Saturday, December 17, 2005
Lord Conrad Black entered a not guilty plea to the superseding indictment that added RICO, obstruction of justice, wire fraud, and money laundering charges to the list of mail/wire fraud charges already in place alleging the diversion of assets from Hollinger International. A RICO charge is relatively rare in white collar cases, at least when the conduct does not involve la arge-scale fraud, such as a ponzi scheme. Black's attorney assailed the new charges as a "blatant example of overreaching" -- but then, aren't they all? The district judge set a tentative trial date of March 5, 2007, which seems like a long time but prosecutors claim to have given the defense CD-ROMs with over 1.3 million pages of documents, with another 500,000 pages to come. Nothing like the deluge approach to discovery. An AP story (here) discusses the case. (ph)
Friday, December 16, 2005
Four members of the Minnesota Vikings, including injured star quarterback Daunte Culpepper, were charged with indecent conduct, disorderly conduct and lewd or lascivious conduct for their actions during a charter boat cruise on Lake Minnetonka in October. The football players avoided facing much more serious federal charges because among the female guests was an exotic dancer and others who traveled from out of the state to attend the party and were compensated for attending. The Mann Act, 18 U.S.C. Sec. 2421, provides: "Whoever knowingly transports any individual in interstate or foreign commerce, or in any Territory or Possession of the United States, with intent that such individual engage in prostitution, or in any sexual activity for which any person can be charged with a criminal offense, or attempts to do so, shall be fined under this title or imprisoned not more than 10 years, or both." An AP story (here) notes that the U.S. Attorney for the District of Minnesota declined to pursue such charges because of "insufficient evidence." (ph)
A Washington Post story (here) notes that in a recent interview of President Bush by Fox News anchor Brit Hume, the President expressed his belief that Rep. Tom DeLay was innocent of the money laundering and conspiracy charges brought in Texas. According to the story, the President said, "I hope that he will [be acquitted], 'cause I like him, and plus, when he's over there, we get our votes through the House." Thank goodness the facts and the jury are less important than political expediency. Of course, the President also said he did not believe that former Baltimore Oriole Rafael Palmeiro -- who he knew from their time together with the Texas Rangers -- did not lie to Congress about his steroid use, and the House Government Reform Committee found insufficient evidence to make of criminal referral on the case, so maybe the President knows something we don't. (ph)
Lord Conrad Black, who was indicted in November on fraud and conspiracy charges related to the alleged diversion of corporate funds from Hollinger International, Inc., was reindicted by a grand jury in Chicago on additional counts that include RICO and obstruction of justice (superseding indictment here). The obstuction charge relates to Black's alleged removal of 13 boxes of documents from Hollinger's Toronto office, with the help of his chauffeur and an assistant, after being ordered not to remove documents by a Canadian court and being notified of a pending SEC civil case and a discovery request for the documents. The RICO charge, which is only against Black and not the other three individual defendants, accuses him of operating Hollinger through a pattern of racketeering activity based on the diversion of assets alleged in the earlier indictment. The RICO charge can be the vehicle for a broad forfeiture order if Black is convicted of the charge. A press release issued by the U.S. Attorney's Office for the Northern District of Illinois (here) discusses the charges, and Black's attorney continues to maintain his client's innocence (see AP story here). (ph)
New York Attorney General Eliot Spitzer sent a letter to the Starr Foundation alleging the former American International Group CEO Maurice Greenberg and other AIG officers fraudulently caused the foundation to sell AIG shares at a depressed price to two other companies controlled by Greenberg back in 1970. This is part of the ongoing battle between Spitzer's office and Greenberg regarding allegations that AIG did not properly account for certain insurance products and misled investors regarding its financial condition. Spitzer effectively forced Greenberg from his position at AIG in March 2005 after nearly forty years in office.
Cornelius Vander Starr founded AIG, and after his death Greenberg and other company executives were the trustees of his foundation and sold AIG shares to C.V. Starr & Co. and Starr International Co., two private entities headed by Greenberg that control large blocks of AIG stock and were used as a means to compensate senior AIG executives. Spitzer's letter alleges that the trustees, specifically Greenberg, sold the shares to benefit themselves through the private companies they controlled, at a cost to the Foundation of $6 billion based on the current value of the stock.
Needless to say, Greenberg has fired back, disputing the allegations and accusing Spitzer of trying to "demonize" him. Kenneth Langone, former chairman of the board of the New York Stock Exchange who is a defendant in another lawsuit filed by Spitzer's office regarding excessive pay to former NYSE CEO Richard Grasso, said that Spitzer "is trying to shore up his sorry case and his flagging political reputation by lobbing what amounts to a public stink bomb.'' Greenberg even allowed that he planned to support opponents of Spitzer in his campaign to be Governor of New York. This case is starting to rival the Ronnie Earle-Tom DeLay case for its level of personal animosity. An AP story (here) and Bloomberg story (here) discuss this latest turn in the Spitzer-Greenberg tussle. (ph)
The SEC settled a securities fraud action against Edward Heil and Bret Jenkins, the CEO and CFO of eSafetyWorld, Inc. (now known as EZ Auctions and Shipping Inc.), for conduct that included false statements about a "revolutionary" containment device for anthrax released during the anthrax scare in 2001. According to the SEC Litigation Release (here):
- During the mailed-anthrax scare, Heil drafted and issued eSafety's October 19, 2001 false press release about a supposed revolutionary anthrax-containment device. The press release caused a one-day price increase of 413% and a volume increase of 57,085%.
- Heil devised, and Heil and Jenkins implemented, eSafety's revenue recognition policy for consulting services which was contrary to GAAP. They also failed to restate eSafety's first through third quarter 2001 reports, improperly deferred costs in eSafety's 2001 Form 10-KSB thereby understating net loss, and aided and abetted eSafety's electronic filing violations.
- In 2001, in order to manipulate the stock of eSafety, Heil directed the purchase and sale of eSafety stock and transferred $473,288 in eSafety funds to an entity that he controlled and another entity.
- Heil executed a false loan agreement and provided eSafety's auditors with a false loan confirmation to conceal the use of monies in the manipulation.
Heil and Jenkins agreed to pay civil penalties of $60,000 and $50,000, respectively, and to a ten-year bar from serving as an officer and director of a public company. The Commission also filed a civil enforcement action against Raymond Burghard for aiding and abetting the fraud, but not settlement of that action was announced. (ph)
Thursday, December 15, 2005
Three outside directors of Hollinger International, Inc., received Wells Notices from the SEC that the Commission's Enforcement Division intends to recommend a civil enforcement action against them. The three directors, former Illinois Governor James Thompson, Marie-Josee Kravis, and Richard Burt, comprised Hollinger's audit committee during the period when its former CEO and controlling shareholder, Lord Conrad Black, is alleged to have diverted funds from the company. Black and three other former Hollinger executives were indicted in November, and his former chief deputy, David Radler, has entered a guilty plea and is cooperating with the government. The SEC sued Black and Radler in November 2004 for securities fraud related to the alleged diversion of corporate funds (SEC Litigation Release here).
The SEC action would be different from most other cases against corporate officers and directors because the Commission may accuse outside directors who did not directly benefit from their decisions with permitting improper conduct by corporate management. In effect, the SEC would be accusing the directors of permitting a fraud by not being sufficiently vigilant, a particularly important role for audit committees, especially after Sarbanes-Oxley. An SEC action would come on top of shareholder suits against Hollinger and its directors. It will be interesting to see if the three directors try to work out a settlement with the Commission, or will fight any action. At a minimum, look for the SEC to seek a bar on serving as a director of other public companies. A Reuters story (here) discusses the SEC notices. (ph)
UPDATE: Bruce Carton has an interesting post (here) on the Securities Litigation Watch blog on the Wells Notices. (ph)
Ken Lay's speech at the Houston Forum (here) sets forth his defense to the conspiracy charges, and a featured player will be former Enron CFO Andrew Fastow. As Ellen Podgor noted in an earlier post (here), defendants in criminal cases usually don't announce so far in advance of trial that they intend to testify, but then this case is not like other ones either. Lay sketched out the basic thrust of his defense here:
In an April 2005 review of Kurt Eichenwald’s book “Conspiracy of Fools”, a former Wall Street analyst concluded that “…it does not seem a stretch to suggest that if someone [other than Andrew Fastow] had been CFO of Enron, the company would probably exist today. Fastow crossed the line… [allowing him]…to profit at the company’s expense. Ultimately, it was the crisis of confidence triggered by these transactions…that brought Enron down.”
This reviewer also concluded, “If nothing else, Skilling and Lay installed Fastow as CFO and trusted him—a catastrophic error in judgment (though not itself a crime).” I agree. We did trust Andy Fastow and sadly—tragically—that trust turned out to be fatally misplaced.
The amount of money that Fastow and Kopper have admitted they stole from Enron did not bring Enron down. As despicable and criminal as their deeds were, the amount they stole—tens of millions of dollars—given Enron’s size, was relatively small. It was the stench of possible misconduct by Fastow—the notion that Enron’s CFO might be involved in shady or even illegal activities that provoked the loss of confidence causing the run on the company’s treasury. Twenty-twenty hindsight pointed out the downside of becoming so big and so successful in the wholesale business. This business was dependent on trust—as is true of virtually all financial and trading/intermediation businesses in the world—and the actions of Andrew Fastow and his cohorts irreparably breached that trust. The result for Enron was catastrophic.
Lay's speech lays much of the blame for his indictment on an overly-aggressive Enron Task Force, and ends with a call for former Enron employees to come forward and testify for the defense at trial -- "a few brave individuals who are willing to stand up and say its time for the truth to come out." The blame certainly lies elsewhere.
While putting Fastow on trial is nothing new -- the same was done by Bernie Ebbers in trying to undermine the testimony of former CFO Scott Sullivan -- the speech hints as a broader defense: there was no fraud at Enron save for the financially modest self-dealing of Fastow & Co. This is a riskier strategy because of the negative publicity concerning the company and the extend of its accounting troubles. Unlike the "honest-but-ignorant CEO" defense used by Ebbers and Richard Scrushy, a denial of any fraud (save for that of subordinate miscreants) may open the defense to credibility problems if the government can link any of the defendants to the decisions or show public statements that were less than truthful.
Another interesting aspect of Lay's decision -- no doubt with his attorney's acquiescence -- to take his defense public in a speech entitled "Guilty, Until Proven Innocent" is whether his co-defendants, Jeffrey Skilling and Richard Causey, are willing to simply follow his lead and offer the same defense. Skilling appears to have had much more involvement in Enron's day-to-day operations, and Causey was the chief accounting officer so he may not be able to distance himself from the accounting issues. Then again, if the strategy works, it is a homerun for the defendants: not guilty. For his co-defendants, at least Lay didn't promise that they would testify, so we'll see if they take an "all-for-one-and-one-for-all" approach and ride on Lay's testimony at trial. (ph)
After having one civil RICO case dropped from its calendar in mid-November, the Supreme Court has now added a second RICO case to its docket in the past two weeks. The Court granted certiorari in Mohawk Industries, Inc. v. Williams, involving a putative class-action against the company and third-party temporary-worker agencies alleging that workers illegally in the U.S. were employed to suppress wages of other workers at Mohawk Industries. The district court dismissed the RICO claims under a Rule 12(b)(6) motion for failure to state a claim, and the Eleventh Circuit reversed (411 F.3d 1252 -- opinion here). The question presented is whether a corporation and its agents can constitute an "enterprise" under RICO Sec. 1962(c) when the conduct of the enterprise takes place through the corporation's agents only.
The issue is one that the Court did not address in its opinion in Cedric Kushner Promotions v. King, 533 U.S. 158 (2001), which held that a corporation is separate from its sole shareholder for the purpose of meeting the "person-enterprise rule" for a Sec. 1962(c) claim. Under the statute, a "person" must operate the "enterprise" to be liable, so that a corporation (or other organization) cannot be both the enterprise and a defendant in the case. Mohawk Industries will have to resolve a split in the circuits regarding whether a corporation is distinct from its agents whose conduct is attributed to it for the purpose of deciding whether the corporation conducted or participated in the conduct of the RICO enterprise.
If this seems hopelessly complex, welcome to the wonderful world of RICO. As with many decisions in this area, the procedural posture is the key because defendants seek to dismiss cases at the pleading or summary judgment stage rather than risk going to trial when faced with the prospect of treble damages and attorney's fees (the holy grail of all litigation). If the corporation is successful on this issue, then it will make it more difficult to file RICO complaints against businesses as defendants based solely on the conduct of their agents that can survive pre-trial dismissal.
The Court's other RICO case is Anza v. Ideal Steel Supply Corp. (see earlier post here), which involves the "injury to business or property" requirement for a civil case that also was dismissed before trial. The cases will be closely watched to see if the Court will continue a recent trend toward reading RICO more narrowly and making it more difficult to plead a claim under the statute. (ph)
The SEC filed civil securities fraud charges against Jeffrey Schmidt and two other defendants alleging that they defrauded investors into providing over $11 million that was supposed to be invested in Skin Nuvo International stores even though the company was failing. Schmidt promised investors a 30-40% return on their investment in the skin care and laser hair removal firm -- once again, if it sounds to good to be true, it is. According to the SEC Litigation Release (here):
According to the complaint, Schmidt told investors their investments would finance particular new Nuvo locations, when in reality Schmidt spent the money to prop up the failing business, pay executives (including $680,000 to himself), and pay preexisting investors to maintain an illusion of profitability. Schmidt also provided investors with false income statements showing the retail locations to be substantially more profitable than they actually were.
The complaint further alleges that Nuvo’s former Chief Operating Officer Norman Valine, 39, of Las Vegas, Nevada, and a Nuvo co-owner Gary Gelnette, 51, of Concord, California, raised money from new investors even after suspecting that Schmidt may have embezzled funds and falsified financial records. Specifically, the complaint alleges that in late 2004, Gelnette, a former pastor, helped raise $1.35 million from a former parishioner, while Valine reaped $138,000 in commissions by selling Nuvo interests to four additional investors.
Wednesday, December 14, 2005
PricewaterhouseCoopers has released its third biennial Global Economic Crime Survey (2005) as reported on the Law Librarians blog here. The report, written in collaboration with Professor Dr. Kai-D Bussman, Chair of Criminology and Penal Law at Martin-Luther-University, Halle, Germany, explores two new topics: "the effectiveness of fraud risk management systems" and "the profiles of fraud perpetrators."
Within the latter section is an interesting finding- that is that: "[t]he development of internal control and risk management systems is important in managing the risk of fraud, but they can only go so far before they become complex and unwieldy - and, importantly, before they create an atmosphere of distrust." This is an important point in looking at how best to structure an "effective program" within a company. To minimize fraud, a "trust-oriented" approach is better than a "control-oriented" method.
(esp) (with thanks to Joe Hodnicki) (see also co-blogger Peter Henning's Comments here)
As part of a plea agreement, "[a] former basketball coach at Barton County Community College, in Kansas, admitted on Monday to falsifying the transcript of a former player and stealing $89,614 in Pell Grants and other student-aid funds." (see Chronicle of Higher Education here - subscription required). In a press release issued by the U.S. Attorney's Office in Wichita , Kansas, (here) the defendant will receive two years probation and "pay $26,259 in restitution.”
In addition to pleading guilty to embezzling student assistant funds, the defendant "admitted that he prepared and submitted time sheets representing that student athletes worked in the campus employment program or Federal Work Study program to DOE and the college and that he knew the work had not been performed by the student athletes."
But the most fascinating aspect of this plea is the admission that the defendant "did class work for athletes." Yes, "he completed academic work on behalf of student athletes, " including as noted in the Press Release of the USA's office, completing astronomy paper for a student athlete at the college. The press release notes that this allowed the student "to complete the required course work at Barton for an associate’s degree and to achieve eligibility to play basketball on an NCAA Division 1 team." And the mailing for the mail fraud, you might ask - a transcript "representing that a student athlete had completed and earned an associates’ degree when he knew the student athlete was not entitled to receive the degree."
The new defense style for CEOs is to be bold, be out there, and don't hold back. After all isn't that what innocent people do?
Well that is exactly the way Ken Lay is handling his case. He announced yesterday that he would in fact take the witness stand at trial. (See Wall Street Jrl here) He states on his web page here "I will testify at my trial. I will do my very best to get the truth out."
This is a rather strange statement to make prior to the prosecutor proving or perhaps not proving their case. More importantly, will his public statements come back to haunt him when he is eventually cross-examined?
And yes, then there is the other problem of whether he will be the only witness at his trial. The claim has been made by the defense that the prosecution is keeping witnesses in a silent mode. Prosecutorial power gives prosecutors an enormous power in this regard. They can keep people in a status of not knowing if they are a target, subject, or witness, unless of course they are called to testify and then given an advice of rights form. And if a witness does something that the government doesn't like, they may suddenly move the person to a new category and before you know it, that individual may find themselves moving from a witness to center-stage as a target of the investigation. Ken Lay is correct when he states that:
"By letting each one of those individuals know that they are literally only the stroke-of-a-pen away from being indicted—an enormous incentive for each of them to do everything possible to please the prosecutors and not be thrown into an expensive legal battle to defend themselves."
Finally, Ken Lay claims that what occurred here was "typical business activities." And he says that "[a]s was the case in the Arthur Andersen trial, the Enron Task Force is again attempting to criminalize" this type of conduct. There has clearly been a shift in recent years to criminalizing business conduct that may previously not have been the subject of prosecution. But was everything that happened at Enron really "typical business activities?"
Disassociating yourself from former lobbyist Jack Abramoff, seems to the be the "in-thing." According to the Washington Post here, "Sen. Byron L. Dorgan (N.D.), vice chairman of the Indian Affairs Committee" has decided to "return $67,000 in donations from Indian tribes represented by the indicted Republican." Others are amending their financial reports to make certain "in kind" gifts that might be associated with Abramoff, are properly reported.
Listed here are posts related to recent Katrina fraud indictments. Lets add to the list yet more, as the Atlanta Jrl. Constitution reports here that "[f]ive metro Atlantans have been charged with illegally receiving federal aid intended for Hurricane Katrina victims."
Tuesday, December 13, 2005
According to a DOJ press release here, "Erik B. Blowers, Supervisory Special Agent and Chief Division Counsel for the Charlotte Field Division of the Federal Bureau of Investigation, has pleaded guilty to knowingly making and submitting to the FBI a materially false statement." He faces a "maximum sentence of one year in prison and a $100,000 fine." Several things are interesting here.
1. He is Supervisory Special Agent and Chief Division Counsel of this FBI office.
2. He "admitted that he accepted benefits worth no less than $6,000 . . . a former cooperating witness for the FBI under Blowers’s supervision.Blowers also admitted that the FBI squad that he was then charged with supervising was conducting a preliminary investigation into allegations of financial institution fraud and wire fraud against [this cooperating witness]."
3. He "admitted that, . . . he traveled to Las Vegas with [this cooperating witness] and although he did not pay for some of the costs of this trip, "he falsely checked the box marked 'None' when reporting amounts received."
The jury is out in the case of a former Republican Party official who is accused of setting up a scheme on election day to jam the telephones of people trying to get out the votes of Democrats. According to Yahoo News here, it may have been difficult on election day to get a ride to the polls in some parts of New Hampshire, because of jammed telephone lines. It seems that someone was making hang-up calls. It is one thing to make hangup calls, but calls that directly effect the electoral process make the conduct here more than just a nuisance.
A former top State Department official plead guilty to making false statements and faces up to 13 years in prison according to a CNN (AP) story here.
The former "Principal Deputy Assistant Secretary for East Asian and Pacific Affairs" admitted that he removed classified documents from the State Department. According to the initial affidavit filed in this case here, the accused allegedly failed to disclose a trip to Taiwan and was seen passing an envelope at a restaurant in Virginia, suspicious conduct in light of the circumstances. "The Centre for Counterintelligence and Security Studies" here provides details of the background on the case and the individual who had been charged, as well as a wealth of newspaper articles that provide the historical commentary.
The government chose the route of a plea to an extraneous offense - false statements - as opposed to a substantive crime (perhaps none was actually committed). In the case of a plea agreement, using crimes such as false statements can be a way to find a mutually acceptable crime that will confine the sentence within certain boundaries. This process is less problematic than when the prosecutor charges a "short-cut" type of offense, like false statements or obstruction of justice, just because it is easier to proceed with such a prosecution than investigate the actual crime.
Monday, December 12, 2005
Here's a phrase I hadn't heard before that comes in the context of Special Counsel Patrick Fitzgerald's questioning of Viveca Novak of Time about her conversations with Robert Luskin, the attorney for Karl Rove. According to Novak's first-person account of her questioning (here) by Fitzgerald :"I would discuss only my interactions with Luskin that were relevant to the conversation in question. No fishing expeditions, no questions about my other reporting or sources in the case. He [Fitzgerald] agreed, telling my lawyer that he wanted to 'remove the chicken bone without disturbing the body.'" What a quaint analogy (or maybe a simile?). After Fitzgerald's initial interview, Novak hoped to avoid any further interaction with the Special Prosecutor, but she was then deposed under oath. It is now clear that her conversation with Luskin about Rove being a source for fellow Time reporter Matthew Cooper is what sent Rove back to the grand jury a second time to clarify his earlier testimony about who he discussed the identity of CIA operative Valerie Plame with in June 2003.
This aspect of the case seems to be more of a minor side-show than anything of real significance because Rove did correct his testimony without being prodded by Fitzgerald's office, which may have overlooked or never received an e-mail Rove sent to another White House official discussing his conversation with Cooper. Luskin clearly provided quite effective representation to his client by doing a thorough investigation after speaking with Novak and bringing new information to the Special Prosecutor's attention, which is much preferable to having it be the other way around. A perjury charge against Rove would be almost impossible to win, or even convince a grand jury to find probable cause.
In the usual tit-for-tat among those who feel they've been burned, albeit by a lawyer doing his best to represent his client, Novak's article ends with a "final note" that largely amounts to sticking her tongue out at Luskin:
Luskin is unhappy that I decided to write about our conversation, but I feel that he violated any understanding to keep our talk confidential by unilaterally going to Fitzgerald and telling him what was said. And, of course, anyone who testifies under oath for a grand jury (my sworn statement will be presented to the grand jury by Fitzgerald) is free to discuss that testimony afterward.
So there! (ph)
It is interesting to see how some individuals will move from one scheme to the next and still be able to lure investors, sometimes even boasting about how they've tangled with the law. Vladislav "Steven" Zubkis was charged with 36 counts of mail/wire fraud and money laundering in the Southern District of California related to two construction projects that did not pan out. A San Diego Union-Tribune story (here) discusses other problems Zubkis has had with some of his business ventures, including a current venture involving a luxury time share in Baja California that may not exist. The SEC obtained a judgment against Zubkis in 2001 related to a fraudulent scheme involving the Stella Bell Corp., including an order to pay over $21 million in disgorgement and prejudgment interest (see Litigation Release here). Zubkis filed for bankruptcy in October (joining the rush to avoid the revised bankruptcy laws, no doubt) in a move the SEC claims is designed to avoid paying the earlier judgment, for which the Commission has already seized a 75-foot yacht (see Litigation Release here). Zubkis is being held after a bail hearing in which the government asserted he was a flight risk, and it's unlikely he'll be able to meet any significant bond requirement because that will draw the SEC's attention to the assets to pay the earlier judgment. (ph)