Wednesday, May 31, 2006
According to the Washington Post here, DOJ is offering a "filter team" "to be made up of an FBI agent and two Justice Department lawyers not part of the investigation." The idea would be that Jefferson would go through these materials with the team and then he could assert to a court what items might be "privileged."
There is one basic problem here. The "team," albeit not directly involved in this case, is still a government team. It is nice of the government to offer members of their team as part of the "filter team," but shouldn't the team be appointed by the Court? It is not like the items in question are in jeopardy of being destroyed. Might this be a good time for the court to intervene and either peruse the materials him or herself, or appoint someone not associated who can review the items and decide if the items violate privilege. More importantly, might this be a good time to hear from Jefferson's lawyers so that a court can decide if the search was warranted here. One commenter to another blog entry here argues that the court already had the chance to review the search as the court approved the issuing of the search warrant. The problem here is that it was issued the warrant without any objection, because no one was given notice of the search. It was premised solely on what the FBI presented. If this had been a subpoena, the court would have heard from both sides in the objection and not just the DOJ.
There are now four U.S. Attorney's Offices looking into the timing of stock options granted to senior executives with the issuance of a grand jury subpoena from the District of Massachusetts to Sycamore Networks, Inc., a Chelmsford, Mass., company. According to an 8-K filed on May 30 (here):
In addition to the previously reported investigation by the Securities and Exchange Commission (the “SEC”) of the practices of Sycamore Networks, Inc. (the “Company”) related to certain stock option grants, the Company is also cooperating with the U.S. Attorney’s Office for the District of Massachusetts (“U.S. Attorney's Office”) in its investigation of the Company’s stock option practices. On May 26, 2006, the U.S. Attorney's Office issued a grand jury subpoena to the Company requesting that the Company produce documents relating to stock option grants. The Company is cooperating, and will continue to cooperate, with the SEC and the U.S. Attorney's Office in their investigations.
The U.S. Attorney's Offices for the Southern and Eastern Districts of New York, i.e. Manhattan and Brooklyn, have taken the lead by subpoenaing over a dozen companies between them, while the U.S. Attorney's Office for the Northern District of California issued a subpoena to Altera Corp. related to its options grant practices (see press release here). It remains unclear whether there is a coordinated investigation by the U.S. Attorney's Offices, although the companies subpoenaed in Massachusetts and California are within the districts, while the New York investigations are nationwide. The SEC is also conducting investigations of the companies that have received grand jury subpoenas, so there is likely at least some coordination through that agency, although there are important limitations on how closely the civil and criminal investigators can work together. Of particular concern, after two district court decisions in the past year dismissing criminal charges, will be how the SEC deals with witnesses who may also be the targets of grand jury investigations.
The Wall Street Journal has a very helpful chart (here) detailing the companies that so far have disclosed governmental and internal investigations of possible options-timing issues. The investigations have already resulted in the dismissal of a few senior executives related to the probes, including the firing of the general counsel at McAfee discussed in an earlier post (here). With the U.S. Attorneys in New York, Boston, and San Francisco conducting investigations, can the offices in Chicago and Los Angeles be too far behind? Moreover, look for the SEC investigations, most of which have been identified as "informal" to this point, to move into the "formal" category in the near future, which will trigger a wave of civil subpoenas. (ph)
Tuesday, May 30, 2006
Starting tomorrow in Miami is the Fifteenth National ABA Criminal Justice Section's Sentencing Conference, also sponsored by the Federal Bar Association and the United States Sentencing Commission. For details, see here.
On Thursday and Friday, Conglomerate Blog here will host an online symposium called, Conglomerate Forum: Enron. The symposium will "explore issues relating to the use of criminal law as a corporate governance mechanism in the wake of last week's guilty verdicts against Ken Lay and Jeff Skilling."
According to the Wall Street Journal here, McAfee has "fired its general counsel after an internal review of stock-options granting practices." And this isn't the first person to go among several companies that are being scrutinized by the government over stock options.
Are stock option improprieties going to be the new government target and priority in the corporate arena? And will the companies all be immediately cooperating with the government? Do individuals within the companies need to be aware that should a company come under scrutiny, they will no longer be protected by their employer?
Monday, May 29, 2006
According to the Washington Post here, Senate Majority Leader Bill Frist is "okay" with the search of Rep. William Jefferson's office. But would he be "okay" if it were his office? Would he be "okay" if someone from the executive came into his office and took documents or materials because they believed a crime had been committed. Yes, the search warrant requires probable cause, but it does not allow the individual the right to go into court and request that the search warrant be quashed prior to the government obtaining the items in question. And if the officer acts in "good faith" even if later proved to be incorrect (Leon), the items obtained from the search may be allowed into court.
Would Sen. Frist be "okay" if the FBI decided to procure all evidence coming from the Abramoff case by entering legislative offices and not using the subpoena duces tecum? And will he be "okay" if the searches start occurring immediately before elections, and maybe when a different Attorney General is in office?
Everyone is innocent until the government proves them guilty beyond a reasonable doubt. And making sure that the executive does not intimidate or interfere with the legislative branch is also important. It doesn't mean that individuals who commit crimes are not prosecuted, it just means that with vast prosecutorial power it is important to protect the tripartite process. President Bush's resolution to seal the items is a good solution to allow the defense the opportunity to present their case to court and force the prosecution to respond as to why the choice of a search was necessary here.
Clearly a topic of discussion is the upcoming sentencing of Ken Lay and Jeff Skilling. Co-blogger Professor Peter Henning provides interesting points here. Professor Doug Berman also has some thoughts here and here. This will clearly be a topic of upcoming conversation.
But what are Ken Lay and Jeff Skilling thinking right now? And what are those close to them thinking right now? Probably many just don't care and want these two men given a maximum sentence. But what purpose will that sentence serve? Will it stop future criminality (deterrence)? Could we achieve that deterrence with far lesser sentences than everyone seems to be predicting? Is the criminal justice system just going to become a retributive machine to answer to the public outcry?
Throughout legal history, scandals have come and gone, and there have been white collar prosecutions to match them - just ask Michael Milken.
The recent white collar prosecutions, however, have been different. The types and number of charges have increased, and the penalties have become enormous - often the equivalent of life sentences. It is also apparent that prosecutions have not been limited to the individuals actually committing the heart of the criminality within a company. The government has chosen to go above the individuals who are committing the actual frauds, and in some cases give these CFOs and lower level managers the plea deals, in order to prosecute the CEOs - the managers who oversee the company.
Back when Park, the CEO of a national food chain was held criminally liable for a violation of the Federal Food, Drug, and Cosmetic Act, the fine was $250.00 and there was no prison time. But the criminal conduct, charges, and sentences have come a long way since then.
Was this all necessary to put a halt to individual criminal conduct occurring within corporations? Or could this criminal conduct have been stopped in a better way?
For one, having a better oversight structure in place should assist in putting a stop to criminal conduct. It would also help if the legislators drafted the laws clearer so that everyone knew what was legal and acceptable business conduct and what crossed the line into criminality. We all know what murder is, but how many can actually understand what constitutes mail or wire fraud. Perhaps business schools need to include a professional responsibility class (all ABA law schools are required to have them).
But will the legacy of Enron be that the government over-reacted in an effort to eradicate corporate misconduct. Will the legacy be that it is necessary to stop criminality before it happens, as opposed to reacting after the fact. Would pensions have been saved if there were adequate controls in place to begin with, as opposed to using punishment as the means for achieving compliance. And more importantly, are we so busy prosecuting the past conduct resulting from cases like Skilling/Lay that we are missing what is happening with hedge funds, identity thefts, and new forms of computer criminality?
But for one juror on the Lay/Skilling case, the trial's legacy may be felt everytime a dog appears, as according to Business Week Magazine here, a juror adopted a bichon frisé puppy during the trial, and calls the dog - "Enron."
Saturday, May 27, 2006
Who is in charge of the executive -- that is when it comes to the power of the President versus the Attorney General?
According to the Washington Post here, it looks like the issue may temporarily be on hold, in that the evidence obtained in a search has been sealed. (see here) The controversy involved the papers removed from the office of Rep. William Jefferson. These items were taken by the FBI pursuant to a search warrant. Although a subpoena duces tecum could have been used, a process which would have allowed the congressman the opportunity to go into court and move to quash the subpoena, it was not used here. (see post here and here). The Washington Post reports a threat of three top law enforcement officials, including the head of the FBI (Mueller) and the DOJ (Gonzalez) resigning if the papers of Jefferson are ordered returned to him by the President.
Does this remind some of us of history? Remember when President Nixon "discharged Special Prosecutor Archibald Cox and accepted the resignations of Attorney General Elliot L. Richardson and Deputy Attorney General William D. Ruckelshaus." See Washington Post here (1973).
But this is not quite the same. We aren't dealing with an investigation of the President here, and we don't have a special prosecutor conducting this particular investigation. Not to mention that the investigation involves a Democrat in Congress and the President is Republican.
But the test of who controls the executive when it comes to a criminal investigation -- the president or DOJ - - remains the same.
The indictment of plaintiff class action law firm Milberg Weiss on conspiracy and mail fraud charges did not mean that the firm would necessarily go out of business, but the pressure from the indictment is starting to show. An article in The Recorder (available on Law.Com here) notes that since the grand jury indicted the firm and two of its name partners on May 18, a member of the executive committee and two members of the management committee have announced plans to move to other firms. One partner, the head of the corporate practice group, is leaving but has not announced plans regarding where he will practice next. In a potentially more ominous sign, the health care group at Milberg Weiss, including two partners, six associates, and a staff lawyer will be moving in whole to another firm. Coupled with the loss of partners have been moves to have the firm removed as lead counsel in various class actions, and the indictment will make it very difficult for Milberg Weiss to obtain new appointments as class counsel from judges leery of appointing a firm that may be convicted of fraud in relation to its representation in other class actions. If other practice groups and their leaders decamp from Milberg Weiss, the financial pressure on the remaining partners to fund the firm's ongoing litigation -- which can be an expensive proposition -- and the continuing expenses defending the indictment may be too great for it to survive. Unlike Arthur Andersen, which could not survive a conviction, Milberg Weiss may be undermined by the fall-out from the indictment. (ph)
The past year has seen the conviction and sentencing of CEOs from WorldCom, Adelphia Communications, and Enron, and it may be that a pattern has emerged that establishes a likely parameter for the sentencing of Ken Lay and Jeffrey Skilling. In all the cases, the companies collapsed after the revelation of significant accounting issues, and investors lost billions of dollars, although arguments can be made whether that loss was directly attributable to the misconduct of the executives. Under the Federal Sentencing Guidelines, these executives could have received sentences of life in prison, which the government argued was the appropriate Guidelines sentence in the proceedings against former WorldCom CEO Bernie Ebbers and Adelphia Communications CEO John Rigas. Professor Frank Bowman has a powerpoint presentation (available through the Wall Street Journal Law Blog here) that works through the Guidelines and concludes that a term of life in prison is a possibility for Lay and Skilling based on the amount of the loss and other sentencing enhancements.
The Guidelines are no longer the governing law after Booker but only advisory, so U.S. District Judge Sim Lake need not adhere to them strictly. The prosecutors probably will argue for the highest sentence under the Guidelines, based on all possible enhancements, including perjury, and ask the judge to apply them as a "reasonable" sentence. That would mean life sentences for both defendants, although different loss calculations might result in a slightly lower sentence for Lay -- say, 30 years, which would not make much of a difference for a defendant in his early sixties. The government's memorandum for the Ebbers sentencing (available below) sets out what I expect will be the likely approach of the Enron Task Force regarding a non-Guidelines analysis based on comparable sentences given in other cases to avoid sentencing "disparity," one of the goals of the Guidelines. Here, the 25-year sentence imposed on Ebbers and the 15 years that the 80-year old Rigas received could be argued by the government as the appropriate parameters of a "reasonable" sentence for Lay and Skilling, and prosecutors would be expected to seek a sentence at the higher end of that range. The Ebbers memorandum undertook the same analysis, relying on the Rigas sentencing and two other cases involving CEOs convicted of securities fraud, Patrick Bennett and Steven Hoffenberg, who received 22-year and 25-year sentences respectively, as relevant to imposing a sentence that did not create gross disparities.
The defendants will not concede that the Guidelines calculation of life is appropriate or that the sentences of CEOs like Ebbers and Rigas are comparable situations. There is also a good argument to be made that defendants like Lay and Skilling do not deserve sentences that may result in their dying in prison, or leaving it when they are quite elderly, when they pose no real threat to society. Nevertheless, it is interesting that there is now a CEO parameter for sentencing that may provide Judge Lake with some guidance as to how to exercise his discretion in determining the punishment for Lay and Skilling. (ph)
Brett Pfeffer served as an aide to Louisiana Representative William Jefferson for three years in the late 1000s, and more recently was solicited for a bribe by his former boss in exchange for the Representative's assistance in obtaining contracts in Nigeria to provide broadband services. On May 25, he received a 96-month prison term after entering a guilty plea to conspiracy and aiding and abetting the solicitation of a bribe (DOJ press release here). Pfeffer was the first person to plead guilty in the government's probe of the Louisiana Congressman, which recently triggered a confrontation between Congress and the Department of Justice over an FBI search of Representative Jefferson's House Office (see earlier posts here and here).
Pfeffer is cooperating in the government's investigation, and he likely will be eligible for a Rule 35 motion for a reduction of sentence at a later point if he provides assistance to prosecutors. As it stands, this is a substantial term of imprisonment, and does not bode well for others who may be considering whether to accept a plea offer from the government. Pfeffer's sentence is two years greater than that received by former lobbyist Jack Abramoff, who is cooperating in a separate -- and apparently much broader -- corruption investigation on Capitol Hill that has triggered pleas from aides to Representative Bob Ney and former House Majority Leader Tom DeLay. Former Representative Randy "Duke" Cunningham also received a 100-month sentence, and his corrupt activities have also spawned a growing investigation that may have ensnared the former No. 3 official at the CIA amid lurid accusations of poker parties that included discrete female entertainment.
Not surprisingly, the first one through the prosecutor's door may be receiving the best deal, but that plea bargain will include a not insubstantial term of imprisonment these days when the crime involves Congressional corruption. (ph)
Friday, May 26, 2006
Although sentencing is still to come for Ken Lay and Jeff Skilling, the wheels are probably turning on what issues might be used for an appeal. Some of the issues that we may see, without predictions on their success or failure, are:
- Venue - the court's denial of the motion to move the case from Houston.
- Severance - the failure to hold separate trials for Lay and Skilling; this was compounded when the case proceeded after Lay's attorney became ill mid-trial.
- Defense Witness Immunity - the failure to grant the defense witnesses immunity so that these witnesses would testify.
- Admission of Potentially Prejudicial Testimony - e.g., Photofete
- Willful Blindness Instruction - did it improperly lower the mens rea standard
- Sufficiency of the Evidence - was there sufficient evidence of the defendants' mens rea
What issues may arise as a result of sentencing, remains an open question. The case will go the Fifth Circuit Court of Appeals, the same court that remanded the Jamie Olis case.
Along with the criminal indictment on false statement, perjury, obstruction, and conspiracy charges filed on June 4, 2003, Martha Stewart and Peter Bacanovic were sued the same day by the SEC for insider trading (complaint here) arising from her sales of ImClone Systems, Inc. stock on December 27, 2001. The Commission alleged that Stewart sold her shares (and avoided approximately $45,000 in losses) based on information about stock sales by ImClone's CEO, Dr. Sam Waksal, that was passed on to her by Bacanovic, her broker at Merrill Lynch. The complaint does not allege that Waksal -- who is serving a 7-year prison term after pleading guilty to insider trading and tax charges -- tipped either Stewart or Bacanovic about problems ImClone was having in obtaining FDA approval for its main drug, Erbitux. Instead, the SEC alleges that Bacanovic violated his fiduciary duty to Merrill Lynch by tipping Stewart about customer information: "As of December 27, 2001, the Waksals' efforts and instructions to sell their ImClone stock were not public and Merrill Lynch policies specifically required employees to keep information about those transactions confidential. Indeed, Merrill Lynch had in place at least four policies that prohibited employees, such as Bacanovic and [his assistant Douglas] Faneuil, from disclosing client transactions to others or effecting trades on information about client securities transactions." The alleged insider trading is a step removed from the confidential information, and concerns market information rather than corporate information, raising questions of materiality and causation. Federal prosecutors did not charge Stewart and Bacanovic with securities fraud, most likely because it would have been too difficult to establish guilt beyond a reasonable doubt. The SEC suit operates under the more relaxed civil standard of preponderance of the evidence, although the case is certainly not an easy one.
The parties agreed to stay the civil case until the criminal case was over, and now that Stewart will not pursue any further appeals from the affirmance of her conviction by the Second Circuit in January 2006, the SEC suit can move forward. An AP story (here) states that Stewart and Bacanovic must now file an answer to the complaint. The civil case involves a fairly trivial amount of money for someone of Stewart's wealth, and could probably be settled for not much more than $200,000 with interest and a triple penalty, at the most. The problem in settling the case most likely is a possible director and officer bar that could be imposed on Stewart if there is a finding that she engaged in a violation of the antifraud provisions of the federal securities laws. The complaint seeks the following relief: "Order that Stewart be barred from acting as a director of, and limiting her activities as an officer of, any issuer that has a class of securities registered pursuant to Section 12 of the Exchange Act, 15 U.S.C. § 781, or that is required to file reports pursuant to Section 15(d) of the Exchange Act, 15 U.S.C. § 78o(d) . . . ." A D&O bar would prevent Stewart from exercising control of Martha Stewart Omnimedia Inc. as a senior executive, barring a move to take it private so that it would not be subject to the registration and reporting provisions of the Securities Exchange Act of 1934. If the Commission is insisting on a bar, that may be too high a price to pay, especially in a case that Stewart stands a reasonable chance of winning, although at the cost of another round of negative publicity. Then again, having appeared on a version of The Apprentice, there may be no such thing as too much bad publicity. (ph)
UPDATE: An AP story (here) states that Martha Stewart filed an answer to the SEC complaint asserting that she acted in "good faith," which is a defense to a fraud charge under Section10(b) and Rule 10b-5, the legal basis for the insider trading prohibition. At this point, discovery will move forward, which means deposition notices are likely to go out to Stewart and Peter Bacanovic, her co-defendant and former broker. Unlike the criminal case, in which neither testified, as civil defendants the opposing party has the right to compel them to testify. While either can assert the Fifth Amendment privilege at the deposition, that can be used as evidence to infer that the person had the requisite intent to violate the antifraud provisions. Settlement is certainly not precluded at this point, and as discovery proceeds the sides may move closer to resolving the issues. (ph)
President Bush issued an memorandum (here) directing that the materials seized from Representative William Jefferson's office on May 20 be sealed for 45 days to permit the Department of Justice and the House of Representatives to resolve the issues related to the search. The memorandum states:
(1) The Attorney General, acting through the Solicitor General of the United States who shall for this purpose be subject to no supervision by any officer of the Department of Justice other than the Attorney General, shall (a) preserve and seal the materials, (b) ensure that no use is made of the materials, and (c) ensure that no person has access to the materials, except that Office of the Solicitor General personnel under the direct supervision of the Solicitor General may have the minimum physical access to the materials essential to the preservation of the materials.
(2) The Attorney General shall endeavor, and the House of Representatives is respectfully encouraged to endeavor, to resolve any issues relating to the materials through discussions between them in good faith and with mutual institutional respect and, if it should prove necessary after exhaustion of such discussions, through appropriate proceedings in the courts of the United States.
A court filing by Representative Jefferson seeking the return of the materials indicates that agents removed two boxes of documents and copied all the files on the Congressman's hard drive. Computer searches are often used to recover deleted items, and it may be that investigators believe that only by searching the computer rather than seeking its production through a subpoena duces tecum would permit them to recover all the evidence. That said, it may well be that the computer could have been obtained by a means other than a Saturday night search, perhaps by having the House Counsel's office secure it and having the hard drive copied. The President's directive will keep the issue out of the courts for at least a little while, and perhaps permit a negotiated resolution that will permit the FBI to obtain the evidence it believes was in the Rayburn Office of Representative Jefferson. An AP story (here) discusses the status of the dispute. (ph)
Thursday, May 25, 2006
The jury returned guilty verdicts on all counts against former Enron CEO Ken Lay and 19 of 28 counts for Jeffrey Skilling, with not guilty on 9 of the 10 insider trading counts. The verdict came much more quickly than most expected, and U.S. District Judge Sim Lake also announced his decision convicting Lay on the bank fraud and false statements to a financial institution charges that were tried separately. For those interested, the redacted version of the indictment given to the jury is available below.
With the conviction of the two defendants, the next two issues significant issues will be sentencing and the inevitable appeal. The key to the sentencing under the Federal Sentencing Guidelines is the amount of the loss attributed to the defendant's crimes. Although the Guidelines are now advisory, Judge Lake has shown in other cases that he will follow them fairly closely in determining the final sentence. Under the fraud loss table in Sec. 2B1.1 in the 2000 Guidelines (here) that would apply to these offenses, a loss of more than $80 million would put them in range of a 6-7 year sentence, and additional enhancements for number of victims, sophisticated means, etc. could add enough points to put them in a 10-15 year range. An interesting question is whether Judge Lake will apply the obstruction of justice enhancement by finding that one or both defendants committed perjury; in a case like this, the government is almost guaranteed to request that increase. The defendants will argue that the loss was insignificant because the company's stock price was unaffected by their statements. Judge Lake also handled the trial and sentencing of Jamie Olis, and the Fifth Circuit required that he more carefully analyze the loss from his criminal conduct. The Judge's decision on Olis likely will provide an outline to how he will approach the sentencing of Lay and Skilling on the loss issue.
I expect that a key appellate issue will be the "Ostrich Instruction" given to the jury on the issue of determining the defendant's intent (see earlier post here). The use of this instruction usually is controversial, and the fact that the jury returned a guilty verdict on all counts for Lay and the non-insider trading counts for Skilling may actually help the defendants if the Fifth Circuit were to find the instruction should not have been given. The lack of any not guilty verdicts related to the disclosure counts could show that the jurors were influenced by the Ostrich Instruction, which would blunt the government's harmless error argument. (ph)
Special Counsel Patrick Fitzgerald's latest filing (available below) about discovery issues in the prosecution of I. Lewis Libby reveals that Vice President Cheney will likely be a witness for the government at the upcoming trial on perjury, obstruction, and false statement charges. The brief discusses the Vice President's annotated copy of the Op-Ed published by Joseph Wilson in the New York Times that triggered the leak of his wife Valerie Plame's identity as a CIA operative. A footnote in the brief states, "Contrary to defendant’s assertion, the government has not represented that it does not intend to call the Vice President as a witness at trial." That statement comes in the context of a discussion about authenticating the annotated Op-Ed for admission into evidence at trial, an issue of very minor importance that is unlikely to be a point of contention. More importantly than the non-denial that the Vice President would be called is the Special Counsel's description of the heart of the case: Libby's intent. The brief states that "the state of mind of the Vice President as communicated to defendant is directly relevant to the issue of whether defendant knowingly made false statements to federal agents and the grand jury regarding when and how he learned about Ms. Wilson’s employment and what he said to reporters regarding this issue." The communications between Libby and the Vice President appear to be a key facet to undermining Libby's "dedicated-but-overworked-public-servant" defense (see earlier post here) that asserts he dealt with so many issues at that time that the identity of Valerie Plame was unimportant and he merely forgot how he learned about her when he spoke to the FBI agents and testified before the grand jury. The Vice President is the only one who can testify as to his state of mind in July 2003, so he is likely to be a featured witness at trial. (ph)
Kirk Wright has been accused of causing loses -- or looting -- of over $100 million in hedge funds he managed, and to this point the government has only been able to recover approximately $150,000, not counting the $28,000 in cash on him when he was found. Wright was arrested at the Ritz-Carlton in Miami on a warrant issued after the filing of a single-count criminal information alleging securities fraud in the Northern District of Georgia, and will be returned to Atlanta to face what will likely be a multi-count indictment. A U.S. Magistrate set bond at $1 million, and according to a South Florida Sun-Sentinel story (here), prosecutors plan to appeal the bond decision on the ground that Wright is a flight risk. He will remain in jail until the initial appeal to a district judge is decided. While the Bail Reform Act does not permit a court to set a bond so high that it effectively keeps a defendant in jail, courts are permitted to require a defendant to deposit property with the court or post a surety bond (18 U.S.C. Sec. 3142(c)) to be released, or else remain in jail. In 2005, mutual fund manager Alberto Vilar spent over a month in jail when he was unable to post property to meet a multi-million bond.
Whether Wright will be able to put up $1 million that is untainted by the alleged fraud is another question, but U.S. Magistrate Judge Stephen Brown told Wright that "[i]f you're going to hide and you're going to flee, the Ritz-Carlton in South Beach is not the place you want to go." I can think of a lot worse places than a Ritz-Carlton to hide out, although perhaps a location outside the United States might have been just a bit more effective, if one were to flee. (ph)
If you have received the e-mails or telephone messages telling you that you've won a sweepstakes, or at least the highly valuable second prize, your heart probably jumps at least for a moment at the thought of riches. For most of us, that's also about how long it takes to figure out that it's a scam, but the lure of free money sure was tempting to over 2,000 victims, as a recently completed Immigration and Customs Enforcement (ICE) investigation shows. Defendants were arrested in a coordinated operation in the U.S. and Costa Rica for running a fraud that an ICE press release (here) described:
During their pitch to victims, the fraudsters in Costa Rica typically claimed to be a "U.S. Customs" official or a representative of another federal agency. They would then tell the victims that they had won 2nd prize in a foreign sweepstakes and that, to collect the prize money, the victims needed to send via Western Union anywhere from $1,000 to several thousand dollars to an "insurance entity" in Costa Rica as a "refundable insurance fee." Victims sent wire transfers to Costa Rica to claim the prizes, but never received any money.
Once the victim had wired the money to Costa Rica, the fraudsters would often call the victims back and inform them that they had actually won 1st prize and that they needed to wire thousands of additional dollars in fees in order to ensure the safe delivery of the prize money. The defendants and their co-conspirators continued to call victims with this pitch as long as the victims continued to wire money to Costa Rica. None of the victims ever received any prize money.
It is believed that more than 2,000 U.S. victims were defrauded out of at least $20 million through this international sweepstakes fraud.
Paying money to get your winnings sounds a bit counterintuitive, but then in hindsight that's true of most frauds. If you're going to gamble, you might as well try investing in stock market, at least that is (marginally) more honest. (ph)
Wednesday, May 24, 2006
The corruption investigation of Louisiana Representative William Jefferson took an extraordinary turn on May 20 when FBI agents executed a search warrant for his Congressional Office in the Rayburn Building. This was the first time in history that the office of a sitting Congressman had been searched, and the use of this means to gather evidence has triggered a strong reaction from the leadership of the House of Representatives, including a complaint from Speak Hastert directly to the President. The issue remains controversial, as a front-page story in the New York Times (here) discusses the continuing concern in Congress over the tactic used by the Department of Justice. Co-blogger Ellen Podgor noted in earlier posts (here and here) that searches in white collar crime cases are uncommon, although in the past few years they have been used with increasing frequency, particularly in health care investigations. In recent corruption probes, search warrants were used to gather evidence against former Representative Randy "Duke" Cunningham, and FBI agents executed a warrant at Representative Jefferson's home and are reported to have seized $90,000 from a refrigerator that was part of an undercover payment. Searches can be an especially effective tool in cases in which there is a likelihood evidence -- particularly computer files -- may be destroyed or removed to an unknown location.
The problem with searching the office of a Congressman is that there are significant separation of powers issues, and perhaps more importantly questions about whether the seizure of evidence might violate the Speech or Debate Clause of Article I, Section 6 of the Constitution (the New York Times refers to it as the "Speech and Debate" Clause, which is technically incorrect). That provision states members of Congress "shall in all cases, except treason, felony and breach of the peace, be privileged from arrest during their attendance at the session of their respective Houses, and in going to and returning from the same; and for any speech or debate in either House, they shall not be questioned in any other place." Those who have lived in Washington D.C. may be familiar with the Clause because it protects members of Congress stopped on I-66 for violating the HOV restrictions. On a higher plane, however, House Majority Leader John Boehner predicted (see AP story here) that the issue of the search will have to be resolved by the Supreme Court, which likely means that any challenge by Representative Jefferson would be on Speech or Debate Clause grounds. The Fourth Amendment does not afford any specific protection to legislative offices so long as there is probable cause to believe that there is evidence of criminal activity at the location specified, and the House of Representatives would not have standing to raise a Fourth Amendment claim on its own.
The two leading Supreme Court cases on the scope of the Speech or Debate Clause are United States v. Brewster, 408 U.S. 501 (1972), and United States v. Helstoski, 442 U.S. 477 (1979). In Brewster, the Court stated, "[A] Member of Congress may be prosecuted under a criminal statute provided that the Government's case does not rely on legislative acts or the motivation for legislative acts. A legislative act has consistently been defined as an act generally done in Congress in relation to the business before it. In sum, the Speech or Debate Clause prohibits inquiry only into those things generally said or done in the House or the Senate in the performance of official duties and into the motivation for those acts.” In Helstoski, the Court explained,
Likewise, a promise to introduce a bill is not a legislative act. As to what restrictions the Clause places on the admission of evidence, our concern is not with the “specificity” of the reference. Instead, our concern is whether there is mention of a legislative act. To effectuate the intent of the Clause, the Court has construed it to protect other “legislative acts” such as utterances in committee hearings and reports. But it is clear from the language of the Clause that protection extends only to an act that has already been performed. A promise to deliver a speech, to vote, or to solicit other votes at some future date is not a legislative act.
I won't pretend to be an expert on Speech or Debate Clause issues, but the scope of the protection as explained by the Supreme Court certainly seems to cover at least some of the materials in Representative Jefferson's office that were subject to the search warrant. News reports state that the Department of Justice used a "taint team" to review items to determine whether they could be seized, but that is faint protection under the Constitution and not likely to insulate the search from a challenge.
Usually, a defendant challenges a search after the filing of charges, but Federal Rule of Criminal Procedure 41(g) permits a challenge at an earlier stage: "A person aggrieved by an unlawful search and seizure of property or by the deprivation of property may move for the property's return. The motion must be filed in the district where the property was seized." I expect that this will be the means by which Representative Jefferson will challenge the search, if he chooses to do so, and the case would be filed in the U.S. District Court for the District of Columbia. Given the extent of the government's investigation of possible corruption involving the Congressman, I would not be surprised to see a challenge to the search on Speech or Debate grounds because that could slow the process, if nothing else. If such a motion is filed, counsel for the House of Representatives and Senate probably would file amici briefs to have a court review the documents to determine whether they are protected by the Constitution, at a minimum, to ensure that legislative materials have not been seized.
With the continuing investigations of corruption in Congress involving a number of different Representatives, Speech or Debate Clause issues will continue to pop up. (ph)
UPDATE: Representative Jefferson filed a motion for the return of the papers seized from his House Office, asserting that the seizure violated the Constitution's Speech or Debate Clause. An AP story (here) discusses the status of the case. (ph)
Clients are supposed to be able to trust their lawyers, so when an attorney is accused of stealing from the funds paid out to injured clients it is particularly troubling. Louis Robles, who at one time headed one of the largest class action and mass tort firms in the country, has been indicted in the Southern District of Florida on 41 counts of mail fraud for misappropriating $13.5 million from clients who received settlements in asbestos litigation. Robles was disbarred in 2003 by the Florida Supreme Court, and in his personal bankruptcy a report asserted that Robles overcharged his clients by $30 million for expenses (see Daily Business Review article here). A press release issued by the U.S. Attorney's Office (here) states:
According to the Indictment, Robles used client trust account money for his personal benefit, including financing his movie production and waste management companies, leasing apartments in New York and Los Angeles, making mortgage payments of up to $101,000 per month on four different properties, including a 9,000 square-foot waterfront mansion in Key Biscayne, and paying his ex-wife’s alimony, as well as payments to other clients.
According to the Indictment, Robles, acting contrary to his fiduciary duty and duty of loyalty as an attorney, misappropriated trust monies belonging to his asbestos clients and used this money for his own personal and business purposes. Specifically, in April 1994, Louis Robles stopped the automatic disbursement to his clients of settlement funds he had received on their behalf, and directed that no disbursements be made without his prior authorization. At around the same time, Robles began requesting bulk withdrawals of funds from client trust accounts without his clients’ knowledge or consent. According to court records, over time, the gap between settlements moneys received versus settlements paid grew until by September 30, 2002, the gap exceeded $13,522,000.
According to the Indictment, Robles further defrauded his clients by making materially false statements regarding his receipt of settlement funds from asbestos corporate defendants. Between April 1994 and February 19, 2003, Robles caused mailings to be sent to his asbestos clients falsely stating that the payment of their claims would be delayed due to the bankruptcies of certain asbestos corporate defendants. In fact, Robles had already received settlement checks for many of his asbestos clients from several of those same asbestos corporate defendants before their bankruptcies.
Robles had a court-appointed lawyer for his initial appearance, and the first issue will likely be sorting out his finances to determine whether he can afford counsel. A court order has frozen his bank and brokerage accounts, and the government is seeking forfeiture of $13.5 million. Robles sold his Key Biscayne house last year for over $12 million. (ph)