September 24, 2005
Time Receives Grand Jury Subpoena in Circulation Probe
A grand jury in the Eastern District of New York (Brooklyn) issued a subpoena in July to Time Inc. for documents related to its circulation figures for the company's various magazines. The investigation focuses on whether media companies have overstated the number of copies that have been purchased as opposed to distributed for free; those figures are important in setting advertising rates, particularly the number of paid subscriptions and news stand sales as opposed to free copies. Earlier this year, three former employees of newspapers owned by the Tribune Co. were charged with fraud for inflating paid circulation figures at Newsday and Hoy (see U.S. Attorney's Office press release here). An AP story (here) discusses the investigation.
One interesting aspect of the investigation is that, according to a Time spokeswoman identified in the AP story, the company received the grand jury subpoena approximately two months ago. Only now, however, is the information coming out, and I could not find any public disclosure of the subpoena in company filings as of Sept. 23. In its 10-Q filed in early August (here), the Time disclosed the government's investigation related to accounting issues involving AOL, which resulted in a large settlement and appointment of an outside monitor. The grand jury subpoena seems to have fallen through the cracks, or perhaps it was not viewed as "material" information that a reasonable investor would consider important. Then again, when a substantial portion of a company's revenue and income is tied to advertising, an investigation of possible fraud in the basis for those rates sure seems material to me, but then I'm not a very good investor, either. (ph)
A HealthSouth CFO Finally Receives a Jail Sentence
Former HealthSouth CFO Weston Smith, who initially blew the whistle on the fraud at the company, received the only substantial sentence among its former officers who entered guilty pleas. U.S. District Judge Robert Propst sentenced Smith to a 27-month term of imprisonment, which is a far cry from the seven-day sentence imposed on former CFO Michael Martin or the home confinement for the other former CFOs. The disparity in the sentences is a result of different judges imposing the sentences, and apparently evaluating the culpability and cooperation of the defendants by different measures. A press release issued by the U.S. Attorney's Office (here) discusses the sentencing.
Meanwhile, back at HealthSouth, Richard Scrushy launched a broadside at the company's current management, accusing them of not enhancing shareholder value and demanding that he be provided access to corporate records in his position as a member of the board of directors. Scrushy remains the largest individual shareholder of HealthSouth, and never gave up his board seat, although he has been shunned by the rest of the directors who operate the company through a special committee that does not include Scrushy -- no great surprise there. Scrushy looks like he's laying the groundwork for a return to the executive suite, assuming the SEC is no more successful than the U.S. Attorney's Office in its securities fraud case. A Birmingham News article (here) discusses Scrushy's criticism of HealthSouth's management. (ph)
Palmeiro Becomes a Pariah
Information from the hearing on now-former Baltimore Orioles player Rafael Palmeiro's drug test indicates that he tried to blame teammate Miguel Tejada, who Palmeiro said gave him an injection of what he thought was vitamin B-12 but may have been the steroid for which he tested positive. The Orioles have now invited Palmeiro to remain at his home in Texas for the rest of the season rather than rejoin the team for the final ten days of the season (AP story here). A statement from baseball's Health Policy Advisory Committee completely exonerated Tejada, who is among the most popular players in the league. As congressional investigators focus on whether Pameiro used steroids before his emphatic testimony denying any use of the drugs (earlier post here), the plausibility of his explanation for the positive drug test only fuels the drive to determine the extent of his steroid use and possible perjury. (ph)
Appealing a 100-Year Sentence for Fraud
Colorado financial advisor Will Hoover received a 100-year sentence for organizing a ponzi scheme that resulted in investors, many of whom are elderly, losing over $13 million. Hoover has appealed the sentence to the Colorado Court of Appeals by citing to the sentences of Bernie Ebbers (25 years) and Dennis Kozlowski (maximum of 25 years) as setting the upper limit of a reasonable sentence. A Rocky Mountain News article (here) discusses the appeal. (ph)
September 23, 2005
HCA Receives Grand Jury Subpoena About Senator Frist's Stock Sale
HCA Inc., the large private hospital and medical clinic company, disclosed that it received a subpoena from the the U.S. Attorney's Office for the Southern District of New York for information related to sales of the company's stock by Senate Majority Leader Bill Frist. A company news release (here) states: "HCA (NYSE: HCA) today announced that the company received a subpoena from the office of the United States Attorney for the Southern District of New York for the production of documents. The company believes the subpoena relates to the sale of HCA stock by Senator William H. Frist. The company intends to cooperate fully with the office of the U.S. Attorney in this matter." Senator Frist directed the sale of all of his shares in HCA, including those owned by trusts for his wife and children, that were held in a blind trust. Approximately two weeks after Frist's shares were sold, HCA announced an earnings shortfall, and the company's shares dropped approximately $5 per share, from $55 to $50.
According to an AP article (here), Frist's HCA shares were worth between $7 and $15 million at the beginning of the year. A large number of HCA executives also sold shares, and the company was founded by Frist's father. The Wall Street Journal reports (here) that the SEC is also looking into the sale. One interesting aspect is that the trust arrangement for holding assets is usually designed to insulate the person from any direct control over the trust holdings, so that any transactions cannot be tied to any particular knowledge the owner might have. Senator Frist's financial disclosure form for 2003 (here) lists a number of blind trusts for which the assets are "unknown," and my quick review of the form does not show any specific listing for HCA shares (he does own Krisy Kreme shares in 2003). I always thought a blind trust meant the person could not be involved in the decisions, but I confess to no knowledge in the area beyond that general impression. (ph)
Did Someone Forget to Tell the Board of Swift Transportation That Insider Trading Is Illegal?
Each time a story like this comes out -- and they seem to appear with alarming regularity -- it causes me to wonder whether corporate executives and board members pay any attention to the discussions about how insider trading in the company's stock is illegal. The SEC filed an insider trading suit against Swift Transportation Co. CEO (and former board chairman) Jerry Moyes for buying 187,000 shares of company stock in the two trading days before an announcement that that Swift projected better-than-expected revenues and a stock repurchase program that sent shares up 20%. Moyes had a paper profit of $622,000, not bad for a two-day investment. Once the information about the transactions was disclosed on the Form 4 filed with the SEC, Moyes put the profits from the trades into a trust. The board was apparently asleep at the switch, though, because the SEC's Litigation Release (here) notes that "[u]pon learning of Moyes' trades, Swift's independent directors took corrective action, including implementing a stricter insider trading policy and instituting a pre-clearing process for all trades by company insiders." I can only imagine what Swift's insider trading policy was before this took place. Moyes settled the case by disgorging the profits and paying a one-time penalty; he will step down as CEO in December 2005.
Swift issued a press release (here) touting the fact that the SEC did not take any action against the company related to Moyes' trading, under the following headline: Swift Transportation Co. Inc. Announces Great News from the Securities and Exchange Commission. Welcome news, perhaps, but "great"? (ph)
GlaxoSmithKline Settles Medicare Fraud Claims for $150 Million While Serono Gets Ready to Pony Up $700 Million
The Department of Justice announced a settlement of a civil false claims act suit against GlaxoSmithKline PLC for inflating the price of two of its drugs that counter nausea for cancer patients undergoing chemotherapy and radiation treatments. The company agreed to pay a $150 million civil penalty, according to a DOJ press release (here), for the following:
The United States alleged in settlement documents that GlaxoSmithKline-one of the world’s largest pharmaceutical manufacturers-engaged in a scheme to set and maintain fraudulent and inflated prices for Zofran and Kytril knowing that federal healthcare programs established reimbursement rates based on those prices. The difference between the reimbursement rate of the federal health care programs and the actual price paid by healthcare providers for a drug is commonly known as the “spread.” The larger the spread on a drug, the larger the profit or return on investment for the provider. GlaxoSmithKline allegedly used the spread to market, promote, and sell the drugs to existing and potential customers. Because reimbursement from federal programs was based on the fraudulent, inflated prices, the United States contended that GlaxoSmithKline caused false and fraudulent claims to be submitted to federal healthcare programs.
Meanwhile, Swiss biotech company Serono AG is close to settling a criminal investigation into the sales of the company's drug to treat AIDS wasting, Serostim. According to a Wall Street Journal story (here), Serono will pay approximately $700 million in criminal and civil fines to the federal and state governments for defrauding Medicare in the pricing of the drug. A group of Serono sales executives were indicted earlier this year related to a program to pump up Serostim prescriptions called the "$6m[illion]-6 day plan" by offering doctors a free trip to an AIDS conference in Cannes, France (earlier post here). The drugs can cost upwards of $80,000 a year, so this isn't something you pick up at your corner pharmacy. It's not clear from the Journal story whether the company or one of its units will have to enter a guilty plea, or whether the Department will enter into a deferred prosecution agreement. Because of the automatic exclusion rules for those guilty of Medicare fraud, any guilty plea will have to avoid triggering a ban on the company's products from government health care programs. (ph)
Two Charged with Secretly Filming Michael Jackson
When Michael Jackson flew from Las Vegas to Santa Barbara in 2003 to face the child molestation charges on which he was later acquitted, little did he know that the owner of the chartered private jet outfitted the passenger cabin with a secret camera and microphone he had purchased from a "spy" store. Now, the owner, Jeffrey Borer, and Arvel Reeves, who owns an aircraft maintenance company, have been indicted on charges of conspiring to illegally intercept oral communications, and Borer has been charged with obstruction of justice for allegedly telling a witness to lie to the FBI about the reason for the videotape camera. Borer and Reeves attempted to sell the tape to the media for $1.5 million, but Jackson's lawyers were able to prevent is dissemination. What makes the tape particularly invasive is the fact that Jackson was accompanied by his lawyer at the time, Mark Geragos, so the discussions would likely be protected by the attorney-client privilege. Along with the indictment for welfare fraud of the mother of the child who accused Jackson, the fall-out from the Jackson prosecution just keeps getting weirder. An AP story (here) discusses the indictment. (ph)
Former Gemstar-TV Guide CEO Pleads Guilty to Obstructing SEC Investigation
The U.S. Attorney's Office for the Central District of California announced that Henry Yuen, the former CEO of Gemstar-TV Guide International Inc., agreed to plead guilty to obstructing an SEC investigation into accounting fraud at the company by destroying e-mails and other electronic files. According to a press release (here):
According to the Information being filed today, and as admitted by Yuen in a plea agreement with the government, also being filed today, the SEC began a formal investigation of Gemstar, a publicly traded company, in October 2002. Yuen received a subpoena from the SEC requiring him to provide the SEC with a broad range of items including e-mails, correspondence and all documents concerning Gemstar, including documents stored on his computer. After receiving this subpoena, Yuen deleted from his computer e-mails and Gemstar corporate documents that the subpoena required him to produce. Yuen also received a subpoena to testify before SEC investigators. In March 2003, the day before Yuen was scheduled to appear and testify before the SEC, Yuen installed a computer program called "Eraser 2003" on his Gemstar office computer. By running this program, Yuen - a computer expert - made it nearly impossible for anyone to recover the documents he had previously deleted. Shortly thereafter, Yuen had the hard drive from his office computer removed and taken away from his Gemstar office.
Yuen is also a defendant (along with the company's former CFO) in an SEC securities fraud suit (complaint here), and the obstruction plea will not help his defense in that case. (ph)
September 22, 2005
Can Anyone Make Sense Out of White Collar Sentencing?
The 8-25 year sentences handed out to former Tyco officers Dennis Kozlowski and Mark Swartz provoked some commentary that the punishment was too harsh, given that these were first time offenders who pose little threat to society, at least from the standpoint of being violent or engaging in clearly illegal conduct like drug dealing. On the flip side, former HealthSouth CFO Michael Martin, one of the five guilty CFOs at the company, was resentenced by Chief U.S. District Judge U.W. Clemon to spend seven days in prison, a $50,000 fine, and two years supervised release. The government appealed the Judge's downward departure in the original sentencing, when Martin received a sentence of six months home confinement. The Eleventh Circuit held that the sentence was unreasonable, applying Booker's newly-created standard of review. A press release issued by the U.S. Attorney's Office for the Northern District of Alabama (here) quotes U.S. Attorney Alice Martin: “To send a former CFO who participated in this massive fraud for over 3 years to jail for 7 days is not justice. It is time for corporate criminals to be sent to prison in Birmingham."
The cases are certainly different, given that Martin cooperated in the government investigation while Kozlowski and Swartz went to trial and maintain their innocence. At the same time, each case involved sentencing under largely discretionary systems. When the Supreme Court declared mandatory sentencing guidelines unconstitutional in Booker and Blakely, many extolled the benefits of a return to judicial discretion in sentencing, that judges would be able to account for the particular circumstances in a case and individualize justice. If judicial discretion is a positive aspect of the sentencing process, then why the criticism of New York Supreme Court Justice Obus' sentences given to Kozlowski and Swartz? He observed the defendants first hand, heard all the evidence at trial -- twice, no less -- and assessed their statements at the sentencing hearing regarding their culpability. Neither defendant appears to have expressed the slightest remorse for his conduct, defending the money they received to the last. In that context, can we say that the judge's decision was too harsh, while it could be argued equally that perhaps he was not harsh enough? (Complaints about the policies of the New York correctional system that may assign these men to maximum security prisons, while well taken, are not directly related to the sentence imposed by the judge.)
If judicial sentencing discretion is a benefit, then we live with the decisions made by judges, at least when they are not extreme, although even that assessment would be subjective. If "discretion" is only a convenient avenue to get lower sentences, then any sentence greater than some undisclosed norm is too harsh, regardless of who has the discretion in the system. Was Chief Judge Clemon's decision to impose a seven-day sentence too lenient? The judge may have been sending a message to the court of appeals not to interfere with sentencing decisions, seeking to find the very bottom of what can be a reasonable departure in a case in which the admitted fraud at HealthSouth totaled $2.7 billion. If it is a test of wills between trial and appellate judges, a kind of turf battle, then the sentence is hardly defensible. If the judge made a reasoned assessment of the harm, and the measure of the defendant's cooperation, then the discretion vested in the trial court permits such a departure, subject to appellate review for reasonableness.
The question comes back to how much discretion should the judges have. The Federal Sentencing Guidelines took much of it away, only to have some of it restored earlier this year. To the extent that disparity in sentencing emerges in the federal system, particularly in white collar crime cases, Congress may react by constricting judicial discretion once again. Mandatory minimums, anyone? (ph)
WorldCom Securities Class Action Settlement Approved; Ebbers Prepares His Appeal
U.S. District Judge Denise Cote approved the settlement of the WorldCom securities fraud class action suit that involves a total of $6.1 billion. The largest payments came from Citigroup ($2.575 billion) and JP Morgan Chase ($2 billion), while former CEO Bernie Ebbers turned over virtually all his remaining assets to settle the case. WorldCom's former directors also made an approximately $25 million payment out of their personal assets, one of the few times directors have paid into a settlement for conduct that did not involve self-dealing or a conflict of interest. WorldCom bondholders will receive approximately $5 billion of the settlement fund, and shareholders who file claims will divide up approximately $1 billion, a pittance compared to the losses suffered by the owners of the company's stock who were wiped out in the bankruptcy (assuming the didn't sell before then). A Reuters story (here) discusses the settlement.
On a related front, a CNN.Com article (here) discusses one of the arguments Ebbers will advance on appeal, that the government's refusal to grant immunity to former WorldCom Chief Operating Officer Ronald Beaumont to allow him to testify for the defense at trial violated due process. Prosecutors named Beaumont as an unindicted coconspirator before trial, most likely to avoid admissibility problems by designating conversations he had with cooperating witness Scott Sullivan as coconspirator statements that fall outside the prohibition on hearsay. With that, Beaumont refused to testify by stating he would assert his Fifth Amendment privilege, and the only way around that roadblock is a grant of immunity, which the government must request. U.S. District Judge Jones denied the defense motion during trial for an order directing the government to authorize immunity on the ground that the testimony was not exculpatory of Ebbers, at least not directly. As a ground for a successful appeal, this is a very tough argument to win, even though Beaumont has not been indicted. (ph)
Congressional Investigators Broaden The Investigation of Palmeiro's Steroid Use
The congressional investigation into whether (former?) Baltimore Orioles player Rafael Palmeiro committed perjury this past March when he denied ever using steroids -- only to be caught using them by baseball's new testing program a few months later -- has expanded to include interviews with current major league players who may have information about Palmeiro's steroid use. According to an AP story (here), investigators on behalf of the House Government Reform Committee are interviewing players who may have information about Palmeiro, including Jorge Piedra, a member of the Colorado Rockies who was also suspended this year when he tested positive for steroids. While the Committee has access to Palmeiro's drug tests, it will be hard to show from that information alone that Palmeiro took steroids before he testified. While it may be absurd to think a player would state on national television that he "never" took steroids, and then begin taking them for the first time shortly thereafter when there was a testing program in place, perjury cases are not made on imbecility but proof that the person's statement was false. The government will have to "put" the steroids in Palmeiro's hands if it wants to win a perjury prosecution, and that may be a very tall order. (ph)
40 Years for Investment Fraud
Speaking of severe sentences, an AP story (here) discusses the sentencing of James Gibson in East St. Louis, IL, to a forty-year term of imprisonment and $83 million in restitution for defrauding 183 victims. Gibson was convicted of fraud and money laundering for taking money from people who received settlements in personal injury and med-mal cases and promising to invest it to provide investors with a life-time income. In a familiar refrain, the money went for his personal expenses (boat, car, etc.) and was invested in a chain of grocery stores that went bankrupt. At trial, at which he represented himself, Gibson argued that the company's attorney's and accountants told him that he could use the investors' money as he saw fit. Perhaps that explains the comment by U.S. District Judge Gilbert as he imposed the highest sentence provided by the Sentencing Guidelines: "You are, without a doubt, the most arrogant, self-centered, manipulative person I've ever laid eyes on." Wow. (ph)
September 21, 2005
From A Reader - An Inside View of the Kozlowski and Swartz Sentencing
A reader of the blog, who was "not involved in the Kozlowski or Swartz case, but [ ] attend[ed] most of their first (mistrial)," described the sentencing as follows:
"Kozlowski was there with, among others, his wife and two daughters.
Swartz's wife was there, but his children were not (they are younger and
this would have been a very difficult experience I suppose). Both
defendants had a number of other family, friends and supporters there.
I had never been impressed by this prosecution, but they did make a
forceful case for a tough sentence. Essentially their argument boiled
down to: the state of New York has established a maximum penalty for
grand larceny, and this is the largest larceny in the history of the
state; if this doesn't deserve the max, what does? They also hit both
defendants hard - they attacked the support letters written by the
friends and family as being devoid of substance. The prosecution
refused to accept that the defendants were totally vilified in the
press, pointing to two New York Times pieces (including the one on
Friday) as "puff pieces." The author of that article, Andrew Ross
Sorkin, was in attendance and I wonder what his take was. If I were
more cynical, I would point out that the Times endorsed Morganthau's
opponent in the recent primary, but I guess I did just point that out.
Oddly, the prosecution also referred to the company's former directors
"The statements by each defendant were not particularly moving, and there
was no acceptance of guilt (perhaps so as to not undermine their
appeal). I was amazed at how calm and cool both were. They were
clearly well prepared for what was to come. After the arguments and
statements were given, Judge Obus called for a brief recess. I ran into
Swartz in the men's room, and I was shocked that he was still smiling
during his last moments as a free man. He looked very different since
the trials, though, having grown a full beard and cut off his hair.
When the recess finished, he returned to the courtroom, kissed his wife,
and took his seat at the defense table.
"After the sentence was read and the request for bail pending appeal was
denied, Dennis Kozlowski and Mark Swartz - two former titans of industry
- were handcuffed and lead away through the backdoor of the courtroom.
There were no goodbyes to their friends and family. It was very painful
to watch. I did not see either of them cry, though their families were.
"Ruth Jordan, the infamous juror from the mistrial was in attendance. I
asked her how she felt, and she just said this was a "real miscarriage
of justice." I agree. Do these men really belong in Attica? Why don't
we just take their money and their pride?"
(esp) (With many thanks).
Radler Takes Plea
Not surprising, former Chicago Sun-Times publisher David Radler has decided to take a plea and it looks like he has secured a "deal" from prosecutors in return for his cooperation. (Chicago Tribune (AP) reports here.) The Wall Street Jrl here notes that in return for a plea of guilty to a mail fraud charge, Radler will cooperate and receive a "29-month prison sentence and a $250,000 fine." Any guesses on who will be indicted next?
How Long Will Kozlowski and Swartz Be in Prison?
Obviously the amount of time to be served is contingent on whether they are successful in the appellate stages of this case. But in the interim, the question is whether they should be incarcerated pending their appeal. Bernard Ebbers is free on bond and Martha Stewart could have been free but she chose to go do her time. And in a New York State Court yesterday, Dennis Kozlowski and Mark Swartz were sent off to immediately start serving their sentence. See here.
Now the issue becomes whether the appellate tribunal will grant them bail pending their appeal. It looks like the issue is already before the appellate court. See here.
Ex-Official in Bush Administration Indicted
An ex-official of the Bush Administration "was arrested on charges of making false statements and obstructing an investigation by the GSA’s (General Services Administration) Office of Inspector General." See DOJ Press Release. According to the Dallas Morning News here, the investigation pertained to lobbyist Jack Abramoff, who has since been indicted on other matters. See here and here. The DOJ press release states that:
"The affidavit filed in support of the criminal complaint alleges that from May 16, 2002 until January 10, 2004, Safavian served as Chief of Staff at the GSA. During that time he allegedly aided a Washington D.C. lobbyist in the lobbyist’s attempts to acquire GSA-controlled property in and around Washington, D.C. In August 2002, this lobbyist allegedly took Safavian and others on a golf trip to Scotland."
Civilans Associated With the Military
Those working next to the military may have Uncle Sam may be looking over their shoulder. And maybe that's a good thing? A DOJ press release here states that "[a]civilian U.S. Department of Army Director of Contracting and two other individuals have been arrested in New York and Indiana on charges of participating in a scheme to pay bribes to a public official and take kickbacks in connection with U.S. Army contracts awarded from an Army recreational facility in Germany." The release describes some of the alleged kickbacks as:
"bribes for himself, his family members and others in the form of cash, home renovations, flat screen televisions, computer laptops, automobile maintenance, airline tickets, hotel rooms, trips, cleaning services, furniture, artwork, appliances, Oktoberfest tickets, tickets to the Indianapolis 500, and ski passes."
Fraud Not Tolerated When Security Is the Concern
The Dallas Morning News here reports that a former employee for a contractor in Iraq was charged with fraud for allegedly issuing security badges to individuals who were not entitled to them. He is alleged to have provided top level security badges to individuals who had not been cleared to receive these badges.
September 20, 2005
Day 1- The Trial of Former Governor Ryan
Yesterday was day one in the trial of former Illinois Governor Ryan. The indictment here charges typical white collar offenses like false statements, mail fraud (premised on intangible rights), Hobbs Act, RICO and tax. Dan Webb is representing the former governor and taking a very slow road in picking the jury. To the prosecutor's objection, he noted the high profile nature of the client charged in this case. For more see the Chicago Tribune here and CNN here.