Tuesday, April 5, 2005
Bruce Carton has an interesting post on the Securities Litigation Watch blog (here) about the different media views of attorneys in litigation related to WorldCom. Jay Kasner of Skadden Arps was counsel to J.P. Morgan, and has been criticized for his advice to the client in settling the WorldCom securities fraud civil class action case for $630 million more than it could have been settled a year earlier. Reid Weingarten of Steptoe and Johnson, who was lead defense counsel for former WorldCom CEO Bernie Ebbers -- who was convicted on all counts -- is featured in a Washington Post article that is quite flattering. Paul wonders about the different media perceptions. Of course, Weingarten established his reputation before the Ebbers prosecution by successfully defending former Secretary of Agriculture Mike Espy and former Tyco general counsel Mark Belnick. Still, it is worthwhile to think about the vagaries of media perceptions of the lawyers in high-profile cases. (ph)
A recent Sixth Circuit decision in United States v. Madden (here) discusses a federal prosecution for vote-buying, in violation of 42 U.S.C. Sec. 1973(c)(i) (here). The defendant paid three people to vote for a candidate in a local primary election, and in that same election there were candidates for federal office on the ballot. The defendant did not pay the people to vote for (or against) anyone running for federal office. The vote-buying/false registration provision has an important limitation on federal jurisdiction:
Provided, however, That this provision shall be applicable only to general, special, or primary elections held solely or in part for the purpose of selecting or electing any candidate for the office of President, Vice President, presidential elector, Member of the United States Senate, Member of the United States House of Representatives, Delegate from the District of Columbia, Guam, or the Virgin Islands, or Resident Commissioner of the Commonwealth of Puerto Rico.
Unfortunately for Madden, his plea agreement waived any right to appeal his plea or sentence, and his after-the-fact motion to vacate the plea by challenging the federal prosecution of this crime could not be heard because the Sixth Circuit did not have jurisdiction over the case.
Despite his counsel's apparent failure to challenge federal jurisdiction, which could have been done by entering a conditional plea, the case raises an interesting federalism issue regarding the power of the federal government to prosecute conduct that does not involve the election of a federal official. While the Supreme Court has been quite forgiving in its approach to federal jurisdiction in corruption cases (e.g. Sabri), elections may be different, although I am out of my league on the constitutional issues related to elections. I think a decent argument can be made that the jurisdictional provision limiting prosecutions to elections "for the purpose" of electing federal officials would only cover payments (or other acts specified in the statute) related to those offices. The counter-argument would be that, similar to the federal funds requirement for Section 666 prosecutions or use of the mails for Sec. 1341 cases, the presence of the federal office is a "hook" for jurisdiction, and any corruption in connection with the election -- even if it only relates directly to a local election -- will have some effect on the federal election, and therefore the federal government has an interest in protecting the integrity of elections involving federal officials. (ph)
Monday, April 4, 2005
It's not exactly like Sauron and the Orcs are approaching, but the fight between American International Group Inc.'s new management and former CEO Maurice Greenberg is starting to get a little bit ugly. AIG posted a letter on its website (here) the contains the following discussion about the removal of documents from a Bermuda location shared by AIG and an off-shore entity led by Greenberg:
AIG has worked diligently to protect and preserve relevant documents, and will provide them to the authorities as requested. Recently, AIG became aware of efforts to remove documents and information from its Bermuda building without AIG's permission. AIG immediately brought these incidents to the attention of the relevant authorities. AIG has been cooperating with the New York Attorney General and the Securities and Exchange Commission with regard to document security in New York, Bermuda, Ireland, and other locations. As previously disclosed, one individual in Bermuda was terminated for failure to cooperate with AIG's review, and several other AIG employees in Bermuda have resigned.
The Wall Street Journal reports (here) that Starr International, a Bermuda company led by Greenberg that controls approximately 12% of AIG's stock and has operated as a means to enhance significantly the compensation of current AIG executives, has removed all current AIG officers from its board; among those removed are new CEO Martin Sullivan. In 2003, Starr International paid out over $120 million in compensation to AIG executives (including then-CEO Greenberg). AIG's 2003 10-K (it's 2004 report has been delayed until at least April 30) describes Starr International in this way: "Starr International Company, Inc. (SICO) provides a Deferred Compensation Profit Participation Plan (SICO Plan) to certain AIG employees. The SICO Plan came into being in 1975 when the voting shareholders and Board of Directors of SICO, a private holding company whose principal asset consists of AIG common stock, decided that a portion of the capital value of SICO should be used to provide an incentive plan for the current and succeeding managements of all American International companies, including AIG." A number of AIG executives have a financial stake in Starr International, and the company has been a vehicle to keep AIG executives from leaving the company at the risk of losing substantial amounts of AIG stock.
The question now is whether Greenberg will use the large block of AIG stock held by Starr International, and its close ties to AIG officers, to influence the burgeoning investigation of the company. Given the attempted removal of documents from AIG's Bermuda office, and the change in board membership at Starr International, I think it is unlikely that off-shore entities with close ties to Greenberg will voluntarily provide documents to investigators. (ph)
The Seventh Circuit issued a decision in United States v. George (here) that discusses, in an off-handed way, whether a sentence is "reasonable" under the Booker standard if it is below the Guidelines range. George was a former member of the Wisconsin state legislature who pled guilty to conspiracy involving the receipt of kickbacks. He challenged his guilty plea, even though the agreement prohibited him from appealing, and the Seventh Circuit rejected his arguments on that issue quickly. On the issue of George's sentence, he received a 48-month term of imprisonment, which was below the Guidelines range of 62-78 months. The District Judge, who entered the sentence while Booker was on appeal to the Supreme Court, treated the Guidelines as non-binding, consonant with Booker's result. The Seventh Circuit stated with regard to the sentence:
George does not contend that his actual sentence is unreasonable, the post-Booker standard of appellate review. It is hard to conceive of below-range sentences that would be unreasonably high. George’s is not. The United States would have better claim to be the party aggrieved by the district judge’s disposition, and it has not appealed.
The case did not involve any downward departure issues, which might affect the "reasonableness" inquiry, and it will be difficult to argue successfully that a sentence below the Guidelines' recommended range will be unreasonable. (ph)
One of the requirements imposed by the Sarbanes-Oxley Act is that companies must certify that their internal accounting controls are sufficient to identify and prevent improper recording of revenue, expenses, etc. Section 404 of the Act requires the company to provide an assessment of the effectiveness of its internal controls, and the CEO/CFO certification requirement for the company's financials puts senior executives on the line. Veritas Software Corp., a large Silicon Valley storage software company, announced last week that it would have to delay the filing of its annual report and Form 10-K because of problems with its internal controls. A press release (here) issued by Veritas states (get ready for accounting-ese):
The company has now determined that the aggregation of its control deficiencies, which include two significant deficiencies, constitute a material weakness (as defined in Public Company Accounting Oversight Board Auditing Standard No. 2). One of the significant deficiencies relates to the company's controls over its order entry processes, while the other relates to its review of multiple element software license transactions.
The company's management has determined that the identified control deficiencies amount to a material weakness because they believe that these deficiencies, in combination, could result in a more than remote likelihood that a material misstatement of the annual or interim financial statements would not be prevented or detected. Notwithstanding the deficiencies, the company does not expect that the material weakness will result in any such misstatements or in any adjustments to its previously announced financial results for the fourth quarter and fiscal year ended December 31, 2004, or for any prior period.
To put it in English, the company has potential problems with how it has booked revenue from the sales of its software, and in this industry it is likely a problem with the timing of income from the sale and licensing of software.
How serious is problem? Well, language along the lines that it is a "more than remote likelihood that a material misstatement" could occur does not really say much, but it is at least bad enough to have gotten the attention of senior management and the company's auditors. The problem for Veritas is that the company is scheduled to be acquired by Symantec Corp., a deal announced in December 2004. Internal controls problems are usually a sign of potentially significant financial disclosure problems, and no company wants to buy a ticking time bomb (just ask Cendant about its merger of HFC and CUC that nearly destroyed the company once the accounting problems at CUC came to light). When the Symantec-Veritas deal was announced, the companies said they hoped to close the acquisition by the end of the second quarter -- June 2005 -- but that may not be possible as long as there are outstanding accounting issues to be resolved.(ph)
The Organisation for Economic Co-operation and Development (OECD) issued a very negative report on March 18 (available here) about the efforts made by the United Kingdom to implement the 1997 Convention on Bribery of Foreign Public Officials in International Business Transactions (here). The Convention, which the U.S. had sought for a number of years to globalize the Foreign Corrupt Practices Act (FCPA), has been widely adopted by the major industrialized nations, but the UK at least has not done much since ratifying it in 1998. In addition to not adopting legislation to implement the Convention -- even the U.S. updated the FCPA to conform to the Convention -- the report notes that "given the size of the UK economy and its level of exports and outward FDI, along with its involvement in international business transactions in sectors and countries that are at high risk for corruption, it is surprising that no company or individual has been indicted or tried for the offence of bribing a foreign public official since the ratification of the Convention by the UK."
An article in The Observer (here) notes that the Department of Trade and Industry does not intend to change the way it investigates corruption allegations or seek additional funds to investigate bribery of foreign officials in connnection with overseas business transactions. The article does note that the Serious Fraud Office is investigating BAE Systems for possible bribes, but that appears to be the only significant investigation. While the number of FCPA cases is not large, they are investigated and filed with some regularity in the U.S., and it's surprising that an economy as large as Great Britain's has not seen one case in since the adoption of the Convention. (ph)
The SEC filed a complaint in the U.S. District Court for the Northern District of California (San Francisco) alleging that Anthony Sudol, a former employee of Cisco Systems Inc., tipped his two brothers (Michael and Richard), about five companies Cisco intended to acquire before the information was publicly disclosed. The SEC alleges (complaint here) that the brothers made profits of more than $400,000 and details their trading in the companies to be acquired by Cisco. (ph)
Sunday, April 3, 2005
Is there any comparison between AIG and Enron. That seems to be the question these days?
Co-blogger Peter Henning raised the issue on March 29th as to whether "AIG was the Next?" Enron (although he hated to use that term) in a post here. He stated:
"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."
Looks like the New York Times has been looking into the question, as this a.m.'s paper has a piece titled, "A.I.G.: Whiter Shade of Enron." Author Grethen Morgenson starts by saying that "As companies go, Enron was all smoke and mirrors; A.I.G. is substance." But she then continues to show the similarities between these two companies. But also notes that "[u]nlike Enron, the situation at A.I.G. is not remotely as dire." She finds that AIG is no Enron.
I guess that some similarities are simplistic here - both companies had a problem revealed; both companies had people who were/are the subject of an extensive investigation. But I guess I wonder how many other companies out there have the same problem, but have not been the subject of investigations? And how many other companies are getting the message that someone can look over your shoulder any time they want to? The message- Get with it - and clean up your act.