Monday, January 31, 2005
The government witness testifying on Jan. 31 in the trial of Richard Scrushy was Harvey Kelly, who worked for PriceWaterhouseCoopers as an accountant in its investigation of the accounting fraud at HealthSouth. Kelly testified that he did not come across any documents (memoranda, e-mails, etc.) specifically linking Scrushy to the overstatements of revenue and income at the company, although he also noted that he was not looking for any when he conducted the internal investigation of the accounting issues. The testimony is consistent with the defense theory that financial officers of the company were responsible for the fraudulent accounting, although it does not undermine the government's position that Scrushy urged those same officers to do whatever was necessary to make the numbers Wall Street wanted to see. It is likely the government will soon call Bill Owens, a former CFO and senior officer at the company, to testify about Scrushy's involvement in the misconduct; his testimony is expected to be quite lengthy, with the cross-examination very contentious with regard to the recordings he made prior to the government's search of HealthSouth's offices. An AP story (here) discusses Kelly's testimony.
Back in early December 2004, the baseball world was rocked by the revelation on successive days (by the San Francisco Chronicle) of the grand jury testimony of Jason Giambi and Barry Bonds (see posts here and here). That testimony is related to the government's prosecution of four defendants involved in the creation of "designer" steroids at BALCO (the Bay Area Laboratory Co-operative). BALCO founder Victor Conte appeared on the television news program 20/20 after his indictment to discuss the steroid use by major athletes, including (among others) track star Marion Jones, essentially admitting to many of the charges in the government's case.
An issue regarding the grand jury transcripts concerns the source of the leak to the Chronicle in violation of protective orders and the grand jury secrecy rule in Federal Rule of Criminal Procedure 6(e), which may be punishable by contempt. Last week, the FBI conducted a search of Conte's Bay Area home for evidence related to the leak of the grand jury transcripts, including a search of his computer. An earlier post on the CrimProf Blog on Jan. 10 (here) discussed possible sources of the leak of the transcripts -- given the level of detail in the Chronicle stories, it is almost certain that the reporters received copies of the grand jury transcripts and not just oral (or written) summaries. Given Conte's penchant for publicity regarding the use (and misuse) of steroids, even when it hurts his criminal case, the government appears to be focusing on him as a source of the transcripts. Whether the mystery of who leaked the transcripts will ever be solved is still up in the air. A story in the San Francisco Chronicle (here) discusses the search of Conte's home and related developments in the BALCO prosecution. (ph)
Marsh & McLennan Cos. Inc. announced a settlement with New York Attorney General Eliot Spitzer's office on Jan. 31 regarding the complaint filed in October 2004 regarding alleged price fixing in its insurance brokerage unit. The company agreed to create an $850 settlement fund for customers to seek reimbursement for the increased costs from the company practice of soliciting inflated bids. A press release issued by Marsh Mac states that in addition to the settlement fund, which does not include any fine or civil penalty, it will undertake the following corporate reforms:
- MMC has discontinued the practice of receiving contingent compensation from insurance carriers. The company adopted this new policy effective October 1, 2004.
- The company will provide clients with a comprehensive disclosure of all forms of compensation received from insurers.
- The company will adopt and implement company-wide, written standards of conduct for the placement of insurance.
- The company will provide all quotes and terms as received from insurance companies to enable clients to make informed insurance coverage decisions.
- MMC will establish a Compliance Committee of the MMC Board of Directors and has appointed a chief compliance officer.
After Spitzer filed the complaint against the company, he essentially demand that its top management, including former CEO Jeffrey Greenberg, be removed by the board of directors before settlement negotiations could begin. The board complied, and Marsh Mac's new CEO, Michael Cherkasky, came from its Kroll unit and was Spitzer's supervisor in the Attorney General's office earlier in his career. Although the settlement ends the highest profile litigation involving the company's insurance brokerage business, it does not end the lawsuits brought by other states, shareholders, and clients. Look for those cases to be settled soon. (ph)
UPDATE: Settlement agreement here.
The government's prosecution of four former executives of Charter Communications, Inc., the large cable TV company, ended when the fourth defendant, former CFO Kent Kalkwarf, agreed to enter a guilty plea. According to the press release issued by the U.S Attorney's Office for the Eastern District of Missouri (St. Louis):
In an effort to generate approximately 15 to 20 million dollars in additional revenue needed to meet these cash flow projections, Charter solicited advertising business from some of Charter’s largest suppliers, including their suppliers of set-top boxes. Kalkwarf and others offered Charter funds to these suppliers so that they could then use those same funds to purchase advertising from Charter at no cost to the suppliers, and these suppliers agreed to return that money to Charter by buying advertising in an equal dollar amount. Charter paid $20 more than necessary for each set-top box, but then received that same $20 back as advertising revenue, creating nothing but a "wash transaction."
Another example of the effect of the enormous pressure on corporate executives to churn out numbers (here, cash flow) to meet Wall Street's expectations, the same show being played out in the WorldCom and HealthSouth prosecutions. (ph)
The U.S. Attorney's Office for the Central District of California (Los Angeles) announced yet another revenue recognition accounting fraud involving an internet company, this time L90, Inc., an internet advertising company. According to the press release, Keith Kaplan, a former vice president and head of sales for the company
conspired with two other former L90 executives to inflate the company's earnings so that it would meet Wall Street analysts expectations. Those other two executives - John C. Bohan, L90's former CEO, president, and board member; and Lucrezia Bickerton, L90's former vice president of finance - have already pleaded guilty to criminal charges. At the time of the alleged offenses, L90 was based in Santa Monica and Marina del Rey, and its stock was traded on the Nasdaq National Market System. L90 is now known as MaxWorldwide, Inc. In the final quarter of 2000, Kaplan and his co-conspirators were concerned that L90's total revenues for the quarter would not meet analysts' projections, according to the indictment. In order to make up the anticipated revenue shortfall, Kaplan and his co-conspirators allegedly developed several schemes to fraudulently inflate L90's revenue numbers.
The pressure to commit accounting tricks in response to the bursting of the internet bubble in 2000 continues to hit home. (ph)
Sunday, January 30, 2005
The Atlanta Journal Constitution in a post here and here reports the latest in the trial of Logan Young, an Alabama booster who is being tried for racketeering in federal court for allegedly paying a former high school football coach, Lynn Lang, "$150,000 to make sure that former Trezevant High football star Albert Means signed with the University of Alabama." A key witness for the government was Lang, "who has pleaded guilty on extortion charges concerning his steering of Means to Alabama."
The defense has now started its case. As reported by the Atl. Jrl-Const. a motion to dismiss by the defense claims that "what Lang did --- taking money to influence Means' college decision --- is not expressly prohibited in the rules and regulations of the Memphis public schools."
Additionally, the defense testimony challenges Lang. "On Friday, former coach Jim Donnan [UGA] testified saying that "[a] Memphis recruit's high school football coach wanted 'at least' an SUV in return for the player's signature."
This is an interesting case to follow not only because it provides a glance into some of the behavior that goes on in the recruiting of college football players, but also because it shows a unique side to collateral consequences, something common in white collar cases. In this case one of the collateral consequences fell on Alabama, who (as stated in the Atl. Jrl.-Const. article" "was charged with NCAA recruiting violations in the Means case and eventually received sanctions that included a loss of scholarships, plus a two-year ban from bowl participation.")
Saturday, January 29, 2005
A report in the Wall Street Journal (Jan. 28) discusses heavy purchases of Gillette February call options right before the close of trading on Jan. 27, after which word began to leak out about the acquisition of Gillette by Procter & Gamble. Buying a call option, especially one set to expire in less than a month at a price well above the underlying stock's current market price, is a particularly bullish bet -- and often a signal of insider trading. According to the Journal report:
The heaviest trading was in Gillette's short-term February options, and 4,224 February 45 calls changed hands Thursday. Each of these calls gives the right, until mid-February, to buy 100 shares of stock at $45 apiece, and were valued at between $75 and $135 Thursday. By Friday, after the deal with P&G made headlines, Gillette shares gained $5.44 to $51.13. Each February 45 call is now worth between $610 and $630 Friday morning -- a nearly sixfold increase in less than 24 hours. Altogether, there were 6,525 Gillette February 45 calls currently outstanding.
My quick estimate, based on purchasing 4,000 calls at the highest price and selling at the lowest identified price, is that the transactions could yield a one-day profit of $1.9 million, and the actual profit is likely much higher, although the trades may have been conducted by more than one person or group. That kind of gain gets the attention of the SEC in a hurry, and we can expect to see the first cases filed in the next week or so, especially if any of the trading were conducted through an off-shore account that sought to liquidate its position. The Commission routinely files for a TRO to have the accounts frozen pending its investigation, and the courts (usually the Southern District of New York) just as routinely grant the temporary freeze orders. Moreover, when this type of brazen trading takes place, the U.S. Attorney's Office will not be far behind. (ph)
The testimony of David Myers, former WorldCom controller, continued on Friday (Jan. 28) in the government's effort to link Bernie Ebbers to the company's accounting fraud. An AP story recounts the following part of the testimony:
[Myers] remembers Ebbers saying that if the stock slid below the mid-teens, "My margin calls are called and everything I've worked for since I've joined WorldCom will basically be wiped out. "At the same meeting, without specifically referring to accounting tricks, he said Ebbers said "while the company was in extraordinary times, extraordinary things had to be done." In addition, Myers said Sullivan told him twice in 2001 that Ebbers understood, as Myers put it, "the magnitude of what we were doing on the revenue side and the line-cost side." The testimony appeared to be the most damaging yet against Ebbers, whose lawyers claim Ebbers left accounting matters to Sullivan and that Sullivan masterminded the fraud.
It is hard to draw much of a conclusion from the testimony because the cross-examination has not yet begun. (ph)
Al Thompson, who refused to permit the 25 employees of his company file W-4s to withhold income tax because the tax system is illegal, was convicted on Jan. 28 in the U.S. District Court for the Eastern District of California (Sacramento) on 13 counts involving various tax violations. (Sacramento Bee article here) Thompson became nationally known when he boasted to the New York Times and on Sixty Minutes II about how the income tax is not enforceable and the government's failure to pursue him demonstrated that his position was correct. The company is now out out business, and Thompson was indicted along with former IRS Criminal Investigation Division Agent Joseph Banister, who worked with Thompson to advance the position that individuals do not have to pay income taxes. Banister's case was severed from Thompson's, and he is awaiting trial.
Thompson acted as his own attorney, and a New York Times article (here) notes that he avoided conviction on the conspiracy count by asserting to the jury that his public proclamation of his position meant that he could not have conspired. The article states: "Because he had publicly declared his actions, Mr. Thompson told the jurors that he did not see how they could convict him of conspiracy." Although I don't think the argument is technically correct as a matter of law -- a conspiracy does not require secrecy even if it is a common feature -- there is a certain logic to the position that only a fool (or tax protester) would announce a conspiracy. (ph)
Friday, January 28, 2005
Discussed in the Wed. Jan.26th post is the prosecution opening in the case of Tyco executives Dennis Kozlowski and Mark Swartz. Yesterday, the defense responded and it sounds like mens rea, and whether the defendants had the appropriate intent, will be prominent in this case. This is not unusual in a white collar case. As reported in the New York Times, "Mr. Stillman [ ] told the jury that Mr. Swartz 'had no criminal intent because his intentions were honest. No criminal intent means no crime.'" On the law.com website, is included the following line from the opening of Stephen Kaufman, attorney for Dennis Kozlowsk, who stated, "You tell me how you steal when you sign a promissory note and repay it."
According to law.com :
"Charles Stillman, the lawyer for Swartz, presented the same chart that Assistant Manhattan District Attorney Owen Heimer had used in his opening to detail the major payments in controversy. The prosecutor's chart had been labeled "thefts." Stillman's version had the word "alleged" added to it."
There is nothing better then being able to take another attorney's demonstrative piece of evidence and use it to your advantage. The ability to turn around opposing counsel's presentation by using their language or their exhibits can be dangerous (e.g., asking the witness to try out the glove to see if it fits in the OJ Simpson case). But the risk is somewhat minimized when you are not dealing with concrete factual evidence and merely the opposing sides "take" on what happened. We'll see if this was a good move here, when the prosecution responds come their closing argument.
There does, however, appear to be differences in the approach taken from the prior trial. The NYTImes reports:
"But lawyers for both defendants, who had appeared to soft-pedal the issue of directors' credibility in the first trial, said that accusations by board members that the two men stole more than $150 million - the basis of the prosecution's case - were part of a self-serving strategy to protect themselves from shareholder lawsuits."
The evidence begins on Monday.
January 28, 2005 | Permalink
A DOJ Press release reports of the "fourth defendant to plead guilty in an ongoing investigation" coming out of a corruption prosecutions in American Samoa. According to this press release, the FBI states that " the Sataua, Seumanutafa, Solaita, and Mageo prosecutions are the first public corruption cases to be prosecuted by federal officials involving American Samoa in more than 15 years."
In this plea, the defendant, "the former director of the American Samoa Department of Education"[ASDOE]
"admitted that beginning in 1999 and continuing until July 2003, he agreed to fraudulently award ASDOE contracts paid for with USDOE [United States Department of Education] funds to his co-conspirators and their companies in exchange for his co-conspirators providing him with over $9,000 in cash and goods. The ASDOE receives in excess of $10 million per year from the USDOE and other federal agencies. Further, Sataua admitted that he stole and misappropriated food and goods from the ASDOE School Lunch Program that were supposed to have been used for feeding children in the American Samoa public school system. The A.S. School Lunch Program is wholly funded by the U.S. Department of Agriculture National School Lunch Program and the USDOE."
The defendant is this case pleaded "guilty to one count of conspiring to commit bribery and fraud concerning federal programs, in violation of 18 U.S.C. § 371."
Thursday, January 27, 2005
AP reports that David D'Amiano, "[a] Democratic fund-raiser and acquaintance of ex-Gov. James E. McGreevey was sentenced to two years in prison Thursday for soliciting $40,000 in cash and political contributions in return for his help in a land deal." D'Amiano had been charged with mail fraud, extortion and bribery, but plead guilty to two counts of bribery.
What was particularly bothersome to many in this case was the indirect references to the former governor in the indictment. The article reports that "McGreevey has acknowledged that he was 'state official 1' referred to in the indictment." The AP story notes that "[p]rosecutors charged that D'Amiano demanded campaign donations from Mark Halper, owner of a 74-acre farm in Piscataway, in exchange for helping Halper get a favorable offer from county officials for rights to preserve the farmland."
Today in the Scrushy trial, an AP story relates how despite testifying against Scrushy, Aaron Beam told the jury that "HealthSouth CEO never told him to break the law at the start of a huge fraud, and that FBI agents were 'pressing' him for figures about the scam after he went to investigators." As previously noted in the post of 1-26-05, the credibility of witnesses, especially those with cooperation agreements, may prove important here.
In the Ebbers trial, the AP story relates the testimony of David Myers. The story on ajc.com says that, "Myers also made clear in his testimony that it was Sullivan, not Ebbers, who explicitly ordered him to find a way to hide expenses when they came in far higher than expected in the third quarter of 2000." But there appears to be damaging evidence as well for the defense, as the news story states that Myers "paraphrased Ebbers as saying: 'I'm sorry you were asked to do what you were asked to do. It's something that you should not have been put in that position to do.'" This evidence may go to whether the accused had the level of mens rea required for the crime. But the credibility of this witness, like others in this trial, will likely be questioned as Myers "former controller pleaded guilty to fraud and conspiracy in 2002, agreeing to cooperate with the government in hopes of winning a lighter penalty when he is eventually sentenced."
Everyone is talking about the trials of Ebbers (Worldcom), Scrushy (HealthSouth) and Kozlowski (Tyco). The Atlanta Journal Constitution, in a website called "CEO Blotter: Corp Execs in Court" features the three trials. But overlooked is what is happening on the west coast. Yesterday the trial opened in the case of Richard Hawkins, a McKesson executive who is on trial for alleged conspiracy and securities fraud. According to law.com, "[f]ormer McKesson Corp. executive and convicted felon Albert Bergonzi took the witness stand Wednesday and described how he helped pull off a scam that led to a $9 billion investor loss -- one of the biggest in history."
According to Yahoo Finance's law com report,
In spring 1999, allegations of corporate wrongdoing soured the otherwise happy merger of San Francisco-based McKesson, touted as the world's largest health care management company, and Atlanta-based software maker HBO & Co.
The resulting scandal prompted a one-day stock drop that cost investors $9 billion and inspired a flurry of shareholder suits. Last week, McKesson agreed to pay $960 million to settle a federal class action, but numerous other suits remain. The government has also gone after several executives."
Like some of the other ongoing trials, the case involves individuals who plead guilty and are now testifying for the government. Credibility of these witnesses can be the essence of the case. As reported in law.com, "In an opening statement last week, one of Hawkins' lawyers, Orrick, Herrington & Sutcliffe partner Melinda Haag, characterized Bergonzi as a liar who is trying to help himself by dragging an innocent man down with him."
As anticipated in our post of January 26th, AP just reported that Riggs Bank pleaded guilty this morning "to a criminal charge of failing to report suspicious transactions in the accounts of foreigners, including two dictators, and agreed to a $16 million proposed fine." As noted in this report, "[a]ttorneys representing the bank entered a guilty plea at a hearing before federal judge Ricardo Urbina, who must approve the proposed fine. If he rejects the fine, Riggs and prosecutors may have to renegotiate or take the case to trial."
As noted in this story the DOJ had been "investigating the banks handling of" "former Chilean dictator Augusto Pinochet." This plea raises an interesting question as to what affect it will have on the DOJ investigation. Is part of the deal that the bank will cooperate in that investigation? Hopefully so, since many in the public desire to know the true story of Pinochet's money.
January 27, 2005 | Permalink
According to the Wall Street Journal, the first two witnesses testified in the trial of Bernie Ebbers, former CEO of WorldCom Inc. These two witnesses provided background information, something that is necessary when dealing with a complicated case that has charges of "conspiracy, fraud and making false filings with the" SEC. The Wall Street Journal states:
"Douglas Webster, a group vice president at MCI, and Adam Quinton, chairman of Merrill Lynch & Co.'s research recommendations committee, served largely as expert witnesses. Mr. Webster, who joined MCI in 1986 and went to WorldCom in 1998 when it acquired MCI, explained the technology and history behind the company and the telecom industry overall."
But witness Adam Quinton also appears to be setting the groundwork for the upcoming testimony of former chief financial officer Scott Sullivan, a key witness in this case. The WSJ reports here:
"In court Wednesday, Assistant U.S. Attorney William Johnson quickly steered Mr. Webster to line costs, which the government alleges were manipulated to inflate WorldCom's earnings. Line costs, or payments to other carriers to initiate or terminate a call locally, were WorldCom's largest expense, followed by selling, general and administrative costs, said Mr. Webster."
One of the truly difficult tasks prosecutors have in presenting white collar cases to juries is simplifying the language and concepts to a level so that jurors who may have no connection with the financial world can understand the essence of the alleged fraud.
Wednesday, January 26, 2005
According to an AP news report, the prosecution called Arthur Beam to present testimony today in the trial against Richard Scrushy. Beam, a former HealthSouth exec, said that Scrushy told him "[i]t's not an option to miss our numbers. You guys need to fix the numbers." According to the news report, "Beam said he participated in the fraud for a year because Scrushy intimidated him."
The jury may have gotten to see if Beam can be intimidated, as one news report states that "Beam came under sharp questioning" from the defense. The news report says that Beam could not recall some information when questioned by defense attorneys Jim Parkman and Art Leach.
Beam is one of several former HealthSouth execs who are scheduled to appear as witnesses in this trial. As noted by the Wall Street Journal, "Mr. Beam has pleaded guilty to one count of bank fraud and one count of criminal forfeiture tied to the $2.7 billion accounting fraud at HealthSouth, but hasn't been sentenced yet." It is common for the prosecution to have sentencing delayed pending the witnesses testimony and cooperation. In these situations, the question sometimes becomes the credibility of the testimony received through this form of cooperation agreement. Can we trust the testimony?
The prosecution gave its opening statement in the retrial of Dennis Kozlowski, Tyco's former chief executive officer, and Mark Swartz, the company's former finance chief. According to an AP report on the trial, the prosecution has made some changes in the way they are proceeding. This news story reports that, "[a]bsent from [the prosecutor's] opening was the assertion made by prosecutors in the first trial that Kozlowski and Swartz had stolen $600 million by outright theft and by deceiving the government and the public and defrauding Tyco shareholders." Additionally, there was no mention of the shower curtain, something we discussed in a prior post.
It sounds like the prosecution is not going to be trying to overwhelm the jury with testimony of extravagant spending by Kozlowski. This may also mean that the trial may not be lasting the six months seen in the last trial.
Retrials present all kinds of strategic issues. It will interesting to see if the defense pursues the same, when they open tomorrow.
With the opening statements in the trials of Bernie Ebbers and Richard Scrushy out of the way -- on the same day no less -- the question arises whether either one will testify in his defense. Reports on the opening arguments gave no indication one way or the other, which is not surprising because defense counsel need to keep their options open and do not want to overpromise in the opening statement. There is no "rule" regarding whether a white collar defendant should (or should not) testify at trial because so much depends on the type of evidence the government will introduce, the defendant's prior statements, and how well the person will come across to a jury. On the last point, a deep-pocket defendant can afford to have a mock jury observe a test-run of a cross-examination of the defendant to see how the person responds to tough questioning, although that is not fool-proof. Frank Quattrone came across poorly at his first trial, and was convicted in his retrial, having testified both times. Neither Martha Stewart nor co-defendant Peter Bacanovic testified in their trial, to no avail there.
The opening statement in the Ebbers trial included the assertion by defense counsel Reid Weingarten that "[t]here are zillions of documents in this case and their ain't one smoking gun." The clear focus of the defense is on the credibility of the government's main witness, former WorldCom CFO Scott Sullivan, including hints that Sullivan's marital infidelity will be used against him (earlier post here), and Ebbers' lack of involvement in accounting issues. According to a New York Times article (Jan. 26), Weingarten asserted that Sullivan was the mastermind of the fraud and "is more than a liar, but a poseur." [NB: I think I missed that one, and the definition of "poseur" is "One who affects a particular attribute, attitude, or identity to impress or influence others." Did the jury pick up on it?] The "honest-but-ignorant CEO" defense that will be offered, coupled with the lack of documentation linking Ebbers to the fraudulent accounting, leads me to think that Ebbers will not be called to testify unless Sullivan comes across especially well in his testimony. There does not seem to be as much for Ebbers to refute or explain, and of course a defendant asserting that he was ignorant of the happenings at his company risks coming across to the jury as less-than-honest, effectively scuttling the defense.
I think Scrushy's case presents a different calculus. The government intends to call a number of former HealthSouth executives who are cooperating in exchange for reduced sentences, including all five CFOs the company had since its creation. The sheer weight of that evidence may compel Scrushy to testify to establish his defense that they are all liars and kept him in the dark. The plea agreements alone are unlikely to undermine the credibility of that many witnesses. When everyone around you is claimed to be a liar, the jury may well expect that Scrushy will explain how it was possible he never knew about the fraudulent accounting, or at least how he was kept in the dark.
I don't hold myself out as much of a prognosticator, and this is all armchair lawyering before any of the evidence has come in. I think it is more likely that Scrushy will testify than Ebbers, but it would not surprise me if both did not testify. Any thoughts? (ph)
Riggs National Corporation, the parent of Washington D.C.'s Riggs National Bank, is on the verge of accepting a plea agreement with the Department of Justice for violating the Bank Secrecy Act for failing to report suspicious activity in accounts involving possible money laundering, according to an article in the Wall Street Journal (Jan. 26). The article states: "The Riggs board has been presented with a plea agreement by prosecutors in which the bank would admit to one count of violating the Bank Secrecy Act by failing to file reports to regulators on suspicious transfers and withdrawals by clients, people close to the case said. Directors are expected to accept the plea and the bank would pay a fine of between $16 million and $18 million. The deal could be announced as soon as tomorrow, these people said." As discussed in earlier posts here and here, Riggs came under federal scrutiny for possible money laundering by foreign government executives, including former Chilean dictator Augusto Pinochet, through accounts maintained that involved large-scale transfers of funds. The article notes that the plea agreement, if it goes through, may affect the deal Riggs has to be acquired by PNC Financial, including the possibility that the transaction will be canceled. (ph)