Saturday, January 22, 2005
As usual, Doug Berman on Sentencing Law & Policy takes the barest thoughts of others and builds on them to discuss important ramifications from Booker, and his post "Increased Sentences post-Booker" deals with the issue of judges increasing sentences beyond the Guidelines range and possible due process/ex post facto concerns. The post here earlier discussed U.S. District Judge Crane in the S.D. Texas (McAllen Div.) when he sentenced three defendants convicted of public corruption offenses to longer terms of imprisonment in reliance on the advisory nature of the Guidelines. Doug poses the following additional issues for consideration in light of the increased sentences:
. . . [while] the due process question is contestable, I must wonder out loud if individual prosecutors have an obligation to make an independent judgment (and not wait for a defense objection) about whether the law allows an increase in a post-Booker sentence based on pre-Booker conduct. Relatedly, in the name of consistency, I wonder if Main Justice should issue some sort of directive about this matter to its offices. Otherwise I could imaging varying legal and policy judgments from different US Attorneys Offices about whether to try to reopen and seek longer sentences in past-sentenced cases.
I think the issue Doug raises is particularly important in white collar crime cases because the pressure for an upward sentence (we can't really call them departures any more, can we?) will be greater in the area of public corruption and corporate/business crime (e.g. accounting, securities, bank, & insurance fraud) than in other prosecutions. The drug and weapons crimes already have significant sentences, and with the criminal history categories (and "armed career criminal" sentences) it is usually not difficult to give a long term of imprisonment to repeat offenders. White collar offenders are more likely to come in lower if the amount at issue is not significant, they're rarely higher than Catetory I on the grid, and there are no mandatory minimums to deal with in these cases.
Judge Crane in McAllen, TX, specifically mentioned the effect on the public trust as meriting the increased sentences for the three defendants called back before him. Cases involving those who owe a fiduciary obligation (especially lawyers!) may draw requests from prosecutors for increased sentences beyond those in the Guidelines because of the breach of trust and need to send a message to professionals. Will the U.S. Attorney's Offices adopt a consistent policy that permits (or opposes) sentences outside the now-advisory Guidelines range? The government should not be allowed to "have its cake and eat it too" by arguing against lower sentences as violative of the remedial portion of Booker or as unreasonable on appeal, and then ask judges to give greater sentences because the harm is not comprehended by the Guidelines.
Regarding Main Justice guidance, this is certainly an area that cries out for consistency, but the rather heavy-hand approach of Main Justice over the past few years in the area of charging, plea bargaining, and appeals of downward departures has caused the local USAOs to resist the rules coming from DC. There is nothing particularly new about the tension between Main Justice and the field offices, but any attempt to draft a rigid policy on sentencing will not be viewed positively in all offices. The change from John Ashcroft, who seemed to a the leading proponent of centralized control, to Alberto Gonzales may lead to a more flexible approach. Booker guidance will likely be the first chance Gonzales (and his team) has to send a message to the U.S. Attorney's Offices about how he will approach issues of cooperation between local offices and DC. The sentencing issue will also be a test of whether DoJ wants to use policy pronouncements or will turn to Congress to legislate a solution to restore of measure of prosecutorial control over sentencing. (ph)
An article in the Wall Street Journal (Jan. 21) discusses the settlement of an SEC action by Jonathan Orlick, the former general counsel for Gemstar-TV Guide International Inc., for his participation in an accounting fraud. In settling the action, Orlick agreed to a bar from serving as a director or officer of a public company for ten years, a $150,000 civil penalty, and to return $150,000 to investors as part of a bonus he received. According to the article:
The SEC has been cracking down on corporate lawyers, who the agency views as "gatekeepers" crucial to deterring fraud. In more than two years, the agency said it has charged lawyers in more than 30 enforcement cases. The SEC's main argument is that lawyers should be helping companies follow the rules instead of providing a way around securities laws. In Mr. Orlick's case, the SEC said that the former general counsel knew, but failed to disclose, that Gemstar was improperly recognizing and reporting material amounts of licensing revenue from two companies. The SEC also said that Mr. Orlick repeatedly signed false management letters used by Gemstar's auditors regarding the status of negotiations with one of the companies.
The Commission has made lawyers a prime target of its enforcement actions in the past year, particularly in-house counsel who do not take steps to prevent accounting fraud and material misstatements. (ph)
Barry Minkow's company, ZZZZ Best, made him the face of fraud in the early 1990s along with Mike Milken and Charles Keating. A media darling for founding a purported multi-million dollar janitorial company that was little more than a facade to fleece investors, Minkow served almost eight years in an FCI in Lompoc, CA, where another notorious white collar criminal, Ivan Boesky, served almost two years for insider trading (in the minimum security part). Minkow's new book, "Cleaning Up: One Man's Journey Through the Seductive World of Corporate Crime," is available in bookstores on Jan. 21. As part of his promotion tour, Minkow gave an interview reported here by the UPI that includes this assessment of the FBI and white collar crime:
Perpetrators don't fear the FBI like they should or like they used to because of the preoccupation with terrorism. Having said that, I'm working with the bureau on a couple of cases right now and they do take white-collar crime seriously. But the perception is that they are overburdened and undermanned for white-collar crime. It's a material concern. And I would say in addition to that -- and you would expect me to say this -- that I think economic conditions are not the only thing that causes people to perpetrate fraud but in this case it's certainly a big deal.
Minkow also has the following take on another well-known person sentenced to prison: "Martha (Stewart) should not be in prison. Martha's victim impact is about $60,000, and she's doing time. Ridiculous! She would be much more valuable on the speaking circuit, telling people not to do what she did . . . So people need to know that no matter how badly you failed, you can come back from failure."
Is Minkow's book self-serving? Sure. But he is also a very smart person, and if you get a chance to listen to him as he plugs the book, he is very entertaining. Will he be able to avoid the lure of investment scams forever? Time will tell. (ph)
Friday, January 21, 2005
Many fraud cases arise from situations where oversight is lacking. What proves to be the most unfortunate are those cases where the individual handling the company oversight is the person committing the fraud.
The Atlanta Journal Constitution reports on a case that may prove to fit within this category. The "vice-president in charge of compliance" "for Applied Financial Group Inc., an Atlanta firm that dispenses investment advice" was charged today in a "295-count federal indictment." According to the article the amount of the defrauding is "more than $5 million."
Addendum (ph) - In addition to the filing of a criminal case, the SEC also filed a civil action. See SEC Litigation Release. "The complaint alleges that from early 2000 through early 2004, Ms. Longo misappropriated at least $5.4 million from the accounts of four profit-sharing plans that were advisory clients of Applied Financial Group."
The United States Attorney's Office in Houston (S.D. Tex.) issued a press release on Jan. 20 stating that U.S. District Judge Randy Crane resentenced three defendants convicted of public corruption offenses to increased prison terms due to the Supreme Court's decision in Booker. The defendants, two former school district officials and a city manager, were originally sentenced on January 11, 2005, under the Federal Sentencing Guidelines to 41 months each. On Jan. 20, the judge increased the sentences by 7, 13, and 31 months. According to the press release: "In imposing the increased sentence as to each of the three defendants, Judge Crane held that the original sentence did not reflect the systemic and pervasive corruption of government nor the loss of public confidence in government resulting from each defendant's actions. The judge's ruling included citations to citizen complaint letters to the editor of a local newspaper."
The resentencings raise the Due Process/Ex Post Facto issue discussed in a comment by Peter Goldberger here and by Doug Berman on the Sentencing Law & Policy blog (here). Goldberger and Berman consider whether a court can impose a sentence above the guidelines range for conduct before Booker, when the mandatory aspect of the statute was declared unconstitutional. Goldberger's comment concludes, "For some time to come, post-Booker discretion must, as a matter of constitutional law, be a one-way ratchet favoring lower sentences." These resentencings will certainly set the issue up for an appeal to deal with the collateral consequences -- still unknown -- of Booker. (ph)
AP Wires report that "Richard Scrushy lost a key pretrial round Thursday when a judge refused to throw out secret recordings that prosecutors contend prove the fired HealthSouth CEO was part of a massive fraud." But whether this ruling will be "key" to the defense remains to be seen. For one, it does not mean that the recordings will automatically be admitted into evidence. As the story reports, "[t]he government still must prove that agents handled the recordings properly."
According to the AP story, another ruling by the court included a holding that the search of Scrushy's office, despite their being no warrant, would be valid as the lawyers for HealthSouth consented to the search. The judge "rejected Scrushy's claims that he wasn't subject to HealthSouth policies that held any employee's work area or computer was company property and subject to search."
Do companies with policies that permit searching of employee's work areas realize that they may be subject to these policies? Will a decision such as this one cause corporations to rewrite their policies to exclude certain individuals in the company? If they do start excluding top company individuals from these access policies, will it make a difference should the government decide to search the work area of the CEO?
The final punch to the defense was when the judge failed to rule on Scrushy's request for documents. But the documents may be forthcoming, especially if they go to bias of a witness who might be testifying.
So the defense took 3 punches, but they aren't in the ring yet. The only thing that really counts is what happens when the fight actually starts.
Thursday, January 20, 2005
The San Diego Union Tribune, in an article titled, "Identity-theft suspect facing fraud charges," reports on perhaps one of the most fascinating people to be accused of a white collar crime. The individual, alleged to live in homeless shelters (FBI appears to question this), is accused of "bank[ing] more than $9 million in bogus class-action settlements." According to the article, he appears to have a law degree, passed the bar, but was never admitted. The article states that he "made $500,000 in less than three months in an online brokerage account where he deposited $2.3 million from a recent fraud, the FBI said." But the article also describes him as a person who was saving the money. This is clearly an unusual case.
In an article in the Atlanta Journal Constitutional this morning, titled, "If Perdue has way, spam will be felony," Governor Perdue of Georgia is trying to push for a new law that would make it a felony "to send more than 10,000 misleading e-mails during a 24-hour period, make large sums of money off those e-mails, or use juveniles to transmit the bogus correspondence." The article notes that other states have moved in this direction. There is also 18 U.S.C. 1037, the relatively new "Fraud and related activity in connection with electronic mail" statute that provides federal legislation focused on some deceptive forms of spam activity. Finally there have been civil actions that have also been focused on spam emails. The issue down the road may be whether to leave this for the civil arena or whether we want prosecutors to be spending time and resources in this area.
In an article in the Chronicle of Higher Education, (subscription required) "[a] former team doctor at the University of Washington pleaded guilty in federal court on Wednesday to prescription fraud." According to the article, the doctor's medical license was suspended in 2003 and he now faces "up to six months in jail, 500 hours of community service, and 90 days of home monitoring,"
UPDATE: The U.S. Attorney's Office press release describing the case is here.
An article in Corporate Counsel (Jan. 20, available on Law.Com) sends out a wake-up call (in case one is necessary) to in-house lawyers who work at publicly-traded companies subject to the securities disclosure rules and, more pertinently, the up-the-ladder reporting requirement imposed by the Sarbanes-Oxley Act. The article discusses the SEC's settlement with John Isselmann, the former general counsel of Electro Scientific Industries Inc.:
The SEC doesn't claim that he participated in the scheme to fraudulently boost the quarterly financials at ESI, a semiconductor manufacturer based in Portland, Ore. The agency doesn't even allege that Isselmann knew about the fraud at the company, which reported revenues of $207 million in fiscal year 2004. The SEC says only that the ex-GC failed to communicate material information to ESI's audit committee and outside auditors -- information that would have stopped the accounting fraud. In his settlement with the SEC, Isselmann neither admitted nor denied the agency's allegations. The 37-year-old lawyer agreed to pay a $50,000 civil penalty, and consented to a cease-and-desist order. He left ESI in 2003 -- he says that the company asked him to stay on -- and currently does consulting work in Portland. (ESI officials did not respond to requests for comment for this article.).
The Commission's complaint does not allege that Isselmann participated in the fraud perpetrated by the company's former CFO, but for the failure to fulfill what it called his "gatekeeper role" by not reporting the transaction when he first became aware of it. According to the article, "The SEC faulted Isselmann for failing to stand up to then-CFO Dooley at the disclosure meeting, and for failing to provide the audit committee with Morrison & Foerster's advice. These failures allowed Dooley and Lorenz to conceal their fraud, the SEC says."
The SEC has announced that it plans to scrutinize the conduct of corporate counsel -- both in-house and outside lawyers -- more carefully regarding not only legal advice but also how they reported potential misconduct and respond to civil and criminal investigations. It is a world fraught with much more peril these days. (ph)
CNN (Reuters) reports that "[f]ormer ImClone Systems CEO Sam Waksal has agreed to pay a $3 million civil penalty to settle charges over the insider trading case that also involved lifestyle entrepreneur Martha Stewart." The SEC Release in the case states that "[p]ursuant to this settlement, which is subject to the Court's approval, Sam Waksal and Jack Waksal will be held jointly and severally liable for disgorgement of over $2 million in illegal loss avoidance, including prejudgment interest, and Sam Waksal will be liable for a civil penalty of over $3 million. The SEC Release also states that Sam Waksal's consent "to the entry of a final judgment against him" was made "[w]ithout admitting or denying the allegations."
In the meantime, the NYTimes reports that "[s]ince Ms. Stewart's conviction, her company's share price has nearly tripled, increasing the value of her personal stake to an estimated $827 million from $318 million"
Everyone has been awaiting decisions post-Booker in hopes of finding some answers to questions that might be hanging in the wake of this new decision. Professor Doug Berman provides thoughtful analysis in his posts of Judge Cassell's reasoning issued in the first post-Booker sentencing case and now again in Judge Adelman's decision in the Ranum case.
The Ranum case is important for this blog as it can easily be classified as a white collar case. Ranum "held the position of section loan officer at State Financial Bank." with "duties includ[ing] managing a commercial loan portfolio and evaluating loan applications." The defendant was found guilty of three counts that included charges of "misapplication of bank funds by a bank officer pertaining to [a] $580,000 loan, count two charged him with making a false statement in connection with a loan application ...." and count three charged him with misapplication of bank funds pertaining to the $300,000 loan . . ."
If sentenced under the sentencing guidelines the sentence would have been "37-46 months." Instead the judge, in an extremely thoughtful opinion, "imposed a sentence of one year and a day."
Some may grab this case and say - "YOU SEE, we need the guidelines." But a careful reading of this decision will convince you immediately that this is exactly why the sentencing guidelines were problematic.
The judge provides careful reasoning that includes details of the offenders characteristics. Significantly, the judge notes that "defendant's conviction had significant collateral effects on him." Collateral consequences are common in white collar cases, but often went unnoticed with use of the sentencing guidelines. The judge also considers "third party interests" - "the significant benefits to family members resulting from his presence."
This decision provides a wonderful model for white collar decisions in the post-Booker world. It demonstrates that white collar offenders will not skate from jail time as a result of the Supreme Court's ruling. It also demonstrates how judicial discretion can offer reasoned analysis to fit the specific circumstances of a case.
Wednesday, January 19, 2005
The question here is not a situation of the case being filed in an improper venue. Rather, the issue before the court was whether the defendants can receive a fair trial in the proper venue.
According to Reuters (via CNN), if Ken Lay and Jeffrey Skilling go to trial, the case will be heard in Houston. "Although news coverage about Enron's collapse, this case, and these defendants has been extensive," U.S. District Judge Sim Lake was "not persuaded that [it] has been so inflammatory or pervasive ... that pretrial publicity will prevent a fair trial."
Although the court denied defendants' request to move the case from Houston, should the case proceed to trial it will be necessary to find a fair and impartial jury. As such, this issue is likely to be raised again during the jury selection process.
With the trials of former CEOs Bernie Ebbers, Richard Scrushy, and Dennis Kozlowski just getting under way, and the trial of Enron's two former CEOs (Ken Lay and Jeffrey Skilling) around the corner, corporate chieftains are certainly in the spotlight in criminal prosecutions. An interesting article from the New Jersey Law Journal (available on Law.Com) by Tim O'Brien reviews the long trial of former Cendant CEO Walter Forbes and his second-in-command, Kirk Shelton, which resulted in a guilty verdict for Shelton and a hung jury for Forbes.
The article notes: "When it comes to surviving cooking-the-book corporate scandals, it's good to be the CEO. That seems to be the message from the prosecution of the top executive of Cendant Corp., the first major company hauled to court for the type of massive accounting frauds that rocked the nation and led to reforms." The article describes the Forbes approach as the "Dumb CEO Defense" which this blog has more charitably called the "Honest-but-Ignorant CEO Defense" (see posts here and here). Forbes testified that he focused on the "big picture" involving strategy and clients, leaving the details (such as accounting) to lower-level employees. The article also discusses the "aggressive" tactics pursued by the Forbes defense team of Brendan Sullivan and Barry Simon from Williams & Connolly. One approach was to extensively cross-exam the government's witnesses, which drags out the trial and makes it much more difficult for the jury to piece all the evidence together. The trial lasted from May to November 2004, and the jury deliberated for over a month.
The U.S. Attorney's Office has not announced whether it will pursue the charges against Forbes in a second trial. The article is a worthwhile read as we watch other CEO prosecutions unfold. (ph)
According to an AP story (Jan. 18), U.S. District Judge Barbara Jones, who is presiding over the Bernie Ebbers trial, rejected a government motion to prohibit Ebbers' counsel from cross-examining former WorldCom CFO about instances of marital infidelity. The story reports: "U.S. District Judge Barbara Jones said the line of questioning was permissible because it spoke to 'Mr. Sullivan's character for truthfulness.' Prosecutors were trying to block the defense from raising the fidelity issue." Sullivan is the key government witness because of his extensive interactions with Ebbers and the lack of a paper trail linking Ebbers to the accounting misconduct at the company. The judge also granted a defense motion to prohibit the government from questioning Sullivan about his conversation with Ebbers when they watched testimony at a Congressional hearing on the collapse of Enron, and questioning other executives about Enron-related conversations. The judge found that the subject would be unfairly prejudicial.
The judge rejected a defense request that the government be required to grant immunity to two witnesses, including WorldCom's former chief operating officer, who will assert their Fifth Amendment privilege and refuse to testify. The judge found that the government had not abused its discretion in refusing to grant immunity, and the court is not authorized to grant immunity on its own authority. The jury selection process began Jan. 18, and opening arguments are scheduled for Jan. 25. (ph)
The CBS Morning News reported on the plea agreement of Richard Hatch, the winner on the first season of Survivor, for failing to report the $1 million he earned on the show's first season (along with another $321,000 paid by a Boston radio station). Survivor is a CBS program, and its next season starts on February 17, so the timing here (for publicity purposes) could not be much better.
Among those interviewed (and in the report on CBSNews.Com) was Joel Podgor, a CPA and (more importantly) brother of co-editor Ellen Podgor:
But CPA Joel Podgor of Holtz Rubenstein Reminick commented to CBS News Correspondent Trish Regan on The Early Show Wednesday that he finds it "shocking that somebody wouldn't report the income when it's so blatant and obvious and it's all over the TV that he earned it."
Joel is a forensic accountant who does work for, among others, law firms dealing with possible accounting fraud and litigation-related issues. He's now more famous than his sister, who is already quite well known. (ph)
The U.S. Attorney's Office in Los Angeles announced on Jan. 18 that four more defendants (the total is now seven) agreed to plead guilty to fraud charges as part of a ponzi scheme involving claims about Italian royalty. According the the press release issued by the USAO:
From late 1996 until the Ponzi scheme collapsed in March 2000, DFJ and its sales force promised investors annual returns of 24 percent. DFJ operated on the bogus premise it was headed by a descendant of a royal Italian family that had a treaty with the United States that gave the company and its "knighted" members immunity from paying taxes. DFJ, which claimed a 700-year legacy, opened an Orange County office in 1997. As part of its claims to investors, DFJ said it had interests in hundreds of companies around the globe and controlled $60 billion that it used as collateral in "bridge gap" financing programs. In fact, DFJ was a sham company that did not make promised investments and lulled investors with bogus account statements showing incredible profits. The majority of money solicited from investors went to the CEO of DFJ, a man known as "the Don."
Once your read it on paper, and hear about returns of 24% per year (not as outlandish as many schemes), you wonder how anyone would fall for it. Then again, how many of us invested in Enron, WorldCom, etc. (ph)
Tuesday, January 18, 2005
An AP story (Jan. 18) discusses the criminal information filed in Rhode Island charging Richard Hatch, the winner of $1 million on the first "Survivor" series, with tax evasion for failing to report that money and an additional $321,000 he received from Boston radio station WQSX for work as a co-host on a program (criminal information here from The Smoking Gun). Hatch is scheduled to be arraigned on Monday, Jan. 24, and likely will plead guilty at that time. While tax evasion certainly occurs even among lawyers and accountants who should know better, it is more than a bit audacious to win $1 million on a popular television program and then somehow think the prize won't be noticed by the IRS. (ph)
An AP story (Jan. 18) reports that Samir A. Vincent has been charged by criminal information in the Southern District of New York for his role in accepting secret commissions from the Iraqi government under Saddam Hussein to arrange transactions in the United Nations' oil-for-food program. According to the story, "The charges were the first to be publicly revealed in the prove of allegations that administrators in the United Nations oil-for-food program took bribes and let Hussein skim money from the program." The administration of the program has already implicated UN Secretary-General Kofi Annan's son, Kojo, in possible fraud and kickbacks, and the charge here is likely only the beginning. Once the criminal information is made available it will be posted. (ph)
UPDATE: Vincent is charged with four crimes: conspiracy, being an unregistered agent of a foreign government, violating the International Emergency Economic Powers Act--which prohibits transactions with certain foreign governments--and tax evasion (thrown in for good measure). The criminal information is available here on Findlaw.
An article in the Christian Science Monitor (Jan. 18) posits that the run of criminal trials involving CEOs, including Dennis Kozlowski, Martha Stewart, and the Rigas family, has had an effect on how business leaders view their jobs and the legal system. The article describes what it calls the "Enron Effect":
Experts say the trials already completed - and the jail sentences under way - have had a big impact on corporate behavior. Lawyers for white-collar defendants say that CEOs are now pressuring underlings to state earnings accurately. Thanks to Martha Stewart, executives are more aware of the dangers of lying to prosecutors. Corporate leaders also know that Congress now requires them to personally vouch for their companies' earnings statements. In short, greed hasn't disappeared, but the path to riches is more likely to follow the legal road map. "The government has largely accomplished its goal of changing corporate conduct in a major and significant way," says Kirby Behre, a former federal prosecutor who is now a partner at Paul, Hastings, Janofsky & Walker in Washington.
If there is an "Enron Effect," then how long it will last? This country seems to have spasms of corporate wrongdoing, often tied to a specific industry, such as the S&L collapse, defense contractor abuses, and the insider trading cases in the 1980s. The current focus on high-level executives such as former CEOs Ken Lay, Jeffrey Skilling, and Richard Scrushy--who were once considered exemplary corporate leaders--makes this era a bit different, perhaps. If you've been around long enough, however, you wonder what the next round of corporate prosecutions will look like. (ph)