Tuesday, September 26, 2006
Cooperation proves very valuable to Andrew Fastow, who received a 6 year sentence today for his activities related to Enron. (See Houston Chronicle here) Although the judge had a 10 year limit, it is perhaps surprising to see the reduction here for such a major player in the Enron case. The Wall Street Jrl here describes the extensive cooperation provided by Fastow, including the fact that one of the victims - the University of California requested leniency for Fastow at his sentencing hearing.
Is it fair for Fastow to receive such a low sentence in large part because of this cooperation? In some respects this sends a message that if you avail yourself of your constitutional rights and request a jury trial, the risks can be enormous. (see here) And if you cooperate, you stand to gain a lot.
And is it fair to say that Jamie Olis and Andrew Fastow deserve the same sentence, or is one clearly being given an enormous benefit because of his cooperation with the government? The answer appears obvious and the message to people is - cooperate or risk a greater sentence.
But it is also important to note that the sentences being given in white collar cases have been outrageous and it is good to see a judge putting an appropriate and thoughtful perspective into the process.
With the Olis sentence now reduced, and Fastow at six years, the big question will be whether Jeff Skilling should suffer a greater sentence. And if he is given a greater sentence will this be because he decided to proceed to trial?
Monday, September 25, 2006
A recent indictment in Florida presents a novel prosecution theory - state identity theft becomes a HIPAA violation. The Indictment charges conspiracy and computer fraud, but also adds a count of wrongful disclosure of identifiable health information. Information is allegedly compromised by a medical clinic's employee who steals patient information and then allegedly sells this information. As opposed to proceeding with a state theft charge, the government decides to proceed with a federal prosecution, because after all - if the allegations are accurate - the information is covered under HIPAA.
The Indictment can be found here.
Jury deliberations are supposed to be secret. And in most cases what happens in the jury room will stay in that room during the deliberations. But with new technologies, it is not surprising to see new issues developing. According to the Wall Street Jrl here and Guardian Unlimited (AP) here, the court in the Scrushy/Siegelman case is now faced with the issue of whether some jurors may have communicated via email.
Scrushy, the former CEO of HealthSouth was found guilty after a second trial by jury (he was found not guilty in a prior trial related to HealthSouth). His defense counsel is seeking a new trial premised on allegations that there were improper communications. (Id.)
With Treos, Blackberries, and other handheld devices that permit access to the Internet, and with so many people now having computers easily accessible, it will not be surprising to see more instances of jurors communicating during deliberations. And I am not talking about emailing to see if someone needs a ride to the courthouse. Judges need to be especially cognizant of the new technologies when instructing a jury. They need to remind jurors that they cannot communicate on the case outside the actual deliberation in the room. They also need to remind jurors that it is not appropriate to google for answers to questions that might be related to the case.
Sunday, September 24, 2006
Both Andrew and Lea Fastow were indicted. Lea Fastow, the wife of the Enron CFO, plead guilty and served a one year term of imprisonment on a tax charge. (see here). Andy Fastow stayed free during this time, taking care of the children and testifying for the government in the Lay/Skilling trial. (see here).
Now Andrew Fastow will be sentenced. He will receive a sentence of ten years pursuant to an agreement, although he will have to first listen to the sad testimony of victims who suffered as a result of his conduct as CFO at Enron. (see Houston Chronicle here). His lawyers will ask for leniency premised on him being a "changed" man (see here)
Several issues deserve mention here -
- Is it fair for Fastow to receive this low a sentence all because he cooperated with the government? This is yet another case of the government providing an enormous benefit to someone who cooperates, while demanding a higher sentence for those who decide to go to trial. Selecting to use the constitutional right of a jury trial comes with the enormous risk of a significantly greater sentence if the jury returns a verdict of "guilty."
- Should the government have given the plea for cooperation to this person, or did they select the wrong person in using their discretion? The government discretion to provide a "deal" to whoever they decide they would like, often produces inequities. In this case one has to ask whether Fastow was more culpable than Jeff Skilling or the now deceased Ken Lay.
- Is putting Fastow in prison the correct way to punish a white collar offender? We did not fear Andrew Fastow while he was free pending his sentencing. The Houston Chronicle reports on his admirable deeds and recognition for being a good father. (see here). This is a no-win situation. As with so many white collar cases, the individual is not someone we fear once their ability to commit future white collar offenses is removed. The sentence is for retribution, and incorporating the victim statements at the hearing just emphasizes this point. But many will suffer by sending Andrew Fastow to prison, most notably his children. Is prison really the appropriate way to punish this individual, or should the sentence consider the unique characteristics and qualifications of the individual and punish the person with a sentence that will maximize those skills for the betterment of society?
Bernard Ebbers will begin serving a 25 year sentence this week. The Washington Post here notes comments on this upcoming sentence, including a comment by Professor Frank Bowman stating that "[m]y own sense is that any sentence over 20 years for anybody for an economic crime is hard to justify."
So why is it that a man with no prior criminal record was given a sentence of 25 years for a non-violent crime? The bottom line is the federal sentencing guidelines. The effect of these guidelines is to rachet up the sentences for white collar offenses. The sentence is computed to a large extent based upon fraud loss. The character of the offender, the lack of prior criminal history, and rehabilitation are basically thrown out the window when courts look at a mathematical forumula that looks solely at the amount of fraud loss, a number that can rarely ever be computed with precision (see Olis). Anyone who contends that we need to worry about the discretion judges have in this post-Booker world, need only watch Ebbers as he goes off to prison.
Saturday, September 23, 2006
On November 5 and 6, 2006, The Benjamin N. Cardozo School of Law, the Jacob Burns Institute for Advanced Legal Studies, and the Cardozo Law Review will present a conference on George P. Fletcher's forthcoming book, The Grammar of Criminal Law, American, European, International.
Kyron Huigens and Rick Bierschbach are the organizers of the conference and individuals participating include John Gardner, Albin Eser, Kai Ambos, Stephen Morse, and Meir Dan-Cohen. More information can be ffound here.
As discussed in earlier posts (here and here), former Dynegy executive Jamie Olis was resentenced by U.S. District Judge Sim Lake to serve six years in prison for his convictions on securities fraud and conspiracy charges. While Judge Lake determined that the Sentencing Guidelines called for a prison term of approximately 12-15 years, he gave a lower sentence because of Olis' exemplary background and the fact that he was not a high-level executive at Dynegy, which remains a viable company that was not undermined by his misconduct. Judge Lake also presided over the trial of former Enron CEOs Ken Lay and Jeffrey Skilling, and he is scheduled to sentence Skilling on October 23. One passage of Judge Lake's opinion explaining why he gave Olis a lower sentence than called for by the Guidelines may be particularly chilling for Skilling and his lawyers:
Although Olis was intimately involved in the conspiracy and in planning Project Alpha, he did not have the ultimate authority at Dynegy to approve Project Alpha, nor was he responsible for drafting the documents by which the conspiracy was carried out and concealed. Moreover, unlike some other recently publicized corporate fraud cases, the purpose of this conspiracy was not to defraud Dynegy or to enrich Olis. Nor did the conspiracy cause Dynegy to file for bankruptcy. Although Dynegy suffered a loss in its market capitalization after the true facts of Project Alpha became public and paid large amounts to settle the resulting civil cases, the company remains a viable entity. The initial success of Project Alpha brought Olis a promotion and stock options, but it did not result in substantial pecuniary benefits to him. Although these facts do not detract from the seriousness of the crime for which Olis was convicted, they mitigate against the type of harsh sentence that may be deserved in cases where the defendant’s conduct enriched him at the company’s detriment or brought about the downfall of the company. [Emphasis added]
Although Judge Lake never uses the word "Enron" in his opinion, it is plain that the company -- and perhaps the impending sentencing of Skilling -- is on his mind when he describes his rationale for the Olis sentence.
The Sentencing Guidelines applicable to Skilling will, in all likelihood, call for a sentence in excess of twenty years, and could even reach life imprisonment if the highest relevant enhancements apply, particularly a probable loss calculation in excess of $400 million. Between Skilling's sales of Enron stock, which triggered a conviction on one count of insider trading, and the company's sudden demise that wiped out the retirement savings of a number of workers and retirees, he sure seems to fit Judge Lake's description of the type of case in which a "harsh" sentence is "deserved." (ph)
Hewlett-Packard CEO Mark Hurd held a press briefing -- no media questions were allowed so it was not very enlightening -- in which he described his role in the company's internal investigation that involved "pretexting" to obtain private data on journalists, directors, and officers. In addition to apologizing for H-P's conduct, Hurd's eight minute statement (audio available here) describes his peripheral involvement in the investigation and admits that he was asleep at the switch when he received but did not review a report of the process. By not allowing questions, Hurd avoided having his story challenged, a situation that is less likely to prevail at the House Energy and Commerce Subcommittee hearing on September 28 at which he will testify. In addition, Patricia Dunn will step down immediately as chairwoman of the board, rather than waiting until January 2007 as previously announced. She has clearly become scapegoat number one, but others will likely follow in that role. (AP story here)
Hurd's statement contains an interesting admission regarding the first investigation of the internal investigation, in May and June when issues were raised about the propriety of the company's conduct. Hurd states that a law firm performed that investigation, although he does not identify it, and then goes on to describe the recent investigation by Morgan, Lewis & Bockius as "more comprehensive." What was wrong with the earlier investigation? Were limitations placed on the law firm that conducted it to limit the scope of the inquiry, similar to the restrictions placed on Vinson & Elkins back in 2001 when it undertook an "investigation" of the allegations of wrongdoing at Enron leveled by Sherron Watkins? In an e-mail exchange between Larry Sonsini and former H-P board member Tom Perkins, Sonsini says that outside counsel conducted an investigation and gave the internal investigation that included "pretexting" a clean bill of health. Was that investigation done by Wilson Sonsini, H-P's long-time outside counsel? If Morgan Lewis can discover problems in only two weeks, why didn't the other law firm ferret them out? If Wilson Sonsini did that first investigation, then Sonsini's assertion to Perkins might be a bit disingenuous by referring to a law firm that was in fact his own.
Hurd states that all the facts related to the leak investigation may never be known because of the extensive use of outside parties. Hurd emphasized that the leaks from H-P that trigger this entire mess were a violation of the company's ethics policy, but that cannot justify unleashing an investigation apparently subject to such little oversight that H-P says it may never know what happened. (ph)
Friday, September 22, 2006
This is a decision that reflects the difficulty faced by courts in trying to decide what is the "loss" figure. Courts are forced to use mathematics to determine what is the appropriate punishment for an individual. This court appropriately went beyond the arithmetic to look at the individual and noted that Jamie Olis had no criminal record. The court should be applauded for this.
Some highlights from the decision -
"The court's conclusion that it is not possible to estimate with reasonable certainty the actual loss to shareholders attributable to corrective disclosures about Project Alpha is based on the facts of this case; it is not a conclusion that such estimates are never possible."
"the court concludes the actual loss to shareholders caused by the corrective disclosures made about Project Alpha on April 25 and May 8, 2002, cannot be reasonably calculated based on the evidence now before the court.Since, however, the controverted trial testimony of Gene Foster establishes that Olis expected the fraudulent accounting treatment accorded to Project Alpha to reduce the taxes that Dynegy would otherwise have owed to the United States Treasury by $79 million, the court concludes that the defendant’s guideline sentencing range should be calculated on the basis of an intended loss to the United States Treasury of $79 million. Accordingly, the court concludes that the defendant’s total offense level would be 34 yielding guideline sentencing range of 151 to 188 months . . "
"Although Olis was intimately involved in the conspiracy and in planning Project Alpha, he did not have the ultimate authority at Dynegy to approve Project Alpha, nor was he responsible for drafting the documents by which the conspiracy was carried out and concealed. Moreover, unlike some other recently publicized corporate fraud cases, the purpose of this conspiracy was not to defraud Dynegy or to enrich Olis."
A copy of the sentencing decision of the Hon. Sim Lake is here - Download olis_resentence_decision.pdf
Jamie Olis, who initially received a sentence of 24 years (292 months total) for convictions of "securities fraud, mail and wire fraud, and conspiracy" arising from his "work as a tax lawyer and accountant at Dynegy Corporation," was resentenced today to six (6) years. The appellate court had affirmed his conviction, but not surprisingly vacated the sentence and remanded it for a new sentence. (Hon. Edith Jones writing the decision).That new sentence was issued today by the same judge who initially sentenced him. (see Bloomberg here)
The key factor to be determined in resentencing was how to value the fraud loss. Olis' Sentencing Memorandum begins with the recognition that Richard Adelson, former President of Impath, received a sentence of 42 months despite a sentencing guideline that called for life. In the opening portions of this Memorandum, the defense argues that "Mr. Olis' case similarly calls for a sentence below the prosecution's suggested Guideline range, both because its 'loss' figure is unreliable and because of section 3553(a)." The Memo is accompanied by a declaration of Professor Joseph A. Grundfest of Stanford Law School.
This new sentence is clearly a tribute to the judge who re-evaluated the sentence after the Fifth Circuit's decision and in an honorable way dropped the sentence initially issued.
But a question that definitely needs to be considered and addressed by Congress and the courts is whether the government should have this enormous prosecutorial power to leverage individuals against each other in order to obtain evidence for a prosecution on the individual who decides not to enter a plea. Is it within the bounds of the Constitution to punish individuals with higher sentences because they decide they want to use their constitutional right to a jury trial? Noteworthy here is that no other individuals at Dynegy were charged with criminal or civil conduct, except Gene Foster (Olis' boss) who received a sentence of 18 months and Helen Sharkey who received one month. One thing that can be said in light of this new sentence, is that a message is at last being sent that the risk of taking the chance of going to trial has been substantially diminished. This is good for many reasons such as obtaining truthful testimony in trials.
The situation at Hewlett-Packard threatened briefly to turn into a nasty fight as California Attorney General Lockyer announced that the company was no longer cooperating in the investigation of "pretexting" so he had "instructed my lawyers this morning to paper the place with subpoenas." Wilson Sonsini has bowed out -- or been eased out -- as H-P's primary counsel on the criminal investigation, replaced in that role by Morgan, Lewis & Bockius, which was first retained when the federal and state criminal investigations began in early September. A Bloomberg article (here) notes that H-P maintains that it is still cooperating, and a spokesman for Attorney General Lockyer acknowledges that the dispute has been settled. It may have been that the new lead counsel took a different approach that might have at least temporarily slowed the production of records and witnesses for interviews, at least until Morgan Lewis gets a more complete read on the situation. Attorney General Lockyer's threat does show the danger a company faces if it does not cooperate, or displays any reticence in its response to requests from criminal investigators. The "paper the place with subpoenas" threat may well have been a hollow one, however, because it is hardly in the government's interest to issue broad document subpoenas that will produce much more chaff that it would ever want and slow down the process as the company engages in a thorough and painstaking review for all potentially relevant records.
H-P CEO Mark Hurd, whose name is appearing more and more in e-mails involving the internal investigation of leaks that included the "pretexting" that is the heart of the criminal investigations, has gone on the offensive. A company press release (here) states that he has offered to appear before the House Energy & Commerce subcommittee on September 28 that is scheduled to hear from chairwoman Patricia Dunn, general counsel Ann Baskins, and Larry Sonsini. He may be seeking to take control of the situation by making himself the focus of the subcommittee's questioning, rather than a lame duck chairwoman and two lawyers who may have problems with revealing information protected by the attorney-client privilege. In addition, Hurd will hold a press briefing about the various investigations of H-P, which now includes an SEC request for information. The company's press release (here) quotes Hurd, "What began as an effort to prevent the leaks of confidential information from HP’s boardroom ended up heading in directions that were never anticipated."
That statement contains an interesting admission about an investigation that was rather successful in revealing the identity of the leaker as a member of the board. It only became a problem when former board member Tom Perkins challenged the company's disclosure of his reasons for resigning from the board, which was in protest of the methods used to investigate the leaks. Had Perkins not spoken up, H-P may well have viewed its conduct as both a successful effort at managing a restive board of directors and perfectly ethical. Is the unanticipated direction the firestorm that has developed in only a couple weeks after an otherwise successful internal investigation? Could it perhaps be the revelation of the lack of control over the investigation when the reason to put lawyers -- including the company chief ethics officer -- in charge of it was to prevent this very sort of breakdown in the process? It can't be a very pleasant time for Hurd, and the outlook may not improve much in the short term. (ph)
An executive with Samsung Semiconductor, Thomas Quinn, entered a guilty plea to fixing prices in the dynamic random access memory (DRAM) chip market, marking yet another prosecution of executives of the leading manufacturers. According to a Department of Justice press release (here), Quinn admitted to "[p]articipating in meetings, conversations, and communications with competitors to discuss the prices of DRAM to be sold to certain customers; and . . . [a]greeing with competitors to coordinate bids submitted to Sun Microsystems Inc." Quinn is the fourth Samsung executive, and the first from the United States, to plead guilty in the wide-ranging DRAM antitrust investigation, and will serve an eight month prison term. The four leading manufacturers, Samsung, Hynix, Elpida Memory, and Infineon have all entered guilty pleas to fixing prices. (ph)
Thursday, September 21, 2006
The attention in the Hewlett-Packard investigation will turn to Congress on September 28 when a subcommittee of the House Energy & Commerce Committee grills chairwoman Patricia Dunn, general counsel Ann Baskins, outside counsel Larry Sonsini, and security manager Anthony Gentilucci. Outside private investigator Ronald DeLia, who has been linked to the "pretexting" that is the ostensible subject of the hearing, will assert his Fifth Amendment privilege (see Bloomberg story here). An article in The Recorder (here) lists the various white collar crime practitioners who have been retained by Dunn, Baskins, Sonsini, and H-P's chief ethics officer, Kevin Hunsaker. I assume the company is paying for all the attorneys, and it is likely that some -- or even all -- of the other board members have retained counsel.
An interesting question will be whether Baskins, Sonsini, and Hunsaker, if he is asked to testify, will assert the attorney-client privilege in response to questions at the hearing. A New York Times article (here) quotes from an e-mail Hunsaker sent that explains the reason why he was taking over supervision of H-P's internal investigation: "Ann Baskins has asked me to oversee the investigation into this in order to protect the attorney-client privilege in the event there is litigation or a government inquiry of some sort." Well, the government inquiry is here, and there may well be a privilege waiver already.
Even if the witnesses attempt to assert the attorney-client privilege, it is not entirely clear that Congress recognizes such a claim to prevent testimony. There have been instances in the past in which Congressional committees rejected attorney-client privilege claims on the ground that the Legislative Branch does not recognize common law privileges, as opposed to a constitutional privilege such as the Fifth Amendment. For example, in hearings related to the Ferdinand and Imelda Marcos regime, a committee recommended contempt for lawyers who asserted the privilege, although the contempt citation ultimately rested on the basis that there was no attorney-client relationship. A recent article in the American Criminal Law Review entitled "Congressional Investigations and the Role of Privilege" discusses the issues (43 Am. Crim. L. Rev. 165 (2006)). There is a chance that a broad attorney-client privilege claim by Baskins or Sonsini could trigger a move to hold either in contempt, although I expect that the parameters of their testimony will be worked out in advance.
The lawyers who will be witnesses have to be equally careful about guarding the attorney-client privilege, regardless of how Congress views its right to reject a common law privilege claim. Under California law, which covers Baskins and Sonsini, they are required to "maintain inviolate the confidence, and at every peril to himself or herself to preserve the secrets, of his or her client." (Cal. Bus. & Prof. Code Sec. 6068(e)(1)) It's that "at every peril" language that could put them at risk if Congress were decide to push the privilege issue, however unlikely that may be. In their testimony, the California lawyers have to be especially careful in what they say. (ph)
Online resume company Monster Worldwide, Inc., announced that it has suspend its general counsel, Myron Olesnyckyj, because of his involvement in options backdating at the company. Monster Worldwide disclosed in July that as a result of an internal investigation of options grants it would have to restate some of its financial statements, and on September 19 issued a brief press release (here) stating it "suspended its senior vice president, general counsel and secretary Myron Olesnyckyj, effective immediately, pending the results of the ongoing review of the Company’s historical stock option grant practices." Olesnyckyj is not the first GC felled in the options-timing investigations. William Sorin, former counsel for Comverse Technology, was charged with securities fraud in August, and Kent Roberts at McAfee was terminated by the company. On another front, the general counsel at Bristol-Myers Squibb was fired recently along with the company's CEO for their involvement in questionable negotiations with a competitor that could have triggered a violation of the company's deferred prosecution agreement. Lawyers in the general counsel's office at Hewlett-Packard are being closely scrutinized for their role in the company's internal investigation that involved "pretexting" to obtain private information, although no one has lost their job yet. With all the talk of judicial quotations from song lyrics (see Wall Street Journal Law Blog here), this is starting to remind me of the refrain Freddie Mercury sang:
Another one bites the dust
Another one bites the dust
And another one gone, and another one gone
Another one bites the dust
Hey, I'm gonna get you too
Another one bites the dust
The preferred manner of settling corporate criminal investigations these days is to enter into an agreement that does not result in a criminal conviction, which can have devastating results for companies in heavily regulated industries, such as health care, insurance, and financial services. The usual vehicle is a deferred prosecution agreement, in which the government files charges but agrees to dismiss them if the corporation fulfills the terms of the agreement. Organizations entering into such agreements include organizations ranging from corporate giants, such as Time-Warner and Boeing, to non-profit hospitals. Bristol-Myers Squibb's CEO was forced out recently because of a possible violation of the company's deferred prosecution agreement. Another way to settle cases has been a nonprosecution agreement, which appears to be quite similar to a deferred prosecution agreement except that the government does not file charges with the intention of dismissing them. Merrill Lynch entered into one of these agreements related to its advice to Enron.
The moniker given to the agreement appears to be important, according to an article in Corporate Counsel (here). Prudential Financial Inc. entered into an agreement with the U.S. Department of Justice to settle mutual fund late trading claims in which it paid $600 million but no criminal charges were filed. The company viewed this as a "nonprosecution agreement." In remarks about the settlement, however, Deputy Attorney General Paul McNulty called is a "deferred prosecution agreement." The agreement itself has neither term in it, and is simply titled "Agreement." The Department of Justice's press release (here) only calls it an "agreement" and does not mention the filing of any charges, which is usually done in the release describing deferred prosecution agreements (see AIG release here). It may be that Prudential Financial's lawyers got snookered by the DoJ because, as the article notes, the U.S. Attorney's Office asked that "Nonprosecution" be removed from the agreement, a change the company accepted.
Does it really make a difference what the agreement is called? From a public disclosure standpoint, a company will find it easier to "spin" a nonprosecution agreement because there are no specific charges filed. Yet, the Prudential Financial agreement contains a "statement of facts" that describes the misconduct that triggered the agreement, so there is no hiding what the government determined was criminal conduct. In each case, a future violation can trigger a renewed prosecution. It may be that Shakespeare captured the distinction well when he wrote "That which we call a rose/By any other name would smell as sweet." (ph)
Wednesday, September 20, 2006
A series of e-mails involving Hewlett-Packard's general counsel's office have come to light that shows the important role played by the company's lawyers, particularly its chief ethics counsel, Kevin Hunsaker. Hunsaker appears to have been responsible for oversight of the internal investigation of leaks at the company that included "pretexting" to obtain private information about a number of journalists, directors, and corporate officers. According to a New York Times article (here), Hunsaker sent an e-mail to Anthony Gentilucci, H-P's manager of global investigations, asking how an outside private investigator obtained cellular and home telephone records used to track contacts with journalists and whether it was proper. Gentilucci responded, "“I think it is on the edge, but above board. We use pretext interviews on a number of investigations to extract information and/or make covert purchases of stolen property, in a sense, all undercover operations.” Hunsaker responded, "I shouldn't have asked . . . ."
When the chief ethics officer at a company responds in that way, don't you think that might indicate a potential problem with the company's conduct? And, why would anyone -- particularly a person with legal and ethics training -- commit to e-mail a statement like "I shouldn't have asked"? That is the ethics counsel's job.
In April 2006, Hunsaker sent another e-mail to Gentilucci seeking to confirm the legality of the investigation that included obtaining the private records. The response appears to be that it is not illegal to engage in suc conduct. To this point, then, it appears that H-P's position, as determined by its general counsel's office, is that "pretexting" is legal. I'm not sure, however, that conclusion is entirely accurate. It may well be that "pretexting" is not illegal, in that the law is very unclear as to whether it is a crime when conducted in the manner that H-P did, rather than to use the information for another illegal purpose, such as identity theft or blackmail. But just because conduct is not illegal does not mean that it is legal. More importantly, it seems that the person charged with overseeing H-P's ethical compliance might view obtaining private information about a person by engaging in conduct that is at least disingenuous, and potentially fraudulent, was unethical even if not illegal.
Law is not ethics, and even momentary reflection should indicate that "pretexting" is wrong when done for the reasons H-P did it. When the goal of serving the client/company's interests becomes paramount, then viewing things as proper when they are not clearly illegal becomes the norm, perhaps even for a person charged with ethics compliance. By the way, it may be that the conclusion that "pretexting" is not illegal is flawed, which would raise an interesting "advice of counsel" issue of charges are ever filed. For those interested in an excellent legal analysis of the ethical relationship between a lawyer and outside experts, including private investigators, check out Professor David Hricik's article, "Conflicts and Confidentiality: The Ethical and Procedural Issues Concerning Experts," available on SSRN (here). (ph)
The revelation by the large hedge fund Amaranth Advisors that a series of risky bets by a natural gas trader have resulted in losses estimated at anywhere from $2 billion to $5 billion -- the "b" is correct -- in only a few weeks raises a question whether there has been any criminal conduct. A decline in value of that magnitude in a short a period of time, less than a month based on the reported value of the fund at the end of August at $9.5 billion and its current value of about $5 billion, triggers the natural response to leap immediately to the conclusion that someone acted illegally. Think back to the collapse of Barings Bank in 1995 caused by trader Nick Leeson's rogue trading that caused over a billion dollars in losses (see here), and he subsequently ended up in jail. Amaranth has a similar young (32) star trader, Brian Hunter, who appears to have triggered the losses through a series of highly leveraged transactions in natural gas futures that did not pan out when the price continued to decline.
But large losses are not necessarily a sign of criminal conduct, although a Hartford Courant story (here) notes that Connecticut Attorney General Richard Blumenthal's office has opened an investigation of the Greenwich-based hedge fund. There may be disclosure issues for the hedge fund, but these investment vehicles are marketed as high-risk/high-reward, and investors must be "sophisticated" in order to put money into them. Investors may cry out about their losses as being "unexpected" or even "improper," but the criminal law is not designed to punish those who are hired to take risks that may (and do) turn out to cause losses. While investors might claim not to have understood the risk of investing in Amaranth, and no one invests money in order to lose it, when you play in the big time there are going to be large disappointments. (ph)
Tuesday, September 19, 2006
The Wall Street Jrl reports here of a trader who was acquitted of securities fraud. This is the second acquittal in a case related to Van der Moolen (see here). As previously noted on this blog, if the jury had found him guilty, he could have faced 20 years in prison. Other individuals connected to this investigation have been found guilty. (see here)
KPMG signed a deferred prosecution agreement with the government that called for cooperation. In the Stein case (as discussed here, here, here and here) the court held that the Thompson Memo discouraged corporations from adhering to their practice of paying employee attorney fees. Since that decision, KPMG has joined sides with the government in saying it will appeal the court's decision and even filed seeking compensation against some of the defendants in that case. (See NYTimes here).
It is not surprising to see KPMG fighting alongside the government. For one, they benefited enormously from the deferred prosecution agreement as a prosecution could have been devastating to the company. One need only look at the Arthur Andersen situation to see the ramifications of an indictment. Even though the Andersen conviction was overturned by the Supreme Court, the indictment caused the company to fall.
In the KPMG case there is even a greater reason for the company to side with the government. Paragraph 21 of the deferred prosecution agreement states:
"KPMG has been involved in an engagement to audit the Department of Justice's financial statements. The Department of Justice's debarring official has determined that KPMG is currently a responsible contractor. The debarring official has determined that suspension or debarment of KPMG is not warranted because KPMG has agreed to the terms of this Deferred Prosecution Agreement, in which, among other things, KPMG has admitted its involvement in unlawful conduct and has agreed to take steps to ensure that KPMG, it leadership, partners, personnel, and clients will adhere to the highest standards of ethics and compliance with the United States tax laws." (emphasis added)
The NYTimes has an article here that examines the Bristol-Myers Deferred Prosecution Agreement, including the role of the monitor. Co-blogger Peter Henning is quoted in this article stating "I am not comfortable,” . . . “with the U.S. attorney at a board meeting where they are considering basic corporate policy. The government is saying this is how we want this company to be operated. The government is telling Bristol-Myers and its shareholders this is how your investment will be managed.’’ This blog previously discussed this aspect of the agreement as well as other unusual aspects of the Bristol-Myers Deferred Prosecution Agreement here.