Tuesday, August 16, 2005
The Wall Street Journal has an interesting story (here) about the prosecution of Irving Kott that began with a search of a small brokerage firm in Beverly Hills that led to a 48-count securities fraud indictment, and ended with a plea to two counts of filing false documents with the SEC. The Journal sought to have the documents in the case unsealed, including the indictment and search warrant affidavit. The government alleged that Kott secretly controlled JB Oxford and used that firm to engage in a "pump-and-dump" scheme involving penny stocks. The article notes that the case was handled by five different prosecutors, a sure sign that an indictment has become a poor stepchild in the U.S. Attorney's Office. The case was unusual in several respects. The SEC never filed a civil securities fraud action against Kott, an odd result given the lower burden of proof in the civil case and the investor-protection mandate of the Commission. The sentence involved a downward departure from the Guidelines range of 16-21 months in prison to probation, a $250,000 fine, and $750,000 charitable donation by Kott, even though Kott was not required to cooperate in any continuing investigation. Finally, at least according to the Journal story, the indictment was never unsealed, even though a seal is only supposed to be granted for a limited purpose under Federal Rule of Criminal Procedure 6 and is not permanent.
Turnover is inevitable in government, and that is especially true in the corporate and securities area because the enticements offered by law firms can be quite attractive after one-too-many trips on the government per diem to New York, Chicago, or Los Angeles (I stayed in a hotel room in New York once that was so small the bed had to be angled to allow the door to open). But turnover alone is probably not the only explanation for a case that changed from a broad fraud prosecution to a narrow reporting violation. (ph)