when neither use was approved by the FDA. This off-label promotion scheme increased the company’s sales between 2002 and 2005.

* Concealing its best price to the U.S. Centers for Medicare and Medicaid Management:

Bristol Myers-Squibb allegedly concealed its best price from the federal Centers for Medicare and Medicaid Management in a private-labeling scheme for its drug Serzone. The federal government uses best price to determine the amount of Medicaid rebates owed to states. The company allegedly affixed Kaiser labels to its Serzone and shipped the drugs at a lower price than was sold to any other customer. The company did not include this low price in its calculations reported to the federal government for Medicaid rebate purposes, thereby underpaying rebates owed to California.

The $23 million settlement with Bristol-Myers Squibb will pay approximately $12 million in full restitution to Medi-Cal and $11 million for the state’s False Claims Fund. The state’s lawsuit was filed in San Diego Superior Court in 2003 and then removed to the federal central district court in Los Angeles. Later it was consolidated with a number of other state lawsuits in federal court in Boston.

To date, California has reached settlements worth $9.7 million with five other companies, and their corporate parents, resolving similar allegations. Claims against fifteen companies are still pending.

For copies of the state's settlement and original lawsuit please contact the Attorney General's Press Office at 916-324-5500.

RIVERSIDE--California Attorney General Edmund G. Brown Jr. and District Attorney Rod Pacheco today sued TXI International, a Riverside cement plant, for exposing people to the potent carcinogen hexavalent chromium without providing warnings to the community as required by law.

“Dust, which contained elevated levels of cancer-causing hexavalent chromium, escaped into the air in violation of state law,” Attorney General Brown said. “California is suing the company to get them to stop their practices which cause chromium exposure.”

In late 2007, the South Coast Air Quality Management District discovered that ambient quantities of hexavalent chromium, a potent carcinogen, were up to 50 times the level that would trigger a mandatory public warning under Proposition 65, the state’s Safe Drinking Water and Toxic Enforcement Act. Investigators traced the source of the chromium to dust piles on a four acre plot at a cement factory operated by TXI International.

Since 2006 the company knew that there were four acres of uncovered and unwetted dust piles that contained chromium at a cement plant it operated. The company knew that fugitive emissions from the dust piles were spreading into the surrounding areas, including the nearby Fleetwood Motor Homes facility, where the emissions caused exposure to hexavalent chromium to persons living, working, or otherwise present in the area.

Proposition 65 was enacted to protect California citizens from chemicals known to cause cancer, birth defects or other reproductive harm, and to inform citizens about exposures to such chemicals. Businesses that expose people to those chemicals must give clear and reasonable warning to the people being exposed. The law requires a warning for chromium if exposure would create a 1 in 100,000 risk of contracting cancer. The Air Quality Management District estimated the chromium levels near the cement plant were up to 50 times that amount.

In today’s lawsuit Brown asserts that the exposures occurred because defendants allowed uncovered piles of dust to remain on a property owned by the cement manufacturer. The company’s deliberate and intentional acts have resulted in the hexavalent chromium emissions getting into the air where it has been inhaled by people near the area.

“The lawsuit filed in collaboration with the California Attorney General’s Office will help protect the environment for the people who live in this community now as well as future generations,” said Riverside County District Attorney Rod Pacheco.

The piles of chromium-containing dust are a by-product of grinding and heating raw materials, such as limestone, clay, silica, in a kiln during preparation to create concrete. After heating these materials, the resulting pebble-like particles, called clinker, are stored for long periods before other materials are added to create the final cement product. Investigators found that the company maintained approximately 80 tons of unwetted dust on four acres at a cement plant.

When wind or atmospheric conditions raise dust from the piles into the surrounding air, this results in emissions of the material contained in the dust. These emissions are called “fugitive emissions.” Defendants have known since at least 2006 that the dust at the cement plant contained hexavalent chromium.

Brown and Pacheco are suing on Thursday in Riverside County Superior Court in Riverside for violations of the state’s Safe Drinking Water and Toxic Enforcement Act. Violators are liable for civil penalties of up to $2500 per day for each violation. Under the act, also known as Proposition 65, businesses must provide a clear and reasonable warning before exposing individuals to dangerous chemicals.

Brown is also suing the company for violating the state’s unfair competition laws, a statue which allows up to $2500 per violation. The state is seeking an undisclosed amount of penalties and restitution.

Hexavalent chromium is a known carcinogen that was identified as a chemical known to the State to cause cancer on February 27, 1987.

Recently, the company agreed to pay the local air district $600,000 in penalties and spend $400,000 toward site improvements as part of an agreement to reduce the amount of toxic cement dust escaping from a factory north of Riverside. That settlement requires the company to eliminate outdoor storage of unprocessed cement, which was found to be a source of dust carrying hexavalent chromium into neighborhoods near the plant in the Rubidoux area.

Defendant TXI Riverside, Inc. is a Delaware Corporation that operates a cement plant at 1500 Rubidoux Blvd. in the City of Riverside.

LOS ANGELES--California Attorney General Edmund G. Brown Jr. today sued Countrywide Financial, its chief executive Angelo Mozilo, and president David Sambol, for engaging in deceptive advertising and unfair competition by pushing homeowners into mass-produced, risky loans for the sole purpose of reselling the mortgages on the secondary market.

“Countrywide exploited the American dream of homeownership and then sold its mortgages for huge profits on the secondary market,” Attorney General Brown said. “The company sold ever-increasing numbers of complex and risky home loans, as quickly as possible. Countrywide was, in essence, a mass-production loan factory, producing ever-increasing streams of debt without regard for borrowers. Today’s lawsuit seeks relief for Californians who were ripped off by Countrywide’s deceptive scheme.”

Brown alleges that Countrywide Financial used deceptive tactics to push homeowners into complicated, risky, and expensive loans so that the company could sell as many loans as possible to third-party investors. According to the lawsuit, the company marketed complex and difficult to understand loans with very low initial or “teaser” interest rates or payments. Countrywide employees, including loan officers, underwriters, and branch managers--who were under intense pressure to process a constantly increasing number of loans--misrepresented or obfuscated the fact that borrowers who obtained certain types of loans would experience dramatic increases in monthly payments.

In the past, lenders like Countrywide sold home loans to customers and held the loans in their own portfolio, an incentive to maintain strong underwriting standards. Countrywide, however, sold its loans to third-parties in the form of securities or whole loans, often earning more profit for riskier loans. The business model generated windfall profits for Countrywide.

The company pushed these loans by emphasizing a low “teaser” or initial rate, often as low as 1 percent for pay option ARMs. Countrywide obscured the negative effects--including rising rates, prepayment penalties and negative amortization--which would inevitably result from making minimum payments or trying to refinance. The company misrepresented or hid the fact that borrowers who obtained its home loans--including exploding adjustable rates and negatively amortizing loans--would experience dramatic increases in monthly payments.

In an effort to rope in as many customers as possible, Countrywide greatly relaxed and liberally granted exceptions to its mortgage lending standards. Traditionally, lenders required borrowers to document income and assets but Countrywide offered reduced or no documentation loan programs to increase its loan sales. Angelo Mozilo and David Sambol actively pushed for easing underwriting standards and granting exceptions to documentation requirements.

In Countrywide’s 2006 annual report, the company touted the massive growth of its loan production from $62 billion in 2000 to $463 billion in 2006--three times the increase of the U.S. residential loan production market, which tripled from $1.0 trillion in 2000 to $2.9 trillion in 2006. 26 percent of Countywide loans were for California properties. The company sold an ever-increasing number of loans in an effort to gain a 30 percent market share of loan originations and then sell its loans on the secondary market, as mortgage-backed securities or pools of whole loans. Countrywide’s securities trading volume increased from $647 billion in 2000 to $3.8 trillion in 2006.

Countrywide routinely sold loans based upon a borrower’s stated income and without verifying the information. Loan officers memorized scripts that marketed low payments by focusing on the potential customer’s dissatisfaction, saying, for example, “Which would you rather have, a long-term fixed payment, or a short-term one that may allow you to realize several hundred dollars a month in savings?” The loan officer did not state that the payment on this new loan would exceed the payment on the current loan.

Countrywide paid greater compensation to brokers for loans with a higher interest rates, as well as prepayment penalties, because it could sell those loans for higher prices on the secondary market. Countrywide also paid rebates to brokers who originated loans with prepayment penalties, adjustable rates and high margins.

Countrywide operated an extensive telemarketing operation in which it touted its expertise and claimed to find the best financial options for customers. Customer Service representatives at Countrywide call centers were required to complete calls within three minutes, often processing sixty-five to eight-five calls per day. Employees who did not meet quotas were terminated. The company’s deceptive marketing practices, designed to sell costly loans while hiding or misrepresenting the terms and dangers, included:

• Encouraging borrowers to refinance or obtain financing with complicated mortgage instruments like hybrid adjustable rate mortgages or payment option adjustable mortgages
• Marketing complex loan products by emphasizing a very low “teaser” rate while misrepresenting the steep monthly payments, increased interest rates and risk of negative amortization
• Dramatically easing underwriting standards to qualify more people for loans
• Using low or no-documentation loans which allowed no verification of stated income
• Hiding total monthly payment obligations by selling homeowners a second mortgage in the form of a home equity line of credit
• Making borrowers sign a large stack of documents without provider time to read the paperwork
• Misrepresenting or hiding the fact that loans had prepayment penalties

As the secondary market’s appetite for loans increased, Countrywide further relaxed its standards to finance borrowers with ever-decreasing credit scores. Countrywide employees routinely overrode the company’s computerized underwriting system, known as CLUES, which issued loan analysis reports recommending or discouraging loans based on factors such as a consumer’s credit rating. As the pressure to produce loans increased, Countrywide set up an entire department in Plano, Texas, at the direction of Mozilo and Sambol, where employees could submit requests for underwriting exceptions. In 2006, 15,000 to 20,000 loans a month were processed through this exception process.

Countrywide’s deceptive sales practices resulted in a large number of loans ending in default and foreclosure. According to Countrywide’s February 2008 records, a staggering 27 percent of its subprime mortgages were delinquent. Overall, approximately 20,000 Californians lost their homes to foreclosure in May 2008 and 72,000 California homes were in default, roughly 1 out of 183 homes.

Despite receiving numerous complaints from borrowers claiming that they did not understand their loan terms, Countrywide ignored loan officer’s deceptive practices and loose underwriting standards. Countrywide also pushed its borrowers to serially refinance, repeatedly urging borrowers to obtain home loans to pay off their current debt.

Today’s lawsuit, filed this morning in Los Angeles Superior Court, redacts confidential information Countrywide provided during the attorney general’s investigation. The attorney general is seeking the company’s consent to file an amended complaint that removes the redactions.

During the course of its investigation into Countrywide, state investigators reviewed hundreds of thousands of documents and interviewed scores of witnesses including consumers and former employees.

Consumers who believe they have been victimized by Countrywide Consumers should file a complaint by contact the Attorney General’s Public Inquiry Unit in writing at Attorney General's Office California Department of Justice Attn: Public Inquiry Unit P.O. Box 944255, Sacramento, California or through an online complaint form: http://ag.ca.gov/contact/complaint_form.php?cmplt=CL

The case is People v. Countrywide, Los Angeles Superior Court case number LC081846.