Saturday, August 20, 2005

MBIA Joins the Wells Notice Parade

MBIA Inc., a large municipal bond insurance company, disclosed that it has received a Wells Notice from the SEC indicating that the Enforcement Division staff intends to recommend to the Commission the filing of a civil action for securities fraud.  The case involves MBIA's purchase of "finite risk insurance," which is the same product that is at the heart of the AIG-General Re investigation.  The issue in the investigations is whether the contracts actually transferred risk, or whether they were used as accounting window-dressing but were not legitimate insurance transactions.  According to MBIA's press release (here):

The Wells Notice indicates that the Staff is considering recommending that the SEC bring a civil injunctive action against the Company alleging violations of federal securities laws 'arising from MBIA's action to retroactively reinsure losses it incurred from the AHERF bonds MBIA had guaranteed, including, but not limited to, its entering into excess of loss agreements and quota share agreements with three separate counterparties.' "

MBIA notes that it is cooperating in the investigations by the New York Attorney General and the Department of Justice, in addition to the SEC investigation, and that it "is unable to predict the outcome of the investigations or whether its current efforts to resolve them on a fair and appropriate basis will be successful."  In English, the negotiations for a global settlement are continuing.  I would certainly expect an agreement in the near future, which may well involve a deferred prosecution agreement and a hefty civil monetary penalty. (ph)

August 20, 2005 in Civil Enforcement, Fraud, Securities | Permalink | TrackBack (0)

Former Kansas Congressional Candidate Indicted for Misusing Campaign Funds

Adam Taff, who ran for the Republican nomination in the Kansas Third Congressional District in 2004 and lost by 207 votes, faces a more daunting challenge because he has been indicted on a wire fraud charge and for misusing campaign funds for personal use.  Taff was charged along with mortgage broker John Myers for their part in a scheme to defraud related to Taff obtaining a mortgage for a $1.2 million home.  According to a press release issued by the U.S. Attorney's Office (here):

On Jan. 19, 2004, Taff met with a NovaStar agent and signed a loan application which showed among his personal assets two accounts at Metcalf Bank, with balances of $61,746 and $250,000. The two accounts actually were his campaign committee's accounts and not his personal accounts, even though at the time he had made loans to his campaign totaling $125,000. The loan application also falsely stated that his monthly income was $15,000 although his actual income was approximately $6,500 a month. On Feb. 10, 2004, Taff withdrew funds from his two campaign committee accounts at Metcalf Bank and obtained a $300,000 bank check payable to Myers and his wife. Taff and Myers then met with a closing agent at a title company in Overland Park and represented that the $300,000 check was a down payment from Taff to Myers. In fact, Taff and Myers did not intend for Myers to receive the money.  With the knowledge and approval of Taff and Myers, the closing agent altered a copy of the $300,000 check to make it appear the check was made payable to the title company. The agent also prepared a closing statement to be sent to NovaStar falsely stating that Taff had paid $300,000 to the title company for distribution to Myers. Taff and Myers signed the false closing statement. The agent faxed the false information to NovaStar. Then, with the knowledge and consent of Myers, Taff took the $300,000 check back and returned the money to his campaign accounts at Metcalf Bank.

The second count of the indictment alleges that on Feb. 10, 2004, Taff violated the Federal Election Campaign Act by converting to his personal use approximately $175,000 in contributions and donations to his authorized political committee, Taff for Congress, by using the funds to obtain the $300,000 check that was part of the mortgage deal.

I wonder whether Taff, who had been the 2002 Republican nominee, thought that he'd have an easy time winning the nomination again, especially when his main opponent for the nomination was strong social conservative Kris Kobach, whom Taff may have viewed as out-of-touch with the district's more moderate views.  Kobach lost the 2004 general election to Democrat incumbent Dennis Moore by a 55-44% margin, even with George Bush winning 62% of the vote.  Taff may have figured the money would not be needed for a while, and he could put it to better use in buying his home. This certainly puts an end to his political career. (ph -- thanks to Scott Lawder for the information)

August 20, 2005 in Corruption, Fraud | Permalink | TrackBack (1)

Two More Convicted in Cleveland Corruption Case

The long-running investigation of municipal corruption in Cleveland and other cities, including Houston, has resulted in the conviction of Cleveland businessman Nate Gray and New Orleans businessman Gilbert Jackson.  Both defendants were convicted of a RICO conspiracy charge, and Hobbs Act and mail/wire fraud counts; Jackson was acquitted on eight counts.  According to a press release (here) issued by the U.S. Attorney's Office for the Northern District of Ohio, the investigation has already resulted in convictions of former East Cleveland Mayor Emmanuel Onunwor, former Cleveland City Councilman Joseph Jones, former Houston Director of Building Services Monique McGilbra, and former Chief of Staff to the Mayor of Houston Oliver Spellman.  The question now is whether the investigation will lead to former Cleveland Mayor Mike White. An FBI affidavit leaked earlier this summer indicated that he was one potential target of the investigation.  Gray may cooperate now that he has been convicted and faces a substantial jail term, although his value as a witness in a case with over 50,000 wiretapped telephone calls is certainly open to question. An article in the Cleveland Plain Dealer (here) discusses the convictions. (ph)

August 20, 2005 in Corruption, Verdict | Permalink | TrackBack (0)

Leading Iceland Businessman Charged With Fraud

Just so we don't think that alleged misconduct by senior corporate officials occurs only in the United States, fraud and embezzlement charges have been filed against leading Iceland businessman Jon Johannesson.  He is the CEO of Bauger Group, an investment firm that has taken a stake in some of Britain's and the Continent's leading retailers.  According to an article in The Guardian (here), however, the charges essentially involve accusations of improper purchases of a "Big Mac and a hot dog" -- you've gotta love the subtlety of the British press.  "The indictment alleges that between October 5 1998 and May 2 2002 Mr Johannesson spent ISK12.5m (£110,000) on his Baugur Visa and Mastercard credit cards before the bills were covered by the executive's private family company, Gaumur. The transactions show him shopping at Gucci, Armani Exchange, Prada, Nike and Dolce & Gabbana, as well as tracking his apparent visits to a sleazy bar in Florida. He is also accused of using company money to buy pizzas and fried chicken. A former colleague of Mr Johannesson's is charged with embezzling customs duties on a lawn mower."  Five others were charged, including Johannesson's father and sister, and the case has been adjourned until Oct. 20. Somehow, Big Macs and Prada don't exactly go together. (ph)

August 20, 2005 in Fraud, International | Permalink | TrackBack (0)

What Better Place to Plan Your Next Crime: Levenworth

Donald Mixan entered a guilty plea to conspiracy to commit mail and wire fraud related to a scheme to pass bogus checks at banks in Utah and Missouri.  Mixan hatched the plan while in the Levenworth Detention Center in Kansas, where he met one Montgomery Akers.  Akers directed Mixan's girlfriend to create the checks on a computer and send them to banks in Utah.  Akers hired an attorney in Utah to withdraw funds from an account funded with the bogus checks.  Akers hired another attorney in Kansas City, and Mixan, upon his release, gave a $100,000 check to the attorney for deposit, but it bounced.  A press release (here) issued by the U.S. Attorney's Office for the District of Kansas notes that the scheme involved obtaining $493,000, although it's not clear how much money was actually withdrawn.  All that free time in prison shows the truth of the old adage that "idle hands are the devil's workshop."  (ph)

August 20, 2005 in Fraud | Permalink | TrackBack (0)

Friday, August 19, 2005

MassMutual - The Details

The Wall Street Jrl here has all the details of the MassMutual scandal including the personal side that people hope never makes the paper. What led to CEO O'Connell leaving and how his shadow retirement account increased over the years - it is all there. 

Should this have come to light sooner? 

While you are reading about the happenings at MassMutual, you may want to check out their website on fraud here.


Addendum - Maybe there is more to this picture.  In the Connecticut Law Tribune (here) (subscription required), one sees the difficulties faced by corporations trying to investigate corporate problems.  The corporation investigates and then an attorney general wants the investigation material (yes, the material that was obtained by the corporate attorneys) and then the next thing you know a newspaper is trying to get this material under the Freedom of Information.  (see Hartford Courant here) So I guess it is not so simple these days for a company to investigate and bring forth any improprieties in a corporation.  (esp)

August 19, 2005 in News | Permalink | TrackBack (0)

More Reebok Action

The SEC reports here of eight (8) more being charged with insider trading.  The press release states:

"In a second emergency action alleging insider trading in the securities of Reebok International Ltd. (Reebok), the Securities and Exchange Commission today charged eight additional individuals who reaped illegal profits. The Commission has now identified more than $6 million in illicit gains related to the insider trading. The illegal trading took place in domestic and offshore brokerage accounts held by residents of the U.S., Croatia and Germany, the Commission alleged."

Not all of the individuals are from the U.S. as the list includes some from Croatia and Germany.  We previously reported on SEC action regarding Reebok here.


August 19, 2005 in Insider Trading | Permalink | TrackBack (0)

What's Wrong With This Picture?

Government Indicts Media Executive, Attorney, and Corp.

The former publisher of the Chicago Sun-Times, along with a lawyer for Hollinger International have been indicted.  Additionally, the company that controlled Hollinger International - The Ravelston Corp. Ltd. was also indicted.   See DOJ press release here.  The press release states that the indictment was for "federal fraud charges for allegedly fraudulently diverting from the U.S.-based Hollinger newspaper holding company more than $32 million through a complex series of self dealing transactions."

The 27 page indictment presents seven counts of mail and wire fraud.  Interestingly, 18 U.C.S. sec. 1346, the intangible right to honest services is used in the indictment. The charges against in-house counsel are premised on an alleged "fiduciary duty of undivided loyalty to International, which among other things, required [the attorney] to provide honest services to International, to disclose all material facts regarding all related party transactions to International's Audit Committee, and to refrain from assisting others in any breach of fiduciary duty against International."

This case perhaps could have had some interesting issues - for one the corporation is a Canadian company and the former publisher is a Canadian citizen; although the indictment does note that the publisher "often stayed at an apartment in Chicago that was owned by International, and often worked at International's office in Chicago." 

But one has to wonder if the indictment is just a prelude to a larger show.  According to CNN Money here, the prosecutor stated that Radler, the president and CEO of Hollinger who was indicted, is cooperating with the government.

The indictment can be found here.

See Wall Street Jrl here.

See Chicago Sun Times (AP story) here.

(esp) (w/ thanks to PH for documents)

August 19, 2005 in Fraud, Media, Prosecutions | Permalink | TrackBack (1)

Thursday, August 18, 2005

Attorney-Client Issue Gaining More Support

As reported here, the ABA passed a resolution that "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) 

The attorney-client issue is gaining momentum with the latest letters going to the Sentencing Commission.  The support for maintaining the attorney-client privilege in the corporate arena are coming from past Attorney Generals, a Solicitor General, and other former high level government officials.The signatories on one letter include names such as Griffin B. Bell, Theodore B. Olson, Kenneth W. Starr, Edwin Meese, III, and Dick Thornburgh.  The letter states in part: "[w]e believe that this new amendment is eroding and weakening the attorney-client and work product protections afforded by the American system of justice, and we urge the Commission to address and remedy this amendment as soon as possible."  The letter states:

We, the undersigned former Justice Department officials, are pleased that the Commission has included, on its list of tentative priorities for the upcoming amendment cycle, the recent amendment to the Commentary to the Organizational Guidelines involving waiver of attorney-client privilege and work product protection in the context of cooperation.

A copy of the letter is here -

Download attyclientprivissueformerdojofficialscommentlettertousscaug152005.pdf

Other support can be found in a coalition letter signed by groups such as the American Chemistry Council, ACLU, Association of Corporate Counsel,  Business Roundtable, NACDL, National Association of Manufacturers, Retail Industry Leaders Association, U.S. Chamber of Commerce, Washington Legal Foundation.  This letter can be found here:

Download attyclientprivissuecoalitioncommentlettertousscaug152005.pdf


August 18, 2005 in Legal Ethics | Permalink | TrackBack (0)

Who Paid for the Golf Game?

Ohio News (ONN-AP) here reports on an investigation of Ohio Governor Bob Taft regarding his golfing.  No, they are not looking if he moved the ball improperly or incorrectly reported his score - but rather who paid for his participation in the golf outings. 60 golf outings since 1999 seems to be the subject of an investigation by the Ohio Ethics Commission.  Who paid for them and if above a certain amount did he properly report them as gifts?  The article fails to mention how he shot on these rounds.



UPDATE: Gov. Taft entered a plea of "no contest" to four misdemeanor counts of failing to report the golf outing gifts, as required by state law.  The court imposed a $1,000 fine for each violation.  An AP story (here) notes that Taft "chose not to plead guilty but was taking responsibility for ethics lapses."  I guess he can say truthfully he was never "convicted" of a crime related to the ethics violations. (ph)

August 18, 2005 in Investigations, News | Permalink | TrackBack (0)

Accounting Issues Not Unique to US

Accounting firms have in some cases been the target of US government investigations - - just state the name Arthur Andersen, LLP and everyone understands.  But is this unique to the U.S.?  And are other countries handling things differently by having agency investigations as opposed to criminal investigations?

In the Wall Street Jrl. here it is reported that the UK Accountancy Investigation & Discipline Board is investigating Deloitte & Touche LLP on its handling of matters related to MG Rover Group Ltd.(U.K. automobile company).  MG Rover's collapse in April has led to an investigation (See BBC here)   

Is a pattern developing?  First a company has problems, and then who do they look to blame - the accountants.   


August 18, 2005 in International | Permalink | TrackBack (0)

KPMG Starts Mud-Wrestling in Civil Suits

KPMG's aggressive tax shelter business has triggered a flurry of lawsuits by former clients of the firm who have run afoul of the IRS for claiming deductions for shelters that were declared abusive.  Having admitted that tax partners engaged in "unlawful conduct" in creating and selling the tax shelters, KPMG is now in the delicate position of seeking to settle the criminal investigation while resisting the civil suits, which could cost the firm as much, if not more, than any fine or civil penalty paid as part of a deferred prosecution agreement.  How do you admit criminal liability and then deny it?  Why, the in pari delicto defense (when in doubt, always use a Latin phrase to sound intelligent)!  A New York Times article (here) discusses the firm's response to a lawsuit filed in Texas by two tax shelter purchasers, the brothers R. Cary and D. Calhoun McNair, investors with large capital gains they wanted to shelter and, more importantly, the sons of the owner for the NFL's Houston Texans.  KPMG's response to the lawsuit states that the McNairs were aware of problems iwth the tax shelter when they filed their returns, and the firm is asking for information about advice given to the McNairs by law firms and an investment adviser.  KPMG's answer also includes a claim for contribution from their advisers if the firm is found liable.  An earlier post (here) discussed the firm's position in Florida litigation with a former client in which it asserted that the phrases "unlawful conduct" and "KMPG partners," which it used in its mea culpa (there's that Latin stuff again) to the Department of Justice, were "vague and ambiguous."   

The in pari delicto or "unclean hands" defense often comes across as a bit unseemly because the party asserting it claims that while it did wrong, the other person was just as bad -- the classic grade school excuse to the teacher.  When it's used in a lawsuit, it can sound like the party is talking out of both sides of its mouth.  The defense essentially turns the case into a contest in which one party tries to hurl as much mud at the other so that both look equally bad, and therefore it would be inequitable for either party to recover from the other.  The defense is often seen in cases in which a company's senior managers engage in wrongdoing, conduct that is attributable to the company, and when new managers or the trustee in bankruptcy take over, they sue the outside advisers -- the lawyers, accountants, and investment bankers -- for not preventing the wrongdoing that harmed the entity.  The defendants argue, with quite a bit of success, that the company is just as responsible for the harm, and therefore should not be allowed to recover for its own misconduct.  The defense is certainly not a pleasant one to advance, but it allows a party to both admit to some impropriety and at the same time defend itself.  It shouldn't come as much of a surprise that KPMG is fighting the civil suits while trying to settle the criminal case, but it certainly makes for some delicate PR and seeming contradictions to blame others while accepting blame at the same time. (ph)

August 18, 2005 in Fraud, Tax | Permalink | TrackBack (2)

Deferred Prosecutions: Who Gets It and Who Doesn't

Which company will receive a deferred prosecution and which will not? 

It's a good question and perhaps a question that no one knows the answer to except DOJ, and it sounds like they're not talking. 

Leonard Post has a wonderful article in the National Law Journal ( here that looks at this question examining companies that have been fortunate  to not be prosecuted as a result of a deferred prosecution agreement and some that have not been as successful in securing such an agreement with the government. 

Is it based upon cooperation with the government, the importance of the company to the government (see Andy Good's comment in the article), or just plain luck?  In any event should it be solely at the discretion of the government?  And should the government be able to wheel and deal on each individual case to obtain information they desire and prosecute when the information is either not forthcoming or nonexistent? 

Perhaps the most ironic aspect of this entire scenario is that on one hand the government is pushing for strict adherence to the sentencing guidelines in order to have consistency in sentencing; but the real consistency will always be lacking if there is no transparency as to why some companies will be entitled to a deferred prosecution when others will not.

(esp) (with thanks to Jack King at NACDL for alerting us to this article)

August 18, 2005 in Civil Enforcement, Prosecutions, Sentencing, Settlement | Permalink | TrackBack (1)

Wednesday, August 17, 2005

Talk or You're Fired - United Rentals

Employees within companies have recently been facing the ramifications of failing to answer questions of a board or corporation counsel when the company is being examined.  If you don't answer the questions, they send you out the door to go find other employment. 

United Rentals, Inc. admits here  that the Board of Directors "terminated the employment of John Milne, the company's president and CFO, for cause."  The cause? Well, "Milne was unwilling to respond to questions of the special committee of the board reviewing matters relating to the previously disclosed SEC inquiry of the company."

Did someone say that companies are now working for the DOJ, FBI, or SEC and helping them secure information for government investigations? Is it better to walk out the door than risk having information you provide to your company turned over to government investigators? Who loses here - the corporation or the individual?    

See here for form 8k filing.


August 17, 2005 in Investigations | Permalink | TrackBack (0)

Jim Guy Tucker Loses Attempt to Reopen Plea

When Ken Starr was handling the Whitewater Investigation, he obtained a plea from former Arkansas Governor Jim Guy Tucker.   The agreement was contingent on Tucker cooperating with the Independent Counsel (5 K1.1).  Tucker accepted the plea at that time, but later went on to  challenge the plea agreement.  Yesterday the 8th Circuit ruled, affirming the lower court's decision. 

Tucker had argued that "that the government based his prosecution on the wrong version of sec. 1374 and therefore he [was] actually innocent and the victim of a Brady violation and entitled to withdraw his guilty plea." (see decision).  The Eighth Circuit stated, "Tucker's guilt did not depend on which version of sec. 1374 in fact applied to the transaction in question. Thus, any misapprehension at the time he pleaded guilty concerned only the strength of the government's case or the likely financial penalty if he was convicted."  For more see AP Tampa News here).


August 17, 2005 in Judicial Opinions, Prosecutions, Sentencing | Permalink | TrackBack (0)

Decision on Palmeiro Perjury Could Come Next Week

The House Government Reform Committee's investigation into whether Baltimore Oriole player Rafael Palmeiro committed perjury this March when he testified (quite emphatically) that he had never taken steroids, and then was suspended by major league baseball after a positive steroid test, could wrap up as soon as next week.  Committee Chairman Tom Davis and Ranking Member Henry Waxman issued a terse statement (here) about the investigation: "Government Reform Committee staff continues to review the documents related to Rafael Palmeiro’s positive steroid test and will have no further comment on any questions related to the documents for at least a week."  Palmeiro authorized major league baseball to release information related to his test after the Committee requested the information.  An AP story (here) notes that Palmeiro believes he will be able to tell his side of the steroid story soon, but on the (good) advice of his lawyers he will not discuss the issue until the Committee completes its investigation. (ph)

August 17, 2005 in Perjury | Permalink | TrackBack (0)

Goodyear Joins the Wells Notice Club

Goodyear Tire & Rubber Co. disclosed that an SEC investigation begun in November 2003 may be nearing its completion with the Enforcement Division staff sending the company a Wells Notice that the staff intends to recommend a civil securities enforcement action.  The investigation arose out of Goodyear's restatement of its earnings related to internal control weaknesses, and the company's press release (here) states that "the SEC staff intends to recommend that a civil or administrative enforcement action be brought against Goodyear for alleged violations of provisions of the Securities and Exchange Act of 1934 relating to the maintenance of books, records and internal accounting controls, the establishment of disclosure controls and procedures, and the periodic SEC filing requirements . . . ."  Goodyear disclosed that its former CFO and chief accounting officer also received Wells Notices from the SEC; Robert Tieken was Goodyear's CFO at the time of the 2003 restatement, and retired from the company in May 2004. (ph)

August 17, 2005 in Civil Enforcement, Securities | Permalink | TrackBack (0)

Tuesday, August 16, 2005

What Do You Do When You're the Target of an Investigation?

The government's investigation of Milberg Weiss and spin-off firm Lerach Coughlin has called for the common response from William Lerach, one of the chief targets of the investigation: hire one of the best criminal defense attorneys around (John Keker in this case), who in turn hires a high-powered public relations person to handle the media.  An article from The Recorder (available on Law.Com here) about the status of the investigation notes that Keker has retained Chris Lehane to deal with the press.  It is important that the attorney retain the public relations person because the attorney-client privilege and work product protection can extend to communications between the lawyer and spokesperson, at least under Judge Kaplan's opinion in In re Grand Jury Subpoena Dated March 24, 2003, 265 F.Supp.2d 321 (S.D.N.Y. 2003). Lehane has served at various times as a spokesman for Bill Clinton, Al Gore (during the 2000 campaign), and John Kerry -- after them, dealing with a criminal investigation ought to be a snap. (ph)

August 16, 2005 in Investigations | Permalink | TrackBack (0)

The Incredible Shrinking Prosecution

The Wall Street Journal has an interesting story (here) about the prosecution of Irving Kott that began with a search of a small brokerage firm in Beverly Hills that led to a 48-count securities fraud indictment, and ended with a plea to two counts of filing false documents with the SEC.  The Journal sought to have the documents in the case unsealed, including the indictment and search warrant affidavit.  The government alleged that Kott secretly controlled JB Oxford and used that firm to engage in a "pump-and-dump" scheme involving penny stocks.  The article notes that the case was handled by five different prosecutors, a sure sign that an indictment has become a poor stepchild in the U.S. Attorney's Office.  The case was unusual in several respects.  The SEC never filed a civil securities fraud action against Kott, an odd result given the lower burden of proof in the civil case and the investor-protection mandate of the Commission.  The sentence involved a downward departure from the Guidelines range of 16-21 months in prison to probation, a $250,000 fine, and $750,000 charitable donation by Kott, even though Kott was not required to cooperate in any continuing investigation.  Finally, at least according to the Journal story, the indictment was never unsealed, even though a seal is only supposed to be granted for a limited purpose under Federal Rule of Criminal Procedure 6 and is not permanent.

Turnover is inevitable in government, and that is especially true in the corporate and securities area because the enticements offered by law firms can be quite attractive after one-too-many trips on the government per diem to New York, Chicago, or Los Angeles (I stayed in a hotel room in New York once that was so small the bed had to be angled to allow the door to open).  But turnover alone is probably not the only explanation for a case that changed from a broad fraud prosecution to a narrow reporting violation. (ph)

August 16, 2005 in Fraud, Prosecutions, Securities | Permalink | TrackBack (0)