December 3, 2005
Using a Cooperating Witness to Run for Political Office as Part of an Undercover Corruption Investigation in West Virginia Triggers Prosecutorial Misconduct Claim
A Washington Post article (here) describes how the former mayor of a small town in southwestern West Virginia ran for office as part of an undercover FBI investigation to ferret out political corruption. Logan County has been famed in West Virginia for its corrupt politics, in which votes were bought for small amounts of cash or a bottle of whiskey, and seemed to be impervious to outside investigation because everyone pretty much knew each other, so no outsider could penetrate the local web of connections.
Thomas Esposito was on the ballot for a seat in the West Virginia House of Delegates while secretly working with the FBI after entering into a plea agreement for paying a bribe to a local magistrate. As part of the sting, Esposito gave $2,000 in cash to Perry Harvey and Ernie Ray Magnus to purchase votes in the upcoming primary. Harvey has been charged with conspiracy to buy votes, while Magnus has received immunity. Harvey's attorney attacked the government's conduct as "outrageous," but the district court rejected the claim. U.S. District Judge David Faber noted that corruption in Logan Country had been around "for longer than living memory." The government noted that it had Esposito withdraw from the primary two days after the payment and publicized the reason for his withdrawal, but Esposito still drew more than 2,000 votes.
There is something vaguely troubling about using a cooperating witness to run for political office as a sham, but then the FBI's ability to investigate public corruption often requires that it use the mantle of government office and the public trust to discover improper use of office or voting fraud. (ph)
Fraud Counts Dismissed from SEC Complaint Against Scrushy
U.S. District Judge Inge Johnson dismissed the two securities fraud counts from the SEC's civil complaint (here) against former HealthSouth CEO Richard Scrushy, although she gave the Commission 15 days to refile the charges. The SEC filed its complaint against Scrushy and HealthSouth in March 2003, and alleged violations of Section 17(a) of the 1933 Act for fraud in the issuance of HealthSouth securities, and of Section 10(b) and Rule 10b-5 for fraud in connection with the purchase or sale of the company's securities. Judge Johnson found that the two fraud counts were impermissibly vague, and the complaint does not specify the fraud but only quotes from the two statutory provisions. While the complaint has the broad outlines of the accounting fraud at the company, the Judge apparently wants a more detailed listing of the specific fraud conducted by Scrushy. The company settled the SEC case in June 2005 (Litigation Release here) and agreed to pay a $100 million civil penalty.
Judge Johnson did not dismiss the other counts of the SEC complaint alleging that Scrushy aided and abetted HealthSouth's violations of the reporting, internal controls, and books-and-records provisions of the federal securities laws. These counts do not have the same stigma as a fraud charge, and involve more technical issues that may be amenable to Scrushy's "honest-but-ignorant-CEO" defense. A Reuters story (here) notes that discovery in the civil case will not be complete until November 2006, and the case will not go to trial until February 2007, at the earliest.
Of course, Scrushy will have to face corruption charges filed against him and former Alabama Governor Don Siegelman in the Middle District of Alabama before the SEC case is ready. Scrushy's legal bills are going to continue to pile up, although HealthSouth may be on the hook for at least the securities case under the indemnification provisions of its by-laws and articles of incorporation. (ph)
Enron Defense Claim of Prosecutorial Misconduct Rejected
U.S. District Judge Sim Lake concluded after a hearing that the claims of Enron defendants Ken Lay, Jeffrey Skilling, and Richard Causey of prosecutorial misconduct based on efforts to discourage potential witnesses from meeting with defense counsel were unfounded. After hearing the testimony from local Houston attorneys Bob Sussman and Wendell Odom, who represent several former Enron employees, the judge said that he had not found prosecutorial misconduct, although he did not rule on the defense motion to dismiss. Neither Sussman nor Odom testified that prosecutors from the Enron Task Force acted improperly, although the government's listing of their clients as unindicted coconspirators certainly influenced the decision to speak with defense attorneys. The outcome of the defense argument is not surprising, given how difficult it is to ever pin down a claim of prosecutorial misconduct. A Houston Chronicle story (here) discusses the hearing, and Tom Kirkendall on the Houston's Clear Thinkers blog has a more skeptical view of the hearing (here) and notes that the Enron Task Force attorney hinted at a possible indictment of other former Enron employees in the near future. (ph)
David Anders Crosses Over
Following in the footsteps of many before him, Assistant U.S. Attorney David Anders from the Southern District of New York will be leaving that office at the end of the year to join Wachtell, Lipton in its white collar crime group. Anders is well-known for his role in prosecuting Frank Quattrone on obstruction charges (twice, after the first trial ended with a hung jury) and Bernie Ebbers for conspiracy and securities fraud. Both cases resulted in convictions, although each is on appeal. Like those before him, Anders will reap significant rewards in private practice, representing individuals and corporations caught up in government investigations and, perhaps, even criticizing the tactics used against his clients every once in a while. A Wall Street Journal story (here) discusses Anders' move into private practice.
December 2, 2005
Army Reserve Officer Charged With Smuggling Money From Iraq
Army reserve Lt. Colonel Michael Wheeler was arrested and charged with bribery, fraud, and money laundering that included smuggling at least $100,000 in cash from Iraq. Wheeler was responsible for contracting for the Coalition Provisional Authority, South Central Region, and is accused of taking money intended for the reconstruction of Iraq and using it to purchase, among other things, firearms and other high-tech military gear in North Carolina. This is the third CPA South Central Region official to be charged with misconduct. An AP story (here) discusses the charges. (ph)
Lord Black Pleads Not Guilty
Lord Conrad Black entered a not guilty plea, as expected, at his arraignment in U.S. District Court in Chicago on charges for defrauding Hollinger, Inc., when he was CEO and its controlling shareholder. Black posted a $20 million bond secured by his Florida home, and will be permitted to travel to his home in Toronto. Two of the other individual defendants, Mark Kipnis and Peter Atkinson, also entered not guilty pleas, while Jack Boultbee, former CFO of Hollinger, did not appear. Boultbee is a Canadian citizen, and his failure to appear may result in extradition proceedings unless he makes arrangements with federal authorities to appear at a later date. An AP story (here) discusses the arraignment. (ph)
Insurance Executive Sentenced to Ten Years for Fraud
Michael Segal was convicted in 2004 of fraud, embezzlement, and racketeering for using his insurance firm, Near North Insurance Brokerage, to bilk clients to support a lavish lifestyle. At his sentencing in the U.S. District Court for the Northern District of Illinois, Segal protested to the he had never stolen a dime in his life, and that if he had kept better records and had a better attorney he would have been acquitted of the charges. In response, U.S. District Judge Ruben Castillo stated, ""Even if Abe Lincoln and Clarence Darrow came back from the dead to represent you, they wouldn't have saved you." The judge then found that while Segal was involved in a $30 million fraud, the actual loss to customers was only $1.5 million, after which he sentenced Segal to a 121-month term of imprisonment. A Chicago Tribune story (here) discusses the sentencing.
SEC Settles Mutual Fund Late Trading Case Against Hedge Fund
The SEC announced that it had settled an administrative action against Millennium Partners, a hedge fund, for late trading and market timing transactions in mutual funds. Millenium Partners, which manages over $5 billion, agreed to disgorge $148 million in profits, Israel Englander, its managing member, will pay a $30 million civil penalty, and Terrence Feeney, its chief operating officer, will pay a $2 million civil penalty. According to the SEC's administrative order (here):
From at least 1999 to 2003, Millennium Partners, Millennium Management, and Millennium International Management generated tens of millions of dollars in profits through market timing trades of mutual fund shares, a practice which mutual funds generally discouraged. Englander, Feeney, [and two other officers] knew that mutual funds sought to detect market timers and frequently blocked Millennium’s trades and, therefore, devised and carried out a fraudulent scheme to avoid detection and circumvent restrictions that the mutual funds imposed on market timing. Specifically, Millennium: (1) created approximately 100 legal entities to hide that Millennium was behind the mutual fund trading; (2) used those entities to create in excess of 1,000 accounts; (3) structured its trading to avoid detection by the mutual funds; (4) used omnibus accounts and variable annuities to further hide Millennium’s identity; and (5) took advantage of certain "sticky" asset arrangements.
The settlement marks the first case involving a hedge fund penalized for engaging in market timing. An AP story (here) discusses the settlement. (ph)
December 1, 2005
MIchigan Attorney's Law Office Searched
Prominent Michigan attorney Geoffrey Fieger's law office was searched by FBI and IRS agents, a move that only heightens the drama surrounding him. Fieger achieved a small amount of national prominence in the 1990s for his representation of Dr. Jack Kevorkian in connection with various assisted deaths, and he was the 1998 Democratic nominee for Governor of Michigan (losing badly to then-incumbent John Engler). More recently, Fieger has been investigated for campaign contributions in opposition to a Michigan Supreme Court Justice running for election and for alleged extortion of Michigan Attorney General MIke Cox for threatening to reveal an affair Cox had with a co-worker in an earlier job if Cox's office did not drop the campaign contribution investigation. When a local county prosecutor announced that he decided not to file charges, despite finding the extortion claim credible, Fieger demand a federal investigation of Cox (see earlier post here).
An AP story (here) notes that a Department of Justice spokesperson referred questions to the local U.S. Attorney's Office and the Public Integrity Section of Main Justice, which indicates that the investigation likely concerns improper payments to public officials. The presence of IRS CID agents as part of the search usually means that undisclosed transfers of funds are involved in the case, and those types of secret payments tend not to be reported on one's tax returns. There's no indication yet whether the search is related to the alleged extortion of Cox, but a search warrant is never a good sign for the lawyer whose office is the object of the search. (ph)
Rep. Cunningham's "Conspirator #1" Identified
In the plea agreement entered into by now-former Rep. Randy (Duke) Cunningham to a bribery conspiracy charge, two of the four unidentified coconspirators were cited as providing payments in exchange for government contracts. A USA Today story (here) notes that the attorney for Brent Wilkes has acknowledged that his client is Conspirator #1, who had a controlling interest in ADCS Inc., a defense contractor that received a number of Pentagon contracts. Wilkes is a substantial campaign contributor, mostly to Republican candidates, including a $25,000 donation to the Republican Congressional Campaign Committee in 2003 and serving as a "Pioneer" for President Bush's 2004 campaign in helping to raise at least $100,000. Federal Election Commission records on Wilkes' contributions (here) list almost $150,000 in contributions to congressional candidates, including a couple Democrats, such as Sen. Dan Inouye.
Wilkes' home and office were searched earlier this year by FBI agents, and the plea agreement identifies Conspirator #1 as providing Cunningham with over $600,000 in cash and other benefits. With Cunningham agreeing to cooperate in the government's investigation, it is likely that Wilkes is a target of the investigation, and may already be cooperating. His company was the recipient of Pentagon contracts that may be been based more on Congressional influence than genuine need, an area investigators are sure to be interested in learning more about. (ph)
UPDATE: An AP story (here) states that lawyers for the House Intelligence Committee will investigate whether Rep. Cunningham ever influenced any Committe business on behalf of MZM, Inc. or ADCS Inc., the two military contractors that allegedly received contracts in exchange for the bribes. Cunningham became a member of the Committee in 2001. (ph)
Is Fraud Mostly Detected by Chance?
International accounting firm PricewaterhouseCoopers issued its Global Economic Crime Survey 2005 (here) that surveys companies worldwide about how they are affected by fraud and other types of white collar crime, and how they go about detecting and combating such misconduct. The headline-grabber (see Reuters story here) is the assertion by PwC that "[o]ver one third of these frauds were discovered by accident, making 'chance' the most common fraud detection tool." Can if be that so many frauds are only discovered through luck, or some other random happenstance, so that much of the money spent on internal controls is a waste? It's interesting to note that an "accidental" discovery of fraud includes an internal tip to management or through a corporate hot-line, which does not strike me as necessarily "chance" but the product of a system that permits the reporting of fraud and effective investigation of tips. It is the rare fraud that involves self-revelation, and perpetrators are unlikely to create files labeled "Fraudulent Scheme" or "Accounts I've Embezzled." Those engaged in fraud know they have to avoid the internal audit department, and it is often the subordinate or co-worker who notices the misconduct first.
The report notes that internal controls are the second most likely way in which fraud it detected, so it is probably not the case that internal control mechanisms are a waste of money if they encourage employees to report misconduct and operate to uncover other types of fraud. With a nod to Prof. Pam Bucy, an organization's corporate ethos can go a long way toward preventing fraud and other types of economic misconduct in the first place. An environment that stresses ethical conduct and a measure of watchfulness can keep some (perhaps even most) fraud from ever happening, something that simply cannot be measured. As Brooklyn Dodger general manager Branch Rickey once said, "Luck is the residue of design." So too may be the "chance" discovery of fraud in corporations. (ph)
A Corruption Case Involving Real Red Tape
Here's one you don't see every day. The U.S. Attorney's Office for the Middle District of Tennessee announced the arrest of two Veterans Administration officials for taking kickbacks for the purchase of, none other than, red tape. A press release (here) describes the conduct:
Joseph Haymond and Natalie Coker have been charged by criminal complaint with accepting bribes in exchange for buying red tape for the VA at inflated prices. Joseph Haymond is the Director of the VA's Consolidated Mail Outpatient Pharmacy (CMOP) in Murfreesboro, and Natalie Coker, who still works at the CMOP, was the Assistant Director during the kickback scheme. The Murfreesboro CMOP, which has an annual budget of more than $300 million, mails prescription drugs to eligible veterans at subsidized prices.
According to the complaint, Haymond and Coker orchestrated the purchase of more than 100,000 rolls of red tape at inflated prices between August of 1999 and July of 2001. Haymond and Coker each allegedly received a kickback of $1.00 per roll of red tape ordered by the CMOP. The wholesale cost of the tape was $2.50 per roll, but the CMOP paid $6.90 per roll to its vendor, a 176 percent markup.
The defendants are alleged to have earned over $100,000 each from the kickback scheme. No word on whether they also solicited bribes to cut through the red tape, or whether they caused the VA to purchase other items at inflated prices, such as toilet seats and hammers. (ph)
November 30, 2005
Hollinger Execs Case - A Lot Happening
CNN Money (Reuters) is reporting here that two executives in the Hollinger case failed to appear in court today. The next step for the prosecutor will be to proceed with an extradition. But one wonders if this will be necessary. After seeing the possibility of an extradition, they might just decide to return willingly and turn themselves into the court. Extradition seems to be more common in street crime cases, although there have been instances of extradition used in white collar matters. One has to wonder whether we will be seeing more extradition issues arising in white collar cases as more transnational crimes and individuals are prosecuted.
On another note, the case - or the judge - is stirring some controversy. Apparently the judge's father in the Conrad Black case made a comment to the press. (see Toronto Star here). The issue raised by the Toronto Star is whether this comment warrants recusal by the judge. Co-blogger Peter Henning does not take as strong a position as another ethics prof who thinks that she should "definitely recuse herself." I tend to agree with Peter on this one, although if they can show that the judge did something that creates the appearance of impropriety it should result in a recusal of the judge. And certainly it warrants a hearing to see if the judge improperly disclosed information to her father. But absent such a showing, we certainly do not want judges being thrown off of cases every time a relative makes a statement even when the statement may be totally false. Judges do, however, need to instruct family members that they need to be careful when the press comes calling.
Is This An "Assault on Republicans?"
With Republican Representative Randy Cunningham's felony plea (see post here) to bribery conspiracy and tax evasion, and others facing scrutiny (see NYTimes here), it's a time when some find out who are their real friends. The NYTimes reports on how some people are distancing themselves from the indicted and convicted.
Others are claiming that this is "part of a broader assault on Republicans." (see NYTimes here) Are they claiming that Attorney General Gonzalez is leading an "assault on Republicans?" After all he is the United States Attorney, and these indictments are coming from United States Attorneys under the AG. And the USA's are appointed by the President - - are they claiming that President Bush is also leading an "assault on the Republicans?" Maybe a better approach would be to credit the President and AG with leading the fight against government corruption and not playing politics in doing this job.
The Sad Elgindy Story
The Wall Street Jrl, in a superb article authored by John R. Emshwiller here, tells the story of Anthony Elgindy and the tragedy faced by his family as a result of his conviction in a white collar case. Clearly the most moving part of this story is the dilemma faced by his wife in deciding which 2 of 3 children would accompany her into the prison to see their father. Street crime cases have faced these issues for years, often with little or no acknowledgment. Perhaps one of the benefits of the focus on white collar offenders and the increased sentences (and in this case the sending of a convicted person to prison prior to sentencing) is that the media is now noticing the effect of these cases on third parties, and most importantly the children.
But white collar crime cases also are unique as pointed out in this article. According to the article it seems the government (article says "federal officials") is offering money (keeping some of their money) to the family if Anthony Elgindy acknowledges a loss of one million dollars, an amount that could increase his sentence. Would a prosecutor really place a person in the position of agreeing to something that may risk them a higher sentence so that their children would have money while they were incarcerated? Talk about prosecutorial power - this is the ultimate power - or shall I say - abuse of power.
Ryan Case A Slow One
According to the Chicago Tribune here, prosecutors are not happy at the speed of the trial of former Governor Ryan. But the judge refused, at this time, to place limits on questioning witnesses to speed things along. This may be the classic case of balancing efficiency with preserving the accused's rights. Clearly, a person facing jail time deserves to have their case heard in full to the jury.
One question not answered here is when did the defense receive their discovery material. In many instances Jencks material are not provided to defense until immediately before trial. Unlike Brady material, material exculpatory to the accused, the prosecution is not required to provide Jencks material until after the witness has testified. The late arrival of this discovery material can often slow down a case. It takes time for the defense to read, digest, and investigate material provided to them. Shorter cross-examinations are often a function of having the time to fully prepare for the trial. Now, this may not be the case in former Governor Ryan's trial, but it certainly can be in some cases.
Charles Walker Receives Sentence of Ten Years
The Atlanta Jrl Constitution here reports on the ten year sentence given to Charles Walker, this time referring to him as "[a] sharecropper's son who became one of Georgia's highest ranking lawmakers." The article details the evidence presented at his trial and the political environment during the events. But unmentioned in this article about "the other southern jury" (my comparison to the Scrushy trial) is that the Walker jury met not only on Memorial Day weekend, but also on Memorial Day. This as well as the jury selection process should make for an interesting appeal. For a discussion of other issues that may be issues for appeal see post here.
November 29, 2005
Former Kansas Congressional Candidate Pleads Guilty to Misuing Campaign Funds
Keeping with this week's theme of corruption, former Republican Congressional candidate Adam Taff entered a guilty plea to one count of mail fraud and one count of violating the Federal Election Campaign Act for misusing campaign funds. Taff was accused of listing $312,000 from his campaign as personal funds in obtaining a home mortgage to purchase a $1.2 million home. A press release (here) issued by the U.S. Attorney's Office for the District of Kansas states:
In his plea, Taff admitted that in November 2003, while he was a candidate for the U.S. House of Representatives, his campaign had two accounts at Metcalf Bank in Overland Park. At the same time, Taff was an employee of a mortgage company in Overland Park, Kan. His co-defendant in the case, John D. Myers, was the founder and chairman of the company. In November 2003, Taff agreed to purchase from Myers a house at 177 Hillcrest West, Lake Quivira, Kan. Taff signed a contract to buy the house for $1.2 million. On Jan. 19, 2004, Taff signed a loan application with NovaStar Home Mortgage, Inc., stating that among his assets were two bank accounts at Metcalf Bank with balances of $61,746 and $250,000. In fact, those were his campaign’s accounts and not his personal assets. The loan application also falsely stated that Taff’s monthly income was $15,000. In fact, his income was approximately $6,500 a month.
Whether or not Taff can avoid jail time is an open question, but his political career is most likely over. (ph -- thanks to Scott Lawder for passing along the information)
Republican Congressman Enters Guilty Plea to Bribery Conspiracy and Tax Evasion
San Diego-area Republican Rep. Randy (Duke) Cunningham entered a guilty plea in the U.S. District Court for the Southern District of California to conspiracy and tax evasion charges related to approximately $2.4 million in bribes and benefits he received for steering contracts to two defense contractors from his position on the Defense Subcommittee of the House Appropriations Committee. Cunningham has been under investigation since earlier in 2005 when newspaper stories revealed that he had sold his house in the San Diego area to Mitchell Wade, a campaign contributor and then-president of MZM Inc., a small defense contractor that had received a number of no-bid contracts from the Pentagon over the past three years (see earlier post here). While the sale price was $1.6 million, Wade turned around and sold the home for $700,000 less. As part of its investigation, the government executed search warrants at Cunningham's home and the boat on which he lived in Washington D.C.
According to the Plea Agreement (here), Cunningham conspired with four unidentified conspirators, two of whom were majority owners of defense contractors. The defense contractors who have been involved in the investigation are MZM, which Wade had a controlling interest in before leaving the company, and ADCS Inc., whose majority owner, Brent Wilkes, had his home searched as part of the investigation. The other conspirators are from the New York City area and were involved in financial transactions related to paying off the mortgage on Cunningham's Ranch Santa Fe home. The home sale transaction is one of many items listed as involving improper bribes for Cunningham, which also included multiple payments run through various bank accounts, payments to antique stores for various items purchased by Cunningham, and payment for repair work on his Rolls Royce -- there's something to be said for trying to hide one's new-found wealth while living on a government salary. None of the payments were disguised as campaign contributions, but instead appear to be naked bribes to obtain contracts during a time when the Pentagon was spending significant funds for the Iraq war. In addition to the guilty plea, Cunningham agreed to forfeit his home, $1.8 million in cash, and the antiques, which including a sleigh-style bed (!).
The plea agreement includes a Sentencing Guidelines calculation that puts Cunningham's potential sentence at over 10 years (135-168 months), and includes a Sec. 5K1.1 provision that will permit the government to ask for a downward departure if he provides substantial assistance. Given the fact that there are four unidentified coconspirators mentioned in the plea agreement, this is certainly not the last charge that will be filed in the case. One question about his usefulness as a witness is the fact that Cunningham asserted his innocence when the investigation first started, and only now is admitting to his wrongdoing. In a public statement (here) released with the entry of the plea that announced his immediate resignation from Congress, Cunningham stated:
When I announced several months ago that I would not seek re-election, I publicly declared my innocence because I was not strong enough to face the truth. So, I misled my family, staff, friends, colleagues, the public -- even myself. For all of this, I am deeply sorry. The truth is -- I broke the law, concealed my conduct, and disgraced my high office. I know that I will forfeit my freedom, my reputation, my worldly possessions, and most importantly, the trust of my friends and family.
In many cases, it is the elected representative who denies that payments were understood to be bribes, so Cunningham's about-face may not cause the government too many problems in pursuing those who provided the money in exchange for government contracts. It is much harder to assert that the help provided by a Congressman was not in exchange for payments when the deals involve no-bid transactions that likely skirted government procurement rules. A San Diego Union-Tribune story (here) discusses the plea agreement. (ph)
Certiorari Granted In Civil RICO Case
The Supreme Court granted certiorari in Anza v. Ideal Steel Supply Corp., a Second Circuit case. The question presented is: "Is a competitor 'injured in his business or property by reason of a violation' of the Racketeer Influenced and Corrupt Organizations Act when the alleged predicate acts of racketeering activity were mail fraud but the competitor was not a party defrauded and did not rely on the alleged fraudulent behavior?" The case involves a scheme by one company to avoid paying sales taxes and submitting fraudulent sales tax returns, which constitutes mail fraud, in order to harm a competitor, who sued under RICO alleging that the scheme caused injury to the plaintiff's business. The Second Circuit held that a competitor whose business is the target of the scheme has standing to sue even though the racketeering activities defrauded a third party and the harm is only indirect to the plaintiff-competitor through the mail fraud (373 F.3d 251 (2d Cir. 2004)). The Second Circuit held:
[T]he principle governing the present case is that where a complaint contains allegations of facts to show that the defendant engaged in a pattern of fraudulent conduct that is within the RICO definition of racketeering activity and that was intended to and did give the defendant a competitive advantage over the plaintiff, the complaint adequately pleads proximate cause, and the plaintiff has standing to pursue a civil RICO claim. This is so even where the scheme depended on fraudulent communications directed to and relied on by a third party rather than the plaintiff.
On Nov. 15, the Court dismissed another RICO case, Bank of China v. NBM, L.L.C. after the Bank of China moved to dismiss the case because it had won a retrial from the Second Circuit. Anza may allow the Court to clarify the standing requirements for a RICO claim, although if past performance is any indication of future decisions, the opinion will not be particularly helpful in explaining a statute that is hardly pellucid. (ph)