Saturday, May 13, 2006

Cheney and Rove: The Blogs and Media Are Buzzing

Did Cheney mark up a copy of the NYTimes Op Ed by administration critic Joseph Wilson?  See Wall Street Journal here.  Does this prove anything?

And what is happening with Karl Rove?  See Talk Left here.

The real question is - What will be Patrick Fitzgerald's next move?

(esp)

Update -  See TalkLeft here.

May 13, 2006 in News | Permalink | Comments (0) | TrackBack (0)

Friday, May 12, 2006

Defense - Be Careful With Proffers

Proffers have long served as a helpful way for the government and defense to determine if a matter can be resolved.  But it looks like the government wants to change the rules with respect to proffers. And the ramifications of their actions may prove to be detrimental to the future of proffers by corporate employees.

In a case in the Western District of Washington (Seattle), the government has filed a trial memorandum in the case of  United States v. Alaska Brokerage International, Inc. and David Karsch that should scare anyone thinking about offering a proffer when representing an employee in a case that may involve a corporation. In this case the government states:

"Defendant Karsch voluntarily submitted to a proffer interview on November 22, 2005. If Karsch introduces evidence or makes arguments inconsistent with his proffer at any time during trial, then his proffer statements are admissible pursuant to the underlying interview agreement. The same applies to ABI, as evidence presented by ABI is intrinsically offered on Karsch’s behalf due to the nature of their relationship and the fact they are being tried together." (footnote omitted and emphasis added)

The government later argues:

"If the defendants elect to present no defense, the proffer statements would be admissible at the end of the government's case-in-chief, so long as either of the defendants have presented evidence, made arguments, and/or representations that were inconsistent with his proffer statements." (emphasis added)

Is this amazing, or is this amazing! In light of this position by the government, should a defense attorney in a corporate case allow his or her client to give a proffer?

Copy of the Brief is

Download karsch1.govt tr brief.pdf

(esp)

May 12, 2006 in Prosecutions | Permalink | Comments (1) | TrackBack (1)

What's Happening in LobbyGate?

Chairing a committee in Congress seems to be dangerous this days - - at least if you happen to be a Republican politician.   The latest according to the Washington Post here is an investigation of the dealings of "Rep. Jerry Lewis (R-Calif.), chairman of the House Appropriations Committee." And yes, it appears that the issue may be related to an alleged association with a lobbying firm.

(esp)

 

May 12, 2006 in Investigations | Permalink | Comments (0) | TrackBack (0)

The Dominoes Start Falling

When a couple of defendants in a case plead guilty and the possibility of a reduction in sentence is mentioned, it is not uncommon for the dominoes to start falling. One has to wonder if that might happen with respect to a recent guilty plea entered by two former NY Stock Exchange floor traders.  (See Wall Street Journal here)

(esp)

May 12, 2006 in Settlement | Permalink | Comments (0) | TrackBack (0)

How Much Is That Special Committee in the Window

The Wall Street Journal  Law Blog has an interesting post (here) on the attorney's fee payments made to date by Hollinger International, Inc. to its former officers and directors in connection with the various investigations and litigation related to Lord Conrad Black's alleged looting of the company.  Black has been indicted and is facing trial in 2007 on various charges, including RICO, and he and the company were involved in litigation in Delaware over control of the corporation.  As the Law Blog notes, some of the fee amounts have been pretty steep, including $4.3 million for Black, $857,000 for his wifewho served as a director of the company, and $4.7 million for Richard Perle. 

Hollinger's most recent 10-Q (here) provides interesting figures for the amounts spent by the company on the various aspects of the investigation of Lord Black's transactions and the related litigation/investigations.  The first thing a company does once it determines there is a problem is to appoint a special committee, which in turn hires lawyers, accountants, and other professionals to conduct the investigation.  Hollinger has spent over $53.6 million since the board first appointed the Special Committee on June 17, 2003.  On top of that, the company has spent $21.4 million for its own litigation costs and a whopping $49.3 million on attorney's fees for those it contractually agreed to indemnify, most prominently Black and the other directors.  A Toronto law firm, Torys, paid Hollinger $30 million to settle claims arising from its legal advice related to Lord Black, so that puts a small dent in the overall costs.  That said, the company spent over $12 million on the case in 2005, and another $8 million in the first quarter of 2006 alone, mostly in indemnification of attorney's fees for individuals (all of Black's fees were paid in the quarter, skewing the numbers a bit).  An agreement on indemnification of litigation costs between Black and Hollinger requires the company to pay 75% of his fees in the upcoming criminal trial (see earlier post here).  Those costs will likely run the bill up quite a bit and likely will push Hollinger well past the $100 million mark by the end of the year.  Internal investigations and the litigation they spawn certainly can be lucrative for the lawyers. (ph)

May 12, 2006 in Investigations, Prosecutions | Permalink | Comments (0) | TrackBack (0)

Kentucky Governor Indicted on Misdemeanor Charges Related to Hiring Practices

Kentucky Governor Ernie Fletcher was indicted by a state grand jury on charges of conspiracy, official misconduct, and illegally discriminating against a state employee on the basis of politics.  The Kentucky Attorney General, Greg Stumbo, is a Democrat, and Governor Fletcher is a Republican, so it should come as no surprise that allegations of political motivation have been raised about the charges.  A press release (here) issued by the Governor's Office states, "This has been a politically motivated, media-driven investigation from the start . . . Because of the politicization of this entire investigation, we are filing a motion at this time to disqualify Greg Stumbo and his entire office from further participation in this matter.”  According to an AP story (here) discussing the latest charges, "Last summer, Fletcher pardoned everyone in his administration other than himself who could be charged in the case, although a legal debate continues over whether a blanket pardon issued before charges are filed is valid."  This one should get a lot more wild in the next few months, not that Kentucky politics has ever been very tame. (ph)

May 12, 2006 in Corruption | Permalink | Comments (0) | TrackBack (1)

Another Strange Turn in Insider Trading Saga

The story of the insider trading ring organized by David Pajcin and Eugene Plotkin, who met while working at Goldman Sachs, took another turn with the arrest of Pajcin's high school friend, Jason Smith, on insider trading and criminal contempt charges.  Pajcin and Plotkin showed a voracious appetite for inside information, as discussed in an earlier post (here), that involved obtaining deal information from an analyst at Merrill Lynch and hiring two men to work at a printing plant in Wisconsin to get a sneak peak at advance copies of Business Week.  Pajcin first came to the government's attention in August 2005 when large-scale call option purchases in Reebok right before the announcement of its acquisition by Adidas, including trades through an account in the name of his aunt in Croatia, first surfaced and caused the SEC to look at a variety of trading accounts for suspicious transactions.

The latest twist involves a letter carrier who was a member of a federal grand jury in New Jersey.  Smith is accused of leaking information to Pajcin and Plotkin about the pending investigation of Bristol-Myers Squibb and its executives for accounting fraud related to channel stuffing that was before the grand jury.  That investigation ultimately resulted in a deferred prosecution agreement for the company and indictments of two of its former financial officers on June 14, 2005.  According to a press release issued by the U.S. Attorney's Office for the District of New Jersey:

Smith allegedly kept Pajcin abreast of progress and developments in the grand jury and what he believed was the anticipated indictment of one particular BMS officer who appeared multiple times before the grand jury. The two allegedly discussed trading in BMS stock and also met in Manhattan with another of Pajcin’s co-conspirators, Eugene Plotkin, then an associate at Goldman Sachs’ fixed-income research unit . . . According to Pajcin, as related in the criminal Complaint from the District of New Jersey, Pajcin told Smith of the insider trading scheme with which he, Plotkin and others were engaged. Pajcin said he opened a brokerage account in the fall of 2004 with about $6,000 or $7,000 provided by Smith, as well as with money from a $20,000 bank loan taken by Plotkin.  Pajcin said Smith told him to use Smith’s money in the insider trading scheme. Subsequently Smith began passing along information on the progress and status of the BMS grand jury investigation. Smith and Pajcin allegedly agreed to share in any profits made as a result of Smith’s information.

Pajcin has been cooperating with the government's investigation since late 2005, and it appears that he assisted in an undercover contact with Smith in April 2006.  According to the press release, "During a recorded telephone conversation on April 12, 2006, according to the Complaint, Pajcin told Smith he was considering cooperating with authorities. If he did, Pajcin told Smith, he might have to tell the government about 'the jury thing.' In response, Smith expressed, among other things, serious concerns for himself and discussed possibly fleeing, according to the Complaint."

It is not clear whether Pajcin and Plotkin made any money on their short sales of BMS, although the U.S. Attorney's Office for the Southern District of New York and the SEC are pursuing insider trading charges against them (and Smith) for that trading (see SEC Litigation Release here).  While trading based on material nonpublic information usually results in a gain or loss avoided, a Rule 10b-5 violation does not require the defendant to realize a profit from the transaction, and it is not a defense that the trade turned out to be a loser if it was made while the person had inside information that caused the transaction.  Of even greater concern for Smith is the contempt charge for violating Federal Rule of Criminal Procedure 6(e), which strictly prohibits disclosure of grand jury information.  Courts are particularly concerned about leaks of grand jury information, so if the allegations prove to be true, then Smith will probably face a much more severe sentence than would be the case for the insider trading, particularly because the contempt statute does not contain a statutory maximum (18 U.S.C. Sec. 401 here). (ph)

May 12, 2006 in Grand Jury, Insider Trading, Prosecutions | Permalink | Comments (0) | TrackBack (0)

Thursday, May 11, 2006

Sentencing in Fortune Teller Fraud Case

Would you believe someone if the person told you she was a psychic and could foresee the future?  Apparently, enough victims did because Linda Marks admitted to bilking clients, many of them elderly, out of $2 million dollars by passing herself off as a psychic.  Regardless of whether she could conjure the future, Marks received something much better from Delray Beach police officer Jack Makler: protection.  Marks and Makler pleaded guilty to fraud and corruption charges in Florida, and a press release issued by the U.S. Attorney's Office for the Southern District of Florida (here) discusses the scheme:

According to previous in-court statements, Marks, a self-proclaimed psychic and fortune teller, agreed that she was responsible for bilking over two (2) million dollars from numerous elderly and otherwise vulnerable victims from 1994 through 2002. Makler, in turn, admitted that he used his official position to improperly keep Marks out of jail and from violating probation. Makler also admitted that he lied to state criminal courts in New Mexico and Key West, Florida, to help Marks and her husband, Jimmy Marks, avoid severe criminal penalties. In addition, Makler admitted to receiving money and other property from Marks and to an improper social relationship with the Marks’ during the time when he was officially assigned to investigate many of Marks’ alleged frauds. Finally, Makler admitted to lying to his department’s Internal Affairs investigators and to federal investigators on numerous separate occasions when he was questioned about his relationship with Marks and his handling of her cases.

Makler received a five-year prison term for his role in the offenses, and Marks will serve four years after the sentencing on May 10, 2005. (ph)

May 11, 2006 in Fraud, Sentencing | Permalink | Comments (0) | TrackBack (1)

Wednesday, May 10, 2006

Morgan Stanley Pays $15 Million Penalty for E-Mail Problems

Morgan Stanley & Co. has had more than its fair share of problems producing e-mails in civil litigation and to the SEC.  The company settled an SEC civil complaint (here) alleging that from 2001 to 2005 it failed to supply e-mails in Commission investigations into IPO distributions and conflicts involving research analysts.  According to the SEC Litigation Release (here):

The Commission alleges in its complaint that Morgan Stanley did not diligently search for back-up tapes containing responsive e-mails until 2005. Morgan Stanley also failed to produce responsive e-mails because it over-wrote back-up tapes. The complaint further alleges that Morgan Stanley made numerous misstatements regarding the status and completeness of its productions; the unavailability of certain documents; and its efforts to preserve requested e-mail. The Commission charged Morgan Stanley with violating the provisions of the federal securities laws requiring Morgan Stanley, a regulated broker-dealer, to timely produce its records and documents to the Commission.

$5 million of the penalty will be paid to the New York Stock Exchange and NASD, which were also involved in the investigations.  The $15 million pales in comparison to the $1.6 billion judgment won by Ronald Perlman in litigation over Morgan Stanley's role in the acquisition of Coleman Cos. by its client Sunbeam that was driven in part by the trial court's finding that the firm made intentional misstatements regarding the production of e-mail evidence.  That award included $850 million in punitive damages, and the judgment is on appeal.

While the dollar amount in the SEC case is not that significant, at least for a firm like Morgan Stanley, the long-term effect on its reputation with the regulators who oversee the firm may be more significant.  In the near-term, at least, the SEC and NASD are less likely to trust the firm on document production issues, and I think the agencies will inspect Morgan Stanley's responsiveness with a more critical eye.  The firm's "one free bite" is gone, and any failure to produce information, especially e-mails, will result in a much more severe punishment and possibly even a criminal investigation.  Private litigants are sure to keep a copy of the Commission's complaint close at hand, too.  The case is yet another example of the importance of managing e-mail when the government comes knocking with one of those pesky little subpoenas. (ph)

May 10, 2006 in Civil Enforcement, Investigations, Securities | Permalink | Comments (0) | TrackBack (1)

More on the Ostrich Instruction

U.S. District Judge Sim Lake is following his plan to give jurors an "Ostrich Instruction" for both Ken Lay and Jeffrey Skilling when he charges the jury before closing arguments.  A New York Times article (here) discusses the controversy over the judge's decision, and quotes co-blogger Ellen Podgor questioning whether the instruction in appropriate given the government's theory of the case.  It is also a fair question whether the instruction should be given for both defendants because of their different roles at Enron.  Nevertheless, Judge Lake is pushing ahead, so if there is a conviction in the case, this will be a prime issue on appeal. (ph)

May 10, 2006 in Enron | Permalink | Comments (0) | TrackBack (0)

Ohio Republican Fundraiser to Plead Guilty to Campaign Finance Violations

Tom Noe has been at the center of an expanding campaign finance and corruption investigation in Ohio for the past year.  He was indicted on state charges related to investments he allegedly made on behalf of a state workers compensation fund in rare coins that turned out to be largely non-existent, resulting in a loss of over $1 million.  Federal charges were filed in October 2005 related to campaign contribution violations.  Noe was a leading fundraiser for the Bush-Cheney campaign in 2004, and contributed over $100,000 to various Republican campaigns.  The federal charges involve funneling approximately $45,000 to the presidential campaign by making payments to others who would then donate in their own names in order to avoid the $2,000 contribution limit.  An AP story (here) states that prosecutors have requested a change of plea hearing be scheduled.  It is not clear whether part of the plea agreement will include cooperation in the various investigations.  (ph)

May 10, 2006 in Corruption, Prosecutions | Permalink | Comments (0) | TrackBack (0)

Another New Law Blog

In the burgeoning world of media-sponsored law blogs, the Washington Post has started one called Bench Conference (here) that is written by Andrew Cohen.  Another good source of legal information and commentary in the blogging world.  (ph)

May 10, 2006 in Media | Permalink | Comments (0) | TrackBack (0)

HHS Seeks to Knock Out San Diego Hospital

The Office of the Inspector General for the Department of Health and Human Services is seeking the ultimate punishment against a San Diego hospital by seeking to bar it from participating in federal healthcare programs, most importantly Medicare and Medicaid.  An OIG release (here) states that the Department has issued a notice to Alvarado Hospital Medical Center and its corporate parent, Tenet HealthSystems Hospitals, Inc., that it is seeking the bar because of alleged illegal kickbacks paid to doctors in exchange for patient referrals.  Alvarado and its CEO have been tried twice on criminal anti-kickback and fraud charges in federal court in San Diego, and a hung jury resulted in mistrials both times.  The U.S. Attorney's Office for the Southern District of California is considering whether to try the defendants again, but in the meantime HHS has acted to seek the "nuclear option" in healthcare that would likely cause the hospital to go out of  business.  According to the OIG release:

OIG alleges that, from 1992 to 2003, Alvarado entered into physician relocation agreements through which Alvarado funneled money to existing physician practices in the San Diego area in exchange for patient referrals. Although the relocation agreements were purported to benefit the doctor who actually relocated to the San Diego area, in practice, the agreements primarily benefited the established physician practices where the new doctors were placed. OIG contends these often-excessive payments actually were used to buy referrals. The agreements typically provided the new physician a monthly salary and a monthly guarantee for overhead expenses. The new physician paid this money over, in large part, to the established practice. The agreements also provided the existing physician practices directly with money intended to make improvements to their offices and purchase equipment necessary to accommodate the new physician.

It will be interesting to see if Tenet decides to fight the OIG action, or whether it can resolve the case short of an exclusion from the federal healthcare programs.  Alvarado is a 306-bed hospital that provides the following medical care: "cardiac services, emergency medicine, general surgical services, neuroscience, orthopedics, oncology, rehabilitation, skull base surgery, surgical weight reduction and vascular services."  A company press release (here) states:

We have been attempting in good faith to resolve the Alvarado matter with the federal government.  We believe that nothing in the hospital’s practice of recruiting physicians to eastern San Diego County warrants a forced sale or closure of the hospital – especially given the lack of any evidence that any physician compromised his or her medical judgment when referring a patient to Alvarado.  Two trials in San Diego have ended after both juries deadlocked on whether anyone at Alvarado intended to violate the law regarding physician relocation agreements.  Despite this unfortunate action by the OIG, we will continue to discuss an overall resolution and we hope to reach an equitable result.

That does not sound particularly defiant, so it's likely there will be some penalty assessed, which means the issue will be how much Tenet will have to pay in penalties and possible changes to its agreements with physicians. (ph)

May 10, 2006 in Civil Enforcement, Fraud | Permalink | Comments (2) | TrackBack (0)

Tuesday, May 9, 2006

The Linda Schrenko Trial

Former state school Superintendent of Georgia, Linda Schrenko, is now in the second week of her trial. So far there have been witnesses testifying for the prosecution saying that Shrenko was "illegally funneling money into then-Georgia School Superintendent Linda Schrenko’s 2002 campaign for governor." (See Atlanta Jrl Constitution here) The Atlanta Jrl Consitution has a blog covering the trial here.

                                                                                                                               

UPDATE: Schrenko entered into a plea bargain with the government today, over a week into her trial, in which she will receive an eight-year prison term.  According to an AP report (here), she will plead guilty to one count of money laundering and one count of fraud. (ph)

May 9, 2006 in Corruption, Investigations, Prosecutions | Permalink | Comments (1) | TrackBack (0)

Looks Like the Ostrich is In

According to Mary Flood's Houston Chronicle Blog here, it looks like the draft instructions include willful blindness.  (see co-blogger Peter Henning's post here)  But there is a question perhaps about whether this instruction fits the case. (see here).

Clearly this instruction makes is easier for the prosecution as it allows the jury to find knowledge when there is an avoidance of having that knowledge.  But the more important question here is whether the prosecution should push for this instruction if the defense argues against it being given. The question that the prosecution needs to ask is whether this instruction is necessary to prove their case. If this instruction is given and the defendants are found guilty, will this create an issue for appeal?  Is it worth that risk?  Or is the risk greater of a not guilty if the instruction is omitted?

(esp)   

May 9, 2006 in Enron | Permalink | Comments (0) | TrackBack (0)

KPMG Hearing on Thompson Memo

Yesterday a hearing was held on whether the Thompson Memo was used to coerce the company from paying individual attorney fees. (see post here)  Both the NYTimes (here) and Wall Street Jrl (here) report on that hearing. 

Also check out Professor Larry Ribstein's Ideoblog here comparing prosecutor conduct in KPMG and business conduct in the Nigerian Barge case.

(esp)

May 9, 2006 in Defense Counsel | Permalink | Comments (0) | TrackBack (0)

5K1.1 Decision In HealthSouth Related Case

According to the Eleventh Circuit in the case of U.S. v. McVay, a 5K1.1 motion filed by the government does not give a district judge a unlimited license to depart. 

McVay, the former "Chief Financial Officer and Senior Vice-President, and Trreasurer of HealthSouth Corporation" plead guilty to conspiracy to commit wire and securities fraud.  The offense level was a 29, but the district court departed to an 8 when the government filed a 5K1.1 motion. The government appealed. The appellate court states that:

" After careful review of the record and the parties' briefs and oral arguments, we conclude the district court reversibly erred by downwardly departing so sharply, based on substantial assistance, virtually without explanation, and on a wholly improper basis."

The appellate court stated that "despite McVay's cooperation, a 'substantial term of imprisonment is required' given the seriousness of McVay's crimes."

One has to wonder several things here: 

1) Would the government have pursued the appeal of this case if Richard Scrushy had been convicted? As noted by co-blogger Peter Henning, it probably would not have made a difference in that the appeal was started before the trial.

2) Can a court still depart substantially as long as they provide a clear indication that it does not consider the crime to be as serious as contended by the government and no improper factors are used in determining the sentence?

3) According to the appellate tribunal the alleged loss in this case was $400 million, but was this a proper way to compute the loss in light of the Olis decision in the Fifth Circuit?

4) Does this case restore some power to the government to play a hand in sentencing even when they ask a court to depart premised on substantial assistance?

What is perhaps the most telling aspect of this decision is that appellate tribunals will in fact review sentences.  This is an important step to assuring that discretion is monitored.  It is also a strong argument as to why the legislature does not have to intercede post-Booker  to control courts - - the appellate courts are doing just fine on their own.

Decision here.

(esp) (w/ a hat tip to Alex Coolman)

May 9, 2006 in HealthSouth, Sentencing | Permalink | Comments (0) | TrackBack (0)

Monday, May 8, 2006

Government Building Cooperating Witnesses to Join Abramoff

Others are joining the Abramoff Club - they are pleading guilty.  According to Forbes Magazine (AP) here a former aide to Rep. Ney has joined the ranks of pleading guilty and become a government cooperating witness.  The Washington Post here notes that Neil Volz, the latest to enter a plea, served as press secretary and later chief of staff to Ney.

(esp)

May 8, 2006 in Investigations | Permalink | Comments (0) | TrackBack (0)

Former Gemstar Executive Gets Civil Penalty

The Wall Street Journal reports here  that former CEO of Gemstar-TV Guide International, Inc., Henry C. Yuen, has been ordered to pay $22.3 million. He also will be barred "from serving as an officer or director of a publicly traded company." But it sounds like there may be an appeal of this ruling.  For some background on this case, see prior post here.

(esp)

May 8, 2006 in Settlement | Permalink | Comments (0) | TrackBack (0)

Commentary on Lay/Skilling Trial and Possible Aftermath

With the conclusion of the prosecution and defense cases in the Lay/Skilling trial, here are some comments on the trial -

Houston Chronicle here

LA Times (AP) here

Wall Street Journal here

Washington Post here

But even if Lay is Succesful at Trial, there are other possible charges that he could face - Co-blogger Peter Henning comments to Mary Flood in the Houston Chronicle here

(esp)

May 8, 2006 in Enron | Permalink | Comments (0) | TrackBack (0)