Monday, March 27, 2006

First Former KPMG Tax Partner Pleads Guilty

Bloomberg reports (here) that former KPMG tax partner David Rivkin entered a guilty plea to conspiracy and tax evasion charges, the first individual from the firm to admit to criminal conduct.  The government has indicted 19 individuals, most from KPMG, for selling tax shelters to wealthy individuals.  At the plea hearing before U.S. District Judge Lewis Kaplan, Rivkin stated that he signed opinion letters regarding the propriety of the tax shelter transactions "knowing them to be false, in order to mislead the IRS."  Rivkin agreed to cooperate in the government's prosecution, and as the first defendant to break ranks -- or cave in to government pressure, depending on your point of view -- he may be a harbinger of more plea agreements.  The government's prosecution focuses more on conduct misleading the IRS about the nature of the tax shelters and less on a technical determination of their propriety, so cooperating witnesses will be key to the case.  (ph)


UPDATE:  The superseding criminal information filed in connection with Rivkin's guilty plea is below.  The tax evasion count is based on his work for nine KPMG clients in 2000 and 2001, and the "approx. amount of fraudulent tax shelter loss" is $235 million. (ph)

Download kpmg_rivkin_superseding_information.pdf

March 27, 2006 in Prosecutions, Tax | Permalink | Comments (1) | TrackBack (0)

Sunday, March 26, 2006

Enron Prosecution Nearly Complete as We Ponder the Chuckle-Giggle Distinction

Former Enron treasurer Ben Glisan is nearly done on the witness stand, and reports indicate that he will be the last significant former Enron employee to testify for the government.  Prosecutors may complete their case this week.  Glisan's cross-examination included a review of how former CEO Ken Lay reacted to a description of the effect of the Raptor off-balance sheet transaction on Enron's accounting.  On direct examination, Glisan described Lay's reaction as a "giggle" because of the way in which it helped out the company's balance sheet.  One of Lay's defense team, Bruce Collins, noted  on cross-examination that he had heard Lay chuckle but never giggle, to which Glisan responded, "I will concede chuckle."  Such are the heights (and depths) of cross-examination in a long trial that hinges on whether small facts can support an inference of intent to deceive and defraud.

If the government is indeed close to finishing its case-in-chief, then apparently it will not use Enron's former chief accounting officer, Richard Causey, who entered a guilty plea shortly before the trial commenced, as a witness.  There is a chance that prosecutors are holding Causey in reserve for rebuttal, depending on what Lay and Jeffrey Skilling say if they testify, although that could be a risky proposition for the government.  I would expect that both Lay and Skilling will testify -- Skilling is unlikely to put his defense in the hands of Lay, and vice-versa -- so the defense case will probably take at least two weeks, and possibly longer.  This proceeding will be done by Memorial Day, won't it? A Houston Chronicle story (here) discusses Glisan's testimony.

March 26, 2006 in Enron | Permalink | Comments (0) | TrackBack (0)

Nacchio Insider Trading Prosecution Lurches Forward

The securities fraud prosecution of former Qwest CEO Joseph Nacchio moved forward, at least a little bit, when U.S. District Court Judge Edward Nottingham denied the defense motion to dismiss the indictment because it did not identify the alleged material nonpublic information on which he traded.  The court noted that while materiality is an element of an insider trading charge, it is an issue for the jury and the not the judge to decide.  Nacchio did succeed in getting the court to require the government to file a bill of particulars that specifies the negative financial information on which Nacchio is alleged to have traded.  While the indictment accuses him of using the information in selling over $100 million of Qwest shares before the company suffered significant financial problems, it does not state what particular facts were available at the time of the trading. 

The defense opened up another front by asking the district court to change the venue of the case because of negative pretrial publicity, and raising questions about whether Colorado is the proper jurisdiction because the trading did not take place there.  Courts rarely grant a change of venue request because of pretrial publicity, and the standard is quite high, that the publicity is both pervasive and highly prejudicial.  The charges were filed more than four years after Qwest's financial problems came to light, and the alleged crime is not the type of notorious act, such as a high profile murder, that would require a court to move the trial.  The jurisdictional question could be a bit closer, but the fact that Nacchio was the company's CEO in Denver at the time of the transactions is likely sufficient, even if the orders to sell the shares did not come from his office on the day of the trade.

While the case will more forward from here, Judge Nottingham did not set a trial date because the defense stills need to review classified information.  Defense counsel has asserted that Nacchio was privy to national security information about possible programs that could benefit Qwest at the time of his sales, so he had no reason to sell based on undisclosed negative information because he possessed positive information at the same time.  Whether or not that defense will pan out will await trial, but the need to review classified information will slow the pretrial discovery process.  A Rocky Mountain News article (here) discusses the district court's rulings in the case. (ph)

March 26, 2006 in Insider Trading, Prosecutions | Permalink | Comments (0) | TrackBack (0)

Third Circuit Bank Fraud Decision

In United States v. Leahy, the Third Circuit issued a decision (here) on the merits of the defendants' bank fraud convictions, after an earlier opinion considered the effect of Booker on forfeiture and restitution.  The defendants, a corporation and two senior managers, were convicted of defrauding ten banks that had the corporation conduct auctions of repossessed cars.  The defendants, through Carriage Trade Auto Auction, took possession of 311 vehicles and resold them at higher prices than the amount reported to the banks.  Two issues considered on appeal were whether the defendants had to intend to cause harm to the banks, and whether an instruction defining fraud as involving "moral uprightness" and "fundamental honesty" was improper.

The defendants argued that the true victims of the scheme were the original owners of the cars who were liable for any difference between the auction price and the remaining loan amount.  In most instances, the amount received at the auction of a repossessed vehicle is less than the amount of the remaining loan, and the borrower would be responsible for any difference.  The defendants argued that they did not intend to cause harm to the bank, which they argued is an element of the bank fraud offense.  The Third Circuit rejected their position, holding:

In our view, where the bank is the "target of the deception," it makes no difference whether the perpetrator had an intent to harm the bank. Indeed, any conduct that causes loss or harm to a bank is likely to undermine the public’s confidence in the integrity of a bank, or otherwise adversely affect the bank’s public image, regardless of whether the loss or harm was so intended. In these circumstances, imposing an intent to harm requirement where the bank is the "target of deception" would leave an unnecessary gap in the reach of the bank fraud statute, which we think would contradict Congress’ purpose as well as undermine the broad federal interest in protecting financial institutions. Rather, proof of a specific intent to defraud the bank is sufficient * * * . However, where the bank is not the "target of deception," but rather merely an "unwitting instrumentality," there is the additional concern that § 1344 may be applied in a manner that reaches conduct that falls well beyond the scope of what the statute was intended to regulate.

The Third Circuit noted the split in the circuits on the issue, and adopted the view that intent to harm is not necessary where the bank is the direct victim of the scheme.

The district court's instruction on fraud included the following: "The fraudulent nature of a scheme is not defined according to any technical standards. Rather, the measure of a fraud in any fraud case is whether the scheme shows a departure from moral uprightness, fundamental honesty, fair play and candid dealings in a general light of the community."  The Third Circuit noted that references to morality and fairness involve ambiguous terms, and in the past the court had cautioned against such language, but it held that the jury instructions, considered as a whole, were not defective:

We continue to have concerns regarding the definition of fraud with reference to such abstract terms as morality and fairness. However, we do not believe that this matter presented any real risk that the District Court’s instruction invoking concepts of morality and fairness, when read with the rest of the instructions, allowed for conviction solely based on this formulation of fraud. Accordingly, we find no error.

The court seems to be playing a bit fast-and-loose with language it had earlier criticized, as Circuit Judge Becker pointed out in his dissenting opinion: "In my view, the standard of 'moral uprightness' has no place in jury instructions defining fraud, as it broadens the federal fraud statute in a manner that 'give[s] inadequate notice of criminality and delegate[s] to the judiciary impermissibly broad authority to delineate the contours of criminal liability.'" (ph)

March 26, 2006 in Fraud, Judicial Opinions | Permalink | Comments (1) | TrackBack (0)

Client Acquitted, Attorney Faints

Former Erie, PA, mayor Rick Filippi, along with his law partner and campaign manager, was acquitted on charges of trying to profit from a proposed racetrack by buying property that could be resold later at a higher price.  The track was never built and the property sold for no gain.  Upon the announcement in state court of the not guilty verdict on the first count, Filippi's attorney, Leonard Ambrose, fainted.  An AP story (here) quotes Ambrose as stating, "It was an emotionally draining experience . . . I have never been as emotionally close to a client and friend as in this case."  Let's hope the reaction was one of joy and not utter astonishment at the verdict.  Unfortunately for Filippi, who was elected in 2001, he came in fourth (out of five candidates) in the Democratic primary in 2005. (ph)

March 26, 2006 in Verdict | Permalink | Comments (0) | TrackBack (0)