March 5, 2005
House Hearing on Steroids May Trigger Fifth Amendment Claims
The House Government Reform Committee announced that it had issued invitations to seven current and former major league baseball players and four executives, including Commissioner Bud Selig, to appear at a hearing on March 17 on the topic of major league baseball's new steroid policy. As described in a Committee news release (here), there will be two panels with the following participants invited to testify:
Jose Canseco - former Oakland Athletic and Texas Ranger
Jason Giambi - current New York Yankee and former Oakland Athletic
Mark McGwire - former Oakland Athletic and St. Louis Cardinal
Rafael Palmeiro - current Baltimore Oriole and former Texas Ranger
Curt Schilling - current Boston Red Sox
Sammy Sosa - current Baltimore Oriole and former Chicago Cub
Frank Thomas - current Chicago White Sox
Bud Selig - Commissioner of Baseball - Major League Baseball
Sandy Alderson – former General Manager, Oakland Athletics, and
current Executive Vice President of Baseball Operations, Major League Baseball
Don Fehr, Esq. - Executive Director & General Counsel, Major League Baseball Players Association
Kevin Towers - General Manager & Executive Vice President, San Diego Padres
According to a New York Times article (here), if the invitations are declined, the Committee will issue subpoenas to compel the appearance of the witnesses, and all witness will be placed under oath for their testimony. Interestingly, the highest profile player caught up in the steroids issue -- Barry Bonds -- is not on the list. Bonds and Giambi testified before a federal grand jury in the BALCO investigation, and they would be the most likely candidates to assert the Fifth Amendment if subpoenaed to testify.
Canseco's attorney asserted that his client would testify if granted immunity -- one wonders if that position is designed to help sales of Canseco's new book, "Juiced," which accuses McGwire and Palmeiro (among others) of using steroids. Somehow, claiming the Fifth Amendment after writing a book about the subject seems a bit disingenuous, but that has not stopped Canseco before. Congress has been rather gun-shy about granting immunity since the Iran-Contra hearings in which Oliver North received immunity and testified with the assistance of his counsel, Brendan Sullivan (who asserted that he is not a shrub or other type of plant), that resulted in North's conviction being overturned on Fifth Amendment grounds. A spokesman for Rep. Tom Davis (R-Va), the Committee chair, asserted that the hearing is not an attempt at grandstanding on a topic in the news because it is "a national public health issue." Far be it from politicians to seek out the spotlight and use a hearing to garner attention for themselves. Batter up! (ph)
SEC Chairman Donaldson Admonishes Lawyers to Counsel Clients to Avoid the Outer Limits of the Law
At the annual conference "The SEC Speaks" at which Commission members and staff discuss the state of securities law, Chairman William Donaldson gave the introductory speech that included some words directed at the lawyers in the audience, who probably accounted for over 90% of the participants. In his statements (available here), Donaldson stated:
I hope you will do your best to explain to your clients the principles behind our rules. Similarly, I hope you will not expend significant time, money, and energy devising structures aimed at evading requirements and trying to achieve an accounting or disclosure result that is “better” only because it achieves technical compliance with a rule while artfully dodging the rule’s purpose.
I hope you will focus attention on identifying what we sometimes call “appearance” problems, which refer to those potential but as-yet-undeveloped issues, such as conflicts of interest that can trip up a client, or new business relationships or revenue streams that could create conflicts with the best interests of the firm’s customers. You can help your clients to integrate compliance and ethics into discussions about new products or new business ventures, and address in real time the risks those new products or business lines may present.
You can help corporations to encourage their employees to learn from their mistakes. If there is a breach in ethics or compliance it is imperative to figure out what went wrong and how it can be prevented from happening again.
And most important, you can help corporate leaders to set a personal example, and insist that when a decision is made, no matter how large or small, everyone is obligated to check his or her internal compass and ask whether the course of action is the right thing to do.
This position is consistent with the SEC's view since enactment of the Sarbanes-Oxley Act of lawyers as gatekeepers of their securities clients, and the recent emphasis in enforcement actions on holding lawyers accountable for the legal advice they provide to clients.(ph)
Buy the Sentence, Sell the Release?
With Martha Stewart's release from prison yesterday, her company's stock (Martha Stewart Living Omnimedia [MSO]) took a nearly 10% fall in price, and for the week is down almost $7 per share. For those keeping score, yesterday's fall cost Stewart approximately $90 million, although that is not real money in the sense that she could not simply sell all her shares at the market price, even if she wanted. Much has been made about what her case "means" in America, and I don't think it means much. Her face appears on the cover of Newsweek in a composite photograph that apparently fooled some into thinking it was real -- does anyone really think that a photo shoot would be allowed in Federal Correctional Institution? Do the changes in the value of Stewart's company, and the effect on her net worth, mean anything about the criminal justice system or the effect of punishment? No. Stewart's conviction had nothing to do with MSO directly, and to the extent anyone tries to draw a lesson about the state of corporate America from a criminal case, the prosecutions of Bernie Ebbers, Richard Scrushy, and the senior Enron executives will tell you more -- although not much more, I think. Is the fact that Stewart seems to be unrepentant worth considering? Perhaps, but she served her term of imprisonment (for a conviction that could still be reversed), and how she views herself and her conduct does not change the fact that lying is still wrong, a point that I doubt she would dispute. (ph)
March 4, 2005
DOJ and AIG
On February 14 and 15, AIG issued statements regarding the subpeonas and actions of the SEC and Office of the Attorney General of New York as they related to the company. The question will be, will they issue a new statement today, or within the next few days, in response to the latest turn of events. The Wall Street Journal is reporting that federal prosecutors have entered into the investigation, specifically an investigation between AIG and Berkshire Hathaway, Inc. General Reinsurance unit. For details on this story see here.
Delphi CFO Forced Out Over Accounting Problems
Delphi Corp., a large auto supplier that had once been a part of General Motors, announced that its Chief Financial Officer, Alan S. Dawes, had been forced out over improper accounting at the company (press release here and SEC 8-K filing here). The SEC launched an investigation of the company in 2004, and the accounting problems, which include possible round-trip transactions and cash payments to GM, have prevented it from filing it quarterly and annual financial statements while the accountants figure out the proper restatements. According to the 8-K, the company's reported income in 2001 of $67 million should have only been $6 million, a rather significant difference. Forcing out the CFO may indicate that the company is preparing to seek a settlement with the SEC, which may also be eased by CEO J.T. Battenberg's announcement that he will retire at the end of the year. It would not be a surprise if the SEC was looking at Dawes' involvement in the accounting decisions, and he may be the focus of the investigation. (ph)
Martha Stewart is Out of Jail
Martha Stewart was released from prison and now faces 5 months of home confinement. Why are so many newspapers making her a "front-pager" this a.m.? See here (Atlanta Jrl Const.), here (New York Times), here (LA Times), here (USA Today), here (Washington Post). And even those that didn't make her a top story had notes on the front page with a jump to the article. See here (Detroit Free Press). When it comes to general deterrence, who won this round of the case?
Prosecution Rebuttal in Ebbers Case
In its final rebuttal to the jury, the prosecution in the trial of Bernard Ebbers focused on restoring the credibility of Scott Sullivan. See AP here. It is now onto jury instructions and then deliberation. See more in the Wall Street Journal here.
March 3, 2005
Another FCPA Settlement Agreement
Yesterday's post included a report on a Foreign Corrupt Practices Act (FCPA) settlement (including civil and criminal claims) for Titan Corp. Today we see yet another FCPA settlement. The Department of Justice issued a press release titled, "Micrus Corporation Enters into Agreement to Resolve Potential Foreign Corrupt Practices Act Liability." The government will not be prosecuting Mircus because of the remedial action taken by the company and its voluntary disclosure. But the settlement will cost Mircus time and money. The agreement provides that Mircus:
"In exchange for the Department’s agreement not to prosecute Micrus for the conduct disclosed by Micrus to the Department, Micrus agrees, among other things, to:
Accept responsibility for its misconduct;
Fully and affirmatively disclose to the Department activities that Micrus believes may violate the FCPA, and continue to cooperate with the Department in our investigation;
Agree that a statement of facts summarizing the subject transactions is materially accurate and agree not to contradict those facts;
Pay a monetary penalty to the United States of $450,000;
Adopt an FCPA compliance program, where previously it had none, as well as a set of internal controls designed to prevent violations in the future; and
Retain an independence compliance expert for a period of three years to ensure the company’s compliance program and internal controls are effective."
Defense Closing in the Ebbers Trial
As one might suspect, Attorney Reid Weingarten had words to say about the testimony of Scott Sullivan. In the closing argument for the trial of his client, Bernard Ebbers, he noted that Sullivan was "more rehearsed in his direct testimony than the actor who plays Hamlet on Broadway." The case is coming to a close and may go to the jury as early as today. See more in the Wall Street Journal here and via AP here.
Martha Stewart-The Legal Side
With the upcoming release of Martha Stewart from prison, the press is writing of her experiences and future. The Wall Street Journal provides a view of her life in prison here, AP here, and there have been many a story on her upcoming TV show. (see e.g. here). Also see our post here.
But I keep wondering about what is happening in the background, namely, Martha Stewart's appeal. Normally, the appeal would be crucial - a chance to vindicate oneself. The brief filed by the government and the defense here and here demonstrates some fascinating legal issues, including a Crawford issue. But what if Martha wins the appeal?
Normally when the defendant wins the appeal, it can mean not going to prison. But Martha Stewart has already done her time. If the result is an out and out reversal then yes, it is clearly beneficial to vindicate her. But what if the result is a retrial? Will this assist Martha Stewart in going on with her life? Or will it keep her from putting the focus on the new TV show and her new life? Would she be better off with it being affirmed?
No one wants a conviction on their record, but this case is challenging a basic premise in our system of justice. Does a conviction really matter? Will it be a deterrence? And more importantly, should the government have prosecuted Martha Stewart? Irrespective of where you stand on the guilt or innocence of Martha Stewart, one has to ask themselves if this was an appropriate case for the federal government to prosecute? Should this case have been handled through civil remedies?
March 2, 2005
Closing Arguments in Ebbers Trial
The defense rested its case in the Bernie Ebbers trial and the prosecution then proceeded into closing argument. Did he or did he not have knowledge of what was happening? Was this all Scott Sullivan, or was Ebbers a major player in the alleged criminal activity? These appear to be the key issues that will need to be resolved in the jury room.
In closing argument, the prosecution hammered away at the credibility of Ebbers and whether he had been corrupted by power. (See AP) (See Wall Street Jrl). Tomorrow the defense will take its turn before the jury. Heavy penalties are at stake here and it may all come down to who the jury believes - Scott Sullivan or Bernie Ebbers.
Health Care Fraud Indictment + Money Laundering
The government is proceeding with another health care fraud case. This time it is the USA in Florida announcing the filing of charges. And as with so many white collar charges being brought recently, the latest prosecution tacks on charges of money laundering.
Using 18 U.S.C. section 1347, a relatively new health care fraud statute, USA Marcos Daniel Jimenez announced an indictment charging "conspiracy to commit health care fraud and to pay kickbacks," 19 counts of health care fraud, a conspiracy to commit money laundering and 11 counts of money laundering. The indictment also has a forfeiture claim, in the amount of more than 10 million dollars.
According to a press release issued by the USA of the Southern District of Florida, five individuals are accused in this case. The press release states in part that some are accused of paying:
"kickbacks to patient recruiters so that they would provide the defendants and their companies with Medicare beneficiaries to pose as patients, and to patients in order to obtain from those Medicare beneficiaries their names and identification numbers, along with prescriptions for Durable Medical Equipment (DME) and prescription drugs relating to them.
"Once they had patient information, the defendants completed Medicare required orthotic measurement forms for DME without an orthotist or orthotic fitter ever having measured a patient, forged the signatures of doctors on prescriptions for DME and prescription drugs, and created entirely fraudulent patient files, containing manufactured and forged documents. The defendants would share patients between the defendants’ two (2) companies, billing the shared patients during different Medicare billing periods, without the patients having been seen by any doctor, orthotist, or fitter, and without having been prescribed any DME or prescription drugs. Using the patients’ identification information and prescriptions, the defendants then submitted claims to Medicare for reimbursement for the cost of DME and prescription drugs, and received payments from Medicare.
"The defendants, as alleged, then laundered some of the proceeds of the fraud by paying someone who they believed was a newspaper owner for bogus advertising that was never placed. The defendants would pay for the nonexistent advertising using a check from either or both of the DME companies and the newspaper owner would pay them back in laundered U.S. currency."
Ebbers on the Hot Seat
Assistant U.S. Attorney David Anders continued the cross-examination of Bernie Ebbers by focusing on the loans Ebbers took -- which WorldCom guaranteed -- on his WorldCom stock, and the pain from the margin calls as the price of shares dropped. The government has argued that Ebbers pressured former CFO Scott Sullivan to engage in accounting fraud to maintain the company's share price at a level sufficient to keep the loans from being called. Anders also focused on Ebbers' involvement in the details of the company, and Ebbers admitted that he was "fairly detail-oriented . . . in the areas that I paid particular attention to." It will be interesting to see if the jury accepts the position that Ebbers paid attention to certain areas of the company (e.g. the water in the water-cooler) but not accounting entries that would affect the stock's price. Articles from the Wall Street Journal (here) and AP (here) discuss the cross-examination. The WSJ also has a poll regarding whether it was a good idea for Ebbers to testify. The problem is that we will not know the effect of the testimony until the jury returns its verdict, and defense lawyers make the decision to call the defendant to testify without the benefit of hindsight or knowing how the person will react to cross-examination. (ph)
Meanwhile, Down in Birmingham . . .
The testimony of Bernie Ebbers has stolen some of the spotlight away from the trial of Richard Scrushy in Birmingham, Alabama, which continues with the testimony of a third former CFO, Michael Martin, about Scrushy's involvement in the accounting fraud. Faced with the drumbeat of witnesses that the government hopes will link Scrushy to the revenue inflation at HealthSouth, defense counsel Jim Parkman stated at a hearing on March 1 that there is a 50% chance Scrushy will testify -- the same odds as tossing a coin, but once discussed publicly, the likelihood of Scrushy testifying is quite high. While no witness has yet testified that Scrushy used the term "fraud" or "fraudulent," the pressure to testify to establish the defense that he was misled by so many different executives for so long (6+ years) makes Scrushy the key witness in the trial, much like Ebbers has been for the "honest-but-ignorant CEO" claim. (ph)
Titan Corp. Settles FCPA Criminal and Civil Claims
Titan Corporation, whose merger with Lockheed Martin Corp. was scuttled in 2004 in part due to questionable foreign payments, agreed to enter a settlement with the SEC and plead guilty to one count of violating the Foreign Corrupt Practices Act related to more than $3.5 million of payments made to the President of Benin's business advisor. The company agreed to disgorge profits approximately $12 million from the transactions obtained through the corrupt payments and to pay a criminal fine of $13 million. The SEC's Litigation Release describes the conduct that violated the FCPA:
The Commission's complaint alleges that, from 1999 to 2001, Titan paid more than $3.5 million to its agent in Benin, Africa, who was known at the time by Titan to be the President of Benin's business advisor. Titan failed to conduct any meaningful due diligence into the background of its agent either before his retention or thereafter and also failed to ensure that the services alleged to be performed by the agent, and described in his invoices, were in fact provided to Titan. The complaint alleges, in 2001, at the direction of at least one former senior Titan officer based in the United States, Titan funneled approximately $2 million, via its agent in Benin, towards the election campaign of Benin's then-incumbent President. The complaint also alleges that some of these funds were used to reimburse Titan's agent for the purchase to T-shirts adorned with the President's picture and instructions to vote for him in the upcoming election. According to the complaint, Titan made these payments to assist the company in its development of a telecommunications project in Benin and to obtain the Benin government's consent to an increase in the percentage of Titan's project management fees for that project. The complaint alleges that a former senior Titan officer directed that these payments be falsely invoiced by the agent as consulting services and that actual payment of the money be broken into smaller increments and spread out over time. The complaint does not allege that the then-incumbent President knew of the payments.
The SEC also issued a Section 21(a) Report of Investigation criticizing Titan for not properly disclosing the FCPA violations as part of the disclosure related to the proposed merger with Lockheed Martin.(ph)
Alleged Internet Fraud
If this case goes to trial, it is unlikely that the defense will be looking for dog lovers for the jury. In Atlanta an individual has been arrested for his alleged use of the internet to get pet owners, who lost their dogs, to send money for a pet carrier so he could send their pet home to them. The problem was that there was no pet, and the allegation is that this was all a scam. The result - a defendant sits in jail with charges pending for fraud and racketeering. (See the Atlanta Jrl. Constitution for more).
March 1, 2005
Executive Settles Insider Trading Charges Related to Exercising Stock Options
The temptation to exercise your stock options and sell the shares when you know that your company is about to announce negative news proved too strong for John D. Hutchinson, an executive with Ryland Group, Inc. The SEC filed a complaint in federal court in Los Angeles charging Hutchinson with insider trading related to the following conduct outlined in the Commission's Litigation Release:
The Commission's complaint alleges that during December 2003, Hutchinson, in the course of his duties as a division president of Ryland, became aware that Ryland's new housing orders for the fourth quarter of 2003 would decrease significantly compared to the fourth quarter of 2002. The complaint alleges that while Hutchinson was aware of this non-public information, he exercised all of his exercisable options in Ryland stock, and sold the underlying shares before this information was publicly announced, thereby avoiding a substantial loss of over $100,000.
Hutchinson disgorged the loss avoided from the trade and paid a one-time civil money penalty in settling the case. The siren song of inside information can be so hard to resist. (ph)
Should Lawyers Be Disciplined for Being Greedy?
Carolyn Elefant on the My Shingle blog has an interesting post (here) releated to a story about a lawyer disciplined for misleading other lawyers into joining her firm with promises of high salaries and luxury cars. The lawyer, Cynthia Sutherin, was a former public defender who told the attorneys that she had $5.2 million to start the firm, and when her lies (including that she had cancer) were revealed, the duped attorneys filed a disciplinary complaint, for which Sutherin received a two-year suspension from the disciplinary panel (see article here discussing case). Carolyn raises some interesting issues about the duped attorneys:
But here's my real beef. If dishonesty, outside the context of an attorney-client relationship is grounds for disbarment, why isn't greed and incompetence? After all, what were those lawyers who left their job thinking when a former public defender claimed to have $5.2 million to start a firm? Did those lawyers think it was a wise business move to work for an attorney who offered to buy them them BMW's rather than reinvesting the money back in the firm? Did the lawyers ask whether Sutherin had a business plan for further growth of the firm or office space or even a website? Were they at all concerned that a former public defender who I'm assuming had no previous experience running a law firm would be capable of launching a practice that would succeed from the start? At best, the duped attorneys were guilty of simple incompetence in failing to protect their own interests and at worst, of allowing the lure of fancy cars and high salaries to obscure their good judgment. Surely, we don't want that kind of attorney in practice any more than a dishonest one. So why weren't those attorneys subject to discipline also?
"I Know What I Don't Know"
As promised this past Friday, Bernie Ebbers was called to the witness stand on Monday to present his variant on the "honest-but-ignorant CEO" defense, asserting that he knew little about technology and apparently even less about accounting. Ebbers testified that his grades in college were not very good, and that at WorldCom he was the company's "coach" much like he had been a high school coach before entering the backwaters of the telecom world. Ebbers denied ever being advised by former CFO Scott Sullivan that the accounting entries were incorrect, and noted that Sullivan had an "uncanny knowledge" of accounting. The defense gambit is risky, and to this point Ebbers appears to be comfortable on the witness stand, but the cross-examination may tell another story. Articles from the Wall Street Journal (here) and AP (here) discuss Ebbers' first day of testimony. (ph)
Criminal and Civil Insider Trading Charges Against Gerber Scientific Director of Corporate Communications
The former director of corporate communications for Gerber Scientific, Inc., Robert Goehring, was indicted in the Southern District of New York and charged in a civil complaint filed by the SEC in Connecticut with trading on material nonpublic information prior to its release by the company, resulting in gains and losses avoided of approximately $94,000. Goehring is also accused of tipping a close friend who traded in Gerber Scientific shares with a gain and loss avoided of approximately $11,000. The SEC Litigation Release states:
Between July 1998 and April 2000, Goehring traded in the Gerber stock nine times on the basis of material, nonpublic information he obtained in the course of his employment as Gerber's director of corporate communications. Goehring enjoyed profits and avoided losses from these illicit trades of $94,016. In addition, Goehring tipped his close friend, Armund Ek, who was not employed at Gerber, with material, non-public information about Gerber on three occasions. Ek bought and sold Gerber stock based on these tips and had profits and avoided losses totaling $11,453 as a result of his trading.
Ek settled with the SEC (Litigation Release here), disgorging the $11,453 and paying a civil money penalty of a little less than $11,000; he was not charged in the criminal case. (ph)