Sunday, March 26, 2006
Former Enron treasurer Ben Glisan is nearly done on the witness stand, and reports indicate that he will be the last significant former Enron employee to testify for the government. Prosecutors may complete their case this week. Glisan's cross-examination included a review of how former CEO Ken Lay reacted to a description of the effect of the Raptor off-balance sheet transaction on Enron's accounting. On direct examination, Glisan described Lay's reaction as a "giggle" because of the way in which it helped out the company's balance sheet. One of Lay's defense team, Bruce Collins, noted on cross-examination that he had heard Lay chuckle but never giggle, to which Glisan responded, "I will concede chuckle." Such are the heights (and depths) of cross-examination in a long trial that hinges on whether small facts can support an inference of intent to deceive and defraud.
If the government is indeed close to finishing its case-in-chief, then apparently it will not use Enron's former chief accounting officer, Richard Causey, who entered a guilty plea shortly before the trial commenced, as a witness. There is a chance that prosecutors are holding Causey in reserve for rebuttal, depending on what Lay and Jeffrey Skilling say if they testify, although that could be a risky proposition for the government. I would expect that both Lay and Skilling will testify -- Skilling is unlikely to put his defense in the hands of Lay, and vice-versa -- so the defense case will probably take at least two weeks, and possibly longer. This proceeding will be done by Memorial Day, won't it? A Houston Chronicle story (here) discusses Glisan's testimony.
The securities fraud prosecution of former Qwest CEO Joseph Nacchio moved forward, at least a little bit, when U.S. District Court Judge Edward Nottingham denied the defense motion to dismiss the indictment because it did not identify the alleged material nonpublic information on which he traded. The court noted that while materiality is an element of an insider trading charge, it is an issue for the jury and the not the judge to decide. Nacchio did succeed in getting the court to require the government to file a bill of particulars that specifies the negative financial information on which Nacchio is alleged to have traded. While the indictment accuses him of using the information in selling over $100 million of Qwest shares before the company suffered significant financial problems, it does not state what particular facts were available at the time of the trading.
The defense opened up another front by asking the district court to change the venue of the case because of negative pretrial publicity, and raising questions about whether Colorado is the proper jurisdiction because the trading did not take place there. Courts rarely grant a change of venue request because of pretrial publicity, and the standard is quite high, that the publicity is both pervasive and highly prejudicial. The charges were filed more than four years after Qwest's financial problems came to light, and the alleged crime is not the type of notorious act, such as a high profile murder, that would require a court to move the trial. The jurisdictional question could be a bit closer, but the fact that Nacchio was the company's CEO in Denver at the time of the transactions is likely sufficient, even if the orders to sell the shares did not come from his office on the day of the trade.
While the case will more forward from here, Judge Nottingham did not set a trial date because the defense stills need to review classified information. Defense counsel has asserted that Nacchio was privy to national security information about possible programs that could benefit Qwest at the time of his sales, so he had no reason to sell based on undisclosed negative information because he possessed positive information at the same time. Whether or not that defense will pan out will await trial, but the need to review classified information will slow the pretrial discovery process. A Rocky Mountain News article (here) discusses the district court's rulings in the case. (ph)
In United States v. Leahy, the Third Circuit issued a decision (here) on the merits of the defendants' bank fraud convictions, after an earlier opinion considered the effect of Booker on forfeiture and restitution. The defendants, a corporation and two senior managers, were convicted of defrauding ten banks that had the corporation conduct auctions of repossessed cars. The defendants, through Carriage Trade Auto Auction, took possession of 311 vehicles and resold them at higher prices than the amount reported to the banks. Two issues considered on appeal were whether the defendants had to intend to cause harm to the banks, and whether an instruction defining fraud as involving "moral uprightness" and "fundamental honesty" was improper.
The defendants argued that the true victims of the scheme were the original owners of the cars who were liable for any difference between the auction price and the remaining loan amount. In most instances, the amount received at the auction of a repossessed vehicle is less than the amount of the remaining loan, and the borrower would be responsible for any difference. The defendants argued that they did not intend to cause harm to the bank, which they argued is an element of the bank fraud offense. The Third Circuit rejected their position, holding:
In our view, where the bank is the "target of the deception," it makes no difference whether the perpetrator had an intent to harm the bank. Indeed, any conduct that causes loss or harm to a bank is likely to undermine the public’s confidence in the integrity of a bank, or otherwise adversely affect the bank’s public image, regardless of whether the loss or harm was so intended. In these circumstances, imposing an intent to harm requirement where the bank is the "target of deception" would leave an unnecessary gap in the reach of the bank fraud statute, which we think would contradict Congress’ purpose as well as undermine the broad federal interest in protecting financial institutions. Rather, proof of a specific intent to defraud the bank is sufficient * * * . However, where the bank is not the "target of deception," but rather merely an "unwitting instrumentality," there is the additional concern that § 1344 may be applied in a manner that reaches conduct that falls well beyond the scope of what the statute was intended to regulate.
The Third Circuit noted the split in the circuits on the issue, and adopted the view that intent to harm is not necessary where the bank is the direct victim of the scheme.
The district court's instruction on fraud included the following: "The fraudulent nature of a scheme is not defined according to any technical standards. Rather, the measure of a fraud in any fraud case is whether the scheme shows a departure from moral uprightness, fundamental honesty, fair play and candid dealings in a general light of the community." The Third Circuit noted that references to morality and fairness involve ambiguous terms, and in the past the court had cautioned against such language, but it held that the jury instructions, considered as a whole, were not defective:
We continue to have concerns regarding the definition of fraud with reference to such abstract terms as morality and fairness. However, we do not believe that this matter presented any real risk that the District Court’s instruction invoking concepts of morality and fairness, when read with the rest of the instructions, allowed for conviction solely based on this formulation of fraud. Accordingly, we find no error.
The court seems to be playing a bit fast-and-loose with language it had earlier criticized, as Circuit Judge Becker pointed out in his dissenting opinion: "In my view, the standard of 'moral uprightness' has no place in jury instructions defining fraud, as it broadens the federal fraud statute in a manner that 'give[s] inadequate notice of criminality and delegate[s] to the judiciary impermissibly broad authority to delineate the contours of criminal liability.'" (ph)
Former Erie, PA, mayor Rick Filippi, along with his law partner and campaign manager, was acquitted on charges of trying to profit from a proposed racetrack by buying property that could be resold later at a higher price. The track was never built and the property sold for no gain. Upon the announcement in state court of the not guilty verdict on the first count, Filippi's attorney, Leonard Ambrose, fainted. An AP story (here) quotes Ambrose as stating, "It was an emotionally draining experience . . . I have never been as emotionally close to a client and friend as in this case." Let's hope the reaction was one of joy and not utter astonishment at the verdict. Unfortunately for Filippi, who was elected in 2001, he came in fourth (out of five candidates) in the Democratic primary in 2005. (ph)
Saturday, March 25, 2006
Former tech investment banker Frank Quattrone had quite a positive week. First, the Second Circuit reversed his obstruction convictions due to improper jury instructions, then a few days later the Securities & Exchange Commission reversed the NASD's order barring him permanently from working with any broker-dealer. In 2002, the NASD, New York Stock Exchange (NYSE), and SEC Enforcement Division began investigations of so-called "IPO Spinning" by Credit Suisse First Boston, in particular the awarding of shares in hot IPOs by Quattrone to corporate executives as a way to win their company's investment banking business down the road. During that investigation emerged the famous "cleanup" e-mail forwarded by Quattrone, urging employees to clear out their files of unnecessary documents when there were pending civil and grand jury investigations, which ultimately led to the obstruction charges. In response to an NASD demand -- called a Rule 8210 Request -- that Quattrone testify about the e-mail, he asserted his Fifth Amendment privilege. The NASD then initiated a separate proceeding and ordered that he be barred from the securities industry because of his failure to provide information. Regarding the Fifth Amendment, the NASD took the position that it was not a "state actor" and therefore the Fifth Amendment was unavailable. Quattrone challenged that position, arguing that the coordinated SEC-NASD investigation meant that he could assert the Fifth Amendment and refuse to testify without that being the basis for an automatic sanction.
The full Commission did not rule on Quattrone's "state actor" argument, finding instead that there was a genuine issue of material fact regarding that question, and therefore the NASD's summary rejection of the argument and imposition of a sanction was improper. The Commission's opinion (here) states:
We do not reach the merits of the issue of whether the Rule 8210 Request constituted state action because we hold only that Quattrone should have been allowed to present evidence to support his claim that the requisite degree of coordination between NASD and the Commission existed here. Applicable law indicates that cooperation between the Commission and NASD will rarely render NASD a state actor, and the mere fact of such collaboration is generally insufficient, standing alone, to demonstrate state action. However, Quattrone proffered enough evidence concerning the Joint Investigation to earn an evidentiary hearing. Therefore, although we consider the burden of demonstrating joint activities sufficient to render NASD a state actor to be high, NASD should not have summarily dismissed the claim that, on the facts of this case, the Rule 8210 Request constituted state action.
While certainly welcome news, the SEC decision does not mean that Quattrone is out of the woods. Prior to the NASD's demand for testimony regarding the e-mail, it had already notified Quattrone that it intended to pursue an enforcement proceeding for the IPO spinning, a position it did not pursue further once it imposed the lifetime ban for taking the Fifth Amendment. The NASD is free to restart that proceeding, and may well in light of the uncertainty related to the e-mail issue. Similarly, the government has not announced whether it will retry Quattrone a third time, and the Second Circuit's opinion finding that sufficient evidence had been introduced at trial to support the convictions may impel the U.S. Attorney's Office to move forward.
Another possibility is that Quattrone will reach a civil settlement with the SEC and NASD, with the imposition of a significant civil penalty and industry bar, after which the criminal case will be dropped. While the situation remains fluid, the SEC's narrow opinion does not say anything about the merits of the NASD's enforcement action, so it is not much of a harbinger of how the criminal and civil cases are likely to proceed from here. The case goes back to the NASD to consider its options, and because the IPO spinning issue has never been fully aired, I suspect the NASD (and even the SEC) will pursue charges against Quattrone. (ph)
Friday, March 24, 2006
Transportation Safety Administration attorney Carla Martin will not have to appear as a witness called by the defense in the death penalty trial of Zacarias Moussaoui. Martin had disclosed trial transcripts to various government witnesses in violation of U.S. District Judge Leonie Brinkema's sequestration order, which nearly resulted in the government being unable to complete its case due to the court's order barring those witnesses from testifying. Judge Brinkema's order (here) notes only that the subpoena has been quashed "based in [on?] the request of Carla Martin's counsel." That statement indicates that Martin would have assert her Fifth Amendment privilege if called to testify, as she did at an earlier hearing when her violation of the court's order first came to light. Martin is currently on paid leave, and once the Moussaoui death penalty case is complete, look for Judge Brinkema to take up the issue of a possible criminal contempt proceeding against Martin. (ph)
While the amount you get for recycling bottles and cans is not much, if you have enough of them you're talking about real money. Kramer and Newman certainly figured that out on Seinfeld when they collected cans in New York and planned to drive them to Michigan, which has a ten cent deposit (Episode 131, Season 7 -- synopsis here). A number of defendants in California have entered guilty pleas to fraud charges for obtaining deposit refunds on bottles and cans collected in other states or Mexico, and claims for non-existent recyclables. A press release (here) issued by the U.S. Attorney's Office for the Central District of California describes the guilty pleas of Errol Segal, Memveluz Lampert, and two corporations under Segal's control, Active Recycling and Worldwide Recycling:
California consumers pay into the state's beverage container recycling system every time they purchase certain beverages – such as soda – in glass, plastic and aluminum containers. This money is refunded to the consumer when containers are redeemed at privately-owned recycling centers, which then reclaim California Redemption Value payments from the state Department of Conservation. Only cans and bottles sold in California are eligible for the CRV refund. Segal, Lampert and the other defendants defrauded the program by seeking and obtaining payments for recyclable goods that came from outside California or simply did not exist.
Appearing before United States District Judge A. Howard Matz last night, Segal pleaded guilty to mail fraud and to conspiring with several individuals to process non-CRV cans and bottles that were transported into California from other states and from Mexico, and then submitting falsified paperwork seeking reimbursement from California for processing those ineligible cans and bottles. The scheme led California to pay Segal and his corporations more than $2 million between September 1998 and February 2000.
Appearing yesterday morning before Judge Matz, Lampert pleaded guilty to conspiracy in a second scheme to defraud the State of California. Lampert admitted that, at the direction of Segal, she oversaw Active Recycling employees who processed paperwork for non-existent bottles and cans that were never recycled. As part of this scheme, which cost California more than $400,000 in less than a year, Lampert directed Active Recycling employees to falsify paperwork that allowed it to receive CRV payments for non-existent bottles and cans.
Watch out for those cans and bottles. (ph)
Faheem Salam, a civilian translator working in Iraq as a contract worker through Titan Corp., was charged with violating the Foreign Corrupt Practices Act for offering a $60,000 bribe to an Iraqi police official to obtain a supply contract. According to a Department of Justice press release (here):
Salam offered a senior Iraqi police official approximately $60,000 for the official’s assistance with facilitating the purchase by a police training organization of approximately 1,000 armored vests and a sophisticated map printer for approximately $1 million. The complaint alleges that Salam later made final arrangements with an undercover agent of the Office of the Special Inspector General for Iraq Reconstruction – posing as a procurement officer for the multinational Civilian Police Assistance Training Team (CPATT) in Iraq – for the map printer and vests, along with a separate $28,000 to $35,000 “gift” to process the contracts.
Thursday, March 23, 2006
Former NFL placekicker Ray Wersching was indicted in the Northern District of California on insurance fraud charges for allegedly siphoning more than $8 million in premiums from Farmers Insurance Group through his insurance agency. He is also charged with evading taxes on $3.6 million of income in his agency. Wersching was a kicker for 15 years in the NFL, including winning two Super Bowls with the San Francisco Forty-Niners. He tied the record for most field goals in a Super Bowl with four in Super Bowl XVI, when the Niners won 26-21 over the Bengals. In addition to the insurance business, Wersching is a CPA. A press release issued by the U.S. Attorney's Office (here) states:
According to the indictment, Mr. Wersching falsified and altered documents and records of his business in order to steal premium money owed to Farmers. Wersching also allegedly transferred premium money to the operating account of his company, instead of remitting the funds to Farmers. Wersching is charged with embezzling and misappropriating over $456,000 of premiums belonging to Farmers in 1997; over $1.2 million in such premiums in 1998; over $3 million in such premiums in 1999; and over $3.4 million in such premiums in 2000, all by failing to remit the premiums to Farmers as required by the company’s policies and procedures
Wersching was also charged with hiring a person convicted of a felony involving dishonesty -- forgery in this case -- to work in the insurance agency, a federal crime under 18 U.S.C. Sec. 1033(e)(1)(B). I suspect it's not a good business practice for insurance companies and agencies to hire former felons to handle other people's money, but I have to admit I never knew it was a federal crime (indictment here).
Former Lions great Alex Karras once observed about kickers, "You battle for 59 minutes, and then some little guy with a clean uniform comes in to kick a field goal to win the game, and he says, 'Hooray, I keek a touchdown.'" No touchdowns here. (ph)
The jury considering the RICO corruption charges against former Illinois Governor George Ryan and co-defendant Lawrence Warner has finished its eighth day of deliberations, and sent two notes to the judge about having "personal difficulties" in reaching a verdict. To make matters even more complicated, U.S. District Judge Rebecca Pallmeyer dismissed the jury early and said she is conducting an investigation of a "personal matter" involving a juror. A Chicago Tribune story (here) notes that the paper raised questions about whether one of the jurors answered a questionnaire truthfully during voir dire, although there are no further details and the court has sealed the records of its meetings with counsel for now. If one of the jurors has to be dismissed, then an alternate can be brought in, assuming one is available. That would require the jury to begin its deliberations all over, which will drag out the process even further. Deliberations will resume on Monday, when Judge Pallmeyer will most likely have completed her investigation of the juror issue and the question of whether an alternate will be used should be answered. Don't anyone hold their breath waiting for a verdict, at least not yet. (ph)
The Mills Corporation, a real estate investment trust (REIT) specializing in shopping centers, disclosed that the SEC bumpted the Enforcement Division's inquiry of the company's accounting up to a formal investigation, which means the Commission staff has subpoena power to compel the production of records and the appearance of witnesses. Mills buried its announcement about the status of the SEC investigation in an 8-K filing (here) that includes a long description of its employment agreement with the president of its operating division, and then the following terse entry: "On March 20, 2006, the Securities and Exchange Commission (the 'SEC') advised the Company that it has commenced a formal investigation of the Company. The Company previously announced in a Current Report on Form 8-K filed on January 12, 2006 that the SEC had commenced an informal inquiry. The Company has fully cooperated, and intends to continue to fully cooperate, with the SEC." In an earlier filing regarding the reasons why the company cannot make a timely filing of its annual 10-K, it noted (here) that the internal investigation has expanded so that "among the areas under review are revenue recognition, cost capitalization, lease accounting, accounting for sales of real estate and purchase price allocations to acquired operating properties." Gibson Dunn and Ernst & Young are conducting the internal investigation and audit.
Mills identified an awful lot of accounting issues, and the review seems to cover a significant amount of its financial reporting. The REIT industry has been largely free from the accounting problems that have enveloped other sectors in the past few years, such as food distribution, pharmaceuticals, and the automobile suppliers and manufacturers. If significant problems crop up at Mills, the SEC may take a proactive approach in looking at other REITs to see if similar problems exist. Check your portfolio. (ph)
Wednesday, March 22, 2006
Philadelphia city councilman Rick Mariano was convicted of 18 of the 22 counts related to accepting over $30,000 from businesses and helping them win city contracts and other favors -- he was acquitted of two counts each of mail and wire fraud. The judge ordered Mariano taken into custody immediately for a mental health examination, due to his behavior right before his indictment when he went to the observation deck of the Philadelphia City Hall in what some feared might be a suicide attempt. Mariano remains in custody, and also remains on the city council. Under state law, he is not required to resign until sentence is imposed, which will be at least three months from now, and possibly longer if the mental health exam takes a significant amount of time. Mariano's attorney did inform the city council president that he resigned from his positions a chair of the Licenses and Inspections Committee and vice-chair of the Appropriations Committee, but will retain his position on the council and, more importantly, the $102,000 annual salary that comes with it. Mariano's defense at trial was that the payments he received were loans due to financial difficulties, so he likely needs the salary, although that is not much justification for continuing on the city's payroll; Mayor Street, a long-time friend, called for his resignation. Having an elected official who has been convicted of corruption for misuse of that office retain his position just to draw a salary certainly presents an odd picture. A Philadelphia Inquirer article (here) discusses Mariano's conviction and position on the council. (ph)
Former Congressman Randy "Duke" Cunningham pled guilty to accepting approximately $2.4 million in bribes that included a wide array of antiques, rugs, and home furnishings from defense contractors. Those items will go on the auction block on March 23 in Los Angeles as the government seeks to recover some of the $1.8 million he was ordered to forfeit, which comes on top of $1.8 million in back taxes owed to the IRS. Among the items to be sold are silver candelabra, marble-top bedroom furniture, and a cherry sleigh bed (I'd pass on that one); he sold the Rolls-Royce before being charged. Cunningham received a ten-year sentence for accepting the bribes and arranging no-bid contracts for defense companies through his position on the House Defense Appropriations Subcommittee, and the auction closes out a sad chapter in the history of public corruption. An AP story (here) discusses the auction. (ph)
The government's wide-ranging investigation of price-fixing in the dynamic random access memory (DRAM)chip market has resulted in three more foreign defendants agreeing to serve prison terms in the United States. Three executives from Samsung, Sun Woo Lee, the senior manager of DRAM sales, Yeongho Kang, associate director of DRAM marketing for Samsung’s U.S. subsidiary, and Young Woo Lee, sales director for Samsung’s German subsidiary, entered guilty pleas to a single antitrust conspiracy charge. Sun Woo Lee will be sentenced to eight months, and Kang and Young Woo Lee to sevenths each. Three Korean executives from Hynix Semiconductor and four executives from the German company Infineon Technologies earlier entered guilty pleas and will serve prison terms in the U.S. Samsung, the largest company in the DRAM market, agreed to plead guilty to conspiracy and pay a $300 million fine in November 2005. A Department of Justice press release (here) discusses the prosecutions. (ph)
The former principal of a charter school in Southwest Philadelphia was indicted on six counts of wire fraud related to submitting inflated student enrollment figures to obtain additional funding. The school closed abruptly in June 2003, before the end of the school year, when its charter was not renewed, and a federal investigation had began shortly before that. According to a press release issued by the U.S. Attorney's Office for the Eastern District of Pennsylvania (here):
As the principal of CEL, Andrews engaged in a scheme to defraud the School District by causing falsely inflated student enrollment data to be submitted to the School District, thereby causing the School District to provide funding to CEL to which CEL was not entitled. As Andrews knew, limitations in the School District’s computer network prevented the School District from knowing that a student had left CEL, where that student had transferred to another school outside of the School District (such as a parochial school or a school outside of Philadelphia) or had dropped out of school altogether. Andrews exploited these limitations in the School District’s computer network by directing his staff to report to the Network that students who had either transferred to another school outside of the School District, or dropped out of school altogether, continued to attend CEL, when in fact as Andrews knew, these students did not attend CEL. As a result of the defendant’s scheme to defraud, the School District overpaid CEL approximately $200,000 in public education funds.
It is not clear from the press release whether Andrews is accused of personally enriching himself from the alleged fraud. For those wondering about the name of the school, CEL stands for "Center for Economics and Law." The school focused on law, economics and entrepreneurship, and this case would have served as a good object lesson for the application of the law. A Philadelphia Inquirer story (here) discusses the indictment. (ph)
Saint Regis University graduates beware, your degree is from a diploma mill in Liberia (in case you didn't know that already). Not to be confused with Regis College in Massachusetts or Regis University in Denver, Saint Regis University was a school purportedly accredited in Liberia, but it turns out that three Liberian diplomats accepted over $40,000 in bribes to have the country's Board of Education certify the on-line school that granted credit for "life experience" -- a sure sign of questionable educational practices. Richard Novak entered a guilty plea to conspiracy and Foreign Corrupt Practices Act charges for his role in making the payments to the diplomats, including at least one transaction in a Washington, D.C. hotel room that was secretly videotaped by the Secret Service. The "University" issued over $6,000 college degrees, and an AP story (here) reports that two other defendants, Dixie and Stephen Randock, allegedly were the source of the bribery funds and the organizers of the operation, which included other purported "universities" issuing diplomas. The Randocks were indicted on mail/wire fraud and conspiracy charges in October 2005. (ph)
Tuesday, March 21, 2006
The Wall Street Journal here notes the latest indictments in the "squawk box" cases. The four new indictments concern the internal audio system used on Wall Street and alleged abuses by individuals who were to have "paid cash or padded commissions to brokers" for access to their squawk boxes. The four individuals, employed by A.B. Watley, were charged with conspiracy to commit securities fraud. Three of the four had conspiracy to commit commercial bribery charges and two had a false statement charge. Perhaps the most unusual part of the indictment here is that one of the individuals charged was a compliance officer.
Despite being found not guilty of all but the tax counts, the Atlanta Journal Constitution reports here that the government seems to be trying to use something on a verdict form (not sure exacly what from the story) as a basis for increasing the sentence that former Atlanta Mayor Bill Campbell might receive at his upcoming sentencing. It seems that although the jury found him "not guilty" on the RICO count, they made an indication of a mail fraud predicate act. RICO requires two predicate acts, and also requires continuity plus relationship of the acts involved. Absent these elements there is no RICO. And in the meantime, Campbell is arguing for a reversal of his conviction.
The U.S. Attorney's Office for the Southern District of California issued a press release here regarding an individual who was convicted of "four counts of Exporting Defense Articles Without a License and one count of Conspiracy to Commit Offenses Against the United States." Unlike many white collar offenders, and certainly those involved in corporate fraud, the individual convicted in this case "was previously convicted in 1987 of violating the Arms Export Control Act by illegally exporting HAWK missile system components from the United States." The press release states that he was deported thereafter. So why is he here in the US and being prosecuted a second time?
Check out a wonderful article in the National Law Journal here by William R. Mitchelson Jr., a former Assistant U.S. Attorney for the Middle District of Florida and Mark T. Calloway, a former U.S. Attorney for the Western District of North Carolina, who both now work at the law firm of Alston & Bird. This article provides defense counsel with some excellent advice on how to deal with prosecutors to avoid having a client disgraced and disadvantaged by being put through a "perp walk." The authors note the prosecution's use of this tactic in many white collar cases.
Perhaps showing the world the discretion afforded the government in making the decision to use a perp walk in arresting a client as opposed to just asking the accused to appear for the fingerprinting ritual, will at last expose this disgraceful tactic employed by the government.