Saturday, April 2, 2005

How to Get Paid $6.6 Million and Still Serve Time in an FCI

I wasn't sure what category to give to this entry, and somehow "fraud" seemed to fit the bill, although when you disclose everything you're doing that usually vitiates any deception.  The annual 10-K filing for Fog Cutter Capital Group Inc. (here), a publicly-traded REIT (whose shares were delisted by NASDAQ last year), disclosed that the company paid it former CEO and board member, Andrew Wiederhorn, a little more than $6.6 million last year -- not bad, but certainly nothing abnormal in the world of CEO compensation.  What makes things interesting is Wiederhorn is currently serving an 18-month term of imprisonment in an FCI after pleading guilty to two counts in June 2004.  Here is the company's description of the guilty plea and a subsequent leave of absence agreement it reached with Wiederhorn:

Under the Settlement terms, Mr. Wiederhorn pled guilty on June 3, 2004 to two federal counts and was sentenced to 18 months incarceration and fined $2.0 million. The first count, a violation of an ERISA provision, involved a federal law that required no criminal intent and for which his reliance on the advice of counsel was not a defense. The second count related to a violation involving a deduction on a personal tax return. The deduction was structured and approved by Mr. Wiederhorn’s tax advisors and did not reduce Mr. Wiederhorn’s tax liability or reduce the government’s tax collections. The charges to which Mr. Wiederhorn has pled guilty pursuant to the Settlement are not based upon any acts or omission involving the Company or Mr. Wiederhorn in his capacity as an officer or director of the Company.

In entering into Mr. Wiederhorn’s leave of absence agreement, the Company’s Board of Directors considered the nature of the statutes to which Mr. Wiederhorn pled and the fact that he relied on the advice of expert legal counsel and a national accounting firm. The Board also believed it was important to assure Mr. Wiederhorn’s return to active involvement with the Company because of his expertise and knowledge and to preserve a significant business relationship and the value of the Company’s investments.

Under the terms of the leave of absence agreement, Mr. Wiederhorn will continue to receive his regular salary and bonus pursuant to and as set forth in his employment agreement. In addition, in consideration of Mr. Wiederhorn’s good will, cooperation, and continuing assistance, and in recognition of Mr. Wiederhorn’s past service to the Company, to help avoid litigation and for the other reasons stated in the agreement, the Company made a leave of absence payment to Mr. Wiederhorn in the amount of $2.0 million on June 2, 2004.

Interesting that the leave of absence payment is exactly the same as the criminal fine, and they made the agreement the day he entered his guilty plea.  But wait, it gets better.  Wiederhorn's position was changed from CEO to "Chief Strategic Officer" because "Mr. Wiederhorn would be in a better position to develop strategies that would be of future benefit to the Company, while his current status would significantly limit his ability to perform the full functions of Co-Chief Executive Officer."  Funny how a prison sentence would "significantly limit his ability" to serve as CEO, but allow one to "develop strategies" for the company -- then again, maybe I'm too cynical. 

Don't worry about Wiederhorn being salary-deprived while in prison, however, because the 10-K notes in the compensation section that his 2004 salary was $556,830, his bonus was $5,508,329, and restricted stock award was $544,025.  He began his term of imprisonment on Aug. 2, 2004, so this presumably includes work since becoming Chief Strategic Officer while also a federal prisoner.  To be fair, the company's disclosure points out that $1.5 million of the bonus was escrowed pursuant to the leave of absence agreement, so he won't get that money until after the conclusion of the leave, I presume.  Thus, his actual compensation in 2004 was only about $5.1 million, plus having the company take care of that criminal fine.  Last, and certainly not least, the company said it will likely have to cover the costs of his attorneys under an indemnification agreement.  Needless to say, there also has been a shareholder derivative suit filed regarding the leave of absence agreement. 

Wiederhorn is scheduled to get out of prison in November 2005 (projected release date), and likely will resume his role as CEO of Fog Cutter.  People expressed dismay when the value of Martha Stewart's stock increased threefold while she was in prison, but she did not receive her salary while there, nor a bonus, and could not control how the market chose to value her company.  This one seems to be quite a bit different, with the company still effectively in Wiederhorn's hands (his father-in-law is the CEO in his absence) awaiting his return from prison. 

Thanks to Peter Goldberger for the tip (noting that it could almost qualify as an April Fools Day story), and a story about Wiederhorn's compensation is available from The Oregonian here, and if you check the article his actual prison register number is 67914-065 at the FCI in Sheridan, OR.(ph)

April 2, 2005 in Fraud | Permalink | TrackBack (0)

Alice Fisher to Be New Head of DOJ Criminal Division

Alice Fisher, a partner at Latham & Watkins and former Deputy AAG to Michael Chertoff when he led the Criminal Division, will be nominated as the new head of the Division.  Chertoff is now Secretary of Homeland Security, and Fisher has been working for him since 1996 in different positions.  According to her law firm biography (here):

Ms. Fisher served as Deputy Assistant Attorney General of the Criminal Division in the U.S. Department of Justice from July 2001-2003. While at the Department of Justice, Ms. Fisher was responsible for managing both the Counter-Terrorism Section and the Fraud Section - two of the Department of Justice’s top priorities during her tenure. 

Specifically, Ms. Fisher was responsible for national coordination in the terrorism area, including all matters relating to September 11 investigations and prosecutions, investigation and prosecution of international and domestic terrorist groups and terrorist acts, terrorist financing investigations, USA Patriot Act implementation and all other terrorism policy issues. She supervised a number of terrorist-related prosecutions and coordinated with the Federal Bureau of Investigation, Department of Defense, Central Intelligence Agency, National Security Council and the White House on terrorism threat, litigation, and policy issues. 

Although she has experience at senior management levels and on the defense side in white collar cases, Fisher has never served in a prosecutor's office (state or federal) dealing with cases on a day-to-day basis.  There may be some grumblings from the field offices about her lack of experience in that area (see article available on Law.Com), but it should not be a major impediment if she surrounds herself with some experienced prosecutors who know the operation of U.S. Attorney's Offices and can manage (or massage) the egos.  The head of the Criminal Division does not need to get involved in the minutiae of particular cases.

I don't know my DOJ history as well as I should, and I wonder whether she will be the first woman to lead the Criminal Division.  (ph)

                                                                                    

UPDATE (4/2): Thanks to Dan Richman (Fordham) for pointing out that Jo Ann Harris was the AAG for the Criminal Division in 1993-95.  To show where my memory is these days, I worked in the Criminal Division for about 9 months when she was AAG.  Oh well.

April 2, 2005 in Prosecutors | Permalink | TrackBack (1)

Knowledge of Communication with Federal Official for Obstruction of Jutice

The Third Circuit issued an opinion in United States v. Guadalupe (here) on the issue of whether must prove the existence or imminency of a federal investigation for a defendant charged with obstruction of justice under 18 U.S.C. Sec. 1512(b)(3) ("corruptly persuading").  The defendant was the deputy warden at a Pennsylvania state prison (Curran Fromhold Correctional Facility --CFCF) when two prison guards severely beat a prisoner.  Lieutenant Burnette saw the beating, and Guadalupe persuaded her not to report the beating by the two guards because "they can't burn . . . they're my boys, my homies."  The lieutenant provided a false report, but eventually disclosed the truth.  Guadalupe was was charged with obstruction (the two guards were charged and convicted for civil rights violations (18 U.S.C. Sec 242) and argued for reversal on the ground that he did not intend to obstruct a federal investigation, only a state investigation by the prison authorities.  In fact, there was no pending (or imminent) federal investigation at the time of the corrupt persuasion of Lieutenant Burnette.  The Third Circuit held, however, that a defendant did not have specifically intend to impede a federal investigation, only that that corrupt persuasion is likely to interfere with a federal investigation.

We hold that it was reasonable for the jury to infer that Guadalupe attempted to corruptly persuade Burnette "with intent to . . . prevent the communication by [Burnette] to a law enforcement officer . . . of the United States of information relating to the commission or possible commission of a Federal offense." 18 U.S.C. § 1512(b)(3). Although the government did not prove that Guadalupe had actual knowledge of the federal nature of the offense or that Burnette’s information might ultimately be communicated to officers who happen to be federal, this knowledge can be inferred by virtue of Guadalupe’s position as a veteran top executive of CFCF with extensive knowledge of how investigations of the sort involved here proceed (including that federal authorities typically become involved).

The issue of what constitutes "corruptly" under the statute will be decided by the Supreme Court this term in the Arthur Andersen case.  This decision highlights another circuit split, with the Fifth Circuit taking a different approach to the intent issue regarding the federal investigation in United States v. Causey, 185 F.3d 407 (5th Cir. 1999). (ph)

April 2, 2005 in Judicial Opinions, Obstruction | Permalink | TrackBack (0)

Rowland Heads to Prison

Former Connecticut Governor John Rowland began serving his year-and-a-day prison sentence at the FCI in Loretto, PA. Although U.S. District Judge Peter Dorsey recommended that Rowland be assigned to a prison in Massachusetts, he was sent further away from his home to western Pennsylvania.  Upon his release next year (with good time credits available because his sentence is more than one year, he will be eligible for release after about ten and one-half months), Rowland will have to serve four months of home confinement.  According to the AP story (here) Rowland entered the prison through a back gate to avoid the press. (ph)

April 2, 2005 in Corruption, Sentencing | Permalink | TrackBack (0)

Friday, April 1, 2005

Is Prison Better for Society in the Waksal Case?

Sam Waksal's attorneys are trying to obtain an early release for him so that he can continue cancer research.  (See CNN) Waksal received a sentence of seven years and three months.  So far he has served just under two years.  But the question is - does society need him in prison or is there more of a need for him outside of prison?

Waksal, as you may recall, was CEO of ImClone, a stock that fell sharply after failing to receive initial approval from the FDA. Waksal, unfortunately told some relatives of ImClone's problems resulting in insider trading, a charge to which he plead guilty.  It was Waksal's transactions that served as a catalyst for questioning  Martha Stewart,  that led to her eventual prosecution and conviction.

But should Waksal be in prison or in a place where he can do cancer research?  Perhaps a part of Waksal's problems were his not sticking to the research side of his profession and moving instead into its business side.  But can scientists and physicians really avoid that these days?  Has the health field become a health industry that makes it difficult for the science types to fully understand and operate within?

If Waksal is allowed out to continue research, will people say that white collar offenders are being given a "preference?"  After all, the street crime offender might not have the education or opportunity to secure this same privilege.  But if the street crime individual has cancer, I can't help but wonder if they wouldn't mind having Waksal back in the lab as opposed to in a prison facility.  Where will society benefit more, and should that be a factor in how we handle punishment?

(esp)   

April 1, 2005 in Martha Stewart | Permalink | TrackBack (0)

Former National Security Advisor to Plead Guilty to a Misdemeanor

According to several press reports (Fox, Jurist, NYTimes), former National Security Advisor from the Clinton Administration, Sandy Berger, will be pleading guilty to a misdemeanor.  He will be admitting to the removal of documents from the National Archives.  The material pertained to information on terrorist threats.  Initially he stated that "he was reviewing the materials to help determine which Clinton administration documents to provide to the independent commission investigating the Sept. 11, 2001, terror attacks." (Fox).  His act, however, caused no harm to the Commission's investigation as "[o]fficials with the Archives and the Sept. 11 commission ultimately determined that despite the incident, the commission had access to all the material needed in its work."(NYTimes).

As with all plea agreements, once entered in court it will up to the judge to decide whether to accept the agreement. Berger's cooperation with the government should significantly assist in having this plea to a misdemeanor accepted by the court. Additionally, he immediately acknowledged his mistake when he stepped down as an advisor to John Kerry's campaign.

It sounds like Sandy Berger tries to help friends. But this time it looks like he may have tried too hard. 

(esp)   

April 1, 2005 in News | Permalink | TrackBack (0)

Kozlowski Trial - Another Day

It was another prosecution witness yesterday in the trial of Dennis Kozlowski and Mark Swartz.  This time it's the outside auditor who is refuting evidence that was brought out in the prior trial.   It sounds like the defense may have some questions to ask when it comes time for cross examination.  For example, if the bonuses were in some way improper then why wasn't the board told about it as part of the outside audit?  Stay tuned. See more in the Wall Street Jrl. here.

(esp)

 

April 1, 2005 in Prosecutions | Permalink | TrackBack (0)

Thursday, March 31, 2005

White Collar Sentencing Abroad

The United States is not the only one issuing stiff sentences for white collar offenders.  Abroad, in Paris, an appeals court  increased a prison sentence of a former official at oil company Elf Aquitaine (now Total) convicted in a "massive corruption scandal"  The sentence was initially four years and the court increased it to seven.  There was also a fine of 2 million euros.   It remains to be seen what the high court in France will do with this sentence. (For more see AP story here).

(esp)

March 31, 2005 in International | Permalink

West Coast Wire Fraud Conviction

Not everything is happening in AG Spitzer's territory.  One can easily find prosecutions and investigations on the West Coast.  For example, yesterday after a five hour deliberation, Matthew Hattabaugh was convicted of twelve counts of wire fraud by a federal jury. Mr. Hattabaugh was convicted based upon an indictment that alleged he "schemed to defraud prospective investors by falsely representing that he owned a bank called Pacific American Capital Corporation in Oakland."

According to a press release of the U.S. Attorney's Office in Northern District of California,  " Mr. Hattabaugh secured promises to invest over $4.5 million in his fraudulent bank.  Only after investors wired over $650,000 to Mr. Hattabaugh's account, did one person detect the fraud and contact the Federal Bureau of Investigation."

(esp)

March 31, 2005 in Fraud | Permalink

AIG Stops to Take a Breath

With all the recent news concerning AIG, it was not surprising for them to issue a statement on Wed. saying --hold on -- we need a little time to regroup.

The company issued a public statement saying:

"American International Group, Inc. ("AIG") announced today that the filing of its 2004 Form 10-K will be delayed beyond the March 31, 2005 extended due date in order to provide AIG, its Board of Directors and its new management adequate time to complete their extensive review of AIG's books and records."

The company further states that "[i]n view of its continuing review, management has not yet completed its assessment of the effectiveness of AIG's internal control over financial reporting as of December 31, 2004. The assessment will be made prior to the filing of AIG's Form 10-K."

Although the statement is understandably tentative on some issues, namely those still needing closer internal scrutiny, it is forthcoming on other points. Immediately prior to a list of transactions is the following statement:

"The continuing review has led AIG management to conclude that the accounting for certain of these matters may need to be recharacterized or otherwise adjusted. Certain but not all of the original characterizations resulted from transactions which appear to have been structured for the sole or primary purpose of accomplishing a desired accounting result."

(esp)

March 31, 2005 in Investigations | Permalink | TrackBack (0)

What Was Andersen's Role in WorldCom's Problems?

What exactly was Arthur Andersen's role in the problems of WorldCom? The answer to this question may be forthcoming as civil litigants are proceeding against  Andersen for an alleged failure to question issues at WorldCom. According to the Wall Street Journal, "Andersen denies that it failed in its responsibility to audit WorldCom's books properly from April 1999 through June 2002, and says it was defrauded, along with investors." Looking at this statement in light of the recent conviction of Bernard Ebbers, former CEO of WorldCom, one has to wonder several things:  Was the CEO manipulating the accountants?  Were the accountants failing to provide information to the CEO of what underlings were doing in the company? Were the accountants failing to provide sufficient transparency to the outside world of what was happening at the company? 

The bottom line is that there is a problem somewhere, and someone is going to have to take the blame.

(esp).

March 31, 2005 in WorldCom | Permalink

Wednesday, March 30, 2005

Another Witness Down in Scrushy Trial

The defense completed their cross-examination of witness Smith, a former finance administrator at HealthSouth, by placing his credibility at issue.  And the question being raised continues - did Scrushy know of fraud going on in the company or did he not?  And to what extent, if any, was he involved?  And can the witnesses who are testifying be trusted? 

Smith appears to have received the benefit in a lighter sentence by agreeing to testify against Scrushy.  See more in the Wall Street Journal here.

(esp)

March 30, 2005 in HealthSouth | Permalink

Another Shoe Drops on AIG

Things may get much worse for American International Group Inc. with the revelation by its lawyers that false information was provided to state insurance regulators concerning at least one reinsurance contract.  A Wall Street Journal article (here) states that AIG's lawyers disclosed that intentionally false statements were made during an examination of the company this year, and that past regulatory and securities filings were misleading.  Unfortunately for AIG, a lied is rarely told only once, and misleading disclosures are usually the result of accumulated transactions that move from aggressive to questionable to fraudulent.  The New York State Insurance Department had adopted a CEO certification requirement, similar to the one imposed by the Sarbanes-Oxley Act on CEOs and CFOs for financial statements, in response to AIG's conduct (see New York Times story here). (ph)

March 30, 2005 in Investigations, Securities | Permalink | TrackBack (0)

First Circuit Standard for Booker Remand on Downward Departure

The First Circuit's opinion in United States v. Heldeman (No. 04-1915) (circuit website here) adopts a low threshold for the Court of Appeals to remand for resentencing when the defendant claims the district court might have granted a downward departure but for the mandatory nature of the Sentencing Guidelines.  Dr. Marvin Heldeman was convicted of conspiracy, health care fraud, and drug distribution for writing prescriptions for steroids and Oxycodone for patients he had never seen; his business card listed him as "Dr. Marvin, The Bodybuilder's Friend" -- no hiding the ball there.  Heldeman sought a downward departure on a number of grounds, including his advanced age (72), medical problems, and that his unlawful activities were an exception to an otherwise legal medical practice (no mention here of the business card).  The district judge found these to be "legitimate" and "somewhat mitigating" but denied the departure because they were discouraged factors and insufficient to take him outside the "heartland" of the Guidelines.  In remanding for resentencing, the First Circuit addressed the threshold showing to send the case back to the district court for reconsideration of a downward departure:

[W]e are inclined not to be overly demanding as to proof of probability where, either in the existing record or by plausible proffer, there is reasonable indication that the district judge might well have reached a different result under advisory guidelines. After all, it will be easy enough for the district judge on remand to say no with a minimum expenditure of effort if the sentence imposed under the pre-Booker guidelines regime is also the one that the judge would have imposed under the more relaxed post-Booker framework.

Does a "plausible proffer" mean that a decent argument that the district court might have granted a downward departure is sufficient, even without any reference by the district court about its inclination to grant a departure?  If so, then the issue for appellate counsel is really one of presenting the grounds for a possible departure and persuading the Court of Appeals that it is a case that is at least strong enough to get another chance. (ph)

March 30, 2005 in Sentencing | Permalink | TrackBack (1)

Buffett's Defense Begins

In a rare response to press reports (including a front page article in the Wall Street Journal here), Berkshire Hathaway, parent company of General Re, issued a rather terse press release (here) disclaiming any involvement of its CEO, Warren Buffett, in the $500 million reinsurance transaction between General Re and American International Group Inc. that triggered the downfall of AIG CEO Maurice Greenberg.  The press release states: "It was reported that Mr. Buffett was briefed on the 'nature' and 'structure' of the 2000-2001 reserve transactions between Gen Re and AIG. To the contrary, Mr. Buffett was not briefed on how the transactions were to be structured or on any improper use or purpose of the transactions." 

Buffett is scheduled to be interviewed by investigators from the SEC and N.Y. Attorney General Eliot Spitzer's office on April 11, the day before Greenberg is scheduled to be deposed under oath.  Unlike the testimony of Greenberg, at this point the meeting with Buffett will only be an interview, not an on-the-record proceeding.  That usually indicates the investigators view the person as a witness in the case and not a subject or target, although that can certainly change down the road.  Buffett cannot be happy with all the publicity swirling around Berkshire Hathaway, which has a number of subsidiaries and investments of whichGeneral Re is only a fairly small part, and I doubt there's much love lost between him and Greenberg at this point. (ph)

March 30, 2005 in Investigations, Securities | Permalink | TrackBack (0)

30 Year Sentence for Frauduldent Scheme

John Henoud received a 360 month term of  imprisonment for his conviction last May for running fraudulent charity drives.  According to a press release issued by the U.S. Attorney's Office, Henoud and his coconspirators took funds that had been solicited for the"Youth At Risk Foundation" from hundreds of individuals and businesses, and laundered the funds threw a pawn shop.  Perhaps the most sensational charge against Henoud involved him soliciting funds for the family of a person killed in the Sept. 11 attacks who he claimed was his cousin (there was no family relationship), and Henoud simply keeping the money for himself (See Virginian-Pilot story here on Henoud's conviction in May 2004).  The total loss from his activities was approximately $358,000, so a thirty-year prison term is well beyond what the Federal Sentencing Guidelines call for, even considering the fraudulent charity claims.  This is the longest prison term for a non-recidivist fraud conviction I have seen. (ph)

                                                                                       

UPDATE (3/30): I have received additional information about the sentencing of Mr. Henoud showing that his sentence was within the Guidelines range.  The press release from the U.S. Attorney's Office does not mention that he has five prior convictions and was on probation for a wire fraud conviction at the time of the offenses in the current case -- hence, he's quite a recidivist.  Also, while the actual loss was approximately $358,000, the intended loss under the Guidelines was significantly higher, thereby pulling the sentence up even further.  Copies of the government's Sentencing Memoranda that provide additional information on the basis for the sentence are available here: Download HenoudSe.pdf  and Download HenoudSE2.pdf . (ph)

March 30, 2005 in Fraud, Sentencing | Permalink | TrackBack (0)

More Corruption in Connecticut?

Norm Pattis has an interesting entry on the Crime & Federalism blog  (here) discussing an investigation of an Assistant State's Attorney in Connecticut, which just saw its former governor (John Rowland) sentenced to one year after pleading guilty to receiving unlawful gratuities.  Norm writes: "Now comes news that a prosecutor may not have been able to avoid all the fun. Supervisory Assistant State's Attorney David Newman of New Haven is under the microscope, according to the Chief State's Attorney's Office. Suspicions that all is not well in the historic Elm Street courthouse. According to the New Haven Register, questions have arisen about whether Mr. Newman regards himself as a legitimate beneficiary of charitable contributions intended to resolve minor offenses." (ph)

March 30, 2005 in Corruption | Permalink | TrackBack (0)

Tuesday, March 29, 2005

Is AIG the Next . . . ?

With all the turmoil swirling around American International Group Inc., I wonder whether the company will become the new poster-child for corporate misconduct.  An insurance company is built on trust, that the money given to them today (the float, as Warren Buffett discusses ad nauseam in his letters to shareholders of Berkshire Hathaway) will be invested wisely to pay off claims made in the future.  At the moment at least, AIG has a triple A credit rating, but that can change in a hurry if damaging revelations of earnings manipulation take a turn toward falsified records or fraudulent reinsurance transactions designed to cover up potentially significant losses.

I hate to use the E word -- Enron -- but that company's energy trading division, which was its primary business unit, was also built on the trust of other market participants, and once serious questions about its survival arose, other companies simply refused to do business with it.  On the Enron theme, another scary similarity for the two companies is their use of questionable off-shore entities to enhance their balance sheets: SPEs for Enron, and possibly captive reinsurers for AIG.  The reinsurance companies that did business with AIG are located in "lightly regulated" jurisdictions, like Bermuda and the Cayman Islands, for reasons other than the nice weather and great beaches.  A disturbing note in a Wall Street Journal story about former AIG CEO Maurice Greenberg (here) is that he refused to turn over documents related to two off-shore entities in which he has substantial involvement.  The inquiry into the off-shore entities is a definite wild card for AIG, and it is hard to predict what will be revealed.

Is AIG going to end up like Enron?  I doubt it, because Enron (and WorldCom) had flawed business models, and at this point there does not appear to be the same problem at AIG.  A different parallel may be to HealthSouth, at least as that company has been portrayed by the government in the prosecution of Richard Scrushy with its cabal of senior executives manipulating the books every quarter for years.  A third senior AIG executive, Michael Murphy, has not been cooperative in the company's internal investigation, and another Wall Street Journal story (here) portrays his deep involvement in Bermudan tax and reinsurance affairs for both the company and Bermuda.  If Murphy asserts the Fifth Amendment -- and he's definitely a candidate for it -- then he will be the third senior executive to refuse to cooperate.  If more AIG executives refuse to cooperate with investigators, it begins to look like there was significant involvement among the top levels of the company in criminal conduct.  If there is a plea agreement involving a senior AIG executive, that will likely mark a significant turning point in the investigation and increase the pressure on the company.

What are the potential problems that could threaten the company in the near future?  Here are two possibilities: first, if there is evidence of document destruction or falsified records, then the case turns from an accounting inquiry into an obstruction of justice case.  While the Arthur Andersen effect -- the destruction of a viable business by a criminal conviction -- is one that will slow down prosecutors in deciding to charge the company, AIG already has one criminal strike against it from its plea deal last December (earlier post here).  Prosecutors are already wary of the company, and a lack of cooperation by senior executives coupled with any possible document destruction might push it toward a criminal indictment. Second, insurance companies have to be licensed in every state (and the District of Columbia) in which they operate, so AIG is subject to as many as 51 state regulators.  Insurance commissioners and state AGs beyond just N.Y. Attorney General Eliot Spitzer may take action against the company, and losing its license in a significant number of states could affect its domestic operations.  Add to that potential foreign regulatory actions, and AIG could be subject to the proverbial thousand cuts. 

AIG is an important company, not only in the insurance market but also for investors.  It is one of the thirty companies in the Dow Jones Industrial Average, and the gyration of its stock (it is down over 20% since the first set of subpoenas came to light in February) affects a significant number of investors.  If the investigations are limited to more technical accounting matters, involving such interesting topics as whether to consolidate the results of a subsidiary on the parent's financial statements and the proper accounting for reinsurance contracts, then I think AIG will come through without too much damage.  If the case turns into one involving fraudulent transactions and bogus agreements, the effect will be much greater.  If there is obstruction of justice, than in another future case the question will be whether a company is "the next AIG." (ph)

March 29, 2005 in Investigations, Securities | Permalink | TrackBack (0)

SEC Sues Former IMPATH Inc. Officers for Fraudulent Accounting

The SEC filed a securities fraud lawsuit alleging accounting fraud and self-dealing against seven former top executives at IMPATH, Inc., a company that provided diagnostic and laboratory services for cancer treatments before it filed for bankruptcy in 2003 (complaint here).  Among the seven former executives named as defendants are Anuradha Saad, former CEO and chairman of the board, Richard Adelson, former president, and David Cammarata, former CFO.  The SEC Litigation Release states:

As a result of the accounting fraud, Impath falsely reported multimillion dollar profits when it had actually suffered huge losses. To meet financial projections and boost Impath's stock price, the defendants made, or directed others to make, phony accounting entries that artificially increased revenue and improperly reduced operating expenses . . . While the accounting fraud was occurring, Saad, Adelson and Cammarata also engaged in undisclosed self-dealing. Not only did they exercise stock options and sell Impath stock during the fraud, they used over $850,000 in corporate funds to pay for option exercises without obtaining board approval or making the required proxy statement disclosures. Saad also used corporate funds to pay for other personal expenses without the requisite approval or disclosure, including vacations, country club dues and artwork.

One defendant settled the suit, disgorging a $100,000 bonus he received as a result of the company meeting certain financial goals, and a $150,000 civil penalty. (ph)

                                                                                             

UPDATE (3/30): The New York Times reports (here) that Saad and Adelson were indicted on conspiracy and securities fraud charges, and four other executives have pleaded guilty to charges arising from the accounting fraud at the company.

March 29, 2005 in Civil Enforcement, Securities | Permalink | TrackBack (0)

Scrushy Trial Starts Up Again

After a one week hiatus, the trial of Richard Scrushy has resumed.  After the fifth of the Guilty CFOs, Weston Smith, completed his direct testimony on Monday, March 21, the court cancelled Tuesday's session because of a juror's illness, and a planned recess for the rest of the week started a day early.  The sick juror has now been dismissed, and the cross-examination of Smith by Scrushy's lead trial counsel, James Parkman, took on what appears to be the usual line of attack questioning the veracity (and sincerity) of the witness.  An AP report (here) quotes Parkman as asking Smith "There weren't any tears coming out of your eyes, were there?" with regard to his breaking down during the direct examination.  Another interest tact was questioning Smith about his assertion of the Fifth Amendment 86 times during testimony in the SEC's request for a freeze on Scrushy's assets, a proceeding in which Scrushy also asserted the Fifth Amendment.  Will the judge permit a similar line of questioning to Scrushy if he chooses to testify?  With the trial moving in fits and starts, it will be interesting to see if the government tries to wrap up its case quickly now that it doesn't have any more Guilty CFOs to call as witnesses. (ph)

March 29, 2005 in HealthSouth | Permalink | TrackBack (0)