Wednesday, December 22, 2004

The Newest Arrow in the Federal Criminal Quiver

The Senate's passage of the Video Voyeurism Prevention Act of 2004 on Dec. 7, following earlier House approval of an identical measure, means that there will be another statute added to the long roster of federal offenses once President Bush signs the legislation into law.  The new crime is a response to the growing number of cell phones with cameras, some of which have been used to snap pictures of unsuspecting individuals in various stages of undress, which are then posted on the internet.  Senator DeWine (R-Ohio), the Senate sponsor of the legislation, stated that this new law "will help safeguard the privacy we all value as well as ensure that our criminal law reflects the realities of our rapidly changing technology."  Approximately 30 states have similar provisions, and the federal law is limited to conduct on federal property and within the maritime jurisdiction to avoid conflicts with state laws.  The statute uses the term "reasonable expectation of privacy" to describe the interest of the individual victim invaded by the defendant, a notoriously vague phrase that will likely test the statutory interpretation skills of the federal courts.  The law provides as follows:

    `(a) Whoever, in the special maritime and territorial jurisdiction of the United States, has the intent to capture an image of a private area of an individual without their consent, and knowingly does so under circumstances in which the individual has a reasonable expectation of privacy, shall be fined under this title or imprisoned not more than one year, or both.

    `(b) In this section--

      `(1) the term `capture', with respect to an image, means to videotape, photograph, film, record by any means, or broadcast;

      `(2) the term `broadcast' means to electronically transmit a visual image with the intent that it be viewed by a person or persons;

      `(3) the term `a private area of the individual' means the naked or undergarment clad genitals, pubic area, buttocks, or female breast of that individual;

      `(4) the term `female breast' means any portion of the female breast below the top of the areola; and

      `(5) the term `under circumstances in which that individual has a reasonable expectation of privacy' means--

        `(A) circumstances in which a reasonable person would believe that he or she could disrobe in privacy, without being concerned that an image of a private area of the individual was being captured; or

        `(B) circumstances in which a reasonable person would believe that a private area of the individual would not be visible to the public, regardless of whether that person is in a public or private place.

          (ph)

    December 22, 2004 in Statutes | Permalink | TrackBack (0)

    Tuesday, December 21, 2004

    Questioning Spitzer's Tactics

    An Op-Ed in the New York Times (Dec. 21) by Professor Leonard Orland (Connecticut) questions New York Attorney General Eliot Spitzer's threats to institute criminal proceedings as part of an effort to oust the CEO of Marsh & McLennan.  Professor Orland writes:

    In the case of Marsh, Mr. Spitzer essentially forced the board to dismiss its chief executive, Jeffrey Greenberg, to avoid corporate criminal indictment. The sequence of events raises serious questions about the use (and potential misuse) of prosecutorial threats to a corporation and whether Mr. Spitzer's powers should be curtailed.

    In October, Mr. Spitzer filed a civil complaint that accused Marsh of securities fraud and bid rigging. Mr. Spitzer also hinted at the possibility of a criminal indictment for the company unless Marsh's board ousted Mr. Greenberg.

    The question Professor Orland raises about Spitzer's rather heavy-handed tactics has been voiced before, although companies are quick to settle civil charges because the cost of a criminal indictment can be so severe, much less a conviction--just ask Arthur Andersen.  The problem is that it is rather difficult to fight a media darling whose approach is lauded by Congress and emulated by the SEC.  Achieving balanced regulation that neither goes overboard nor permits companies to act with impunity is very hard to achieve, and Professor Orland's argument is worth considering. (ph)

    December 21, 2004 in News | Permalink | TrackBack (0)

    Mistrial in Westar Energy Prosecution

    The prosecution of former Westar CEO David Wittig and Executive VP Douglas Lake ended in a mistrial after a seven week trial and more than six days of deliberations.  Wittig and Lake were charged with wire fraud, conspiracy, accounting violations, and money laundering.  The case, which drew national attention during the collapse of Enron and other large corporations, involved allegations that Wittig and Lake treated Westar as, essentially, a personal piggy bank to fund lavish personal expenses.  Wittig bought and began to refurbish the Alf Landon mansion in Topeka, and his free-spending style contrasted rather sharply with the staid culture of the Kansas state capital.  The jurors did reach a verdict on the money laundering counts, but because they were deadlocked on the substantive violations that serve as the basis for the alleged monely laundering, the prosecutor and defense counsel agreed to a complete mistrial, which U.S. District Judge Julie Robinson ordered.  An article in the Kansas City Star (Dec. 21) speculates that the jurors had reached a not guilty verdict on the money laundering charges: "At Robinson's direction, the jury foreman did not say whether the jury found Wittig and Lake guilty or not guilty of counts 23 through 39. Those counts charged the defendants with money laundering. But it's likely the jury acquitted the men on those counts because they depended on guilty findings on the first 22 counts. Count 40 of the indictment, which sought the forfeiture of Wittig's and Lake's assets, wasn't reached because it could not be taken up until the jury reached a decision on guilt." 

    Although the U.S. Attorney's Office has not said whether it will retry the case, given the national headlines the prosecution has received and the significant resources committed to the case already, it is much more likely than not the government will try the case again.  The interesting question will be whether either (or both) of the defendants agrees to a plea bargain.  At this point, that could be the least costly option for both sides. (ph)

    December 21, 2004 in Fraud, Prosecutions | Permalink | TrackBack (0)

    Former Carson (Calif.) Mayor Sentenced to 71 Months for Corruption

    Former Carson, California, Mayor Daryl Sweeney was sentenced on Dec. 20 to a 71-month term of imprisonment for his role in a kickback scheme that involved hundreds of millions of dollars worth of city contracts.  U.S. District Judge Percy Anderson viewed Sweeney in this way, according to an AP story: "I don't think this was about losing your way or taking a wrong turn. You're really nothing more than a thief--a petty thief.  You wanted the money." Sweeney is not the first Carson mayor sentenced to jail, however, as former Mayor Pete Fajardo was sentenced in November to 15 months in federal prison for extorting and accepting $120,000 related to city contracts.  For a town of 88,000 people, and probably best known for its soccer stadium, two mayors in a row is putting it in a league with Chicago, Philadelphia, Boston . . . the list just seems to go on for municipal corruption. (ph)

    December 21, 2004 in Corruption, Sentencing | Permalink | TrackBack (0)

    Monday, December 20, 2004

    Tax Shelter Case Dismissed

    An entry on the TaxProf Blog discusses the Department of Justice's decision to dismiss a civil case against  xélan, Inc. that involved over 3,500 San Diego-area doctors and dentists involved in allegedly fraudulent tax shelters.  After trumpeting the filing of the civil action and the entry of a TRO freezing the company's assets, the TRO was subsequently lifted and last week, with much less fanfare (i.e. none), the DoJ dismissed the civil case.  Professor Caron describes the decision to dismiss the case as a "stunning reversal." 

    December 20, 2004 in About This Blog, Civil Enforcement, Tax | Permalink | TrackBack (0)

    Edward D. Jones & Co. SEC Settlement

    Edward D. Jones & Co., a nationwide brokerage firm that caters largely to individual investors has agreed to settle SEC charges and pay a $75 million fine, according to a report in the Wall Street Journal (Dec. 20).  The firm settled charges that it marketed mutual funds to its customers as among the "best" choices available to investors without disclosing that the funds paid the firm a fee to be included on the list--a fact that any reasonable investor would--or at least should--consider quite important in making a decision about what assets to purchase.  The settlement is part of a continuing effort by the SEC to police conflicts of interest on Wall Street, and another example that sometimes the difference between a broker and a used car salesman can be quite small. (ph)

    December 20, 2004 in Civil Enforcement, Securities | Permalink | TrackBack (0)

    Pushing Back Against Regulators

    With the re-election of President Bush and the fading memory of the collapse of Enron et al., it appears that the business lobby is increasing the pressure on the SEC and prosecutors to back off from the tough stance that had been taken in the past few years towards corporate crime and accounting/regulatory violations.  Last week, Treasury Secretary John Snow indicated in an interview that he favored a more "balanced" approach toward enforcement of the Sarbanes-Oxley Act.  A CNN report includes the following statement by Secretary Snow: "I think regulators, government officials, U.S. attorneys -- all of us who have a role in administering the oversight system for corporate governance -- have to be cognizant of the need for appropriate, measured balance here."  An article in the Wall Street Journal (Dec. 20) indicates that business groups are opposed to William Donaldson continuing as Chairman of the SEC.  The article notes, "The biggest gripes center on the SEC's regulatory and enforcement approach. Businesses complain they are being forced to spend too much time and money trying to comply with a slew of new regulations, many of which are required under the 2002 Sarbanes-Oxley Act. They also have taken aim at other SEC initiatives, including plans to give shareholders more power to nominate directors, register hedge-fund advisers and require independent chairmen for mutual-fund boards."

    Chairman Donaldson is hardly the scourge of Wall Street, and Secretary Snow of course asserts that the Sarbanes-Oxley Act is "absolutely essential" and requires "no major modifications."  One wonders whether his teeth were clenched when he said that.  It will be interesting to see whether the enforcement climate changes over the next couple years, or at least until the next major scandal erupts.  (ph)

    December 20, 2004 in Civil Enforcement, Investigations, News, Securities | Permalink | TrackBack (0)

    TOEFL Mail Fraud Convictions Affirmed

    On Dec. 16, the Third Circuit affirmed the mail fraud convictions of two men who participated in a scheme to buy scores for the Test of English as a Foreign Language (TOEFL) Exam, which is administered by the Educational Testing Service (ETS). United States v. Al Hedaithy. A passing score (usually 550) on the TOEFL is required by most colleges for admission to undergraduate and graduate programs for those whose first language is not English.  The defendants, who paid to have the exam taken for them by an impostor, argued that the Mail Fraud Statute (18 U.S.C. § 1344) did not apply to the scheme in which the TOEFL score was mailed to a drop in California, where the reports were doctored to substitute the defendants' pictures for the impostor and then mailed to schools in fake ETS envelopes. The government's superseding indictment alleged that ETS was the victim of the scheme and that it lost valuable confidential information through the use of the impostors to obtain a passing TOEFL score.  The Third Circuit rejected the defendants arguments that first, the TOEFL scores were not property, holding that the confidential information and scores were valuable property interests of ETS; and second, that under Cleveland v. U.S. (531 U.S. 12 (2000)) the scores were like government licenses before they are issued to the test-taker, holding that the fact that property may not be valuable in the hands of the victim does not mean that it cannot constitute property subject to the Mail Fraud Statute. 

    The Third Circuit's decision shows once again--in case anyone needed reminding--that the mail fraud statute is the great catch-all provision for dishonest conduct that results in a gain to the defendant and some articulable loss to the victim, even if there is no direct connection between the gain and loss.  The defendants were not sentenced to any prison time, but as aliens they are ineligible to remain in the United States because of the felony conviction. (ph)

    December 20, 2004 in Fraud, Judicial Opinions | Permalink | TrackBack (0)

    Sunday, December 19, 2004

    Hacker Sentenced to Six-Month Prison Term

    Gregory Aaron Herns, who hacked into the computer system at NASA's Goddard Space Flight Center when he was 17 years old to store movies he had downloaded has been sentenced to a six-month term of imprisonment for his violation of the computer crime act (18 U.S.C. 1030).  He pled guilty a violating the act and causing over $200,000 of damages.  According to an AP story, Herns' attorney described the now 21-year old Mt. Hood Community College student as a "computer geek" who will suffer because after serving his sentence he will have only limited access to computers for three years.  Greg Nyhus, the Assistant U.S. Attorney who prosecuted the case, tried--perhaps not successfully--to describe what Herns did: "It would be like clearing a sidewalk full of spectators with a fire hose so you can walk through it." I guess. (ph)

    December 19, 2004 in Computer Crime, Sentencing | Permalink | TrackBack (0)

    Lawyer Misconduct

    A decision issued on Dec. 17 by the D.C. Circuit, SEC v. Loving Spirit Foundation Inc. (No. 03-5234), involves inter alia the referral of two attorneys to the disciplinary authorities for misstatements to the court.  The case involves an action by a receiver for a disgorgement fund created out of the SEC's litigation against Paul Bilzerian in the early 1990s.  Bilzerian was convicted of securities fraud, and in a related civil action the court ordered him to disgorge over $60 million.  Among the assets were those in foundations controlled by Bilzerian's wife, and the litigation at issue here involves the appeal by the foundation of District Judge Lambreth's refusal to recuse himself.  The D.C. Circuit found two bases for referring the lawyers for disciplinary proceedings related to the appeal: first, the motion to recuse and the appeal appear to be frivolous because of the lapse of time in the filing of the motion and false statements as the basis for the motion; second, the filing of an affidavit in bad faith seeking the District Judge's recusal under 28 U.S.C. 144.

    The litigation in this case has been, not surprisingly, quite contentious, and the attorneys have now been caught--or put themselves--in the cross-fire.  There is some animosity toward Judge Lambreth, who is not always easy to get along with (just ask the Department of the Interior about their internet access), but the effort to force him off the case appears to have gone too far.  This is an important case for litigators to review to keep a case from spinning out of control and putting the lawyer's license at risk. (ph)

    December 19, 2004 in Judicial Opinions, Legal Ethics | Permalink | TrackBack (1)

    Saturday, December 18, 2004

    Former Cutter & Buck President Settles SEC Charges

    Martin Marks, the former President and COO of Cutter & Buck Inc., a Seattle sportswear company, settled charges filed by the SEC that he inflated revenue at the end of the April 2000 quarter by shipping goods to three "distributors" who in fact could not pay for the items.  According to the SEC Litigation Release (No. 2154, Dec. 17 and complaint):

    Cutter negotiated deals with three purported distributors under which Cutter would ship them a total of $5.7 million in products. Cutter recognized revenue for the supposed sales, which constituted over 10% of the quarter's revenue. In reality, the distributors had no obligation or ability to pay for any of the goods unless and until Cutter's sales force found actual customers to purchase the products. The distributors essentially acted as warehouses, rendering revenue recognition for the shipments improper under generally accepted accounting principles (known as "GAAP"). Marks signed Cutter's annual Commission filings falsely announcing revenue of $54.6 million for the fourth quarter and $152.5 million for the fiscal year; because these amounts included $5.7 million in bogus revenue on the distributor sales, they overstated Cutter's true quarterly and annual revenue by 12% and 4%, respectively.

    Marks agreed to pay $45,777 in disgorgement and prejudgment interest.

    December 18, 2004 in Securities | Permalink | TrackBack (0)

    He's Back

    Michael Milken was the face of 1980s greed and hubris after his guilty plea on six felony counts related to his work at the famed junk bond machine Drexel Burnham Lambert.  Of course, that is now ancient history--it was almost 15 years ago--and the S&L crises and the Enron/Worldcom corporate debacles since then have taken center stage.  A New York Times article (Dec. 18) discusses Milken's latest investment foray, into the world of for-profit educational enterprises that includes a substantial investment in the buy-out of KinderCare, an old Drexel junk bond client.  Milken is barred from the securities industry, but the large ($1 billion+) fortune he amassed from his investment banking days can make him a major player in almost any industry, and his contacts in the financial world remain deep. His rehabilitation is viewed as a model for other white collar criminals who seek to rebuild their life after a conviction and term of imprisonment.

    For-profit education companies are growing, and the University of Phoenix is the largest post-secondary educator in the country.  Perhaps the Milken College of Law one day?  The white collar crime class could have its first guest speaker already lined up.

    December 18, 2004 in Celebrities | Permalink | TrackBack (0)

    Friday, December 17, 2004

    Not a Sure Thing

    A system of effectively compensating employees used by the New York Racing Association (NYRA) resulted in extensive tax evasion charges for the NYRA and a number of its employees.  A press release from the U.S. Attorney for the Eastern District of New York describes the deferred prosecution agreement the NYRA entered into related to a long-running scheme to permit employees to deduct unreimbursed business expenses for which they had been reimbursed.  The press release describes the practice as follows:

    Mutuel employees were assigned teller boxes or dealer bags to hold the proceeds of betting transactions conducted through their assigned betting windows and terminals. All betting transactions, including cash received and cash disbursed, were tracked by a computer system, which, at the end of each day, indicated the cash balance that should be in each teller box and dealer bag. Discrepancies were referred to as "shorts." Legitimate shorts were the results of inadvertent errors by the mutuel employees in handling betting transactions; bogus shorts were the result of employees taking cash for their personal use, or by the employees reporting fictitious voucher sales, for which no cash was received.

    From 1980 through December 1999, NYRA permitted its mutuel employees to report shorts in any amount, as long as they were reimbursed to NYRA by the employees, either by a cash payment or by a deduction from the employee's next paycheck. If the reported shorts were reimbursed, NYRA neither disciplined the mutuel employee nor provided any corrective or training measures in response to the reporting of excessive, consistent or bogus shorts.

    According to the charges unsealed today, from January 1980 through December 1999, NYRA certified approximately $19 million in shorts reported by its mutuel employees. The indictment alleges that mutuel employees, including BOGGIANO, FASONE, KING and PONTRELLI, as well as the 17 mutuel employees who have previously pleaded guilty to tax charges in this case, routinely took cash from their teller boxes and dealer bags and falsely reported the cash as legitimate shorts. These amounts were then returned by the mutuel employees to NYRA, either by cash payments or through deductions from weekly paychecks. The employees then falsely reported the shorts as unreimbursed employee expenses on their individual income tax returns.

    Unlike the heart-warming story of Seabiscuit, this tale involves an employer willing to abuse the tax system for nearly two decades. (ph)

    December 17, 2004 in Prosecutions | Permalink | TrackBack (0)

    It's Not the Season for Receiving Gifts

    Fidelity Investments announced that it has disciplined 16 stock traders for accepting gifts and entertainment from brokers seeking business from the large mutual fund company.  Two traders, Thomas Bruderman and Robert Lewis Burns, have left the company, apparently because of their ties with Kevin Quinn, a broker with Jefferies & Co. who has been terminated by that firm (see Dec. 16 post) for improperly accounting for entertainment expenses.  Bruderman and Burns appear to have been recipients of Quinn's largesse, according to a story in the New York Times  (Dec. 17).  In a press release, Fidelity stated:

    Fidelity Investments has been cooperating with the Securities and Exchange Commission (SEC) and the National Association of Securities Dealers (NASD) in an investigation of policies and procedures regarding gifts, gratuities and business entertainment. During the course of our own investigation, we uncovered instances where there were violations of the company's policies and procedures. This has caused us deep concern because we do not tolerate wrongful behavior. We take this matter very seriously. That said, our internal review has not revealed any instance where inappropriate and unauthorized behavior on the part of any individual has resulted in any financial loss to the Fidelity mutual funds or to any shareholder by adversely affecting the quality of executions received by the Fidelity funds on their trades.

    Fidelity had largely dodged the after-hours trading controversy that rocked the mutual fund industry in 2003, and this issue may be just an isolated incident.  However, the number of traders who violated the firm's own policies indicates that this may well be an issue that will touch other mutual fund companies, hedge funds, and pension plans. The issue of gifts is certainly not limited to the investment business, and serious questions have been raised regarding entertainment and travel provided to doctors by the pharmaceutical companies.  No telling yet whether this will this presages a wide crackdown on the industry. (ph)

    December 17, 2004 in Civil Enforcement, Securities | Permalink | TrackBack (0)

    The Confidentiality Fetish

    Professor William H. Simon (Columbia) has an article in the December issue of The Atlantic, "The Confidentiality Fetish," that challenges what he sees as the overuse by lawyers of the protections afforded by the attorney-client privilege.  Professor Simon is one of the leading academics in the field of professional responsibility.  He argues that lawyers are effectively selling the privilege to protect information that society may be better served having revealed.  He states:

    Lawyers, in short, have carved out a role for themselves as the privileged keepers of much information that is important to the public interest. Historically, lawyers have liked to think of themselves as defenders of individual liberty against an overbearing state, primarily through traditional advocacy—that is, persuasively asserting a client's rights. Today, however, lawyers' typical efforts to mediate between clients and the state rely less on advocacy and more on information control. This is a disturbing development; lawyers have brought to their new role as information guardians a powerful predisposition toward needless secrecy that suppresses and distorts information about many matters of public importance.

    The push toward confidentiality, if it can be called that, is nothing new, at least among lawyers, and the attorney-client privilege has been described by the Supreme Court as the oldest one recognized by the law (Upjohn).  Nor is it necessarily a "fetish"--for which one definition is "an abnormally obsessive preoccupation or attachment; a fixation"--for lawyers to use a widely-recognized tool to a client's advantage, or at least to protect the client's current interests.  There is naturally a frustration with the privilege, in much the same way that the Fifth Amendment protection against self-incrimination thwarts a search for the truth.  Professor Simon's point that lawyers use the privilege to their advantage as a marketing tool--he references the tobacco industry's employment of lawyers to shield unfavorable research on the harmfulness of cigarettes--is well taken.  One of the advantages of having an attorney conduct an internal investigation is the benefit of both the attorney-client privilege and the work product protection to shield certain types of information generated by the investigation, at least for a while.

    Professor Simon has also published an extensive article in the California Law Review in 2003 entitled "Whom (or What) Does the Organization's Lawyer Represent.?".  A working paper version of his article is available on SSRN here. His analysis of the problems with identifying the true "client" of the organization is worth considering. (ph) 

    December 17, 2004 in Scholarship | Permalink | TrackBack (0)

    Thursday, December 16, 2004

    Charter Communications Guilty Plea

    The U.S. Attorney for the Eastern District of Missouri announced today that David G. Barford, the former Chief Operating Officer of Charter Communications Inc., a large cable company controlled by Paul Allen, has pled guilty to a single count of conspiracy to commit wire fraud and will cooperate in the government's investigation. Barford admitted to participating in a "scheme to defraud Charter's stockholders by reporting to the public artificially inflated numbers of paying subscribers." Four Charter officers were indicted in July 2003 for wire fraud and conspiracy, including the former Chief Financial Officer and two senior vice presidents (indictment here). One of the senior VPs pled guilty in 2003 and is cooperating with the government. (ph)

    December 16, 2004 in Prosecutions | Permalink | TrackBack (0)

    BALCO Defamation Suit

    Victor Conte, the former CEO of the Bay Area Laboratory Co-operative (BALCO) who is a defendant in the widely-noted steroids prosecution, has been sued by Marion Jones for defamation.  Conte gave an extensive interview to 20/20 that aired on Dec. 3 accusing Jones, who won five medals at the 2000 Olympics (including three gold), of injecting steroids.  There has been speculation about why Conte's attorney permitted him to implicate himself in the manufacture and sale of illegal steroids when the charges are pending against him, but--for whatever reason--Conte made his statements in a high-profile manner that makes his upcoming criminal trial almost anticlimactic. 

    Jones' defamation suit was filed in U.S. District Court in San Francisco and seeks $25 million in damages.  According to an MSNBC story, Conte responded to it in an e-mail stating the the suit was "nothing more than a PR stunt by a desperate woman, who has regularly used drugs throughout her career. I look forward with all confidence to the court proceedings as I stand by everything I said on the '20/20' special.'' Jones' attorney offered to have Conte take a lie detector to answer the following three questions: "Did he observe Jones injecting herself with performance enhancing drugs on April 21, 2001, as he stated on national television? Has he ever leaked any grand jury testimony or other evidence related to the BALCO investigation? Has he ever observed Marion Jones illegally taking any performance-enhancing drugs?"

    As if this case wasn't already a complete media circus, now a collateral proceeding will be played out in the press.  It almost makes you long for a nice gag order. (ph)

    December 16, 2004 in Prosecutions | Permalink | TrackBack (0)

    Self-Dealing on Wall Street

    The government is delving rather energetically into the conduct of brokers who act for their own personal benefit to the detriment of their clients and the market.   A criminal complaint filed against a former managing director of SG Cowen (Dec. 13) alleges that he engaged in insider trading about companies about to undertake PIPE transactions, which are Private Placement in Public Equity sales that usually cause a companies stock price to drop because of the dilutive effect of the transaction.  According to a release from the U.S. Attorney's Office for the Eastern District of New York, GUILLAUME POLLET, has been charged in a criminal complaint with one count of conspiracy to commit securities fraud related to short sales of three companies who were using Cowen for PIPE transactions.  According to the complaint:

    The complaint alleges that in furtherance of the scheme, POLLET, and others, obtained material non-public information concerning PIPE transactions that were being contemplated by Sorrento Networks, Inc., Aradigm Corp., and HealthExtras, Inc. (collectively, the "Subject PIPEs"), the securities of which were publicly-traded on the NASDAQ national market system. While SG Cowen operated as the placement agent for the Subject PIPES, POLLET obtained the material, non-public information concerning the Subject PIPEs from SG Cowen employees and from representatives of the Subject PIPE issuers. The information was disclosed to POLLET pursuant to confidentiality agreements to enable him to determine whether SG Cowen would participate as an investor in the Subject PIPEs. Notwithstanding the terms of the confidentiality agreements, POLLET caused SG Cowen to short sell the publicly-traded securities of the PIPE issuers before the Subject PIPEs were publicly announced, resulting in substantial decreases in PIPE issuers' stock prices. POLLET then covered these short positions by either purchasing discounted stock through an investment in the Subject PIPEs, or purchasing the PIPE issuers' publicly-traded securities at the deflated post-announcement market prices.

    An article in the Wall Street Journal (Dec. 15) details a regulatory action by the New York Stock Exchange against a clerk for a floor broker who engaged in "front-running," which involves trading ahead of large orders to take advantage of the current price before the execution of the large order.  Front-running has been an issue of continuing concern to the NYSE and the SEC, and was the subject of a large-scale undercover operation at the futures exchanges in Chicago in the 1980s that resulted in multiple convictions of brokers. 

    The temptation to take the "free money" available from the use (and misuse) of information is very strong, and one suspects that the number of cases is only a small fraction of transactions involving self-dealing and insider trading. A front page article in the Wall Street Journal (Dec. 15) discusses the problem of self-dealing in brokerage firms, with the following example:

    When a mutual-fund company asked brokerage firm Knight Securities to get it 600,000 shares of a fiber-optic stock, traders at Knight quickly swung into action.

    A half-dozen traders -- figuring the big order would push up the price of the stock -- quickly began buying some for accounts that benefited their firm and themselves, according to testimony in a National Association of Securities Dealers arbitration.

    The buying may have affected the price the client ultimately had to pay for the stock, JDS Uniphase, according to people familiar with the trading records. They say the traders in some cases sold their newly bought stock to the client, Oppenheimer Funds. According to testimony, it was sold to the client at a markup, a move that may have taken money out the pockets of mutual-fund shareholders.

    The NASD's regulatory arm has examined Knight's trading from the period in question, March 2001, and other periods. It and the Securities and Exchange Commission are expected to levy a penalty against Knight soon. Knight, which has since changed management, testified that the trades weren't improper, didn't disadvantage the client, and followed typical industry practice. Oppenheimer declined to comment.

    The incident points to one of the hardest-to-eradicate conflicts of interest on Wall Street. Securities laws generally require brokerage firms to put the client first. But it's an open secret that they or individual traders sometimes take advantage of their role as middleman to profit, at clients' expense, from what they know about clients' investing intentions.

    Notably, New York Attorney General Eliot Spitzer has not gotten involved in this area . . . yet. (ph)

    December 16, 2004 in Securities | Permalink | TrackBack (0)

    Ending with a Whimper

    The so-called "Detroit Terrorism Trial" that spun so badly out of control this past summer, resulting in the government's voluntary dismissal of the most serious charges involving a conspiracy to support terrorism, has entered its final stage with a new indictment that has nothing to do with national security or even possible immigration fraud.  On Dec. 15, the government charged the two remaining defendants, Karim Koubriti and Ahmed Hannan, with conspiracy to commit mail fraud related to a false $2,500 insurance claim they filed for a faked auto accident in Dearborn, Michigan.  While this event was mentioned in the first trial as evidence of the defendants raising money to support terrorism, but not separately charged, it is now the sole count against them.  A conviction would put the defendants in the lowest range under the Federal Sentencing Guidelines--assuming they survive the Supreme Court's decision in Booker/Fanfan--but would likely trigger deportation. 

    An article in the Detroit News (Dec. 16) reviews the new indictment, and includes the following statement by one defense counsel questioning the government's motive:

    "It's my view that the government is looking to convict these guys because they want them out of the country," said James C. Thomas, a lawyer for Hannan. "Is it face-saving or is it because they are really bad guys? I have yet to see any evidence that these guys are hardened criminals."

    U.S. Attorney Craig Morford defended the indictment:

    "We openly welcome people into this country, and we also insist that they comply with our laws," Morford said. "What are we supposed to do? Do you just give people a pass and ignore evidence of criminal violations?"

    The government's investigation of the lead prosecutor in the first trial is continuing to determine whether his conduct in withholding evidence from the defense constitutes an obstruction of justice or whether the suborned perjury from the government's key cooperating witness, who is now largely discredited. The original defendants appear to be little more than a sideshow at this point.  (ph)

    December 16, 2004 in Prosecutions | Permalink | TrackBack (0)

    Spy Satellite Leak

    An AP story discusses a new Department of Justice investigation into the leak of top-secret information about a stealth spy satellite program.  According to the article:

    The sources said a U.S. intelligence agency had referred the issue to the department, but did not identify the agency. The National Reconnaissance Office, which builds spy satellites, declined to comment.

    The Washington Post said on Saturday the classified program was for a new generation of spy satellites designed to orbit undetected. It cited U.S. officials as saying its projected cost had almost doubled to nearly $9.5 billion from $5 billion.

    The program was recently criticized, in very general terms, by Senator John Rockefeller (D-WVa) as being wasteful, and Senate Republicans are looking into making an ethics complaint against him. Leak investigations rarely result in prosecutions because it is so difficult to ever track down the ultimate source of the information, especially when it is in both the spy agencies and on Capitol Hill.  Moreover, extracting information from the press about the source of a leak is quite daunting, as the current investigation of the leak of the identity of a CIA officer shows. (ph)

    December 16, 2004 in Investigations | Permalink | TrackBack (0)