Tuesday, May 3, 2005

Insider Trading by USPS Emplolyee

Advanced copies of Business Week have once again been the source of information for insider trading, this time by a former U.S. Postal Service employee who gained access to the magazine before its delivery to subscribers.  Davi Thomas agreed to settle SEC charges that he traded on material nonpublic information gleaned from the magazines, in violation of Postal Service regulations, that resulted in profits of approximately $154,000.  He also tipped a friend, Lionel Thotam, who realized approximately $77,000 in profits.  Thotam settled the SEC case in 2002. Thomas agreed to disgorge his profits (plus interest) and pay a one-time penalty equal to the profits.  According to the SEC Litigation Release (here):

From August 1996 through January 1999, Thomas misappropriated information from Business Week magazine before its public release by reading the Inside Wall Street column in the magazine as it passed through the Mount Vernon, New York postal sorting facility on its way to subscribers and news stands. He tipped Thotam to the information. Thotam paid Thomas $10,000 for Thomas's efforts, and updated Thomas on his profits from the illegal trades. Starting in June 1997 and continuing through January 1999, Thomas also traded in his own accounts in the stocks of the companies mentioned in the Inside Wall Street column. In almost all instances, Thotam and Thomas bought stock of companies favorably mentioned in the column on Thursday afternoons and sold the stock after the price increased the next day, after the column had been published.

Cliff Claven would be deeply saddened that a member of the USPS would breach his position of trust (a link to Cliff sound bites is available here). (ph)

May 3, 2005 in Civil Enforcement, Insider Trading, Securities | Permalink | TrackBack (0)

Whose Evidence Is It Anyway?

As detailed in Tom Kirkendall's Houston's Clear Thinkers Blog (which is always an interesting read, especially on Enron developments), the Enron Broadband Services trial (see earlier post here) took a decidedly odd, and potentially devastating, turn when the prosecution's key witness started to backtrack about what was said at an analysts presentation in 2000.  An important piece of the government's case involves a videotape of the presentation, in which the allegedly false statements were made by some of the defendants.  The government witness is Ken Rice, former co-CEO of Enron Broadband Services who entered a guilty plea and it testifying for the government.  Tom writes(here):

At any rate, the defense's raw footage video came into evidence this morning, and the defense showed the raw footage video side-by-side to the prosecution's video from which Mr. Rice had previously testified during direct examination. It turns out that the prosecution video of the analysts' conference is different in material respects from the raw footage video and that the prosecution's video -- contrary to Mr. Rice's testimony on direct -- contained footage of Mr. Shelby making statements that was not shown to the analysts at the conference.

Well, as you might expect, Mr. Rice is in full retreat today as Mr. Canales and other defense attorneys hammer him on why he previously testified that Mr. Shelby had made statements at the analysts' conference that he actually did not make.

Given that the government provided the raw video footage to the defense, it's hard to figure out quite how it got caught so flat footed. (ph)

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

Welcome to the Business Law Prof Blog

Professor Dale Oesterle from Ohio State, one of the leading corporate, M&A, and securities law professors around, has joined the LawProfs Blog network with the Business Law Prof Blog.  His initial post (here) is on the recent indictment of 15 NYSE floor specialists for front-running (trading ahead of their customers to take advantage of prices) with a terrific shot across the regulators' bow: "This is fifty or so years late but whose counting?"  Welcome to the wonderful world of blogging, and there is certainly no shortage of topics.

May 3, 2005 in About This Blog | Permalink | TrackBack (0)

Monday, May 2, 2005

Post-Booker Sentence Reviews Under the Guidelines

An Eleventh Circuit opinion in United States v. Crawford (here) considers the government's challenge to a sentence in a case involving a scheme to defraud the government of over $400,000 from illicit transactions in WIC coupons, specifically the district court's failure to find "more than minimal planning" under 2F.1.1(the roughly equivalent provision now would be 2B1.1(8)(C) "sophisticated means") and a downward departure because the case was "outside the heartland."  Crawford operated a store called "Mr. Wick, Jr." (note the play on the government's Women, Infants and Children assistance program), and engaged in over 100 transactions with one seller of WIC coupons over a 5-year period.  The district court sentenced Crawford to 60 months probation, plus restitution, and the government appealed the sentence.

The first step was to determine the standard of review in light of Booker making the Sentencing Guidelines advisory rather than mandatory.  The court stated that Booker did not alter the standard of review involving application of the Guidelines:

Nothing in Booker suggests that a reasonableness standard should govern review of the interpretation and application as advisory of the Guidelines by a district court. See Villegas, — F.3d at —, 2005 WL 627963 at *4. Booker did not affect 18 U.S.C. section 3742(f), which mandates remand of any case in which the sentence "was imposed as a result of an incorrect application of the sentencing guidelines . . . ." Id. at —, 2005 WL 627963 at *5. Although under Booker, the Sentencing Guidelines are an advisory rather than a mandatory regime, the district court remains obliged to "consult" and "take into account" the Guidelines in sentencing . . . This consultation requirement, at a minimum, obliges the district court to calculate correctly the sentencing range prescribed by the Guidelines."

The Eleventh Circuit overturned the district court's finding that Crawford's misconduct was "purely opportune" and not the product of more than minimal planning: "The district court found that each of the over 100 instances in which Crawford bought vouchers from Kelley was purely opportune. That determination was clearly erroneous. The sheer number of transactions alone makes it highly unlikely that each transaction was purely opportune. Crawford wrote 184 checks to Kelley between April 12, 1996, and March 22, 2001, totaling $434,032."

Regarding the downward departure because the case was outside the heartland, the district found that a variety of factors in combination, including extreme remorse, substantial assistance to the government (despite the absence of a prosecutor's motion for a departure), lack of criminal sophistication, and that the loss overstated the criminality, supported the departure.  The Eleventh Circuit reversed because it could not determine how some factors which are discouraged (remorse) or prohibited (substantial assistance with no departure motion) played into the departure decision, therefore a remand was necessary. (ph)

May 2, 2005 in Judicial Opinions, Sentencing | Permalink | TrackBack (0)

AIG Annnounces Accounting Adjustments from Its Internal Investigation

American International Group issued a statement (here) discussing the accounting adjustments that will be taken as a result of an internal investigation prompted by state and federal regulators inquiring into transactions involving the company.  AIG will restate its financials going back to 2000 that will include a $2.7 billion charge to shareholder equity.  The statement described the reasons for the adjustments for accounting errors:

The restatement will correct errors in prior accounting for improper or inappropriate transactions or entries that appear to have had the purpose of achieving an accounting result that would enhance measures important to the financial community and that may have involved documentation that did not accurately reflect the nature of the arrangements. In certain instances, these transactions or entries may also have involved misrepresentations to members of management, regulators and AIG's independent auditors. The adjustments also include transactions or entries that should be restated as a result of quantitative and qualitative factors or as a result of errors, some of which had been previously identified but considered not to be material to require correction.

Translated from legalese and accounting-speak: everything was not as we made it appear.  This is the stuff of criminal prosecution these days, especially when it involves a number of smaller transactions designed to meet short-term expectations spread over a number of reporting periods.  An interesting question will be whether federal prosecutors will try to use the CEO/CFO financial statement certification provision 18 U.S.C.§ 1350 here) against former CEO Maurice Greenberg and former CFO Howard Smith. (ph)

May 2, 2005 in Investigations, Securities | Permalink | TrackBack (0)

Killing Two Husbands (Plus a Former Lover) Results in Mail Fraud Convictions

You just don't see opinions like the Fourth Circuit's in United States v. Gray (here) every day, or even every year.  As if recounting the plot from an episode of Law & Order (preferably one with Jerry Ohrbach), or worse, a law school exam, Josephine Gray told a friend that she had killed two of her husbands plus a lover (whom she caller her "cousin") who helped kill the second husband and had then tried to blackmail her.  For both husbands and the lover/cousin, Gray was the beneficiary of life insurance policies, which were eventually paid to her, totaling $170,000.  Her friend told the authorities about Gray's statement, and she was prosecuted for mail fraud for engaging in a scheme to defraud the insurance companies by applying for the death benefits under policies on the three victims.  Gray's argument -- which has all the appeal of the proverbial son who pleads for mercy after killing his parents because he's now an orphan -- was that the insurance companies were not the real victims of the fraud because they had a contractual obligation to pay out on the policies, and only the lawful beneficiaries were the victims of the fraud.  The Fourth Circuit rejected that argument, not surprisingly, stating:

Gray contends that the insurance companies were merely disinterested third parties that held the insureds’ money for the named beneficiaries. Thus, the only true victims of Gray’s fraud were the rightful beneficiaries under the policies, not the insurance companies. Whether or not the insurance companies paid the proper parties at the end of the day, they would not have been required to pay anyone had Gray not killed their insureds. In other words, the insurance companies were deprived of the use of their assets by Gray’s accelerating the necessity to pay benefits.

This appears to be the "float loss" theory for fraud, that the insurance companies would have been able to hold on to the premiums (and related investment gains) longer had Gray not killed the victims, and therefore suffered a loss.  Gray, nicknamed by the media -- here's a shocker -- the "Black Widow," received a 40-year term of imprisonment for defrauding the insurance companies, a sentence no doubt influenced by the three murders.  Gray had been charged earlier with the murders of both husbands, but those cases never even went to trial. Just to make things a bit scarier, after receiving the insurance proceeds on the second husband, Gray inquired about taking out an insurance policy on her newest boyfriend.  Thank goodness for the mail fraud statute. (ph)

May 2, 2005 in Fraud, Judicial Opinions, Prosecutions | Permalink | TrackBack (0)

Key Witness Testifies in Enron Broadband Services Prosecution

Flying largely under the radar, the Enron Broadband Services trial has been going on since mid-April, and the government's key witness, former  Broadband Services co-CEO Ken Rice, is now being cross-examined.  Rice and former Broadband Services Chief Operating Officer Kevin Hannon entered guilty pleas to one count of securities fraud and are cooperating in the prosecution of five former Broadband Services officers -- including Rice's former co-CEO Joe Hirko -- for securities fraud, wire fraud, conspiracy, and money laundering.  The allegations center around statements about the technology behind the Broadband Services division and its ability to create a market buying and selling broadband access, which was Enron's attempt to take advantage of the internet bubble that burst shortly before the company itself collapsed. 

Similar to the other trials of corporate executives for accounting and securities fraud, the government's case relies on the testimony of former executives who have agreed to cooperate in exchange for lighter sentences.  Among the cooperating executives have been former WorldCom CFO Scott Sullivan and the Five Guilty CFOs from HealthSouth, and next year's Enron conspiracy trial of former CEOs Ken Lay and Jeff Skilling will feature former CFO Andrew Fastow, who is sure to be portrayed as the architect of Enron's downfall.  Skilling even made a brief appearance in the courtroom the day Rice, an old friend, began his testimony.  Skilling was asked to leave because he is on one of the defendants' witness list, although I suspect he would assert his Fifth Amendment privilege if called to testify -- why give the prosecutors even a brief free preview of his testimony.

Rice testified against his fellow executives for four days, and has been cross-examined for two more, with more to come this week. On Friday, when asked if he would lie to the jury to help get a shorter sentence, Rice responded, "I wouldn't lie in this proceeding because it could result in going to prison for life if I did."  Rice also conceded that many statements made by the Broadband Services division were truthful, supporting the defense that no material misstatements were made.  The Houston Chronicle has continuing coverage of the trial here, including links to all the Enron indictments, plea agreements, plea agreement scorecards, etc. (here) (ph)

May 2, 2005 in Enron | Permalink | TrackBack (0)

Sunday, May 1, 2005

Former State Department Official Pleads Guilty

A press release of the Department of Justice reports that a "former state department chief consular officer pleads guilty to receiving illegal benefits from foreign nationals."  The release states "that Patricia Raikes, a former State Department employee and former Chief Consular Officer at the United States Embassy in Beirut, Lebanon, pled guilty to a one count information charging her with a conflict of interest in violation of Title 18, United States Code, Sections 209 and 216."

The press release further states:

"From 1999 through 2001, while serving as Chief Consular Officer, Raikes received thousands of dollars of benefits from foreign businesspeople in the form of paid airline travel and hotel stays for Raikes and her family members. After receiving these benefits, Raikes subsequently issued and/or approved more than 35 visa applications submitted or referred by the aforementioned foreign businesspeople. The plea documents further stated that many of the individuals who received visas issued and/or approved by Raikes were in fact ineligible to have received tourist visas under the then-existing embassy policy."

This appears to be a year of scrutiny on consular issues.  On one hand we see the government looking at the actions of consulars.  On the other hand we see individuals questioning the government's failure to provide appropriate consular notification to individuals charged with crimes. The Supreme Court has yet to rule on the case of Medellin v. Dretke, a case recently argued before the Court where the issues involve failure to properly notify consulars, what remedy should apply in these situations, and what role international law plays here.


May 1, 2005 in News | Permalink | TrackBack (0)