Saturday, May 14, 2005

Commentary on Scrushy Case

Listen to co-blogger Peter Henning, as he comments on the Scrushy case here as part of a special on "Scrushy and Sarbanes-Oxley."

(esp)

May 14, 2005 in HealthSouth | Permalink | TrackBack (0)

AIG Executive Is Reported to Have an Immunity Deal

A Wall Street Journal story (here) reports that Joseph Umansky, president of AIG Reinsurance Advisors, the unit involved in a number of the reinsurance transactions that are the subject of the broad government investigation of American International Group, has reached an immunity agreement with prosecutors.  Under such agreements, the recipient receives an order, authorized by 18 U.S.C. Sec. 6002, that grants limited immunity -- called "use/fruits" immunity -- to permit the person to testify without the statements or any information derived from the testimony being used against the witness in a subsequent criminal proceeding.  Federal and state investigators have been scrutinizing AIG's transactions with two off-shore reinsurance companies, Union Excess Reinsurance Co. and Richmond Insurance Co., that it now acknowledges controlling.

Although the government prefers not to give immunity, in this case it likely concluded, after receiving a proffer from the witness or his attorney, that Mr. Umansky had sufficient involvement in questionable transactions to require greater protection than a letter stating that he is only a witness in the investigation, which provides no real protection to the person.  At the same time, he must also be seen as someone who can provide valuable information regarding senior AIG executives, perhaps including former CEO Maurice Greenberg and former CFO Howard Smith, to avoid having to reach a plea agreement with the government.  Both Greenberg and Smith asserted the Fifth Amendment in the investigation, and AIG's disclosure about its internal investigation states that senior executives were able to circumvent internal controls, a red flag for possible accounting fraud.  I think it is likely that the immunity agreement is another building block in putting together a criminal case against former AIG executives. (ph)

                                                      

UPDATE (5/14): A New York Times story (here) sheds a little more light on the immunity agreement that adds a new wrinkle to what I wrote above.  The Wall Street Journal article stated that the immunity agreement was reached with "authorities," and I assumed (I know, "Whenever you assume . . .") that it was with the federal and state authorities.  The Times indicates that the agreement is with N.Y. Attorney General Eliot Spitzer's office, with no information about the involvement of federal prosecutors.  The immunity may signal another instance of the unseemly competition between Spitzer and federal agencies to take the lead in bringing cases.  While a grant of immunity by a state does not necessarily protect the witness from a separate federal prosecution, any sharing of the immunized information would taint the federal investigation.  Once Umansky is granted immunity by New York and provides information, it is hard to see how it would not seep out and become available to federal investigators, thereby effectively immunizing him from federal prosecution.  What I haven't seen yet, and the news reports are still very general, is any indication of federal-state cooperation on immunity.  It may be that federal prosecutors accepted Spitzer's actions, but things could get more difficult if there are plans to grant immunity to more senior executives in Spitzer's drive to indict Greenberg, Smith, and perhaps other top AIG executives. (ph)

May 14, 2005 in Civil Enforcement, Fraud, Investigations, Privileges | Permalink | TrackBack (0)

Another Delay in Scrushy Case

According to the Birmingham News, there is another delay in the Scrushy trial (see here).  Looks like closing arguments will now be on Wed. And an even more interesting question is whether there has been an ethical violation by one of the attorneys in the case. It seems that the Wall Street Jrl article here, contains a statement  that refers to " two lawyers familiar with the case."  The issue involved the dismissal of a juror. It seems that the lawyers involved in the case are all under a gag order that prohibits them from discussing the case with the media. The Birmingham News reports that the judge assembled all the lawyers in the case to make certain that none had violated her order. And it sounds like none have done so. (see Birmingham News Report here)

This  case presents an interesting study of ethics in the courtroom. The judge has issued rulings that demonstrate a strict adherence to proper courtroom conduct.  See here and here.  And now we have the judge stopping to see if a court order has been violated.

There are also other interesting questions to ask here:  Doesn't it seem like lately in a good number of high profile white collar cases, jurors have been removed? Are the number of jurors in excess of the norms from past cases?  And if they are, why might this be happening?

(esp)

May 14, 2005 in HealthSouth | Permalink | TrackBack (0)

Former Basketball Star Ralph Sampson Arrested for Failure to Pay Child Support

The U.S. Attorney's Office for the Eastern District of Virginia announced that former University of Virginia and NBA basketball player Ralph Sampson was arrested in Georgia for failure to pay child support.  A press release issued by the USAO (here) states:

Sampson, a former NBA basketball player for the Sacramento Kings and Houston Rockets, was indicted in the Eastern District of Virginia on March 19, 2003, for failing to pay more than $21,000 in child support obligations. The 2003 charges arose from Sampson’s failure to comply with a 1990 Stafford County Juvenile and Domestic Relations Court order that directed him to pay $1,500 a month in support of a daughter living in Falmouth, Virginia. The order was modified in 1992 to reduce Sampson’s obligations to $675 per month. Sampson pled guilty to the federal charge on April 4, 2003, and was sentenced to two years probation on July 8, 2003. As a condition of his sentence and probation, Sampson was ordered to pay all current and delinquent child support obligations. Sampson has failed to maintain the child support obligations for this child and is currently more than $6,000 in arrears.

On May 4, 2005, Sampson was again indicted in the Eastern District of Virginia. The current indictment alleges that Sampson has not only failed to pay child support obligations as required by the 2003 federal order for the child mentioned above, but also has failed to pay court-ordered child support for a second daughter, who resides in Alexandria, Virginia. Despite a 1988 order from the District of Columbia’s Superior Court, Family Division, Domestic Relations Branch directing him to pay $1,500 a month in child support for this daughter, the indictment alleges that as of April 30, 2005, Sampson owed more than $247,500 in past due child support obligations for her.

The prosecution is under the criminal provision of the federal Child Support Recovery Act of 1992 (18 U.S.C. Sec. 228 -- available here), which provides: "Any person who . . . willfully fails to pay a support obligation with respect to a child who resides in another State, if such obligation has remained unpaid for a period longer than 1 year, or is greater than $5,000 . . . ."  The punishment for a first offense is up to six months in prison, and a second offense is punishable by up to two years.  This is the second time Sampson has been charged, so he may be facing a prison term if convicted in this case.  An interesting question is whether the federal criminal law should be used to prosecute "deadbeat" parents who fail to pay state-ordered child support.

Basketball aficionados may recall the last great "Battle of the Centers" in December 1982 when Sampson's UVa team faced Patrick Ewing's Georgetown Hoyas. I got to attend the game at the Capital Centre in Landover, MD.  Does anyone remember the score? (ph)

May 14, 2005 in Celebrities, Prosecutions | Permalink | TrackBack (0)

Eight Arrested in California and Costa Rica in Connection With Alleged $80 Million Ponzi Scheme

The Department of Justice announced the arrest of eight people -- five in Southern California and three in Costa Rica -- related to an alleged ponzi scheme called the Genesis Fund.  Press releases by the DOJ (here) and the U.S. Attorney's Office for the Central District of California (here) describe the scheme that has resulted in the unsealing of an 83 count indictment for mail and wire fraud, conspiracy, money laundering, obstruction of justice, and tax charges:

The indictment alleges that between May 1998 and June 2002, Genesis Fund investors entrusted more than $80 million with the defendants. The defendants - through promotional materials, account agreements and other means - allegedly told investors that their money would be pooled and invested in foreign currency trading through a currency dealer in Hong Kong and Macau that had earned large profits for investors in the past. Instead, the indictment alleges, virtually all investor funds were used to make Ponzi payments to investors and to personally enrich the defendants.

The indictment also alleges that in June 2002 - just weeks after advising investors that the Genesis Fund was worth $1.3 billion - investment, trading and payment activities in the fund were suspended. After the collapse of the Genesis Fund, the defendants presented investors with a new investment plan to lull them into believing that there was hope of recovering their money.

The promotional literature asserted that because the fund was operated off-shore through Costa Rica, investors would not owe federal taxes.  Needless to say, virtually all of the money has disappeared. (ph)

May 14, 2005 in Fraud, Prosecutions | Permalink | TrackBack (0)

Friday, May 13, 2005

Problems for Military and Law Enforcement

This time the feds are calling it - "Operation Lively Green."  (I often wonder who  names the government operations, and when they retire do they go into newspapers to write the headlines.)  And a good number of guilty pleas are coming from this undercover government operation. According to a DOJ Press Release, "16 current and former U.S. soldiers and law enforcement officers have agreed to plead guilty to participating in a widespread bribery and extortion conspiracy."  The press release states:

"In documents filed today in federal court in Tucson, Arizona, each defendant agreed to plead guilty to one count of conspiracy to enrich themselves by obtaining cash bribes from persons they believed to be narcotics traffickers. Those individuals were actually Special Agents from the FBI, and the defendants used their official positions to assist, protect and participate in the activities of what they believed was an illegal narcotics trafficking organization engaged in the business of transporting and distributing cocaine from Arizona to other locations in the southwestern United States."

The people pleading guilty include "a corrections officer with the U.S. Bureau of Prisons," a former Arizona Police Officer, a "former[ ]sergeant in the United States Army," individuals associated with the "Arizona Army National Guard" and more.  Are you telling me I can't trust the police and the military?  Gosh, next thing you know, someone will be trying to tell me that I can't trust the Boy Scouts (see here). 

(esp)

 

May 13, 2005 in Prosecutions | Permalink | TrackBack (0)

Immigration Charges for Attorneys and Law Firms

A U.S. Immigration and and Customs Enforcement Press Release reports the indictment of TWO LAW FIRMS and four individuals, including two attorneys. The 149 count indictment charges  "conspiracy to commit immigration fraud in Maryland, Washington, D.C., and Virginia during a four-year period from April 2001 until the present."  The press release states that "[t]he indictment alleges that the defendants profited from the use of fraudulent practices to thwart immigration laws in order to obtain work visas for alien clients who were charged legal fees as high as $22,000."  Additionally the press release states:

"One of the fraudulent aspects of these applications and petitions was that the defendants listed Maryland businesses, including an employment agency, a pizza restaurant and a construction company, as the official sponsors for the alien applicants when, in fact, the owners of the businesses never agreed to sponsor them. Some of the documents filed by the defendants contained the forged signatures of the business owners and/or listed false work experience for the alien applicants. *  *  * The indictment further alleges that to facilitate the conspiracy some of the payments from the alien applicants were deposited into bank accounts controlled by companies formed by some of the defendants."   

(esp)

May 13, 2005 in Prosecutions | Permalink | TrackBack (0)

Laundering Business Charged With Antitrust Violation

It's the laundering business, but not laundering charges. The DOJ announced charges of a Sherman Act violation against " two executives and their Brooklyn, New York companies for participating in a conspiracy to allocate customers for linen supply services in the New York City metropolitan area..."  It is part of an ongoing investigation into the linen supply industry.   The DOJ press release reports that  several linen supply "companies carried out the conspiracy by agreeing not to compete for each other’s customers, meeting to discuss and affirm their agreement, notifying each other when customers were contemplating switching linen suppliers, and submitting intentionally high non-competitive price quotes or refraining from submitting price quotes to customers."

May 13, 2005 in Prosecutions | Permalink | TrackBack (0)

Thursday, May 12, 2005

Down to 48 in Scrushy (Including Forfeiture Counts)

With the defense resting without the testimony of Scrushy himself, it seems that the prosecution has decided not to present additional evidence.  But it is far from over yet.  According to the Wall Street Jrl here, the judge threw out two more counts against the accused. The Birmingham News here reports that it was an obstruction of justice charge and a SOX fraud charge that have been dismissed.  It seems that the judge also has some doubt about the money laundering charges, although so far they remain.  Money laundering, initially passed to combat drug trafficking, shows up more and more as add-on charges with white collar offenses.

There are also still closing arguments to come (starting Monday) and then 48 counts for the jury to consider.  The Birmingham News notes here that 12 of these are forfeiture charges that only come into play if the accused is convicted. The large number of charges can work both ways.  On one hand it can be difficult for the defense to overcome even with a strong case as the jury might come back with a compromise verdict.  On the other hand, the jury can think the prosecution went too far and refuse to accept anything.  Of course, there is always the possibility of guilty as to all counts.  Stay tuned.

(esp)

May 12, 2005 in HealthSouth | Permalink | TrackBack (0)

More Sentencings in the Enron Nigerian Barge Prosecution

The three remaining defendants in the Enron Nigerian Barge prosecution were sentenced today by U.S. District Judge Ewing Werlein.  Former Merrill Lynch bankers Robert Furst and William Fuhs each received 37 month terms of imprisonment, which is in the range of sentences given the first two Merrill defendants sentenced, Daniel Bayly and James Brown, who received 30 and 46 months respectively.  The sentencing recommendation in the Presentence Report prepared by the U.S. Probation Office was 15 years for Furst, based on the jury's loss calculation.  The judge also said he would ask the Bureau of Prisons to postpone the beginning of Furst's sentence until after his 20th wedding anniversary on June 29.  Former Enron executive Dan Boyle received a 46 month term, the same sentence as Brown.  The judge denied requests by all the defendants to remain free pending appeal. A story in the Houston Chronicle (here) discusses the sentencings.

Tom Kirkendall has an interesting post (here) on his Houston's Clear Thinkers blog about Bayly's appeal of the bail denial that foreshadows the arguments he (and the other defendants no doubt) will make in the full appeal of the conviction.  The post contains a link to the brief.  Tom writes:

The brief previews Mr. Bayly's arguments on appeal, which are focused on the paucity of direct evidence linking Mr. Bayly to the transaction, the hearsay nature of the evidence that did, and the refusal of Judge Werlein to instruct the jury on a key defense theory. That key defense theory is that an Enron promise to Merrill Lynch to arrange a sale of the barges within six months to a third party -- as opposed to an Enron promise to repurchase the barges within that time frame -- did not undermine Enron's accounting of the transaction and did not constitute the basis of a crime. Inasmuch as Enron ultimately arranged for such a sale to a third party as opposed to buying back the barges from Merrill itself, the lack of a jury instruction on that issue appears to be a solid basis for Mr. Bayly's appeal.

It will be interesting to see if the Fifth Circuit is receptive to these arguments, and possibly previews the strength of them by granting bail pending the appeal.  Recall that the court rejected the arguments of Arthur Andersen in the first of the Enron-related prosecutions, a position that does not appear to be favored by the Supreme Court.  With the passage of time and a transaction that is overshadowed by the much larger pending conspiracy prosecution of former Enron CEOs Ken Law and Jeff Skilling, the circuit court may be a bit less favorable to the government in its review of this phase of the Enron prosecutions. (ph)

May 12, 2005 in Enron, Sentencing | Permalink | TrackBack (0)

The Boy Scouts?

Are the Boy Scouts having issues?  According to the Atlanta Jrl Constitution here, an audit is examining the reporting of membership in the Boy Scouts.  The AJC article, although speaking mainly to the Atlanta area, also notes that:

"The FBI is looking into allegations of membership inflation involving the Greater Alabama Council, which governs troops in the northeastern part of that state. Membership rolls in Tampa, Dallas and Oregon also have been questioned."

If the investigation finds evidence of inflated reporting to "boost financial support," will DOJ be looking to prosecute the Boy Scouts and will the investigation be of individuals or the organization?  Is there a local United States Attorney who would be willing to present evidence to a grand jury to investigate these allegations? 

(esp)

May 12, 2005 in Media | Permalink | TrackBack (0)

Moving Onto New Insurance Companies

Looks like Chubb Corp. has been subpoenaed and its the feds (as opposed to Spitzer's Office) doing the looking this time. (see Wall Street Jrl. here).One can only say that the insurance industry is the hot investigation topic if you happen to be in New York.   But things at Chubb Corp. appear to be going smoothly, as their top press release on their web page concerns the charity golf outing.(see here)

(esp)

May 12, 2005 in Investigations | Permalink | TrackBack (0)

Wednesday, May 11, 2005

Wrong Again, Naturally!

If you've ever gone to the racetrack, you've seen the tout sheets that proudly display their winning picks for the day.  I am proud to say that I hit the daily double in predictions about testifying defendants: my prognostication back in January (no, I won't search for the link) was that Bernie Ebbers was less likely to testify and Richard Scrushy (much) more likely to take the stand.  Today, the defense rested in Scrushy's trial without calling him to testify. We all know how Ebbers came across to the jury in his testimony.  I won't hazard a prediction on how the jury will come out in Scrushy's case, although I did pick North Carolina in one of my NCAA pools (along with everyone else). (ph) 

May 11, 2005 in HealthSouth | Permalink | TrackBack (0)

What Kind of a Business Is It?

How one chooses to organize a business is usually of concern primarily for tax and regulatory purposes, and only rarely is it an issue in the criminal law.  Two areas that I can think of where the particular legal form under which a business operates will be important are for the privilege against self-incrimination (only a sole proprietorship can assert the Fifth Amendment for the act of production) and sentencing.  The Organizational Sentencing Guidelines do not apply to sole proprietorships, which are viewed merely as extensions of the individual owner, in much the same way that the sole owner can assert the Fifth Amendment on behalf of the business.  The issue was important in the sentencing context in United States v. Helmos Foods Product, Inc. (here), which was convicted along with its owner, Theodore Mantas , of improperly storing adulterated meat and poultry.  At trial, there was considerable confusion about the legal status of the business, which had been incorporated but the corporation had been dissolved by the state before the criminal conduct.  Both sides believed that it was a partnership of Mantas and his wife, but in fact it was a sole proprietorship.  Upon conviction, the judge imposed a $250,000 fine on the company, and it filed for a writ of coram nobis to lift the fine because the Organizational Sentencing Guidelines do not apply to sole proprietorships.  Unfortunately, the mistake in the initial proceeding cannot be undone in a coram nobis if the issue could have been argued in the direct appeal.  For example, a number of coram nobis writs were issued in the wake the Supreme Court's decision in 1987 in McNally v. United States that (briefly) rejected the right of  honest services theory for mail/wire fraud convictions, former Maryland Governor Marvin Mandel being among the most famous to have their convictions vacated.  The Seventh Circuit found that the information to avoid the error was available while the case proceeded on direct appeal:

But the confusion has considerable relevance as to whether the issue that Helmos Food was a sole proprietorship could have been raised on direct appeal. At both trial and sentencing, attention was directly focused on Helmos Food’s status, and it was quite clear that Mr. Mantas was going to be responsible for the fine. Counsel should have been alerted that if there was a way to prevent the imposition of a fine—by proving that Helmos Food was a sole proprietorship, for instance—there was no time like the present. In addition, at sentencing, both parties had available Mantas’s 1997 and 1998 tax returns, specifically schedule C to form 1040, which is entitled "Profit or Loss from Business (Sole Proprietorship)." The information from which to argue that Helmos Food was not subject to guideline § 8A1.2 was available; it just was not used at trial or on direct appeal.

Those minor little technicalities, like how a business is organized legally, can have great importance. (ph)

May 11, 2005 in Judicial Opinions, Sentencing | Permalink | TrackBack (0)

TIAA-CREF CFO Takes Unpaid Leave

As expected, TIAA-CREF CFO Elizabeth Monrad has stepped down temporarily from her position because of the Wells notice she received from the SEC about its current intention to file securities law charges against her related to the AIG-General Re reinsurance transaction (earlier post here). A Wells notice is the term for the notification provided by the SEC's Enforcement Division staff that it plans to recommend to the full Commission that a civil action be filed naming the person (or company) as a defendant for a violation of the federal securities laws. A press release issued on May 10 (here) states: "TIAA-CREF today said that Elizabeth A. Monrad, Executive Vice President and Chief Financial Officer, has requested, and has been granted, an unpaid leave of absence without day-to-day responsibility at the company."  A third General Re executive involved in the transaction, John Houldsworth, who supervised Monrad and Richard Napier, has received a Wells notice (see Wall Street Journal story here).  These are the three principal officers involved on General Re's side of the transaction.

Interestingly, neither General Re nor Berkshire Hathaway have made any public disclosure yet (as of 10:30 a.m. on May 11) about Houldsworth receiving the Wells notice, although Berkshire Hathaway's quarterly earnings statement and 10-Q both reference the notice given to Napier that he received on May 2.  If prior practice is any indication, the SEC probably Wellsed [like any area of law, terms of art become verbs] the three recipients (and their counsel) at the same time, and it is unlikely that one received it well in advance of the others.  Its puzzling to me why the disclosures by General Re have been so slow regarding the second executive to receive an identical Wells notice.  Moreover, while Ms.Monrad has stepped down temporarily from her position at a private company, there is no word yet whether Napier or Houldsworth will also be put on leave by General Re. This one seems to be playing out in slow motion, with corporate disclosures following up on the press. (ph).

May 11, 2005 in Civil Enforcement, Fraud, Investigations, Securities | Permalink | TrackBack (0)

Enron Stuff

Lest we forget about the various Enron proceedings that are taking place, here's a short update:

Enron Broadband Services Trial: A funny article in the Houston Chronicle (here) expresses the frustration of the reporter, and probably the jurors, as the trial descends into tech-speak -- but then, the case is about whether the various statements by the five defendants were misleading about the state of Enron's broadband services.  The current witness is a tech specialist, with both the direct and cross-examinations getting into the knotty details of the software.  Imagine having someone from a tech helpdesk testifying.  It has gotten so bad that one lawyer compared the case to a "civil trial," truly damning words.  The bad news for participants is that the case is likely to last at least another four weeks.

Merrill Continues to Pay Attorney's Fees for Convicted Employees: The Enron Nigerian Barge trial resulted in the conviction of four Merrill Lynch employees, and the two remaining Merrill defendants are scheduled to be sentenced tomorrow by U.S. District Judge Ewing Werlein.  A Wall Street Journal article (here) states that the firm (still affectionately known as "Mother Merrill" to some) will continue to pay the attorney's fees of the employees through their appeals.  To this point, Merrill has paid over $17 million to the lawyers, and the government apparently is now complaining in a letter to the district court about the continued payment of the fees and the firm's failure to seek repayment.  The duty to pay attorney's fees on behalf of an employee for conduct in the course of employment is governed by whatever contract they might have, and corporate law authorizes such agreements.  Merrill is a Delaware corporation, and Delaware General Corporation Law Section 145 (here) permits such payments in a criminal prosecution so long as the officer or director "had no reasonable cause to believe the person's conduct was unlawful."  Whether the officer's can have their attorney's fees paid (Delaware law authorizes advancement of expenses) is up to the board of directors, which must decide whether the employees were acting in good faith.  Although the Department of Justice views the payment of attorney's fees as somehow suspicious (see the Criminal Division's Principles of Federal Prosecution of Business Organizations (here) on this issue), I don't think the government has any basis to question a business judgment made by a corporation about its obligation to pay the attorney's fees of its officers and directors.  Shareholders can certainly object to how their company uses its funds, but that is a matter of internal corporate governance and not an issue in a criminal prosecution.

Sentencing Dates for Cooperating Former Enron Execs Postponed:  Not surprisingly, the sentencing dates of four former Enron executives who reached plea agreements with the government have been pushed back.  Among the four are former CFO Andrew Fastow and his top aide Michael Kopper, who will be key witnesses in the 2006 conspiracy trial of former CEOs Ken Lay and Jeff Skilling (along with former chief accounting officer Richard Causey).  Their sentencing has been set for June 2006, which will probably be after the trial if finished -- at least I hope it's done within five months. A Houston Chronicle article (here) discusses the sentencing postponements. (ph) 

May 11, 2005 in Enron, Prosecutions, Sentencing | Permalink | TrackBack (0)

Will Scrushy Be the Next Defense Witness?

The trial of Richard Scrushy has turned positively somnambulant over the past week as the defense called two expert witnesses to split hairs about the value of Scrushy's stock options and the effects of the fraud on HealthSouth's share price.  Things may have hit a new low on the interest meter on Tuesday when the defense spent the day reading into the record transcripts of two witnesses who testified last year at the SEC's asset freeze hearing but who have since asserted their Fifth Amendment privilege and refused to testify (with the government unwilling to grant immunity).  If you have ever had the joy of reading a transcript to a jury (grand or petit) you know just how boring the process can be..  That may change in the next day or so, however, as lead defense trial counsel James Parkman has indicated that Scrushy is prepped and ready to take the witness stand.  This will be the key to the defense because the other witnesses will be overshadowed by the direct and, more importantly, the cross-examination of the former CEO. 

Of course, Parkman has hinted that he may not call Scrushy to testify, no doubt trying to keep the government off-balance and creating the possibility that prosecutors would appear unprepared if he were to suddenly rest the defense case.  Given the particular spin on the "Honest-but-Ignorant CEO" defense being used here, which accuses HealthSouth's Five Guilty CFOs (and others) of actively lying to Scrushy for years and not just that the defendant did not pay attention to all that complicated accounting stuff (the Ebbers/Lay variant), it will be difficult for him not to testify to try to counter the extensive testimony about his involvement in all aspects of the company.  This just seems like a very difficult case to rely on the burden of proof, attacking witnesses who entered plea bargains, and accusations that everyone lied and engaged in a grand conspiracy to keep Scrushy in the dark without the defendant saying what he did and did not know.  The trial can move from something just this side of watching paint dry to an edge-of-the-seat drama once Scrushy takes the witness stand. An AP story here discusses the statements of Scrushy's counsel about the possibility of calling him to testify. (ph)

May 11, 2005 in HealthSouth | Permalink | TrackBack (0)

Should Materiality Be an Element of Obstruction of Justice?

Blog co-editor Ellen Podgor will have an article coming out in volume 44 of the Washburn Law Journal, as part of a symposium issue on white collar crime, that compares the obstruction charges against Arthur Andersen and Martha Stewart.  The article, entitled Arthur Andersen, LLP. and Martha Stewart: Should Materiality be an Element of Obstruction of Justice?, is summarized as follows:

Obstruction of justice, with its many different statutes, is a crime that prosecutors can use with relative ease. It covers a wide breadth of activity and has few limitations. This paper examines the prosecutorial use of obstruction charges in the cases of Martha Stewart and Arthur Andersen, LLP. Although the statutes differed in these two prosecutions, with Arthur Andersen, LLP., prosecuted for the crime of obstruction of justice under 18 U.S.C. Section 1512, and Martha Stewart, prosecuted for several criminal charges including obstruction of justice under 18 U.S.C. Section 1505, both demonstrate how prosecutors can leave unfinished the original activity that was the subject of investigation to proceed with the easier obstruction charge.

This article provides a way to restrict prosecutors in their use of the crime of obstruction of justice when it is used solely for expediency purposes. In essence, it reads in an element of materiality as required for this crime in a manner similar to how the Supreme Court included materiality for fraud prosecutions. By adding an element of materiality as a requirement for an obstruction conviction, prosecutors are forced to complete investigations that can be completed on the substantive charges. In contrast, investigations that cannot continue because the obstructive conduct precludes continuation because of either destruction of evidence or intimidation of witnesses, still have available the ability to appropriately punish the activity via a charge of obstruction of justice.

With the recent arguments in Andersen in the Supreme Court and Stewart in the Second Circuit -- and perhaps destined for the Supreme Court too? -- this is a timely article that looks at the aggressive prosecutions initiated in these cases and questions whether the obstruction statutes are being used properly. The article is available on SSRN here. (ph)

May 11, 2005 in Scholarship | Permalink | TrackBack (0)

Tuesday, May 10, 2005

Saks Fires Three Executives Over Improper Accounting of Vendor Allowances

Saks Inc. announced the results of a previously disclosed internal investigation into accounting for vendor allowances for marked down inventory, and has fired three executives from its Saks Fifth Avenue division (I resisted using the term "Sacked" in the title, just barely).  Saks had conducted an internal investigation in 2002 into the same issues, and apparently the problem has continued.  According to a company press release (here):

The Audit Committee's investigation concluded that during the Company's 1999-2003 fiscal years, the total markdown allowances improperly collected from vendors was approximately $20 million. Amounts of markdown allowances improperly collected during this period were previously disclosed in the Company's press release dated March 3, 2005. No improper collections during the 2004 fiscal year were identified. Now that the Audit Committee's investigation is completed, management is undertaking its work to confirm the amount of total vendor markdown allowances determined to have been improperly collected and to determine if any markdown allowances were improperly collected before fiscal 1999. As previously disclosed, the Company intends to reimburse or otherwise compensate the affected vendors for any improper allowances.

The terminated executives are Donald Watros, former COO of Saks Fifth Avenue, Brian Martin, former general counsel for the company during the 2002 internal investigation and then a senior executive with the retail division, and Donald Wright, Saks' Chief Accounting Officer.  Brian Martin's brother, Brad, is CEO of Saks, so you know this can't have been an easy decision.  The internal investigation also criticized senior Saks management for the "quality of communication" and monitoring of the vendor allowances, and bonuses will be withheld -- at least for this year. 

The company will have to restate its earnings for the relevant period, and has not filed its annual report yet for the past fiscal year.  The cascade of suits should commence shortly, with the SEC, stock purchasers, and shareholders all jumping into the fray.  Perhaps more ominously for the individuals, Saks also disclosed that the U.S. Attorney for the Southern District of New York has made an "inquiry" about the matter -- look for the launch of grand jury subpoenas very soon, if they haven't gone out already. (ph)

May 10, 2005 in Fraud, Investigations, Securities | Permalink | TrackBack (0)

Let's Stick to the Case- Not Senator A

Unfortunately, it sounds like there might be some outside interference in the upcoming David Rosen trial (reported here) that starts today. Yahoo reports here that "A conservative watchdog group with a history of dogging the Clintons urged a Senate panel on Monday to investigate Sen. Hillary Rodham Clinton over a Hollywood fundraiser for which a former staffer faces charges." 

The Rosen indictment, however, appears to present a different picture.  There is NO mention in this indictment of Clinton's involvement in any criminal activity  and there is NO mention in the indictment of her overseeing this individual in any criminal activity.   The indictment even goes so far as to omit her name.   

Perhaps the most fascinating aspect of the Yahoo report is that it reports that "Judicial Watch President Tom Fitton" was "equat[ing] her situation with the ethics controversy surrounding House Majority Leader Tom DeLay, R-Texas, who has been criticized for privately funded travel." We reported on Tom DeLay's financial issues here.

Hopefully, politics will not interfere in the trial of David Rosen, who stands charged with four counts of a 1001 violation.  It's a sad day when politics becomes a part of our criminal justice process.

(esp)

May 10, 2005 in Media | Permalink | TrackBack (1)