Saturday, June 25, 2005

Whither KPMG?

Joseph Nocera has an interesting column in the New York Times (here) asking whether KPMG will be spared an indictment because the destruction of the firm that a criminal conviction would likely cause would have too great an effect on the public accounting industry.  In a twist on the old "too big to fail" theory about whether the government would allow a large bank to fail because of the negative impact on the economy, Nocera asks whether there are too few large accounting firms that can provide the services necessary for publicly-traded companies to allow one to fail.  The answer in the banking sector in the early 1990s was that some very large banks failed, such as Bank of New England and First City Bancorp, although the government bailout of Continental Illinois in 1984 certainly gave the appearance of a "too big to fail" decision.  Nocera describes KPMG's conduct in peddling tax shelters as "truly reprehensible," but the recent reforms under the Sarbanes-Oxley Act rely on the accounting firms to provide a backstop to ensure companies have adequate internal controls to report their financials properly.  Since cutting loose from the tax shelters, and recently hanging a few former partners out to dry by trying to shift blame to them, KPMG has taken a definite turn toward the conservative side in an effort to show it does not deserve the fate of Arthur Andersen.  The recent stories about a possible criminal indictment have probably only made the firm more hesitant in dealing with its clients.  I wonder whether a gun-shy accounting firm among the Big 4 is what the government really wants. (ph)

June 25, 2005 in Investigations, Tax | Permalink | TrackBack (0)

Lawyer Accused of Taking Kickbacks from Plaintiffs Class Action Counsel

The U.S. Attorney's Office for the Central District of California announced the indictment of Seymour Lazar, a 78 year-old lawyer in Palm Springs, for allegedly taking approximately $2.4 million in secret kickbacks from lawyers for plaintiffs in class actions in exchange for serving and causing his family members to serve as named plaintiffs in more than fifty class action and shareholder derivative action law suits over the last twenty years.  According to a press release (here):

[T]o conceal the illegal kickback scheme from the courts presiding over such lawsuits, the other parties to such lawsuits, and the absent class members and shareholders whose interests Lazar and his family members purported to represent, Lazar made false and misleading statements in under-oath depositions and in documents Lazar signed under penalty of perjury. The indictment further alleges that the illegal kickbacks were secretly paid to Lazar through various intermediary law firms and lawyers selected by Lazar, who used and applied the kickback payments at Lazar's direction and for his benefit. 

Also indicted was Paul Selzer, a lawyer who is accused of being an intermediary for Lazar by funneling payments to him.

A quick check of Westlaw shows that Lazar was one of the named plaintiffs in Churchill Village v. General Electric, 361 F.3d 566 (9th Cir. 2004), a class action by dishwasher owners against manufacturers, In re MCA Shareholder Litigation, 785 A.2d 625 (Del. 2001), a shareholder derivative suit in the Delaware courts alleging a breach of fiduciary duty by the board related to a merger agreement, and Bell Atlantic Corp. v. Bolger, 2 F.3d 1304 (3rd Cir. 1993), another shareholder derivative suit.  He was also a plaintiff in In re Concord Holding Securities Litigation, a securities fraud class action for which there is a settlement notice here.  It is not clear whether Lazar received any of the alleged payments in connection with these cases, but he is clearly one of the group of "usual suspects" who serves regularly as a named plaintiff in class actions. 

Interestingly, one of the issues in the Bell Atlantic case was an alleged conflict of interest for a law firm that represented the defendant corporation and individual defendant-directors and officers.  A named or representative plaintiff in class actions and derivative litigation has a fiduciary duty to the other members of the class, or other shareholders in derivative litigation, to ensure that the action is conducted fairly, and there is a strict prohibition on these plaintiffs from accepting anything other than what other class members receive, unless specifically approved by the court.  To receive payments from attorneys for the class while serving as representative would be a conflict that automatically eliminates the person from any involvement as the representative plaintiff, and as seen here can result in criminal charges.  One of the changes adopted in the Private Securities Litigation Reform Act in 1995 was to alter the method of selecting the representative plaintiff in federal securities fraud actions, requiring that the court choose as the lead plaintiff a party -- often now an institutional investor -- with a large stake the company.  This provision was designed to eliminate some of the more unseemly aspects of the "race to the courthouse" among the plaintiff class action firms who kept a roster of potential representative plaintiffs on file.  Lazar is charged with taking the process of serving as a representative plaintiff a step further by accepting payments from the attorneys to serve as the named plaintiff, or obtaining a compliant family member, most likely to allow the lawyers to pursue the class action or derivative suit without any interference (or oversight) while getting a cut of the attorney's fees. (ph)

June 25, 2005 in Fraud, Prosecutions | Permalink | TrackBack (0)

Ambulance Chasing 101

Gene Burd is (or now more likely was) a lawyer who had a personal injury practice in Houston that specialized in cases involving auto accident victims -- do you see where this is going?  A press release issued by the U.S. Attorney's Office for the Southern District of Texas (here) provides the following sordid tale of a PI lawyer who matched the caricature of the classic ambulance chaser:

[Burd] pays runners to solicit accident victims and bring the potential clients to his office. He contracts with his clients to make a claim against the other driver's insurance company on their behalf and he agrees to accept 33 percent of the settlement as his fee. Burd's office then refers the client to particular chiropractic clinics for therapy. Some clinic patients are referred to Burd's law office by the clinics.

After the therapy at the clinics is completed, Burd or his office will send a demand to the insurance company. After some negotiation, Burd settles the case and a check is mailed to him from the insurance company. When the case is settled, Burd takes the insurance company's settlement check and deposits it into his attorney-client trust account. He withdraws the money by writing three checks. One check goes to the chiropractic clinic to pay for the treatment. The second check goes to the client. The third check goes to Burd as his legal fee and is deposited into his operating account.

When the chiropractic clinic receives their check from Burd they often deposit that check into a third party account instead of into their clinic's operating account. After the check is cashed in a case in which the patient was referred to the clinic by Burd, the clinic owner meets privately with Burd and returns 40-50 percent of the check to Burd in the form of a cash kickback. Burd keeps the cash and does not deposit it into his operating account. This income received by Burd is never reported on his federal income tax return. The income reported by Burd on his income tax return is only that money that he received from the trust account by check and the salary checks received by Burd from his law firm. The cash kickbacks are not reported.

Burd and the chiropractor each entered a guilty plea to making a false statement on their tax returns related to the income from this little scheme, which netted Burd approximately $686,000 in 1996 and 1997, the years at issue for the tax charge.  One wonders why a mail or wire fraud charge was not filed in the case.  (ph)

June 25, 2005 in Fraud, Prosecutions, Tax | Permalink | TrackBack (1)

Former IRS CID Agent Acquitted on Tax Charges

Former IRS Criminal Investigation Division Agent Joseph Banister was found not guilty of assisting taxpayers in filing false tax returns.  Banister is well-known in the tax protester movement for his statements that the tax laws are unenforceable.  The charges relate to so-called "protest returns" filed by Banister's clients, which dispute whether any tax is owed.  Banister himself was not charged with failure to file taxes, and the government failed to prove that his conduct knowingly assisted his clients in filing false tax returns.  Although Banister was acquitted, one of his clients, Walter Thompson, was convicted of tax violations in an earlier trial and is serving a six-year term of imprisonment.  With the tax protester movement, acquittals or convictions are not always the benchmark. A New York Times story (here) discusses the Banister case. (ph)


UPDATE (6/25): Check Paul Caron's post on the Tax Prof blog (here) for additional information and links to information on Banister's place in the tax protester movement. (ph)

June 25, 2005 in Tax, Verdict | Permalink | TrackBack (0)

Friday, June 24, 2005

Fraud Statutes

The fraud statutes, particularly the mail and wire fraud statutes, have an elasticity that allows them to be used irrespective of the specific form of fraud.  It is, therefore, always interesting to see how different parts of the country use the statutes.  In a post of the US Attorney's Office of the Southern District of Florida here we see an individual being "charged by Information in federal court in West Palm Beach, Florida with one (1) count of wire fraud."  The alleged activity involved is what I would call - the type of fraud one might find in Florida, as opposed to a state in a colder climate (at least most of it).  The alleged fraud is described in the press release as:

"defrauded certain investors by telling them that the money they invested with her would be used to purchase the contents of estate sales, which contents could be quickly resold for a substantial profit. In fact, however, [this individual] did not use the investors’ money to purchase estate sales items. Instead, [she] used money that had been paid to her by the investors for her own personal use and to operate her own company, the [company] which was in the business of promoting women’s surfing, skateboarding and snowboarding competitions."

Well the estate sale, and the surfing at least sounds like Florida.


June 24, 2005 in Fraud | Permalink | TrackBack (0)

White Collar Strategy

It is common knowledge that many prosecutors and investigators use a strategy of working up the ladder in pursuing criminal conduct.  Start with low level figures and work up to the bigger player.  Thus, in Scrushy's trial we saw a parade of managers testifying against the top man in the company. The success for the government in this particular case remains to be seen.

But sometimes a prosecutor will go after the lower level individual.  The NYTimes has an article here titled, For Some, Just Following Orders is a Good Defense, that presents some interesting commentary on white collar strategy through an examination of the NY AG's unsuccessful prosecution of Sihpol.

The bottom line, though, is that each investigation and prosecution can have its own idiosyncrasies and a cookie cutter recipe may not apply to all cases.


June 24, 2005 in Prosecutions | Permalink | TrackBack (0)

Thursday, June 23, 2005

The Kozlowski Letter

It is hard to imagine that Dennis Kozlowski would have thought that the letter he wrote against someone facing sentencing, would one day be used to evaluate his sentence.  The letter, according to CNN  here, was written 10 years ago and  recommended that a former assistant controller at Tyco, who was being sentenced at that time, receive the maximum. In the letter, Kozlowski said that "stealing from a company is 'a particularly egregious crime.'"

There is no doubt that this is a pretty damaging statement for Kozlowski, who now faces sentencing for crimes that might be characterized as "stealing from a company."  Two things come to mind here:

1. Did the jury see this letter, and would the letter have demonstrated a lack of intent to commit the crimes which Kozlowski was charged with?

2.  What is the individual who had this letter to contend with at his sentencing (CNN says he was "sentenced to 20 years in prison but was released four year later in 1999") thinking right now?


June 23, 2005 in Sentencing | Permalink | TrackBack (0)

Things Are Hot in Dallas Right Now

The Dallas Morning News here reports on how an FBI investigation into possible corruption at city hall is affecting the city council.   This is understandable as investigations into city or state corruption can be very disruptive.  For one, investigations of this nature usually include search warrants and/or requests for documents.  Individual employees may need to refocus their everyday duties into securing material for the federal investigation.  It also brings into play certain fears when individuals are uncertain who may be talking with agents and who may be wearing a wire and taping a conversation. And perhaps the biggest concern among people who may have worked side-by-side for years is -- who will be indicted and who will go to jail.

"Business as usual" may come to a halt.  But of course a key question is - what was that "business as usual" and was it legal?

From a federal-state perspective, one always has to question whether there was a need for the federal government to intervene in state activity.  This often happens because the state is unable or unwilling to prosecute the local activity, sometimes for political reasons and sometimes because they do not have the expertise or funding to pursue the alleged criminality. But it is also necessary to examine if it is appropriate for a federal agency to monitor the particular conduct that might be in question, and whether a federal violation has in fact occurred in order that the appropriate balance between federal and state governments be maintained.  Courts can serve as a good check here.

But whether it is a corporation or a political body, it is certain that when the feds come in, it is disruptive to "business as usual."


June 23, 2005 in Corruption | Permalink | TrackBack (0)

Did He Not Hear the Sentences in White Collar Cases?

Doug Berman's Sentencing Blog has some wonderful posts here, here, and here on AG Gonzales' recent "prepared remarks" on the need to reactivate mandatory guidelines with  a "minimum guideline" system.  (see here).  The one ( see addedum below) A reference to white collar cases is found in the AG's statement that:

"In a case involving white collar crime, a Kansas rancher got 1.8 million dollars in cattle loans, falsely claiming that he was using the money to buy live cattle. He even took bank officials to livestock pens and claimed that the cows he was showing them were purchased with loan proceeds, when, in fact he lost all the money speculating on the cattle futures market. He pled guilty to defrauding the bank and faced a sentencing range of 37 to 46 months under the guidelines. But the judge gave him probation only, reasoning, in part, that the defendant had suffered enough when the bank foreclosed on his house. "

Like Professor Berman, I am troubled by the AG's desire to place restrictions of this nature on the judiciary. But what is perhaps most fascinating is having the AG being upset with a white collar case, a case in which a court was thoughtful enough to consider the collateral consequences that often occur in white collar cases, on the very day following a court handing down 15 and 20 year sentences in a white collar case, one sentence of which went to an 80 year old man. (Rigas' sentences here). 

And oddly enough these "prepared remarks" of the AG come on the very same day that sentences of two HealthSouth execs were vacated, on the government's appeal, because a rationale for the reduced sentences was not provided. (see here).

It seems obvious here that we have a DOJ leader that is not happy that he does not have control over all the cards in the deck. He states in these "Prepared Remarks" that:

"Under the sentencing guidelines, defendants were only eligible to receive reductions in sentences in exchange for cooperation when the government petitioned the court. Under the advisory guidelines system, judges are free to reduce sentences when they believe the defendant has sufficiently cooperated."(emphasis added).

What does this mean?  It means the AG is now forced to share some of the exclusive power his office held in sentencing, with members of the judiciary. DOJ when they don't like a sentence are now placed in the same position as defendants have always been in, appealing that decision to a higher court.  And in some cases they will be successful on appeal as indicated in the HealthSouth exec case, and in other instances they may fail. 

Giving all the  POWER to one branch, however, and specifically one office here (DOJ),  is not the answer.  The answer is for there to be a proper balance of power between all three branches.  It is important for Congress to remember the words of James Madison of Feb. 1, 1788:

"The accumulation of all powers, legislative, executive, and judiciary, in the same hands, whether of one, a few, or many, and whether hereditary, self appointed, or elective, may justly be pronounced the very definition of tyranny. Were the federal Constitution, therefore, really chargeable with the accumulation of power, or with a mixture of powers, having a dangerous tendency to such an accumulation, no further arguments would be necessary to inspire a universal reprobation of the system. "


Addendum - Doug Berman appropriately points out that the AG also mentions a white collar tax case where the defendant's sentence was modified post Booker due to "the defendant's age and the need to take care of his wife – not normally relevant sentencing factors pre-Booker – now justif[ying] a lesser sentence."   Again my response is - if you don't like it appeal -- just like defense attorneys have to do all the time.  Just maybe, factors like age and family responsibilities are important to society and punishment theory. After all, are we punishing the individual or his or her family?

June 23, 2005 in Sentencing | Permalink | TrackBack (0)

What Happens Next in the Scrushy Trial

Now that the jury, in the trial of Richard Scrushy, has to resume deliberations "anew" because of the replacement of a juror with an alternate - - what happens next?   The NY Times here, Wall Street Jrl here, and Birmingham, Alabama News here, all talk of the long process that has accompanied the deliberations. The NYTimes even includes a detailed hourly summary of the deliberation process (see here) But the effect of a new process and new individual as a part of the process is truly an unknown.

If the jury was 11-1 for a verdict and the one holdout for a particular view was the dismissed juror, then we may see some quick action.  But if the votes are split further than that, this replacement may not be as consequential to a speedy resolution as some might want. (unless the juror is a master at negotiation or advocacy and can convince the others to come around to a position). Because of the secrecy of the jury process, we really will not know the full extent of what has occurred in this deliberation, until perhaps it is over.  And it is possible that we may never know.

Some may not agree with the slow process of this trial and the failure to have fuller days of deliberation, but the judge's response to this criticism is important. The judge recognizes the sacrifices being made by jurors. (see here) and in doing so she is considering not merely the accused, but also the costs to everyone when the government proceeds to  trial.  I guess slow justice isn't super, but I'm still bothered by the lightening speed of the "other southern jury" that worked through Memorial Day and Weekend (see here).


June 23, 2005 in HealthSouth | Permalink | TrackBack (0)

Wednesday, June 22, 2005

Back to Square One with the Scrushy Jury

U.S. District Judge Karon Bowdre sent the jury in the prosecution of Richard Scrushy back to the beginning by replacing a juror, whose recent health problems had caused the jury to miss three days of deliberations, with one of the alternates alternate.  Federal Rule of Criminal Procedure 24(c)(3) (here) provides in part that "[i]f an alternate replaces a juror after deliberations have begun, the court must instruct the jury to begin its deliberations anew."  The judge kept alternate jurors available, which is permitted under the same Rule although not required, in case of this very situation in which a juror would need to be replaced, .  I suspect that while the deliberations have been painful for the jurors, the wait for the alternates must be excruciating because Rule 24(c)(3) also states that "[t]he court must ensure that a retained alternate does not discuss the case with anyone until that alternate replaces a juror or is discharged."  Is being an alternate on this jury cruel and unusual punishment?  An AP story (here) discusses the judge's ruling replacing the juror. (ph)

June 22, 2005 in HealthSouth | Permalink | TrackBack (0)

The Parmalat Case

A working paper on the Parmalat case was recently added to SSRN here. It is titled Financial Scandals and the Role of Private Enforcement: The Parmalat Case.  Authors Guido Alessandro Ferrarini and Paulo Giudici authored this piece that is described in the abstract as follows:

"Coming shortly after the Enron and WordCom scams, the Parmalat scandal offers a good opportunity to compare failures on both sides of the Atlantic. In this paper, we start by tracing Parmalat's history and describe the frauds and the criminal proceedings and civil actions that followed the company's collapse both in Italy and the US. We then focus on Parmalat's governance and gatekeepers, and argue that gatekeepers are substantially undeterred in Italy because of poor enforcement rather than legislative black holes. In fact, law on books, in particular the civil law concerning auditors, is even more severe than common law. We subsequently analyse the causes of under-enforcement and the reasons why Parmalat generated litigation in the US rather than Italy. Drawing from economic analysis, we explain the role of private enforcement and consider the benefits of class actions. In this respect, we emphasize the importance of discovery and pleading rules. We also find that the interplay between public and private enforcement is missing in Italy and argue, by way of conclusion, that US securities regulation was transplanted into Continental Europe without sufficient modernisation as to civil procedure in the area of mass claims and complex litigation."


June 22, 2005 in Scholarship | Permalink | TrackBack (0)

Ohio State Professor Convicted of Insider Trading

Dr. Roger D. Blackwell, a professor of marketing at Ohio State University, was convicted of 14 counts of insider trading, conspiracy, and obstructing an SEC investigation into trading in the securities of Worthington Foods through the use of information he gained while a member of the company's board of directors.  Two other defendants convicted were an employee of his consulting firm, Roger Blackwell Associates, Inc., and her husband.  A Blackwell Associates website (here) describes Dr. Blackwell:

Roger Blackwell was named "Outstanding Marketing Educator in America" by Sales and Marketing Executives International and "Marketer of the Year" by the American Marketing Association. He also received the "Alumni Distinguished Teaching Award", the highest award given by The Ohio State University. After 30 years at the university and recently receiving two additional teaching awards, his depth of knowledge and enthusiasm for teaching still make him a favorite among students.

A press release issued by the U.S. Attorney's Office for the Southern District of Ohio (here) states that the judge ordered Blackwell to post a $1 million cash bond within 24 hours to remain free until sentencing.  An SEC civil insider trading suit against Blackwell and others (complaint here) filed in January 2003 alleges that the defendants made $245,000 from trading in Worthington Foods based on a proposed acquisition of the company. 

A check of the Ohio State University marketing department website (here) notes that Dr. Blackwell received "the 16th Annual Mortar Board and Sphinx Faculty and Staff Recognition event held Mar. 8, 2005. Students who are senior honorees nominate university personnel who made a difference in their lives on campus. Douglas Hange, stated that Dr. Blackwell's '. . .ability to give real-world examples relating to business and marketing help to make class concepts come to life.'" An insider trading conviction certainly is a real-world example.

Dale Oesterle on the Business Law Prof blog, who is also on the Ohio State University faculty (in the law school, not the business school), has an interesting post (here) on Blackwell's role on the campus. (ph)

June 22, 2005 in Fraud, Insider Trading, Prosecutions | Permalink | TrackBack (0)

The Mess at MassMutual Will Get Messier

MassMutual fired CEO Robert O'Connell on June 2 after an investigation triggered by a complaint by his wife about an affair he was allegedly having with another executive that came to the attention of the board of directors.  The investigation turned up evidence that O'Connell engaged in unauthorized trading in a supplemental compensation account, bought a condominium in Florida at a development financed by MassMutual at a below-market price, and misled the California Insurance Department about the transaction.  In response to the termination, the Massachusetts Attorney General and Secretary of State William Galvin initiated investigations, and MassMutual filed a copy of the termination letter given to O'Connell with a state court as part of a filing resisting a subpoena issued by Galvin's office.  The letter details what the board concluded was "a systematic and pervasive pattern of willful abuse of authority" that included causing the company to make large severance payments to employees for what the letter called "personally motivated and retaliatory terminations." 

In addition to his executive position, O'Connell was also a member of MassMutual's board of directors, and there is meeting of the board on June 22 to determine whether to remove him for cause.  O'Connell plans to fight his removal, according to a Boston Globe article (here), which also discusses the termination letter.  In a publicly-traded company, the right to remove a director is usually reserved to the shareholders, but as a mutual insurance company, MassMutual's board holds the authority to remove directors.  This promises to be an ugly fight for both sides, and with ongoing civil and criminal investigations, the matter is unlikely to be resolved for some time. (ph)

June 22, 2005 in Investigations | Permalink | TrackBack (0)

University Dean Pleads Guilty to Wire Fraud

Timothy Van Susteren, a former associate dean at the University of Florida, entered a guilty plea to a wire fraud charge that he diverted $120,000 that was supposed to be paid to the University as support for medical education programs it conduct.  Van Susteren had the vendors send the checks to his home and then deposited them into his personal account -- no one said working for a university makes you good at committing a fraud.  Van Susteren resigned from the school in October 2004 after an internal audit turned up the discrepancy in the program.  An AP story (here) discusses the guilty plea.

June 22, 2005 in Fraud | Permalink | TrackBack (0)

Tuesday, June 21, 2005

Former HealthSouth Executives Sentences Vacated

Former HealthSouth CFO Michael Martin-- one of the Five Guilty CFOs who testified against former CEO Richard Scrushy -- and former senior vice president for tax Richard Botts had their sentences vacated and remanded for resentencing by the Eleventh Circuit in two unpublished opinions that employ the same language and reach identical conclusions (Martin here and Botts here).  Martin entered a guilty plea in June 2004 to one count of conspiracy to commit securities fraud and one count of filing false financial statements with the SEC, and under the Sentencing Guidelines his offense level was 31, which called for a sentence of 108-135 months.  The government filed a 5K1.1 motion and asked Chief U.S. District Judge U.W. Clemon to sentence Martin to a 60-month term of imprisonment.  Instead, the judge sentenced Martin to 60 months probation, with six months home confinement, by granting a 21-level downward departure.  Botts entered a guilty plea to conspiracy and mail fraud charges in August 2003, and although the offense level under the Guidelines was 34, which would result in a sentencing range of 151-188 months, the statutory maximum for the crimes (at that time) was five years, so his sentence was capped at 60 months.  The government made a 5K1.1 motion and asked for a 40-month term of imprisonment for Botts, but  Chief Judge Clemon sentenced Botts to 60 months probation, with six months home confinement, by granting a 26-level downward departure.   The government appealed both sentences, and the appellate court remanded them because the judge provided no written or oral statement supporting what the Eleventh Circuit termed "this extraordinary departure" in both cases, rendering the sentences "incapable of meaningful appellate review."

On remand, Chief Judge Clemon can give each the same sentence, and both have served the term of home confinement, a point played upon quite heavily by Scrushy's defense counsel in cross-examining each.  The judge will, however, have to give reasons for the departures that relate to permissible factors under the Guidelines, and the sentence will be subject to appellate review for reasonableness under Booker.  (ph)

June 21, 2005 in HealthSouth, Sentencing | Permalink | TrackBack (0)

Krispy Kreme Axes Six Officers in Accounting Investigation

The board of directors of Krispy Kreme Doughnuts Inc. announced that a special committee recommended the termination of six senior corporate officers as part of its continuing internal investigation of accounting problems that have delayed the company's release of financial statements since last year (see earlier post here). According to a company press release (here), the special committee recommended to the board on June 15 that the officers be terminated, although the company delayed until now making that disclosure, and there have not been any securities filings by Krispy Kreme since the June 13 disclosure that it was once again unable to file its quarterly financial statements.  According to the press release: "[T]he Special Committee had concluded that six of the Company's officers should be discharged. These six officers include four senior vice presidents and were in the areas of operations, finance, business development, and manufacturing and distribution. Five of these individuals have resigned, and one has retired. The Company intends, for the time being, to fill these positions with existing personnel."  None of the individuals have been identified by name yet.

Krispy Kreme is the subject of ongoing investigations by the U.S. Attorney's Office for the Southern District of New York and the SEC related to its accounting for certain franchisee payments, among other issues.  Things are only getting stickier for the company, and quite possibly for the terminated officers. (ph)

June 21, 2005 in Fraud, Investigations, Securities | Permalink | TrackBack (0)

GE Gets Picked for the Finite Insurance Subpoena Team

For those of us who were less-than-stellar athletes, it was always tough waiting to be picked for the playground game.  Maybe General Electric felt the same way -- although I doubt it -- when the U.S. Attorney's Office for the Southern District of New York began doling out subpoenas as part of its grand jury investigation into finite insurance agreements.  GE joined the team when it announced (press release here) that it had received a subpoena just like some other players (see earlier post here about St. Paul Travelers and Ace Ltd. disclosures last week).  The announcement contains an interesting sentence: "The subpoena is general in nature."  I'm not sure I've ever heard that description before, and I'm not sure what it means except, of course, to imply that GE is not a target or subject of the investigation, which is may not be at this point.  One complaint about grand jury (and SEC) subpoenas is that they are overly broad, seeking truckloads of documents.  Saying that one is "general in nature" does not shed much light on the situation, but it probably means that the government is seeking a broad range of documents without specifying particular transactions that would indicate possible criminal conduct.

With GE on the team, look for its recently spun-off insurance unit, now known as Genworth Financial, to be among the next players selected to disclose receiving a grand jury subpoena.  Like GE (and many other insurance companies), Genworth received an SEC subpoena on the same transactions (see company press release here). (ph)

June 21, 2005 in Fraud, Grand Jury, Investigations | Permalink | TrackBack (0)

Vilar Finally Released on Bail

Alberto Vilar, the co-founder of Amerindo Investment Advisers, was released on bail after spending a month in the Manhattan MCC since his arrest on May 26 at the Newark airport on fraud charges.  Vilar is well-known for his philanthropic gifts to support the arts, although a grand jury indictment on June 9 charges him with securities, mail and wire fraud, plus money laundering, related to taking funds from a customer account and using some of the money to make good on various charitable pledges.  Bail was set at $10 million, which Vilar was unable to make until June 20, when he put up assets valued at $4 million, including art works at his apartment, to obtain a bond permitting his release.  Amerindo continues to suffer withdrawals by its large institutional investors, and its mutual fund, Amerindo Technology Fund, has lost almost 40% of its assets and fund management has been moved to a new firm.  Vilar is likely to retain more experienced counsel to prepare his defense now that he has been released from jail.  A Wall Street Journal story (here) discusses the case. (ph)

June 21, 2005 in Fraud, Prosecutions | Permalink | TrackBack (0)

Private Lawyers for the Executive Branch

John Steele has an interesting post on the Legal Ethics Forum (here) about the Department of Justice's enlistment of private lawyers as the first line of investigation of corporate misconduct.  He writes about the new role for these lawyers: "But, quietly and almost unnoticed, some US lawyers have effectively adopted a fifth role: Officer of the Executive Branch.  The paradigm example arises when the DOJ uses the Thompson and Holder Memorandums to outsource their oversight and investigation functions to private law firms.  When a catastrophic corporate failure occurs, the DOJ advises the corporation that the DOJ might charge the company with a felony -- but, just maybe, the DOJ won't do that if the company hires top-notch white collar lawyers to do an immediate investigation, waives all privileges, and turns over the lawyers' notes and work product to the prosecutors."  I'm not sure about the unnoticed part, given the consistent complaints about the Thompson Memorandum (and its predecessor, the Holder Memorandum), but a change is certainly taking place in the investigation of corporate misconduct.  With the focus on the role of lawyers for the corporation, and the new internal whistleblowing rules imposed by the Sarbanes-Oxley Act, it is fair to ask whether we're witnessing a real revolution in the legal representation of corporations, and (perhaps more importantly) how prosecutors view the role of lawyers in representing their corporate clients or individual officers of organizations.  (ph)

June 21, 2005 in Legal Ethics | Permalink | TrackBack (0)