Saturday, March 19, 2005
The Securities Litigation Watch blog has an interesting post (here) about blogs being written by corporate executives, and asks whether these could be fodder for plaintiffs securities fraud class action firms for their complaints. "So--what is the over/under on the filing date of the first securities class action to include allegations from a corporate executive's blog? For argument's sake, I'm setting it at December 31, 2005." I would certainly bet the under big time (not that the White Collar Crime Prof blog endorses gambling in any way, especially during this time of March Madness). (ph)
Eleven former WorldCom board members have reached another settlement with the plaintiffs in the securities fraud class action. The first settlement was virtually identical to this one but U.S. District Judge Denise Cote did not approve it because of objections raised by the investment banks who were also defendants. With the last of those firms (J.P. Morgan here) having reached a settlement, the way is clear for the judge to approve the settlement. The amount of the settlement is small -- $55.25 million -- compared to the approximately $6 billion paid by the investment bankers. The key though is that while $35 million comes from a D&O insurance policy, the other $20.25 million comes from the pockets of the individual directors. This is one of the few cases in which individual directors who did not gain personally from the alleged fraud (aside from their fees) will contribute to the settlement from their personal assets. This portion of the WorldCom settlements has sent a powerful message to corporate board members about their responsibilities, and the risks of ignoring the operation of the company or passively accepting information provided by management.
The remaining defendants in the case are former WorldCom board chairman Bert Roberts and former company accountant Arthur Andersen. Any finding of liability against Andersen will trigger an interesting process of trying to collect from insurers and perhaps from the worldwide Andersen organization that was separate from the U.S. entity that was convicted of obstruction of justice and ceased to exist in 2003. See the AP store here about the settlement. (ph)
I did not watch the full testimony of the baseball players panel appearing before the House Government Reform Committee, but as best I can tell Mark McGwire took the Fifth without taking the Fifth -- a neat trick. Clearly the Committee members decided not to push the issue of requiring McGwire to answer affirmatively whether he has ever taken steroids or assert his right not to incriminate himself, otherwise the gloss on the hearing as an investigation of baseball's current steroids policy would have been blown. McGwire's prepared statement (available here) which he read to the Committee does a bit of a fast shuffle, never coming out and saying he will refuse to answer questions by asserting the privilege against self-incrimination, presenting himself instead as a "stand-up" guy who does not want to implicate friends and former teammates: "I have been advised that my testimony here could be used to harm friends and respected teammates, or that some ambitious prosecutor can use convicted criminals who would do and say anything to solve their own problems, and create jeopardy for my friends . . . My lawyers have advised me that I cannot answer these questions without jeopardizing my friends, my family, or myself." Of course, the Fifth Amendment cannot be asserted to protect family, friends, or anyone other than the witness, and asserting that the reason for not answering questions is because of ambitious -- which apparently means unscrupulous or unethical -- prosecutors shifts the focus away from the real reason for not answering questions. It's all a sideshow, and asking McGwire whether he used steroids is hardly worth the time of a congressional committee. His lawyers did a nice job of protecting him without the need to announce to the world that he believes his answer may be used to incriminate him in a criminal proceeding. (ph)
We hear a lot about there being too many lawyers, and impersonating one got Harold Goldstein into quite a bit of trouble. Goldstein was sentenced to a 150 month term of imprisonment for engaging in identity theft and taking the name of David Goldstein, a member of the California Bar, and soliciting clients by advertising himself as a criminal and immigration attorney. What makes Harold's conduct more audacious is the fact that he did this while on supervised release after serving a prison term for securities fraud. At least he was well-versed in the criminal law, and no doubt had a good understanding of prison issues. A press release from the U.S. Attorney for the Central District of California (Santa Ana) noted the following:
At yesterday's day-long sentencing hearing, Judge Carter found that Goldstein defrauded more than 50 victims out of more than $70,000. Judge Carter enhanced Goldstein's sentence because the defendant targeted vulnerable victims, specifically, inmates in INS holding facilities awaiting deportation hearings. Judge Carter, while sentencing Goldstein to 150 months, commented that Goldstein's criminal history was the most extensive he had seen since taking the federal bench.
At least Goldstein will be able to practice his newly chosen profession with fellow inmates for the next decade. (ph)
The U.S. Attorney for New Jersey filed a criminal complaint alleging that Jason Arabo, who owns an online sportswear company specializing in throwback sports jerseys, hired a New Jersey juvenile (who was not identified by name) to undertake a computer attack on the websites of competitors. According to a press release issued by the USAO, the computer attack ended up affecting servers in both North America and Europe, disrupting internet service for banks and pharmaceutical companies in addition to the competitors Arabo targeted. The press release states:
From his Michigan home, Arabo ran two web-based companies, www.customleader.com and www.jerseydomain.com, that sold sports apparel, including historic sports uniform reproductions, popularly known as "retro" or "throwback" jerseys. The complaint alleges that Arabo recruited and paid the New Jersey juvenile to conduct computer attacks, known as distributed denial of service, or "DDOS for hire" attacks, on the computer servers supporting the websites and online sales operations of his competitors. According to the complaint, Arabo compensated the juvenile for the attacks with sports apparel, including designer sneakers.
The complaint identified one of Arabo's targets as a New Jersey company with the initials "J.J."; another targeted competitor was a Georgia company identified in the complaint by the initials "D.R." The juvenile was identified in the complaint only by the juvenile's initials, "J.S." and by his online usernames, "Jatt" and "Pherk," which the juvenile allegedly used when communicating with Arabo via online "instant messaging." Arabo allegedly used the online usernames "CLdotcom" and "Jaytheplaya."
Friday, March 18, 2005
Martha Stewart's sentence was sent back to the lower court for review. This is separate from the appeal of her case, with several appellate issues that are still to be ruled on by a panel in the Second Circuit. The fact that the sentence was sent back for review is not unique to her case, as many sentences were returned to trial courts for review in light of the Booker decision. See more here.
Is there a difference in the way the public is treating the convictions in the Bernard Ebbers case and the Martha Stewart case? And if so, why is that?
Check out the poll in the Wall Street Journal regarding the Ebbers verdict -here.
Jurist alerts us that "US Indicts Former Halliburton Subsidiary Employee for Fraud."
So what's it all about?
Well, it seems that "Assistant Attorney General Christopher A. Wray of the Criminal Division and U.S. Attorney Jan Paul Miller of the Central District of Illinois announced today that two men," one a former employee of "Kellogg, Brown & Root (KBR)" and the other a "managing partner of a Kuwaiti business, LaNouvelle General Trading and Contracting Company - have been indicted on charges of devising a scheme to defraud the United States of more than $3.5 million related to the awarding of a subcontract to LaNouvelle to supply fuel tankers for military operations in Kuwait." The charges are for "major fraud against the United States and six counts of wire fraud."
Thursday, March 17, 2005
It looks like Martha Stewart may not be paying the entire cost of the legal problems that she faced. Check out the CNN story here.
When someone in corporate America is under investigation, under indictment, or just appearing as a witness before a grand jury, it isn't always the case that they are footing their own legal bill. As a matter of fact, it often is the situation that the company bears the cost. This in part comes about because of the contractual arrangement that the individual may have made with the company. In some cases, a directors and officer's liability policy may place the cost with insurance.
And yes, the oral argument on Martha Stewart's appeal was today. As expected, it looks like the Crawford issue was at the top of the hour. See here.
Looks like Detroit is doing a cleanup --
The Department of Justice reports that "former Vice President of the City Environmental facility in Detroit, formerly owned by Texas-based U.S. Liquids, Inc., was sentenced today to 27 months imprisonment and a fine of $60,000, after pleading guilty to felony violations of the Clean Water Act (CWA) and the Resource Conservation and Recovery Act (RCRA)." This is hardly a light sentence, another indication that Booker has not destroyed significant sentences being handed out in white collar cases.
According to a DOJ Press Release, the case involved the following:
"City Environmental was a waste treatment facility located at 1923 Frederick Street in Detroit, Michigan. It was in the business of receiving, treating, hauling and disposing of liquid and solid hazardous and non-hazardous waste. City Environmental was authorized to introduce pollutants to the Detroit Water and Sewerage Department (DWSD) system pursuant to a permit that the DWSD issued to the facility. City Environmental's permit set forth limits on the types and concentrations of pollutants that the company could discharge. The permit also required that City Environmental regularly take samples of its effluent to determine whether the facility was in compliance with permit requirements. In order to comply with permit discharge requirements, City Environmental was required to treat much of the wastewater before discharging it into the sanitary sewer.
"During the period from September 1998 until August 1999, as a result of the defendant’s conduct, millions of gallons of untreated waste went into the sewers of Detroit, and from there to the Detroit DWSD and to the Detroit River. The conduct also resulted in thousands of tons of hazardous waste being sent to a landfill that was not designed to handle hazardous waste."
This morning's Wall Street Journal has a wonderful article describing the commentary by the jury on the trial and the deliberation. According to the article it did not come down to Sullivan versus Ebbers, but rather the paper in the trial - - that is the documents. This may actually make it a more interesting appeal. If it had been the credibility of the witness, then the favor would go to the winning party - the government. In the case of admission of documents and instructions to the jury, the court will be looking at the legal issues. This is definitely an appeal to watch. See more here on the issues to consider on appeal.
The last of the bond underwriters, J.P. Morgan, threw in the towel the day before jury selection was to start in the WorldCom securities fraud class action by agreeing to pay $2 billion. That brings the tally to approximately $6 billion paid by a slew of investment banks that brought WorldCom bonds and stock to the market while the company engaged in a massive accounting fraud that led to the conviction on Tuesday of former CEO Bernie Ebbers. The last defendants left standing are former WorldCom auditor Arthur Andersen -- which is not exactly standing tall these days but may have insurance policies out there to cover some of the claims -- and 12 former directors of the company whose earlier settlement was rejected by U.S. District Judge Denise Cote. The directors will likely take another shot at settling, which likely will include personal payments from each and not just amounts covered by D&O insurance. A New York Times article (here) discusses the settlement. (ph)
Wednesday, March 16, 2005
What is the effect of the Ebbers verdict on the trial of former HealthSouth chief, Richard Scrushy? (See the Wall Street Journal here)
Unlike the Ebbers trial, that matched Scott Sullivan against Bernard Ebbers, the trial of Richard Scrushy, former HealthSouth chief, has a list of witnesses pointing the finger at him. Most recently we see the testimony of Tadd McVay, a former HealthSouth executive. McVay pled guilty and according to an AP story in the Atlanta Journal Constitution, he received a sentence of "six months of house arrest, five years on probation and ordered [ ] to pay $60,000 in criminal forfeitures and fines."
A problem that prosecutors face when they make "deals," is the reaction of the jury when they hear this evidence. Consider the following reactions that juries can have to this type of testimony:
- Is the person testifying truthfully, or is this testimony tainted by the desire to obtain a shorter sentence for him or herself? (e.g. MvVay was facing 15 years)
- The defendant didn't take a deal so they must REALLY be innocent?
- Why did the prosecution let off culpable people with these "deals" ?
- The defendant seems less culpable then the people testifying. (After defense cross-examination, the person on trial may seem less guilty than the ones who plead and testified?)
Bernie Ebbers offered the "honest-but-ignorant CEO" defense, and the jury rejected it. Ken Lay, former CEO of Enron, has advanced a similar position, asserting his innocence because he did not know about the complex financial chicanery at the company (check his personal website at www.kenlayinfo.com). An interesting post at TalkLeft (here) notes that while the key witnesses in both cases are former CFOs (Scott Sullivan of Worldcom and Andy Fastow of Enron) who have agreed to cooperate with the government in exchange for lower sentences, Fastow may have more credibility problems. Part of Fastow's deal included delaying his ten-year sentence until his wife could complete her sentence for a tax violation related to Enron, giving him a powerful incentive to seek the best deal for himself by incriminating others. Of course, a ten-year sentence is substantial, and may bolster the government's contention that Fastow is truthful because he did not receive a "sweetheart" deal.
Lay's "honest-but-ignorant CEO" defense may be stronger than Ebbers' because Lay was less of a hands-on manager, unlike the Ebbers portrayed to the jury as a micromanager who had tap water put into the company's water coolers to save money. If nothing else, Lay went first-cabin at Enron, and the company did not scrimp on perks. Lay has a more significant problem, however, arising from his stock sales, including a number of transactions during 2001 -- as the company was collapsing -- in which he sold shares back to Enron to repay a $77 million line of credit from the company. The SEC's civil complaint (here) summarizes the transactions:
From January 25, 2001 to November 27, 2001, Lay took advances on his line of credit in the total amount of $77,525,000. Thereafter, despite having other assets at his disposal, Lay repaid balances on the line of credit by selling $70,104,762 worth of Enron stock to the company twenty times, at prices he knew did not reflect accurately Enron’s true financial condition. For example, after learning of Enron’s undisclosed plan to hide over $500 million in EES losses in ENA, Lay sold 1,086,571 shares of Enron common stock back to the company, in 11 transactions, for a total of $34,081,558. Following Skilling’s resignation on August 14, 2001, at a point when Lay was learning more about Enron’s deteriorating financial condition, Lay sold 918,104 shares of Enron common stock back to the company, in five transactions, totaling $26,066,474. As Lay learned more negative information following Enron’s third quarter earnings release on October 16, 2001, Lay sold 362,051 shares of Enron stock back to the company, in four transactions, totaling $6,050,232.
While Ebbers never sold his stock, Lay engaged in a number of transactions in Enron shares that were not publicly disclosed until after it filed for bankruptcy. The focus of the government case is likely to be on the period from Aug. 14, 2001, when Jeff Skilling resigned as CEO and Lay assumed that position again, until the company's collapse in November 2001. Rather than link Lay to the accounting, which is far more complex than the fraud at WorldCom and more susceptible to a claim of ignorance, the government will use Lay's knowledge of the company's burgeoning problems during the last few months and his stock transactions to overcome a claim of ignorance. On these issues there is more of a paper trail, including a number of public statements and private meetings which Lay attended. Fastow remains a key witness, but perhaps more for Skilling and Richard Causey, Enron's former chief accounting officer, than for Lay. (ph)
Jose Canseco's request for immunity so that he can testify completely -- beyond the statements already contained in his book, 60 Minutes interview, and numerous other promotional appearances -- has been rejected by the House Government Reform Committee, to no one's real surprise. The Committee did excuse Jason Giambi from having to testify because he had already testified before a federal grand jury in 2003 under a grant of immunity, and it likely did not want to grant him immunity while denying it to the other witnesses. Whether any of the other witnesses, which will include Mark McGwire, who had not indicated earlier whether he would attend, will assert the Fifth Amendment is still unclear. The hearing begins Thursday, March 17 at 10:00 a.m., and will be carried live on ESPN, feeding the circus atmosphere. An AP story here discusses the Committee's decision and the reaction of Canseco's attorney.
Former Qwest CEO Joseph Nacchio, two former CFOs, and five other former senior executives at the Baby Bell were sued by the SEC for fraudulent accounting at the company; two executives settled their cases. The SEC Litigation Release (here) states that under the direction of the defendants "Qwest fraudulently recognized over $3 billion of revenue and excluded $71.3 million in expenses." The Commission and Qwest settled the case in Oct. 2004, with the company paying a civil penalty of $250 million. The Commission is seeking disgorgement and director & officer bars against the remaining defendants. (ph)
The Institute of Bill of Rights Law at William & Mary, Marshall-Wythe School of Law will host a half-day conference (announcement here) on March 25, 2005, on the effect of the Supreme Court's decision in United States v. Booker on sentencing in white collar crime cases. An announcement states: "Speakers of the conference include James E. Felman, co-chair of Practitioners' Advisory Group, U.S. Sentencing Commission, 2000-2004; Frank O. Bowman, the M. Dale Palmer Professor of Law at Indiana University – Indianapolis and reporter for the ABA “Justice Kennedy Commission” on sentencing; and Stephanos Bibas, Associate Professor of Law University of Iowa College of Law." Thanks to the CrimProfBlog for this announcement.
Tuesday, March 15, 2005
One of the first questions asked of Reid Weingarten after he left the courthouse was whether having Bernie Ebbers testify was a mistake. Weingarten responded, in effect, that he thought it was a good decision then and, if given a second chance, would make the same decision. The question about whether a client should testify is always very difficult, and no doubt the second-guessing of Weingarten will focus on that decision because Ebbers' testimony was, no doubt, crucial to the jury's decision. Weingarten may have boxed himself in when he described former CFO Scott Sullivan in the opening statement as "the most impeachable witness ever to hit a witness stand" (no hyperbole there). Conceding that the fraud took place and placing the blame squarely on Sullivan turned the case into a credibility battle. Once Sullivan did a decent job testifying, it was almost impossible for Ebbers to avoid testifying. Unlike cases in which the focus is more on the quality (and quantity) of the government's proof and the inferences that can be drawn from that proof -- e.g. the prosecution of Martha Stewart and Peter Bacanovic -- here the question was purely one of intent/knowledge based on witness credibility. Whether there are any lessons to be drawn in the next "honest-but-ignorant" CEO case -- Ken Lay -- remains to be seen. The defense there may want to avoid making the credibility of one witness, such as Andrew Fastow, the key to the trial. (ph)
After deliberating over eight days, the jury found Bernie Ebbers guilty on all counts this afternoon. Ebbers was charged with conspiracy, securities fraud, and seven counts of false filings with the SEC. Judge Barbara Jones set sentencing for June 13. Because everyone looks ahead to the next step, two things that will be discussed are grounds for an appeal and the potential sentence. One issue that is likely to be raised is the presence of the supplemental counts that the judge did not strike from the indictment after the Booker decision made those factual issues that relate to sentencing irrelevant for jury consideration (see earlier post here). The defense moved for a mistrial when the jury asked the court whether they had to agree unanimously on those and the judge said they need not be considered. That type of information in an indictment will be argued to have been prejudicial, and there's no question the jury considered the allegations. Another issue mentioned in the press accounts concerned the government's refusal to grant immunity to witnesses the defense wanted to call, including WorldCom's former president, who indicated he would assert his Fifth Amendment privilege if he did not receive immunity. Claims of this type are very difficult to win, but the defense will likely argue that, combined with other evidentiary errors, the judge's rulings were prejudicial.
For sentencing, Booker has thrown a shroud of uncertainty around the sentence. The Guidelines range will likely be quite significant because of the amount of loss caused by the fraud, and adding in possible enhancements for leadership role and obstruction of justice (if the Judge determines Ebbers was untruthful in his testimony) will would make for an even longer term of imprisonment if the Guidelines are applied strictly. Whether (and how closely) the Judge follows the Guidelines, and whether she can be persuaded to give a downward departure if she does, can't be predicted at this point. In an earlier high profile case involving an extortion of Bill Cosby by his daughter Autumn Jackson (her conviction was ultimately reversed), Judge Jones sentenced Jackson to 26 months while the Guidelines range was 57-71 months. (See article here). An AP story here discusses the jury's verdict. (ph)