July 23, 2005
Scrushy Seeks Dismissal of SEC Securities Fraud Suit
Former HealthSouth CEO Richard Scrushy filed a brief in response to U.S. District Judge Inge Johnson's order to show cause seeking dismissal of the SEC's securities fraud and accounting suit. Scrushy argues that the government has not offered any "credible" evidence that he knew about the fraud at the company, and because the Commission's evidence will be the same as that presented in the criminal trial that resulted in an acquittal, the court should dismiss the SEC case. The usual analysis is that, because the SEC only seeks a civil remedy and not a criminal punishment, the lower burden of proof means that an acquittal in a prosecution has no effect on the enforcement action. Nevertheless, nothing about this case has been usual, and the district court may dismiss some or all the counts in the SEC complaint (here).
If the SEC survives the show cause hearing, then the next step will be the deposition of Scrushy, which promises to be an interesting proceeding. The Department of Justice's decision not to seek appellate review of the dismissed perjury charges means that Scrushy would not be able to postpone the deposition because of the pending criminal case, and he no long has a Fifth Amendment problem because he was acquitted of the charges.
Scrushy posted a letter on July 15 to his personal website (here) that, among other things, discusses the government's continued pursuit of him:
However, what pains me the most, is how our United States government conducted this investigation in a way that maximized the damage done to HealthSouth and to its shareholders. Some have called the government’s tactics a “shock-and-awe” campaign—but it was the shareholders who were shocked and awed. Had the government conducted their investigation properly, instead of prioritizing their media blitz, I believe HealthSouth’s stock would never have been delisted, and the stock price drop would have been minimal.
Has there been a more overworked phrase in the last couple years than "shock and awe"?
The oral argument at the show cause hearing (assuming there is one) will certainly be a hot ticket. A Washington Post article (here) discusses Scrushy's brief in the SEC case and also mentions that he is pursuing repayment from the company of his $20+ million legal expenses in the criminal action. Under Delaware law, Scrushy has a good argument for payment of the fees, but don't look for that litigation to be any less contentious than the criminal or SEC cases. (ph)
Can a $98 Investment Be Worth Over $15,000 a Year Later?
In the "If it sounds too good to be true, it is" category, an AP story (here) describes the scheme that triggered an indictment:
Richard J. Dompier of Vale, N.C., started the New Millennium Group in Roseburg in 1998, selling one-ounce silver ingots through the mail and over the Internet for $98 each on promises buyers would receive a series of commission checks totaling $15,853.50 in 14 months, the indictment said. He had bought 70,000 ingots from the Franklin Mint for $10.50 each.
Dompier was charged with cheating investors out of $2.5 million, and apparently used some of the proceeds to sponsor a NASCAR driver and to start a motorcycle company. No commodity, particularly silver, can increase 15,000% in a little over a year, unless of course it's a scam. One wonders if any of the investors remembered the Hunt brothers and their little foray into cornering the silver market back in the late 1970s, only to see their investment collapse. (ph)
Defendant in Michigan's Largest Securities Fraud Gets Ten Year Sentence
Patrick Quinlan, who was CEO of MCA Financial Corp., which invested in Detroit-area real estate and financed it operations by selling securities, received a ten year prison sentence after pleading guilty two years ago to conspiracy to commit mail, wire and securities fraud. The company collapsed in 1999, triggering losses to investors of over $265 million that made it the largest securities fraud in Michigan history. The sentence was the maximum allowable under the statute; at the time of the offenses, the fraud statutes (which would control the sentence for conspiracy in this case) had a ten year maximum, which was increased to thirty years by the Sarbanes-Oxley Act. Although Quinlan apologized to investors, U.S. District Court Judge Nancy Edmunds found that he had not accepted responsibility by still blaming other executives and MCA's accountants for the fraud. According to a Detroit Free Press article (here), Judge Edmunds stated that Quinlan was "the dominant force at MCA, the architect of the fraud and the most culpable person in the scheme to defraud." (ph -- in the interest of full disclosure, I consulted on a malpractice lawsuit against the company's outside law firm, which was dismissed on summary judgment).
July 22, 2005
Can the "S" Show Intent?
News reports on the Valerie Plame leak investigation are raising interesting questions about a possible perjury case involving witnesses who testified before the grand jury. A Bloomberg article (here) notes that I. Lewis Libby, chief of staff for the Vice President, testified that he learned about Plame's CIA role from NBC's Tim Russert, but Russert apparently denied telling Libby about Plame's identity. Karl Rove, Deputy Chief of Staff to the President, testified that he learned about Plame from columnist Robert Novak, but according to Bloomberg a source states that Novak "has given a somewhat different version to the special prosecutor." The exercise in figuring out where all this started is complicated by New York Times reporter Judith Miller's refusal to testify, and she may have information that could exculpate one or both administration officials. That makes Special Counsel Patrick Fitzgerald's investigation all the more difficult if his office cannot line up the different stories to at least figure out who is pointing the finger at whom.
The leak investigation requires Fitzgerald's office to figure out when information about Plame's CIA status was revealed before Novak published his article. A Washington Post story (here) discusses the memorandum provided to then-Secretary of State Powell that included a couple sentences about Plame with an "S" notation, indicating that the information about her was secret. If the information about Plame was passed among senior administration officials, that might clear up the source of the information and, more importantly, provide a basis for establishing that the person who revealed the information had knowledge of her covert status. Regarding any prosecution for the actual leak under 50 U.S.C. § 421, as opposed to perjury, the intent level is fairly high -- knowledge -- and showing only access to the memorandum might not be enough to prove that intent (see earlier post here).
According to Rove's attorney, he did not see the memorandum until the Special Counsel's office showed it to him. Actual review of the memorandum may not be required under Sec. 421(b), which states: "Whoever, as a result of having authorized access to classified information, learns the identity of a covert agent and intentionally discloses any information identifying such covert agent to any individual not authorized to receive classified information, knowing that the information disclosed so identifies such covert agent and that the United States is taking affirmative measures to conceal such covert agent's intelligence relationship to the United States, shall be fined under Title 18 or imprisoned not more than five years, or both." Unlike subsection (a), which requires proof of that the person "had authorized access to classified information that identifies a covert agent," this provision only requires that the person have authorized access to classified information that results in the disclosure, but not necessarily to the specific information identifying the covert agent. Of course, the knowledge element would be difficult to establish if the government's proof was simply stories that conflicted.
In addition to the Washington Post, the Wall Street Journal has discussed the content of the memorandum. What is not clear from the stories is the source of the memo, whether it came from the Special Counsel's office or some place else. Given that it appears to have been the subject of grand jury testimony, it is at least arguably grand jury material protected from disclosure by Federal Rule of Criminal Procedure 6(e), although the Rule is notoriously vague about what constitutes "a matter occurring before the grand jury." Any disclosure by the Special Counsel's office could be a violation of the Rule, and as an internal government document one would expect that it would be confidential. But then, in a case about leaks, it's not surprising that there have been an awful lot of leaks -- this is Washington, D.C., after all, where leaking is a high art form. (ph)
Fake Doctor's Note Defendant Pleads Guilty
Michael Alcott tried to postpone his bank fraud trial by submitting a fake doctor's note to the district court stating that he had terminal cancer. As discussed in an earlier post (here), upon learning about this little ruse, the court revoked his bail and ordered him held pending the start of trial. Alcott has now entered a guilty plea to bank fraud charges that included submitting a financial statement on the letterhead of a local accounting firm -- faked, once again. According to a press release (here) issued by the U.S. Attorney's Office for the District of Massachusetts (Boston), another charge was a Travel Act violation because, while on pre-trial release on the bank fraud charges, Alcott tried to extort a doctor in California for $150,000 by threatening to reveal that the doctor had a close personal relationship with a woman from an escort service -- Alcott apparently learned about the liaison because he also partook of the escort service's offerings. Extortion, fake doctor's notes . . . sounds like Alcott had way too much free time while awaiting trial. Any bets on whether the judge will buy the "acceptance of responsibility" argument at sentencing? (ph)
Top Five "Nicest" Prisons for White Collar Criminals
An article in the Corporate Crime Reporter (here) quotes Allan Ellis, the co-author of the Federal Prison Handbook 2005, listing his Top Five federal prisons for white collar offenders, including a little background on the "amenities" at each. Here we go (with links to each location on the BOP website in case you'd like to get a bit more information on the places):
Yankton, South Dakota. “A stand alone federal prison camp,” Ellis says. “A vanishing breed. These are camps that are not satellites to larger more secure institutions. It happens to be a converted college that went defunct. It’s in the middle of the town, not on the outskirts. There is a lot of community programming. People leave during the day and come back at night.”
Englewood, Colorado. “That’s outside of Denver,” Ellis says. “It’s a satellite camp to the federal correction institution there. I’m told by my clients that it is a pretty laid back place.”
Texarkana, Texas. “The federal prison camp there has an drug and alcohol treatment program,” he says. “It has a pond stocked with fish. And one of my clients said he liked to spend his day fishing.”
Sheridan, Oregon. A federal prison camp outside of a medium level security facility about 60 miles from Portland.
Pensacola Naval Base. “You get out during the day, you work on the Naval base, you intermingle with Navy personnel,” Ellis says. “The food is better. You are outside. I’ve had people who were taking care of the grounds at the admiral’s house. The admiral’s wife would bring out lemonade, invite the inmate in for lunch. Things of that sort.”
I guess there's nothing better than drinking lemonade in the hot Florida sun with the admiral's wife, and it isn't very often that Yankton, SD is considered a garden spot. (ph)
42-Month Sentence for Mail Fraud
U.S. District Judge E. Richard Webber (E.D. Mo.) sentenced Richard Drury to a 42-month term of imprisonment for his conviction on four counts of mail fraud related to creating false invoices for returns of expired drugs. Drury was chief operating officer for a company called Easy Returns Worldwide Inc. (catchy name), and a press release (here) issued by the U.S. Attorney's Office described the scheme this way:
As part of the services that they provided to client pharmacies, Easy Returns returned recently expired pharmaceuticals to the appropriate manufacturers for a credit to the client pharmacy for a 5-10% fee paid by the pharmacy. The fee was based on the expected credits from the manufacturer. As part of the services provided to client distributors, Easy Returns destroyed recently expired pharmaceuticals and the distributor received a credit from the manufacturer. Between August 2000 and January 2002, Drury, as COO of Easy Returns, devised and participated in a scheme to create fraudulent returns to pharmaceutical manufacturers, causing the manufacturers to credit various pharmacies for returns that did not belong to them. These pharmacies paid a 33% fee to Drury and Easy Returns for the false returns credited to them.
In addition to the jail sentence, Drury was ordered to pay restitution of approximately $725,000. Another substantial term in a white collar crime case. (ph)
July 21, 2005
State Guide to Collateral Consequences
In white collar cases, the criminal sentence may only be a part of the penalty paid by the convicted defendant. Collateral consequences, such as loss of license, can also result from a criminal conviction. Margaret Colgate Love authored a new study that may assist here. It is titled, Relief From The Collateral Consequences Of A Criminal Conviction: A State-By-State Resource Guide. The report states that it is prepared with support from an Open Society Institute fellowship." Details can be found on the website of the Sentencing Project here.The website describing this work here states in part:
"This comprehensive survey describes for each United States jurisdiction the laws and practices relating to restoration of rights and obtaining relief from the collateral disabilities and penalties that accompany a criminal conviction. It is the first-of-its-kind, and it illustrates the extraordinary variety and complexity of state and federal laws that impose a continuing burden on convicted persons long after the court-imposed sentence has been fully discharged. It is an important resource for policymakers interested in offender reentry and reintegration, for practitioners at all levels of the criminal justice system, and for people with a criminal record who are seeking to put their past behind them. "
One of the tables here includes a state by state chart on "Consideration of Criminal Record in Licensing and Employment."
Operation Safe Pilot has resulted in the indictment of forty individuals.
U.S. Department of Justice, United States Attorney for the Northern District of California reports here that 30 defendants were charged with violations of 18 USC 1001 (False Statements to a Government Agency), and 10 additional individuals were charged with violations of 18 USC 1018 (Making and Delivering a False Official Writing). The allegations against the indicted individuals were that "[w]hile claiming to be medically fit to fly an airplane, the defendants were also collecting disability benefits from the Social Security Administration based on serious medical and psychological conditions, which would have prevented them from operating an aircraft."
The Press Release states that:
"Operation Safe Pilot began with a review of 40,000 pilots residing in the northern half of the State of California. Federal agents identified numerous pilots with current flight medical certificates, who were receiving disability benefit payments. Although the operation identified pilots who claimed to be suffering from an array of illnesses, agents focused only on the most egregious claims of disabilities. The illnesses ranged from schizophrenia, bipolar disorder, drug or alcohol addiction, disabling back condition, or the presence of severe heart condition.
Federal Agents selected the most blatant instances of fraud which totaled 40 pilots. Of those 40 pilots, a number were airline transport and commercial pilots, as well as medical doctors."
NG &/or Mistrial for Five Former Enron Employees
AP reports here that three former executives employed by Enron heard "not guilty" to some of the counts against them. The jury failed to reach a verdict on other counts against these three individuals, as well as on counts against two others who were on trial. The bottom line is that despite a lengthy trial, no one was found guilty in this Enron broadband case. (see also NYTimes here)
Interestingly, the judge only had the jury deliberate for four days. We have seen longer deliberations in other white collar cases (e.g. Scrushy Trial). Although, prosecutors may be perturbed with the short deliberation period, second trials in white collar cases have not always favored the defense. Additionally, second trials for those accused of white collar crimes are not necessarily wins. The attorney fee bills and toll on the accused and family can be high costs to pay for a hung jury. Hopefully, a hung jury will allow the prosecution and defense to reconsider their cases, with either dismissals on the part of the government and/or pleas on the part of the defense, resolving any remaining pending matters.
Karl Who? and the Media
With the announcement of a Supreme Court nominee, the front page of newspapers across the United States focused on this newly nominated individual - the Hon. John G. Roberts Jr. As one might suspect, Karl Rove's name was no longer on the front page. For example, one finds him mentioned on page 6A of yesterday's USA Today. Peter Johnson of USA Today notes that "President Bush had no control over when Supreme Court Justice Sandra Day O'Connor would step down. But announcing her successor — and when — was his call." (see here)
And irrespectiveof whether the timing on the Supreme Court nominee announcement was intended to remove controversial issues from the front page of newspapers, who will actually control the media remains to be seen. Hearings continued on proposed legislation to protect journalists. Although Deputy AG James Comey did not appear before the Judiciary Committee on this legislation, his written statement was, "[t]he bill is bad public policy primarily because it would bar the government from obtaining information about media sources -- even in the most urgent of circumstances affecting the public's health or safety or national security.'' (AP NYTimes here)
In the meantime, Judith Miller of the New York Times remains in jail. Is it rather odd that one part of the executive is advocating for disclosure of confidential sources and another office is refusing to comment on it? Who is controlling the media?
July 20, 2005
At the Southeastern Association of Law Schools (SEALS) conference, Professor Joan Hemingway of University of Tennessee Law School led a wonderful discussion titled, "Corporate and Securities Fraud Update." In addition to moderating the panel, she offered her own comments that "put a face on corporate fraud," specifically discussing the securities aspect of the Martha Stewart case.Some interesting points made by the panelists -
Professor Marleen O’Connor (Stetson University College of Law) spoke about "Gender, Ego, & Power" - the gladiator or "winner take all" corporate culture. She discussed women in the "tournament" environment of the corporate world. She looked at women’s behavioral traits and the makeup of women superstars in the corporate world. She noted differences from traditional traits of women to those who progress to higher positions (the "women superstars") in the corporate world.("The game is rigged against her from the start.").
Professor Erica Beecher-Monas (Wayne State University Law School) focused on how we help directors make better decisions. Her talk looked at issues of accountability in small groups.
Professor Lisa Fairfax (University of Maryland Law School) moved the discussion to the state level, discussing how states look at independent directors.
Professor Jayne Barnard (William & Mary School of Law) spoke about small retail frauds and recidivism by white collar offenders in this particular category of white collar crime. In this regard she looked at who these individuals were, their skill set, and other characteristics. She offered recommendations for better enforcement.
Comment - Professor Barnard's talk presented an interesting irony in that high sentences are being given to corporate offenders with no track record of criminality and little recidivism in this category (Jamie Olis, Bernard Ebbers, etc.), while the recidivist small retail fraud offenders might walk out with a comparatively insignificant sentence.
Think Before You Write That E-Mail
On the list of things not to write in an e-mail is the following from a lawyer to his partners in a law firm in connection with a case he had:
I completely overlooked an important recent decision that dramatically changed the landlord-tenant law. (How I missed the case is a mystery since I read the advance sheets. Arguably the case is indistinguishable, but there is a $1M risk of malpractice if I am wrong . . . . I fell into the trap in a major way.)
The e-mail is recounted in a story in the Fulton County Daily Record (available on Law.Com here), and needless to say the clients are suing for -- you guessed it right -- malpractice. The story is not about white collar crime, but it reinforces a point that, for some strange reason, many people apparently don't think that e-mail exists and the contents of a message disappear when they hit the delete button. Now, thank goodness blog posts don't really exist either, otherwise my record as a prognosticator would be available for all to see (Scrushy will testify, Ebbers will not, etc.). (ph)
Former Philadephia Treasurer Sentenced to Ten Years
U.S. District Judge Michael Baylson sentenced former Philadelphia Treasurer Corey Kemp to a ten-year term of imprisonment for his conviction on conspiracy and right of honest services fraud charges. Kemp was one of five defendants charged in a wide-ranging indictment that included "pay-to-play" counts, along with perjury and false statement charges. Kemp was the highest ranking city official charged in the case that included a bug placed in the office of Philadelphia Mayor John Street, who has never been charged with any crimes as a result of the investigation. Kemp's attorney said at the hearing that "[h]e simply played the pay-to-play game."
The U.S. Attorney's Office recommended a 97-month term of imprisonment, the maximum based on the Sentencing Guidelines (see Philadelphia Inquirer story here), but the judge imposed a more severe sentence because of Kemp's high position in the city's government. In a move usually not seen in white collar crime cases, Baylson denied Kemp's requests for bail pending appeal and to set a reporting date after the sentencing, ordering Kemp to begin serving his term immediately. Kemp was escorted from the courtroom after the hearing in handcuffs by U.S. Marshals. Judge Baylson sentenced another defendant in the case, Janice Knight, to five and one-half months in prison for her conviction on false statement charges, and permitted her to remain free on bail pending appeal. Sentencing for the two Commerce Bank executives convicted of conspiracy charges with Kemp will not take place until October, and it will be interesting to see whether they receive substantial sentences for participating in the corruption. A Philadelphia Inquirer story (here) discusses the sentencing of Kemp, and thanks to Peter Goldberger for passing along the information about the sentencing. (ph)
Is There Such Thing as White Collar Crime Jurisprudence?
With the nomination of John G. Roberts, Jr., to replace Justice Sandra Day O'Connor on the Supreme Court, there will be lots of discussion about his judicial philosophy and its potential effect on different areas of the law. One question I thought about briefly is whether his nomination will have an effect on white collar crime cases, and the answer is a resounding possibly, but it's hard to estimate because Supreme Court cases in the area are rather infrequent, at least compared to more mainstream criminal procedure decisions. Cases that affect white collar crime investigations and prosecutions don't always lend themselves to one particular type of judicial philosophy. This past term included the unanimous reversal of the conviction in Arthur Andersen based on flaws in the jury instructions for the obstruction charge, and the 5-4 decision in Pasquantino on the mail fraud statute in which Justice Thomas wrote the majority opinion and Justice Scalia joined in part the dissent by Justice Ginsburg. Given that Roberts would likely be viewed as being in the conservative camp on the court, it's hard to figure out where he would stand in a case of statutory interpretation like Pasquantino.
One area in which the resignation of Justice O'Connor could be felt is in relation to grand jury subpoenas for documents. She wrote once, in a concurring opinion, that the Court's decision in U.S. v. Fisher sounded the "death knell" for the privacy rationale of Boyd for application of the Fifth Amendment. U.S. v. Doe, 465 U.S. 605, 618 (1984). The Court's more recent decision in U.S. v. Hubbell took a more jaundiced view of a broad grand jury subpoena, and Roberts may be more willing to consider arguments in favor of limiting the broad inquisitorial power of grand juries. If Chief Justice Rehnquist were to resign in the next year or so, that could have an even greater impact on the Court's grand jury jurisprudence. The Chief Justice wrote the broad collective entity opinion in Braswell, a 5-4 decision in 1988 in which Justice O'Connor was in the majority and Justices Scalia and Kennedy dissented, and he was the lone dissenter in Hubbell.
Judge Roberts' track record during his fairly brief stint on the D.C. Circuit gives no hint about how he will rule on white collar cases because the few criminal decisions in which he wrote the court's opinion largely involved, not surprisingly, sentencing and procedural issues, common fare for a circuit court judge. Interestingly, while most of the cases Roberts argued before the Court were civil matters, he was appointed to argue on behalf of the defendant in U.S. v. Halper, a double jeopardy decision that briefly held that civil sanctions could possibly preclude a subsequent criminal proceeding if they were punitive, a position the Court overturned a few years later in Hudson. Halper was quite important to white collar practitioners because of its effect on parallel proceedings. (ph)
July 19, 2005
What Exactly Is a Crime?
In connection with the ongoing investigation of the leak of Valerie Plame's role as a CIA agent, President Bush said that anyone on the White House staff who "committed a crime" related to the leak would be fired. Did the President mean a conviction, indictment, or just being named a "target" of the investigation? Not much clarification came from White House Press Secretary Scott McClellan, but the following interchange at the daily press briefing (here) does highlight one potential role the President could play as Investigator-in-Chief:
Q What is his problem? Two years, and he can't call Rove in and find out what the hell is going on? I mean, why is it so difficult to find out the facts? It costs thousands, millions of dollars, two years, it tied up how many lawyers? All he's got to do is call him in.
MR. McCLELLAN: You just heard from the President. He said he doesn't know all the facts. I don't know all the facts.
MR. McCLELLAN: We want to know what the facts are. Because --
Q Why doesn't he ask him?
MR. McCLELLAN: I'll tell you why, because there's an investigation that is continuing at this point, and the appropriate people to handle these issues are the ones who are overseeing that investigation. There is a special prosecutor that has been appointed. And it's important that we let all the facts come out. And then at that point, we'll be glad to talk about it, but we shouldn't be getting into --
Q You talked about it to reporters.
MR. McCLELLAN: We shouldn't be getting into prejudging the outcome.
Would lying to the President be grounds for a Sec. 1001 false statement charge? (ph)
Corruption Convictions in San Diego
While justly famous for its zoo, San Diego may have a competitor with its city government. Two members of the city council, Michael Zucchet and Ralph Inzunza, were convicted on corruption charges along with a former Clark County (Nevada) Commissioner in a trial dubbed "Strippergate" by the local media. To make matters worse for San Diego, Zucchet became interim Mayor of the city last week when Dick Murphy stepped down from the post amidst allegations of possible criminal activity related to a $2 billion shortfall in the municipal pension fund. The Councilmen were convicted of accepting $23,000 disguised as campaign contributions from the owner of Cheetahs Totally Nude. The owner sought to have a change made in an ordinance that banned customers from touching dancers at strip clubs -- isn't that the type of issue to crater an entire career and go to jail over? A Los Angeles Times story (here) discusses the verdict, including a statement by Zucchet's attorney that "[t]here isn't a single public official in the country that hasn't done the same thing." That's heartening.
While San Diego has a reputation as a conservative town, it is still a military outpost in many ways. The city's problems likely will continue as the SEC and U.S. Attorney's Office push forward with their investigations of the pension fund, for which six former trustees face criminal conflict of interest charges in state court. Of course, it's not just the city government that has been tainted by scandal, as local Congressman Randy "Duke" Cunningham had his home searched in connection with the sale of a house to a campaign contributor whose company has received defense contracts (see earlier post here). Rep. Cunningham has announced that he will not seek another term next year. (ph)
Head of Enron Task Force Resigns
Andrew Weissmann, the second director of the Enron Task Force in Houston, TX, announced his resignation to return to private practice. Tom Kirkendall on the Houston's Clear Thinkers blog has an interesting post (here) about the timing of the announcement and the tactics used by the Task Force with its cooperating witnesses. Having worked for a short time on a DOJ Task Force, one of the scariest places to be is in the last group of prosecutors with the responsibility of turning out the lights. It may be that after the Enron Conspiracy Trial next year, much of the remaining work will be to clean up the remaining sentencings, appeals, etc., which is not nearly as exciting as putting the case together and getting that first blast of publicity when the indictment is unsealed -- not to mention the infamous "perp walk," an exercise that I'm hopeful has been dropped from the MO of U.S. Attorney's Offices. Whatever the reason for Weissmann's resignation, it will certainly not be the last one as the Task Force winds down. (ph)
Employees Sunk By the Corporation's Waiver of the Attorney-Client Privilege
It is axiomatic that the client holds the attorney-client privilege and controls its waiver, but things get much more complicated when a corporation is the client and its attorneys interview employees as part of an internal investigation of wrongdoing. Employees are likely to view the company's lawyer as their own attorney, and corporate counsel has to be careful that the limits of representation are conveyed to the employee without dissuading the person from talking -- corporate cooperation rules the day in the post-Enron world. An interesting case from the Fourth Circuit, In re: Grand Jury Subpoena (Under Seal) (here -- now that's a catchy title that's easy to distinguish from the 99 other Grand Jury cases), analyzes whether attorneys for AOL who conducted an internal investigation also represented the individual employees. As part of its investigation of AOL's accounting for transactions with PurchasePro Inc., the grand jury subpoenaed AOL for notes of interviews of three employees taken by corporate counsel: Kent Wakeford (who was indicted in January 2005 along with five others for conspiracy, securities fraud, and false statements -- indictment here), and two employees identified as John Doe I and II. Each received the same "warning" from the company's lawyers: "We represent the company. These conversations are privileged, but the privilege belongs to the company and the company decides whether to waive it. If there is a conflict, the attorney-client privilege belongs to the company." Importantly, the lawyer went on to tell each, "We can represent [you] until such time as there appears to be a conflict of interest, [but] . . . the attorney-client privilege belongs to AOL and AOL can decide whether to keep it or waive it." This last statement is wrong to the extent that in a joint representation each client holds the privilege and one side cannot waive it unilaterally. After completing its investigation, AOL waived the protections of the attorney-client privilege and work product doctrine and turned over the results to the government, thereby enabling it to enter into a deferred prosecution agreement -- no great surprise there.
In resisting the grand jury subpoenas for their statements to counsel, the witnesses argued that the latter statement by the lawyer led them to believe they had entered into an attorney-client relationship with corporate counsel, so that AOL's waiver of the privilege did not affect their personal right to keep the interview notes confidential. The Fourth Circuit rejected the argument and enforced the subpoena, holding that the statement that the corporate lawyers "can" represent the employees is not the same as representing them:
[A]ppellants could not have reasonably believed that the investigating attorneys represented them personally during the time frame covered by the subpoena. First, there is no evidence that the investigating attorneys told the appellants that they represented them, nor is there evidence that the appellants asked the investigating attorneys to represent them. To the contrary, there is evidence that the investigating attorneys relayed to Wakeford the company’s offer to retain personal counsel for him at the company’s expense, and that they told John Doe 1 that he was free to retain personal counsel. Second, there is no evidence that the appellants ever sought personal legal advice from the investigating attorneys, nor is there any evidence that the investigating attorneys rendered personal legal advice. Third, when the appellants spoke with the investigating attorneys, they were fully apprised that the information they were giving could be disclosed at the company’s discretion. Under these circumstances, appellants could not have reasonably believed that the investigating attorneys represented them personally. Therefore, the district court’s finding that appellants had no attorney-client relationship with the investigating attorneys is not clearly erroneous.
The court also rejected Wakeford's argument that a subsequent joint defense agreement he entered into with the company protects his statements in the internal investigation because that agreement came after the interviews, and therefore the only party with a privilege (and work product) claim is AOL, which has happily waived those protections.
In the pressure of an investigation, when the invocation of the Fifth Amendment likely means termination from the company, and even refusal to accept voluntary service of an SEC subpoena can cost a person his job (see earlier post here), employees will likely respond to questioning by the company's lawyers, not necessarily thinking about the consequences of that cooperation. In this case, the government will use Wakeford's statements to corporate counsel as substantive proof of his knowledge and intent regarding the transactions at issue, so that his own words may force him to take the witness stand to explain what he meant when he spoke with AOL's lawyers. The corporate attorney-client privilege is a trap for the unwary these days. (ph)
Beware the "Misdirected" Fax
Similar to the scam that involved leaving fake "misdirected" voicemail messages touting a stock, three defendants were charged criminally and civilly with sending out hundreds of thousands of faxes addressed to one "Dr. Mitchel" urging the purchase of penny stocks. Joshua Yafa's part of the scheme involved a company called AVL Global, Inc., and after sending the fax Yafa sold shares in the company for a profit of $300,000 when the price rose. Proving that imitation is truly the sincerest form of flattery (and that there's no honor among thieves, as long as I'm throwing out aphorisms), Michael Pickens received one of the faxes and recognized for what it was. He then put the names of three different companies on the fax and resent them to almost a million recipients, then selling the shares to reap his own profits of over $300,000. Pickens was assisted by Serafin Sierra, whose company handled the "blast" copycat faxing for him. The SEC Litigation Release (here) describes the claims against the three defendants. Like any good B-School teaches its students, take the best practices from a competitor and make them your own, in this case taking advantage of the greed of others. (ph)
UPDATE (7/19) What's In a Name: A Wall Street Journal article (here) about the "misdirected" fax scam points out that Michael Pickens is the son of famed 1980s corporate raider T. Boone Pickens, whose hostile offer for Unocal in 1985 became the cornerstone precedent in Delaware for reviewing hostile tender offer defenses in Delaware (Unocal v. Mesa Petroleum, 493 A.2d 946 (Del. 1985)). The article also notes that faxes reached two SEC offices, which is not a great idea for conducting an investment scam. (ph)