Saturday, November 20, 2004

Insurance Probe Competition

The insurance industry probe took an interesting turn on Thursday (Nov. 18) when California Insurance Commissioner John Garamendi (California Department of Insurance) filed a lawsuit against Universal Life Resources (ULR) for taking undisclosed compensation and bid-rigging.  This is the same company that New York Attorney General Eliot Spitzer sued the previous Friday (Nov. 12), alleging the firm took undisclosed compensation and engaged in bid-rigging.  Quite a coincidence, isn't it?  ULR settled the California law suit by agreeing to the entry of a Consent Decree, while disputing the factual allegations in the Insurance Commissioner's complaint, and agreed to cooperate in an on-going investigation. 

Is California trying to compete with New York, or at least Garamendi fighting for headlines with Spitzer?  According to a Wall Street Journal story, here's the spin provided by each side on the competing law suits:

Mr. Garamendi's actions "don't represent any type of coordinated effort with this office," said Kermitt J. Brooks, a deputy attorney general in New York and head of that office's ULR probe. Mr. Brooks added that the California settlement with ULR "has no effect in the lawsuit in New York." Mr. Garamendi seemed to play down any conflicts with Mr. Spitzer, calling the two suits part of an "East Coast/West Coast knockout punch."

Spitzer and Garamendi testified together at a U.S. Senate Subcommittee hearing this past Tuesday (Nov. 16) on the topic of insurance regulation, and they certainly had a chance to discuss the matter then.  Could Douglas Cox, ULR's owner, be using the California Dept. of Insurance to fend off Spitzer by agreeing to cooperate with one agency to keep the other at bay?

In a prepared statement given to the Senate Subcommittee, Spitzer declared:

From our work in this area, it is clear that the federal government's hands-off policy with regard to insurance combined with uneven state-regulation has not entirely worked. There are too many gaps in regulation across the 50 states and many state regulators have not been sufficiently aggressive in terms of supervising this industry. The federal government should not preempt state insurance enforcement and regulation. Nonetheless, I do believe there is a role for the federal government, especially in the areas of off-shore capitalization and investment by insurance companies. At a minimum, federal involvement may be necessary to assure some basic standards of accountability on the part of insurance professionals.

Competition among regulators is not a good thing if cases are filed to establish the regulator's bona fides as a tough enforcer or, even worse, as a means to garner a share of the national spotlight.  It will be interesting to see if theULR case, which involves a fairly small firm with only 80 employees and annual revenue of $25 million, triggers greater cooperation among the state agencies or presages a "race to the courthouse" among state regulators.  That alone may be reason enough to call for more federal regulation.

November 20, 2004 in Civil Enforcement, Investigations | Permalink

Friday, November 19, 2004

Political Happenings Across the Country

Today's News -

New Jersey - According to Newsday, the former head of the New Jersey Assembly's ethics panel "pleaded guilty to misapplication of entrusted funds, specifically campaign money, and concealing campaign contributions."   

Illinois- Newsday AP also reports that "Prosecutors on Friday urged the judge overseeing the racketeering case against former Gov. George Ryan to set a firm trial date, complaining that additional delays could harm their case because witnesses might die before they have a chance to testify."  You may recall in the post of November 17th that former Mayor Bill Cambell of Atlanta moved to dismiss his case arguing that prosecutors waited too long in bringing the case. He claimed that a witness died.

New York - And in NY, the AP wires report "[a] former state senator who was released after serving about three months of a one-year sentence in a bribery scheme was ordered back to jail Friday."

All in one day.....   


November 19, 2004 in Corruption, Investigations, News | Permalink

5 of 6 Pardons are White Collar cases

Bush pardoned six people on Wed. and five of the six appear to have been convicted in white collar crime cases. The LATimes reports that individuals were pardened for crimes of "embezzling U.S. postal funds," "evading federal currency reporting requirements," "interstate transportation of fake securities," "making a false statement on a bank loan application," and "aiding and abetting the making of a false statement to a credit union."

Professor Doug Berman on his sentencing blog has a good bit more information on these pardons, including some comments by Margy Love, former pardon attorney with DOJ.   


November 19, 2004 in News | Permalink

Former South Carolina Official Convicted

Thomas Hockman at Jurist had the following entry yesterday evening:

Former SC lieutenant governor convicted of securities fraud_

[JURIST] A jury found former South Carolina lieutenant governor Earle Morris guilty of 22 counts of securities fraud Thursday. While Morris was chairman of Carolina Investors he told investors to keep their money with the company even though he knew it was going under. Carolina Investors subsequently went through the largest bankruptcy in South Carolina history in 2003, causing more than 8,000 investors to lose more than $278 million. Morris, now 76, will be sentenced Friday and can get up to five years in prison for each count and $1 million in fines. AP has more. The South Carolina Greenville News has extensive local coverage of the bankruptcy and the trial.

November 19, 2004 in Fraud, News, Securities | Permalink

Thursday, November 18, 2004

What's the Latest on Sentencing

As everyone awaits the post-Blakely decisions of Fanfan and Booker, the DOJ has decided to start its campaign to fight back with legislation, just in case the decision is not to their liking.  In today's Wall Street Journal, in an article titled, "Justice Department Backs Bowman's Sentencing Reform," we see reporter Gary Fields reporting that the DOJ  supports a plan that "takes the top off the existing guideline ranges, replacing them with the legally prescribed maximum for the crime."  No one else seems to agree with DOJ, and hopefully Congress will also reject such a proposal. Some important testimony can be found at  fellow blogger Doug Berman's Nov. 15th site that has the  testimony of those who were scheduled to appear (and have now appeared) before the Commission.

What's wrong with this proposal for white collar cases?

1.  We will be missing the opportunity to reconsider sentencing with all players at the same table.  Lets get the prosecutors, judges, defense attorneys and sentencing experts to study the deficiencies of the present system and come up with something that works. (Check out my co-authored op-ed piece with Barry Scheck in the National Law Journal (7-26-04) titled, Proceed With Caution)

2. Do we really want draconian sentences for white collar offenders?  The prisons are full, costly, and will these sentences really serve as a deterrent of future white collar offenses?

3. We would be missing the opportunity of examining in more depth the Kennedy Commission Report that looks at sentencing alternatives for offenders who likely could benefit from rehabilitation.

4.  This sure looks like an attempt to circumvent the basic holding in Blakely, a decision authored by Justice Scalia (not exactly the liberal type).

5. Gosh, does the DOJ want to risk reversals of trial and appellate decisions when the Court sends the message home yet another time (Apprendi, Blakely, etc.) as to what is required by the Sixth Amendment?

Yes, I have an opinion, and could go on....But that is exactly why we should all slow down and carefully study the different proposals.  And after all, what's so bad about having juries decide whether a sentence should be enhanced?      (esp)

November 18, 2004 in Sentencing | Permalink

Government Looks at Lay's Wife

The NYTimes reported it yesterday and several newspapers are reporting today that Ken Lay's wife is under investigation for a stock sale.  The Washington Post  says  that the  investigation goes to " Linda P. Lay's sale of 500,000 Enron shares on behalf of the couple's family foundation on Nov. 28, 2001."  Defense Counsel Michael Ramsey remarked to the NYTimes that, "This is an attempt at extortion. If I tried something like this, I would be indicted."

The government has been known to investigate the spouse of someone they have indicted.    It certainly places more pressure on the parties to move to negotiate a plea (e.g. Fastow).  Is the government acting within the definition of "family values" when it  uses a child, parent, or spouse to move a case along?    Stay tuned......                                                      


November 18, 2004 in Enron | Permalink

Wednesday, November 17, 2004

What's New in Atlanta

While New York's Attorney General Elliot Spitzer has the insurance industry feeling some pressure, in Atlanta some ex-officials are the ones facing scrutiny -  but this time it's by the federal government.

Former Mayor Bill Campbell,  charged with "racketeering, accepting bribes and evading taxes" asked the court to dismiss two racketeering counts because prosecutors delayed in indicting him.  According to the Atlanta Journal Constitution, the defense motion argues that  "prosecutors waited so long to indict the former Atlanta mayor a key witness has died."

And the Atlanta Journal Constitution also reported that former state superintendent Linda Schrenko  turned herself in to face an 18 count indictment (discussed Nov. 12 & 15).  If finding herself in the paper facing indictment wasn't enough, she also made the fashion page of the paper. Facing charges that she used "$9,300 of the money to pay for cosmetic surgery" - a face-lift - her court appearance was not without comment and picture from the press .  A Scott Walton of the Atlanta Jrl. Constitution wrote how everyone was talking about Schrenko showing up in court "in a camel-hair coat with billowing marabou trim on the collar and cuffs."  Of course there was another article talking about her bankruptcy.   And in an opinion piece by Cynthia Tucker, we see the best line -  "she could start her own makeover show — 'Fashion Felonies'."

If nothing else, you have to say that the U.S. Attorney's Office in Atlanta is being even-handed in their indictments - one democrat and one republican. (esp)

November 17, 2004 in News | Permalink

Up the Ladder at Boeing

An earlier posting (Nov. 9) about the expanding government investigation of Boeing may involve the highest levels of the company's management.  In a plea entered on Monday (Nov. 15), Michael Sears, the former CFO of Boeing, plead guilty to aiding and abetting acts affecting the personal financial interest of a federal government employee (18 U.S.C. §§ 208(a) and 216), namely Darleen A. Druyun, the former Principal Deputy Assistant Secretary of the Air Force for Acquisition and Management.  Druyun earlier entered into a plea agreement and on October 1, 2004 was sentenced to 9 months in prison, 7 months in community confinement, and a $5,000 fine.

Sears hired Druyun to work for Boeing in December 2002 after her retirement from the Air Force, although their negotiations took place before she left and while she was heavily involved in decisions regarding significant contracts with Boeing.  At the time, Druyun's daughter also worked for Boeing, and she helped facilitate the contacts between Sears and Druyun.  The government's Statement of Facts asserts: "

The defendant acknowledges that, as discussed above, he knowingly, intentionally and willfully aided and abetted Darleen Druyun’s willful violation of Title 18, United States Code, Section 208 (a) and Section 216 (a)(2) in that he proceeded to negotiate Boeing employment opportunities with Druyun despite her statement to him that she had not disqualified herself  from Boeing matters and that it was improper for her to have such negotiations with defendant when the defendant understood that Druyun was personally and substantially participating in matters in which Boeing had a financial interest.

The Statement of Facts discloses that the hiring of Druyun, who was also negotiating with Boeing rival Lockheed Martin for a job, was discussed at a meeting of Boeing's Strategy Council, which included the company's CEO, Harry C. Stonecipher.  In a statement released on Nov. 15, the company asserted:

We believe the Statement of Facts reinforces what we have said before – that no Boeing executive other than Mr. Sears engaged in any wrongdoing in connection with Ms. Druyun’s hiring. Boeing officials believed that Mr. Sears and Ms. Druyun were fully complying with all appropriate Boeing and DOD procedures in his recruitment efforts.

It will be interesting to see if Sears will provide information that may lead to further investigation of Boeing's top leaders.

November 17, 2004 in Investigations, Prosecutions | Permalink

Tuesday, November 16, 2004

Senate Hearing on Insurance Industry

The Subcommittee on Financial Management, the Budget, and International Security of the Senate Governmental Affairs Committee will be holding a hearing today (Nov. 16) on the state of the insurance industry in light of the various investigations of industry practices that have been the subject of two lawsuits filed by New York Attorney General Eliot Spitzer.  There will be two panels appearing before the Subcommittee:

Panel 1

Eliot L. Spitzer, Attorney General, Office of the New York State Attorney General
The Honorable Richard Blumenthal, Attorney General, State of Connecticut
The Honorable Gregory V. Serio, Superintendent of Insurance, State of New York , Representing the National Association of Insurance Commissioners
The Honorable John Garamendi, Insurance Commissioner, State of California

Panel 2

Albert R. Counselman, President and CEO, Riggs, Counselman, Michaels & Downes, Inc. , Representing the Council of Insurance Agents and Brokers
Alex Soto, President, InSource, Inc., Representing the Independent Insurance Agents and Brokers of America
Ernie Csiszar, President and CEO, Property Casualty Insurers Association of America
Janice Ochenkowski, Vice President for External Affairs, Risk and Insurance Management Society
J. Robert Hunter, Director of Insurance, Consumer Federation of America

Congressional hearings of this type are usually a forum for grandstanding, by both witnesses and elected officials, rather than a substantive consideration of the issues.  The interesting question about the insurance industry is whether there will be an effort in the next Congress to increase federal regulation in the area, perhaps through the creation of a new agency charged with oversight of large insurance companies.  Yesterday (Nov. 15), Ace Ltd., a large reinsurer, disclosed that it had received a subpoena from the SEC regarding its "finite insurance" contracts, which are designed to help companies limit risk and, in some instances, smooth out their financial results.  This is part of a continuing investigation by the Commission of the reinsurance field and how its financial products have been used--or misused--by companies in their financial reporting.

While the SEC can investigate the financial practices of insurance companies to the extent their conduct affects financial reporting, the Commission cannot directly regulate insurers. Indeed, there is no federal regulation of insurance companies because of the McCarren-Feguson Act, which reserves to the states the power to regulate insurance.  The key provision of the Act is 15 U.S.C. § 1012, which provides:

(a) State regulation
The business of insurance, and every person engaged therein, shall be subject to the laws of the several States which relate to the regulation or taxation of such business.
(b) Federal regulation
No Act of Congress shall be construed to invalidate, impair, or supersede any law enacted by any State for the purpose of regulating the business of insurance, or which imposes a fee or tax upon such business, unless such Act specifically relates to the business of insurance: Provided, That after June 30, 1948, the Act of July 2, 1890, as amended, known as the Sherman Act, and the Act of October 15, 1914, as amended, known as the Clayton Act, and the Act of September 26, 1914, known as the Federal Trade Commission Act, * * * shall be applicable to the business of insurance to the extent that such business is not regulated by State Law.

The Act means that large insurance companies potentially are subject to 51 state regulators (including the District of Columbia), and that kind of fragmentation makes it difficult for coordinated oversight.  At the same time, any push for federal regulation will run into issues regarding the budget and federalism, not to mention the usual in-fighting on Capitol Hill regarding which Committee would have oversight responsibility for the overseers.  As the investigations of the insurance industry blossom, watch for calls for increased regulation, and notice how the insurance industry divides on the issue. (ph)

November 16, 2004 in Investigations | Permalink

Lucent FCPA Woes

Lucent Technologies Inc., one of the largest telecommunications equipment providers, is caught up in a foreign government bribery scandal involving payments and perks to Dr. Ali Al-Johani, who was Saudi Arabia's telecommunications minister.  A front-page article in the Wall Street Journal (Nov. 16) describes the benefits provided by Lucent on Dr. Al-Johani's behalf, including a $2 million donation to a cancer hospital that treated him.  The article also points out that Lucent received over $5 billion in contracts from the Saudi Arabian government while it was providing these benefits. Last week, the SEC sent Wells Notices to three former Lucent executives, including former CEO Richard McGinn, that it intends to sue them for violating the FCPA in connection to payments to Saudi Arabian officials.  The Justice Department is also investigating the company.

The usual pattern in FCPA investigations is that the company will settle an SEC action and plead guilty to a violation of the Act, paying fines and taking measures to strengthen its internal controls.  The FCPA is almost 30 years old, yet the same ways of doing business abroad remain troublesome. (ph)

November 16, 2004 in FCPA, International, Investigations | Permalink

Monday, November 15, 2004

Sociological Origins of White Collar Crime

A recent report for The Heritage Foundation by Professor John S. Baker, Jr. (LSU), entitled "The Sociological Origins of White Collar Crime," raises questions about the definition--or lack thereof--of what constitutes a "white collar crime."  Regarding the scope of what now comes under the definition of white collar crime, Professor Baker points out:

Are millions of middle-class Americans really white-collar criminals? The unauthorized importation of prescription drugs from a foreign country is a federal crime. So is "sharing" copyrighted material without permission. Assisting someone in the commission of a federal crime is also a federal crime. Countless American seniors purchase prescription drugs from Mexican and Canadian pharmacies. Millions of Americans, including teens using family computers, share copyrighted music without paying for it.

According to the Department of Justice, "White-collar offenses shall constitute those classes of non-violent illegal activities which principally involve traditional notions of deceit, deception, concealment, manipulation, breach of trust, subterfuge or illegal circumvention." Under that definition, the illegal purchase of prescriptions and music pirating clearly qualify. The Justice Department has recently promoted the idea that enforcement of federal crimes should be uniform. Nevertheless, it is highly unlikely that federal prosecutors will hand down millions (or any) indictments of seniors, parents, and children for these crimes.

Despite the rhetoric, the decision to prosecute is unavoidably discretionary. How do prosecutors determine whom to prosecute? All too often, the choice reflects contemporary politics--and today's criminal du jour is the "white-collar" crook. Yet when most people talk about vigorously prosecuting white-collar crime, they don't mean locking up those who purchase medicine from neighboring countries or pirate music over the Internet, despite the fact that such crimes defraud pharmaceutical and music corporations (and thus their shareholders) of billions of dollars.

Professor Baker questions the definition of white collar crime offered by Edwin Sutherland, widely considered to be the first scholar in the area.  In the conclusion to his report, Professor Baker writes:

The origin of the "white-collar crime" concept derives from a socialist, anti-business viewpoint that defines the term by the class of those it stigmatizes. In coining the phrase, Sutherland initiated a political movement within the legal system. This meddling in the law perverts the justice system into a mere tool for achieving narrow political ends. As the movement expands today, those who champion it would be wise to recall its origins. For those origins reflect contemporary misuses made of criminal law--the criminalization of productive social and economic conduct, not because of its wrongful nature but, ultimately, because of fidelity to a long-discredited class-based view of society.

The report is provocative, and Professor Baker is one of the leading critics of the federalization of the criminal law. (ph)

November 15, 2004 in Scholarship | Permalink

Corruption Indictment II

A post last Friday, Nov. 12, discussed the indictment of former Georgia School Superintendent Linda Schrenko on mail fraud and theft of government property charges.  A copy of the indictment is at the following link: Download schrenko_indictment.pdf .

November 15, 2004 in Corruption, Prosecutions | Permalink

Whistleblower Protection

One of the many changes made by the Sarbanes-Oxley Act was the enactment of specific protections for corporate whistleblowers.  While the role of whistleblowers, such as Enron's Sherron Watkins, were much celebrated, this aspect of the Act has received relatively little attention, at least until now.  According to an AP story, two leading senators, Charles Grassley (R-Iowa) and Patrick Leahy (D-Vermont), have written a letter to the SEC requesting information about how the Commission plans to enforce the whistleblower protections.  The letter was triggered by a finding by the Department of Labor in early October that an officer of CheckFree Corp., a publicly-traded company, had been retaliated against for reporting corporate misconduct and ordering the company to pay him $103,000 in backpay.  The National Whistleblower Center website has a description of the provisions of the Sarbanes-Oxley Act that protect employees of publicly traded corporations from retaliation for reporting illegal conduct by their employers.  The Center's analysis states:

Unlike most whistleblower laws, the SOX’s whistleblower protection provisons are not limited to providing a legal remedy for wrongfully discharged employees.   In addition to containing employment-based protections for employee whistleblowers, the law contains four other provisions directly relevant to whistleblower protection.  First, the law requires that all publicly traded corporations create internal and independent “audit committees.”  As part of the mandated audit committee function, publicly traded corporations must also establish  procedures for employees to file internal whistleblower complaints, and procedures which would protect the confidentiality of employees who file allegations with the audit committee.


November 15, 2004 in Investigations, Securities | Permalink

Sunday, November 14, 2004

Identity Theft

A story in the Christian Science Monitor discusses a disturbing problem caused by courts that make records available online. According to the article:

Public records held at the county clerk's office or city hall have always been available for public scrutiny, but to access them you needed to turn up in person between 8:30 a.m. and 4 p.m. Now, in the name of efficiency, many counties are putting their public records online and ending the practical obscurity paper records once offered.

And that's what alarms privacy advocates. It's not just checking out the new neighbors that's at issue. Those public files often contain sensitive personal information - particularly court documents, writes Beth Givens, director of Privacy Rights Clearinghouse, a nonprofit consumer education and advocacy group ( based in San Diego.

As the story notes, divorce proceedings, bankruptcy documents, mortgage, and other personal information can be accessed quickly when those items are available through the internet, and many will contain social security numbers, bank information, etc.  Identity theft is a growing problem, and investigators at the federal and state level have had a hard time catching up with identity theft rings that engage in large-scale frauds through the use of stolen information to obtain credit cards and bank accounts.  As courts push further into electronic filing, the security of personal information will take on even greater importance.  (ph)

November 14, 2004 in News | Permalink