Friday, March 31, 2006

Lord Black Learns the Hard Way that Documents Don't Get Much Protection

Lord Conrad Black lost his fight to keep a set of documents from being subpoenaed by federal prosecutors, and the decision provides a lesson that great care must be taken with such materials if you don't want the government to get its hands on them.  Before his indictment on fraud and RICO charges related to allegations of looting Hollinger International, the media company he controlled while serving as chairman and CEO, the SEC issued a subpoena for documents for the records of Ravelston Corp., Black's holding company in Toronto.  After receiving the subpoena, a surveillance camera caught Black taking thirteen boxes of documents from the company's offices, and a Canadian court ordered that they be returned.  The SEC has been unsuccessful in enforcing its subpoena for the documents in Canada, but federal prosecutors had more luck when they learned that a copy of the documents were sent to one of Black's law firms in the United States.  Quicker than you can say "subpoena duces tecum" -- and be careful of the pronunciation -- a trial subpoena issued for the records, which are related to an obstruction of justice count in the Black indictment.  A Chicago Tribune story (here) recounts a hearing before U.S. District Judge Amy St. Eve in which she denied the defense motion to quash the subpoena. 

While law firm records are usually protected by the attorney-client privilege, and possibly the work product doctrine, documents supplied by a client do not gain any greater protection just by being in the lawyer's files.  Moreover, corporate records are not subject to a Fifth Amendment claim, so once the Ravelston documents came within the jurisdiction of the district court they were subject to being produced pursuant to a valid subpoena.  If the documents are incriminating, and Black's attempt to remove them indicates that they may be, then providing them to U.S. counsel may have been a strategic mistake. (ph)

March 31, 2006 in Fraud, Prosecutions | Permalink | Comments (0) | TrackBack (0)

Six Aides to Rep. Jefferson Subpoenaed in Corruption Probe

Six aides to Louisiana Rep. William Jefferson have been subpoenaed to testify before a grand jury in the Eastern District of Virginia investigating corruption charges.  A former aide to the Congressman, Brett Pfeffer, entered a guilty plea to conspiracy and corruption charges in January in which he detailed kickback demands by Rep. Jefferson related to two transactions involving companies seeking contracts in African countries.  Five of the aides work in Jefferson's New Orleans district offices and the sixth is a legislative assistant in his Capitol Hill office.  The subpoenas were not issued recently, but came to light because, as required by House rules, the recipients contacted the House Office of the General Counsel, which disclosed them and found that the aides can testify.  A New Orleans Times-Picayune story (here) notes that Jefferson's spokeswoman stated that the subpoenas were not "new news," but that certainly does not make them into good news. (ph)

March 31, 2006 in Corruption, Grand Jury, Investigations | Permalink | Comments (0) | TrackBack (0)

Former DeLay Aide to Plead Guilty to Corruption Charge

The AP reports (here) that Tony Rudy, former Deputy Chief of Staff to Rep. Tom DeLay when he was House Majority Leader, will plead guilty to taking $50,000 from superlobbyist Jack Abramoff to assist in blocking legislation on internet gambling and a postal rate increase that Abramoff's clients opposed.  In the Abramoff plea in Washington D.C. to corruption charges, Rudy was identified as "Staffer A" and Abramoff admitted to disguising the corrupt payment by having the money paid in ten monthly installments to Rudy's wife.  While this aspect of the corruption investigation does not involve a new player, because Rudy had been easily identified from the court papers, the interesting question now is whether he will provide new information to federal prosecutors about DeLay and other elected officials. (ph)

                                                                                       

UPDATE: A copy of Rudy's plea agreement and factual stipulation is available below.  Rep. DeLay is identified as "Representative #2," with Ohio Rep. Bob Ney resuming his role as "Representative #1" from the Abramoff et al. pleas.  The government and Rudy agreed to a Sentencing Guideline calculation with an offense level of 17 after the acceptance of responsibility, which would give him a range of 24 to 30 months.  He is eligible for a 5K1.1 downward departure based on his cooperation. (ph)

Download rudy_filed_information_and_plea_agreement.pdf

Download rudy_factual_basis.pdf

March 31, 2006 in Corruption | Permalink | Comments (0) | TrackBack (0)

Thursday, March 30, 2006

TSA Attorney Is Target of Witness Tampering Investigation

Transportation Safety Administration attorney Carla Martin is being investigated by the U.S. Attorney's Office for the Eastern District of Pennsylvania for possible witness tampering, according to a recently unsealed transcript from the Zacarias Moussaoui death penalty proceeding.  Martin provided a number of government witnesses a copy of the transcript of the first day of the proceeding in contravention of the court's witness sequestration order.  The revelation of her conduct caused a delay while U.S. District Judge Leonie Brinkema determined how to handle the violation, which nearly scuttled the government's case

Martin is admitted to practice law in Pennsylvania, a jurisdiction notorious at one time for its high bar passage rate, and the U.S. Attorney's Office in Virginia recused itself because her conduct directly impacted that office's attorneys in the Moussaoui case.  While Pennsylvania prosecutors will review the matter, the venue provision of the main federal witness tampering statute, 18 U.S.C. Sec. 1512(h)(i), provides: "A prosecution under this section or section 1503 may be brought in the district in which the official proceeding (whether or not pending or about to be instituted) was intended to be affected or in the district in which the conduct constituting the alleged offense occurred."  That would require any charges be brought in either Virginia or the District of Columbia, where Martin worked at the TSA. Moreover, a criminal contempt proceeding for violating the sequestration order would have to be brought in the Eastern District of Virginia.  Whether any charges come out of the investigation remains to be seen, but Martin's conduct has stirred up quite a hornet's nest. An AP story (here) discusses the hearing transcript. (ph)

March 30, 2006 in Investigations, Obstruction | Permalink | Comments (0) | TrackBack (0)

Enron Nigerian Barge Trial Defendant Freed on Bail

The ever-vigilant Tom Kirkendall of the Houston's Clear Thinkers blog posts a link (here) to an order by the Fifth Circuit directing the release of William Fuhs, one of the former Merrill Lynch investment bankers convicted in the Enron Nigerian Barge Trial.  Oral arguments in the case took place a little over three weeks ago, and the Fifth Circuit, which initially denied his motion for bail pending appeal before the argument, has turned around and now ordered Fuhs' release.  Tom notes that Fuhs appears to be the only defendant who renewed his motion for bail after the oral argument, and if that's the case, you can expect motions from the other three defendants to be filed as soon as the Clerk's office opens for business.  If there ever was a signal about how an appellate panel was likely to rule, this has to be it, especially if bail is granted to the other defendants.  Tom's post on the case is here. (ph)

March 30, 2006 in Fraud | Permalink | Comments (0) | TrackBack (0)

Fugitive Hedge Fund Manager Charged with Fraud

Kirk Wright, the CEO of International Management Associates (IMA) and manager of hedge funds that purportedly had assets of $180 million, was charged in a sealed criminal complaint with one count of mail fraud.  An arrest warrant was issued for Wright on March 10, and he is a fugitive.  Problems at IMA first surfaced in December 2005 when a group of former NFL players who invested in Wright's hedge funds accused the firm of fraud when they were unable to withdraw their funds.  Wright marketed the funds to a number of African-American professionals in the Atlanta area, and more recently began attracting money from NFL players.  The government has only been able to find $150,000 in IMA's accounts, a far cry from the millions of dollars it told clients it had under management. 

The specific fraud charge involves a falsified account statement mailed to former All-Pro safety Steve Atwater, one of the NFL player investors.  If Wright is located and arrested, a grand jury will indict him on a wider array of charges because a number of investors received similar account statements.  While Wright has an attorney, he has not been seen since January, nor has the money surfaced yet.  A press release from the U.S. Attorney's Office for the Northern District of Georgia (here) discusses the charge and the government's attempt to arrest Wright. (ph)

March 30, 2006 in Fraud, Prosecutions | Permalink | Comments (0) | TrackBack (4)

Three KPMG Accountants Sanctioned for Fabricating Audit Workpapers

Three accountants on the KPMG audit team for Tenet Healthcare Corp. were sanctioned by the SEC for creating workpapers after the purported completion of the audit to make it appear that they had completed the work before issuing a clean opinion.  The SEC administrative orders (here and here) described the conduct:

These proceedings arise out of the failed audit of Tenet Healthcare Corporation’s ("Tenet") fiscal year ("FY") 2002 financial statements and the auditors’ after-the-fact modifications to the working papers creating the false impression that the audit had been adequately performed. Clete Madden, who was the KPMG partner in charge of the Tenet audit engagement, failed to complete the audit and then participated in and directed the after-the-fact modifications. David Huffman, the senior manager on the Tenet audit engagement, shares responsibility for the audit failure and also participated in and directed the after-the-fact modifications.

In August 2002, Madden released an audit report containing an unqualified opinion stating that KPMG had performed an audit in accordance with Generally Accepted Auditing Standards ("GAAS"). When the audit report was released, however, Madden and Huffman knew, or reasonably should have known, that several procedures in critical audit areas had not been completed. Tenet included the audit report in its FY 2002 Form 10-K, which failed to disclose that Tenet’s substantial earnings growth was driven by an aggressive pricing strategy designed to trigger an increase in outlier payments, a component of Medicare revenue. Many of the unfinished audit procedures concerned outlier revenue even though Madden had identified Tenet’s disclosure deficiency in this area.

The audit team, including [Aron] Carr, spent over 500 hours changing the working papers in November and December 2002. The audit team modified more than 350 working papers from the FY 2002 audit, including adding nine references to outlier payments. The audit team made these modifications months after Madden signed and authorized the release of the audit report on Tenet’s FY 2002 financial statements.

Huffman and Carr received four and three year bars from practicing before the Commission as accountants under Rule 102(e), while Madden, the highest ranking KPMG partner on the audit, received a lifetime bar with no right to reapply to appear before the Commission. (ph)

March 30, 2006 in Civil Enforcement, Securities | Permalink | Comments (1) | TrackBack (0)

Embezzling to Pay for Your Dominatrix

What motivates someone to embezzle from a charity where the person works?  There are lots of reasons to steal, and a new one to someone like me -- who has led a very sheltered life -- is embezzling to pay for trips from New York to see your dominatrix in Columbus, Ohio.  Abraham Alexander admitted to stealing $237,000 from the Cardiovascular Research Foundation, including at least $11,000 to pay for sessions with a dominatrix called Lady Sage, plus other charges on Foundation credit cards for air travel from New York to Ohio and rental cars in Columbus.  An AP story (here) notes that Alexander entered a guilty plea to second-degree grand larceny charges and will receive a sentence between two and six years, but that could be reduced if he can repay some of the money he stole.  One potential source of funds may be the house he is selling because his wife -- not surprisingly -- is divorcing him.  The final indignity may be that Alexander will be deported to India after serving his term, which is an awfully long way from Columbus. (ph -- thanks to Jerry Kelly for passing on the story)

March 30, 2006 in Fraud, Sentencing | Permalink | Comments (0) | TrackBack (2)

Wednesday, March 29, 2006

Former Assistant U.S. Attorney Indicted on Conspiracy, Obstruction, and Perjury Charges Related to Trial Conduct

Former Assistant U.S. Attorney Richard Convertino was indicted on conspiracy, obstruction of justice, and perjury charges related to his conduct as lead trial counsel in the so-called "Detroit Terrorism Trial" in which two defendants were convicted on terrorism charges only to have the government request that the verdicts be thrown out because the theory of prosecution was unsupported (indictment below).  State Department Agent Harry Smith, who was one of the government's key witnesses, is also charged.  The prosecution began shortly after the Sept. 11 terror attacks when a search of a Detroit apartment turned up evidence believed to be related to a terrorist cell.  Among the evidence used at trial was a hand-written drawing of what the government asserted was the Queen Alia Military Hospital in Jordan; the notebook in which the drawing was found contained the Arabic writings "Queen Alia" and "Hashemite Kingdom of Jordan."  Convertino and Smith viewed the hospital, and Smith attempted to take pictures of the facility.  When those pictures did not turn out, he requested that another State Department agent in Jordan take digital pictures of the hospital, which were eventually e-mailed to Convertino before the trial.  At trial, however, Smith testified in response to Convertino's questions that no pictures of the hospital were ever taken, and indeed could not be taken because it was a military hospital and a foreign agent taking such pictures would jeopardize the relationship with the Jordanian government.  The defense had requested any pictures of the hospital to determine whether the drawing, which was quite crude, in fact matched the building, but Convertino denied that any existed.  The photographs eventually came to light, and led the U.S. Attorney's Office to investigate the prosecution and determine that the terror charges were  unfounded.

Among the overt acts for the conspiracy charge is the allegation that Convertino "failed to comply with his duty" to disclose the photographs to defense counsel.  This may be the first criminal prosecution premised in part on the failure to comply with the prosecution's Brady obligation.  Similarly, the obstruction of justice charge is based on "concealing contradictory evidence from the Court, defendants and jurors," which again relies on the due process right of defendants to disclosure of material exculpatory evidence.  Convertino has consistently maintained that the prosecution was proper, and that he is being prosecuted because he is a whistle-blower.  He has filed a lawsuit against the Department of Justice and various current and former DOJ officials in Washington D.C. related to his being removed from the case and relieved of his duties as a prosecutor.

The prosecution is the end game in a case that was touted by Attorney General Ashcroft as the first significant terror prosecution after Sept. 11 and collapsed after the government, at the urging of the district court judge who presided over the trial, took a second look at the evidence and whether it fulfilled its Brady obligations.  Two of the original defendants entered guilty pleas to minor charges, and it is likely that they had nothing to do with terrorist groups.  This indictment may help to show how serious the government is in ensuring that trials are conducted fairly. (ph)

Download convertino_indictment.pdf

March 29, 2006 in Obstruction, Perjury, Prosecutors | Permalink | Comments (3) | TrackBack (1)

Austria Wants Former Refco CEO Bennett

Former Refco Inc. CEO Phillip Bennett is under house arrest in New York awaiting trial on securities fraud charges related to false accounting at the commodities and securities broker that collapsed in a little more than a week in October 2005.  The source of the company's problems was that its books carried $430 million in loans for which Bennett was liable, although that fact was not quite disclosed.  Once revealed, Bennett re-payed that amount with funds from a loan made by Bawag (Bank Fuer Arbeit und Wirtschaft ), an Austrian bank, that was secured by soon-to-be worthless Refco stock.  Needless to say, that loan went sour almost before the ink dried on the papers, and Bawag is now among the many unsecured creditors of Refco, a position no one ever wants to be in when a company enters bankruptcy.  Now, the Vienna public prosecutor has issued warrants for the arrest of Bennett and Wolfgang Floettl Jr., the son of Bawag's CEO who authorized the loan to Bennett, on fraud charges.  The Bennett loan is part of over $1 billion in losses the bank suffered from its dealings with Refco, including various transactions with Refco through its Caribbean affiliates in accounts listing non-existent bonds.  Bennett has remained silent so far, and the case may never be fully sorted out if he does not eventually cooperate.  An AP story (here) discusses the Austrian prosecution. (ph)

March 29, 2006 in Fraud, International | Permalink | Comments (0) | TrackBack (0)

Abramoff Receives 70 Month Sentence

Jack Abramoff received good news at his sentencing -- to the extent there can be good news related to going to prison -- when U.S. District Judge Paul Huck accepted the defense argument and gave him a 70 month term of imprisonment, which was at the bottom of the agreed to sentencing range.  Abramoff will not have to report for three months so that he can continue his cooperation in the Washington, D.C. corruption investigation.  He has also been subpoenaed to testify in the investigation of the murder of Gus Boulis, who was killed in 2001 in his car during the power struggle over who would control the SunCruz Casino gambling boats.  The Florida charges arose from the acquisition of those boats, although Abramoff contends he knows nothing about the murder.  Needless to say, he will certainly remain in the news for quite a while as the corruption and murder investigations unfold. An AP story (here) discusses the sentencing. (ph)

March 29, 2006 in Sentencing | Permalink | Comments (1) | TrackBack (0)

Now It's a Criminal Investigation of GM

As noted in an earlier post (here), GM had to delay the filing of its annual 10-K due to accounting problems that cropped up at its ResCap residential mortgage division.  The company filed the report on March 28, and it includes the disclosure that an investigation of its accounting for certain supplier credits and rebates involves a federal grand jury, which issued a subpoena to GM.  The 10-K (here) describes the many and varied government investigations of the company:

The SEC has issued subpoenas to us in connection with various matters that it is investigating. These matters for which we have received subpoenas include our financial reporting concerning pension and OPEB [Other Postretirement Employee Benefits], certain transactions between us and Delphi, supplier price reductions or credits, and any obligation we may have to fund pension and OPEB costs in connection with Delphi’s Chapter 11 proceedings. In addition, the SEC recently issued a subpoena in connection with an investigation of our transactions in precious metal raw materials used in our automotive manufacturing operations, and a federal grand jury recently issued a subpoena in connection with supplier credits. Separately, SEC and federal grand jury subpoenas have been served on GMAC entities in connection with industry-wide investigations into practices in the insurance industry relating to loss mitigation insurance products such as finite risk insurance. We are cooperating with the government in connection with all these investigations. A negative outcome of one or more of these investigations could require us to restate prior financial results (in addition to our recent restatements) and could result in fines, penalties, or other remedies being imposed on GM, which under certain circumstances could have a material adverse effect on our business.

By my count, that's at least four accounting investigations -- pensions, raw material trading/income reporting, supplier rebates/credits, and finite risk insurance -- and two of them involve criminal inquiries.  In the jargon of disclosure documents, "a material adverse effect on our business" means GM could get whacked hard, at a time that it is struggling with declining market share and significant labor cost issues.  An interesting question will be whether any of the investigations will result in charges against individuals, and if so, how high up the corporate ladder the investigation could stretch. (ph)

March 29, 2006 in Fraud, Grand Jury, Investigations, Securities | Permalink | Comments (0) | TrackBack (0)

Tuesday, March 28, 2006

Insider Trading Ban for Capitol Hill

An article in the Wall Street Journal (here) discusses proposed legislation that would make it illegal for members of Congress and their staff to trade on nonpublic information related to legislative action that affects the price of a stock.  The legislation is not yet available, and the article notes that it covers more than just insider trading: "In addition to banning trading on inside information, the proposal would require that lawmakers and their top aides disclose within 30 days any stock trades. Congressional rules now require lawmakers to disclose their trades once a year. The bill also would require that companies register with Congress if they sell information about congressional activity to Wall Street investors."

As Peter Lattman on the WSJ's Law Blog (here) notes so well, "If you’re asking yourself, 'Wait a minute, members of Congress are allowed to commit insider trading?' you’re not alone. We asked the same question."  Can Capitol Hill's investors really do better than Wall Street's?  Bruce Carton on the Securities Litigation Watch blog (here -- welcome back from that nasty flu bug) points out that a study of securities investing by Senators in the 1990s showed that their picks beat the market by 12%, a strikingly high return.  The legislation introduced by Reps. Louise Slaughter and Brian Baird is motivated in part by the trading of a former aide to Rep. Tom DeLay in 1999 and 2000, although it is not clear whether his trading was based on nonpublic information.

While the usual basis for insider trading cases (civil and criminal) is Sec. 10(b) and Rule 10b-5, the Supreme Court's interpretation of those provisions requires that there be a duty to maintain the confidentiality of the information.  That duty appears to be lacking for our elected officials and their staff, unlike corporate executives, employees, lawyers, accountants, journalists (particularly from the Wall Street Journal), printers, consultants, and many, many others. 

It may be possible to solve the insider trading problem without having to enact legislation which -- here's a shocker -- could get bogged down in partisan bickering.  Instead, the House and Senate could adopt rules imposing on each member and their staff a duty to maintain the confidentiality of information arising from the legislative process that could affect a company's business or share price.  Companies, professional firms, and other organizations routinely require employees to sign forms acknowledging such a duty, and a similar requirement could be adopted by Congress for those working on Capitol Hill.  Once such a duty is in place, an insider trading case can be pursued for violating the antifraud provisions of the federal securities laws.

While Congressional hearings and legislation can affect a whole industry, it would seem better to restrict trading in the shares of individual companies to avoid questions about whether legislation that negatively affects one industry and helps another means there can be no trading in either.  It would hardly make sense to put the entire energy or pharmaceutical industry off-limits for investing (either buying or selling).  A prohibition on trading based on nonpublic information about single-company proposals, which are common in the tax area, would be more workable. 

After the Supreme Court endorsed the misappropriation theory in U.S. v. O'Hagan, the source of the information was rendered largely irrelevant so long as the defendant owed a duty of trust and confidence to the source of the information and breached that duty by trading.  By changing its rules, Congress can effectively adopt a prohibition on insider trading for its members and staff by imposing a duty to maintain confidentiality and abstain from trading before information is disclosed. 

Whether information arising from the legislative process is "material" is another issue.  Moreover, there are few real secrets on Capitol Hill, so it might be that an insider trading action could not succeed except in particularly blatant situations.  That is where the disclosure requirements of the proposed legislation might be useful by shining a light on trading that, while not up to the standard of insider trading under Rule 10b-5, is still questionable and possibly unethical. (ph)

March 28, 2006 in Insider Trading | Permalink | Comments (0) | TrackBack (0)

Abramoff Sentencing: Round One

Former superlobbyist Jack Abramoff will receive his first criminal sentence under his plea agreement on bank fraud charges in U.S. District Court for the Southern District of Florida.  Abramoff and co-defendant Adam Kidan pled guilty to charges related to their purchase of SunCruz Casinos in 2000 in which they lied to banks in connection with obtaining $60 million in loans for the transaction.  U.S. District Judge Paul Huck refused requests by the government and Abramoff to postpone the sentencing until after he completed his cooperation in the Congressional  corruption investigation in Washington, D.C., where Abramoff entered a guilty plea to a second set of charges related to corruption involving a Congressman and staffers.

A Miami Herald article (here) discusses the many letters submitted to the court on Abramoff's behalf that paint him as a sympathetic figure deserving of the reduced sentence.  The sentencing memorandum submitted by defense counsel (here) goes to great lengths (62 pages) to put Abramoff in the most positive light, although his plea agreement does not permit him to seek a downward departure and there is a stipulated Sentencing Guidelines range of seven to ten years, so his initial prison term will fall somewhere in there.  His lawyers argue for a sentence at the bottom of that range, and acknowledge that his cooperation in the continuing investigation likely will result in a Rule 35 motion by prosecutors down the road for a sentence reduction.

One sentence in the defense brief, which does a very good job of presenting Abramoff as deserving of a minimum sentence, caught my eye.  The brief states, "There also is no chance the crime will be repeated."  I certainly hope not, because Abramoff misused his clients' money for himself and to corrupt officeholders and their staff.  I hope he does not have the opportunity to commit crimes like this again, although American politics is full of second-chances. (ph)

March 28, 2006 in Corruption, Sentencing | Permalink | Comments (0) | TrackBack (0)

SEC Files Insider Trading Charges Against Pharmaceutical Company Executive for Selling Before Bad News

The SEC filed insider trading charges against Alexander Yaroshinsky, a vice president of Connetics Corp., for trading in the company's securities upon learning about the FDA's preliminary negative reaction to cancer studies of an acne drug being tested.  The Commission's Litigation Release (here) states:

[Yaroshinsky] learned the FDA's preliminary views with respect to the cancer tests in an April 13, 2005 call with the FDA. Shortly thereafter, Yaroshinsky positioned himself to profit from a fall in the price of Connetics' stock. In accounts he controlled, Yaroshinsky sold 15,100 previously acquired Connetics shares, and bought 2,076 put contracts which gave him the right to sell Connetics shares at a fixed price and profit when the shares fell below that price. Ultimately, on June 13, 2005, when news of the non-approval was made public, Connetics' share price fell 27% and Yaroshinsky reaped a benefit of at least $680,000.

Yaroshinsky's trading included a heavy bearish bet on the company by buying puts on Connetics.  That trade is the flip side of buying a call, which one would do in anticipation of an increase in the stock price.  That volume of put contracts, which often have lighter volume than calls, is likely what tipped off the SEC and Chicago Board of Options Exchange about questionable trading and triggered the inquiry. (ph)

March 28, 2006 in Civil Enforcement, Insider Trading, Securities | Permalink | Comments (0) | TrackBack (0)

Government Rests Its Case Against Lay and Skilling, and Asks for Four Counts to Be Dismissed

The government ended its case-in-chief against former Enron CEOs Ken Lay and Jeffrey Skilling after calling its final witness, Joanne Cortez,  a former Enron employee who testified about how Lay used his line of credit from the company.  After resting, the government requested that the court dismiss three of the securities fraud charges against Skilling and one charge of lying to auditors against Lay.  According to the Houston Chronicle's trial blog (here), the prosecutor stated that "[w]e elected out of economy and some other reasons" to not introduce evidence on those charges.  The government case stretched out over 8+ weeks, and I suspect it decided not to put on evidence on those charges because they concerned mostly conduct in early 2000, which is fairly well removed from the focus of the case on public statements made by Lay and Skilling -- and their stock trading -- in 2001, right up to the time Enron went into a tailspin. 

Under Federal Rule of Criminal Procedure 48(a), the government is required to obtain the court's permission to dismiss charges during trial.  After the government completed its case, U.S. District Judge Sim Lake  granted the government's motion and directed that it produce a redrafted indictment with the dismissed counts removed.  He also denied the defense's Rule 29 motion to dismiss the remaining charges due to insufficient evidence -- no great surprise there because such motions are granted only rarely.  The trial will resume on Monday, April 3, with the defense putting on its case.  Everyone will be preparing for the testimony of Lay and Skilling during the break, no doubt.  The defense lists 113 possible witnesses, a number that should be cut down in much the way baseball teams have to pare their rosters at the end of spring training.  Otherwise, see you at the Fourth of July picnic. (ph)

March 28, 2006 in Enron | Permalink | Comments (0) | TrackBack (0)

Cutting Off Attorney's Fees to Former Corporate Executives

The Wall Street Journal has an interesting article (here) on instances in which corporations have terminated payment of the attorney's fees of executives who are being prosecuted for conduct at the company.  One reason for stopping the payments identified in the article is pressure from the Department of Justice on companies that have entered into plea or deferred prosecution agreements to demonstrate their continuing cooperation.  The focus on payment of attorney's fees for individuals is traceable to the Thompson Memo (here) on prosecuting corporations, which identifies such payments as one example of a corporation's lack of cooperation.  The Memo states, "[W]hile cases will differ depending on the circumstances, a corporation's promise of support to culpable employees and agents, either through the advancing of attorneys fees, through retaining the employees without sanction for their misconduct, or through providing information to the employees about the government's investigation pursuant to a joint defense agreement, may be considered by the prosecutor in weighing the extent and value of a corporation's cooperation."  One case the article examines involves former executives of Enterasys Networks Inc. charged with accounting fraud.  They asserted to the court that prosecutors pressured the company to cut-off the payment of their attorney's fees in 2005.  The district court postponed the trial to look into the matter, although it made no finding of prosecutorial misconduct. 

Co-blogger Ellen Podgor is quoted in the article as noting that many corporations cannot continue in business with a criminal conviction, so they will do almost anything to demonstrate their cooperation to prosecutors.  The problem for the company is that its contractual obligations and the requirements of state law, particularly for companies incorporated in Delaware, may mandate payment of the attorney's fees to current and former executives during both an investigation and subsequent criminal or civil action.  Prosecutorial requests to discontinue payments to defense attorneys can put the company in the difficult position of denying assistance to a person who has not been found guilty of a crime and acting in a way that could be a breach of a legal obligation, yet also risk being branded as uncooperative.  This is a situation that is  unlikely to get better so long as the Thompson Memo's view of the payment of attorney's fees reigns. (ph)

March 28, 2006 in Defense Counsel | Permalink | Comments (0) | TrackBack (0)

Monday, March 27, 2006

Two Jurors Dropped From Ryan Jury

The RICO corruption trial of former Illinois Governor George Ryan and a co-defendant remained on hold as U.S. District Judge Rebecca Pallmeyer dismissed two jurors because they failed to disclose criminal convictions on their juror questionnaire.  The judge said she would meet with the jury to determine whether to seat two alternates and have them restart their deliberations from the beginning.  The defense attorneys have objected to the judge's decision and likely have requested a mistrial.  Under Federal Rule of Criminal Procedure 24(c)(3) (here), "The court may retain alternate jurors after the jury retires to deliberate. The court must ensure that a retained alternate does not discuss the case with anyone until that alternate replaces a juror or is discharged. If an alternate replaces a juror after deliberations have begun, the court must instruct the jury to begin its deliberations anew."  The trial judge has fairly broad discretion to remove a juror and seat an alternate, so this is a difficult issue to win on appeal if the jury were to return a guilty verdict. 

A recent example in which the judge removed a juror well into the deliberations was the corruption prosecution of former Philadelphia City Treasurer Corey Kemp and other defendants in 2005.  In that case, the judge removed a juror who was refusing to deliberate, and after seating the alternate, the jury returned a guilty verdict on many of the counts.  That situation may present a stronger basis for an appeal rather than removing a juror for misconduct unrelated to the case.  In Ryan's case, however, if the removed jurors were the holdouts for an acquittal, then a substantial constitutional claim can be raised if there is a guilty verdict.  This is an area in which the broad discretion of the district court, and the lack of information about the jury deliberations and the reasons for the removal, make it difficult to predict what will happen next, or even down the line.  An AP story (here) discusses Judge Pallmeyer's decision to remove two jurors. (ph)

March 27, 2006 in Corruption, Prosecutions, RICO | Permalink | Comments (0) | TrackBack (0)

Lawyers, Cigars, and Forgery

Lawyers certainly find creative ways to get in all sorts of trouble.   The Seventh Circuit upheld the conviction of Chicago attorney Richard Connors for attempting to smuggle 46 boxes of Cuban cigars (hidden in four suitcases) into the country through Canada.  The opinion's first paragraph (here) shows that this one is more than a little intriguing:

Divorce rates are disturbingly high. Sometimes, marital splits get nasty when an ex-spouse decides to dish out a little dose of discomfort to his or her former partner. And as far as dishing out discomfort is concerned, the havoc visited on Chicago lawyer Richard Connors by his ex-wife would win a gold medal for creativity. With substantial assistance from his ex, Connors stands convicted in federal court of (among other things) violating a law we seldom encounter, the Trading with the Enemy Act * * * .

Connors received quite a surprise when his ex-wife's role in turning him in first came to light at trial.  The Seventh Circuit rejected his Fourth Amendment argument that his ex-wife's involvement in the case constituted an illegal search.  He received a 37-month prison term.  Peter Lattman on the Wall Street Journal Law Blog caught this one.

Meanwhile,  New York attorney Perry Reich received a 27-month sentence for his forgery of a federal magistrate's signature on a fake order and lying to federal officials.  Reich continues to deny that he faxed the fake order to an opponent in civil litigation.  According to a Law.Com story (here), U.S. District Judge Nicholas Garaufis said at the sentencing, "I don't know why he did what he did -- I don't know if he knows why he did what he did.  I'm not sure that any rational lawyer would ever do anything like this. It defies logic."  Reich's lawyer's questioned whether his client was in his right mind for doing something "this stupid, this outrageous."  Maybe it seemed like a good idea at the time, but the consequences have been disastrous.  Thanks to Harlan Protass on the Second Circuit Sentencing Blog for passing along the story. (ph)

March 27, 2006 in Legal Ethics, Prosecutions, Sentencing | Permalink | Comments (0) | TrackBack (0)

First Former KPMG Tax Partner Pleads Guilty

Bloomberg reports (here) that former KPMG tax partner David Rivkin entered a guilty plea to conspiracy and tax evasion charges, the first individual from the firm to admit to criminal conduct.  The government has indicted 19 individuals, most from KPMG, for selling tax shelters to wealthy individuals.  At the plea hearing before U.S. District Judge Lewis Kaplan, Rivkin stated that he signed opinion letters regarding the propriety of the tax shelter transactions "knowing them to be false, in order to mislead the IRS."  Rivkin agreed to cooperate in the government's prosecution, and as the first defendant to break ranks -- or cave in to government pressure, depending on your point of view -- he may be a harbinger of more plea agreements.  The government's prosecution focuses more on conduct misleading the IRS about the nature of the tax shelters and less on a technical determination of their propriety, so cooperating witnesses will be key to the case.  (ph)

                                                                                                      

UPDATE:  The superseding criminal information filed in connection with Rivkin's guilty plea is below.  The tax evasion count is based on his work for nine KPMG clients in 2000 and 2001, and the "approx. amount of fraudulent tax shelter loss" is $235 million. (ph)

Download kpmg_rivkin_superseding_information.pdf

March 27, 2006 in Prosecutions, Tax | Permalink | Comments (1) | TrackBack (0)