Friday, December 23, 2005
Some in India believe the punishment is too harsh and they are protesting. (See The Hindu here) It seems that the media conducted their own undercover sting operation and filmed several members of parliament in an alleged "cash for questions scam." (allegedly they took cash for asking questions in Parliament) (See NYTimes here). The result is that 11 members of the Parliament were expelled for conduct that is "unethical and unbecoming." According to the Times of India (here) one member of Parliament wants a chance to present a defense.
Like the fifth Beatle, former Enron Chief Accounting Officer Richard Causey has been the unknown defendant in the upcoming Enron conspiracy trial. Unlike codefendants Ken Lay and Jeffrey Skilling, who as CEOs of the company had high-profile and highly lucrative roles, Causey was responsible for the nuts-and-bolts of the accounting issues at the core of the fraud, including the responsibility for assuring that the transactions with the "special purpose entities" controlled by former CFO Andrew Fastow were handled properly. A Wall Street Journal article (here) offers the tantalizing speculation that Causey may enter into a last-minute deal with the prosecutors and become a government witness against his former bosses.
To this point, Lay, Skilling, and Causey have presented a united front, and Lay's recent speech sets forth his defense that presumably represents the position of his codefendants: Enron was a good company dragged down by a few highly-placed bad apples (i.e. all those cooperating witnesses). The Journal article notes the financial pressure on Causey, who does not have the same deep pockets as Lay and Skilling, and hints that they have been supporting him by having their attorneys carry much of the load, citing to a filing on the venue issue in which Skilling's lawyers submitted a box of documents and Causey's submitted a six-page brief that piggybacked on the codefendant's arguments. A united front is important for all three because they can bolster the position of each and have their attorneys focus on the government's case exclusively. If Causey testifies, he will certainly be an important witness for either side, and entering a deal with the government would present significant problems for Lay and Skilling. Moreover, a last-minute deal would probably result in a postponement of the trial, now set to begin jury selection on Jan. 17, to permit defense counsel to prepare for the different situation.
An interesting question is whether the defendants have a full-scale joint defense agreement that would permit attorneys for one defendant to interact with the other defendants and have the communications protected by the attorney-client privilege through the common interest extension of the privilege. If there is such an agreement, then a deal by Causey could present major problems for the other defense teams because of the potential conflicts of interest arising from those privileged communications. Courts have struggled with the issue of whether a person leaving a joint defense agreement to testify for the government means that the remaining attorneys have to withdraw from their representation because they cannot completely cross-examine the former member of the joint defense group. A disqualification motion by the Enron Task Force would make an already contentious relationship between the attorneys for both sides even worse. (ph)
UPDATE: Tom Kirkendall on the Houston's Clear Thinkers blog has an interesting post (here) on the author of the Wall Street Journal article, asking whether the author is advancing a position that will help sales of his book about Enron. (ph)
Thursday, December 22, 2005
Former HealthSouth CEO Richard Scrushy and his wife, Linda, filed libel suits against the Birmingham News and Alabama radio personality Paul Finebaum for comments regarding their decision to switch churches during the government's investigation of fraud at the company. The Scrushys changed congregations from one in the suburbs to a largely African-American church in Birmingham in 2003, after he was terminated from HealthSouth and the U.S. Attorney's investigation obtained the cooperation of all five CFOs regarding the accounting fraud. The Scrushys allege that the Birmingham News quoted a law professor as stating that the change was to gain an advantage in the expected criminal prosecution and made them appear to be "like a devious hypocrite and heathen," while Finebaum is accused of making unflattering comments about Linda Scrushy. Both defendants are challenging the suits on First Amendment grounds, and it will be interesting to see if the case can survive a summary disposition. An AP story (here) discusses the libel suits. (ph)
A well-timed trade by a company employee sure draws the SEC's attention in a hurry, as demonstrated once again in the Commission's filing against Gregory Champe, an executive of Martek Biosciences Corporation, which make food supplements. It seems that Champe sold 2,600 shares of Martek on April 26, 2005, and the next day after the close of trading, the company disclosed that its revenues would drop over the next two quarters, which caused the shares to drop an eye-popping 46% the next day. Champe's loss avoided was over $70,000, according to the SEC's Litigaiton Release (here). In an example of virtual real-time enforcement in this type of investigation, the SEC announced a settlement of the case within a bit less than nine months from the transaction. Champe agreed to disgorge $54,825 and will not pay a civil penalty because of his "demonstrated inability to pay," which generally means the person has been fired by the company and the attorney's fees have chewed up the remaining resources to settle the matter. There's a pretty simple lesson in these types of cases: it ain't worth it! (ph)
Wednesday, December 21, 2005
Former Dynegy executive Jamie Olis became something of a poster child for harsh sentencing in white collar crime cases when he received a 24-year sentence for his role in an accounting fraud at his company. The Fifth Circuit reversed the sentence, finding that U.S. District Judge Sim Lake used an incorrect methodology that attributed all of the decline in the company's stock to Olis' misconduct and directed the lower court to consider other market forces that may have affected the stock in calculating the loss. Olis is scheduled to be resentenced on Jan. 5, 2006, and the U.S. Attorney's Office has weighed in with a recommendation of a 15-year prison term. Under the 2001 Sentencing Guidelines applicable to Olis' case -- albeit in an advisory capacity since Booker -- the government would be arguing that the loss from the accounting fraud was greater than $50 million to bring the sentence within that range. Whether the district court will accept that figure remains to be seen, and the case illustrates the key role that the loss calculation plays under the Guidelines for fraud cases (Sec. 2B1.1), particularly if the judge adheres to the loss table in setting the sentence. The government is recommending sentences of 30 and 24 months for two other Dynegy executives who entered guilty pleas and testified against Olis. A Houston Chronicle story (here) discusses the government's position on sentencing. (ph)
The SEC sued HMC International, its manager, Robert M. Massimi, and chief trader, Bret A. Grebow, for fraud and diversion of assets from the fund that collapsed in September. The Commission alleges that the defendants (and Massimi's wife) took $5.2 million in fund assets for personal use. One red flag about the fund, into which approximately 80 investors placed almost $13 million, is that its stated investment style was "low-risk day trading" -- an investing oxymoron if there ever was one. The SEC Litigation Release (here) states:
Massimi and Grebow sent investors false monthly account statements that portrayed their investments as profitable when, in reality, Grebow was systematically looting the Fund's trading account and Massimi was continually benefiting from lucrative "profit" distributions and unauthorized expenses that he paid to himself and Grebow from new investor funds. Massimi also falsely assured investors that he was a hands-on manager, who maintained diligent oversight of the Fund's assets and trading. The Commission further alleges that, recently, as Massimi faced increasing investor concerns about the Fund's legitimacy and government inquiries into his misconduct, Massimi diverted assets to others, including the Relief Defendant, to shield them from investors and government authorities.
A Dow Jones Newswire story (here) notes that Grebow purchased, among other items, a $160,000 Lamborghini Gallardo and that Massimi moved $100,000 last month from a fund account into a bank account in his and his wife's name. (ph)
The German Federal Supreme Court ordered a retrial of six prominent executives, included Josef Ackermann, the CEO of Deutsche Bank, for their role in authorizing large bonuses to executives of Mannesmann in the wake a takeover of the company by Vodafone. The 57-million Euro payments to the Mannesmann executives, large by German standards but hardly a drop in the bucket compared to payments made to terminated executives in the U.S. (think Disney), were highly controversial and triggered a six-month trial involving an alleged breach of trust that ended in July 2004 with a dismissal of the charges. Another round may not necessarily result in a different verdict, but the trial may make it impossible for Ackermann to remain in his position at Deutsche Bank. An APF story (here) discusses the decision. (ph)
It's hard enough even getting in to see a doctor, but when the insurance company gets billed for more than 21,000 physical therapy services and injections for 34 patients, there has to be something wrong. Dr. Zack Brown of Detroit was indicted on 72 counts of mail fraud, 34 counts of health care fraud, and conspiracy related to a long-running scheme in which patients covered by Blue Cross-Blue Shield were recruited to provide their insurance information in exchange for payments, and then the good doctor billed upwards of $1 million for services for these non-existent patients.
It's not as if there weren't warning signs about Dr. Brown, however, as a check of his record with the Michigan Department of Community Health (here) shows that his license was revoked in 1988, restored in 1992, suspended in 1994, restored in 1995 (after payment of a fine and being placed on probation), and then in 1999 he was fined again and ordered to perform community service. Does anyone see a pattern here? It gets worse, as a press release issued by the U.S. Attorney's Office for Eastern District of Michigan (here) notes that Dr. Brown is a "twice convicted felon," and in addition to all the other counts he is also charged with being a felon in possession of a firearm. That probably explains all the "sanctions" imposed by the state. It seems like it's tougher to lose a medical license than to get one. (ph)
But what would a plea agreement with Abramoff mean for the government?
Clearly if there is a plea, the government will require cooperation as a component of the agreement.
But what would make this a particular stellar holiday gift for prosecutors would be the cooperator. It isn't every day that one has the potential testimony of a individual inside extensive political circles and one who is a former lobbyist - someone who might therefore be a strong witness should cases go to trial.
Prosecutors, in deciding whether to offer "deals" to cooperating witnesses, can consider several factors. Some may look at whether the individual will provide truthful and substantial information. Others may be more focused on the ability of the individual to convey the information to a jury should someone implicated by the testimony decide to proceed to trial. Defense attorneys cross-examining the cooperating witness are likely to suggest that the testimony provided is not truthful and that the person is testifying against their client in order to obtain a lesser sentence. A witness with access to details that can be substantiated with other evidence offers prosecutors a stronger case. And the more evidence prosecutors have in presenting a case, the more likely that the future defendants will enter into plea agreements as opposed to going to trial - thus saving cost and time and providing a more efficient process. And so the dominoes start falling.
So the questions here are: Will Abramoff be willing to plead guilty? What does he have to offer the government? Can what he has to say be substantiated? Is the information substantial? And the most important question -- who right now is particularly nervous when they read in the media that Abramoff may be talking about a possible plea?
Tuesday, December 20, 2005
Joe Nacchio, the former Qwest CEO was indicted yesterday (see Denver Post here). The indictment (Download nacchio_indictment.pdf) charges forty-two counts that are titled "Securities Fraud - Insider Trading.". It also includes a forfeiture count for the sum of $100,812,582.
Despite the number of counts and the inclusion of forfeiture, the entire indictment is only eight (8) pages long. Co-blogger Peter Henning in the Denver Post, "called the indictment 'bare bones.' 'They don't even try to link any of the information to any of the specific trading, which is uncommon,' he said." The essence of the criminality as alleged in the indictment is that:
"Beginning on or about January 2, 2001, and continuing through and including September 10, 2001, NACCHIO, in the District of Colorado and elsewhere, did knowingly and willfully, directly and indirectly, by the use of means and instrumentalities of interstate commerce and of the mails, and the facilities of a national securities exchange use and employ, in connection with the purchase and sale of a security registered on a national securities exchange, a manipulative and deceptive device, scheme, artifice or contrivance to defraud in contravention of Rule 10b-5 (17 C.F.R.§ 240.10b-5) and Rule 10b5-1 (17 C.F.R. § 240.10b5-1) prescribed by the United States Securities and Exchange Commission. More specifically, NACCHIO, in furtherance of this scheme to defraud, did knowingly and willfully sell, using the instrumentalities of interstate commerce and the facilities of a national securities exchange more than $100 million worth of Qwest common stock on the dates and in the amounts set forth in Counts 1 through 42 while aware of and on the basis of material, non-public information on or about the dates and in the amounts set forth below." [the indictment lists the specific amounts]
According to the Denver Post, Attorneys Herbert Stern and John Richilano will be representing Nacchio and he will be pleading "Not Guilty."
One cannot discern from this indictment whether the government intends to try and prove this case through a witness, through correspondence, or via an email. There is no indication from this limited indictment as to how the government intends to try and prove that the accused acted "knowingly and willfully" in engaging in the alleged conduct.
The Wall Street Journal has a fascinating story here detailing recent happenings in the diamond industry. The title of the story tells it all "Diamond Industry Rocked By Allegations of Bribery."
The Gemological Institute of America (GIA) on its website here states as its mission, "to ensure the public trust in gems and jewelry by upholding the highest standards of integrity, academics, science, and professionalism through education, research, laboratory services, and instrument development."
"Following the recent independent investigation mandated by the Board of Governors, the names of those diamond dealers who may have violated GIA's Code of Ethics have been turned over to law enforcement officials. GIA notified these dealers that it will no longer accept diamonds from them for grading."
Monday, December 19, 2005
A massive consent order with state, federal, and international parties, has |ABN AMRO Bank, N.V. taking remedial measures and also paying "$80 million in penalties to U.S. federal and state regulators." (See Wall Street Jrl here).
The joint press release here demonstrates how several entities were able to cooperate to arrive at this resolution. It was issued by the Board of Governors of the Federal Reserve System, Financial Crimes Enforcement Network, Office of Foreign Assets Control, NY State Banking Dept., and the Illinois Dept. of Financial and Professional Regulation. The press release states in part:
"The Order requires ABN AMRO to make improvements to its global compliance and risk management systems to ensure adequate oversight, effective risk management, and full compliance with applicable U.S. laws and regulations. . . .
". . . . The agencies have assessed penalties based on findings of unsafe and unsound practices; on findings of systemic defects in ABN AMRO's internal controls to ensure compliance with U.S. anti-money laundering laws and regulations, which resulted in failures to identify, analyze, and report suspicious activity; and on findings that ABN AMRO participated in transactions that violated U.S. sanctions laws. ABN AMRO is also required to take ongoing measures to ensure compliance with U.S. sanctions laws."
There are 34 signature lines (the ABN AMRO's lines are repeats for each of the parties) on this "Order to Cease and Desist Issued Upon Consent" (here) and it even has the Dutch translation of the title of this Order included in the document [Order to issue a Direction (in Dutch, "Besluit tot het geven van een aanwijzing")].
And although there is a consent to a civil penalty, one does not find an admitting to wrongdoing. For example, in the Assessment of Civil Penalty (here) it specifically states that it was entered into "without admitting or denying the determinations by the Financial Crimes Enforcement Network, as described in Sections III and IV below."
Howard Stern decided to move to Sirius Radio and the information had a value. Now that proves well for Howard Stern, but not for those around him who might have decided to trade on that information. Unfortunately, an accountant and former VP of Sirius now find themselves entering into a civil settlement. (see here Fraud Update's to an SEC Press Release). The press release states in part:
" Without admitting or denying the SEC’s allegations, ..., a certified public accountant and former president of [an] accounting firm ...., agreed to pay $52,000, and former Sirius executive vice president .... agreed to pay $35,000 to settle the Commission’s charges."
The Washington Post reports here that the accountant also plead guilty to criminal insider trading.
Serono Laboratories, a U.S. subsidiary of Serono S.A., the Swiss biotechnology company, entered a guilty plea to two conspiracy counts. In October, Serono agreed to pay $567,065,000 to settle its civil liabilities in connection with its efforts to sell Serostim, a drug used to fight AIDS wasting. A group of whistleblowers will receive over $50 million from the civil settlement. Upon entering the guilty plea, Serono Labs was sentenced to pay a $136,935,000 fine, bringing the total amount paid to $704 million. The two conspiracy charges are outlined in a press release issued by the U.S. Attorney's Office for the District of Massachusetts (here):
The first Conspiracy count to which SERONO LABS pleaded guilty charged that, from as early as September 1996, through at least January 2002, SERONO LABS conspired with medical device manufacturer RJL Sciences, Inc., ("RJL") to introduce on the market bioelectrical impedance analysis ("BIA") computer software packages for use in calculating body cell mass and diagnosing AIDS wasting. The software devices were adulterated in that approval from the FDA had not been obtained for these uses before the software was disseminated. SERONO LABS conspired with RJL to increase the market for the body cell mass calculation devices/software, which in turn, would increase the market for Serostim. Additionally, SERONO LABS employees directly administered BIA tests to patients to induce doctors to prescribe Serostim and to get Medicaid agencies and other payors to reimburse for the drug. RJL and its president, Rudolph J. Liedtke, pled guilty to their roles in the conspiracy in April 2005 and are scheduled to be sentenced in 2006.
SERONO LABS pleaded guilty to a second Conspiracy count charging that, from March 1999, through December 1999, SERONO LABS conspired to pay illegal remuneration to physicians to induce them to prescribe Serostim for which payments were made by the Medicaid program. In March and April 1999, in an attempt to reverse the severe short fall in sales of Serostim, SERONO LABS offered physicians an all expenses paid trip to a medical conference in Cannes, France in return for the physicians writing up to 30 new prescriptions of Serostim. The sales strategy was part of a campaign referred to as the "$6m-6 Day Plan." Each prescription encompassed a twelve week course of therapy that cost $21,000, thus the value of 30 scripts to be written by each doctor was $630,000. The SERONO LABS marketing department announced within the company that 10 physicians were "U.S. Invitees" to the Cannes conference with all expenses paid for them and a guest to attend. The 30 prescriptions each doctor was expected to write meant a total value of approximately $6.3 million in sales.
Four former marketing executives at Serono's U.S. subsidiary were also indicted in June 2005 on charges related to the "$6m-6 Day Plan." As part of the settlement, Serono agreed to what the government termed a "stringent Corporate Integrity Agreement for the next five years. " (ph)
Sunday, December 18, 2005
Former Ohio State University business school professor Roger Blackwell received a 6-year (72-month) prison term from his conviction in June on charges arising from an insider trading scheme. Blackwell is a well-known marketing expert who has worked with a number of companies on their business and marketing strategies. Blackwell's business, Roger Blackwell Associates (RogerBlackwell.com), touts his many accomplishments but does not quite mention his conviction. Blackwell resigned his position at OSU after the conviction.
Blackwell was convicted of one count of conspiracy to commit insider trading, one count of conspiracy to obstruct justice, 14 counts of insider trading, two counts of making false statements, and one count of obstruction of an SEC proceeding. In addition, a Blackwell Associates employee and her husband were also convicted of the same charges (see U.S. Attorney's Office press release on the conviction here). Blackwell tipped, among others, Jack Kahl, a wealthy Cleveland businessman, about a pending acquisition of Worthington Foods by Kellogg. Blackwell was a director of Worthington Foods at the time of the transaction. Kahl testified against Blackwell under a grant of immunity.
A Cleveland Plain Dealer story (here) notes that Blackwell sent a letter to the district court before the sentencing stating that he succumbed to the temptations of wealth and fame. Tipping by a director cannot be more obviously wrong in this day and age, so the temptation (or perhaps the love of money and honor) must have been particularly powerful. A post by Doug Berman on the Sentencing Law & Policy blog (here) notes an e-mail from a reader that the judge sentenced Blackwell in the upper range of the Sentencing Guidelines for the offense (63-78 months) and departed upward in imposing a $1 million fine on Blackwell. His codefendants received 33 and 27 months. (ph)
James Tobin, former New England regional coordinator for the Republican National Committee, was convicted on Dec. 15 of disrupting the telephone service for five Democratic Party offices and a firefighters' ride-to-the-polls program in the 2002 election in New Hampshire. Tobin was convicted of conspiracy and telephone harassment, and the jury acquitted him of conspiracy to interfere with the right to vote. Among those testifying against Tobin was Charles McGee, former Executive Director of the New Hampshire Republican State Committee, who entered a guilty plea and said that Tobin was integral to the phone-jamming scheme. A Department of Justice press release (here) discusses the verdict. (ph)
The U.S. Attorney's Office for the Southern District of Texas announced the indictment of Lisa Smith for running a scam involving a purported "Genetic Research Program" on cattle that bilked investors of upwards of $5 million. A press release by the USAO (here) described the scheme this way:
[B]eginning in January 2000 and continuing through November 2003, Ms. Smith told investors she was a post-graduate student at Texas A&M University working on a Doctorate in Cattle Reproduction. She allegedly claimed that a genetic program funded by a grant from Texas A&M University, the King Ranch and three other Texas ranches, had been in operation since 1997. Ms. Smith told investors that they could participate in the research program by purchasing cattle through her at $600 per head from the four ranches. Research on the cattle would take approximately nine months, after which the cattle would be sold back to the ranches by Texas A&M University at the price of $1,000 per head. The $400 difference in purchase and sale price was to be paid by the University’s grant program. Investors were promised this $400, less $100 retained by Ms. Smith for tax purposes, as a return on their investment. At that time, investors had the option to purchase additional cattle through her at the same amount of $600, effectively leaving their original investment in place, taking only the $300 profit or they could choose to "cash out" from the program, that is, receiving the $300 profit on each head and the invested principal ($600 per head). Investors signed contracts with Ms. Smith for the purchase of cattle. The United States mail or wire communications were used to send and receive letters and investment checks during the course of the scheme.
According to the indictment, Texas A&M University did not, in fact, sponsor a Genetic Research Program, the four Texas ranches, in fact, never sold any cattle to Ms. Smith for any purpose, and Ms. Smith was not enrolled in a Doctoral program at the University. It is alleged that Ms. Smith spent the investor’s funds for her personal benefit.
It just goes to show you that a claim of easy money from cattle can be a load of _______, even if the promised return is made by an Aggie. (ph)
Tom DeLay's defense case suffered a setback today when the trial judge ruled that the appellate court needs to hear and rule on the propriety of the dismissed count, before the trial can go forward. (see here) The dismissed count related to an alleged conspiracy to violate election laws. The court did not dismiss the counts pertaining to money laundering. (see post here)
The key issue on appeal is likely to be whether the underlying offense has to be in existence at the time of the alleged conspiracy. If the specific offense is later added, can it be used to form the basis of the conspiracy or will this be ex post facto. A fascinating legal issue that might be different if the case were in the federal courts and the prosecutor were using a conspiracy to defraud under section 371 of title 18. Seeing this argument, one can't help but think of Professor Abe Goldstein, the author of a leading article called Conspiracy to Defraud, who passed away earlier this year. For some wonderful tributes to him, see the Yale Jrl here.
Saturday, December 17, 2005
Former HealthSouth CEO Richard Scrushy filed a lawsuit against the company for breach of his employment agreement on the ground that his acquittal in June means that he should not have had the benefits of the contract terminated. The five-year contract calls for annual pay of $1.2 million and at least that amount in yearly bonuses, along with other benefits. HealthSouth's board of director's declared Scrushy's contract "null and void" as of March 19, 2003, the date he was put on administrative leave after the government's investigation of the company became public (see Form 8-K here). Scrushy alleges in his suit, filed in state court in Jefferson County, Alabama, that the agreement can only be terminated if he is convicted of a felony, which did not happen in the first trial, although it could in a second prosecution for bribery involving former Alabama Governor Don Siegelman that is pending in the Middle District of Alabama.
Along with his claim for damages, Scrushy seeks attorney's fees for pursuing the breach of contract action. If he is successful, this would add to HealthSouth's tab for the cost of his representation because the company is likely on the hook for the attorney's fees from the first criminal trial, and will be for the SEC case if Scrushy is successful in that proceeding. This one is going to just keep getting messier, and costlier for HealthSouth if Scrushy prevails in the various litigation. A Birmingham News story (here) discusses Scrushy's lawsuit. (ph)
Former Enron CEO Ken Lay's speech on Dec. 13 to the Houston Forum laying out his defense and attacking the Enron Task Force provoked an immediate but futile response from those prosecutors. U.S. District Judge Sim Lake denied the government's request for a gag order in the case, finding that Lay's statement was "just a drop in the bucket" amidst the torrent of Enron publicity over the last 4 years. Lay's speech may have gotten under the skin of the Enron Task Force, but it may not have resonated with its audience all that well, receiving what the Houston Chronicle described (here) as "polite applause." With the trial just a month away, look for the rhetoric to increase after the holidays, when the court is more likely to pay attention to public statements that might affect the jury pool. A Houston Chronicle story (here) discusses the judge's denial of the gag order request.
On a related front, the district court granted former Arthur Andersen accountant Dave Duncan's motion to withdraw his guilty plea to obstruction of justice and dismiss the charge. The Enron conspiracy defendants have argued that the dismissal is designed to keep Duncan from being able to testify for the defense because the potential of being charged means he will likely assert his Fifth Amendment privilege. Whether that's the motive, the dismissal is certainly well-timed to take Duncan out of the trial picture. Yet another Houston Chronicle story (here -- this is the best source of Enron news available) discusses the dismissal. (ph)