Saturday, May 7, 2005

SEC Gives Notice of Plans to Sue General Re Executive

Berekshire Hathaway's quarterly earnings release discloses that the SEC has given a "Wells" notice to a current vice president at its General Re subsidiary that it plans to file civil charges alleging violations of the federal securities laws.  The earnings release (here) states: "On May 2, 2005, a Senior Vice President of General Reinsurance received a 'Wells' notice from the staff of the SEC in connection with its ongoing investigation. The Wells notice states that the staff of the SEC is considering recommending that the SEC bring a civil injunctive action and seek civil penalties against this individual, alleging that the  individual violated or aided and abetted violations of the Securities Exchange Act of 1934." A Wells notice is a preliminary step toward filing a lawsuit in which the Commission invites the person(s) to submit a statement about the possible charges, and is often an invitation to initiate settlement negotiations.  The SEC's Rules of Practice (here) state: "Upon request, the staff, in its discretion, may advise such persons of the general nature of the investigation, including the indicated violations as they pertain to them, and the amount of time that may be available for reparing and submitting a statement prior to the presentation of a staff recommendation to the Commission for the commencement of an administrative or injunction proceeding." According to a MarketWatch report (here), the Wells notice may involve the General Re-AIG finite insurance contract, which sparked a wide-ranging federal and state probe of AIG's accounting practices.

While Wells notices are usually quite general, they do indicate that the Enforcement Division staff is ready to move forward with its case, often in conjunction with other regulators and, if necessary, federal prosecutors.  Moreover, in most cases, notices are sent out to all potential defendants and not just a few at a time because the Commission wants to bring the entire case, if possible.  Therefore, I suspect that we will hear about more individuals who have received the notices, including AIG executives, and the companies themselves may be notified that they could be named as defendants in the Commission's civil action.  The heat is being turned up even higher, and over the next few weeks I think we will see one or more deals announced with individuals connected with the two companies, including possible plea agreements. (ph)


UPDATE (5/9): A New York Times article (here) identifies the General Re executive who received the Wells notice as Richard Napier. One of the AIG executives with whom Napier worked on the transaction is Christian Milton, who was fired by AIG for not cooperating in the government's investigation of the transaction.

May 7, 2005 in Civil Enforcement, Securities | Permalink | TrackBack (0)

A Blast From the Past

For aficionados of "classic rock" stations -- "old people music" according to one of my teenagers who mistakenly thinks I'm old -- it's always nice to hear an old favorite tune and turn up the volume even higher (the Volokh Conspiracy had a fun listing of "Top Ten Songs By Relatively Obscure Artists" here).  Well, an oldie came up today while surveying recently published circuit court decisions (see how much fun it is to find material to write a blog entry for a Saturday): In re: Madison Guaranty Savings & Loan.  For those waiting for me to hum a few bars (please don't!), this one goes by another name: Whitewater -- now you can start playing your air guitar.  With Bill Clinton 4+ years removed from the White House and the Starr Report long since faded from memory (the current "Starr" everyone is paying attention to is the one attached to AIG), you'd think this one was completely off the charts.  Well, the attorney's fees provision of the since-expired Independent Counsel law keeps cases bouncing around for years.

The D.C. Circuit (maybe Power DCC should be the station ID) issued an opinion (here) reviewing the attorney's fee application of Matthew L. Moore, a self-described junior member of the White House Office of Administration who got caught up in the travel office imbroglio in which seven staffers were fired.  Now how's that for another oldie -- "Did Hillary Clinton order the mass firings?" you might recall was the refrain of the day.  Moore was caught up in the investigation, which was rolled into the larger Whitewater investigation conducted by Independent Counsel (and now Dean at Pepperdine) Ken Starr, and sought reimbursement of $74,477.04 of attorney's fees and expenses (what is the four cents for?).  Alas, the D.C. Circuit rejected that claim.  Under the expired statute, a claimant must meet a four-part test: (1) the person is a subject of the investigation, (2) the fees were incurred during the investigation, (3) the fees would not have been incurred but for the requirements of the Act, and (4) the fees are reasonable.  Moore did not meet the "but for" test, as laboriously explained by the court.  The DC Circuit did award Moore $7,447.70 in fees related to filing a response to the Independent Counsel's final report, a separate basis for recovering fees.  At least he got something for getting caught up in the Whitewater maelstrom.

Now, for today's trivia question: Who was the Assistant to the President for Management and Administration who fired the seven travel office employees?  The answer is in the D.C. Circuit opinion.  Let's get back to the music with a tune from a favorite duo briefly popular in the 1980s, Wang Chung! (ph)

May 7, 2005 in Defense Counsel, Investigations, Judicial Opinions | Permalink | TrackBack (0)

Friday, May 6, 2005

SE White Collar Crime Program

The ABA Criminal Justice Section, White Collar Crime Committee, Southeast Region, sponsored a superb program this morning in Atlanta, Georgia.    Co-chairs Marc Garber, Paul Murphy, and Wilmer "Buddy" Parker started the event with a video presentation titled "Lessons from the Front Lines: White Collar Crime Cases After Enron."  (My next email will be to see if I can obtain a copy of this video for my white collar crime classes.)

The first panel titled, "Corporate Cooperation and the Changing Relationship Between Companies and their Employees," had the following panelists: Thomas Bever, Richard Deane, William Mitchelson, Jr., and Paul Monnin. Some of my favorite lines from this panel are:

Rick Deane - when speaking about the Thompson Memo, called it the "Holder Memo on Steroids."

Tom Bever - when cautioning about company counsel, he said, " Company counsel may be assistant attorney general for the government."

- when talking about the power of the government - "Government is able to hold your client's livelihood in the palm of their hand."

Paul Monnin- when discussing the pressures on an AUSA - "To move things along quickly."  "Real time."

Interestingly in the second panel, a panel of government individuals, David Nahmias, the United States Attorney for the Northern District of Georgia,  used the term "real time enforcement."  Will prosecutors be pushing to make Atlanta the next "rocket docket" jurisdiction?

USA Nahmias also outlined white collar crime priorities of: corporate fraud, internet crime, mortgage fraud, and public corruption.

Also speaking on the second panel were Katherine "Kit" Addleman (SEC), Greg Jones  (FBI), James Vickery (IRS).     Overall, an excellent program. 


May 6, 2005 in Scholarship | Permalink | TrackBack (0)

Greenberg in the Crosshairs

The New York Times reports (here) that federal prosecutors are looking at whether former American International Group CEO Maurice Greenberg engaged in market manipulation in AIG shares in February.  According to the report, there is a tape of a telephone conversation between Greenberg and a trader at the company in which Greenberg orders the trader to purchase its stock at the time that the government issued subpoenas in connection with the General Re transaction that led to Greenberg's downfall.  The government investigation focuses on whether the purchases were designed to manipulate the price of AIG's stock in the face of the negative publicity generated by the investigation.  There is no lack of motive to keep the share price high, given Greenberg's large share holdings (including the 41 million shares he gave his wife a month later -- see earlier post here ("Do You Trust Your Wife?") and Form 4 here) and the even larger ownership held by Starr International Co. (12% of AIG's shares) and C.V. Starr & Co. (18.8 million shares), two entities led by Greenberg -- see AIG 2004 proxy statement here

Market manipulation cases are notoriously difficult to prove, however, because they are all about intent and inferring it from everyday legal conduct can be quite difficult to establish.  There is nothing illegal about a company buying its own shares, nor is there anything wrong about buying stock in the hope that it will increase in price -- that's what investing is all about.  Unlike insider trading, in which the person purchases or sells to take advantage of undisclosed information, these purchases were contrary to the negative information.  Unlike the easier link that can be made between material nonpublic information and subsequent transactions in insider trading, these transactions are not as easily identified as fraudulent.  Greenberg was notorious for the attention he paid to AIG's stock price, but that's not unique among CEOs and is hardly proof of an intent to manipulate the market. This new front will likely prove problematic for Greenberg and AIG because it brings a different focus to the investigation, with the likely effect of prolonging an already complex, multifaceted probe. (ph)

May 6, 2005 in Fraud, Investigations, Securities | Permalink | TrackBack (0)

Three Strikes You're Out! -Update in Scrushy Case

In this blog's April 6th post here, we talked about the judge's admonishment to the jury to disregard the prosecutor's comments regarding WorldCom and Enron.  After all, it is pretty obvious that these companies have nothing to do with this case -- other than to perhaps get the jury thinking that there is some comparison here.

But both the Wall Street Journal here and the Birmingham News (via here are reporting that the prosecutor mentioned Enron  in front of the jury again.   And according to the Birmingham News - it was not once, but three times.  Despite objections being granted by the court two times, the prosecutor went for a third question with the "E" word.  And not surprisingly, the court called the prosecutor's out -- (no more cross-examination of this witness for them).

According to these newspaper online stories it sounds like the initial mention of Enron came from the witness, and the prosecution argument here would probably be that their questions were an "invited response," a response sometimes permissible when a witness opens the door to certain questions.  But knowing the judge's prior position, and after two strikes, the third question was certainly taking an extraordinary risk. 

One has to wonder what the prosecution is thinking here.  Will the jury be upset with the judge because it seems like the prosecutors can't get their questions answered?  If the prosecution thought they might not make substantial headway with a witness would they  be better off,  tactically, having the cross examination stopped in midstream? 

On the other hand, continued conduct that goes against the judge's ruling is building an argument for the defense premised on prosecutorial misconduct should the defendant be convicted.  One approach  to prosecutorial misconduct is not to focus on a specific instance of misconduct, but rather to look cumulatively at the conduct throughout the trial. If the prosecution thinks the jury may convict the accused, is it wise to risk this?  Or are they putting pressure on the defense to have Scrushy take the witness stand?  Stay tuned.


May 6, 2005 in HealthSouth | Permalink | TrackBack (0)

Georgia Preacher Receives 17 1/2 Year Sentence

Abraham Kennard, a former preacher who was convicted in February (see earlier post here) for defrauding over 1,600 churches, most of them with small, of over $9 million with promises of high investment returns, received a long term of imprisonment: 17 1/2 years.  According to an AP story (here), U.S. District Judge Harold Murphy stated at the sentencing: "These people lost everything they had. Some even lost their church. The court cannot ignore that."  Given the amount of the loss and the nature of the victims, I don't think the severity of the sentence should come as a surprise. (ph)

May 6, 2005 in Fraud, Sentencing | Permalink | TrackBack (0)

Thursday, May 5, 2005

Military Recruitment Tactics - Are We Dealing With Corporate Criminal Liability?

The tactics of military recruiters have been making the news lately. (e.g. here)  CBS, New York Times, and other media are recently reporting about tactics that may reach the level of falsification of documents. 

The question here is whether this needs to be investigated  -- the way white collar investigations are usually conducted. Are higher ups in the chain of command putting pressure on individuals to commit these acts?  And what kind of corporate compliance program does the military have?  Should military CEOS be held liable?  Where is Spitzer when you need him!


May 5, 2005 in News | Permalink | TrackBack (0)

Defense Department Analyst Charged

The Department of Justice charged a defense department analyst with disclosing classified information.  The DOJ, Criminal Division, Press Release states that:

"The criminal complaint and an accompanying FBI affidavit, filed at U.S. District Court in the Eastern District of Virginia, alleges that on June 26, 2003, Franklin had lunch at a restaurant in Arlington, Virginia with two individuals. At the lunch, Franklin allegedly disclosed classified information designated Top Secret related to potential attacks upon U.S. forces in Iraq to the two individuals, neither of whom had the security clearance to receive that information. Franklin allegedly told the two individuals that the information was “highly classified” and asked them not to “use” it."

The press release also states:

"The complaint further alleges that Franklin disclosed, without authorization, classified U.S. government information to a foreign official and members of the news media on other occasions. In addition, according to the FBI affidavit, approximately 83 separate classified U.S. government documents were found during a search of Franklin’s West Virginia home in June 2004. The dates of these documents spanned three decades, and at no time was Franklin’s house an authorized location for the storage of classified U.S. government documents."

The criminal complaint can be found here. Alleged is a violation of 18 U.S.C. 793(d). The names of the two individuals that Franklin allegedly disclosed classified information to, are not disclosed on the criminal complaint.   In cases involving drugs or national security, one sometimes finds the government  keeping confidential the names of individuals who may be cooperating with law enforcement or may be witnesses.  This is less common to the typical white collar case.


May 5, 2005 in Prosecutions | Permalink | TrackBack (0)

Greenberg Fires Shot Across AIG's Bow

Former American International Group CEO Maurice Greenberg fired back with a letter to the board of directors disputing the company's assertion that former management skirted internal controls and was not forthcoming about certain transactions (see earlier post here with link to AIG's statement).  Greenberg challenges the conclusions drawn from the internal investigation that accounting rules were violated, asserting that those decisions were made in "good faith" and approved by the auditors but are now being subjected to a "hindsight analysis."  The letter, written on C.V. Starr & Co. stationary -- which is one of the off-shore entities headed by Greenberg that controls a substantial block of AIG stock -- ends with an attack on the company's unwillingness to share information or consult him about the transactions:

I have known many of you for a long time and am puzzled by your refusal to share sufficient information with me to permit me to respond to the vile accusations being made against me and to provide input which could make the Board's findings more complete and accurate.

The battle is joined, on Greenberg's 80th birthday no less. A copy of Greenberg's letter is below. (ph)

Download greenberg_letter_may_4_2005.pdf

May 5, 2005 in Investigations, Securities | Permalink | TrackBack (0)

You've Got the Wrong Number!

Would you use a stock tip left on your answering machine by someone who you didn't know?  Would you think it a wrong number and jump at the opportunity?  If you would - - think twice.  It seems that SEC just filed a suit against telemarketers who they believe were leaving "wrong number" stock tips.  The SEC press release states:

"The messages, which were left on telephone voicemail recording machines throughout the country, were designed to make each recipient believe the caller had dialed the number by mistake. Many of the messages were left by a woman calling herself "Debbie," and sounded as if she had misdialed when calling a friend to pass along a hot stock tip."

So where's the harm.  Well here is what the press release says about the alleged "wrong number" scheme:

"The complaint alleges that the messages were part of a larger scheme enabling Houston-based stock promoters to sell approximately $4.5 million of one of the touted stocks through a Tampa, Fla.-based broker-dealer. The scheme drove up the price of each of the touted stocks, temporarily inflating their combined market capitalization by approximately $179 million."

You have to admit -- this one is different!


May 5, 2005 in Securities | Permalink | TrackBack (1)

Wednesday, May 4, 2005

Everyone's Testifying in Tyco Case

Dennis Kozlowski is not the only accused that the jury will hear from in this trial, as former CFO Mark Swartz took the stand today. Hearing a defendant say - I didn't do anything wrong - certainly is beneficial.  The downside, however, comes when the witness-defendant has to go through cross-examination.   It may be more problematic here as Mark Swartz took the witness stand at the last trial - a trial that ended in a mistrial.  This means there is prior testimony that prosecutors have probably closely scrutinized.  For more details on what Mark Swartz testified to today, see the AP story in the Atlanta Jrl. Constitution here.


May 4, 2005 in Prosecutions | Permalink | TrackBack (0)

What is Happening in Education?

If you are concerned about our present education system, I am afraid this post may make you even more concerned.  Here's a sampling of recent education related activities that are of interest to this blog:

The Chronicle of Higher Education today reports here (subscription required) that "A former president of William Tyndale College pleaded guilty on Monday to charges that he had used fraud to obtain hundreds of thousands of dollars in federal financial aid for students at a technical institute that he jointly owned."

The DOJ reported in a press release that "Eric G. Andell, former Deputy Undersecretary for Safe and Drug Free Schools with the Department of Education, pled guilty to a one count information charging him with a conflict of interest in violation of Title 18, United States Code, Sections 208 and 216."  According to the DOJ press release:

" Between November 2002 and September 2003, Andell approved official travel for himself on approximately fourteen occasions to New York, New York; Austin and Houston, Texas, Detroit, Michigan; and Columbus Ohio. Each of these trips was motivated at least in part by Andell’s interest in private personal and financial matters, including his desire to accrue service time toward receipt of a pension from the State of Texas. On each of these trips, Andell conducted some personal business, and certain of his personal expenses were reimbursed by the government. Additionally, as part of these trips, Andell received his government salary for days on which he requested, received, and was paid for sick leave, when in fact he was working as a visiting judge in the State of Texas."

Some of our past posts that related to indictments, pleas, or investigations related to individuals associated with education are here:

Related to donors to universities here.

Related to university team MD and prescription fraud here.

Indictment of former School Superintendent in Georgia here.

School library scams here.

University medical doctor indicted here.

University professor pleads guilty to filing false research grant application here.

Sports scheme at university here.

There are many more.  The point here is that even individuals associated with education are not immune from the white collar crime reporting of this blog.


May 4, 2005 in Fraud, News, Prosecutions | Permalink | TrackBack (0)

The Fight Over Greenberg's Trinkets in His AIG Office

The split between American International Group and its former long-time CEO Maurice Greenberg has all the hallmarks of a nasty divorce, according to a front-page Wall Street Journal story here.  Among the items being fought over are a Remington sculpture, Chinese vases, and a Van Gogh painting.  While celebrity divorces are always an interesting side show for the gossip-minded (think Jennifer, Brad, and Angelina), the more interesting aspect to me is that among the items Greenberg seeks to recover from his office are personal files containing documents.  While those files apparently contain letters from his mother during his military service in World War II, they may also contain information that will be of interest to the government regulators focusing on Greenberg's involvement in the accounting problems disclosed by the company this past Sunday (see earlier post here).  In addition, records from two off-shore entities led by Greenberg that have had substantial dealings with AIG (and control approximately 15% of the company's stock) may still be in his AIG office, no doubt enjoying the fine art in close proximity.

The distinction between "personal" and "business" records is crucial for Fifth Amendment purposes -- documents in the former category may be subject to a self-incrimination claim regarding the act of production that can ultimately thwart the government's ability to obtain them (U.S. v. Hubbell is the key recent case), while a corporation's documents are not protected by the Fifth Amendment (although check Lance Cole's recent article on extending the Fifth Amendment privilege to organizations discussed here).  Given that AIG is scrambling to demonstrate its cooperation to fend off any threat of a criminal charge, the company likely will be more than happy to turn over whatever records it can get its hands on that the regulators may want to review.  Greenberg, on the other hand, will not want his personal files reviewed by the government, and the records of the off-shore companies (Starr International and C.V. Starr Foundation) will not be easy to obtain if they are returned to the countries of incorporation: Bermuda and Panama.  While fighting over baubles is commonplace in a divorce -- recall the nasty fight between Jack Welch and his former wife Jane over the perks in his GE retirement package -- the issues here run in a very different direction as the government seeks documents.  While hell hath no fury like a forced-out CEO, Eliot Spitzer, the SEC, and the DOJ probably want nothing more than a chance to rummage through Greenberg's personal files to learn about how he ran AIG and any "bodies" that may be buried in the company.  This one is going to go on for quite a while, and may implicate the government's interest in enforcing its subpoenas. (ph)

May 4, 2005 in Investigations, Securities | Permalink | TrackBack (0)

N.Y. Court of Appeals Rejects Partnership's Fifth Amendment Privilege Claim for Business Records

The New York Court of Appeals adopted the Supreme Court's approach to the availability of the Fifth Amendment privilege against self-incrimination for collective entities when it rejected a claim under the New York Constitution that a broad subpoena for a law partnership's records could be resisted on Fifth Amendment grounds.  The New York Attorney General's office was investigating the law firm for possible involvement in possible insurance fraud involving faked accidents, and subpoenaed the firms business records. The law firm argued that the state constitution's self-incrimination privilege was broader than that afforded by the U.S. Constitution, which would not allow a collective entity to assert the Fifth Amendment to resist production of records, even if they are incriminating of the partners.

In In the Matter of Nassau County Grand Jury Subpoena Duces Tecum Dated June 24, 2003, "Doe Law Firm," et al. (here), the New York Court of Appeals relied on Bellis v. United States, 417 U.S. 85 (1974), which denied a Fifth Amendment claim advanced by a three-person law firm.  The Court of Appeals held that the partnership, subpoenaed for a broad array of business records (the list of documents covers 16 paragraphs that encompass virtually all the firm's business records for a four year period), could not rely on Article 1, Sec. 6 of the New York Constitution (here), which provides "nor shall he or she be compelled in any criminal case to be a witness against himself or herself . . ."  In adopting Bellis as the proper interpretation of the New York Constitution, the court stated: "Under our 'noninterpretive' analysis of the state and federal constitutional provisions, we conclude that none of the factors that would suggest a broader reading of Article I, § 6 are present."  As discussed in the post above, there may be Fifth Amendment issues related to former AIG CEO Maurice Greenberg's files at his offices in New York City, and the self-incrimination analysis will be the same regarding AIG's business records under federal and New York state law.  An article from the New York Law Journal (available on Law.Com here) discusses the decision. (ph)

May 4, 2005 in Grand Jury, Judicial Opinions, Privileges | Permalink | TrackBack (0)

Hedge Fund Manager Charged With Fraud

Vincent Montagna, who managed two hedge funds (Tiburon Asset Management and Tiburon Partners), was indicted on two counts of securities fraud, two counts of investment adviser fraud, and five counts of wire fraud related to his operation of the funds for his personal benefit.  According to the press release issued by the U.S. Attorney's Office for the Southern District of New York (here)

MONTAGNA converted assets held by each of the Tiburon Companies to his own use. MONTAGNA transferred Tiburon assets to Quantus Holding Company, where they were used to pay for  Montagna’s personal expenses, including credit card bills, travel expenses, the cost of a mink jacket, and car payments. MONTAGNA also caused Tiburon investors to pay, on at least two occasions, his personal income taxes. MONTAGNA also transferred ownership of property held by Tiburon Asset Management to a company nominally controlled by his wife. In addition, MONTAGNA improperly redirected to himself or to his wife monies that were paid to him, as manager of the Tiburon Funds for the benefit of those companies.

The SEC filed a civil complaint against Montagna and his wife, Christine Palmer, for "allegedly defrauded the investors and prospective investors by: repeatedly causing extremely positive – and false – performance claims to be disseminated to them; failing to disclose to investors the declining value and increased risk of Fund holdings; failing to disclose conflicts of interest he had with respect to certain investments; converting Fund income and assets for his own (or his wife's) benefit; and causing the Funds to make payments to him and his associates in excess of the amounts to which they were entitled."  See the SEC Litigation Release here. (ph)

May 4, 2005 in Fraud, Prosecutions, Securities | Permalink | TrackBack (0)

Developer Charged in Monmouth County (NJ) Corruption Probe

The drumbeat of prosecutions arising from the Monmouth County, New Jersey, corruption probe continues with the arrest of developer Anthony Spalliero, who was charged with bribing former Marlboro Mayor Matthew Scannapieco and the former director of the Monmouth County Board of Freeholders.  According to a press release (here) from the U.S. Attorney's Office:

Spalliero offered and paid Scannapieco approximately $135,000 between 2001 and 2003 in conjunction with three development deals. Count One of the criminal complaint charges that between 2001 and 2002, Spalliero paid Scannapieco approximately $100,000 in exchange for Scannapieco's assistance in obtaining re-zoning and land-use approvals for a proposed development of the site of the former Marlboro Airport and surrounding property. In December 2002, during a recorded conversation, a business associate of Spalliero allegedly offered to provide a member of the Marlboro Township Council with approximately $150,000 in campaign funds in exchange for that council member's support of re-zoning and land-use proposals that Spalliero sought for the site of the Marlboro Airport and surrounding property.

The bribes to the freeholder director were allegedly paid on two occasions: First, in 2001 and 2002, Spalliero had a Monmouth County official deliver $5,000 in cash to the freeholder director at his home. Second, in 2002 and 2003, Spalliero and another developer paid the freeholder director $3,500 in cash, again by having the Monmouth County official deliver the money to the freeholder director at his home. The complaint alleges that the second payment was in exchange for the freeholder director's assistance on a planning issue for a Marlboro development.

The criminal complaint (here) charges Spalliero with violations of 18 U.S.C. Sec. 666.  With all the indictments of Monmouth County officials, the last one left standing may have to turn out the lights.(ph)

May 4, 2005 in Corruption, Prosecutions | Permalink | TrackBack (0)

Tuesday, May 3, 2005

R.I. Lawyer Pleads Guilty to Contempt and Perjury for Leaking FBI Tape to Reporter

Rhode Island attorney Joseph Bevilacqua, Jr., agreed to plead guilty to contempt of court and perjury for leaking to a television reporter an FBI videotape of a Providence city official accepting a bribe.  The tape was made during the investigation of former Providence Mayor Vincent Cianci, whose 60 month sentence for corruption was recently remanded by the First Circuit for resentencing in light of Booker, and showed one of Cianci's top aides, Frank Corrente, taking money. Bevilacqua was counsel for one of the defendants during the prosecution and gave the tape in violation of a court order to a local NBC reporter, Jim Taricani, who aired the tape and later served four months in jail for refusing to divulge the source of the leaked video.  A special prosecutor eventually identified Bevilacqua, and he will now plead guilty before what I suspect will be a very angry U.S. District Judge who is unlikely to view the conduct with much sympathy -- there's just something about violating explicit judicial orders and then lying about it.  In addition, an AP story (here) about the case notes that the chief counsel for the Rhode Island Supreme Court's Disciplinary Board plans to seek Bevilacqua's disbarment.  For those who recall the name, Bevilacqua's father was Chief Justice of the Rhode Island Supreme Court until leaving the bench in 1987 under a cloud for alleged ties to mobsters.  (ph)

May 3, 2005 in Legal Ethics, Media, Perjury, Prosecutions | Permalink | TrackBack (0)

Outback Steakhouse CFO Quits Because of the Regulatory Environment

Prof. Gordon Smith (Wisconsin) on the Conglomerate Blog has an interesting post about the resignation of Outback Steakhouse's CFO, Bob Merritt, who blamed the current regulatory environment for his decision to resign.  Gordon writes(here):

The more we hear about the problems associated with financial reporting, the more this looks like a problem for which fingers can justifiably point in all directions. Merritt takes aim at auditors and "regulatory and other bodies" (a reference that is probably intended to include FASB, Congress, and the SEC). Why stop there? Certainly Merritt's own colleagues -- America's CFOs -- also deserve a share of the blame. And while many corporate managers are being demonized unfairly, there are plenty of genuine bad actors in that crowd, too.

Gordon's post contains a link to Merritt's full statement about his reasons for resigning, including a diatribe about lease accounting, one of the truly thrilling accounting issues.(ph)

May 3, 2005 in News | Permalink | TrackBack (0)

GE Joins the Subpoena Club

The General Electric Company joined the crowd of insurers under the microspope (AIG, General Re, Marsh Mac, AON) by disclosing that it received a subpoena from the SEC on April 29 requiring it to produce documents related to its sales of so-called "finite risk" insurance.  This type of policy, which GE describes as a "loss mitigation insurance product" (doesn't that sound benign, just like any other plain vanilla insurance policy), is at the center of the investigation of AIG and General Re by state and federal regulators and the Department of Justice.  GE's press release (here) states:

GE understands that a number of other insurance and reinsurance companies have been subpoenaed by the SEC in relation to finite risk. One of GE's businesses, GE Insurance Solutions, has made limited use of reinsurance with finite characteristics to manage the risks of catastrophic events such as storms or hurricanes, and to protect itself and GE shareowners from the volatility that is inherent in its business.

I notice that GE points out quickly that "we're just like all those other guys" so there's nothing to be worried about.  What the heck, AIG's shares went up 5% after it announced the scope of its accounting woes, so maybe confession is good for the stock price in addition to the soul. (ph)

May 3, 2005 in Investigations, Securities | Permalink | TrackBack (0)

30-Month Sentence in Connecticut Public Corruption Case

Ben Andrews, former head of the Connecticut NAACP, was convicted  by a jury of corruption charges related to sharing a $1.5 million consulting contract with former Connecticut State Treasurer Paul Silvester in 1998 in connection with steering $150 million of state pension assets to a private equity fund.  Andrews testified in his defense that the payment was not a bribe, but the jury convicted him on all counts and U.S. District Judge Ellen Bree Burns found that he committed perjury at trial based on the jury's verdict.  Yet, Judge Burns granted a downward departure to Andrews in sentencing him to a 30 month term of imprisonment, below the Guidelines range of 57-71.  According to a press release issued by the U.S. Attorney's Office (here), the judge noted Andrews' "substantial service to the community and lack of a criminal history" in sentencing him to the lower term. 

Doug Berman has raised the question whether white collar defendants will be the primary beneficiaries of the new flexibility afforded by the Supreme Court's decision in Booker (see Doug's post here and discussion of the sentencing here). Departures on these grounds are discouraged under the Guidelines, and this case may be an example of a defendant with an otherwise clean record and history of representing a popular organization benefiting from a sympathetic situation.  Bribing a public official and then lying about it at trial, however, is a serious offense that I doubt deserves a nearly 50% downward departure. (ph)

May 3, 2005 in Corruption, Sentencing | Permalink | TrackBack (0)