January 15, 2005
Baseball Players Urine Samples Ordered Returned
In connection with the BALCO steroid prosecution, in April 2004 IRS agents seized all of the urine samples provided by major league baseball players as part of the now-replaced drug testing program. The search took place the day after the major league baseball player's union filed a motion to quash a subpoena for the items to Quest Diagnostics, the lab the collected and analyzed them. On Friday, Jan. 14, a federal court granted the union's motion to return all the urine samples and records to Quest Diagnostics. According to an AP story (on ESPN.com Jan. 14), the government will not have to return the samples and records related to those players who testified before the federal grand jury in 2003 that ultimately indicted BALCO founder Victor Conte and three others. Among those who testified were Barry Bonds and Jason Giambi, whose grand jury testimony was revealed in San Francisco Chronicle stories in December 2004 (see posts here on Jason Giambi and here on Barry Bonds). Because the government can keep, and presumably use, the items related to the players who testified before the grand jury, that may indicate the government is looking at one or more of the witnesses for a possible perjury charge based on any discrepancy between the testimony and test results. (ph)
Elgindy Securities Fraud Trial Coming to a Close
The securities fraud trial of Anthony Elgindy, a well-known market analyst who specializes in shorting stocks, and Jeffrey Royer, a former FBI agent accused of leaking to Elgindy information about ongoing investigations of companies, is nearing its end as the attorneys completed their closing arguments on Friday, Jan. 14. Royer testified that he disclosed the information to Elgindy for law enforcement purposes to develop a source of information on corporate misconduct (see Jan. 4 post "Former FBI Agent Testifies in His Own Defense"). Elgindy did not testify, and has been in custody since last year when he was arrested for trying to leave the country. According to the government, Elgindy used the information from Royer to short stocks before disclosing the investigations, and to try to extort money from companies in exchange for not disclosing the information to the public. An article in the New York Times (Jan. 15) describes the closing arguments of the two sides:
Lawyers for the defendants maintained that prosecutors presented an "Alice in Wonderland" view of the evidence, distorting statements and events to bolster their case.
But prosecutors said yesterday that the facts were clear: Mr. Elgindy and Mr. Royer might talk about their ambitions for law enforcement glory but their motives were corrupted by financial gain.
"It was a made-up rationale to hide their true financial motives," the prosecutor, Kenneth Breen, an assistant United States attorney, said. "The relationship with the S.E.C. and the F.B.I. served as a cover story" so that Mr. Elgindy "could pretend to get information - not glean it."
The article notes another interesting defense: venue. While venue is usually not an issue, in this case the prosecution was brought in the Eastern District of New York (Brooklyn), although Elgindy operated out of San Diego and Royer was assigned to FBI field offices in Oklahoma and New Mexico. Judicial decisions allow for a jury charge on venue, which is effectively an element of every federal crime, so long as there is some evidence put forward by the defendant to show there is a dispute regarding venue in the district of the prosecution. [In a shameless bit of cross-promotion, for more information on proof of venue, see Wright, Federal Practice & Procedure: Criminal, Vol. 2, § 307.] (ph)
Nine Executives Indicted in U.S. Foodservice Accounting Fraud Scheme
Nine executives from a variety of food-supply companies were arraigned on Jan. 13 for their part in an revenue-inflation scheme at U.S. Foodservice, a wholly-owned subsidiary of the Dutch company Royal Ahold N.V. According to an article in the New York Times (Jan. 14):
All the executives are accused of approving documents that claimed U.S. Foodservice, a unit of Royal Ahold, was owed millions of dollars more in promotional allowances - a type of rebate offered by manufacturers to stores and distributors - than was actually the case. The scheme had the effect of inflating U.S. Foodservice's profits, prosecutors say.
The SEC also filed civil fraud charges against the nine defendants, including insider trading charges against one defendant, Mark Bailin, who agreed to pay $2,224,446.51 disgorgement, $751,031.78 prejudgment interest and a $175,000 penalty (SEC Litigation Release). According to the article, most of the executives are expected to plead guilty. In July 2004, four U.S. Foodservice executives were charged in connection with the scheme, and two are awaiting trial.
This is one of the few cases in which employees of the outside vendors have been accused of criminal participation in an accounting scheme, an approach also taken in the Enron Barge trial when executives of Merrill Lynch were charged and convicted of participating in the accounting fraud. The prosecution is a further signal that the Department of Justice is looking at upstream and downstream participants in accounting misconduct. (ph)
January 14, 2005
Is Martha Stewart's Sentence Affected by Booker?
Many may be wondering whether Martha Stewart's sentence gets reduced because of the Booker decision. Will this happen automatically? No. Can the attorneys file for a reduction in sentence? Yes. Will they? Not sure. According to a CCN Report "Attorneys for Stewart said Thursday that they were studying whether the high court decision could lead to an early release for their client."
Cases where the guidelines have mandated an enhancement of a sentence are the most likely ones to be on the chopping block post-Booker. And some of these clearly warrant review. For example, "Olis, the ex-Dynegy executive who is serving more than 24 years behind bars," should be up at the front of the line when it comes to reviewing sentences. This is a case where as reported by CNN "the trial judge himself indicated he was reluctant to impose the sentence." Because "Olis was found guilty of participating in a fraud whose value exceeded $100 million[, ] [s]entencing rules automatically tacked more than 10 years onto his prison term." Booker may come to the rescue in cases such as this, but that's because it should be there in order to neutralize mandatory guidelines that were in some cases totally unrealistic.
But Martha? She may have better fish to fry with her Crawford issue and the issue of not allowing her an instruction that would have informed the jury that she was not being tried for insider trading.
Prosecution Strategy in Ebbers Trial
An article in the Wall Street Journal (Jan. 14) discusses the strategy of the U.S. Attorney's Office in the prosecution of Bernie Ebbers. The article states:
If it's up to the prosecution, the trial revolving around the largest accounting fraud in U.S. history may end up having relatively little to do with accounting.
Part of the reason for the prosecution's likely trial strategy: Past trials of corporate scandals show that most jurors are unlikely to be interested in lengthy and technical explanations of shady accounting maneuvers. For example, a recent trial of four former midlevel executives at Qwest Communications International Inc. failed to yield any convictions after seven weeks focused on accounting matters and voluminous e-mail exchanges.
The KISS (Keep It Simple, Stupid) strategy is standard fare in white collar crime cases, although the Manhattan DA's office seemed to miss that point in its mind-numbing six-month trial of Dennis Kozlowski and Mark Schwartz, whose retrial begins soon (see Wall Street Journal story here). The problem for the government in the Ebbers case is that the accounting issues, largely focusing on whether certain items should have been capitalized or expensed as incurred, will have to be addressed at some point. One defense strategy may be to focus on the arcane accounting issues (is that repetitive?) to essentially bore the jury to death in support of its "Honest-but-Ignorant CEO" defense (earlier posts here and here). In effect, if the jurors find this stuff incomprehensible, then isn't it likely Ebbers did too? The tug-of-war will be interesting to watch to see how much the government can shift the focus of its financial fraud/conspiracy case away from the underlying accounting issues. (ph)
January 13, 2005
More on Sentencing
The comments on Booker are everywhere:
The government press release on the case makes it clear that they are not particularly happy with advisory guidelines.
Expressed in the Detroit News is that the sky is falling. The very title of the article tells it all-, "Ruling to affect hundreds of Detroit federal defendants."
The NACDL Press Room is filling up quickly with articles that have quotes from President Barry Scheck.
Clearly Booker is an important decision. Clearly it changes some of the premises upon which sentencing proceeds. Clearly there are questions that will arise from this decision that necessitate further Court review. And yes, some of the draconion sentences may now be history. But other than that, lets sit back and wait to see what happens. There are some of us who do not anticipate the roller coster ride that others envision in the upcoming months.
Addendum- Check out Professor Ron Wright's thoughts as he takes over the Berman blog for a few hours.
Many are talking about Booker's effect on 5K1.1 motions, always a hot topic in the white collar area. Doug Berman's Sentencing Blog raises the issue and the NACDL list serv has had its share of chatter. Professor Berman includes a Wall Street Journal quote from Indiana University School of Law at Indianapolis Professor Frank Bowman, who states that, "[n]ow that the guidelines are only advisory, defendants may see less need to cooperate." The article states that "[t]he Department of Justice has just lost all of its bargaining leverage" with defendants, asserts Prof. Bowman." (but see addendum below).
Lets slow down.
1. First, the Booker decision does not appear to remove the government ability to file a 5K1.1 Motion. It also does not invent a 5K1.1 motion for the defense to file.
2. Yes, the Court can depart downward absent a government agreement as long as it is not "unreasonable." And although it can happen absent a request or the permission of the prosecutor, is it really that likely?
3. The bottom line is that courts are instructed to use the guidelines. And with ample knowledge of what the guidelines advise (since they have been using them), it seems likely that unless the circumstances warrant (e.g., the government told the defendant they would file a 5K1.1, the defendant assisted, and then the government fails to do so), most courts are not going to be haphazardly departing downward.
4. The guidelines have constrained the judiciary in cases that just didn't fit the norm. Judges left the bench because of their inability to comply with the guidelines restrictions (it's a shame we can't get them back now). So merely balancing things out is not an announcement that everything is up for grabs. Lets be reasonable about this Court result.
5. If the prosecution offers no incentive to plea, then yes the defense may take a chance with the court. But that would have happened pre-Booker. And most defendants will want certainty in a plea as opposed to rolling the dice with a judge that could go down OR UP. And judges are more likely to take a plea and adhere to a plea that both sides agree to. So, the bottom line is....perhaps if we give this some time we may find that the post-Booker and pre-Booker scenarios are pretty close to the same result.
Addendum- Professor Frank Bowman responds in a comment on the Sentencing Blog to some of these points and his statement includes the following - "the quote attributed to me in the WSJ is an overstatement."
Addendum to # 5 - it refers to future cases and not past cases, as going "UP" may present other legal problems if attempted on a past case.
In the News
While everyone is focusing on sentencing, the news is heavy with other happenings that are important to the white collar area. Here are some of the highlights:
1. The Wall Street Journal reports in an article titled, "SunTrust Discloses Formal SEC Probe Of Restatement," that "Sun Trust Banks Inc. said the Securities and Exchange Commission is formally investigating the restatement of the company's financial results for the second and third quarters of 2004, and has issued subpoenas seeking documents related to the bank's allowances for loan losses and related matters."
2. OfficeMax Inc. also appears to be having issues. The Wall St. Jrl. reports in an article titled, "OfficeMax CFO Quits; Results Delayed" that "OfficeMax Inc. said its chief financial officer quit, four employees were fired and that it would postpone release of its fourth-quarter results amid a widening internal probe into accounting irregularities at the superstore giant."
3. The New York Times has a Boomberg News clip reporting that "A unit of the Zeon Corporation agreed to pay a fine of $10.5 million and plead guilty to charges of fixing [rices of synthetic rubber that is used to make auto parts, hoses, belts and adhesives, the Justice Department said yesterday."
4. The New York Times also reports in an article titled, "Man in 9 - 11 Fraud Case Pleads Guilty" that "[a] man who collected $68,000 from a charity by falsely claiming his boyfriend died in the World Trade Center attacks has pleaded guilty to grand theft."
January 12, 2005
Booker-What is a Reasonable White Collar Sentence?
The topic of the day, without doubt, is the Booker decision. Most likely many are still engaged in creating a map of the various decisions. It is always amazing how clear laws create such incredible division among the brightest of minds, the Supreme Court. This is not new for sentencing. For example, the Court in Koon v. United States had several decisions all giving different interpretations on what could or could not be a downward departure. Amazingly, even with uniformity there were different interpretations and different results. In many cases, the Sentencing Commission would resolve disputes as they arose on the sentencing horizon.
While the sentencing guidelines were intended to promote uniformity, some have questioned whether it achieved its purpose. Did it merely shift judicial discretion into the hands of prosecutors, thus providing uniformity only facially? Through charge bargaining, 5K1.1 motions, and plea agreements some may have wondered if the sentencing goals were ever achieved.
But today's decision in Booker (not Fanfan as it could have been called), puts some of these questions to rest. The question now remains - what is the effect of removing the word "mandatory" before the words "federal sentencing guidelines," and specifically for this blog, what will be considered a "reasonable" sentence in a white collar case.
The initial post on this site, as well as the several posts on Douglas Berman's Sentencing Blog and others that he references, provide excellent discussion that dissects, explains, and synthesizes today's Supreme Court decision. But there are some questions that will linger even after reading the decision in this case.
For example, will this decision really make a difference in the white collar sphere, an arena where fraud guidelines have been a source of contention and a segment of sentencing where mandatory minimums are not the crux of the sentencing scheme?The answer to this question most likely relates to plea bargaining, a component of the system that provides certainty to all parties in the system and removes the need in many cases for appellate review. Since most cases proceed through an agreement of the parties, the question is whether the Booker decision will influence this practice.
- Will defendants be reluctant to plea bargain because of a "possibility" that they might now do better at sentencing?
- Will the sentence, if it falls below the advisory level of the guidelines, be found to be "unreasonable"?
- If a judge states a "reason" for imposing a sentence, will that be sufficient?
- Will Congress rush in with mandatory sentences, trying to resume a position of power, prior to seeing if this decision truly influences the sentences issued by courts?
- If Congress reacts, will the new statutory structure be subject to a new challenge and will it be found constitutional?
The bottom line may be that if parties desire to achieve certainty and avoid risk-taking, in practice this decision may not make a significant difference. But it remains to be seen what the fallout will be. Key questions will be - Are white collar offenders risk takers, and therefore will they feel that they should present their facts for review? Will prosecutors be "reasonable" in the plea agreements that they offer? Will judges defer to agreements reached by the parties? Restoring an element of judicial discretion does not necessarily create havoc. It all depends on how all the players - judges, prosecutors, defense attorneys, and Congress react? Optimistically,
Initial Booker Musings for White Collar Cases
At the risk of speaking without thoroughly reviewing all the opinions (wading through Justice Scalia's attack, which includes a reference to "Wonderland," will have to wait), a couple initial impressions (with quotes). For a more detailed (and learned) assessment of the decision, check out Doug Berman's postings at Sentencing Law & Policy:
1. Blakely (and Apprendi) are real, and the sentencing judge has significant discretion restored at this point in time. According to Justice Stevens' opinion for the majority:
Indeed, everyone agrees that the constitutional issues presented by these cases would have been avoided entirely if Congress had omitted from the SRA the provisions that make the Guidelines binding on district judges; it is that circumstance that makes the Court's answer to the second question presented possible. For when a trial judge exercises his discretion to select a specific sentence within a defined range, the defendant has no right to a jury determination of the facts that the judge deems relevant.
The "defined range" is the key--will Congress constrain judges by imposing more mandatory minimums, or for white collar crimes permit the government to prove a certain amount of loss (intended or actual) and impose a mandatory minimum? Any number of state crimes are based on the value of an item (e.g. larceny of more than $1000 is a felony), and transporting that into the federal statutes is certainly possible. While there are a number of mandatory minimums in the narcotics and weapons areas, there are none that I'm aware of in the more traditional white collar statutes: the fraud statutes (mail, wire, bank, insurance, securities), public corruption, and false statements/obstruction. Of course, if Congress starts enacting a number of mandatory minimums, that will be the next issue the Court may revisit. Note also that prior convictions remain exempt from Blakely: "Accordingly, we reaffirm our holding in Apprendi: Any fact (other than a prior conviction) which is necessary to support a sentence exceeding the maximum authorized by the facts established by a plea of guilty or a jury verdict must be admitted by the defendant or proved to a jury beyond a reasonable doubt."
2. The standard of appellate review is now "reasonableness"--which drew Justice Scalia's Wonderland" attack--rather than the Feeney Amendment's de novo. Justice Breyer's opinion states: "In other words, the text told appellate courts to determine whether the sentence 'is unreasonable' with regard to §3553(a). Section 3553(a) remains in effect, and sets forth numerous factors that guide sentencing. Those factors in turn will guide appellate courts, as they have in the past, in determining whether a sentence is unreasonable." This is not a constitutionally required standard, only what the statute is left with (sub silencio) after the Court excised the de novo standard. Congress can certainly revisit the standard of review and give some guidance to the circuit courts on how to review potentially disparate sentences.
3. Justice Breyer's opinion used inter alia a mail fraud hypothetical to show why the majority (namely Justice Ginsburg switching sides) rejected the requirement that all relevant aspects of a sentence be decided by the jury. The opinion states:
Consider, too, a complex mail fraud conspiracy where a prosecutor may well be uncertain of the amount of harm and of the role each indicted individual played until after conviction--when the offenders may turn over financial records, when it becomes easier to determine who were the leaders and who the followers, when victim interviews are seen to be worth the time. In such a case the relation between the sentence and what actually occurred is likely to be considerably more distant under a system with a jury trial requirement patched onto it than it was even prior to the Sentencing Act, when judges routinely used information obtained after the verdict to decide upon a proper sentence.
This point is critically important. Congress' basic goal in passing the Sentencing Act was to move the sentencing system in the direction of increased uniformity. That uniformity does not consist simply of similar sentences for those convicted of violations of the same statute--a uniformity consistent with the dissenters' remedial approach. It consists, more importantly, of similar relationships between sentences and real conduct, relationships that Congress' sentencing statutes helped to advance and that JUSTICE STEVENS' approach would undermine.
Many recent indictments contain Blakely factors for the jury to decide, and the Enron Barge trial even included a Blakely phase to the sentencing. While that is not constitutionally required, any inclusion of factual elements to increase a sentence (see #1 above) will have to be alleged in the indictment and proven at trial. Under the sentencing advisory system, how much disparity will there be, and can the goal of uniformity be reached?
These are preliminary thoughts, and Booker will become a source of many judicial opinions plumbing its depths--pity the poor trees felled in its wake. (ph)
Booker Decision Announced
From the SCOTUS blog, this brief discussion of the Supreme Court's decision announced Jan. 12 in U.S. v. Booker:
The Supreme Court ruled today that the federal Sentencing Guidelines must satisfy the standards of the Sixth Amendment as applied in the Court's ruling in Blakely v. Washington. Justice Stevens wrote an opinion on that point, and Justice Breyer wrote a separate opinion saying that the Guidelines can no longer be mandatory, but can continue to operate "in a manner consistent with congressional intent."
The opinion is available here and on Westlaw (2005 WL 50108). (ph)
The Credibility Battle at Ebbers Trial
A front page article in the Wall Street Journal (Jan. 12) describes the relationship between Bernie Ebbers, former WorldCom CEO whose criminal fraud trial begins later in January, and Scott Sullivan, the company's former CFO who has agreed to a plea bargain and will be the government's key witness. As noted earlier (Jan. 6 post), Ebbers will argue at trial that he was unaware of the financial chicanery at the company and accuse Sullivan of orchestrating the fraudulent accounting without Ebbers' knowledge--the "honest-but-ignorant CEO" defense. Sullivan's importance to the government's case cannot be overstated because Ebbers did not use e-mail--the primary source of evidence of corporate misconduct these days--and rarely communicated with subordinates in writing. In the credibility battle to come at trial, the article notes, "In an effort to discredit Mr. Sullivan as a witness, Mr. Ebbers's lawyers are seeking the judge's permission to disclose potentially damaging information about Mr. Sullivan's personal conduct, according to people familiar with the case. U.S. District Court Judge Barbara S. Jones hasn't yet ruled on the request." No indications yet what that conduct involves, but the effort to discredit (and bolster) Sullivan will be the centerpiece of what will likely be a long trial. (ph)
TASER International's Open Letter to Shareholders
TASER International Inc., which disclosed on Jan. 7 (post here) that it was the subject of an informal SEC inquiry into its public disclosures regarding the safety of its security products and possible revenue recognition problems, issued an open letter on Jan. 11 to its shareholders to address concerns about the company, whose stock has dropped approximately 45% since the investigation disclosure. The letter addresses, among other things, concerns about insiders selling shares ahead of the bad news:
[W]e have received questions indicating there is confusion on the issue of insider stock sales in the fourth quarter. Phil Smith, our Chairman who retired from day to day duties on December 31, 2004 sold the majority of his TASER stock as part of his retirement transition. Tom Smith and Rick Smith, co-founders of the company and whom currently serve as President and CEO, also sold a portion of their position in order to diversify their holdings. During the fourth quarter of 2004, Tom and Rick sold an average of 22% of their position in TASER including both their stock and vested and unvested options. We still retain a significant position in TASER International, which at year-end comprised a significant majority of our personal assets. Hence, we feel that the rumors about us "bailing out" are not fair, nor accurate. We have pointed out previously that the Smith family along with one other investor provided all of the startup capital to TASER International prior to its public offering, and we have held this investment for up to eleven years. We have historically sold stock and have been straight-forward with our investors that insiders would continue to diversify through continuing stock sales in the future.
Selling of this magnitude, when coupled with the uncertainty of an ongoing SEC investigation, can lead to the quick demise of a company if any more bad news leaks out, such as a criminal investigation by a U.S. Attorney's Office. Watch your portfolios. (ph)
January 11, 2005
Money Laundering Conspiracy Does Not Require Overt Act
Although the Supreme Court did not issue an opinion in the much awaited sentencing cases of Booker and Fanfan, it did rule in Whitfield v. United States. The Court held that a conspiracy to commit money laundering premised upon 18 U.S.C. 1956(h) does not require an overt act.
The key issue before the Court was whether to interpret the money laundering statute more like the general conspiracy statute or the drug conspiracy statutes. The Court distinguished the statute from 18 U.S.C. 371, the general conspiracy statute, which does require the government to prove an overt act. The unanimous decision written by Justice O'Connor found that 1956(h), the money laundering statute, was more like drug conspiracy statutes that do not require proof of an overt act as the language is "plain and unambiguous." "Because the text of s1956(h) does not expressly make the commission of an overt act an element of the conspiracy offense, the Government need not prove an overt act to obtain a conviction."
This decision sends a message to Congress that if they want an overt act required for a conspiracy, then they had better include explicit language in the statute requiring it.
On Jan. 10, U.S. District Judge Karon O. Bowdre denied Richard Scrushy's motion to suppress tape recordings made by former CFO William Owens in March 2003 while he was wearing a hidden tape recorder. The tapes were made over a two-day period right before the government executed a search warrant at HealthSouth that ultimately lead to Scrushy's resignation from the company and a series of guilty pleas by financial and other executives at the company. At issue in the motion to suppress were claims by Scrushy that the government had tampered with the evidence by turning the tape recorder on and off, and that there might be problems in the chain of custody for the tapes. Although Judge Bowdre denied the motion, stating she saw no evidence of tampering, a story in the Birmingham News (Jan. 11) indicates that defense counsel will challenge the tapes if the government seeks to admit them at trial:
Upcoming challenges to the recordings are likely to concentrate on the handling of them after they were made, said [Raymond] Johnson, the Birmingham lawyer [and former member of Scrushy's defense team]. Such efforts might call into question the chain of custody that law enforcement officers must respect to preserve the integrity of evidence, he said.
"The government will have to show the evidence maintained its integrity throughout, that, for example, it wasn't taken from an evidence room by an unauthorized person," Johnson said. "If there is a gap in the chain, there can be problems for the government."
The court did grant Scrushy's motion to postpone the start of the trial by one week, to Jan. 25, due to the large volume of evidence recently turned over to the defense. (ph)
Fraud Indictment of Former PurchasePro.Com and AOL Executives
Two former executives with AOL and four former executives of PurchasePro.Com, including former CEO Charles "Junior" Johnson, were charged with securities fraud, wire fraud, and conspiracy related to a scheme to inflate the revenues of both companies through a swap arrangement in an indictment returned in the Eastern District of Virginia. PurchasePro.Com was a software sales company involving a "business-to-business" license (remember the days before the bubble burst and "B2B" was among the hot items in the market?), and a press release issued by the U.S Attorney for the Eastern District of Virginia states:
The indictment alleges that a substantial amount of PurchasePro’s reported revenue was earned from marketplace license sales improperly recognized as revenue because the defendants and their co-conspirators achieved the sales as a result of the side agreements with the marketplace purchasers that were kept secret from PurchasePro’s outside auditors and the investing public. Many of the side agreements were with AOL’s partners and suppliers, which purchased marketplace licenses in the first quarter of 2001, thereby helping PurchasePro meet its revenue objectives.
Three defendants (Johnson and two other PurchasePro.Com executives) are also accused of obstruction of justice, related to alleged destruction of documents and deletions of e-mails, and false statements to the FBI during its investigation. A story in the New York Times (Jan. 11) quotes Johnson's attorney (using the trusty nautical metaphor):
Yale L. Galanter, a lawyer for Mr. Johnson, said the charges against his client were baseless. "He was the captain of a sinking ship and he went down with the ship," he added. Mr. Galanter said that Mr. Johnson, who was worth $5 million before getting involved with PurchasePro, was now $15 million in debt.
Lawyers for the other defendants also deny their clients committed a crime. (ph)
Former MarketWatch.Com Commentator Settles SEC Scalping Complaint
Thom Calandra, a co-founder of CBS.MarketWatch.Com and publisher of a newsletter (The Calandra Report), agreed to settle an SEC complaint accusing him of securities fraud in connection with stock recommendations in his newsletter while he secretly accumulated shares in the companies right before the recommendation and then sold them shortly thereafter once the recommendation caused an increase in the price. Calandra also received shares in two Canadian mining companies at a substantial undisclosed discount from a stock promoter that he then recommended to his readers. According to the Commission's Litigation Release:
Calandra made over $400,000 in illegal profits through a practice known as "scalping"-buying shares of thinly-traded, small-cap companies, writing highly favorable newsletter profiles recommending the companies to his newsletter subscribers, and then selling the majority of his shares when the increased demand generated by his favorable columns drove up the stock price. From March to December 2003, Calandra followed this "Buy-Write-Sell" pattern for 23 different stocks that he covered in The Calandra Report, without disclosing his actions to his readers.
A Wall Street Journal article quotes Calandra: "I am happy to have finally reached a settlement with the SEC on this matter. It has been a challenging year, to put it mildly, and I do not wish to expose my family to a protracted public dispute with the Commission on this matter."
Scalping claims are not often pursued by the Commission against non-broker-dealers, and this case illustrates one of the problems with such an action. While Calandra made money from his trades in highly speculative stocks, his obligation to his readers is not clear when there is no existing fiduciary relationship in the traditional sense of the term. When one subscribes to a stock tip sheet--for lack of a better term--should the person expect that the author will not profit from trading in the shares? That said, scalping is a type of "pump-and-dump" that has all the hallmarks of a ponzi scheme, and the SEC certainly will not turn a blind eye to a pattern of trading and hidden arrangements. (ph)
January 10, 2005
Plea Agreement in Former Georgia School Superintendent Prosecution
A post on Nov. 12 (here) discussed the indictment of Linda Schrenko, the first woman elected School Superintendent in Georgia and a one-time rising star in the state Republican party who was charged with defrauding over $600,000 in education funds from the federal government that she used for her failed campaign for the nomination for governor and to pay for, among other things, her cosmetic surgery. On Monday, Jan. 10, Merle Temple, Jr., Schrenko's top deputy and a co-defendant in the case, agreed to plead guilty and cooperate in the government's prosecution. An article in the Atlanta Journal-Constitution states that Temple has agreed to pay a fine of $199,500, and will be sentenced on April 7. (ph)
Spy Case Dismissed for Prosecutorial Misconduct in Plea Agreement
The government's efforts to keep one defendant away from another by inserting a clause in a plea agreement forbidding the cooperating defendant from speaking with the other defendant's lawyer has resulted in a dismissal of the indictment against the remaining defendant for prosecutorial misconduct. The government's prosecution of Katrina Leung for allegedly spying on behalf of China while pretending to cooperate with the FBI has ended, at least at this point, with the dismissal of all charges against Leung because of the plea agreement with ex-FBI agent (and former lover) James Smith. A post on the website Watching Justice states:
U.S. District Judge Florence-Marie Cooper of California issued a sharply worded decision on January 6, 2004 dismissing all charges against Katrina Leung, a socialite and Republican fundraiser arrested in 2003 along with her lover, FBI agent James Smith. The FBI had been paying Ms. Leung to provide intelligence on the Chinese government for years before the agency claimed to have discovered that she had been spying on that nation's behalf, according to the Washington Post.
Leung was recruited by Smith in 1982 for her valuable contacts in the Chinese government, the Post reported. She was reportedly paid $1.7 million over two decades for intelligence on China's military and espionage capabilities and its attempts to influence U.S. politics. The FBI eventually came to believe that she was secretly copying classified documents that Smith – with whom she had a romantic relationship – brought to her house. Smith eventually pleaded guilty to lying about the affair during an FBI background check and agreed to cooperate with the investigation of Leung in exchange for dropping more serious charges of mail fraud and mishandling classified documents. The agreement contained a clause forbidding Smith from sharing any more information with Leung or her lawyers.
The opinion, issued Jan. 6, raises troubling questions about the Department of Justice's approach to the case, specifically its intent in having the "no cooperation" clause in the plea agreement. Judge Cooper stated:
This is the most troublesome aspect of this entire motion. The government in the many documents filed with this Court in connection with this motion has repeatedly insisted that it never intended to communicate to Smith that he could not talk to Leung’s attorneys; that the language was inartfully drawn and not carefully thought out; and that at the time of the plea, the government was not particularly concerned about Smith’s being interviewed by Leung’s attorneys. The evidence before the Court absolutely belies these representations.
The evidence makes it abundantly clear to the Court that the government, in negotiating and drafting a plea agreement for Smith, wanted to secure his promise that he would not talk to Leung or her attorneys. The clause was intentionally placed in the agreement to accomplish that purpose. When confronted with Ms. Leung’s motion to dismiss, the government proffered an assortment of explanations and denials. Such conduct compounds the problem by undermining the Court’s confidence in the integrity of the process.
While the dismissal of an indictment for prosecutorial misconduct is rare, it does on occasion happen. The district court relies on due process and a finding of outrageous government conduct as the basis for ordering dismissal, grounds that are frequently rejected by the circuit courts when there is a less drastic alternative. Given the high stakes involved in the case, an appeal to the Ninth Circuit is likely. (ph)
Rowland's Plea Plays the Sentencing Guidelines Game
As discussed on the Sentencing Law & Policy Blog, a New York Times article (Jan. 10) reviews the plea deal former Connecticut Governor John Rowland agreed to right before Christmas (see post here) that included an admission to receiving unlawful gifts totaling approximately $107,000. According to the article:
[P]rosecutors wanted Mr. Rowland to admit to taking gifts worth at least $70,000, to bolster their case that the 15- to 21-month recommended sentence he faced as a public official under the guidelines was warranted. As long as that figure was reached, the lawyers said, prosecutors were willing to give Mr. Rowland leeway on which gifts to acknowledge as improper. At the same time, Mr. Dow sought to keep the figure below $120,000; even a tad more would have added three months to the recommended prison time.
In the end, the $107,000 compromise paved the way for the recommendation that Mr. Rowland receive a 15- to 21-month sentence, which Judge Dorsey can accept or increase or decrease.
The article also notes that Rowland drew Judge Peter Dorsey, who "has been challenged by prosecutors in the past for leniency." The plea agreement acknowledges that Rowland can seek to have his Sentencing Guidelines score reduced for his "minor role" in the offense and for extraordinary factors, including "unique financial circumstances and professional and individual community contributions." The agreement also permits Rowland to argue for a downward departure if the minor role provision is not applied. Interestingly, the plea agreement does not contain a 5K1.1 cooperation down departure provision. If Booker/Fanfan ends up declaring the Guidelines unconstitutional, Rowland's sentence could be much less than the 15-21 month Guidelines range. (ph)