Wednesday, August 31, 2005

State Prosecutor Indicts Two in Election Fraud Case

Ray Beckerman, on the Ohio Election Fraud website here links to a Cleveland Plain Dealer article titled "2 Election Officials Indicted in Recount" that discusses the recent indictment of two election officials from Cuyahoga County, Ohio who were indicted "on charges of not handling ballots correctly during the recount of the 2004 presidential election." The case is being brought by a state prosecutor.

(esp)

August 31, 2005 in Fraud | Permalink | TrackBack (0)

More KPMG Documents

Additional items have been posted by Professor Paul Caron on the tax blog (here) includingthe statements of  AG Gonzales, IRS Commissioner Everson, KPMG Statement, and a copy of the Press Conference Transcript between Gonzalez, Everson and USA Kelly.

(esp)

August 31, 2005 | Permalink | TrackBack (0)

Katrina News

Tulane and Loyola Law School Communities - Professor Pamela Metzger has set up the following website - http://metzgerlevittfamily.typepad.com/new_orleans_where_are_you/

She and Professor Katherine Maris Mattes of Tulane are also using their blog as a hub - http://lawprofessors.typepad.com/clinic_prof/2005/08/after_katrina.html

To all in the storm area - we send our thoughts and best wishes. 

August 31, 2005 in News | Permalink | TrackBack (0)

Pleas in Spitzer's Office

Attorney General Spitzer's Office is in the news again.  This time the New York Times is reporting on guilty pleas being entered by two former executives of Security Trust Company. (here)   According to a press release issued by the New York Attorney General's Office here, "the former Chief Executive Officer and the former President of an Arizona based trust company have pleaded guilty to state criminal charges in connection with the ongoing investigation of illegal trading practices in the mutual fund industry." The pleas were to "second degree grand larceny, a class C felony, and to a violation of the Martin Act."  (description of the Martin Act can be found here on the Corp. Law Blog).  These two cases bring Spitzer's total to "nine [  ] pleas since the investigation of illegal trading in the mutual fund industry..."

(esp)

August 31, 2005 in Sentencing | Permalink | TrackBack (0)

More on Kentucky Pardons

Discussed here is Kentucky Governor Ernie Fletcher's pardon of some "former and current aides."  Margy Love, former pardon attorney for DOJ and author of a resource guide (Relief From The Collateral Consequences Of A Criminal Conviction: A State-By-State Resource Guide) comments on these pardon's as follows:

"To me, the most outrageous thing about the Fletcher pardons is that he has otherwise been extraordinarily stingy with his power.  As of last March he had granted no pardons at all to ordinary people in his entire time in office, and he doesn't even grant restoration of rights very frequently..  Keep in mind that in Kentucky a pardon is the ONLY way for convicted persons to get their civil rights back: it is now one of only four states that do not restore the right to vote automatically to at least some offenders.   My research for the Resource Guide (posted on the SP website) showed that in the past few years more than 1000 applications for restoration of voting rights have been received each year by the Kentucky Pardon Board, and that the Board forwards over 90% of these applications to the governor with a favorable recommendation.  But Governor Fletcher issued only about 100 “partial pardons” to restore voting rights in his first year in office (compared to 637 issued by his predecessor in his first year in office).  I was informed by Gov. Fletcher's staff in March 2005 that after 15 months  in office the governor had not yet formulated a pardon policy or procedure, had not decided whether to consult the Parole Board (as his predecessors had done), and had issued no full pardons. . . ."

(esp)

August 31, 2005 in Investigations | Permalink | TrackBack (0)

Who is Entitled to the Money?

The Wall Street Journal here reports that "Arizona state authorities [ ] seized more than $101 million in assets from a bank account that may have held money from Bayou Management LLC, a hedge-fund management firm currently under investigation for fraud." The question now becomes, who is entitled to this money?  The choices include Bayou as well as investors.   It doesn't look like there will be a check in the mail to anyone until some of these issues are resolved.

(esp)

August 31, 2005 in Investigations | Permalink | TrackBack (0)

Tuesday, August 30, 2005

Attorney-Client Privilege Issue and KPMG

One controversial area between defense attorneys and the DOJ has been the attorney-client privilege issue.  It has been a subject of resolutions of the ABA and the NACDL. (see posts here and here).  One aspect of concern has been the government's requirement that the corporation or company waive the privilege in cases where there is a deferred prosecution agreement.  The KPMG agreement here has some interesting language in this regard.  The agreement provides as follows: 

"8. KPMG agrees that its continuing cooperation with the Office's investigation shall include, but not be limited to, the following:

.   .   .   (e) Not asserting, in relation to the Office, any claim of privilege (including but not limited to the attorney-client privilege and the work product protection) as to any documents, records, information, or testimony requested by the Office related to its investigation, provided that:

(I) not withstanding the provisions of this subparagraph (e), KPMG may assert the attorney-client privilege, work product protection, or other privileges with respect to (A) privileged communications between KPMG and its counsel that post-date February 1, 2004 and that concern the Office’s investigation, (B) privileged communications between KPMG and Skadden, Arps, Slate, Meagher & Flom LLP, concerning the IRS’s promoter penalty audit, or (C) any private civil litigation; and

(II) by producing privileged materials pursuant to this subparagraph (e) KPMG does not intend to waive the protection of the attorney-client privilege, work product protection, or any other applicable privilege as to third parties.”

(esp)

August 30, 2005 in Settlement | Permalink | TrackBack (0)

KPMG will pay 456 Million, Is it An Odd Number?

How did the DOJ and KPMG come to the number of 456 million?  Although it may seem like an odd number, the source of this amount is specifically laid out in the agreement. (see here)

1. "a fine consisting of disgorgement of 128,000,000 of fees received by KPMG from the activities described in the Statement of Facts"

2. "restitution to the IRS of $228,000,000 for...."

3. "100,000,000 to settle the IRS's promoter penalty examination of KPMG....."

(esp)

August 30, 2005 in Settlement | Permalink | TrackBack (0)

Pardons: A New Dimension

It makes it somewhat difficult for a state attorney general to continue an investigation when the governor pardons individuals called to testify before the grand jury. According to the New York Times (AP) here  "Gov. Ernie Fletcher [of Kentucky] granted a blanket pardon on Monday night to current and former aides charged in the inquiry."  Part of the problem in this scenario is that the Attorney General and Governor appear to be at odds on some issues.  The question may become whether there is criminality present or whether this is a political fishing expedition, and perhaps the best entity to resolve this may just be the federal government- United States Attorney. (see here)

The Governor, who did not pardon himself, was also called to testify before the grand jury.  He made a very brief appearance, so brief that the Herald Leader newspaper timed it at "2 minutes 18 seconds" (see here) (enough time for invoking the Fifth perhaps?).

(esp)

August 30, 2005 in Investigations | Permalink | TrackBack (0)

Jack Abramoff Pleads Not Guilty

The Washington Post reports here that Jack Abramoff, former lobbyist, pleaded not guilty yesterday.  He is represented by Neal Sonnett, a past president of the National Association of Criminal Defense Lawyers. The indictment and details of the wire fraud and conspiracy to commit mail and wire fraud charges against Abramoff can be found here.

(esp)

August 30, 2005 in Prosecutions | Permalink | TrackBack (0)

Spitzer Takes on Cancer Fraud

Attorney General Eliot Spitzer's office secured guilty pleas from six individuals in a case involving counterfeit LiveSTRONG bracelets of the Lance Armstrong Foundation. LIVESTRONG is a foundation with a "mission [ ] to inspire and empower people with cancer to live strong."

A press release of Spitzer's office states that an:

"illegal enterprise that imported and sold counterfeit LiveSTRONG bracelets in New York City has been put out of business and that the participants in the criminal enterprise have pleaded guilty in state court. In addition, the defendants in the case have turned over $111,830 to the Lance Armstrong Foundation as part of their sentences."

This case had international aspects in that the counterfeit LiveSTRONG bracelets were being produced in China and were being imported into the United States.

(esp)

August 30, 2005 in Fraud | Permalink | TrackBack (0)

Monday, August 29, 2005

The Thin Line Between Tax Planning and Tax Fraud: The KPMG Individual Conspiracy Indictment (U.S. v. Stein et al.)

The indictment of nine individuals for conspiracy to defraud the IRS is available from Findlaw here.  It is a single-count indictment, although it covers both the tax shelters and an allegation of obstruction of the IRS and Senate investigation of KPMG in 2003.  The nine defendants are:

Jeffrey Stein, former vice chairman of tax services and then #2 at the firm; John Lanning, former vice chairman of tax services; Richard Smith, former vice chairman in charge of tax; Jeffrey Eischeid, former partner-in-charge of KPMG's Personal Financial Planning group (through which the tax shelters were sold); Philip Wiesner, former partner-in-charge of the Washington National Tax group; John Larson and Robert Pfaff, former KPMG partners in San Francisco who formed two limited liability companies that served as the investment adviser for the tax shelter program; R.J. Ruble, a former partner at Sidley Austin Brown & Wood who provided the opinion letters on the tax shelters at $50,000 per (the only non-KPMG defendant named in the indictment).

In addition to Ruble, five of the eight KPMG partners were lawyers (Stein, Smith, Wiesner, Larson, and Pfaff).

While the indictment goes into some detail about the various tax shelters (BLIPS, FLIP/OPIS), the crux of the indictment seems to be the hiding of the status of the shelters, such as the failure to register with the IRS.  Moreover, at least one allegation is aimed at Eischeid for trying to obstruct the Senate investigation of the tax shelters in his testimony by taking the approach (according to an internal KPMG e-mail) of "to be forgetful.  And so the record will reflect repeated 'I don't knows,' 'I don't recalls,' and 'I was out of the loops' -- the rope-a-dope/Enron defense."  When in doubt, invoke Enron.

For the government to succeed in this case, I think they have to focus on the hiding and not get into a fight about whether the shelters were proper.  That is easier said than done because at some point the nature of the shelters will have to be discussed, and it may be in the defendants' favor that getting a clear explanation of what is (and is not) acceptable tax planning is almost impossible to state simply.  These were top-drawer tax partners, leaders in the field, so a fight on the technicalities would probably favor the defendants.  To the extent there is hiding of the details of the shelters to avoid a full review of their legality, the government will have an easier case.  If any of the defendants agrees to cooperate and provide testimony about steps taken to hide the real nature of the shelters, that would assist the government significantly. Regardless, this prosecution will be a test of whether anyone can identify the thin line between tax advice and tax fraud. (ph -- thanks to ProfBlog Leader Paul Caron for passing along the indictment, and all the relevant documents related to the KPMG case are available on the TaxProf Blog here).

August 29, 2005 in Prosecutions, Tax | Permalink | TrackBack (0)

Nine Indicted for Conspiracy Related to KPMG Tax Shelters

An AP report (here) states that a grand jury in the Southern District of New York indicted nine individuals on a conspiracy charge related to the sale of tax shelters by KPMG.  Eight of the defendants are former KPMG partners, including the former deputy chairman of the firm, Jeffrey Stein, and the ninth defendant is a lawyer with an outside law firm who assisted in the sales.  A Wall Street Journal story (here) states that five of the defendants are lawyers.  As expected, KPMG entered into a deferred prosecution agreement with the government that calls for a $456 million fine.  The agreement lasts through Dec. 31, 2006, and requires KPMG to abide by restrictions on its tax practice. Once the individual indictment is available, I will post it and try to give a bit more information on the charge(s) and defendants. (ph)

                                                                                                                  

UPDATE: KPMG's statement regarding the deferred prosecution agreement is available here:

Download kpmg_llp_media_statement.pdf

August 29, 2005 in Prosecutions, Tax | Permalink | TrackBack (0)

Fraud Conviction Nets Attorney 30-Year Prison Term

Chalana McFarland received a 30-year prison term for her role in an extensive mortgage fraud scheme that skimmed $20 million from the sale of over 100 homes from 1999 to 2002.  The U.S. Attorney for the Northern District of Georgia (press release here describing the case in greater detail) called it the longest sentenced ever imposed on a first-time offender in a mortgage fraud case.  McFarland was convicted on 170 counts this past February related to her work as the closing attorney on a number of the transactions.  At her sentencing, McFarland denied responsibility for the crimes and, according to an Atlanta Journal-Constitution story (here) about the sentencing hearing, said that she was only "an inexperienced lawyer who was duped by her more experienced co-defendants."  An attorney's experience does not have that much to do with distinguishing right from wrong, particularly when documents contain falsehoods and transactions are little more than shams.  Moreover, after being disbarred in Georgia, McFarland moved her operation to Florida and allegedly asked a man to act as a straw purchaser. (ph -- thanks to a local Detroit reader for passing along the information). 

August 29, 2005 in Fraud, Sentencing | Permalink | TrackBack (0)

Eleventh Circuit Takes a Swipe at Overbroad SEC Injunctions

The common form of relief sought by the SEC in a securities fraud action is an injunction directing the defendant(s) not to violate the federal securities laws in the future.  At one time, this was the most important equitable relief available to the Commission (along with disgorgement), and the civil money penalties and director & officer bars are a more recent legislative development to beef up its enforcement authority.  In most settled cases, the SEC and the defendant agreed to a broad injunction ordering the defendant to "sin no more" under the securities laws.  Because the parties agreed to the relief, district courts usually did not scrutinize the settlement papers very closely, including the permanent injunctions that could be the subject of a contempt prosecution if violated.  In fact, SEC suits for violations of injunctions are fairly uncommon, although it does happen on occasion.  In SEC v. Smyth (here), however, the Eleventh Circuit in a footnote issued a nice bit of dicta stating that these broad injunctions are unenforceable because they violate a defendant's due process rights.  The footnote, which comes at the end of the opinion and deals with an issue that was not before the court (hence the term "dicta"), states:

The injunctions reach any violation of the securities laws and regulations Johns may commit. If the SEC believes that Johns has committed a violation, it has the right to move the district court for an order to show cause why he should not be adjudged in civil contempt and sanctioned. And it would matter not where the violation occurred, as we now explain. Paragraph II of the decree enjoins Johns from violating section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and Rule 10b-5. Thus, if Johns violated the statute  and the rule by employing a "device, scheme, or artifice to defraud . . . in connection with the purchase or sale" of the shares of Corporation X in California, the district court could make Johns come to Atlanta on a rule to show cause, issued at the SEC’s behest, and explain why he should not be jailed, fined or otherwise sanctioned for the violation.

"[T]he Securities Exchange Act permits the exercise of personal jurisdiction to the limit of the Due Process Clause of the Fifth Amendment. . . ." E.g., SEC v. Unifund SAL, 910 F.2d 1028, 1033 (2d Cir. 1990). In the above hypothetical, because Johns committed the violations in California and had no presence in Georgia, the district court, and thus the SEC, could not obtain jurisdiction over his person if the SEC sued him in the Northern District of Georgia. By persuading the district court to sign the consent decree it  presented pursuant to its stipulation with Johns, the SEC apparently is of the belief that the Due Process Clause would present no hurdle to the enforcement of the injunction it has obtained. Put another way, the Clause would effectively bar the prosecution of an independent suit in Atlanta based on the California  violation (because in personam  jurisdiction over Johns would be lacking), but it would not bar a contempt proceeding in Atlanta based on the same violation. The SEC is also apparently of the belief that the Rules of Civil Procedure would have little application in a contempt proceeding in Atlanta. If the SEC sued Johns in California, Johns would have the benefit of all of the rights the Rules provide a civil litigant, not to mention his Seventh Amendment right to a trial by jury. Not so in a contempt proceeding; the court would issue a show-cause order on the SEC’s motion, and would promptly convene a hearing to permit Johns to rebut the SEC’s proof that he violated the law. Whether the court would delay the hearing to afford Johns his rights under the Rules, including discovery, and a jury trial of the issues the court would ordinarily submit to a jury were the SEC to sue Johns in a separate action rather than seek enforcement of the injunction are issues a district court should consider in deciding whether to sign an obey-the-law consent decree such as the one the SEC drafted in this case.

Will the SEC have to take more care in writing its injunctions, at least in cases involving a settlement?  The narrower the injunction, the more likely a crafty defendant can seek to engage in misconduct while avoiding the technical prohibitions in the injunction.  Yet, the Eleventh Circuit's concern with an "obey-the-law" injunction is legitimate (even if the opinion is dicta) if the court order is little more than a license for the SEC to bring a separate case in a jurisdiction with no other connection to the subsequent violation, a valid concern for a federal court. (ph)

August 29, 2005 in Civil Enforcement, Judicial Opinions, Securities | Permalink | TrackBack (0)

When Will the Senate Confirm Alice Fisher to Lead the Criminal Division?

Alice Fisher was nominated as the Assistant Attorney General for the Criminal Division in  April and approved  by the Senate Judiciary Committee in May, but a hold on her nomination by Michigan Senator Carl Levin has stalled the process.  According to a Newsweek article (here) in early August, Levin is seeking additional information, apparently including a personal interview with an FBI agent, concerning Fisher's knowledge of abusive interrogation techniques used on prisoners detained at Guantanamo.  While Fisher's involvement in the entire affair seems modest at best, Levin is involved in a tug-of-war with the Department of Justice over access to the FBI agent, whom Justice interviewed but has refused to make available to the Senator.  Being a pawn in that kind of fight often means the nomination will linger while the two sides glare at each other.  Even the intercession of Attorney General Alberto Gonzales did not budge Senator Levin. 

While the Criminal Division will still operate, the absence of a Senate-approved AAG means that there will be no new initiatives, and some decisions will be postponed pending Fisher's approval.  Moreover, the top levels of Justice do not have others with extensive criminal experience outside of the career prosecutors, who do not have the political capital of a Presidential appointee.  Former Deputy Attorney General James Comey has left the Department to become the General Counsel for Lockheed Martin, and his nominated successor, Tim Flanigan, has not come before the Senate for a vote (nor does Flanigan, Attorney General Gonzales' chief deputy in the White House Counsel's office, have much criminal experience).  Career prosecutor David Margolis, an Associate Deputy Attorney General, will take over Comey's role overseeing U.S. Attorney Patrick Fitzgerald's investigation of the leak about Valerie Plame, probably the most politically-sensitive case at the moment in the Department.  With the pending Senate consideration of the nomination of John Roberts likely to draw most of the attention over the next few weeks, the question is whether Fisher's nomination will be freed up or remain in limbo.  (ph)

August 29, 2005 in Prosecutors | Permalink | TrackBack (1)

Immucor FCPA Investigation

Immucor Inc., which is in the blood-transfusion business, announced (here) that the SEC had issued a formal order of investigation of payments made in Italy that violated the FCPA.  Immucor announced the possible violations last year, and in its most recent 10-Q (here) disclosed the following:

In addition, as reported in a press release issued by the Company on November 2, 2004, the Company’s Italian subsidiary and Dr. Gioacchino De Chirico, the former President of the Italian subsidiary, are the subjects of a criminal investigation by Italian authorities in Milan, Italy centered on the activities of a well-known Italian physician and hospital administrator. The investigation concerns alleged improper cash payments by several companies to the physician in exchange for favorable contract awards by his hospital in Italy. Based on the Company’s internal investigation discussed further below, it does not appear that the Italian subsidiary made any improper payments to the physician in question. However, the doctor rendered services as the organizer and chairman of a convention sponsored by the Italian subsidiary in October 2003, for which he received 13,500 Euros, and the invoice for those services did not properly identify the doctor or the nature of his services, in violation of the books and records provisions of the Foreign Corrupt Practices Act.

Immucor announced on August 15 (here) that it would not be able to file its 10-K for the most recent fiscal year because it had not resolved its internal control problems that came to light in its internal investigation and "is currently in the process of finalizing its review of certain accounting matters relevant to the completion of its audit and its assessment related to its internal controls over financial reporting as of May 31, 2005, as required by Section 404 of the Sarbanes-Oxley Act, and requires additional time to complete such review and assessment."  The move to a formal investigation, along with the continuing internal control problems, does not bode well for the company.  (ph)

August 29, 2005 in FCPA | Permalink | TrackBack (0)

The Revolving Door

A Legal Times article (available on Law.Com here) discusses some of the recent moves from government into private firms and in-house counsel positions of leading government lawyers.  Prosecutorial and regulatory experience is a significant plus, and it's no secret that a stint in the government is an important asset in representing clients before one's former agency.  The revolving door swings both ways, of course, as prominent attorneys, such as Harvey Pitt, have moved back into leadership roles in the the government, even if it's only for a short time.  Even the two people who write a blog about white collar crime can be ex-prosecutors, not that there's anything wrong with that. (ph)

August 29, 2005 in Defense Counsel | Permalink | TrackBack (0)

Sunday, August 28, 2005

Martha Stewart says to Government - Take a Hike

Martha Stewart, assuming that she is not busted for yoga again (see post here), will return to the government the jewelry they recently lent her.  This coming Wednesday she is supposed to remove the ankle bracelet that apparently does not match her upcoming outfits.

Martha will now be able to tell the government  - "take a hike."

And what remains to be seen is whether the deterrence generated by this case becomes  -

1. Tell the truth to the government when questioned.

OR

2.Don't talk to the government when they seek information.

(esp)      

August 28, 2005 in Martha Stewart | Permalink | TrackBack (2)

KPMG: Creating Corporate Havoc

$456 million is a lot of money, but is it enough? 

Will it include funds for the individuals that were wronged by the conduct occurring here?  Will it be a global settlement? Remember the settlements with Salomon (1992) and PSI (1994), agreements that included funds for restitution and in the case of PSI a special fund of $330 million.  And if not a plea of guilty to something as this appears to be strictly a deferred prosecution agreement, will it include a special fund like the one for $350 million in the Drexel case of 1988.  Or is this a settlement where the government takes all?

Clearly when a company has its back against a wall and the firing squad is about to kill you (y'all remember Arthur Andersen, LLP) there is little bargaining room for the company. In the meantime the company has the prospect of a huge wave of civil litigation that will erupt upon a plea of guilty, not to mention the cases already filed.    So global settlements can be very inviting.

Will there be agreements accompanying this deferred prosecution agreement with individuals within the company? Who will be charged with crimes? And will the company now be the first witness in the prosecutions against these individuals?

The more important question is - which company would you, as an employee, choose to work for? Would you rather work for a company that protects its employees or one that sells them out? And perhaps it makes a difference if the company tolerated individuals bad behavior because it financially enhanced the company? (Did I hear correctly that the agreement here is for deferred prosecution on a charge of conspiracy?  - see Wall Street Journal here)

Some may question whether KPMG will suffer more in the end because of failing to provide all documents up-front to the government (see NYTimes here - BTW- co-blogger Peter Henning is quoted).  But I will continue to say that there is a difference between destroying documents and dumping everything on the doorstep of the government. 

Many will advocate that dumping is the best route for a company- but is it?  What will be the long term effect within the company and among employees?  Companys are not just answering to the government.  They also answer to the public and to the employees within the company.  A company ethos of good corporate governance needs to be instilled and maintained within a company.  But will that happen when individuals within a company are constantly looking over their shoulder wondering if the company decision will be to send them down the river the minute the government decides to ask questions, or implicate the company in some wrongdoing.  Good corporate policy requires both the individuals and company working together to operate ethically.  Looks like we'll find out Monday if the government and KPMG take that position. Stay tuned.

(esp)

August 28, 2005 in Sentencing | Permalink | TrackBack (0)