Thursday, August 24, 2006
The Department of Justice's decision to enter into a deferred prosecution agreement with Frank Quattrone may signal that this device will be used in a broader array of white collar cases and not just for corporations. An article in the Wall Street Journal (here) discusses the developing use of these agreements in investigations of corporate crime, and how they have achieved a featured position in the resolution of a variety of cases. A key benefit to a deferred prosecution agreement is that the collateral effects from a criminal case are limited. Blog co-editor Ellen Podgor is quoted in the article, and notes that in many industries, such as health care and military contracting, an indictment can be the death knell for a company because it is cut-off from future business. It will be interesting to see if cases involving individuals will be resolved by deferred prosecution agreements, and what the parameters of those agreements will look like. (ph)
On top of the investigation in San Francisco into the leak of secret grand jury testimony leaked to the San Francisco Chronicle comes word that U.S. District Court Judge T.S. Ellis has ordered the Department of Justice to investigate whether confidential information was leaked to the press about the impending indictment of two lobbyists subsequently accused of disseminating national security information to Israel. A Washington Post story (here) states that Judge Ellis, who sits in the Eastern District of Virginia, directed prosecutors to determine who may have disclosed information to CBS News in 2004, which reported that Steven Rosen and Keith Weissman would be indicted for violating the Espionage Act before the indictment was returned. The ruling comes in connection with a motion to dismiss by the defendants, who argued that the pre-indictment publicity prejudiced the jury pool; Judge Ellis refused to dismiss the charges but did order the investigation.
The Post story seems to indicate that the investigation is directed at the media, but it looks to me like the basis for it is the grand jury secrecy requirement of Rule 6(e), a violation of which is punishable by a criminal contempt. Although the media cannot generally be charged for publishing information leaked to it, at least outside the national security context, there is a good possibility that reporters will be subpoenaed to testify about the source of their information, perhaps leading (once again) to the incarceration of members of the media for civil contempt for refusing to comply with a grand jury subpoena. Our nation's capital has seen quite a bit of that lately, too, during the investigation of the disclosure of Valerie Plame's identity as a CIA agent. (ph)
Remember when Lee Iacocca was trying to save Chrysler by initiating the first rebate program with the tag-line, "Buy a car, get a check"? After entering into a deferred prosecution agreement that will result in the dismissal of all charges after one year, former star investment banker Frank Quattrone may be looking at a $120 million payday if he can keep his nose clean. The Wall Street Journal Law Blog (here) discusses a report that Quattrone entered into an agreement with Credit Suisse (former Credit Suisse First Boston, or CSFB) when the left the firm at the time of his indictment that if he were cleared of the charges he would receive $120 million worth of restricted stock and deferred compensation awarded to him while he led its high tech investment banking group. The terms of the deferred prosecution agreement (here) are not particularly onerous, requiring that Quattrone "refrain from violation of any law (federal, state, and local)" and that he "shall associate only with law-abiding persons." With $120 million waiting at the end of the year, Quattrone's car will be easy to identify in the Bay Area -- it will be the only one driving one mile per hour under the speed limit on 101, and it may even be made by Daimler-Chrysler. (ph)
Wednesday, August 23, 2006
The options-timing investigations that have ensnared numerous companies call into question the oversight role of the board of directors at the organizations. The Wall Street Journal reports (here) that KB Home, the Los Angeles home building giant, has initiated an internal investigation into some "propitiously timed" stock options granted to CEO Bruce Karatz, who was among the highest paid executives in 2005 with total compensation of over $150 million, most of it from cashing in options. An interesting tidbit in the story is that the former head of the compensation committee on KB Home's board, James Johnson, is also an independent director at UnitedHealth Group, which is also involved in a number of options-timing investigations. Indeed, UnitedHealth has hired Bill McLucas, former head of the Enforcement Division at the SEC and now at Wilmer Cutler, to lead its internal investigation, and the company has achieved the federal investigatory hat trick, with the IRS, SEC, and Department of Justice conducting investigations of possible options backdating in grants to executives, including its CEO, William McGuire (see proxy statement here). Johnson is the former CEO of Fannie Mae, and serves as a director at Goldman Sachs and Temple-Inland, along with KB Home and UnitedHealth. Directors serving on multiple boards is certainly not unknown, and boards are stocked with former CEOs, giving these groups the feel of an old boys club. While there is certainly no conflict involved in serving on multiple boards, the options-timing investigations will focus on the work of compensation committees in particular, and it cannot be comforting to shareholders to see companies with the same directors facing similar problems involving internal controls and oversight of executive compensation. (ph)
Tuesday, August 22, 2006
The Wall Street Jrl reports here that "[a] former mailroom employee at J.P. Morgan Chase & Co. pleaded guilty to a conspiracy charge in connection with the theft of more than $100 million in corporate checks from a "lockbox" facility in Brooklyn." So the question here is whether this is a white collar crime -
What makes something a white collar crime, and what designates a person a white collar criminal?
The term, coined by sociologist Edwin Sutherland, started as a word that had an element of class infused into it. Corporate misconduct was white collar. Basically, the collar you wore made a difference in whether you would be considered a white collar offender.
Today, we have moved in the criminal justice system to looking more closely at the act. Thus, the crime being conspiracy to commit bank fraud in this scenario would make this a white collar crime. It is an economic crime, and perhaps it has an element of there being a fiduciary duty that was breached. But could one also say this is just theft, like a street crime?
The fuzzy nature of white collar crime presents issues to those of us who teach the course. What should be covered and what should be omitted? Is this like Potter Stewart's Jaobellis test - you'll know it when you see it? Or does that only work with pornography?
Some of the reporting on the Quattrone resolution here-
All in all - is there something beneficial coming from this case? - Yes - - Quattrone will be continuing his work with an Innocence Project. Perhaps one added effect of the white collar prosecutions is that more people, who normally would not have known about the criminal justice system, are learning about really happens.
The Frank Quattrone case is essentially resolved. The government and accused have entered into a deferred prosecution agreement and the court has signed off on this agreement. (See Peter Lattman at the Wall Street Jrl Blog here) Some thoughts on the agreement here.
- This is a superb resolution for both Frank Quattrone and the government. (see prior post here) After all, his attorney fees for two trials and preparation for a third were probably sufficient punishment, not to mention all the collateral consequences that he has suffered.
- The government is not walking away empty handed, as they might have should this case have gone to trial a third time. Rather, they have some concession from Frank Quattrone - he promises to be good.
- The agreement kind of reminds one of the deferred prosecution agreements given to juveniles. Stay clean and we won't prosecute you. It is basically saying - we'll give you a second chance.
- The best part is he "can only associate with law-abiding persons." How do you know if someone is abiding by the law? Obviously if they are murdering someone in front of you, you will know. But what if they don't pay their taxes, will you really know this?
- The agreement lasts for one year, and should be relatively easy for Quattrone to abide by. There is no admission of guilt here.
- Deferred prosecution agreements filed after a case is pending have to be submitted to the judge for approval, as in this case. In contrast, deferred or non-prosecution agreements pre-trial can remain outside the system. This has been very problematic for corporations that are asked to sign away their attorney-client material or provide no support to employees. Without a pending case, there is no judicial oversight. Only when the individuals are eventually indicted as in the Stein, et. al case is it possible for the judiciary to provide oversight. It is good to see the court participating in this resolution.
Monday, August 21, 2006
The Las Vegas Review Journal reports here that "Former Clark County Commissioner Dario Herrera was sentenced to 50 months in prison" and "Former Clark County Commissioner Mary Kincaid-Chauncey was sentenced this morning to 30 months in prison." Some white collar offenders are not being given significant breaks in the sentence. For example, prosecutors in the first case, a case where the individual received a 50 month sentence, asked for 51 months. The prosecutions result from a corruption investigation including an alleged bribe from a strip club owner. The Las Vegas Review Jrl has a web page here noting the entries from the Vegas corruption cases.
Yet another professor is entering the practical world. According to the Wall Street Journal Law Blog here, Professor Joseph Grundfest of Stanford Law School, is helping out in the Jamie Olis case. And he is doing it pro bono. Peter Lattman, the author of the post, discusses the key issue of this case - how should the court to calculate loss.
According to the Atlanta Jrl Constitution here, Professor Jeff Fisher (who represented the defendants in cases such as Blakely and Crawford) and Professor Doug Berman (editor of the Sentencing Law & Policy Blog here) have agreed to assist Decatur attorney Mawuli Davis on Campbell's appeal. Former Atlanta Mayor Bill Campbell, unlike so many others convicted of white collar crimes, is being sent immediately to prison.
Sunday, August 20, 2006
"Scooter" Libby, scheduled for trial in January, is having a problem getting some of the discovery material he wants for this trial. The issue he faces is common in cases of espionage and sometimes terrorism, but this particular problem is rarely seen in the white collar case. The problem, according to the Wall Street Jrl. here, is that some of the documents are sensitive documents that might risk national security if released. Not an unexpected ruling when dealing with a CIA leak.
It is important to note here that the judiciary is making the decision of whether to release the documents. Considerations are whether the accused truly needs this material for his or her defense and the issues of national security that might accrue if the information were released.
Kobi Alexander, former Comverse Technology CEO, has been missing (posts here and here). No doubt problematic as he has been charged with mail fraud, wire fraud, and securities fraud. The story of his background and rise to fame is outlined in a comprehensive story by Julie Creswell in the NY Times. (see NYTimes here).
One interesting note is that the story states that "Robert G. Morvillo, said he last heard from his client more than two weeks ago and he believed that Mr. Alexander and his family were on vacation in Israel."
Robert G. Morvillo, an experienced white collar attorney (see here), also represented Martha Stewart at her trial.
Saturday, August 19, 2006
The Wall Street Jrl reports here that Frank Quattrone may be reaching an agreement with the government that would resolve the criminal case pending against him. Quattrone is presently facing a third trial. The first trial was a hung jury and the second was reversed by an appeals court. The case of alleged obstruction of justice charges hinged to a large extent on an email instructing people to clean up their files.
This is not the first time that the Wall Street Jrl has suggested that a resolution of this case might be forthcoming (see post here). And should this happen it would be beneficial to everyone.
- On one hand, the stress of a third trial for Quattrone would be an incredible strain - one trial is tough enough, but three is above and beyond - clearly a punishment not faced by most alleged offenders.
- Second, the cost of attorney fees is also a significant punishment here. With the high cost of white collar attorney fees, having an attorney for two full trials, an appeal, and now the preparation for a third possible trial is above and beyond - clearly a punishment not faced by most alleged offenders.
- Also Quattrone had to defend the civil NASD charge of alleged "spinning," a charge overturned and then not pursued, but likely costing him the punishment of the strain of dealing with the action and the cost of attorney fees.
- There is a new prosecutor, a new judge, and a new defense attorney, which means everyone getting up to speed on this case -- a lot of time, and yes, money - is it really worth it?
- Should the government be expending tax dollars on a case such as this? Are there more important priorities that need to be addressed?
Quattrone loses either way. He is deprived of his chance to prove his innocence and has paid a high cost experiencing the judicial process. Some might argue that the government also loses in that they are deprived of the opportunity to prove his guilt. This is one of those situations where there will probably never be winners, but cutting everyone's losses now may just be best.
According to the Yahoo News (AP) here, President Bush pardoned 17 people this past week. Few were for white collar related offenses. There were a good number related to:
- firearms("firearms to out-of-state residents and falsifying firearms records, "unlawful transfer of a firearm," "possession and transfer of an illegal weapon")
- alcohol ("liquor law violations and conspiracy to violate the liquor laws,"possessing an unregistered still, carrying on the business of a distiller without the required bond, and manufacturing mash on other than lawfully qualified premises")
- drugs ("possession with intent to distribute marijuana, conspiracy to possess with intent to distribute marijuana; importing marijuana," "possession with intent to distribute cocaine"
The white collar offenses being pardoned included "conspiracy to impede the functions of the Federal Deposit Insurance Corp., commit embezzlement as a bank officer, make false entries in the records of an FDIC-insured bank, and commit bank fraud" and "conspiracy to defraud the United States by making false claims."
Martin Armstrong has spent almost the entire 21st century in jail, having been sent there in January 2000 because he was found in civil contempt for refusing to turn over assets in an SEC securities fraud action. Armstrong was a money manager who founded Princeton Economics International, and he was accused in parallel criminal and civil cases of defrauding Japanese investors of over $700 million. Despite repeated attempts to get out of jail on the ground that the civil contempt was ineffective, U.S. District Judge Richard Owen -- backed by the Second Circuit -- refused to let Armstrong leave the Metropolitan Correctional Center in New York for over six years, no doubt a record for the longest civil contempt in federal court history. Now, Armstrong has finally entered a guilty plea to a charge of conspiracy to commit securities and wire fraud, and he will be sentenced in January 2007 by U.S. District Judge John Keenan, who presided over the criminal case that was set to go to trial in October. A Bloomberg story (here) discusses the plea agreement.
Even after the guilty plea, it remains an open question whether Armstrong will be let out of jail on the civil contempt, and whether the court will take into consideration his 6+ years in jail. On the latter issue, federal law permits the imposition of a civil contempt that interrupts a criminal sentence, and there is no requirement that the time spent in jail on the civil contempt be counted toward the criminal punishment, although Judge Keenan is free to do so in setting the sentence. The reason why the civil contempt does not count lies in the difference between a civil contempt, which is viewed as coercive, and a criminal sentence, which is punitive.
The person held in civil contempt "holds the keys to the jail cell" according to the old adage, which means the person can "purge" the contempt by complying with the court's directive. Most cases in this area involve individuals who have received immunity but continue to refuse to testify, and they can get out of the civil contempt simply by testifying. One of the seminal decisions is United States v. Liddy, 510 F.2d 669 (19774), involving Watergate burglar G. Gordon Liddy -- how's that for a blast from the past -- who refused to testify before the Watergate grand jury despite an immunity grant. In rejecting his argument that the civil contempt could not interrupt his service of the criminal sentence, the D.C. Circuit stated:
The coercive impact of confinement for civil contempt results from the fact that the contemnor 'carries the key to the jailhouse door in his pocket,' that is, he can procure his release at any time by agreeing to comply with the court order whose violation is the basis of his contempt. Had the District Court ordered that Liddy's contempt confinement be concurrent with his sentence for Watergate crimes, Liddy would have no incentive to comply with the District Court's order since his doing so would not reduce his total period of confinement. Therefore, the District Court was manifestly justified when it stated: "To give meaning and coercive impact to the Court's contempt powers in the interest of protecting the Court's integrity, the Court here finds it necessary to hold in abeyance the execution of Mr. Liddy's sentence under the indictment pending his confinement for contempt."
Armstrong faces a maximum sentence of five years on the conspiracy charge, and under the federal Sentencing Guidelines if the loss is even 10% of what the government alleges he will be in a sentencing range that will easily take him to the full five years. Whether he gets the benefit of having spent six years in jail already poses an interesting question because he has not, to this point, agreed to cooperate in the SEC enforcement action that triggered the civil contempt. He has, however, shown a resolve that likely would make G. Gordon Liddy proud. (ph)
A Department of Justice criminal investigation into an agreement between Bristol-Myers Squibb and generic drug-maker Apotex regarding a $40 million payment to the company to keep a generic version of Plavix, one of Bristol-Myers best selling drugs, from the market has certainly caught the eye of the company's board of directors. One would think that an FBI search of the Bristol-Myers' offices, including the CEO's, would be enough to spur the board into action, but a press release issued by the company (here) on August 17 made it a point to begin by stating that the board has been treating the investigation "with the highest degree of attention and seriousness." The release goes on to note that in addition to hiring former U.S. Attorney Mary Jo White to conduct the internal investigation, the independent directors have hired former U.S District Court judge Kenneth Conboy (now with Latham & Watkins), and that former FBI Director Louis Freeh will monitor "internal and external legal initiatives."
I assume one of those "external legal initiatives" is to keep Bristol-Myers out of hot water with the U.S. Attorney's Office for the District of New Jersey for violating the terms of the deferred prosecution agreement it entered into in June 2005 regarding accounting fraud arising from a channel stuffing program that inflated revenues and earnings. The agreement (here) primarily addresses securities reporting and internal control issues, but Paragraph 34 contains a general requirement that "BMS will inform the Office of any credible evidence of criminal conduct at BMS occurring after the date of the Agreement . . . ." The definition of "criminal conduct" includes "any crime related to BMS's business activities committed by one or more BMS executive officers or directors," which certainly appears to cover the current criminal investigation. The effect of a future criminal violation can be rather severe, as provided in Paragraph 36:
Should the Office determine during the term of this Agreement that BMS has committed any criminal conduct as defined in paragraph 34 commenced subsequent to the date of this Agreement, or otherwise in any other respect knowingly and materially breached this Agreement, BMS shall, in the discretion of the Office, thereafter be subject to prosecution for any federal crimes of which the Office has knowledge, including crimes relating to the matters set forth in the Statement of Facts.
That means the original securities fraud case could be restarted, which gets even scarier for the company because Paragraph 37 states that "[i]n the event of a breach of this Agreement that results in a prosecution of BMS, such prosecution may be premised upon any information provided by or on behalf of BMS to the Office at any time, unless otherwise agreed when the information was provided." All those high priced lawyers will have to keep Bristol-Myers from having to face a government onslaught not only from the current investigation but also from last year's trouble. (ph)
Friday, August 18, 2006
Two senior executives of DHB Industries, Inc., a supplier of body armor to the U.S. military, were arrested on insider trading, securities fraud, and conspiracy charges, and the SEC filed a civil suit alleging securities fraud. The former officers are Dawn M. Schlegel, DHB's CFO, and Sandra L. Hatfield, the chief operating officer, and the charges were filed by the U.S. Attorney's Office for the Eastern District of New York. The charges involve both accounting fraud and the sale of DHB securities that resulted in a profit of over $8 million. According to the SEC Litigation Release (here), the two defendants:
[R]egularly overstated the value of DHB's inventory by fraudulently increasing inventory quantities, labor costs, overhead costs, and the amount of raw materials used in DHB's products. The complaint alleges that together Hatfield and Schlegel also transferred millions of dollars of expenses from cost of goods sold to research and development costs to materially increase the company's gross profit. The complaint further alleges that Schlegel falsely inflated DHB's $60 million charge against earnings taken in the third quarter of 2005 to mask her and Hatfield's fraudulent conduct. Schlegel is alleged to have lied to DHB's auditors and provided fake inventory schedules and other documents to conceal the fraud.
The complaint also alleges that during the period of their fraudulent conduct, Schlegel and Hatfield collectively profited by over $8.2 million from the cashless exercise of warrants and sale of over 400,000 DHB shares. Schlegel and Hatfield sold these shares at the end of 2004 at the height of DHB's stock price and before the public knew about the misrepresentations in DHB's filings and public statements.
Last year, the military ordered the recall of one of the company's body armor products due to quality issues. Former CEO David Brooks, whose daughter's $10 million bat mitzvah party featured legendary rockers Steven Tyler and Joe Perry of Aerosmith, left the company on July 10 "pending the outcome of federal, state, and internal investigations" while DHB settled shareholder suits (press release here) Because federal prosecutors did not file any charges against Brooks at the same time as they did against Schlegel and Hatfield, it may be that he is cooperating in the investigation. Brooks made over $190 million from the sale of DHB stock in 2004, so he is a likely target of the grand jury investigation. (ph)
The grand jury investigations involving Balco (Bay Area Laboratory Co-operative) and possible perjury by Barry Bonds may end up sending witnesses to jail for civil contempt for their refusal to testify in response to subpoenas. Bonds' former personal trainer, Greg Anderson, went to jail in July for refusing to testify, and was released when the grand jury's term expired. With a new panel in place for at least 18 months, he now runs the risk of spending a lot of time in jail. In an appearance before the grand jury, Anderson apparently responded to a few questions, but refused to answer a key one: "Did you distribute anabolic steroids to Barry Bonds?" The San Francisco Giants slugger denied knowingly using them in grand jury testimony in 2003. Prosecutors have asked that Anderson be held in contempt again, and a hearing is scheduled for August 28 to decide whether he should be held on contempt for refusing to answer. If he is ordered to respond to the question and refuses again, he may sit in jail for up to the 17 months remaining in the grand jury's term, assuming it's not extend by six months. An AP story (here) discusses the latest twist in the Bonds perjury investigation.
How do we know what Bonds said before the grand jury? That brings us to two more potential witnesses who have asserted they will not testify about who leaked Bonds' testimony to them despite being ordered by a federal judge, who refused to quash subpoenas to San Francisco Chronicle reporters Mark Fainaru-Wada and Lance Williams. Prosecutors are investigating the leak of grand jury material that is supposed to remain confidential. The reporters, whose First Amendment privilege claim has been rejected by courts in a variety of situations, have stated that they will not disclose the confidential source of the grand jury testimony. As discussed in an earlier post (here), the person who leaked the testimony of Bonds and other major league baseball players could face a criminal contempt and other charges for disclosing the transcripts. Within a few weeks, there could be three people in jail for refusing to testify before the grand jury, and no one has even been indicted yet. (ph)
U.S. District Judge Gladys Kessler ruled in favor of the federal government in its massive RICO case against the tobacco companies alleging that they engaged in misleading conduct for decades as part of a broad conspiracy (U.S. v. Philip Morris USA, et al. here). The opinion may be nearly as dangerous to the environment as smoking, coming in at 1,653 pages, not counting the appendices, so that's a whole lot of trees. The table of contents alone is 29 pages, although there are only 58 footnotes.
Judge Kessler ruled earlier in the case that the government could not seek disgorgement of the profits made by the defendant cigarette manufacturers under RICO, which was affirmed by the D.C. Circuit (396 F.3d 1190), and the Supreme Court rejected the government's certiorari petition in October 2005. With disgorgement knocked out, the remedial portion of the opinion comes off as almost anti-climactic:
[T]he Court is enjoining Defendants from further use of deceptive brand descriptors which implicitly or explicitly convey to the smoker and potential smoker that they are less hazardous to health than full flavor cigarettes, including the popular descriptors “low tar,” “light,” “ultra light,” “mild,” and “natural.” The Court is also ordering Defendants to issue corrective statements in major newspapers, on the three leading television networks, on cigarette “onserts,” and in retail displays, regarding (1) the adverse health effects of smoking; (2) the addictiveness of smoking and nicotine; (3) the lack of any significant health benefit from smoking “low tar,” “light,” “ultra light,” “mild,” and “natural” cigarettes; (4) Defendants’ manipulation of cigarette design and composition to ensure optimum nicotine delivery; and (5) the adverse health effects of exposure to secondhand smoke.
As a reformed smoker, these don't mean very much to me. For those interested in reviewing documents related to the tobacco litigation -- assuming the opinion just whets your appetite -- the Department of Justice has a webpage with links to documents and testimony (here). (ph)
Thursday, August 17, 2006
A major bank fraud case in Florida that lasted three months followed by three weeks of jury deliberations resulted in a split verdict on some of the counts, but a guilty finding against all the defendants. (See Miami Herald here) All were taken into custody immediately (See David Marcus' Southern District of Florida Blog here). David Marcus raises the question of whether these defendants will be punished more harshly for having exercised their right to a jury trial.
The US Attorney's Office for the Southern District of Florida issued a Press Release that includes the following:
According to the evidence presented at trial, the defendants conspired to fraudulently inflate, by hundreds of millions of dollars, the value of collateral used to obtain loans through Espirito Santo Bank of Florida. The defendants worked for E.S. Bankest, LLC, a company in the business of “factoring.” Factoring involves the purchase of accounts receivable from client companies at a discount. Espirito Santo Bank was a joint venture partner in E.S. Bankest, LLC, and was responsible for arranging funding for E.S. Bankest, LLC’s factoring operations. The accounts receivable E.S. Bankest, LLC, supposedly purchased were to serve as the collateral for the funding arranged by Espirito Santo Bank and provided by Espirito Santo Bank customers.
According to the evidence, over the nine-year period from June 1994 through August 2003, the defendants’ conspiracy deceived Espirito Santo Bank and investors by falsifying financial statements, creating fictitious invoices and checks, using fictitious companies, and engaging in other machinations to create the appearance that millions of dollars in fictitious accounts receivable were actually real. Through these tactics, defendants deceived Espirito Santo Bank, federal banking regulators, and independent public accounting firms that examined E.S. Bankest, LLC, about the value of the accounts receivable owned, all to support additional loans through the bank. As a result of their schemes, the conspirators fraudulently obtained approximately $170 million in loan proceeds.
(esp) (w/ thanks to David Marcus for the hat tip)