Tuesday, May 31, 2005

2 New Blogs Join Law Professor Blogs Network

We are pleased to announce the launch of two new blogs as part of our Law Professor Blogs Network:

These blogs join our existing blogs:

LexisNexis is supporting our effort to expand the network into other areas of law.  Please email us if you would be interested in finding out more about starting a blog as part of our network.

May 31, 2005 in News | Permalink

Commentary on Arthur Andersen Decision

Several things are important to note here-

1. It is a 9-0 decision.  Reaction -  The government had it wrong and the Court thought it clear enough to speak with a single voice.

2.  It only took 11 1/2 pages to write a decision that rejects two government arguments (that knowingly does modify "corruptly persuades" and a nexis requirement is required)

3. This decision sends a message that the Court is troubled with cases brought on a mere thread of criminal culpability. This is particularly important in white collar decisions as the law is complex, people have trouble understanding it, and criminal liability should only be imposed when there is a proper mens rea.

4. Document retention policies deserve some respect- the Court specifically says that they are "common in business."  To say that one "impedes" the government merely because they have and use such a policy is wrong.  More should be required.  Likewise to say that you can be guilty of obstruction if you merely "impede" the government is absurd.  The Court goes so far to use the example of "a mother who suggests to her son that he invoke his right against compelled self-incrimination."  Obviously this should not be considered as obstructive conduct. Equally important to lawyers is that they be permitted to properly advise clients without fear of being accused of obstructing justice.

5. What happened here -  The government chose to bring an obstruction of justice charge, usually an easy shortcut way of proceeding, as opposed to investigating and proceeding on substantive charges that might exist.   Reaction - Taking shortcuts runs risks.

6. What effect will this decision have on pending cases and future cases - After the Arthur Andersen indictment, Congress amended the statute.  Obviously because of ex post facto the government cannot proceed against Andersen under the new statute for the alleged conduct. Congress also added a new statute 18 U.S.C. s 1519. These amendments and the new statute were previously discussed here.  Section 1512 and 1519 both have the word "knowingly" in them, so some of the findings of this Court may still apply.  The Court's decision emphasizes with italics the word knowingly when it states that "Section 1512(b) punishes not just corruptly persuad[ing]  another, but 'knowingly . . . corruptly persuad[ing]' another."

7.  Sorry Martha, but this case may not be of much assistance in your appeal.  Martha Stewart was indicted under section 1505 which has the word corruptly but does not have the modifier "knowingly." (see footnote 9 of the Court's decision that distinguishes obstruction cases brought under 1503 and 1505).

The moral of the story - the government gave a corporate death sentence here, and when you are dead there isn't much that can be done even when it is later proved that you were wrong.  The truly unfortunate part here is that innocent employees suffered.

(esp)

May 31, 2005 in Arthur Andersen, Obstruction | Permalink | TrackBack (4)

Andersen Conviction Reversed by High Court

Not surprisingly, the Supreme Court in a 9-0 decision reversed the conviction of Arthur Andersen LLP. In a 11 1/2 page opinion authored by Chief Justice Rehnquist, the Court found that the "jury instructions failed to convey properly the elements of a 'corrup[t] persuas[ion]' conviction under sec. 1512(b)."  The Court also found that the jury instructions improperly told the jury that "it did not have to find any nexus between the 'persua[sion]' to destroy documents and any particular proceeding."

It's a brief opinion, but there is a lot to say about it.  Commentary on the decision will be forthcoming.

Decision is here - Download 04-368P.pdf

(esp)

May 31, 2005 in Arthur Andersen, Judicial Opinions | Permalink | TrackBack (2)

Not Every Southern White Collar Case Moves Slowly

Co-blogger Professor Peter Henning previously remarked on the slowness of the Scrushy case and now on the easy hours that the jury is working (here).  Not all southern white collar cases proceed this way. James Salzer of the Atlanta Journal Constitution reports here   on the ongoing trial of  former state Sen. Charles Walker, who he describes as "a Democrat who was once the Capitol's most powerful black official." The jury in the Walker case heard evidence this Sunday, and Monday --yes --  Memorial Day weekend. (see here)   

We previously reported on the Walker case here.  Walker was initially charged with 142 counts ranging from mail fraud and income tax evasion to conspiracy.(see here).  Salzer of the Atlanta Jrl Constitution reports that the defense is expected to present its case this week.

(esp)

May 31, 2005 in Corruption, Prosecutions | Permalink | TrackBack (0)

Medco Fights Subpoena

While companies are usually quick to tout their willingness to cooperate with government investigations, every once in a while a corporation resists producing records.  Medco Health Solutions, Inc., the pharmacy benefits management company that was spun out of Merck, has refused to provide documents subpoenaed by the Department of Health and Human Services' Office of the Inspector General as part of an investigation into possible kickbacks and false claims until the OIG agrees not to share the records with the U.S. Attorney's Office for the Eastern District of Pennsylvania.  That office filed a civil lawsuit against Medco in 2003 alleging fraud in the recommendation of drugs, and Medco is demanding that any records produced not be given to the government attorneys prosecuting the civil action.  A Wall Street Journal story (here) quotes a response from a Medco spokeswoman that the company is only seeking confidential treatment of the documents.  The OIG has moved to enforce the subpoena, and a hearing is scheduled for Wednesday, June 1, in U.S. District Court in Philadelphia.

While Medco claims that all it is seeking is confidential treatment of its records, it is unusual that the request is directed at another office of the federal government.  In most cases involving confidential treatment, a private plaintiff is seeking the records produced to the government, and that brings up issues related to FOIA and the need to maintain confidentiality during a pending investigation.  Unlike a grand jury subpoena, under which the documents may be protected by the strict confidentiality requirements of Rule 6(e), a civil investigative subpoena does not restrict the sharing of information with other offices of the federal government that may be interested in the documents.  While Medco may fear an end-run by the OIG, if the HHS investigation is legitimate and not a sham for the benefit of the earlier lawsuit -- and it appears to be part of a broad investigation of other companies, such as Caremark -- then I think the subpoena is likely to be enforced because the OIG has broad investigatory authority. (ph)

May 31, 2005 in Civil Enforcement, Fraud, Investigations | Permalink | TrackBack (0)

The SEC's Internal Control Weakness

Bruce Carton on the Securities Litigation Watch blog discusses (here) the recently released General Accountability Office's first annual audit of the SEC, including its comment on the Commission's internal controls shortcomings.  The post quotes from a San Jose Mercury-News story noting the rather delicious irony of the SEC's internal control problems in the new world of Sarbanes-Oxley Act Section 404, which imposes stringent internal control certification requirements on corporate CEOs and CFOs.  The GAO report (here) summarizes the Commission's internal control weakness in this way:

The material weaknesses we have identified and discuss in this report relate to SEC’s internal control over (1) recording and reporting of disgorgements and penalties, (2) information security, and (3) preparing financial statements and the related disclosures. These material weaknesses were considered in determining the nature, timing, and extent of audit tests applied in our audit of SEC’s fiscal year 2004 financial statements, and our opinion on internal control does not affect our opinion dated February 11, 2005, on these financial statements. The details surrounding these weaknesses are being reported separately to SEC management, along with recommendations for corrective actions. Less significant matters involving SEC’s system of internal controls and its operations will also be reported to SEC separately.

It seems like internal controls are not the Commission's only problems these days.  As detailed in an AP story (here), the SEC is facing a $50 million budget shortfall over the next two years due to cost overruns related to moves to new offices in New York, Boston, and Washington DC.  This has led to budget cuts, including the oft-cited cutback on "nonessential travel."  In my experience working for the government, the lower you were, the less essential your travel was viewed.  Moreover, if you've ever traveled on the government, you know that every trip is essential -- no one goes out of their way to enjoy the bounteous per diem and joy of trying to find a hotel room at a government rate in a large city during a peak travel period.  Have you ever tried getting a hotel room in Boston during spring graduation season? (ph)

May 31, 2005 in Securities | Permalink | TrackBack (0)

Scrushy Jury Puts Its Nose Back to the Grindstone

After the holiday weekend, the jury in the prosecution of Richard Scrushy returns to work after spending a week hung up on trying to reach unanimity on the first charge of the indictment, the broad conspiracy count.  The jury's frustration was clear when it sent a note to U.S. District Judge Karon Bowdre asking her whether they had to be unanimous on the conspiracy count, and then putting a large "YES OR NO. Please circle one" beneath the question.  That sure sounds like a conversation between a parent and a teenager.  A New York Times article (here) quotes co-editor Ellen Podgor's discussing the potential problems with the conspiracy count, that it can be the easiest to prove but the hardest to explain to jurors in understandable terms.  See her earlier post here discussing the the complexity of conspiracy charges.  Another point noted in the Times article is that Judge Bowdre has allowed the jury to set its own deliberation schedule, and the pressure to reach a verdict may not be there yet to force the deliberations toward a resolution, one way or the other.  The almost contemptuous tone of the jury's note may indicate that the judge needs to take a more active role in moving them forward. (ph)

May 31, 2005 in HealthSouth | Permalink | TrackBack (0)

Monday, May 30, 2005

"He Spent Money Like It Was Water"

When none other than The Donald says, "He spent money like it was water," then you know you're in the big leagues.  Trump was talking about Alberto Vilar, who is currently sitting in jail spending the weekend locked up after being unable to meet the $10 million cash bail set at a hearing on Friday.  Vilar is a leading patron of the arts, particularly the Metropolitan Opera and the Vilar Center for the Arts at Beaver Creek (CO), and a investment fund manager who has been accused of stealing $5 million from a client account to make good on charitable pledges.  The Vilar Center website (here) says the following about him:

Now Alberto heads Amerindo Investment Advisors, Inc., a firm that pioneered investing in young technology companies twenty years ago. Performing arts remain Vilar's avocation and passion, and he has a particular affinity for opera and ballet, as well as symphonic, classical choral and chamber concert music. "Culture enriches our life," says Alberto. "'What would life be without Mozart?' as the saying goes." So when the opportunity to construct a world class performing and visual arts center in Beaver Creek came about, Alberto Vilar played a major role in its creation by making a significant naming contribution.

Federal authorities arrested Vilar on Thursday evening, May 26, at the airport in Newark as he returned from a financial conference in Las Vegas.  One of his investment funds, the Amerindo Technology Fund, was a darling of the tech stock boom in the late 1990s, and crashed as hard as any fund in 2001.  A New York Times article (here) details Vilar's various charitable contributions -- and related demands for attention for his generosity -- along with his successes and failures as an investment advisor. This case will be the next great New York high society prosecution, perfect for the summer gossip-fests in the Hamptons. (ph)

May 30, 2005 in Fraud, Prosecutions, Securities | Permalink | TrackBack (1)

Greenberg's Focus on AIG's Stock Price

While it is hard to feel much sympathy for former American International Group CEO Maurice Greenberg, who viewed regulations as a pest to be swatted rather than a guide to proper business conduct, N.Y. Attorney General Eliot Spitzer's recent complaint against the company and Greenberg for alleged fraud engages in a bit of character assassination of its own.  The complaint (here) states in its "Preliminary Statement" that Greenberg was "intensely focused on the daily movement of AIG's price," and on Feb. 3, two days after AIG announced underwriting losses from natural disasters, Greenberg told a trader for AIG to buy the company's shares on the open market and "I don't want the stock below $66 so keep buying."  On Feb. 18, a few days after the subpoenas to AIG were revealed, the company's stock again declined and Greenberg urged a company trader to buy up to 250,000 shares, saying he wanted the trader to be "a little bit more aggressive."  That's the last the complaint mentions of Greenberg's dealings with AIG's stock, and it's unclear why this information is in there except to somehow cast Greenberg as a nefarious manipulator of the market. 

But is what Greenberg did wrong?  It is certainly not a violation of New York state law, and none of the charges against Greenberg have anything to do with stock trading.  If there is any violation, it would be of the federal securities laws and related regulations, a claim that the SEC (and DOJ) could bring.  Company's are limited in the amount and timing of purchases of their own shares on the open market, and it's possible that Greenberg's requests to the traders caused a violation of those rules, but the evidence to this point does not show a significant violation, if there even is one.  For a Rule 10b-5 violation for market manipulation, it appears that a crucial aspect of such a case is missing: the benefit to the trader from the manipulation.  Greenberg was not selling shares while trying to prop up the company's price, and it does not appear that the trading had any purpose other than to help maintain the stock price in the face of negative news.  Without the back-end benefit from the transactions, it's difficult to show a manipulative purpose for a fraud violation.  Greenberg's extensive holdings in the stock (since transferred to his wife by gift in March) might be a reason to maintain the stock price, but he didn't sell any AIG shares to show that he sought to manipulate the price.  An executive obsessed by the price of his company's stock is not unknown in CEO circles, much less illegal.  What is the benefit from including the recitation of Greenberg's conversations with AIG traders when they have nothing to do with the alleged legal violations in Spitzer's complaint?  Surely not grandstanding. (ph)

May 30, 2005 in AIG, Civil Enforcement | Permalink | TrackBack (0)

Sunday, May 29, 2005

Juris Novus Featuring Blogs from the Law Professor Blogs Network

The Law Professor Blogs Network is proud to announce a collaboration with Juris Novus, one of the finest law blog aggregators online. Juris Novus will be featuring a rotating cast of blogs from our Network.

Statement from Juris Novus:

Keeping up with the blogsphere is a daunting task as new blogs come online daily. Juris Novus provides order and centralization, pulling together relevant headlines and presenting them on a single page. Law professors greatly influence the legal blogsphere. Academia demands a clear writing voice and current knowledge of legal ongoings. Successful blogging demands the same, it comes as no surprise that professors have risen to the top of the law blogsphere. In honor of those law professors who have contributed to the rich culture of the legal blogsphere, Juris Novus features a heavier balance of law professor blogs.

Juris Novus is updated three times an hour and stores headlines on a history page when you miss a day. Save time and simplify your day with Juris Novus. Thank you for making the legal blogsphere a better place!

May 29, 2005 in News | Permalink

Article By John C. Coffee

Professor John C. Coffee of Columbia Law School has an article titled, "A Theory of Corporate Scandals: Why the U.S. and Europe Differ"  posted on SSRN here as part of the Columbia Law and Economics Working Papers.  In part the abstract on SSRN states:

"This paper submits that different kinds of scandals characterize different systems of corporate governance. In particular, dispersed ownership systems of governance are prone to the forms of earnings management that erupted in the United States, but concentrated ownership systems are much less vulnerable. Instead, the characteristic scandal in concentrated ownership economics is the appropriation of private benefits of control. Here, Parmalat is the representative scandal, just as Enron and WorldCom are the iconic examples of fraud in dispersed ownership regimes.

"Is this difference meaningful? This article suggests that this difference in the likely source of, and motive for, financial misconduct has implications both for the utility of gatekeepers as reputational intermediaries and for design of legal controls to protect public shareholders. What works in one system will likely not work (at least as well) in the other. The difficulty in achieving auditor independence in a corporation with a controlling shareholder may also imply that minority shareholders in concentrated ownership economies should directly select their own gatekeepers.

(esp) (With thanks to Joseph A. Hodnicki for alerting us to this Article).

May 29, 2005 in Scholarship | Permalink | TrackBack (0)

Rosen Acquittal in Perspective

We reported here the acquittal of David Rosen, former fundraiser for "Senator A."  We noted here the importance of keeping politics out of prosecutions.  We also noted here how those who associate with high profile individuals, such as Hillary Clinton, subject themselves to additional scrutiny.  We asked whether Rosen would be able to "standup to this scrutiny and walk out of the courtroom even after every piece of paper is fully examined."   

And the answer is that David Rosen is able to walk out of the courtroom with an acquittal with a jury speaking loudly an clearly.  (See NYTimes AP story here) And yes, they looked at all the evidence.  Some have wrongly criticized the judge (here)   and perhaps others may now try to criticize the jury.  But the plain fact is that David Rosen was not guilty of the crimes for which he was charged.

Monday morning quarterbacking is in order for prosecutors here.  Why did they bring this prosecution?  Looking at the problems they faced in this case, one has to wonder how well the case was investigated?  Were prosecutors  led astray on the evidence by those with political motivations, that is motivations to try and get "Senator A"?   

Again, as we stated here, politics needs to stay out of the judicial system.  Thankfully, the jury here is above politics.

(esp)

May 29, 2005 in Prosecutions | Permalink | TrackBack (0)

Saturday, May 28, 2005

State Senator Ford Resigns

Tennessee State Senator John Ford, a 30-year veteran of the Senate, has resigned after his indictment on corruption charges and order of home confinement because of an alleged threat against a witness (see earlier posts here and here). According to an AP story (here), Ford's lawyer said the threat against the witness was just a joke. (ph)

May 28, 2005 in Corruption, Prosecutions | Permalink | TrackBack (0)

Heads I Win, Tails You Lose

Workers compensation is one of those areas of the law that is better left unexamined.  Unfortunately for the Ohio Bureau of Workers Compensation (BWC) and its CEO, James Conrad, the spotlight is now focused on a rather peculiar investment by the Bureau that seems to be missing.  According to an AP story (here), the BWC bought approximately $55 million in rare coins through a Toledo dealer as part of an investment strategy to diversify its portfolio.  Companies pay hefty premiums into state workers comp pools, and investment gains should lower the cost of insurance.  About $10-12 million worth of coins, however, are missing, and the coin dealer, Tom Noe, is being investigated for the disappearance.  Conrad resigned from the BWC because of the disappearance, and questions have been raised about the use of Noe because he was a substantial contributor to Governor Taft and other Republican candidates. Collectibles are notoriously hard to value -- just ask Ellen about the value of her Beanie Baby stash -- and subject to theft, unlike stocks and bonds. While the missing coins are only a small part of the BWC's $15 billion investment fund, it shows that even a small-scale fraud can blow up once it is tied in with campaign contributions. (ph)

May 28, 2005 in Corruption, Fraud, Investigations | Permalink | TrackBack (0)

Another One Falls for the Nigerian 419 Scam

A Fourth Circuit opinion in United States v. Blick (here) has a thorough discussion of the appeal waiver related to post-Booker sentencing issues, taking the approach adopted by all other circuits that a waiver of the right to appeal in a plea agreement is enforceable even though the Supreme Court's decision on the Federal Sentencing Guidelines had not been announced.  What is more interesting is how Blick ended up in this position.  Blick was a principal and one-third owner of a consulting firm, with the responsibility for managing its business affairs.  Over the course of about a year, he embezzled approximately $1.4 million, transferring the money overseas.  Eventually, the embezzlement caught up with him, and he informed the other owners of the firm and was eventually indicted on wire fraud charges.  He repaid about $750,000 of the money he took, and was sentenced for defrauding the firm of $655,000.  Why did Blick embezzle all that money?  It turns out that he was "assisting" a person in Nigeria to remove $20.5 million from that country into a safe account in Europe.  How many of those e-mails do you get a week?  It is simply amazing that people actually fall for these scams, although according to Wikpedia (here) this type of advanced fee fraud goes all the way back to the 16th century.

On a side note, Blick had a creative, if less-than-compelling, argument why the actual loss from his scheme should be zero, which could have a significant effect on his sentence.  Blick argued that the firm suffered no loss because he owned one-third of it, and his ownership interest exceeded the $655,000 loss, so the "net loss" to the victim -- the consulting firm -- was really zero.  In effect, he argued "I stole only my share of the company."  Neither the district court nor the Fourth Circuit fell for the argument as easily as he agreed to participate in the Nigerian 419 plan. (ph)

May 28, 2005 in Fraud, Judicial Opinions, Sentencing | Permalink | TrackBack (1)

Who Wants to Be a Deputy Sheriff in the O.C.?

Elvis_nixon

In the fine tradition of Barney Fife, Orange County Sheriff Michael Carona appointed 86 campaign contributors (Sheriff is an elected post in California), friends, and family members as reserve Deputy Sheriffs, giving them badges and -- a bit scarier -- the authority to arrest.  None of the reserve deputies, who are all volunteers, had to undergo a criminal background check, and the state Commission on Peace Officers Standards and Training removed them from its database of peace officers once the lack of a background investigation was revealed.  A Los Angeles Times story (here) quotes Carona as stating, "Like any organization, the first group of individuals we reach out to for support and assistance is friends and family of the members of the organization."  I would have thought law enforcement training might be a more appropriate criterion for appointing someone who carries the authority of the county sheriff's office, but maybe I'm old fashion.  It does remind me of the time when Richard Nixon gave Elvis Presley a badge as a "Federal Agent-at-Large" for the Bureau of Narcotics and Dangerous Drugs (the predecessor of the DEA), which became one of the King's prized possessions.  Didn't Nixon have a house in Orange County? (ph)

May 28, 2005 in News | Permalink | TrackBack (0)

Ebbers Sentencing Postponed to July 13

U.S. District Judge Barbara Jones postponed the sentencing of former WorldCom CEO Bernie Ebbers from June 13 to July 13 to give the parties more time to file briefs on the new trial request and to complete the presentence report.  Any guesses on the fraud loss figure?  Because Judge Jones can treat the Guidelines as advisory, I think she is unlikely to impose the highest sentence even if the loss amount would have triggered a significant term of imprisonment under the Guidelines. See the AP story here.

May 28, 2005 in Sentencing, WorldCom | Permalink | TrackBack (0)

Even White Collar Offenders Are Restricted Pre-Trial

In cases where the accused is charged with murder, it is rare that the defendant will receive bail.  In contrast in white collar cases, it is rare that the accused is not granted bail.  Often, however, restrictions are placed on the defendant.  The usual restrictions range from turning in a passport or gun. CNN reports here that in the "Tennessee Waltz" case of John Ford, a state senator of Tennessee, the court has placed him under house arrest.  Ford has an obstruction charge premised on witness intimidation and retaliation that has caused the judge to place this added restraint on him. 

(esp)

May 28, 2005 in Corruption, Prosecutions | Permalink | TrackBack (0)

Friday, May 27, 2005

Rosen Acquitted of Campaign Reporting Charges

David Rosen, the former national finance director for Senator Hillary Rodham Clinton (referred to as "Senator A"), was acquitted of two counts of filing false campaign finance statements with the Federal Election Commission.  An AP story (here) reports that the jury was out approximately 6 hours before it returned the "not guilty" verdict.  Rosen's testimony resonated with the jury, who accepted his position that he got in over his head and was not responsible for any misreporting of contributions.  As in other high profile cases, the decision whether to have the defendant testify turned out to be crucial to the outcome. (ph)

May 27, 2005 in Prosecutions, Verdict | Permalink | TrackBack (0)

The FBI Dances the Tennessee Waltz

In an undercover operation that appears to have lasted more than two years, the United States Attorney's Office for the Western District of Tennessee indicted four present and one former state legislators on criminal charges related to improperly taking money.  Some of the news reports on these indictments coming from the undercover operation, called the "Tennessee Waltz," can be found here (AP),  here (WBIR-TV), and here (Jurist). 

One of the indictments can be found here and the charges in this indictment are for violations of the Hobbs Act (extortion), 18 USC 666 (a statute that allows the federal government to charge criminal conduct when a state receives federal assistance in excess of a specified amount), and 18 USC 1512(b)(3) (obstruction premised on intimidation and threats). 

The indictment describes an FBI undercover operation where the FBI set up a company called E Cycle Management Inc.  The indictment discusses the alleged payment of money for the passage of a bill in the legislature (bill here) related to this company. 

It is fairly common these days for the federal government to proceed against state actors with charges related to alleged corruption. The charges in these cases carry severe penalties, so these will definitely be cases to follow. 

(esp)

May 27, 2005 in Corruption | Permalink | TrackBack (0)