Saturday, November 6, 2004

Identity Theft

One of the ever growing problems in the U.S. is identity theft.  In the first case to be sentenced under the Health Insurance Portability and Accountability Act (HIPAA), the judge sentenced the defendant, pursuant to a plea agreement, to 16 months.  According to a statement issued by the United States Attorney's Office for the Western District of Washington, the defendant, a technician at a cancer center, "admitted that he obtained a cancer patient's name, date of birth and social security number while [he] was employed at the Seattle Cancer Care Alliance, and that he disclosed that information to get four credit cards in the patient's name. [He] also admitted that he used several of those cards to rack up more than $9,000 in debt in the patient's name."   According to an AP story, the defendant's sentence was "four months longer than prosecutors requested."     Some, however, argue that this case should not have been prosecuted under the HIPAA statutes.


November 6, 2004 in Fraud | Permalink

Enron Barge Trial

A story in the Houston Chronicle (Nov. 6) discusses the sentencing phase of the Enron/Merrill Lynch barge trial.  A key Issue being argued to the jury is the amount of the loss caused by the barge deal, which the government pegs at $43.8 million and a defense expert estimated at $120,000.  The disparity shows once again that accounting and loss estimation are a less-than-exact science.  The loss provisions of the Federal Sentencing Guidelines state that the amount of loss is only an estimate and need not be exact.  The article reports that

The judge also asked the jurors to consider what kind of leadership or managerial role each man had, whether they abused a position of trust at the bank, whether there was more than minimal planning involved, and whether they used sophisticated methods.

Two defendants, former Enron finance executive Dan Boyle and former Merrill Lynch executive William Fuhs, opted out of the Blakely sentencing phase of the case, apparently ceding any right to have a jury decide the factual issues at sentencing.  The post-Blakely world will include arguments on the severity of the sentence triggered by the jury's factual finding, if that is indeed where the Supreme Court takes the Federal Sentencing Guidelines.  According to the story,

Thomas Hagemann, attorney for [former Merrill Lynch banker Daniel] Bayly, told jurors their decisions could alter "whether Mr. Bayly goes to prison for 15 years or not at all." But prosecutor John Hemann told jurors that it is the judge, not the jury, that will decide the punishments and they are to consider the facts before them and not be swayed by attempts to garner sympathy.


November 6, 2004 in Enron, Sentencing | Permalink

Corporate Misbehavior Conference

On Friday, November 12, 2004, the Brooklyn Law School Center for the Study of Law, Language and Cognition will host a conference entitled: Corporate Misbehavior by Elite Decision-Makers–Perspectives from Law and Social Psychology. The Conference description states:

The conference will explore ways in which corporate misconduct and scandals result not from the presence of a few ““bad apples”” among corporate executives and directors, but from systematic and predictable aspects of group behavior and corporate organization. Prominent social psychologists and organizational and management specialists will present and discuss their research findings and theories of group behavior. Corporate law scholars will then comment upon the implications of the findings for policy making.

The Conference, which will be held at Brooklyn Law School, includes both law professors and social scientists, and will present an interesting view of corporate misconduct. Check the Conference website for further information. (ph)

November 6, 2004 in Scholarship | Permalink

Friday, November 5, 2004

Investigations May Mean Dismissing of Executives

It is becoming more common for companies to dismiss individuals who may be subjects of investigations. The NYTImes reports today that Ace, Ltd., "subject of the New York attorney general's investigation into bid-rigging and price-fixing in the insurance industry" is dismissing two executives.  The NYTimes also notes that Marsh & McLennan "dismissed four executives who were suspended last month soon after Mr. Spitzer filed a civil lawsuit accusing Marsh of cheating its customers through bid-rigging and through steering business to the highest-paying insurers."  (see also Wall Street Journal).

In the federal system, the dismissal of employees may be important to demonstrate that the company has a "effective compliance and ethics program," a  criteria for federal sentencing under the guidelines for the Sentencing of Organizations.  The "effective compliance and ethics program guidelines provide that:

" 6) The organization’s compliance and ethics program shall be promoted and enforced consistently throughout the organization through (A) appropriate incentives to perform in accordance with the compliance and ethics program; and (B) appropriate disciplinary measures for engaging in criminal conduct and for failing to take reasonable steps to prevent or detect criminal conduct."

Although the investigation here is not federal, and the guidelines may be questionable because of pending cases Post-Blakely, demonstrating a satisfactory compliance program may benefit a company from possible future criminal ramifications.


November 5, 2004 in Investigations | Permalink

What's Happening With Arthur?

On September 14, 2004, a Petition for Certiorari (2004 WL 2070872) was filed by Arthur Andersen, LLP requesting the Supreme Court grant review of its case and conviction. The sole issue before the Court is:

"Whether Arthur Andersen LLP's conviction for witness tampering under 18 U.S.C. § 1512(b) must be reversed because the jury instructions upheld by the Fifth Circuit misinterpreted the elements of the offense, in conflict with decisions of this Court and the Courts of Appeals for the First, Third, and D.C. Circuits."

The Petition raises a fascinating question as the Indictment in Andersen charged the company with "knowingly, intentionally and corruptly persuade and attempt to persuade other persons." The Petitioners argue two deficiencies in the instructions:

1. First they contest the court’s instructing the jury on what the term "corruptly persuades" means. “Andersen repeatedly objected to the court's determination that ‘corrupt’ persuasion could be equated with an ‘improper purpose,’ and argued that the term requires proof of improper means of persuasion or inducement to unlawful acts, or at least conscious wrongdoing.”

2. Second they contest the court’s denial of an instruction that would have “ensure[d] that the jury would be required to find a close nexus between an employee's reminder to follow the document retention policy and any future SEC proceeding. . . . The district court instead instructed the jury that the Government did not have to prove that the "corrupt persuader" had any particular proceeding in mind or knew that a future subpoena was likely.”

This case raises serious questions of the line between valid document retention policies and corrupt behavior that merits obstruction of justice charges.


November 5, 2004 in Arthur Andersen | Permalink

Thursday, November 4, 2004

Ashcroft Going?

Will John Ashcroft be leaving the Attorney General's position? According to AP wires Ashcroft aides say he will be leaving before President Bush starts his next term. What effect might this have on the prosecution of white collar crime? Will the Thompson Memo continue? Will respect for the attorney-client privilege take a different course? (Yes, it was Attorney General John Ashcroft who issued the Bureau of Prison Order that authorized the monitoring of attorney-client conversations in jail.) Many questions for right now. If Ashcroft resigns, the course of the DOJ is likely not to change in the fight against terrorism, but can we say the same for white collar prosecutions?


November 4, 2004 in Prosecutors | Permalink

Five Convicted and One Acquitted in the First Criminal Trial Related to Enron

Five defendants (four former executives of Merrill Lynch and one fomer executive in Enron's finance division) were convicted yesterday after a six week trial in the first Enron related criminal case. The New York Times reports that "the case - centered on a single transaction involving what the government argued was a bogus sale of an interest in barges by Enron to Merrill." According to the New York Times, the lone defendant not convicted "testified that she had warned Enron executives many times that the company could not properly provide Merrill with a guaranteed profit or a commitment to repurchase the barges." The Wall Street Journal reports that "to date, some 30 individuals have been criminally charged. " This includes former Enron Chair Kenneth Lay who awaits trial.

Yesterday's case, however, is not over. Those who were convicted are back in court today for the jury to hear evidence for the purpose of sentencing. The reason for this sentencing hearing results from the recent Supreme Court decision in Blakely v. Washington. Although the Supreme Court has not specifically held that the Blakely decision applies to the federal sentencing guidelines, the government appears to be taking no chances. They will be presenting evidence to the jury on the amount of the loss, a factor that can serve as a sentencing enhancement.


November 4, 2004 in Enron | Permalink

Wednesday, November 3, 2004

The Latest on Martha Stewart

Attorneys for Martha Stewart filed the Brief.pdf in the Second Circuit, to appeal her conviction. Four issues are presented:

I. Whether, after a trial pervaded by allegations that Stewart had committed the uncharged crime of insider trading, the District Court erred by: (1) refusing to instruct the jury that it could not convict Stewart of insider trading and could consider evidence of uncharged conduct only for a limited purpose; and (2) barring Stewart from rebutting the Government’s allegations or explaining to the jury that she had not committed insider trading.

II. Whether the Government’s use of out-of-court testimonial statements by Stewart’s co-defendant to discredit a key defense witness and otherwise bolster its case violated the Confrontation Clause.

III. Whether the false testimony of a high-ranking Government official, known to several other Government officials and transparent to prosecutors, requires a new trial (or, at very least, an evidentiary hearing) under the “virtually automatic” reversal rule.

IV. Whether the District Court erred in refusing to convene an evidentiary hearing to consider direct and credible evidence that one of Stewart’s jurors made numerous false statements about his qualifications to sit on the jury.


November 3, 2004 in Martha Stewart | Permalink

Federal Corruption Prosecutions Article

A very interesting article by Associate Dean and Professor George D. Brown (Boston College) will appear in the Catholic University Law Review entitled Carte Blanche: Federal Prosecution of State and Local Officials After Sabri. Professor Brown is the leading authority on the federal corruption statutes, and has published a number of articles questioning the scope of federal power to police misconduct by state and local officials under various federal statutes, including the mail/wire fraud statute and the Hobbs Act. His latest article considers the effect of the Supreme Court’s decision last term in Sabri v. United States, 124 S.Ct. 1941 (2004), which upheld the federal prosecution under 18 U.S.C. § 666 of a developer for bribing a local official to facilitate approval of a project. The abstract for the article states:

Federal prosecutions of state and local officials for political corruption are a significant feature of the American political landscape. However, they raise serious federalism questions, especially the potential impact on state autonomy and sovereignty. Thus, these prosecutions would seem to run counter to the Supreme Court's "New Federalism." The Court has never explored the issue in depth. Last term it handed down a decision highly favorable to the federal role in the case of Sabri v. United States. This paper examines Sabri, and questions the rationale that the prosecution in that case was an example of justifiable protection of federal funds. The article offers an alternative perspective, namely, that the Court was anxious to further the anti-corruption imperative demonstrated in McConnell (the Campaign Finance Reform case). The article concludes with possible alternative rationales for a strong federal role in overseeing state and local governments and for a general anti-corruption statute.


November 3, 2004 in Corruption, Scholarship | Permalink

DaimlerChrysler FCPA Investigation

A report in the Detroit Free Press discusses an SEC investigation of possible violations of the Foreign Corrupt Practices Act by DaimlerChrysler AG (DCX) (Suit Says Secret Accounts at DCX Used for Bribes, Sarah A. Webster, Oct. 29, 2004). The investigation was triggered by a whistleblower lawsuit filed in U.S District Court (E.D. Mich.) by a former accountant for DCX who alleges he learned that the company maintained 40 bank accounts to bribe officials of foreign governments. The former employee contends that, after reporting the misconduct to a senior DCX officer, he received the worst performance appraisal of his career, and he was terminated from the company in early 2004.

While the Big Three automakers largely avoided being caught up in the broad investigations of corporate misconduct of the past few years, DCX now joins Ford and General Motors as the subjects of SEC investigations. Unlike the DCX investigation, the SEC inquiry involving Ford and General Motors concerns how they account for their pension liabilities, and does not appear to arise from any specific allegations of misconduct by the companies at this time. (ph)

November 3, 2004 in FCPA, Investigations | Permalink

Tuesday, November 2, 2004

Marsh & McLennan Complaint

In response to a comment posted by Leigh Bienen regarding the specific statutes for Eliot Spitzer's action against Marsh & McLennan, here is a link to the complaint. The specific provisions of New York law are Executive Law §63(12) for fraud and the Donnelly Act (Gen. Bus. Law §340 et seq.) for antitrust. The Donelly Act was passed a few years after the Sherman Anti-Trust Act, and has an even greater pedigree than the Martin Act, which was used against the mutual funds and stock analysts. There are also causes of action for securities fraud (Gen. Bus Law §352-c), unjust enrichment, and common law fraud (i.e. the kitchen sink).

On October 25, after Marsh & McLennan CEO Jeffrey Greenberg resigned, Mr. Spitzer issued the following press release:

The actions announced today by the Board of Directors of Marsh & McLennan Companies permits Marsh and this office to move forward toward a civil resolution of our lawsuit.

We are persuaded that the goals that would have been advanced by a criminal prosecution of the corporation - punishment, restitution, general deterrence, and industry reform - will be better accomplished by criminal prosecution of individuals, adoption by the company of dramatically new business procedures, installation of new leadership, a full examination of prior wrongdoing and a pledge of restitution to those harmed.

Realizing these goals, while also allowing Marsh & McLennan to retain a viable role in the marketplace, makes corporate criminal prosecution unnecessary.

No word (yet) on criminal charges against individuals from Marsh & McLennan (aside from a couple lower level employees who plead guilty to state charges), nor any indication (yet) that the U.S. Attorney's Office has started an investigation, but don't be surprised to see the S.D.N.Y. U.S. Attorney in the vicinity. (ph)

November 2, 2004 in Civil Enforcement | Permalink

Market Manipulation Trial

The conspiracy trial of Amr (Anthony) Elgindy, who ran a well-known website for short sellers, and Jeffrey A. Royer, a former FBI agent, began in U.S. District Court in Brooklyn yesterday. The indictment in the case describes a scheme that included Royer leaking confidential information about government investigations of corporate misconduct to Elgindy so that he could sell short the company’s stock and then leak the information to the market, including subscribers to his newsletter and website. An article in the New York Times (Nov. 2) describes the opening statements of the two sides. Elgindy’s defense is that he tried to stop fraudulent companies from continuing to harm investors, and he worked with the government to stop fraud.

There are two interesting aspects of the case (beyond the potential involvement of an FBI agent in leaking confidential information). First, there has been mention that Elgindy, whose family moved to the United States from Egypt when he was 3, may have had advanced notice of the September 11 terrorist attacks because on September 10 he sold stocks to avoid what he allegedly said was a likely substantial drop in the market in the near future. At this point, the trial judge has not permitted the government to mention this theory to the jury, but will revisit it during trial. Needless to say, such an accusation would be explosive, and given how prejudicial it would be, it seems unlikely the judge would allow the government to raise it. The indictment does not mention this conduct, and its probative value seems hardly sufficient to outweigh the prejudice.

A second aspect of the case is the question regarding the relevance of the truthfulness of the information Elgindy released after the short sales for the market manipulation charge. The indictment states:

Often, after short selling the stock of a Targeted Company, the defendants AMR I. ELGINDY, TROY PETERS and DERRICK W. CLEVELAND, together with others, coordinated the release of negative, and sometimes false, information with short selling in a manner designed to exaggerate the negative market sentiment for the stock. ELGINDY’s paid subscribers received the information and recommendations first, so that they could position themselves to profit if the broader market reacted to the exaggerated negative market sentiment for the stocks. The subscribers, including subscribers in the Eastern District of New York, passed a portion of their profits back to ELGINDY in the form of subscription fees.

Note that the indictment says only that the information was “sometimes false.” While it may appear odd that the release of truthful information can be a crime, market manipulation cases brought under Section 10(b) and Rule 10b-5 do not require that false information be released, only that there be an omission of material information. The government’s claim is that Elgindy did not disclose his trading in the stock when he released the information, so that he engaged in “scalping.” The two main scalping cases are SEC v. Capital Gains Research Bureau, 375 U.S. 180 (1963), which involved a violation of § 206 of the Investment Advisers Act of 1940, and Zweig v. Hearst Corp., 594 F.2d 1261 (9th Cir. 1979). Neither case involved a criminal prosecution, and it will be interesting to see if the U.S. Attorney can establish a market manipulation case based on use of truthful information. The government also alleges that Elgindy and the other defendants engaged in insider trading based on the nonpublic information received from Royer, and that may be a stronger case of securities fraud. Insider trading only really works with truthful information. (ph)

November 2, 2004 in Prosecutions, Securities | Permalink

More Crime or More Prosecutions?

An interesting article by Eduardo Porter, entitled More Corporate Crime, or Just Prosecutions?, appeared in Sunday’s New York Times Week in Review section (Oct. 31, 2004) (forwarded by Professor Jerry Israel). The article considers the following:

But is the flood tide of scandals evidence of a flood tide of malfeasance? Economists have their doubts. Chicanery does tend to flourish when the economy is booming and regulation is weakening, they say, but the last few years have hardly been boom times. More likely, they say, is that bad business behavior is about as common now as it ever was, but that it has attracted more notice because Americans are tolerating it less.

It quotes Professors James D. Cox (Duke) and John C. Coffee, III (Columbia). Professor Cox noted the emergence of the state Attorneys General as a force in white collar crime prosecutions, a relatively recent phenomenon:

“Prosecutors are going after white-collar crime with an eagerness we hadn't seen before," said James D. Cox, a professor of law at Duke University. "The state attorneys general realized that the governor-in-waiting, otherwise known as the attorney general, can get a lot of headlines.”

Professor Coffee noted:

Perhaps more important, though, prosperity promotes tolerance for deception. “In a bubble, people want to be lied to,” said John C. Coffee Jr., a professor at Columbia Law School. “It was more than a conflict of interest - securities analysts boosted stocks because people wanted them to.”

While the “scandal du jour” attracts the media’s attention, most understand that the amount of white collar crime is not driven by the economy, although the type of white collar crime often depends on whether the economy is in boom or bust period. It is also important to remember that the level of resources committed by the government, especially the federal government, will affect the volume of cases. This was shown in the late 1980s with the S&L crisis, and today significant resources are devoted to health care fraud cases. (ph)

November 2, 2004 in Prosecutions | Permalink

Monday, November 1, 2004

Election Crimes

With the Presidential Election almost upon us, there has been much talk about voters being intimidated or otherwise interfered with while trying to vote. Because it is a federal election, 18 U.S.C. § 594 applies, which provides:

Whoever intimidates, threatens, coerces, or attempts to intimidate, threaten, or coerce, any other person for the purpose of interfering with the right of such other person to vote or to vote as he may choose, or of causing such other person to vote for, or not to vote for, any candidate for the office of President, Vice President, Presidential elector, Member of the Senate, Member of the House of Representatives, Delegate from the District of Columbia, or Resident Commissioner, at any election held solely or in part for the purpose of electing such candidate, shall be fined under this title or imprisoned not more than one year, or both.

Interestingly, there are no reported federal court decisions under the statute, and there are no references to any actual prosecutions.

Another provision that applies to voting is 18 U.S.C. § 245(b)(1)(A), which provides:

Whoever, whether or not acting under color of law, by force or threat of force willfully injures, intimidates or interferes with, or attempts to injure, intimidate or interfere with--
(1) any person because he is or has been, or in order to intimidate such person or any other person or any class of persons from--
(A) voting or qualifying to vote, qualifying or campaigning as a candidate for elective office, or qualifying or acting as a poll watcher, or any legally authorized election official, in any primary, special, or general election . . . .

This provision is in the Civil Rights section of Title 18, the federal criminal code, and it protects the right of all citizens to vote and campaign for office. There are no reported decisions under this provision either. (ph)

November 1, 2004 in Statutes | Permalink

Spinning Spitzer

The current round of investigations into corporate wrongdoing being led by New York Attorney General Elliot Spitzer, this time involving the insurance industry, includes an interesting sidelight in how one public relations firm tried rather unsuccessfully to turn the tide against Spitzer. According to a report in Friday’s Wall Street Journal (Oct. 29, 1994), American International Group (AIG) hired a public relations agency, Qorvis Communications, to assist the company in connection with the investigation. Qorvis, in turn, contacted Leading Authorities, a Washington, D.C., speakers bureau, about generating op-eds and TV appearances criticizing the insurance industry investigation. Leading Authorities apparently sent an e-mail on October 25 to various financial industry pundits, including Jeffrey Sonnenfeld at the Yale School of Management, offering a $25,000 retainer and payments of $10,000 for articles and appearances. AIG was unaware of the e-mail, and terminated its contract with Qorvis on October 25, although–remarkably–an AIG spokesman said the termination was unrelated to the e-mail messages.

Among the talking points criticizing Spitzer’s investigation suggested to the e-mail recipients was that revamping industry practices is better left to regulators than criminal prosecutors, and that Spitzer could have addressed problems in the industry in a more “subtle way, perhaps by bringing the industry in to reach an agreement, without the media storm.” No mention of any criticism of Spitzer’s hair.

A critique of Spitzer’s tactics, especially his statement that he would not deal with the current management of Marsh & McLennan to talk about a settlement, may be legitimate, although one is left with the impression that the insurance industry pushed the law to the very limit while ignoring the interests of their clients along the way. Whether there will be any criminal charges remains to be seen, and federal prosecutors have not appeared on the scene, at least at this point. Qorvis and Leading Authorities learned a quick lesson in public relations in this area, however, that offering to buy criticism is not the best approach to an investigation of corporate misconduct. (ph)

November 1, 2004 in Investigations, Media | Permalink

Up and Running

Welcome to the White Collar Crime Prof Blog. Starting on Monday, November 1, 2004, Professors Ellen Podgor and Peter Henning will make daily postings on issues related to White Collar Crime. The Blog will discuss current investigations and indictments, criminal and civil enforcement cases, and issues related to the scope of the criminal law. Welcome. (ph)

November 1, 2004 in Celebrities | Permalink