Saturday, June 4, 2005

White Collar Crime Blog Featured in NYTimes

Today's NYTimes here features this white collar crime blog in the column "What's Online."  It provides the commentary on the Court's opinion in Arthur Andersen by co-editor Peter Henning.

(esp)

June 4, 2005 in Media | Permalink | TrackBack (0)

Ohio Coin Dealer's Campaign Contributions Being Investigated

Tom Noe, a Toledo (OH) rare coin dealer whose investments on behalf of the Ohio Bureau of Workers Compensation have come under scrutiny because approximately $10-12 million worth of collectible coins are missing (see earlier post here), is now the subject of a federal grand jury investigation for possible campaign contribution violations.  An AP story (here) discusses the grand jury appearance of a former aide to Noe who testified before the grand jury that he made a $2,000 contribution to the Bush-Cheney campaign in 2004 and Noe reimbursed him, a clear violation of the campaign contribution laws; Noe was the northwest Ohio chair of the presidential campaign last year.

Once the hint of scandal hits a campaign contributor, politicians treat their donations as if they were radioactive, and usually can't get rid of them fast enough.  At a press briefing with White House Press Secretary Scott McClellan on June 2 (transcript here), the following Q-and-A took place:

Q Scott, there was a published report this morning that the President had decided to return $4,000 in campaign contributions he received from Tom Noe, the rare coin dealer in Ohio who is under investigation, but that he did not plan to return some $100,000 in other people's contributions that Mr. Noe had helped raise. Is that true, and why draw the distinction between them?

MR. McCLELLAN: I think that there are some serious allegations that have been raised against this individual. They have raised concerns with people in Ohio, they have raised concerns with the White House. And the President felt it was the right thing to return those contributions that came directly from him.

Q But why not the additional contributions that Mr. Noe had raised?

MR. McCLELLAN: Well, those are from other individuals, and in the past, I think the campaign, if you'll go back and look, has returned contributions from individuals that maybe have been convicted of crimes, and so forth. And this one is certainly a unique situation that raises some very serious allegations and we felt it was the right thing to do to return the contributions that he had made to the campaign.

The Republican National Committee plans to donate $2,000 to charity, the amount given by Noe, while a number of Ohio politicians also plan to give up funds (upwards of $60,000 donated by Noe.  California Governor Arnold Schwazenegger received $10,000, but does not have any plans to return it or donate the funds to charity. Look for this one to get stickier in the coming weeks. (ph)

June 4, 2005 in Fraud, Grand Jury, Investigations | Permalink | TrackBack (0)

Applause for USA in Detroit

In a rare move, the United States Attorney in Detroit, has informed the court that it does not want to proceed on felony charges "against a state senator and a county realtor.  See Detroit News here. Co-editor Peter Henning is quoted in the article, praising the prosecutor. 

It takes guts for a prosecutor to say he or she will not proceed with a pending case.  That's what you call a true "minister of justice."

(esp)

June 4, 2005 in Prosecutions | Permalink | TrackBack (0)

Deep Throat "Probably" Will Not Be Prosecuted

An AP story (here) quotes Attorney General Alberto Gonzales as stating that W. Mark Felt probably will not be prosecuted for his disclosures as "Deep Throat" to Washington Post reporters Woodward and Bernstein.  Gonzales noted that the DOJ "has a lot of other priorities."  Imagine prosecuting a 91-year-old man for helping to bring down a corrupt President (regardless of his motivation at the time, which was likely tied to his loyalty to J. Edgar Hoover) -- in a District of Columbia courtroom, no less. "Well, duh!" (as a teenage member of my household would happily say). (ph)

June 4, 2005 in Media | Permalink | TrackBack (0)

Saks Looks Into More Problems With Vendor Markdowns

Saks Inc. disclosed today that its audit committee has expanded an internal investigation into accounting problems to look into whether vendors were improperly charged for inventory markdowns, which would have bolstered the company's revenues and income.  On May 10, the company dismissed three executives over accounting problems regarding vendor allowances (see earlier post here), and the new "supplemental" investigation looks at other issues related to how Saks used its contracts with vendors to pad its books.  A company press release (here) states:

The Audit Committee's supplemental internal inquiry will review (i) the timing of the recording of both inventory markdowns and vendor markdown allowances at Saks Fifth Avenue Enterprises ("SFAE"), (ii) whether there have been any overcollections of vendor markdown allowances in any of the merchandising divisions of SFAE that were not the subject of the Audit Committee's prior internal investigation, and (iii) whether the Company has improperly charged any of its merchandise vendors any fees for failure to comply with the Company's logistics, transportation, or billing policies (these types of fees often are referred to in the retail industry as "chargebacks"). This supplemental inquiry is being undertaken in connection with the previously disclosed restatement of the Company's financial statements from fiscal 1999 through the third quarter of fiscal 2004 and the preparation of the Company's Annual Report on Form 10-K for the fiscal year ended January 29, 2005 (the "2004 Form 10-K").

With respect to the timing of inventory markdowns and vendor markdown allowances, the Company currently believes that some inventory markdowns and some vendor markdown allowances may have been incorrectly recorded at SFAE in one or more fiscal quarters prior to 2005. The Company's results of operations for the first quarter of fiscal 2005 released on May 17, 2005 reflected an approximately $1.2 million reduction to net income based upon management's preliminary determination that SFAE had incorrectly accelerated into the first quarter of 2005 the recognition of $2 million of vendor markdown allowances.

The company has disclosed that the SEC and U.S. Attorney for the Southern District of New York are investigating it and individuals involved in the accounting problems, and look for the scope of those inquiries to expand. The bargain bin may start filling up with more discarded executives soon. (ph)

June 4, 2005 in Fraud, Investigations, Securities | Permalink | TrackBack (0)

That Other Southern Jury Reaches A Verdict

The jury in the case of Senator Charles Walker reached a decision after deliberating 20 hours, according to the Atlanta Jrl. Constitution here.  We previously discussed this case  here, a federal case against a man who is described by reporter James Salzer as "once among the most powerful African-Americans in [Georgia] state politics." The jury convicted Walker of 127 counts.  For more information, see the Atlanta Journal article here.

June 4, 2005 in Prosecutions | Permalink | TrackBack (0)

Friday, June 3, 2005

Allen Charge Delivered in Scrushy Trial

U.S. District Judge Karon Bowdre delivered an Allen charge (see prior post for link discussing it) to the jury in the trial of Richard Scrushy.  The text of the charge (from the Birmingham News here):

Members of the jury:

I am going to ask that you continue your deliberations in an effort to agree upon a verdict and dispose of this case; and I have a few additional comments I would like for you to consider as you do so.

The trial has involved great time and exceptional effort by both the government and the defendant. If you should fail to agree on a verdict, the case is left open and must be tried again. I have no reason to believe that the case can be tried again better or more thoroughly that it has been tried before you.

Any future jury must be selected in the same manner and from the same source as you were chosen, and I have no reason to believe that the case could ever be submitted to 12 people more conscientious, more impartial, or more competent to decide it than you. You have heard all the relevant evidence and I have no reason to believe that either side could produce more or clearer evidence in a new trial.

If a substantial majority of your number are in favor of a conviction, those of you who disagree should reconsider whether your doubt is a reasonable one because it appears to make no effective impression upon the minds of the others. On the other hand, if a majority or even a lesser number of you are in favor of an acquittal, the rest of you should ask yourselves again, and most thoughtfully, whether you should accept the weight and sufficiency of evidence that fails to convince your fellow jurors beyond a reasonable doubt.

Remember at all times that no juror is expected to yield a conscientious conviction he or she may have as to the weight or effect of the evidence. But remember also that, after full deliberation and consideration of the evidence in the case, your duty is to agree upon a verdict if you can do so without surrendering your conscientious conviction.

You may be as leisurely in you deliberations as the occasion may require and should take all the time that you may feel is necessary. Your goal should never be to just return a verdict, but to return a just verdict.

I will ask now that you retire once again and continue your deliberations with these additional comments in mind to be applied, of course, in conjunction with all of the instructions I have previously given to you.

The dynamite charge can raise questions regarding improper judicial interference in the jury's deliberations if a guilty verdict is returned, especially when it does so in a short time after the charge is delivered.  Given the apparent deadlock that has persisted since last week, it's certainly an open question whether the above charge will have any effect. (ph)

June 3, 2005 in HealthSouth | Permalink | TrackBack (0)

Scrushy Jury Can't Decide - Will it be a Mistrial?

CNN and  AP Birmingham Alabama News report the latest jury note to the judge:

"We regret to inform the court that after many days of deliberating we were unable to reach a verdict of either guilty or not guilty of any/all counts."

What can the judge do-

1. Call it a mistrial.

2. Send the jury back to deliberate more.

3. Give them an Allen charge. (see here for explanation)

Stay tuned.

(esp)

June 3, 2005 in HealthSouth | Permalink | TrackBack (0)

Some Outside Commentary on Arthur Andersen

As one might suspect, there has been interesting commentary on the Arthur Andersen Case.  Some links are below:

Rich Smith, Andersen Innocent?  Think Again (here)

NPR (here)

Floyd Norris, Who Killed Andersen? It Was Suicide, NYTimes (here)

Ann Woolner, Bloomberg (here) (On my quote, the reason we don't know is because the government chose to proceed with an obstruction charge as opposed to investigating any substantive crimes that they may have been considering) (See my Commentary here discussing the problem with taking shortcuts).

Corporate Compliance Blog (here)

June 3, 2005 in Arthur Andersen | Permalink | TrackBack (0)

Two Voting Fraud Guilty Pleas in Washington

Two people in  Washington state entered guilty pleas to voting twice in the 2004 election, which is the subject of a hotly contested lawsuit because of the narrow (129 vote) margin of victory in the Governor election.  Doris McFarland and Robert Holmgren admitted that they voted a second time on behalf of recently deceased spouses, and were fined $490.  Mrs. McFarland voted her husband's absentee ballot after he died in October after 63 years of marriage, while Mr. Holmgren's wife died right before the election and he stated he was grieving for her when he voted. Is a criminal prosecution really necessary in this situation? An AP story (here) discusses the cases. (ph) 

June 3, 2005 in Fraud, Prosecutions | Permalink | TrackBack (0)

I Concur With Myself

Having nothing to do with white collar crime, I noticed this little quote in a Ninth Circuit concurring opinion in United States v. Fay (here) written by Circuit Judge John Noonan: " I write separately to state that, while I join the opinion I’ve written, it seems to me that we are engaging in the drawing of fine distinctions that do not need to be drawn."  Didn't Billy Idol sing about dancing with himself, too? This is probably the only time you'll think about Judge Noonan and the King of Sneer at the same time. (ph)

June 3, 2005 in Judicial Opinions | Permalink | TrackBack (0)

Cooperation Builds in Qwest Investigation

Cooperation is an important  factor in many white collar cases.  It allows the government to secure important information needed to build a case. 

Clearly there are costs in acquiring that information.  One cost is the lower sentence being offered to the cooperator.  A second cost is that when the government offers a deal, they are also placing the reliability of the evidence into question when it  is presented to a jury.  After all, someone pleading to a lesser charge is doing so to acquire a personal benefit and if that benefit is significant, the testimony can be questioned.  Jurors may ask: Was the individual motivated by the opportunity to receive to lesser sentence, and are they telling the truth or merely lying in order to obtain the benefits of the plea deal.

But without cooperation many cases would not exist.

According to the Wall Street Jrl (here) the government has just made a deal with a former chief financial officer of Qwest Communications International Inc.  This individual will plead guilty "to one criminal count of insider trading" and in return there is an agreement to cooperate with the government in their investigation.   This is likely to be a significant advancement in the government's investigation as this is the "former chief financial officer" and "is the highest-ranking former Qwest official to be charged with a crime related to accounting problems at the Denver phone company."

(esp)

June 3, 2005 in Prosecutions | Permalink | TrackBack (2)

Thursday, June 2, 2005

Quiet Day in Scrushy Deliberations

There were no notes from the jury out to the judge in the Scrushy trial today.  There were also no requests for rehearing specific evidence.  That's because the deliberations were put on hold for the day, as a result of an ill juror.  (See AP in Birmingham Alabama News here).   

(esp)

June 2, 2005 in HealthSouth | Permalink | TrackBack (0)

Runaway Bride

Runaway bride pleads no contest and gets probation and community service (see more here and here).

(esp)

June 2, 2005 in News | Permalink | TrackBack (0)

Jury Out in Kozlowski

The jury in the Dennis Kozlowski/Mark Swartz case has gone to deliberate.  (See CNN  here)  The question is whether this jury will reach a verdict?  (first time was a mistrial). CNN reports that "Before reaching a verdict, jurors can ask to have more than 16,000 pages of trial transcript read back to them and can pore over 860 exhibits." 

Although they have access to the transcript and exhibits and the Scrushy trial was denied receiving a small piece of testimony, the two rulings are consistent. You can have it all, but you can't have a part that will highlight one specific item or place something out of the context in which it occurred. It should be noted though, that a major difference between these two trials is that Scrushy is a federal prosecution and Kozlowski is a New York State prosecution.

(esp)

June 2, 2005 in Prosecutions | Permalink | TrackBack (0)

Scrushy Update- What happens When a Jury Can't Remember Everything

Looks like the deliberations in the Scrushy trial continue.  There has been only one note to the judge since our last post here - - with the judge responding by refusing to play back specific testimony from the trial. For details, see AP story in Birmingham Alabama News here.

The AP story in Birmingham Alabama News states that the judge wrote the jury "back in a note released by the clerk's office"  that  "[f]or me to read a small portion of the testimony to you from the lengthy transcript could unduly emphasize one bit of testimony to the exclusion of all other testimony." (see here)

Some may ask whether it is proper to playback specific testimony for a jury that is deliberating, or alternatively to provide that jury with a transcript of that testimony.   Actually it is a question that has come up in several appellate decisions.  In some of these cases because the judge did provide a transcript and the defense was then contesting on appeal, the propriety of this action.

There is one Second Circuit case (United States v. Criollo) that reversed because the district court announced to the jury during defense counsel's summation that the court was not going to readback trial testimony during the deliberations. But that decision was focused on the pronouncement of the judge prior to commencement of the jury deliberation that nothing would be readback.

Most courts give broad discretion to the judge to decide whether to readback testimony during deliberations. But a key factor is whether it will place "undue emphasis on a particular portion of testimony read out of context." (Criollo).  In the case of United States v. Rogers (6th Cir.), the court stated:

"This court has recognized 'two inherent dangers' in allowing a jury to read a transcript of a witness's testimony during its deliberations,... First, the jury may accord 'undue emphasis' to the testimony; second, the jury may apprehend the testimony 'out of context.' . . .  These dangers are 'escalated' if the jury makes the request after reporting an inability to arrive at a verdict..." (citations omitted)

This is not a comprehensive review of all the caselaw out there that deals with this issue, but it sure sounds like the judge is looking at the concerns expressed in some of these decisions in her response to the jury.   

But one does have to feel sorry for the jury in a white collar case that has gone on for some time.  It really is difficult for the jury to remember everything.

(esp)

Addendum- See Wall Street Jrl Article here. (esp)

June 2, 2005 in HealthSouth | Permalink | TrackBack (0)

Operation Digital Gridlock Ends

A Press Release here of the Department of Justice (DOJ) tells of the final defendant pleading guilty in what has been called Operation Gridlock.  This investigation "targeted illegal file-sharing of copyrighted materials over Direct Connect peer-to-peer networks that belonged to an online group of hubs known as The Underground Network. These networks required their users to share large quantities of computer files with other network users, all of whom could download each others’ shared files."  The press release notes that "[t]hese pleas constituted the first federal felony convictions for copyright piracy using peer-to-peer networks..."

This is not a situation of one or two movies being improperly downloaded.  The press release states that the defendant:

"owned, maintained, operated, and moderated a Direct Connect hub named "Silent Echoes." According to court documents, the defendant’s hub offered movies, computer software, computer games, and music in digital format. During the investigation, government agents downloaded numerous copyrighted works worth approximately $7,371 from Tanner’s hub. Agents estimated that on any one day, Tanner’s hub shared an average of 6.72 terabytes of files, which is roughly equivalent in storage space to well over 6,000 movies in digital format."

(esp)

June 2, 2005 in Computer Crime | Permalink | TrackBack (0)

That Other Southern Case Has Jury Deliberating

Like the Scrushy case, the case of former Georgia state senator Charles Walker is also deliberating.  This case, with a 142 count indictment, began on May 23rd (see Atl Jrl Const. story here).  And like so many white collar cases, a key issue for the jury is whether the accused had a criminal intent or whether this was just poor recordkeeping.  Our prior posts on this case are here and here.

(see)

June 2, 2005 in Corruption, Prosecutions | Permalink | TrackBack (0)

Wednesday, June 1, 2005

DOJ Comments on Andersen

DOJ issued a press release here expressing disappointment, but acceptance in the Andersen decision. It states:

Department of Justice is disappointed in today’s decision by the U.S. Supreme Court regarding jury instructions given in the case, but of course we respect the Court’s decision.

“The Justice Department’s decision to charge Arthur Andersen was based at the time on the determination that the substantial destruction of documents in anticipation of an investigation by the Securities and Exchange Commission violated the law. We remain convinced that even the most powerful corporations have the responsibility of adhering to the rule of law.

“We will carefully examine today’s decision and determine whether to re-try the case.”

(esp)

June 1, 2005 in Arthur Andersen | Permalink | TrackBack (0)

A (Slightly) Different Take on the Arthur Andersen Opinion

The Supreme Court clearly foreshadowed its decision in the Arthur Andersen case (opinion here) when the Justices uniformly expressed concern about the scope of the government's argument, which would sweep much lawful activity, particularly the advice of lawyers, within the definition of "corruptly persuades" in Section 1512.  I am hesitant to read too much into the Court's castigation of the position of the United States as a validation of what Andersen did in the Enron engagement.  The Court did not hold that Andersen was not guilty of the offense, and there was no issue before the Court regarding the sufficiency of the government evidence.  While the opinion was certainly negative regarding the strength of the government's case, that needs to be viewed in the context of a decision about whether the jury instructions were sufficiently flawed to require reversal of the conviction.  While the Chief Justice's opinion -- which may well be one of his last decisions for the Court -- does not mention harmless error, that is the standard for judging mistaken jury instructions.  The Court is concerned with whether the jury might have reached its decision based on an improper interpretation of the law, so that the strength of the government's evidence is important, but it never said that Andersen was not guilty of the crime.  One can question whether the government would win a retrial -- and I'm certainly hopeful that the case will end at this point because further proceedings would be meaningless given the state of the firm -- but the fact remains that it can pursue the charges.

Was Arthur Andersen picked on unfairly?  Again, the wisdom of charging the firm with a crime is open to question, but Andersen was not an unwitting innocent.  It began shredding documents once Enron began to collapse, and continued to do so throughout the period until it received the SEC subpoena.  The repeated admonitions to Andersen employees to follow the firm's "document retention policy" without an explicit directive not to destroy any records was at least misguided, and quite possibly a cynical signal to get rid of as much of the documentation as possible.  One cannot view the conduct of Andersen's legal department as a template for how to handle a potential government investigation.  While the Court notes that many firms have such policies, a lawyer takes a significant risk if he or she permits an organization -- especially an accounting firm -- to destroy documents in the face of an impending government investigation and a potential client meltdown.  Of course, there is much 20-20 hindsight involved because no one knew how quickly Enron would be enveloped by its fraudulent transactions, but a cautious lawyer will assume the worst and work from there. 

The Enron relationship was not Andersen's first brush with problematic accounting, and the firm's once pristine reputation had already been sullied by other accounting engagements in which significant problems arose (e.g. the Baptist Foundation lawsuit in Arizona, the Sunbeam/SEC action).  While that alone does not justify bringing criminal charges against the firm, its conduct certainly raised questions about whether it had obstructed justice to avoid implicating itself in another client's fraud.  One can question the prosecutorial judgment whether to file charges, but I don't think the factual basis for the charge is open to serious question.

Finally, I wonder whether the Chief Justice's opinion will spawn the "Mom would have done the same thing" defense.  The opinion notes, "Indeed, 'persuad[ing]' a person 'with intent to . . . cause' that person to 'withhold' testimony or documents from a Government proceeding or Government official is not inherently malign. Consider, for instance, a mother who suggests to her son that he invoke his right against compelled self-incrimination, see U. S. Const., Amdt. 5, or a wife who persuades her husband not to disclose marital confidences, see Trammel v. United States, 445 U. S. 40 (1980)."  Obstruction cases can now feature references to each person's mother, and whether she would have taken the same approach.  My mother would no more tell me to assert the Fifth than root for the New York Yankees (she was Worcester Irish through and through). (ph)

                                                                               

UPDATE (6/1): Blog co-editor Ellen Podgor is quoted in stories about the Andersen decision in the New York Times (here), Wall Street Journal (here), and Legal Times (here). That's a hat trick, if we still had hockey. (ph)

June 1, 2005 in Arthur Andersen, Judicial Opinions | Permalink | TrackBack (0)