Wednesday, July 27, 2005
Tax charges often appear as accompanying charges with white collar fraud and corruption cases. In addition to charging the taking, bribing, or extorting of money, it is common to see charges for the failure to pay taxes on this money.
An example of this is seen in a recent press release here by the USA for the District of New Jersey. In this release USA Christopher J. Christie informed the public that "[a] former human resources manager who defrauded her employer of more than $350,000 and evaded paying taxes on the money was sentenced today to 37 months in prison."
The press release notes that:
"Buturla pleaded guilty on Oct. 25, 2004, to one count of wire fraud and one count of tax evasion, according to Assistant U.S. Attorney Bohdan Vitvitsky.
"Buturla was formerly a human resources manager at Agip USA, a former New York City subsidiary of Agip International, an Italian multinational corporation. Buturla admitted at her plea hearing that in the years1998 to 2000 she had defrauded Agip USA by exploiting her position to manipulate her then-employer's payroll system."
Tuesday, July 26, 2005
The broad investigation of the reinsurance industry by the SEC and other regulators will likely involve a civil enforcement action against two executives of RenaissanceRe Holdings, Ltd., a Bermuda reinsurer. The company disclosed in a press release (here) that the SEC sent Wells Notices to its CEO, James Stanard, and a former senior executive, Michael Cash, that the Commission staff has determined to file a civil enforcement action against the two related to "finite insurance" products sold to other insurance companies that can allow the purchaser to manipulate its reserves by apparently shifting risks away from the comapany, thereby making the balance sheet look better, i.e. accounting fraud. As discussed in an earlier post (here), RenaissanceRe effectively fired Cash when he would not voluntarily accept service of an SEC subpoena to testify. Whether Stanard can survive as CEO is an open question, and will depend in large part on whether a settlement can be worked out with the Commission that does not include a director-and-officer bar or a finding of fraudulent conduct. (ph)
eToys Inc. was one of the many dot.com companies that flamed out once business reality set in, and it filed for bankruptcy in 2001 in Delaware. Well-known bankruptcy attorney Paul Traub (of Traub, Bonacquist & Fox in New York) recommended to the Delaware Bankruptcy Court that Barry Gold be appointed CEO to oversee the liquidation of the company. Traub represented eToys creditors in the bankruptcy. Unfortunately, what was not disclosed at the time is that just a short time before that recommendation, Traub and Gold formed a company, Asset Disposition Associates, a liquidation company. Although their company did not have any dealings with the eToys bankruptcy, the business relationship is something that would usually be disclosed to the bankruptcy court. An article in the Wall Street Journal (here) discusses the case, including a motion by the bankruptcy trustee seeking the return of $750,000 in fees paid to Traub's firm for its work on behalf of creditors.
The article also notes that the "Three Amigos" of investigations -- the SEC, DoJ, and NY Attorney General's Office (i.e. Eliot Spitzer) -- have been in touch with individuals involved in the bankruptcy. While bankruptcy is usually a world of its own, bankruptcy fraud cases against lawyers for failure to disclose conflicts of interest have been brought. Among the most well-known, especially to the New York bar, is the prosecution and conviction of John Gellene (then of Milbank Tweed), who failed to disclose his representation of a creditor of a bankrupt company (182 F.3d 578 (7th Cir. 1999). Unlike other types of fraud, in which the government usually must prove a gain to the defendant and some loss by the victim, in bankruptcy fraud cases the harm can be to the court and the bankruptcy process from a failure to disclose, without the need to prove any monetary harm. For those interested in the Gellene case, an outstanding book that uses the prosecution as a starting point for a discussion of conflicts in the world of corporate law and finance is Eat What You Kill: The Fall of a Wall Street Lawyer by Prof. Milton Regan at Georgetown University Law Center. (ph)
The Wall Street Journal is reporting (here) that Fidelity Investments has received a Wells Notice from the SEC, which is a notification that the Commission staff has decided to recommend a securities enforcement action, regarding the receipt of gifts by employees who worked in the firm's stock trading department from securities brokerage firms. The investigation has been going on since late last year, and was the subject of an embarrassing front page article in the Journal (see earlier post here) about a bachelor party for a Fidelity trader that included a private jet, hotel rooms, and yacht, all paid for by brokerage firms. Other gifts being investigating include tickets to the Olympic women's figure skating final and rounds of golf, including an invitation to the highly-coveted Pebble Beach Pro-Am, that were paid for by brokerage firms seeking a slice of Fidelity's approximately $1 billion in trading commissions. Fidelity reassigned the former head of stock trading, Scott DeSano, to a new position, after the gift probe came to light.
Fighting Fidelity could be a significant undertaking for the SEC because the firm has quite a deep pocket and a reputation among small investors that it wants to defend. The Johnson family, which controls FMR Inc., which is the corporate parent of Fidelity, naturally have quite a proprietary interest in the firm and have a reputation for being quite hard-nosed. That said, the mutual fund company likely would prefer to avoid a drawn out fight in which some rather gory details would come to light (perhaps even worse than the dwarf-tossing at the bachelor party), so it may accept the one-day publicity hit from a settled SEC action. The Wells Notice is all part of the negotiation dance, and Fidelity's response, at least as quoted in the Journal article, is a familiar step, that it intends to "vigorously" defend itself. We'll see. (ph)
John Rutter was convicted of forgery, attempted larceny, and perjury related to his attempt to blackmail actress Cameron Diaz to pay him $3.5 million to prevent him from selling topless photographs he took of her in 1992. Rutter claimed to have a signed release from Diaz, but the jury convicted him of forgery for the signature on the release, and the larceny count was based on the demand for money to not release the photographs. Interestingly, the perjury count relates to Rutter's certification in a pending civil law suit that the signature was legitimate. As a former President learned the hard way, what goes on in a civil case can quickly turn into a criminal proceeding. An AP story (here) discusses the conviction. (ph)
Paul McGreal on the Corporate Compliance Prof Blog has an excellent post (here) on the settlement that Sony reached with the New York Attorney General's office regarding payola -- one of my all-time favorite made-up words. In a practice as old as radio, Sony settled a claim that it made payments and gave other items of value to radio station employees to get songs by its artists on the air, or played during favorable times (i.e. not just the graveyard shift at the stations. As Paul points out, "[T]he problem appears to be a serious breakdown in (or lack of) internal controls that assure compliance" with applicable rules prohibiting payola, including a federal statute making it a crime (47 U.S.C. § 508). (ph)
Bruce Carton on the Securities Litigation Watch blog has an interesting post (here) about schools with buildings (or in one case a professorship) named after defendants in corporate crime prosecutions, including Kozlowski Hall at Seton Hall and the Rigas Family Theater at St. Bonaventure. Other examples include Alberto Vilar, who is charged with fraud for allegedly taking funds from a client's account to make good on various charitable pledges, including his alma mater Washington & Jefferson College, and the A. Alfred Taubman College of Architecture and Urban Planning at the University of Michigan, named after Al Taubman, who was convicted of an antitrust violation and served a little less than a year in federal prison. Unfortunately for the schools, they cannot control the actions of major donors. (ph)
Monday, July 25, 2005
The LATimes here discusses whether possible perjury and obstruction of justice will be the main focus of the special prosecutor in evaluating the evidence received in the investigation of the leak that caused the name of a CIA agent to be released to the press. Often "short-cut" type offenses, like obstruction of justice, are used by the government because they are easier to prove. I have often maintained that it should not be proper for the government to avoid a thorough investigation just because they think there might be an easier course to pursue. Justice demands more than mere efficiency. As such obstruction of justice, perjury, false statements, and false declarations should not be used to avoid a thorough investigation of possible criminal activity. In the case of Arthur Andersen, LLP, the government learned that taking shortcuts is not always effective. In Andersen the Supreme Court struck down the conviction in a case in which the government proceeded with a single obstruction charge.
Short-cuts should be frowned upon when the government is able to investigate the underlying offense. If the underlying offense is impossible to investigate because of the destruction of evidence, intimidation of witnesses, or there is an inability to obtain the underlying evidence, charges such as obstruction of justice may be warranted. With a journalist in jail (Judith Miller of the New York Times) because she has not been released to disclose her source, these type of charges may in fact be proper if there is conduct found by the prosecutor to be false, obstructive, or intimidating. The question will certainly be whether the conduct meets the elements of one of these crimes, and more importantly "who," if anyone, engaged in such activity.
The NYTimes reports here that some may even believe that the rules regarding outing CIA agents needs review and change, to loosen the requirements placed on existing secrecy of CIA agents. If a congressional hearing proceeds this way, it may prove to be interesting, as the NYTimes notes that the CIA was the one that called for the investigation upon the disclosure of one of their operative's names. Would Congress wish to provide less protection to the CIA then they desire?
In any event, this investigation may not be on page one of all newspapers, but it continues to be prominent. (See, e.g., A4 Wall Street Jrl here). Certainly not an easy position for any prosecutor.
The fall-out from the grand jury investigation of Matthew Cooper/Judith Miler affects other media outlets, and back in June the editor for the Cleveland Plain Dealer stated that he would not run a story based on information from confidential sources until the protection for reporters was clarified. The story has now hit, and the paper has revealed the contents of a 115-page FBI affidavit, which had been sealed by the court, that was used to obtain wiretaps for telephones of Nate Gray, who was the best man at the two weddings of long-time Cleveland Mayor Michael White. A corruption prosecution of Gray and others ended in a mistrial, and a second trial is scheduled to begin in August. One of Gray's lawyers admitted that he leaked another document to the Plain-Dealer, which was an FBI summary of an interview with a confidant of Mayor White. The lawyer claimed that he did not know the document was covered by the court order sealing the documents, although that type of information is not usually a matter of public record and not something that would be given to a reporter if it were otherwise available. The defense received the documents as part of the discovery in the prosecution, and the affidavit (filed in 2002) describes the FBI agent's conclusions regarding alleged bribes paid to Mayor White, who left office in 2002 and has not been charged with any crimes. The Plain Dealer story (here) describes the affidavit and alleged corruption in the White administration, and a follow-up article (here) describes a hearing before the court in which U.S. District Judge James Gwin called for an investigation of the leaks. Unlike the leak investigation in Washington, D.C., this case has a more limited universe of potential leakers, although like so many of these types of inquiries it will be very difficult to figure out who leaked the affidavit. (ph)
We reported here on the recent corruption convictions in San Diego (two councilman convicted for conspiracy, extortion, and fraud (see San Diego Union-Tribune here)). But when the convictions involve politicians, the ramifications can be far reaching. This has proved true in San Diego with the recent convictions necessitating a need for a new election.
According to AP here the latest is that a second councilman has resigned post-conviction. This can be a wise move and assist with arguments at the sentencing hearing. It can show not only the collateral consequences of the conviction, but the acceptance by the individual in resigning their post.
Co-blogger Peter Henning mentioned in a recent post the fame of the San Diego Zoo. Let me add the site for the panda.cam so you can watch the panda bears live here. This is not mentioned to minimize the importance of the recent convictions in San Diego, but for those like me, who occasionally need a break, the pandas are fun to watch.
Sunday, July 24, 2005
The special prosecutor's investigation of a leak of the name of a CIA operative is back at the top of the news. CNN reports here in an article titled, "Ex-CIA Official Blasts Bush on Leak of Operative's Name" that a former CIA official who worked with Valerie Plame is not happy about this leak stating that "[w]e deserve people who work in the White House who are committed to protecting classified information."
The NYTimes, the newspaper employing Judith Miller who remains in jail for refusing to testify before a grand jury as to her source, discusses here the implications of this case to President Bush.
Has the media been fair to Bernard Ebbers, who was recently convicted and sentenced to 25 years?
One person associated with the defense team does not think so and has written his case to the newspapers in the form of an op-ed. It remains to been seen whether the media will print this piece. In the meantime, you can find this op ed here -
Craig J. McCann, PhD, CFA, Securities Litigation and Consulting Group, Inc. states that:
"1. The bloodlust for Mr. Ebbers is misplaced and doesn’t justify the sentence. He should have been sentenced on the basis of what he was convicted of and 99% of the losses in WorldCom were definitely not caused by the things Mr. Ebbers was convicted of.
2. The standard of evidence for proving shareholder losses at sentencing hearings is so low that a rough assertion by the government suffices. I contrast this with the evidentiary burden in class action litigation.
3. The sentencing guidelines thresholds are so low that (combined with the low standard of proof for shareholder losses in sentencing hearings) executives at large publicly traded firms who are found guilty of filing false SEC reports statements will always get the maximum sentence – effectively a life sentence."
Although many may disagree with the Ebbers sentence, find the media mischaracterizing the harm, and find some of the recent white collar sentences beyond recognized punishment theory, convincing the public may prove more difficult. The Wall Street Journal's poll on the Ebbers sentence (here) shows 55% of the people voting in the poll finding the Ebbers sentence to be fair, with only 24% finding it too harsh. But maybe you haven't voted yet.
Saturday, July 23, 2005
Former HealthSouth CEO Richard Scrushy filed a brief in response to U.S. District Judge Inge Johnson's order to show cause seeking dismissal of the SEC's securities fraud and accounting suit. Scrushy argues that the government has not offered any "credible" evidence that he knew about the fraud at the company, and because the Commission's evidence will be the same as that presented in the criminal trial that resulted in an acquittal, the court should dismiss the SEC case. The usual analysis is that, because the SEC only seeks a civil remedy and not a criminal punishment, the lower burden of proof means that an acquittal in a prosecution has no effect on the enforcement action. Nevertheless, nothing about this case has been usual, and the district court may dismiss some or all the counts in the SEC complaint (here).
If the SEC survives the show cause hearing, then the next step will be the deposition of Scrushy, which promises to be an interesting proceeding. The Department of Justice's decision not to seek appellate review of the dismissed perjury charges means that Scrushy would not be able to postpone the deposition because of the pending criminal case, and he no long has a Fifth Amendment problem because he was acquitted of the charges.
Scrushy posted a letter on July 15 to his personal website (here) that, among other things, discusses the government's continued pursuit of him:
However, what pains me the most, is how our United States government conducted this investigation in a way that maximized the damage done to HealthSouth and to its shareholders. Some have called the government’s tactics a “shock-and-awe” campaign—but it was the shareholders who were shocked and awed. Had the government conducted their investigation properly, instead of prioritizing their media blitz, I believe HealthSouth’s stock would never have been delisted, and the stock price drop would have been minimal.
Has there been a more overworked phrase in the last couple years than "shock and awe"?
The oral argument at the show cause hearing (assuming there is one) will certainly be a hot ticket. A Washington Post article (here) discusses Scrushy's brief in the SEC case and also mentions that he is pursuing repayment from the company of his $20+ million legal expenses in the criminal action. Under Delaware law, Scrushy has a good argument for payment of the fees, but don't look for that litigation to be any less contentious than the criminal or SEC cases. (ph)
In the "If it sounds too good to be true, it is" category, an AP story (here) describes the scheme that triggered an indictment:
Richard J. Dompier of Vale, N.C., started the New Millennium Group in Roseburg in 1998, selling one-ounce silver ingots through the mail and over the Internet for $98 each on promises buyers would receive a series of commission checks totaling $15,853.50 in 14 months, the indictment said. He had bought 70,000 ingots from the Franklin Mint for $10.50 each.
Dompier was charged with cheating investors out of $2.5 million, and apparently used some of the proceeds to sponsor a NASCAR driver and to start a motorcycle company. No commodity, particularly silver, can increase 15,000% in a little over a year, unless of course it's a scam. One wonders if any of the investors remembered the Hunt brothers and their little foray into cornering the silver market back in the late 1970s, only to see their investment collapse. (ph)
Patrick Quinlan, who was CEO of MCA Financial Corp., which invested in Detroit-area real estate and financed it operations by selling securities, received a ten year prison sentence after pleading guilty two years ago to conspiracy to commit mail, wire and securities fraud. The company collapsed in 1999, triggering losses to investors of over $265 million that made it the largest securities fraud in Michigan history. The sentence was the maximum allowable under the statute; at the time of the offenses, the fraud statutes (which would control the sentence for conspiracy in this case) had a ten year maximum, which was increased to thirty years by the Sarbanes-Oxley Act. Although Quinlan apologized to investors, U.S. District Court Judge Nancy Edmunds found that he had not accepted responsibility by still blaming other executives and MCA's accountants for the fraud. According to a Detroit Free Press article (here), Judge Edmunds stated that Quinlan was "the dominant force at MCA, the architect of the fraud and the most culpable person in the scheme to defraud." (ph -- in the interest of full disclosure, I consulted on a malpractice lawsuit against the company's outside law firm, which was dismissed on summary judgment).
Friday, July 22, 2005
News reports on the Valerie Plame leak investigation are raising interesting questions about a possible perjury case involving witnesses who testified before the grand jury. A Bloomberg article (here) notes that I. Lewis Libby, chief of staff for the Vice President, testified that he learned about Plame's CIA role from NBC's Tim Russert, but Russert apparently denied telling Libby about Plame's identity. Karl Rove, Deputy Chief of Staff to the President, testified that he learned about Plame from columnist Robert Novak, but according to Bloomberg a source states that Novak "has given a somewhat different version to the special prosecutor." The exercise in figuring out where all this started is complicated by New York Times reporter Judith Miller's refusal to testify, and she may have information that could exculpate one or both administration officials. That makes Special Counsel Patrick Fitzgerald's investigation all the more difficult if his office cannot line up the different stories to at least figure out who is pointing the finger at whom.
The leak investigation requires Fitzgerald's office to figure out when information about Plame's CIA status was revealed before Novak published his article. A Washington Post story (here) discusses the memorandum provided to then-Secretary of State Powell that included a couple sentences about Plame with an "S" notation, indicating that the information about her was secret. If the information about Plame was passed among senior administration officials, that might clear up the source of the information and, more importantly, provide a basis for establishing that the person who revealed the information had knowledge of her covert status. Regarding any prosecution for the actual leak under 50 U.S.C. § 421, as opposed to perjury, the intent level is fairly high -- knowledge -- and showing only access to the memorandum might not be enough to prove that intent (see earlier post here).
According to Rove's attorney, he did not see the memorandum until the Special Counsel's office showed it to him. Actual review of the memorandum may not be required under Sec. 421(b), which states: "Whoever, as a result of having authorized access to classified information, learns the identity of a covert agent and intentionally discloses any information identifying such covert agent to any individual not authorized to receive classified information, knowing that the information disclosed so identifies such covert agent and that the United States is taking affirmative measures to conceal such covert agent's intelligence relationship to the United States, shall be fined under Title 18 or imprisoned not more than five years, or both." Unlike subsection (a), which requires proof of that the person "had authorized access to classified information that identifies a covert agent," this provision only requires that the person have authorized access to classified information that results in the disclosure, but not necessarily to the specific information identifying the covert agent. Of course, the knowledge element would be difficult to establish if the government's proof was simply stories that conflicted.
In addition to the Washington Post, the Wall Street Journal has discussed the content of the memorandum. What is not clear from the stories is the source of the memo, whether it came from the Special Counsel's office or some place else. Given that it appears to have been the subject of grand jury testimony, it is at least arguably grand jury material protected from disclosure by Federal Rule of Criminal Procedure 6(e), although the Rule is notoriously vague about what constitutes "a matter occurring before the grand jury." Any disclosure by the Special Counsel's office could be a violation of the Rule, and as an internal government document one would expect that it would be confidential. But then, in a case about leaks, it's not surprising that there have been an awful lot of leaks -- this is Washington, D.C., after all, where leaking is a high art form. (ph)
Michael Alcott tried to postpone his bank fraud trial by submitting a fake doctor's note to the district court stating that he had terminal cancer. As discussed in an earlier post (here), upon learning about this little ruse, the court revoked his bail and ordered him held pending the start of trial. Alcott has now entered a guilty plea to bank fraud charges that included submitting a financial statement on the letterhead of a local accounting firm -- faked, once again. According to a press release (here) issued by the U.S. Attorney's Office for the District of Massachusetts (Boston), another charge was a Travel Act violation because, while on pre-trial release on the bank fraud charges, Alcott tried to extort a doctor in California for $150,000 by threatening to reveal that the doctor had a close personal relationship with a woman from an escort service -- Alcott apparently learned about the liaison because he also partook of the escort service's offerings. Extortion, fake doctor's notes . . . sounds like Alcott had way too much free time while awaiting trial. Any bets on whether the judge will buy the "acceptance of responsibility" argument at sentencing? (ph)
An article in the Corporate Crime Reporter (here) quotes Allan Ellis, the co-author of the Federal Prison Handbook 2005, listing his Top Five federal prisons for white collar offenders, including a little background on the "amenities" at each. Here we go (with links to each location on the BOP website in case you'd like to get a bit more information on the places):
Yankton, South Dakota. “A stand alone federal prison camp,” Ellis says. “A vanishing breed. These are camps that are not satellites to larger more secure institutions. It happens to be a converted college that went defunct. It’s in the middle of the town, not on the outskirts. There is a lot of community programming. People leave during the day and come back at night.”
Englewood, Colorado. “That’s outside of Denver,” Ellis says. “It’s a satellite camp to the federal correction institution there. I’m told by my clients that it is a pretty laid back place.”
Texarkana, Texas. “The federal prison camp there has an drug and alcohol treatment program,” he says. “It has a pond stocked with fish. And one of my clients said he liked to spend his day fishing.”
Sheridan, Oregon. A federal prison camp outside of a medium level security facility about 60 miles from Portland.
Pensacola Naval Base. “You get out during the day, you work on the Naval base, you intermingle with Navy personnel,” Ellis says. “The food is better. You are outside. I’ve had people who were taking care of the grounds at the admiral’s house. The admiral’s wife would bring out lemonade, invite the inmate in for lunch. Things of that sort.”
I guess there's nothing better than drinking lemonade in the hot Florida sun with the admiral's wife, and it isn't very often that Yankton, SD is considered a garden spot. (ph)
U.S. District Judge E. Richard Webber (E.D. Mo.) sentenced Richard Drury to a 42-month term of imprisonment for his conviction on four counts of mail fraud related to creating false invoices for returns of expired drugs. Drury was chief operating officer for a company called Easy Returns Worldwide Inc. (catchy name), and a press release (here) issued by the U.S. Attorney's Office described the scheme this way:
As part of the services that they provided to client pharmacies, Easy Returns returned recently expired pharmaceuticals to the appropriate manufacturers for a credit to the client pharmacy for a 5-10% fee paid by the pharmacy. The fee was based on the expected credits from the manufacturer. As part of the services provided to client distributors, Easy Returns destroyed recently expired pharmaceuticals and the distributor received a credit from the manufacturer. Between August 2000 and January 2002, Drury, as COO of Easy Returns, devised and participated in a scheme to create fraudulent returns to pharmaceutical manufacturers, causing the manufacturers to credit various pharmacies for returns that did not belong to them. These pharmacies paid a 33% fee to Drury and Easy Returns for the false returns credited to them.
In addition to the jail sentence, Drury was ordered to pay restitution of approximately $725,000. Another substantial term in a white collar crime case. (ph)
Thursday, July 21, 2005
In white collar cases, the criminal sentence may only be a part of the penalty paid by the convicted defendant. Collateral consequences, such as loss of license, can also result from a criminal conviction. Margaret Colgate Love authored a new study that may assist here. It is titled, Relief From The Collateral Consequences Of A Criminal Conviction: A State-By-State Resource Guide. The report states that it is prepared with support from an Open Society Institute fellowship." Details can be found on the website of the Sentencing Project here.The website describing this work here states in part:
"This comprehensive survey describes for each United States jurisdiction the laws and practices relating to restoration of rights and obtaining relief from the collateral disabilities and penalties that accompany a criminal conviction. It is the first-of-its-kind, and it illustrates the extraordinary variety and complexity of state and federal laws that impose a continuing burden on convicted persons long after the court-imposed sentence has been fully discharged. It is an important resource for policymakers interested in offender reentry and reintegration, for practitioners at all levels of the criminal justice system, and for people with a criminal record who are seeking to put their past behind them. "
One of the tables here includes a state by state chart on "Consideration of Criminal Record in Licensing and Employment."