Friday, January 21, 2005
The United States Attorney's Office in Houston (S.D. Tex.) issued a press release on Jan. 20 stating that U.S. District Judge Randy Crane resentenced three defendants convicted of public corruption offenses to increased prison terms due to the Supreme Court's decision in Booker. The defendants, two former school district officials and a city manager, were originally sentenced on January 11, 2005, under the Federal Sentencing Guidelines to 41 months each. On Jan. 20, the judge increased the sentences by 7, 13, and 31 months. According to the press release: "In imposing the increased sentence as to each of the three defendants, Judge Crane held that the original sentence did not reflect the systemic and pervasive corruption of government nor the loss of public confidence in government resulting from each defendant's actions. The judge's ruling included citations to citizen complaint letters to the editor of a local newspaper."
The resentencings raise the Due Process/Ex Post Facto issue discussed in a comment by Peter Goldberger here and by Doug Berman on the Sentencing Law & Policy blog (here). Goldberger and Berman consider whether a court can impose a sentence above the guidelines range for conduct before Booker, when the mandatory aspect of the statute was declared unconstitutional. Goldberger's comment concludes, "For some time to come, post-Booker discretion must, as a matter of constitutional law, be a one-way ratchet favoring lower sentences." These resentencings will certainly set the issue up for an appeal to deal with the collateral consequences -- still unknown -- of Booker. (ph)
AP Wires report that "Richard Scrushy lost a key pretrial round Thursday when a judge refused to throw out secret recordings that prosecutors contend prove the fired HealthSouth CEO was part of a massive fraud." But whether this ruling will be "key" to the defense remains to be seen. For one, it does not mean that the recordings will automatically be admitted into evidence. As the story reports, "[t]he government still must prove that agents handled the recordings properly."
According to the AP story, another ruling by the court included a holding that the search of Scrushy's office, despite their being no warrant, would be valid as the lawyers for HealthSouth consented to the search. The judge "rejected Scrushy's claims that he wasn't subject to HealthSouth policies that held any employee's work area or computer was company property and subject to search."
Do companies with policies that permit searching of employee's work areas realize that they may be subject to these policies? Will a decision such as this one cause corporations to rewrite their policies to exclude certain individuals in the company? If they do start excluding top company individuals from these access policies, will it make a difference should the government decide to search the work area of the CEO?
The final punch to the defense was when the judge failed to rule on Scrushy's request for documents. But the documents may be forthcoming, especially if they go to bias of a witness who might be testifying.
So the defense took 3 punches, but they aren't in the ring yet. The only thing that really counts is what happens when the fight actually starts.
Thursday, January 20, 2005
The San Diego Union Tribune, in an article titled, "Identity-theft suspect facing fraud charges," reports on perhaps one of the most fascinating people to be accused of a white collar crime. The individual, alleged to live in homeless shelters (FBI appears to question this), is accused of "bank[ing] more than $9 million in bogus class-action settlements." According to the article, he appears to have a law degree, passed the bar, but was never admitted. The article states that he "made $500,000 in less than three months in an online brokerage account where he deposited $2.3 million from a recent fraud, the FBI said." But the article also describes him as a person who was saving the money. This is clearly an unusual case.
In an article in the Atlanta Journal Constitutional this morning, titled, "If Perdue has way, spam will be felony," Governor Perdue of Georgia is trying to push for a new law that would make it a felony "to send more than 10,000 misleading e-mails during a 24-hour period, make large sums of money off those e-mails, or use juveniles to transmit the bogus correspondence." The article notes that other states have moved in this direction. There is also 18 U.S.C. 1037, the relatively new "Fraud and related activity in connection with electronic mail" statute that provides federal legislation focused on some deceptive forms of spam activity. Finally there have been civil actions that have also been focused on spam emails. The issue down the road may be whether to leave this for the civil arena or whether we want prosecutors to be spending time and resources in this area.
In an article in the Chronicle of Higher Education, (subscription required) "[a] former team doctor at the University of Washington pleaded guilty in federal court on Wednesday to prescription fraud." According to the article, the doctor's medical license was suspended in 2003 and he now faces "up to six months in jail, 500 hours of community service, and 90 days of home monitoring,"
UPDATE: The U.S. Attorney's Office press release describing the case is here.
An article in Corporate Counsel (Jan. 20, available on Law.Com) sends out a wake-up call (in case one is necessary) to in-house lawyers who work at publicly-traded companies subject to the securities disclosure rules and, more pertinently, the up-the-ladder reporting requirement imposed by the Sarbanes-Oxley Act. The article discusses the SEC's settlement with John Isselmann, the former general counsel of Electro Scientific Industries Inc.:
The SEC doesn't claim that he participated in the scheme to fraudulently boost the quarterly financials at ESI, a semiconductor manufacturer based in Portland, Ore. The agency doesn't even allege that Isselmann knew about the fraud at the company, which reported revenues of $207 million in fiscal year 2004. The SEC says only that the ex-GC failed to communicate material information to ESI's audit committee and outside auditors -- information that would have stopped the accounting fraud. In his settlement with the SEC, Isselmann neither admitted nor denied the agency's allegations. The 37-year-old lawyer agreed to pay a $50,000 civil penalty, and consented to a cease-and-desist order. He left ESI in 2003 -- he says that the company asked him to stay on -- and currently does consulting work in Portland. (ESI officials did not respond to requests for comment for this article.).
The Commission's complaint does not allege that Isselmann participated in the fraud perpetrated by the company's former CFO, but for the failure to fulfill what it called his "gatekeeper role" by not reporting the transaction when he first became aware of it. According to the article, "The SEC faulted Isselmann for failing to stand up to then-CFO Dooley at the disclosure meeting, and for failing to provide the audit committee with Morrison & Foerster's advice. These failures allowed Dooley and Lorenz to conceal their fraud, the SEC says."
The SEC has announced that it plans to scrutinize the conduct of corporate counsel -- both in-house and outside lawyers -- more carefully regarding not only legal advice but also how they reported potential misconduct and respond to civil and criminal investigations. It is a world fraught with much more peril these days. (ph)
CNN (Reuters) reports that "[f]ormer ImClone Systems CEO Sam Waksal has agreed to pay a $3 million civil penalty to settle charges over the insider trading case that also involved lifestyle entrepreneur Martha Stewart." The SEC Release in the case states that "[p]ursuant to this settlement, which is subject to the Court's approval, Sam Waksal and Jack Waksal will be held jointly and severally liable for disgorgement of over $2 million in illegal loss avoidance, including prejudgment interest, and Sam Waksal will be liable for a civil penalty of over $3 million. The SEC Release also states that Sam Waksal's consent "to the entry of a final judgment against him" was made "[w]ithout admitting or denying the allegations."
In the meantime, the NYTimes reports that "[s]ince Ms. Stewart's conviction, her company's share price has nearly tripled, increasing the value of her personal stake to an estimated $827 million from $318 million"
Everyone has been awaiting decisions post-Booker in hopes of finding some answers to questions that might be hanging in the wake of this new decision. Professor Doug Berman provides thoughtful analysis in his posts of Judge Cassell's reasoning issued in the first post-Booker sentencing case and now again in Judge Adelman's decision in the Ranum case.
The Ranum case is important for this blog as it can easily be classified as a white collar case. Ranum "held the position of section loan officer at State Financial Bank." with "duties includ[ing] managing a commercial loan portfolio and evaluating loan applications." The defendant was found guilty of three counts that included charges of "misapplication of bank funds by a bank officer pertaining to [a] $580,000 loan, count two charged him with making a false statement in connection with a loan application ...." and count three charged him with misapplication of bank funds pertaining to the $300,000 loan . . ."
If sentenced under the sentencing guidelines the sentence would have been "37-46 months." Instead the judge, in an extremely thoughtful opinion, "imposed a sentence of one year and a day."
Some may grab this case and say - "YOU SEE, we need the guidelines." But a careful reading of this decision will convince you immediately that this is exactly why the sentencing guidelines were problematic.
The judge provides careful reasoning that includes details of the offenders characteristics. Significantly, the judge notes that "defendant's conviction had significant collateral effects on him." Collateral consequences are common in white collar cases, but often went unnoticed with use of the sentencing guidelines. The judge also considers "third party interests" - "the significant benefits to family members resulting from his presence."
This decision provides a wonderful model for white collar decisions in the post-Booker world. It demonstrates that white collar offenders will not skate from jail time as a result of the Supreme Court's ruling. It also demonstrates how judicial discretion can offer reasoned analysis to fit the specific circumstances of a case.
Wednesday, January 19, 2005
The question here is not a situation of the case being filed in an improper venue. Rather, the issue before the court was whether the defendants can receive a fair trial in the proper venue.
According to Reuters (via CNN), if Ken Lay and Jeffrey Skilling go to trial, the case will be heard in Houston. "Although news coverage about Enron's collapse, this case, and these defendants has been extensive," U.S. District Judge Sim Lake was "not persuaded that [it] has been so inflammatory or pervasive ... that pretrial publicity will prevent a fair trial."
Although the court denied defendants' request to move the case from Houston, should the case proceed to trial it will be necessary to find a fair and impartial jury. As such, this issue is likely to be raised again during the jury selection process.
With the trials of former CEOs Bernie Ebbers, Richard Scrushy, and Dennis Kozlowski just getting under way, and the trial of Enron's two former CEOs (Ken Lay and Jeffrey Skilling) around the corner, corporate chieftains are certainly in the spotlight in criminal prosecutions. An interesting article from the New Jersey Law Journal (available on Law.Com) by Tim O'Brien reviews the long trial of former Cendant CEO Walter Forbes and his second-in-command, Kirk Shelton, which resulted in a guilty verdict for Shelton and a hung jury for Forbes.
The article notes: "When it comes to surviving cooking-the-book corporate scandals, it's good to be the CEO. That seems to be the message from the prosecution of the top executive of Cendant Corp., the first major company hauled to court for the type of massive accounting frauds that rocked the nation and led to reforms." The article describes the Forbes approach as the "Dumb CEO Defense" which this blog has more charitably called the "Honest-but-Ignorant CEO Defense" (see posts here and here). Forbes testified that he focused on the "big picture" involving strategy and clients, leaving the details (such as accounting) to lower-level employees. The article also discusses the "aggressive" tactics pursued by the Forbes defense team of Brendan Sullivan and Barry Simon from Williams & Connolly. One approach was to extensively cross-exam the government's witnesses, which drags out the trial and makes it much more difficult for the jury to piece all the evidence together. The trial lasted from May to November 2004, and the jury deliberated for over a month.
The U.S. Attorney's Office has not announced whether it will pursue the charges against Forbes in a second trial. The article is a worthwhile read as we watch other CEO prosecutions unfold. (ph)
According to an AP story (Jan. 18), U.S. District Judge Barbara Jones, who is presiding over the Bernie Ebbers trial, rejected a government motion to prohibit Ebbers' counsel from cross-examining former WorldCom CFO about instances of marital infidelity. The story reports: "U.S. District Judge Barbara Jones said the line of questioning was permissible because it spoke to 'Mr. Sullivan's character for truthfulness.' Prosecutors were trying to block the defense from raising the fidelity issue." Sullivan is the key government witness because of his extensive interactions with Ebbers and the lack of a paper trail linking Ebbers to the accounting misconduct at the company. The judge also granted a defense motion to prohibit the government from questioning Sullivan about his conversation with Ebbers when they watched testimony at a Congressional hearing on the collapse of Enron, and questioning other executives about Enron-related conversations. The judge found that the subject would be unfairly prejudicial.
The judge rejected a defense request that the government be required to grant immunity to two witnesses, including WorldCom's former chief operating officer, who will assert their Fifth Amendment privilege and refuse to testify. The judge found that the government had not abused its discretion in refusing to grant immunity, and the court is not authorized to grant immunity on its own authority. The jury selection process began Jan. 18, and opening arguments are scheduled for Jan. 25. (ph)
The CBS Morning News reported on the plea agreement of Richard Hatch, the winner on the first season of Survivor, for failing to report the $1 million he earned on the show's first season (along with another $321,000 paid by a Boston radio station). Survivor is a CBS program, and its next season starts on February 17, so the timing here (for publicity purposes) could not be much better.
Among those interviewed (and in the report on CBSNews.Com) was Joel Podgor, a CPA and (more importantly) brother of co-editor Ellen Podgor:
But CPA Joel Podgor of Holtz Rubenstein Reminick commented to CBS News Correspondent Trish Regan on The Early Show Wednesday that he finds it "shocking that somebody wouldn't report the income when it's so blatant and obvious and it's all over the TV that he earned it."
Joel is a forensic accountant who does work for, among others, law firms dealing with possible accounting fraud and litigation-related issues. He's now more famous than his sister, who is already quite well known. (ph)
The U.S. Attorney's Office in Los Angeles announced on Jan. 18 that four more defendants (the total is now seven) agreed to plead guilty to fraud charges as part of a ponzi scheme involving claims about Italian royalty. According the the press release issued by the USAO:
From late 1996 until the Ponzi scheme collapsed in March 2000, DFJ and its sales force promised investors annual returns of 24 percent. DFJ operated on the bogus premise it was headed by a descendant of a royal Italian family that had a treaty with the United States that gave the company and its "knighted" members immunity from paying taxes. DFJ, which claimed a 700-year legacy, opened an Orange County office in 1997. As part of its claims to investors, DFJ said it had interests in hundreds of companies around the globe and controlled $60 billion that it used as collateral in "bridge gap" financing programs. In fact, DFJ was a sham company that did not make promised investments and lulled investors with bogus account statements showing incredible profits. The majority of money solicited from investors went to the CEO of DFJ, a man known as "the Don."
Once your read it on paper, and hear about returns of 24% per year (not as outlandish as many schemes), you wonder how anyone would fall for it. Then again, how many of us invested in Enron, WorldCom, etc. (ph)
Tuesday, January 18, 2005
An AP story (Jan. 18) discusses the criminal information filed in Rhode Island charging Richard Hatch, the winner of $1 million on the first "Survivor" series, with tax evasion for failing to report that money and an additional $321,000 he received from Boston radio station WQSX for work as a co-host on a program (criminal information here from The Smoking Gun). Hatch is scheduled to be arraigned on Monday, Jan. 24, and likely will plead guilty at that time. While tax evasion certainly occurs even among lawyers and accountants who should know better, it is more than a bit audacious to win $1 million on a popular television program and then somehow think the prize won't be noticed by the IRS. (ph)
An AP story (Jan. 18) reports that Samir A. Vincent has been charged by criminal information in the Southern District of New York for his role in accepting secret commissions from the Iraqi government under Saddam Hussein to arrange transactions in the United Nations' oil-for-food program. According to the story, "The charges were the first to be publicly revealed in the prove of allegations that administrators in the United Nations oil-for-food program took bribes and let Hussein skim money from the program." The administration of the program has already implicated UN Secretary-General Kofi Annan's son, Kojo, in possible fraud and kickbacks, and the charge here is likely only the beginning. Once the criminal information is made available it will be posted. (ph)
UPDATE: Vincent is charged with four crimes: conspiracy, being an unregistered agent of a foreign government, violating the International Emergency Economic Powers Act--which prohibits transactions with certain foreign governments--and tax evasion (thrown in for good measure). The criminal information is available here on Findlaw.
An article in the Christian Science Monitor (Jan. 18) posits that the run of criminal trials involving CEOs, including Dennis Kozlowski, Martha Stewart, and the Rigas family, has had an effect on how business leaders view their jobs and the legal system. The article describes what it calls the "Enron Effect":
Experts say the trials already completed - and the jail sentences under way - have had a big impact on corporate behavior. Lawyers for white-collar defendants say that CEOs are now pressuring underlings to state earnings accurately. Thanks to Martha Stewart, executives are more aware of the dangers of lying to prosecutors. Corporate leaders also know that Congress now requires them to personally vouch for their companies' earnings statements. In short, greed hasn't disappeared, but the path to riches is more likely to follow the legal road map. "The government has largely accomplished its goal of changing corporate conduct in a major and significant way," says Kirby Behre, a former federal prosecutor who is now a partner at Paul, Hastings, Janofsky & Walker in Washington.
If there is an "Enron Effect," then how long it will last? This country seems to have spasms of corporate wrongdoing, often tied to a specific industry, such as the S&L collapse, defense contractor abuses, and the insider trading cases in the 1980s. The current focus on high-level executives such as former CEOs Ken Lay, Jeffrey Skilling, and Richard Scrushy--who were once considered exemplary corporate leaders--makes this era a bit different, perhaps. If you've been around long enough, however, you wonder what the next round of corporate prosecutions will look like. (ph)
On Jan. 14, U.S. District Judge Timothy Savage (E.D. Pa.) enjoined the Department of Justice from indicting Stolt-Nielsen S.A., a foreign freight carrier, and Richard Wingfield, an executive vice-president, for antitrust violations for fixing prices in the chemical shipment industry. In 2003, under the Antitrust Division's "Corporate Leniency Program," which permits the first company that discloses an antitrust violation to receive complete immunity from prosecution, Stolt-Nielsen received immunity from prosecution, and information provided by the company resulted in the successful prosecution of two other companies, Odfjell Seachem AS and Jo Tankers BV. The government, however, then sought to revoke the immunity grant because Stolt-Nielsen had misled prosecutors about when it ceased its illegal activity. An article in the Wall Street Journal (Jan. 17) states:
Stolt and Mr. Wingfield had been granted amnesty by the government in early 2003 and agreed to cooperate with the antitrust probe. But the Justice Department later revoked the amnesty and indicted them, arguing that they had failed to abide by terms that required "prompt and effective" action to halt the alleged activity. The Justice Department also suggested that Stolt, with headquarters in London but whose top executives are based in Connecticut, might not have been forthcoming with investigators.
Judge Savage found that the immunity agreement contained only one date--January 15, 2003--and that there was no express provision under which Stolt-Nielsen asserted that it had ceased fixing prices before that date (opinion here). The court held:
We find that SNTG performed its obligation under the agreement when it supplied DOJ with self-incriminating evidence that led to the successful prosecution of SNTG’s coconspirators. Because DOJ got the benefit of its bargain, it cannot avoid fulfilling its promise based upon an understanding it contends the parties intended during negotiations but is not clearly defined in the integrated agreement. Thus, because SNTG did not breach the agreement, we shall enjoin DOJ from prosecuting and indicting SNTG for its part in the antitrust conspiracy to the date of the agreement.
Litigation over immunity agreements, either formal or informal, involves very high stakes, and in this case saved the company and an executive from an indictment. (ph)
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Monday, January 17, 2005
An article in the Wall Street Journal (Jan. 17), "Ruling on Sentencing Guidelines May Also Affect Corporate Crime," indicates that the Supreme Court's decision in Booker could result in Congressional changes to the Corporate Sentencing Guidelines. This portion of the Sentencing Guidelines contains a detailed description of how corporate cooperation and measures to prevent misconduct by employees should be assessed in determining a criminal fine--including multipliers to increase or decrease a fine based on an assessment of the corporation. Most importantly, the Corporate Sentencing Guidelines focus on the presence of an effective compliance program and early notification of possible criminal violations.
Whether Booker will have any effect on this area of the Federal Sentencing Guidelines has not been widely addressed. According to the article:
Corporate attorneys are reviewing the decision to understand what it means for companies facing federal criminal charges. An immediate concern is that Congress might pass legislation to add more requirements to corporate-ethics plans -- programs that companies can cite in their defense if employees are charged in a criminal case tied to their work there, such as accounting fraud. The ruling also gives judges the discretion to determine whether a company has an "effective" compliance program.
While one would hope corporate counsel will read and digest Booker, they shouldn't stay up too late (billing the time, no doubt) because the decision's effect on corporate prosecutions will be minimal, if non-existent, for at least three reasons. First, the Guidelines are reflective of a trend in state corporate law to require corporations to create and maintain adequate systems for detecting and reporting misconduct that can be attributed to corporations. Recall that the standard for holding a corporation criminally liable is quite low--respondeat superior--so directors have a fiduciary duty to prevent misconduct and, if it occurs, to report it promptly to take advantage of any possible leniency. Second, the Sarbanes-Oxley Act requires corporate attorneys (both in-house and outside counsel) to report any possible corporate misconduct (both civil and criminal) to the company's chief legal officer and to the audit committee, so that provides another impetus to implement an effective compliance program.
Third, the key issue for the corporation is not the fine table in the Sentencing Guidelines, it is avoiding a criminal prosecution. Any number of recent cases, including the recent settlement by Edward D. Jones & Co. (see post here), involve deferred criminal prosecution agreements in which the company assents to certain remedial measures--hiring an outside consultant to review its procedures is a current favorite--that will result in dismissal of the charges if the company complies. The Department of Justice's Principles of Federal Prosecution of Business Organizations, which sets forth guidelines for federal prosecutors in deciding whether to charge a corporation, is much more important in this area than the Sentencing Guidelines. And it is in those Principles that the push for waiving the attorney-client privilege and work product protection has arisen, not the Sentencing Guidelines. It is unlikely that the DOJ sees much need for Congressional assistance in the area because it treasures the prosecutorial discretion is has. While the Corporate Sentencing Guidelines are a nice stick for the government to use in assessing a potential fine, for many companies, the specter of criminal prosecution is enough to push for a settlement, and the Arthur Andersen prosecution shows the effect of a conviction. Andersen was fined $500,000 for its violation, a sentence that came well after its collapse. Even a Supreme Court reversal of the conviction will not bring the firm back, and the Guidelines had little to do with its demise.
In preparing a book on white collar crime, I searched for a decision applying the Corporate Sentencing Guidelines and found none. There is little judicial involvement in corporate sentencing, at least when a publicly-traded corporation or large organization is involved, and Booker is unlikely to change that in any way. When the government charges a smaller, closely-held corporation, it is usually in conjunction with charges against the controlling (or sole) shareholder, and the corporation may be prosecuted more for evidentiary reasons.
Corporations, and their directors, have a fiduciary obligation to the shareholders to prevent misconduct and, when it is discovered, to minimize it. The Corporate Sentencing Guidelines provide one means to analyze the corporation's conduct, but the structure now in place would not be affected by any change in the Guidelines from being mandatory to advisory--they always were in effect advisory. (ph)
While the Supreme Court's decision in Booker is still being parsed, one fairly consistent view of its effect is that with the demise of the rigidity of the mandatory federal Sentencing Guidelines, sentences are likely to move lower. That may well be true in the drug area, at least for lower-level operatives who get hit with high sentences because of the overall quantity of drugs, but in the public corruption area the effect of Booker may be increased sentences. As the federal government has stepped up its investigations of corruption at the state and local level--encouraged by last year's Supreme Court decision in Sabri v. United States--more convictions (and sentences) have resulted involving comparatively small amounts of money. The Sentencing Guidelines put substantial weight on the amount at issue, which can result in a fairly lenient sentence, even if the municipality or other governmental body had few resources and could ill-afford any loss. An article in the New Orleans Times-Picayune (Jan. 15) highlights this point in discussing the sentencing of payroll clerk who embezzled $71,000 from a local school district and received a two-year sentence. The article states:
Louis Serrano lucked out in getting two years in federal prison, considering a new decision by the U.S. Supreme Court that would have given his judge authority to hand the convicted embezzler a stiffer sentence. "I would have," U.S. District Court Judge Jay Zainey said this week, not long after the Supreme court ruled that the federal sentencing guidelines are no longer mandatory. Serrano, who pleaded guilty to helping steal $71,000 from the city's public school system while working as a payroll clerk there, got the maximum sentence under the guidelines at the time: two years. He could have faced a decade or more. Zainey told Serrano in December that he deserved more time than the law allowed, but like judges across the nation, he was constrained by the formula spelled out in the guidelines, which typically gives first offenders like him lighter penalties.
In a jurisdiction like the Eastern District of Louisiana, which has its fair share (and maybe more) of public corruption, the message sent by the judges after Booker will not be welcomed by defendants in corruption cases.(ph)