June 8, 2005
Aircraft Parts Manufacturer and Two Executives Charged with Providing Materials for Military Aircraft That Failed to Meet Product Specs
Anco-Tech, Inc., and two of its executives, Andrew Maliszewski, a quality manager and vice-president, and Alan Maliszewski, a sales manger and later a quality manager, were charged with mail fraud, aircraft parts fraud (18 U.S.C. Sec. 38), and conspiracy related to the sale to Boeing of titanium tubing that was used in the V-22 Osprey aircraft (indictment here). According to a press release issued by U.S. Attorney Patrick Meehan of the Eastern District of Pennsylvania (here):
“Tests were skipped, protocols were ignored, inspection procedures were not followed, documentation was either incomplete or falsified, and all of this was not only tolerated but sanctioned and condoned by the company,” said Meehan. “The certification process is a critical part of this country’s overall defense effort. The conduct of these defendants undermined that effort and created needless risk for the men and women of our armed forces.”
The indictment charges that from approximately 1995 through February 2002, Anco-Tech sold for use in V-22 Osprey aircraft and civilian aircraft titanium tubing without regard to whether it conformed to the applicable specifications, but nonetheless certified that the tubing complied with the specifications. The indictment further charges that defendants Andrew Maliszewski and Alan Maliszewski executed, or directed other Anco-Tech employees to execute, false certificates of conformance that represented that titanium tubing manufactured for use in the aerospace industry conformed to all applicable specifications, knowing that the tubing had not been manufactured, inspected, and/or tested in conformance with the specifications, or that the tubing did not conform to the applicable specifications regarding chemical composition, dimension, strength and/or other physical and mechanical properties. In this regard, the indictment charges that the Malizsewskis directed Anco-Tech employees to skip required tests and ignore certain testing protocols, or were aware of and approved this conduct. The indictment further alleges that applicable inspection procedures were not followed, and that required documentation was not being completed and/or was falsified, and that this conduct was directed and/or condoned by the Maliszewskis.
Barbara McCoy and Elaine Slomsky, who were Anco-Tech quality assurance supervisors, were charged in separate informations with making false statements under Sec. 1001 regarding compliance with testing requirements for the titanium tubing (press releases here and here). The Osprey fleet was grounded once the problem in the titanium tubing was discovered by Boeing. Although two Ospey's have crashed in 2000, those were not attributable to the product supplied by Anco-Tech. (ph)
June 7, 2005
Panel Discussion on New Corporate Crime Book by David Skeel
A panel discussion will take place on Wednesday, June 8, at 6:00 p.m. at the New School (Theresa Lang Student Center, 55 West 13th Street, New York) on a new book published by Oxford University Press by Professor David Skeel (University of Pennsylvania), Icarus in the Boardroom: Saving American Business From Corporate Corruption. The panel members include Kurt Eichenwald of the New York Times and author of Conspiracy of Fools, and Bethany McLean of Fortune and author of The Smartest Guys in the Room: The Amazing Rise and Scandalous Fall of Enron. A copy of the panel announcement is below, and for those interested in attending, if you contact Rudy Faust at Oxford University Press by e-mail (firstname.lastname@example.org) by 2:00 p.m. Wednesday, June 8 (and mention our little blog), he will be able to provide you with complimentary tickets. (ph)
Proving a White Collar Crime
The Baltimore Sun has an interesting article (here) about the difficulties in proving a white collar crime case, including the current prosecutions of former CEOs Richard Scrushy and Dennis Kozlowski. Blog co-editor Ellen Podgor points out the core problem with these cases, that the evidence of criminality is difficult to come by as compared to a more common street crime: "It's not like a homicide case where you have fingerprints or you have people who can testify: 'I saw him with a gun.'" (ph)
Quest Diagnostics Receives Subpoena in DOJ Investigation
Quest Diagnostics Inc., which provides health care testing and laboratory services, disclosed that it received a subpoena from the U.S. Attorney's Office in New Jersey as part of an investigation into possible overbilling. Quest's Form 8-K (here) may set a record for pithiness in its disclosure, consisting of a single paragraph filled with boilerplate statements: "Quest Diagnostics Incorporated received a subpoena from the U.S.Attorney's office for the District of New Jersey. The subpoena seeks the production of business and financial records regarding capitation and risk sharing arrangements with government and private payers for the years 1993 through 1999. Quest Diagnostics is cooperating with the government's investigation." (ph)
Former Speaker of Mass. House of Representatives Charged with Perjury and Obstruction of Justice
Former Speaker of the Massachusetts House of Representatives Thomas Finneran was charged with perjury and obstruction of justice related to his testimony in a federal voting rights case in which racial gerrymandering was alleged by the plaintiffs. According to the press release issued by the U.S. Attorney's Office (here):
The Indictment alleges that FINNERAN committed perjury and obstruction of justice during a sworn deposition on March 28, 2003, and during his sworn trial testimony on November 14, 2003. FINNERAN was a witness in a federal Voting Rights Act case brought by the Black Political Task Force and other minority plaintiffs from the City of Boston against the Commonwealth of Massachusetts. That lawsuit alleged that the 2001 state statute which drew new legislative district boundaries discriminated against black and minority voters in Boston and deprived them of an equal opportunity to vote. In particular, the lawsuit alleged that FINNERAN and other legislators engaged in "racial gerrymandering" to protect incumbent legislators. FINNERAN's own legislative district, the 12th Suffolk District, was at the heart of the lawsuit, and he was questioned at the deposition and at trial about his personal involvement in the development of the redistricting legislation.
The investigation was triggered by the findings of a three-judge panel reviewing a challenge to the redistricting plan under the Voting Rights Act. In Black Political Task Force v. Galvin, 300 F.Supp.2d 294 (D.Mass. 2004) (here), the panel opinion stated in a footnote: "Although Speaker Finneran denied any involvement in the redistricting process, the circumstantial evidence strongly suggests the opposite conclusion. For one thing, he handpicked the members of the Committee and placed Petrolati at the helm. For another thing, he ensured that the Committee hired his boyhood friend and long-time political collaborator, Lawrence DiCara, as its principal functionary. Last--but far from least--Finneran's in-house counsel, John Stefanini, had the Maptitude software installed on his computer in the Speaker's office suite and was one of only four legislative staffers who received training in how to use the software." The perjury charges against Finneran involve testimony at trial and in depositions, and the obstruction charges is based on providing "misleading and false statements on a range of issues from his knowledge of a redistricting plan before it was publicly released, to his knowledge of the racial and ethnic makeup of neighborhoods he gained and lost in the redistricting process." (ph)
Former Inso Corp. General Counsel Convicted of Perjury
Former Inso Corp. General Counsel Bruce Hill was convicted of one count of perjury in Boston related to his testimony before the SEC in an investigation of a sham transaction with a Malaysian purchaser of software. A press release issued by the U.S. Attorney's Office (here) states that Hill "played a pivotal role in arranging a series of deals that were designed to create the appearance that the Malaysian software distributor had paid Inso $3 million for software products that Inso had reported as sold during the third quarter of 1998. In sworn testimony before the SEC, Hill disavowed any knowledge about the preparation of a fraudulent certificate which purported to reflect approval by Inso's Board of Directors of the issuance of approximately $4 million in letters of credit that were used to create the appearance that Inso received $3 million in payment for the reported third quarter sale. At trial, the United States presented evidence that Hill had personally directed the preparation of the fraudulent certificate and approved its signing. Share prices for Inso's stock tumbled in February 1999, when the company publicly announced that it would need to restate its revenues from the first three quarters of 1998. The company is no longer publicly traded." The jury could not reach a verdict on five other counts, including securities fraud, wire fraud, making false statements to accountants, and a second perjury count.
June 6, 2005
Govt. Gets Cooperator in AIG-General Re Investigation
According to the Wall Street Jrl here, a General Re executive who lives in Ireland and worked there has agreed to plead guilty to a conspiracy count and provide the government with cooperation in their investigation. A key issue here may be how much information this cooperating witness will be able to provide to the government.
The cooperation here had two benefits to the Government. First it may provide them with information to move the investigation a step forward. Second, if they had planned to proceed against this individual, they can now do so without having to go through an extradition process.
(esp) (with thanks to Joe Hodnicki for also noticing this newsbreak)
UPDATE (6/6): The SEC filed a complaint against John Houldsworth that outlines the government's allegations and identifies the involvement of both former AIG CEO Maurice Greenberg and former General Re CEO Ronald Ferguson, both of whom asserted their Fifth Amendment privilege and refused to testify before the SEC. The complaint (here) summarizes the case in this way:
This case is not about the violation of technical accounting rules. It involves the deliberate or extremely reckless efforts by senior corporate officers of a facilitator company (Gen Re) to aid and abet senior management of an issuer (AIG) in structuring transactions, having no economic substance, that were designed solely for the unlawful purpose of achieving a specific, and false, accounting effect on the issuer’s financial statements. The only economic benefit to either party of the transactions at issue was a $5.2 million fee – agreed to in an undisclosed side agreement – to be paid by AIG to Gen Re for putting this deal together. The "premiums" purportedly due AIG under the terms of the bogus transaction documents were merely window dressing and were in fact pre-funded by AIG to Gen Re in another undisclosed side agreement. Gen Re and AIG also created a phony paper trail to make it appear as though Gen Re had solicited reinsurance from AIG when, in fact, AIG had solicited the deal to manipulate its financial statements. The complaint does not identify Greenberg and Ferguson by name, but does describe their involvement in this way: "AIG’s then Chairman (the "AIG Chairman") called Gen Re’s then CEO (the "Gen Re CEO") to solicit help in structuring a transaction between AIG and Gen Re that would transfer $200 million to $500 million of 'loss reserves' to AIG by year end through a reinsurance arrangement between AIG and Gen Re." The AIG side of the transaction clearly is based on information provided by AIG's former president of its reinsurance unit, Joseph Umansky, who testified before a New York state grand jury under an immunity grant (see earlier post here). The Houldsworth guilty plea brings the government one step closer to bringing a case against Greenberg and Ferguson, the top officials at the two companies involved in the transaction. (ph)
This case is not about the violation of technical accounting rules. It involves the deliberate or extremely reckless efforts by senior corporate officers of a facilitator company (Gen Re) to aid and abet senior management of an issuer (AIG) in structuring transactions, having no economic substance, that were designed solely for the unlawful purpose of achieving a specific, and false, accounting effect on the issuer’s financial statements. The only economic benefit to either party of the transactions at issue was a $5.2 million fee – agreed to in an undisclosed side agreement – to be paid by AIG to Gen Re for putting this deal together. The "premiums" purportedly due AIG under the terms of the bogus transaction documents were merely window dressing and were in fact pre-funded by AIG to Gen Re in another undisclosed side agreement. Gen Re and AIG also created a phony paper trail to make it appear as though Gen Re had solicited reinsurance from AIG when, in fact, AIG had solicited the deal to manipulate its financial statements.
The complaint does not identify Greenberg and Ferguson by name, but does describe their involvement in this way: "AIG’s then Chairman (the "AIG Chairman") called Gen Re’s then CEO (the "Gen Re CEO") to solicit help in structuring a transaction between AIG and Gen Re that would transfer $200 million to $500 million of 'loss reserves' to AIG by year end through a reinsurance arrangement between AIG and Gen Re." The AIG side of the transaction clearly is based on information provided by AIG's former president of its reinsurance unit, Joseph Umansky, who testified before a New York state grand jury under an immunity grant (see earlier post here). The Houldsworth guilty plea brings the government one step closer to bringing a case against Greenberg and Ferguson, the top officials at the two companies involved in the transaction. (ph)
Lea Fastow Goes to Halfway House
Lea Fastow, wife of former Enron finance exec Andrew Fastow, was released from prison early this a.m. and moved to a halfway house for the remaining one month of her sentence. For details see AP story here.
According to the AP story she was released at 4:00 A.M. and had to report at 4:15 A.M. to a halfway house several blocks away in Houston. One has to wonder whether this timing was at the request of her counsel to avoid publicity, or was standard procedure. If it was standard procedure then it needs to be examined, especially for women who might not have family or friends to meet them upon release. Check out Myrna Raeder's wonderful article in the Spring 2005 issue of Criminal Justice Magazine titled, "A Primer on Gender Related Issues of Women Offenders" for a discussion on some of the issues faced by women offenders.
Washington Legal Foundation Program on Andersen
WLF June 9 media briefing focuses on fallout from Andersen ruling.
The Washington Legal Foundation (WLF) will be holding a panel discussion on Thursday, June 9 from 9:00-10:00 a.m. on the Andersen decision. Our panel of experts, moderated by former Attorney General Dick Thorburgh, will analyze the Court’s reasoning and assess the ruling’s broader implications for prosecutors, white collar criminal defense lawyers, and in-house counsels.
In addition to General Thornburgh, WLF’s panel features: Association of Corporate Counsel Vice President for Law and Technology (and former General Counsel) Ronald Peppe; Arnold & Porter LLP partner (and National Association of Criminal Defense Lawyers counsel in Andersen) Robert Weiner; and King & Spalding LLP partner Gary Grindler. To attend the live session at 2009 Massachusetts Avenue, please RSVP to 202-588-0302. It is also available for viewing live, and after the event as an archived document. Access the webcast at www.wlf.org.
Quattrone Reply Brief Says It All
"The government’s brief is an effort to weave a rope of sand, and to imbue a trial with evidentiary substance and procedural fairness when it was sorely lacking in both. With regard to the evidence, the prosecutors dutifully characterize the defendant as plainly guilty, and describe their proof as "strong" or even "compelling." (G.Br. 24, 112.) This is standard rhetoric for those who write the red-covered briefs in criminal cases. But if this was a "strong" case, then there is no such thing as a weak one. Notwithstanding the government’s cavalier description, this case turned on a "threadbare phrase," United States v. Mulheren, 938 F.2d 364, 370 (2d Cir. 1991)—Quattrone’s one-line e-mail urging his colleagues to "follow [the] procedures" contained in a standard corporate document retention policy. As the Supreme Court reminded the government only recently, "[i]t is, of course, not wrongful for a manager to instruct his employees to comply with a valid document policy under ordinary circumstances." Arthur Andersen LLP v. United States, No. 04-368, 2005 WL 1262915, *5 (U.S. May 31, 2005)."
This will be a tough one for the government....do I dare say again....that's what happens when you take shortcuts (obstruction charges as opposed to investigating fully the underlying substantive conduct).
(esp) (with thanks to Atty. Mark F. Pomerantz for providing the blog with this brief)
Alberto Vilar Spends More Time in Jail While His Amerindo Investment Advisers Teeters on the Brink
Arts patron and investment adviser Alberto Vilar (nee Albert Vilar, originally from West Orange, NJ) spent his second weekend in jail after not being able to meet a reduced $4 million in bail for release on securities fraud charges. Vilar was arrested on Thursday, May 26, at the Newark airport on a warrant for allegedly stealing $5 million from a client of Amerindo Investment Advisers Inc., the investment advisory firm which he founded. The government claims that Vilar and Amerindo's co-founder, Gary Tanaka, took the money for personal use, and that Vilar used a portion of it to make good on charitable pledges and to pay for the repair of the dishwasher in his New York apartment. Although a few family friends put up assets to help Vilar make bail, he fell about $1 million short of the amount needed, although his attorney is hopeful he will make bail this week. None of his high-society arts friends have volunteered to help him. See the Reuters story here.
In addition to criminal charges, the SEC filed a securities fraud suit against Vilar and Tanaka, and the Litigation Release (here) states:
[I]n approximately June 2002, Vilar solicited an Amerindo client and close personal friend to invest $5 million in a limited partnership, the Amerindo Venture Fund LP, that was purportedly being organized to qualify and be operated as a Small Business Investment Company (“SBIC”). Shortly after the investor wired $5 million to a brokerage account as Amerindo had instructed, Tanaka began to transfer a portion of her funds to other accounts Vilar and Amerindo controlled. Specifically, within several days of her investment, Tanaka signed letters of authorization directing the transfer of at least $1.65 million to other accounts, including $1 million to a personal checking account held in Vilar’s name, and $650,000 to a bank account Amerindo controlled. Vilar then used the funds he received from the investor to pay personal expenses, including transferring $540,000 to Washington and Jefferson College, his alma mater to which he had pledged large sums, and $177,000 to the American Academy in Berlin, an institution to which Vilar had donated money in the past.
At the SEC's request, the U.S. District Court also appointed a monitor for Amerindo's accounts, and institutional and individual investors are likely to seek to withdraw their money as soon as possible. Morningstar, the mutual fund rating firm, urged investors to sell their shares in the Amerindo Technology Fund (see MarketWatch story here), which will worsen the run on the firm's investments. I think it is unlikely that Amerindo will survive, and an orderly liquidation probably is the best many investors can hope for in this type of situation, although any time there is a fire sale of investments -- particularly those in the small tech companies in which Amerindo specialized -- the losses can be substantial. (ph)
Bristol-Myers Reportedly Will Settle Accounting Investigation with DOJ
The Wall Street Journal reports (here) that Bristol-Myers Squibb will settle a long-running criminal investigation of its accounting related to channel stuffing by paying $300 million and entering into a deferred prosecution agreement with the Department of Justice. On May 10, the company issued a press release stating that it had increased its litigation reserve by $110 million (see earlier post here), so if this settlement is reached it will probably require additional reserves The settlement of the criminal case comes on top of a settlement with the SEC in August 2004 for accounting violations that included a $100 million civil penalty and a $50 shareholder fund for channel stuffing. That's a lot of money to pay for helping to make quarterly sales look a bit better. (ph)
June 5, 2005
What Happens to Quattrone After Andersen?
The reversal by the Supreme Court of the conviction against Arthur Andersen should have those with recent section 1512 convictions checking the jury instructions to see if they match the instructions given in the Andersen case. (see more here and here) Not surprisingly, Frank Quattrone appears to be the first in line. (Bloomberg News reports here)
If the instruction in Quattrone's case, with regard to the section 1512 count, matches the Andersen instruction, relief would seem to be warranted as the matter is pending on appeal and the issue is being raised now. Frank Quattrone's indictment here also has two other counts, one for a section 1503 violation and one for a 1505 violation (both obstruction of justice statutes). These may not be affected by this decision, as the Court in Andersen stated in footnote nine of the decision that:
"The parties have pointed us to two other obstruction provisions, 18 U.S.C. ss 1503 and 1505, which contain the word 'corruptly.' But these provisions lack the modifier 'knowingly' making any analogy inexact."
Does Quattrone get a new trial based upon this one count perhaps being improper? Not to pre-judge the judicial ruling here, it raises some interesting questions. Clearly that particular count is in jeopardy. And the question may be whether this tainted the rest of the trial? Was there a spillover effect that caused evidence to be admitted that would not have been admitted, but for this count?
The Court in Andersen did not use a harmless error analysis which also strengthens the position taken in the Quattrone case. But I will leave it for the judiciary to make this decision -- but you can bet we will probably comment on whatever that decision turns out to be.
With everyone reexamining obstruction cases premised on 1512, the government should be asking whether it is worth it to take a shortcut (charge obstruction) as opposed to investigating a case fully before indicting.
New Article by Geraldine Moohr
On SSRN you will find a new white collar crime article authored by Professor Geraldine Moohr of Houston. The article in volume 7 of the Buffalo Criminal Law Review, is titled: "Prosecutorial Power in an Adversial System: Lessons from Current White Collar Cases." In part the abstract states:
"A comparison of the roles of American federal prosecutors and their European counterparts in investigating, charging, and sentencing corroborates the judgment that our present system has a decidedly inquisitorial cast. The power of inquisitorial prosecutors is constrained by inherent safeguards that impose formal and informal limitations on their discretion. In contrast, federal prosecutors exercise greater power in the investigation and charging phases and exercise even more authority in sentencing and plea bargaining. The combination belies adversarial values.
"Retreat from the adversarial trial can undermine the goal of deterring business misconduct in several ways. Inconsistent sentences that result from plea bargains can forfeit the moral authority of criminal law in the business community, the very group one wishes to deter. In contrast, public trials provide a rationale for sentences and educate the business community about the illegality of specific conduct, a requirement for optimal deterrence that is especially relevant in white collar crimes. Public trials also strengthen shared social norms of the business community against fraudulent practices. In sum, disposing of criminal cases through quasi-inquisitorial investigation and plea bargaining forfeits an opportunity to reinforce the standards of lawful business conduct and thereby strengthen deterrence."