Wednesday, June 1, 2005
What little remains of Arther Andersen LLP was not the only victor in the appellate courts yesterday. Daytime television Judge Glenda Jackson's decision in Amanda Robinson v. Maria Bristow, first aired on April 12 and resulting in an award to Robinson of $2,000 for faulty hair care services, was reversed by Judge Joe Brown. According to a story in The Onion (here): "Judge Joe Brown presides over one of the nation's Syndicated-Television Courts of Appeals. These appellate courts stand between less-watched Cable-Television District Courts, such as Hatchett's, the Divorce Court, and Judge Larry Joe's Texas Justice courtroom, and higher-Nielsen-rated courts. The nation's highest courts, such as Judge Judith Sheindlin's family court, will only hear cases that appellate TV judges have determined raise questions of importance to a network audience." I suspect this decision was more widely seen than the Court's opinion in Arthur Andersen. (Thanks to Joe Hodnicki on the Law Librarian Blog (here) for noting the decision).
Mikhail Khodorkovsky, the former controlling shareholder of erstwhile Russian oil giant OAO Yukos, finally received his sentence after a Russian court spent ten days reading its decision. He was sentenced to nine years in prison for fraud, tax evasion, and embezzlement, and ordered to pay $613 million back taxes and fines (see International Herald Tribune story here). International businesses with an interest in investing in Russia watched the case closely for signs that the Putin government may be turning against private enterprises, and the effect on foreign investments may be significant -- although it is awfully hard to resist all the Russian oil with prices at $50 per barrel. Tom Kirkendall on the Houston's Clear Thinker blog has an interesting post on the sentence and a comparison with the 24 year sentence given to Jamie Olis in the Dynegy case (here).
The old John Houseman commercials for Smith Barney were classic examples of branding, using a catchy slogan ("They make money the old fashion way. They earn it!") to establish an identity for a firm engaged essentially in commodity transactions. The SEC filed an action against the firm and its parent, Citigroup, for engaging in self-dealing transactions in its mutual funds, as described in the SEC's Cease-and-Desist Order (here):
This is a case about an investment adviser placing its interest in making a profit ahead of the interests of the mutual funds it serves. Investment advisers have a fiduciary duty to act in the best interests of the mutual funds they advise and their shareholders. Mutual funds pay fees for various services provided to the mutual funds, including transfer agent services. Among its duties, the adviser may advise fund boards about the retention of a particular transfer agent and how much to pay for the transfer agent’s services. In this case, the Adviser, which serves as investment adviser to the Smith Barney Family of Funds (the "Funds"), recommended the Funds contract with an affiliate of the Adviser, which would perform limited transfer agent services and sub-contract with the Funds’ existing transfer agent. The existing transfer agent would perform almost all of the same services it had performed previously, but at deeply discounted rates, permitting the affiliate of the Adviser to keep most of the discount for itself and make a high profit for performing limited work. In making this recommendation, the Adviser misled the boards by omitting material facts, which led the boards to believe that the Adviser’s recommendation was made in the Funds’ best interests, which was not true. This self-interested proposal permitted the Adviser and its affiliates to profit from the transfer agent function at the expense of the Funds.
Citigroup agreed to disgorge profits of $109 million, plus prejudgment interest of $19 million, and to pay a civil penalty of $80 million. That's a hefty price for misleading investors, and certainly not meeting that other old fashion requirement of an investment advisor: acting as a fiduciary.(ph)
Tuesday, May 31, 2005
We are pleased to announce the launch of two new blogs as part of our Law Professor Blogs Network:
These blogs join our existing blogs:
- AntitrustProf Blog (Shubha Ghosh (SUNY Buffalo))
- ContractsProf Blog (Carol Chomsky (Minnesota) & Frank Snyder (Texas-Wesleyan))
- CrimProf Blog (Jack Chin (Arizona) & Mark Godsey (Cincinnati))
- Health Law Prof Blog (Betsy Malloy (Cincinnati) & Tom Mayo (SMU))
- LaborProf Blog (Rafael Gely (Cincinnati))
- Law Librarian Blog (Joe Hodnicki (Cincinnati))
- Law School Academic Support Blog (Dennis Tonsing (Roger WIlliams) & Ellen Swain (Vermont))
- Media Law Prof Blog (Cristina Corcos (LSU))
- Sentencing Law & Policy Blog (Douglas Berman (Ohio State))
- TaxProf Blog (Paul Caron (Cincinnati))
- Tech Law Prof Blog (Jonathan Ezor (Touro) & Michelle Zakarin (Touro))
- White Collar Crime Prof Blog (Peter Henning (Wayne State) & Ellen Podgor (Georgia State))
- Wills, Trusts & Estates Prof Blog (Gerry Beyer (Texas Tech))
LexisNexis is supporting our effort to expand the network into other areas of law. Please email us if you would be interested in finding out more about starting a blog as part of our network.
Several things are important to note here-
1. It is a 9-0 decision. Reaction - The government had it wrong and the Court thought it clear enough to speak with a single voice.
2. It only took 11 1/2 pages to write a decision that rejects two government arguments (that knowingly does modify "corruptly persuades" and a nexis requirement is required)
3. This decision sends a message that the Court is troubled with cases brought on a mere thread of criminal culpability. This is particularly important in white collar decisions as the law is complex, people have trouble understanding it, and criminal liability should only be imposed when there is a proper mens rea.
4. Document retention policies deserve some respect- the Court specifically says that they are "common in business." To say that one "impedes" the government merely because they have and use such a policy is wrong. More should be required. Likewise to say that you can be guilty of obstruction if you merely "impede" the government is absurd. The Court goes so far to use the example of "a mother who suggests to her son that he invoke his right against compelled self-incrimination." Obviously this should not be considered as obstructive conduct. Equally important to lawyers is that they be permitted to properly advise clients without fear of being accused of obstructing justice.
5. What happened here - The government chose to bring an obstruction of justice charge, usually an easy shortcut way of proceeding, as opposed to investigating and proceeding on substantive charges that might exist. Reaction - Taking shortcuts runs risks.
6. What effect will this decision have on pending cases and future cases - After the Arthur Andersen indictment, Congress amended the statute. Obviously because of ex post facto the government cannot proceed against Andersen under the new statute for the alleged conduct. Congress also added a new statute 18 U.S.C. s 1519. These amendments and the new statute were previously discussed here. Section 1512 and 1519 both have the word "knowingly" in them, so some of the findings of this Court may still apply. The Court's decision emphasizes with italics the word knowingly when it states that "Section 1512(b) punishes not just corruptly persuad[ing] another, but 'knowingly . . . corruptly persuad[ing]' another."
7. Sorry Martha, but this case may not be of much assistance in your appeal. Martha Stewart was indicted under section 1505 which has the word corruptly but does not have the modifier "knowingly." (see footnote 9 of the Court's decision that distinguishes obstruction cases brought under 1503 and 1505).
The moral of the story - the government gave a corporate death sentence here, and when you are dead there isn't much that can be done even when it is later proved that you were wrong. The truly unfortunate part here is that innocent employees suffered.
Not surprisingly, the Supreme Court in a 9-0 decision reversed the conviction of Arthur Andersen LLP. In a 11 1/2 page opinion authored by Chief Justice Rehnquist, the Court found that the "jury instructions failed to convey properly the elements of a 'corrup[t] persuas[ion]' conviction under sec. 1512(b)." The Court also found that the jury instructions improperly told the jury that "it did not have to find any nexus between the 'persua[sion]' to destroy documents and any particular proceeding."
It's a brief opinion, but there is a lot to say about it. Commentary on the decision will be forthcoming.
Decision is here - Download 04-368P.pdf
Co-blogger Professor Peter Henning previously remarked on the slowness of the Scrushy case and now on the easy hours that the jury is working (here). Not all southern white collar cases proceed this way. James Salzer of the Atlanta Journal Constitution reports here on the ongoing trial of former state Sen. Charles Walker, who he describes as "a Democrat who was once the Capitol's most powerful black official." The jury in the Walker case heard evidence this Sunday, and Monday --yes -- Memorial Day weekend. (see here)
We previously reported on the Walker case here. Walker was initially charged with 142 counts ranging from mail fraud and income tax evasion to conspiracy.(see here). Salzer of the Atlanta Jrl Constitution reports that the defense is expected to present its case this week.
While companies are usually quick to tout their willingness to cooperate with government investigations, every once in a while a corporation resists producing records. Medco Health Solutions, Inc., the pharmacy benefits management company that was spun out of Merck, has refused to provide documents subpoenaed by the Department of Health and Human Services' Office of the Inspector General as part of an investigation into possible kickbacks and false claims until the OIG agrees not to share the records with the U.S. Attorney's Office for the Eastern District of Pennsylvania. That office filed a civil lawsuit against Medco in 2003 alleging fraud in the recommendation of drugs, and Medco is demanding that any records produced not be given to the government attorneys prosecuting the civil action. A Wall Street Journal story (here) quotes a response from a Medco spokeswoman that the company is only seeking confidential treatment of the documents. The OIG has moved to enforce the subpoena, and a hearing is scheduled for Wednesday, June 1, in U.S. District Court in Philadelphia.
While Medco claims that all it is seeking is confidential treatment of its records, it is unusual that the request is directed at another office of the federal government. In most cases involving confidential treatment, a private plaintiff is seeking the records produced to the government, and that brings up issues related to FOIA and the need to maintain confidentiality during a pending investigation. Unlike a grand jury subpoena, under which the documents may be protected by the strict confidentiality requirements of Rule 6(e), a civil investigative subpoena does not restrict the sharing of information with other offices of the federal government that may be interested in the documents. While Medco may fear an end-run by the OIG, if the HHS investigation is legitimate and not a sham for the benefit of the earlier lawsuit -- and it appears to be part of a broad investigation of other companies, such as Caremark -- then I think the subpoena is likely to be enforced because the OIG has broad investigatory authority. (ph)
Bruce Carton on the Securities Litigation Watch blog discusses (here) the recently released General Accountability Office's first annual audit of the SEC, including its comment on the Commission's internal controls shortcomings. The post quotes from a San Jose Mercury-News story noting the rather delicious irony of the SEC's internal control problems in the new world of Sarbanes-Oxley Act Section 404, which imposes stringent internal control certification requirements on corporate CEOs and CFOs. The GAO report (here) summarizes the Commission's internal control weakness in this way:
The material weaknesses we have identified and discuss in this report relate to SEC’s internal control over (1) recording and reporting of disgorgements and penalties, (2) information security, and (3) preparing financial statements and the related disclosures. These material weaknesses were considered in determining the nature, timing, and extent of audit tests applied in our audit of SEC’s fiscal year 2004 financial statements, and our opinion on internal control does not affect our opinion dated February 11, 2005, on these financial statements. The details surrounding these weaknesses are being reported separately to SEC management, along with recommendations for corrective actions. Less significant matters involving SEC’s system of internal controls and its operations will also be reported to SEC separately.
It seems like internal controls are not the Commission's only problems these days. As detailed in an AP story (here), the SEC is facing a $50 million budget shortfall over the next two years due to cost overruns related to moves to new offices in New York, Boston, and Washington DC. This has led to budget cuts, including the oft-cited cutback on "nonessential travel." In my experience working for the government, the lower you were, the less essential your travel was viewed. Moreover, if you've ever traveled on the government, you know that every trip is essential -- no one goes out of their way to enjoy the bounteous per diem and joy of trying to find a hotel room at a government rate in a large city during a peak travel period. Have you ever tried getting a hotel room in Boston during spring graduation season? (ph)
After the holiday weekend, the jury in the prosecution of Richard Scrushy returns to work after spending a week hung up on trying to reach unanimity on the first charge of the indictment, the broad conspiracy count. The jury's frustration was clear when it sent a note to U.S. District Judge Karon Bowdre asking her whether they had to be unanimous on the conspiracy count, and then putting a large "YES OR NO. Please circle one" beneath the question. That sure sounds like a conversation between a parent and a teenager. A New York Times article (here) quotes co-editor Ellen Podgor's discussing the potential problems with the conspiracy count, that it can be the easiest to prove but the hardest to explain to jurors in understandable terms. See her earlier post here discussing the the complexity of conspiracy charges. Another point noted in the Times article is that Judge Bowdre has allowed the jury to set its own deliberation schedule, and the pressure to reach a verdict may not be there yet to force the deliberations toward a resolution, one way or the other. The almost contemptuous tone of the jury's note may indicate that the judge needs to take a more active role in moving them forward. (ph)
Monday, May 30, 2005
When none other than The Donald says, "He spent money like it was water," then you know you're in the big leagues. Trump was talking about Alberto Vilar, who is currently sitting in jail spending the weekend locked up after being unable to meet the $10 million cash bail set at a hearing on Friday. Vilar is a leading patron of the arts, particularly the Metropolitan Opera and the Vilar Center for the Arts at Beaver Creek (CO), and a investment fund manager who has been accused of stealing $5 million from a client account to make good on charitable pledges. The Vilar Center website (here) says the following about him:
Now Alberto heads Amerindo Investment Advisors, Inc., a firm that pioneered investing in young technology companies twenty years ago. Performing arts remain Vilar's avocation and passion, and he has a particular affinity for opera and ballet, as well as symphonic, classical choral and chamber concert music. "Culture enriches our life," says Alberto. "'What would life be without Mozart?' as the saying goes." So when the opportunity to construct a world class performing and visual arts center in Beaver Creek came about, Alberto Vilar played a major role in its creation by making a significant naming contribution.
Federal authorities arrested Vilar on Thursday evening, May 26, at the airport in Newark as he returned from a financial conference in Las Vegas. One of his investment funds, the Amerindo Technology Fund, was a darling of the tech stock boom in the late 1990s, and crashed as hard as any fund in 2001. A New York Times article (here) details Vilar's various charitable contributions -- and related demands for attention for his generosity -- along with his successes and failures as an investment advisor. This case will be the next great New York high society prosecution, perfect for the summer gossip-fests in the Hamptons. (ph)
While it is hard to feel much sympathy for former American International Group CEO Maurice Greenberg, who viewed regulations as a pest to be swatted rather than a guide to proper business conduct, N.Y. Attorney General Eliot Spitzer's recent complaint against the company and Greenberg for alleged fraud engages in a bit of character assassination of its own. The complaint (here) states in its "Preliminary Statement" that Greenberg was "intensely focused on the daily movement of AIG's price," and on Feb. 3, two days after AIG announced underwriting losses from natural disasters, Greenberg told a trader for AIG to buy the company's shares on the open market and "I don't want the stock below $66 so keep buying." On Feb. 18, a few days after the subpoenas to AIG were revealed, the company's stock again declined and Greenberg urged a company trader to buy up to 250,000 shares, saying he wanted the trader to be "a little bit more aggressive." That's the last the complaint mentions of Greenberg's dealings with AIG's stock, and it's unclear why this information is in there except to somehow cast Greenberg as a nefarious manipulator of the market.
But is what Greenberg did wrong? It is certainly not a violation of New York state law, and none of the charges against Greenberg have anything to do with stock trading. If there is any violation, it would be of the federal securities laws and related regulations, a claim that the SEC (and DOJ) could bring. Company's are limited in the amount and timing of purchases of their own shares on the open market, and it's possible that Greenberg's requests to the traders caused a violation of those rules, but the evidence to this point does not show a significant violation, if there even is one. For a Rule 10b-5 violation for market manipulation, it appears that a crucial aspect of such a case is missing: the benefit to the trader from the manipulation. Greenberg was not selling shares while trying to prop up the company's price, and it does not appear that the trading had any purpose other than to help maintain the stock price in the face of negative news. Without the back-end benefit from the transactions, it's difficult to show a manipulative purpose for a fraud violation. Greenberg's extensive holdings in the stock (since transferred to his wife by gift in March) might be a reason to maintain the stock price, but he didn't sell any AIG shares to show that he sought to manipulate the price. An executive obsessed by the price of his company's stock is not unknown in CEO circles, much less illegal. What is the benefit from including the recitation of Greenberg's conversations with AIG traders when they have nothing to do with the alleged legal violations in Spitzer's complaint? Surely not grandstanding. (ph)
Sunday, May 29, 2005
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Professor John C. Coffee of Columbia Law School has an article titled, "A Theory of Corporate Scandals: Why the U.S. and Europe Differ" posted on SSRN here as part of the Columbia Law and Economics Working Papers. In part the abstract on SSRN states:
"This paper submits that different kinds of scandals characterize different systems of corporate governance. In particular, dispersed ownership systems of governance are prone to the forms of earnings management that erupted in the United States, but concentrated ownership systems are much less vulnerable. Instead, the characteristic scandal in concentrated ownership economics is the appropriation of private benefits of control. Here, Parmalat is the representative scandal, just as Enron and WorldCom are the iconic examples of fraud in dispersed ownership regimes.
"Is this difference meaningful? This article suggests that this difference in the likely source of, and motive for, financial misconduct has implications both for the utility of gatekeepers as reputational intermediaries and for design of legal controls to protect public shareholders. What works in one system will likely not work (at least as well) in the other. The difficulty in achieving auditor independence in a corporation with a controlling shareholder may also imply that minority shareholders in concentrated ownership economies should directly select their own gatekeepers.
(esp) (With thanks to Joseph A. Hodnicki for alerting us to this Article).
We reported here the acquittal of David Rosen, former fundraiser for "Senator A." We noted here the importance of keeping politics out of prosecutions. We also noted here how those who associate with high profile individuals, such as Hillary Clinton, subject themselves to additional scrutiny. We asked whether Rosen would be able to "standup to this scrutiny and walk out of the courtroom even after every piece of paper is fully examined."
And the answer is that David Rosen is able to walk out of the courtroom with an acquittal with a jury speaking loudly an clearly. (See NYTimes AP story here) And yes, they looked at all the evidence. Some have wrongly criticized the judge (here) and perhaps others may now try to criticize the jury. But the plain fact is that David Rosen was not guilty of the crimes for which he was charged.
Monday morning quarterbacking is in order for prosecutors here. Why did they bring this prosecution? Looking at the problems they faced in this case, one has to wonder how well the case was investigated? Were prosecutors led astray on the evidence by those with political motivations, that is motivations to try and get "Senator A"?
Again, as we stated here, politics needs to stay out of the judicial system. Thankfully, the jury here is above politics.