Tuesday, April 19, 2005
Amazing, is the best way to describe what is occurring in the Scrushy trial. First the judge dismisses the 3 perjury counts, then reinstates them after a notice of appeal by the government and says they will be dismissed at the appropriate time. The Order is below. Some thoughts on all this:
1. The judge's change in the order is necessary. You can't dismiss the counts just because you are prohibiting the use of the deposition. The govt. has to be given the chance to present other evidence if they have it. Assuming they do not have other evidence of the perjury counts (as will inevitably be the case here) then a judge can dismiss when the govt. has finished presenting all its evidence in their case in chief. But you can't dismiss the counts without first giving them the chance to present something else. Thus, it's likely that the dismissal will happen, but the timing was not initially correct and the correction was necessary.
2. Why is the government's notice of appeal only as to the dismissal of the counts? Will there be a notice and appeal of the court's ruling on not allowing the deposition into evidence?
3. The court's order is what I would call - forceful. This judge is not going to tolerate game playing by the government. The court is not saying that the SEC and DOJ cannot share evidence. The court explicitly says that "a defendant cannot succeed on a theory of a 'perjury trap' when the questions relate to a legitimate, parallel investigation" The difference in this case is that the court is finding the conduct here to be illegitimate. And one finds explicit items within the Order to support this conclusion.
4. The most fascinating part of the order is footnote 6. This footnote states that:
"The Government submitted for in camera review the email exchange between Department of Justice counsel and its Professional Responsibility Advisory Office. Although such officer authorized the contacts at issue, the court expressly makes no determination of their propriety."
This part of the Order is dealing with whether there has been Rule 4.2 violation (the old Thornberg Memo issue). The court does not grant defendant's motion on this issue. But what was in the email exchange that caused the Professional Responsibility Advisory Office to side with the government? One has to wonder whether it included the essence of the first part of the court's order? That is, did the government ask permission of their professional responsibility office to ask questions of the defendant using a civil proceeding in order to obtain evidence for a criminal trial?
If a person is being questioned by the government and they are a target of an investigation than under internal policy of the DOJ, they should be provided with a target letter. Was Scrushy provided a target letter before he testified? Was he not given a target letter because this was supposedly a civil proceeding and not a criminal one? Either way, this is not something a defendant can enforce in court, but is something that the Office of Professional Responsibility (OPR) can review and internally control. What really happened here?
The government issued a press release today here, describing the latest happenings in Operation Roaming Charge. Operation Roaming Charge is a national/international government operation focused on telemarketing fraud schemes. Back in October 2004, the DOJ stated here that 135 individuals worldwide had been arrested as a result of this Operation. They noted that:
"The ongoing action, known as Operation Roaming Charge, began on Jan. 1, 2004, and involved unprecedented coordination at the national and international levels to combat telemarketing fraud schemes. The schemes uncovered in this operation include every major category of telemarketing fraud: bogus lottery, prize and sweepstakes schemes; offers of nonexistent investments; bogus offers of 'pre-approved' credit cards or credit-card protection; employment and business opportunity swindles; tax fraud schemes; and 'recovery room' schemes, in which criminals pretend to be members of law enforcement agencies who can help telemarketing fraud victims recover some of their losses if they pay bogus 'fees.'"
Today's DOJ press release states that:
"The Justice Department announced today that a federal court in Las Vegas has barred five Nevada men linked to a defunct telemarketing firm-the Las Vegas-based National Audit Defense Network (NADN)-from selling tax fraud schemes and preparing income tax returns for others. The court barred NADN’s former president, Weston Coolidge, of Las Vegas; its former general manager, Alan Rodrigues of Henderson; and Lee Panelli, Jeff Klingenberg, and Ric Klingenberg, all Las Vegas residents. The court also enjoined a related company, ALR, Inc., doing business as Success Matrix Group, from committing the same conduct. "
These actions are an outgrowth of Operation Roaming Charge.
The National Association of Criminal Defense Lawyers (NACDL) had a white collar track for those attending the spring seminar. Speaking on Friday of last week were a host of white collar criminal defense attorneys, including Abbe David Lowell, Jane Barrett, Tracy Minor, and John Keker.
One fascinating presentation was given by Steve Peters. Although titled, "Honest Services in Corporate America: The Federal Investigation of Qwest Communications International," the honest services law was not the focus of the discussion until near the end of the presentation. The front part of the presentation was focused on the powerpoints and evidence used in his recent trial. He described what has been called the "distraction defense."
Attorney Peters focused on the specific events of each day in the defendant's life that corresponded to the dates the government was using in its indictment. He placed these personal events on a screen using powerpoints with adobe. The result was a convincing presentation that the accused could not possibly have the mens rea to commit the crimes in question. Not only did each powerpoint bring forth enormous sympathy for the accused, but it also showed how it was unlikely that this person would be focused on fraudulent acts at a place of business when so many significant events were occurring in his personal life.
The specific facts of this case made this defense appropriate. But the presentation of this defense was what was particularly effective. The use of technology served an important role in explaining the defense position to the jury.
Monday, April 18, 2005
Lawyers for Bernie Ebbers filed a motion on Friday for a new trial under Federal Rule of Criminal Procedure 33. According to a report in the Wall Street Journal (here), Ebbers asserts that the court's refusal to grant immunity to three witnesses -- all former executives of WorldCom -- denied him a fair trial. He also argues that the jury instruction on conscious disregard for the securities fraud counts was in error.
The immunity issue is usually a non-starter because the court does not have statutory authority to grant it without a government request, and will not grant it on its own independent authority absent evidence of government misconduct in refusing to authorize immunity. Regarding the second ground, given that the judge decided to give the intent instruction once already, it is unlikely the court will second-guess itself now, especially when the so-called "ostrich instruction" is widely accepted in the circuits if there is evidence that the defendant refused to pursue information in light of the circumstances. The defense motion is the usual step in the appellate process. (ph)
The prosecution of five former executives of Enron's broadband services unit (EBS) for securities fraud, conspiracy, and money laundering gets under way today in Houston. That unit tried to set up a trading market for broadband similar to the much larger energy trading unit at Enron, and for a while EBS gave Enron the cachet of being an internet company. The broadband market never took off, and EBS shut down when Enron collapsed. The defendants are Joe Hirko, former co-CEO of EBS, Scott Yeager, Rex Shelby, Kevin Howard, and Michael Krautz (indictment here). Two other former executives entered guilty pleas and will testify for the government. Jury selection begins today before U.S. District Judge Vanessa Gilmore, and an article in the Houston Chronicle (here) discusses the start of the trial.
The Coca-Cola Company agreed to a cease-and-desist order from the SEC regarding channel stuffing by the company from 1997 through 1999. According to the Administrative Order (here) issued today, Coke used its Japanese subsidiary (Coca-Cola (Japan) Co. -- CCJC) to pump up its syrup sales as volume began to diminish in 1996 in the following way:
At or near the end of each reporting period between 1997 and 1999, Coca-Cola, through its officers and employees implemented a "channel stuffing" practice in Japan known as "gallon pushing." In connection with this practice, CCJC asked bottlers in Japan to make additional purchases of concentrate for the purpose of generating revenue to meet both annual business plan and earnings targets. The income generated by gallon pushing in Japan was the difference between Coca-Cola meeting or missing analysts’ consensus or modified consensus earnings estimates for 8 out of 12 quarters from 1997 through 1999.
The channel stuffing resulted in the issuance of misleading financial statements for two year. The Order essentially requires the company to continue to follow revenue recognition policies instituted in 2000, with no fine or other remedial requirements. More importantly for Coke, the Department of Justice dropped its criminal inquiry into the accouting issues (see company press release here). (ph)
From fellow LawProg blog CrimProf comes a link (here) to a story from Newsweek (here) about how TIAA-CREF hired one Sonia Radencovich for a tech position without checking her background. It seems that Sonia came from a "preferred vendor" and TIAA-CREF assumed the vendor had checked her background. Unfortunately, under her other name, Sonia Howe, less than two weeks before starting at TIAA-CREF she was sentenced to four years in prison for her part in the Martin Frankel insurance fraud that landed Frankel in jail for 16 years after he disappeared amid smoking documents in a fireplace in his Connecticut mansion. Her role in Frankel's scheme was described by the U.S. Attorney's Office for the District of Connecticut in this way in a press release after her sentencing (here):
HOWE, a purported trustee of the Thunor Trust, the entity through which FRANKEL allegedly controlled the insurance companies, was convicted of participating in the racketeering enterprise through which FRANKEL and others were able to obtain the insurance company assets and convert them to their own use and benefit. HOWE admitted that she created bogus monthly statements and confirmation slips that were sent to the insurance companies that falsely reflected that the insurance company assets were safe and secure. HOWE was also charged with and admitted laundering the proceeds of the fraud through her receipt of various funds.
HOWE was described by the prosecutor as instrumental in Frankel’s successful “ponzi scheme” that left seven insurance companies looted and in receivership. However, HOWE cooperated with federal authorities and was granted a downward departure from the applicable guideline range of 188-235 months in prison as a result. The Court also departed on the basis of HOWE’s stated motivation for becoming enmeshed in Frankel’s scheme, that is, her belief that her children had been abused by their father and her efforts to prevent further harm to them.
According to the Newsweek story, Radencovich/Howe worked at TIAA-CREF for two months, and downloaded data from accounts related to at least three colleges (Purdue, Michigan, and Harvard) on to her personal laptop computer. It's not clear whether she did anything with the data.
TIAA-CREF has garnered a bit of bad publicity lately. It removed two board members last year because of disclosure issues related to consulting work they did with the company's auditors, Ernst & Young, and the SEC initiated an informal investigation of E&Y regarding auditor independence (the firm was replaced by PwC last month). Also, the company's current CFO, Elizabeth (Betsy) Monrad, worked at General Re before joining TIAA-CREF and had some contact with the reinsurance transaction that is the focus of the widespread investigation of AIG and General Re. In the interest of full disclosure, not that anyone should care in the least, I have a sizeable chunk of my retirement money invested with TIAA-CREF -- although perhaps I will change that to "had." (ph)
As the prosecution of Richard Scrushy moves inexorably toward its third month, the government did not have a good week before Judge Karon Bowdre. First, she dismissed the three perjury counts, which were added to the indictment last September, because of apparent coordination between prosecutors and SEC investigators immediately before Scrushy testified under oath in the SEC's investigation (see earlier post here). I doubt the loss of the perjury counts was a major blow to the prosecution, but it does make it easier for the defense to call Scrushy to testify without him having to explain why his statements to the SEC were not false. The Judge then dismissed one of the money laundering counts on the ground that the government had not introduced sufficient evidence linking the funds to specified unlawful activity. Once again, not a major blow to the government's case because the core securities fraud, conspiracy, and money laundering charges remain.
The testimony of the government's expert witness about tracing the money Scrushy used to acquire various assets related to the money laundering and forfeiture counts took a turn for the worse during cross-examination last week. The witness, William Bavis, testified that he analyzed 34,000 transactions in Scrushy's personal accounts to trace the funds from the alleged fraud. Unfortunately, Bavis appears to have struggled with the details, and at one point said that a statement that $5 million was the product of the fraud should have been $3 million. Judge Bowdre then asked about the missing $2 million: "Did that just evaporate in your calculations?" Needless to say, when the financial expert gets confused about the numbers, and the judge starts asking about basic math, it cannot help his credibility. While the tracing testimony does not go to the financial fraud, and Scrushy's awareness of it, if more counts start dropping off the government's case, then the core claim about Scrushy's involvement in the fraud could become more difficult to prove. An AP story (here) discusses the testimony of the government's expert. (ph)
One of the goals of the Sarbanes-Oxley Act was to require publicly-traded companies to improve their internal controls. Section 404 of the act seeks to accomplish that goal by requiring the CEOs of companies and their auditors to attest annually to the effectiveness of the corporation's internal controls to ensure that financial statements are a prepared in accordance with GAAP. A recent article by Linck, Netter, and Yang, Effects and Unintended Consequences of the Sarbanes-Oxley Act on Corporate Boards, assesses the costs of this provision, and concludes that it will imposes a "disproportionate burden" on smaller companies [Article available on SSRN here]. Increased costs will always draw a negative reaction, and one is brewing regarding this provision. While few call for the repeal of the entire Sarbanes-Oxley Act, at least not publicly, and criticism is always prefaced by protestations that the Act is a fine example of effective corporate regulation, there is increasing criticism of Section 404. Congressman Ron Paul (R-Texas) introduced on Thursday, April 14, the Due Process and Economic Competitiveness Restoration Act that would repeal Section 404. The Congressman's statement accompanying the bill (here) is entitled "Repeal Sarbanes-Oxley!", and states:
Sarbanes-Oxley was rushed into law in the hysterical atmosphere surrounding the Enron and WorldCom bankruptcies, by a Congress more concerned with doing something than doing the right thing. Today, American businesses, workers, and investors are suffering because Congress was so eager to appear “tough on corporate crime.” Sarbanes-Oxley imposes costly new regulations on the financial services industry. These regulations are damaging American capital markets by providing an incentive for small US firms and foreign firms to deregister from US stock exchanges. According to a study by the prestigious Wharton Business School, the number of American companies deregistering from public stock exchanges nearly tripled during the year after Sarbanes-Oxley became law, while the New York Stock Exchange had only 10 new foreign listings in all of 2004.The reluctance of small businesses and foreign firms to register on American stock exchanges is easily understood when one considers the costs Sarbanes-Oxley imposes on businesses. According to a survey by Kron/Ferry International, Sarbanes-Oxley cost Fortune 500 companies an average of $5.1 million in compliance expenses in 2004, while a study by the law firm of Foley and Lardner found the Act increased costs associated with being a publicly held company by 130 percent. Many of the major problems stem from section 404 of Sarbanes-Oxley, which requires Chief Executive Officers to certify the accuracy of financial statements.
One CEO who was openly critical of Sarbanes-Oxley was Maurice Greenberg, the former CEO of AIG who may ultimately run afoul of its provisions, and few CEOs appear willing to be lumped together with him at the moment. While it is unlikely that Section 404 will be repealed in its entirety, look for some regulatory relief in the near future, especially if SEC Chairman William Donaldson leaves the Commission. (ph)
Sunday, April 17, 2005
An article in the New York Times (here) discusses the role of N.Y. Comptroller Alan Hevesi, whose responsibilities include being the sole fiduciary responsible for the New York Common Retirement Fund, which has assets of $120 billion, as the lead plaintiff in securities class action law suits. The Common Retirement Fund was the lead plaintiff in the WorldCom litigation that resulted in settlements of over $6 billion and is currently in trial against Arthur Andersen, the last remaining defendant (see earlier post here). Hevesi is an elected official, and as the article points out, one source of campaign contributions for him was the large plaintiffs securities law firms, including contributions from partners at Bernstein Litowitz, the plaintiff's counsel in the WorldCom litigation. It's important to note that Bernstein Litowitz had already been appointed lead counsel by Hevesi's predecessor, H. Carl McCall, before the election, so the campaign contributions could not affect that firm's appointment in the WorldCom litigation. It seems, though, that the relationship between the lead plaintiffs and law firms could trigger issues of "pay-to-play" when an elected official is responsible for the determining which law firm will be appointed as lead counsel.
The genesis of this situation is the Private Securities Litigation Reform Act, adopted in 1995 as part of the so-called Contract With America proposed by Newt Gingrich in the 1994 elections. The PSLRA was designed to deter frivolous securities lawsuits, and one means to achieve that result was to make it more difficult for the plaintiffs law firms (particularly the old Milberg Weiss firm) to control the litigation by having courts appoint the "most adequate plaintiff" to serve as the named representative of the class. In choosing the lead plaintiff, the district court looks to the party that "has the largest financial interest in the relief sought by the class . . . " 15 U.S.C. Sec. 78u-4(a)(3)(B)(iii)(I)(bb) [Is everyone following along with that cite? If not, it's right here]. This provision clearly favors the large institutional investors, such as CalPERS and Hevesi's fund, whose billions in assets means they have large investments in many companies. Once the "most adequate plaintiff" is determined, then that party "shall, subject to the approval of the court, select and retain counsel to represent the class." 15 U.S.C. Sec. 21D(a)(3)(B)(v). A party can only serve as the lead plaintiff in five cases in any three year period, so the role gets passed around, but a number of the plaintiffs have been the large public pension funds.
The use of institutional investors as the representative plaintiff has resulted in lower attorneys fees, and Hevesi has worked to keep fees down, including a 5% cap in the WorldCom case. But 5% of $6 billion is still a lot of money, and even with lower fees there is still a powerful financial incentive to be named as lead counsel. Campaign contributions are a necessary part (or evil) of the political system, and so elected officials who will make the decision on appointment of counsel in securities cases naturally will look to interested constituencies, including plaintiffs securities law firms, for contributions. In the municipal securities area, efforts have been made to limit "pay-to-play" through rules barring contributors from doing bond work for the government, but those rules have not been entirely effective. Campaign contributions will work their way to candidates who can make decisions that affect the donor, and the PSLRA may have opened up a new avenue for those contributions to flow from plaintiffs securities firms to elected officials in positions like Hevesi's who will choose the lawyers for the large securities fraud claims. (ph)
A recent decision of the Fifth Circuit in United States v. Miller (here) discusses a situation that points out the trap into which a defendant can fall under the plain error rule because counsel did not see the problem and object. Miller entered a guilty plea to one count of money laundering and one count of tax evasion related to his embezzlement of over $950,000 while he served as CFO of a health care provider. He was sentenced to a 96-month term of imprisonment and ordered to make restitution of $1,485,074.24, which includes a payment to the IRS of $335,000 for unpaid taxes and $1.15 million to his former employer. Here is where the plain error rule rears its ugly head. The Fifth Circuit rejected his argument that there is no authority to order a defendant to pay restitution to the IRS because no objection was raised at sentencing to this part of the sentence. The court found that Miller could have been fined the same amount, so "it cannot be that Miller's substantial rights were affected." All well and good, but if a court does not have power to make this type of order, shouldn't there be a remedy?
But wait, it gets worse for Miller. His appellate counsel pointed out that he was ordered to repay the former employer and pay taxes on that same amount. In order words, he's paying taxes on money he did not receive, if the restitution is made to the former employer. Certainly logical, as the Fifth Circuit noted when pointing out that the argument has a "certain intuitive appeal." Unfortunately for Miller, once again there was no objection to the restitution order, and therefore under the plain error doctrine his argument was described as "novel," and plain error only applies to errors that are "obvious," "clear," or "readily apparent." A novel argument cannot be any of those, reasoned the Fifth Circuit, and therefore the wonderfully logical argument -- which may, of course, fail as a matter of tax law, where logic bears little relation to reality -- cannot be said to be "plain" to trigger any relief.
I have read enough plain error cases in the past two years, while working on the Federal Practice and Procedure: Criminal treatise to not be surprised by the failure of counsel to object, make motions for judgment of acquittal, or seek other relief in the trial court. It is a matter of having to be more than just right, but really right, to avoid having the sins of trial counsel visited on the defendant. (ph)