May 5, 2006
Here Comes an Ostrich (Instruction)
With former Enron CEO Ken Lay having completed eight days of testimony, the Enron conspiracy prosecution is winding down and the case may go to the jury in less than two weeks. It is unlikely, however, that the jury will return a verdict before we can break out our white shoes and straw hats with the arrival of Memorial Day. The defense is finishing up with experts who testified that Enron's accounting for the various transactions was fully proper, and a financial analyst who compared Lay's sales of Enron shares back to the company to meet margin calls as roughly akin to buying additional shares (I'm not very good at math, so I won't try to figure it out). Trial even ended early for the week when Judge Sim Lake ruled that if the defense read a portion of former Arthur Andersen accountant David Duncan's testimony at the Andersen obstruction of justice trial about the propriety of Enron's accounting treatment, then the government could read other parts about the shredding of documents and portions of Duncan's grand jury testimony. At that, the defense dropped its plan and the afternoon was freed up because no other witnesses were available. Interestingly, neither side plans to call former co-defendant Richard Causey, who was Enron's chief accounting officer. A frequent complaint of the defense was the unavailability of senior Enron officials to testify on their behalf, and it does not appear that Causey would have invoked his Fifth Amendment right, so the defense could have called him. Speculation is that both sides viewed him as too great a threat to its position, belying once again the notion of a trial as a search for the truth.
With the trial nearly complete, the next significant issue will be the jury instructions. Judge Lake hopes to charge the jury on May 15, so time will be spent this week preparing (and arguing over) the instructions. Lay's testimony appears to open up a basis for the government to seek a so-called "Ostrich Instruction" that the defendants had sufficient notice of significant problems but deliberately refused to obtain the information necessary regarding the criminal conduct. Sherron Watkins' warning letter and other evidence of problems at Enron may be sufficient to put Lay (and Jeffrey Skilling) on notice to investigate problems further, and Lay testified he was not aware of any significant problems at the company or with its accounting that were abnormal. Indeed, he defended "aggressive accounting" as acceptable, a position the government may use to argue that he ignored the effects of such accounting and may have even encouraged it without learning its effect on Enron when he made public statements about its strength. A jury determination of deliberate ignorance (or willful blindness) by the defendant can be sufficient for the knowledge element of a conspiracy and the intent element for securities fraud, especially in a case in which the underlying claim is based on materially false statements and omissions.
The Ostrich Instruction is a common feature in white collar crime prosecutions. One basis for the appeal by former WorldCom CEO Bernie Ebbers of his conviction was that the instruction should not have been given at his trial. United States v. Jewell, 532 F.2d 697 (9th Cir. 1976), sets forth the classic instruction in this area: “You may infer knowledge from a combination of suspicion and indifference to the truth. If you find that a person had a strong suspicion that things were not what they seemed or that someone had withheld some important facts, yet shut his eyes for fear that he would learn, you may conclude that he acted knowingly.” Judge Posner explained how the Ostrich Instruction should be understood, and its limitations, in United States v. Giovannetti, 919 F.2d 1223 (7th Cir. 1990):
The most powerful criticism of the ostrich instruction is, precisely, that its tendency is to allow juries to convict upon a finding of negligence for crimes that require intent . . . The criticism can be deflected by thinking carefully about just what it is that real ostriches do (or at least are popularly supposed to do). They do not just fail to follow through on their suspicions of bad things. They are not merely careless birds. They bury their heads in the sand so that they will not see or hear bad things. They deliberately avoid acquiring unpleasant knowledge. The ostrich instruction is designed for cases in which there is evidence that the defendant, knowing or strongly suspecting that he is involved in shady dealings, takes steps to make sure that he does not acquire full or exact knowledge of the nature and extent of those dealings. A deliberate effort to avoid guilty knowledge is all the guilty knowledge the law requires.
Not surprisingly, the defense usually opposes the instruction because it effectively lowers the intent level for the offense, or at least redirects it toward asking whether the defendant should have done more to avoid the harm or wrongful conduct.
Lay testified, "Rules are important, but you should not be a slave to rules either." (See Houston Chronicle TrialWatch blog here). The government could use that statement to show that Lay was not interested in determining if the rules had been violated. Whatever Lay meant by that assertion, he may well have opened himself up to an Ostrich Instruction if the defense had not done so already. I expect the government to exploit that assertion in a number of ways, including perhaps an argument that a person who says that one "should not be a slave to rules" is a person who made a deliberate choice of avoid guilty knowledge, because adherence to the rules would have resulted in the guilty knowledge. (ph)
KPMG Defendants Receive Support
The KPMG defendants who are set for a hearing on May 8th (see here) received support from amici who filed a brief that demonstrates that many have concerns about how the Thompson Memo is being implemented.
The amicus brief is filed on behalf of the Securities Industry Association, The Association of Corporate Counsel, The Bond Market Association, and the Chamber of Commerce. The brief presents two arguments: 1) that "[t]he government's policy violates key criminal justice principles," and 2) that "[t]he government's attack on fee advancements threatens the integrity of the employment relationship and efficient corporate operations." A copy of the brief is here-
Afternoon Session at NACDL Conference
Yesterday morning also had a wonderful presentation by Peter Goldberger who spoke about mail and wire fraud. The materials (a joint effort of myself and Peter G) can be obtained from NACDL.
In the afternoon Stephanie Martz, who serves as the NACDL White Collar Crime Director was kind enough to guest blog for us with the following-
The afternoon session began with a panel discussion on managing your client’s exposure pre-indictment. The participants (moderator Dave Angeli of Stoehl Reeves in Portland; Blair Brown and Melinda Sarafa, both of Zuckerman Spaeder; and Bob Morvillo and Gary Naftalis from NYC, super-lawyers and international men of mystery) began by playing the roles of lawyers for an audit committee, a CEO, and a CFO, but the general theme, expressed best by Blair Brown, was that the only major decision that an audit committee/company has to make these days is "whether to grab your knees when you’re bending over or your ankles." The leit motif was that just the presence of the Thompson Memo, regardless of whether its factors are specifically mentioned by prosecutors, is enough for company leaders to "appreciate" the stakes of choosing not to follow the letter of the Memo.
Some specific take-home lessons:
- It really is in the interest of the corporation to keep everyone in the same tent, given that if any individual employees are guilty, so is the corporation. Gary Naftalis: "Maybe I’ve been a defense lawyer too long, but I have to slow things down and get the facts. I’m not a prosecutor building a case. I have to share information with employees and do whatever I need to do to get the facts that I need."
- This, of course, runs up against the Thompson Memo. But you can hope for a reasonable prosecutor.
- On document retention/destruction once the first news of a problem hits the papers: a good faith effort to suspend a regular company document retention policy vis-a-vis the relevant material ought to suffice, even under the new(ish) 1519.
- On managing witness interviews: Obviously, you have to take notes. But now you need to worry about the kind of roadmap that you are giving the prosecutors once the inevitable waiver moment arrives. Sometimes, it is wise to advise your board not to produce a written internal investigation report at all.
Second session: Whether, when and how to proffer. The panel was led by former NACDL President Larry Goldman, and the panel participants were Rusty Wing from NYC; Bill Mateja of Fish & Richardson (and formerly counsel to DAGs Larry Thompson and James Comey); Ross Garber, of Shipman Goodwin LLP in Connecticut; and Jan Nielson Little of Keker Van Nest in San Francisco. Larry stepped everyone through a hypothetical with various employees of a company in different positions with potentially different degrees of culpability. One of the big problems is when the prosecutors give you a tiny window of time in which to decide whether your client is going to come in and proffer; you have to try to get more time, and Ross and Jan both observed that in reality, the cooperation offer isn’t actually going to expire.
One of the big problems is the state of the law with regard to how proffers can be used in trial. The Second Circuit has held that even raising a defense in opening argument that is remotely contrary to a proffer opens the door to its use in court. There is virtually no way to make these bullet proof. Therefore, maybe your client ought not proffer unless s/he is clearly innocent or guilty as sin. If you think you are going to trial, think hard about proffering.
Interesting question: Why bother with a proffer agreement if they don’t protect your client in any meaningful way? When your client then takes the stand, you can bring out that s/he went into the government and told her story without any protection at all. Excellent proof of consciousness if innocence.
Another Two Charges Against Ralph Sampson
Former NBA star Ralph Sampson seems to be attracting federal indictments these days as prosecutors added two more charges against him arising out of an earlier prosecution for failure to pay child support. As discussed in an earlier post (here), Sampson was indicted in January 2006 on perjury and false claim charges for filing a false affidavit seeking appointment of counsel due to indigency in the child support prosecution. Sampson plead guilty to the child support charges, and the two additional charges were set to go to trial on May 16. Prosecutors have now secured a superseding indictment adding new mail fraud and false statement charges. According to an AP story (here), Sampson did not disclose in his application for the appointment of counsel that he had a $5,000 per month consulting contract and the use of a $200,000 house in exchange for certain promotional activities, claiming instead that he had no income. In addition, he denied ownership of an SUV valued at $43,000, and is alleged to have mailed false documents to a finance company to hide his ownership of the vehicle. The hole keeps getting deeper for Sampson. (ph)
May 4, 2006
Judge Sirica Visits NACDL Conference
Third Circuit Chief Judge Anthony Sirica made a brief appearance at the NACDL conference saying -
"I never liked the mandatory nature of the guidelines.....Blakely and Booker have restored some of the balance." He reminded the audience that the defense voice is important. He used Crawford as a second example of the Supreme Court being the branch of government to make a change. He noted how the change has not come from the executive.
It is nice to see a judge taking time from his busy schedule to remind criminal defense practitioners that they play an important role in the judicial process.
Another Guilty Plea in Corruption Investigation of Louisiana Congressman
Kentucky businessman Vernon Jackson admitted in federal court that he paid over $400,000 to Louisiana Representative William Jefferson to secure his assistance in obtaining government contracts and participating in deals in Africa. A press release issued by the U.S. Attorney's Office for the Eastern District of Virginia (here) only identifies the official as "Representative A," although the media has disclosed that it is Representative Jefferson who is involved (see Washington Post story here). According to the press release:
[F]rom 1998 through the present, Jackson has been the Chairman and CEO of iGate, Incorporated, a Kentucky firm focused on developing technology which is designed to transmit data, audio, and video communications over copper wire. In his plea today, Jackson admits that in approximately 2000, he was introduced to a member of the U.S. House of Representatives (Representative A), who was active in promoting U.S. trade and business in Africa. Representative A then provided official assistance to Jackson in persuading the U.S. Army to test iGate’s broadband two-way technology and other iGate products. Representative A’s official assistance led to the placement of iGate on the U.S. General Services Administration (GSA) schedule, making iGate products eligible for use in various federal contracts. Ultimately, iGate’s products were used by the U.S. Army at Fort Stewart, Georgia.
Jackson further admits that in early 2001, Representative A told him that Representative A would not continue to provide official assistance to Jackson’s company, iGate, unless Jackson agreed to pay a nominee company ostensibly maintained in the names of Representative A’s spouse and children. Jackson agreed and signed a consulting services agreement committing iGate to pay the nominee company various things of value, thereby concealing Jackson’s payments in exchange for Representative A’s performance of official acts in furtherance of iGate’s business in Africa and elsewhere, including, but not limited to: a) monthly payments of $7,500; b) a percentage of iGate’s gross sales; c) a percentage of capital investments raised for iGate; and d) options for iGate stock.
In January 2005, a former aide in Representative Jefferson's office pleaded guilty to a similar charge involving the solicitation of bribes. The grand jury has also subpoenaed six member of Representative Jefferson's staff to testify, as discussed in an earlier post (here). Prosecutors appear to be closing in on yet another Congressman in the Department of Justice's ongoing corruption probe. (ph)
The "Big Dig" in Boston made the city's already hellish traffic even worse, and the size of the project made it a target for a variety of different fraudulent schemes. An indictment of six defendants announced today in the District of Massachusetts presents a bit scarier scenario because the alleged fraud involved the quality of the concrete used in the project that was supplied by Aggregate industries Inc., New England's largest concrete company. According to a press release issued by the U.S. Attorney's Office (here):
They are charged with highway project fraud and related offenses for their participation in a scheme to provide concrete to Big Dig projects that did not meet contract specifications, and to conceal the true nature of the concrete through false documentation. The Indictment alleges that between 1996 and 2005 the defendants delivered at least 5,000 truckloads of non-specification concrete to the Big Dig. Each truckload comprised approximately ten yards of concrete. This concrete included recycled concrete that was over ninety-minutes old, concrete that had been adulterated with the addition of excess water, and concrete that was not batched pursuant to Big Dig project specifications.
The Indictment alleges that the defendants recycled “leftover concrete,” i.e. concrete that had not been used by other customers, mixed the leftover concrete with Big Dig project concrete, and delivered this adulterated concrete to the Project. The leftover loads of mixed concrete were dubbed “10-9 loads" by the defendants, and did not meet Big Dig project specifications. The defendants concealed this fraud by falsifying concrete batch slips delivered to Big Dig inspectors and/or representatives of the general contractors at the various construction sites. These false batch reports were relied upon by the Government to determine the quality and amount of concrete placed by the general contractors on the project.
Big Dig project specifications required that concrete must be placed or poured within ninety minutes of batching. In most instances involving these “10-9 loads,” the concrete had exceeded the ninety minute time limit. In order to conceal the true age of the concrete, the defendants directed truck drivers and other Aggregate employees to add water, as well as other ingredients, to the “10-9 loads” to make those loads appear to be freshly batched. Big Dig project specifications also prohibited the addition of water to concrete after the concrete had been batched except under tightly controlled circumstances.
In addition to knowing much more about concrete specs than you ever really wanted to learn, the next time you drive through the Big Dig tunnel, recall the allegations of this case while you look at the drops of water on those walls and say to yourself, "I sure hope that concrete is strong enough." (ph)
More From the NACDL White Collar Crime Conference
Leon Rodriguez, of Ober Kaler in Washington, D.C., spoke about health care fraud. He noted that there are a growing number of cases in the kickback and Starke area because of the commercial nature of the medical world. Attorney Rodriguez stated that the big issue in health care is the false claims act cases. Most of the cases begin as whistleblower actions under the false claims act -- cases seeking substantial damages – and that some of these cases then progress into a criminal prosecution.
Rodriguez brought out that so much of what is discussed with regard to health care pertains to three cases: TAP (anti-cancer drug case), Tenet (had its second mistrial), and the Columbia cases. But he noted there really are many other every-day type of cases that make up the health care fraud criminal practice.
Discussing the Whiteside case he reminded the audience of a key point made by the court- "[i]n a case where the truth or falsity of a statement centers on an interpretive question of law, the government bears the burden of proving beyond a reasonable doubt that the defendant’s statement is not true under a reasonable interpretation of the law." He then laid out key points to consider when building a Whiteside Defense. Three initial key points that he noted are:
- Determine provision is believed to have been violated by client;
- Does the provision work the way the prosecution says it does;
- Prosecutors and regulators are not always on the same page.
Blogging at the NACDL White Collar Crime Program in Philadelphia
Blogging in Philadelphia at the National Association of Criminal Defense Lawyers (NACDL) is guest blogger Stephanie Martz who serves as the director of NACDL’s white collar crime project.
The morning began with Audrey Strauss from Fried Frank in New York talking about recent developments in the field of criminal securities enforcement. Of course, one of the most intriguing developments in the last year were the decisions in US v Stringer and US v. Scrushy. The courts in both of those cases held, as Strauss put it, that what we learned in geometry class is true: two parallel lines never intersect. Thus, when the SEC’s civil investigation not only intersects with, but masks, a criminal investigation, they ain’t parallel anymore. Strauss laid out the facts of the Stringer case in some detail (the case was addressed in a previous posting (here) and I think one of the most interesting is that when the defendant’s counsel asked specifically, before the defendant went into SEC testimony, whether there was a criminal investigation, the SEC kind of finessed the answer and referred to Form 1662, which all SEC deponents get. It left me wondering how different Stringer really is from the typical case (since that’s ALWAYS how the SEC answers that question), and whether, if other courts start going in the same direction, the SEC is going to have to change its practice.
In any event, Strauss urged the audience to use Brady motions to get discovery on how information was shared between the SEC and US Attorney’s office, and at least one member of the audience said that he had done so already. Query whether there is a vehicle for doing this pre-indictment? ....
Next was Scott Michel, a partner at Caplan & Drysdale in DC, who spoke about developments in tax criminal enforcement. Headline: DOJ looooves bringing criminal tax cases these days, and has begun to focus (ala KPMG) on tax professionals – tax lawyers, folks who market shelters, etc. – rather than the taxpayer. What was once a good defense – "our lawyer told us that this was a legal shelter" – now becomes a conspiracy investigation. Second, as can be seen in the massive prosecution of Walter Anderson in DC, the IRS’ CID and DOJ are increasingly ignoring the corporate form in going after off-shore tax arrangements. In other words, having an off-shore company with a real structure, real boards of directors for itself and its subsidiaries, and legitimate money transfers can still get you indicted. Third, the IRS announced last year that it would no longer cease the civil track once a criminal track has commenced. Fourth, again ala KPMG, employees have become "speed bumps on the way to deferred prosecution agreements."
May 3, 2006
Yet Another Federal Crime
We elect Congress to pass laws, so it is a bit disingenuous to criticize our Senators and Representatives for enacting legislation. Yet, when it comes to federal criminal laws, will there ever come a time when we say "enough already"? The House passed H.R. 5253, the Federal Energy Price Protection Act of 2006, on a 389-34 vote (AP story here). The legislation ostensibly is designed to address one aspect of the spike in gasoline prices. The Act makes it an unfair or deceptive practice to engage in "price gouging" in the sale of petroleum products such as gasoline, home heating oil, diesel fuel, and the like. The law gives the Federal Trade Commission the authority to investigate such abuses and to bring civil actions for violations, and permits a civil penalty of $3 million per day. It also authorizes state Attorney Generals to pursue a civil enforcement action in federal court under the law. While that is all well and good, the final provision of H.R. 5253 (here) provides:
(1) IN GENERAL- In addition to any other penalty that applies, a violation of subsection (a) is punishable-
(A) in the case of a wholesale sale in violation of subsection (a), by a fine of not more than $150,000,000, imprisonment for not more than 2 years, or both; or
(B) in the case of a retail sale in violation of subsection (a), by a fine of not more than $2,000,000, imprisonment for not more than 2 years, or both.
What is "price gouging" you might ask? The statute states that the FTC will adopt rules within six months defining that term. That sure is precise for a criminal provision. Note that the statute does not contain any mens rea element, and indeed simply adds criminal liability on to the civil liability provisions, with an additional fine and prison term a possibility tacked on to the bill. Do we really need to make this type of conduct, which likely will be very difficult to prove, a federal offense? (ph)
Fallout From the Ryan Corruption Trial
Although former Illinois Governor George Ryan and a codefendant were convicted on corruption and RICO charges a couple weeks ago, collateral proceedings from the case remain in the news. One defense witness was Edward McNally, who represented Ryan in 2001 during the investigation before serving as the former United States Attorney for the Southern District of Illinois; he is now in the Criminal Division at the Department of Justice. An issue raised by the government after McNally's testimony was the fact that a number of former partners at a firm he was at that went bankrupt were being sued by the trustee in bankruptcy for certain firm debts. Counsel to the trustee was Winston & Strawn, the same firm that represented Ryan, and one partner not sued over the debt was none other than McNally. Prosecutors protested the potential conflict from that situation, and also claimed that McNally may have tape recorded a meeting between Ryan and FBI agents that McNally attended as counsel. The Chicago Sun-Times reports (here) that the Office of Professional Responsibility in the Department of Justice has begun an investigation of the taping allegation against McNally, according to a letter sent to Illinois Senators Durbin and Obama.
On another front, defense attorneys have asked the court to have the jury forewoman testify under oath regarding whether she gave false answers on her juror questionnaire. During the jury deliberations, U.S. District Judge Pallmeyer dismissed two jurors because of questions raised in the media about prior convictions they did not disclose. According to an AP story (here), Ryan's attorneys claim that the forewoman did not disclose her divorce proceeding and two domestic violence complaints in answering questions about whether she had ever been a crime victim or her involvement in legal proceedings. Post-verdict challenges for juror bias or deception are very difficult to win, as was shown in the defense challenge to a juror in the Martha Stewart case that was rejected by the Second Circuit. Ryan's sentencing is set for August 4, 2006, and juror issues are much more likely to come up during the appeal of the conviction. (ph)
Former Qwest CEO Once Again Seeks Dismissal of Insider Trading Charges
Former Qwest CEO Joseph Nacchio's attorney have sought dismissal of the 42 insider trading charges on the ground that venue is not proper in Colorado and prosecutorial misconduct. An earlier motion to dismiss because the indictment failed to charge a criminal offense failed, and these motions do not deal with the substance of the charges but the process of the indictment and its location. According to an AP story (here), Nacchio alleges that prosecutors tainted the grand jury by having other Qwest executives testify regarding internal corporate policies on selling shares, and only six witnesses testified before the grand jury in a rush to secure an indictment before the five-year statute of limitations expired. The problem with this argument is that under U.S. v. Costello, 350 U.S. 359 (1956), a facially valid indictment cannot be dismissed because of the quality or sufficiency of the evidence before the grand jury. It will be difficult for Nacchio to show that the grand jury process was so tainted by prosecutors that the grand jury's function was usurped, so an evidentiary claim is unlikely to succeed even when coupled with a claim of prosecutorial misconduct.
The second motion to dismiss is based on the ground that none of the stock sales took place in Colorado, so venue is not proper in that jurisdiction. The securities fraud statute is not quite so restrictive, however, and covers any scheme or artifice to defraud "in connection with the purchase or sale of a security." The fact that Nacchio was a Qwest executive in Colorado at the time of the alleged insider trading is likely sufficient to establish venue, and to the extent he wishes to raise a factual issue on this element then it is a jury question and not one the judge is likely to decide before trial. As an alternative, Nacchio also requests a change of venue because he is "among the most reviled figures in recent Denver history." While I thought Jake Plummer would rank as #1 on that list these days, the issue for the court is whether Nacchio can receive a fair trial and not the general perception of him. Once again, this is a difficult argument to win, and the trial is likely to be held in Denver, the site of Qwest's headquarters. An AP story (here) discusses the venue issues. (ph)
If You Can't Trust the Woman You're Dating With Insider Information . . .
An earlier post (here) discussed an insider trading case in New York in which the live-in boyfriend looked at the deal documents his girlfriend brought home from her office and bought shares in the client-company involved in an extraordinary transaction. A slightly different situation arose in an SEC civil insider trading case filed in San Francisco involving Marnie Sharpe, who got the news from a "close friend" and almost immediately tipped her father about it. As described in the SEC complaint (here), Sharpe received the information from an executive at biotech company Renovis, Inc., and "Sharpe and the executive, both divorced, met socially and exchanged email, phone calls and text messages." The executive and Sharpe had dinner at which he said the company expected to receive the results of a clinical trial on its most advanced drug on May 2. Shortly after the executive received information on May 2 that the results were positive, Sharpe called the executive and asked about the test results. After initially resisting her requests for information, he told her that the results were positive and warned her not to disclose the information. The executive then called her back to reiterate the confidentiality of the information and, when she asked if she or her family could trade, the executive said "of course not."
At this point, Sharpe's relationship with the executive probably hit the skids because she immediately called her father, who liquidated mutual funds in his brokerage account to raise cash, and Sharpe wire transferred $10,000 to her father's account. The father even asked the broker whether a company could trace who was buying its stock. On May 3, 2005, the father purchased over 7,000 Renovis shares, apparently not knowing that the best way to trade on such inside information is to purchase out-of-the-money call options on the company's shares. On May 4, Renovis announced the positive clinical test results, and the stock nearly doubled, generating a $42,000 profit. Sharpe and her father settled the SEC case by disgorging the profits and each paying a one-time penalty of $42,000.
The SEC's theory that Sharpe breached her fiduciary duty in tipping her father was the pattern of sharing confidential information in the relationship with the executive. As described in the complaint, "During their friendship, Sharpe and the Renovis executive had a history, pattern or practice of sharing confidential work and personal information. They each expected the other to keep such exchanges confidential and, until May 2005, did so. Because of their close personal relationship and history of sharing confidences, the Renovis executive trusted Sharpe and expected her to keep information about his work confidential." This is not the type of classic fiduciary relationship that is the basis for an insider trading case under Chiarella or O'Hagan, but it is consistent with the SEC's definition of the "Duty of Trust or Confidence in Misappropriation Insider Trading Cases" in Rule 10b-5-2(b)(2). Whether that definition, which goes further than most judicial decisions have in describing the contours of the type of duty that can trigger insider trading liability, would hold up to a judicial challenge is an open question. While this case might have presented a good vehicle to address the scope of the fiduciary duty arising from a personal relationship, the San Jose Mercury News quotes the attorney for Sharpe and her father (here) as stating "[i]t is unfortunate that it is so expensive for people to defend themselves against government charges like these." The cost of settling was probably less than litigating the case, especially if it went up on appeal. But then, if you can't trust your girlfriend, who can you trust these days. (ph)
KPMG Defendants Receive Unfavorable Ruling
The NYTimes reports here that KPMG defendants were unsuccessful in their bid to dismiss the charges. The defense claim made in the motion was that the tax shelters were not illegal, and therefore there was no basis of law to bring the criminal action. A refusal to dismiss this matter does not mean that the tax shelters might not later be shown to be legal (and therefore there would be no basis for this action), it merely means that the government will have its day in court to prove its case. (correction added in light of comment)
This is not the first round of motions lost by the KPMG defendants. (see here; see also here) But the defendants have had one bright light and that is that the judge ordered a hearing on the Thompson Memo (see here). Will the defense be calling David Anders to testify at this hearing? After hearing his comments on the Thompson Memo at the Maryland Roundtable one wonders where he might stand on the issue of whether the Memo is coercive to companies when faced with possible government prosecution.
Former NASA Employee Sentenced
Sometimes one may wonder what type of corporate compliance program the government has when activities such as follows can occur for several years.
Fraud Update links here to a press release of the Maryland USA who reports on the sentencing of a former employee of NASA. The press release states in part that:
From 1996-2005, Harrison prepared a series of NASA purchase orders payable to some variation of “The Franklin Thomas Group.” Harrison subsequently certified that services or goods had been received from “The Franklin Thomas Group,” and assisted Thomas in providing the documentation required by NASA to process payment. As a result of the fraudulent representations and documentation provided by Harrison and Thomas, wire transfers in the total amount of $194,749.98 were sent from the United States Treasury to Thomas’s personal bank account. Thomas and Harrison shared in the proceeds.
During 2004-2005, Thomas processed 11 SSA payments to Harrison. Using a manual override computer function, Thomas instructed the SSA system to make payments to “Andrea Harrison, attorney for [claimant].” Harrison is not licensed to practice law and did not represent any claimants before the SSA. As a result of the computer entries by Thomas, checks totaling $52,534.50 were mailed via the United States Postal Service to Andrea Harrison at her home address. Harrison cashed and/or deposited those checks at her personal banks and shared the proceeds with Thomas."
The sentence against Harrison, the former NASA employee, was "18 months in prison and 12 months of home detention on electronic monitoring, followed by 3 years of supervised release" There was also restitution "in the amount of $247,284.48." Co-defendant Thomas, who was employed by Social Security Administration, "was [previously] sentenced to 18 months in prison followed by 12 months of home detention on electronic monitoring." For both the charges were mail and wire fraud.
May 2, 2006
Quattrone - New Judge, New Prosecutor, New Defense Counsel
No one knows yet if there will be a retrial of the Quattrone case, but if there is - the stage will have new players. The Wall Street Journal reports here and here on the new judge (from U.S. District Judge Lewis Kaplan to Judge George Daniels) on the new prosecutor (from David Anders and Steven Peikin to William Johnson and Raymond Lohier) and on the new defense attorney (Mark Pomerantz and Ted Wells). Is it really worth it to retry Quattrone, here's what they are saying in Canada (see here).
Ken Lay's Testimony Ends
The testimony of Ken Lay ended and it is interesting to read the reports of what occurred. (here- Wall Street Jrl; here - Houston Chronicle). One has to remember that those judging this case do not read the press and were not attuned to what happened at Enron. They were picked for this jury because they had not formed an opinion.
How will this play out in the result? Will they believe Ken Lay when he says he made a mistake in trusting Andrew Fastow and places the blames for Enron's problems upon this manager? Or will they believe that Ken Lay knew and participated in wrongdoing at Enron? Certainly the defense raises issues that hurt the government's case. For example, Lay's personal losses resulting from his holding onto stock and vested options plays against the government's case. The witnesses following Lay also assist in building his credibility, as character witnesses usually can assist when credibility is the theme of the case.
Like so many of the recent CEO prosecutions, we are seeing here a test of how much does a CEO have to do to stop and root out criminal liability from their company. One has to wonder to what extent these cases will have on employing better controls within a company. On the other side, one can't help but see the government working against better corporate culture by instituting practices like having corporations implicate employees who may have confided in corporate counsel. Will employees continue to come forward and assist in stopping criminal activity within a corporation knowing that the corporation may use this information against them?
This case has unique qualities given the extent of criminal activity within the company and the huge fall that it suffered. It also has enormous social consequences to so many who lost so much as result of practices at Enron. The extent that the jury will be able to factor this into its deliberation may also play a part in the verdict.
Leaving Tracks - Abramoff Footprints
In white collar crime cases we do not deal with footprints left by the perpetrator in the snow. But the tracks are still there - whether it be in documents, emails, or telephone conversations. At the white house the tracks may be easy to follow, as prosecutors can see who came and went from the Presidential home and office and who the visitor saw while there.
According to the Washington Post here, the tracks being examined are the secret service logs of who Abramoff visited at the white house. But it isn't the FBI, DOJ, or other government agency requesting them. Instead, this time it is Judicial Watch, a public interest group.
Vogel Plea Documents in Milberg Weiss Clients Case
The documents related to the plea agreement of Howard Vogel, who admitted to receiving over $2 million in secret kickbacks from plaintiff securities class action firm Milberg Weiss for serving as the representative plaintiff, are available below. Two interesting items to note in the documents. First, Vogel pled guilty to violating 18 U.S.C. Sec. 1623, the false declaration/perjury provision, based on certifying to the federal courts considering the settlements of the securities class actions that he did not receive any payments other than what was approved by the court. This strikes me as a much stronger case than asserting mail or wire fraud for the payments because the law is clear that such payments are prohibited without judicial approval and the documents will show the scope of the disclosure ( or lack thereof). Second, the payments to Vogel and his family were from 1992 to 2005, including a $1.1 million payment in December 2003 from Milberg Weiss arising from the Oxford Health Plans securities class action, so it is a continuing course of conduct. The Statement of Facts contains a chart listing the specific cases and payment amounts, which will provide a roadmap to the types of charges that may be filed against current or former members of the law firm and, perhaps, even the firm itself. Very interesting reading, and possibly a precursor to coming indictments. (ph -- thanks to a faithful reader for sending along the case documents)
April 30, 2006
Robert "Bob" Ritchie Will Be Missed
Robert " Bob" Ritchie, Past President of the National Association of Criminal Defense Lawyers (NACDL), lost his battle with cancer. (See obituary from the Knoxville News Sentinel here). Ritchie had also served as a President of the Tennessee Association of Criminal Defense Lawyers and as Knoxville Bar Association President. Bob Ritchie had lectured at the National College of Criminal Defense Lawyers (NCDC) and had given lectures at NACDL. He will be missed.The guest book can be found here.