Saturday, February 26, 2005
During a hearing on Friday, defense counsel for Bernie Ebbers stated "in good faith" that Ebbers will be called to testify on Monday. The decision is the most important one the defense will make, and may reflect an assessment that former CFO Scott Sullivan's testimony needs to be countered by more than just the defense witnesses called so far who have indicted only indirectly that Sullivan was the main architect of the fraud at WorldCom. The "honest-but-ignorant" defense is not an easy one to pull off, and the key will be how Ebbers comes across to the jury in his likely assertions that, while he is an otherwise bright person and something of a micromanager (tap water for the water coolers), he did not know about the extensive fraud in the company's accounting. Another factor that may be playing a role in the decision to testify is that the court has so far refused to grant immunity to two witnesses the defense wants to call, including former chief operating officer Ronald Beaumont. A Wall Street Journal story here discusses the defense announcement that Ebbers will testify.
The decision for Ebbers to testify could change over the weekend because the statement was not made before the jury and therefore -- at least in a perfect world in which jurors adhere to the judge's admonition not to read any media accounts of the trial -- no direct harm would come to the defense from jury expectations of hearing him testify. I had predicted in an earlier post that Ebbers would not testify, proving once again that my prognostications are better used as a negative indicator. (ph)
Miami attorney Sam Burstyn appeared in federal court in the Southern District of Florida this past week to face an indictment charging money laundering and obstruction of justice. Burstyn has represented celebrity clients, including Robin Givens and the wife of tennis player Boris Becker, and is known for his penthouse office on Brickell Ave. in addition to his criminal defense work. The government alleges that he was the "house counsel" for a marijuana importation enterprise led by Jeffrey Tobin. The charges against Burstyn include a $500,000 money laundering charge related to a loan that was made with alleged drug profits, and that Burstyn obstructed justice by advising Tobin to flee the United States and organized meetings with grand jury witnesses to provide false testimony. According to a press release issued by the U.S. Attorney's Office:
On or about October 22, 1998, Burstyn lent approximately $498,250, in the form of a counter check, to an owner of the business, Auto Fund of Atlanta, Georgia, at a substantial interest rate. This check was drawn on the lawyer’s trust account of Samuel I. Burstyn, P.A. Burstyn obtained the proceeds to make this loan from the financial accounts of his relatives. Burstyn used a fictitious company named “J.B. Partners” as an entity to make the loan. As a condition for making the loan, defendant Burstyn obtained collateral of $500,000 in drug proceeds from Jeffrey Tobin.
An AP story here discusses Burstyn's law practice and his attorney's statement that "If you were to see him now, you would be struck by how confident he is that he will be acquitted." (ph)
Friday, February 25, 2005
Ebbers- In order to succeed in the prosecution of Bernie Ebbers, the government needs to prove mens rea - that the defendant knew. Two witnesses for the defense, however, state otherwise. (See more here and here).
Scrushy- The government presented some damaging evidence against the defendant with testimony that goes to whether the accused had knowledge of improprieties occurring at HealthSouth. It's tough to get around a statement like, "We can all go to the lake and retire," (See more here). But it is too soon to judge how things are going in this case. Unlike the Ebbers trial, this case is still in the prosecution phase.
The local United States Attorney offices are not wasting any time in bringing cases of alleged defense fraud. (See post here and here). In a press release of the United States Attorney's Office for the District of Colorado, "Bill Leone, Acting United States Attorney for the District of Colorado, and Steven O’Neill, Resident Agent in Charge of the Department of Defense’s Office of the Inspector General, announced" the indicment of an individual on "charges of mail and wire fraud for" allegedly "implementing a scheme to defraud the Department of Defense." According to the press release the defendant is accused of causing "numerous invoices to be sent to the Department of Defense which falsely reflected that the goods had been shipped on the date invoiced." " The indictment alleges that" the accused "ultimately over-billed the Department of Defense on hundreds of items, and sometimes failed to deliver any supplies at all."
United States Attorney John L. Brownlee announced the indictment by a federal Grand Jury of an attorney in Lynchburg, VA, (who they list as being 72 years old). The press release states that "'[t]he indictment details a scheme by which' the two individuals accused 'obtained $1,355,000 from four families by falsely promising them that they could realize a very high return on their money while their invested funds remained risk free in" the "attorney trust accounts."
The conduct alleged in the press release talks about the use of the accused trust account, but also speaks to activities that may have crossed state lines. The press release states that the accused individuals face a "three count indictment with conspiracy to commit wire fraud and aiding and abetting each other to commit wire fraud."
Thursday, February 24, 2005
Second Circuit Takes a Different Approach to Attorney-Client Privilege Claim Involving Government Official
During the government's investigation of former Connecticut Governor John Rowland, the grand jury subpoenaed the counsel to the Governor to testify regarding conversations she had with Rowland and members of his staff about the receipt of gifts, which was the focus of the investigation and the basis for the charge to which Rowland eventually pled guilty. The district court enforced the subpoena, but on appeal the Second Circuit (on Aug. 26, 2004) issued a summary order quashing the subpoena on attorney-client privilege grounds. On Feb. 22, the court issued its written opinion in In re: Grand Jury Investigation (available here on court website) explaining the basis for its decision. The Second Circuit rejected the approach of the Seventh, Eighth, and D.C. Circuits and upheld the attorney-client privilege assertion by a government attorney advising an official in relation to that person's duties. The other circuits have found the government's interests in investigating wrongdoing through the grand jury overcame the protections of the privilege when the investigation concerned the conduct of officials in the office. The D.C. and Eighth Circuit cases involved the Independent Counsel investigation of Whitewater (and "related" conduct) and the consultation by the President and First Lady with White House counsel. The Second Circuit rejected a balancing test, explaining
In arguing that we ought not "extend" the attorney-client privilege to the present situation, the Government asks us, in essence, to assign a precise functional value to its protections and then determine whether, and under what circumstances, the costs of these protections become too great to justify. We find the assumptions underlying this approach to be illusory, and the approach itself potentially dangerous. The Government assumes that "the public interest" in disclosure is readily apparent, and that a public official’s willingness to consult with counsel will be only "marginally" affected by the abrogation of the privilege in the face of a grand jury subpoena. Because we cannot accept either of these assumptions, we decline to abandon the attorney-client privilege in a context in which its protections arguably are needed most.
The court acknowledged that its decision conflicted with the Seventh Circuit's position and was in "sharp tension" with the Eighth and D.C. Circuit analysis, but it decided that the protections of the privilege outweighed the need of the grand jury to obtain evidence. While uncommon, cases involving the governmental attorney-client privilege do arise -- especially with the federal government's efforts to combat state and local corruption-- so that at some point the Supreme Court may have to intervene to settle the scope of the privilege.(ph)
We left off in our post of 2/21 discussing the final portions of the government's case in the trial of Ebbers. The prosecution's case has now ended, and the court has denied the defense motion for a directed verdict. The defense, now presenting its case, started with its first witness being Cynthia Cooper, the former head of internal auditing at WorldCom. See AP story for more.
If there was any thought that defense procurement was no longer a top priority, it was just destroyed with the announcement by DOJ of the creation of a "special task force aimed at combating fraud among defense and homeland security contractors." GOVEX.com reports on U.S. District Attorney Paul McNulty's goals in creating this task force. We previously reported on the U.S. Attys. White Paper on his reasons for setting up a procurement fraud working group- here.
(esp) (With thanks to Neal Sonnett for sending this alert of the GOVEX.com site).
Petitioner Arthur Andersen filed its Brief in the United States Supreme Court and without doubt this will be an interesting case. The Summary of the Argument states:
"It is plain as day that the Government did not charge Andersen with obstruction of justice for discarding documents during the relevant time period because no official proceeding of the SEC was pending. . . ."
A paragraph later we see:
"The United States attempted to evade that settled law by instead charging Andersen with 'witness ampering' on the remarkable theory that although it was perfectly lawful for Andersen to have a document retention policy that preserved only the final audit work papers, and perfectly lawful for Andersen's employees and professionals to follow that policy, it was somehow a serious felony for Andersen's in-house attorney and supervisors to remind its employees of the policy."
The legal arguments within this brief cover issues regarding the word "corruptly," whether the instruction on the "requisite nexus to an official proceeding," was proper, and the Rule of Lenity. But a message is also being sent - how far can the Government go... and did they go too far this time?
The Brief. Download andersen_merits_opening_brief.PDF
Wednesday, February 23, 2005
The National Association of Criminal Defense Lawyers (NACDL) has hired Stephanie Martz as its first White Collar Crime Project Director. Introduced at the recent NACDL meeting in New Orleans, Ms. Martz will coordinate white collar related initiatives for the defense organization. NACDL's announcement of her appointment describes are role as follows:
"Stephanie will address issues related to overcriminalization of economic conduct and related prosecutorial practices, and she will identify and document abuses and formulate reform proposals. Her areas of focus will include: monitoring overcriminalization, overfederalization, and erosion of mens rea; identifying attacks on the attorney-client privilege; highlighting disproportionate and inflexible sentences; tracking legislation on Capitol Hill; monitoring DOJ and other federal agency initiatives; staffing the NACDL White Collar Crime Committee; outreach to the white collar defense bar and law firms; and assisting in the development of white collar defense-oriented CLE programs."
Ms. Martz brings strong background and expertise to this new position. As described in the NACDL press release:
"Stephanie previously served as Staff Counsel of the National Litigation Center of the Chamber of Commerce of the United States and also was an Associate in the law firms of Mayer, Brown, Rowe & Maw and with Miller, Cassidy, Larroca & Lewin (which merged with Baker Botts LLP). From 1998 - 1999, Stephanie clerked with the Hon. Patricia Wald of the US Court of Appeals for the DC Circuit and in 1997 - 1998, she clerked with the Hon. James Robertson of the US District Court in DC. From 1991 - 1994, Stephanie was a stringer for The New York Times and was a reporter for the Charleston Gazette form 1992 - 1994. She is a 1997 graduate of Stanford Law School, where she graduated with distinction and where she served as Executive Editor of the Stanford Law Review, and she received her AB in American Studies in 1991 from Georgetown University, where she graduated magna cum laude."
The closer it gets to April 15th, the more tax indictments there seem to be. One can only guess that it's the government reminder to file and also to include everything in the reporting. Some call this general deterrence.
But it seems that the individuals selected from prosecution are not always the classic citizen types. For example, Bill Rankin of the Atlanta Journal Constitution reports that the individual being indicted is a former employee of the Internal Revenue Service. According to the United States Attorney for the Northern District of Georgia, the AJC reports that the accused "accessed the accounts of more than 40 taxpayers and then sold the information to others so they could file fraudulent tax returns."
Interestingly this is not the first time that someone employed at the IRS is the subject of a criminal charge. In 1997 a "[c]ontract representative in the Boston office of the taxpayer Services Division of the" IRS was accused of accessing information from IRS computers and charged with mail, wire, and computer fraud. The conviction in the case was reversed when the First Circuit held that "mere browsing" in a government computer was not a basis for a "conviction on a 'deprivation of intangible property ' theory". (106 F.3d 1069 1st Cir. (1997)).
Other IRS defendants have not been as fortunate. For example, in United States v. Mangan, 575 F.2d 32 (2d Cir. 1978) a conviction of a former IRS agent was upheld for the submission of tax returns of fictitious individuals for the purpose of obtaining tax refunds on the filed returns.
The corruption trial of former Philadelphia City Treasurer Corey Kemp, two Commerce Bank executives, and two other defendants began in U.S. District Court on Tuesday with opening statements by the government and three of the five defense counsel. Kemp was one of 12 defendants indicted (here) on honest services fraud charges in June 2004 as part of a wide-ranging corruption investigation by the FBI that included a bug placed in Mayor Street's office. The allegations involve a claimed "pay-to-play" scheme in which, among other things, Commerce Bank made a mortgage loan to Kemp in exchange for receiving $150 million in city deposits. Defense counsel assailed the government investigation in the opening statements, with Kemp's lawyer asserting that the government's case is a "situation where the elephant has given birth to the mouse. And it's a dead mouse at that." I'm not sure how the biology of that one works. The Philadelphia Inquirer has extensive coverage of the trial here. (ph)
Boxing promoter Robert Mitchell received a 37-month sentence for his conviction last November on conspiracy and sports bribery charges for fixing fights involving boxer Thomas Williams. The three-year knock-out punch (I couldn't resist) came for fixing 11 fights, including a match with Richie Melito that was an undercard for an Evander Holyfield heavyweight title fight in Las Vegas in 2000. While Mitchell's lawyer said, "I don't think he represents everything that is wrong with boxing," he certainly is not part of what is right about the sport. Williams, known as the "Top Dawg," was also convicted and sentenced to a 15-month term of imprisonment. An AP story here discusses the sentencing.
Tuesday, February 22, 2005
The First Circuit issued an opinion today in U.S. v. Antonakopoulos involving a Booker plain error claim in a bank fraud prosecution in which the defendant's base offense level was increased substantially by the application of Sec. 2B1.1 loss calculation. The court summarized its analysis of when a Booker error will trigger a reversal for plain error, and the standard is a tight one:
To summarize our position at the outset, we intend to apply, in accordance with Justice Breyer's admonition, conventional plain-error doctrine where a Booker error exists but has not been preserved. See id. at 769; United States v. Olano, 507 U.S. 725, 731-32 (1993). The Booker error is that the defendant's Guidelines sentence was imposed under a mandatory system. The error is not that a judge (by a preponderance of the evidence) determined facts under the Guidelines which increased a sentence beyond that authorized by the jury verdict or an admission by the defendant; the error is only that the judge did so in a mandatory Guidelines system. A mandatory minimum sentence imposed as required by a statute based on facts found by a jury or admitted by a defendant is not a candidate for Booker error. The first two Olano requirements -- that an error exists and that it is plain at the time of appeal -- are satisfied whenever the district court treated the Guidelines as mandatory at the time of sentencing. But to meet the other two requirements -- that this error affected defendant's substantial rights and would impair confidence in the justice of the proceedings -- we think that ordinarily the defendant must point to circumstances creating a reasonable probability that the district court would impose a different sentence more favorable to the defendant under the new "advisory Guidelines" Booker regime. We follow the more flexible standard for plain error articulated in United States v. Dominguez Benitez, 542 U.S. ___, 124 S. Ct. 2333 (2004). We engage in case by case review and we reject certain automatic reversal rules.
The First Circuit stated that a Blakely error does not require automatic reversal of a sentence under Booker on the ground that
It is far from necessarily true, as a per se remand rule assumes, that a judge who found the facts underlying an enhanced sentence would have reached a different result under a post-Booker regime. In these situations a judge's factual findings, unless they were found to be clearly erroneous, are far more likely than not to be the same if the case were remanded. The fact that the judge initially did the fact finding on a certain factor is surely a different matter than what the judge would have done with that factor if the Guidelines were not mandatory. The use of judicial fact finding, then, ordinarily cannot alone meet the "reasonable probability" standard of the third Olano prong.
The court did note one situation that will in all likelihood lead to a remand for resentencing under Booker:
Finally, history shows that the mandatory nature of the Guidelines has produced particular results which led trial judges to express that the sentences imposed were unjust, grossly unfair, or disproportionate to the crime committed, and the judges would otherwise have sentenced differently . . . Where the district judge has said as much about a Guidelines sentence, that is a powerful argument for remand. If the resulting sentence after remand is itself unreasonable, the government can appeal. By like token, if the district judge has said at sentencing that he would have reached the same result regardless of the mandatory nature of the Guidelines, that is a powerful argument against remand.
The court emphasized that an argument that the trial judge would have given a lower sentence if freed from the mandatory nature of the Guidelines will, if made persuasively, trigger a remand for resentencing. That is the apparent invitation in this case, in which the court found the fraud loss calculations to be entirely reasonable and, indeed, the district judge gave the defendant the benefit of the doubt on a couple transactions that could easily have gone against him. The First Circuit gave the defendant the opportunity to address this question in a supplemental brief, and counsel in other cases will now be alerted to make the "it would have been different if the judge were sentencing under advisory guidelines" argument. [Sorry about the quirky fonts in the case quotes. I haven't quite figured that one out yet.] (ph)
Two decisions by the Sixth Circuit issued last week deal with sentencing enhancements in white collar crime cases, most importantly the loss calculation under Section 2B1.1 that affects so many sentences in economic crimes. In U.S. v. McDaniel (here), the defendants were convicted of conspiracy, theft of U.S. mail, and bank fraud related to a scheme to steal checks from the mail, alter the payee, and then cash them. The sentences were enhanced based on the amount of the loss, number of victims (> 50), obstruction of justice (for one defendant), and leadership role in the conspiracy (for the second defendant). The Sixth Circuit held that these enhancements were not based on the jury's guilty verdicts, and therefore violated Booker's Sixth Amendment analysis. More importantly, the court found that the enhanced sentences -- which took the defendants well beyond the base offense level (and resulting sentence) under the Federal Sentencing Guidelines -- constituted plain error. The Sixth Circuit has been inconsistent in applying the plain error standard (see Doug Berman's many thorough discussions on this issue on the Sentencing Law & Policy blog), but this case seems to set forth a clearer standard for white collar cases in which the usual enhancement for amount of the loss can trigger a remand for plain error. Comparing the base offense level for most economic crimes (6 or 8) with the higher sentence after the loss calculation gives a strong plain error argument under both the third and fourth prong's of the Olano test, as the Sixth Circuit recognized. That said, McDaniel also has dicta (what the court called "merely providing advice to the district court to guide its sentencing determination on remand") in which the Sixth Circuit endorsed the sentencing determinations by the district court under the Guidelines. This indicates that the second half of Booker -- the "reasonableness" prong -- may not result in many changes to sentences if the district judges adhere to the Guidelines. The court's analysis is worth reviewing for what it says about the application of the Guidelines in a white collar case in the post-Booker world.
The second decision, U.S. v. Murdock (here), deals with a loss enhancement based on the defendant's plea agreement. In Murdock, the defendant pled guilty to causing another to possess documents with the intent to defraud the U.S. (Section 1002 -- a provision you don't see charged very often), involving an attempt to get the IRS to lift a lien on the defendant's sister's pay check by presenting a $132,000 check to an IRS clerk drawn on a closed bank account. Although the defendant did not admit to a particular loss (actual or intended) in the plea agreement, the agreement did acknowledge that he presented the $132,000 check to the IRS. Based on that admission, the Sixth Circuit found that the judge's loss determination of $132,000, which substantially increased his sentence above the base offense level under the Guidelines, met the Sixth Amendment requirement of Booker. It is interesting to note that there was not a specific loss admission by the defendant, but only a general reference to the amount of the check and the intent to have the IRS lift its levy (which it did not do). Murdock makes it clear that, at least for guilty pleas, the courts will take a broader (or more flexible) approach to what constitutes a sufficient admission to meet Booker's requirement that only a jury's verdict or defendant's admission can be the basis for the sentence. [NB: Murdock also involves a waiver-of-appeal issue, which the defendant won, only to lose on the ultimate sentencing issue.] (ph)
An article in the Wall Street Journal (Feb. 22) speculates on whether Richard Scrushy will seek to regain his CEO position if he is acquitted in his criminal trial. While that is getting a little bit ahead of things, Scrushy remains a large shareholder of the company and likely has allies in management. While Scrushy was fired as CEO in 2003, he retains his board seat and shareholders have not been asked to remove him because there has not been an annual meeting since 2003 -- the company has not filed its quarterly or annual reports since then because of problems with getting certified financial statements while the auditors prepare a restatement of prior years. HealthSouth stock was delisted by NASDAQ and only trades on the "pink sheets," although it remains viable, having avoided bankruptcy. Even if Scrushy wanted to return to HealthSouth as an officer, he faces an SEC civil enforcement action seeking, among other things, a director & officer bar for securities law violations. A conviction on almost any count of the indictment will likely lead to a bar. The criminal trial resumes today with more testimony (and cross-examination) about "the family" that conspired to inflate the company's earnings (see AP story here). (ph)
The volume of information any decent-sized university library must maintain, and the number of providers selling that information on a daily basis, has led to a developing scam involving fake claims that targets university libraries, according to an article in the Chronicle of Higher Education (here). Telemarketers are calling libraries demanding payment for items they claim were ordered, and threatening lawsuits if not paid immediately, even though the library never ordered the information. They even submit false invoices, hoping that they will get lost in the shuffle and be paid without the library checking the bills carefully. Libraries are like any organization that does a large volume of business with multiple vendors, but with university budget cutbacks, the costs of any fraud are felt by a large number of students and faculty. (ph)
Monday, February 21, 2005
With the obligatory introductory moniker of "Shock-Jock" Howard Stern, a contributor to Stern's morning radio program has been subpoenaed by the SEC to testify about possible insider trading in the shares of Sirius Satellite Radio Inc. before the announcement that Stern would be moving his program to that company's broadcast platform in 2006. Chaunce Hayden said he received a subpoena from the SEC to testify on Wednesday about the decision to switch to Sirius, which was announced last Oct. 6 and triggered an immediate 30% rise in the company's shares before settling down to a 15% gain at the end of the day. Apparently, there was some suspicious trading ahead of that announcement that has peaked the SEC's interest. An AP story here discusses Hayden's pending testimony, a fact that is usually not disclosed by subpoena recipients, at least not in advance of their testimony. (ph)
Alcoa Inc. disclosed in its annual report (available here) filed on Friday, Feb. 18, that the SEC has begun an informal investigation of the company's accounting for "certain trade payables financing." The company paid some vendors through intermediaries, and the issue is whether the company classified properly its payments and any discounts received. Alcoa's annual report states:
On January 28, 2005, in the context of an informal investigation being conducted by the staff of the Securities and Exchange Commission (SEC) relating to certain trade payables financing, the company received a request for the voluntary provision of documents and related information concerning the classification and disclosure of certain trade accounts payable transactions for periods beginning after December 31, 2002 that involve, directly or indirectly, an intermediary. The SEC staff has advised the company that the inquiry should not be construed as an indication by the SEC or its staff that any violations of law have occurred, or as an adverse reflection upon any person or security. Alcoa is fully cooperating with this inquiry.
Jurist has additional information on the investigation. (ph)
The importance of Scott Sullivan to the government's case is clear as the prosecutors told the court that they expect to end their case-in-chief on either Tuesday or Wednesday and will not be calling any more witnesses from the company. Sullivan was the principal witness used to establish Bernie Ebbers' involvement in the fraud, and the cross-examination included repeated references to Sullivan's lies and misstatements, including a discussion about whether what he said in a conference call constituted "B.S." It did not, however, include any discussion of marital infidelity -- an issue that was probably used by the defense more as a red herring than anything else. U.S. District Judge Barbara Jones refused the government's request to call a former WorldCom employee who lost almost their entire retirement savings when the company collapsed, calling the testimony repetitive -- an attempt to end the case on an emotional note that had little to do with the charges against Ebbers except in the most general sense. An AP story here discusses the conclusion of the cross-examination of Sullivan.
The interesting question will be whether the defense even puts on any witnesses, and if it does, whether they will only be character witnesses to discuss Ebbers' general niceness and disinterestedness in things related to accounting. I still think it will be a surprise if Ebbers testifies because the case hinges more on Sullivan's credibility, and Ebbers could do more harm than good if he testifies. We'll know by the end of the week. (ph)