Monday, March 21, 2005
Time Warner agreed to settle a civil action with the SEC, which had been hanging over the company's head for over two years, by agreeing to pay a $300 million civil money penalty. The investigation concerned the accounting for $400 million worth of round-trip transactions between Bertelsmann AG and AOL related to advertising. The SEC's Litigation Release (here) states:
Beginning in mid-2000, stock prices of Internet-related businesses declined precipitously as, among other things, sales of online advertising declined and the rate of growth of new online subscriptions started to flatten. Beginning at this time, and extending through 2002, the company employed fraudulent round-trip transactions that boosted its online advertising revenue to mask the fact that it also experienced a business slow-down. The round-trip transactions ranged in complexity and sophistication, but in each instance the company effectively funded its own online advertising revenue by giving the counterparties the means to pay for advertising that they would not otherwise have purchased. To conceal the true nature of the transactions, the company typically structured and documented round-trips as if they were two or more separate, bona fide transactions, conducted at arm's length and reflecting each party's independent business purpose. The company delivered mostly untargeted, less desirable, remnant online advertising to the round-trip advertisers, and the round-trip advertisers often had little or no ability to control the quantity, quality, and sometimes even the content of the online advertising they received. Because the round-trip customers effectively were paying for the online advertising with the company's funds, the customers seldom, if ever, complained.
The Commission also brought administrative proceedings against three Time Warner executives, including CFO Wayne Pace, and all entered into settlements and agreed to accept cease-and-desist orders, but will not pay any civil penalty or be barred from serving as an officer of a publicly-traded company (here).
The issue of round trip transactions has been a particular focus of the SEC since the collapse of Enron, and has recently come up in the investigation of accounting problems at Delphi (see earlier post here). (ph)
Mike on the Crime & Federalism blog has an interesting post (here) about a leak of information concerning a tax investigation of a prominent civil rights attorney, and Mike's theory about the reason for the leak that is linked to the government's subsequent motion to have him disqualified because of a potential conflict of interest. The newspaper (Los Angeles Daily Journal) has resisted disclosing the source of the information, and whether prosecutorial or investigative misconduct will ever be proven is questionable, given how few Rule 6(e) or DOJ Office of Professional Responsibility investigations ever turn up evidence of the actual person who disclosed confidential information. (ph)
The ugly brawl at the Pistons-Pacers game in 2004 has triggered an interesting situation in which the attorney for the fan accused of throwing a chair into a large group that included Pacers players will be called to testify at his (now former) client's trial. Kenneth Karasick is on the prosecutor's witness list because, according to the police, when he was viewing a videotape of the person who threw the chair, he said, "That's my boy." Karasick denies having said any such thing, stating, "I'll be a hostile witness . . . I'm not going to testify to something I didn't say." The Michigan Rules of Professional Conduct, like the rules in virtually every other state, prohibit an attorney from being a witness at a client's trial (MRPC 3.7), so the client will have to obtain new counsel. An article in the Detroit News (here) discusses the prosecution of the various fans and players, including a number of motions that have been filed in the case. (ph)
Wal-Mart and the Department of Justice reached a civil settlement over the company's use of illegal immigrants in its stores who were hired by floor-cleaning contractors. The investigation, which had been going on for over four years and involved raids in 2003 at various Wal-Mart stores in 21 states, resulted in the company paying an $11 million civil penalty, the largest immigration civil settlement ever, and setting up an internal compliance program to monitor hiring. Various contractors who actually hired the illegal immigrants to work in the stores agreed to plead guilty to criminal charges. See an AP story (here) and Wal-Mart press release (here) discussing the settlement. (ph)
For fans of the entrapment defense, the death of John DeLorean on March 19 marks the passing of one of the exemplars of that often-offered by usually unsuccessful defense. An obituary from The Guardian (here), which describes him as an "American carmaker and con man" reviews DeLorean's many run-ins with the courts and investors. (ph)
The Association of American Law Schools will be hosting a Workshop on Legal Ethics in a New Millennium: New Practice, New Rules, New Visions, on June 12-14 in Montreal in conjunction with mid-year meeting (workshop announcement here). John Dzienkowski on the Legal Ethics Forum [a very interesting blog that those interested in the area of professional responsibility should check out here] raises an interesting point (here) about the location of the Workshop and its accessibility to teachers of Professional Responsibility (which includes the co-editors of this blog):
I have attended the AALS workshops in the past and find them to be very high in quality, however, I do criticize the AALS for the high cost of attending the conference which ranges from $430-$480. I believe that the AALS should hold substantive workshops at a member law school site. In today's world of law school promotion, there should be a queue of schools willing to host conferences for no fee, perhaps even with a complimentary reception and/or dinner. The cost of hosting such a conference would be far lower than the brochures that schools send out each US News season to increase the school's exposure to voting faculty. And, the benefit would be far greater to the hosting school. How many of those brochures make it past the mailroom trash can?
While the AALS Annual Meeting is well attended, I'm not sure the mid-year meeting draws as large a crowd, and with the cut-backs in state funding at a number of law schools, it is difficult to get financial support to attend a conference such as this, including travel expenses, etc., on top of the fee. (ph)
Dr. Eric T. Poehlman, a one-time respected researcher at the University of Vermont College of Medicine who published more than 150 scientific papers on menopause and the effects of aging on women, entered a guilty plea to one count of lying to the federal government on a research grant application. In 2000, a research assistant, Walter DeNino, questioned the research results of Poehlman, triggering an investigation that determined that Poehlman made up data in at least five research studies. One of his research subjects said, "He was a lovely man, very pleasant to us. Why would he do something like that? Maybe he got tired of dealing with us old people." In addition to the criminal plea, Poehlman also agreed to repay $180,000 in a civil fraud settlement, and to pay DeNino $16,000 for his attorney's fees incurred when Poehlman denied the claim that he falsified data. An article in the Burlington Free Press (here) discusses the case. (ph)
Sunday, March 20, 2005
As we get closer and closer to April 15th, tax day, it is common to find an increased number of tax indictments in the news. So it is not surprising to see a press release issued by the Department of Justice titled, "Utah Corporate Executives and Legal Counsel convicted of Tax Fraud." It is also not surprising to see an IRS Chief from the Criminal Investigation Division, Nancy J. Jardini, stating that “[t]oday's conviction sends a clear message that the IRS is committed to vigorously enforcing the tax laws.” To a large extent the IRS aims for compliance based on the general deterrence that comes from prosecutions, such as this latest one.
The press release tells us that in this case, two of the individuals convicted "founded, co-owned and controlled Neways, Inc., an international multi-level marketing company based in Salem, Utah" and that they served as the CEO, CFO, and directors of the company. The additional conviction shows the latest trend in Justice to also indict the lawyer, as corporate counsel "from the fall of 1995 through the summer of 1997" was also convicted in this case.
The press release states that "[t]he defendants devised and executed a scheme to conceal from the IRS more than $1 million of Neways, Inc.’s gross receipts received from Neways Australia, as well as more than $3 million of commission income the" CEO and CFO "received from distributorships in the multi-level marketing structure of their United States, Australian and Malaysian companies." The press release states that "[i]n furtherance of the scheme," the lawyer "created and presented a false and fraudulent loan document and made false and fraudulent statements to an IRS Special Agent to hide the [ ] commission income."
In addition to the fact that the lawyer was also indicted and convicted here, is the fact that international issues can present unique problems for those handling tax matters.
I was somewhat surprised that this article in the New York Times was not in the book review section, but could easily understand its placement in the Business Section. It is a wonderful preview by Kurt Eichenwald of his book "Conspiracy of Fools." The teasers in the article will make the book a big seller. Ken Lay's telephone call to Alan Greenspan on Oct. 26, 2001, suggesting that the Fed monitor them, is just the beginning. Read more here.