Tuesday, July 26, 2005
eToys Inc. was one of the many dot.com companies that flamed out once business reality set in, and it filed for bankruptcy in 2001 in Delaware. Well-known bankruptcy attorney Paul Traub (of Traub, Bonacquist & Fox in New York) recommended to the Delaware Bankruptcy Court that Barry Gold be appointed CEO to oversee the liquidation of the company. Traub represented eToys creditors in the bankruptcy. Unfortunately, what was not disclosed at the time is that just a short time before that recommendation, Traub and Gold formed a company, Asset Disposition Associates, a liquidation company. Although their company did not have any dealings with the eToys bankruptcy, the business relationship is something that would usually be disclosed to the bankruptcy court. An article in the Wall Street Journal (here) discusses the case, including a motion by the bankruptcy trustee seeking the return of $750,000 in fees paid to Traub's firm for its work on behalf of creditors.
The article also notes that the "Three Amigos" of investigations -- the SEC, DoJ, and NY Attorney General's Office (i.e. Eliot Spitzer) -- have been in touch with individuals involved in the bankruptcy. While bankruptcy is usually a world of its own, bankruptcy fraud cases against lawyers for failure to disclose conflicts of interest have been brought. Among the most well-known, especially to the New York bar, is the prosecution and conviction of John Gellene (then of Milbank Tweed), who failed to disclose his representation of a creditor of a bankrupt company (182 F.3d 578 (7th Cir. 1999). Unlike other types of fraud, in which the government usually must prove a gain to the defendant and some loss by the victim, in bankruptcy fraud cases the harm can be to the court and the bankruptcy process from a failure to disclose, without the need to prove any monetary harm. For those interested in the Gellene case, an outstanding book that uses the prosecution as a starting point for a discussion of conflicts in the world of corporate law and finance is Eat What You Kill: The Fall of a Wall Street Lawyer by Prof. Milton Regan at Georgetown University Law Center. (ph)
The Wall Street Journal is reporting (here) that Fidelity Investments has received a Wells Notice from the SEC, which is a notification that the Commission staff has decided to recommend a securities enforcement action, regarding the receipt of gifts by employees who worked in the firm's stock trading department from securities brokerage firms. The investigation has been going on since late last year, and was the subject of an embarrassing front page article in the Journal (see earlier post here) about a bachelor party for a Fidelity trader that included a private jet, hotel rooms, and yacht, all paid for by brokerage firms. Other gifts being investigating include tickets to the Olympic women's figure skating final and rounds of golf, including an invitation to the highly-coveted Pebble Beach Pro-Am, that were paid for by brokerage firms seeking a slice of Fidelity's approximately $1 billion in trading commissions. Fidelity reassigned the former head of stock trading, Scott DeSano, to a new position, after the gift probe came to light.
Fighting Fidelity could be a significant undertaking for the SEC because the firm has quite a deep pocket and a reputation among small investors that it wants to defend. The Johnson family, which controls FMR Inc., which is the corporate parent of Fidelity, naturally have quite a proprietary interest in the firm and have a reputation for being quite hard-nosed. That said, the mutual fund company likely would prefer to avoid a drawn out fight in which some rather gory details would come to light (perhaps even worse than the dwarf-tossing at the bachelor party), so it may accept the one-day publicity hit from a settled SEC action. The Wells Notice is all part of the negotiation dance, and Fidelity's response, at least as quoted in the Journal article, is a familiar step, that it intends to "vigorously" defend itself. We'll see. (ph)
John Rutter was convicted of forgery, attempted larceny, and perjury related to his attempt to blackmail actress Cameron Diaz to pay him $3.5 million to prevent him from selling topless photographs he took of her in 1992. Rutter claimed to have a signed release from Diaz, but the jury convicted him of forgery for the signature on the release, and the larceny count was based on the demand for money to not release the photographs. Interestingly, the perjury count relates to Rutter's certification in a pending civil law suit that the signature was legitimate. As a former President learned the hard way, what goes on in a civil case can quickly turn into a criminal proceeding. An AP story (here) discusses the conviction. (ph)
Paul McGreal on the Corporate Compliance Prof Blog has an excellent post (here) on the settlement that Sony reached with the New York Attorney General's office regarding payola -- one of my all-time favorite made-up words. In a practice as old as radio, Sony settled a claim that it made payments and gave other items of value to radio station employees to get songs by its artists on the air, or played during favorable times (i.e. not just the graveyard shift at the stations. As Paul points out, "[T]he problem appears to be a serious breakdown in (or lack of) internal controls that assure compliance" with applicable rules prohibiting payola, including a federal statute making it a crime (47 U.S.C. § 508). (ph)
Bruce Carton on the Securities Litigation Watch blog has an interesting post (here) about schools with buildings (or in one case a professorship) named after defendants in corporate crime prosecutions, including Kozlowski Hall at Seton Hall and the Rigas Family Theater at St. Bonaventure. Other examples include Alberto Vilar, who is charged with fraud for allegedly taking funds from a client's account to make good on various charitable pledges, including his alma mater Washington & Jefferson College, and the A. Alfred Taubman College of Architecture and Urban Planning at the University of Michigan, named after Al Taubman, who was convicted of an antitrust violation and served a little less than a year in federal prison. Unfortunately for the schools, they cannot control the actions of major donors. (ph)
Monday, July 25, 2005
The LATimes here discusses whether possible perjury and obstruction of justice will be the main focus of the special prosecutor in evaluating the evidence received in the investigation of the leak that caused the name of a CIA agent to be released to the press. Often "short-cut" type offenses, like obstruction of justice, are used by the government because they are easier to prove. I have often maintained that it should not be proper for the government to avoid a thorough investigation just because they think there might be an easier course to pursue. Justice demands more than mere efficiency. As such obstruction of justice, perjury, false statements, and false declarations should not be used to avoid a thorough investigation of possible criminal activity. In the case of Arthur Andersen, LLP, the government learned that taking shortcuts is not always effective. In Andersen the Supreme Court struck down the conviction in a case in which the government proceeded with a single obstruction charge.
Short-cuts should be frowned upon when the government is able to investigate the underlying offense. If the underlying offense is impossible to investigate because of the destruction of evidence, intimidation of witnesses, or there is an inability to obtain the underlying evidence, charges such as obstruction of justice may be warranted. With a journalist in jail (Judith Miller of the New York Times) because she has not been released to disclose her source, these type of charges may in fact be proper if there is conduct found by the prosecutor to be false, obstructive, or intimidating. The question will certainly be whether the conduct meets the elements of one of these crimes, and more importantly "who," if anyone, engaged in such activity.
The NYTimes reports here that some may even believe that the rules regarding outing CIA agents needs review and change, to loosen the requirements placed on existing secrecy of CIA agents. If a congressional hearing proceeds this way, it may prove to be interesting, as the NYTimes notes that the CIA was the one that called for the investigation upon the disclosure of one of their operative's names. Would Congress wish to provide less protection to the CIA then they desire?
In any event, this investigation may not be on page one of all newspapers, but it continues to be prominent. (See, e.g., A4 Wall Street Jrl here). Certainly not an easy position for any prosecutor.
The fall-out from the grand jury investigation of Matthew Cooper/Judith Miler affects other media outlets, and back in June the editor for the Cleveland Plain Dealer stated that he would not run a story based on information from confidential sources until the protection for reporters was clarified. The story has now hit, and the paper has revealed the contents of a 115-page FBI affidavit, which had been sealed by the court, that was used to obtain wiretaps for telephones of Nate Gray, who was the best man at the two weddings of long-time Cleveland Mayor Michael White. A corruption prosecution of Gray and others ended in a mistrial, and a second trial is scheduled to begin in August. One of Gray's lawyers admitted that he leaked another document to the Plain-Dealer, which was an FBI summary of an interview with a confidant of Mayor White. The lawyer claimed that he did not know the document was covered by the court order sealing the documents, although that type of information is not usually a matter of public record and not something that would be given to a reporter if it were otherwise available. The defense received the documents as part of the discovery in the prosecution, and the affidavit (filed in 2002) describes the FBI agent's conclusions regarding alleged bribes paid to Mayor White, who left office in 2002 and has not been charged with any crimes. The Plain Dealer story (here) describes the affidavit and alleged corruption in the White administration, and a follow-up article (here) describes a hearing before the court in which U.S. District Judge James Gwin called for an investigation of the leaks. Unlike the leak investigation in Washington, D.C., this case has a more limited universe of potential leakers, although like so many of these types of inquiries it will be very difficult to figure out who leaked the affidavit. (ph)
We reported here on the recent corruption convictions in San Diego (two councilman convicted for conspiracy, extortion, and fraud (see San Diego Union-Tribune here)). But when the convictions involve politicians, the ramifications can be far reaching. This has proved true in San Diego with the recent convictions necessitating a need for a new election.
According to AP here the latest is that a second councilman has resigned post-conviction. This can be a wise move and assist with arguments at the sentencing hearing. It can show not only the collateral consequences of the conviction, but the acceptance by the individual in resigning their post.
Co-blogger Peter Henning mentioned in a recent post the fame of the San Diego Zoo. Let me add the site for the panda.cam so you can watch the panda bears live here. This is not mentioned to minimize the importance of the recent convictions in San Diego, but for those like me, who occasionally need a break, the pandas are fun to watch.
Sunday, July 24, 2005
The special prosecutor's investigation of a leak of the name of a CIA operative is back at the top of the news. CNN reports here in an article titled, "Ex-CIA Official Blasts Bush on Leak of Operative's Name" that a former CIA official who worked with Valerie Plame is not happy about this leak stating that "[w]e deserve people who work in the White House who are committed to protecting classified information."
The NYTimes, the newspaper employing Judith Miller who remains in jail for refusing to testify before a grand jury as to her source, discusses here the implications of this case to President Bush.
Has the media been fair to Bernard Ebbers, who was recently convicted and sentenced to 25 years?
One person associated with the defense team does not think so and has written his case to the newspapers in the form of an op-ed. It remains to been seen whether the media will print this piece. In the meantime, you can find this op ed here -
Craig J. McCann, PhD, CFA, Securities Litigation and Consulting Group, Inc. states that:
"1. The bloodlust for Mr. Ebbers is misplaced and doesn’t justify the sentence. He should have been sentenced on the basis of what he was convicted of and 99% of the losses in WorldCom were definitely not caused by the things Mr. Ebbers was convicted of.
2. The standard of evidence for proving shareholder losses at sentencing hearings is so low that a rough assertion by the government suffices. I contrast this with the evidentiary burden in class action litigation.
3. The sentencing guidelines thresholds are so low that (combined with the low standard of proof for shareholder losses in sentencing hearings) executives at large publicly traded firms who are found guilty of filing false SEC reports statements will always get the maximum sentence – effectively a life sentence."
Although many may disagree with the Ebbers sentence, find the media mischaracterizing the harm, and find some of the recent white collar sentences beyond recognized punishment theory, convincing the public may prove more difficult. The Wall Street Journal's poll on the Ebbers sentence (here) shows 55% of the people voting in the poll finding the Ebbers sentence to be fair, with only 24% finding it too harsh. But maybe you haven't voted yet.