Tuesday, February 22, 2005
Two decisions by the Sixth Circuit issued last week deal with sentencing enhancements in white collar crime cases, most importantly the loss calculation under Section 2B1.1 that affects so many sentences in economic crimes. In U.S. v. McDaniel (here), the defendants were convicted of conspiracy, theft of U.S. mail, and bank fraud related to a scheme to steal checks from the mail, alter the payee, and then cash them. The sentences were enhanced based on the amount of the loss, number of victims (> 50), obstruction of justice (for one defendant), and leadership role in the conspiracy (for the second defendant). The Sixth Circuit held that these enhancements were not based on the jury's guilty verdicts, and therefore violated Booker's Sixth Amendment analysis. More importantly, the court found that the enhanced sentences -- which took the defendants well beyond the base offense level (and resulting sentence) under the Federal Sentencing Guidelines -- constituted plain error. The Sixth Circuit has been inconsistent in applying the plain error standard (see Doug Berman's many thorough discussions on this issue on the Sentencing Law & Policy blog), but this case seems to set forth a clearer standard for white collar cases in which the usual enhancement for amount of the loss can trigger a remand for plain error. Comparing the base offense level for most economic crimes (6 or 8) with the higher sentence after the loss calculation gives a strong plain error argument under both the third and fourth prong's of the Olano test, as the Sixth Circuit recognized. That said, McDaniel also has dicta (what the court called "merely providing advice to the district court to guide its sentencing determination on remand") in which the Sixth Circuit endorsed the sentencing determinations by the district court under the Guidelines. This indicates that the second half of Booker -- the "reasonableness" prong -- may not result in many changes to sentences if the district judges adhere to the Guidelines. The court's analysis is worth reviewing for what it says about the application of the Guidelines in a white collar case in the post-Booker world.
The second decision, U.S. v. Murdock (here), deals with a loss enhancement based on the defendant's plea agreement. In Murdock, the defendant pled guilty to causing another to possess documents with the intent to defraud the U.S. (Section 1002 -- a provision you don't see charged very often), involving an attempt to get the IRS to lift a lien on the defendant's sister's pay check by presenting a $132,000 check to an IRS clerk drawn on a closed bank account. Although the defendant did not admit to a particular loss (actual or intended) in the plea agreement, the agreement did acknowledge that he presented the $132,000 check to the IRS. Based on that admission, the Sixth Circuit found that the judge's loss determination of $132,000, which substantially increased his sentence above the base offense level under the Guidelines, met the Sixth Amendment requirement of Booker. It is interesting to note that there was not a specific loss admission by the defendant, but only a general reference to the amount of the check and the intent to have the IRS lift its levy (which it did not do). Murdock makes it clear that, at least for guilty pleas, the courts will take a broader (or more flexible) approach to what constitutes a sufficient admission to meet Booker's requirement that only a jury's verdict or defendant's admission can be the basis for the sentence. [NB: Murdock also involves a waiver-of-appeal issue, which the defendant won, only to lose on the ultimate sentencing issue.] (ph)
An article in the Wall Street Journal (Feb. 22) speculates on whether Richard Scrushy will seek to regain his CEO position if he is acquitted in his criminal trial. While that is getting a little bit ahead of things, Scrushy remains a large shareholder of the company and likely has allies in management. While Scrushy was fired as CEO in 2003, he retains his board seat and shareholders have not been asked to remove him because there has not been an annual meeting since 2003 -- the company has not filed its quarterly or annual reports since then because of problems with getting certified financial statements while the auditors prepare a restatement of prior years. HealthSouth stock was delisted by NASDAQ and only trades on the "pink sheets," although it remains viable, having avoided bankruptcy. Even if Scrushy wanted to return to HealthSouth as an officer, he faces an SEC civil enforcement action seeking, among other things, a director & officer bar for securities law violations. A conviction on almost any count of the indictment will likely lead to a bar. The criminal trial resumes today with more testimony (and cross-examination) about "the family" that conspired to inflate the company's earnings (see AP story here). (ph)
The volume of information any decent-sized university library must maintain, and the number of providers selling that information on a daily basis, has led to a developing scam involving fake claims that targets university libraries, according to an article in the Chronicle of Higher Education (here). Telemarketers are calling libraries demanding payment for items they claim were ordered, and threatening lawsuits if not paid immediately, even though the library never ordered the information. They even submit false invoices, hoping that they will get lost in the shuffle and be paid without the library checking the bills carefully. Libraries are like any organization that does a large volume of business with multiple vendors, but with university budget cutbacks, the costs of any fraud are felt by a large number of students and faculty. (ph)
Monday, February 21, 2005
With the obligatory introductory moniker of "Shock-Jock" Howard Stern, a contributor to Stern's morning radio program has been subpoenaed by the SEC to testify about possible insider trading in the shares of Sirius Satellite Radio Inc. before the announcement that Stern would be moving his program to that company's broadcast platform in 2006. Chaunce Hayden said he received a subpoena from the SEC to testify on Wednesday about the decision to switch to Sirius, which was announced last Oct. 6 and triggered an immediate 30% rise in the company's shares before settling down to a 15% gain at the end of the day. Apparently, there was some suspicious trading ahead of that announcement that has peaked the SEC's interest. An AP story here discusses Hayden's pending testimony, a fact that is usually not disclosed by subpoena recipients, at least not in advance of their testimony. (ph)
Alcoa Inc. disclosed in its annual report (available here) filed on Friday, Feb. 18, that the SEC has begun an informal investigation of the company's accounting for "certain trade payables financing." The company paid some vendors through intermediaries, and the issue is whether the company classified properly its payments and any discounts received. Alcoa's annual report states:
On January 28, 2005, in the context of an informal investigation being conducted by the staff of the Securities and Exchange Commission (SEC) relating to certain trade payables financing, the company received a request for the voluntary provision of documents and related information concerning the classification and disclosure of certain trade accounts payable transactions for periods beginning after December 31, 2002 that involve, directly or indirectly, an intermediary. The SEC staff has advised the company that the inquiry should not be construed as an indication by the SEC or its staff that any violations of law have occurred, or as an adverse reflection upon any person or security. Alcoa is fully cooperating with this inquiry.
Jurist has additional information on the investigation. (ph)
The importance of Scott Sullivan to the government's case is clear as the prosecutors told the court that they expect to end their case-in-chief on either Tuesday or Wednesday and will not be calling any more witnesses from the company. Sullivan was the principal witness used to establish Bernie Ebbers' involvement in the fraud, and the cross-examination included repeated references to Sullivan's lies and misstatements, including a discussion about whether what he said in a conference call constituted "B.S." It did not, however, include any discussion of marital infidelity -- an issue that was probably used by the defense more as a red herring than anything else. U.S. District Judge Barbara Jones refused the government's request to call a former WorldCom employee who lost almost their entire retirement savings when the company collapsed, calling the testimony repetitive -- an attempt to end the case on an emotional note that had little to do with the charges against Ebbers except in the most general sense. An AP story here discusses the conclusion of the cross-examination of Sullivan.
The interesting question will be whether the defense even puts on any witnesses, and if it does, whether they will only be character witnesses to discuss Ebbers' general niceness and disinterestedness in things related to accounting. I still think it will be a surprise if Ebbers testifies because the case hinges more on Sullivan's credibility, and Ebbers could do more harm than good if he testifies. We'll know by the end of the week. (ph)
While the criminal prosecution of Bernie Ebbers will be concluding soon, the civil securities fraud class action against WorldCom, its directors, and various banks involved in the company's finances will have to wait a little bit longer before it can begin. As discussed on Jurist, U.S. District Judge Denise Cote has postponed the trial until March 17 to give the attorneys a chance to interview the witnesses from the criminal case -- most likely, former CFO Scott Sullivan, who was the architect of the fraud and key witness in the criminal prosecution of former CEO Ebbers. Sullivan has been kept under wraps by the U.S. Attorney's Office prior to the trial, to ensure that Ebbers did not gain any "free" discovery of Sullivan's testimony through the civil case. Now that Sullivan (and others) have testified, that stricture is gone and the civil attorneys can pursue their case, which involves broader issues than just Ebbers' involvement in the fraud.
Jurist also notes that Judge Cote has said the trial will be concluded by July, less than the nine months projected by counsel. Unlike most criminal cases, the judge in a civil case can speed things along more easily. It will be interesting to see if the case even goes to trial, given the propensity for such actions to settle (the judge refused an earlier settlement negotiated by the parties as being unfair to the banks named as defendants). (ph)
The U.S. Attorney's Office for the Eastern District of Virginia issued a white paper on Feb. 18, "Combating Procurement Fraud: An Initiative to Increase Prevention and Prosecution of Fraud in the Federal Procurement Process." The district is home to the Pentagon and, more importantly, thousands of government defense consulting firms in Crystal City, Rosslyn, and Alexandria; the revolving door spins rather quickly in D.C. The recent scandal involving Boeing (see previous post here) that led to the sentencing of the company's former CFO and a senior Air Force procurement officer has led to a large-scale initiative by the U.S. Attorney's Office, which is already well-known for the Ill-Wind investigation of the 1980s. The white paper discusses the reasons for the formation of a new Procurement Fraud Working Group:
In addition to increasing DoD contracts, these contractors are expanding operations to acquire and service contracts from the State Department, DHS, and other federal agencies. For example, the President and Chief Operating Officer of one of DHS's top ten contractors recently announced the company’s intent to grow 15 per cent each year. With increased procurement, including a rise in the outsourcing of particular services, there is also the potential for an increase in procurement fraud, which includes product substitution, defective pricing or other irregularities in the pricing and formation of contracts, misuse of classified or other sensitive information, labor mischarging, accounting fraud, fraud involving foreign military sales and ethical and conflict of interest violations. This puts the United States Attorney's Office, as chief law enforcement agency for this district, in a unique position to act.
Sunday, February 20, 2005
Co-Blogger Peter Henning has a new piece in the Buffalo Criminal Law Review, now available on SSRN titled, "Sarbanes-Oxley Act Section 307 and Corporate Counsel: Who Better to Prevent Corporate Crime?" The article "argues that the SEC should adopt the withdrawal portion of the noisy withdrawal rule, and that withdrawal should be mandatory for both outside counsel and in-house lawyers when they become aware of corporate misconduct and the corporation refuses to take adequate remedial measures." The rationale for this approach is explained in detail in the article.
SSRN also reports that Professor Stuart Green has a chapter in a book titled "DEFINING CRIMES: ESSAYS ON THE CRIMINAL LAW'S SPECIAL PART R.A." Duff & Stuart P. Green, eds., Oxford University Press, 2005. He states that, "In this chapter analyzing the moral content of bribery, bribes are conceptualized as bilateral agreements between two parties (a briber and bribee) in which the briber gives or offers something of value in exchange for the bribee's agreeing to act on the briber's behalf."
Professor Elizabeth Joh has two new pieces listed on SSRN that may be of interest to people teaching white collar crime. One is titled "Conceptualizing the Private Police," and the second is "The Paradox of Private Police."
A recent Seventh Circuit decision, United States v. Cummings, highlights a key limit to the RICO statute.
For starters this is wonderful case to learn what skip tracing is and the role these individuals serve in finding debtors. The case notes that "Although skip tracing is not necessarily illegal, some skip tracers stray across the line in their efforts to track down their quarry."
The reversal here is upon a failure by the government to follow the mandates of the case of Reves v. Ernst & Young. Reves clearly holds that one must "conduct or participate" in the "operation or management" of the enterprise. The only exception provided in the case is when the "enterprise might be operated or managed by others associated with the enterprise who exert control over it as, for example, by bribery." As the accused was an "outsider," the court in the Cummings decision reversed.
For more on how this limitation to RICO operates, see White Collar Crime: Law and Practice, 2nd ed. by Israel, Podgor, Borman & Henning.
What was John Ashcroft thinking when he was meddling in the libraries? (Report) Was he thinking that the librarians might be involved in criminal activity? No way, not the librarians.
In the posts of December 6th and December 30th are reported two different incidents of librarians being charged with criminal activity. The Law Librarian Blog reports of another instance. It seems that a "Homer Township's former library director was sentenced" "to six months in the Will County jail for stealing more than $100,000 from the library district." It sounds like a case of basic embezzlement through use of two sets of books.
(esp)((With thanks to Joe Hodnicki for sending us this story)
Saturday, February 19, 2005
Former Boeing CFO Michael Sears was sentenced to four months in prison and fined $250,000. (See Jurist ) The case involved "improper job talks" with another individual who was "a former senior Air Force procurement official, while she still had sway over contracts involving the company." GOVEX.com reports:
"Druyun admitted in federal court last month to favoring Boeing in at least four contract negotiations, including the tanker deal. She said she felt indebted to the company for giving her daughter, her son-in-law and herself jobs. Druyun was sentenced to nine months in prison."
The sentencing of Michael Sears sends a clear message that fleeing the federal government doesn't pay. The four month jail sentence will act as a wake-up a wake-up call and strong deterrent for any contractor who thinking they can get away with ripping off taxpayers.
Defense procurement was a top white collar crime priority in the 90s. This case emphasizes that it still remains a concern.
The U.S. Attorney's Office for the Northern District of California is prosecuting a case of alleged computer criminality. According to a press release of this office, the indictment charges:
"[F]ormer Information Technology Manager of Creative Explosions, Inc., a Silicon Valley software firm, was indicted today by a federal grand jury on charges that he gained unauthorized access to the computer system of his former employer, reading email of the company's president and damaging the company's computer network. Creative Explosions, Inc., is based in Scotts Valley, California."
Friday, February 18, 2005
The United States Attorneys Office for E.D. Missouri indicted the former director of Support Dogs, Inc. a service organization that trains support dogs. The allegations go to "fraud charges in connection with an alleged embezzlement of over $400,000." The press release of the U.S. Attys. Office states:
"According to the indictment, between September 1998 and January 2004, Hansen was the Executive Director of Support Dogs, Inc. As part of his responsibilities, Hansen oversaw fund raising activities at Support Dogs and regularly made presentations and passed out brochures soliciting donations for Support Dogs. Between January 1999 and January 2004, the indictment alleges that Hansen wrote checks on Support Dogs’ operating accounts and used these funds for his personal use. Hansen concealed this fraud on the books and records of Support Dogs in several ways, including using "white out"to alter cancelled checks, removing cancelled checks, and creating phony receipts in Support Dogs’ files.
As a further part of the scheme, as alleged in the indictment, in July 2002, Hansen opened a bank account in the name, "Support Dogs for the Handicapped, Inc." Hansen then allegedly intercepted donations mailed to Support Dogs and deposited them into this new account, which he used for his own benefit.
Finally, the indictment states that in May 2001, Hansen added his wife to the Support Dogs payroll, even though she was not an employee. Between May 2001 and January 2004, ADP created checks payable to Hansen’s wife drawn on Support Dogs' payroll account."
It looks like the press is starting to expose one of the worst examples of sentencing guideline inequities. In the recent issue of Christian Science Monitor, one finds a discussion of how Jamie Olis, former Dynergy executive, could have received a reasonable sentence but for the mandates of the guidelines that forced the judge to add up the amount of loss in computing the sentence. (See here). The Fifth Circuit heard appellate arguments in this case, and in light of Booker the sentence may now be subject to modification.
As pointed out here, sentences for the most part, are unlikely to change as a result of the Booker decision. Most judges will use the instruction of the Supreme Court and use the guidelines as advice. But some sentences, like the sentence of Jamie Olis, certainly merits review and reconsideration. (see also Ann Woolner of Bloomberg's article titled, "Olis's 24 Year Prison Sentence Due for a Shave." The press plays an important role in how issues are framed for the public, so it is important that the media continue to expose cases such as this one. (esp)
Ebbers - It was probably not a day that witness Scott Sullivan truly enjoyed, as defense attorney Reid Weingarten was asking the questions. This appears to be the witness that will make or break the government's case. (see more AP) And it may come down to whether the jury thinks Scott Sullivan was doing everything at the direction of Bernie Ebbers. (see more here) So far we have Sullivan admitting that he "knew it was against the law."
Scrushy- More talk about "family," although not the kind with parents and children. The defense continued to place the blame on a group referred to as the "family" with claims that this group "hid [the conduct] from Scrushy." (See more here)
Kozlowski - The jury head the testimony of Mark D. Foley, a former senior vice president of finance. (See more here)
Addendum to Ebbers- Title of Wall Street Journal article of this a.m. says it all - "Burden of Proof
Linking Ebbers to the Fraud At WorldCom Proves Difficult."
Thursday, February 17, 2005
The amicus brief filed by the National Association of Criminal Defense Lawyers (NACDL), New York Association of Criminal Defense Lawyers, and California Attorneys for Criminal Justice (below), is not the usual brief filed by a criminal defense lawyers' group. But the authors of the brief admit to this in the opening passages of the brief when they "acknowledge that this brief presents an unusual subject matter for an amicus brief."
As opposed to a brief focused on a substantive legal issue, the amici argue that there was a "breakdown of the adversary process, in which there should be a prosecutor, a defense attorney, and an impartial judge acting as arbiter between them." The brief then states that "the trial court abandoned that position in favor of transparent bias against the defendant, and unprovoked antagonism toward defense counsel." Examples to support this claim are found throughout the brief.
The brief catalogs the conduct into six areas, that include an argument of "the trial court's different standard of relevance for the prosecution and defense evidence." It also presents a claim of the trial court's sua sponte interruptions of the presentation of the defense case." For example, the support for the claim of a difference in treatment to prosecution and defense counsel when discussing sua sponte interruptions by the trial court is a listing of transcript pages to show that "[e]xcluding interruptions about needing to orient or to hear better, the transcript reveals five sua sponte interruptions to government examinations . . . ., while in contrast, there were more than firty sua sponte interruptions to defense examinations. . . "
This is without doubt a highly unusual amicus brief. But it is clearly an important one in that amici are sending a strong message that trials that place defense counsel in a lesser position than the prosecution should not be tolerated.
February 17, 2005 | Permalink
Bill Rankin of the Atlanta Journal Constitution reports on a conviction of a former lawyer in "a $20 million mortgage fraud operation called the largest of its kind in metro Atlanta." When the indictment was handed down, the U.S. Attorneys Office for the Northern District of Georgia stated that this defendant:
"owned and operated The McFarland Law Firm located first at 4820 Redan Road, Stone Mountain, Georgia, and later at 900 North Hairston Road, Stone Mountain, Georgia. She acted as agent for title insurance companies, and was the closing attorney for various lenders. MCFARLAND caused HUD-1 Settlement Statements (HUD-1s) to be signed certifying that she received and disbursed loan proceeds as reflected on the HUD-1s when she closed mortgage loans for various lenders on the properties for which she wrote title insurance, with the actual McFarland receipts and disbursements not as reflected on the Settlement Statements. The indictment alleges that McFarland paid the identity thief $10,000 per identity, the primary appraiser who inflated property values over $400,000, and other coconspirators from her escrow account without reflecting such payments on the settlement statements."
Wednesday, February 16, 2005
While Attorney General Spitzer is investigating activities on a state level, the federal government is also busy with white collar cases. The trial of a former chief executive of American Tissue continued with the testimony of the former chief financial officer. Former CFO Stein pleaded guilty and is now testifying as a government witness in a trial that charges the defendant with "fraud, conspiracy to commit perjury and obstruction of justice." See Newsday for more.
In addition to criminal charges, the SEC also brought a civil action. (Complaint) (Litigation Release No. 18022). According to the New York State Society of CPA's website, the accused "has gone to extraordinary lengths to block efforts aimed at selling its network of paper mills and warehouses to pay hefty debts. He allegedly instructed employees to forge ownership documents for machinery he didn't own and the told them to lie to a Delaware bankruptcy court." The same website reports that the defendant's attorney states that, "[a]ny dispute with the bankruptcy court is really a business dispute, not a criminal dispute."
Kozlowski -The former head of human resources at Tyco has now spent four days on the stand being cross-examined. For more see the Wall Street Journal article titled, "Tyco Ex-Official Discusses LoansTo Executives, Key Panel's Moves" (see also Atlanta Journal Constitution article here).
Scrushy- The defense cross-examined a former HealthSouth finance chief, Bill Owens. The defense continued to present testimony aimed to show that Owens was acting without approval from the accused. For more see here.
It is always fascinating how murder cases can often be over with in a very short period of time, but white collar cases can take weeks and months.