Saturday, November 13, 2004

Spitzer's Next Shoe

New York Attorney General Elliot Spitzer dropped another shoe from his closet on an insurance company, although it was not Aon Corp., about which there was some speculation when Spitzer announced that another suit was coming on Friday morning (Nov. 12).  This time, the target is Universal Life Resources (ULR), which is a San Diego-based insurance broker, and the complaint alleges bid-rigging in violation of New York's Donnelly Act similar to that charged against Marsh & McLennan. 

Unlike Marsh Mac, which is a multi-billion dollar company with thousands of employees spread across different divisions, ULR is a closely-held company, organized as a limited partnership with only one owner, Douglas P. Cox, and 80 employees.The complaint alleges that "Cox completely controls ULR," other companies doing business with it viewed Cox and the organization as interchangeable, and engaged in "self-dealing transactions" with the company and its subsidiaries.  As the sole owner of the company, it is not surprising that Cox completely controls it, indeed that's the very nature of being the sole owner of a company.  Moreover, the fact that other companies that did business with ULR viewed Cox as the embodiment of the company is commonplace, and there is nothing necessarily improper about it.  While corporate formalities have to be observed, owners of closely-held businesses are not held to the same standard in dealing with their company as officers and directors of publicly traded corporations.  That does not mean Cox can treat the company as a personal piggy-bank, but a closely-held business is often run with less formality because the owner suffers any loss associated with the business directly. 

Because the lawsuit names both ULR and Cox, there is a greater possibility that Cox (and ULR) will fight Spitzer, rather than immediately seek a settlement.  While a public company has a powerful incentive to cooperate with the government, a private company, especially one with a single owner who is also the object of the government enforcement action, does not need to protect the interests of a large group of shareholders.  If Cox decides to fight, then ULR will fight, something we have not really seen in any of Spitzer's earlier cases.  (ph)

November 13, 2004 in Civil Enforcement | Permalink

Friday, November 12, 2004

Marsh Mac Fallout

New York Attorney General Elliot Spitzer’s suit against Marsh & McLennan, filed on October 14, 2004, has triggered a near avalanche of federal and state investigations of insurance companies and their various practices ranging from the sale (and accounting for) sophisticated financial products to the submission of fake bids to give the appearance of competition.  An AP report this morning indicates that Spitzer will file a suit today against another company, and the speculation is that the defendant will be Aon Corp., which is (or was) second to Marsh Mac in the insurance brokerage arena.  According to the article:

"We're working as hard as we possibly can. There will be new chapters, some of them perhaps later today in terms of cases that will come out," Spitzer said at the 2004 Reuters Finance Summit in New York. "There may be a filing later today."

In one section (Money & Investing--Section C) of today’s Wall Street Journal (Nov. 12), there are three (3) articles detailing issues related to investigations of the insurance industry, and Marsh Mac in particular:

  • A story on Berkshire Hathaway’s sale of finite (or retroactive) insurance products through its General Re subsidiary. The controlling shareholder and CEO of Berkshire Hathaway is Warren Buffett, who is an oracle-like presence in the market and known (or prone?) to make pronouncements about improper practices in other industries. The Berkshire Hathaway annual report contains a long letter from Buffett, written in a plain style, discussing his take on the markets and the latest scandal du jour. Will the letter issued in next year's annual report contain a mea culpa? For those who follow the company, General Re has been a millstone around the company's neck since it was acquired a few years ago, one that is only getting bigger.
  • A story about 42 subpoenas issued by Connecticut Attorney General Richard Blumenthal to leading insurance companies asking about possible bid-rigging, which is the focus of the Marsh Mac suit in New York. Given the resignation this past summer of Governor John Rowland (in a hail of corruption allegations), one wonders if Blumenthal is the next "Governor-in-waiting," piggy-backing on the Spitzer investigation.
  • Finally, a story about the dismissal of two executives from the Los Angeles office of Hartford Financial Services Group, which was identified in Spitzer’s Marsh Mac complaint as one of the locations that submitted inflated insurance bids to facilitate the bid-rigging scheme. A number of executives have already left Marsh Mac, and expect more resignations from other companies in the scramble to show the company’s are cooperating in the government investigation (the subject of an earlier post here).

When Enron collapsed, terms like "special purpose entities" and "off-books transactions" entered common parlance. The demise of WorldCom brought to the forefront the difference between capitalizing and expensing costs, something that few outside the accounting world would have ever thought about. The fallout from Marsh Mac and the growing SEC investigation of the insurance industry likely will allow us to learn even more about the murky world of reinsurance. Neat! (ph)

November 12, 2004 in Civil Enforcement, Investigations | Permalink

Corruption Indictment

An article in the Atlanta Journal-Constitution (Nov. 11) discusses the indictment of the former Georgia School Superintendent Linda Schrenko, a one-time rising star in the Georgia Republican Party who ran for governor in the 2002 Republican primary, losing to now-Governor Perdue.  In 1994, Schrenko was the first woman to be elected to a statewide office in Georgia.

The indictment charges both wire fraud and theft of federal property.  The article states:

Former Georgia School Superintendent Linda Schrenko, whose groundbreaking political career dissolved into erratic behavior and defeat, was indicted Wednesday on federal charges that she stole more than $500,000 in taxpayer money and spent part of it on cosmetic surgery.

Schrenko, 54; her close friend and chief assistant Merle Temple, 56; and Alpharetta businessman A. Stephan Botes, 47, were named in an 18-count indictment that alleges they were involved in a scheme to steal federal education funds and secretly funnel about half the money to Schrenko's failed 2002 campaign for governor.

One allegation designed to draw attention is the claim that Schrenko used $9,300 of the money she received improperly to pay for a face lift; in November 2002, she acknowledged having cosmetic surgery.  The article quotes Sally Q. Yates, the acting U.S. Attorney for the Northern District of Georgia: "The defendants attempted to cover up the scheme by filing false campaign disclosure forms, creating back-dated contracts, devising false cover stories and lying to state of Georgia auditors and to the public." The indictment is another example of the federal push against state and local corruption. (ph)

November 12, 2004 in Corruption, Prosecutions | Permalink

Thursday, November 11, 2004

What Do They Teach in Law School Anyway

A short article at Law.Com (courtesy of Paul Caron) reports on a new course being offered by the Faculty of Law at the Universita degli Studi Roma Tre in Italy that looks at the history and development of the Mafia.  The course drew an enrollment of 500 students for the first day.  The article notes that "mafia research centers have sprung up in recent years, and at least two museums have been devoted to the subject, including one in Corleone, the Sicilian town whose name is practically synonymous with Cosa Nostra." What type of course would one need to offer in an American law school to draw that kind of enrollment?  Certainly not White Collar Crime. (ph)

November 11, 2004 in International | Permalink

The Best Way to Rob a Bank

There is an old adage that the best way to rob a bank is to work for it.  As long as you're going to work for the "bank" the best place to conduct the crime may be to work in the security department, at least when you look at the following story about an attempt to scam a state lottery.

A former lottery security officer has been charged with helping two men buy a $1 million winning ticket by tipping them to where it would be sold.

William C. Foreman, 59, was arrested Monday and charged with disclosing lottery information and theft, authorities said. He faces up to 50 years in prison.

Foreman told an acquaintance, Chad Adkins, and Daniel Foltz in May that a winning scratch-off ticket had been sent to a store in Cross Plains in southeastern Indiana, said Marion County Prosecutor Carl Brizzi.

The full story is here, and it notes that one $50,000 payment was made to the purchasers of the ticket.  It is highly unlikely that much if any of that money will ever be recovered. (ph)

November 11, 2004 in Fraud | Permalink

Martha Stewart's Legal Bills

Who Should Pay Martha Stewart's Legal Bills?  CCN Money, in an article titled "Martha Asks for Help With Legal Bills," tells how Martha Stewart has filed a claim with her company "for 3.7 million for help with her legal bills.  The claims relates to a charge that was dismissed by the court.  The charge relates "to her defense of the charge that she made false and misleading statements intended to influence the price of Martha Stewart Living Omnimedia's stock."  The company is wise in submitting this to an independent expert for review.

November 11, 2004 in Martha Stewart | Permalink

Wednesday, November 10, 2004

High Court Hears Pasquantino Case

The Supreme Court heard oral arguments this week in the case of Pasquantino v. United States. This is a wire fraud (18 U.S.C. 1343) case emanting from the Fourth Circuit. The defendants "were convicted of using interstate wires for the purpose of executing a scheme to defraud Canada and the Province of Ontario of excise duties and tax revenues relating to the importation and sale of liquor."

Oddly enough many newspapers seem to be omitting discussion of this case.  They shouldn't - as this case may set the tone for how far the government can go with extraterritorial prosecutions. 

The Baltimore Sun, in an article titled "High Court Hears Smuggling Case Involving Liquor From Maryland,"  notes how some justices were concerned about the possibility that the U.S. might punish the defendants, and then another country (Canada in this case) might also proceed against them for the same conduct.  This is a legitimate concern, since if the positions were reversed the U.S. would be able to proceed because of the dual sovereignty rule.  So the net result is that we could have countries all prosecuting the same person for the same crime. 


November 10, 2004 in Fraud, International, Tax | Permalink

Enron/Merrill Lynch Jury Findings for Sentencing

On Tuesday, November 9, the jury in the Enron/Merrill Lynch trial concluded that the loss caused by the defendants’ fraudulent misconduct was $13.7 million. A story in the Houston Chronicle (Nov. 10, 2004) reviews the jury’s verdict. The government argued for a loss calculation of $43 million, and the defendants who participated in the sentencing phase (two opted out) presented an expert who quantified the loss at approximately $125,000. In addition to the loss calculation, “The jurors made additional determinations that could lengthen three of the defendants' sentences: Bayly, Brown and Furst all broke a private trust with Merrill Lynch; Brown and Furst had managerial or leadership roles; and Brown and Furst used more than minimal planning in the deal.” The sentencing phase was the result of the uncertainty created by the Supreme Court’s decision in Blakely that throws into doubt whether the Federal Sentencing Guidelines, which rely on an assessment of the effect of the defendant’s conduct and the person's role in the offense to determine the ultimate sentence, are constitutional when the judge makes those decisions. Whether the jury can–and should–play the deciding role will be determined by the Court in the near future.

Based on the jury’s verdict and loss determination, a rough estimate of the likely sentence range is: the base offense level for an economic offense (§ 2B1.1 of the Guidelines) is 6, and then the $13.7 million loss adds 20, resulting in an offense level of 27. Assuming the judge accepts the jury’s loss determination and the defendants are in Criminal History Category I–which is likely–then the sentencing range would be 70 to 87 months. A defendant would have to serve at least 85% of the sentence, meaning that he would be in a federal correctional institution for at least 5 years, give or take a couple months and the possibility of serving the last few months in a halfway house. The additional jury findings regarding certain defendants can increase the offense level by an additional two to six points, again assuming the judge accepts them, resulting in a sentence as high as 135 to 168 months. Two defendants were also convicted of false statement (§ 1001) charges, which may affect their sentences. Given that the defendants went to trial, an Acceptance of Responsibility credit is off the table. If the Feeney Amendment restrictions on downward departures still apply when the sentencing occurs, then the judge will likely have to give the Guidelines sentence prescribed by the Sentencing Table. The sentencing is set for next March, by which time the Supreme Court should have decided, at least generally, the issues related to the constitutionality of the Federal Sentencing Guidelines procedures. All of this may go out the window and U.S. District Judge Ewing Werlein could have complete discretion to sentence them within the statutory maximum set by Congress. (ph)

November 10, 2004 in Sentencing | Permalink

What is the Effect of an Investigation on Corporate Employees?

On Nov. 5th we reported one of the side effects of  investigations -  the dismissal of corporate executives. (Ace, Ltd. dismisses two executives - NYTImes ; Marsh & McLennan dismisses four executives -NYTimes).

Today we are seeing the effect of an investigation on employees.  This mornings NYTimes reports that "Marsh is Planning to Cut 3,000 Jobs to Offset Recent Setbacks."  The Wall Street Journal has the interview with Michael Cherkasky, CEO of Marsh & McLennon Companies, who states, "we no longer face criminal prosecution as a corporation, and we have constructive discussions going on with regulators across the country."

There is no doubt that crime has its victims - oftentimes innocent people in the public who are wronged by the activity of those who perpetrate the criminal activity.

But investigations into allegations of criminal activity, even when no charges are filed, also can have victims.  The victims can be the public who may have been wronged by the alleged fraudulent activity.  Without them it is unlikely that prosecutors would be pursuing the conduct in the first place.

There also may be innocent parties associated with a company who may be dismissed when the company suffers because of the toll of the investigation (even when there may be no criminal activity found or when an alternative to prosecution is found). Professor Darryl K. Brown has a wonderful article titled, "Third Party Interests in Criminal Law, 80 Texas Law Review 1383 (2002) that explores the effect of criminal prosecutions and convictions on third parties.


November 10, 2004 in Investigations | Permalink

Tuesday, November 9, 2004

Ashcroft Resigns

CNN, etc. it is showing up as breaking news - John Ashcroft resigns.  More to come.


November 9, 2004 in News | Permalink

Boeing Probe

This morning the Wall Street Journal, in an article titled "Investigation of Boeing Grows Wider," reports that "[a] federal criminal investigation of Boeing Co.'s dealings with the Air Force is branching out to include aspects of a $100 billion program it is overseeing for the Army, according to people familiar with the matter, threatening to complicate and perhaps prolong the company's already difficult legal problems."


November 9, 2004 in Investigations | Permalink

Monday, November 8, 2004

White Collar Crime Employment Opportunity

Applicants Sought for White-Collar Crime Initiative Director

National Association of Criminal Defense Lawyers

The National Association of Criminal Defense Lawyers seeks a director for its new white-collar crime initiative focusing on over-criminalization, over-federalization, the gradual disappearance of mens reas as an element of a crime, and the application of criminal sanctions in enforcing economic regulations.

Qualified candidates will have a J.D and at least 3 years of relevant professional experience and also:

Excellent writing skills;

Solid research skills, including LEXIS-NEXIS, Westlaw, and the Internet;

Good public-speaking skills;

An ability to design creative projects for public education;

An ability to build and work collaboratively with diverse coalitions;

Knowledge of federal criminal justice issues, with a special emphasis on white-collar offenses; and

Proven skills in public policy issues, grassroots organizing, public relations, and legislative work a plus

Ideal candidates will also have fundraising experience, including writing grant proposals. Some travel required. Competitive salary; excellent benefits and downtown DC location. Email resume, cover letter, and writing sample to NACDL Legislative Director Kyle O’Dowd at


November 8, 2004 in News | Permalink

Two News Items - Hot Off the Wires

Two items hot off the wires-

1.  The Wall Street Journal reports in an email news item titled, SEC, Justice Department Probe Vioxx Withdrawal  that " Merck & Co. disclosed Monday that it received a subpoena from the Justice Department related to its Vioxx research, marketing and selling activities. The company also said it faces an informal investigation by the Securities and Exchange Commission." 

2. Although not a white collar topic- many white collar attorneys are involved in Guantanamo litigation.  This federal court ruling was issued today - "Salim Ahmed Hamdan petitions for a writ of habeas corpus, challenging the lawfulness of the Secretary of Defense’s plan to try him for alleged war crimes before a military commission convened under special orders issued by the President of the United States, rather than before a court-martial convened under the Uniform Code of Military Justice. The government moves to dismiss. Because Hamdan has not been determined by a competent tribunal to be an offender triable under the law of  war, 10 U.S.C. § 821, and because in any event the proceduresestablished for the Military Commission by the President’s order are “contrary to or inconsistent” with those applicable to courts-martial, 10 U.S.C. § 836, Hamdan’s petition will be granted in part.  The fovernment's motion will be denied.  The reasons for these ruling are set forth below....."


November 8, 2004 in Investigations, Judicial Opinions | Permalink

Steroid Prob

Smoking Gun, in a web article titled, "Barry Bonds Fingered in Steroid Prob" includes a Memorandum of an IRS special agent with Victor Conte, Jr. of a conversation during the search of Balco Labs. The document includes a "Who's Who" of athletes.

IRS- Are they looking for unpaid taxes? 

Lawyer- Was a lawyer present- none appear to be mentioned in the document.

Memo Dated September 2003- According to Smoking Gun, the Prosecutors filed this memo in court on Friday - Do they want us to see it, and why?


November 8, 2004 in Celebrities | Permalink

Does Halliburton Have Problems?

Today's Wall Street Journal, has an article titled "Halliburton Says Nigeria Payments Were Possible,"  and reports that "Halliburton Co.,  part of a consortium under investigation into whether it bribed foreign officials to win a multibillion construction contract, said in a filing 'that payments may have been made to Nigerian officials.'"  Although the government is investigating, the WSJ reports that a spokeswoman for Halliburton is saying that "We still have no evidence that supports there were any bribes paid."   


November 8, 2004 in FCPA | Permalink

Sunday, November 7, 2004

The Court Hears Oral Argument in Pasquantino This Week

This Tuesday, November 9, 2004, the United States Supreme Court will hear oral argument in the case of Pasquantino v. United States. This is a wire fraud (18 U.S.C. 1343) case emanting from the Fourth Circuit. The defendants "were convicted of using interstate wires for the purpose of executing a scheme to defraud Canada and the Province of Ontario of excise duties and tax revenues relating to the importation and sale of liquor." The issue before the Court is whether the wire fraud statute includes prosecutions where the alleged  scheme to defraud involves  taxes potentially owed to a foreign sovereign.  The Court will be looking at the common law  revenue rule and how far it should extend.  It will also look at the definition of the term "property" in the fraud statutes to see if property includes schemes to defraud foreign governments.  Because many of the fraud statutes operate the same, this case could have the potential to influence prosecutions that use the mail fraud statute (18 U.S.C. 1341 ), as the Court will be deciding if prosecutors can use fraud statutes when the scheme is to defraud a foreign government. 

The mail and wire fraud statutes provide prosecutors with enormous discretion in prosecuting fraud cases.  Will the Court allow them to use this discretion in prosecuting schemes that involve alleged deprivations of property outside the United States.  Stay tuned.


November 7, 2004 in Fraud, International | Permalink