Saturday, March 18, 2006
General Motors filed a notice with the SEC that it would not be able to make a timely filing of its annual 10-K financial report because of accounting problems at its mortgage subsidiary, ResCap. This comes on top of previously-disclosed SEC investigations of the company's pension accounting and treatment of supplier rebates, the latter investigation also catching its former parts subsidiary, Delphi. According to GM's recent filing (here):
[GM] is unable to file its Annual Report on Form 10-K by March 16, 2006, due to an accounting issue regarding the classification of cash flows at ResCap, the residential mortgage subsidiary of GMAC, a wholly owned subsidiary of GM. The ResCap accounting issue relates to the erroneous classification of cash flows from certain mortgage loan transactions as cash flows from operating activities instead of cash flows from investing activities. Although GM has not completed its review of this matter, the issue will not impact either net income or the balance sheet presentation but is expected to impact the presentation of cash flows from operating and investing activities. This issue may impact the statements of cash flows for 2005 and prior periods at ResCap, GMAC and GM, and the impact may be material in some or all of the affected periods.
Adding to the confusion, GM filed an 8-K (here) warning that its most recent financial statements should not be relied on because of problems with its accounting for vehicles leased to rental car companies. GM will also have to restate its earnings for 2000 to 2004 related to, among other things, its accounting for supplier rebates that will knock out over $350 million in earnings from those years.
Under the Sarbanes-Oxley Act, a company's CEO and CFO must certify that the financial statements are correct, so there are a number of filings with CEO Rick Wagoner's signature that contained incorrect information. At some point, as the accounting problems keep piling up, the issue arises whether the case may move beyond just a civil investigation into a criminal inquiry. If subpoenas start coming from the grand jury, the pressure on GM and its senior executives will be increased substantially. (ph)
One becomes inured to reading about corporations hiring law firms and forensic accountants to help determine the scope of a potential fraud, with senior executives being relieved of their duties pending the outcome of the internal investigation. It is quite disheartening when the press release is issued by a church, however, because the harm from financial misconduct can have such a significant effect on church members and the clergy, who often must make do with very limited resources. The Orthodox Church in American (OCA) issued a press release (here) on March 16 stating:
His Beatitude, Metropolitan Herman announced that as the Primate of the Church, he has retained the law firm of Proskauer Rose LLP to undertake an internal investigation of allegations relating to the finances of the Church. He also announced that the accounting firm of Lambrides, Lamos, Moulthrop, LLP, presently engaged to conduct an Independent Audit of all Church financial accounts for the years 2004 and 2005, has been engaged further to examine the disposition of monies collected through OCA appeals from 2001 through 2005. Metropolitan Herman also announced that he will authorize any additional engagements with the accounting firm as requested by the attorneys conducting the internal investigation. He also announced that Protopresbyter Robert S.Kondratick has been relieved of his service as Chancellor of the Orthodox Church in America.
According to the Church's website, "the Orthodox Church in America numbers some 700 parishes, missions, communities, monasteries, and institutions throughout the United States, Canada, and Mexico." Let's hope the damage is not significant. (ph)
Friday, March 17, 2006
The hot topic in sentencing right now is the United States Sentencing Commission's post-Booker report.Professor Doug Berman's blog has been reporting on this document (see here). Unfortunately we can't give you the link, because as pointed out by Professor Berman, it is suddenly missing from the US Sentencing Commission's website and is no where to be found. (see here). But assuming it reappears, here are some comments regarding the report and white collar crime.
There is a good bit of data provided about the Theft & Fraud Guidelines (2B1.1) scattered throughout the document. And I even found the words "white collar crime" mentioned on page 76 of the report, but what is included within the term is not mentioned. Was it limited to fraud/theft? Did it include antitrust? Did it include mail fraud that served as predicate acts for RICO?
Page 74 recaps some significant data related to the fraud/theft guidelines. It states:
"There likely are two factors contributing to the increased rate of imprisonment for theft and fraud offenders. First, statutory and guideline penalties increased for many fraud offense as a result of the Commission's Economic Crime Package of 2001, the 2002 Sarbanes-Oxley Act and other recent legislation. The proportion of cases sentenced under USSG s 2B1.1 that are subject to the higher base offense level of level seven under the guideline increased from 0.7 percent post-PROTECT Act to 13.7 percent post-Booker. Second, the government may be prosecuting more serious economic crimes. The amount of economic loss involved in theft and fraud cases has increased. The medium loss amounts for cases with loss amounts sufficient to trigger a sentence increase from the loss table in USSG 2B1.1 increased during the three time periods from $38,060 pre-PROTECT Act, to $41,595 post-PROTECT Act, to $54,566 post-Booker. These median loss amounts depict a steady increase in offense severity. Additionally, the victim table at USSG 2B1.1(b)(2) is being applied at a steadily increased rate. The victim-related increases applied to 9.9 percent of USSG 2B1.1 cases pre-PROTECT Act, 13.9 percent of cases post-PROTECT Act, and 16.7 percent of cases post-Booker."
To me this kind of sounds like the inflation and increase in the housing market down in the St Pete, Florida area. And if it is nothing more than inflation, shouldn't there be adjustments to the loss? And what about the loss in some areas being higher than other areas ? Did someone say the purpose of the sentencing guidelines was to achieve uniformity in sentencing? The bottom line - sentences are up. So for all who were afraid that giving the judiciary some discretion would result in lower sentences, you better be looking for a new song to sing.
Thursday, March 16, 2006
Futures and commodities dealer Refco Inc. collapsed in a little over a week after it was revealed in October 2005 that its CEO, Philip Bennett, was involved in certain debt transactions carried on the company's books as loans. Bennett repaid over $400 million with funds from a loan made by Austrian bank Bawag P.S.K. (Bank fuer Arbeit und Wirtschaft), but the improper disclosure and suspicions about the company caused it to fall into bankruptcy just a week after the disclosure of problems on its balance sheet. Bennett was arrested before leaving for a European trip, and remains under home confinement while he awaits trial on securities fraud charges. A Bloomberg.com article (here) discusses a potentially greater fraud at Refco as over $500 million in bonds seem to have disappeared since the bankruptcy filing, and the registration numbers for the bonds do not correspond to existing debt securities. To make matters even more suspicious, the bonds were held through Refco's Bermuda subsidiary, and the purported owners of the bonds are Bawag -- which bailed out Bennett -- and an off-shore hedge fund, Liquid Opportunity. They owned the through six Anguilla companies that were incorporated in 2004, a year before Refco went public with its stock offering.
Does any of this sound like a budding fraud case? In the Parmalat collapse, a faked fax for an account at an off-shore bank was the trigger for that company's demise, and the use of bank secrecy havens like Anguilla certainly does not bode well for getting to the bottom of transactions, at least without a cooperating witness. Deep Throat was certainly right when he said to follow the money, the only problem being the brick walls that exist when off-shore accounts are used and transactions involve multiple layers of corporate entities. Refco had been a public company for a bit less than three months before it dove into bankruptcy, which likely means some underwriters, investment bankers, and accountants (plus a couple lawyers) will be watching these developments very closely because of their potential liability to investors under the Securities Act of 1933. (ph)
Bear, Stearns & Co. settled with the SEC and New York Stock Exchange in connection their investigations of its conduct in facilitating market timing and late trading in mutual funds. The firm agreed to pay a $90 million fine and disgorgement of $160 million in addition to compliance measures to prevent such transactions in the future. The SEC's admininistrative order (here) provides details of how the firm helped hedge funds and other institutional customers circumvent trading rules of mutual funds designed to prevent the market timing and late trading who cleared their trades through Bear, Stearns subsidiaries. The order includes portions of recorded conversations in which traders expressed thanks for receiving tickets, spa gift certificates, and other benefits. (ph)
Wednesday, March 15, 2006
After the seemingly endless parade of government witnesses who entered guilty pleas and have testified at the Enron conspiracy trial of Ken Lay and Jeffrey Skilling, prosecutors called Sherron Watkins, one of the few people who emerged with a better reputation after the Enron debacle -- a neutral term for those who agree with the defense assertion about Enron being a fundamentally sound company. For those whose memories have faded over the lasts 4+ years, Watkins was the "whistleblower" who accepted Lay's admonition to address him directly if they believed there were problems at the company. Watkins raised concerns about the accounting for the special purpose entities (SPE) created by former CFO Andrew Fastow that were used to help engineer earnings at the company and move assets off its books. She accused the company of engaging in fraudulent accounting, and urged Lay to conduct an investigation of the SPEs and other financial issues with a law firm other than long-time outside counsel Vinson & Elkins. As it turned out, Vinson & Elkins did the investigation, but under severe limits on what areas could be inquired into and with a restricted time frame, resulting in an exoneration of the company. A few months later, Enron collapsed and Watkins was celebrated for trying to bring the fraud to light, including an appearance on the cover of Time. She is now a well-received public speaker, being paid upwards of $30,000 per speech, and has written a book about her experiences. Her cross-examination focused on the benefits she has reaped since her attempts to warn of fraud came to light, with defense counsel questioning whether a conviction motivated her testimony to pump up book sales and to maintain her many speaking engagements. Also, Watkins sold Enron shares before the accounting problems emerged, leading one of Lay's attorney's, Chip Lewis, to accuse Watkins of insider trading and questioning why the Enron Task Force had not charged her with a crime. Even St. Sherron is not immune to accusations of greed and misconduct, although if everyone at Enron was dirty, does that help the defense claim that it was a fundamentally sound company? The Houston Chronicle's trial blog (here) has up-to-the-minute coverage of the trial, which will take a four day break and resume on Monday, March 20. (ph)
It is always a good thing for couples to share interests, although when that common ground involves embezzlement, it could trigger a period of separation while they serve jail terms. The U.S. Attorney's Office for the District of Maryland's blog (here) discusses the sentencing of Ronald Stewart, who was an auditor at CitiFinancial Inc. responsible for approving expense reimbursement for the company's Canadian employees. Stewart created records for two fictitious employees, and his wife Saratou and a friend traveled to Canada to open bank accounts into which the reimbursements would be deposited. From Sept. 2003 to Sept. 2005, Stewart had almost $600,000 Canadian, or approximately $450,000 US, deposited into the accounts. According to the blog, Stewart and his wife used the funds for, among other things, "the purchase of a 2005 Lincoln Navigator, valued at approximately $60,000; the purchase of a new home in Owings Mills, Maryland and furniture for that home; the renewal of their wedding vows; the purchase of property in Trinidad; and monetary gifts to their families." How romantic to embezzle money to pay for the pledge of undying love and fidelity. Ronald received a 27-month prison sentence, and Saratou is scheduled for sentencing on April 3. I doubt there will be a second honeymoon at an FCI. (ph)
Things haven't changed all that much since traveling salesmen peddled snake oil and other concoctions as cures for a variety of illnesses, although the internet makes it much easier to reach a wider audience than a wagon (or car). The same claims of a miracle cure continue to lure desperate buyers, and the salesmen continue to run into trouble with the law, as evidenced by the indictment in the Southern District of Florida of Arthur Vanmoor on conspiracy, fraud, and drug violations. According to a press release (here):
Vanmoor and his co-conspirators sold fake cures for cancer, migraines, influenza, and cramps over the Internet using approximately twenty websites with names such as www.breastcancercure.com and www.lungcancercure.org. Vanmoor and his co-conspirators used these websites to promote his products “Cancer Control,” “Migraine Miracle,” “Flu Fighter,” and “Cramps Comforter” as being “guaranteed” cures and approved by the United States Food & Drug Administration (“FDA”) for use on human beings, when, in fact, they were not.
The Indictment further alleges that Vanmoor arranged for the websites to contain “Bogus articles from bogus doctors, . . . pictures of people dressed like doctors holding the products [“Cancer Control,” “Migraine Miracle,” “Flu Fighter,” and “Cramps Comforter”], . . . [and] bogus testimonials.” Additionally, the Indictment states that Vanmoor promoted his products on his websites under the names of FDA-approved drugs such as Pfizer’s Camptosar®. In reality, his products were neither such FDA-approved drugs, nor did they contain significant amounts, if any, of the active ingredients of these FDA-approved drugs.
If it's on the internet, it's gotta be true . . . right? The Pierre Salinger Syndrome certainly lives on for those who peddle miracles. (ph)
Two companies disclosed recently possible foreign bribery that may violate the Foreign Corrupt Practices Act. Universal Corp., a tobacco and lumber company with annual sales of over $3 billion, issued a press release (here) disclosing that
[A]s a result of a posting to the Company’s Ethics Complaint hotline alleging improper activities that involved or related to certain of the Company’s tobacco subsidiaries, the Audit Committee of the Company’s Board of Directors engaged an outside law firm to conduct an investigation of the alleged activities. That investigation revealed that there have been payments that may have violated the U.S. Foreign Corrupt Practices Act. At this time, the payments involved appear to have approximated $1 million over a five-year period. In addition, the investigation revealed activities in foreign jurisdictions that may have violated the competition laws of such jurisdictions, but the Company believes those activities did not violate U.S. antitrust laws.
At least it is heartening to see that the hotlines many companies set up as part of their internal compliance program can be useful in discovering wrongdoing. It is likely that that Universal Corp.'s response will spare it from much if any criminal sanction for an FCPA, although a civil settlement with the SEC is likely, although the possible antitrust problems could be a different story.
United Parcel Service, Inc., disclosed an FCPA problem in one of its overseas subsidiaries, although the company only disclosed it in its most recent 10-K (here) and largely soft-pedals the issue:
With the assistance of outside counsel, we have undertaken an internal investigation of certain conduct within our Supply Chain Solutions subsidiary in certain locations outside the United States. Our investigation has determined that certain conduct, which commenced prior to our subsidiary’s 2001 acquisition of a freight forwarding business that was part of Fritz Companies Inc., may have violated the United States Foreign Corrupt Practices Act. Our investigation also determined that a small number of former employees directed the conduct in question. The monetary value involved in this conduct appears to be immaterial. We have implemented numerous remediation steps, and our investigation continues. In March 2006 we informed the SEC and the Department of Justice of our investigation, and we intend to cooperate fully with any review by the government of these issues. We do not believe that the results of this investigation, the remediation or related penalties, if any, will have a material adverse effect on our financial condition, liquidity or results of operations, nor do we believe that these matters will have a material adverse effect on our business and prospects.
Whether the DOJ and SEC agree with UPS's assessment will remain to be seen. (ph)
Transportation Security Administration attorney Carla Martin may have single-handedly cratered the government's effort to seek the death penalty against Zacarias Moussaoui for his involvement in the Sept. 11 attacks by passing along transcripts of the proceeding's first day to a number of government witnesses who would be called to testify. U.S. District Judge Brinkema's pretrial sequestration order, issued on Feb. 22, clearly prohibits either side from providing a potential witness with a transcript and bars those witnesses from reading about the trial. The government submitted a number of e-mails (available on Findlaw here) from Martin to the witnesses from the Federal Aviation Administration or TSA that forwarded the transcripts and discussed how they should testify in light of failings she perceived in the government's opening argument. In a March 8 e-mail, Martin states, "Dave [one of the federal prosecutors] is going to have to go over the lack of information sharing with you ON DIRECT EXAMINATION - to blunt the blow of having the defense raise it for the first time on cross, thus weakening your credibility - and I'm specifically speaking of the following issues: . . ." Martin then sets forth her view of what the witness will need to say regarding certain evidence related to whether the government could have prevented the Sept. 11 hijackings.
Martin's discussion may well cross the line between permissible witness prep and what many would view as improper coaching, although the ethics rules in this area -- like many others -- are notoriously vague on the subject. Model Rule 3.4(b) states that a lawyer shall not "counsel or assist a witness to testify falsely," which would not appear to be the case here because Martin wanted the witnesses to present the government's strongest case, but not to falsify testimony. Given that her conduct violated the district court's explicit order on providing witnesses a copy of the transcripts from the case, assuming Martin was aware of that prohibition, she could be found guilty of a criminal contempt.
A hearing on the matter on March 14 revealed that Martin also told Moussaoui's lawyers that two defense witnesses from the TSA were unwilling to meet for a pretrial interview, which was false (see AP story here). Unlike violating the court's order, this could constitute an obstruction of justice under 18 U.S.C. Sec. 1512(c), which makes it a crime for any person who corruptly "obstructs, influences, or impedes any official proceeding, or attempts to do so . . . ." The obstruction statute is not limited to the government's case or its investigator's access to evidence. That may explain why Martin asserted her Fifth Amendment right and refused to testify at the hearing on March 14.
If the government cannot continue its prosecution of Moussaoui due to the district court's exclusion of witnesses because of Martin's misconduct (order here), then the focus will shift to her, and a criminal investigation is likely. (ph)
Tuesday, March 14, 2006
Fraud Update reports here of the five year sentence given to a woman who had been charged along with other family members to "defrauding the U.S. Department of Education of almost $1 million in student loans and grants." This case was pursued by the United States Attorney for the District of Nevada.
Things are heating up in Detroit. According to the Detroit News here the government is investigating an alleged leaking of "names of grand jury witnesses in a federal investigation of the government's conduct" in a terrorism trial. The government does not appear to be happy with a paralegal who is alleged to have accessed names from a grand jury calendar and then passed them on to a target of the investigation. The problem is that the person who is allegedly the recipient of this information denies having received it from the paralegal. The amazing part of this investigation is that the individuals being looked at include an FBI agent and the AUSA who handled the terrorism trial.
The Center for the Study of Economic Crimes, a collaborative project of Florida State College of Criminology & Criminal Justice and St. Thomas University School of Law, is holding a conference starting this coming Friday (3/17) titled, ECONOMIC CRIME IN THE 21 ST CENTURY: EMERGING TRENDS IN CONSUMER FRAUD AND STRATEGIES FOR ENFORCEMENT. (see here)
"This conference brings together a cross-section of government, law enforcement, and corporate leaders to discuss key issues in economic crime including disaster-related white-collar crime, healthcare fraud and internet crime, as well as the latest strategies for detection, enforcement, and prevention."
The speakers are: http://www.stu.edu/speakers-article-2050.html
(esp)(co-bloggers Peter Henning and I will be speaking at this event.)
The Second Superseding Indictment in the case of United States v. Singleton provides some fascinating language in Count Ten, an obstruction charge under 18 USC 1512(c)(2). It seems that comments made by an employee during an internal investigation are now being used to form the charge of obstruction. The indictment actually states that the defendant "informed the Outside Lawyers that he had retained an attorney and wanted to reschedule the interview for a time when his attorney could be present.....The attorney was a criminal defense attorney."
This approach of using employee statements during an internal investigation to form the basis of a charge in an indictment was seen in the case of Computer Associates (see post here).
The ramifications of the government taking this approach is that employees will be less likely to participate in internal investigations. Such an approach will not be beneficial to the company, not assist the shareholders, and certainly destroys any trust between a company and its employees. And if the conversations will no longer take place, then the government will get nothing. This is not an impressive move by the government. Is it really worth getting the information in these two cases to cause such damage to the corporate environment?
See Singleton Indictment here- Download 2nd_ss_singleton.pdf
(esp)(hat tip to Bill Jordan)
Monday, March 13, 2006
The State prosecutor proceeding against Representative Tom DeLay is having problems issuing some subpoenas. According to the Houston Chronicle here, the subpoenas cannot be issued because the case has been stayed pending the appeal. The appellate court "threw out more than 30 subpoenas requested by Travis County prosecutors." This decision presents some interesting questions: Will this decision mean that if the prosecution appeals a matter, they are precluded from proceeding with their investigation? Will it be limited to investigation of the matter only under scrutiny by the appellate court, or all matters against that individual?
These days, even white collar crime might be considered terrorism. So it therefore seems appropriate to mention that the Seattle Post-Intelligencer has an AP story here telling that Kenneth Wainstein, a federal prosecutor in Washington, has been named the new head of the DOJ anti-terrorism division. This new position was created under the Patriot Act. The establishment of this position comes at an interesting time in that the administration has been subject to recent criticism for the NSA's warrentless eavesdropping.
Sunday, March 12, 2006
There was some activity in the upcoming SOCom related trial of a retired Army colonel. Facing charges of conspiracy, bribery and wire fraud, retired Col. Tom Spellissy argued that his Motion to Suppress Evidence should be granted and that the military is hindering his ability to prepare a defense.
The Tampa Tribune reports here that the court rejected the motion to suppress evidence. The motion sought to suppress items such as emails between the accused and a former SOCom official who has plead guilty.
The court was understanding, however, of the defense complaint that SOCom was hindering his ability to prepare his case. According to the St Pete Times here, the accused argued that individuals who were subpoenaed were being told that they "must decline [to make a statement] and inform the staff judge advocate." The court recognized that the defense had the right to present a defense.
If you have to go to jail, where is the best place to go? The Kansas City Star has a wonderful article here talking about prisons that house some white collar offenders. It provides a list of the five best places from Alan Ellis' The Federal Prison Handbook 2005.
Of particular note in this Kansas City Star article is a quote of Professor Frank Bowman. The newspaper reports that Bowman claims that "tougher sentences for white-collar offenders made the system more fair, but he says in some cases the guidelines 'have gone too far.'”
Obviously it is this last point by Professor Bowman that is of interest. This is exactly why a Booker-Blakely fix is unnecessary. If we leave judges with some discretion to rectify injustices, perhaps sentences will be reasonable. The problem with the guidelines was that it "fixed" too much.
(esp) (with a hat tip to Bill Olis)
Indictments of leaders and former leaders seems to be the "in thing" these days. Just look at some of the recent indictments here in the United States:
- Former Atlanta Mayor Bill Campbell who was only convicted of tax charges despite an attempt by prosecutors to convict him on racketeering and bribery charges;
- The jury is out on Former Illinois Governor Ryan;
- Former Louisiana Governor Edwin Edwards convicted on corruption charges;
- Then there is former Governor John Rowland;
- Duke Cunningham;
- And we certainly can't forget "Scooter" Libby.
And there are others. But this is not unique to the United States it seems. The Wall Street Jrl reports here that Italian prosecutors are seeking the indictment of Premier Silvio Berlusconi on corruption charges.
I guess it is good to know that this is not just a U.S. thing.