Saturday, April 23, 2005
We posted here some comments on the opening by the defense in the Scrushy trial. But it is a fascinating how the defense is putting the FBI to the same test as they expect of the former CEO of HealthSouth. When questioned about the evidence gathering process, FBI Agent Kelly admitted to not knowing what everyone within the FBI was doing in gathering evidence on this case. The defense here was trying to show the selective evidence gathering process that was favorable to the government. The defense also managed to show how people "in charge" just can't follow every action of those working under them. A brilliant trial strategy move here by defense Attorney Parkman to bolster the defense argument.
If defense attorney Parkman had just left that statement "as is" and tied it up in final arguments he might have had more success with the comparison. But he chose to ask the next question -
"Then how can you say that Richard Scrushy ought to know what 50,000 employees are doing every minute of every day?"
This allowed the witness the opportunity to explain the difference between knowing what the top executives in the company were doing and what FBI field agents might be doing.
Defense Counsel has scored a few points here, but not as many as perhaps they might have been trying for with this witness. (See more in this AP story in the WSJ).
Serono S.A., the large biotech company, indicated in an SEC filing that it is preparing to settle an investigation of its U.S. subsidiary, Serono Inc., related to its sales of Serostim, a drug used to treat AIDS wasting, by reserving $725 million. Serostim is a human growth hormone, and can be used -- and abused -- by athletes. An earlier post (here) discussed the indictment of four former Serono sales executives related to alleged kickbacks given to doctors to entice them to write prescriptions for Serostim, a drug which costs $21,000 for a full treatment cycle. The sales push was dubbed "$6 Million in Six Days" -- catchy, but perhaps a little hard to justify under the anti-kickback rules. Serono S.A.'s Form 6-K (the foreign private issuer financial disclosure form here) states:
The company has taken a provision of $725.0m, in connection with the previously reported Serostim investigation. The group’s principal US subsidiary, Serono, Inc., received a subpoena in 2001 from the US Attorney’s office in Boston, Massachusetts requesting that it produce documents for the period from 1992 to the present relating to Serostim. As part of an ongoing, industry-wide investigation by the states and the federal government into the setting of average wholesale prices and commercial practices, other pharmaceutical companies have received similar subpoenas. These investigations seek to determine whether such practices violated any laws, including the Federal False Claims Act or the US Food, Drug and Cosmetic Act or constituted fraud in connection with Medicare and/or Medicaid reimbursement to third parties. Serono has cooperated fully with the investigation and continues to do so. Although no final agreement has been reached, the company’s discussions with the US Attorney’s office have advanced to a point where it is now appropriate to take a provision that management believes will be sufficient to cover resolution of the investigation related to Serostim. Serono is committed to meet the highest standards of ethical behaviour. The company participated in the setting of industry-wide codes of conduct, and has in place a rigorous compliance program.
A global settlement would likely involve both civil penalties, a criminal fine, and reimbursement of federal health care programs. The $725 million figure, if that turns out to be the final amount, would be among the largest settlements in the healthcare fraud area. The size of Serono S.A.'s reserve indicates that the case is much broader than the "$6 Million in 6 Days" program, and may involve inflated billings, a broader array of kickbacks, or other healthcare fraud violations. The U.S. Attorney's Office in Boston has specialized in these types of cases, including the $875 million penalty assessed TAP Pharmaceuticals related to the marketing of Lupron. Individual defendants from TAP Pharmaceuticals were found not guilty in the criminal prosecution. Let's hope Serono's ethical "behaviour" improves, too. (ph)
Friday, April 22, 2005
The trial of former Philadelphia Treasurer Corey Kemp and four other defendants on corruption charges has started to resemble a game at Veterans Stadium as tensions have risen with the jury still deliberating after being instructed last week. U.S. District Judge Michael Baylson interviewed each of the jurors separately on Wednesday, and apparently the subject of the judge's inquiry was a note sent out by one juror that another juror believes the FBI lied during the investigation and at trial. The wiretaps in the case, including one place in Mayor Street's office, were a bone of contention during the trial, and the defense questioned whether the prosecution of Kemp and the other four defendants, including two Commerce Bank executives, was brought to justify the extensive investigation undertaken by the FBI of Mayor Street's administration. The judge has refused to disclose transcripts from the juror interviews and sealed four notes sent out from the jury room. If the jury convicts, the juror interviews are almost certain to be a ground for a request for a new trial and an appeal.
Tension between the defense lawyers and Judge Baylson has gotten pretty high. A local observer mentioned that the lawyers are upset at Judge Baylson for what they perceived as his pro-government approach -- he is a former U.S. Attorney for the Eastern District of Pennsylvania -- including rolling his eyes when defense counsel examined witnesses and a hostile tone. At a hearing yesterday, the tension boiled over as defense counsel objected to an instruction given to the jury in response to a question, when Judge Baylson said that Kemp was acting in an official capacity, a point disputed by the defense. George Parry, Kemp's lawyer, said to the judge, "I don't know why you just didn't tell them to convict Corey Kemp . . . Direct a verdict of guilt. You ought to be the 13th juror." Later, when Judge Baylson reminded the defense lawyers that "I'm the judge," one defense lawyer replied, "And the jury." And you thought it was tough to be on the Phillies (or Eagles, Flyers, 76ers . . .). An article in the Philadelphia Inquirer (here) discusses the happenings in court. (ph)
U.S. District Judge Sim Lake rejected the government's request to begin the trial of Ken Lay on the severed bank fraud charges within the next two months. Judge Lake accepted the defense argument that an earlier trial -- and conviction -- would have a prejudicial effect on the jury pool because of the intense publicity it would engender. The two sides also agreed that the charges will be decided by the judge and not a jury, so the court will begin the bank fraud case as soon as the jury retires in the larger conspiracy case that also includes former Enron CEO Jeff Skilling and former Chief Accounting Officer Richard Causey. This is an interesting arrangement that essentially piggybacks the evidence (to the extent it may be relevant) from the conspiracy trial on to the bank fraud/false statement to a financial institution case, which involves Lay's uses of funds from loans to purchase additional Enron stock. For Lay, the timing of the separate trial means that he will have greater freedom to decide whether to testify in the conspiracy prosecution without the specter of a prior conviction hanging over his head if the earlier trial had gone against him. A Houston Chronicle story (here) discusses the judge's ruling. (ph)
The Financial Crimes Enforcement Network (FinCEN) filed a notice of proposed rulemaking to prohibit two Latvian banks headquartered in Riga, VEF Banka and Multibanka, from conducting financial transactions with banks in the United States because of possible money laundering activities at the banks. Under the USA PATRIOT Act, U.S. financial institutions can be required to take "special measures" against foreign banks or other institutions when there is a "primary money laundering concern" regarding use of accounts for money laundering. FinCEN seeks to adopt the "fifth special measure" which "prohibits or conditions the opening or maintaining of correspondent or payable through accounts for the designated institution by U.S. financial institutions."
According to the FinCEN release on VEF Banka (here), "The bank’s dealings with foreign shell companies, provision of confidential banking services, and lack of controls and procedures adequate to the risks involved, make VEF vulnerable to money laundering and other financial crimes. As a result of the significant number of credit and debit transactions involving entities that appear to be shell corporations banking at VEF, some U.S. financial institutions have already closed correspondent relationships with VEF." Regarding Multibanka, the FinCEN release (here) states, "Multibanka offers confidential banking services and numbered accounts for non-Latvian customers. Reports substantiate that a significant portion of its business involves wiring money out of the country on behalf of its accountholders. The bank has been suspected of being used by Russian and other shell companies to facilitate financial crime. A common way for criminals to disguise illegal proceeds is to establish shell companies in countries known for lax enforcement of anti-money laundering laws. The criminals use the shell companies to conceal the true ownership of the accounts and assets, which is ideal for the laundering of funds." (ph)
The defense in the prosecution of Richard Scrushy began -- after more rounds of legal wrangling -- by focusing on the lack of any documentary evidence showing that he was aware of the fraud at HealthSouth, with the first witness being an FBI agent, who would have to be considered hostile. This is the consistent theme underlying the "honest but ignorant CEO" defense, and the first issue raised by defense lawyer James Parkman was whether the FBI found any of Scrushy's fingerprints on documents related to the fraud. That type of forensic evidence is usually not an issue in white collar crime prosecutions, but it presents an avenue for the defense to emphasize that there is no physical evidence of Scrushy's involvement, and no damning e-mails or memoranda from him regarding the fraud.
Before the defense began its case, Judge Karon Bowdre refused to dismiss most of the charges, but did grant the defense motion by dismissing five charges, including one of the Sarbanes-Oxley Act certification counts that alleged Scrushy forced two HealthSouth officers, including former CFO Bill Owens, to sign false certifications. She also reserved ruling on 12 other counts relating to money laundering and obstruction, including one of the other Sarbanes-Oxley Act counts, but did not dismiss the count regarding the one certification Scrushy signed. In addition, the judge's frustration with the prosecutors rose to the surface again when she said the government's 155 page brief on the Rule 29 dismissal motion "makes the unabridged edition of `Les Miserables' an easy read" -- I guess War and Peace in the original will come with the jury instructions.
The court also dismissed the three perjury charges arising from the SEC deposition (bringing the total number of charges to 50 from the original 58), although the government has appealed that decision to the Eleventh Circuit. If the appellate court overrules the judge's ruling that the transcript is inadmissible (see prior post with ruling here), then the government will have to re-open its case-in-chief and present the evidence. That makes for some procedural difficulties, and no doubt would be an issue on appeal should Scrushy be convicted. Articles in the Birmingham News (here) and AP (here) discuss the beginning of the defense case and the judge's rulings. (ph)
Hynix Semiconductor Inc., a South Korean manufacturer of dynamic random access memory (DRAM), agreed to plead guilty to a single count of conspiring to violate the Sherman Act by fixing prices with other manufacturers. The plea agreement requires the company to pay a $185 million fine, which is the third largest criminal antitrust fine ever; and the company agreed to cooperate in the government's continuing investigation. This is the second company to have entered a guilty plea as part of the price-fixing conspiracy, with Infineon Technologies AG also pleading guilty in Oct. 2004 and agreeing to pay a $165 million fine; four Infineon executives also entered guilty pleas. According to the Department of Justice press release (here) engaged in the conspiracy by:
Participating in meetings, conversations, and communications in the United States and elsewhere to discuss the prices of DRAM to be sold to certain customers; Agreeing, during those meetings, conversations, and communications, to charge prices of DRAM at certain levels to be sold to certain customers; Issuing price quotations in accordance with the agreements reached; and Exchanging information on sales of DRAM to certain customers, for the purpose of monitoring and enforcing adherence to the agreed-upon prices.
Hynix and Infineon were the third and fourth largest DRAM manufacturers in the world in 2004, with Samsung and Micron the top two companies (see article in EETimes here about DRAM manufacturing rankings). JURIST has coverage on the plea agreement and investigation here. (ph)
The Eleventh Circuit reiterated its position that the broad commerce element for a Hobbs Act violation only requires a minimal effect on interstate commerce and not a "substantial" effect in United States v. Verbitskaya (here). The court rejected a claim that the Supreme Court's federalism decisions in Lopez and Morrison changed the broad interpretation of the Hobbs Act, in much the same way that the Third Circuit rejected that argument in United States v. Urban (see earlier post here). As the Eleventh Circuit noted rather pithily: "Extortion of money obtained in interstate commerce affects interstate commerce." It's pretty hard to earn money any other way. While the cases involve different types of extortion (use of force in Verbitskaya, "under color of official right" in Urban), the outcome remains the same regarding the broad scope of the commerce element. (ph)
Abuses involving durable medical equipment (DME) have been among the most pervasive types of health care fraud prosecuted by the federal government. A grand jury in Philadelphia indicted David Mazer, who operated the Women's Medical Group, on 12 counts of health care fraud and 18 counts of wire fraud for providing cheaper or less complex DME and then billed Medicare for more expensive or complex items (indictment here). Mazer's company is alleged to have contacted potential recipients by purchasing telephone lists and then conducting cold-calling to entice elderly Medicare Plan B participants to request the DME through their doctors. (ph)
Thursday, April 21, 2005
Two Merrill Lynch executives, Daniel Bayly and James Brown, were sentenced for their roles in the Enron Nigerian barge trial in which Enron agreed to sell the barges to Merrill and then repurchase them later, essentially a financing deal rather than a true sale, in order to inflate Enron's earnings for at the end of the year. This was the first of the Enron-related trials, and the jury determined the loss caused by the transaction was $13.7 million -- a procedure adopted by some federal courts before the Supreme Court's decision in Booker made such jury fact-finding unnecessary.
U.S. District Judge Ewing Werlein sentenced Bayly to 30 months imprisonment, below the Sentencing Guidelines range even after the judge determined the loss caused by the fraud was $1.4 million, based on Merrill's gain on the transaction. The Pre-Sentence Report recommended a 14 year prison term, based on the larger jury-based loss and other sentencing enhancements. Brown received a 46-month prison term. In addition to the conspiracy/wire fraud charges, Brown was also convicted of perjury and obstruction, and the jury determined he played a leadership role in the offense. (See Bloomberg story here)
In sentencing Bayly, Judge Werlein stated how impressed he was by the defendant's reputation: "I may have never had a defendant before me who had a more glowing and extraordinary record of being a good citizen . . . The ignominy of a conviction and sentence by one who commits a crime of this type is quite different than one that could be tolerated by people who committed (other types of offenses)."
Sentencing Law & Policy has an interesting post (here) continuing an earlier discussion about whether Booker will result in lighter sentences in white collar crime cases. In an earlier post (here), I discussed whether judges will favor white collar defendants who are more like themselves, with long-term charitable and family ties in the community. Two items in Judge Werlein's sentence are of interest, based on the Houston Chronicle story (here) discussing the sentence: the judge noted Bayly's "boy scout" reputation and opined that white collar defendants cannot tolerate long prison terms and are sufficiently deterred by shorter sentences.
"Boy scout" reputations are certainly not unknown among white collar offenders, and are more likely to be the norm. The collateral consequences of a prison term, including loss of livelihood, reputation in the community, licenses, etc. are exacerbated when the person has so much more to lose than the typical defendant in a street crime case, even the ones that come up in federal court involving drugs and weapons. Are these sufficient to justify lower sentences, so that a "reasonable" sentence in a white collar crime case will be less than that for a person who is a felon in possession or is a lower-level drug dealer in a large narcotics organization? Unfortunately, the message from a sentencing like Bayly's to Congress may be that judges will gradually move toward consistently lower sentences for white collar defendants who have the ability (and means) to present themselves in the best possible light to a judge who is naturally sympathetic to someone similar to himself or herself. The congressional overreaction is H.R. 1528, which would prohibit as least some of the grounds cited by Judge Werlein as the basis for a downward departure from the Guidelines (leaving aside the loss calculation).
That said, 30 months is not a short sentence, and Bayly could be barred from the securities industry by the SEC for his role in the barge transaction. This is a substantial punishment. (ph)
UPDATE (4/21): A USA Today story (here) gives some additional details about the sentencing of James Brown that were not available when I posted earlier. The PSR recommended a 33 year prison term, and even with the judge's lower fraud loss calculation the sentence certainly looks like a downward departure. An additional basis identified by Judge Werlein for giving Bayly and Brown lower sentences was his comparison with the sentence Andrew Fastow is expected to get for his cooperation, which is capped at ten years. Whether that is a fair basis for comparison is a different matter. Fastow cooperated while Bayly and Brown (among others) did not, although I have not always found that to be entirely persuasive.
One statement by Brown did catch my eye. He said at the sentencing: "Since I was indicted, I have been branded a liar and a criminal; I could no longer make a living in my chosen profession." Regarding the first part, being convicted of perjury, obstruction of justice and wire fraud tends to have that effect on a person. That he can no longer pursue his chosen profession is true of most people convicted of crimes, particularly professionals. I have a hard time seeing how either of those circumstances should affect a sentence, and I doubt that they did. (ph)
UPDATE (4/22): For an interesting discussion of Bayly's sentencing hearing by Tom Kirkendall, an attorney who was present, check his blog Houston's Clear Thinkers here.
The old Wall Street adage that "bulls and bears make money but pigs get slaughtered" certainly applies to doctors who abuse the medicare system. The U.S. Attorney's Office for the Central DIstrict of California issued a press release (here) discussing the 51 month sentence given to Mark Little, a podiatrist in Orange County, who was convicted for submitting over $800,000 of fraudulent bills for procedures that were never performed on patients. According to the press release:
The evidence presented at trial showed that Little used the names and Medicare beneficiary numbers belonging to a few of his elderly patients to create and submit bogus claims for services that were never performed. Specifically, Little submitted claims for daily or almost-daily surgical procedures and casting on these same patients for months, sometimes years, at a time.
The investigation into Little began when a Medicare beneficiary reviewed her Medicare statement and noticed that Little had billed Medicare for more than 70 procedures he had never performed. That beneficiary called Medicare's hotline number to complain. In its investigation, Medicare noticed the same type of daily or almost-daily billing for Little's top-ten highest billed patients. When these patients were interviewed, they stated that they only saw Little once every two weeks or once a month, and then they only received toenail clippings.
Among podiatrists in Orange County, Little submitted the largest amount of claims to Medicare, even though he had far fewer patients then the next highest-billing podiatrists. In fact, Little's ten highest-billed patients generated approximately $800,000 in Medicare claims and accounted for 90 percent of his total Medicare income.
The Third Circuit issued an opinion in United States v. Urban (here) upholding the convictions of a number of former Philadelphia plumbing inspectors who were convicted of violating the Hobbs Act and RICO related to small cash payments (generally from $5 to $20) they received from plumbers to expedite inspections on construction jobs -- "grease" payments. The government's evidence to prove the effect on interstate commerce for the Hobbs Act convictions was the "diminution of assets theory" under which the government shows the victim has less money for other economic activity because of the bribe payments. Specifically, the defendants argued that the jury instruction, which only required the government to show a "potential" effect on interstate commerce from the diminution of assets, violates the Commerce Clause analysis of the Supreme Court in Lopez, Morrison, and Jones, which require a closer connection between the criminal conduct and an actual effect on interstate commerce. the Third Circuit rejected that argument, stating:
There thus appears to be little doubt that our precedent supports the District Court’s use of "potential" effect and its formulation of the depletion of assets theory in the jury instructions . . . But as we have repeatedly noted, the government need only prove that Hobbs Act extortion potentially affected commerce. Our “potential” effect reading of the Hobbs Act explains our continued adherence to the depletion of assets theory, because it is beyond cavil that the depletion of assets of a person engaged in interstate commerce has at least a “potential” effect on that person’s engagement in interstate commerce. Indeed, had the District Court instructed the jury that, notwithstanding proof of depletion of assets of plumbers engaged in interstate commerce, it could nonetheless acquit if it credited those plumbers’ conclusory testimony that their payments to Appellants did not affect their ability to purchase supplies made out-of-state, it would have misstated the law of this Circuit – extortion which depletes the assets of persons or businesses engaged in interstate commerce is, as a matter of law, a Hobbs Act violation.
The commerce element in the Hobbs Act is as broad as Congress's constitutional authority to regulate interstate commerce, and does not require proof of any interstate transportation, use of a means of interstate commerce, or the like. The challenges to this broad exercise of the Commerce Clause power in the Hobbs Act have usually come in robbery prosecutions in which the defendant engages in a series of petty robberies and is prosecuted under the "diminution of assets theory" because only money is taken. Commerce element challenges are less common in the corruption/"under color of official right" cases because the amounts are usually much greater, so that the effect on interstate commerce is easily identified. In Urban, the amounts were quite small -- pocket change really -- and spread among a number of plumbers and construction projects so that the effect on individual victims was much harder to demonstrate. Nevertheless, the "diminution of assets" theory -- which requires little proof beyond showing that money changed hands -- is alive and well in Third Circuit (and elsewhere). (ph)
The DC Circuit refused the government's petition for a rehearing en banc of the panel's decision on Feb. 4 that threw out the government's request that the tobacco company defendants be ordered to disgorge $280 billion in profits from their alleged RICO enterprise. An excellent post on the SCOTUS Blog has a thorough review of the case (here), with the trial continuing in District Court at Day 95. (ph)
Wednesday, April 20, 2005
The Seventh Circuit issued an opinion in United States v. Miller (here) that deals, in a footnote, with the question whether a judge can impose the Obstruction of Justice enhancement based on the defendant's perjury at trial without a specific jury finding on that issue. The defendant denied in his testimony that he knew the bag he delivered contained Ecstasy, yet the jury convicted him of conspiracy and distribution. Although the court remanded the sentence to the district court, it paused to discuss the Obstruction enhancement:
To indicate our resolution of issues presented on the present appeal, however, we would note that the district court did not clearly err in finding that Miller perjured himself by testifying that he did not know that the bag he delivered to Detective Mahone contained Ecstasy, since it could have refused to credit Miller’s testimony in light of his admissions. Moreover, both the offenses of conspiracy and distribution incorporate a scienter element that Miller’s testimony was intended to negate, and the jury’s verdict directly establishes that it disbelieved his testimony, since it was required to find scienter in order to convict Miller. Under Booker, therefore, it could certainly be argued that there was no constitutional error in applying the enhancement for obstruction of justice because the jury by its verdict established that perjury had been committed. In any event, there was a statutory error since the district court, in applying the enhancement, erroneously believed that the Guideline was mandatory, not advisory. Although no objection was raised at trial, the government has conceded that the application of the assessment was error, whether constitutional or statutory. (But the context of the government concession indicated that it applied to the constitutional question).
The Seventh Circuit approach indicates that, at least when the jury's verdict implicitly rejects the defendant's denial of an element of the crime, then an Obstruction of Justice enhancement would be reasonable under Booker. That approach would require the trial court to interpret the scope of the jury's verdict, and seems to support, at least implicitly, the argument that the Obstruction/Perjury enhancement requires some jury finding, even if not an explicit one regarding perjury. (ph)
The government rested its case against Richard Scrushy yesterday, with the judge granting the government's request to drop two charges (earlier post here). One mail fraud charge alleged the wrong recipient, and for one money laundering charge involving Scrushy's purchase of four Persian rugs the seller had destroyed the paperwork -- one wonders how the government could have included counts without checking who received the mailing or having secured the documentary evidence before seeking the indictment. The defense is scheduled to begin today at 1:30, assuming U.S. District Judge Bowdre does not grant the defense's Rule 29 motion to grant a judgment of acquittal on all counts. There is certainly a possibility that the judge will dismiss some charges, although I think it is unlikely that the core securities fraud/false certification counts will be dropped.
Once the defense begins, the key question is whether Scrushy will testify. Given the parade of witnesses against him, including the five Guilty CFOs, I believe he will have to testify to establish his "honest but ignorant CEO" defense. The evasiveness of former WorldCom CEO Bernie Ebbers in his cross-examination should be a lesson to the defense team on how to prepare Scrushy for his testimony. An AP story (here) discusses the conclusion of the government's case. (ph)
Big Four accounting firm KPMG settled the SEC civil fraud action related to its auditing work on behalf of Xerox Corp. in the late 1990s by agreeing to the entry of a cease-and-desist order, the payment of a civil penalty of $10 million, and to disgorge its fees from the Xerox engagement of $9.8 million plus interest -- a total payment of $22.475 million. The SEC's Litigation Release (here) describes KPMG's role in the Xerox accounting fraud:
[F]rom 1997 through 2000, KPMG permitted Xerox to manipulate its accounting practices to close a $3 billion "gap" between actual operating results and results reported to the investing public. During this period, Xerox used topside accounting actions at the end of financial reporting periods to increase equipment revenue and earnings through the improper acceleration of revenue from long term leases of Xerox copiers and through manipulation of excess or "cookie jar" reserves. Most of Xerox's topside accounting actions violated generally accepted accounting principles (GAAP) and all of them inflated and distorted Xerox's performance but were not disclosed to investors. These undisclosed actions overstated Xerox's true equipment revenues by at least $3 billion and overstated its true earnings by approximately $1.5 billion during the four-year period.
The SEC earlier settled its case with Xerox, with a similar $10 million civil penalty, and with six Xerox executives, including former CEO Paul Allaire, with total payments (penalties, disgorgement, and interest) of $22 million. The Commission also sued five former KPMG audit partners for their role in the Xerox accounting fraud, and that case continues (see Litigation Release here). KPMG ran afoul of the SEC last year in a settlement involving accounting at Gemstar-TV Guide International. (ph)
The Supreme Court issued its opinion yesterday in Dura Pharmaceuticals v. Broudo, unanimously reversing the Ninth Circuit and requiring something more than notice pleading on the issue of loss causation -- no great surprise there. An excellent post on The 10b-5 Daily (Lyle Roberts of Wilson Sonsini) thoroughly discusses the case. We white collar types continue to await the Court's decision in Paquantino v. United States on the scope of the mail fraud statute when the victim is a foreign government being deprived of taxes, which was argued Nov. 9. In addition, for those with an interest in international criminal law, Small v. United States concerning the effect of a foreign conviction remains undecided and was argued on Nov. 3. See Ellen Podgor's earlier post here on what may be holding up the decisions in these cases. (ph)
Nikolai Tehin, an attorney in San Francisco for over 30 years, was convicted last October of six counts of mail fraud and nine counts of money laundering for stealing settlement funds his law firm, Tehin + Partners, received on behalf of clients (indictment here). He has received a sentence of 170 months, a very substantial term of imprisonment in a white collar crime case. A press release (here) issued by the U.S. Attorney's Office for the Northern District of California described Tehin's conduct as akin to a ponzi scheme in which he used funds for his personal expenses and then took money from later settlements to repay clients whose case settled earlier. In one case in which Tehin represented low-income, mostly Latino plaintiffs complaining about their living conditions -- the Vintage Ranch case -- a $2 million settlement was siphoned away. According to the press release:
In early 2001, Mr. Tehin settled the Vintage Ranch lawsuit for $2 million. After attorney's fees and costs, the clients were entitled to approximately $1.3 million. However, within just two months of receiving the final settlement check in the case, Tehin had actually stolen and spent the entire $2 million on unauthorized personal and business expenses before any of the Vintage Ranch plaintiffs received any of their settlement funds.
For many months following the settlement, Mr. Tehin's Vintage Ranch clients complained repeatedly about how long it was taking for them to be paid. Ultimately, tensions increased to the point where nearly a dozen of the unpaid clients marched in front of Mr. Tehin's office building, in San Francisco's Financial District, holding signs with slogans such as: "Taking Money from the Poor, Shame on You Nick Tehin and Pam Stevens" and "Bank Records Don't Lie, You Took Our Client Trust Fund."
When the Vintage Ranch clients did ultimately receive their money, they were paid not with their own settlement funds, but with funds belonging to other clients of Tehin + Partners.
Other clients from whom Tehin stole settlement money included two medical malpractice victims and two claimants in a will contest. (ph)
UPDATE (4/20): There is a good article about the prosecution of Tehin on Law.Com (here), including a comment by his lawyer that this is the longest sentence one of his clients has received in a federal prosecution (I assume he does not do many large-scale drug cases). Among those who requested a long sentence is the director of Legal Aid of Marin, which retained Tehin to represent the clients in the Vintage Ranch case discussed above.
The SEC sued Alina Welt, a former benefits analyst with two accounting firms for insider trading based on tips she gave to her husband, Andrew, about companies that were involved in merger activity. Andrew traded on the material nonpublic information and also tipped his brother, Bruce, and a friend, Bruce Hirschhorn. The defendants made over $400,000 from their trading in Renex Corp., Travel Services International, Inc., Intermedia Communications, Inc., Digex, Inc. and Sensormatic Electronics Corp. In addition to disgorging their profits, the defendants agreed to pay civil penalties of approximately $1.2 million, including a penalty of $393, 669 by Alina and Andrew Welt. Whether it be a bull or bear market, insider trading just never seems to go away -- the allure of "free money." (ph)
Tuesday, April 19, 2005
But minutes ago, a post here described the court's elimination of three perjury counts against Richard Scrushy, former CEO of HealthSouth. But even more is happening today as the government is now requesting that the court drop two mail fraud counts against the accused. (See AP story here in Wall Street Jrl). If granted it will bring the number of charges against the defendant to 52 (will the closing argument use analogies like -"we are dealing with a full deck").
The government appears to want these two charges dropped because documents they intended to use to prove these allegations are no longer available. Did the government lose the evidence, fail to retain it, and when did they find this out?
So why drop the charges, as opposed to just letting the jury return a not guilty or letting the court dismiss the charges at the end of the government's case?
Perhaps it is good faith on the part of the government, and if so this is admirable to see in a case that has suffered such controversy. But it can also be that the government needs them out of the way as quickly as possible to avoid later claims of a spillover effect coming from improper charges. The last thing the government wants if Scrushy is convicted, is a defense appellate argument that the charges allowed improper evidence that tainted the rest of the trial. Then again it could be that the government can't take a chance that the defense will move to dismiss these unproved counts.
Keeping them as charges can work both ways for the defense.
(1) On one hand they can be used to show how absurd the government charging process is - the closing argument might be something like - they threw spaghetti at the wall and just hoped something might stick. The defense motive may also be that some of their relevant evidence relates to these charges and it is necessary to keep them in play to present that evidence.
(2) Alternatively, the defense cannot take a chance at failing to move to dismiss unproved charges at the close of the government case. What happens if the prosecution should be successful on these charges? There is also the fear of the compromise jury - - the jury that wants to give something to the defense and something to the prosecution. Giving away charges that could have been eliminated without jury resolution may take away a favorable card in the defense hand.
In the end, if the evidence isn't there, the charges need to go, and it is good to see the government making the first move to make this happen.