April 9, 2005
Scrushy Seeks to Exclude Transcript of His SEC Testimony
The prosecution of Richard Scrushy seems to have nearly come to a complete stop, with an occasional day (or less) of testimony, seemingly followed by a week of recess. It has now fallen behind watching paint dry on the interest meter, and I wonder whether the jury feels that the government's case is floundering. During the one day of testimony this week, on Tuesday, April 5, U.S. District Judge Karon Bowdre admonished the prosecutor for asking a witness about other Fortune 500 companies, i.e. Enron and WorldCom (see earlier post here). The government then called the SEC staff member who took Scrushy's deposition on March 14, 2003, in connection with the Commission's investigation of possible insider trading by Scrushy and other HealthSouth employees in advance of a negative announcement the company made in 2002 about Medicare reimbursements, which caused the stock to drop. During the course of that deposition, Scrushy was questioned about HealthSouth's financial statements, and the indictment (here) alleges that he perjured himself during the testimony.
Scrushy's attorneys objected to the introduction of the deposition transcript, which brought the trial t a screeching halt again. In a motion filed on Thursday, defense counsel sked the judge to exclude the deposition because the SEC was cooperating in the Justice Department's investigation of HealthSouth at the time Scrushy testified and did not disclose that fact to him. An AP story (here) discusses the motion, but does not provide any detail on the alleged constitutional violation, although I assume the claim is either a Fifth Amendment violation or due process claim. He may be arguing for outrageous government conduct, a type of due process claim, that a so-called "perjury trap" had been set. The claim regarding SEC cooperation with the DOJ is a difficult argument to win in the face of a long line of precedents going back to SEC v. Dresser Industries Inc., 628 F.2d 1368 (D.C. Cir. 1980), in which the D.C. Circuit said that, unlike restrictions on the IRS once a criminal investigation begins, "the SEC's civil enforcement authority continues undiminished after Justice initiates a criminal investigation by the grand jury." Although Scrushy's deposition come right about the same time former CFOs Weston Smith and Bill Owens were talking with prosecutors and Owens wore a wire to record Scrushy, the SEC's investigation pre-dates the criminal investigation, going back to the authorization by a Formal Order from the Commission a few months earlier and the issuance of subpoenas to Scrushy (among others) on Feb. 18, 2003. Perjury trap claims are usually unsuccessful if the investigation is legitimate because the witness has an easy way to avoid it: tell the truth. If the Judge excludes the deposition, it would have to sink the three perjury counts. (ph)
When Malpractice Becomes a Crime & the Obstruction of Justice Enhancement After Booker
A lawyer realizes that he has failed to file suit within the statute of limitations. What should the lawyer do? An answer about what not to do is provided in United States v. Holmes (here), a recent decision of the Fifth Circuit. [The next two posts also review convictions of lawyers -- I guess it's Lawyer Crime Week in the circuit courts] Lassiter Holmes was retained to represent a client in a med mal case, did nothing for two years, and on May 14, 1996, filed the lawsuit. Unfortunately, the injury occurred on May 11, 1994, so he was outside the two-year statute of limitations. After much wrangling during discovery (this is a med mal case, after all, so the tussle was quite intense), a check of the court file produced another copy of the complaint filed by Holmes with a notation that it was filed on May 7, 1996; attached to the filing was a badly torn envelope with the date "May 6, 1996" with Holmes' return address and it appeared that it could have been addressed to the Clerk of the Court, whose last name was "Gonzalez." Defense counsel had the second complaint tested, and determined that the bond paper was produced in 1997 -- just a little bit after the "complaint" was supposed to have been filed. Well, to make an overly long story short, the malpractice case settled with Holmes making a payment to both the insurance company for the defendants and to his client. Defense counsel didn't rest there, filing a grievance with the state bar, which sanctioned Holmes by placing him on two years probation. The FBI showed up next, and Holmes and Ms. Gonzalez, the court clerk, were indicted on mail fraud and conspiracy charges relating to the false document in the court files (Gonzalez died before trial).
The Fifth Circuit upheld the conviction, but remanded for resentencing (he received a 33-month term of imprisonment) because, inter alia, the district court gave a two-level enhancement for Obstruction of Justice when the judge determined Holmes perjured himself at trial, which the Fifth Circuit held violates Blakely (and Booker). The court rejected the position adopted by the 11th Circuit in United States v. Rodriguez, 398 F.3d 1291, 1298 n.5, that when a jury convicts a defendant who denies he committed the crime it necessarily determines that the defendant committed perjury, thereby permitting the court to impose the two-level Obstruction enhancement. The Fifth Circuit agreed that the jury rejected the "veracity of Holmes's story," but the enhancement could not be saved because there must be "more than a conclusion that the defendant's story of events is not credible . . ." The court stated:
[T]here is more than ample evidence in the record to support the district court's thorough perjury findings. Nevertheless, because the enhancement was imposed under mandatory guidelines and the jury was not specifically asked and instructed to find beyond a reasonable doubt whether Holmes had committed perjury based on the foregoing elements, there is Booker error. So although we harbor little doubt that, if so asked and instructed, the jury would have reached the same conclusion as the district court--i.e., that Holmes committed perjury--the requisite findings cannot be projected onto the jury's guilty verdict to cure the constitutional error.
The Fifth Circuit approach effectively eliminates the Obstruction enhancement, at least for defendant perjury at trial, unless the jury returns a verdict stating that the defendant committed perjury, a process that is similar to the Blakely counts added to indictments before Booker. That brings back all the questions attendant to that approach, such as how the courts would conduct the proceedings, plus the problem that it would be highly prejudicial to a defendant to have a paragraph in the indictment stating "If the defendant testifies at trial, did he make a false statement of material fact . . . ." That approach would have substantial Fifth Amendment problems, and holding a jury over to conduct a mini-trial on whether a defendant committed perjury, all for a two-level enhancement, seems to be less-than-economical. (ph)
Stealing From a Client = 41-Month Sentence
The basic premise of the lawyer-client relationship is that the lawyer acts as the fiduciary of the client, responsible for protecting the client's interests. When that relationship goes awry and the lawyer steals from the client, it is one of the worst white collar crimes. In United States v. Della Rose, the Seventh Circuit upheld the conviction of Steven Della Rose for stealing the $64,000 settlement that his client received from a workers comp claim. The client was no angel, having been fired from a number of previous jobs, struggling with drug and alcohol addictions, and losing his house and car. Della Rose's coconspirator, who actually cashed the check and took the $64,000 in $100 dollar bills -- receiving $50 from Della Rose for his "parking expense" -- was described by the court as "somewhat of a shady character," i.e. as unseemly as they come. In an opinion that goes into excruciating detail (approximately 10 pages of facts in the .pdf version of the opinion, available here), Della Rose engaged in an elaborate scheme that included obtaining a false ID from a compliant clerk at the Illinois Secretary of State's office -- no paragon of virtue if the indictment of former Governor Ryan is true -- who Della Rose used for his "DUI clients." Della Rose received a 41-month term of imprisonment, and gets another chance at the sentencing because of a remand to the district court to reconsider the sentence in light of Booker. He may get more time, not less. (ph)
Can a Lawyer Plead Ignorance of the Law As a Defense?
David Tedder was a lawyer who helped two clients set up an off-shore gambling business and created a company to funnel money to them, in violation of 18 U.S.C. Sec. 1084 (here), which prohibits the use of wire communications for the purpose of wagering or betting. Tedder created a company called Clear Pay to move money to the off-shore betting business, Gold Medal Sports, that operated out of Curacao. The Florida Attorney General warned Western Union not to wire money to Gold Medal Sports, so Tedder set up Clear Pay to get around that restriction. Unfortunately, Tedder's clients were caught and, not surprisingly, turned on their former lawyer by testifying against him. His conviction was upheld by the Seventh Circuit (United States v. Tedder here), and Judge Frank Easterbrook described Tedder's trial defense:
Although he was a lawyer, knew about §1084, and even knew about criminal prosecutions of similar ventures (after which he whipped up still more layers in a futile attempt to shield his clients), Tedder told the jury that he thought that Gold Medal Sports and Clear Pay were upstanding businesses operated in compliance with all laws. This was essentially the tax protester’s defense that he just didn’t think that the law, however clear, applied to his endeavors. See Cheek v. United States, 498 U.S. 192 (1991). The district judge gave appropriate instructions to the jury, which did not believe Tedder’s professions of ignorance and convicted him. Tedder maintained that he drew his understanding of federal law from observing conduct —Gold Medal Sports was not the only offshore gambling enterprise—as if the existence of bank robberies shows that it is lawful to steal money at gunpoint. Testimony about this curious approach to legal "research" did more to demonstrate Tedder’s mendacity than to make out a defense. His multifarious endeavors to hide the source and disposition of Gold Medal Sports’ funds revealed his true beliefs.
Courts have generally held lawyers to a higher standard regarding knowledge of the illegality of conduct, and Tedder's conduct shows how a lawyer who gets involved in his client's wrongdoing will end up the target of the criminal prosecution. The Seventh Circuit upheld the conviction, and remanded to the district court to reconsider the sentence in light of the discretion granted by Booker. The original sentence was 60 months (!!!), at the high end of the Guidelines range, and I would not be surprised if Tedder is looking the same amount of time, at a minimum. (ph)
April 8, 2005
Nine Years in Prison for Spamming
The headline is correct! A court just sentenced a spammer to nine years in "the U.S.'s first felony prosecution for sending junk e-mail." But the defendant is not quite headed off to jail. The court is allowing him to stay outside the prison system pending the appeal. See more in the Wall Street Jrl. here, New York Times here. (both AP stories).
Another Consideration on Sentencing
To add some comments here to my co-blogger :
1. It is unlikely courts will go far afield from the sentencing guidelines because there is a tradition in place and some scrutiny right now, in that everyone is watching what will happen. It seems unlikely that judges will want to drift far from the guidelines in this present state of affairs.
2. But there is an additional point of consideration regarding whether judges will go outside the guidelines. Just, perhaps, the guidelines failed to account for prosecutorial discretion that might toss in extraneous charges into white collar cases. Take for example a charge of money laundering, a crime initially intended for drug offenses. Today we see money laundering tacked on to many white collar offenses, like mail fraud. When this happens, judges have no choice but to neutralize this prosecutorial discretion.
3. So if we are talking about going outside the guidelines in white collar cases, it is important to also consider that prosecutors may be instigating this extension by charging crimes that merely are intended to heighten the sentence.
Will White Collar Sentences Have the Greatest Disparity Post-Booker?
Doug Berman on the Sentencing Law & Policy blog has an interesting post (here) raising the question whether the defendants in white collar crime cases will be the greatest beneficiaries of the newly-granted discretion federal judges have after Booker. He highlights two below-guidelines sentences given by U.S. District Judge Peter Dorsey, including the year-and-a-day sentence to former Connecticut Governor John Rowland. Rather than write a comment to his post, I decided to put something up here and encourage readers to check Doug's post and add comments there. [For anyone with an interest in sentencing, the SL&P is a must-read)
I think white collar defendants have the most to gain from a discretionary sentencing system (bound by the "reasonableness" standard of review imposed by Booker) because they are more likely to make arguments that appeal to the judges. Their offenses are non-violent, many of the defendants can show long-time charitable and community involvement, and the collateral effects of the convictions can be significant (e.g. loss of professional license), particularly the effect of a conviction and incarceration on third-parties (e.g. layoffs of employees if the company owner is sent to prison). Unlike defendants in many drug or gun-possession cases, white collar defendants are almost universally first-time offenders, and therefore can make a plausible argument that their conduct is aberrational -- how often can a felon-in-possession or defendant in a large-scale drug case do that with a straight face?
Defendants in white collar cases are most like the judges who sentence them, and some are well-known in the community in which the sentencing judge lives. There is a natural sympathy for a defendant who is just like you, has a nice family, etc. Of course, these were among the very arguments in favor of a mandatory sentencing system, to eliminate the bias in favor of white collar defendants.
Mandatory minimums are prevalent in the drug and gun cases, but not for economic crimes, so there is no "floor" under the sentences for white collar crimes except for the Guidelines. While the number of white collar cases in the federal system is small, they also tend to be cases with much higher profiles, so any disparity in the sentencing of these defendants will be noticed by the press (and federal prosecutors).
I do not think that all the grounds outlined above are legitimate reasons to give sentences below the Guidelines' "suggested" range, but to the extent courts incorporate them in sentences, then over time it will trigger a growing disparity in white collar cases, both between these crimes and other types of offenses and within the category of economic crimes itself. Different districts and judges will gain reputations as being harsher or more lenient. Will that trigger a reaction from Congress, possibly by adopting mandatory minimums for certain types of white collar crimes (e.g. public corruption offenses)? Of course, the constitutionality of mandatory minimums remains open to question, but that's a different issue. I suspect Congress will repsond by restoring some aspect of a mandatory sentencing system, but at this point the outlines of that response are unknown. (ph)
Reporter's Privilege versus Grand Jury Investigation
It sounds like the investigation into leaks regarding "the disclosure of the identity of a covert C.I.A. officer, Valerie Plame" has reached a stumbling block. The prosecutor handling the case can't seem to get the information needed and the reporters aren't talking. The NY Times and Time magazine reporter have their cause up on appeal and unless they are successful in that court, the issue may be whether they face jail or talk. And the special prosecutor is describing his investigation as "for all practical purposes complete." See more in the NYTimes here.
If reporters are going to obtain information, it is necessary for them to provide some protection to their sources. Sources will not provide information for the public unless they are assured anonymity. But on the other hand, what happens when the failure to provide information stalls an investigation, and the investigation is a grand jury into possible criminal offenses that may have been committed. And the crime may have involved " two senior administration officials." But then again, there may be no crime here.
Several questions to consider here:
If this were a homicide case, would people be outraged by the conduct of the reporters, and demand that they talk? Should it make a difference that this is a white collar case?
On the other hand, if the press does not investigate and report on what happens within the federal administration, who will? Isn't it therefore more important to have the reporter's privilege in this context so that the public can continue to receive information that can be helpful to them in evaluating government conduct?
This is clearly a tough one, and the court's will need to resolve the issue. But if they rule that the reporters talk or go to jail, one has to wonder if jail is the correct answer here. Will it really make a difference, and will the people hurt by this merely be the families of the reporters.
Former Wal-Mart Exec May Have Filed False Documents with Company to Fund Anti-Union Campaign
As discussed in an earlier post (here), former Wal-Mart executive and board member Thomas Coughlin was forced out of the company in late March because of falsified expense reports that the company said was in the $100,000-500,000 range. I asked why someone with Coughlin's resources (both pay and stock ownership) would risk his career for a comparatively paltry amount, and the answer may be that he was hiding payments as part of a "union project" to keep unions from organizing Wal-Mart workers. A front-page story in the Wall Street Journal (here) details how Coughlin told a junior Wal-Mart executive to process a reimbursement without any supporting documentation because it was for payments to union organizers to gain information about efforts to unionize Wal-Mart employees. The company has long resisted unionization efforts, and relations with organizers have been frosty, to say the least. Wal-Mart denies that any payments were made to union officials, which would be a criminal violation of the Taft-Hartley Act (29 U.S.C. Sec. 186 here), and documents about the expense reimbursement include a payment for alligator skin boots for Coughlin. In addition to Coughlin, his deputy, Robert Hey, has also been fired by Wal-Mart as part of the investigation of improper payments. The U.S. Attorney's Office for the Western District of Arkansas is conducting the criminal investigation, and it will be interesting to see if this is a case of petty corruption or something much larger involving Wal-Mart as a perpetrator rather than the victim. (ph)
Securing AIG-Related Documents
The SEC moved to ensure access to AIG documents, including those held by off-shore entities with substantial (if diminishing) ties to AIG, by obtaining a court order prohibiting the destruction of documents and an agreement from the off-shore companies to comply with the SEC's document requests. The SEC does not have jurisdiction over Starr International, a Bermuda company that controls approximately 12% of AIG's stock and has been a vehicle to compensate senior AIG executive (see earlier post here), and C.V. Starr & Co., a private Barbados reinsurer that did a substantial amount of business with AIG and whose board chairman was former AIG CEO Maurice Greenberg. The investigators concerns about the access and continued existence of documents rose substantial approximately two weeks ago when lawyers for Greenberg and Starr International (whose chairman is also Greenberg -- does anyone see a pattern here?) removed approximately 87 boxes of documents from offices in Bermuda owned by AIG but shared with Starr International. Not surprisingly, investigators are quite interested in those records, and lawyers are now in the process of organizing them for review by the various government agencies investigating AIG. A New York Times story here discusses the court order and agreement.
In a related story, the "reinsurance" agreement between General Re (a subsidiary of Berkshire Hathaway) and AIG that triggered the widening investigation of both companies includes documents that were altered by General Re employees after they were signed by the companies. Berkshire Hathaway apparently informed the government of the alterations, which triggered the investigation that has now engulfed AIG, Greenberg, and, to a much lesser degree, Berkshire Hathaway CEO Warren Buffet. Greenberg and Buffet are scheduled to speak with government investigators next week, although whether Greenberg testifies under oath remains to be seen. Another N.Y Times story here discusses the document alteration. (ph)
April 7, 2005
Fraud of September 11th Funds
With all the blog items on AIG, Kozlowski, and Scrushy, we sometimes lose sight of the smaller cases happening in the offices throughout the United States. These cases can be vital, not only with respect to deterring corruption, but also with respect to exposing how some federal statutes are being used. The topic here will be a case of a prosecution for wire fraud. And in mentioning this case it is noted that there may yet be some implications to the wire fraud statute forthcoming from the Pasquantino case.
A press release of the United States Attorney's Office in the Western District of Michigan tells of an individual pleading guilty "to three counts of wire fraud and one count of making a false statement on a loan application, in violation of Title 18, United States Code, Sections 1343 and 1014." The facts as stated in the press release are:
"Smith admitted that during her tenure as Executive Director, Western Upper Peninsula Chapter, American Red Cross, from September 2001 to September 2002, she engaged in dozens of unlawful transactions in which she made personal and unauthorized use of funds obtained from the Chapter’s bank and credit union accounts, cash belonging to the Chapter or being held by the Chapter, and property that was paid for in whole or in part by the Chapter.
Smith admitted that she carried out these acts and delayed the detection of these acts by failing to report, and falsely reporting, the conditions of the Chapter’s finances to the American Red Cross’s national and regional offices. Among other things, Smith falsely reported that donations to “the Liberty Fund” – a fund set up for the victims of the terrorist attacks of September 11, 2001 -- had been remitted to the American Red Cross’s national offices. In fact, Smith had diverted these funds and others held by the Chapter to her own use."
It is important for the government (although sometimes, perhaps, it might be best left for state prosecutors) to intercede when charitable organizations become the victims of fraud.
Can A Lawyer Testify At A Client's Trial?
News reports (See, e.g., Wall Street Journal, Atlanta Jrl Constitution) are talking about the possibility that Dennis Kozlowski's attorney may be an upcoming witness at his trial. Kozlowski, former CEO of Tyco, along with Mark Swartz is presently on trial for a host of charges, including larceny under New York State law. It seems that Attorney David Boies did an internal investigation of the company for Tyco's Board and that he may now be a witness in the trial. The problem is that there seems to be a conflict in testimony between what he might say, and what Kozlowski's present attorney might say with regard to Kozlowki's departure from the company.
So can a lawyer testify at the trial of their own client? And if so, can they ask themselves the questions on direct examination? It could be quite a circus if the attorney would have to ask themselves questions, that they would then answer.
First, in the rare circumstance that this happens, the witness testifying normally has another attorney ask the questions -- so that's easy to resolve. But the tougher question is whether the present attorney can testify in the trial of his client in order to rebut testimony presented by a witness at the trial (the fact that the initial witness is an attorney is not a factor). And if he or she does testify, can they remain counsel for the client for the rest of case.
The ABA Model Rules of Professional Conduct speak to this issue in Rule 3.7(a), where it states:
(a) A lawyer shall not act as advocate at a trial in which the lawyer is likely to be a necessary witness unless:
(1) the testimony relates to an uncontested issue;
(2) the testimony relates to the nature and value of legal services rendered in the case; or
(3) disqualification of the lawyer would work substantial hardship on the client. . . .
Rule 3.7(a)(1)(2) do not apply here, but the question of (3) is one that may need to be considered. Would it be a substantial hardship for Kozlowski to have to get new counsel, or to proceed without his lead counsel, for the rest of this trial. And if the prosecution really needs the initial testimony, knowing full well that it might mean that trial counsel may need to take the stand and respond, do they want to risk a problem in the case just for this testimony?
The New York Ethics Rules differ slightly, but not significantly on this issue. DR5-102 states:
DR 5-102A. A lawyer shall not act, or accept employment that contemplates the lawyer's acting, as an advocate on issues of fact before any tribunal if the lawyer knows or it is obvious that the lawyer ought to be called as a witness on a significant issue on behalf of the client, except that the lawyer may act as an advocate and also testify:
1. If the testimony will relate solely to an uncontested issue.
2. If the testimony will relate solely to a matter of formality and there is no reason to believe that substantial evidence will be offered in opposition to the testimony.
3. If the testimony will relate solely to the nature and value of legal services rendered in the case by the lawyer or the lawyer's firm to the client.
4. As to any matter, if disqualification as an advocate would work a substantial hardship on the client because of the distinctive value of the lawyer as counsel in the particular case. . . .
Here again, the issue may be whether it would be a substantial hardship to the client. But do the prosecutors in the Kozlowski trial really want to run the risk of having the defendant's own counsel up on the witness stand testifying for the defense.
April 6, 2005
What's Holding Up Pasquantino?
The Supreme Court heard oral arguments on the case of Pasquantino v. United States back on November 9, 2004. And a good number of cases that were heard after this one, have been ruled on by the Court. But it seems that there is still no decision in Pasquantino and also in Small v. United States. Interestingly these two cases have a commonality; that being that there is an international aspect to each of these matters. Pasquantino is a white collar case, a wire fraud case, involving the transporting of liquor between the United States and Canada. In Pasquantino the harm suffered was to Canada, and it was premised upon a loss of tax revenue to that country. The question accepted for review is:
Whether the federal wire fraud statute (18 U.S.C. s 1343) authorizes criminal prosecution of an alleged fraudulent scheme to avoid payment of taxes potentially owed to a foreign sovereign, given the lack of any clear statement by Congress to override the common law revenue rule, the interests of both the Legislative and executive Branches in guiding foreign affairs, and this Court's prior rulings concerning the limited scope of the term "property" as used in the wire fraud statute.
It is an issue that can go in so many directions. 1) It could be a case where the Court will focus on the wire fraud statute and its breadth and cut back on what is "property" as was done in the Cleveland case, where the Court held that licenses were not property. 2) Or it could be a case that the Court will define how far the revenue rule can extend, a relatively narrow decision in comparison to the other choices. 3) Or, finally, it could be a case where the Court focuses on extraterritoriality and whether wire fraud should apply outside the United States. This last option could make this a landmark decision. This decision coupled with what the Court might do in Small could make this the year that the Court tackles tough questions of transnational law. And what better place to start than with a white collar case.
My guess is that the Court is focusing on the international issue. It seems odd that both Small and Pasquantino have been bypassed in the Court's ruling on cases heard well after these two, and both of these cases have an international issue. Could this be the year that the Court will finally look at whether criminal law should apply to extraterritorial cases? The last time this was really examined is in the Bowman decision, and a lot has happened since 1922 when this decision was issued.
Pasquantino could be a simple resolution of the jurisdictional split coming from in the cases of Boots, Trapilo, and Fountain. But as the jury stays out longer, I am beginning to think that this case may be more monumental than some may have expected it to be.
The Prosecutor Did What?
The Scrushy trial is certainly not getting boring, that is when it has been in session. The breaks come and go and the trial continues. But today AP reported that the prosecutor, while questioning a witness about HealthSouth under Scruchy's leadership asked:
"Was WorldCom a Fortune 500 company?"
"Was Enron a Fortune 500 company?"
As you might suspect, the judge did not allow these questions and admonished the jury to ignore them. But one has to wonder why a prosecutor would ask such inflammatory questions? Is the prosecution nervous that a conviction may not be forthcoming? Is the prosecution trying to make it so that Scrushy will have to take the witness stand to respond to prosecutorial comments? And if Scrushy is convicted, will this admonishment be sufficient to get rid of the taint?
The ABA Model Rules of Professional Conduct in Rule 3.4 state: "A lawyer shall not: . . . (e) in trial, allude to any matter that the lawyer does not reasonably believe is relevant or that will not be supported by admissible evidence, . . "
The ABA Prosecution Function Standards, Standard 3 - 5.9 also speaks to this issue in stating, "The prosecutor should not intentionally refer to or argue on the basis of facts outside the record whether at trial or on appeal, unless such facts are matters of common public knowledge based on ordinary human experience or matters of which the court may take judicial notice."
Lawyer Discipline Statistics
Check Ben Cowgill's Legal Ethics Blog (here) for links to the ABA's Survey on Lawyer Discipline and his discussions on the topic, which are always worthwhile.
Ét Tu, MBIA?
The widening investigation of the use of reinsurance to manipulate the balance sheets of insurers is starting to envelop MBIA Inc., one of the largest insurers of municipal bonds. MBIA disclosed last week that it received a demand for additional documents pursuant to subpoenas issued late last year by the SEC and N.Y. Attorney General Eliot Spitzer. A company press release (here) discloses that the regulators "seek documents relating to the Company's accounting treatment of advisory fees; its methodology for determining loss reserves and case reserves; instances of purchase of credit default protection on itself; and documents relating to Channel Reinsurance Ltd., a reinsurance company of which MBIA is part owner. The requests cover the period January 1, 2000 to the present." Channel Re is a Bermuda reinsurance company, and while not a pure captive, MBIA's CFO did state that "[w]e have significant influence, but we do not control them." A Wall Street Journal article (here) discusses the focus of the investigators on whether MBIA had a secret agreement to protect Channel Re from losses on the insurance contract, which would mean that the transaction was a loan and any liabilities would have to remain on MBIA's books. MBIA denies that there was such a secret agreement, but investigators are unlikely to accept any such denial at face value these days, and the investigation will likely continue for quite a while. (ph)
Lawyer Discipline Statistics
Check Ben Cowgill's Legal Ethics Blog (here) for links to the ABA's Survey on Lawyer Discipline and his discussions on the topic, which are always worthwhile.
Abrupt End to Philadelphia Corruption Trial as Defense Calls No Witnesses Amid Claimed Brady Violations
The corruption prosecution of former Philadelphia City Treasurer Corey Kemp, two Commerce Bank executives, and two other defendants ended suddenly on Monday when each defendant rested without calling any witnesses. Defense counsel argued that the government failed to turn over exculpatory (Brady) reports in a timely fashion, a point one prosecutor conceded. Amazingly, Assistant U.S. Attorney Robert Zauzmer said in court, "Mistakes were made . . . I apologize for it." The defense strategy would appear to be to emphasize the prejudice from that failure if the jury convicts on any of the counts rather than mount a defense and open up the harmless error avenue for upholding the verdict. Indeed, the government is already describing the undisclosed exculpatory evidence as "six little items out of a sea of evidence." (See Philadelphia Inquirer story here). The defendants may also have determined that the government's case is so weak that the risk of conviction is not great, and therefore the Brady argument, if needed, will be easier to establish. Reports are that the government's case has not gone well, with strong wiretap evidence against Ronald White -- who died after being indicted -- and not much direct evidence against the other defendants. It looks to be a conspiracy with the hub missing, so the empty chair (or "blame the dead guy") defense works in the defendants' favor. Moreover, by maintaining a unified front, the defendants do not have to worry about pointing fingers at one another. Closing arguments are set to begin Thursday. (ph)
UPDATE (4/6): An interested observer of the trial sent the following information regarding my statement that there is not much direct evidence connecting the defendants to the corruption. With permission, I pass along the following useful observations about the government's case:
There has been evidence of improper or questionable benefits going to Corey Kemp; however, the evidence also showed (a) Kemp did not have the power to give anyone bond deals; the most he could do was put people on a recommended list, and the recommendations then had to approved by (and were often changed by) his boss (Janice Davis, city finance director), her boss (George Burrell), and ultimately Mayor Street; (b) Street made it clear to Janice Davis and others than people recommended by Ron White should be favored; (c) it is therefore questionable that the benefits to Kemp deprived the city of Kemp's honest services, because he presumably would have followed Street's directions and favored White's people even if he had not received those benefits. I agree that there is not much direct evidence of criminal conduct by the other defendants.
Hail the Returning Felon
Steve Madden, the shoe guru, will be getting out of federal prison soon after serving a 3+ year sentence for securities fraud. His company, Steve Madden Ltd., which is publicly traded, has started running ads welcoming his return in a manner that has brought to mind the rousing welcome Martha Stewart received upon her release and return to work at her company. A New York Times article (here) notes that ads being run in various magazines that turn on the idea of "spring" -- both the season and Madden's release from prison to a halfway house (his sentence runs through Sept. 2005). While he has been serving time in the Coleman (Low) FCI in Florida, Madden's position with the company has been its "Creative and Design Chief." The company's 10-K (here) discusses the employment agreement:
The Company has an employment agreement with Steve Madden, its Creative and Design Chief, which provides for an annual base salary of $700 through June 30, 2011. Mr. Madden is entitled to receive base salary payments during periods that he is not actively engaged in the duties of Creative and Design Chief. The agreement also provides for an annual performance bonus, an annual option grant at exercise prices equal to the market price on the date of grant and a non-accountable expense allowance. However, the Company is not required to pay the bonus for any fiscal year that Mr. Madden is not actively engaged in the duties of Creative and Design Chief for at least six months, the Company is not required to grant an annual option if Mr. Madden is not actively engaged in the duties of Creative and Design Chief for at least six months out of the twelve months immediately preceding the grant date for such annual option and the Company is not required to pay the expense allowance for any month during which Mr. Madden is not actively engaged in the duties of Creative and Design Chief.
If I'm reading the disclosure correctly, Madden has received his base salary while in prison, but not the bonuses, assuming he conformed with Bureau of Prison regulations that do not permit federal prisoners to conduct outside business while in its custody. Madden also owns approximately 26% of the company's shares.
It may be that those with eponymous companies in fields requiring creativity (as opposed to manufacturing or financial skills) are untainted by convictions because their creative ability is such a valuable asset to the company. (ph)
April 5, 2005
Prosecutors Seek Quick Trial of Ken Lay on Bank Fraud Charges
When the grand jury indicted Ken Lay, Jeff Skilling, and Richard Causey last year in connection with the collapse of Enron, it also included separate charges against Lay for bank fraud and making false statements to banks related to personal lines of credit he obtained from the banks (indictment here). In February, U.S. District Judge Sim Lake severed the bank charges because they are unrelated to the conspiracy and securities fraud charges involving the other two defendants. Now, the prosecutors are seeking a quick trial on the bank charges, asking the judge to order a trial on them to begin in May or June. Lay had asked for a separate trial after the larger conspiracy trial, set to begin in January 2006. To bolster its position, prosecutors have reprised Lay's requests, at the time of the indictment, that the trial begin as soon as possible. For example, a transcript of a statement (here) by Lay given the day after the indictment states, "Although my lawyers and I believe I should not have been indicted, now that I have been, I have instructed my legal team that I want a speedy trial and I hope it will begin by early September this year. Not only are we ready to go to trial but we are anxious to prove my innocence." (See Lay's website at www.kenlayinfo.com for additional information).
Lay's attorney, Mike Ramsey, has not taken a position yet on the government's request, and I suspect he will oppose the motion; a conviction would enhance the negative perception of Lay. Moreoever, it would be hard to call Lay as a witness in the conspiracy trial to advance his "honest-but-ignorant CEO" defense if he's been convicted of fraud and false statement charges. The benefit to the government of a quick trial is that if Lay is convicted, it will increase significantly the pressure on him to cooperate on the conspiracy charges. The bank fraud charge carries a 30-year maximum sentence -- a legacy of the S&L collapses of the early 1990s -- and even though the actual sentence would be much less, there is a good chance he would be sent to jail prior to the start of the main event, which would also hinder his trial preparation. The government's downside is not all that significant, in that the bank charges are more of a sideshow, and a not guilty verdict will not cause that much damage to the larger conspiracy case. A Houston Chronicle story (here) discusses the government's motion for a prompt trial date. (ph)