Saturday, February 12, 2005
The arguments, the fears, and the concerns post-Booker have been focused on whether judges will be handing out sentences below the sentencing guidelines. As noted here DAG Comey's memo used language calling it "difficult times."
In truth, however, the early returns show inconsequential change. As usual, Professor Doug Berman, is always on top of the issue in his sentencing blog where he reports on the "House Booker hearing" of this past Thursday. Interestingly he shows how different media eyes reported the same scene. The bottom line is that U.S. District Judge Ricardo Hinojosa, chairman of the Federal Sentencing Commission, spoke to the fact that most judges are sticking with the sentence that would be given pursuant to the guidelines. (See also here).
We looked at this issue in posts here, here, here and here although another did not necessarily concur when it came to corporate criminality. As the early returns continue to come in, it is important to remember several things:
1. It is too soon to judge who won this race, even though there is seldom a winner when it comes to punishment issues. So.... Congress.... sit tight until all the ballots are counted to determine if there is a need to provide damage control.
2. The fact that the guidelines are in a somewhat advisory status should not stop the Sentencing Commission from evaluating cases where there have been departures by judges to a sentence below the guidelines. Perhaps we will find that these cases of non-adherence to the guidelines are important to soften the effect of the strict guidelines structure.
3. If we do start finding that in more white collar than street crime cases the sentences are coming in lower than the guidelines, perhaps it is time to examine why this disparity is occurring. Could this be an indication that the guidelines are out of sync with punishment values? Maybe, just maybe, the problem is not judicial disparity but rather a problem in the sentences offered by the guidelines.
4. And, finally, in cases such as a 24 year sentence for Olis (see here), the rare case where a defendant's sentence is far removed from the white collar norms, perhaps the flexibility is needed to adjust the sentence to a "reasonable" level. (see Ann Woolner's reporting on the appellate arguments in this case here).
Friday, February 11, 2005
The Senate Permanent Subcommittee on Investigations issued a lengthy report on abusive tax shelters, which have been the focus of both Congressional and IRS investigations the past few years. A Subcommittee press release states that its report ("The Role of Professional Firms in the U.S. Tax Shelter Industry") highlights problems in the creation and sale of tax shelters by accountants, lawyers, and investment banks:
The bipartisan Subcommittee report released today provides new details about the abusive tax shelters promoted by KPMG, Ernst & Young, or PricewaterhouseCoopers, as well as the commitments each accounting firm has since made to end their abusive tax shelter business. It also provides new information on how other professional firms helped promote these tax shelters, including Sidley Austin Brown & Wood, Deutsche Bank, HVB, Wachovia Bank, Presidio and Quellos. The report also provides new information about how two charitable organizations, the Los Angeles Department of Fire & Police Pensions System and Austin Fire Fighters Relief and Retirement Fund, became involved with an abusive tax shelter.
These is just something irresistible about the quotes that emerge from the parallel accounting fraud trials of Bernie Ebbers in New York and Richard Scrushy in Birmingham, Alabama. In the HealthSouth case, former CFO Bill Owens completed his eighth day on the witness stand (time sure flies by when you're having fun) and the government finished its direct examination by playing the last of the six audio tapes Owens made over a two-day period in March 2003. A short time later, the FBI executed a search warrant at HealthSouth's headquarters, after which the board relieved Scrushy of his CEO position. Among other things, the tape recording has Scrushy telling Owens, "You've got accountants signing off on all this. You've got everything set up. You're smart, Bill, but you've got to lead your troops. I'll do whatever you want me to. I think you ought to go down fighting, Bill. You ought to go down fighting." While this statements is potentially nefarious, Scrushy's comments are not the proverbial smoking gun, and he is likely to testify to explain what he meant -- no doubt with lots of martial and sports references thrown in to complete the picture. The cross-examination of Owens has begun, and expect him to testify well into next week. An AP story here discusses the testimony and tapes. (ph)
Scott Sullivan, former CFO of WorldCom, continued his testimony tying Bernie Ebbers to the accounting fraud at the company. Sullivan recounted how WorldCom entered negotiations with Verizon Communications Inc. in 2001 about a possible merger, but Ebbers ended the talks because due diligence by Verizon likely would have revealed the fraud. Sullivan said that Ebbers used WorldCom's low stock price as the reason for calling off further negotiations. While Sullivan asserts that Ebbers knew about the accounting fraud at the company, the lack of documentation for that claim remains an issue in the government's case. The cross-examination of Sullivan by Reid Weingarten, Ebbers' lead counsel, will likely begin next week, and the effort to fulfill Weingarten's prophecy about the impeachability of Sullivan will be tested. An AP story (here) discusses Sullivan's continuing testimony. (ph)
A potential new high (or low) in chutzpah may have been reached in by George Fiorini, who agreed to plead guilty last year to mail fraud, tax evasion, and ITSP charges related to a ponzi scheme called the "Ten Percent Plus Plan" that bilked at least 170 investors -- as usual, many them elderly and unsophisticated. Now, the U.S. Attorney's Office is accusing Fiorini of seeking a tax refund based on the fraudulent scheme, which puts his plea agreement in jeopardy. Some people apparently just can't stop themselves. An article in the Cincinnati Enquirer discusses the case.
The underlying crime is not a white collar offense (weapons possession under Section 922), but the defendant certainly qualifies as a white collar professional: a District Attorney in the Texas Panhandle region. Richard J. Roach entered a guilty plea on Feb. 8 to a Section 922(g)(3) charge of being an addicted or unlawful user of narcotics in possession of a firearm, and admitted to the following (taken from the U.S. Attorney's Office for the Northern District of Texas (Amarillo) press release):
Roach admitted that he was addicted to a controlled substance, and that on January 11, 2005, he knowingly and intentionally possessed two firearms — a Beretta .38 caliber semi-automatic pistol and a Smith & Wesson, 9mm pistol. Roach had occupied the position of district attorney for the 31st and the 223rd Judicial District Court in the Texas Panhandle since 2000. Roach admitted that several months ago he began using methamphetamine on a regular basis and became addicted. On December 16, 2004, one of Roach's employees found a syringe floating in the toilet located in their private office bathroom. The DEA lab found methamphetamine residue in the syringe. Roach further admitted that on December 20th and 31st of 2004, and January 3, 2005, Roach injected himself with a syringe containing substances including methamphetamine.
This is a very scary, sad story of a respected attorney who became addicted to the latest scourge on the drug landscape. (ph)
Thursday, February 10, 2005
New York attorney Lynne Stewart was convicted of conspiracy, giving material aid to terrorists, and defrauding the government for smuggling messages from her client -- Omar Abdel-Rahman, a radical Egyptian sheik sentenced to prison in 1995 for conspiracy to kill Egyptian President Mubarak and blow up landmarks in the New York City -- to his followers regarding the sheik's withdrawal of support for a cease-fire by his adherents in Egypt. Stewart argued that her conduct was part of her representation of a client and not an effort to support terrorism. The case has been widely followed by defense lawyers, especially in light of post-9/11 efforts by the Department of Justice to combat terrorism. An AP story (here) discusses the case. Co-editor Ellen Podgor raises the following points: What message will this verdict send to the defense bar? Most likely the government would like it to be - watch what you do with your clients; because we are watching you! But perhaps this verdict will send another message. That message might be, avoid signing a SAM (Special Administrator Matter) Order because this means the government might be listening to your conversation. Will this conviction possibly curtail the proper representation of clients by defense counsel? (ph)
Addendum - The National Lawyers Guild issued a press release that "condemns [the] verdict in Lynne Stewart trial," but "urges defense attorneys to continue representing unpopular clients." (esp)
The SEC entered into settlements with two more mutual fund companies regarding improper market timing by favored customers that effectively permitted the customers to bypass the 4:00 p.m. settlement time and engage in late trading to the detriment of other investors in the funds. The settlements by Bank of America (for the mutual funds marketed by NationsBank) and Columbia Management Advisors (Coumbia Funds) are available here and here. Bank of America agreed to disgorge $250 million and pay a civil money penalty of $125 million, bringing its total to $375 million (in addition to other administrative remedies), while Columbia will disgorge $70 million and pay a civil money penalty of $70 million. Ouch! The Commission also entered into settlements with individual managers at Columbia (see filings here against Gustafson, Palombo, and Martin). (ph)
The Owens Tapes have been admitted at the trial of former HealthSouth CEO Richard Scrushy, including Scrushy's statement regarding the non-existence of certain conversations. The defense had fought vigorously to keep the tapes made from a wire worn by former CFO Bill Owens from being admitted at trial. After foundational testimony from Owens and an FBI technician, and apparently a lengthy lunch-time argument on admissibility, U.S. District Judge Karon Bowdre admitted them into evidence and the jury has begun hearing Scrushy's unadorned statements. The defense has argued that the tapes actually exonerate Scrushy, and it is unlikely any contain the type of pure admission of guilt that is seen on TV cop shows. With the admission of the tapes, it is much more likely that Scrushy will have to testify to explain what he meant and why he said certain things -- like why a conversation should not be acknowledged as having occurred. An AP story here discusses the admission of the tapes, and more will be played for the jury over the next day or two. Expect the cross-examination of Owens to begin by next week, and it may prove to be lengthy, with more than a few lurid details coming out. (ph)
The Sixth Circuit issued a decision on Feb. 8 (U.S. v. Douglas) reversing the dismissal of an indictment of two former United Auto Workers representatives charging them with mail fraud, conspiracy, and Hobbs Act extortion related to union demands made as part of a contract negotiation. Donny Douglas and Jay Campbell were officials of Local 594, and during negotiations for a contract at a Pontiac, Mich., truck factory, allegedly they demanded that the company hire Campbell's son and the son-in-law of a former Local official as "skilled tradesmen" even though neither met the qualifications for that position (which pays over $100,000 per year). The mail fraud count alleged that the the defendants deprived union members of property, namely the right to compete for the skilled tradesman positions that were improperly given to the relatives, and honest services fraud. The district court dismissed the money/property allegation, relying on the Supreme Court's decision in Cleveland v. United States, 531 U.S. 12 (2000), that held unissued government licenses were not property. The Sixth Circuit reversed, stating that "We are persuaded by the government’s argument that, were the right to compete to have such little value—indeed, value equivalent to an unissued government license—then the union would not bother to bargain collectively for this hiring system . . . The right to compete guaranteed by the collective bargaining agreement in this case is sufficient to constitute property for purposes of the mail fraud statute." The district court dismissed the honest services claim because the government only alleged an unfair labor practice and the indictment did not identify how the defendants breached their fiduciary duty. The Sixth Circuit rejected that reasoning too, holding that "The indictment has only to allege that defendants devised a scheme to defraud, involving use of the mails for the purpose of executing the scheme. The indictment sufficiently makes these allegations." (ph)
Wednesday, February 9, 2005
Martha Stewart's sale of ImClone Systems stock has spawned a cottage industry of cases beyond the criminal prosecution (and now appeal), including the SEC's civil action alleging insider trading and a shareholder lawsuit against her company, Martha Stewart Living Omnimedia, alleging violations of Rule 10b-5 for failing to make proper disclosure about her legal situation. The attorneys for the securities class action plaintiffs, the well-known Milberg Weiss firm, sought to discover otherwise privileged communications with Wachtell Lipton, the company's counsel during the period of the SEC/U.S. Attorney investigation into her stock sales in 2002. An article in the New York Times (Feb. 8 here) discusses a ruling by U.S. District Judge John Sprizzo permitting discovery of the communications by the company with Wachtell Lipton but not Stewart's communications with her own lawyers. The ruling appears to follow the shareholder exception to the privilege, which in limited circumstances allows shareholders to gain access to communications with the company's lawyers if there is "good cause" (see the venerable decision in Garner v. Wolfinbarger, 430 F.2d 1093 (5th Cir. 1970)). Certainly, Stewart's communications with her personal attorney would not be subject to that exception, which is limited to corporate counsel. An interesting question, which is not clear from the article but hinted at, is whether Wachtell Lipton represented both the company and Stewart personally during the government's investigation. If the firm represented Stewart personally, that could create a potential conflict for the firm and, more importantly, a very sticky situation for analyzing whether her communications with corporate counsel were in her personal or corporate capacity. The usual rule is that communications by a corporate officer are made on behalf of the company and only protected by the organization's attorney-client privilege, but personal representation of the officer changes the analysis. (ph)
The SEC has raised the maximum Civil Monetary Penalty it can impose for violations of various provisions of the federal securities laws (including the Sarbanes-Oxley Act), as detailed in a final rule adopted by the Commission that becomes effective on Feb. 14 -- Happy Valentine's Day! (Rule available here). The changes range from $5,000 to $50,000, depending on the particular provision and type of defendant (individual, corporation, broker-dealer, etc.) that permits the Commission to seek a CMP. While the increases are not particularly significant, and many cases involving CMPs are for less than the statutory maximum, the change will likely affect the calculus for settlement negotiations because the SEC's starting point on an acceptable penalty most likely will be raised. (ph)
As discussed in an earlier post (here), former Georgia School Superintendent and 2002 gubernatorial candidate Linda Schrenko was charged in a federal indictment with corruption charges involving the misappropriation of over $600,000 in federal education funds that were used for her campaign and also for cosmetic surgery. Her top deputy entered a plea agreement on Jan. 10 (see post here), and his cooperation may have led to new charges. The U.S. Attorney's Office for the Northern District of Georgia (Atlanta) upped the ante on Feb. 8 when the grand jury issued a superseding indictment alleging an additional 20 counts of money laundering, which could substantially affect the sentence if she is convicted of those charges. Among the methods alleged by the government to disguise the source and use of the funds were the issuance of 104 blank checks for $590 each that were to be used for "focus groups" related to the campaign. An article in the Atlanta Journal-Constitution describes the new allegations against Schrenko and her codefendants. (ph)
A press release issued by the U.S. Attorney's Office for the Southern District of Florida (Miami) discussed a conviction on Feb. 7 of David Ellisor for running a scam on local elementary school students who purchased tickets to a program at the Coconut Grove Convention Center called "Christmas From Around the World." The press release states:
At trial, the government proved that Ellisor targeted students and teachers at Miami-Dade County public and private schools, promising that the event would be a “once in a lifetime opportunity” and that students attending the event would receive raffle tickets to win “thousands of dollars of sponsored gifts.” Over 2,700 victims, from at least twenty (20) Miami-area schools, paid the $10 per person fee requested by Ellisor, and made arrangements to attend the event, supposedly scheduled for December 3-5, 2003. Local business also provided money to Ellisor based upon his promises about the event. When the first group of students arrived at the Convention Center on the morning of December 3, they found the building locked, with no information about the event, and Ellisor nowhere to be found. Ellisor never met the requirements for staging an event at the Convention Center. Ellisor also collected thousands of dollars in fees for the event, which he then took as cash or used for personal expenses, including a hotel suite, a Jaguar and a watch which he estimated at $5,000.
Targeting kids with a fake holiday show is about as low as one can go, and the now-advisory guidelines might not be of much help to Mr. Ellisor. (ph)
The Irish drug company Elan Corporation, plc, settled SEC civil charges that it made materially false statements regarding its operations in 2000 and 2001. The three primary disclosure violations involved statements about income and gains that failed to note their non-recurring nature, the failure to disclose that $490 million of transactions involved round-trip payments for which there was no real economic gain with partners in a joint venture, and a sale of securities with an affiliated party for which the company did not disclose the relationship. The SEC Litigation Release discussed the effect of the company's disclosure violations:
Elan represented in its public statements that it was generating record amounts of revenue, net income and operating cash flow from drug sales and licensing activities. Elan also claimed that it was making significant progress towards achieving its goal of transforming itself into a fully integrated pharmaceutical company and generating $5 billion of annual revenue by 2005. The complaint alleges that these statements were materially misleading because Elan failed to disclose, or inadequately disclosed, certain transactions that were critical to Elan's perceived success. As a result, investors were led to believe that Elan had achieved record results through improvements in the company's business, when in fact it had not.
Elan agreed to pay $1 in disgorgement -- it is not clear what the basis for that remedy is, and it is an amount much lower than usually seen in SEC enforcement actions involving disgorgement -- and a $15 million civil penalty (now that's more like it). (ph)
Tuesday, February 8, 2005
A federal district court jury in Rome, Ga., found former preacher Abraham Kennard guilty of 122 counts of mail fraud, money laundering, and tax evasion for running a ponzi scheme that defrauded primarily poor churches with largely African-American congregations in 41 states. Kennard charged the churches a $3,000 fee to join his company, promising forgivable loans or grants up to $500,000, but much of the money was used to finance Kennard's personal spending and little ever made its way back to the churches. Shortly after his indictment in January 2004, Kennard fled and was arrested approximately six weeks later in Tupelo, Miss. At trial, he defended himself, asserting that "[t]hey've mistaken a dream for a scheme." See post on ReligionNewsBlog. A co-defendant, Scott Cunningham, who is an attorney in Dalton, Ga., is scheduled for trial later this year. A story in the Atlanta Journal-Constitution also discusses the case. (ph)
W.R. Grace & Co., an industrial company currently in bankruptcy, and seven of its current and former executives were indicted by a federal grand jury in Montana for violating the Clear Air Act related to a now-closed mine in Libby, Montana, that emitted asbestos into the air (indictment here). The company and Alan Stringer, the former manager of the mine, were also charged with Obstruction of Justice for allegedly provided false and misleading information to the Environmental Protection Agency (EPA) during its investigation of the mine for possible CERCLA violations and preventing a Superfund team from gaining access to the mine. According to the government's charges, asbestos from the mine caused 1,200 people to become ill. (ph)
The HealthSouth and WorldCom trials continue along their parallel paths as former WorldCom CFO Scott Sullivan took the witness stand on Monday, Feb. 7, to begin what promises to be a long engagement testifying against Bernie Ebbers. On his first day of testimony, Sullivan -- the government's star witness because he is the principle link between Ebbers and the multi-billion dollar accounting fraud -- stated that Ebbers had a "hands on grasp of financial information." (AP story here) At the HealthSouth trial, former CFO Bill Owens admitted on Friday, Feb. 4, that he had not filed income taxes for the period from 1995 through 2002, and had not repaid loans totaling $1 million from HealthSouth. Sullivan made his own admissions, stating that he used marijuana and cocaine over a two decades and, perhaps more tellingly, lied to the Department of Defense about his drug use as part of a security clearance check. Being an admitted liar is not helpful to the government's case that hinges largely on the testimony of Sullivan.
Once the government's direct examination ends, expect the defense to mount significant attacks on Owens and Sullivan, both of whom entered into plea agreements with the government and will be open to questions regarding their veracity (the always-effective "Which time were you lying?" question). (Birmingham News story here (Owens) and Wall Street Journal story here (Sullivan)). (ph)
The SEC and the U.S. Attorney's Office for the Central District of California (Los Angeles) announced on Feb. 7 the filing of criminal and civil charges against Courtney D. Smith, an investment advisor who wrote the well-known market newsletter Wall Street Winners (company website here). According to the Litigation Release issued by the SEC, Smith received approximately $1.1 million in cash and stock that was funneled through his girlfriend's small vitamin exporting company to tout the shares of GenesisIntermedia, Inc. (GENI), a now defunct public company:
The Commission alleges that Smith assisted GENI's Chief Executive Officer and his accomplice (a Saudi Arabian national reputed to be an international arms dealer and financier) in a fraudulent stock manipulation and lending scheme that occurred between September 1999 and September 2001. According to the complaint, GENI's CEO secretly paid Smith approximately $1.1 million in cash and GENI stock to tout GENI shares on television. Smith's public statements, many of which were false or misleading, artificially inflated the price of GENI shares and facilitated the misappropriation of approximately $130 million by GENI's CEO and his accomplice.
The SEC's complaint is here, and a copy of the criminal filing will be posted when it is available. (ph)
UPDATE: A press release issued by the U.S. Attorney's Office describes the criminal charges: "The indictment charges Smith with conspiring with a high-ranking officer and substantial shareholder of GENI to violate the securities laws through his paid promotion of the stock. Smith is also charged with eight substantive counts of violating federal securities laws for failing to disclose the payments he received for promoting GENI on television. If he is convicted of the nine counts in the indictment, Smith faces a maximum possible sentence of 45 years in federal prison."
Monday, February 7, 2005
As discussed extensively by Doug Berman on the Sentencing Law & Policy blog (here and here), the question regarding how closely the "plain error" review will be undertaken by appellate courts in light of Booker is still very much up for grabs. Doug discusses the division in the Sixth Circuit between cases that find plain error almost as a matter of course and a decision that finds no plain error because the sentence was within the range that the judge likely would have given anyway (what Doug calls the "process versus outcomes" distinction).
Two decisions that involve more traditional white collar violations that are emblematic of this split are U.S. v. Bruce (6th Cir.) and U.S. v. Hughes (4th Cir.). Bruce involved a guilty plea to bank fraud and illegal access device charges involving fake credit cards. Hughes was a bankruptcy fraud case involving the transfer of assets without disclosure to the trustee. Plain error analysis requires that a defendant prove (1) an error that is (2) plain and (3) affects substantial rights (i.e. prejudice), and then a discretionary fourth step in which the appellate court will correct a plain error only if it "seriously affects the fairness, integrity, or public reputation of judicial proceedings." (Main cases here are Johnson v. U.S., 520 U.S. 461 (1997) and U.S. v. Olano (507 U.S. 725 (1993)). This fourth step is where the Booker appeals will get hung up in cases where the sentencing took place before the Supreme Court's decision in Blakely. Because no defense counsel (or district judges) knew Blakely was coming, much less Booker, no one knew to make the requisite objection to the mandatory nature of the Sentencing Guidelines to avoid plain error. This prong has been used by courts to review the evidence and outcome in white collar cases, perhaps most notably in the area of Gaudin-error involving instructions on the materiality element in any type of fraud prosecution. Few convictions were reversed for this type of error.
The Sixth Circuit panel in Bruce took the outcome (or instrumental) approach to plain error, finding that the fourth prong had not been met because the district judge likely would have come out the same way. The decision states:
Two other considerations buttress our conclusion on the fourth prong of the plain error standard. First, we view it as unlikely that the district court would have imposed a lower sentence if it had realized that the guidelines are advisory and not mandatory. Exercising its more limited discretion under the mandatory regime, the district court elected to sentence Defendant at the top of the applicable 27-to-33-month guideline range. Surely, if the district court was not inclined to impose a shorter sentence despite its power to do so within the guidelines’ mandatory sentencing scheme, it would not have elected to reduce Defendant’s sentence under a more open-ended advisory system does not distinguish between offense-related conduct and other sentence enhancing facts, we cannot help but believe that a judge’s findings concerning obstructive conduct toward a probation officer during a court-ordered and judicially-supervised presentence investigation do not trigger the same "fairness" concerns as, say, a judge’s determination that a defendant brandished a weapon during the commission of a crime.
Bruce is written by U.S. District Judge Rosen, who was sitting on the panel by designation. He was appointed to the bench in 1989, and has spent his career working under the Guidelines, and I suspect is fairly accepting of the approach taken by them. The Fourth Circuit decision in Hughes takes a different approach toward the fourth prong of the plain error analysis, stating (in a footnote, by the way):
In determining whether the exercise of our discretion is warranted, it is not enough for us to say that the sentence imposed by the district court is reasonable irrespective of the error. The fact remains that a sentence has yet to be imposed under a regime in which the guidelines are treated as advisory. To leave standing this sentence simply because it may happen to fall within the range of reasonableness unquestionably impugns the fairness, integrity, or public reputation of judicial proceedings.
Chief Judge Wilkins, the first Chair of the Federal Sentencing Commission, is the author of Hughes, and his approach seems to take a blanket view of all challenges to sentencings after Booker that are subject to plain error: reversal and resentencing. That seems to run counter to the usual plain error analysis, which reverses a decision because of the error only in the rare case. This looks more like an automatic (or structural) error approach that does not involve the usual plain error analysis.
White collar crime cases usually involve a range of sentencing determinations beyond just the conviction, such as role in the offense, abuse of trust, use of a special skill, and most importantly in economic crimes the loss (actual v. potential, etc.). If the circuit courts adopt the automatic review approach of Hughes, then a number of sentences in the past couple years (think about the Olis sentencing to 24 years imprisonment) in cases on appeal will be subject to resentencing. I wonder whether the circuits want to open up that many cases to resentencing. At the same time, if the approach taken by Bruce in the Sixth Circuit (which cannot seem to even decide on a unified analysis) is followed, then this will be Gaudin-error all over again: few sentences reversed. (ph)