May 21, 2005
First Sentences Handed Down in Philadephia Corruption Trial
U.S. District Judge Michael Baylson imposed sentences on two defendants, both of whom entered guilty pleas, in connection with the Philadelphia corruption trial on Friday. Former Philadelphia Treasurer Corey Kemp's pastor, the Rev. Francis McCracken, admitted that he and Kemp diverted $50,000 from a bank loan to his church for repairs after it was struck by lightening, that he set up a shell corporation to take funds from a federal welfare program, and not paying taxes on over $500,000 of income. Judge Baylson sentenced Rev. McCracken, who is widely respected in the community for his work on behalf of the poor, to 30 months in prison. A Philadelphia Inquirer story (here) quotes Rev. McCracken stating at the sentencing hearing: "Your Honor, I can't calculate how much I've given to others, in terms of food, in terms of recreational needs, how many allowances I've given to children, how much food, how much clothing. But please, Your Honor, rest assured that I put back into the church, back to the community and the church during the past 20 years, many times over what I took in this case." The other defendant, Rhonda Anderson, agreed to cooperate early on in the government's investigation and received a term of two years probation.
The five defendants from the main corruption are awaiting sentencing, with Kemp and Janice Knight set for July 18, Detroit businessman La-Van Hawkins on Aug. 16, and former Commerce Bank executives Glenn K. Holck and Stephen M. Umbrell scheduled for Sept. 16. While Rev. McCracken's conduct was largely unrelated to the corruption and perjury charges involving the five defendants, the substantial prison term imposed by Judge Baylson may well indicate that Kemp and the others will receive prison sentences, perhaps quite significant terms. As the central character in the misconduct, Kemp will receive probably receive the longest term, followed by Holck and Umbrell because of their conviction for conspiring with Kemp to commit honest services fraud. (ph)
New York Begins Grand Jury Investigation of AIG Executives
A Wall Street Journal article (here) reports that N.Y. Attorney General Eliot Spitzer's office has begun presenting evidence to grand jury about possible criminal violations by former American International Group executives in connection with accounting issues at the insurance company. The targets of the investigation at this point are most likely former CEO Maurice Greenberg and former CFO Howard Smith, although other AIG executives have left the company after asserting the Fifth Amendment and their conduct probably will be part of the grand jury's investigation. Joseph Umansky, who is head of AIG's reinsurance division that is a principal focus of the investigation, has testified before the grand jury and received immunity (see earlier post here).
Under New York law, a witness who testifies before a grand jury automatically receives immunity (subject to certain exections), which is quite different from the federal system that requires a witness to testify and assert the Fifth Amendment if there is possible incrimination, but immunity is solely at the discretion of the Department of Justice. Another important difference is that the immunity granted under New York law is transactional immunity, i.e. the state cannot prosecute the person for any crime discussed in the testimony, while the federal government pretty much only grants the more limited "use/fruits" immunity that prohibits the use of the testimony in a subsequent prosecution and (more importantly) any information derived from it to prosecute the witness -- unless one happens to be dealing with the Ken Starr Independent Counsel's office, but that's another story. New York CPL 190.40 (here) provides:
1. Every witness in a grand jury proceeding must give any evidence legally requested of him regardless of any protest or belief on his part that it may tend to incriminate him.
2. A witness who gives evidence in a grand jury proceeding receives immunity unless:
(a) He has effectively waived such immunity pursuant to section 190.45; or
(b) Such evidence is not responsive to any inquiry and is gratuitously given or volunteered by the witness with knowledge that it is not responsive.
(c) The evidence given by the witness consists only of books, papers, records or other physical evidence of an enterprise, as defined in subdivision one of section 175.00 of the penal law, the production of which is required by a subpoena duces tecum, and the witness does not possess a privilege against self-incrimination with respect to the production of such evidence. Any further evidence given by the witness entitles the witness to immunity except as provided in subparagraph (a)
and (b) of this subdivision.
What remains unclear is whether there is any coordination between Spitzer's office and the U.S. Attorney for the Southern District of New York on the investigation. A "race to the courthouse" could have a negative effect on any prosecution ("act in haste" and all that). (ph)
Blame the Messenger
Things at venerable Wall Street investment bank and brokerage firm Morgan Stanley aren't going particularly well these days. There is a fight between the old guard from the investment banking side of the firm (called the "Group of 8") seeking the ouster of CEO Phillip Purcell, who comes from the brokerage side of the firm (Dean Witter and all those nattering clients). This week, a jury in Florida hit the firm with a $1.45 billion judgment for defrauding Ronald Perelman in the sale of Coleman Co. to Morgan Stanley client Sunbeam (see earlier posts here and here), a corporation the was cooking its books while buying the maker of (among other things) grills -- there's something ironic in there, but I'll leave it be for now. So, when things go bad, what's a company to do? Why, try to punish the media for reporting all this information, of course, and make sure former employees say good things about you.
From the blog PR Machine (here) comes an amendment Morgan Stanley is sending to media outlets at which it purchases advertising: "In the event that objectionable editorial coverage is planned, agency must be notified as a last-minute change may be necessary. If an issue arises after-hours or a call cannot be made, immediately cancel all Morgan Stanley ads for a minimum of 48 hours." God forbid the media be critical of a company that keeps shooting itself in the foot . . . oops, I think that's objectionable editorial coverage. Darn!
In order to maintain support among even its departed troops, Morgan Stanley revealed the following terms of a severance agreement with two former senior investment bankers, one of whom is the highly regarded Joseph Perella, that explains what is meant by "good behavior" to earn a bonus payout from the firm (Form 8-K here):
"Good Behavior" means that (1) through December 31, 2005 (a) the individual has not committed any act that would constitute a "Cancellation Event" (as defined in the applicable settlement and release agreement) and (b) unless waived in writing by the Board of Directors of the Company, the individual will not support or associate himself with the so-called "Group of 8" or become part of any management team sponsored by such group and (2) through the Termination Date the individual (a) proactively assists in key employee retention efforts, (b) supports the Company and his colleagues in a positive manner, (c) assists in client relationship efforts where helpful or necessary, (d) remains employed by the Company (unless sooner terminated by the Company) and (e) assists in the orderly transition of his duties.
One for all and all for one, especially when it's worth a $6.4 million bonus. (ph)
Corruption and Obstruction in Margaritaville
The former Monroe (FL) County Attorney, James Herrick, was added to a superseding indictment for alleged obstruction of justice, conspiracy to obstruct a federal grand jury, and two counts of witness tampering in connection with concealing an alleged $29,000 kickback paid to former Monroe County Commissioner and Mayor Jack London. The payment was related to approval of a development in the Florida Keys ("Margaritaville") called Halls Resort (it's now a Hampton Inn). According to a press release issued by the U.S. Attorney's Office for the Southern District of Florida (here):
[T]he payment to London was made by a consultant, identified as “R.H.,” who had been hired by a real estate developer, identified as “M.R.,” to assist “M.R.” with obtaining building permits from the BOCC for the Halls Resort project. According to the Superseding Indictment, London used the $29,000 payment to satisfy an outstanding lien against a residential property London owned in Cork, Ireland. Hendrick allegedly agreed to participate in this kick-back scheme, and used his position as County Attorney to place the Halls Resort project on the BOCC agenda.
In addition, the Superseding Indictment alleges that, beginning in July 2003, and continuing into March 2004, Hendrick acted as a conduit between John “Jack” London and “R.H.” and that he subsequently devised a false explanation to legitimize “R.H.’s” $29,000 payment to London. Hendrick did so knowing that the false information would be conveyed to a federal grand jury.
Houston, Cleveland, Hoboken, and now Margaritaville -- this is certainly worse than stepping on a pop-top. Is no place safe from corruption these days, Jimmy? (ph)
Energy Trader Pleads Guilty to Manipulating Natural Gas Prices
A second energy trader working for The Williams Cos. entered a guilty plea in the Northern District of California to submitting false trade information to a publication in order to manipulate the price of natural gas (7 U.S.C. Sec. 13(a)(2)). Brion McKenna, formerly an energy trader with Williams Energy Marketing & Trading in Tulsa, admitted submitting false information about natural gas trades to two industrynewsletters, Inside FERC's Gas Market Report and NGI's Bidweek Survey -- two sure-fire cures for insomnia for most, but wildly influential publications in the industry. According to a press release issued by the U.S. Attorney's Office (here):
In pleading guilty, Mr. McKenna admitted that between approximately mid-September, 2000, to June 30, 2002, he conspired with others at Williams Energy Marketing & Trading to report fictitious trades to two industry newsletters, Inside FERC's Gas Market Report and NGI's Bidweek Survey. McKenna submitted the fictitious trades for the purpose of manipulating the published index prices in order to increase the value or profitability of Williams' natural gas positions.
"This is the second plea by a Williams trader to the manipulation of natural gas index prices," said U.S. Attorney Kevin V. Ryan. "This plea confirms that Williams traders conspired to manipulate natural gas prices in the West Coast, East Coast, Gulf Coast and Rocky Mountain regions of the country."
Mr. McKenna admitted that most of the trades he reported were deliberately fabricated and that he would routinely circulate a spreadsheet containing fictitious trades for input from other traders. Mr. McKenna also admitted that his predecessor taught him how to complete and submit the spreadsheet with fictitious trades designed to benefit the company's positions.
May 20, 2005
Jury Instructions in Scrushy
Looks like the jury in the Scrushy case is asking the court a question (see Birmingham News here) which appears to relate to a conspiracy count.
It is not surprising to see a jury having some difficulty with jury instructions in a white collar case. The instructions in this case are 78 pages in length (see here) and even includes a glossary of terms for the jury (pages 20-23). One particular difference from street crime cases, found in some white collar matters involves the court speaking to possible civil collateral matters. For example, in this case, the jury was instructed that:
"Related Civil Suits
As I instructed you at the beginning of the trial, your deliberations in this case concern only the government’s allegations that Mr. Scrushy violated certain laws and is subject to criminal penalties because of that conduct. This case is NOT about claims against Mr. Scrushy or HealthSouth by shareholders or employees who lost money because of the fraud. Those matters are civil matters, and many civil cases have been filed about what compensation, if any, those people are entitled to receive. Those cases, although arising from the fraud at HealthSouth, involve different legal issues and standards, and have a different burden of proof. Those civil cases have not been tried and will not be tried until some time after the end of this criminal case to protect all parties’ right to a fair trial here.
Please remember that the issue before you is whether the Government has proven beyond a reasonable doubt that Mr. Scrushy committed the criminal acts the Government has alleged in this case. Penalties for any violations so proven are provided by the law and, if necessary, will be addressed by the court after you reach a verdict. Any civil liability Mr. Scrushy may owe to shareholders or employees will be determined later under the civil laws that apply to those cases. Therefore, you should not consider in any way in your deliberations any concerns that you might have about losses sustained by shareholders or employees. Those claims will be addressed elsewhere."
Plain Error Under Booker Likely Headed to the Supreme Court
Courtesy of Doug Berman, who is enjoying "Revenge of the Sith" this evening, the Solicitor General's Office submitted a response to a petition for certiorari in Rodriguez v. United States (here) urging the Supreme Court to review the proper application of the plain error rule to Booker sentencing cases in which the defendant is forced to argue plain error because he or she did not raise the sentencing issue in the district court. As Doug has admirably traced out on Sentencing Law & Policy (in posts too numerous to link -- check here for the Weekly Roundup), the circuit courts have essentially devolved into a three-way split, with an en banc in the Ninth Circuit keeping that court out of the game. Approaches range from the Seventh Circuit's almost automatic limited remand to the Eleventh Circuit's "over our dead bodies" stand. The government's position on the issue is that "despite the likely limited effect of a decision by this Court in this case, further review is warranted. There is a clear and deep multi-circuit conflict on the proper analysis of plain Booker error."
While the government may prefer the Eleventh Circuit approach, I doubt it will be particularly troubled by adoption of any of the three approaches taken by the circuits. Moreover, it's unlikely an additional plain error opinion by the Court will have any real effect on Rule 52(b), given the decisions in Olano and Johnson have restricted the scope of the plain error doctrine sufficiently so that it is very difficult to ever get a reversal on plain error grounds, a position favorable to the government. I think the interesting part of the case is the second question presented, which may be the more important one for the government:
2. Whether such a defendant, who received a sentence within the applicable Guidelines sentencing range, can meet his burden to show that the error under Booker seriously affected the fairness, integrity, or public reputation of judicial proceedings, as is required to obtain relief under the plain-error rule.
This is the fourth-step in the plain error analysis -- the "no-harm-no-foul" approach for you basketball fans -- that permits a court to refrain from correcting an error if it decides there is insufficient harm to the system from leaving the error uncorrected. I wonder if the government will use the case to seek a reaffirmation from the court (at least the Breyer fivesome) of the importance of the Guidelines in determining the sentence, even in their "advisory" state. Such a statement could give aid to legislative efforts (i.e. H.R. 1528) to push the Guidelines back closer to the mandatory range by restricting downward departures, restoring some of the power prosecutors had under the Guidelines pre-Booker. Moreover, statements emphasizing the importance of the Guidelines strengthen the argument for government appeals in cases involving downward departures from Guidelines sentences.
While the Court hardly needs to issue another plain error case, I think most agree with Doug's assessment that the Booker split is simply unfair because of the inconsistency between the circuits.(ph)
Guilty Plea in International Price-Fixing Case
There is a guilty plea for a former executive of Bayer AG, a German company, for his role in an "international conspiracy to fix prices in the rubber chemicals market." A DOJ press release provides explicit details of the conduct alleged and also states that this individual:
"was charged with fixing the prices of certain rubber chemicals sold in the United States and elsewhere from January 1999 until December 2001. Koch, a German national, was product manager of rubber chemicals at Bayer during the time he participated in the conspiracy. Under the plea agreement, which must be approved by the court, Koch has agreed to serve a four-month prison term, pay a $50,000 fine, and assist the government in its ongoing rubber chemicals investigation."
The press release notes that previously "Bayer AG and Crompton Corporation pleaded guilty to participating in the conspiracy and paid fines of $66 million and $50 million, respectively." Three other individuals related to this case also previously entered guilty pleas to antitrust charges.
With globalization, it is not surprising to see more and more white collar issues with international implications.
OfficeMax Settles Civil False Claims Case
OfficeMax has settled a civil false claims action for $ 9.8 million. According to a DOJ press release here, the settlement was for:
"allegations that it submitted false claims when it sold office supply products manufactured in countries not permitted by the Trade Agreements Act to United States government agencies, the Justice Department announced today. The settlement resolves allegations that the Itasca, Illinois-based company sold products from countries that do not have reciprocal trade agreements with the U.S., such as China. OfficeMax was required by its contract with the General Services Administration (GSA) to prevent such items from being offered for sale to U.S. government agencies."
The Trade Agreements Act states as its congressional purpose,
"(1) to approve and implement the trade agreements negotiated
under the Trade Act of 1974 [19 U.S.C. 2101 et seq.];
(2) to foster the growth and maintenance of an open world
(3) to expand opportunities for the commerce of the United
States in international trade; and
(4) to improve the rules of international trade and to provide
for the enforcement of such rules, and for other purposes."
This case arose as a qui tam whistleblower civil action, which means that private parties will benefit from this settlement. The DOJ press release notes that the company was cooperative in this investigation.
Dupont Receives Subpoena
Dupont reports here that they have in fact received a subpoena from the Environmental Crimes Section of the Environment and Natural Resources Division of the U.S. Department of Justice (DOJ). On their website they state that the subpoena:
"relates to perfluorooctanoic acid (PFOA) and its salts, C8, ammonium perfluorooctanoate, and FC-143. The subpoena calls for the production of documents previously produced to the U.S. Environmental Protection Agency and other documents related to those chemicals."
As one might anticipate, Dupont's counsel is also stating that "[w]e will be fully responsive to the DOJ in this matter."
Cooperation with the government is a key factor that can assist a company should there be evidence of any wrongdoing. Providing this information to the public and expressing a desire to cooperate is certainly a helpful move for a company. A key concern for a company here is not only a government investigation but the possibility of civil collateral consequences that might come from a government investigation or action. The Wall Street Journal provides here more details on a civil settlement of last year.
May 19, 2005
Scrushy Will Not Be A Quick Verdict
Looks like the jury will not be reaching an immediate verdict in the Scrushy case. According to the Birmingham News here , the jury has asked the court to replay tapes of FBI wired Bill Owens, former HealthSouth finance chief, talking with Scrushy. Although Scrushy proclaims this as a positive sign, I would imagine that the government also considers this as positive.
Tapes can be very damaging evidence in a trial. Sometimes it is not the content, but rather the language and description of events that can be a problem to the defense. On the other hand, the concept of a snitch wiring him or herself up to talk to someone who is unaware they are being taped is not particularly appealing to some juries. There can also be problems related to the quality of tapes and their accuracy.
Investigating a Possible Computer Crime
When it comes to computer crimes such as theft of computer data, one question that can be presented to prosecutors is - where to charge a computer crime? A second issue likely to arise is - what happens when the accused is not aware that what they were doing was really illegal?
The Washington Post reports here the latest on the investigation into an alleged theft of data from LexisNexis, Inc. Federal agents executed search warrants of computers across the country. Exactly what, if anything, they found remains to be seen.
But if they did find evidence that implicates individuals, it is likely that these two issues will arise.
1. Do you charge a computer crime where the keystroke occurs, where the theft of a password may have occurred, the place where the computer message was sent through, the location of the Internet Service Provider (ISP), or the location of the ultimate harm. Oftentimes, prosecutors will have their choice, a choice that may not be present except in cases such as conspiracy or RICO.
2. And what happens when the government seizes a computer and the individual may say they have no clue that what they were doing was illegal. Is ignorance of the law an excuse when the crime is a complicated computer offense?
It will be interesting to follow the investigation surrounding LexisNexis to see if these two issues become the hot issues of any potential cases that might come from this investigation.
Washington Legal Foundation Program
On Tuesday, May 24, 2005 at 10:00 a.m. EST, Washington Legal Foundation will be holding a Web Seminar entitled "Deferred Prosecution Agreements: Promises and Pitfalls for Businesses Under the Federal Microscope". The program will feature William Mateja, a partner with Fish & Richardson and a former senior Justice Department official, and Michael Sklaire of the Womble Carlyle law firm. See attached brochure ( Download deferred5-24-05.pdf )
(esp) (with thanks to Paul Rosenzweig)
John C. Richter, Acting Assistant AG
We reported here that Christopher Wray was leaving the Criminal Division of DOJ. His picture and name have now been removed from the DOJ Criminal Division website, and one finds it replaced with a pictureless John C. Richter, the Acting Assistant Attorney General of the Criminal Division. See here.
Scrushy - To The Jury
Scrushy case is off in the hands of the jury. See here.
Government Says Its for Terrorism
As amazing as it may sound, it looks like prosecutors want even more freedom to investigate without oversight. According to the New York Times here the government is seeking power so that they can "subpoena records from businesses and other institutions without a judge's sign-off if THEY declared that the material was needed as part of a foreign intelligence investigation." (emphasis added). Some questions here:
1. What makes something a foreign intelligence investigation? How connected will the conduct have to be to terrorism, and who will make the decision that it is connected closely enough? And what happens if the government makes the wrong decision?
2. Should US businesses be concerned about this proposal? Will they find records being obtained without them having the opportunity to appear before a judge and assert privileges or other defenses to the production of the documentation?
3. Is the FBI willing to disclose how they have used the powers they received so far; that is those powers provided in the name of terrorism? (see ACLU claims here) Has the Patriot Act been used in non-terrorism cases? And will it be enough to have oversight twice a year after the passage of this legislation?
This may be a white collar crime blog - - but when unmonitored power to obtain certain documents, without oversight, is being considered, everyone needs to start considering the ramifications of this possibility. Is judicial oversight really that problematic to fighting terrorism?
How Long Can The Government Take to Indict?
In our Nov. 17th post here, we spoke of the indictment of former Atlanta Mayor Bill Campbell of Atlanta, Georgia. In this prior post we also spoke of a defense motion to dismiss two racketeering counts because the prosecution was particularly slow in bringing this indictment. And now approximately six months later a hearing was held on this motion.
It seems the government took a long time in bringing this indictment, and a key witness for the defense is no longer alive. This is an interesting issue that can arise in white collar cases, cases that often take longer to investigate then cases involving street crimes.
And the issue the magistrate judge will need to decide here is whether this particular delay deprives the accused of the right to present his defense. Did this delay place former Mayor Bill Campbell at a disadvantage? No one wants to be indicted, but if its going to happen, it should be done in a timely fashion. For more details on this issue see Bill Rankin's story here, in the Atlanta Jrl Const.
Closing Arguments Set in Kozlowski Case
With the evidence all in, the next step in the trial of Dennis Kozlowski and Mark Swartz (both formerly associated with Tyco), will likely be a hearing on what jury instructions should be given to the jury, followed by closing arguments. And it sounds like the jury may have the case before the end of this month. (See Bloomberg News in the NYTimes here).
May 18, 2005
Closing Arguments in Scrushy-Part II
The defense closing has been full steam ahead. The Birmingham Alabama News reports the details here. And as anticipated, a key issue is whether Scrushy "knew." A second strong defense argument appears to be the - "holes" in the government case.
When a case comes down to what the defendant "knew," the credibility or lack thereof of the witnesses who testify can be crucial. And in this case the jury will not have Scrushy's testimony to balance against the witnesses who did in fact testify. The jury also will not have a cross-examination of Scrushy to consider. What they do have is witnesses who received "deals."
Meanwhile the Wall Street Jrl reported on some of the ethics issues underlying the case here. (esp)
Perelman Awarded $850 Million in Punitive Damages From Morgan Stanley
The Florida jury that awarded Ronald Perelman damages of $604.3 million for being defrauded by Morgan Stanley (see earlier post here) in connection with his sale of Coleman Co. to Sunbeam -- a Morgan Stanley investment banking client at the time -- has added another $850 million as punitive damages. (See AP story here) Thus concludes phase one of the case, which Morgan Stanley has already said it plans to appeal the judge's ruling entering a default judgment on the fraud issue. Look for the company's stock to take a hit tomorrow, amidst all the other turmoil it is facing from a revolt against current CEO Phil Purcell. When it rains . . . (ph)