Tuesday, June 28, 2005
General Motors changed its policy in April when it stopped giving earnings guidance, no doubt because all the bad news of the past year meant its financial executives had to conduct conference calls while wearing flak jackets. When a company does not try to guide estimates of its quarterly and annual earnings, there is a greater likelihood that disclosure of financial information will move the market one way or the other (mostly down recently for GM, but that could change). In an apparent effort to avert any temptation for its executives to trade on financial information before its disclosure, the company issued a prohibition to all executives with access to sensitive financial information from all trading in GM stock, at least for the time being. It is unlikely the company will adopt a permanent ban on trading by its executives because stock awards are an important component of compensation at most publicly traded companies. GM may direct its executives toward a program of pre-planned sales through a written plan for securities transactions, which is permissible to avoid liability for insider trading under SEC Rule 10b-5-1(c) (here).
Given the gyrations in the company's stock, the threat posed by investor Kirk Kerkorian, who is now the largest individual shareholder in the company, and the need to renegotiate its retiree health care costs, the last thing GM needs to see is an allegation of insider trading by one of its executives. While the prohibition against insider trading is well-known, there is always a temptation to pick up a little "free money" that GM may be acknowledging as management tries to turn the company around. Of course, a cynic might argue that the restriction is really meant to keep executives from dumping shares after the recent run-up in the stock price, but I'm hardly a cynic. A Detroit News article (here) discusses the restrictions on trading imposed by the company. (ph)
The Enron Broadband Services prosecution of five former executives at the unit grinds into its third month, with three former high-ranking officers taking the witness stand to dispute the government's claim that they misled analysts and investors about the unit's technology and engaged in accounting fraud. Former executives Scott Yeager, a senior vice president for business development, and Rex Shelby, senior vice president of engineering and operations, have already testified, and former co-CEO Joe Hirko is on the witness stand. The other two defendants, Kevin Howard and Michael Krautz, who ranked more as mid-level officers on the finance side of the Broadband Services unit, appear to be left behind in the trial. A Houston Chronicle article on June 11 (here) notes that most of the testimony focuses on the statements and conduct of Hirko, Yeager, and Shelby, and that the judge sometimes does not even ask the other two defendants' attorneys whether they want to ask questions because there has been no mention of either. Moreover, unlike the other three defendants, Howard and Krautz are not charged with securities fraud related to sales of Enron stock, so there may be an even greater distance between them and the three more prominent defendants, who must defend sales of Enron shares that provided them with millions of dollars in profits before the company collapsed.
While the high-level executives have all taken the stand, I would not be surprised if Howard and Krautz do not testify to avoid bringing attention to themselves, relying instead on a "Hey, we're the little guys" defense, which is accentuated by their being almost ignored each day at trial, sitting at the back table in the defense area. An "Out of sight, out of mind" approach is not a bad strategy in a multi-defendant case that rises and falls on intent and whether statements were misleading. If the two mid-level executives don't testify, then the case may be able to go to the jury in fairly short order. The Houston Chronicle has excellent coverage of the trial in a number of stories available here, along with Tom Kirkendall's Houston's Clear Thinkers blog (which also includes a valuable update on the struggling Astros, who proved last year that the first half of the season does not determine the second half). (ph)
Monday, June 27, 2005
The potential that Milberg Weiss, one of the leading plaintiff class action firms, will be indicted triggered an interesting reaction from the firm, which argued that the government should not indict the partnership for wrongdoing by individual lawyers because of the effect on innocent employees. Earlier posts here and here discuss the indictment of Seymour Lazar for accepting payments from an unnamed New York law firm with California offices -- Milberg Weiss acknowledges that it is the law firm named as an unindicted coconspirator -- for serving as the named or representative plaintiff in over 50 class actions involving consumer complaints, securities fraud, and shareholder derivative claims. An article in the Wall Street Journal (here) discusses the law firm's response to the government investigation in which it cites the prosecution of Arthur Andersen as showing the harm that can befall innocent employees from an indictment of an organization.
Is Andersen an apt precedent? One important difference between the two situations is that Andersen's conduct was not directly related to its primary business as an accounting and consulting firm, and there was never an issue that its accounting at Enron, even if questionable, constituted criminal conduct. If Milberg Weiss attorneys made payments to individuals to serve as representative plaintiffs, and that conduct can be tied to the firm, then this goes to the core of the law firm, which is to represent clients before the courts in an honest and ethical manner. The payments would not only be improper, but more importantly would involve deceiving the court, opposing counsel, and the class members about the firm's involvement in the case. That strikes me as categorically different conduct than Andersen's document shredding, and calls into question the entire culture of the firm.
The impact of an indictment on Milberg Weiss will also have a different effect on the "innocent" employees and partners of the firm than the Andersen conviction. Accounting firms are licensed by the states, and the criminal conviction would have resulted in Andersen losing its license in almost every jurisdiction in which it practiced in the U.S., preventing the firm from providing services to publicly-traded companies. While lawyers are licensed by the states, law firms are not, so lawyers with no involvement in the misconduct will still be able to pursue their trade and can try to switch to a different firm or start their own firm. The support staff will suffer significant disruptions, but the number of law firms is much greater than the number of public accounting firms, so the job market is probably much better for them. While accounting went from the "Big Five" to the "Big Four" with Andersen's demise, there is no such effect on the plaintiff class action bar which has a number of firms that operate, and they may be in the market for experiences lawyers and support staff. The effect of the Andersen indictment went well beyond just that firm because of the oligopoly that exists in public accounting, a problem that will not affect the Department of Justice's analysis of Milberg Weiss as it has on whether to pursue criminal charges against KPMG for its tax shelter business (see earlier post here).
That's not to say that the indictment of a law firm should be pursued without considering the impact of a criminal conviction on its employees and partners. But if a law firm acts unethically in its representation of clients by paying kickbacks to representative plaintiffs, the harm to other clients of the firm will be substantial. While Andersen's other clients were affected by the criminal conviction, Milberg Weiss' clients may be represented by lawyers who do not put the client's interests first. (ph)
Eight term California Congressman Randy (Duke) Cunningham's sale of his home for $1.675 million in 2003 is the focus of an FBI investigation, according to an article in the North County (Calif.) Times (here). The purchaser was Mitchell Wade, a contributor to Rep. Cunningham's campaigns and the owner of MZM Inc., a defense contractor whose revenues have tripled over the past two years to approximately $65 million. The company provides intelligence services to the military, including translators in Iraq. Records show that Wade sold the house for $700,000 less than he purchased it from Rep. Cunningham approximately one year later -- this in one of the hottest housing markets in the country, which is saying a lot given the current real estate bubble. Rep. Cunningham is on the Defense Appropriations Subcommittee of the House Appropriations Committee, so the connection (if any) between his work on that subcommittee and the house sale is the likely subject of the investigation, i.e. whether the transaction, which appears to be at an above-market price, was a bribe or unlawful gratuity under 18 U.S.C. Sec. 201. An AP story (here) notes that Rep. Cunningham said in a written statement that the transaction with Wade showed "poor judgment." The article also notes that Rep. Cunningham lives on Wade's yacht in Washington DC, and he pays dock fees and other expenses. (ph)
The spate of high profile white collar crime trials over the past 18 months (or so) -- kicking off with Martha Stewart and Frank Quattrone through the jury deliberations about the fate of Richard Scrushy and leading up to the anticipated blockbuster Enron conspiracy trial of former CEOs Ken Lay and Jeffrey Skilling -- is triggering a reassessment of some of the so-called conventional wisdom in criminal prosecutions. An article in Business Week (here) highlights the strategies of prosecutors and defense counsel in white collar crime cases, touching on topics from indictments and plea bargains to pre-trial publicity and the decision whether to have the client testify. The author is even kind enough to mention this blog (I plead guilty to shameless self-promotion). (ph)
Sunday, June 26, 2005
A judge in Milan, Italy, ordered Parmalat CEO and founder Calisto Tanzi to stand trial beginning Sept. 28 on charges related to the accounting fraud that led to the company's bankruptcy. In addition, Italian officers of Bank of America, accounting firm Grant Thornton, and Parmalat's accountant Deloitte & Touche, are among others who will also be tried in the case. The Milan charges are the result of one branch of the investigation of Parmalat's collapse, which included falsified documents on Bank of America stationary indicating large accounts at off-shore banks that never existed, except of course on the company's balance sheet that was widely circulated to investors in its bonds. An investigation in Parma, Italy, site of the company's headquarters, is continuing. On the civil side of the Parmalat case, Morgan Stanley agreed to pay €155 million to settle claims by Parmalat related to underwriting of the company's bonds (8-K here). An AP story (here) discusses the charges against Tanzi and others. (ph)
The Milberg Weiss firm, in its various incarnations, is one of the leading plaintiff securities class action and shareholder derivative firms in the country. The firm and William Lerach, once a name partner and now the lead partner at Lerach Coughlin Stoia Geller Rudman & Robbins, may be the unindicted coconspirators in the prosecution of Seymour Lazar for accepting kickbacks in connection with his service as a representative plaintiff in various civil cases (see earlier post here). The indictment refers to "a New York law firm with principal offices in New York and California," which certainly is a description of Milberg Weiss before it broke up in May 2004. Milberg Weiss had represented Lazar as one of the representative plaintiffs in class actions, including Churchill Village LLC v. GE, In re MCA Shareholder Derivative Litigation, In re Xerox Corp. Securities Litigation, and In re Biogen Securities Litigation; the firm also represented the plaintiffs in a class action against Hertz in California in which one Adam Lazar was the named plaintiff (Lazar v. Hertz Corp.). An article in The Recorder (here) states that the government is trying to pressure Lazar, who is accused of using family members in addition to himself as the representative plaintiff, to cooperate against Milberg Weiss and Lerach. In a statement, Milberg Weiss asserted that "[w]e are outraged that these allegations have been made against the firm and reject them as baseless." (See AP story here) This case could get a whole lot more interesting, and have a major impact on the securities bar, if some of the leaders of that bar -- who are also large political contributors in the fight against restrictions on class actions -- are linked to improper payments. (ph)
The American Bar Association formed a Task Force on the Attorney-Client Privilege in response to the recent push by the Department of Justice and federal regulatory agencies, primarily the SEC, in demanding that corporations which are the subject of criminal and civil investigations waive their attorney-client privilege and the protections afforded by the work product doctrine and turn over the results of their internal investigations. Of particular concern has been the DoJ's Thompson Memorandum on the principles regarding whether to charge a corporation with a crime, which views waiver of the confidentiality protections as an important sign of the corporation's cooperation in the investigation. The ABA has expressed concern that this will lead to an erosion of the confidentiality protections afforded to the attorney-client relationship. The Task Force Report (here) notes one effect of this perceived erosion:
The Task Force heard consistently the concern that from the perspective of a corporation faced with a legal problem, the willingness to retain counsel and confide candidly and truthfully in counsel will be reduced because of the risk that government agencies, subject to scant internal standards, safeguards and guidelines, may later demand and obtain access to confidential communications with counsel, thereby in turn making those communications accessible to private litigants. Some submit that the perception that corporate lawyers have been, in effect, "deputized" by government agencies to develop evidence for those agencies’ use will not only discourage disclosures but will undermine the trust and confidence in counsel that have historically been recognized as fundamental to an effective attorney-client relationship.
I wonder whether this perception by corporate counsel (in-house and law firms) is in fact what is going on in corporations. If corporate officers are avoiding making disclosures to counsel, then there's no way to know about that because there has been no communication on which to base the perception. The criticism may also miss the mark because corporations are not individuals who can always control the flow of information to an attorney. Corporations communicate with counsel through a number of different officers, and it is unlikely that all would decide to withhold important information at once, unless there were a broad conspiracy of silence to keep counsel in the dark about particular transactions. If that were the case, then it would likely mean the corporation is going down the road to a potentially criminal course of conduct. Whether counsel can stop a concerted effort to violate the law is a difficult question.
The Task Force's Recommendations (here) are so vague that they communicate little to the government beyond a broad admonition to tread lightly. Here's the second recommendation:
FURTHER RESOLVED, That the American Bar Association believes that, although the protections arising from the attorney-client privilege and work-product doctrine may be voluntarily waived in particular instances by the holders of the protections, waiver should occur only under circumstances that do not erode those protections . . .
In other words, waiver should occur only when it is not bad, and waiver should not occur when it is bad. This is hardly an effective position to advocate to the DoJ, which would probably happily accede to such a resolution and state that prosecutors will be scrupulous in avoiding any erosion of the privilege. But that's the whole point, that the Thompson Memo's policy is undermining the privilege and work product doctrine, not just particular instances of waiver. (ph)
The indefatigable Ellen Podgor published an article in the McGeorge Law Review entitled "A New Dimension to the Prosecution of White Collar Crime: Enforcing Extraterritorial Social Harms." The article considers recent prosecutions in which the victim of the criminal conduct was a foreign government:
David McNab and David Pasquantino
wentwere sentenced to prison for very different crimes, but in both cases the laws of another country served as a basis for the United States prosecutions. This Article examines and analyzes the McNab and Pasquantino cases, and in this process considers the issues faced when a prosecution is premised on another country's laws. For example, a key issue in the McNab case was whether the United States correctly interpreted Honduran law. In Pasquantino, the Court struggled with the use of a generic federal statute, wire fraud, to prosecute conduct that violates the revenue laws of another country.
A question explored in this Article is whether a United States prosecution should be allowed when the supposed harm caused by the criminal conduct is predominantly a harm to another country. This Article recommends that extraterritorial prosecutions, including those in the United States that use foreign law, need to give more recognition to the location of the social harm.
The article is available on SSRN here. (ph)
Addendum - Article is being udated on SSRN continually and still is in draft form, Comments and corrections are welcomed. (esp)
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