Wednesday, May 18, 2005

Closing Arguments in Scrushy Trial-Part I

Closing arguments have started in the Scrushy trial with the prosecution calling the accused the "the quintessential micromanager."  (see AP in Birmingham News here)   Clearly the government is trying to demonstrate that Scrushy had the knowledge and intent required for the crimes charged.

CEOs reading and listening to this are likely troubled by this description.  On one hand the government is sending a message in some of the recent trials that you need to know what is going on in the company.  But here, knowing too much and being involved in too much is being held to be a problem. 

Obviously, some will argue that it all comes down to what is really happening in the company. That is, you need to know what is going on, but also need to correct improprieties that may be occurring, and most certainly you shouldn't be causing, participating in, or allowing illegalities to occur. It sounds simple, but for the CEO at the top, the job is becoming more difficult and the responsibilities greater.

(esp)

May 18, 2005 in HealthSouth | Permalink | TrackBack (0)

When White Collar Crime Trials Turn Into Cures for Insomnia

While the field of white collar crime is (sometimes) considered interesting, and perhaps even "sexy," the trials themselves can be quite laborious, as some of the recent well-known prosecutions have shown that the proceedings can drag on over months.  Tom Kirkendall has a terrific post (here) on his Houston's Clear Thinkers blog about the Enron Broadband Services trial in which the government now estimates that its case-in-chief will take an additional 7-10 days, much to the chagrin of the jurors already laboring through a tedious proceeding.  The trials in the HealthSouth (Scrushy) and Tyco (Kozlowski and Schwartz) cases both began in late January and are only now heading for the jury. For the Tyco case being prosecuted by the Manhattan DA, this is a significant improvement over the first trial, in which the prosecution case lasted for 18 weeks while this time it only took 13 weeks.  Last year, the prosecution of former senior executives of Cendant lasted for five months, and the jury deliberations went on for over a month.  The jury could not reach a verdict on one defendant in that case, former chairman Walter Forbes, and his retrial is scheduled to begin in September.  White collar cases are rarely simple affairs, and usually involve a number of documents and a stream of transactions that need to be placed in a larger context.  Yet, prosecutors sometimes become enamored with the details of a case, especially when they know the evidence so well that everything seems important, and interesting. Will these drawn out trials have a negative effect on the jury's view of the government's case? (ph)

                                                                         

UPDATE (5/18): Larry Ribstein has an interesting take on the travails of the Enron Broadband Services jury here.

May 18, 2005 in Enron, HealthSouth, Prosecutions | Permalink | TrackBack (0)

It's a Small World After All

As the prosecution of Richard Scrushy enters its final phase, with closing arguments set for today, the various sideshows should be coming to an end (see earlier post here on the investigation into a Wall Street Journal story on the dismissal of a juror).  Judge Karon Bowdre released a transcript of a hearing held in November 2003, shortly after the original indictment and her assignment to the case, in which she informed the counsel that she had a prior relationship with Scrushy's daughter and ex-wife from when their show horses were boarded together.  Indeed, Judge Bowdre's horse was in a stable owned by Scrushy and she met him on a few occasions.  Neither side took up her recusal offer, no doubt because the contacts were probably no more extensive -- and perhaps even much less -- than other federal district court judges in Birmingham.  Scrushy's prominence in the business community likely put him in contact, in one way or another, with most of the judges or members of their families.  The hearing transcript also has Judge Bowdre stating that she was not very happy with drawing the Scrushy prosecution, a feeling that has probably grown stronger since the trial started back in January. An AP story (here) discusses the hearing in November 2003. (ph)

May 18, 2005 in HealthSouth | Permalink | TrackBack (0)

Former Houston Official Pleads Guilty to Wide-Ranging Corruption

Maybe there's something in the air these days with all the corruption cases flowing out of the U.S. Attorney's Offices (e.g., Philadelphia, Hoboken NJ, Connecticut).  The U.S. Attorney's Office for the Southern District of Texas (Houston) announced the guilty plea of Monique McGilbra, a former Director of Building Services for the city of Houston, to charges that involve corruption not only in Houston, but also touching Inglewood, CA, and Cleveland.  According to the press release (here):

McGilbra admitted to accepting bribes and gifts for favorable treatment on City of Houston contracts. Some of the bribes were paid to Garland Hardeman, a former Inglewood, California, City Councilman and businessman, who pleaded guilty to an unrelated public corruption bribery scheme in California. McGilbra introduced Hardeman to representatives of a Houston-based development company doing business with the City's Building Services Department. The development company sought contracts with the City using Hardeman and McGilbra to influence the award of contracts, including the 911 Superstation project. McGilbra accepted and agreed to accept money from Hardeman for any contracts awarded by the City to the development company. McGilbra also admitted to accepting gifts from representatives of the development company including numerous meals in restaurants, the use of a condominium in Northern California for a ski vacation for her and her family, payment of expenses for a trip to San Antonio, tickets to professional football games, and a gift certificate from Neiman Marcus.

McGilbra also admitted to accepting gifts and benefits for favorable treatment on City of Houston contracts from an Atlanta-based contractor who obtained an energy-related subcontract to change-out the traffic signals in the City. McGilbra accepted gifts from the contractor and representatives of an energy company, including $6,000 in cash, sporting event tickets, a pair of earrings, a gift certificate to Luis Vuitton, trip related expenses to Miami and New Orleans, and tickets to the Lion King production.

McGilbra is also tied into a broad corruption case in the Northern District of Ohio:

McGilbra is one of nine defendants charged in Cleveland, Ohio, with corruption and racketeering violations last February. McGilbra pleaded guilty to federal charges of conspiracy and extortion under color of official right in Cleveland, Ohio, on May 6, 2005, and faces a maximum punishment of 20 years imprisonment and a $250,000 fine for those convictions. A sentencing date has not yet been set in that case. In addition to McGilbra, Brent Jividen, a Cleveland businessman, has pleaded guilty to racketeering conspiracy; and Ricardo Teamor, a Cleveland lawyer, has pled guilty to extortion conspiracy.

Oliver Spellman, the former Chief of Staff to the Mayor of Houston, pleaded guilty last December on separate Cleveland charges for accepting bribes from Nate Gray relating to a contract Gray was seeking with the City of Houston for a shuttle service at Houston Intercontinental (Bush) Airport. Spellman admitted that he introduced Cleveland businessman Brent Jividen to McGilbra regarding the selection of vendors to provide energy services to the City of Houston.

Also charged and pending trial in Cleveland, Ohio, on May 23, 2005, are Nate Gray, a Cleveland businessman, Gilbert Jackson, a New Orleans businessman, and Joseph Jones, a Cleveland City Councilman.

Did McGilbra and the others do any work in their spare time? (ph)

May 18, 2005 in Corruption | Permalink | TrackBack (2)

Former Hoboken Mayor Sentenced to 30 Months

Former Hoboken, NJ. Mayor Anthony Russo received a 30-month term of imprisonment for taking $317,000 in bribes from an accounting firm in exchange for directing city business to the firm.  A press release issued by the U.S. Attorney's Office (here) noted that, at his sentencing, "Russo equivocated and minimized his conduct." Initially dissatisfied with Russo's acceptance of responsibility for his conduct, the district judge placed him under oath and required that he acknowledge the amount of the bribes he received, which he has been ordered to repay. (ph)

May 18, 2005 in Corruption, Sentencing | Permalink | TrackBack (0)

Tuesday, May 17, 2005

Illinois Governor's Office Subpoenaed for Records in Corruption Investigation

An AP story (here) states that Illinois Governor Rod Blagojevich's office and campaign fundraising committees have been subpoenaed for records by a state grand jury investigating corruption.  The investigation concerns possible job appointments being given in exchange for campaign contributions, and the grand jury seeks a broad array of records on campaign contributions and hiring.  In addition to Blagojevich's office, his chief fundraiser and his father-in-law, a Chicago Alderman, have also been served with subpoenas.  After graduating from law school in 1983, Blagojevich worked as an Assistant States Attorney in Cook County before launching his political career.  Interestingly, his official biography (here) contains the following statement: "A former golden gloves boxer, Blagojevich is committed to fighting a system that accepts corruption, mediocrity and failure, and pledges to make everyday life better for average working families in Illinois." 

Blagojevich succeeded George Ryan in 2002, who left office under a cloud and is currently under indictment on charges (including RICO) related to -- don't be shocked -- corruption.  Of course, gubernatorial corruption is not limited to Illinois, having forced out John Rowland in Connecticut, who is currently serving a one year sentence in a federal correctional institution, and tinged the administration of former New Jersey governor Jim McGreevey, with corruption charges against one of his chief fundraisers. (ph)

May 17, 2005 in Corruption, Grand Jury, Investigations | Permalink | TrackBack (0)

More Dismissals at Delphi

The internal investigation at Delphi, the large auto parts supplier, is coming to a close, with more executives being dismissed for their involvement in improper accounting. In early March, the company announced the dismissal of its CFO, Alan Dawes, and two other accounting executives (see earlier post here), and Delphi's Form 8-K filing (here) on May 16 adds to the list of those losing their jobs over the accounting problems:

As previously reported, the independent investigation by the Company’s Audit Committee of the Board of Directors is substantially complete and the Company is in the process of preparing restated financial statements for audit and review by its independent auditors, Deloitte & Touche LLP. At the same time as management has been preparing the restatement, the Audit Committee is finalizing its review of the conduct of various individuals who had supervisory authority for others involved in or were directly involved in certain of the principal transactions under investigation. Certain lower and middle level executives in the Company’s finance staff will be resigning from the company.

The SEC and criminal investigations should now move to center stage as the case shifts into the next phase with individuals tied to the accounting problems identified.  With CEO J.T. Battenburg slated to leave the company by the end of the year, Delphi will look to settle any civil and criminal cases as soon as possible so the new CEO starts with a clean slate. (ph)

May 17, 2005 in Fraud, Investigations, Securities | Permalink | TrackBack (0)

(Belated) Happy First Birthday to Sentencing Law & Policy

While Doug Berman is on top of all sentencing issues, even he missed Sentencing Law & Policy's first birthday (here), but we're even later in wishing him (it?) a Happy Birthday!  SL&P is, quite simply, the best, and should not be missed for a day, lest you fall further behind on all that takes place in the world of sentencing.  Rock on! (ph & esp)

May 17, 2005 in About This Blog | Permalink

Update On the (So-Called) Detroit Terrorism Trial

The so-called Detroit Terrorism trial, which ended with the government admitting that its theory of prosecution was unsupported by the evidence, resulted in an apology by outgoing Deputy Attorney General James Comey recently.  An AP story (here) quotes Comey as stating, "I think that the people we represent -- the people of the United States -- were owed an apology for the way the work was done in that particular matter."  While the government dismissed the terror-related charges against the two defendants convicted of those offenses in the earlier trial, it did subsequently indict both men on fraud charges related to an attempted insurance fraud involving a claim for $15,000 from a fake auto accident -- a claim that was never paid.  An AP story (here) reveals internal DOJ e-mails around the time of the trial regarding the fraud charge, expressing concern that bringing such a charge might be perceived as "vindictive" if brought after the defendants were acquitted or a mistrial declared.  The e-mails give a rare inside look at assessment of the charges by the prosecutors. One defendant entered a guilty plea to the fraud charge, a second one awaits trial.

An additional aspect of the case that remains active is the investigation of Richard Convertino, one of the prosecutors, and others for conduct related to the investigation and trial.  Convertino resigned on Monday from the Department of Justice, which will likely end the investigation by the Office of Professional Responsibility (see AP story here). (ph)

May 17, 2005 in Fraud, Government Reports, Prosecutions, Prosecutors | Permalink | TrackBack (0)

Perelman Wins $604 Million Verdict Against Morgan Stanley

A jury awarded financier Ronald Perelman $604.3 million in damages against Morgan Stanley related to its faulty advice regarding the sale of his interest in the Coleman Company to Sunbeam in 1998 (AP story here).  Morgan Stanley advised Sunbeam in the acquisition, and Perelman accused the firm of failing to disclose Sunbeam's fraudulent financials.  Perelman case was aided enormously by Morgan Stanley's pratfalls during discovery, in which the trial judge found the firm purposely refused to provide discovery of e-mails and gave misleading responses to the court.  The judge finally entered a default on the fraud claim against Morgan Stanley, requiring Perelman to show only his damages from the firm's complicity in Sunbeam's false financial statements.  It is not easy to make Perelman out to be the good guy in a case, but this is the rare instance in which a firm's (overly?) aggressive discovery tactics caused it significant harm.  The SEC has also taken an interest in Morgan Stanley's discovery conduct in the case.  A thorough Wall Street Journal article (here) discusses the e-mail problems at the firm.  Morgan Stanley issued a press release (here) which states:

"The verdict, while disappointing, is not surprising, given the unprecedented and highly prejudicial rulings imposed by the trial judge," the company said in a statement. "Morgan Stanley was not permitted to defend itself on the merits. As a result, the jury heard allegations, instead of true facts, and Morgan Stanley was denied a fair trial. Far from being part of the Sunbeam fraud, Morgan Stanley was a victim of that fraud, losing $300 million when Sunbeam collapsed, one of the many true facts that the jury was not allowed to hear."

Funny how e-mails have a way of making (and breaking) so many cases these days.  Now, Morgan Stanley faces the punitive damages phase of the trial, which may result in a further award to Perelman. (ph)

May 17, 2005 in Fraud, Verdict | Permalink | TrackBack (0)

Monday, May 16, 2005

First Thing We Do, Let's Pay All the Lawyers

With American International Group caught up in a widening federal and state investigation of its accounting practices, the company took steps to protect its directors by entering into indemnification agreements on May 9 with them that contractually obligates AIG to advance all costs -- most importantly, attorney's fees -- in connection with the investigation and any related criminal, regulatory, shareholder derivative suit, and securities class action litigation.  AIG filed a Form 8-K (here) today (May 16) that states:

Each of the following members of American International Group, Inc.'s ("AIG") board of directors entered into an agreement relating to the advancement of expenses by AIG: M. Bernard Aidinoff; Pei-yuan Chia; Marshall A. Cohen; William S. Cohen; Martin S. Feldstein; Ellen V. Futter; Stephen L. Hammerman; Carla A. Hills; Frank J. Hoenemeyer; Richard C. Holbrooke; George L. Miles, Jr.; Morris W. Offit; and Frank G. Zarb.

The indemnification agreement (here) essentially mimics Delaware General Corporation Act Sec. 145 in granting full rights to reimbursement to the directors, including of course the attorney's fees.  Each director could require separate counsel to avoid any conflict of interest problems, which means the cost to AIG from this agreement may be significant on top of the costs of providing counsel to current and former officers and directors (assuming they have indemnification agreements, too).  While indemnification agreements are standard fare in the corporate world, it is interesting that AIG apparently did not have such an agreement with its board until this time. Perhaps former CEO Maurice Greenberg, who largely hand-picked the board members, did not believe one was necessary for directors.  The company looks like it is battening down the hatches in the face of the coming storm. Thanks to Stephanie Martz, Director of the White Collar Crime Project for the NACDL, for the information about the AIG filing.(ph)

May 16, 2005 in Defense Counsel, Investigations, Securities | Permalink | TrackBack (0)

FBI Unable to Account for Health Care Fraud Funding

A New York Times story (here) discusses a report that will be issued this week by the Government Accountability Office (GAO) reviewing the FBI's spending of funds appropriated by Congress for health care fraud investigations.  According to the Times' discussion of the report, a portion of an annual appropriation of $114 million from the Medicare trust fund that is earmarked specifically for health care investigations may have been shifted over to counterterrorism projects.  While the money was not misappropriated, it raises questions about the Bureau's accountability for the use of resources targeted to a specific area of investigation and prosecution.  Given the sizable spending on Medicare and Medicaid ($474 billion), and persistent patterns of abuse in the field, health care fraud remains an area of considerable importance for federal law enforcement. (ph)

May 16, 2005 in Government Reports | Permalink | TrackBack (0)

Greenspan Gives His Imprimatur to the Sarbanes-Oxley Act

Federal Reserve Chairman Alan Greenspan endorsed the changes in business practices mandated by the Sarbanes-Oxley Act in the commencement address (here) delivered to the graduates of the Wharton School at the University of Pennsylvania on May 15.  In a speech that stressed the need for trust and honesty in business, Greenspan said:

The Sarbanes-Oxley Act of 2002 appropriately places the explicit responsibility for certification of the soundness of accounting and disclosure procedures on the chief executive officer, who holds most of the decisionmaking power in the modern corporation. Merely certifying that generally accepted accounting principles were being followed is no longer enough. Even full adherence to those principles, given some of the imaginative accounting of recent years, has proved inadequate. I am surprised that the Sarbanes-Oxley Act, so rapidly developed and enacted, has functioned as well as it has. It will doubtless be fine-tuned as experience with the act's details points the way.

Corporations have been pushing back at the internal controls requirements imposed by Section 404 of the Act, arguing that the costs are too great for the benefit provided (see earlier post here).  For example, the U.S. Chamber of Commerce argues (here):

The unintended expansion of corporate governance rules and excessive compliance demands will cost the nation’s 17,000 public companies billions of dollars this year. Entire industries have been consumed by multiple, sweeping demands from competing regulators for their data, e-mails, and correspondence. These excesses have discouraged bold business decision making, have sent both domestic and foreign companies fleeing from public markets, and have hurt efforts to attract strong board members and executives to public companies.
It will be interesting to see how Greenspan's support for the law affects the debate over whether its stringent internal controls certification provision will be eased. (ph)

May 16, 2005 in Celebrities, News, Securities | Permalink | TrackBack (1)

General Re Executive Is Target of DOJ Investigation While AIG May Dismiss More Executives Involved in Accounting Problems

In typically cryptic fashion, Berkshire Hathaway disclosed that one of its executives it now the target of a grand jury investigation in connection with the investigation of the AIG-General Re reinsurance transaction (see earlier post here).  The executive will be placed on paid leave as of May 16, along with another executive who is also involved in a different investigation by the Department of Justice. A New York Times story (here) identifies the executive as John Houldsworth.  It is possible that two others involved in the General Re side of the transaction, Richard Napier and Elizabeth Monrad, will also be notified that they are targets of the criminal investigation. Houldsworth stepped down almost two weeks after receiving a Wells notices from the SEC, which informed him that the Commission's Enforcement Division staff had determined that he was likely to be sued for securities law violations.  No word yet on whether Napier will also take a paid leave.  Berkshire Hathaway's Form 8-K filing (here) on Friday, May 13, states:

An employee of a subsidiary of General Re Corporation (“General Re”) has been informed by the U.S. Department of Justice (“DOJ”) that the employee is a target of the DOJ’s ongoing investigation. This employee has also received a Wells notice from the Securities and Exchange Commission (“SEC”) in connection with the SEC’s ongoing investigation. General Re’s subsidiary has, effective May 16, 2005, placed this employee on administrative leave with pay, subject to the employee’s continuing cooperation with all governmental investigations. A former officer of General Re was previously informed by the U.S. Attorney for the Eastern District of Virginia (the “U.S. Attorney”) that this former officer is a target of the U.S. Attorney’s ongoing investigation.  In addition to the employee first mentioned above and the officer of General Re who, as previously disclosed, also received a Wells notice from the staff of the SEC in connection with its ongoing investigation, a former officer of General Re has received a Wells notice from the staff of the SEC in connection with its investigation.  The Chief Executive Officer of General Re’s subsidiary, Faraday Group, who previously served as the head of General Re’s international finite business unit, has also been placed on administrative leave with pay, effective May 16, 2005, subject to his continuing cooperation with all governmental investigations.

The other executive discussed in Berkshire's disclosure is Milan Vukelic, the head of the Faraday Group.

Berkshire Hathaway seems to make it a practice to disclose information about the investigation in Friday afternoon SEC filings, and its disclosure is not exactly a model of clarity.  The identification of targets of the criminal investigation means that the federal prosecutors believe they have sufficient information showing a likely involvement in criminal activity by the individuals, and the notification can be the functional equivalent of an SEC Wells notice, inviting the recipient to enter plea negotiations.

Meanwhile, over on the AIG side, the Wall  Street Journal reports (here) that the company will fire up to six eight* executives involved in the various accounting problems uncovered in its internal investigation.  No word yet on whether any of them have received Wells notices from the SEC, or target letters from the DOJ or N.Y. Attorney General Eliot Spitzer's office, but the issue is probably more a matter of when and not if the notifications will come, and who will receive them.  Federal prosecutors will likely bring a more narrow case than the SEC. (ph)

* Revised Wall Street Journal article here.

May 16, 2005 in Civil Enforcement, Fraud, Investigations | Permalink | TrackBack (2)

Sunday, May 15, 2005

Extradition Issue in Price-Fixing Case

With globalization, more and more international issues are arising in the area of white collar crime.  The issue this time is whether price-fixing is a basis for the extradition of a British executive.  (see New York Times here)  Extradition requires adherence to the double criminality rule and rule of speciality.  The double criminality rule requires that the crime exist in both countries (the country from where the individual is being extradited and the country receiving the extradited person).   The rule of speciality speaks to making certain that the person extradited is charged and tried only for the crimes for which they are extradited.  Exceptions and clarifications exist to both of these principles, including treaties that can play a role here.   In the most recent case, the issue is whether the treaty is in effect, and whether the treaty  was intended for terrorism cases as opposed to its application here to an individual accused of a white collar antitrust offense.

(esp)

May 15, 2005 in International | Permalink | TrackBack (1)