Saturday, November 5, 2005

Libby Prosecution Will Enter CIPA Hell

The indictment of I. Lewis Libby implicates classified information, and the indictment refers to the disclosure of information to Libby in the context of security briefings, which means the government will have to invoke the Classified Information Procedures Act, 18 U.S.C.A. App. 3.  The first step will be that all of Libby's defense lawyers (he has representation from three firms) will have to undergo a background investigation to obtain a security clearance.  After that, strict secrecy procedures will be in place regarding the review of documents and any witness interviews by the defense that involve classified information.  Under Section 6(a) of CIPA, the government can request a hearing to determine the "use, relevance, or admissibility" of classified information.  The Act provides:

Within the time specified by the court for the filing of a motion under this section, the United States may request the court to conduct a hearing to make all determinations concerning the use, relevance, or admissibility of classified information that would otherwise be made during the trial or pretrial proceeding. Upon such a request, the court shall conduct such a hearing. Any hearing held pursuant to this subsection (or any portion of such hearing specified in the request of the Attorney General) shall be held in camera if the Attorney General certifies to the court in such petition that a public proceeding may result in the disclosure of classified information. As to each item of classified information, the court shall set forth in writing the basis for its determination. Where the United States' motion under this subsection is filed prior to the trial or pretrial proceeding, the court shall rule prior to the commencement of the relevant proceeding.

Needless to say, the presence of classified information makes the case that much more complex, and will slow the process down considerably.  Don't hold your breath waiting for a trial date to be set in the case because the discovery phase may be prolonged by any wrangling over classified information, or even delays in clearing the legion of defense lawyers who will have to have access to the information.  Moreover, the hearings involving such information will be closed to the public, so the cause of any delay due to classified information issues will not necessarily be disclosed. (ph)

November 5, 2005 in Plame Investigation | Permalink | TrackBack (0)

Will Morgan Stanley Be Held in Criminal Contempt?

After Ronald Perelman won a $1.58 billion fraud judgment against Morgan Stanley for its failure to properly warn him about problems at client Sunbeam Inc., the financier pursued criminal contempt charges against the firm for alleged perjury by its lawyers and officers regarding the production of e-mail evidence.  At the initial fraud trial, Judge Elizabeth Maass held that Morgan Stanley's repeated failure to produce e-mails permitted the court to find that the firm intended to defraud Perelman, so the only issue at trial was the amount of the damages.  On top of the fraud verdict, the court has now heard Perelman's petition that Morgan Stanley be held in  criminal contempt for its misleading statements to its opponent and the court about the completeness of its document production.  The judge is considering the motion, which raises questions about the intent of the firm and its lawyers, and whether a private party can pursue a criminal contempt action.  An adverse ruling would be more than a black eye for Morgan Stanley because it holds licenses to trade securities in all the states, and some of those could be placed in jeopardy by a criminal contempt citation. A nasty fight keeps getting nastier. A CNN.Com story (here) discusses the contempt proceeding. (ph)

November 5, 2005 in Perjury, Prosecutions | Permalink | TrackBack (0)

Friday, November 4, 2005

DeLay Draws Another Democrat

With two judges recused from the prosecution of Rep. Tom DeLay because of their political donations, Texas Supreme Court Chief Justice Wallace Jefferson -- a Republican whose 2002 campaign treasurer had ties to Texans for a Republican Majority, the organization involved in the prosecution -- appointed retired San Antonio judge Pat Priest to preside over the trial.  Apparently, Judge Priest has made only modest campaign contributions, according to a Washington Post story (here), involving only three $150 checks to Democrats in the 2004 election cycle.  Then again, even those modest contributions may bring us the sequel, Recusal Motion, Part Deux, from the defense camp. (ph)

November 4, 2005 in Prosecutions | Permalink | TrackBack (0)

Settlement of ImClone Insider Trading Case

The SEC announced the settlement of an insider trading case against Dr. Zvi Fuks and Sabina Ben-Yehuda , who received material non-public information from ImClone CEO Dr. Sam Waksal about a negative FDA response to the drug application for the company's primary product, the colon cancer drug Erbitux.  The SEC alleged that Waksal told Ben-Yehuda the information, and she in turn tipped Fuks at Waksal's direction. While Ben-Yehuda sold $73,000 worth of ImClone stock, avoiding a loss of $9,679, Fuks sold over $5 million worth of shares, avoiding a loss of approximately $1.2 million. Fuks had been a member of ImClone's scientific advisory board.  In settling the matter, Fuks agreed to disgorge the amount of the loss avoided plus pay a penalty of approximately $1.2 million, while Ben-Yehuda will disgorge the loss avoided and pay a $50,000 civil penalty. An SEC Litigation Release (here) describes the settlement. 

Fuks and Ben-Yehuda were originally charged with criminal insider trading, but those charges were dropped pending a resolution of the SEC civil case.  The conduct of Dr. Waksal landed him in a federal prison to serve a seven-year sentence, and the disclosure of the information to Peter Bacanovic triggered the investigation that ultimately ensnared Martha Stewart, who sold her shares at the same time. An AP story (here) discusses the settlement.  (ph)

November 4, 2005 in Insider Trading | Permalink | TrackBack (0)

The Never-Ending Independent Counsel Investigation

Now more than ten years old, the Independent Counsel investigation of former HUD Secretary Henry Cisneros may finally be over.  An order issued by the D.C. Circuit (here) states, "Specifically, the Court orders that the Independent Counsel, with all deliberate speed, prepare for release and make release of the now pending Final Report, except for that portion designated as Section V."  Section V contains grand jury material that the D.C. Circuit found should not be released. 

David Barrett was appointed in May 1995 to investigate whether Cisneros made a false statement in his FBI background investigation regarding payments made to his mistress.  Cisneros ultimately entered a guilty plea to a misdemeanor count of lying to the FBI in December 1997. One would have thought the IC's office would have closed-up shop shortly thereafter, but instead the investigation dragged on well into the next administration to check into allegations of obstruction of justice related to an IRS investigation of Cisneros.  Information about that portion of the investigation is in Section V, the portion that is not to be publicly released -- at least until it is leaked, because this is Washington D.C., after all.  IC Barrett's final acts are to file his report, and then deal with the inevitable attorney's fees requests, including those related to responding to the final report.  Here's one possibility regarding that final report: ignore it, because no one cares any more about a stale investigation that should have ended years ago.  And people thought Patrick Fitzgerald's investigation took a long time. A St. Petersburg Times article (here) discusses the IC investigation. (ph)

November 4, 2005 in Investigations | Permalink | TrackBack (0)

FBI Joins Special Ops Command Investigation

The St. Pete Times reports (here) that the FBI has joined the investigation of possible corruption and procurement fraud at the Special Operations Command (SOCom), which is headquartered at MacDill Air Force Base in Tampa.  The Pentagon's Inspector General has been conducting a preliminary inquiry into the conduct of SOCom's commander, Gen. Doug Brown, and the addition of the FBI likely means that a wider-ranging investigation will take place.  The newspaper also reports receiving an anonymous letter stating the Gen. Brown directed lucrative contracts to friends and former SOCom commanders, a charge the General's spokesman denies.  The newspaper has refused to turn over the letter to the FBI or the Inspector General's investigators. (ph)

November 4, 2005 in Investigations | Permalink | TrackBack (0)

U.S. Attorney's Office Blog

Rather than the usual bland press release page, the U.S. Attorney's Office for the District of Maryland is now issuing announcements and other information on a blog maintained by the office.  The new site (here) contains the usual announcements of pending cases, and also updates on trials, speeches, etc.  Maybe the Southern District of New York, which wins my award for worse public information site for a large district (slow to post and virtually no information about the cases),  could pick up a tip or two about making its information a bit more accessible and user friendly. (ph)

November 4, 2005 in Prosecutors | Permalink | TrackBack (2)

Thursday, November 3, 2005

Burning Through Judges in Texas

Things have gotten even weirder in the Rep. Tom DeLay prosecution in Texas as Travis County D.A. Ronnie Earle's recusal motion directed against Administrative Judge B.B. Schraub was granted because the judge made contributions to Republicans, including Texas Gov. Rick Perry, an ally of Rep. DeLay.  Judge Schraub was supposed to appoint the judge who would replace Judge Bob Perkins, removed earlier this week on Rep. DeLay's recusal motion because of Judge Perkins' extensive contributions to Democratic candidates and organizations.  Now, Judge Schraub has asked the Texas Supreme Court to appoint a judge to hear the case.  Of course, because the justices on that court are appointed by the Governor, and may have contributed to one side or the other, perhaps they too will have to be recused.  How much more absurd can this case get? An AP article (here) discusses the latest recusal. (ph)

November 3, 2005 in Prosecutions | Permalink | TrackBack (0)

Libby Pleads Not Guilty

As expected, I. Lewis Libby entered a not guilty plea before U.S. District Judge Reggie Walton to the five-count indictment returned by a grand jury last week charging obstruction, false statements, and false declarations (perjury).  Libby also unveiled two new additions to his defense team: Theodore Wells, Jr. from Paul Weiss and William Jeffress, Jr. from Baker & Botts.  Wells successfully defended former Secretary of Argiculture Mike Espy and former Secretary of Labor Ray Donovan, showing that he has worked with high-level officials from both parties.  Jeffress is a long-time litigator at Baker & Botts who clerked for Justice Potter Stewart and has argued before the Supreme Court.  The heavy-hitters have arrived.  An AP story (here) discusses the arraignment.

November 3, 2005 in Defense Counsel, Plame Investigation | Permalink | TrackBack (0)

More Overseas Insider Trading

It's an oft-repeated scenario: an offer is made for a company at a premium to its market price, and a few days later the SEC files a suit in the U.S. District Court for the Southern District of New York (effectively its home court) for a freeze on brokerage accounts through which options in the target were purchased right before the announcement.  The latest example is a suit filed over the purchase of 10,000 call options in Placer Dome 5-6 days before Barrick Gold announced an unsolicited $9.2 billion bid for the company on Oct. 31.  Placer Dome's stock increased by 20%, and the options increased in value by $1.9 million.  Needless to say, the options market makers for Placer Dome raised the roof over that kind of gain in only a few trading days, and the SEC responded by filing an emergency action to freeze the accounts.  According to a Bloomberg story (here), the trading was through accounts at a Swiss asset management firm, and it is unlikely the true owners will identify themselves any time soon.  Once again, it's not free money, but it's awfully tempting to reach for it. (ph)

                                                                                                      

UPDATE: The SEC Litigation Release is now available (here), and it states:

The Commission further alleges that on October 25 and 26, while in possession of material, nonpublic information regarding this acquisition offer, the Unknown Purchasers, using overseas accounts, purchased over 10,000 call option contracts for Placer stock in an account at a broker-dealer in the United States. As the complaint alleges, over 5,000 call option contracts were "out of the money" and set to expire in November, within weeks of the purchase date. The complaint further alleges that, as a result of the increase in price of Placer stock following the Announcement, the unrealized illicit profits on these option contracts total over $1.9 million.

Large purchases of out-of-the-money call options + $1.9 million in profits almost overnight = SEC TRO. (ph)

November 3, 2005 in Civil Enforcement, Insider Trading, Securities | Permalink | TrackBack (0)

Lucky Winners in the Enron Jury Sweepstakes

It's not as much fun as Ed McMahon showing up on your front door with the prize patrol, but the extensive jury questionnaire in the upcoming Enron conspiracy trial has been delivered to 400 residents of the Southern District of Texas.  The questionnaires include approximately 70 questions regarding the background and work history of the recipients, including investments and connections to law enforcement.  Needless to say, the wording of the questions has been a source of contention between prosecutors from the Enron Task Force and defense counsel, and a Washington Post article (here) notes that U.S. District Judge Sim Lake has generally favored the defense side in permitting broader, more open-ended questions designed to uncover potential bias.  Out of the 400 who received their envelopes, approximately 100-150 will be called to the courthouse in January for further examination, and from that pool the jury will be picked.  Tom Kirkendall on the Houston's Clear Thinkers blog has an interesting post (here) on the questionnaire and course of the upcoming trial. (ph)

November 3, 2005 in Enron | Permalink | TrackBack (0)

Mercury Interactive's Options Timing Problem

Mercury Interactive Corp. announced the appointment of a new CEO, CFO, and General Counsel as a result of an internal investigation that turned up substantial problems in reporting by officers of the dates on which options were granted.  According to the company's press release (here):

From 1995 to the present, there have been forty-nine instances in which the stated date of a Mercury stock option grant is different from the date on which the option appears to have actually been granted. In almost every such instance, the price on the actual date was higher than the price on the stated grant date. These instances represent the overwhelming majority of the grants between January 1996 and April 2002. The misdating occurred with respect to grants to all levels of employees.

Chief Executive Officer Amnon Landan, Chief Financial Officer Douglas Smith, and General Counsel Susan Skaer were each aware of and, to varying degrees, participated in the practices discussed above. Each of them also benefited personally from the practices. While each of these officers asserts that he or she did not focus on the fact that the practices and their related accounting were improper, the Special Committee has concluded that each of them knew or should have known that the practices were contrary to the options plan and proper accounting. While the Special Committee is appreciative of and sympathetic to the far-reaching demands of these executives’ positions during this critical period, missing or overlooking a practice as basic and important as the proper granting of options is not acceptable.

The internal investigation also disclosed that Landan received a $1 million loan from the company in 1999 to fund an options exercise, but no documentation for the loan could be located, although the board approved an extension of the loan and it was ultimately repaid.  Needless to say, that type of disclosure will invite an SEC investigation and a torrent of securities fraud lawsuits.. 

Landan, Smith, and Skaer resigned, and the company will probably have to delay the filing of its quarterly and annual reports due to the internal weaknesses identified in the internal investigation -- the press release notes that a timely filing of its Form 10-Q and 10-K is in "serious jeopardy." (ph)

November 3, 2005 in Fraud, Investigations, Securities | Permalink | TrackBack (0)

Former Hospital CFO Settles Criminal and Civil Accounting Fraud Charges

The former CFO for Bon Secours Cottage Health Services, David Zilli, entered a guilty plea in the U.S. District Court for the District of Maryland and settled an SEC securities fraud action alleging that he cooked the books by approximately $117 million between 1998 and 2003. The SEC Litigation Release (here) states:

According to the complaint, from 1998 through 2003, the accounting department prepared preliminary financial statements for Cottage Health and forwarded them to Zilli for review. Zilli, on numerous occasions, independently devised complex adjusting manual journal entries to the preliminary statements, lacking any support or accounting basis. The accounting department then finalized the monthly reports for Cottage Health after making the adjustments that Zilli had instructed the accounting personnel to make. The Commission alleges that the adjustments made by Zilli artificially and fraudulently boosted Cottage Health's income in each period. As alleged, Zilli created the fraudulent journal entries to derive the specific income amount that he wanted to book for the particular period in order to ensure that Cottage Health's reported performance figures met its financial targets. The complaint further alleges that Zilli's fraudulent accounting resulted in the overstatement of three general categories of Bon Secours' assets: accounts receivable, fixed assets and inventory.

(ph)

November 3, 2005 in Civil Enforcement, Fraud, Securities | Permalink | TrackBack (0)

Wednesday, November 2, 2005

New Judge For Tom DeLay

The judge in the Tom DeLay case was removed from the case after a finding that his donations to the Democratic National Committee and other organizations, might not make him the best judge for what is likely to be a case with political issues.  (See Dallas Morning News, Houston Chronicle, NYTimes)  Dick DeGuerin appeared to make his argument carefully saying that a donation to a political party is not what creates the problem here. It's that the judge had contributions "that have used Mr. DeLay as a poster boy for raising money and rallying their troops." (Dallas AM News).

So the question is - will they be able to find a judge in Texas, a state with political judges, who will be able to provide a satisfactory level of neutrality that appeases both sides?

(esp)   

November 2, 2005 in Legal Ethics | Permalink | TrackBack (0)

Not Everything Has to Be White Collar Crime

The government has the power, ability, and discretion to "punish" individuals and corporations using civil mechanisms.  DOJ issued a press release yesterday showing a civil settlement in a case  involving King Pharmaceuticals.  The press release states that the company "has agreed to pay $124 million plus interest to resolve allegations that it underpaid rebates owed under the Medicaid program and overcharged various federal and state governmental entities for its drug products." The press release further states:

"The government alleges that from 1994 through 2002, the company failed to report accurately the average manufacturer price (AMP) and best price (BP) for its Medicaid-reimbursed drugs. AMP and BP are used to calculate a quarterly rebate payment that each participating manufacturer must make to each state Medicaid program. They are also used to determine the ceiling price for drugs purchased under certain federal and state drug programs, and by agencies such as the Veterans Administration and entities subsidized by the Public Health Service. King’s misreporting of both AMP and BP’s across its entire product line resulted from the absence of appropriate internal systems and controls and improper methodologies used to calculate the erroneous figures."

(esp)

November 2, 2005 in Civil Enforcement | Permalink | TrackBack (0)

Tuesday, November 1, 2005

5th Circuit Rules in Jamie Olis Case

It took a long time for the 5th Circuit to rule, but at last a decision is rendered in the case of United States v. Jamie Olis, former "Senior Director of Tax Planning and International (and later, Vice President of Finance) at Dynegy."  Olis had received a sentence of 24 years (292 months total) for convictions of "securities fraud, mail and wire fraud, and conspiracy" arising from his "work as a tax lawyer and accountant at Dynegy Corporation." (Decision)  The appellate court affirmed his conviction, but not surprisingly vacated the sentence and remanded it for a new sentence.  A superb analysis of this decision is found on Professor Doug Berman's Sentencing Blog here.

The court easily discarded the government's claim that the Booker issue was not preserved for appeal, and moved onto the substantive issues raised by this sentencing claim.  The court proceeded to examine a key issue that arises in white collar cases - the use of the loss calculation as a crucial factor in determining the defendant's sentence. White collar defendants have been faced with increased sentences in cases where the government attributes losses to their conduct. Professor Doug Berman states in describing one of the court's points:

"The Olis court then engages in a thorough discussion of loss calculations (which dictated Olis' long sentence in the district court) to reach the conclusion that 'the district court, faced with a "'cook the books'" fraud, overemphasized his discretion as factfinder at the expense of economic analysis.'  The Fifth Circuit thereafter suggests that 'attributing to Olis the entire stock market decline suffered by one large or multiple small shareholders of Dynegy would greatly overstate his personal criminal culpability.'"

The appellate court in the Olis case states that "[b]ecause the district court's approach to the loss calculation did not take into account the impact of extrinsic factors on Dynegy's stock price decline, Olis is entitled to resentencing on this factor, subject to the principles" discussed within the opinion. 

Although the actual effect on Jamie Olis' sentence remains to be seen, this is clearly an important sentencing decision for white collar offenders. It sends a message that total losses to a company, the market, or the outside world will not just be slapped up on a chart as the determining factor of a sentence.  Those losses can be scrutinized, and scrutinized carefully.

(esp)

                                                                                              

UPDATE: Co-blogger Ellen Podgor is quoted in the Wall Street Journal story (here) about the Fifth Circuit's decision. (ph)

November 1, 2005 in Sentencing | Permalink | TrackBack (1)

Do the President and Vice-President Have An Appropriate Compliance Program?

With the indictment of "Scooter" Libby, and an ongoing investigation by Prosecutor Fitzgerald, one has to ask how a leak such as this could have happened.

If this was a US corporation or a business and there was alleged criminal activity occurring within the corporation, a prosecutor might be looking at the entity to discern whether the entity should be charged with a crime. And the prosecutor would probably be turning to the Thompson Memo of January 20, 2003, and the nine factors to be considered in deciding whether to indict the corporation.

Now obviously the US government is not a corporation, but perhaps this is a good time to re-evaluate some of the provisions of the Thompson Memo, and also evaluate whether the Office of the President and Vice-President are handling the recent developments in the same way they demand of corporations and businesses.

The Thompson Memo uses nine factors "in reaching a decision as to the proper treatment of a corporate target." Six of these nine factors present interesting questions here for the government:

1. the nature and seriousness of the offense, including the risk of harm to the public, .... WE ARE TALKING ABOUT THE LEAK OF A CIA OPERATIVE'S IDENTITY AND NATIONAL SECURITY - THIS ONE'S EASY

2. the pervasiveness of wrongdoing within the corporation, including the complicity in, or condonation of, the wrongdoing by corporate management - -DID CHENEY KNOW?

4. the corporation's timely and voluntary disclosure of wrongdoing and its willingness to cooperate in the investigation of its agents, including, if necessary, the waiver of corporate attorney-client and work product protection . . . - - ARE THEY WILLING TO WAIVE ALL ATTORNEY-CLIENT PRIVILEGE AND WORK PRODUCT PROTECTIONS?

5.the existence and adequacy of the corporation's compliance program . . .- - DO THEY HAVE AN INTERNAL COMPLIANCE PROGRAM AND IS IT AN "EFFECTIVE PROGRAM"?

6. the corporation's remedial actions, including any efforts to implement an effective corporate compliance program or to improve an existing one, to replace responsible management, to discipline or terminate wrongdoers, . . . - - ARE THEY DISCIPLINING EVERYONE WHO DID WRONG?

Obviously, this is the government we are talking about and not a corporation, but should the executive be held to the same standard that they hold businesses and corporations?

(esp)

November 1, 2005 in Investigations | Permalink | TrackBack (0)

KPMG- The Civil Side

According to the Wall Street Jrl here, it looks like the court has given preliminary approval in the class action suit resulting from the KPMG tax shelters. The amount - $225 million.   The settlement appears to include the Sidley Austin law firm.

(esp)

November 1, 2005 in Settlement | Permalink | TrackBack (0)

Happy Birthday Blog

This blog started on November 1, 2004, and today marks our first birthday.  We thank all of our readers, and hope that you will continue to write us, read us, and send us bloggable information.

(esp) & (ph)

November 1, 2005 in About This Blog | Permalink | TrackBack (0)

Monday, October 31, 2005

Judge Alito and White Collar Crime

The nomination of Third Circuit Judge Samuel Alito, Jr., to the Supreme Court is now official, and a very quick check of his opinions while serving on the court of appeals shows that there are no major decisions on white collar crime issues.  One of some interest is the decision in United States v. Cohen, 301 F.3d 152 (3d Cir. 2002), in which the court overturned the obstruction of justice conviction of a former Secret Service agent who stole money that was seized in an arrest.  Judge Alito's opinion found that the government introduced insufficient evidence of his intent to obstruct justice, holding that his theft of money that was related to an investigation was not enough to show the intent to impede the investigation or prosecution.  In another case familiar to those who follow white collar crime cases, he wrote the opinion in United States v. McDade, 28 F.3d 283 (3d Cir. 1994), that rejected then-Representative Joseph McDade's challenge to the government's RICO and corruption charges on the grounds that it violated the Speech or Debate Clause, holding that the government was not questioning the Congressman about his statements.  The government's prosecution of McDade, and his subsequent acquittal, led to the adoption by Congress of the McDade Act, 28 U.S.C. Sec. 530B, which requires federal prosecutors to adhere to the professional responsibility rules of the state in which the attorney practices, and the Hyde Amendment, 18 U.S.C. Sec. 3006A Note, which permits an award of attorney's fees to a defendant who is a "prevailing party" in a prosecution.

Prior to his appointment to the Third Circuit, Judge Alito was the United States Attorney for the District of New Jersey from 1987 to 1990.  In that role, he certainly had significant contact with a wide range of white collar crime issues, so he will be familiar with many of the questions that arise in such cases.  In thinking about the nomination of Judge Alito, has there been a Supreme Court justice who served as a United States Attorney (not the Attorney General, which is a much different position)?  That position gives a person a front-row seat to a number of federal criminal law issues, a background no current member of the court has (save perhaps Justice Breyer's involvement in the Federal Sentencing Guidelines). (ph)

October 31, 2005 in Judicial Opinions, News | Permalink | TrackBack (1)