Saturday, September 10, 2005

Boeing Nears a Deferred Prosecution Agreement

Taking advantage of the Department of Justice's new-found fondness for deferred prosecution agreements for corporations, Boeing Co. is reportedly close to settling two government investigations that will require the company to pay upwards of $500 million and, if form holds, appoint an outside monitor and agree to certain restrictions on its operations.  The government has investigated Boeing for the conduct of its former CFO in recruiting a senior Pentagon procurement official that resulted in both individuals pleading guilty and being sentenced to short prison terms.  In addition, Boeing improperly obtained secret documents from rival defense contractor Lockheed Martin that it used in formulating its bids.  The Department of Defense stripped Boeing of some of its contracts, and the company came in for withering criticism from Sen. John McCain over its practices, including efforts to vilify the Senator. An AP story (here) discusses the settlement negotiations.

The recruitment problem was a black eye for the company, but had little long-term effect, probably no more than the sudden resignation of then-CEO Harry Stonecipher earlier upon the revelation that he was having an affair with a subordinate employee.  The Lockheed document issue cost Boeing revenue and, more importantly, credibility.  The deferred prosecution agreement, even with the fine, is a comparatively small price to pay to put the two investigations behind it. (ph)

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

Spitzer Prepares to Move Against Former Insurance Executives for Bid-Rigging

New York Attorney General Eliot Spitzer's initial investigation that roiled the insurance industry last year may be reaching fruition amid a report that a number of former executives of Marsh Inc. have been told they will be indicted on bid-rigging and criminal enterprise charges if they do not reach a plea agreement in the next two weeks.  Marsh Inc. is the insurance brokerage unit of Marsh & McLennan Cos., and the company has already settled charges filed by Spitzer's office.  The bid-rigging investigation led to a broad review of the reinsurance industry by the SEC and Department of Justice along with the New York Attorney General, and has resulted in the filing of charges or notices of possible charges against a number of insurers and individuals, including AIG, General Re, and MBIA.  With Labor Day behind us, look for those investigations to move into the final stages. A Bloomberg.Com story (here) discusses the possible charges against the former Marsh Inc. executives. (ph)

September 10, 2005 in Grand Jury, Investigations, Prosecutions | Permalink | TrackBack (0)

Friday, September 9, 2005

General Re CEO Receives Wells Notice From the SEC

Joseph Brandon, the current CEO of General Re, has received a Wells Notice from the SEC that the Enforcement Division staff intends to recommend a civil action against him for violations of the securities laws in connection with the AIG-General Re "finite insurance" transaction that has been the subject of an ongoing investigation.  Two former General Re executives (John Houldsworth and Richard Napier) have already entered guilty pleas related to their roles in the transaction, and former General Re CFO Elizabeth Monrad (who is on unpaid leave from TIAA-CREF, where she was the CFO) and CEO Ronald Ferguson have already been notified by the Commission that they may be named in a securities fraud complaint.  (See earlier post here). Ferguson's consulting contract with the company was terminated when he refused to cooperate in the SEC investigation by asserting his Fifth Amendment privilege.  Brandon replaced Ferguson as CEO of General Re in 2001, and other executives who received Wells Notices ultimately have been relieved of their duties, and it will be interesting to see if Brandon receives the same treatment.  A story on Bloomberg.Com discusses the SEC notice (here).

General Re is a wholly-owned subsidiary of Berkshire Hathaway, whose CEO Warren Buffett has already voluntarily appeared and given a statement to the SEC and U.S. Attorney's Office.  The SEC's case has reached as high as it can within General Re, and the interesting question is whether Buffett will receive a Wells Notice. I think it's unlikely, given Buffett's usual hands-off approach to the operations of subsidiaries, but it is certainly not impossible if he played a role in the accounting decisions related to the transaction. (ph)


UPDATE: Add two more General Re executives (one recently retired) to the list of those who received Wells Notices from the SEC related to their roles in the AIG finite insurance transaction.  Berkshire Hathaway issued a press release (here) disclosing that Christopher Garand, a former Senior V-P who retired on Aug. 31, and Robert Graham, a Senior V-P and Assistant General Counsel at the comapny, both received their Wells Notices on Sept. 8.  As with General Re CEO Joseph Brandon, the question regarding Graham is whether he will be allowed to continue in his job. (ph)

September 9, 2005 in AIG, Civil Enforcement, Securities | Permalink | TrackBack (0)

When Does an Outsider Assume an Insider's Fiduciary Duty for Insider Trading Liability?

The SEC announced the settlement  of securities fraud action involving sales before disclosure of negative news about a company that presents an interesting issue on the scope of insider trading liability. In SEC v. Johnson,  David Johnson learned of a negative analyst report about PMA Capital Corp., and spoke with the chairman of the company's board of directors.  The chairman stated that the company was having financial difficulties and would likely have to eliminate its dividend.  The SEC's complaint (here) states that "[a]t no time during the conversation did the Chairman tell Johnson that he expected him to keep the information conveyed in their conversation confidential or that he should not trade based on this information."

Johnson then sold his substantial holdings in the company, and had his son sell his shares.  When PMA's stock dropped 62% after announcing the dividend elimination, Johnson avoided over $325,000 in losses, and his son avoided over $55,000.  The interesting point about the Commission's complaint is that it merely asserts that Johnson knew the information he received from the company's chairman was confidential, and that he then assumed the fiduciary obligation to maintain the confidentiality of the information and abstain from trading.  The complaint (here) states:

The information Johnson obtained from the Chairman concerning the loss reserve charge and the discontinuation of the common stock dividend was material and nonpublic. Johnson knew, or was reckless in not knowing, that the Chairman had provided confidential information to him. By disclosing this information to Johnson, the Chairman breached his fiduciary duty to PMA’s shareholders. Therefore, Johnson assumed this duty of trust and confidence to PMA and its shareholders not to trade, or to direct others to trade, in PMA securities. By trading and by tipping his family members, including his son and daughter, Johnson breached that duty.

I'm not sure how you get to the part after "therefore" without some evidence that the chairman intended to tip Johnson, or that Johnson accepted a responsibility to maintain the confidentiality of the information and then violated the "abstain or disclose" rule.  The complaint sure sounds like the "possession" theory of insider trading, ostensibly rejected by the Supreme Court in Chiarella and revived, as least somewhat, by the SEC in Rule 10b-5-1, an amendment that has never been tested in court.  As a settled matter, the assertions in the complaint will not be tested in court, but the SEC's position that an outsider can assume a duty to the company without any assertion that the person agreed to undertake that duty, or was a tippee under the more common Dirks analysis, is beyond anything I have seen the courts sanction regarding liability for insider trading. (ph)

September 9, 2005 in Civil Enforcement, Insider Trading | Permalink | TrackBack (0)

First Survivor Richard Hatch Indicted on Ten Counts

Richard Hatch, the first Survivor winner, has now been indicted on ten counts of tax fraud and using funds intended for a charity for personal expenses.  Back in January, it was reported that Hatch would plead guilty to one count of tax evasion for not reporting his $1 million prize from Survivor and an additional $326,000+ he received from a Boston radio station during 2000.  That deal fell apart in March when Hatch stated that he thought CBS was responsible for the taxes on his winnings.  As happens when a person reneges on a plea deal, the government fired back with both barrels, so to speak, with an indictment listing a number of additional sources of income Hatch failed to report and the misuse of funds given to a charity he purportedly set up to run a camp (see U.S. Attorney's Office for the District of Rhode Island press release here).  A CNN.Com report (here) notes that Hatch was on his way to Houston to help Katrina victims when the indictment was disclosed.  Burned once, don't look for the government to offer any sweet deals this time. (ph)

September 9, 2005 in Fraud, Prosecutions, Tax | Permalink | TrackBack (1)

Caremark RX Settles Civil Health Care Fraud Claim

Caremark RX entered into a civil settlement with the Department of Justice regarding alleged illegal kickbacks at its AdvancePCS subsidiary.  The company agreed to pay $137.5 million to resolve claims that it solicited kickbacks from drug manufacturers and secretly paid rebates to customers to contract with AdvancePCS, a pharmacy benefits manager (PBM).  According to the a press release (here) issued by the U.S. Attorney's Office for the Eastern District of Pennsylvania:

The civil settlement resolves claims under the False Claims Act and the Public Contract Anti-Kickback Act arising from (1) payments made by pharmaceutical manufacturers to AdvancePCS in the form of excessive administrative fees and over-priced products and services agreements as an improper reward for favorable treatment of the manufacturers’ drugs in connection with the contracts between AdvancePCS and health care providers to the OPM, which administers benefits to federal employees and their dependents, and HHS with respect to Medicare Plus Choice organizations, (2) payments by pharmaceutical manufacturers of flat fee lump sum and flat fee percentage rebate contracts for heavily utilized drugs as an improper reward for favorable treatment of those drugs in connection with contracts between AdvancePCS and those who provide health care plans to OPM and HHS, and (3) payments made by AdvancePCS to customers and potential customers that contracted with federally-funded healthcare plans to ensure that AdvancePCS was selected or retained as the PBM for the healthcare plan.

While the government touted the settlement as "the first of its kind" against a PBM for undisclosed financial arrangements with pharmaceutical companies and purchasers of its services, Caremark RX had a bit of a different spin on the matter, as discussed in the company's press release (here):

In reaching the settlement, AdvancePCS expressly denied all allegations made against it and further denied that it had engaged in any wrongful or inappropriate conduct. The Government has agreed that the settlement agreement is not intended to be, and shall not be understood as, an admission of liability or wrongdoing by AdvancePCS.  Further, the settlement agreement states that nothing "shall be interpreted or construed as an agreement or acknowledgement by AdvancePCS as to whether any pharmaceutical manufacturer, customer, or other entity which has, or previously has had, a contract with AdvancePCS has at any time engaged in any of the conduct alleged."


September 9, 2005 in Civil Enforcement, Fraud | Permalink | TrackBack (0)

Civil Suits Start Flowing Against Bayou Securities

There is a growing list of lawsuits against Bayou Securities, the Connecticut hedge fund management firm that has been the subject of multiple criminal investigations for alleged fraud.  The Jewish Federation of Metropolitan Chicago is suing for $4 million that is invested in the firm, while Multi-Dimension Fund, a so-called "fund-of-funds" has filed suit for its $2 million investment.  These suits come on the heels of a civil forfeiture claim filed by the U.S. Attorney for the Southern District of New York seeking to gain control of the approximately $101 million that was frozen by the Arizona Attorney General because it was related to a potential fraud (press release here).  As the lawsuits pile up, the likelihood of any (reasonably) quick resolution of the matter gets more and more distant. An AP story (here) discusses the recent lawsuits against Bayou. (ph)

September 9, 2005 in Fraud | Permalink | TrackBack (0)

Thursday, September 8, 2005

Texas Grand Jury Indicts Two PACs for Campaign Law Violations in 2002 Election

A Travis County, Texas, grand jury issued four indictments against the Texas Association of Business (TAB) and one indictment naming the Texans for a Republican Majority Political Action Committee (TRMPAC) for campaign law violations related to the 2002 elections that resulted in Republicans taking control of the Texas legislature and Congressional delegation for the first time in over 100 years.  TRMPAC was created by House Majority Leader Tom DeLay, who was not named in any of the indictments.  TAB is accused of illegally spending corporate funds on campaigns, while the TRMPAC indictment alleges that it illegally accepted corporate funds.  The organizations have also been sued by losing Democrat candidates from the 2002 election for alleged illegal expenditures during the campaign.  The grand jury investigation is one facet of the bitter political infighting that has characterized Texas politics for the past few years.  An Austin American-Statesman story (here) discusses the indictments. (ph)

September 8, 2005 in Prosecutions | Permalink | TrackBack (0)

The Katrina Scams Are Here

A New York Times article (here) highlights the sorry aftermath of any major disaster: the onslaught of fraudulent schemes.  The article notes that Missouri has taken action against websites with ties to white supremacist groups that are using the names like "" to funnel traffic to a site to collect donations without disclosing the use of the funds or the organizations behind it.  The FBI estimates that there are over 2,300 websites that deal with Katrina-related issues, some legitimate but it's likely that many are not.  If form holds, we should start receiving e-mails seeking assistance in transferring large sums of money in bank accounts left behind by people who died in the hurricane and later flooding.  (ph)


UPDATE: From Findlaw is the complaint (here) filed by Florida against Robert Moneyhan for setting up allegedly bogus Katrina charity websites. (ph)

September 8, 2005 in Fraud | Permalink | TrackBack (0)

Has the Enron Task Force Put the Prosecution in Jeopardy?

Tom Kirkendall on the Houston's Clear Thinkers blog has a post about the latest defense filing in the conspiracy prosecution of Ken Lay, Jeff Skilling, and Richard Causey seeking dismissal of the charges due to prosecutorial misconduct from efforts by the Task Force to keep witnesses from speaking with defense counsel.  The filing (available here) goes into great detail to show that the government has discouraged various potential witnesses, many of them unindicted coconspirators, from communicating with defense counsel except for a smattering of former employees.  The defense faces two significant hurdles.  First, the factual allegations are, at least in part, based on a conspiracy theory, as asserted by its expert, Professor Michael Tigar, who states in an affidavit that "[i]n my experience, this level of silence is not normal."  The fact that the court issued an order that the government not discourage witnesses from meeting with the defendants' lawyers, which was provided to potential witnesses, and still so few have responded could be proof of a secret campaign to keep the defendants from gathering evidence.  Like every nefarious conspiracy theory, however, it rests in substantial part on inaction, not action.  While denying the conspiracy may be proof of its existence, that is not the strongest case.

The second problem to obtaining a dismissal based on prosecutorial misconduct is establishing prejudice, which requires that the defendants make some showing of what evidence they have been denied.  Courts are loath to dismiss charges pretrial based on prosecutorial misconduct, at least as a means of punishing the prosecutor without a showing of substantial prejudice.  What will all these witnesses provide to the defendants?  Like most white collar crime cases, the Enron conspiracy prosecution is based more on documents than testimony.  While some witnesses may provide some exculpatory evidence, it is unlikely that any one will make (or break) the government's case, except perhaps for former CFO Andrew Fastow.

Even if the defense request for dismissal is denied, it serves a purpose of putting a spotlight on the prosecution's tactics that have clearly made Judge Sim Lake uncomfortable.  A motion need not be granted to be successful, and the aggressive defense has probably knocked the government off its stride.  (ph)

September 8, 2005 in Enron | Permalink | TrackBack (0)

What a Tangled Web We Weave

The U.S. Attorney's Office for the Southern District of Texas (Houston) announced that Larry Michael ("Mike") Nixon entered a guilty plea to two counts of bank fraud related loans from Minnwest Bank in Montevideo, MN, and Old National Bank in Indianapolis, IN.  Nixon defrauded the banks by getting loans supposedly to purchase cranes for his company, Delta Crane Co., by sending false documents showing purchases that were never made.  Once Nixon got in too far over his head, he took the mature approach to his problems -- he decided to fake his death.  In 2003, Nixon's speedboat, named "Living Extra Fast'', hit a barge in Galveston Bay, and while the Coast Guard spent days searching for Nixon, a body was never recovered.  According to a press release issued by the U.S. Attorney's Office (here):

Nixon also admitted that after finding himself and his company, Delta Crane, in debt for approximately $4 to $5 million, and unable to refinance, he decided a boating accident gave him an opportunity to disappear. After having obtained a Tennessee driver's license using a birth certificate in the name of Patrick Hudgens, Nixon disappeared after a boating accident on Galveston Bay on August 27, 2003. Nixon obtained the birth certificate on the Internet. At the time of his arrest on state charges by authorities in West Virginia, Nixon was using and living under the name Patrick Hudgens.

Nixon has been in custody since his arrest in 2004 on the West Virginia state charge, and life has probably been "extra slow" since then. (ph)

September 8, 2005 in Fraud, Prosecutions | Permalink | TrackBack (0)

Report on UN Oil-for-Food Programme Describes Quite a Mess

The final report of the Independing Inquiry Committee Into the United Nations Oil-for-Food Programme has been released, and it is a catalogue of how a well-intentioned relief effort spun out of control through a lack of oversight and the inability of the UN, particularly the Security Council, to maintain any sort of responsible discipline over the operation.  The Report (available here) points out that among the lessons to be learned from the effort was leaving far too much initiative for the program's design and implementation with the Iraqi regime -- which is a bit like leaving the punishment to the offender that led, to no one's great surprise, to systematic abuses.  The Committee also emphasized the "grievous absence of effective auditing and management controls" for the program.  Among the lessons of Enron et al. is that corruption and a lack of internal controls is a recipe for disaster. (ph)

September 8, 2005 in Corruption, Government Reports, International | Permalink | TrackBack (0)

Wednesday, September 7, 2005

Bernie Ebbers to Remain Free Pending Appeal

Bernie Ebbers, sentenced to 25 years, has been granted the right to remain free pending his appeal.  See here and here.   This is in large part because he has significant issues for the appellate tribunal to consider.

This is clearly a difference between white collar and street offenses.  The chances that a person given a 25 year sentence for a street crime would be allowed to remain free pending appeal are slim. 

But this difference is also warranted.  There is little chance that the white collar offender will harm someone, especially since they usually are no longer in a position of power to do any harm.  Unlike the street crime, incapacitation is not needed here.   But one also has to wonder if the sentence should not account for the fact that incapacitation does not serve a legitimate purpose here.


September 7, 2005 in WorldCom | Permalink | TrackBack (1)

Records In Scrushy Trial Being Released

A lot was happening behind the scenes before and after the Scrushy trial. Several in the media filed a motion for the release of undisclosed documents during this trial. (see here) The defense did not object to the release of almost all information, objecting only to items pertaining to personal  and financial data of Scrushy. (see here) According to the Website of the New York Society of CPAs here, the media has been successful in having these records unsealed.  So  stay tuned.


September 7, 2005 in HealthSouth | Permalink | TrackBack (0)

Bob May resigns as Board Chair at HealthSouth

The Birmingham News reports here that Bob May, chair of the board at HealthSouth has resigned. May led the company during the trying times of Richard Scrushy's, former CEO of HealthSouth trial.  HealthSouth's news release is here.


September 7, 2005 in News | Permalink | TrackBack (0)

Attorney-Client Privilege Issue Gaining Even More Support-Add the Sentencing Commission

Reported here was the growing support for re-examination of the attorney-client privilege issue and the government requests for waiver. Prior posts showed that a strong coalition was building including the addition of a resolution by the ABA. (see more here). 

As seen here, however, the government did not get the message - at least not completely-  as the provisions of the KPMG deferred prosecution agreement require a waiver of the privilege in some instances. 

But others are hearing the voices loud and clear.  Adding to the list of those concerned about government requests for waiving the attorney-client privilege is the US Sentencing Commission. In 70 Federal Registrar No. 167, Aug. 30, 2005, here, the Sentencing Commission lists its upcoming priorities for the year as follows:

(6) Review, and possible amendment, of commentary in Chapter Eight (Organizations) regarding waiver of the attorney-client privilege and work product protections;

With the increased support, perhaps something will change.

(esp) (with thanks to the ABA for bringing this to the blog's attention)

September 7, 2005 in Legal Ethics | Permalink | TrackBack (0)

More Indictments Are Coming-KPMG

In court today, the nine individuals indicted in KPMG related prosecutions (see here) pleaded not guilty.  Reported by Reuters here and Wall Street Jrl here, the lead prosecutor on the case then made a statement that there are likely to be twelve more individuals indicted soon.

Certainly a statement like this should be enough to get anyone near or associated with KPMG pretty nervous. But fortunately, they will not have to wait very long as the judge set an October 17th deadline for the prosecution to file its superseding indictment. 

This deadline actually puts the pressure on all parties, as the government may be seeking pleas from the nine already indicted or the twelve in the forthcoming group.  Certainly the government will need some pleas, as it might prove extremely difficult fitting that many attorneys and their clients in the courtroom in one trial.The question now is who will be at the defendant's table, and who will be in the witness box come October 17th.


September 7, 2005 in Prosecutions | Permalink | TrackBack (0)

Prosecutor Indicts Former Employee of Charitable Foundation

Bill Rankin of the Atlanta Journal Constitution reports an indictment of "[a] former finance director" of a local chapter of a well known foundation. See AJC here.

What should you do when you are a reputable foundation and you find fraud or embezzlement in your midst? 

If you report it to the government they will investigate, possibly indict, and then you'll likely find your name in the newspapers.  Unfortunately your foundation's reputable name will be placed in a sentence next to the individual who has been indicted.   Even when the newspaper tells how your foundation found the fraud and reported it to authorities, the fear you have is that the incident will taint your organization.  Will people be reluctant to give because of your appropriate disclosure of possible criminality within your organization?  Hopefully the public will understand that you are doing the right thing in reporting possible wrongdoing to authorities so that they can appropriately investigate.


September 7, 2005 in Prosecutions | Permalink | TrackBack (0)

Tuesday, September 6, 2005


Is it criminal to make statements over the wires that are dishonest?  If you happen to be a government official does it reach the level of being a scheme to defraud of  "honest services"?  Is the government a corporation and therefore subject to the collective knowledge of other officials within their midst; the US government holds corporations to this standard? Is it specific intent, recklessness, or negligence, and does it make difference?

I have a lot of questions.  The bottom line is that after listening to the CNN video clip on AOL here, reading TalkLeft here, reading the Times-Picayune open letter to President Bush here, and John Lewis' letter in Newsweek here and being horrified by the incompetency and disregard of too many these past few days, one has to wonder if this reaches a level of criminality.  And if not, should it?


September 6, 2005 in News | Permalink | TrackBack (5)

A Win for Former Gov. Rowland

Former Governor Rowland of Connecticut left office under a cloud after being sentenced to a year and a day in prison. His post-governor employment raised ethics issues at his sentencing and then again, when the state's attorney's office tried to have Rowland arrested for violating a criminal ethics prohibition of Connecticut.  The Hartford Courant reports here that the judge hearing the case said - no way to arresting Rowland. And as noted in this newspaper story, even those opposed to Rowland appear to agree with this decision.


September 6, 2005 in Celebrities, News, Prosecutions | Permalink | TrackBack (0)