April 8, 2006
Is the Thompson Memo Unconstitutional?
Judge Lewis A. Kaplan's ruling on KPMG (post discussing here) certainly raises some interesting questions. As noted by two comments to that post and an email received, we need to look further at what the judge stated. The Wall Street Journal's Review and Outlook piece here, talks about another aspect of what the judge stated, that being, whether there are unconstitutional aspects of the Thompson Memo.
I wonder whether the Thompson Memo, an internal guideline of the DOJ, can really be held unconstitutional. What I think can be found unconstitutional are acts by prosecutors using this memo that deprive individuals or corporations of constitutional rights. Clearly a deprivation of a Sixth Amendment right to counsel would fall under that theme.
The problem here is that a corporation is unlikely to raise the issue. It would mean placing themselves at risk of a possible indictment and death (e.g. Arthur Andersen - once you are dead, you are dead forever, even when there is a reversal). A Board of Directors, answerable to shareholders, might not be willing to take such a risk. And the problem with an individual raising the issue will likely be whether he or she has standing to do so in a case. The best case would probably be one where individual attorney fees were deprived by a corporation because the government placed a restriction on that corporation paying the executive's fees despite a prior contract arrangement that required the payment of these fees.
What is perhaps the important point here, is that judges are noticing what prosecutors are doing in using the Thompson Memo. The benefit of a tri-partite system is that when one branch steps out of line, another can intercede.
(esp) (with a hat tip to Ross Garber)
Did A Gossip Columnist Try to Extort Money?
Yahoo News (Reuters) reports here on an investigation of a gossip columnist at a NY newspaper who is alleged to have tried to extort money from an individual in return for not printing a story. Clearly such reprehensible form of conduct would be ethically improper. And if this extortion did occur then there might be also be legal implications, including criminal ones. But the columnist is saying hold on - - on Poynter Online - Romenesko here . He said he is hoping that his paper will "not rush to judgment."
April 7, 2006
Former Salvation Army Financial Manager Charged with Embezzlement
The late Jim Croce sang about Bad, Bad Leroy Brown from the south side of Chicago, and there is a Leroy Brown in New Jersey who has been charged with stealing over $385,000 from the Salvation Army from 1995 to 2002 while he worked for the organization as a financial manager. A press release (here) issued by the U.S. Attorney's Office for the District of New Jersey states that the indictment (here) alleges that Brown "used his position at the Salvation Army’s Newark office to generate fraudulent rental assistance checks. According to the Indictment, Brown and a co-conspirator, who was not employed by the Salvation Army, would cash the checks at a business in Newark and divide the proceeds. Brown and his co-conspirator, who pleaded guilty on Monday, allegedly cashed approximately 585 fraudulent checks between October 1995 and July 2002, stealing approximately $385,760 from the Salvation Army." Brown is charged with conspiracy, embezzling from a program receiving over $10,000 in federal funds (Sec. 666), and tax evasion. Jim Croce's Leroy "looked like a jigsaw puzzle with a couple of pieces gone" after messin' with the wife of a jealous man, while this Leroy may be facing a substantial term of imprisonment for defrauding a charitable organization. (ph)
Hollinger Will Pay a Substantial Portion of Lord Black's Attorney's Fees
When Lord Conrad Black was forced out as CEO and controlling shareholder of Hollinger International Inc. in 2004 for financial misconduct, there was -- needless to say -- a flurry of lawsuits and governmental investigations. The result of the company's determination that Black had siphoned company assets was that the SEC filed civil securities fraud charges and, in 2005, a grand jury in Chicago indicted Black on fraud, obstruction of justice, conspiracy, and RICO charges. Black has hired dozens of lawyers to defend him in the various civil and criminal cases, and one part of the litigation was his demand that Hollinger pay his attorney's fees under an indemnification agreement with the company. Such agreements are standard in larger corporations, and Delaware law, the jurisdiction in which Hollinger incorporated, is considered quite friendly to claims by former executives seeking indemnification and advancement of attorney's fees. Hollinger and Black settled their dispute about the attorney's fees in an agreement that the company's recent Form 10-K discloses (here):
Pursuant to the settlement agreement, the Company will advance approximately $4.4 million for legal bills previously submitted to the Company for advancement, which reflects an offset for amounts previously advanced to Black that he was required to repay as a result of the rulings against him in the Delaware Litigation. In connection with future legal bills, the Company will advance 75% of the legal fees of attorneys representing Black in the criminal case pending against him in the United States District Court for the Northern District of Illinois and 50% of his legal fees in other matters pending against him. All such advancement is subject to Black’s undertaking that he will repay such fees if it is ultimately determined that he is not entitled to indemnification.
Hollinger has not been charged with an offense, and it does not appear to be viewed by either the SEC or U.S. Attorney's Office as a target or subject of the investigation. Therefore, its payment of Black's attorney's fees will not be viewed as a sign of a lack of cooperation under the Thompson Memo on charging corporations with crimes. While it may appear odd that the "victim" of a crime pays the perpetrator's legal fees, in fact such payments are not at all out of the ordinary, and the fact that Black may be acquitted shows that an indictment does not mean a contractual obligation can be ignored. (ph)
Former Texas Tech Students Sentenced for Defrauding Student Loan Program
Whatever happened to harmless student fun like stealing your biggest rival's mascot or engaging in a little "harmless" fraternity hazing? A group of former students at Texas Tech were sentenced for their roles in a scheme to qualify students for Pell Grants that they were not eligible to receive, and then split the money. The ringleader, Rojelio Hernandez, received a 30-month term of imprisonment, while the former students who acted as "go-betweens" received six-month home confinement sentences. Students who agreed to the use of their names and social security numbers and entered guilty pleas have received terms of probation. According to a press release issued by the U.S. Attorney's Office for the Northern District of Texas (here):
Hernandez completed, signed, and submitted approximately 31 fraudulent signature pages on the grant applications. Even after he left employment in the financial aid office, he continued to remotely access the university’s computer system to continue the scheme. He altered or removed verification for approximately 26 students. In total, Hernandez falsely qualified approximately 33 students as eligible to receive Federal Pell Grants. The students paid half of the money they received to the “go-betweens,” who in turn delivered the remainder to Hernandez. Hernandez retained approximately $72,525.00 from the scheme for personal use. The total amount of this part of the scheme is approximately $200,000.
April 6, 2006
Proving Libby's Intent
Special Prosecutor Patrick Fitzgerald's filing in response to I. Lewis Libby's most recent discovery request contains information indicating that the Vice President authorized Libby to reveal information from a classified government report to New York Times reporter Judith Miller in July 2003. The revelation that the President had the Vice President direct a member of his staff to meet with a reporter to disclose information previously classified (the President apparently can declassify information and permit its disclosure) has garnered significant attention. What that information also does is show Fitzgerald's trial strategy to counter Libby's defense that disclosure of Valerie Plame's identity was so unimportant that he was simply mistaken when he spoke with the FBI and testified before the grand jury about his involvement in the disclosure of her CIA position. The intent defense is certainly a key aspect of the "honest-but-overworked-civil-servant" strategy.
Fitzgerald's response (available below) shows how his office intends to establish intent by focusing on Libby's unique role in leaking the information to Miller and other reporters, and that he worked assiduously to have the White House support him in denying that he had disclosed Plame's identity. The prosecutors are disputing the need for certain documents requested by Libby, so they discuss how they are irrelevant to the case. The filing notes that Libby substituted for the Vice President's communications director in meeting with Miller in July 2003, and that the President's authorization to disclose previously classified material to a reporter was "unique." After the controversy over the Plame disclosure erupted, Libby wrote out a request to White House press secretary Scott McClellan to defend him by stating that Libby, along with Deputy Chief of Staff Karl Rove, was not a source for the column by Robert Novak that first disclosed Plame's CIA connection. Shortly thereafter, Libby's first FBI interview occurred, and the Special Counsel's filing discusses its theory of proving Libby's intent to deceive and commit perjury:
Thus, as defendant approached his first FBI interview he knew that the White House had publicly staked its credibility on there being no White House involvement in the leaking of information about Ms. Wilson and that, at defendant’s specific request through the Vice President, the White House had publicly proclaimed that defendant was "not involved in this." The President had vowed to fire anyone involved in leaking classified information. In that context, defendant proceeded to tell the FBI that he had merely passed information from one reporter (Russert) to other reporters while disclaiming any knowledge of whether the information he passed was true, and certainly unaware that he knew this classified information from government channels. Once that die was cast, defendant repeated the story in a subsequent interview and during two grand jury appearances.
The prosecution will likely have to highlight the role of the President and Vice President in using Libby to respond to reports questioning pre-war WMD claims, which means there is even a chance they could be called as witnesses. The filing also notes that the government does not intend to call Rove, who worked closely with Libby. As the details of the case continue to dribble out, the outlines of the government case are coming clear, and the potential problems it could cause for the White House. (ph)
Indictment of Class Action Attorneys May Come Soon
The Recorder reports (here on Law.Com) that two named partners at class action law firm Milberg Weiss Bershad & Schulman, David Bershad and Steven Schulman, will be indicted shortly for fraud related to secret payments to representative plaintiffs in class actions. Seymour Lazar, who served as the named plaintiff in a number of cases litigated by Milberg Weiss' predecessor firm, was indicted in 2005 on fraud charges related to the receipt of the secret payments. Lazar has asserted that they payments were referral fees, although the usual rule is that a representative plaintiff is not permitted to receive any compensation other than that authorized by the court. The class actions were filed before the adoption of the Private Securities Litigation Reform Act in 1995, so any prosecution of Bershad and Schulman may face possible statute of limitations problems if there is not a waiver.
Prosecutors had been investigating the roles of Melvyn Weiss and William Lerach, two of the best-known plaintiff class action attorneys in the country who were partners until their firm split in 2004. They have now been dropped from the case, although they are likely to be witnesses for one side or the other if Bershad and Schulman are indicted. The Recorder story notes that three Milberg Weiss partners and two former clients have been granted immunity, and attorneys for the two lawyers have traveled to Washington D.C. to speak with the Criminal Division at the Department of Justice to try to block an indictment. If indictments are handed up, it promises to be a bitter fight involving seasoned litigators as the defendants. (ph)
Vinson & Elkins Attorney's Testimony at Enron Trial
Vinson & Elkins attorney Max Hendrick testified for the defense at the Enron conspiracy trial about his work investigating the issues raised by Sherron Watkins in her famous memo to Ken Lay discussing accounting problems at the company. Hendrick's "investigation" was quite limited (see the law firm's letter to Enron here), and V&E's report that largely exonerated Enron by noting that there were only "cosmetic" problems turned out to be incorrect, to say the least, although the firm did not actively cover-up wrongdoing at the company. Christine Hurt has an interesting post on the Conglomerate blog (here) discussing the testimony of Hendrick, including his cross-examination that raised the question whether V&E had an interest in seeing Lay and Jeffrey Skilling acquitted because of litigation against the firm by former Enron securities holders.
In reading reports about Hendrick's testimony, I wondered why the defense called him as a witness when the V&E report essentially dismissing Watkins' assertions turned out to be wrong, and Watkins' plea for an outside investigation was validated in many ways by subsequent events. Watkins testified for the government at trial, and the defense brought up some questions regarding her conduct around the time of the memo to Lay that could have hurt her credibility. Calling Hendrick, however, emphasizes the fact that Lay was put on notice of the problems and V&E, limited in what it could look at, effectively helped sweep the problems under the rug, at least for a little while. Did Hendrick help to rehabilitate Watkins by focusing the jury on her claims about accounting fraud and other problems at Enron, and the company's failure to respond? In the same vein, former Enron general counsel James Derrick, a former V&E attorney before going in-house at the company, was cross-examined about the limited investigation done by the firm and whether it should have done more (see Houston Chronicle blog here). The focus again is on the Watkins memo and how ineffective management and its attorneys were in responding to a worsening situation.
The upcoming testimony of Jeffrey Skilling, who is the next witness, will likely overshadow the witnesses called to this point by the defense. But the testimony of Hendrick (and Derrick) may have inadvertently helped the government. (ph)
April 5, 2006
The KPMG Tax Shelter Mega-Trial
U.S. District Judge Lewis Kaplan rejected the flood of motions filed by the 18 defendants charged with conspiracy arising from the sale of tax shelter products by KPMG, including requests for separate trials. The judge found that the same core of evidence would be applicable to all defendants, 16 of whom are former KPMG partners, so that separate trials would not be efficient. The judge also rejected a request to dismiss the indictment because KPMG's deferred prosecution agreement would require all employees of the firm to testify in support of the firm's admission of wrongdoing and not provide testimony favorable to the defendants.
The Department of Justice has estimated that the trial will take three months, according to an AP story (here) about Judge Kaplan's rulings. Unless a slug of defendants are going to enter guilty pleas, that strikes me as pretty low estimate of the time it will take the government to put on its case. The transactions involved are fairly complex, and even if the government avoids the nitty-gritty details of the tax shelters -- a likely strategy -- it will still have to explain how they worked and the false statements allegedly made to the IRS about the propriety of the underlying transactions. The cross-examination of the government witnesses by over a dozen defense lawyers alone could take weeks -- "just a few questions, your honor" from each -- and that's before the defense case even begins. This trial could be a sure cure for insomnia if it is allowed to drag on, which could be in the defendants' favor. (ph)
Dentist Charged in Mortgage Fraud Scheme
There is nothing worse than going to the dentist, but how often does the dentist moonlight by engaging in mortgage fraud. A press release from the U.S. Attorney's Office for the District of New Jersey (here) describes a scheme by Terrance Stradford, a Staten Island dentist, and a friend, Christina Hachadoorian, to mortgage the same property three times in 2004 when it was already encumbered by first and second mortgages. The government charged the two defendants with conspiracy, wire fraud, and money laundering for mortgage the property for $500,000, $585,000, and $275,000 in June, August, and September 2004 with three different mortgage lenders. Among the items purchased with the proceeds of these loans was property in North Carolina, a 1998 Maxum 46' yacht, and a 2005 GMC Yukon Denali. No word on whether the good doctor found time to practice dentistry at the same time. (ph)
Ohio Corporation Pleads Guilty to Honest Services Fraud
Gear Pump Distributors (USA), a subsidiary of the South African company Dosco GPM Holdings (PTY), Ltd., entered a guilty plea to honest services fraud for enticing an employee of a competitor to share secret pricing information from his company. A press release issued by the U.S. Attorney's Office for the Northern District of Ohio (here) describes how Gear Pump got an executive at Permco, Jack Buffin, to provide it with "internal price lists for both the U.S. and European markets, internal cost lists, copies of internal Permco e-mails, internal customer trip reports, Permco customer purchase specifications, business opportunities of Permco, and Permco supplier information." According to the press release:
Gear Pump admitted that, beginning in approximately 2001, Dosco began exploring the opportunity of increasing its presence in the United States market. In or about December 2003, Dosco approached Buffin about the possibility of setting up its operations in the United States. Dosco eventually made a formal offer of employment to Buffin in September 2004, to take effect December 2004; in reality, Buffin began working with Dosco/Gear Pump prior to receiving a formal employment offer.
It was part of the scheme that representatives of Dosco would have secret meetings with Buffin to discuss its plans for the United States market. While still a full-time employee at Permco, Buffin took two trips to South Africa to discuss his role in Dosco’s business development in the United States. Buffin also attended secret meetings with representatives of Dosco at a trade show in Dallas, Texas.
Buffin assisted in the creation of Dosco’s United States operations in Ohio, the Gear Pump corporation, while a full-time Permco employee.
Buffin entered a guilty plea in February 2006 to a charge of violating the Economic Espionage Act for supplying trade secrets to Gear Pump. The company will pay a $190,000 fine and restitution to Permco of $95,000. It is an awfully competitive business environment out there these days, especially in the manufacturing sector, and resorting to these tactics to gain an advantage is a sign of how great the pressure if to achieve results. (ph)
Sentencing Commission Votes to Remove Attorney-Client Waiver LanguageAccording to a couple of reports received, the US Sentencing Commission voted unanimously today to remove the language regarding attorney-client privilege waivers from the guidelines. Yes, this means the Sentencing Commission has reversed itself on this issue. This is an enormous victory for the many groups that have been lobbying to stop the government from eliminating the important principle of attorney-client privilege. (esp)
Second Mistrial in Tenet Hospital Prosecution
The second trial of Tenet Healthcare Corp. and the former CEO at its Alvarado Hospital Medical Center ended in another mistrial after the jury deliberated for 60 -- yes, sixty -- days. The government charges relate to relocation agreements that prosecutors claim were really disguised kickback arrangements to encourage the doctors to refer patients to the hospital. The retrial in San Diego, which included U.S. Attorney Carol Lam as a member of the prosecution team, lasted seven months and went to the jury in December 2005. After two long trials in which the government was unable to secure a guilty verdict, I think it's fairly likely that the government will look to the civil investigations of Tenet by the SEC and CMS as the better means to a final resolution of the issues. A Bloomberg story (here) discusses the mistrial and other investigations. (ph)
Monitor Report on New Jersey Med School Identifies Demands for Jobs from Politicians
As part of the deferred prosecution agreement with the Department of Justice, the University of Medicine and Dentistry of New Jersey (UMDNJ) appointed former federal judge Herbert Stern as its outside monitor to investigate corruption and financial fraud at the school. Stern's first report (here) to the U.S. Attorney's Office identifies significant problems, ranging from inappropriate expenses to hiring practices tainted by political influence. According to the report, "Our investigation revealed that UMDNJ, for several decades, was besieged by politicians looking to use UMDNJ, and in particular, its large workforce, as a vehicle for patronage and favor peddling. In short, politicians exerted significant pressure and used their offices to influence hiring practices and decisions at UMDNJ." Another issue raised in the report concerns whether a state Senator who chaired the appropriations committee steered millions of dollars worth of appropriations to the school after it retained him as a part-time consultant. A Newark Star-Ledger story (here) discusses the report. If Stern's investigation uncovers significant instances of corruption, federal prosecutors are likely to commence a grand jury investigation of the individuals involved, if it has not started already. (ph)
April 4, 2006
What Do Cynthia McKinney and Tom DeLay Have in Common?
Tom DeLay in an interview with CNN's Wolf Blitzer here states that "[t]hey're trying to criminalize politics." He also announced that he will not seek re-election. Finally he says that "[t]here is nothing that connects me to Abramoff or any of the activities that they have. I am not a target of this investigation. I haven't even been interviewed by these investigators."
DeLay may not be target, but one has to wonder about his claiming non-target status in part because he has not been interviewed by investigators. Investigators often interview the witnesses first - - the people who will testify against a target.
On the opposite side of the political spectrum, Rep. Cynthia McKinney appears to also be having some issues. It looks like she is under investigation for an alleged incident with guards at the Capitol. (see here). And to make matters worse she is alleged to have "broke congressional rules by using money from a government fund to fly singer Isaac Hayes to Atlanta, WSB-TV reported Monday."
So, what, if anything, do McKinney and DeLay have in common?
"Non 5K Cooperation"
The Second Circuit Sentencing Blog (Harlan J. Protass) reports here on an important sentencing decision from the Second Circuit. In the case of United States v. Fernandez, Docket No. 05-1596-cr (2d Cir. April 3, 2006), the Second Circuit held that a judge has the "power to reduce ... [a] sentence in light of 'non 5K cooperation' under 18 U.S.C. § 3553(a), as long as the sentence imposed was reasonable..." This reduction was not mandatory and not required in the drug case the court was deciding. But it is significant that the court is allowing "non 5K cooperation" to be considered as part of the reasonableness review.
In the white collar case this may prove significant in sentencing decisions, especially for those who want to reduce a sentence but are not privileged enough to receive a 5K1.1 substantial assistance motion from the government. This language in the decision removes some of the prosecutorial power in being the exclusive body that could authorize a departure outside the guidelines. It places some of this power in the hands of the judiciary. This case is a step in the right direction of having the three branches properly balanced.
April 3, 2006
Some Avoid the Perp Walk
Isn't it amazing that some have to do the perp walk, and others do not? And isn't it amazing that the ones doing the perp walk do not have a pre-arranged deal with the government?
According to Newsday here, a former business executive at Newsday surrendered to federal officials on charges related to his alleged role in Newsday's circulation scandal. And yes, there was no perp walk. No one appears to be talking, according to Newsday, but one has to wonder what will happen here next. Check out the Newsday article to see what sources are telling them.
Is ID Theft Really Lower?
According to a NYTimes (AP) story here, the DOJ is reporting that identity theft has decreased. The Federal Trade Commission seems to have numbers that show a decrease in identity theft from prior years, but an increase number of fraud cases (see here).
But if a victim of identity theft, the Federal Trade Commission's website may prove helpful. (see here)
18 Years for former CEO of Westar
White collar defendants are being sentenced higher than ever before. Just ask Bernie Ebbers, former CEO of WorldCom who was sentenced to 25 years, John Rigas, founder of Adelphia who was sentenced to 15 years; or his son Timothy Rigas, the CFO of Adelphia who was sentenced to 20 years. And we haven't even mentioned the ridiculous sentence that Jamie Olis originally received - over 24 years - that was remanded for resentencing by the Fifth Circuit Court of Appeals.
There is now a newcomer to the club, and his name is David Wittig, the former CEO of Westar who received a sentence of 18 years. And the former executive VP, Douglas Lake, received a 15 year sentence. And there were also fines - "Wittig to pay $14.5 million in restitution and [ ] Lake to pay $2.785 million." (see Wall Street Journal here)
April 2, 2006
Will Lay & Skilling Testify? And Who Else?
The most talked about question these days is whether Ken Lay and Jeff Skilling will take the witness stand. Obviously as criminal defendants they do not have to present anything.
The Wall Street Journal has a chart here that looks at some recent white collar cases, telling whether the accused testified and the outcome in each trial. Some who did not testify were convicted and others were acquitted - so there is no statistical correlation here. There are only two acquittals on the list and both did not testify. The Journal here, also has a poll asking readers whether attorneys for Lay and Skilling should advise them to take the witness stand. As of 12:30 A.M. the voting was at 76 people with 54% saying "no" and 46% saying "yes". As the number responding to this poll rises, it will be interesting to see what readers of the Wall Street Journal think about whether Lay and Skilling should take the stand.
To me the more interesting question rests with other possible witnesses that the defense may present. The prosecution presented a simplified case, not calling many witnesses. Based on lessons learned from prior white collar cases, this is a smart move. But as the defense starts, the question will be whether the prosecution presented enough. Also, will the prosecution be able to rehabilitate their case after the defense concludes. Clearly intent and credibility of witnesses will be key factors in this case. But to what extent will the defense be putting the government or others on trial? Will there be claims of Enron failing because of bad press and the market losing confidence (see AP here) As we near April 15th, tax day, is this a good time for the defense to blame the government?