Wednesday, August 24, 2005

The Enron Conspiracy Prosecution as the Super Bowl of Trials

The Houston Chronicle has an interesting story (here) about a planning session attended by representatives of local Houston civic organizations about how to present "the other side of the story" about the city when the media descend in January for the trial of former Enron CEOs Ken Lay and Jeffrey Skilling, and former chief accounting officer Richard Causey.  Among the ideas kicked around at the meeting was something called "covert hospitality" in which hotels at which media members were staying would be identified and the staff would be trained to answer their questions -- an idea quickly rejected, by the way.  The city will make arrangements for the expected media circus by providing a tent for equipment and parking spaces, albeit not free parking, because this is Houston.

Planning for major events like the Super Bowl takes years and involves extensive efforts to spruce up the city -- witness the major road construction here in Detroit for the 2006 Super Bowl, which will do nothing to prevent the usual round of stories about urban decay, crime, corrupt city government, and the cold temperatures.  Although the Enron trial will not have the party atmosphere of a Super Bowl, it is sure to be filled with details of accounting minutiae and special purpose entities, the stuff of legends. (ph)

August 24, 2005 in Enron, Media, Prosecutions | Permalink | TrackBack (1)

Suing Milberg Weiss

Bruce Carton on the Securities Litigation Watch Blog has an interesting post (here) about a Washington Legal Foundation webcast entitled  "Trial Lawyers’ Enron: Will Indictments & Investigations Expose Bill Lerach and Milberg Weiss to Shareholder Lawsuits?".  As Bruce points out, "Presumably the lawyers bringing any shareholder lawsuit against Milberg would be WLF-approved lawyers who only file non-frivolous lawsuits seeking non-outrageous punitive damages."  Maybe it's like Being John Malkovich. (ph)

August 24, 2005 in Fraud | Permalink | TrackBack (0)

Tuesday, August 23, 2005

KPMG Deferred Prosecution Agreement At Hand

The Washington Post reports (here) that the deferred prosecution agreement between the government and KPMG is nearing completion.  The Post states that the firm will pay between $300 and $500 million ($400 million as the over-under line?) and have an outside monitor to review the firm's activities and file reports.  These have become the standard terms of such agreements (Time, Inc. and Bristol-Myers Squibb are recent examples of such provisions), and will allow KPMG to avoid the fate of fellow public accounting firm Arthur Andersen.  Look for a high profile law firm to receive the lucrative assignment as outside monitor.

Once the deferred prosecution agreement is in place, KPMG will have to defend the many lawsuits filed by former clients who purchased its tax shelters (see earlier post here).  The government is likely to disclose any criminal cases against former KPMG tax partners shortly after a public announcement of the final agreement. (ph)

August 23, 2005 in Prosecutions, Tax | Permalink | TrackBack (0)

Does Corruption Ripen in the Summer?

An AP story (here) talks about "A Summer of Scandal for U.S. Politicians," including the current cases involving Gov. Bob Taft's misdemeanor guilty plea, Rep. Tom DeLay's ethics problems in Congress, and Gov. Arnold Schwarzenegger's questionable financial dealings.  Throw in investigations of two Congressmen, William Jefferson of Louisiana and Randy "Duke" Cunningham of California, and it sure seems like the summer of corruption.  But is it really different this time of year?  Since this blog started last Nov. 1, Connecticut Governor John Rowland entered a guilty plea and began serving a one year federal prison term for accepting gifts in exchange for favors, former Phildelphia Treasurer Corey Kemp was convicted on conspiracy and mail fraud charges and sentenced to ten years, and two members of the San Diego City Council were convicted in the appropriately sleazy "Strippergate" prosecution.  Upcoming corruption prosecutions involve the former Mayor of Atlanta and Governor of Illinois, both on RICO charges arising from their alleged misuse of office for personal gain.  There are ongoing corruption investigations in Cleveland and Dallas, to name just two.  The AP story asserts that there has been a "clear uptick" in the number of politicians under investigation, although I think that may be debatable.  There is a cycle in corruption investigations, which can take months (or years) to develop, but we rarely see a year go by without at least a couple significant corruption cases being brought, mostly by federal prosecutors.  Prosecutors certainly are more aggressive in targeting elected officials, particularly in the use of RICO charges, but then, isn't it good that being an elected representative is not a license to steal? (ph)

August 23, 2005 in Corruption, Investigations, Prosecutions | Permalink | TrackBack (0)

Ferro Corp. Financial Executive Charged with Securities Fraud

The U.S. Attorney's Office for the Northern District of Ohio announced that it filed a securities fraud information against Brian Haylor, a former controller in a division of the Ferro Corporation.  According to a press release (here):

[F]rom March 6, 2003, through June 4, 2004, Haylor committed securities fraud by causing Ferro to prepare and file false quarterly and annual reports with the Securities and Exchange Commission. Specifically, the defendant is alleged to have made false entries to make Ferro’s earnings appear higher and its debts to appear lower. These entries were made in several of the company’s accounts including: accounts receivable, unrecorded liabilities, and consignments payable as well as the company’s inventory accounts. Haylor is alleged to have made these entries so that the company’s actual results would appear to have come close to the company’s previously forecasted results. This was sometimes referred to as "closing the gap."

Ferro first disclosed the accounting problem in July 2004, and conducted an internal investigation that resulted in the company identifying a "former subordinate divisional employee" as responsible for the misstatements, which required a $10 million adjustment (see Jan. 18, 2005 press release here).  Apparently, Haylor is the unidentified employee, and the filing of an information usually means that the defendant will enter a guilty plea in the near future.  The case is a good example of the pressure on mid-level managers to meet financial targets, and how the use of seemingly minor accounting shortcuts to meet expectations can turn into a crime. (ph)

August 23, 2005 in Fraud, Securities | Permalink | TrackBack (0)

Kozlowski Hall Bites the Dust

Former Tyco CEO Dennis Kozlowski, who faces sentencing on Sept. 19 after his conviction on grand larceny charges, asked his alma mater, Seton Hall, to remove his name from two buildings on the campus.  According to a press release issued by the University (here):

Seton Hall University has removed the name of L. Dennis Kozlowski from the academic building that has borne his name since 1997. The Stillman School of Business and the College of Education and Human Services are currently housed in the facility, which will now be called Jubilee Hall in recognition of the University's sesquicentennial anniversary this year. In addition, his name was removed from the rotunda in the University's library. Mr. Kozlowski asked that this action be taken during a telephone conversation with University President Monsignor Robert Sheeran in late July. Respectful of the donor's wishes, Monsignor Sheeran then notified the University's Board of Regents that Mr. Kozlowski's name would be removed. According to Monsignor Sheeran, Mr. Kozlowski's request was motivated by his ongoing affection for the University, as well as his desire to spare Seton Hall any further adverse attention or distraction from its educational mission. Mr. Kozlowski was convicted on June 17 of grand larceny in New York State Supreme Court.

Kozlowski's request was honorable, and takes Seton Hall out of a very ticklish situation. (ph)

August 23, 2005 in News | Permalink | TrackBack (0)

SEC Adds Civil Fraud Charges Against Former Bristol-Myers Executives

The SEC added its two cents to the Bristol-Myers Squibb Co. channel-stuffing accounting fraud by filing civil securities fraud charges against former CFO Frederick Schiff and executive vice president Richard Lane.  Schiff and Lane were indicted this past June on conspiracy and securities fraud charges arising from the scheme to pump up the company's sales (indictment here).  As described in the SEC's Litigation Release (here):

The Complaint alleges that from the first quarter of 2000 through the fourth quarter of 2001, at Schiff and Lane's direction, Bristol-Myers stuffed its distribution channels with excessive amounts of its pharmaceutical products ahead of demand to meet the Company's internal earnings targets and the consensus estimate of Wall Street securities analysts, and improperly recognized revenue from $1.5 billion of such sales to its two largest wholesalers. According to the Commission's Complaint, when Bristol-Myers' results still fell short of its targets and the consensus estimate, at Schiff's direction, the Company used "cookie jar" reserves to further inflate its earnings. The Complaint also alleges that at Schiff's direction, and as a result of the channel-stuffing, Bristol-Myers also underaccrued for Medicaid and prime vendor rebate liabilities. As a result of its channel-stuffing and improper accounting measures, Bristol-Myers reported results that met or exceeded the consensus estimate every quarter during the scheme.

The Commission's complaint is here.  Bristol-Myers has already settled the SEC action, and entered into a deferred prosecution agreement with the U.S. Attorney's Office for the District of New Jersey.  (ph)

August 23, 2005 in Civil Enforcement, Fraud, Securities | Permalink | TrackBack (0)

Monday, August 22, 2005

When the Right-Hand Man Turns

The indictment of former Chicago Sun-Times publisher F. David Radler, along with the former general counsel for Hollinger Inc. and Lord Conrad Black's private holding company, Ravelston (see earlier post here), signals a significant step forward in the government's civil and criminal investigation of large payments made to Black and other senior officers of Hollinger, the media holding company. A New York Times article (here) discusses Radler's decision to plead guilty and cooperate in the government's investigation of Black, the former CEO of Hollinger.  Radler's role as publisher of the Sun-Times, one of the many newspapers owned by Hollinger, certainly does not appear to have been based on merit, at least if quotes in the Times story are to be believed: "He wasn't averse to quality journalism; he just thought it should go on someplace else" and "I always used to think: 'How stupid can he be? He's the guy with the jet and the money and three homes.' "  For 36 years, Radler was Black's confidante and behind-the-scenes numbers person, so his knowledge of Hollinger's business dealings will be crucial to building a case against Black, who is the obvious target of the continuing investigation.  Much like Scott Sullivan was the key to unlocking Bernie Ebbers' involvement in the fraud at WorldCom, Radler can give investigators a roadmap to the diversion of company funds and perhaps other schemes to siphon assets from Hollinger, a Canadian company whose shares are traded on the New York Stock Exchange so it is subject to the jurisdiction of federal prosecutors and the SEC.  Of course, much like Sullivan, Radler's every peccadillo will be subject to scrutiny to determine whether he can be a credible witness. (ph)

August 22, 2005 in Fraud, Media, Prosecutions | Permalink | TrackBack (0)

Who Pays for the Lawyers When Accounting Fraud Hits the Company?

When a company and its senior executives are caught up in a government investigation, it sometimes seems like an invitation to a Lawyers Full Employment seminar because of the number of fronts on which the company has to fight, and the number of lawyers that have to be hired for individual officers, directors, and employees to represent their interests in the various forums.  The source of the payment for all these lawyers is the company, assuming it is not in bankruptcy and unable to pay its bills.  A recent unpublished decision by the Ninth Circuit heightens the financial risk to companies when officers engage in accounting fraud.  In Federal Insurance Co. v. Homestore, Inc. (available here),  the court upheld the grant of summary judgment to a group of insurance companies that had underwritten the Directors & Officers (D&O) policy for Homestore.Com, which changed its name to Homestore, Inc. after a major accounting investigation.  In 2002, Homestore's then-CFO, Joseph Shew, and other former officers entered guilty pleas to conspiracy to commit securities fraud  related to overstatements of the company's advertising revenue (that whole darn round-trip transaction problem, involving matched orders, etc.).  Homestore settled the SEC action and restated its revenue and income for the relevant period.  With the multiple investigations of the company, a number of officers were represented by counsel, and Homestore sought reimbursement of the costs of representation and settlement amounts from its various D&O insurers.  In an aggressive move, the insurance companies filed a declaratory judgment action because, in its application for insurance signed by Shew, Homestore attached a copy of its 10-Q and 10-K filings that contained the accounting misstatements.  The district court held that the materially false statements submitted by the company meant the D&O policies could be rescinded.  Importantly, the district court held, and the Ninth Circuit affirmed, that the rescission applied to both guilty officers (i.e. Shew) and  "innocent" directors and officers who had no knowledge of the accounting fraud.  This means that Homestore, and not its insurers, is on the hook for the attorney's fees and costs of settling the various cases.

Can the company avoid having to pay all those attorneys?  Under corporate law, a company can indemnify officers and directors for their costs, including attorney's fees, incurred in investigations and litigation related to their conduct on behalf of the company.  In fact, most corporations have broad  indemnification provisions, including advancement of such costs if the officer makes a good faith representation to repay the costs if it turns out the officer is not entitled to the payment of expenses.  Like the D&O insurers, companies will sometimes seek to avoid payment under indemnification provisions in the Articles and by-laws, but they have received much less favorable treatment in the courts, particularly the Delaware Chancery Court.  In Tafeen v. Homestore, Inc., arising out of the same set of investigations, Delaware Chancellor Chandler rejected Homestore's attempt to avoid advancing attorney's fees to an officer caught up in the investigation.  The Chancellor's opening paragraph (here) in one of the many opinions generated in the case summarized his view of the company's argument seeking to avoid payment of the fees:

This is yet another case seeking advancement or indemnification of legal expenses, in this instance brought by a former officer of a Delaware company who is a defendant in multiple legal proceedings. What is unusual about this advancement case is the company's novel defense: it contends (among many other things) that the former officer is not entitled to advancement because he has offered a hollow, worthless promise to repay if he is ultimately found not to be entitled to indemnification. The defense is novel because it reminds one of a sinner who suddenly finds religion-the conversion is breathtaking. Content to adopt advancement and indemnification bylaws drafted with holes large enough to drive a truck through, the defendant company (like so many others in this Court of late) suddenly "finds religion"-insisting on a rigorous interpretation of its loosely written bylaws.

Corporations  involved in accounting investigations, such as Krispy Kreme, Delphi, and AIG, face civil and criminal investigations, along with shareholder derivative suits and securities class actions, and know that the meter on attorney's fees shoot up like it's spring-loaded.  Now, the ostensible protections of the D&O policies, including the highly valuable "duty to defend" provisions, may get yanked away.  If the officer is successful in defending a case, such as Richard Scrushy of HealthSouth, then the company is required to pay for the attorney's fees.  For officers and directors involved in such cases, the continued existence of the company is their only hope of having attorney's fees reimbursed if the insurance disappears. If the company goes bankrupt, they can be left to fend for themselves, and we know the lawyers do not come cheap. (ph)

August 22, 2005 in Civil Enforcement, Fraud, Investigations, Judicial Opinions, Prosecutions | Permalink | TrackBack (1)

Chicago Bridge & Iron Subpoenaed by SEC in FCPA Investigation of Halliburton

Chicago Bridge & Iron Co. N.V., a Dutch construction company, filed an 8-K that makes a terse disclosure that the company received an SEC subpoena as part of an Foreign Corrupt Practices Act investigation of possible bribery in connection with the construction of a liquefied natural gas (LNG) facility in Nigeria.  The company's entire release (here) states:

We were served with a subpoena for documents on August 15, 2005 by the Securities and Exchange Commission in connection with its investigation titled “In the Matter of Halliburton Company, File No. HO-9968” relating to an LNG construction project on Bonny Island, Nigeria, where we served as one of several subcontractors to a Halliburton affiliate. We are cooperating fully with such investigation.

The SEC commenced an investigation last year of possible bribery related to the project, which involved the Halliburton Company as one of the lead contractors, and Chicago Bridge was a subcontractor that received a $100 million contract.  In an update on the investigation issued on Sept. 1, 2004, Halliburton disclosed (here) that the Department of Justice and a French magistrate were investigating possible bribery related to the project.  In June 2004, the company terminated the contract with the former head of its Kellogg Brown & Root subsidiary, Jack Stanley, "because of violations of Halliburton's and Dresser’s codes of business conduct that, to Halliburton’s knowledge, involve the receipt by these persons of improper personal benefits. Evidence of these violations was uncovered in connection with the previously disclosed investigation related to the construction and subsequent expansion by TSKJ of a natural gas liquefaction facility in Nigeria." (See 8-K here).  The SEC's latest subpoena means that the investigation is continuing, and may be focusing on whether illegal payments were made through intermediaries. (ph)

August 22, 2005 in FCPA, Investigations, Securities | Permalink | TrackBack (0)

Animal House and Federalism

For aficionados of one of the finest movies ever made, you know that the Deltas extracted their revenge on Dean Wormer and Faber College in the annual homecoming parade, involving such traditional college hijinks as assault with a deadly weapon, mayhem, and the like.  It's not just in the movies that such fun among the Greek set takes place.  The Second Circuit recently affirmed a conviction in United States v. Logan (here) involving a member of Delta Kappa Beta -- yes, known as the Deltas -- who lost their house to a hated rival, Pi Kappa Phi (the Kappas, of course), at SUNY Cortland.  As the opinion notes with perhaps a bit of irony: "The Deltas were not model tenants: they caused structural and interior damage to the house, failed to keep the premises clean, and did not pay the utility bills they incurred. The Deltas also failed to pay the rent agreed upon in the lease, and were responsible for the cancellation of the insurance on the building."  I suspect they were on double secret probation, too.  When the Kappas took over the house, the Deltas threatened to burn it down and, on Aug. 11, 2001, a group of frat brothers entered the house, doused the furniture with gasoline, and torched the Kappas new house.  Luckily for the Deltas, a Kappa sleeping in the house escaped the fire, so all they were charged with was arson under 18 U.S.C Sec. 844(n) and conspiracy, not felony-murder.  Logan was convicted on the conspiracy charge.

On appeal, Logan challenged the conviction on federalism grounds, arguing that the Supreme Court's decision in Jones v. United States, 529 U.S. 848 (2000), applying a federalism limitation to the scope of the arson statute made the earlier decision in Russell v. United States, 471 U.S. 858 (1985), obsolete when the arson involves a single house.  Russell held that an arson of a rental unit necessarily affects interstate commerce, while the house in Jones was an owner-occupied property and therefore outside the scope of Congressional authority under the Commerce Clause.  The Second Circuit rejected Logan's argument, noting that the Court distinguished Russell in Jones, and "even if we had reason to believe that Russell's holding is questionable in light of Morrison and Lopez, it has not been expressly overruled by the Supreme Court. Courts of Appeals are therefore obligated to follow Russell until the Supreme Court itself sees fit to reconsider that decision." 

As Dean Wormer said so well, "I hate those guys." (ph)

August 22, 2005 in Judicial Opinions, Prosecutions | Permalink | TrackBack (0)

Tax Protester Tricks Net Upward Departure

Within the tax protester movement, there are those with firmly held beliefs on the impropriety of the federal tax system.  Some take their protests beyond just refusing to pay taxes by seeking to exploit the system and take advantage of the various protections it affords to individuals.  In U.S. v. Saldana (here), the Fifth Circuit affirmed the convictions of twin protesters Samuel and Saul Saldana for false statements and impeding the administration of the Internal Revenue Code.  Among other things, the brothers submitted Form 8300s reporting cash transactions over $10,000 that listed the names of government officials and lawyers involved in various cases against the Saldanas as receiving large amounts of money, including "$213 quintillion or $1,955,000,000,000,000."  Needless to say, the Form 8300s caused problems for both the IRS and the individuals identified as receiving the money. Saul tried to claim the forms were submitted in good faith and sought to introduce manuals from tax protester seminars, which the judge refused to allow.  Saul received a 24-month sentence and Samuel received a 60-month sentence, both of which involved upward departures.  The Fifth Circuit upheld the sentences, although with some trepidation:

At the outset, we again acknowledge that the extent of the departure here comes close to the outer limits of reasonableness. First, the degree of the departure overstates the harm done to the victims. Specifically, most victims testified to experiencing only some annoyance and trepidation at the thought of an IRS investigation, and their greatest inconveniences were contacting the IRS or FBI and filling out forms. Second, Samuel’s sentence is significantly longer than those imposed in similar "tax protestor" cases. We note, however, that —— as in Saul’s case —— the district court’s reasons for upwardly departing are valid and, taken together, clearly justify a sentence of the length of the one actually imposed by the district court. Given the deference we owe to the district court, we will not overturn the extent of the upward departure here as unreasonable.

(ph)

August 22, 2005 in Tax | Permalink | TrackBack (0)

Sunday, August 21, 2005

Old(er) Bloggers

An article from the San Jose Mercury News entitled "Bucks for Blogs" (here) caught my eye, especially this opening paragraph: "When it comes to blogging, big corporations are turning to twentysomething mavericks for advice. If they can't lick them, they may have to join them."  How about the 40+ mavericks who are members of Paul Caron's Empire of Blogs? (ph)

August 21, 2005 in About This Blog | Permalink | TrackBack (0)

Cosmed Settlement

DOJ and EPA have entered into a settlement (subject to 30 day public comment and court approval) with Cosmed-Group, Inc. for environmental violations. The DOJ press release states that the settlement reached is for Clean Air Act violations and

"[u]nder the consent decree, . . . Cosmed will pay a $500,000 civil penalty and spend an additional $1 million to perform supplemental environmental projects that will improve air quality in urban areas. Cosmed also will complete environmental audits at all eight of its current and former facilities, and establish an environmental management system that will help ensure that the company fully complies with environmental regulations in the future at its three remaining facilities."

A Copy of the Complaint can be found here.

A copy of the consent decree can be found here.

August 21, 2005 in Environment | Permalink | TrackBack (0)

Mississippi and KMPG

KPMG may have more on its hands than just civil law suits (see post here). The LATimes (Reuters) reports here that Mississippi is considering filing "criminal charges" against KPMG. Will other states follow?  Should states be allowed to bring cases against national companies for criminal charges  where the federal government does not bring the charges?  Could a state bring a company down as was done by the federal government in the case of Arthur Andersen?  Should this be permitted? Stay tuned.

(esp)

August 21, 2005 in Arthur Andersen, Prosecutions, WorldCom | Permalink | TrackBack (1)