Thursday, November 23, 2006
Reflecting on who in the white collar crime world is giving thanks on this Thanksgiving Day --
1. Jamie Olis can be thankful to the Fifth Circuit panel that reversed his initial sentence of 24 years, with a special thank you to the Hon. Edith Jones who authored the opinion, an opinion that allowed him to be resentenced to six years.
2. Andy Fastow can be thankful to the prosecutors who did not object when his defense counsel presented reasons for a lower sentence than the ten years specified in his plea agreement.
3. The KPMG 16 can be thankful that U.S. District Judge Lewis Kaplan wrote an incredible decision that calls into question some of the government's actions with respect to the Thompson Memo.
4. Eric Holder can be thankful that Larry Thompson decided to redraft his memo so that when everyone criticizes the memo they call it the Thompson Memo.
5. Kobi Alexander can be thankful that he ended up in Namibia as opposed to country that would move quickly to extradite him back to the United States.
6. Jack Abramoff can be thankful that he had a lot of friends in high places to talk about when the government came calling.
7. U.S. District Judge Sim Lake can be thankful the Enron trial is now behind him, although the possibility of a retrial should Skilling's appeal be successful may give him a bit of dyspepsia, along with the cranberry log.
8. The Enron Nigerian Barge Defendants can be thankful the Fifth Circuit's view of "right of honest services" fraud went their way.
9. Law Firms with white collar practice groups can be especially thankful for the extra servings provided by the options back-dating turkey.
If readers have any thanks they would like to add, please do so in the comment section.
Happy Thanksgiving!!! (esp & ph)
Wednesday, November 22, 2006
The Second Circuit heard oral arguments on November 21 in the appeal of U.S. District Judge Lewis Kaplan's decision providing sixteen former KPMG partners and employees with a civil claim to seek attorney's fees in the government pending prosecution of them on conspiracy and tax fraud charges. A Wall Street Journal article (here) states that senior Circuit Judge Ralph Winter said he was "dubious" of the district court's authority to permit a civil cause of action, and noted Judge Winter questioned whether Judge Kaplan "created a proceeding without any expressed authority." U.S. District Judge John Gleason, sitting on the panel by designation, raised the interesting issue of the proper remedy for a constitutional violation, stating that it could be dismissal of the indictment. As a trial court judge, I suspect Judge Gleason will be more sympathetic to Judge Kaplan's position than the appellate judges might be because he may well face the same issues in his courtroom in Brooklyn one day.
As discussed in an earlier post (here), Judge Kaplan's recent order postponing the trial indefinitely hinted that he might revisit the issue of remedy, and the defendants have asked for dismissal due to prosecutorial misconduct and a violation of their constitutional rights from the government's pressure on KPMG to deny them attorney's fees. Dismissal is the ultimate penalty, and one the Supreme Court has been loath to permit absent a clear violation of a constitutional or statutory protection. The Second Circuit's skepticism about Judge Kaplan's decision to drag KPMG into the case in a collateral proceeding may result in a remand to address directly the question of the proper remedy for a constitutional violation, assuming there is one. (ph)
Options-timing investigations triggered the resignations of two more CEOs, one of whom will receive a nice chunk of change for leaving his job. Cyberonics, Inc. CEO Robert "Skip" Cummins left the medical device maker after the disclosure in its 8-K (here) that the "Audit Committee has concluded that incorrect measurement dates were used for certain stock option grants made principally during the period from 1999 through 2003." The board announced that its "consolidated financial statements and all earnings and press releases and similar communications issued by the Company relating to periods beginning on or after June 30 1999, should no longer be relied upon. What does that get the former CEO? The company entered into a severance agreement containing the following terms:
[T]he payment of approximately $1.7 million in cash within five days, the issuance of 75,000 unregistered shares of the Company’s common stock to Mr. Cummins, and the acceleration of vesting for outstanding options and restricted stock grants and the payment of certain benefits. The Cummins Resignation Agreement also provides for the payment to Mr. Cummins of an amount equal to the cash value of 75,000 shares of the Company’s common stock within one week of the filing of the Company’s next Annual Report on Form 10-K and for the payment of cash for certain tax payments that will be incurred by Mr. Cummins as provided in Paragraph 6(f) of his Employment Agreement.
With my limited math skills, I think the cash and stock payments are worth at least $5.3 million based on a stock price of $24.50 per share: $1.7 million up front, 75,000 shares worth over $1.8 million, and another payment of about $1.8 million -- depending on the stock price -- when Cyberonics files its 10-K. The company's CFO also resigned, and only received a consulting contract that will pay her $1,200 per day.
Trident Microsystems, Inc. founder and CEO Frank Lin resigned because of options-timing issues uncovered in an investigation by a special board committee. According to the company's 8-K (here):
While the investigation is not yet complete, on November 14, 2006 the Special Committee provided a preliminary report to the Board of Directors. The Special Committee found that the Company previously used incorrect measurement dates when accounting for stock option grants made to new hires, existing employees and officers. The Company will restate its financial statements to correct the accounting for its historical stock option grants. Based on the preliminary results of the Special Committee’s investigation, the Company currently expects to record non-cash charges for stock based compensation expense in a range of approximately $40 million to $50 million, which the Company expects to recognize in periods between 1994 and 2006.
No word yet on Lin's severance package. (ph)
It will be a good Thanksgiving for five former floor traders. The Wall Street Jrl reports here that in the "interests of justice" prosecutors have decided that these cases should not be pursued. It is not easy for the government to decide not to pursue cases they were working on, but it is an important step for prosecutors who serve as "ministers of justice." A good Thanksgiving to the floor traders and also to the prosecutors who realized that mere advocacy is not the role of those who serve in the government.
A fascinating story in the Wall Street Journal titled, "To Catch Crooks in Cyberspace, FBI Goes Global" discusses the cooperation that the U.S. has provided to other countries in the investigation of international cybercrime. Without doubt, cybercrime poses unusual problems in that it crosses borders by a mere keystroke. What becomes problematic is when the U.S. decides to prosecute the conduct merely because it affects this country. The Wall Street Jrl. article puts a good face on the U.S. prosecution in that it describes the U.S. providing assistance to other countries in the investigative stage, with other countries then proceeding with the prosecution.
Tuesday, November 21, 2006
With computers everywhere one has to expect that jurors are likely to be looking for answers to their questions on the web. The problem here is that the jury is supposed to limit their deliberation to what is contained in the trial and that which is provided to them by the court.
In the Siegelman/Scrushy trial this question may prove interesting. According to the Montgomery Advertiser (AP) here the jury may have downloaded copies of the indictment and one juror may have used a home computer to learn about the fore-person's role on a jury.
The problem now becomes whether their investigation and downloading tainted their deliberation. After questioning the jurors and finding no influence, the court has ordered both parties to brief the issue. Clearly the court is looking to see if this is was prejudicial to the defendant or merely harmless error. One question that may prove interesting is whether the materials downloaded replicated what was given to them by the court. If the material contained excess items that the jury had not been privy to during the trial, the question will be whether that material was prejudicial. Although the government has the burden here (See Remmer v. United States, 347 U.S. 227 (1954)) ( al.com here), it may not be a difficult burden for them to meet.
A Tampa district court issued a sentence of home confinement and probation to a Tampa business executive despite prosecutors asking for jail time. According to the St. Petersburg Times here, the defendant who "methodically stole $1.8-million from [his] ex-employer" "blamed the antidepressant" "for his embezzling." For many white collar offenders, the naming and shaming in the newspapers can be devastating, and in some cases more traumatic then the actual sentence. The St. Petersburg Times does note the stellar work record and looks at family consequences in ascertaining the sentence. Irrespective of whether one agrees or not with the sentence issued by U.S. District Court Judge James Moody Jr., his consideration of factors beyond the guidelines is important. We must always remember that we are not just sentencing "acts" but rather are also sentencing "actors."
Monday, November 20, 2006
Former Mayor Bill Campbell (Atlanta) is feeling the collateral consequences of his recent federal conviction. Although he was convicted of tax crimes, and acquitted of other charges against him (see here), it did not stop the Georgia Supreme Court from suspending him from the practice of law (See Atlanta Jrl Constitution here). Although a bricklayer comes out of prison a bricklayer, and a welder remains a welder, a white collar offender often is precluded after prison from resuming the livelihood that he or she had prior to the conviction.
Playing in the international market can have severe ramifications for a company. Not only must they fear the US Foreign Corrupt Practices Act (FCPA), but they also have to be apprised of the law of other countries and be knowledgeable of how best to operate in these countries. And it is not always easy.
It is, therefore, not surprising to see that that Lone Star Funds is having some difficulty with South Korean prosecutors. According to the Wall Street Jrl here, they have indicted the "Dallas private-equity firm Lone Star Funds and Korea Exchange Bank on stock-manipulation charges related to the bank's credit-card unit." And it sounds like this investigation opens up an array of accusations. The Korean Herald reports here on allegations related to a judge's failure to grant an arrest warrant in 2004 for an executive of Lone Star. Part of the question here will be whether this whole investigation really is anything new from what had previously been looked at in 2004.
Sunday, November 19, 2006
Another plea has been entered into in the DRAM manufacturing antitrust conspiracy cases. A DOJ press release reports here that "[a] former executive of Elpida Memory, a large Japanese manufacturer of a common computer component called dynamic random access memory (DRAM), has agreed to plead guilty, pay a $250,000 criminal fine, and serve prison time in the United States for participating in a global conspiracy to fix DRAM prices." This brings the government tally to "four companies and 17 individuals" being charged related to the DRAM cases. The government press release notes that
"Samsung, the world’s largest DRAM manufacturer, pleaded guilty to the price-fixing conspiracy and was sentenced to pay a $300 million criminal fine in November 2005. Hynix, the world’s second-largest DRAM manufacturer, pleaded guilty and was sentenced to pay a $185 million criminal fine in May 2005. In January 2006, Elpida Memory agreed to plead guilty and pay an $84 million fine. In October 2004, German manufacturer Infineon pleaded guilty and was sentenced to pay a $160 million criminal fine."
TRAC Reporting out of Syracuse University is saying that:
"[t]imely criminal enforcement data from the Justice Department document that in July 2006, U.S. federal white collar crime prosecutions reached their lowest number (498) in the last five years. In fact, not since May 2000 (when there were 446 prosecutions) has the number been lower." (see here)
(esp) (with disclosure that she is a Syracuse grad).
Saturday, November 18, 2006
Bloomberg News is reporting here that DOJ officials are reconsidering their practice of requesting waivers of attorney-client privilege by corporations. But it also sounds like they aren't ready to just plain ban this DOJ practice. Instead, it may just be a baby step in this direction.
One change mentioned is to require approval from top DOJ officials before seeking a waiver from a company of their attorney-client privilege. Approvals from high level DOJ officials are common in existing DOJ guidelines. For example, using RICO requires approval, as does some actions involving international affairs. But these actions that require approval are a far cry from the present practice of disregarding a basic common law privilege.
This is the second time that DOJ would be modifying the practice, with the first time requiring merely a set practice within each USA's office. (see here) This new step would bring the issue to a higher level, but it certainly will not alleviate the problem.
Defense costs in white collar crime prosecutions, and the inevitable wave of parallel proceedings, can run into the millions. Recent cases involving a high level of defense legal fees includes the prosecution of Jeffrey Skilling, which came in at over $70 million, the $17 million Richard Scrushy was awarded from HealthSouth, and the various KPMG defendants who will spend at least $5 million each, and quite possibly much more as the government buries the eighteen defendants in documents. While directors and officers usually have a right to be indemnified for their attorney's fees, and even a right to have the company pay the fees in advance of a final judgment in the matter, the back end of the deal is often overlooked. The requirement to pay attorney's fees can be conditioned on requiring the recipient to provide an agreement to repay any amounts advanced if it turns out the officer or director is guilty of a crime, which would show the person did not act in good faith. Such is the case involving former Computer Associates CEO Sanjay Kumar, sentenced to twelve years for securities fraud and obstruction of justice related to a scheme to inflate the company's revenue. CA Inc., at it is now known, filed suit against Kumar to recover $14.9 million in attorney's fees advanced to him during the government's three year investigation. According to a Reuters story (here), the company obtained an order from a New York state court attaching Kumar's property as security for the attorney's fee claims, including his "$9 million home, two Ferrari sports cars, Volvo and Land Rover sport utility vehicles, and a 57-foot Italian Azimut yacht."
CA's by-laws are typical of most public corporations in providing for a right to repayment of attorney's fees if the covered employee is found (or pleads) guilty to a crime. The relevant provision (here) states:
Expenses (including attorneys’ fees) actually and reasonably incurred by any such person in defending any such threatened, pending or completed action, suit or proceeding shall be paid on behalf of such person by the Corporation in advance of the final disposition of such action, suit, or proceeding and within 30 days of receipt by the Secretary of the Corporation of (1) an application from such person setting forth the basis for such indemnification, and (2) an undertaking by or on behalf of such person to repay such amount if it shall ultimately be determined that such person is not entitled to be indemnified by the Corporation as authorized in this Article. A plea of guilty to a felony charge arising out of misconduct committed by such person in his or her capacity (a) as a director or officer of the Corporation, (b) as a director or officer of, or in a similar capacity with respect to, any subsidiary or joint venture of the Corporation or other entity or enterprise referred to in the preceding paragraph of this Article, or (c) as a fiduciary, trustee or administrator or in a similar capacity with respect to any employee benefit plan or other plan or program sponsored by the Corporation or any subsidiary of the Corporation shall, for purposes of the mandatory advancement of expenses provided in the preceding sentence, constitute a final disposition of such action or proceeding. The financial ability of any person to make a repayment contemplated by this provision shall not be a prerequisite to the making of an advance.
The guilty plea triggers Kumar's undertaking to repay the attorney's fees that he gave to secure the advancement of funds, so the company's claim is pursuant to the terms of the by-law provision. As a Delaware corporation, CA is permitted under the Delaware General Corporation Law to condition an advancement on such an undertaking, so it will be difficult for Kumar to stop the court from ordering repayment or seizing property to satisfy the claim. (ph)
A jury in New York acquitted Osama Awadallah of two counts of perjury the government charged took place during testimony before a grand jury in October 2001 investigating the September 11 terrorist attacks. Awadallah was a student in San Diego in 2000 when he became acquainted with one of the hijackers who was on the plane that flew into the Pentagon, and he was arrested as a material witness shortly after the attacks. In grand jury testimony given while he was handcuffed and had been held in solitary confinement for weeks, he admitted knowing Nawaf al-Hazmi but denied knowing the name of al Hazmi's companion, Khalid al-Mihdhar, or that it was his handwriting in a notebook with their first names in it. In a subsequent grand jury appearance, he testified that he was mistaken about knowing Khalid, whom he met a few times, and in not recognizing his handwriting, but he was charged anyway with perjury. The first trial ended in a hung jury with a single juror holding out for an acquittal, while the second case ended with a unanimous verdict in his favor. According to an AP story (here), the jury forewoman stated that Awadallah's testimony appeared to be immaterial to the government's investigation because it already knew the identity of the two hijackers, so he could add little to the inquiry. (ph)
Friday, November 17, 2006
The sentencing of the major Enron players who reached plea agreements and testified for the government against former CEOs Ken Lay and Jeffrey Skilling concluded this week. Michael Kopper, an aide to former CFO Andrew Fastow who helped set up the special purpose entities that caused much of the accounting troubles at the company, received a 37-month sentence from U.S. District Judge Ewing Werlein. Mark Koenig, the head of Enron's investor relations department, received an 18-month term. Kopper was the first Enron executive to plead guilty, and his cooperation was instrumental in the case against Fastow, who in turn provided evidence against Lay and Skilling. Koenig was the government's first witness at trial and described the misstatements made to investors by Enron's management, a key part of the government's case. Judge Werlein, who earlier gave Fastow four years less than his plea agreement called for, accepted the government's recommendation to give Kopper and Koenig reduced sentences for their cooperation, again highlighting the significant benefits that can flow from a plea agreement. An AP story (here) discusses the sentencing. (ph)
California Senator Diane Feinstein and Alabama Senator Jeff Sessions introduced a bill in the Senate to enact the Department of Justice's proposal to overturn the abatement doctrine that led to the dismissal of the indictment and conviction of former Enron CEO Ken Lay after his death in July 2006. The Department had asked U.S. District Judge Sim Lake to postpone dismissing the case while it sought Congressional action to enact a retroactive reversal of the abatement doctrine (see earlier post here), but the bill was never introduced before Judge Lake finally acted on a motion by Lay's estate on October 18. The Fifth Circuit affirmed that decision a short time later.
The effect of the abatement doctrine, as discussed in an earlier post (here), is that the entire case disappears, which means that any asset forfeiture action must proceed as a civil case against the estate and not as an adjunct to the criminal conviction, and there can be no restitution order because the conviction is removed from the record. A Houston Chronicle story (here) quotes Senator Feinstein reiterating the victims rights rationale first offered by the DOJ for getting rid of the abatement doctrine. Given that a majority of the federal departments do not have a budget yet and the change of party control in Congress will cause much distraction, it is unlikely the bill will go anywhere during the lame duck session. While it can be reintroduced in the new Congress in January, the Senate Judiciary Committee may have more pressing business, although bi-partisan sponsorship certainly gives the bill a chance. (ph)
UPDATE (Nov. 25): The text of S. 4005, entitled "Preserving Crime Victims' Restitution Act of 2006" is available here. (ph)
Comverse Technology, Inc. became embroiled in the options-timing controversy when former CEO Kobi Alexander, former CFO David Kreinberg, and former general counsel William Sorin, were charged with securities fraud in July 2006. Kreinberg and Sorin have agreed to plea bargains with the government, and reports are that Kreinberg will finger Alexander for offering to pay him to take the blame for the back-dating. The latest news from the company is that problems go much deeper than the options practices and involve possible wide-scale accounting fraud. A Comverse press release (here) states:
[I]n connection with the ongoing investigation by the Special Committee of the company’s Board of Directors of the company’s stock option practices and related accounting matters, the company identified errors in the recognition of revenue related to certain contracts, errors in the recording of certain deferred tax accounts and the misclassification of certain expenses in earlier periods. In addition, based on information provided to the company, areas of financial reporting under investigation include the possible misuse of accounting reserves and the understatement of backlog in fiscal 2002 and prior periods.
If there are significant misstatements in Comverse's books and records, it may put the options back-dating in a new light. Rather than just executives lining their own pockets, it could be a systematic fraud to inflate the stock and then cash in surreptitiously by further inflating the value of the options by timing them for a low price that was then artificially surpassed through accounting fraud -- greed squared, if you will. Alexander is reputed to have boasted of his attention to the company's financial filings, which makes it even more difficult to offer the "honest-but-ignorant" CEO defense.
Alexander is still in Namibia awaiting an extradition hearing that is now scheduled to start on April 25. He left the United States in June 2006, shortly before prosecutors filed charges in the case. With five months before the hearing, prosecutors will have time to gather evidence that could link Alexander to a broader fraud at the company and strengthen the case so that it is more than just options-timing. A Long Island Business News article (here) discusses the extradition proceeding. (ph)
Even with the 2006 midterm elections past, there is still fall-out in New Hampshire from the elections four years ago from an effort to jam the telephones of organizations involved in a get-out-the-vote effort on behalf of Democratic candidates. A fourth defendant in the case, Shaun Hansen, entered a guilty plea to two counts of harassment by interstate telephone calls through a marketing firm, Mylo Enterprises, he used to own. Two defendants entered guilty pleas, Allen Raymond, former president of a Virginia communications consulting company, and Charles McGee, former Executive Director of the New Hampshire Republican State Committee, while James Tobin, former New England Regional Chairman of the Republican National Committee, was convicted by a jury in December 2005 for his part in the scheme. According to a Department of Justice press release (here):
Hansen admitted that he was contacted by others involved in the scheme and asked to assist in making harassing phone calls to five telephone numbers associated with the New Hampshire Democratic Party and one number associated with the Manchester Professional Firefighters Association on Election Day, November 5, 2002. Hansen agreed that, in return for $2,500, employees of Mylo Enterprises would place repeated hang-up calls to those numbers on that day. At Hansen’s direction, employees of Mylo Enterprises in Idaho placed several hundred hang-up calls to those New Hampshire telephone numbers on that morning before the scheme was discontinued.
For the political junkies in the crowd, in the most recent election, Democrats won both House seats in New Hampshire and the governorship, something that has not happened since 1912 in the Granite State (see Boston.Com article here). (ph)
Thursday, November 16, 2006
The Houston Chronicle reports (here) that U.S. District Judge Sim Lake has ordered former Enron CEO Jeffrey Skilling to report to the federal correctional institution in Waseca, Minnesota (link here), about 75 miles south of the Twin Cities. This is a low-security facility. Judge Lake had recommended that Skilling be placed in the FCI in Butner, North Carolina, but as seen in former Enron CFO Andrew Fastow's assignment to the FCI in Oakdale, Louisiana, rather than the recommended facility outside Austin, the Bureau of Prisons makes its own decisions on prisoner assignments. Skilling has been ordered to surrender by December 12 at 2:00 p.m., although the Fifth Circuit could order release on bail pending his appeal, which is uncommon but certainly not impossible. If Skilling is not permitted by the Court of Appeals to remain free on bond, it would not surprise me if he reported before December 12 to avoid a media circus on that day. (ph -- thanks to Tom K. for noticing an error in the date in an earlier version)