Saturday, August 13, 2005

Is There a Bright Line Between Civil and Criminal Fraud?

Bruce Carton on the Securities Litigation Watch blog (here) and Prof. Larry Ribstein on the Ideoblog (here) raise questions about when a securities fraud case, perhaps more specifically a case involving accounting issues, moves from being a civil to a criminal case, and whether the direction of a case is anything more than the "corporate crime lottery."  Prof. Ribstein's post asks: "So will somebody explain where this magic bright line is between criminal and non-criminal fraud?"  I assume the question is somewhat rhetorical, because I'm not sure there ever was a "magic bright line" between the frauds, and given their roots in the common law crime of larceny I'm not sure there's any significant difference between them -- except, of course, the penalty.  It is not much of an answer to say that anything civil could be criminal, although as Mr. Carton points out every violation of the federal securities laws (and regulations) could be prosecute criminally, although a specific intent to commit securities fraud must be proven and not just recklessness.  Anyone who has tried (and no doubt failed) to explain to a criminal law class the difference between knowledge (including willful blindness) and recklessness knows how thin that magical line can be too.

The question is whether it is indeed a lottery, in the sense that the decision to pursue a criminal case is random, based on unaccountable variables.  I think (and hope) the answer is no, that there are certain signposts that prosecutors look for in deciding whether to pursue a criminal case based on accounting decisions.  WorldCom involved a number of false entries in the company's books, and not just "shading" of the numbers, at least as admitted by the five cooperating defendants who were sentenced over the past week or so.  There have been quite a few criminal accounting cases over the past few years involving false receivables, inflated inventory, and round-trip transactions to give the appearance of actual revenue.  One indicia that prosecutors look for is some type of clearly false document or transaction to build a case around, and not just a questionable accounting judgment.  But then, there is a tough line to draw between what is false and what is a judgment (check FASB 5 for the ultimate in judgment calls).  There is not a simple checklist that prosecutors use in deciding whether to pursue a case or leave the remedy to the civil side.  Cases tend to start with the regulatory agencies agencies (SEC, CFTC), and often the first-cut is made there regarding the strength of the case and whether to refer it to the criminal authorities.  Like anyone else, the regulators want to be heard, and so they will reserve the more egregious cases for a criminal referral.  That's not to say that headlines don't generate grand jury investigations, although if a case makes the front page of the Wall Street Journal it probably would have gone criminal at some point.

Does the size of the company matter?  It certainly does to the SEC because of its investor-protection mission, and likely matters to the U.S. Attorney's Offices because they are concerned about resource allocation, and a large public company will generate more interest.  Although most offices don't acknowledge a monetary cut-off point for taking a case, they will not pursue small dollar cases with few victims or only a minimal impact.  Another thing that gets the attention of both the civil and criminal players is the nature and extent of cooperation, or on the flip side any indication of perjury or obstruction of justice will shift a case over to the criminal side in a hurry.  It is sometimes hard to figure out why a criminal investigation has started (see the post today on a criminal investigation of Collins & Aikman) because the government does not disclose the rationale for its decision and companies provide as little information as possible.  Any number of cases don't pan out on the criminal side, and may not even result in a civil enforcement action.

Finally, for all the discussion of corporate crime prosecutions, the vast majority of cases in this field are brought against individuals and not companies.  A number of recent high-profile cases against senior executives did not involve any criminal charges against the companies: Enron, WorldCom, Adelphia Communications, and HealthSouth.  The recent trend to use deferred prosecution agreements for companies (e.g. Bristol-Myers Squibb, Time, and perhaps KPMG in the next few weeks) may result in an increase in the number of cases against corporations.  If a company complies with the agreement, though, the criminal charges are dismissed.  The main focus will continue to be on individuals, particularly senior officers of companies, including CEOs.  The current investigation of the reinsurance industry has already resulted in plea agreements by senior General Re officers, and may extend all the way to its former CEO.  Is that the result of a lottery?  Are there cases involving similar or greater misconduct that are not prosecuted criminally, or even ignored by the civil regulators? I have rambled long enough, especially for a Saturday. (ph)

August 13, 2005 in Civil Enforcement, Fraud, Prosecutions | Permalink | TrackBack (0)

Tax Protester Convicted

Tax protester Larken Rose was convicted in Philadelphia of five counts of failure to file a tax return.  Rose is a leading advocate of the Section 861 position, which claims that income earned inside the United States is not subject to taxation.  Section 861 (here) is entitled "Income From Sources Within the United States," and according to a press release (here) issued by the Department of Justice after Rose's conviction:

Courts have consistently held that Section 861 does not provide authority for United States citizens to fail to file income tax returns on income earned in the United States, as was highlighted by evidence at trial. The trial evidence also showed that Rose received more than a dozen notices from the IRS that rejected his 861 argument. Further, there were more than ten letters from members of Congress, found at Rose's residence during execution of a search warrant, that provided notice to him that his 861 argument was invalid. In addition, Rose was aware of two district court cases that had rejected the 861 argument. In one case, the district judge informed Rose directly that Rose's view of the law was incorrect. There was also considerable evidence presented at trial, through email correspondence, that Rose intended to create a mass movement of non-compliance to obstruct the enforcement of the tax laws.

A New York Times story (here) notes that Rose dared the Justice Department to charge him with a crime -- probably a double-dog dare -- and he defended himself at trial by denouncing the federal government by likening it to a bully in his closing argument.  It took the jury just 90 minutes to return its verdict, although it is one that will likely only fuel the tax protest movement.  Among other instructions, the judge told that jury that Rose's Section 861 argument is wrong as a matter of law, which only adds to the tax protester movement's view of the entire process as one rigged against those attacking the tax system. The TaxProf Blog (here) has additional links in this area.  (ph)

August 13, 2005 in Tax, Verdict | Permalink | TrackBack (0)

Collins & Aikman Discloses SEC and DOJ Investigations

Collins & Aikman Corp., the large auto-supplier that filed for bankruptcy protection earlier this year, disclosed that it has received a grand jury subpoena and has been providing documents to the SEC.  The company's press release (here) states:

Collins & Aikman Corporation (CKCRQ) announced today that it has received a grand jury subpoena from the United States Attorney’s Office in the Southern District of New York, seeking documents and information relating to the Company’s financial statements for the fiscal years 2000-2005, as well as documents and information pertaining to accounts receivable, customer and/or supplier rebates and other matters. The Company intends to fully cooperate in responding to this request, as it has for similar information requests from the Securities and Exchange Commission. As previously announced, an independent committee of its board of directors initiated and has been conducting an investigation of these issues.

C&A has annual sales in the $4 billion range, so a subpoena for five years worth of financial records will like result in more than a few truckloads of documents.

C&A's former CEO immediately before the bankruptcy filing was David Stockman, former Reagan White House OMB wunderkind (I've always wanted to use that term) whose private equity firm, Heartland Industrial Partners, took a controlling stake in the company a few years ago.  Given Stockman's high profile and well-known financial acumen, it will be interesting to see if prosecutors from the Southern District focus on him as they investigate the company's accounting.   (ph)

August 13, 2005 in Fraud, Grand Jury, Investigations | Permalink | TrackBack (0)

Another Load of KPMG Dirty Laundry

For those who have been following the continuing saga of KPMG and the government investigation of its sales of abusive tax shelters, you know that the firm is working feverishly to avoid a criminal indictment, going so far as to issue a public statement blaming an array of former tax partners for engaging in illegal conduct.  Some current and former members of the firm, including former board members, recently fired off an anonymous eleven-page memorandum detailing what they view as the firm's failure to protect its partners and inconsistent treatment of favored members of senior management.  The memorandum, available below, goes into excruciating detail that only the most serious KPMG follower will be able to follow -- it is purportedly written by accountants, so it's hard to describe it as scintillating -- but the tone is one of extreme bitterness.  Even if the firm avoids a criminal prosecution by entering into a deferred prosecution agreement (and paying a hefty sum for that privilege, no doubt), will it be able to survive as much more than a shell of its former self?  (ph -- thanks to a tax lawyer friend for passing this along)

Download kpmg_anonymous_memo.pdf

August 13, 2005 in Fraud, Investigations, Tax | Permalink | TrackBack (3)

Friday, August 12, 2005

Did Karl Rove Lie to Bush?

Yahoo News (AP) here looks at the question of what happens if Karl Rove lied to the President.  The story notes that a spokesperson from the white house denied Karl Rove's involvement in the leak of the name of a CIA operative to the media. But the issue may be whether he lied to Bush, a key member of the executive.  Co-blogger Peter Henning is quoted in this article as saying:

the false statement law covers statements made to all members of the executive branch, including the president acting in his official capacity. In contrast, a typical false statement case involves lying to investigators or writing false information on a form to the government.

18 USC 1001 provides in relevant part:

a) Except as otherwise provided in this section, whoever, in any matter within the jurisdiction of the executive, legislative, or judicial branch of the Government of the United States, knowingly and willfully—

shall be fined under this title or imprisoned not more than 5 years, or both.  . .

If we are dealing with a material statement, and if someone lied to President Bush, it may raise a legal question. If this happened, it certainly would not be the typical 1001 case one sees of an individual under investigation lying to a federal officer who is conducting the investigation. But because of grand jury secrecy we do not know what evidence Prosecutor Patrick Fitzgerald has, or where the testimony is leading him.

(esp)

August 12, 2005 in Investigations | Permalink | TrackBack (0)

ABA Stand on the Attorney-Client Privilege

Posted here  is a reference to the ABA resolution regarding the Attorney-Client privilege that was recently passed by the ABA House of Delegates. The resolution itself can be found here. The last paragraph of this resolution is very telling.  It states:

"FURTHER RESOLVED, that the American Bar Association opposes the routine practice by government officials of seeking to obtain a waiver of the attorney-client privilege or work product doctrine through the granting or denial of any benefit or advantage." (emphasis added)

This resolution is important because it shows that that the government has acted improperly in continually asking counsel to waive the attorney-client privilege or work product doctrine in conducting criminal investigations that might implicate the corporation. Every corporate counsel and outside counsel representing corporations should have a copy of this resolution in their pocket or purse. When someone in the government asks for this waiver during a criminal investigation, pull out the resolution and show them the impropriety of their actions. 

This issue often arises in the corporate setting where the corporation is asked to waive all privileges and give information on individuals within the corporation to the government.  Oftentimes in this context, the corporation becomes pitted against the individuals in the corporation, with the government trying to secure evidence that will lead to an indictment..  Having seen the devastation that can be caused by an indictment against a corporation (Arthur Andersen LLP), even when the corporation is later successful in the matter, corporations become overly willing to cooperate and provide the government with anything desired.  The benefit or advantage here to the corporation in this cooperation is to avoid the corporation from suffering criminal or civil penalties. 

Cooperation is clearly beneficial to resolving criminal matters, but there needs to be limits to what is acceptable in this realm.  And when the government crosses the lines in trying to secure that cooperation, the corporation and individuals need to have some leverage in order to respond.  The ABA Resolution is the first step in providing a response to the government. 

What might be even more beneficial to corporations would be if the ABA would pass a specific ethics rule prohibiting this conduct.  ABA ethics rules in the past have been used to counter improper activity on the part of the government. Just look at ABA Model Rule of Professional Conduct Rule 3.8(e) that restricts prosecutors from subpoenaing a lawyer to a "grand jury or other criminal proceeding to present evidence about a past or present client."

If the government does not reconsider its position in light of this ABA Resolution and continues to ask for a waiver as a part of "necessary cooperation" to avoid criminal or civil penalties to the corporation, and by chance a corporate attorney does waive that privilege, this ABA Resolution provides a new line of questioning in a cross-examining that attorney on the witness stand.  After questions explaining to the jury what waiver and privilege are, it might include a question like -  -  "Counsel, do I understand correctly, you agreed to a waiver of this privilege despite the American Bar Association specifically resolving that this was an improper practice being used by the government? . . ."

(esp)

August 12, 2005 in Legal Ethics | Permalink | TrackBack (0)

Thursday, August 11, 2005

Abramoff Indicted

Jack Abramoff, a lobbyist, has been indicted by a federal grand jury in Florida for five counts of wire fraud (18 USC 1343) and one count of conspiracy (18 USC 371) to commit mail (18 USC 1341) and wire fraud. (See Wall Street Jrl here ; New York Times (AP) here).  He was indicted along with a NY businessman, Adam Kidan.

Abramoff is clearly no lightweight in political circles, as his name is often spoken in the same sentence with names like Tom Delay and President Bush.  The Wall Street Journal notes that in recent elections, Abramoff  raised substantial funds for President Bush and for Tom Delay (R. House Majority Leader).(see here)  The indictment relates to financing for SunCruz casinos.  It does not appear to relate to a Washington grand jury investigation that involves funds of Indian tribes.

(esp)

                                                                                             

UPDATE (8/12): The indictment of Kidan and Abramoff is available on Findlaw here.

August 11, 2005 in Prosecutions | Permalink | TrackBack (0)

Sullivan Receives Five-Year Prison Term for His Role in WorldCom Accounting Fraud

Former WorldCom CFO Scott Sullivan received the second longest sentence arising from the accounting fraud at the company when U.S. District Judge Barbara Jones sentenced him to a five year prison term.  Judge Jones characterized Sullivan as the "architect of the fraud at WorldCom" and said that his crimes "were of the highest magnitude."  The judge noted that Sullivan's cooperation was the key to the prosecution of former CEO Bernie Ebbers who was not indicted until after Sullivan agreed to cooperate, and also found that his family situation -- Sullivan's wife is quite ill and they have a young daughter -- was an additional ground for a lighter sentence.  Stories from the Wall Street Journal (here) and AP (here) discuss the sentencing.

Ellen Podgor's post from earlier today (below) raises questions about the fairness of giving significant sentencing breaks to the cooperator versus higher sentences for the defendant who goes to trial.  Ebbers has maintained his innocence, so that affects the calculation, at leas somewhat.  Sullivan's cooperation certainly brought him a much lighter sentence than his former boss, 80% less, and it's hard to ever say whether the benefit he received from cooperating was too great.  The government certainly touted Sullivan's cooperation, and will cite the 20 year difference in other cases in trying to entice agreements to assist.  The HealthSouth trial showed one of the dangers from cooperation agreements that largely give a defendant a nearly complete pass on punishment, but it is unlikely the government can stop seeking cooperation from corporate insiders if it ever wants to pursue higher-level officers of a company.  In the end, five years is a significant amount of time to spend in prison. (ph)

August 11, 2005 in Fraud, Sentencing, WorldCom | Permalink | TrackBack (0)

So Far Cooperation Brings Big Rewards in WorldCom Case

Yesterday, former WorldCom controller David Myers was sentenced to a year and a day, a sentence equivalent to that received by former WorldCom Accounting Director Buford Yates. (See Wall Street Jrl here).Giving a year and a day allows the defendant the opportunity to reduce the sentence premised on good time.  (See post here)

So far the WorldCom sentences have been:

Bernard Ebbers - 25 years (see here)

Betty Vinson- 5 months jail, 5 months house arrest (see here)

Troy Norman - no jail time (see here)

David Myers - year and a day in jail, and three years supervised release

Key cooperator Scott Sullivan is due to be sentenced today.

Reactions so far:

1. The Booker/Blakely cases have had relatively no effect on white collar sentences being issued by judges.  Atty General Gonzales (here) can't argue that there is a drift toward lower sentences or that sentence reductions are happening because of activist judges.  Perhaps the argument should be made that lower sentences are happening because prosecutors are "dealing" them out in return for testimony.  These WorldCom related sentences support the position that the best way to receive a reduced sentence is to provide some form of cooperation to the government.  Prosecutors, not judges, have been the ones calling for the reduced sentences. Prosecutors could do this prior to these Supreme Court decisions under 5K1.1 and they continue to request that judges treat cooperating defendants extremely favorably.

2. With the disparity in sentences so far (25 years for Ebbers in contrast to others), sentences not based solely on the culpability of the individual but significantly premised on cooperation, will defendants in other cases be encouraged to cooperate? It is obviously a goal of prosecutors in asking for these reduced sentences, to send a message that cooperation will be heavily rewarded. To some this may seem beneficial in reducing criminal activity.  But one also has to wonder if the incentive for cooperation is too high and may result in encouraging individuals to provide cooperation that may not be truthful.

3.  What happens to the individual who is last to be indicted when there is no one left to talk against and no way to provide cooperation?  What happens when the the accused has nothing to offer in cooperation because they did not see or hear anything?  Are we punishing these individuals with heavier sentences merely because they have nothing to offer the government?  Should we be afraid that they will invent something to tell the government just to obtain a reduced sentence?

4.  The Bill of Rights provides everyone accused of a crime with the right to a jury trial.  Are we punishing individuals who avail themselves of this right?

(esp)   

August 11, 2005 in WorldCom | Permalink | TrackBack (13)

Corporate Settlement Agreements With the Government Can Be Costly- Ask Hilfiger

Tommy Hilfiger announced its entering into a settlement agreement with the government.  Their press release here tells of their entering into a non-prosecution agreement with the U.S. Attorney's Office for the Southern District of New York.  It states in part:

"The non-prosecution agreement with the USAO is subject to certain understandings, including that THUSA will file amended U.S. federal income tax returns for the fiscal years ending March 31, 2001 through 2004 reflecting a reduced buying office commission rate for those four years, adopt and implement the recommendations of the Special Committee of the Company's Board of Directors, adopt and implement an effective ethics and compliance program, and provide information to the Hong Kong Inland Revenue Department ("IRD") for it to evaluate whether THEH or its Hong Kong subsidiary owe any Hong Kong taxes to the IRD. THUSA also agreed for a period of three years to provide the USAO, upon request, with information so that the USAO can monitor THUSA's compliance with the agreement."

As noted by the Wall Street Journal here, this settlement will cost the company "$18.1 million in back taxes and interest."

August 11, 2005 in Settlement | Permalink | TrackBack (0)

Did Wife and Son Aid Pinochet With Bank Account

This is not the first time one sees Augusto Pinochet's accounts at Riggs Bank mentioned.  (see here)  But the focus this time is on Pinochet's wife and son, and the investigation relates to their aiding the General with these accounts.  (see New York Times here)  With respect to Pinochet's wife, a defense appears to be one premised upon her being an innocent spouse who was unaware of her husband's financial dealings. One rather eye-brow raising comment in the article is that Gen Pinochet was visiting his wife who was being held in a military hospital.  The claim has been that he is not medically fit to stand trial.

(esp)

August 11, 2005 in International | Permalink | TrackBack (0)

The Latest on Paramalat

Much has been happening in the last couple weeks with respect to the aftermath of the Parmalat investigation. (see here).  As is often the case in white collar matters, criminal actions are not the only cases to follow.  Collateral civil matters can also provide significant information.  The Wall Street Jrl reported  here that Parmalat can proceed in its civil action against Bank of America Corp.  Previousl noted was that three Bank of America Corp individuals, from the Italian branch, have been charged by Italian prosecutors. (see here).

(esp)

August 11, 2005 in International | Permalink | TrackBack (0)

Wednesday, August 10, 2005

ABA Takes Stand on Government's Demands for Attorney-Client Privilege Waivers

The ABA Lawyers' Manual on Professional Conduct reports here (subscription required) that the ABA House of Delegates passed a resolution regarding the attorney-client privilege and the government's practice of trying to obtain a waiver of that privilege. The Task Force's recommendation, however, was not in fact the language passed by the House of Delegates as the House of Delegates decided to take a stronger stand against the government practice.  Stay tuned on exactly what was passed.

The National Association of Criminal Defense Lawyers (NACDL) has also been at the forefront of this issue. Past NACDL President Gerald Lefcourt testified before the ABA Task Force and an Executive Summary of the NACDL Report titled, "The Attorney-Client Privilege is Under Attack" can be found here.

For background information on the ABA task committee reports see here.

(esp)

August 10, 2005 in Legal Ethics | Permalink | TrackBack (0)

Krispy Kreme's Internal Investigation Reports On Accounting Problems

A special committee of Krispy Kreme Doughnuts, Inc.'s board has concluded its investigation of accounting problems and determined that the company engaged in earnings management -- usually a polite way of saying accounting fraud -- that it blames on its former CEO and COO.  A summary of the committee's report (here) adopts an interesting tone, noting that it was unable to ascertain the intent behind some of the transactions but points out that government investigators have tools available to gather more information.  The summary states:

In our view, Scott A. Livengood, former Chairman of the Board and Chief Executive Officer, and John W. Tate, former Chief Operating Officer, bear primary responsibility for the failure to establish the management tone, environment and controls essential for meeting the Company's responsibilities as a public company. Krispy Kreme and its shareholders have paid dearly for those failures, as measured by the loss in market value of the Company's shares, a loss in confidence in the credibility and integrity of the Company's management and the considerable costs required to address those failures.

The number, nature and timing of the accounting errors strongly suggest that they resulted from an intent to manage earnings. All those we interviewed have repeatedly and firmly denied having any intent to manage earnings or having given or received any instruction (explicit or otherwise) to do so. But we never received credible explanations for transactions that appear to have been structured or timed to allow for the improper recognition of revenue or improper reduction of expense. While we believe that our investigation was thorough and more than sufficient to support our conclusions, we recognize that government investigators, who have a broader array of investigatory tools than are available in a private investigation such as ours, may uncover additional facts that will better illuminate the intent behind various individuals' actions and the underlying events.

The company disclosed earlier that the SEC and U.S. Attorney's Office for the Southern District of New York have open investigations into accounting issues, and it may be that one or more officers (likely former employees) refused to cooperate in the investigation; Krispy Kreme provided the internal investigation report to the government but has not yet released it publicly. The government may be able to coax more information from the individuals through immunity grants or plea agreements, a tool not available to internal investigators.  The likely targets of the investigation are Livengood and Tate, so look for agreements with lower-level employees as the government starts to build its criminal and civil cases. (ph)

August 10, 2005 in Investigations, Securities | Permalink | TrackBack (0)

ABA Supports Reporters Shield Statute

The American Bar Association issued a news release here supporting a journalist's shield statute.  Interestingly it did not take a hard line approach of protecting all sources, but rather provided for some exceptions.  The essence of the news release provides that:

"To overcome the reporters’ shield, the new association policy would require a showing that the information sought from a journalist is essential to a critical issue, that all reasonable alternative sources for the information have been exhausted, and that the need for the reporter’s information clearly outweighs the public interest in free flow of information."

In reading this, I am reminded of Rule 3.8(e) of the ABA Model Rules of Professional Conduct that precludes prosecutors from subpoenaing a lawyer to a "grand jury or other criminal proceeding to present evidence about a past or present client unless the prosecutor reasonable believes" that the information is not protected by the privilege, the information is essential to an ongoing investigation and the prosecutor has no other way of obtaining the information.  Here, however, the privilege reigns as a priority above the public's need to know. 

Are lawyers more entitled to a privilege than journalists?  On the other hand it is nice to see some restraint being suggested so that prosecutors cannot try to use the media as a shortcut for doing the hard work in their investigation.

(esp)

August 10, 2005 in Media | Permalink | TrackBack (0)

More KPMG Tax Shelter Dirty Laundry Aired

Much of the attention paid to KPMG's abusive tax shelters involved individual clients of the firm, many of whom were officers at corporations that were audit clients.  A Wall Street Journal story (here) discusses sales of shelters to corporations to lower their tax liabilities, and notes that two senior partners in the tax division were involved in the marketing of the shelters, including e-mails urging other partners to contact firms and secure agreements as soon as possible.  KPMG has worked feverishly to avoid a criminal charge, and the article indicates that negotiations have progressed to the point that the a deferred prosecution agreement is in the works that will involve a penalty of $400 to $500 billion and restrictions on the firm's tax work.  As the government digs through KPMG's tax shelter business, the question is whether the firm really deserves a pass on prosecution.  The Arthur Andersen effect is likely to provide a shield from a full-scale criminal case because the cost of reducing the field of public accounting to a Big Three is too great, but the practice restrictions on the firm may prove to be a significant cost and could result in a substantially diminished number four. (ph)

August 10, 2005 in Investigations, Tax | Permalink | TrackBack (0)

What If You Lie in an Internal Investigation?

Internal corporate investigations are all the rage these days as companies seek to demonstrate their level of cooperation as part of an effort to forestall criminal charges.  Corporations almost routinely turn over the results of their investigations to prosecutors and civil regulatory authorities, and the reports usually contain statements -- many of them personally incriminating -- from employees about their knowledge and participation in transactions under scrutiny.  What if an employee lies to the internal investigators in an effort to obstruct that investigation?  Paul McGreal has two interesting posts on the Corporate Compliance Prof blog (here and here) discussing the issue in the context of the indictment of former officers of Computer Associates, including an obstruction of justice charge against former CEO Sanjay Kumar based on his statements during the investigation that includes the following information in the indictment:

58. On or about October 6, 2003, January 14, 2004, January 22, 2004, and April 6, 2004, the defendant SANJAY KUMAR was interviewed by attorneys from the Audit Committee’s Law Firm. During these interviews, KUMAR did not disclose, but instead falsely denied and otherwise concealed, the existence of the 35-day month practice. For example, KUMAR falsely stated that he had never monitored end-of-quarter contracting activity to determine whether CA would meet analyst earnings estimates. KUMAR admitted that he occasionally encouraged salespeople to close deals after the end of quarters, but stated falsely that these efforts were unrelated to revenue recognition.

59. The defendant SANJAY KUMAR well knew and believed, at the time of the October 6, 2003, January 14, 2004, January 22, 2004, and April 6, 2004 interviews, that certain of the statements he made during the interviews were false and that he otherwise concealed during the interviews information which he knew to be material to the Government Investigations. KUMAR further well knew, and in fact intended, that his false statements and concealment of material information would have the effect of obstructing and impeding the Government Investigations.

Paul points out that "as the Martha Stewart case illustrated, obstruction of justice can be prosecuted even though no other crime has been committed. And this theory makes internal investigation counsel a material witness to the crime. Let’s just say that that ups the ante quite a bit for in-house compliance attorneys who routinely conduct such interviews."  Talk about corporate counsel being deputized to carry out the government's investigatory mission.  (ph)

August 10, 2005 in Investigations | Permalink | TrackBack (0)

Kodak's Restatement Is Being Investigated by the SEC

In its most recent 10-Q (here), buried somewhere around page 66 under "Legal Proceedings," Eastman Kodak Co. makes the following disclosure:

During March 2005, the Company was contacted by members of the Division of Enforcement of the Securities and Exchange Commission (the “SEC”) concerning the announced restatement of the Company’s Financial Statements for the full year and quarters of 2003 and the first three unaudited quarters of 2004.  The staff of the SEC has been conducting an informal inquiry into the substance of that restatement.  The Company has fully cooperated with this inquiry, and the staff has indicated that the inquiry should not be construed as an indication by the SEC or its staff that any violations of law have occurred.

Kodak announced the restatement, which knocked off approximately $93 million in 2004 earnings, in March 2005, and it acknowledged internal control problems.  A restatement is sure to grab the SEC's attention in the current environment, particularly when it covers more than one year. The company did not disclose the informal investigation earlier this quarter when it discussed its earnings.  An informal inquiry means that the Commission staff does not (yet) have subpoena power, and obtains information voluntarily from the company and its auditors.  If there is any indication of extensive accounting problems, or the need to use compulsory process to obtain information, then the SEC will bump the case up to a formal investigation, which empowers the staff to issue subpoenas to obtain documents and testimony. (ph)

August 10, 2005 in Civil Enforcement, Investigations, Securities | Permalink | TrackBack (0)

Maybe This Explains Why Philly Isn't So Pretty These Days

The U.S. Attorney's Office for the Eastern District of Pennsylvania announced the indictment of former Streets Department Commissioner William Johnson, Assistant City Managing Director David Robinson, and former Executive Director of "Keep Philadelphia Beautiful" Mark N. Viggiano on conspiracy and theft of government program funds for taking $13,000 from the "Keep Philadelphia Beautiful:" fund and using it for a going-away party for Johnson.  In a press release (here), U.S. Attorney Patrick Meehan stated, "This was money that was supposed to help make Philadelphia a better place to live, not provide entertainment for a city official . . . The amount of money isn’t as significant as the abuse of trust by two public servants and the gatekeeper of federal funds given to the Streets Department."  Indeed, while the amount is small, Sec. 666 charges are punishable by up to ten years imprisonment, so I hope it was a very nice party. (ph)

August 10, 2005 in Corruption | Permalink | TrackBack (0)

Pleading Guilty in a New York Minute

A post yesterday (here) discussed the Independent Inquiry Commission's report on corruption in the UN's Oil-for-Food program, and that the UN would lift the immunity for two officials identified in the report as having accepted bribes.  Later that afternoon, one of the officials, Alexander Yakovlev, a former UN procurement officer, entered a guilty plea in the U.S. District Court for the Southern District of New York to conspiracy, wire fraud, and money laundering charges.  According to a press release issued by the USAO (here):

As charged in the criminal Information filed today, in 2000, YAKOVLEV, while working as a procurement officer at the United Nations, established the company Moxyco, Ltd. to facilitate the illicit and secret payment of money to him by foreign companies seeking to secure contracts to provide goods and services to the United Nations. Thereafter, YAKOVLEV received wire transfers sent to bank accounts in Antigua and Switzerland from foreign companies in exchange for providing information to companies about United Nations contracts that were up for bid and for assisting companies to obtain United Nations contracts.

(ph)

August 10, 2005 in Corruption, International | Permalink | TrackBack (0)