Tuesday, July 12, 2005

Follow the Cheese As It Goes Round and Round

The U.S. Attorney's Office for the District of New Jersey and the SEC announced the filing of criminal and civil charges against Mark Cocchiola and Steven Venechanos, the former CEO and CFO of Suprema Specialties, Inc., a Patterson NJ-based cheese company related to fraudulent transactions in the company's products.  The defendants were indicted on 38 counts that include conspiracy, bank, securities, mail, and wire fraud (that's just about all the big ones) related to a scheme that resulted in over $600 million in bogus sales through a series of round-trip transactions with customers and vendors until Supreme collapsed in bankruptcy in 2002.  According to a press release issued by the USAO (here):

The Indictment alleges that the defendants participated with several of its major customers in a conspiracy to falsely inflate Suprema's sales by creating false invoices and other documents to make it appear as if Suprema had sold and shipped product to these customers, when it had not. According to the Indictment, the defendants also participated in a scheme to inflate its inventory by having certain Suprema vendors ship imitation cheese and other non-cheese products, which Suprema then re-labeled as higher-priced premium cheese and booked in its inventory. Certain vendors also shipped cheese to Suprema which Suprema booked as inventory on its fiscal year-end financial statements. These vendors had agreed not to invoice Suprema until after the fiscal year ended; this enabled Suprema to avoid booking the cost of the cheese, which would have offset the added inventory value. Suprema reported owning $60 million in inventory at the end of 2001; the Indictment alleges that this inventory figure was greatly inflated.

According to the Indictment, the bogus sales and inventory were recorded in Suprema's books, and the inflated numbers were reported to Suprema's lenders, to the SEC and to the investing public. This made Suprema appear far more successful and profitable to the investing public than it actually was. The Indictment alleges that Cocchiola and Venechanos participated in "road shows" in connection with the November 2001 secondary stock offering where they traveled the country touting these inflated numbers directly to potential investors.

The company's stock price hit a high of $14 -- trading under the symbol "CHEZ" naturally -- and the SEC Litigation Release (here) notes that Cocchiola and Venechanos sold shares while they were allegedly inflating the Suprema's sales, earning $4.8 and $1.4 million, respectively.  Like the collapse of Parmalat, there must be something about dairy products that makes them attractive for fraudulent schemes. (ph)

July 12, 2005 in Civil Enforcement, Fraud, Prosecutions, Securities | Permalink | TrackBack (0)

Monday, July 11, 2005

What Will the Reporter's Notes Reveal? Karl Rove?

It looks like the press is openly naming Karl Rove as someone who was a source to Time Magazine reporter Matthew Cooper.  (see Wall Street Jrl here and NYTimes here).  This does not, however, mean that Karl Rove committed a crime.   

What the prosecutor needs to still determine is who leaked this information to the press and did anyone who leaked this information lie to the grand jury.  Either of these two items could produce a criminal charge. A deliberate leak to the press for political reasons could make for a strong criminal case, as juries like a motive for criminal actions even when the statute may not require one.  A leak that came from another source might complicate the case.

But why is Judith Miller still in jail?  She didn't print the story and the prosecutor has yet to say what crime her testimony is needed for in this grand jury investigation.  Even if this can't be stated to the press and public, has this been disclosed ex parte to the court?   

(esp)

                                                                                                             

UPDATE (7/11):  Needless to say, the White House press corps was quite interested in the status of Karl Rove, and the following exchange took place between Press Secretary Scott McClellan and a reporter (full transcript of the press briefing available here):

Q Does the President stand by his pledge to fire anyone involved in the leak of a name of a CIA operative?

MR. McCLELLAN: Terry, I appreciate your question. I think your question is being asked relating to some reports that are in reference to an ongoing criminal investigation. The criminal investigation that you reference is something that continues at this point. And as I've previously stated, while that investigation is ongoing, the White House is not going to comment on it. The President directed the White House to cooperate fully with the investigation, and as part of cooperating fully with the investigation, we made a decision that we weren't going to comment on it while it is ongoing.

Q Excuse me, but I wasn't actually talking about any investigation. But in June of 2004, the President said that he would fire anybody who was involved in this leak, to press of information. And I just want to know, is that still his position?

MR. McCLELLAN: Yes, but this question is coming up in the context of this ongoing investigation, and that's why I said that our policy continues to be that we're not going to get into commenting on an ongoing criminal investigation from this podium. The prosecutors overseeing the investigation had expressed a preference to us that one way to help the investigation is not to be commenting on it from this podium. And so that's why we are not going to get into commenting on it while it is an ongoing investigation, or questions related to it.

Stay tuned. (ph)

July 11, 2005 in Media | Permalink | TrackBack (0)

Federal-State Turf Wars Can Cause Problems

Evaluating whether state or federal prosecutors are in the best position to proceed with a prosecution can be an important decision. In some cases it can require examining the law in both systems (state and federal) and determining which jurisdiction provides the prosecution with a sound case Sometimes, however, these decisions are not easy.

According to Newsday here, the question in a recent case involving alleged police corruption, is whether federal RICO charges are within the statute of limitations.  Although RICO allows conduct from beyond a normal statute of limitations, it does require a recent act. The benefit to the prosecution with RICO is that it can expand the relevant evidence by bringing in conduct that might normally be outside the statute of limitations range and also evidence of co-conspirator statements when the charge is RICO conspiracy. RICO does, however, require an act within the normal statute of limitation range, and  the predicate acts may need "continuity plus relationship."  These are some of the aspects of a case that need to be evaluated in determining whether the state or federal system provides the best forum for a prosecution.

Prosecutors in NY (both federal and state) are learning the importance of making the correct decision in these matters.  They are also learning the need to have strong cooperation between the two entities when these decisions are made.

(esp) (with thanks to Joel Podgor for alerting us to this article)

July 11, 2005 in Corruption | Permalink | TrackBack (0)

Shrek and Donkey Headed to Court on Another Adventure

DreamWorks Animation SKG, the animated film company split off from the larger DeamWorks studio in an IPO last year, is headed for court and embroiled in an SEC insider trading investigation.  The company, which produced the Shrek movies among others, had a less-successful release this summer (Madagascar), and in May announced poor first quarter earnings due to problems with the DVD release of Shrek 2, which has not been as successful as hoped.  The company disclosed all sorts of litigation problems, including an SEC investigation into trading before the May earnings announcement (which was gloomy, so this is a loss avoided situation) in a press release (available on company website here under "News"):

The company also noted that six purported class action lawsuits have been filed in recent weeks against DreamWorks Animation and certain officers and directors, alleging violations of federal securities laws. The company believes these lawsuits are without merit and intends to vigorously defend itself against them. In addition, DreamWorks Animation has received a request from the staff of the Securities and Exchange Commission and is voluntarily complying with an informal inquiry concerning trading in its securities and the disclosure of its financial results on May 10, 2005. The SEC has informed DreamWorks Animation that the informal investigation should not be construed as an indication that any violations of law have occurred. The company intends to cooperate fully with the inquiry.

The stock price dropped approximately $6 per share in May, around the time of the earnings announcement, from $38 to $32.  For a company this young -- in only went public last November -- this is awfully quick for an insider trading problem to erupt.  Then again, in Hollywood, people aren't known for keeping secrets, and anything is possible because even Mike Myers can win the hand of Cameron Diaz. (ph)

July 11, 2005 in Civil Enforcement, Fraud, Investigations, Securities | Permalink | TrackBack (0)

Scrushy - Double Jeopardy Should Preclude Retrial

The Motion to Dismiss the government's appeal in the Scrushy case is pretty telling. (see Download motion_to_dismiss.pdf)

This motion includes as an attachment the judge's order that dismissed the three counts that the government is appealing.  After noting the improper conduct by the government in this case, the order explicitly states - "The Government represented on the record to the court that it has no evidence of perjury apart from Mr. Scrushy's S.E.C. deposition. As a result, the perjury counts, Counts 30, 31, and 32, of the Superseding Indictment based on that testimony will be dismissed at the appropriate time."  This sure sounds like a decision premised upon sufficiency of the evidence.  And if premised upon sufficiency of the evidence the law is clear that the government cannot appeal the decision because it will be double jeopardy. Co-blogger  Peter Henning notes the problems that the government could have with respect to collateral estoppel as a result of the jury verdict in this case (see here).  But looking at the language used by the court in this Order, not once, but more than once, it sounds like the cases of Martin Linen and Smalis should preclude the prosecution from appealing this decision.

P.S.  And if you didn't like the verdict, well check out Dean John Carroll's op ed piece here. Sometimes the evidence just isn't there.

(esp)

July 11, 2005 in HealthSouth | Permalink | TrackBack (0)

Sunday, July 10, 2005

Ebbers Sentencing is Wed. of this Week

The sentencing of Bernard Ebbers is set for this coming Wed. and many are speculating - how long- his sentence will be. After hearing the sentences of John Rigas (15 years and 80 years old), Timothy Rigas his son (20 years), Jamie Olis (24 years), one can only imagine how ridiculously high this upcoming sentence might be. CNN has a wonderful article here that compares these sentences with those given to white collar offenders years back.  A big difference is noted in the increased sentences experienced by individuals today. Co-blogger Peter Henning notes in this article the change in white collar sentences stating that "'Olis probably would not have been prosecuted or, if he had been, received probation "or a very short sentence in a halfway house'"  if this were "twenty years ago."

Are the increased sentences the correct move?  Sentencing serves several purposes - deterrence (general and specific), retribution, and rehabilitation.  One aspect not noted in this article is that not one of the offenders who received the "lighter" sentences of years past committed another crime.  If punishment is to deter others it isn't working as we still have many white collar offenders.  If the sentence is to deter the specific offender, the long punishments were not needed as the offenders were not committing second offenses.  And if for retribution, sorry, but wasting taxpayer dollars locking up these people is not the answer.  Make them pay back those who lost money as a result of their crimes and make them work for society using their business skills to help society for the wrongs committed.  But locking them up serves no purpose other than for politicians in Congress to be able to say to their constituents that they are tough on crime.

And some politicians may be crossing the line and trying to influence the judges.  I keep wondering if perhaps someone should be investigating this conduct.  Rep. James Sensenbrenner did what?  That's outrageous!!!! See here.   

(esp)

Addendum - See the thoughtful comments of Professor Doug Berman here.   See also Berman's entry here where he notesDr. Paul Leighton's comments. Professor Berman states "These commentaries, while noting we are getting tougher on corporate crime, explore whether the sentences consistent with sentences for non-violent street crimes and whether they make sense in light of the social harm done."

July 10, 2005 in Sentencing | Permalink | TrackBack (0)

Government Corruption on the City Level

The Dallas Morning News has a wonderful article here discussing recent government corruption cases being prosecuted by the DOJ.  They list many cities that have present and future cases related to alleged city corruption or officials.  The cities include San Diego, Atlanta, Philadelphia, New Orleans, Houston, etc. They also quote co-blogger Peter Henning on several items including his statement that, "[c]ertainly, with elected officials the department is careful. So they are going to bring the best cases that they can."  But in the case of Bill Campbell, former mayor of Atlanta, this remains to be seen.

(esp)

July 10, 2005 in Corruption | Permalink | TrackBack (0)

SEC Lets the Cat Out of the Bag About PCAOB Investigation of Deloitte & Touche

The Public Company Accounting Oversight Board (PCAOB) has launched an investigation of Big Four audit firm Deloitte & Touche in connection with the 2003 audit of Navistar International.  Unfortunately for all involved, PCAOB investigations are supposed to remain confidential, but apparently the SEC accidentally disclosed the information by placing the investigation order in its public document room where, not surprisingly, it got noticed.  The PCAOB was created by the Sarbanes-Oxley Act to undertake the oversight function of accounting firms, a job previously left to the SEC alone.  The Board issued an investigative order in May, and according to a Bloomberg story (here), around June 20 the SEC placed the document in its public reference room for all to see.  While most SEC filings are available on-line through EDGAR, there is still a thriving business in the public reference room for looking up documents, and this one somehow got out. 

In January, Navistar announced that it could not file its annual report due to accounting problems, and a Jan. 31 8-K filed by the company stated:

As previously disclosed in Navistar International Corporation’s (the company) Report on Form 8-K dated January 7, 2005 and Form 12b-25 (Notification of Late Filing) dated January 14, 2005, the company was unable to timely file its Report on Form 10-K for the period ended October 31, 2004 due to the ongoing analysis of the application of certain accounting standards relating to the securitization of assets at the company’s finance subsidiary, Navistar Financial Corporation (NFC). Following the completion of this analysis, and after discussions with the company’s audit committee and independent registered public accounting firm, Deloitte & Touche, LLP on this subject, the company concluded on January 28, 2005 that a restatement of its financial statements for fiscal years 2002 and 2003 and the first three quarters of fiscal 2004 is required. As such, those financial statements and any related auditor reports should no longer be relied upon because of errors in such financial statements.

The PCAOB investigation appears to be related to the Navistar restatement, and the order states that Deloitte may have violated as many as five auditing standards.  If PCAOB takes any disciplinary action against Deloitte, it will be the first by the Board against a Big Four firm since it came into existence. (ph)

July 10, 2005 in Investigations | Permalink | TrackBack (0)