October 15, 2005
Pimp Pleads Guilty to Money Laundering
The U.S. Attorney's Office for the District of Nevada announced that Louis Wright, who has appeared in documentaries discussing how he is a pimp, entered into a guilty plea to two counts of money laundering for using a stolen identity to clean up the cash from the prostitutes he oversaw. According to a press release (here):
In pleading guilty today, WRIGHT admitted that he is a nationally known pimp who has had numerous prostitutes work for him and who has appeared in several documentary films about pimping, including the 1999 documentary, “American Pimp.” WRIGHT admitted that he opened a CitiBank bank account using the name Tyler Montana and the social security number of a woman in Rialto, California, and deposited cash into it during 2003 and 2004 totaling approximately $95,000. The deposits were made in Illinois, New York, and California, all places where prostitutes had worked for WRIGHT.
On April 8, 2005, investigating agents executed search warrants at 10024 Garamound; 8321 W. Sahara, #1058; and 9824 Concord Downs, all Las Vegas residences connected with the defendant. Agents recovered numerous items related to pimping, including a motorcycle helmet depicting a skeleton dressed as a pimp, belt buckles, trophies and other awards presented to “Kenny Red.”
Records from "Blackjack Bail Bonds" showed that Wright provided the bail for a number of women arrested on prostitution charges. I didn't know there was a line of products specifically related to pimping, but then I've led a very sheltered life. (ph)
Rove's Fourth Appearance Is a Long One
Karl Rove made his fourth appearance before the grand jury investigating the leak of Valeria Plame's identity as a CIA operative, and he appears to have spent a fairly significant amount of time answering questions. Rove arrived at the federal courthouse in Washington D.C. at 9:00 a.m. and didn't leave until after 1:00 p.m. Even if the entire time was not spent in the grand jury (and I hope they took at least one bathroom break), it appears that Rove's testimony took a great deal of time, at least as compared to other witnesses. With three prior grand jury sessions and interviews with FBI agents, there was a lot of ground to cover. Rove's attorney, Robert Luskin, stated that special prosecutor Patrick Fitzgerald would not need Rove to testify again -- no great surprise given the grand jury will expire in two weeks (unless extended another six months, which is a possibility if new evidence has emerged) and Rove has probably talked himself out at this point. Unless there are additional grand jury sessions next week, the issue now shifts to whether Fitzgerald's office will ask the grand jury to return an indictment or he decides not to pursue criminal charges. Watching a grand jury -- or more appropriately the building where it meets -- is just not all that interesting, however. Stories from the Washington Post (here) and AP (here) discuss Rove's testimony. (ph)
Futures Firm Available, Really Cheap
The tidal wave caused by the accounting fraud at Refco Inc. appears to be on the verge of swamping the firm. The company announced that its largest unit, Refco Securities LLC, had begun unwinding its positions, which means it is in the process of shutting down (Bloomberg story here). The SEC has prohibited withdrawals of capital from Refco's securities and clearing units to prevent a run on the firm, and the the Wall Street Journal reports (here) that the CFTC has approached other investment companies, including Goldman Sachs, about taking over the firm's customer accounts. This brings back memories of the days when the FDIC and Office of Thrift Supervision would swoop in and take over a failing bank on a Friday afternoon in the hope of reopening it on Monday under a new name. Once Refco's lenders pull the plug on loans to the firm, the entire company will go into liquidation fairly quickly because it cannot survive without ready financing. It is still a bit hard to comprehend that the conduct of one person could crater a large financial operation in only one week, but then Nick Leeson took down Barings, and he wasn't even 28-years old. (ph)
Plenty of Jobs in DC
Bruce Carton has an interesting post (here) on the Securities Litigation Watch blog noting a number of high-level openings in the securities field at the SEC and Department of Justice. While the Enforcement Division just appointed a new chief of its litigation unit (Luis Mejia), the Commission has not filled the Chief Accountant post, and there are vacancies at the top of the Divisions of Investment Management and Market Regulation. The chairman of PCAOB, William McDonough, is leaving his post at the end of November, and the Fraud Section in the Criminal Division at the DOJ (my old section) has posted for both the Chief and the Deputy Chief for Litigation. And I suspect the number of senior-level openings will increase after the 2006 election. The final two years of an administration usually has significant turnover as people position themselves for the transition to a new administration (regardless of whether there is a change of party, but the turnover is particularly dramatic when a different party wins the Presidency). (ph)
October 14, 2005
Will "The Closer" End Up Closing Down Refco?
Former Refco CEO Phillip Bennett had the nickname of "The Closer" for his ability to close deals, and he built Refco Inc. into the largest futures trading firm. He was charged with one count of securities fraud in a criminal complaint filed in the Southern District of New York (see earlier post here) that accuses him of hiding a $430 million debt he owed to Refco by shuffling it between ostensibly unrelated entities at the end of quarters. Bennett's fast shuffle has rendered Refco's financial statements a sham, and the company has lost over 60% of its market value since the revelation of the accounting fraud on Oct. 10. Bennett is out on a $50 million bond and confined to his luxury Park Avenue apartment -- not the worst place to spend your time, but not as nice as the purported European wine-tasting vacation he was going to leave on when the government arrested him. All this despite the fact that Bennett repaid the $430 million debt, apparently by pledging his Refco shares (he owns over a third of the company) for a loan from a European bank. How often do you see a fraud in which the perpetrator repays the money as soon as the deception is revealed, yet the company is pushed to the brink of insolvency because of the conduct?
Refco's plight illustrates how much companies, particularly those in the financial sector, are built on trust and the understanding that they will continue to operate successfully. Bennett's alleged fraud violates a principle of the market that all related-party transactions must be fully disclosed, and the nature of a company's debts fairly presented. If investors had known that Bennett owed a significant debt to the company, that information likely would have caused investors to question the offering price for the firm when it went public in 2004. Even though Bennett has repaid the debt, and therefore the company is ostensibly in a better position than it was before the revelation, the market's reaction is now one that shows a significant, and perhaps overly extreme, mistrust of Refco, and probably a fear that another shoe (or two) will drop out of the company's financial statements and knock the firm flat. The reputational risk to a firm from the misconduct of one of its officers, particularly one with a large stake in the firm, means that any misstep can come close to destroying it. Refco may survive the accounting fraud, but it will not be trusted by investors for years. A Reuters story (here) discusses the problems the firm faces from Bennett's conduct. (ph)
UPDATE: Tom Kirkendall on the Houston's Clear Thinkers blog has an interesting post (here) on Refco.
Now It's a Dog-Fight?
I guess they do things differently in Texas, and not just bigger. In a new turn in the battle between Travis County District Attorney Ronnie Earle and former House Majority Leader Tom DeLay, there is an advertisement running in the Austin media that compares Earle to a viscious attack dog. According to an AP story (here), the ad, put out by the Free Enterprise Fund, states ""A prosecutor with a political agenda can be vicious" while a snarling dog is shown. I assume the next ad will include sharks, piranhas, jackals, hyenas, and the like. (ph)
Listen to Your Wife, But Don't Trade on What She Says
Husbands are frequently accused of not listening to their wives, although I've never heard that complaint in my household. In an insider trading case filed by the SEC, it seems that Robert Petrosky not only listened to his wife, but he used the inside information she provided about an upcoming deal to buy ahead of the announcement. Petrosky's wife is an employee of Valero Energy, and she discussed a pending acquisition by Valero of Premcor, Inc. Without his wife's knowledge, Petrosky purchased Premcor shares, and reaped profits of approximately $41,000 after the announcement of the acquisition, which he will now have to disgorge in a settlement with the SEC, along with a civil money penalty of approximately $20,000. Petrosky may want to revert to nodding his head and occasionally mumbling "uh-huh" in the future. The SEC's Litigation Release (here) discusses the settlement. (ph)
Samsung Is the Third DRAM Manufacturer to Plead Guilty to an Antitrust Violation
Samsung Electronics agreed to plead guilty to a charge of fixing prices in the Dynamic Random Access Memory (DRAM) chip market, and will pay a $300 million fine. The Korean manufacturer and its U.S. subsidiary will pay the second largest antitrust fine in history. Samsung is the third DRAM chip manufacturer to plead guilty to price-fixing charges, joining Hynix Semiconductor (Korea), which paid a $185 million fine, and Infineon Technologies (Germany), which paid a $160 million fine. A Department of Justice press release (here) discusses the guilty plea. (ph)
October 13, 2005
Frist Received SEC Subpoena for Stock Sale Documents
A Washington Post story (here) discloses that the SEC sent a subpoena to Senate Majority Leader Bill Frist for documents related to the sale of HCA Inc. stock from the so-called "blind trusts" that held shares on behalf of the Senator and his family. The sales took place in late June, and a short time later the company disclosed a revenue shortfall that caused its stock to drop more than 10%, and the SEC investigation is focusing on possible insider trading by a number of HCA executives in advance of that announcement. While one can draw the impression from the story that the Commission issued the subpoena in just the past few days, which might signal a new direction in the case, in fact the article notes that the subpoena was sent out at some time in the past two weeks. The Commission issued a formal order of investigation at the start of the case, so the subpoena would likely have been issued to Senator Frist early on. Moreover, once the Enforcement Division staff has the power to compel the production of documents, they will use subpoenas rather than voluntary requests for documents.
I doubt much should be drawn from the fact that the Senator received a subpoena because, most likely, so did everyone else involved in the inquiry, including HCA and any financial institutions through which the shares were traded. At this stage, the SEC is most likely just sorting through the records it has received, and preparing to take the testimony of witnesses (including Senator Frist) under oath. Whether the case advances past the investigative phase depends on what is revealed by the documents and depositions, a process that will take quite a while. (ph)
Is the KPMG Tax Partner Indictment That Bad?
The Wall Street Journal's has already come out against the prosecution of eight former KPMG partners and a former law firm partner for their involvement in the creation and sales of questionable tax shelters, and it has published a lengthy op-ed (here) by Stanford law professors Robert Weisberg and David Mills, entitled "A Very Strange Indictment." The issue raised by Profs. Weisberg (one of the leading criminal law scholars in the nation) and Mills is, "While the accountants and their clients may have done some bad things, the notion that their behavior is criminal, and even sufficiently criminal to threaten the very existence of this major firm and its thousands of jobs, casts doubt on the fairness and judgment with which the federal prosecutors have exercised their discretion." They assert that the prosecutors, frustrated with the failure of Congress to outlaw tax shelters, are "venting their frustration over this failure to act by fashioning felony charges out of ethereal legal material."
There are certainly questions that can be raised about the prosecution, and the principle one in my mind is that these shelters have never been found to be improper, an issue that will be raised by the defense, no doubt. Moreover, as the op-ed notes, the indictment hints at possible "obstruction of justice" in the testimony of one of the indicted KPMG partners, but that is not an object of the conspiracy nor even cited as integral to the sales of the tax shelters -- it took place well after the transactions at issue.
Profs. Weisberg and Mills make a number of good points, but I do quibble with two issues that they raise as calling into doubt the legal viability of the indictment. First, they argue that "there has never been a prosecution under the general 'defraud' clause in a tax case where the alleged conspiratorial objective is reducing one's taxes without substantial legal basis for doing so." I'm not sure whether they are trying to distinguish this conspiracy prosecution from any number of tax conspiracy cases in which the defendant did not pay federal taxes on a claim that the tax laws do not apply. Many of the tax protester cases involve a charge of conspiracy to defraud the United States under Sec. 371, that a claim that the tax laws do not apply (or that income earned in the United States is not subject to tax) is a conspiracy to deprive the government of lawfully owed taxes. A recent decision discussing such a charge is U.S. v. Ambort, 405 F.3d 1109 (10th Cir. 2005). The government's charge that the KPMG tax shelters were improper is similar to the prosecution of tax protesters who assert the tax laws do not apply to them: each defendant is seeking to reduce (or avoid) taxes without a substantial basis for doing so. The key assumption in the KPMG case, of course, is that the shelters were illegal, a claim that will be more difficult to establish than showing the validity of the tax laws and Sixteenth Amendment (leaving aside the whole admission of Ohio to the Union question).
A second point made in the op-ed is "the very idea of punishing the accountants in a kind of test case of this theory of the criminal tax law is self-refuting. That is, even if the accountants knew the transaction would be deemed to lack a business purpose, they had no reason whatsoever to think that under these circumstances they could face anything worse than the usual civil penalties. And without that knowledge, they cannot be guilty of tax fraud." I'm not sure I agree with the reading of Cheek v. United States, 498 U.S. 192 (1991), that Profs. Weisberg and Mills advance. The key passage in Cheek about the intent required to prove a "willful" criminal violation of the tax law is: "Willfulness, as construed by our prior decisions in criminal tax cases, requires the Government to prove that the law imposed a duty on the defendant, that the defendant knew of this duty, and that he voluntarily and intentionally violated that duty." This intent element permits a defendant to argue that a mistake regarding the applicability of the law is a valid defense because it negates the requisite intent, but Cheek does not require the government to prove that the defendant knew the conduct was in fact a crime, or would be prosecuted by the government. Cheek requires a voluntary and intentional breach of a known legal duty, but knowledge that a violation of that duty could be prosecuted criminally is not an element. The fact that the government has not prosecuted a particular theory of liability before, or imposed civil penalties in prior situations, does not mean the defendants did not know that they had a duty to properly report (or assist clients of the firm in reporting) their taxes. Indeed, I think it would be quite difficult for accountants and lawyers (including five defendants who were both) in this case to assert the type of ignorance of the law defense that was sanctioned in Cheek. Ignorance of the law does not equate to ignorance of what could be prosecuted as a criminal violation, if the person knows that there is an obligation to comply with a legal duty.
The prosecution of the KPMG partners is certainly aggressive, and it will be a very difficult case for the government to win without the cooperation of one or more individual partners who participated in the creation and selling of the shelters. The more the government allows the case to become a battle over the technical aspects of the shelters, the worse off it will be. Profs. Weisberg and Mills are right that it is difficult to understand what the government's theory of prosecution is at this point, and whether the shelters were illegal, which does indeed make the indictment strange. Whether it is an improper application of the conspiracy statute is a much closer issue. (ph)
Is Libby Wearing the Bullseye?
New York Times report Judith Miller completed her second round of testimony before the grand jury investigating the leak of Valerie Plame's identity as a CIA operative, and now the focus has shifted to I. Lewis Libby, the Vice-President's chief of staff (see CNN.Com story here). Miller reportedly testified about a previously undisclosed meeting she had with Libby on June 23, 2003 [for those into high-level corruption trivia, on that date in 1972, Nixon and his chief of staff, Bob Haldeman, met to discuss covering-up the White House's involvement in the Watergate break-in]. Much has been made of the fact that Libby did not discuss this meeting during his interviews with FBI agents and testimony with the grand jury.
For those salivating about (or dreading) a possible indictment of Libby for perjury or false statement, the first question is whether he was ever asked about the meeting with Miller. The focus of the investigation seemingly has been on contacts between senior administration officials and reporters after Joseph Wilson's op-ed piece appeared on July 6, 2003, and not as much about what occurred before that date. The lesson from perjury cases like Bronston v. U.S. is that the question is just as important, and perhaps more so, than the answer. If no one asked Libby about the meeting, then his failure to volunteer the information may be disingenuous, but it would not necessarily be a lie, which is necessary for a perjury or false statement charge.
There has also been some discussion in the media (see National Journal story here) that Libby may have obstructed justice by telling Miller that his waiver of confidentiality was coerced, thereby ensuring that she would not testify before the grand jury. Can a factual statement ("the waiver was not voluntary") that will likely cause a reporter to refuse to testify before a grand jury constitute obstruction? That seems to be a bit of a stretch, in light of the Supreme Court's recent statement in the Arthur Andersen case about lawful conduct that can have the effect of thwarting an investigation. Chief Justice Rehnquist's opinion notes: "Such restraint is particularly appropriate here, where the act underlying the conviction--'persua[sion]'--is by itself innocuous. Indeed, 'persuad[ing]' a person 'with intent to ... cause' that person to 'withhold' testimony or documents from a Government proceeding or Government official is not inherently malign. Consider, for instance, a mother who suggests to her son that he invoke his right against compelled self-incrimination, see U.S. Const., Amdt. 5, or a wife who persuades her husband not to disclose marital confidences . . . ." 125 S.Ct. 2125, 2134-2135.
Libby's failure to disclose his meeting with Miller is certainly cause for further inquiry by special prosecutor Patrick Fitzgerald, and I would not be surprised if he were "invited" to return to testify before the grand jury, just as Presidential aide Karl Rove will be doing (for the fourth time). Whether the non-disclosure is enough for a criminal prosecution depends on what he was asked as much as what he said. (ph)
An Attack on Attorney's Fees
A National Law Journal article (available here on Law.Com) discusses a new tactic the government used to keep a company from advancing legal fees to two former officers who were prosecuted for their conduct at the business. In the recent retrial of former Westar Energy executives David Wittig and Douglas Lake, the government obtained a restraining order on their assets to prevent the company from complying with its contractual obligation to advance their attorney's fees in the case. A common contractual or by-law provision in corporations is that the company will pay the costs, most importantly the attorney's fees, of an officer or director in any case related to their conduct on behalf of the company; the agreement is known as an indemnification provision. Such provisions are authorized by state corporate law, but the Department of Justice has come to view the payment of attorney's fees by a company for its employees as suspicious, and an indication of a lack of cooperation. The Thompson Memo specifically mentions the payment of attorney's fees as one indication of a lack of cooperation, although the Memo acknowledges that corporation's may have a legal obligation to make the payments. The recent deferred prosecution agreement with KPMG has resulted in the firm cutting off further payments of attorney's fees for its former partners who have been indicted.
The restraining order in the Wittig/Lake case was based on a forfeiture count in the indictment, and the theory appears to be that the the right to attorney's fees was an asset of the defendants that could be reached if it was a proceed of their illegal conduct. The logic here appears to me to be wonderfully circular: the right to attorney's fees is triggered by the allegation of illegal conduct by the officers, which makes it forfeitable because there would not have been any payment but for the prosecution, therefore any prosecution means the right to attorney's fees can be forfeited to the government. In this case, the defendants and the Association of Corporate Counsel challenged the restraining order in the Tenth Circuit, but the jury verdict found that the right to attorney's fees was not a forfeitable asset, so the appeal was moot.
This is a tactic federal prosecutors will likely pursue in the future because of the view that the payment of attorney's fees is somehow nefarious or these provisions are improper. The fact that state corporate law permits corporations to enter into such agreements seems to be lost in the effort to obtain convictions. (ph)
Spitzer Drops Prosecution of Broker for Mutual Fund Late Trading
New York Attorney General Eliot Spitzer announced that his office will not retry former Bank of America broker Theodore Sihpol on the four remaining counts of an indictment charging him with aiding a hedge fund to trade after-hours in mutual funds. Sihpol was found not guilty in June on 29 counts, including a grand larceny charge, but the jury deadlocked on four counts, and shortly after the trial ended Spitzer announced that Sihpol would be tried again. Sihpol entered into a settlement with the SEC in which he agreed to pay a $200,000 civil penalty and in an administrative proceeding would accept a five-year bar from the securities industry (Litigation Release here). Spitzer's office dropped the four remaining charges in light of the civil settlement and Sihpol's admission that he acted improperly in assisting in the late-trading of the mutual funds. While certainly not a victory for the New York Attorney General, the resolution of the case certainly avoids a defeat that would have opened Spitzer up to charges of being vindictive, certainly not something he would want at the start of a gubernatorial campaign. A Reuters story (here) reviews Spitzer's decision. (ph)
October 12, 2005
BellSouth Lobbyist Enters Plea
The Miami Herald reports here of the plea agreement reached for a BellSouth lobbyist, Eliseo ''Tito'' Riera-Gomez . Pleading to a misdemeanor charge of "making an illegal corporate contribution to former Miami-Dade County Mayor Alex Penelas' U.S. Senate campaign," he faces up to one year in jail. The plea agreement has the government dismissing felony charges. Representing the accused with respect to this plea was former president of the NACDL, Neal Sonnett.
Former CEO of Refco Charged
According to the Wall Street Jrl here, the former CEO of Refco has been charged with securities fraud. The complaint, filed by the United States Attorneys Office for the Southern District of New York, includes the following claim:
". . .there is probable cause to believe that from at least as early as in or about 2004 up to and including in or about October 2005, Phillip R. Bennett, the defendant, and others known and unknown, hid from investors in the August 2005 initial public offering of stock in party transactions between Refco and a company controlled by BENNETT, including by causing Refco to file a false and fraudulent S-1 registration statement with the Securities and Exchange Commission. When those related party transactions were disclosed to the market on October 10, 2004, the stock price plummeted, leading to a loss to investors of over a billion dollars."
NYTImes has copy of complaint here.
DeLay Turning the Tables on the Prosecutor
It looks like Tom DeLay is trying to make the prosecutor who is spearheading his case explain his actions. Previously reported here was a discussion regarding three grand juries investigating DeLay, with one no billing. DeLay's attorney, Dick DeGuerin filed a Motion to Dismiss the indictment (see post here) and prosecutorial misconduct appears to be a claim. Now the defense is proceeding full speed ahead to prove this claim. According to the Houston Chronicle here, they have subpoenaed documents and other materials of the prosecutor.
The question now becomes how the prosecutor will handle this attack. Will the prosecutor recuse himself as there are ethical issues involved when a lawyer becomes a witness in a case they are handling? Irrespective of this ethical rule, is there a conflict because the prosecutor is now having to defend his actions? On the other side, if defendants can remove prosecutors merely by filing prosecutorial misconduct actions against them, the defense could be placed in the position of removing prosecutors they do no want on the case.
Defendants routinely file prosecutorial misconduct motions and few are successful. It is often difficult to prove that the prosecutor acted vindictively with respect to this particular indictment. There is also the problem of grand jury secrecy and whether a court will allow defense counsel the right to break that secrecy in order to secure evidence to support its motion. If the defense is successful in breaking that secrecy or in obtaining the information it desires from the prosecutors, it may be a different story. Stay tuned.
Down to the Wire on CIA Leak Case
Prosecutor Patrick Fitzgerald is facing a deadline (NYTImes reports it here as Oct. 28th) of an upcoming end to the grand jury that has been investigating the leak of a CIA agent. Although he can ask to continue, it looks like Fitzgerald is moving things along in the final stages of this investigation. He has Karl Rove reappearing before the grand jury (see post) and now NYTimes reporter Judith Miller, who is out of jail, also set to appear. According to the NYTimes, Judith Miller met with prosecutors in anticipation of her testimony today to the grand jury. (see here). Stay tuned.
The Latest on Fairfax Financial Holdings
Posted here was a denial by Fairfax Financial Holdings that it had received subpoenas from the United States Attorney, with a somewhat contrasting Wall Street Journal article telling of the investigation against the company. (see post here). Now Fairfax is saying otherwise and has issued a clarification here stating:
"In response to certain published information incorrectly reporting Fairfax’s release of October 10, 2005, Fairfax advises that it understands that the U.S. attorney’s office for the Southern District of New York will review information that Fairfax provides to the SEC in response to SEC subpoenas, but that Fairfax has not been advised that it is the target of an investigation by that office. Fairfax confirms its October 10, 2005 release that it has not received a subpoena or other information request from the U.S. attorney’s office. Fairfax continues to cooperate with the SEC’s investigation."
Are they a target of an investigation? Are they a subject of an investigation? Or are they just a witness? What exactly was Fairfax told? And if they are being investigated, should the government be issuing a target letter? Is Fairfax trying to hide information from its investors, or is this a situation that the government is not being up front with the company? Or is this a situation that the government is trying to pressure the company to provide information and individuals for their investigation? The government has the ability to place enormous pressures on companies during an investigation. On the other side, the release of information of a pending investigation can be detrimental to a company. Is there a better way of doing things here?
October 11, 2005
Scrushy Lawyers Talk
At the recent NACDL - Georgetown White Collar Crime conference, one of Scrushy's lawyers, Jim Jenkins, told the crowd the details of the defense in this case. While based in Atlanta, Jim wrote the many memos and motions that were successful in this case. He provided the behind the scenes materials that worked well with Art Leach who was on the front line in the courtroom. Reported in the Corporate Crime Reporter here are the full details of Jenkin's talk to the white collar crowd, which the reporter appropriately characterizes as a "the most popular event" at this white collar crime conference.
Is Fairfax Financial Holdings Under Investigation?
According to a press report in the Wall Street Jrl., "[f]ederal prosecutors in New York have joined a continuing probe by the Securities and Exchange Commission of Fairfax Financial Holdings Ltds." (See Wall Street Jrl here). The article sources are "people familiar with the investigation."
Interestingly, the company issued a press release here stating "that it has not received a subpoena or other information request from the U.S. Attorney's Office."
But as Reuters notes here the stock fell 8.8 % after the Wall Street Jrl report.How is it that companies find out from the media when they are being investigated as opposed to from the government? And will the media prove correct here? (esp)