December 31, 2005
What to Expect in 2006
What Can We Expect in 2006 :
- A decision in the Martha Stewart Case pending in the 2nd Circuit
- A decision in the Frank Quattrone case pending in the 2nd Circuit
- Ken Lay and Jeff Skilling's trial
- Trial of former Atlanta Mayor Bill Campbell
- A verdict in the trial of former Governor Ryan in Illinois
- A trial on Scrushy's new indictment along with co-accused former Gov. Don Siegelman
- A plea for Abramoff (maybe) followed by perhaps other indictments
- The re-sentencing of Jamie Olis
- Trial of "Scooter" Libby and/or more indictments?
- More investigations of leaks
- Appeals in the many convictions obtained this past year by DOJ
We wish everyone a happy, healthy, and peaceful New Year.
(ph & esp)
December 30, 2005
Will Abramoff Ring in the New Year with a Plea Agreement?
An AP story (here) notes that lobbyist Jack Abramoff is close to a plea deal with prosecutors in Miami and Washington, D.C., in connection with the bank fraud charges in Florida and the investigation of corruption involving Congressmen and members of their staffs. Abramoff has been at the center of an extensive investigation of payments and campaign contributions from Indian tribes he represented to various people on Capitol Hill. Abramoff was a long-time friend and supporter of former House Majority Leader Tom DeLay, and his contributions were spread through both parties in Congress. In recent weeks, former colleagues have entered guilty pleas, including his co-defendant in the Florida fraud prosecution.
If Abramoff pleads guilty and agrees to cooperate in the investigation, the case has the potential to rip through Congress and put a number of careers in serious jeopardy, both politically and legally. Ohio Rep. Bob Ney has already been identified as receiving improper payments from Abramoff in the plea agreement of Michael Scanlon, a former partner of Abramoff, and admitted to being a target of the grand jury investigation. Rep. Ney may only be the first in a line of indictments in Washington D.C. The AP story notes that Abramoff is likely to enter his guilty plea in the U.S. District Court in Washington, indicating that his cooperation will be crucial to prosecutors from the Public Integrity and Fraud Sections of Main Justice who have been conducting the investigation of corruption on Capitol Hill. This case has the potential to be the white collar crime story of 2006. (ph)
DOJ Opens Inquiry Into NSA Surveillance Leak
The Department of Justice announced that it has opened an investigation into the leak of information to the New York Times regarding the surveillance by the National Security Agency of domestic telephone calls. This investigation comes on top of inquiries into leaks regarding the covert status of CIA operative Valerie Plame and the disclosure of supposed secret prisons run by the CIA. White House spokesman Trent Duffy, speaking at the Crawford Middle School, explained (here) the rationale behind the latest investigation and the White House's role in it:
Q Is the White House the ones that requested the Justice Department investigation into the NSA leaks?
MR. DUFFY: No, as the President said, the Justice Department undertook this action on its own, which is the way it should be. The President spoke directly about how he felt about the leaking of classified information, and the White House was informed of the decision, as was the President. And you have his own words about how he feels about the leaking of classified information. I think it's plain to say that the terrorists want to strike America again and they hope to inflict even greater damage than they did on September the 11th. The leaking of classified information is a serious issue. The fact is that al Qaeda's playbook is not printed on page one, and when America's is, it has serious ramifications. You don't need to be Sun Tzu to understand that. (Laughter.)
Somehow, sports analogies don't seem quite appropriate when talking about terrorism and civil liberties. Whether this leak investigation will be successful remains to be seen, although the Plame investigation shows the extent to which prosecutors will seek to ferret out information from the media. (ph)
A Busy Week For Scrushy
The time between Christmas and New Year's Day is usually pretty slow, except in retail and, at least this year, for former HealthSouth CEO Richard Scrushy. Earlier in the week, Scrushy entered a "not guilty" plea to federal corruption charges alleging that he paid bribes to former Alabama Governor Don Siegelman for an appointment to a state board. HealthSouth, the company he founded, responded to his multimillion dollar breach-of-contract suit related to the termination of his employment agreement by countersuing to recover approximately $76 million in salary, bonuses, and stock option awards because he "systematically plundered" the company during the period of its ongoing accounting fraud. A Reuters story (here) discusses the company's countersuit. The company also held its first annual meeting since the accounting problems surfaced in March 2003, the only one in its history without Scrushy as a member of the board because he resigned his position in early December rather than face being turned out by shareholders. An AP story (here) discusses the annual meeting. With a criminal trial looming along with discovery in the SEC's securities fraud action, things won't slow down for Scrushy and his legal team. (ph)
New Jersey Med School Settles Health Care Fraud Investigation
The University of Medicine and Dentistry of New Jersey (UMDNJ), the only medical school in the state, agreed to pay back at least $4.9 million that it had double-billed to
Medicare Medicaid. The U.S. Attorney's Office for the District of New Jersey announced that it had entered into a deferred prosecution agreement (here) to a charge of health care fraud that calls for the school to adopt various reforms to its operations, and it may have to make more payments for the double-billing as it continues to investigate. According to a press release issued by the USAO (here), UMDNJ agreed to the following:
UMDNJ will establish a position of Chief Compliance Officer (CCO) who will report directly to the UMDNJ president and board of trustees.
The positions of CCO and a new general counsel will be filled through a nationwide search, after which the Monitor will recommend one or more candidates to the board for consideration and selection.
UMDNJ will establish training and education programs as recommended by the Monitor that are designed to advance and underscore the institution's commitment to exemplary corporate citizenship, corporate governance and the highest principles of integrity and professionalism. The Monitor and Board will determine who will be required to participate in such programs.
UMDNJ will establish a hotline and email address for employees and others to notify UMDNJ of any concerns about unlawful conduct or other wrongdoing at UMDNJ.
The agreement requires UMDNJ to give the Monitor unfettered access to all documents and information which he deems necessary to fulfill his duties. The monitor will have no role in academic affairs.
Other problems identified in the government's investigation included improper bonuses and perquisites, and the award of no-bid contracts. Former federal district court judge Herbert Stern will serve as the school's outside monitor -- Stern has been busy lately, serving as the attorney for former Qwest CEO Joseph Nacchio on his recent indictment on insider trading charges.
The deferred prosecution agreement requires UMDNJ to comply with the provisions for 36-months to have the charges dismissed, and it does not appear to include an endowed professorship for any New Jersey universities, unlike the settlement with Bristol-Myers Squibb earlier in 2005. (ph -- thanks to sharp-eyed reader Delia Johnson for picking up which federal health care program was defrauded)
December 29, 2005
2005 White Collar Crime Awards
In the finest end-of-the-year tradition of various media outlets, we have decided to honor individuals and organizations for their work this year in the white collar crime arena by bestowing "The Collar" on those who deserve our praise, scorn, acknowledgment, blessing, curse, or whatever else you can think of that would be appropriate. Comments are open if any readers would like to suggest additional categories or winners (or losers?), remembering to keep any offerings reasonably mature and somewhat well-meaning, at least to the extent ours meet those criteria (and do not open us up to a libel suit).
With the appropriate fanfare, we present The Collars for 2005:
The Collar for Best Parent goes to Bill Olis for all his work on behalf of his son Jamie.
The Collar for Best Suspense goes to the 2nd Circuit for sitting on both the Martha Stewart and Frank Quattrone appeals.
The Collar for the Government's Biggest Bust goes to Martha for getting busted for attending a yoga class without permission, resulting in having to spend an extra three weeks wearing an ankle bracelet.
The Collar for Put Me In The Headline goes to -- who else -- Eliot Spitzer.
The Collar for Not Beating a Dead Horse goes to the DOJ group that decided not to re-prosecute Arthur Andersen after the Supreme Court ruling.
The Collar for Best Public Appearance by an Accused was a tie this year, going to Richard Scrushy, who was found not guilty despite not testifying, and Ken Lay, who set forth his defense in a public speech barely a month before trial.
The Collar for Best Cooking the Books goes to the DOJ for failing to include corruption cases in its reporting of white collar crimes.
The Collar for Best Singing by a Cooperating CFO goes to Scott Sullivan for his performance at the trial of former WorldCom CEO Bernie Ebbers (easily beating out the Five Guilty CFOs of HealthSouth).
The Collar for Ruining a Reputation Through Bribery goes to former Rep. Randy (Duke) Cunningham, a Viet-Nam ace pilot and eight-term Congressman who traded it all in for a few hundred thousand dollars and some cheesy antique furniture.
The Collar for Worst Affidavits goes to Morgan Stanley for submitting questionable affidavits about producing e-mails that cost the firm $850 million in punitive damages.
The Collar for the Best United Front That Is Not a Conspiracy goes to all the groups that aligned together to try and convince the government that the attorney-client privilege really is important.
(ph & esp)
Skilling's Motion to Dismiss Insider Trading Charges Denied
In the run-up to the Enron conspiracy trial -- now delayed for two weeks after the plea agreement of Richard Causey -- U.S. District Judge Sim Lake is clearing out motions to allow the prosecution to proceed. In the latest decision, Judge Lake denied Jeffrey Skilling's motion to dismiss ten insider trading charges (counts 42-51 of the indictment here) for failure to identify the material non-public information on which he is alleged to have traded in selling approximately $62 million worth of Enron shares in 2000 and 2001. While the specific charges are simply a recitation of Section 10(b) and Rule 10b-5, along with the dates and amounts of the trades, the indictment goes into significant detail on specific knowledge Skilling is alleged to have had regarding Enron and his failure to disclose or misrepresentations about the company. Unlike the recent indictment of former Qwest CEO Joseph Nacchio on similar insider trading charges also involving sales based on knowledge of the company's prospects, the Enron indictment does identify specific types of information and its dissemination on particular dates, primarily analyst conference calls and other public disclosures of the company. While the government will have to "connect the dots" at trial in trying to convince the jury that Skilling knew the market did not adequately reflect all the information available to him, the indictment does not contain the type of vague allegations that it does in the case against Nacchio. Look for Judge Lake to issue additional rulings on remaining motions as we get closer to Jan. 30, the new trial date. An AP story (here) discusses the judge's decision to deny the motion to dismiss. (ph)
UPDATE: Judge Lake's opinion denying the motion to dismiss is available on Findlaw here.
Where Do Nice Guys Finish?
By all accounts, former Enron chief accounting officer Richard Causey is a very nice person, not prone to engage in temperamental outbursts and degrading harangues that former CFO Andrew Fastow is accused of doing to subordinates, outside auditors, and investment bankers. With his plea agreement, Causey may become the cornerstone of the government's case against former CEOs Ken Lay and Jeffrey Skilling because, as the "nice guy" of Enron's financial operation, he can put a human face on the fraud. Counsel for the defendants have tried to portray Causey's decision as one forced on him by the government because of the financial pressure of paying for his attorneys without the kind of resources Lay and Skilling can muster. Whether or not Causey would ever admit that, he has said he committed a crime in submitting false information to the SEC in Enron's financial disclosures. Causey's admission is different from that of former Arthur Andersen accountant Dave Duncan, the other person with intimate knowledge of Enron's accounting who was accused of obstruction of justice but was recently allowed to withdraw his guilty plea. While one can argue whether Duncan and Andersen's conduct constituted obstruction, Causey admitted to conduct that clearly violates the federal securities laws.
Causey's plea goes to the heart of the government's case that Lay and Skilling misled investors about the company by painting a false picture of its operations and profitability. Lay sets forth the basic position of the defense on the front page of his website (www.kenlayinfo.com) where he states: "Contrary to popular belief, I firmly believe that Enron was a great company. Enron was a strong, profitable, growing company even into the fourth quarter of 2001. Enron was so successful for so many years because it had the best and brightest people, as continues to be demonstrated by the success of Enron alumni in business and industry around the world." Causey's admissions regarding the misstatements of Enron's finances seems to directly counter Lay's assertion, and, unlike Fastow, Causey's relative poverty -- he is also forfeiting $1.25 million and waiving any claim to severance or deferred salary from the company -- may even support his testimony because he did not skim profits from the questionable dealings as Fastow and other cooperating witnesses did.
Nice guys don't always finish last, and Causey is looking at a prison term of at least five years even if he cooperates with the government and testifies at trial. His niceness may be the counterbalance to Fastow that the government needs in presenting its case to the jury. Lay has already promised to testify, and there is no word yet whether Skilling will also be a witness in his defense. It will be interesting to see if Skilling is willing to put his defense in Lay's hands now that Causey has gone over to the other side. Houston Chronicle stories here and here discuss the plea agreement and Causey's background. (ph)
December 28, 2005
The Case of the Defective Mice
Every year, Jack Boese of Fried Frank offers a holiday story tied to a False Claims Act case to lighten things up. This year's story is about the sale of mice to a federal laboratory that may not have met the government's usually impenetrable procurement standards. Herewith is the story of the defective (?) mice:
On March 1, 2005, the U.S. Attorney’s Office for the District of Maryland issued a press release, with a seriousness that only government press releases can bring to such announcements, reporting that an Indiana-based laboratory agreed to pay $7.2 million to settle a threatened FCA case alleging that the company – Harlan Spigue Dowley, Inc. – sold mice to the HHS National Institute for Aging that did not conform to Federal specifications. Many of us, familiar with detailed specifications for missiles or health care regulatory requirements, could not imagine "Federal specifications" for mice, but clearly they exist, and failing to comply with them can be quite expensive. According to a Washington Post article about the settlement, that $7.2 million "reimburses expenses for feeding and housing the mice . . . ." Those are some hungry mice!
As befits the season, the nice part about this "feel good" story is that everyone goes away happy (unlike last year’s sad tale, which resulted in an incarcerated beauty queen). The DOJ and HHS OIG got $7.2 million to add to their FCA recovery statistics. The laboratory got to deny liability and (we assume) continue to supply new mice to be used in scientific experiments. And the defective mice, because they are "nonconforming" and presumably useless for experiments, will apparently get to live and live well, since the DOJ got $7.2 million to "feed and house" them.
As always, we at FraudMail Alert leave you with a number of questions about this episode to ponder at those boring holiday parties:
1. Just what kind of food does the government feed its special mice? At $7.2 million, is it better then the buffet line at the holiday parties?
2. Who exactly investigates this kind of case? Do they get a "risibility bonus" if folks like us, who read about cases like this one, start to giggle?
3. Were 3 of the mice blind?
As has been the case in past years, FraudMail Alert applauds such efforts of the Department of Justice and other enforcement agencies. After all, without them, these annual holiday FraudMail Alerts would not be possible.
For those interested in earlier FraudMail Alerts, or to sign up to receive periodic e-mails about the latest issues in this area, check here. Fried Frank's website is one of the best sources of information on the False Claims Act and related private actions. (ph)
Ecuadorean Pyramid Scheme
An AP story (here) discusses the collapse of a long-running pyramid scheme in Ecuador that may have been used to help launder profits from drug transactions. Jose Cabrera, a notary, had been collecting funds in $10,000 increments with a promise of 10% interest from investors for over twenty years. Cabrera died of a heart attack earlier in 2005 in a scene described by his 18-year old girlfriend that involved smoking cocaine and taking Viagra -- Cabrera was 71-years old at the time of his death, so that explains the presence of at least one drug. Since then, there have been problems for the 6,500 investors, many of whom were members of the military and also include a judge and the wife of a former defense minister. Seventeen soldiers were charged with criminal violations for flying to Cabrera's home to try to reclaim their investments. The government estimates that Cabrera managed $800 million as part of the investment program. The shame is that, unlike the old Grateful Dead song, Cabrera was livin' on much more than reds, vitamin C, and cocaine. (ph)
The New Pleas - Causey & Weisberg
Two Major Pleas for the Government Today - - Both require cooperation with the government.
As anticipated, Richard Causey entered a plea this afternoon to Securities Fraud and agreed to cooperate with the government in the trial of Ken Lay and Jeffrey Skilling. (see Wall Street Jrl here). The plea, however, is somewhat bothersome. It provides for a term of seven years unless the government is happy with the cooperation of Causey, in which case it can be reduced to five years. The bothersome aspect of this plea is that it requires Causey to produce testimony to save himself two years. This will most likely be a key aspect for Lay and Skilling in their cross-examination of Causey. With a need to please the government to secure an even further reduction in the sentence, the truth in Causey's testimony has the potential to be distorted. Does the government get more information, more truthful information, or more false information when they hang a condition onto a plea that allows an accused to receive an additional benefit based upon their testimony in court. Now clearly the government will say that they only reward for truthful testimony, but how will they truly know what is and is not truthful? After all, if they already had this truthful testimony they wouldn't need this new witness.
And CNN Money reports here that in a last minute plea, Marc Weisberg, a former exec at Qwest Communications avoided his trial set for this coming week and entered a plea agreement that anticipates him testifying against recently indicted CEO Joseph Nacchio. (see post here).
UPDATE: The Causey plea agreement is available on Findlaw here. (ph)
The Causey Plea - Why So Late?
Everyone now seems convinced that former Enron Chief Accounting Officer Richard Causey will in fact enter a plea (See CNN here, NYTimes here, Houston Chronicle here), although we will have to wait until later today to get the terms of the agreement. It is without doubt that a key term will be cooperation.
It also remains to be seen whether Skilling and Lay's joint defense agreement with Causey will result in a delay in the trial. Most likely the defense agreement included a provision that anticipated a possible plea by one of the three. There are several possibilities here. Among them are: 1) It is possible that the three were careful not to disclose privileged information and only used the agreement for investigation purposes -- it can be cost effective to use one set of investigators for three people; 2) The agreement will preclude disclosure by Causey of anything regarding the defense of the three - and the government will be limited in using this witness; 3) New counsel will need to be secured for Skilling and Lay so that there can be a cross-examination of Causey without violating the joint defense agreement. See also post here and here.
But why do pleas happen so late? Why does a defendant suddenly faced with the possibility of jail time decide to fold and avoid the risk of greater time? Oftentimes the reason for the late plea is because the government turns over discovery material just before trial. Although the government is required to turn over Brady, or exculpatory material, early on, witness statements that are not exculpatory do not get turned over in the same manner. Jencks material (witness statements) are not required to be turned over until after the witness has testified for the government. Because this could result in a long recess in the middle of the trial (and thus irritating a trial judge), the government often turns Jencks material over pre-trial. Unfortunately, however, the government waits until 3, 5, or 10 days before trial to give this material to the defense. (See study of when prosecutors turn over Jencks material - Podgor, Criminal Discovery of Jencks Witness Statements: Timing Makes a Difference, 15 GA St. L. Rev. 651 (1999)). Some prosecutors even ruin defense counsel's weekend before trial by dumping large volumes of material on them on Friday with a Monday trial looming. The result of seeing what a cooperating witness might have said to the government or a grand jury is that suddenly an accused wants to enter a plea. The risk of going to trial, and the risk of an even greater sentence, may be suddenly realized when someone sees this information.
Now we don't know if this happened here, but receiving Jencks material late in the process is a known fact. It's a card in the prosecution's deck that they can use or abuse as they see fit.
For commentary on the effect of such a plea, check out Tom Kirkendall's blog - Houston's Clear Thinkers here.
Addendum - The Washington Post here notes that the time of the court hearing is 3 P.M. today.
Addendum - Houston Chronicle reports here on likely terms of the plea agreement.
White Collar Sentencing in China
In the United States it has been a tough year for some individuals who have been found guilty of white collar offenses. The sentences have been well beyond what we saw in the past. Jamie Olis originally received a sentence of 24 years - although it has been reversed and he will be re-sentenced in January. Bernie Ebbers received 25 years and John Rigas, who is 80 years old, was issued a sentence of 15 years. These cases did not involve a fraud against the government, but rather were cases in the private sector of society. In looking at these enormous sentences, it appears that we are moving closer to a sentence we see issued this week in China.
China Daily reports here that a former minister will receive a life sentence for bribery. Additionally he will forfeit all his "personal belongings." AP reports here that other bribery cases in China have ended with an execution of the individual.
Should our sentences be moving closer to those issued in China, or should we be re-evaluating white collar sentences?
December 27, 2005
Avoiding Katrina Frauds
Katrina frauds have been a major focus of the Department of Justice (DOJ) (see post here). So it is not surprising to see in the news yet more indictments. But the number of indictments and source that they come from were a bit surprising. The Washington Post reports here that 50 people were indicted in California and some of them worked at a Red Cross call center.
But also in the news here (Washington Post), it seems that Washington intends to look through the piles of money spent in the aftermath of Katrina. It seems that "[f]ederal employees helping victims of Hurricane Katrina charged more than $39 million on government credit cards for disaster relief items." Some may argue that this number is high - but is it really? Remember the number of people left homeless with nothing.
There seems to be a lot of time and energy being spent reacting to frauds and possible frauds in the aftermath of Katrina. Is anyone spending the same time on thinking about how to properly prepare for the expenses and needs of other possible diasters, to learning from the mistakes of how the Katrina recovery efforts were managed, and to what could be done from an environmental stance to avoid floods like seen in New Orleans post-Katrina. Where is the line between mismanagement and fraud?
December 26, 2005
The Kidan-Abramoff History
Abramoff's co-defendant Adam Kidan plead guilty (see post here) and one has to wonder what kind of testimony he might offer to the government. Newsday offers here an interview with Kidan that shows the close relationship between him and Abramoff, a relationship that the paper reports goes all the way back to their college days as Young Republicans together. Is this an unusual time to be giving an interview? What will Abramoff do? (see post here)
Will Causey Plead?
On Friday here we reported on the talk of the town - - could it be possible that former Enron Chief Accounting Officer Richard Causey would plead guilty. Would he cooperate with the government, most likely a necessity for a plea? And would the case against Lay and Skilling be able to still go to trial or would problems arising from a joint defense agreement cause a delay? Well it seems that either the rumors are spreading, or there is some truth to this possibility. One finds reports of a possible plea here (CNN Money -Reuters) and here (Houston Chronicle). But whether it will happen remains to be seen.
The Houston Chronicle notes in its article that "Causey lacks the financial assets of Skilling and Lay."
One key problem often faced by those accused of white collar offenses is the cost of the defense. In fraud cases where a defendant has reaped huge amounts of money, there may be funds available to present a strong defense. But for those who are caught up in a fraud case and may not have received huge benefits, and also lack substantial funds, the cost of presenting a defense can exceed the means of the accused. What does one do then? Do you plead guilty merely because you can't afford to defend your innocence? There is a big gap between being able to afford a top attorney and being deemed indigent by a court and eligible to receive the fine assistance provided by a federal public defender.
Spitzer's Holiday Greetings
It was not your typical holiday greeting that Attorney General Elliot Spitzer was sending this week to some companies. According to the New York Times here, Spitzer sent subpoenas to several major record companies. For example, one entity reports here that:
"On December 20, 2005, the Attorney General of the State of New York served Warner Music Group Corp. (the 'Company') with a request for information in the form of a subpoena duces tecum and subpoena ad testificandum in connection with an industry-wide investigation as to whether the practices of industry participants concerning the pricing of digital music downloads violate Section 1 of the Sherman Act, New York State General Business Law §§ 340 et seq., New York Executive Law §63(12), and related statutes. The Company intends to cooperate fully with the Attorney General’s inquiry."
And Spitzer was also the subject of an article here.
December 25, 2005
White Collar Crime Survey
Each year the American Criminal Law Review puts out a survey on white collar crime. This year the topics covered are:
- Antitrust Violations
- Computer Crimes
- Corporate Criminal Liability
- Employment-Related Crimes
- Environmental Crimes
- False Statements and False Claims
- Federal Criminal Conspiracy
- Financial Institutions Fraud
- Foreign Corrupt Practices Fraud
- Health Care Fraud
- Intellectual Property Crimes
- Mail and Wire Fraud
- Money Laundering
- Obstruction of Justice
- Public Corruption
- Racketeer Influenced and Corrupt Organizations
- Securities Fraud
- Tax Violations
What is fascinating, is going back to last year here and checking the journal of last year to see what topics have been added or deleted. False Claims and False Statements were separate last year and have now been folded into one category. There no longer are notes specifically titled, "Federal Criminal Conflict of Interest," "Federal Food and Drug Act Violations" and "Procedural Issues." And what has been added - "Public Corruption." It is without doubt that Public Corruption has been a hot topic of the year.
The essay accompanying the volume this year is Motion Denied: Systematic Impediments to White Collar Criminal Defendants' Trial Preparation, by Robert G. Morvillo, Barry A. Bohrer, and Barbara L. Balter.