Saturday, February 5, 2005

Owens Completes Fourth Day on Witness Stand at Scrushy Trial

Former HealthSouth CFO Bill Owens has now spent four days on the witness stand describing the construction and operation of the accounting fraud at the company.  His testimony on Friday, Feb. 4, supplied a motive for Scrushy's involvement in the inflation of revenues: selling his shares.  Scrushy appeared on CNBC in 2002 touting the HealthSouth as an undervalued company, stating that its shares were worth $20, shortly before he exercised stock options and sold the shares for $74 million. A short time later, the CEO/CFO certification requirements of Sarbanes-Oxley became effective, leading to the alleged false certifications charged against Scrushy.

The defense has not gotten the chance to cross-examine Owens yet, and I would expect that process to take at least as long as his direct testimony, if not longer.  An AP story (here) describes the day's proceedings. (ph)

February 5, 2005 in Fraud, HealthSouth, Prosecutions | Permalink | TrackBack (0)

DC Circuit Rejects Government Disgorgement Claim Against Tobacco Companies

The D.C. Circuit issued an opinion on Feb. 4 (here) rejecting the government's disgorgement claim under RICO against the leading tobacco companies (U.S. v. Philip Morris USA et al.).  The court's 2-1 decision reverses the district court, which had permitted the government's claim to go forward in seeking disgorgement of $280 billion (which would be real money even to Everett Dirksen).  The court held "The relevant section of RICO, 18 U.S.C. § 1964(a), provides the District Courts jurisdiction only for forward-looking remedies that prevent and restrain violations of the Act. Because disgorgement, a remedy aimed at past violations, does not so prevent or restrain, we reverse the decision below . . . "

Not surprisingly, the shares of the tobacco companies rose rather sharply in response to the news.  It wouldn't be surprising either if the government appealed to the Supreme Court. (ph)

February 5, 2005 in RICO | Permalink | TrackBack (0)

Friday, February 4, 2005

Plea in AntiSpam Law Case

In our post of December 22, 2004 we told of the refusal "to accept a plea agreement involving a former AOL employee who sold e-mail addresses in violation of the recently enacted Can-Spam law."  But things seem to have changed.  The Wall Street Journal has an article here  telling about the judge's decision to now accept a plea in this case.

The case emanates from Operation Web Snare (see here).  The DOJ reported that the defendant and another individual were charged initially with "conspiracy charges" "arising from their scheme to steal AOL’s entire subscriber list, and to use the list to send massive amounts of unsolicited commercial emails-- also known as "spam" -- to millions of AOL’s customers."  Because it was considered "one of the first" cases under the Can-Spam law, it was closely watched.   

(esp)

_______________________________________

Update: Criminal Information here (U.S. v. Smathers)

February 4, 2005 in Computer Crime | Permalink

Across the Country

The big east coast and deep south white collar cases (Ebbers, Kozlowski, and Scrushy) continued yesterday, all still in the prosecution portion of the case.  And it looks like the prosecution has quite a bit more to present in these three cases.  For an update on specific testimony presented, check out the "CEO Blotter, Corporate Execs In Court"  found on the Atlanta Jrl-Const. website.  It sounds like the prosecution had some difficulty in the Ebbers trial (see here and here).

On the west coast, the trial of Richard Hawkins, former CFO of McKesson, continued yesterday with more prosecution evidence.  This trial, however, appears to be in the final stages of the prosecutor's case. (see here).

All of this, and I haven't even mentioned cases that may be forthcoming from investigations related to Enron.  It sounds like things are building up in that corner of the country as a title of an article in the LA Times this a.m. is  "Tapes Reveal Enron's Power Plant Rigging."

(esp)

February 4, 2005 in HealthSouth, Prosecutions, WorldCom | Permalink

Thursday, February 3, 2005

Scrushy Trial Excitement- Rolling Admissions

It sounds like a rolling admission process, only the recipients have not applied to enter the group and would only wish they could decline acceptance into the indicted club.  The United States Attorneys Office for the Northern District of Alabama indicted James P. Bennett  - and yes, right in the middle of  Richard Scrushy's trial. (See  release of the USA's office)  (See also the AP story in the Atlanta Journal Constitution and check out the status of the Scrushy trial on the Birmingham News site.)

Bennett, the former HealthSouth corporation president (see employment contract between Bennett and HealthSouth), has been indicted for "conspiracy, securities fraud, insider trading, and money laundering in connection with the $2.64 billion accounting fraud that occurred at HealthSouth Corporation." (DOJ Press Release). The conspiracy count is premised on mail fraud, wire fraud, and securities fraud and from the DOJ press release it sounds like one count is for false statements.  The indictment, according to the DOJ press release also seeks "forfeiture of approximately $28,133,000."

This is a perfect example of a difference in the way prosecutions occur in the white collar and street crime setting.  In street crime cases, the individuals most often are indicted and then proceed to trial as a group.  In a white collar case, however, prosecutors often move more slowly and an indictment in the middle of the trial can therefore occur. 

But this certainly can put a damper on defense strategy.  Why? 1) In some cases, it means that a witness who might have planned to testify for the defense will no longer be available as they may be concerned about something being used against them at their own trial. 2) A mid trial prosecution of a new individual can also cause the defense to change its strategy, especially if they planned to argue that the government was not proceeding against the most culpable player.

Other than a possible strategic benefit, why would the government indict someone close to a case in the middle of another trial? 1) In some situations this could mean that the government acquired new information as a result of the pending trial.  The new information might allow them to now proceed against this other party. 2)Or maybe the new defendant was frightened by the trial and suddenly decided to talk and the indictment will be followed by a plea agreement 3)Or maybe the individual on trial decided to cooperate after finding the evidence against them incredibly damaging and this new indictment comes from this conversation.

There is a downside to the government in waiting to charge a codefendant, especially when there is a conspiracy charge.  By not having a joint trial, the available evidence may be limited to just what happened with regard to this one person and any unindicted co-conspirators.    A sooner indictment could mean that the individuals are all tried in unison.

So what happened here? Will it affect the trial of Richard Srushy and will it help or hurt the government's case?

(esp)

February 3, 2005 in HealthSouth, Prosecutions | Permalink

Sports Conviction-Should this be RICO?

Logan Young Jr., an investment banker, was convicted of paying a high school football coach, Lynn Lang, in order to recruit a star player to the Alabama team.  Find out more here, herehere (subscription required),  The case proceeds into the forfeiture portion of the trial today.  We previously reported on this case here.

Why was RICO used in this prosecution?  Would bribery charges have been sufficient?  RICO is an easy choice for prosecutors when they have two or more predicate acts that operate with continuity and are related to each other.  RICO usually allows for higher sentences.

But RICO, because of the ease with which it can be used requires approval above the individual United States Attorney's Office.  In the past, sports prosecutions of this nature have been charged using the mail fraud statute.  RICO sends a very strong message to everyone that paying for the recruitment of college athletes will not be tolerated.  But was it necessary here?

This case is a perfect example of the prosecutorial discretion that can operate to determine the sentence a defendant receives. If the predicate acts had been prosecuted, then the court would be sentencing premised upon those specific charges.  By adding RICO, the prosecution places before the court additional conduct that increases the potential sentence of the defendant. The prosecutor had the choice of what charges to bring and thus the choice of controlling the sentence. Deputy Attorney General James Comey in his memo discussed here (and in detail on the Berman Sentencing Blog) calls it "challenging times" now that judges have some oversight of prosecutorial discretion as a result of the Supreme Court's decision in Booker.  It is unfortunate that DAG Comey thinks that an appropriate balancing of power between the prosecution and judiciary is a "difficult time."   

(esp)

February 3, 2005 in Prosecutions, RICO | Permalink

Wednesday, February 2, 2005

Comey's Sentencing Memo & White Collar Crime

As noted in our last post and in Professor Doug Berman's superb sentencing blog, it looks like the AUSAs and USAs throughout the country have received their guidance from main justice on how to proceed on sentencing matters. And the tone and language certainly will raise some eyebrows. As noted by Professor Berman,

In particular, I am intrigued by the "keep your chin up" theme: DAG Comey at the outset commends prosecutors "for your flexibility, your creativity and your good humor in these difficult times" and in closing lauds prosecutors' hard work and says that their "ability and dedication will get the job done in these challenging times."

There is another interesting item on the page attached to the memo (Comey Memo (1/25/05)). Called the Booker Sentencing Report Form, it provides prosecutors with a handy-to-use form for reporting judges who sentence outside the guidelines.  It specifically says that it replaces the "Blakely Sentencing Report Form."  But what is particularly fascinating about this form for white collar cases is found in # 5 of the form, where it asks for "Primary Offense of Conviction" and says to "(indicate only one)."  Prosecutors are given the following choices: "Drugs, Guns/violent crime, Economic Crime, Child porn/exploitation, Immigration, and Other (explain)."  What isn't there?  Well unless you want to include terrorism in the category of violent crime or immigration, it appears to be omitted as an exclusive category.  Isn't terrorism a top priority of DOJ?  Is DOJ thinking that most judges will not depart in these cases?  Or are there an insignificant number of cases being filed with respect to terrorism to merit its inclusion on this form? And does the fact that economic crime is included have significance?

(esp)   

February 2, 2005 in Sentencing | Permalink

DOJ's Response to Booker: More Reporting on Judges

Doug Berman on Sentencing Law & Policy mentions the "buzz" about a Department of Justice memo on sentencing after Booker (post here), and an article in the Wall Street Journal (here) confirms the memo as issued by James Comey, the Deputy Attorney General. [Doug is quoted in the article]  The memo states that prosecutors should take steps to ensure that judges continue to follow the Federal Sentencing Guidelines, and -- more importantly -- to report to Main Justice judges who sentence outside the (now advisory) Guidelines range or who do not calculate a sentence under the Guidelines.  The reporting aspect is similar to the requirements of the Feeney Amendment regarding reports to Congress about the sentencing practices of judges, a point that was particularly galling to the federal judiciary, especially Chief Justice Rehnquist.  The Department appears to be gearing up for a legislative solution based on its "findings" from reports from local U.S. Attorney's offices.

February 2, 2005 in Sentencing | Permalink | TrackBack (0)

Scrushy's Parade of Attorneys

A lengthy front-page article in the Wall Street Journal (here) discusses the various attorneys who have represented Richard Scrushy since problems began at HealthSouth in mid-2002, including a dispute over billing with the Jones Day firm that has triggered an ethics complaint against the firm with the Washington, D.C. bar authorities.  (ph)

February 2, 2005 in Defense Counsel, HealthSouth | Permalink | TrackBack (0)

Tuesday, February 1, 2005

Preparing to Introduce the Tapes at Scrushy's Trial

The government set the stage for introducing the audiotapes made by Bill Owens, HealthSouth's former CFO, who wore a wire for two days immediately before the FBI executed a search warrant at the company as part of its accounting fraud investigation.  The defense has raised questions regarding the  veracity of the tapes and problems regarding the government's handling of them.  At the trial today, prosecutors called an FBI evidence technician, who testified she made an "honest mistake" when she put the incorrect date on the evidence log for the tapes.  The defense has sought to exclude the tapes from being introduced at trial, a position U.S. District Judge Karon Bowdre rejected before trial (see earlier post here) but did give the defense the opportunity to raise admissibility questions at trial.  The government appears to be laying the foundation for admission of the tapes through Owens.  Interestingly, while the defense has sought to exclude them, counsel has also said they are exculpatory of Scrushy and show that it was Owens who was the perpetrator of the fraud.  No harm in having a fall-back position, in case the tapes come in. An AP story discussing the testimony at Scrushy's trial is here.

This type of evidence is uncommon in white collar cases, but not unique -- recall the prosecution of senior Rite Aid executives involved a cooperating witness who wore a wire to meetings with other defendants. The recordings in that case were challenged as being made in violation of Pennsylvania Rules of Professional Conduct 4.2 and 8.4 because it was an unauthorized contact with a represented person and involved dishonest conduct by the federal prosecutor, U.S. v. Grass, 239 F.Supp.2d 535 (M.D. Pa. 2003), arguments the district court rejected in refusing to suppress the tapes. (ph)

February 1, 2005 in Fraud, HealthSouth, Investigations, Legal Ethics, Securities | Permalink | TrackBack (0)

Responding to Booker: Plea Agreement Permits Withdrawal If Judge Sentences Outside the Agreed Sentence Range

A plea agreement announced by the U.S. Attorney's Office for the Central District of California (Los Angeles) contains a provision I had not seen in a federal case during the Guidelines era: a stipulated sentencing range that, if not followed by the judge, permits either party to withdraw from the plea bargain.  A press release issued by the USAO on Jan. 31 about the plea of Scott Brabson to commercial bribery and honest services fraud charges contains the following language:

Brabson pleaded guilty before United States District Judge John F. Walter, who is scheduled to sentence the defendant on April 11. While the four charges he pleaded to carry a maximum possible penalty of 35 years in federal prison, the government and Brabson have agreed that the sentence should be between 57 and 71 months in prison. If Judge Walter believes the sentence should be outside this range, either the government or the defendant is entitled to withdraw from the plea agreement.

Under the Guidelines, neither party controlled the factual determinations that went into the Guidelines calculation, which was decided by the judge based on the PSR (along with any submissions by the parties). While the parties could agree to certain conduct and amounts, that was not binding.  This provision in the plea agreement effectively constrains the judge's sentencing discretion, at least if the court does not want to have the case go to trial by giving a sentence far enough outside the range to trigger a withdrawal by one side.  Plea agreements in Michigan, and no doubt in other states, contain similar sentencing range provisions, but these types of agreements were not a feature of federal prosecutions because the Guidelines were mandatory, thereby providing the measure of certainty each side wanted. The sentencing range in the Brabson case appears to reflect what the Guidelines provide for his offenses, based on the dollar figures involved in the case. If a stipulated sentencing range is the new approach by the Department of  Justice, it will be interesting to see if judges react positively or negatively in light of Booker's restoration of sentencing discretion to federal judges. (ph)

February 1, 2005 in Sentencing | Permalink | TrackBack (0)

The Booker Effect on the Nigerian Barge Trial

The so-called Nigerian Barge Trial that resulted in the conviction of executives from Enron and Merrill Lynch included a post-verdict proceeding -- triggered by the Supreme Court's Blakely decision -- in which the government "proved" the amount of the loss and the leadership role of certain defendants to the jury.  The jury found that the loss caused by the defendants was $13.7 million, which would have triggered a sentencing range under the Federal Sentencing Guidelines of approximately 63-78 months.  U.S. District Judge Ewing Werlein has now announced that, after the Supreme Court's decision in Booker, he is not bound by the jury's sentencing determinations when he announces the sentences in the case, currently set for March.  Doug Berman on Sentencing Law & Policy, who first posted on this report, states here that "[m]y instinct is to say the result of the Nigerian Barge 'sentencing trial' should still be relevant to advisory guideline calculation, but it will now be especially interesting to see how this sentencing gets handled in March." It is hard to see how a judge can ignore a jury finding, especially one based on a finding of fact beyond a reasonable doubt, but we're in a brave new (Booker) world these days. An article in the Houston Chronicle discussing Judge Werlein's decision is here. (ph)

February 1, 2005 in Enron, Sentencing | Permalink | TrackBack (0)

Release of Computer Worm Nets 18-Month Prison Sentence

For everyone who has been afflicted by a computer virus, a bit of retribution was meted out to Jeffrey Parson for releasing a variant of the Blaster worm in August 2003.  He was sentenced to an 18 month term of imprisonment and an as-yet undetermined amount of restitution for violating the computer crime statute (18 U.S.C. 1030).  A press release issued by the U.S. Attorney's Office for the Western District of Washington states:

PARSON admitted that he created his worm by modifying the original MS Blaster worm and adding a mechanism that allowed him to have complete access to certain infected computers. PARSON then infected approximately fifty computers that he had previously hijacked with his worm. From those fifty computers, PARSON's worm spread to other individual computers. PARSON's worm then directed those infected computers to launch an attack against a Microsoft web site. Attorneys for the government calculate that more than 48,000 computers were infected by PARSON's worm.

Parson was only 18 at the time he released the worm, and likely never thought through the possible consequences of his action. (ph)

February 1, 2005 in Computer Crime, Sentencing | Permalink | TrackBack (0)

Monday, January 31, 2005

No "Smoking Gun" Document Linking Scrushy to Accounting Fraud

The government witness testifying on Jan. 31 in the trial of Richard Scrushy was Harvey Kelly, who worked for PriceWaterhouseCoopers as an accountant in its investigation of the accounting fraud at HealthSouth.  Kelly testified that he did not come across any documents (memoranda, e-mails, etc.) specifically linking Scrushy to the overstatements of revenue and income at the company, although he also noted that he was not looking for any when he conducted the internal investigation of the accounting issues.  The testimony is consistent with the defense theory that financial officers of the company were responsible for the fraudulent accounting, although it does not undermine the government's position that Scrushy urged those same officers to do whatever was necessary to make the numbers Wall Street wanted to see. It is likely the government will soon call Bill Owens, a former CFO and senior officer at the company, to testify about Scrushy's involvement in the misconduct; his testimony is expected to be quite lengthy, with the cross-examination very contentious with regard to the recordings he made prior to the government's search of HealthSouth's offices.  An AP story (here) discusses Kelly's testimony.

January 31, 2005 in Fraud, HealthSouth, Securities | Permalink | TrackBack (0)

Tracking Down the BALCO Grand Jury Transcripts Leak

Back in early December 2004, the baseball world was rocked by the revelation on successive days (by the San Francisco Chronicle) of the grand jury testimony of Jason Giambi and Barry Bonds (see posts here and here). That testimony is related to the government's prosecution of four defendants involved in the creation of "designer" steroids at BALCO (the Bay Area Laboratory Co-operative).  BALCO founder Victor Conte appeared on the television news program 20/20 after his indictment to discuss the steroid use by major athletes, including (among others) track star Marion Jones, essentially admitting to many of the charges in the government's case. 

An issue regarding the grand jury transcripts concerns the source of the leak to the Chronicle in violation of protective orders and the grand jury secrecy rule in Federal Rule of Criminal Procedure 6(e), which may be punishable by contempt.  Last week, the FBI conducted a search of Conte's Bay Area home for evidence related to the leak of the grand jury transcripts, including a search of his computer.  An earlier post on the CrimProf Blog  on Jan. 10 (here) discussed possible sources of the leak of the transcripts -- given the level of detail in the Chronicle stories, it is almost certain that the reporters received copies of the grand jury transcripts and not just oral (or written) summaries.  Given Conte's penchant for publicity regarding the use (and misuse) of steroids, even when it hurts his criminal case, the government appears to be focusing on him as a source of the transcripts.  Whether the mystery of who leaked the transcripts will ever be solved is still up in the air. A story in the San Francisco Chronicle (here) discusses the search of Conte's home and related developments in the BALCO prosecution. (ph)

January 31, 2005 in Grand Jury, Investigations, Prosecutors | Permalink | TrackBack (0)

Marsh Mac Settles with N.Y. Attorney General Spitzer Over Insurance Brokerage Practices

Marsh & McLennan Cos. Inc. announced a settlement with New York Attorney General Eliot Spitzer's office on Jan. 31 regarding the complaint filed in October 2004 regarding alleged price fixing in its insurance brokerage unit.  The company agreed to create an $850 settlement fund for customers to seek reimbursement for the increased costs from the company practice of soliciting inflated bids.  A press release issued by Marsh Mac states that in addition to the settlement fund, which does not include any fine or civil penalty, it will undertake the following corporate reforms:

  • MMC has discontinued the practice of receiving contingent compensation from insurance carriers. The company adopted this new policy effective October 1, 2004.
  • The company will provide clients with a comprehensive disclosure of all forms of compensation received from insurers.
  • The company will adopt and implement company-wide, written standards of conduct for the placement of insurance.
  • The company will provide all quotes and terms as received from insurance companies to enable clients to make informed insurance coverage decisions.
  • MMC will establish a Compliance Committee of the MMC Board of Directors and has appointed a chief compliance officer.

After Spitzer filed the complaint against the company, he essentially demand that its top management, including former CEO Jeffrey Greenberg, be removed by the board of directors before settlement negotiations could begin.  The board complied, and Marsh Mac's new CEO, Michael Cherkasky, came from its Kroll unit and was Spitzer's supervisor in the Attorney General's office earlier in his career.  Although the settlement ends the highest profile litigation involving the company's insurance brokerage business, it does not end the lawsuits brought by other states, shareholders, and clients.  Look for those cases to be settled soon. (ph)

                                                                        

UPDATE: Settlement agreement here.

January 31, 2005 in Civil Enforcement, Fraud | Permalink | TrackBack (0)

Charter Communications Prosecution Ends with Fourth Defendant Pleading Guilty

The government's prosecution of four former executives of Charter Communications, Inc., the large cable TV company, ended when the fourth defendant, former CFO Kent Kalkwarf, agreed to enter a guilty plea.  According to the press release issued by the U.S  Attorney's Office for the Eastern District of Missouri (St. Louis):

In an effort to generate approximately 15 to 20 million dollars in additional revenue needed to meet these cash flow projections, Charter solicited advertising business from some of Charter’s largest suppliers, including their suppliers of set-top boxes. Kalkwarf and others offered Charter funds to these suppliers so that they could then use those same funds to purchase advertising from Charter at no cost to the suppliers, and these suppliers agreed to return that money to Charter by buying advertising in an equal dollar amount. Charter paid $20 more than necessary for each set-top box, but then received that same $20 back as advertising revenue, creating nothing but a "wash transaction."

Another example of the effect of the enormous pressure on corporate executives to churn out numbers (here, cash flow) to meet Wall Street's expectations, the same show being played out in the WorldCom and HealthSouth prosecutions. (ph)

January 31, 2005 in Fraud, Prosecutions, Securities | Permalink | TrackBack (0)

More Accounting Shenanigans

The U.S. Attorney's Office for the Central District of California (Los Angeles) announced yet another revenue recognition accounting fraud involving an internet company, this time L90, Inc., an internet advertising company.  According to the press release, Keith Kaplan, a former vice president and head of sales for the company

conspired with two other former L90 executives to inflate the company's earnings so that it would meet Wall Street analysts expectations. Those other two executives - John C. Bohan, L90's former CEO, president, and board member; and Lucrezia Bickerton, L90's former vice president of finance - have already pleaded guilty to criminal charges. At the time of the alleged offenses, L90 was based in Santa Monica and Marina del Rey, and its stock was traded on the Nasdaq National Market System. L90 is now known as MaxWorldwide, Inc. In the final quarter of 2000, Kaplan and his co-conspirators were concerned that L90's total revenues for the quarter would not meet analysts' projections, according to the indictment. In order to make up the anticipated revenue shortfall, Kaplan and his co-conspirators allegedly developed several schemes to fraudulently inflate L90's revenue numbers.

The pressure to commit accounting tricks in response to the bursting of the internet bubble in 2000 continues to hit home. (ph)

January 31, 2005 in Fraud, Prosecutions, Securities | Permalink | TrackBack (2)

Sunday, January 30, 2005

Alleged College Football Pass Ends Up in Federal Court

The Atlanta Journal Constitution in a post here and here reports the latest in the trial of Logan Young, an Alabama booster who is being tried for racketeering in federal court for allegedly paying a former high school football coach, Lynn Lang, "$150,000 to make sure that former Trezevant High football star Albert Means signed with the University of Alabama."   A key witness for the government was Lang, "who has pleaded guilty on extortion charges concerning his steering of Means to Alabama." 

The defense has now started its case.  As reported by the Atl. Jrl-Const. a motion to dismiss by the defense claims that "what Lang did --- taking money to influence Means' college decision --- is not expressly prohibited in the rules and regulations of the Memphis public schools." 

Additionally, the defense testimony challenges Lang. "On Friday, former coach Jim Donnan [UGA] testified saying that "[a] Memphis recruit's high school football coach wanted 'at least' an SUV in return for the player's signature."

This is an interesting case to follow not only because it provides a glance into some of the behavior that goes on in the recruiting of college football players, but also because it shows a unique side to collateral consequences, something common in white collar cases.  In this case one of the collateral consequences fell on Alabama, who (as stated in the Atl. Jrl.-Const. article" "was charged with NCAA recruiting violations in the Means case and eventually received sanctions that included a loss of scholarships, plus a two-year ban from bowl participation.")

(esp)

January 30, 2005 in Prosecutions | Permalink