June 11, 2005
Another General Re Executive Pleads Guilty -- Did TIAA-CREF Act Improperly When It Hired General Re's CFO?
A second senior General Re executive, Richard Napier, has entered a guilty plea in the Eastern District of Virginia to a single count of conspiracy to commit securities fraud related to the AIG-General Re finite insurance transaction. The statement of facts (here) is virtually identical to the recitation of those for John Houldsworth, and the statement again plays "What's My Line" (see earlier post here) by only identifying other executives by title.
One of the executives identified is General Re's (former) CFO, Elizabeth Monrad, who was until recently the CFO of TIAA-CREF, the large pension fund and insurance company (yes, I still have retirement money with the company). The Napier statement of facts includes one particular statement by Monrad as demonstrating the General Re executives knew AIG could not report an increase in its insurance reserves from the agreement: "We told AIG that there would not be symmetrical accounting . . . we told them that was one of the aspects of the deal they had to digest." Having identified Monrad's statement as evidence of the knowledge of the General Re executives that they were participating in a conspiracy with AIG executives to misreport the transaction, it appears that she will be charged with a crime, and may well enter into a plea agreement similar to that reached by Napier and Houldsworth.
As the government gets closer to Monrad, I wondered whether TIAA-CREF could have done anything to protect itself from having its name dragged into stories like this one, and I think the answer is no. TIAA-CREF hired her in June 2003, months before the transaction became the subject of the investigations by the SEC, DOJ, and NY Attorney General Spitzer's office. Moreover, the transaction involves aggressive accounting by AIG, not General Re, and while Monrad participated in the negotiations, it is unlikely she viewed them at the time as anything other than a normal business transaction. Indeed, that's what so many white collar crimes are when they involve questionable business decisions that are not obviously fraudulent: aggressive judgments that cross the line into illegality in the name of accomplishing a business objective. If TIAA-CREF asked Monrad if there were any questionable transactions during her tenure at General Re, I think she would have answered the question negatively, or at least not have considered the AIG finite insurance deal as the likely subject of a criminal investigation, much less a conspiracy that would be the subject of a plea bargain by two fellow executives. If TIAA-CREF checked her credentials with other General Re executives -- and I certainly hope it did -- the answer would have been similarly negative. Does that mean the transaction was not illegal? That's a different question from whether Monrad and other General Re executives viewed it that way at the time.
Can a large company protect itself from hiring a ticking timebomb? Companies can limit the pool of candidates to those in-house, but that breeds an insular culture, as witnessed by AIG under the near-dictatorial control of Maurice Greenberg. If an organization goes outside its ranks for some executives, it will be taking a risk that at some point in the past the person may have participated in transactions that will be the subject of investigation and even prosecution. All the background checks in the world cannot eliminate completely the possibility that a new hire will become a high-profile target of a state or federal investigation. Lie detector tests do no good when the process of making the decision that crosses the line includes convincing the participants that what they are doing is not only legal, but an acceptable exercise of business judgment. (ph)
Ebbers Seeks Leniency in Sentencing
Former WorldCom CEO Bernie Ebbers submitted a brief to U.S. District Judge Barbara Jones seeking leniency in sentencing so that the court does not sentence the 63-year old to what would be a life term. Among the reasons for seeking a shorter sentence cited by the defense are Ebbers' devotion to his family, history of extensive charitable giving, declining health, and personal financial losses suffered when WorldCom collapsed. While stating he was "profoundly sorry" for the fraud and job losses it caused, Ebbers did not accept responsibility for WorldCom's demise due to the accounting misstatements. The latter position will not help his cause, although he did submit 169 letters of support on his behalf that may be persuasive with the judge. Ebbers poses no continuing threat to society, and the testimonials (and health issues) can create a sympathetic scenario. It's not clear whether any sentence given to former CFO Scott Sullivan will influence Judge Jones' determination for Ebbers. My hunch is that, given the advisory nature of the Federal Sentencing Guidelines, the sentence will be in the 8-10 year range (I would use 100 months as the over/under line). Sentencing is set for July 13. See a CNN story here about the defense submissions, and thanks to Doug Berman's always comprehensive Sentencing Law & Policy (here) for noting the defense submission. (ph)
Citigroup Settles Enron Investor Suit for $2 Billion -- Is J.P. Morgan Chase Next?
Citigroup is heading into Everett Dirksen territory with its settlements in securities fraud actions. It paid $2.58 billion to settle with WorldCom investors, and now it has agreed to pay $2 billion to Enron investors to settle claims related to the company's work on behalf of the now-bankrupt energy giant. Among the investment banks that remain in the lawsuit is J.P. Morgan Chase, which resisted settling the WorldCom class action and ended up paying $600 million more than had been offered earlier by the plaintiffs class to settle. With the $2 billion paid in the WorldCom case coming on top of the recent $1.45 billion awarded to Ron Perlman related to J.P. Morgan's work on behalf of Sunbeam, this may be an expensive year for its investment banking unit. Thank goodness I still own shares in the company (by way of one of the many mergers that brought it to its current state). An AP story here discusses the Enron settlement (here). (ph)
June 10, 2005
Lawyers & RICO
The ABA e-journal has a post here discussing a civil RICO case against two lawyers. RICO, through 18 U.S.C. s 1964, has civil provisions that allow civil litigants to bring RICO actions and if successful receive treble damages and attorney fees. But there is a stumbling block, namely the Reves case, when someone tries to bring a RICO action against attorneys, accountants, or others who might not be part of the "operation or management" of the enterprise. Co-editor Peter Henning explains this decision and its applicability to the present case in the ABA e-journal here.
7 New Pardons Predominantly White Collar
According to a Department of Justice Press release here President George W. Bush granted seven pardons this week. One of the cases is clearly an alleged street crime (drug related). Of the remaining six, four definitively fit the white collar category and the remaining two lean in that direction. And men seem to be the major recipients of the pardons.
Because there is no clear definition of what constitutes a white collar offense, and because crimes are not designated white collar or non-white collar, it is sometimes difficult to place them definitively in one group. For example, charges under the Racketeer Influenced Corrupt Organization Act (RICO) can be either white collar or street crime, often dependent upon the predicate act involved. In recent years, the government has been using the charge of mail fraud against activities that are economic related and non-violent, characteristics that tend to describe a white collar offense. The mail fraud described in # 3 below is clearly a white collar, but the conspiracy to commit mail fraud described in # 4 is less clear. So too, with the theft of government property described in #7 below.
So my conclusion is that four out of seven of the pardons granted are clearly white collar and six out of seven could very well be. What can also be said about these pardons is that they are relatively minor offenses being pardoned (exception perhaps the one drug offense and the conspiracy to commit mail fraud), and that just looking at the names - men seem to be the major recipients of the pardons.
My other question is - looking at the sentences each received and the dates of the sentence, what would each of these individuals have received if sentenced under the sentencing guidelines? The press release describes the offenses and sentences as follows:
1. Offense: Making a false claim; U.C.M.J., Article 132
Sentence: December 8, 1978; United States Air Force special court-martial convened at Royal Air Force Base Lakenheath, Suffolk, England; two months confinement at hard labor, forfeiture of $369 pay per month for two months, and reduction to pay grade E-3, as approved by the convening authority on January 30, 1979.
2. Offense: Income tax evasion; 26 U.S.C. § 7201
Sentence: August 30, 1983; Middle District of Pennsylvania; Two years probation with special conditions of 200 hours of community service; $10,000 fine.
3.Offenses: Mail fraud; 18 U.S.C. § 1341; Furnishing false information on a Housing and Urban Development loan application; 18 U.S.C. § 1010.
Sentences: May 18, 1979; District of South Carolina; Three years probation; $1,000 fine; October 21, 1980; District of South Carolina; 15 months imprisonment.
4.Offense: Conspiracy to commit mail fraud and mail fraud; 18 U.S.C. §§ 2, 371, and 1341.
Sentence: August 18, 1983, modified on January 16, 1984; District of New Hampshire; 27 months imprisonment, five years probation, and $20,827 restitution, as modified.
5. Offense:Income tax evasion; 26 U.S.C. § 7201.
Sentence:July 22, 1977; Eastern District of Michigan; Two years probation; $10,000 fine.
6. Offense:Conspiracy to possess with intent to distribute marijuana; 21 U.S.C. § 846.
Sentence:January 10, 1975; Northern District of Texas; 18 months imprisonment; two years special parole.
7. Offense:Theft of government property; 18 U.S.C. § 641.
Sentence:May 25, 1989; District of South Carolina; Three years probation, with the special condition to perform two hours of community service per week.
Playing "What's My Line?" With the Houldsworth Plea Agreement
For those whose misspent youth included serious TV watching, you'll remember the television game show "What's My Line?" in which celebrities tried to guess the occupation (or with other celebrities their identity) of a contestant by asking a series of questions: "Can you do it at night?" This was my first introduction to Bennett Cerf, Kitty Carlisle, etc. (see here). The government is playing a little bit of that game with the statement of facts for former General Re executive John Houldsworth, who entered a guilty plea in the Eastern District of Virginia to one count of conspiracy to commit securities fraud related to structuring a reinsurance transaction to help American International Group dress-up its financial statements through a contract that did not in fact transfer any risk, as required by accounting rules (see earlier post here). The statement of facts (here) refers to other General Re players by their title, such as its CEO, who we know was Ronald Ferguson, and its CFO, who was Betsy Monrad, now on unpaid leave from TIAA-CREF. Others referred to obliquely are Richard Napier, another General RE executive, and, according to a Wall Street Journal story (here), Chris Garand, an executive in General Re's international finite insurance division. A fifth General Re executive has not been guessed yet -- "Is it a he or a she? Does this person have a title of vice president or higher?" -- but the mystery will no doubt be solved as the government gathers in more guilty pleas from the General Re side of the AIG deal.
June 9, 2005
Jury Deliberation - Kozlowski Trial
This time the jury that is struggling is the Dennis Kozlowski/Mark Swartz jury.
According to an AP report in the Atlanta Jrl Constitution, they are asking, "[c]an we deliver a verdict if we are unanimous on some counts and not on others?" (see here). After five days of deliberations, it seems the jury is unable to reach a verdict on all counts. And... this is the second time this trial is occurring as the first ended in a mistrial.
This is additional proof for my post below (here) where I state-
My guess is that overall white collar cases take longer. Longer to investigate, longer to try, and often with longer jury deliberations.
The judge has several choices here:
1. Take the verdict on the counts that are resolved and declare a mistrial on the others. If some turn out to be guilty, perhaps the government will be satisfied and go home. If they are a not guilty, well then maybe the government needs to reevaluate whether to proceed on the remaining counts.
2. Make the jury go back and work tomorrow to try and resolve the rest of the counts.
3. Give an Allen charge in the hopes of stimulating more discussion. The problem here is that it may put at risk counts that have been resolved.
Addendum - But I was reminded by Jamie Olis' father that his son's jury (formerly of Dynergy) was out only for 2 hours. But the result, in sentencing, is something - well that's another matter - see criticism here. (esp)
Jury Deliberations in White Collar Cases
White collar cases are complicated for juries. They often involve financial intricacies that may exceed the education level of most jurors. And often the trials are longer than the typical street crime case (The OJ case was not the typical). But what about the jury deliberations?
On one hand the jury deliberation in the MIchael Jackson case goes on its 4th day today (see here), the trials of Dennis Kozlowski and Mark Swartz have deliberated for 5 days (see here) and the trial of Richard Scrushy continues after an uncertain number of days because of the various breaks taken by the jury (see post here).
Is it that high profile cases take longer, or is it that white collar cases take longer? Clearly each individual jury has its own dynamics. And as such, some may take longer than others. And maybe the correlation is between the length of the trial and the jury deliberation -- the longer the trial, the longer the deliberation.
My guess is that overall white collar cases take longer. Longer to investigate, longer to try, and often with longer jury deliberations. I have no scientific study to back this up with, and this "guess" is subject to proof otherwise. But for now, I am sticking with it.
Guilty Plea Entered in General Re
29 Counts NG; 4 Mistrial - Spitzer's Case Against Former Bank of America Broker
The Wall Street Journal reports that a "[f]ormer Bank of America broker [ ] was found not guilty [of 29 counts] on charges of improper mutual-fund trading." Four additional counts the jury deadlocked on, and the judge declared a mistrial on these counts. See more here.
Lawyers Who Improperly Take the Client's Escrow Funds
New York Times has a story titled "When Lawyers Steal the Escrow" that tells the story of a lawyer who has pleaded guilty and is set to be sentenced this week. According to the NYTimes, the Lawyers' Fund in NY has "so far paid $1.9 million of the estimated $3.6 million to $4.7 million" that this lawyer "stole from his clients."(see here)
Greenberg Resigns from AIG Board
Maurice Greenberg faxed in his resignation from American International Group's board of directors last night, severing his last official tie with the company that he served as CEO and Chairman for over forty years. Greenberg remains chairman of two entities that control approximately 14% of the company's shares. In his resignation letter, Greenberg reiterated his complaint about the lack of information provided to him by AIG as it conducted an internal investigation that includes criticisms of accounting decisions by former senior executives: "I previously stated my intention not to stand for re-election to the board. My decision to resign now results from my inability to receive information regarding the company and its operations necessary to fulfill my fiduciary duties. I wish the employees of A.I.G. every future success." No sour grapes there. A New York Times story (here) discusses the resignation. (ph)
The Corporate Compliance Prof Blog
One of the newest members of the Law Professor Blogs network is Professor Paul McGreal's Corporate Compliance Prof Blog. Paul is the Director of the Corporate Compliance Center, and is the Harry and Helen Hutchens Research Professor and Professor of Law at South Texas College of Law in Houston, TX. The blog should be of particular interest to many of the hardy band of readers of this blog because so many white collar cases involve issues related to corporate ethics and compliance. Paul describes his target audience (here):
In short, this Blog is written for anyone interested in the legal and practical issues raised by designing, implementing, and operating a corporate ethics and compliance program. This audience has many potential members:
- In-house lawyers whose responsibilities include compliance.
- In-house non-lawyers whose responsibilities include compliance.
- Outside lawyers and compliance professionals.
- Law professors and students teaching and studying subjects related to compliance.
While much of the Blog’s content will deal with legal sources and issues, the Blog will not be written solely for lawyers. My hope is that non-lawyer compliance professionals will find the content both useful and accessible.
Be sure to check it out, including an outstanding post on the Arthur Andersen prosecution that gives a thorough review of how the case unfolded (with a nice mention of the Houston Astros thrown in). (ph)
June 8, 2005
That Other Southern Jury v. Scrushy (and HealthSouth Addendum)
While the other southern jury (Senator Charles Walker) is long since over (see here) , the Scrushy case is proceeding leisurely through the week. It looks like they will only be working two days this week. (see AP Birmingham News here).
In looking back at the Walker case, a case tried by two of Atlanta's finest attorneys (Don Samuel & Ed Garland), one has to wonder was the work week too grueling for the jury. In Walker the jury worked from 8:00 a.m. to 7:00 p.m., seven days a week, including holidays and Sundays. (see here) They worked, yes- Memorial Day weekend including Memorial Day. Is this fair to a jury and what happens when a jury is put under this strain? In the Walker case, the jury convicted the state senator of 127 counts. (see here).
With so much talk about uniformity in sentencing, one has to wonder if maybe the focus should be on uniformity in trials. Where is the happy medium between the Scrushy trial and Walker case. On one hand we praise the judge in Scrushy for accommodating the jurors, individuals who are giving up valuable time in their lives to assist the justice process. After all if you were a juror who had pre-paid for a vacation, to be asked to cancel it might influence your decision. But is it right that one defendant is fast tracked through trial and another is not?
Some of the forthcoming post trial issues in Walker are likely to be? (1) Can an honest services mail fraud conviction be sustained where evidence is premised on a failure of the defendant to file state-required personal financial statements, (2) The judge's reseating a juror that the defense had struck premised upon the background of the individual and the type of case involved. (3) The honest services prong of the indictment.
Addendum - Wall St. Jrl reports here that HealthSouth has "agreed to pay $100 million to settle claims brought by the Securities and Exchange Commission" and that the jury in the Scrushy case will resume deliberations on Monday of next week. (esp)
Wire Fraud Requires Interstate Transmission
18 U.S.C. s 1343 seems clear - - wire fraud requires an interstate transmission. The government, however, recently argued that all you need is an "instrument of an integrated system of interstate commerce." If this approach were taken, would all state phone calls become subject to the wire fraud statute, even if intrastate?
A U.S. District Court in Mass. rejected this government stretching of the wire fraud statute, and today dismissed the wire fraud convictions in a case handled by Atty. David Hoose. Judge D.J Ponsor supported this dismissal on three grounds, including the plain language of the statute.
See order here Download order_granting_rule_29_on_wire_fraud.pdf
Plea in Bidrigging/Fraud Case
A press release of the Government here, reports that "[a] former maintenance manager at the General Electric Company’s Waterford, New York plant [ ] pleaded guilty to bid rigging and conspiracy to commit mail fraud in connection with a kickback scheme involving roofing contracts in the Albany, New York area. . ."
The government notes that this "is the fourth [plea] obtained in the government’s ongoing investigation of the roofing industry in the Albany area." Defendant and his co-conspirators had been charged according to the government "with carrying out the conspiracy by:
"Discussing the submission of prospective bids on certain roofing contracts;
"Agreeing among themselves which company would be the low bidder on each of the contracts discussed; an
"Arranging for co-conspirators to submit bids that were intentionally higher.
Principles of Constitution Project's Bipartisan Blue-Ribbon Sentencing Initiative Released
Yesterday at the Heritage Foundation, members of the Constitution Project's Bipartisan Blue-Ribbon Sentencing Initiative, released principles that urge more focus being placed on proportional punishment. Doug Berman's Sentencing Blog Posts details here. The Preface to the Report states in part:
"The Constitution Project’s Sentencing Initiative was established in response to the U.S. Supreme Court’s June 2004 decision in Blakely v. Washington, in which the Court ruled that Washington State’s sentencing guidelines system violated the Sixth Amendment right to a jury trial by permitting judges to increase a sentence above a presumptive guideline range based on facts not determined by a jury beyond a reasonable doubt. The Court’s decision in Blakely called into question the constitutionality of the federal sentencing guidelines, and on January 14, 2005, the Court held in U.S. v. Booker and U.S. v. Fanfan that the federal guidelines must satisfy Blakely’s Sixth Amendment standards, and that therefore the guidelines must be advisory rather than mandatory.
"To respond to rising concerns about the future of American criminal sentencing, and in particular to concern about the direction of the federal sentencing system, the Constitution Project convened a bipartisan committee of current and former prosecutors, judges, defense attorneys, scholars, and other sentencing experts. The group’s co-chairs are Edwin Meese III, Attorney General under President Reagan, and Philip B. Heymann, Deputy Attorney General under President Clinton.
"The Committee’s primary objective was to seek consensus on some of the fundamental elements of a sentencing system that achieves both appropriate punishment and crime control. These "Principles for the Design and Reform of Sentencing Systems" are the first step in the Committee’s work. The Committee plans also to release a background report on these principles, to be followed by specific recommendations for a post-Booker federal sentencing scheme.
"These Principles reflect a broad consensus among Committee members with diverse perspectives and experiences. The Committee’s hope is that these Principles, and the forthcoming background report and recommendations, will inform the debates currently being held in Congress and around the country."
(esp) (with thanks to Pal Rosenzweig for providing us with this report)
Conte Likely Will Face Additional Money Laundering Charges in the BALCO Case
Victor Conte, founder of the Bay Area Laboratory Co-op (BALCO) who has admitted providing steroids to a number of athletes, will likely face additional money laundering charges, according to an AP story (here). At a closed hearing in San Francisco on June 7, the government disclosed that it plans to issue a superseding indictment with charges that only name Conte and not the other defendants. The trial is scheduled to begin September 6, although additional charges that only name Conte increases the chance that the judge will sever at least some of the defendants to avoid any prejudice to them from unrelated evidence. Conte's admissions in a national television interview (see earlier post here) that BALCO created and distributed steroids certainly makes his defense quite difficult, and the other defendants have a stong incentive not to join him at the defense table once trial starts. (ph)
"Porn Star" Insider Trading Case Nears Its End
The long-running insider trading case involving James McDermott, former CEO of investment banking firm Keefe, Bruyette & Woods (KBW) and Kathryn Gannon, better known the adult film world as Marilyn Starr, largely came to an end with the entry of a final order in the SEC's civil enforcement action and an administrative order (here) barring McDermott from the securities industry. In late 1999, McDermott was accused of leaking information about extraordinary transactions involving clients of KBW, which specialized in advising banks, to Gannon, with whom he had developed a close personal relationship. Gannon opened an account and began trading shares in the companies, including Central Fidelity Banks, Inc., Advanta Corporation, Barnett Banks, Inc., First Commerce Corp., California State Bank (West Covina), and First Commercial Corp. immediately before mergers involving the banks were announced. Gannon realized profits of $88,135, and in turn tipped another boyfriend (fidelity has never been much of a virtue in any parts of the film industry), Anthony Pomponio, who made profits of $86,378. McDermott did not trade in any of the shares, although it was not particularly difficult to establish the tipping requirement for tipper liability under SEC v. Dirks because of the personal relationship with Gannon.
McDermott, Gannon, and Pomponio were indicted on conspiracy and insider trading charges, and Gannon fled to her native Canada. McDermott and Pomponio were convicted -- with Pomponio also convicted of perjury related to statements made in an SEC deposition -- even though they had never met one another and McDermott had no clue that Gannon was passing on the information. The Second Circuit reversed the convictions in 2001, holding that the government could not establish a chain conspiracy linking Pomponio and McDermott, and in an all-time great line the court noted that "[w]e decline to hold as a matter of law that a cheating heart must foresee a cheating heart." U.S. v. McDermott, 245 F.3d 133 (2nd Cir. 2001). McDermott then entered a guilty plea to one count of insider trading and was sentenced to time served prior to the reversal of the conviction after having been sentenced to eight months on the original conviction. Gannon eventually was extradited from Canada and agreed to enter a guilty plea to two counts of conspiracy and was sentenced to three months in prison. The final judgment in the SEC action required McDermott to pay approximately $230,000, which represents Gannon's profits, prejudgment interest, and a one-time penalty; Gannon was not required to pay any money due to her financial condition (see the SEC Litigation Release here). The SEC case against Pomponio has not been settled yet. (ph)
Defense Department Inspector General's Report on Boeing Aircraft Lease Program
The Department of Defense's Inspector General issued a very extensive report on the acquisition program involving the leasing of 100 tankers from Boeing (at a total cost of over $23 billion) that involved what it termed an "inappropriate acquisition strategy." Problems of favoritism shown to Boeing by Darleen Druyan, former Principal Deputy Assistant Secretary of the Air Force for Acquisition and Management, and her improper negotiations to obtain a job at the company, resulted in her pleading guilty to a conflict-of-interest charge and sentenced to a nine-month prison term; in addition, former Boeing CFO Michael Sears also entered a guilty plea related to the botched hiring of Druyan. The IG report (available to download here -- like all things military, it is very long) notes that in the future, DoD "must not tolerate situations where senior officials use their positions to have contractors put pressure on other senior officialsto have them change their stance relative to a particular situation." (ph)