Saturday, December 23, 2006
A third defendant involved in the sale of tax shelters by KPMG entered a guilty plea and will cooperate in the government's prosecution of eighteen other defendants. Chandler Moisen, a businessman, worked primarily with one KPMG accountant located in Denver at the time to promote and structure the tax shelters. He entered a guilty plea to conspiracy to commit tax fraud and wire fraud. The plea agreement does not identify the KPMG accountant Moisen worked with, but a New York Times article (here) asserts that it was Robert Pfaff, one of the eighteen defendants awaiting trial in New York.
The criminal information filed in the case quotes from an e-mail Moisen sent to Domenick DeGiorgio, who worked at international bank HVB Group that was involved in the tax shelter transactions, entitled "Us getting rich" (good English, too): “Dom, one of my recurring nightmares involves you/me and our receipt of $. The first used to be that somehow the bank would catch you and we would all go to jail because we were violating federal banking laws . . . That concern of course was started by Bob and has largely dissipated. The second nightmare is that the I.R.S. catches on and you/we are nailed for income tax evasion. People go to jail for that one.” The article makes the assumption that "Bob" is former KPMG accountant Pfaff.
Regardless of Bob's identity, this is yet another illustration of people putting the darnedest things in e-mails, plus giving them some glaringly stupid titles, on the apparent belief that hitting the "Send" button means they no longer exist. Moisen's e-mail does contain one potentially prescient observation: people do indeed go to jail for tax fraud -- just ask former Survivor winner Richard Hatch. With the KPMG trial still months away, the pressure on other defendants to cooperate may not be all that great yet, but as it gets closer to the September starting date more may switch sides. (ph)
Friday, December 22, 2006
A Yahoo.Com story (here) states that a former defense attorney for Balco (Bay Area Laboratory Co-operative) founder Victor Conte leaked the grand jury testimony of San Francisco Giants slugger Barry Bonds and perhaps other major league players who testified into the investigation of steroid manufacturing. Two San Francisco Chronicle reporters, Mark Fainaru-Wada and Lance Williams, published excerpts of the testimony, including Bonds' statement that he unknowingly took steroids in 2001. The lawyer, identified as Troy Ellerman, represented Conte and another Balco executive in the criminal case, although Conte switched lawyers in March 2005 and eventually agreed to a plea bargain. A former investigator who shared an office with Ellerman asserts that the lawyer disclosed the transcripts in 2004 to the Chronicle. In addition to his legal practice, Ellerman is the commissioner of the Professional Rodeo Cowboys Association.
The grand jury transcripts were likely supplied to defense counsel after the 2004 indictment of five defendants with Balco connections, including Conte and Bonds' former personal trainer, Greg Anderson. They may have contained Brady material, and so prosecutors had to disclose them to the defense, but that disclosure would have included significant restrictions on any pre-trial use of them. If Ellerman leaked the documents, it would in all likelihood violate a court secrecy order and could subject him to a contempt proceeding, although not under Federal Rule of Criminal Procedure 6(e)(7) because defense lawyers are not covered by the grand jury secrecy rules.
An interesting question is whether the two Chronicle reporters can avoid jail for contempt if Ellerman is the source for their stories recounting the grand jury testimony. Fainaru-Wada and Williams refused to testify about the identity of their source before the grand jury investigating the leak, asserting the journalist privilege to maintain the confidentiality of sources; the contempt issue is currently before the Ninth Circuit. While reporters have been unsuccessful lately in fighting demands for testimony about their confidential sources, there may be no need to obtain testimony from the reporters now and the contempt citation could be vacated. That would certainly be a nice holiday gift for Fainaru-Wada and Williams. (ph)
The SEC sued two former Tyco Inc. executives for fraud, and it's not the well-known former CEO Dennis Kozlowski and former CFO Mark Swartz, who are serving time after their convictions for grand larceny for diverting money from the company. Instead, the Commission sued Richard D. Power and Edward Federman for their role in a scheme to pump up the company's revenue through a sham transaction that was allegedly at the behest of Kozlowski and Swartz. According the the SEC Litigation Release (here):
The Commission's complaint alleges that Power and Federman inflated Tyco's operating income by hundreds of millions of dollars through the use of a sham transaction. In that transaction, Tyco charged authorized dealers of Tyco's ADT Security Services, Inc. (ADT) subsidiary a "dealer connection fee" whenever the company purchased security monitoring contracts from them. However, the connection fee was fully offset by a simultaneous increase in the purchase price ADT allocated to the dealers' security monitoring contracts. Thus, the transaction lacked economic substance. No additional money changed hands as a result of the dealer connection fee transaction. The sham transaction was designed by Power immediately following Tyco's 1997 merger with ADT Ltd. Federman subsequently defended the transaction when concerns were raised in meetings with Tyco's independent accountant. His defense was successful, and the income inflation from the transaction continued unabated. The complaint alleges that the transaction inflated Tyco's operating income by $567 million from the company's fiscal year 1998 through its fiscal quarter ended December 31, 2002.
The complaint alleges that Power and Federman further inflated Tyco's operating income by means of fraudulent acquisition accounting, including the pre-acquisition reduction of asset valuations and overstatement of liabilities in connection with several of Tyco's most significant business acquisitions. In addition, Federman engaged in the improper use of accounting reserves to enhance Tyco's reported financial results, directing the reversal of reserves at Tyco's fiscal year-end to offset an unanticipated $40 million compensation expense.
A third executive responsible for booking the transactions, Richard (Skip) Heger, settled the SEC case by agreeing to pay $450,000 in disgorgement, interest, and a civil penalty. Tyco settled an SEC enforcement action in April 2006 (Litigation Release here) related to the same transactions and paid a $50 million civil penalty. Securities fraud charges against Kozlowski and Swartz are still pending. (ph)
I'm always fascinated in reading about embezzlement cases to see what people do with the money. Some spend it on cars, luxury trips, or lavish gifts, while some seem to have a penchant for collecting things. An entry on the U.S Attorney's Office for the District of Maryland's blog (here) describes a nearly $400,000 embezzlement that caught my eye:
According to the plea agreement presented to the court, McDevitt was employed at SAFT America Inc. as a communications manager. He worked out of the Cockeysville, Maryland office, but the advertising and promotions services he provided required him to travel to trade shows around the United States. From March 2005 to February 2006 McDevitt submitted invoices to his employer for promotional expenses that he did not incur. He also falsified signatures on documents to make it appear that certain requests for reimbursement had been approved. McDevitt sent fraudulent documents via email, and accessed data over the internet. As a result of this scheme, McDevitt wrongfully obtained and caused the loss of approximately $399,537 from SAFT America Inc. As part of the plea, McDevitt has agreed to forfeit to the government 12 Rolex watches and other items he bought for his personal benefit with his employer’s funds.
I'm not a watch-wearer myself, but even if I were, do you need a Rolex for each month? And isn't almost four-hundred grand in expenses in one year just a bit on the high side, unless he was one heck of a salesman? Maybe my tastes are just too pedestrian. (ph)
Thursday, December 21, 2006
Well, that's easy -- two tax fraud trials! U.S. District Judge Lewis Kaplan decided to spare himself from having to try a second time the massive tax shelter fraud case with eighteen defendants, sixteen of them former partners and employees of accounting firm KPMG, by rejecting the government's suggestion that the case be divided into separate proceedings, one with the higher-ups and the other with lower-echelon defendants. After earlier indefinitely postponing the trial, Judge Kaplan has now set a trial date of September 17, 2007, noting at a hearing that "What I've been offered is to have two unmanageable trials instead of one . . . Might as well have one." Don't hold your breath for that trial date, however, because the appeal of the government and KPMG over the issue of the firm's obligation to pay attorney's fees, and the procedure for doing so, is still before the Second Circuit. If the appellate court reverses Judge Kaplan's approach, which is to try the attorney's fee issue in a separate proceeding before him rather than send it to arbitration, I expect the defendants to appeal to the Supreme Court.
As discussed in an earlier post (here), if KPMG is not required to pay the attorney's fees soon, the judge could consider dismissing the indictment for prosecutorial misconduct. The recent revision of the Department of Justice's policy on charging corporations and other business organizations with crimes, now known as the McNulty Memo, rescinds an earlier policy that considered payment of an employee's attorney's fees as a sign of corporate noncooperation. It will be tough for the federal prosecutors to argue that the did not engage in misconduct when their own policy has gone in the opposite direction. A Reuters story (here) discusses the scheduling hearing before Judge Kaplan. (ph)
The Department of Justice announced that Overseas Shipholding Group Inc., a large publicly-traded tanker company, entered a guilty plea to thirty-three counts of environmental and other violations from ocean dumping by a number of its vessels. The charges include illegal dumping of waste oil, violations of the Clean Water Act/Oil Pollution Act, the Act to Prevent Pollution from Ships, conspiracy, false statements and obstruction of justice The company will pay $37 million as part of its guilty plea, which involves $27.8 million in criminal fines and $9.2 million to fund various environmental projects. According to a DoJ press release (here):
The government’s investigation was initiated after the Coast Guard in Boston received a referral from the Marine Safety Branch of Transport Canada, indicating that records for the M/T Uranus showed that bilge waste was being disposed while the official Oil Record Book failed to account for the disposal of waste. It was determined that these illegal discharges occurred within U.S. waters off-the-coast of Maine and Massachusetts. During this time, crew members discharged approximately 150,000 gallons of oil-contaminated waste while “tricking” the Oil Content Meter designed to detect and prevent discharges containing more than 15 parts per million oil, the international limit established by the MARPOL Protocol, an international treaty implemented by the Act to Prevent Pollution from Ships.
The government’s investigation grew to include evidence of deliberate violations of the MARPOL Protocol and U.S. law by the following 12 oil tankers: M/T Ania, M/T Cabo Hellas, M/T Neptune, M/T Overseas Alcesmar, M/T Overseas Cleliamar, M/T Overseas Shirley, M/T Overseas Portland, M/T Pacific Sapphire, M/T Pacific Ruby, M/T Rebecca, M/T Uranus, and M/T Vega.
Prosecutions for violating the environmental laws are one of the primary areas in which corporations are charged with offenses and not just individuals. Often it is difficult to identify the particular employee responsible for the dumping, and the misconduct can be company wide, involving a number of facilities or vessels, as in this case. (ph)
High tech equipment manufacturer Juniper Networks, Inc., disclosed that its internal investigation of options issuance practices shows that award were backdated and that there are "serious concerns regarding certain former management." The company said it would take a $900 million charge, as a press release (here) explains:
[T]he actual measurement dates for financial accounting purposes of numerous stock option grants issued in the past differ from the recorded grant dates of such awards. The Audit Committee determined that there were numerous instances in which grant dates were chosen with the benefit of hindsight as to the price of the Company’s stock, so as to give favorable prices. In this regard, the Audit Committee identified serious concerns regarding certain former management. In addition, formal documentation often lagged the referenced grant date and there was insufficient exercise by management of responsibility for the stock option process. The Company currently anticipates that it will record additional non-cash charges for stock-based compensation expense of approximately $900 million, 99.9 percent of which relate to options granted between June 9, 1999 and December 31, 2003.
There are lots of nice euphemisms in there that can be easily translated: the options were issued with backdated documentation, and one or more former managers have been fingered by the company's internal investigators.
The press release notes that Juniper CEO Scott Kriens received two options awards with the backdated issuance date, but that those options were canceled unexercised in 2001 and he has not exercised any options since 1998. Like many companies caught in the tech collapse when the bubble burst in 2001, most of its options issued prior to mid-2000 were likely worthless by 2001 even with the beneficial price adjustments through the backdating. Juniper earlier disclosed that the U.S. Attorney's Office for the Eastern District of New York (Brooklyn) is investigating its options issuance practices, and prosecutors will be quite interested in those "serious concerns" revealed in the internal investigation. (ph)
Tuesday, December 19, 2006
Four former Enterasys executives were convicted on securities fraud and conspiracy charges, while another had an acquittal on one count and a hung jury on other counts. (see here) The company where they worked focuses on providing its customers with a secure network. Founded in 1983, as Cabletron Systems, the company is now a private company.
This case is particularly interesting in that a question regarding payment of attorney fees arose in a pre-McNulty hearing. For background, see here.
The McNulty memo, discussed here, here, here, and here, is clearly controversial. Another voice can be added to those proclaiming that the memo is deficient as not going far enough. This time it is William Sullivan of Winston & Strawn. Last March, Sullivan, a former prosecutor, testified before the House. He appeared along with Tom Donahue, former Attorney General Thornburgh, and former Associate Attorney General Robert McCallum. William Sullivan now provides a detailed release Download Untitled.pdf that states is part:
"Ultimately, the Memorandum's piecemeal revisions may in the short term appease some critics and forestall imminent judicial and congressional action, but they do not demonstrate an earnest re-evaluation of Department policies regarding corporate criminal enforcement, and fail to provide meaningful procedural change."
The National Law Journal has named Theodore V. Wells Jr. its lawyer of the year. Wells, co-chairman of the litigation department at New York’s Paul, Weiss, Rifkind, Wharton & Garrison, is set to start trial on January 16th. His client is Lewis "Scooter" Libby. And CNN reports that Vice President Cheney will be called as a witness.
If you think that white collar sentences are going down in a post-Booker world, you need only check out the sentence given to John A. Lynch Jr. yesterday. He received a sentence of three years and three months for guilty pleas to fraud and tax evasion. The 39 month sentence was on the high end of the guideline range of 33 to 41 months. Well known in political circles, Lynch is a former state Senate President. (see Newsday AP here for more details)
Monday, December 18, 2006
United States Attorney's Office for the Southern District of Florida issued a press release that Samantha Johnson and Scott Warren Johnson, husband and wife, were sentenced following their guilty please to "a wide-ranging mortgage fraud scheme." The sentences were 60 months for Samantha Johnson and one year for Scott Johnson. The press release said that they received "in excess of 2.5 million in ill gotten gains."
Now compare this to the sentence received by Chalana McFarland, a first offender who was sentenced for mortgage fraud (see here) to 30 years imprisonment for her role in an extensive mortgage fraud scheme that skimmed $20 million from the sale of over 100 homes from 1999 to 2002.
Why such a disparity in sentence? Could it be that the first group of individuals plead guilty and the second person risked trial? When the stakes are so high, do you really have a constitutional right to a jury trial?
The United States Attorney for the Central District of California reports in a press release of a plea they obtained from someone who was "caught using a camcorder to record the movie Mission Impossible III" at a Hollywood theater. The plea was to copyright infringement. It really is better to just buy the video.
Sunday, December 17, 2006
Identity Theft is clearly a national problem. And when one thinks of the problem, computer fraud or credit card schemes come to mind. But DOJ has a new category to add to the list - immigration violations. The Washington Post reports in an article by Spencer Hsu and Krissah Williams that federal authorities arrested hundreds of people on identity theft charges for what in fact appears to be allegations of immigration violations.
It is nothing new for prosecutors to use a charge that may not have initially been intended for the purpose it is now being used. Years ago, one saw tax offenses used to prosecute organized crime and corruption matters. Recently, money laundering charges have been tacked onto white collar crimes. So I guess, it should not be surprising to see identity theft being pulled from the hat for alleged immigration violations.
Hats off to the N.Y. State prosecutors who dismissed tax charges against L. Dennis Kozlowski, former CEO of Tyco. (see Wall Street Jrl here) Kozlowski is serving a lengthy prison sentence in the state system of between 8 1/3 to 25 years. The resolution of this matter will save the cost of having to litigate another matter regarding this defendant. Kozlowski, along with co-defendant Mark Swartz, is presently appealing his conviction (see here).
Saturday, December 16, 2006
What have others been saying about the McNulty Memo -
ABA Jrl E- Report here
Alan Childress, Legal Profession Blog here
Business Week Online here
Carrie Johnson, Washington Post here
Dale Oesterle, Business Law blog here
Doug Berman's Sentencing Blog here
Jason McClure, Legal Times here
Linnley Browning, New York Times here
Porter Wright Morris & Arthur here
Wachtell, Lipton, Rosen & Katz here (per the Wall Street Jrl)(John F. Savarese & David B. Anders)
The former chancellor of Alabama’s two-year-college system faces a forfeiture action according to an article in the Chronicle of Higher Education. There are no federal criminal charges in this case, but the forfeiture seeks return of funds he received from from contractors.
(esp)(w/ a Stetson hat tip to Dean Darby Dickerson)
The Balco (Bay Area Laboratory Co-Operative) steroids investigation has entered what U.S. Attorney Kevin Ryan called the "third stage" with the indictment of Tammy Thomas, a former cyclist banned from competition for steroid use. Thomas testified under a grant of immunity in 2003 before the same grand jury that heard from a number of prominent athletes, including famed San Francisco Giants slugger Barry Bonds and Olympic gold medalist Marion Jones. According to the indictment (here), Thomas committed perjury by denying she received the designer steroid THG, known as the "the clear," from Balco chemist Patrick Arnold, who entered a guilty plea earlier in 2006 to conspiracy and money laundering charges. The indictment quotes the relevant testimony for count one:
Q: Did you ever – besides this one instance of getting the 1-AD from Mr. Arnold, did you ever get any other services from Mr. Arnold or products?
(a) A: No, no other products.
* * * * *
Q: Did you ever, in addition to anything I’ve said, get any kind of what you knew to be banned or illegal performance-enhancing drugs from Mr. Arnold?
(b) A: No.
In another exchange quoted in the indictment, she denied ever taking steroids or taking anything that Arnold gave her. Thomas tested positive for steroids in 2002,leading to her ban from competition. The key witness appears to be Arnold, which means that the case could come down to a credibility battle between Thomas and an admitted felon.
U.S. Attorney Ryan hinted in a press release (here) that more perjury indictments may be coming. He said, "“In the early stages of the investigation, the individuals who distributed steroids to some of the nation’s top-flight athletes were indicted and convicted. In the second stage, we developed the evidence to indict and convict the creator of the undetectable steroid THG distributed through Balco. A third stage has begun as we bring charges against individuals who lied to investigators or committed perjury while testifying under oath to a federal grand jury. Our investigation into each of these stages will continue as the evidence develops." In addition to Thomas, the grand jury earlier indicted Trevor Graham, Jones' former coach.
Bonds has already been the subject of serious speculation about a possible perjury and tax evasion indictment, the latter based on unreported income from memorabilia sales. When the earlier Balco grand jury expired in July 2006, many thought its last act would be to indict Bonds, but right before its expiration, the Giants released his medical records, so White's office announced that nothing would be done at that time. Bonds' former personal trainer, Greg Anderson, remains in jail on a civil contempt because of his refusal to testify about Bonds' use of steroids; Anderson was affiliated with Balco and entered a guilty plea to a drug charge related to steroid distribution. A San Jose Mercury News article (here) quotes Bonds' attorney stating, "If this is phase three, why not indict Barry?' The simple answer -- they need the testimony of Greg Anderson.''
It's not clear how important Anderson is to the case, but he could certainly help the government by identifying Balco documents that apparently indicate a schedule of steroid use by Bonds. If the perjury case rides on Anderson, the government will not be in a very strong position unless it has powerful documentary evidence to support its position. Anderson is unlikely to be a very convincing witness, or perhaps not a very trustworthy one.
In addition to Anderson, two San Francisco Chronicle reporters are fighting a contempt citation in the Ninth Circuit for refusing to testify before the grand jury about the leak of transcripts of Bonds and other major league players. The perjury stage of the investigation has generated a significant amount of litigation already, and the U.S. Attorney's Office for the Northern District of California has not been shy about pursuing perjury and contempt cases, so look for more to come. Whether higher-profile athletes like Bonds, Jones, or perhaps others are charged could play out over the next few months. (ph)
An article in The Recorder (here) states that former McAfee Inc. general counsel Kent Roberts may be indicted by prosecutors in the Northern District of California for backdating documents related to options he received from the company. The options-timing investigations have already resulted in a guilty plea from another GC, William Sorin at Comverse Technology. McAfee terminated Roberts on May 30, 2006, stating in a press release (here): "In connection with [an internal] review, the Company became aware of one episode involving the General Counsel in 2000 that was improper. As a result, the Board has terminated his employment." It is not clear whether this is the only instance under investigation.
The options-timing investigations are now about six to nine months along, and a number of companies have announced the preliminary results of their internal investigations. It appears that the companies are cooperating with the government by turning over the results of those reviews, including privileged materials. The government's investigations are probably far enough along that we should expect to see indictments and SEC enforcement actions starting in January. Unlike the accounting fraud cases of the past few years, the options-timing cases are much less complex in most instances because they involve a fairly narrow range of transactions and the initial issue is whether documents were altered or created to make it appear the decision was contemporaneous with the grant. While issues may arise about the timing of the exercise of the options, raising tax questions, this conduct also involves fairly discrete transactions that are not difficult to investigate. (ph)
Friday, December 15, 2006
On-line employment company Monster Worldwide, Inc. disclosed that the options backdating at the company was the result of intentional conduct and not "mere oversights" by executives. A press release (here) states:
The Special Committee has determined that the exercise price of a substantial number of stock option grants during the periods between 1997 through March 31, 2003 differed from the fair market value of the underlying shares on the measurement date. In most cases, the original date assigned to the grant corresponded to the date as of which a unanimous written consent ("UWC") was executed by the members of the Compensation Committee of the Company's Board of Directors, but the date of that consent did not correspond to the actual date on which the identities of the individual optionees and the number of shares underlying each option was determined. The Company believes that the dates as of which the UWCs were dated were earlier than the dates on which they were actually executed. In a significant number of instances, the stock price on the assigned date (the date as of which the UWC was executed) was lower, sometimes substantially lower, than the price on the date the award may be deemed to have actually been determined. The Company believes that this practice was done intentionally, by persons formerly in positions of responsibility at the Company for the purpose of issuing options at a higher intrinsic value than would have otherwise been the case.
The financial restatement triggered by the backdating will be over $300 million. Former CEO Andrew McKelvey resigned his position because of the problem, and quit the board of directors when he decided not to meet with the law firm conducting the internal investigation for another interview (see earlier post here). Former general counsel Myron Olesnyckyj went on paid leave in September 2006, and was fired for cause in November (see earlier post here). The reference to "persons formerly in positions of responsibility" indicates that senior executives were involved in the backdating, and the U.S. Attorney's Office is likely privy to their identity and may pursue a criminal case now that the internal investigation is largely complete. There has not been an indication yet that McKelvey or Olesnyckyj are targets of the grand jury investigation. (ph)