Saturday, December 25, 2004
Each year the American Criminal Law Review puts out a survey on white collar crime. The 2004 issue has student notes on topics such as antitrust violations, environmental crimes, false statements, health care fraud, mail and wire fraud, and tax violations. The webpage contains a full listing of topics.
Friday, December 24, 2004
The Times-Picayune reports in an article titled, "Feds look into allegations of bribery at Traffic Court" that "sources close to the case said," that "[a] wide-ranging probe into potential ticket-fixing at Orleans Parish Traffic Court has been under way for more than a year, and federal authorities have obtained video and audiotape evidence showing bribes being paid."
This is not the first time there has been an undercover operation into a local or state traffic court. Some of the investigations have produced indictments and convictions such as those from Operation Greylord (Chicago) and Operation BarTab (Lake County, Indiana). But there was also Operation Corkscrew (Cleveland) with a high cost and poor result. The Cleveland undercover operation is detailed in a Report of the Subcommittee on Civil and Constitutional Rights (H.R. Doc. No. 267, 98th Cong. 2d Sess 17-18 (1984)).
Attorneys for Martha Stewart filed a reply brief that includes a strong argument based on the case of Crawford v. Washington, a case in which Justice Scalia, writing for the majority stated, " [w]here testimonial statements are at issue, the only indicium of reliability sufficient to satisfy constitutional demands is the one the Constitution actually prescribes: confrontation." This reply brief argues that the government's use of Peter Bacanovic's testimonial statements violated Martha Stewart's right to confrontation as required by the Crawford decision.
In the initial passages of this portion of the Reply Brief, defense counsel argues that
"in more than 56,000 words, the Government nowhere disputes that:
- Bacanovic's statements were made in a 'testimonial' setting; and
- Were used against Stewart;
- To prove the truth of the matters asserted."
It would not be surprising to see this Crawford argument and the first argument made by defense counsel in their original brief as the key issues at oral argument. The first argument was:
"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."
(See also Post of Nov. 3, 2004 which includes Stewart's initial brief.)
In a holiday message, Martha Stewart wishes everyone a happy holiday and also gives us her thoughts on women in prison. She says, "I beseech you all to think about these women -- to encourage the American people to ask for reforms, both in sentencing guidelines, in length of incarceration for nonviolent first-time offenders, and for those involved in drug-taking."
Professor Myrna Reader (Southwestern) has written some wonderful pieces on the issues faced by women in prison. For a primer, check out her Introduction in 16 Criminal Justice Magazine 4 (2001), titled "Female Offenders: An Introduction." It is wonderful to see Martha Stewart joining as an advocate to correct deficiencies in our justice system.
Thursday, December 23, 2004
AP wires report that Former Governor Rowland of Connecticut pled guilty to one count of conspiracy with the specific offense being a deprivation of honest services. The AP story notes that "[t]he plea deal ends the two-year-long investigation into corruption in the administration of Rowland, who resigned July 1 after 9 1/2 years in office." According to the AP wire, prosecutors told the judge, "that Rowland accepted $107,000 worth of vacations, work on his cottage and free flights from state contractors and others."
Rowland will likely face jail time, fines and a payment to the IRS. Although it is uncertain what sentence John Rowland will receive, and whether the sentencing guidelines of "15 to 21 months in prison," as stated by the AP story, will be controlling, it appears that this matter is over for the former governor.
Despite the fact that Rowland may soon be facing fines and jail time, this plea may be somewhat of a holiday present for the former governor. After being investigated for two years, finality to this process may offer a certain relief, even when jail time may be in his future. In some cases the jail time is not as difficult as the publicity and stigma that surrounds white collar offenders during an investigation. This is especially true when the investigation lasts for several years.
Addendum - The plea agreement can be found on Findlaw.
Other bloggers, like Doug Berman's Sentencing Blog (which includes comments of Margy Love, former pardon attorney for DOJ and now in private practice), Orin Kerr writing on the Volokh Conspiracy Blog, and the Crime and Federalism Blog have been commenting on whether President Bush is being stingy or not in his use of the pardon power. There is, however, another aspect regarding these pardons that warrants mention.
In our Nov. 19th blog entry we noted how 5 of the 6 pardons given by Bush in November 2004 were white collar offenders. Here again we are seeing the same pattern. CCN reports that the latest four pardons involve an "embezzlement by a bank employee," a "misapplication of bank fund by an employee," "possession of counterfeit obligations," and "theft from interstate shipment."
Although the definition of white collar crime is sometimes a term that is open for discussion, especially when the crime involves something like RICO, which can be a white collar offense in some instances and more a street crime in other contexts, I'm categorizing 3 of these 4 recent pardons as white collar. Clearly "embezzlement by a bank employee" and "misapplication of bank fund by an employee" fit the white collar category. "Possession of counterfeit obligations" also tends to fall in the white collar crime category. The last one, "theft from interstate shipment" could go either way, perhaps depending on the facts. I will give the benefit of the doubt on this last one to it being in the non-white collar category and claim 8/10 of the November/December pardons as white collar. (admittedly not an accurate statistical study being conducted here - so I would say the margin of error is likely to be 10%).
Some will claim that having 80% of pardons as white collar offenses is a proper percentage, as we are dealing with non-violent crimes here. Others may, however, note that there seems to be a lack of consistency in the types of pardons being granted by the President (high percentage of white collar offenders) with an aim of increased penalties in sentencing guidelines for white collar offenders. Just maybe, President Bush is giving a perfect reason for the need to rethink sentencing guidelines with respect to white collar offenses. But I guess, others out there will claim that I am comparing apples and oranges, as sentences have nothing to do with pardons. Your choice, I have my opinion.
Addendum - Christoper Geider also comments on the pardons on his blog. (esp)
Wednesday, December 22, 2004
The law firm Fried, Frank, Harris, Shriver & Jacobson LLP has an e-mail service called FraudMail Alert that notifies recipients about qui tam and contractor fraud-related developments [you can subscribe by going to one of the following websites: http://www.ffhsj.com/quitam/cfc.htm or http://www.ffhsj.com/wcc/fmamain.php3?sort=chron]. An e-mail sent today discusses the prosecution of a Minnesota beauty queen for fraud that is certainly worth reading (and enjoying):
FraudMail Alert® No. 04-12-22
December 22, 2004
The False Claims Act and the Beauty Queen
Over the many years that FraudMail Alert has served its readers, we have tried at holiday time to warn our readers of the substantial risk of fraud they face at such a precarious time of the year. Last year we warned of "Lobster Fraud," see FraudMail Alert No. 03-12-18. In previous years, we had warned our readers of "Caviar Fraud" (December 2002); "Chicken Fraud" (December 2001); "Frog Leg Fraud" (December 2000); and "Coffee Fraud" (December 1996). (In order to protect themselves and their organizations from allegations of "food fraud," we strongly encourage those who have not read these prior Alerts to do so at http://www.ffhsj.com/wcc/fmamain.php3?sort=chron.)
Having covered all the major food groups, we thought that we would have difficulty finding a Federal enforcement effort silly enough to give us holiday cheer - but we were wrong. After all, this past year brought the sad and tragic - but also true and amazing - case of the enforcement of the civil False Claims Act against the "Minnesota Beauty Queen." Once again, we are not making this up.
In March of this year, trolling through the daily grind of new FCA cases, we happened on the case of United States v. Denise Marie Henderson, 2004 WL 540278 (D. Minn., March 16, 2004). It appears that Ms. Henderson was hurt in an automobile accident and, some time later, applied to the U.S. Government for disability benefits paid for by the U.S. Social Security Administration, an agency of the Department of Health and Human Services ("HHS"). According to the Complaint, she allegedly made numerous false certifications, both express and implied, regarding her disability and ability to work.
Turns out, however, that Ms. Henderson's disability did not prohibit her from participating in, of all things, beauty pageants. Apparently quite attractive, Ms. Henderson won both the Mrs. Minnesota International - and the Mrs. Iowa International - beauty pageants despite her disability.
Ever vigilant to protect the Federal fisc, the U.S. Attorney's Office promptly sued Ms. Henderson under the civil False Claims Act, claiming that she obviously lied about her disability since she clearly was able to stand on a stage and look good (a skill that has always eluded the undersigned).
The Federal District Court heard oral argument on the case and promptly dismissed the FCA case under Rule 9(b) - for failure to plead with particularity. The Government, although free to file an amended complaint, never did so, and Ms. Henderson emerged victorious. But, alas, Ms. Minnesota/Iowa International's legal victory was short-lived. She was indicted, and recently convicted, for fraud.
All of this, of course, both warms and chills the heart at this holiday season. As your mind wanders while you are at a boring holiday party, think of these questions:
1. Just what facts did the Justice Department not plead with particularity? Perhaps her choice of songs at the pageant? The color of her evening gown?
2. Was the HHS OIG involved in this case? One can see one or two OIG agents, stealthily making their way into the exhibition auditorium, waiting breathlessly for Ms. Henderson to make her appearance in the bathing suit competition and take "pictures" of the contestants (purely as evidence, of course).
3. Be careful of winning those Rule 9(b) motions. Requiring the government to plead its civil case with particularity may have dire consequences.
As has been the case in past years, when FraudMail Alert applauded the efforts of the Department of Justice to protect the eating habits of the "rich and famous," we applaud these prosecutions. After all, without agents and prosecutors lacking a sense of humor or common sense, these annual holiday FraudMail Alerts would not be possible.
Most importantly, we want to wish you and your families the best for the holiday season and a Happy New Year.
Thanks to Jack Boese of Fried Frank for permission to post the e-mail. One question: how can someone from Minnesota win an Iowa beauty contest? (ph)
UBS AG, a large multinational investment bank, disclosed yesterday (press release here) that it received a Wells Notice from the SEC that the Enforcement Division staff is planning to recommend the institution of a civil action against the company for securities fraud related to its investment banking work on behalf of HealthSouth Corporation. A Wells Notice invites a company or person to file a response with the Commission staff arguing why charges should not be filed, and it is often an invitation to negotiate a settlement.
UBS was the leading investment banker for HealthSouth, and participated as an underwriter in numerous stock and bond offerings for the company while its analysts were among thestock's main cheerleaders. According to a Wall Street Journal article (Dec. 22), two UBS bankers, Benjamin Lorello and William McGahan, had a close relationship with Richard Scrushy, HealthSouth's former CEO who is scheduled to go on trial early next year for securities fraud and violating the Sarbanes-Oxley Act's CEO/CFO certification provision. The WSJ article notes:
The SEC has been looking into UBS's work for HealthSouth for months, with a focus on whether any UBS bankers had knowledge of the accounting fraud or did transactions with HealthSouth that made the company's books appear stronger than they actually were, according to people familiar with the probe. HealthSouth, one of the nation's largest providers of rehabilitative and surgical health care, has been under the scrutiny of Justice Department and SEC investigators for two years.
At this point, there is no indication that any individuals at UBS have received Wells Notices, but there is a reasonable likelihood that the SEC will file charges against individuals at some point. (ph)
Jurist reports that Federal District Court Judge Alvin Hellerstein refused to accept a plea agreement involving a former AOL employee who sold e-mail addresses in violation of the recently enacted Can-Spam law. The judge stated that it is not clear to him that the defendant acted with the requisite intent to deceive. (ph)
The Senate's passage of the Video Voyeurism Prevention Act of 2004 on Dec. 7, following earlier House approval of an identical measure, means that there will be another statute added to the long roster of federal offenses once President Bush signs the legislation into law. The new crime is a response to the growing number of cell phones with cameras, some of which have been used to snap pictures of unsuspecting individuals in various stages of undress, which are then posted on the internet. Senator DeWine (R-Ohio), the Senate sponsor of the legislation, stated that this new law "will help safeguard the privacy we all value as well as ensure that our criminal law reflects the realities of our rapidly changing technology." Approximately 30 states have similar provisions, and the federal law is limited to conduct on federal property and within the maritime jurisdiction to avoid conflicts with state laws. The statute uses the term "reasonable expectation of privacy" to describe the interest of the individual victim invaded by the defendant, a notoriously vague phrase that will likely test the statutory interpretation skills of the federal courts. The law provides as follows:
`(a) Whoever, in the special maritime and territorial jurisdiction of the United States, has the intent to capture an image of a private area of an individual without their consent, and knowingly does so under circumstances in which the individual has a reasonable expectation of privacy, shall be fined under this title or imprisoned not more than one year, or both.
`(b) In this section--
`(1) the term `capture', with respect to an image, means to videotape, photograph, film, record by any means, or broadcast;
`(2) the term `broadcast' means to electronically transmit a visual image with the intent that it be viewed by a person or persons;
`(3) the term `a private area of the individual' means the naked or undergarment clad genitals, pubic area, buttocks, or female breast of that individual;
`(4) the term `female breast' means any portion of the female breast below the top of the areola; and
`(5) the term `under circumstances in which that individual has a reasonable expectation of privacy' means--
`(A) circumstances in which a reasonable person would believe that he or she could disrobe in privacy, without being concerned that an image of a private area of the individual was being captured; or
`(B) circumstances in which a reasonable person would believe that a private area of the individual would not be visible to the public, regardless of whether that person is in a public or private place.
Tuesday, December 21, 2004
An Op-Ed in the New York Times (Dec. 21) by Professor Leonard Orland (Connecticut) questions New York Attorney General Eliot Spitzer's threats to institute criminal proceedings as part of an effort to oust the CEO of Marsh & McLennan. Professor Orland writes:
In the case of Marsh, Mr. Spitzer essentially forced the board to dismiss its chief executive, Jeffrey Greenberg, to avoid corporate criminal indictment. The sequence of events raises serious questions about the use (and potential misuse) of prosecutorial threats to a corporation and whether Mr. Spitzer's powers should be curtailed.
In October, Mr. Spitzer filed a civil complaint that accused Marsh of securities fraud and bid rigging. Mr. Spitzer also hinted at the possibility of a criminal indictment for the company unless Marsh's board ousted Mr. Greenberg.
The question Professor Orland raises about Spitzer's rather heavy-handed tactics has been voiced before, although companies are quick to settle civil charges because the cost of a criminal indictment can be so severe, much less a conviction--just ask Arthur Andersen. The problem is that it is rather difficult to fight a media darling whose approach is lauded by Congress and emulated by the SEC. Achieving balanced regulation that neither goes overboard nor permits companies to act with impunity is very hard to achieve, and Professor Orland's argument is worth considering. (ph)
The prosecution of former Westar CEO David Wittig and Executive VP Douglas Lake ended in a mistrial after a seven week trial and more than six days of deliberations. Wittig and Lake were charged with wire fraud, conspiracy, accounting violations, and money laundering. The case, which drew national attention during the collapse of Enron and other large corporations, involved allegations that Wittig and Lake treated Westar as, essentially, a personal piggy bank to fund lavish personal expenses. Wittig bought and began to refurbish the Alf Landon mansion in Topeka, and his free-spending style contrasted rather sharply with the staid culture of the Kansas state capital. The jurors did reach a verdict on the money laundering counts, but because they were deadlocked on the substantive violations that serve as the basis for the alleged monely laundering, the prosecutor and defense counsel agreed to a complete mistrial, which U.S. District Judge Julie Robinson ordered. An article in the Kansas City Star (Dec. 21) speculates that the jurors had reached a not guilty verdict on the money laundering charges: "At Robinson's direction, the jury foreman did not say whether the jury found Wittig and Lake guilty or not guilty of counts 23 through 39. Those counts charged the defendants with money laundering. But it's likely the jury acquitted the men on those counts because they depended on guilty findings on the first 22 counts. Count 40 of the indictment, which sought the forfeiture of Wittig's and Lake's assets, wasn't reached because it could not be taken up until the jury reached a decision on guilt."
Although the U.S. Attorney's Office has not said whether it will retry the case, given the national headlines the prosecution has received and the significant resources committed to the case already, it is much more likely than not the government will try the case again. The interesting question will be whether either (or both) of the defendants agrees to a plea bargain. At this point, that could be the least costly option for both sides. (ph)
Former Carson, California, Mayor Daryl Sweeney was sentenced on Dec. 20 to a 71-month term of imprisonment for his role in a kickback scheme that involved hundreds of millions of dollars worth of city contracts. U.S. District Judge Percy Anderson viewed Sweeney in this way, according to an AP story: "I don't think this was about losing your way or taking a wrong turn. You're really nothing more than a thief--a petty thief. You wanted the money." Sweeney is not the first Carson mayor sentenced to jail, however, as former Mayor Pete Fajardo was sentenced in November to 15 months in federal prison for extorting and accepting $120,000 related to city contracts. For a town of 88,000 people, and probably best known for its soccer stadium, two mayors in a row is putting it in a league with Chicago, Philadelphia, Boston . . . the list just seems to go on for municipal corruption. (ph)
Monday, December 20, 2004
An entry on the TaxProf Blog discusses the Department of Justice's decision to dismiss a civil case against xélan, Inc. that involved over 3,500 San Diego-area doctors and dentists involved in allegedly fraudulent tax shelters. After trumpeting the filing of the civil action and the entry of a TRO freezing the company's assets, the TRO was subsequently lifted and last week, with much less fanfare (i.e. none), the DoJ dismissed the civil case. Professor Caron describes the decision to dismiss the case as a "stunning reversal."
Edward D. Jones & Co., a nationwide brokerage firm that caters largely to individual investors has agreed to settle SEC charges and pay a $75 million fine, according to a report in the Wall Street Journal (Dec. 20). The firm settled charges that it marketed mutual funds to its customers as among the "best" choices available to investors without disclosing that the funds paid the firm a fee to be included on the list--a fact that any reasonable investor would--or at least should--consider quite important in making a decision about what assets to purchase. The settlement is part of a continuing effort by the SEC to police conflicts of interest on Wall Street, and another example that sometimes the difference between a broker and a used car salesman can be quite small. (ph)
With the re-election of President Bush and the fading memory of the collapse of Enron et al., it appears that the business lobby is increasing the pressure on the SEC and prosecutors to back off from the tough stance that had been taken in the past few years towards corporate crime and accounting/regulatory violations. Last week, Treasury Secretary John Snow indicated in an interview that he favored a more "balanced" approach toward enforcement of the Sarbanes-Oxley Act. A CNN report includes the following statement by Secretary Snow: "I think regulators, government officials, U.S. attorneys -- all of us who have a role in administering the oversight system for corporate governance -- have to be cognizant of the need for appropriate, measured balance here." An article in the Wall Street Journal (Dec. 20) indicates that business groups are opposed to William Donaldson continuing as Chairman of the SEC. The article notes, "The biggest gripes center on the SEC's regulatory and enforcement approach. Businesses complain they are being forced to spend too much time and money trying to comply with a slew of new regulations, many of which are required under the 2002 Sarbanes-Oxley Act. They also have taken aim at other SEC initiatives, including plans to give shareholders more power to nominate directors, register hedge-fund advisers and require independent chairmen for mutual-fund boards."
Chairman Donaldson is hardly the scourge of Wall Street, and Secretary Snow of course asserts that the Sarbanes-Oxley Act is "absolutely essential" and requires "no major modifications." One wonders whether his teeth were clenched when he said that. It will be interesting to see whether the enforcement climate changes over the next couple years, or at least until the next major scandal erupts. (ph)
On Dec. 16, the Third Circuit affirmed the mail fraud convictions of two men who participated in a scheme to buy scores for the Test of English as a Foreign Language (TOEFL) Exam, which is administered by the Educational Testing Service (ETS). United States v. Al Hedaithy. A passing score (usually 550) on the TOEFL is required by most colleges for admission to undergraduate and graduate programs for those whose first language is not English. The defendants, who paid to have the exam taken for them by an impostor, argued that the Mail Fraud Statute (18 U.S.C. § 1344) did not apply to the scheme in which the TOEFL score was mailed to a drop in California, where the reports were doctored to substitute the defendants' pictures for the impostor and then mailed to schools in fake ETS envelopes. The government's superseding indictment alleged that ETS was the victim of the scheme and that it lost valuable confidential information through the use of the impostors to obtain a passing TOEFL score. The Third Circuit rejected the defendants arguments that first, the TOEFL scores were not property, holding that the confidential information and scores were valuable property interests of ETS; and second, that under Cleveland v. U.S. (531 U.S. 12 (2000)) the scores were like government licenses before they are issued to the test-taker, holding that the fact that property may not be valuable in the hands of the victim does not mean that it cannot constitute property subject to the Mail Fraud Statute.
The Third Circuit's decision shows once again--in case anyone needed reminding--that the mail fraud statute is the great catch-all provision for dishonest conduct that results in a gain to the defendant and some articulable loss to the victim, even if there is no direct connection between the gain and loss. The defendants were not sentenced to any prison time, but as aliens they are ineligible to remain in the United States because of the felony conviction. (ph)
Sunday, December 19, 2004
Gregory Aaron Herns, who hacked into the computer system at NASA's Goddard Space Flight Center when he was 17 years old to store movies he had downloaded has been sentenced to a six-month term of imprisonment for his violation of the computer crime act (18 U.S.C. 1030). He pled guilty a violating the act and causing over $200,000 of damages. According to an AP story, Herns' attorney described the now 21-year old Mt. Hood Community College student as a "computer geek" who will suffer because after serving his sentence he will have only limited access to computers for three years. Greg Nyhus, the Assistant U.S. Attorney who prosecuted the case, tried--perhaps not successfully--to describe what Herns did: "It would be like clearing a sidewalk full of spectators with a fire hose so you can walk through it." I guess. (ph)
A decision issued on Dec. 17 by the D.C. Circuit, SEC v. Loving Spirit Foundation Inc. (No. 03-5234), involves inter alia the referral of two attorneys to the disciplinary authorities for misstatements to the court. The case involves an action by a receiver for a disgorgement fund created out of the SEC's litigation against Paul Bilzerian in the early 1990s. Bilzerian was convicted of securities fraud, and in a related civil action the court ordered him to disgorge over $60 million. Among the assets were those in foundations controlled by Bilzerian's wife, and the litigation at issue here involves the appeal by the foundation of District Judge Lambreth's refusal to recuse himself. The D.C. Circuit found two bases for referring the lawyers for disciplinary proceedings related to the appeal: first, the motion to recuse and the appeal appear to be frivolous because of the lapse of time in the filing of the motion and false statements as the basis for the motion; second, the filing of an affidavit in bad faith seeking the District Judge's recusal under 28 U.S.C. 144.
The litigation in this case has been, not surprisingly, quite contentious, and the attorneys have now been caught--or put themselves--in the cross-fire. There is some animosity toward Judge Lambreth, who is not always easy to get along with (just ask the Department of the Interior about their internet access), but the effort to force him off the case appears to have gone too far. This is an important case for litigators to review to keep a case from spinning out of control and putting the lawyer's license at risk. (ph)