Tuesday, August 9, 2005
Former WorldCom director of general accounting Buford Yates received a prison term of one year and a day from U.S. District Judge Barbara Jones for his role in the massive accounting fraud at the company. By having the extra day added to the sentence, Yates is eligible for the 15% good time credit to reduce his term by a little less than two months. According to an AP story (here), Judge Jones described Yates as "perhaps the lease useful" of the cooperating witnesses against former CEO Bernie Ebbers because he appeared to be reluctant to "upset the applecart" at WorldCom. Yates did not testify at Ebbers' trial, unlike the other four WorldCom employees who entered into plea agreements. The two former senior WorldCom executives, controller David Myers and CFO Scott Sullivan, will be sentenced over the next two days. As the sentences have progressed for the five cooperators, each defendant has received approximately six months more than the previous one, so we'll see if that trend holds in the next sentencing. (ph)
The Independent Inquiry Commission Into the United Nations Oil-for-Food Programme issued its third interim report (here) and identified two senior officials in the Programme who it concluded engaged in criminal wrongdoing. The report analyzes the role of Benon Sevan, the Executive Director of the UN Office of the Iraq Programme, and Alexander Yakovlev, a UN procurement office, and concludes that they solicited bribes. The Commission further recommends that the UN waive the immunity that protects each from prosecution. A statement (here) by the UN chief of staff announced that Secretary-General Annan intends to waive the immunity, and that "[w]ith specific regard to Mr. Sevan, the United Nations is already cooperating with inquiries from the Manhattan District Attorney and is in the process of replying to a request for cooperation from the U.S. Attorney for the Southern District of New York. With regard to Mr. Yakovlev, the UN's Office for Internal Oversight Services (OIOS) last month contacted the U.S. Attorney for the Southern District of New York to alert them that internal, ongoing investigations of Mr.Yakovlev had turned up prima facie evidence of criminal wrong doing and has shared that evidence with the U.S. Attorney's office." With the immunity from prosecution gone, look for prosecutors to file charges in the near future against each for his role in a program that was rife with corruption. (ph)
The SEC filed a civil fraud action against two former Citigroup executives, including Thomas Jones, the former head of its Global Investment Management division, for setting up an affiliated transfer agent to handle mutual fund transactions for Citigroup customers but did not pass along the savings to those investors. As discussed in an earlier post (here), Citigroup settled the SEC action by agreeing to pay $208 million in disgorgement, interest, and civil penalties. The SEC charged Jones and Lewis Daidone, CFO of the division, with aiding and abetting fraud under the Investment Advisors Act, and according to the Commission's Litigation Release (here):
The complaint alleges that Jones, the former chairman and chief executive officer of the asset management division, directed an effort to negotiate a deal that would permit Citigroup to reap much of the profit that the funds' third party transfer agent had been making. Jones approved the final structure of the deal fully aware that the affiliated transfer agent was projected to make tens of millions of dollars in profit each year for doing minimal work. The complaint further alleges that Jones intentionally or recklessly acted in disregard of his fiduciary duty by failing to take steps to ensure the funds' independent directors were fully informed of the details of the proposal and that Jones approved the presentation delivered to the funds' boards seeking approval of the self-dealing transaction knowing or recklessly disregarding that the presentation was materially misleading.
The complaint alleges that Daidone, a senior vice president of the Adviser and the funds' treasurer and chief financial officer, participated in the negotiations with the existing third party transfer agent and was the person responsible for making the presentation to the funds' boards in a way that led the boards to believe the affiliated transfer agent proposal was in the funds' best interests, which was not true.
According to a Reuter's story (on CNN.com here), Jones' attorney asserted that he was a "victim" of the fraud and "not a perpetrator." (ph)
Monday, August 8, 2005
The grand jury investigation of leading lawyers from famed securities class action firm Milberg Weiss is expanding, according to a report in the Wall Street Journal (here). According to the Journal, two former Milberg Weiss partners have received immunity, and one has testified before the grand jury. The investigation has already produced the indictment of Seymour Lazar, who served as a representative plaintiff in a number of class actions in which the firm was lead counsel. The indictment alleges that Lazar received secret payments from the firm, and he worked closely with former name partner William Lerach, who split away from Milberg Weiss last year to form his own firm. The article also asserts that the government is looking into payments made to an expert witness who testified in a number of Milberg Weiss securities class action cases on damages issues; the expert was charged with fraud and embezzlement in an unrelated case.
As discussed in an earlier post (here, which includes a link to the Lazar indictment), the major problem the government faces is the statute of limitations for much of the alleged misconduct, most of which occurred before 2000. The Journal articles notes that the government's focus is on a conspiracy case, which would allow for older acts that would otherwise fall outside the limitations period to be used so long as at least one overt act took place within the last five years. The problem is establishing a single, overarching conspiracy that incorporates all the alleged misconduct, which may be difficult to prove. The Journal notes that new subpoenas have been sent to other law firms that acted as co-counsel with Milberg Weiss, although attorney-client privilege issues could slow the investigation even further. (ph)
The brouhaha triggered by the revelation that prominent Ohio Republican fundraiser Tom Noe may have defrauded the Bureau of Workers' Compensation through non-existent investments in rare coins has resulted in an interesting division of authority over the investigation among federal and state prosecutors. A press release (here) issued by the U.S. Attorney's Office for the Northern District of Ohio describes the agreement among the different offices on how to proceed in the wide-ranging investigation of Noe's various activities:
Prosecutors Julia Bates of Lucas County and Ron O'Brien of Franklin County, together with United States Attorneys Greg Lockhart and Greg White today announced a partial division of prosecutorial responsibilities in the investigation of Thomas Noe and the larger investment issues involving the Bureau of Workers' Compensation. The following was agreed upon at a meeting in the Lucas County Prosecutor's Office on July 7, 2005.
First, the Thomas Noe investigation regarding the investment of Bureau of Workers' Compensation funds in rare coins will be supervised jointly by Julia Bates and Ron O'Brien through a Special Grand Jury convened in Lucas County.
The investigation of the remaining issues associated with the Bureau of Workers Compensation investment portfolio, to include the Emerging Managers Program will be supervised jointly through the offices of the United States Attorneys for both the Southern and Northern Districts. A Grand Jury will be seated in Cleveland to begin that process.
Mr. O'Brien will supervise all state ethics investigations in conjunction with the Columbus City Attorney, Richard A. Pfeiffer.
Finally, the Public Integrity Section of the Department of Justice and the United States Attorney's office in the Northern District of Ohio will jointly supervise the investigation into the Noe contributions to the Bush/Chaney 2004 Campaign. The Federal Grand Jury seated in Toledo will continue to consider matters related to this investigation.
It is rare that prosecutors make a public statement on the scope of an ongoing investigation, and the specific focus of the inquiry. The state investigation has already triggered one guilty plea to a misdemeanor ethics violation by the former chief of staff for Gov. Taft, and the various prosecutors will likely bring more charges. Noe served as the Ohio chairman for the Bush/Cheney 2004 Campaign and was a "Pioneer", which means he helped raise over $100,000 for the presidential election campaign. Fundraising investigations have a way of tainting a number of public officials who receive funds from contributors under suspicion. (ph)
CNN reported here on government searches of the homes and vehicle of United States Representative William Jefferson (Louisiana, D). CNN states "Jefferson was elected to Congress in 1990 as the first black House member in the state since Reconstruction. He serves on the influential House Ways and Means Committee."
The wide-ranging investigation of the reinsurance industry for its "finite insurance" products that were used by purchasers to engage in earnings management shows no signs of abating, according to Berkshire Hathaway's most recent quarterly report (here). The company's 10-Q -- filed as usual on a Friday after 5:00 p.m. -- has disclosures about the various government investigations and related civil litigation in the section entitled "Legal Proceedings" that is growing in size each quarter. According to the company:
General Reinsurance Corporation (“General Reinsurance”), a wholly owned subsidiary of General Re Corporation (“General Re”) and an indirect wholly owned subsidiary of Berkshire, is continuing to cooperate fully with the U.S. Attorney for the Eastern District of Virginia, Richmond Division (the “U.S. Attorney”) and the Department of Justice in Washington (the “DOJ”) in their ongoing investigation of Reciprocal of America (“ROA”). The U.S. Attorney and the DOJ have continued to request additional information from General Reinsurance regarding ROA and its affiliate, First Virginia Reinsurance, Ltd. The U.S. Attorney and the DOJ have also interviewed a number of current and former officers and employees of General Re and General Reinsurance, and have indicated they plan to interview additional such individuals. General Reinsurance and four of its current and former employees, including a former president, originally received subpoenas for documents from the U.S. Attorney in connection with the U.S. Attorney’s investigation of ROA in October 2003. One of the individuals originally subpoenaed in October 2003 has been informed by the U.S. Attorney that this individual is a target of the U.S. Attorney’s investigation. General Reinsurance has also been sued in a number of civil actions as described below.General Re, Berkshire, and certain of its other insurance subsidiaries, including National Indemnity Company (“NICO”) have also been continuing to cooperate fully with the U.S. Securities and Exchange Commission (“SEC”) and the New York State Attorney General (“NYAG”) in their ongoing investigations of non-traditional products. The U.S. Attorney and the DOJ have also been working with the SEC and the NYAG in connection with these investigations. General Re, Berkshire and NICO have been responding to subpoenas from the SEC and the NYAG originally issued in January 2005 by providing information relating to transactions between General Reinsurance or NICO (or their subsidiaries) and other insurers. In particular, General Re and Berkshire have been responding to requests from all of the governmental authorities involved in these investigations for information relating to certain transactions that may have been accounted for incorrectly by counterparties of General Reinsurance (or its subsidiaries). Berkshire understands that the government is reviewing the role of General Re and its subsidiaries, as well as that of their counterparties, in these transactions. The SEC, NYAG, DOJ and the U.S. Attorney have jointly interviewed a number of current and former officers and employees of General Re and General Reinsurance as well as Berkshire’s Chairman and CEO, Warren E. Buffett, and have indicated they plan to interview additional such individuals.
The italicized parts above note that the various agencies plan to interview more employees, and those frequently lead to requests for additional documents to determine the accounting for transactions discussed, and perhaps can reveal new areas of inquiry. Berkshire Hathaway's disclosure also notes that another senior officer of a General Re subsidiary, Milan Vukelic of the Faraday Group, was terminated in July in connection with an investigation by the Australian authorities related to finite insurance transactions. Don't look for a quick resolution of the various investigations, much to Warren Buffett's chagrin, no doubt. (ph)
When the conversation turns to corruption, Chicago is frequently near the top of the list ("vote early and often" and all that), and two recent indictments carry on the tradition. In an indictment filed Aug. 3, a former trustee for the Illinois Teacher's Retirement System and two Chicago attorneys were charged with seeking kickbacks from investment firms seeking to manage money on behalf of the system. According to a press release issued by the U.S. Attorney's Office for the Northern District of Illinois (here), one attorney allegedly said to an investment firm from which an $850,000 kickback was sought, "This is how things are done in Chicago."
In the second indictment, filed on Aug. 4, the former Director of Natural Resources for the Chicago Park District "allegedly received payments totaling approximately $123,800 and free vacations in Michigan, Wisconsin, Utah and Illinois, computers, a bicycle, a spa gift certificate and tickets to sporting events for herself, her family, and friends in exchange for using her influence to recommend contracts, assign work and approve invoices for the vendor, James Michael, Inc., the Mundelein landscaping company," according to the USAO press release (here). Two officers of the landscape company are also charged in the indictment, and the company received over $8 million in contracts from the Park District over four years. (ph)
The federal government settled its long-running civil False Claims Act case against Harvard University and two University advisors who worked on a program funded by USAID to provide advice to the post-Communist Russian government on how to structure a market economy. Harvard agreed to pay $26 to settle the false-billing claims, and the two advisors, Andrei Shleifer and Jonathan Hay, will pay approximately $4 million; a firm controlled by Shleifer's wife, through which the false billings were made, has already repaid $1.5 million. According to a press release (here) issued by the U.S. Attorney for the District of Massachusetts:
The United States' case provided extensive evidence that, despite the clear terms of the agreements, SHLEIFER, and HAY were making prohibited investments in Russia in the areas in which they were providing advice. The United States further demonstrated that SHLEIFER and HAY were self-dealing by using their positions, as well as USAID-funded resources, to advance their own personal business interests and investments and those of their wives and friends. Their self-dealing activities included using their influence over the Russian Securities Commission to which they were key advisors to secure for themselves and their wives the first ever launched and licensed mutual fund in Russia. The terms of the USAID grant strictly prohibited any investments in Russia by American advisors funded under the grant . . . The United States alleged and demonstrated that SHLEIFER, HAY and HARVARD never disclosed any of these prohibited personal business activities and/or investments to USAID.
The civil case was certainly a black-eye for Harvard, which failed to properly oversee Shleifer and Hay's activities. (ph)
Sunday, August 7, 2005
Reported here (AP Ala.Com) and here (Wall Street Jrl) are how two judges (one in the civil case and another in the criminal case) reached the same conclusion in the Richard Scrushy case - the DOJ and SEC had worked too closely together. The SEC is concerned that these rulings will obligate them to notify defendants who are targets of a criminal investigation.
Two judges have now said the same thing and the SEC just doesn't seem to get it. They seem to think that the ruling by these judges will preclude their ability to cooperate on matters. Maybe, just maybe, cooperation is not the issue. Perhaps the issue is the type of cooperation occurring here. The backdoor conversation to find the best location that would disadvantage a defendant, and then in fact disadvantaging the defendant by not notifying him of being a target is perhaps what seems the most disturbing aspect of events here. And is it really so cumbersome for the SEC to tell someone their status in an investigation? If DOJ places an individual before a grand jury, there is an obligation to notify him or her of target status under the U.S. Attorneys Manual and there is an explicit guideline on "Advice of "Rights" of Grand Jury Witnesses. (U.S.Atty.Manual 9-11.151)