July 30, 2005
Co-blogger Peter Henning posted here some of the corruption cases pending throughout the United States. Corruption, however, is not unique to this country and in some cases is more blatant in other countries. This is presented in today's New York Times article here, where one finds a detailed account of corruption in Latin America. The New York Times series previously highlighted here graft in Africa.
Corruption abroad can make it difficult for United States companies who may be doing business in these countries. The Foreign Corrupt Practices Act (FCPA) prohibits in most instances United States companies and individuals from engaging in foreign bribery. When this Act was initially passed some businesses argued that it would place them at a competitive disadvantage. The Act was modified in later years to allow companies to accommodate some local practices such as payments for "routine governmental action," a term explicitly defined in the statute. This NYTimes series, in describing the corruption occurring abroad, allows one to understand the difficulties that US companies and individuals face when they operate in the international market.
The Scope of the Attorney-Client Privilege After the Crime-Fraud Exception
The crime-fraud exception arises with some regularity in white collar crime investigations, and it is always a difficult area because the attorney-client privilege and work product protection, together with the requirements of grand jury secrecy, often mean that both sides are advancing positions based on assumptions and less-than-complete information. Many of the cases involve in camera and ex parte submissions to the court, and cryptic decisions by the judge on the question whether the exception applies. An interesting issue that arose recently in a Fifth Circuit case -- the inevitably named In re: Grand Jury Subpoena (here) -- addresses the subsequent question after a finding that the crime-fraud exception applies: Do any of the communications and attorney work product remain protected by the privilege/protection? The government often seeks particular documents or communications, so the issue may not arise in every case. But in In re: Grand Jury Subpoena, the court had to address the issue whether the attorney could be compelled to testify about all communications with the client and provide all work product (save perhaps opinion work product).
The case began as a run-of-the-mill gun possession case in which the police seized the weapon at the house the defendant shared with his girlfriend. After counsel was appointed, the girlfriend met with him and asked about the difference in penalties between a perjury charge and the gun possession offense -- you should be able to guess where this is going. The girlfriend, who had denied knowing anything about the weapon at the time of the search, then submitted an affidavit stating that it was hers and she lied because she did not want to lose custody of her child. When contacted by the prosecutor, the girlfriend changed her story back and said she and the defendant had concocted the affidavit, which was false. At this point, the prosecutor subpoenaed the defense attorney (who had since withdrawn because of the perjury and obstruction) to testify about his communications with the defendant and the girlfriend, and to turn over all documents related to the representation. The district court found that the government had established a prima facie case for the crime-fraud exception -- no great surprise there -- and ordered the defense attorney to comply with the subpoena. The defendant appealed on the ground that the subpoena was overbroad by seeking all communications and work product from the representation, without any specification of the communications that were related to the alleged crime or fraud.
Before the Fifth Circuit, the government argued that once a court finds the crime-fraud exception applies, then the protections of the attorney-client privilege and work product doctrine disappear and all parts of the relationship are open to inquiry. The court rejected that argument, stating:
We conclude that the proper reach of the crime-fraud exception when applicable does not extend to all communications made in the course of the attorney-client relationship, but rather is limited to those communications and documents in furtherance of the contemplated or ongoing criminal or fraudulent conduct . . . The orders compel Former Counsel to bring all written statements of Appellant and Witness and all notes, records, and recordings of interviews of Appellant and Witness. Moreover, because the court’s orders compel Former Counsel to appear and order that he cannot assert any attorney-client or work product privilege, no boundary exists as to the extent of his compelled testimony. The court’s application of the crime-fraud exception was overly broad because it lacked the requisite specificity to reach only communications and documents no longer protected by the attorney-client and work product privileges.
The Fifth Circuit's analysis is sensible because the attorney-client relationship can be quite extensive, and a finding that the purpose of some communications with the attorney involved a possible crime or fraud by the client cannot mean that the entire relationship is no longer subject to the protections of the privilege or work product doctrine. If the sole purpose of the client contacting the attorney is to seek assistance in a crime or fraud, then the Fifth Circuit acknowledges that such a situation may call for compelling the attorney to testify about all aspects of the relationship. But I suspect those situations are comparatively rare, at least when there is an on-going relationship between the lawyer and client, and the legal representation relates to more common business transactions, not drug deals, loan sharking, etc. (ph)
WorldCom Cooperating Defendants Face Sentencing
The five former WorldCom officers and employees who entered guilty pleas and cooperated with the government's investigation that led to the successful prosecution of former CEO Bernie Ebbers will be sentenced in the first two weeks of August. The schedule of appearances before U.S. District Judge Barbara Jones (see U.S. Attorney's Office press release here) is:
Betty L. Vinson: August 5, 2005 at 10:00 a.m.
Troy M. Normand: August 5, 2005 at 2:00 p.m.
Buford T. Yates: August 9, 2005 at 10:00 a.m.
David F. Myers: August 10, 2005 at 2:00 p.m.
Scott D. Sullivan: August 11, 2005 at 10:00 a.m.
The order of appearances approximates the level of responsibility of the defendants in the company, with Vinson and Normand in the accounting department under the supervision of Yates. Myers was the corporate controller who oversaw Yates' department and reported to Sullivan, WorldCom's CFO and effectively the second ranking executive on the financial side of the company under Ebbers. The government has filed a 5K1.1 motion on behalf of Sullivan (see earlier post here) seeking a downward departure under the advisory Sentencing Guidelines. Ebbers received a 25-year sentence from Judge Jones, which included a modest downward departure, so the 5K1.1 motion probably will drop Sullivan's sentence significantly, although I would be surprised if he did not receive a term of imprisonment much greater than the other four cooperating defendants, given his role in the fraud that triggered the largest bankruptcy in U.S. history. (ph)
The Corruption Cases Keep on Coming
In the past few months, corruption investigations and prosecutions have made headlines in Atlanta, Dallas, San Diego (with the catchy title "Strippergate"), and Philadelphia, along with the leak of an FBI affidavit discussing possible corruption in the Cleveland Mayor's office. This past week brought more corruption cases, including:
- Ohio Governor Taft's former Chief of Staff pleaded no contest to a misdemeanor ethics charge for not reporting his use of the Florida house of Republican party fundraiser Tom Noe, who is under investigation related to missing funds that he was supposed to invest in rare coins on behalf of the Ohio Bureau of Workers Compensation. An AP story (here) notes that Gov. Taft is under investigation for not reporting up to 60 golf outings. Noe's contacts with Republican officeholders in Ohio is quite extensive, so this investigation will likely last for a while.
- The U.S. Attorney's Office for the Eastern District of Pennsylvania (Philadelphia) issued a press release (here) discussing the indictment of the Mayor of Norristown, PA, and the city's former Borough Administrator for accepting bribes from different contractors to steer business their way.
- The U.S. Attorney's Office for the Central District of California (Los Angeles) announced (here) a guilty verdict in the prosecution of a former treasurer for the city of Southgate for extracting bribes from contractors seeking to receive contracts with the city.
- The U.S. Attorney's Office for the Southern District of Florida (Miami) announced (here) the sentencing of a former Florida Correctional Probation Officer for accepting a bribe from one of his probationers to avoid taking a mandatory drug test.
All in a week's work. (ph)
July 29, 2005
White Collar Crime Conference
Georgetown University and the National Association of Criminal Defense Lawyers (NACDL) will be holding a conference titled, "Defending the White Collar Case:In and Out of Court" September 22-23, 2005. The website states:
Georgetown University School of Law and NACDL will hold this jointly sponsored 2-day seminar at Georgetown University School of Law, September 22-23, 2005.
Today’s white collar climate is unlike any we have ever seen. With sentencing guidelines and government investigations bearing-down on corporate accounting scandals, the white collar bar needs to stay abreast of the latest strategies for representing corporate clients.
The federal guidelines have dramatically increased sentencing exposure, and more individuals and corporations are going to trial in white collar cases. Knowing when to plea is essential, but when trial is necessary, you need to understand the complex issues involved and know about the latest enforcement tools being used by prosecutors and how to avoid and discredit them.
Georgetown University Law Center and The National Association of Criminal Defense Lawyers have produced this very timely and unique program to address lessons learned from current cases and investigations, and teach you the best ways of defending your clients on all fronts. Seasoned defense lawyers, corporate counsel, consultants and judges will share their stories and arm you with new skills, techniques, and knowledge to negotiate and try the toughest cases in the white collar legal arena, including the appropriate actions to take and what to avoid. Veteran prosecutors will also be on hand to contribute the government’s perspective on the most pressing issues facing the defense bar.
Join NACDL and Georgetown in addressing the new realities of white collar defense and threats to your clients.
For more information, see here.
New Charges Added in Case Against "Natural Gas Traders"
In a press release of the United States Attorney's Office of the Southern District of Texas it tells how two national gas traders, one a former employee of Dynegy, and the other a "former El Paso Merchant Energy (“El Paso”) natural gas trader" had counts added to their indictment. They were originally charged with"conspiracy, false reporting, and wire fraud related to the transmission of allegedly inaccurate trade reports to industry newsletters which used the reported trades to calculate the 'index' price of natural gas in August 2000." The new counts now charge these two individuals "with additional counts of false reporting and wire fraud relating inaccurate trade reports used to calculate the 'index' price of natural gas in July 2000."
One of the effects of adding a new month to the charges is that if found guilty, it could mean a higher sentence if the loss amount increases.
Potential Conflicts of Interest in Advising Corporations
One of the toughest areas to determine whether there is a conflict of interest in legal representation involves corporate clients. While the entity is usually the client, the lawyer interacts with the board of directors and senior management, who will view the lawyer as providing them with legal advice as much as the corporation. Things can get even murkier when it is a closely-held corporation, so the line between shareholder, manager, and corporation can be hopelessly blurred. A New York Times article (here) discusses the possible conflicts involving Marty Lipton, perhaps the leading attorney in the country in the field of mergers-and-acquisitions and corporate governance.
Lipton recently advised Morgan Stanley when former officers of the company challenged the leadership of its then-CEO, Philip Purcell. Lipton counseled the board and company management, including Purcell, in dealing with the dissidents and institutional investors. Things changed when Purcell decided to retire, and Lipton then advised the board on his severance package, which totals $113 million. Lipton's firm, Wachtell Lipton, also represented the board on a pay package for co-president Stephen Crawford, who entered into an agreement that guaranteed him $32 million, even if he quit before August. Once John Mack returned to Morgan Stanley as CEO, Crawford pulled the ripcord and took the money after serving as co-president for less than two months. Did Lipton (and his firm) have a conflict in these different roles? In one sense, the answer is yes, in that his work with Purcell could call into question his loyalty to Morgan Stanley, which arguably included seeking the lowest possible payment, once he had to negotiate with Purcell (who was advised by his own attorney). On the other hand, Lipton's client remained the entity -- Morgan Stanley -- and of course no one has objected to the representation (although some outside the company blanched at the severance payments, and the lawsuits started flowing like a New York fire hydrant on a hot summer day).
The pay figures for Purcell and Crawford are reminiscent of the compensation of former New York Stock Exchange chairman Dick Grasso. Interestingly, the NYSE was advised by Lipton on Grasso's pay, and Lipton also counseled Grasso on the issue. A conflict of interest? Maybe yes, maybe no -- and who says the rules of professional responsibility are vague? The determination of a conflict is not based solely on whether a client objects, but at the same time in corporate representation the lawyer has to deal with multiple constituencies, and turning the ethics rules into a "Lawyers Full Employment Act" by requiring separate counsel whenever there is a change in circumstances can be more harmful to clients by driving up the costs of representation. One hopes that conflicts of interest are not like Leona Helmsley's view of taxes, only for the little people (or lawyers, as it were). (ph)
Parmalat Investigation Heating Up
The Parmalat investigation appears to be heating up with the focus now on several international banks. Parmalat suffered from a corporate fraud scandal.(see discussion here of paper written about the Parmalat Case)( also see post on the upcoming trial of its CEO here).
According to the Wall Street Journal here , prosecutors in Italy are looking at indicting several banks and securities firms. This article notes that "three executives at the Italian branch of Bank of America Corp." have already been charged. One of the firms listed in the Wall Street Jrl article is Morgan Stanley. It will be interesting to see what, if any, affect the recent civil settlement between Morgan Stanley and Parmalat has on these matters. Parmalat's website notes here the following within a press release of June 23rd:
"Parmalat and Morgan Stanley have announced today a proposal for global settlement of their mutual claims.
"The Euros 155 million agreement settles all existing and potentials actions and claims, including compensation of damages. The litigation was originated by transactions before that Parmalat was declared under Extraordinary Administration."
A press release here on July 19th shows the agreement was signed and consideration was received.
July 28, 2005
White Collar Shame in Miami
People often remark that white collar sentences need to be the same as street crime, and to some extent there does need to be equity here. But there also has to be consideration of the collateral consequences- no matter what the crime might be. In the case of the white collar offender, or individual charged with an offense, one of the greatest consequences is the shame. The shame that this individual feels in the community.
Because of the stature of the person, often in a position of power, the shame may be a much harder fall than the individual committing offenses that are not as public. The street robbery will not result in the robber being on the front page of a newspaper for the whole community to see. Being a "front pager" carries the consequence that every detail of the indictment may be splashed for the world to see across the news.
This blogger mourns the loss of Former Miami Commissioner Arthur E. Teele Jr., although never acquainted with him. According to the Miami Herald here he killed himself in the lobby of the Herald Building today. Publicly humilitated? Yes. To some it may just be news. But to the recipient seeing their world crash down around them, they may see suicide as an exit. Sad? Yes. Those accused of white collar offenses and those who are convicted should not be getting death sentences. Todays death sends a strong message that legislators and courts need to factor in the devastation felt by someone charged with a white collar crime.
We all have heard of rewards being offered for lost items or to find information on the location of individuals- - even information leading to arrests in connection with a crime where the perpetrator may be unknown - but this one is VERY DIFFERENT.
According to CCN here the "The Cook County Republican Party is offering a $10,000 reward for information leading to an indictment and conviction of Mayor Richard M. Daley. . ."
Would any prosecutor dare to proceed on information obtained this way? Can you imagine the cross-examination at a trial on how the information was obtained? So if the jury fails to convict, no payment?
This is a lesson in why politics should stay out of law enforcement.
Addendum - The second part of this story may be around the question of whether the Republicans actually have the money to pay such a reward. John Kass in a column for The Chicago Tribune quotes them as saying, "We'll get it." See here.
(esp) (with thanks to Mike Orenstein).
Addendum - The Marathon Pundit has here a post "Cook County GOP chairman fired from day job (after offering $10,000 bounty for Mayor Daley conviction)"
Where Is This Investigation Headed?
Discrediting a CIA operative may have been a motive of some of the administration, but motive is not the same as intent. If Prosecutor Fitzgerald wishes to prosecute someone he is faced with showing some form of intent in the leak of the confidential information to the press. Intent, however, can be inferred from the circumstances and the motive may form a circumstance that assists in showing an intent.
Alternatively, Prosecutor Fitzgerald has to look at whether someone has committed a crime of obstruction of justice, perjury, false declarations or false statements. The "who" still remains an unknown - at least to most of us - with new information being presented in the press each day. The Washington Post reports here some of the latest in an article titled, "Prosecutor In CIA Leak Case Casting A Wide Net."
Thinking back to Special Prosecutor Ken Starr's investigation that started with the Whitewater investigation and traveled to sexual conduct engaged in by the President, one has to wonder how far Prosecutor Fitzgerald will go with his investigation. Will he start examining the 16 words in a State of the Union address, televised over wires, that may have started this whole chain of events?
Does Your Law Firm Handle White Collar Cases?
Having counsel available in a firm to handle a white collar issue is important these days. Business matters can develop into white collar crime matters overnight. It is therefore no surprise to see major firms expanding with new "special matters" sections. Law.com reports here , from the Fulton County Daily Report, that the law firm of Powell Goldstein (PoGo) is doing just that, with none other than a key partner in the firm, John Marshall, leading the group.
U.S. Attorney Seeks to Delay Discovery in SEC Securities Fraud Case Against Former Qwest Executives
The U.S. Attorney's Office for the District of Colorado has asked for a 150-day delay in discovery in the SEC's securities fraud case against former Qwest executives, including former CEO Joseph Nacchio. The SEC filed its complaint (here) in March 2005, and it alleges that the company improperly recognized over $3 billion in revenue from round-trip transactions and other accounting maneuvers, and also improperly excluded $71 million in expenses. Since then, two defendants have reached agreements with the government: former CFO Robin Szeliga has entered a guilty plea to insider trading (earlier post here), and former executive vice president Gregory Casey settled the claims by agreeing to disgorge almost $1.4 million, pay a $250,000 civil money penalty, and agree to a director-and-officer bar (earlier post here). The U.S. Attorney's Office is seeking the delay to permit it to complete an investigation of involvement of the individuals in the accounting for the transactions without the civil discovery interfering in the criminal review.
Parallel proceedings are common in this area, and the courts usually grant the prosecutor's request for a delay to complete an investigation because courts do not like to interfere in grand jury investigations, although the judge may not give the U.S. Attorney's Office all the time it wants because the investigation has been going on for almost three years now and the transactions occurred from 1999 to 2002. An AP story (here) discusses the government's request and notes that Nacchio and two other defendants want to continue with limited discovery in the SEC case. (ph)
July 27, 2005
What's In Store for Scott Sullivan?
Without the testimony of Scott Sullivan, there would likely be no conviction against Bernard Ebbers, former CEO of WorldCom. Now the question will be, what sentence should Scott Sullivan receive for his criminal activities, activities to which he plead guilty.
Sullivan is set for sentencing on August 11th and the New York Times reports here of his settlement in a civil class action lawsuit where he will turn over assets such as his home in Boca Raton. This gives Sullivan an even better shot at a lesser sentence. He has cooperated with the government and he has tried to give back some proceeds to victims. Should this assist in reducing his sentence? Will it assist? Stay tuned.
Cox Nomination Hearing
At his nomination hearing to be Chairman of the SEC yesterday before the Senate Banking, Housing and Urban Affairs Committee, Rep. Christopher Cox (in his prepared remarks here) stated that "my top priority will be vigorous enforcement of our securities laws." Saying anything else would be akin to attacking mothers, apple pie, and the American flag. The question is always the how, not the what. Gordon Smith on the Conglomerate Blog has an interesting post (here) about a few possible differences between Cox and his predecessor, William Donaldson.(ph)
SEC Files Insider Trading Suit Against Brothers
The SEC filed a securities fraud complaint in the U.S. District Court in Oregon against Philip and Paul Evans alleging insider trading in the securities of Merix Corp. immediately before the company announced an earnings shortfall in 2004. Philip is a financial analyst for Merix, and when he learned about the bad news he sold all his shares in a brokerage account despite a company policy against trading during the "black out" period before the public disclosure of the information. The Commission further alleges that Philip tipped his brother Paul, who sold short Merix shares and, in a more aggressive move, bought put options on the company's stock, which gave him the right to sell shares at a specified price. When the stock dropped 30% after the disappointing earnings announcement, Paul's transactions generated a profit of over $400,000. The Commission's Litigation Release (here) also notes that Philip told his mother about the bad news, and she sold her shares and avoided a loss of approximately $3,000. The SEC chose not to name the mother as a defendant in the case -- she may well have simply followed his suggestion to sell her shares without knowing the true reason. (ph)
Former Qwest Executive Settles SEC Action
The SEC announced a settlement with former Qwest Communications executive vice president Gregory Casey, who was one of the defendants in a securities fraud action related to the company's accounting for transactions that were designed to inflate revenues and earnings through round-trip agreements. As part of the settlement, Casey will pay $1,390,344 of disgorgement (plus $456,481 in prejudgment interest) and a $250,000 civil penalty; he will also be barred for five years from serving as an officer or director of a public company (see Litigation Release here). The Commission's civil fraud action continues, and among the defendants is Qwest's former CEO, Joseph Nacchio. (ph)
Using Political Connections for Ponzi Scheme
Frank Devine entered a guilty plea to conducting a ponzi scheme that defrauded investors of over $4 million. Devine was a Kendall County -- in the Chicagoland area -- Republican precinct leader who impressed investors with his political connections, including giving one person a tour of Speak of the House Dennis Hastert's office in order to induce an additional $100,000 investment in the scam. Rep. Hastert's office knew nothing about Devine's scheme. A Chicago Tribune article (here) discusses the guilty plea. (ph)
White Collar Criminal Cases Often Include Tax Charges
Tax charges often appear as accompanying charges with white collar fraud and corruption cases. In addition to charging the taking, bribing, or extorting of money, it is common to see charges for the failure to pay taxes on this money.
An example of this is seen in a recent press release here by the USA for the District of New Jersey. In this release USA Christopher J. Christie informed the public that "[a] former human resources manager who defrauded her employer of more than $350,000 and evaded paying taxes on the money was sentenced today to 37 months in prison."
The press release notes that:
"Buturla pleaded guilty on Oct. 25, 2004, to one count of wire fraud and one count of tax evasion, according to Assistant U.S. Attorney Bohdan Vitvitsky.
"Buturla was formerly a human resources manager at Agip USA, a former New York City subsidiary of Agip International, an Italian multinational corporation. Buturla admitted at her plea hearing that in the years1998 to 2000 she had defrauded Agip USA by exploiting her position to manipulate her then-employer's payroll system."
July 26, 2005
RenaissanceRe CEO Receives Notice of Possible SEC Suit
The broad investigation of the reinsurance industry by the SEC and other regulators will likely involve a civil enforcement action against two executives of RenaissanceRe Holdings, Ltd., a Bermuda reinsurer. The company disclosed in a press release (here) that the SEC sent Wells Notices to its CEO, James Stanard, and a former senior executive, Michael Cash, that the Commission staff has determined to file a civil enforcement action against the two related to "finite insurance" products sold to other insurance companies that can allow the purchaser to manipulate its reserves by apparently shifting risks away from the comapany, thereby making the balance sheet look better, i.e. accounting fraud. As discussed in an earlier post (here), RenaissanceRe effectively fired Cash when he would not voluntarily accept service of an SEC subpoena to testify. Whether Stanard can survive as CEO is an open question, and will depend in large part on whether a settlement can be worked out with the Commission that does not include a director-and-officer bar or a finding of fraudulent conduct. (ph)