Tuesday, August 2, 2005
In many white collar cases, prosecutors start at the bottom and move up the ladder as they secure new information and the assistance of lower level employees through the use of cooperation agreements. Pleas are often offered to employees within a corporation to testify against higher-ups. And as recently seen in many cases, the government tries to secure a plea of a chief financial officer before proceeding up the ladder.
In the case of MCA we saw five pleas before moving to the CEO. Pleas included "MCA's former President and Chief Operating Officer," "MCA's former Chief Financial Officer," "MCA's former Controller," "MCA's former Vice President for Marketing Syndication," and "the former head of MCA's Special Loan Group." (DOJ Press Release 2-24-04)
And then we reported here the plea entered by Patrick Quinlan, who was CEO of MCA Financial Corp. The company "invested in Detroit-area real estate and financed its operations by selling securities." Quinlan received ten years on a plea to charges of conspiracy to commit mail, wire and securities fraud. When he plead guilty, the press release of the Eastern District of Michigan stated:
"MCA was a privately held concern that raised capital in large part by selling debt and pass-through securities to the general public. Through his guilty pleas today, Mr. Quinlan admitted that from as early as 1993 until its seizure by state regulators in January 1999, MCA engaged in a scheme to defraud its investors and institutional lenders by misrepresenting its true financial condition through the preparation and use of false and fraudulent financial statements that were regularly filed with the SEC and made available to brokers and investors and to banks and other institutional lenders. As the result of paper transactions involving low-income housing in the City of Detroit between MCA and numerous off-book partnerships controlled by Mr. Quinlan, millions of dollars in sham assets and revenues were created and included in MCA's balance sheets and statements of income."
The government secured another important plea today with "John P. O'Leary, a former senior vice president for corporate finance" pleading guilty "to one count of concealing a felony" in return for "prosecutors drop[ping] 12 other fraud and conspiracy charges." (see here AP). This has all individuals initially charged in the matter now entering pleas.
The old saw is that the best way to steal from a store or bank is to work for it, especially if you're a trusted employee. Similarly, when the accounting firms advise clients on their internal controls, one of the key steps to ensuring that employees do not embezzle is to require double checking of expense submissions so that one person cannot submit false bills or set up fake accounts. It appears that big four accounting firm Deloitte & Touche's internal controls may not have been up to snuff, based on the indictment (and arrest) of a former manager for Deloitte Consulting LLP, Jamie Watkins, on mail and wire fraud charges for stealing approximately $500,000 from the company. According to a press release (here) from the U.S. Attorney's Office for the Central District of California:
Watkins allegedly exploited Deloitte expense reimbursement programs to defraud the firm out of approximately $550,000 from June 2000 until October 2003. The Indictment alleges that Watkins used several schemes to perpetrate the fraud on Deloitte. In one scheme, Watkins used her company credit card to pay for personal items knowing Deloitte would pay the account balance. Using her company credit card, Watkins allegedly paid her property taxes and made numerous purchases, including jewelry, clothing and a wine cellar. Second, Watkins sought and received reimbursement payments for purported business-related purchases that Watkins paid for with a company credit card. Watkins allegedly had no out-of-pocket expenses, but she submitted documentation claiming business-related expenses. Finally, Watkins allegedly created false invoices for non-existent purchases and submitted reimbursement forms and phony receipts to receive reimbursements. Based on Watkins' allegedly fraudulent acts and false representations, Deloitte made reimbursements and paid off the account balance on Watkins's company credit card.
I assume this won't become a case study for the firm for its internal controls testing for other companies. (ph)
As Doug Berman points out on the Sentencing Law & Policy blog (here), the differing approaches of the circuit courts on the question of whether to remand to the district court for resentencing in light of the advisory nature of the Guidelines has created some inequities, at least regarding what must be shown to get a second chance at sentencing. On one side is the Eighth Circuit's parsimonious approach, and one need only look at the daily release of opinions to see that it is the rare case in that court which meets the standard for a sentencing remand. The Seventh Circuit takes a more forgiving approach, making a limited remand to the district court to address the initial question of whether it might have imposed a different sentence in light of Booker. What does a judge in the Seventh Circuit have to say to trigger the remand? In an opinion released on Aug. 1 in U.S. v. Askew (here), the court found the following statement by the district judge sufficient: "I am unable at this time to say that I would have imposed the same sentence if I had known the Sentencing Guidelines were merely advisory. I therefore desire to resentence the defendant." It all depends what side of the Mississippi River you're on (well, kinda). (ph)
Monday, August 1, 2005
Baltimore Orioles first baseman Rafael Palmeiro, the latest entrant into baseball's select 3000 hit club (not to mention being one of four major leaguers with 3000 hits and 500 home runs), was suspended by Major League Baseball for ten days for violating the new steroid policy. That policy was adopted shortly after a hearing before the House Government Reform Committee in March 2005 at which Mark McGwire refused to state whether or not he had ever taken steroids, and Palmeiro asserted in his prepared remarks (here): "Let me start by telling you this: I have never used steroids. Period. I don’t know how to say it any more clearly than that. Never. The reference to me in Mr. Canseco’s book is absolutely false." Jose Canseco (an admitted steroid user) asserted in his book that Palmeiro took steroids while they were on the Texas Rangers. In response to the suspension, Palmeiro issued a written statement (here) that takes a similar approach: "I have never intentionally used steroids. Never. Ever. Period . . . Ultimately, although I never intentionally put a banned substance into my body, the independent arbitrator ruled that I had to be suspended under the terms of the program."
Did Palmeiro tell the truth when he testified before Congress? Recall that Barry Bonds, who was not subpoenaed to the March hearing, testified before the grand jury in the BALCO case that he did not know the substances he received from his personal trainer contained steroids. After all the publicity surrounding steroids, can one "accidentally" take steroids? Palmeiro explains in his statement: "I am sure you will ask how I tested positive for a banned substance. As I look back, I don't have a specific answer to give. Unfortunately, I wasn't able to explain to the arbitrator how the banned substance entered my body." Given the certainty of Palmeiro's assertion to the Committee, I suspect an enterprising prosecutor will take a closer look at his past conduct. (ph)
The sentencing for former Tyco CEO Dennis Kozlowski and CFO Mark Swartz is still set for Tuesday, August 2, so barring a late postponement, New York State Supreme Court Justice Michael Obus will impose a term of imprisonment on the defendants. The most serious charge on which the jury convicted Kozlowski and Swartz was first degree grand larceny, which under New York law is a class B felony "when the value of the property exceeds one million dollars," which was certainly the case here (see N.Y. Penal Law Sec. 155.42 here). Unlike the federal Sentencing Guidelines, which require a fairly intricate analysis of the circumstances surrounding the conviction and the relevant conduct of the defendant in the crime that leads to a "offense level" that gets plugged into a sentencing grid, New York provides for a range of sentences based on the type of offense and gives the sentencing judge discretion within that range to impose a term of imprisonment (i.e. an "indeterminate sentence"). Under N.Y. Penal Law Sec. 70.00(2)(b) & (3)(b) (here), the minimum sentence for a class B felony is from 1 to 8.3 years, and the maximum is 3 to 25 years (i.e. the minimum is 1/3 of the maximum).
What makes things dicey for Kozlowski and Swartz is that, under New York law, a sentence of more than six years means that they will be sent to a maximum security prison, such as Attica or the Downstate Correctional Facility in Fishkill, NY (doesn't that sound inviting). While federal prisons are not necessarily pleasant, a minimum security camp is much less structured, and threatening, than a New York State Correctional Facility, especially a maximum security prison. As discussed in a CNN.Com article (here), the usual practice in New York is to take the prisoner from the courtroom immediately after sentencing to begin serving the term of imprisonment, although the person will be processed for approximately six weeks until being sent to the assigned prison. If Justice Obus does not grant Kozlowski and Swartz bail pending appeal, which is a distinct possibility, they could be in a New York prison by the end of the summer. (ph)
A press release here of the United States Attorney for the Northern District of Alabama announces that two individuals "plead guilty . . . to the charge of conspiracy to commit bribery in connection with their role in the Jefferson County" Alabama sewer project. Both defendants agreed to cooperate with the government in an ongoing investigation as part of their plea agreements. The press release states:
"'Corruption can be contagious and was in the case of the Jefferson County sewer project' said U. S. Attorney Alice H. Martin. 'To individuals and businesses that argue this is just part of '"doing business"', we respond that bribery is illegal business and will be met with prosecution.'"
USA for the District of Colorado announced in a press release here that an individual from "Caracas, Venezuela, pled guilty before U.S. District Court Judge Walker D. Miller to intentionally damaging a protected Department of Defense computer." The press release states that the individual pleading guilty "was a member of 'World of Hell,' a group of people who assisted each other with, and communicated regarding intrusions they made into government, business and corporate computers." What was particularly frightening about this case is that according to the DOJ press release:
"On or about June 10, 2001, the defendant caused the transmission of a code or command to a protected computer that was exclusively used by the United States Department of Defense, Defense Information Systems Agency (“DISA”), which is responsible for computer based training for the United States Air Force and other military personnel. The defendant perpetrated a web-page defacement on DISA web-based computers by altering the web-page to display a World of Hell message. The defendant also deleted logging information from the DISA computers to intentionally impair the availability of computer logging data."
The Times of London reports (here) that the Serious Fraud Office is looking at possible bribery involving "Robert Lee International, Travellers World and BAE, in connection with defence equipment contracts and the Saudi Arabian Government." A report issued earlier this year (here) by the Organisation for Economic Co-operation and Development (OECD) criticized the British government for not taking a more active role in implementing the OECD's anti-corruption covention, which largely parallels the Foreign Corrupt Practices Act by prohibiting the payment of bribes to obtain or keep overseas business contracts. The disclosure of the investigations may be a result of the OECD's prodding, and an earlier post (here) discussed articles in the New York Times on the effects of corruption in Latin America and Africa. (ph)
A permanent injunction was entered at the the SEC's request freezing the assets of Alanar Inc. and Vaughn A. Reeves, Sr., Vaughn A. Reeves, Jr., J. Christopher Reeves, Joshua C. Reeves -- along with six companies controlled by the Reeves family -- for violations of the antifraud provisions of the federal securities laws. As described in the SEC's complaint (here) and Litigation Release (here):
the Commission charged that the Reeves’ investment scheme was an “affinity fraud.” The Commission alleged that by employing solicitations appealing to the Christian faith of many investors, the Reeves succeeded in raising over $120 million from investors in church bonds (bondholders) and over $50 million from investors in the Bond Funds (Bond Fund investors). Through their control of Alanar, the Bond Funds and the Paying Agents, the Reeves allegedly misused funds that churches paid to the Paying Agents to be held in trust for the benefit of bondholders, misused Bond Fund investor proceeds, and misrepresented the rates of return of the Bond Funds. For instance, from September 2003 to May 2005, the Reeves and the Paying Agents allegedly diverted $8 million worth of church funds held in trust for the repayment of bondholders into an online brokerage account. The Reeves allegedly used those funds to trade stock and equity options, loan money to at least one church and to make unsecured loans to themselves and companies they controlled. Similarly, the Reeves allegedly caused the Bond Funds to loan investor proceeds to other Bond Funds, and transferred almost $5 million worth of Bond Fund investor proceeds to their companies.
Churches and their members are often easy prey in investment schemes because of the trust between members who share, at least ostensibly, the same religious beliefs. (ph)
Sunday, July 31, 2005
Federal prosecutors in Los Angeles, California have subpoenaed some Home Depot records relating to "environmental practices." (see Business Week's AP story here) The SEC filing by Home Depot states here :
"The Home Depot, Inc. (the "Company") has received a grand jury subpoena from the United States Attorney's Office in Los Angeles, California, seeking documents and information relating to the Company's handling, storage and disposal of hazardous waste. California state and local government authorities are also investigating this matter, and the Company is cooperating fully with the respective authorities. Although the Company cannot predict the outcome of this matter, it does not expect that these investigations will have a material adverse effect on the Company's operating results or financial condition."
Home Depot prides itself in its corporate responsibility statement on environmental practices. It states: "[o]ur commitment to environmental sustainability shows through our energy efficient and sustainable products, recycling practices, and business principles." The Home Depot page on environmental programs can be found here.
DOJ reports in a press release here that the first indictments have been issued in "Operations FastLink and Site Down - the two largest and most aggressive international enforcement actions against criminal organizations involved in the illegal online distribution of copyrighted material."
The press release, in part, states:
"Operations FastLink and Site Down resulted in a total of more than 200 search warrants executed in 15 countries; the confiscation of hundreds of computers and illegal online distribution hubs; and the removal of more than 100 million dollars worth of illegally-copied copyrighted software, games, movies, and music from illicit distribution channels. Countries participating in these U.S.-led operations included: France, Canada, Sweden, Denmark, the Netherlands, the United Kingdom, Portugal, Hungary, Israel, Spain, Australia, Singapore, Belgium, and Germany. . . .
"The defendants charged today were leading members in the illegal software, game, movie, and music trade online, commonly referred to as the 'warez scene.' They acted as leaders, crackers, suppliers, distribution site hosts or site administrators. All were affiliated with organized warez groups that acted as 'first-providers' of copyrighted works to the Internet - the so-called “release” groups that are the original sources for a majority of the pirated works distributed and downloaded via the Internet. Once a warez release group prepares a stolen work for distribution, the material is distributed in minutes to secure, top-level warez servers throughout the world. From there, within a matter of hours, the pirated works are distributed globally, filtering down to peer-to-peer and other public file sharing networks accessible to anyone with Internet access."
The cases that come from this investigation are important to follow as they may assist in interpreting statutes in this new techno world.