Saturday, December 4, 2004

Sentencing Tensions Boil Over Between Judge and Prosecutor

The Federal Sentencing Guidelines have heightened the tension between judges and prosecutors, and it boiled over into a nasty confrontation between the U.S. District Judge Mark Bennett, Chief Judge for the Northern District of Iowa, and Assistant U.S. Attorney Kevin Fletcher.  According to an article in the Des Moines Register (Dec. 1):

A national debate over federal sentencing has taken a confrontational turn in Iowa, where Chief U.S. District Judge Mark Bennett recently tried to hold in contempt a prosecutor who had repeatedly challenged Bennett's efforts to reduce prison terms.

Prosecutor Kevin Fletcher and his attorney, a former solicitor general for the U.S. Department of Justice, responded with allegations of judicial misconduct against Bennett, who presides over Iowa's northern judicial district. They alleged in a recent court filing that the judge's behavior toward prosecutors signaled "a pattern of abuse and intimidation" that merited further review.

The U.S. Attorney's Office retained former Solicitor General Seth Waxman to represent Fletcher, and the Judge has now asked that the contempt be dismissed because it was inappropriate.  According to the article, "A week after being interviewed by The Des Moines Register about the dispute, Bennett on Tuesday asked a fellow judge to dismiss the contempt case, conceding that his courtroom disagreement with Fletcher 'upon further reflection and study . . . did not provide a basis for a contempt charge.'"  A copy of the brief seeking Chief Judge Bennett's recusal in the matter is here (Brief on Motion to Recuse Download mo_recuse_memorandum.pdf ).  The much anticipated Supreme Court decisions in Booker and Fanfan may not do much to quell the tensions between prosecutors and federal judges, and could even exacerbate it if the decision involves a split that does not provide clear guidance. Moreover, even if the outcome favors greater judicial discretion in sentencing, the Department of Justice has not been reluctant to seek a more favorable resolution of the issues in Congress.  (ph)

December 4, 2004 in Sentencing | Permalink

U.S. v. Scrushy Void-for-Vagueness Opinion

The memorandum opinion by U.S. District Judge Karon O. Bowdre rejecting the challenge by Richard Scrushy to the charges filed against him for violating the Sarbanes-Oxley CEO/CFO financial statement certification provision (18 U.S.C. 1350 as void-for-vagueness is (much belatedly--my apologies) here.  The judge concluded:

Taking 18 U.S.C.A. §1350 in its entirety, as the court must, the court finds 18 U.S.C.A. §1350(c)(2) is both "sufficiently definite as to give a person of ordinary intelligence fair notice that his contemplated conduct is forbidden," and specific enough to prevent arbitrary or discriminatory enforcement under its terms. See City of Chicago v. Morales, 527 U.S. 41, 119 S. Ct. 1849, 144 L. Ed. 2d 67 (1999); Kolender v. Lawson, 461 U.S. 352, 103 S. Ct. 1855, 75 L. Ed. 2d 903 (1983). The court further finds 18 U.S.C.A. § 1350(c)(2) imposes punishment "only for an act knowingly done with the purpose of doing that which the statute prohibits, [so the defendant] cannot be said to suffer from a lack of warning or knowledge that the act which he [allegedly did was] in violation of law." See, Screws v. United States, 325 U.S. 91, 102, 65 S. Ct. 1036, 89 L. Ed. 1495, 1503 (1945)(plurality)(emphasis added).

The court further finds that counts brought in this indictment under 18 U.S.C.A. §1350(c)(2) are subject to the standard of proof described herein. These counts are, as are all counts in criminal cases, subject to challenge by motion under Rule 29 of the Federal Rules of Criminal Procedure should the proof at trial fail to meet the standard required. Fairness, materiality, and willfulness are fact intensive questions generally reserved for the jury. Whether the information contained in the periodic reports certified by Mr. Scrushy fairly presented, in all material respects, the financial condition and results of operations of HealthSouth are questions of fact for the jury and part of the Government’s burden of proof in this case. If the jury finds that the reports did not fairly present, in all material respects, the financial condition and results of operations of HealthSouth, the jury must then determine whether Mr. Scrushy willingly certified these reports knowing that the reports did not comport with the statute’s accuracy requirements. See, United States v. Gaudin, 515 U.S. 506, 115 S. Ct. 2310, 132 L.Ed. 2d 444 (1995) * * * .


December 4, 2004 in Judicial Opinions | Permalink

How Not to Leave a Job

An employee worked for a company in New York City called StaffIT until he was fired on Oct. 31.  Some time that evening, the employee allegedly accessed the company's computer system and deleted e-mail of his boss who had fired him.  Maybe a nice way to get back at the company for firing you, but the result is a charge of violating 18 U.S.C. 1030(a)(5)(A)(i) & (B)(i) in a criminal complaint filed in the Southern District of New York, to wit:

the defendant, unlawfully, willfully, and knowingly, caused the transmission of a program, information, code and command, and as a result of such conduct, intentionally caused damage, without authorization, to protected computers, causing loss to one and more persons during a one-year period aggregating at least $5,000 in value, to wit, * * *, without the knowledge or authorization of StaffIT, Inc. * * *, accessed StaffIT’s computer network system and executed computer commands that, among other things, deleted electronic mail messages in StaffIT’s computer network in New York, New York.

One wonders whether a company that specializes in information technology should take greater care to protect its computer networks from its well-trained staff, especially a terminated one. (ph)

December 4, 2004 in Computer Crime | Permalink | TrackBack (0)

Friday, December 3, 2004

Investigation of Prosecutorial Misconduct

An article in the Detroit News (Dec. 3) discusses the expansion of a criminal investigation of Richard Convertino, an Assistant U.S. Attorney in the Eastern District of Michigan, for his conduct as the prosecutor in two drug trials.  Convertino was the lead prosecutor in the so-called "Detroit Terrorism Trial" in 2003, in which two men were convicted of conspiracy to engage in terrorism.  The conviction was reversed and those charges dismissed this past summer when the U.S. Attorney's Office admitted that Brady materials had been withheld from the defense, allegedly by Convertino, and that the government's theory was not supported by the evidence.  At that time, the Department of Justice began a criminal investigation of Convertino, and an investigation by the Office of Professional Responsibility also began. Convertino filed a law suit against Attorney General Ashcroft and then-U.S. Attorney Jeffrey Collins alleging that he was being retaliated against because he was a whistleblower.  The article discloses that an Assistant U.S. Attorney from Buffalo, N.Y., has been assigned to the investigation and is looking into allegations of misconduct by Convertino in drug prosecutions in the late 1990s.  Convertino's attorney strongly denies his client engaged in any wrongdoing in the various cases.  According to the article:

It's the first indication that the department's review of Assistant U.S. Attorney Richard G. Convertino, a 14-year prosecutor in Detroit, has expanded beyond his handling of the nation's first post-September 11 terrorism trial. In that case, a judge dismissed terror convictions in September against two men after the Justice Department acknowledged that Convertino withheld key evidence from defense attorneys.

Justice Department officials have assigned Anthony M. Bruce, the chief of organized crime investigations in Buffalo, N.Y., to review allegations of misconduct by Convertino in two major drug-gang cases prosecuted in Detroit in the late 1990s, said U.S. Attorney Michael Battle, who heads the Buffalo office. Although Bruce was named in April, his assignment had not been disclosed.

The revelation suggests the government's investigation of Convertino's prosecutions has broadened and could result in the dismissal of other convictions in prior cases. Convertino handled dozens of high-profile cases during his time in Detroit, prosecuting gang, drug and mafia cases.

Investigations of this type of rare, and it will be interesting to see if it results in the filing of any criminal charges. (ph)

December 3, 2004 in Investigations, Prosecutors | Permalink

BALCO Keeps Getting Bigger: Grand Jury Leaks and Potential Perjury

The leaks of grand jury transcripts got even bigger when the San Francisco Chronicle published an article (Dec. 3) for the second day in a row containing excerpts from previously secret grand jury testimony transcripts in the BALCO case.  This time, the newspaper recounted the testimony of Barry Bonds, the reigning National League MVP (four times in a row and seven overall) and likely holder of the all-time home run record in a couple seasons.  Bonds testified that he used two items provided by his personal trainer, Greg Anderson, that contained steroids, but asserted that he did not know what was in them.  Anderson is one of the four defendants in the BALCO prosecution.  Yesterday's story concerned Jason Giambi, who admitted to the grand jury that he took steroids and human growth hormones provided by BALCO.  The Chronicle appears to be parceling out information a little at a time, and there may be more revelations from the grand jury's investigation.

Grand Jury Secrecy Violation

While the revelation of steroid use by baseball players is hardly a shock, the leak of secret grand jury transcripts is troubling.  U.S. Attorney Keven Ryan announced yesterday that he had requested an investigation by the Department of Justice into the leaks (S.F. Chronicle article here).   The source of the leak is unclear, and it is unlikely that it will ever be revealed.  Government attorneys and agents are subject to the proscription of Federal Rule of Criminal Procedure 6(e) regarding maintaining the secrecy of grand jury information, and a violation is subject to a criminal contempt proceeding under Rule 6(f).  If the transcripts were given to the defendants as part of the discovery in the case (Brady or Jencks Act disclosure), they would most likely be subject to a protective order by the court regarding disclosure, and violation of that order would be subject to a civil or criminal contempt.  Either way, whichever side leaked the information violated the law, but these types of leaks are almost never prosecuted because discovery of the identity of the violator is so difficult when the press is not required to disclose the source of information.  There has been increased government pressure on the press to reveal the source of secret information--notably Judith Miller of the New York Times for refusing to disclose who provided information about the identity of a CIA agent--but this is probably not the type of case in which the U.S. Attorney will push hard on the S.F. Chronicle.

Potential Perjury by Bonds

There has been some speculation in the media (ESPN) whether the government might seek to prosecute Barry Bonds for perjury because he did not admit to using steroids despite evidence seized from his trainer Anderson detailing what appears to be extensive steroid use.  In the grand jury, Bonds denied ever seeing any documents created by Anderson, and denied using anything more than the two products (an oral substance and a cream) that he said he did not know contained steroids.  Bonds was examined about documents seized from Anderson's condominium which detail the alleged use of various steroids and human growth hormones by Bonds. Anderson created the documents, and Bonds denied ever seeing anything in writing by Anderson. 

The problem with bringing a perjury case against Bonds is that the key witness would appear to be Anderson, so he would have to cooperate with the government as part of a plea deal for a perjury case to even be considered.  Even then, Anderson is not likely to be the most credible witness, and the government would need some independent corroboration of Bonds using steroids or other illegal substances from a more reliable source.  That said, it is not impossible that the government will bring a case based on Anderson's testimony and evidence alone.  NBA star Chris Webber was indicted in 2002 on perjury charges based on the testimony of Ed Martin, who admitted to secretly paying Webber over $200,000 while Webber was student at the University of Michigan and pled guilty to money laundering.  Martin died before the trial, and Webber eventually pled guilty to contempt of court and has not been sentenced as part of a plea arrangement.  Can the government charge Bonds with perjury?  There is no way to know at this point, but high-profile perjury, obstruction, and false statement cases are more the norm these days (Martha Stewart, Frank Quattrone), so it is within the realm of possibility, especially if Anderson (and perhaps others) agrees to cooperate. (ph)

December 3, 2004 in Grand Jury, Obstruction, Prosecutions | Permalink

Kmart Securities Fraud Civil Case

The SEC filed a civil injunctive action (Dec. 2) against three former Kmart executives and five employees of three vendors related to a scheme to inflate the company's earnings by $24 million through improper accounting for vendor payments.  The former Kmart employees are John Paul Orr, former Divisional Vice President of Kmart's photo division; Michael K. Frank, former Divisional Vice President and General Merchandise Manager of Kmart's food and consumables division; and Albert M. Abbood, former Divisional Vice President of non-perishable products in Kmart's food and consumables division.  The vendors are Eastman Kodak Company, Coca Cola Enterprises Inc. and two PepsiCo Inc. wholly-owned subsidiaries, Pepsi-Cola Company and Frito-Lay, Inc.  According to the SEC's Litigation Release:

[I]ndividuals caused Kmart to issue materially false financial statements by improperly accounting for millions of dollars worth of vendor "allowances." Kmart obtained allowances from its vendors for various promotional and marketing activities. According to the Complaint, defendants caused Kmart to recognize allowances prematurely on the basis of false information provided to the company's accounting department. A number of vendor representatives participated in the fraud by co-signing false and misleading accounting documents, executing side agreements, and, in some instances, providing false or misleading third party confirmations to Kmart's independent auditor, Pricewaterhouse-Coopers LLP. As a result, Kmart's net income for the fourth quarter and fiscal year ended January 31, 2001, was overstated by approximately $24 million or 10 percent, as originally reported. The company restated its financial statements after filing for bankruptcy to correct these and other accounting errors.

Two of the Kmart defendants, Frank and Abbood, agreed to settle the action with the entry of a permanent injunction, payment of a civil penalty of $50,000 by Abbood, and a five-year bar from serving as a director or officer of a publicly-traded company by Frank. Frank did not have to pay a penalty due to his lack of resources.  Three of the vendor defendants settled with the Commission and agreed to the entry of a permanent injunction and to pay civil penalties totaling $110,000.

The SEC notes in its Litigation Release that the investigation is continuing.  Earlier this year, a criminal prosecution against two mid-level Kmart executives for a similar accounting fraud involving vendor payments collapsed when the government's second witness admitted that she had received information from the executives regarding the proper accounting for the payments.  The SEC subsequently dismissed its civil action against the same defendants.  There were large retention payments and forgiven loans paid to senior Kmart executives not long before the company declared bankruptcy, but to this point no civil (or criminal) charges have been filed against Kmart's top managers.  One wonders whether the investigation is continuing or whether it has hit a dead end, especially given how much time has passed since the company's problems were revealed. (ph)

December 3, 2004 in Civil Enforcement, Securities | Permalink

Thursday, December 2, 2004

Insider Trading Charge for Former Network Associates Officer

On Nov. 30, Evan Collins, the former controller of Network Associates (now McAfee, Inc.) was charged with one count of securities fraud in a criminal information for insider trading based on stock sales he made in November 2000 in advance of the release of negative information by the company (you remember that darn tech bubble bursting).  Collins also settled an SEC civil complaint filed the same day, and agreed to an injunction barring future violations of the securities laws and to disgorge unlawful trading profits (losses avoided) of $253,125, with prejudgment interest of $63,336 and pay a civil  penalty of $253,125 (SEC Litigation Release No. 18986).

In addition to Collins, two other former Network Associates executives have been charged with insider trading: Prabhat Goyal, the former CFO, was indicted on June 10, 2004, on 20 counts of securities fraud and conspiracy (indictment here); and, Terry Davis, Collins' replacement as Controller, pled guilty to securities fraud on June 11, 2003 and is cooperating in the government investigation.  Based on the filing of a criminal information and settlement of the SEC action, it appears that Collins will also cooperate and likely be called to testify against Goyal.  There is a hearing in Goyal's case on Dec. 16. 

December 2, 2004 in Securities | Permalink

BALCO Steroid Prosecution

The high-profile prosecution of four men linked to the Bay Area Lab Co-operative (BALCO), including the former personal trainer for Barry Bonds, made more headlines when the San Francisco Chronicle (Dec. 2) got a chance to review the grand jury testimony of Jason and Jeremy Giambi in which they admitted taking a variety of steroids.  BALCO's  founder, Victor Conte, and Greg Anderson, Bonds' former trainer, are accused of manufacturing and distributing anabolic steroids to a number of professional athletes (indictment here).  The grand jury testimony of the Giambis discloses that the took different steroids by injection, orally, and by applying a cream.  Jason Giambi, who is in the midst of a 7-year, $120 million contract with the Yankees, has suffered from a variety of health problems this past year and strongly denied that he ever took steroids.  According to the article, "Giambi has publicly denied using performance-enhancing drugs, but his Dec. 11, 2003, testimony in the BALCO steroids case contradicts those statements, according to a transcript of the grand jury proceedings reviewed by The Chronicle."

The article does not disclose the source of the grand jury transcripts made available to the S.F. Chronicle.  If the transcripts contain Brady material, they may have been disclosed to defense counsel, although there would be a protective order against disclosure of grand jury material. From the extensive quotes in the article, it is clear that the reporters had access to the actual transcripts and not just summaries.   

At a hearing on Wednesday, Dec. 1, on defense motions to dismiss the charges for "outrageous government behavior" and to suppress evidence from searches, District Judge Susan Illston indicated that she would deny all the defense motions and set the case for trial in  March 2005.  One issue raised by Conte is whether statements he made to agents during the search--in which he apparently admitted to manufacturing steroids--should be suppressed because he was not given Miranda warnings when he did not believe he was free to leave.  These claims are often made in white collar cases involving searches, and usually do not succeed. An article on reviews the hearing and notes that Conte will be interviewed on ABC Television in the near future. (ph)

December 2, 2004 in Grand Jury, Prosecutions | Permalink

Political Harassment Indictment

The former New England Regional Director of the Republican National Committee, James Tobin, was charged in a four-count indictment on Wednesday, Dec. 1, with conspiracy to make harassing telephone calls to the New Hampshire Democratic headquarters on election day in 2002.  According to the indictment, Tobin worked with Charles McGee (who is not charged in the indictment), the Executive Director of the New Hampshire Republican Party, to hire a vendor to make telephone calls to five telephone numbers associated with the New Hampshire Democratic Party and one number for the Manchester Professional Firefighters Association, to prevent them from being able to use the telephones as part of a get-out-the-vote program.  The vendor would place the calls, and then hang up once the telephone was answered, and then place calls again to the numbers.  The conspiracy count and substantive charges allege violations of 47 U.S.C. 223(a)(1)(C), which makes it a crime for any person who

makes a telephone call or utilizes a telecommunications device, whether or not conversation or communication ensues, without disclosing his identity and with intent to annoy, abuse, threaten, or harass any person at the called number or who receives the communications;

The statute does not require any actual conversation, so it covers a wider range of conduct than, say, 18 U.S.C 875, which requires the interstate communication of an actual threat.  An issue will be whether calling and hanging up constitutes harassment.  In U.S. v. Lampley, 573 F.2d 783 (3d Cir. 1978), the Third Circuit stated that "in enacting section 223 the Congress had a compelling interest in the protection of innocent individuals from fear, abuse or annoyance at the hands of persons who employ the telephone, not to communicate, but for other unjustifiable motives."  Is interfering with a political party's use of the telephone for political purposes the same as causing them "fear, abuse or annoyance"?  The indictment was returned in the District of New Hampshire, and the prosecutors are from the Computer Crime Section in Main Justice. (ph)

December 2, 2004 in Prosecutions | Permalink

Wednesday, December 1, 2004

AIG Finalizes Settlement with Federal Government

American International Group, Inc. (AIG) announced on Nov. 30 that it had concluded a settlement with the SEC and Department of Justice regarding insurance products sold to two customers that assisted them in allegedly providing misleading financial statements.  A post on Nov. 24 discussed the first report of the settlement.  According to the AIG press release, the terms of the agreement involve the following:

As detailed in an AIG news release on November 24, 2004, the agreement with the SEC, under which AIG does not admit or deny any wrongdoing, will fully resolve all government claims against AIG and its subsidiaries regarding the transactions and related public statements and press releases. Pursuant to the agreement, AIG will pay into an SEC disgorgement fund approximately $46 million in fees (and interest on the fees) on the PNC transactions, which were structured by AIGFP. In addition, AIG is enjoined from future violations of certain provisions of the federal securities laws. The Brightpoint transaction, which was underwritten by the Loss Mitigation Unit of the National Union Fire Insurance Company of Pittsburgh, Pa., was settled with the SEC in 2003. The settlement includes the appointment of an independent consultant who will review certain transactions entered into between 2000 and 2004 to determine whether the transactions were used by a counterparty to violate GAAP or obtain a specified accounting or reporting result. The settlement also requires AIG to establish a transaction review committee. The independent consultant will review the policies and procedures of the transaction review committee.

AIGFP will pay a penalty of $80 million to the DOJ. The proposed settlement with the DOJ consists of an agreement with respect to AIG and AIGFP and a complaint and deferred prosecution agreement with AIGFP PAGIC Equity Holding Corp. (PAGIC) that will foreclose future prosecutions in connection with the PNC and Brightpoint transactions, provided that the companies comply with the agreements. AIGFP has also agreed to a statement of facts describing its conduct.

The SEC filed its complaint (here) in the U.S. District Court for the District of Columbia, and still needs final approval from the court, which is done routinely.  According to the SEC's press release:

Under the terms of the settlement with the Commission, which is subject to court approval, AIG will be permanently enjoined from violating the antifraud provisions of the federal securities laws and from aiding and abetting violations of the reporting and record-keeping provisions of the federal securities laws. In addition, AIG has agreed to the appointment of an independent consultant to examine certain AIG transactions going back to the year 2000, including any transaction that was effected with the primary purpose of enabling a public company to achieve an accounting or financial reporting result. Further, AIG has agreed to establish a Transaction Review Committee to review certain future transactions involving heightened legal, reputational or regulatory risk.

The Department of Justice filed a criminal complaint against an AIG subsidiary (press release here), and will defer prosecution and dismiss the complaint if AIG complies with the terms of the settlement.  The settlement allows AIG to avoid a federal criminal conviction--assuming it meets the requirements of the settlement agreement--that would have seriously jeopardized the company's state-issued licenses to sell insurance.  The resolution does not, however, involve any state investigations, most prominently the one being conduct by New York Attorney General Eliot Spitzer (who was the subject of a profile in the Atlanta Journal-Constitution on Nov. 30). (ph)

December 1, 2004 in Civil Enforcement, Fraud, Investigations | Permalink

Prosecutorial Control of Information

An interesting working paper by Professor Peter Margulies (Roger Williams), entitled Above Contempt?: The Attorney General, the Courts, and Informational Overreaching in Terrorism Prosecutions, looks at the issue of prosecutorial control of information and incentives to withhold such information from defendants.  The abstract states:

Prosecutors face the continual temptation to overreach in decisions about the control of information. At each phase of a criminal proceeding, from investigation through trial, prosecutors make crucial decisions about information to disclose and highlight with courts, juries, and the public. In ordinary times, courts, defense counsel, the media, and internal sources of oversight can place some constraints, however tenuous, on the prosecutor’s efforts to monopolize the management of information. However, external events, such as the attacks of September 11, 2001, can weaken these constraints, producing alarming spikes in prosecutorial power.

The so-called "Detroit Terrorism Trial," in which with the government withdrew the most serious terrorism charges after it was revealed that the lead prosecutor withheld Brady information from the defense, is a good example of how the pressure on prosecutors to win convictions can result in a serious miscarriage of justice.

December 1, 2004 in Scholarship | Permalink

Cyber Business Attacks

An article in the Wall Street Journal (Nov. 30) discusses a new form of cybercrime in which businesses are attacked by competitors who seek to disable or disrupt websites through which so much commerce occurs.  Hackers do not attack websites or release viruses just for the joy of testing computer network security, but rather are hired by competitors to disrupt businesses.  The article discusses the indictment of Jay R. Echouafni, who arranged for a hacker attack on the website of a business who had rejected a deal he proposed (Echouafni is now a fugitive).  The article notes:

The Internet's growth has led to a surge in cyber-crime, including identity theft and online fraud. The Federal Bureau of Investigation ranks cyber-criminals as its third-biggest priority after terrorists and spies. The United Kingdom's National Hi-Tech Crime Unit has made more than 100 arrests related to major computer crimes since it was set up three years ago.

The U.S. Department of Justice employs about 38 attorneys in its computer-crime section, up from three a decade ago. About half focus on viruses and other computer intrusions. The toll of viruses on business, in terms of lost revenue and repair costs, could hit $17.5 billion this year, up from an estimated $13 billion in 2003, according to Computer Economics Inc., a research firm in Aliso Viejo, Calif.

It isn't known how much of that stems from financially motivated attacks, but law-enforcement officials say that their frequency is rising sharply. The growth in such attacks is driven by a new family of viruses that lets a person control large numbers of computers in order to, say, attack a corporate Web site.


December 1, 2004 in Investigations | Permalink

Tuesday, November 30, 2004

Money Laundering Problems at Bank of New York

A report in the Wall Street Journal (Nov. 30) indicates that the Bank of New York is negotiating to avoid an indictment for failing to report suspicious activity by a customer.  The Bank was at the center of the widely-report Russian mafia money-laundering scandal in the mid-1990s that was reputed to involve billions of dollars.  Among other things, Bank of New York promised to comply with all money laundering laws in order to avoid a criminal charge, so this case will be a significant embarrassment to its internal controls in the area of customer monitoring for potential money laundering.  The case also may provide an example of how the Department of Justice will apply its Principles of Federal Prosecution of Business Organizations.  According to the article, the Bank will pay a $24 million penalty, and the scope of its cooperation will likely be reviewed by corporate counsel to determine how it demonstrated its cooperation with prosecutors to avoid an indictment. (ph)

November 30, 2004 in Investigations | Permalink

Guidance on Charging Corporations

John Richter, the chief of staff for the Criminal Division in the U.S. Department of Justice, made remarks at an ABA conference sponsored by the Business Law Section on Nov. 19 about how federal prosecutors decide whether to charge a corporation with a criminal offense.  In January 2003, the so-called Thompson Memo (Principles of Federal Prosecution of Business Organizations), issued by former Deputy Attorney General Larry Thompson, set forth a series of broad principles for prosecutors to consider in deciding whether to charge a corporation with a federal offense.  The principles are quite broad, and Mr. Richter's comments shed a little additional light on the subject. A BNA report in U.S. Law Week (Vol. 73, No. 20, Nov. 30, 2004) summarized his comments:

Richter allowed that judging corporate culture is a "subjective assessment in some ways," but noted that "hard facts" exist in most cases. He said that because of the inherent timing of a prosecutor's interest in a company, much of a corporation's character reveals itself in how it deals with authorities during times of crisis.

A company's nature "really manifests itself in looking at the corporate response" to an investigation, Richter said. For instance, "corporations always tell us when they first realize they are under investigation that they will cooperate, and typically they'll publicly say so. But from our perspective, what we are looking at is: Are they actually cooperating? Is the cooperation authentic?"

"This cooperation, this self-reporting, this making facts available to us," he continued, "is part of what we take into account in exercising our prosecutorial discretion in making a determination [about] whether to focus on an individual wrongdoer, or whether the individual wrongdoer is actually an extension and reflection of the corporation that is potentially on a criminal liability hook for their conduct."

Richter said that his most important advice for corporate counsel is: "Don't just ask whether your client is complying with Sarbanes-Oxley or complying with applicable state law. Rather, ask your client whether its corporate culture is actually healthy." If wrongdoing occurs and is detected, Richter said, "does it get reported to the appropriate lawyers, both inside counsel and outside counsel? Does the board hear about it? And then how does the corporation respond to the information? Does it self-report, and thereafter what action does it take? Those are the key factors from a federal law enforcement standpoint and where we come from."

A corporation could pay a heavy price if it is perceived as uncooperative, although some types of conduct, such as paying the attorneys fees for counsel for individual officers and employees, is perfectly legal, yet may be considered a sign of a lack of cooperation.  This area is a minefield for corporate counsel, and Mr. Richter's comments do not make it any easier to determine what will--and more importantly, will not--constitute cooperation and avoid a criminal charge against the business organization. (ph)

November 30, 2004 in Investigations, Prosecutors | Permalink

Judge Upholds Sarbanes-Oxley Criminal Provision

U.S. District Judge Karon O. Bowdre (N.D. Ala) issued an opinion dated Nov. 23--but apparently not released until Nov. 29--rejecting Richard Scrushy's vagueness challenge to the CEO/CFO certification provision of the Sarbanes-Oxley Act.  The provision, now codified at 18 U.S.C. § 1350, provides:

Whoever--(1) certifies any statement as set forth in subsections (a) and (b) of this section knowing that the periodic report accompanying the statement does not comport with all the requirements set forth in this section shall be fined not more than $1,000,000 or imprisoned not more than 10 years, or both; or (2) willfully certifies any statement as set forth in subsections (a) and (b) of this section knowing that the periodic report accompanying the statement does not comport with all the requirements set forth in this section shall be fined not more than $5,000,000, or imprisoned not more than 20 years, or both.

According to an AP report, the judge held that issues of intent are for the jury to decide and that the statutory terms are not unconstitutionally vague.  A copy of the opinion will be posted here as soon as it is available.  Scrushy's trial is set to begin on Jan. 5, 2005, and it promises to be interesting, to say the least. (ph)

November 30, 2004 in Fraud, Judicial Opinions | Permalink

Expanding Federal Criminal Law

A post here on Nov. 25 mentioned, inter alia, Congressional consideration of a bill to criminalize interstate trafficking in horsemeat for human consumption.  An article by Trent England and Paul Rosenzweig in The American Spectator notes: "Ironically, the 'American Horse Slaughter Prevention Act' is not about preventing the slaughter of horses. It does nothing to stop horses from being killed for dog food or glue or as a good Godfather-style warning. The Act would only outlaw the killing of, or commerce in, horses for 'human consumption.' A better name for the bill might be the 'More Horses for Glue Act.'" The ability, and eagerness, of Congress to criminalize more and more conduct seems inexhaustible, and a report by Prof. John Baker (LSU) for the Federalist Society, entitled Measuring the Explosive Growth of Federal Crime Legislation, tries to catalogue the scope of the federalization of criminal law.  Prof. Baker's study notes,

• There are over 4,000 offenses that carry criminal penalties in the United States Code. This is a record number, and reflects a one-third increase since 1980.

• Previous studies conducted in 1989, 1996, and 1998 all reported "explosive" growth in the number of offenses created by Congress in the years since 1970. The rate of enactment has continued unabated since 1970.

• A review of Congressional enactments from the past seven years reveals that a very substantial number addresses environmental issues.

November 30, 2004 in Scholarship | Permalink

Monday, November 29, 2004

Going to Trial

Why do prosecutors take a case to trial?  A forthcoming article by two economists, Cheryl X. Long (Colgate) and Richard T. Boylan (Alabama) seeks to answer, at least in part, the question by looking at the local labor markets in which Assistant United States Attorneys operate.  The article, "Salaries, Plea Rates, and the Career Objectives of Federal Prosecutors," is scheduled to appear in the Journal of Law and Economics in October 2005, and is available through SSRN here.  The authors' abstract states:

We examine the relation between local labor markets and the behavior of federal prosecutors. Empirical evidence is provided that assistant U.S. attorneys in districts with high private  salaries are more likely to take a case to trial, compared to assistants in districts with low private salaries. We explain this finding as follows. In high salary districts, government salaries are not competitive relative to the private sector. As a result, positions of federal prosecutors are sought by individuals who want the trial experience needed to secure desired private sector employment. The following additional evidence is provided to further support this explanation. First, the turnover of assistant U.S. attorneys is higher in high-private-salary districts than in low-private-salary districts. Second, individuals who leave their employment as assistant U.S. attorneys are of higher quality in districts with higher private lawyer salaries. Third, assistant U.S. attorneys with more trial experience are more likely to take positions in large private law firms.

An interesting thesis, although one might question the linkage between the salary levels for private attorneys and the quality of local federal prosecutors. (ph)

November 29, 2004 in Scholarship | Permalink

Beware of Donors

Virtually every university (and law school) needs to engage in serious fundraising these days.  A problem arises when a donor gets in hot water over personal improprieties or, even worse, is charged (and convicted) of a crime.  The University of Missouri has been in the center of a controversy over the removal of the name of the daughter of the donors, who gave $25 million, from a new basketball arena that just opened.  The daughter, Paige Laurie, is the granddaughter of one of the founders of Wal-Mart, and a former freshman roommate at the University of Southern California accused Paige of paying her $20,000 over 3 1/2 years to write term papers.  An article on ESPN.Com (where else do you get news on Thanksgiving weekend?) mentions that the University also will likely return a $1.1 million gift from Ken Lay, the ex-CEO of Enron, to endow a chair in the economics department, if Lay is convicted next year in a trial related to the collapse of Enron.  The University has not filled the chair to this point.

There are a number of Arthur Andersen Professors of Accounting (e.g, Michigan,  Boston College, Southern California, Texas Tech), and the University of Michigan has the Taubman College of Architecture and Urban Planning, named for  A. Alfred Taubman, who spent a little less than a year in a federal correctional institution after his conviction for criminal antitrust.  University's cannot control the actions of their donors, and a criminal conviction does not mean the donation was wrongful or the recipient tainted.  It is not, however, helpful to the school when a prominent donor is convicted of a crime. (ph)

November 29, 2004 in Media | Permalink

Sunday, November 28, 2004

Money Laundering on Tuesday's Supreme Court Docket

This Tuesday the Supreme Court will hear oral argument in a case that is important to white collar crime law, as the case will determine whether the crime of conspiracy to commit money laundering under 18 U.S.C. 1956 requires an overt act.   The reason that this case is significant to white collar prosecutions and defense is because in recent years the government has been tacking on money laundering charges to cases involving  traditional white collar crimes, like mail or wire fraud. (see p. 201-05 Israel, Podgor, Borman, & Henning, White Collar Crime: Law & Practice).

The cases to be heard are Whitfield v. United States and Hall v. United States.  The defendants were alleged to have participated in a fraudulent investment scheme connected with a church organization.  (e.g. "Double Your Blessings Program")  Going across the country raising money, the defendants allegedly made promises of money to be made by investing with them.  According to the 11th Circuit decision in the Hall case, "many investors received little or no return on their gifts."  As you might suspect, the defendants, on the hand, were accused of receiving amounts of $539,000 and $678,000.  The government convicted Hall of conspiracy to commit mail fraud and conspiracy to commit money laundering.

Whether a conspiracy to commit money laundering requires an overt act will be the focus on Tuesday.  It is a fascinating question because the general conspiracy statute located at 18 U.S.C. 371 requires an overt act, while drug conspiracy statutes do not. The Court will likely spend significant time questioning the lawyers about the wording of the statute and the intent of Congress when the statute was passed.  But the bottom line really is - will money laundering end up being more like drug conspiracies or the regular generic conspiracies.   If the Court decides to omit the overt act in money laundering conspiracies then prosecutors will be able to charge this offense merely upon the agreement of the parties and the defendant's intent. The defendant will not have to take any steps toward the commission of the crime. The breadth of the money laundering statute is already obvious, as demonstrated by the fact that it is being used in white collar cases.  If no overt act is required for conspiracies to commit money laundering, the money laundering statute becomes an even more powerful tool for prosecutors.


November 28, 2004 in Fraud, Judicial Opinions | Permalink