June 10, 2006
Part One of the Olis Re-Sentencing
The Houston Chronicle reports here on the first part of the re-sentencing hearing of Jamie Olis, former employee at Dynergy who was convicted for his role with Project Alpha. Olis initially had been sentenced to 24+ years, but the Fifth Circuit (Hon. Edith Jones authoring the opinion) sent it back for re-sentencing. The Houston Chronicle reports that at Friday's initial re-sentencing hearing the defense counsel asked for three months to file a report in response to the Government report.
One has to wonder when the government report was first provided to defense counsel. Was it a month prior, a week prior, or that day?
Discovery during sentencing is important, and especially crucial in cases where a fraud loss is being determined. Forensic accountants become important players in helping counsel and the court understand the financial aspects of a case.
But in all this, one has to wonder if culpability, that is significant culpability, minor role, or a total lack of motive in the wrongdoing, gets lost in the financial determinations.
Addendum - See Tom Kirkendall's Houston Clear Thinkers here.
Korea and White Collar Crime
According to the Atlanta Journal Constitution here, Korean prosecutors continue to proceed against Hyundai's chairman, with additional charges being added in an alleged bribery scheme. Korean prosecutors, however, have decided not to proceed against the chair person's son, who is the president of Kia Motors.
Two things are important here. First is that prosecutors in Korea are not using a child to secure a conviction against a parent, but rather are looking hard at the evidence and judging it to see who in fact is really the culpable individual. Korean prosecutors should be applauded for this.
Second is that there is a decision made by the Korean prosecutors, that has become public, that the government will not be proceeding against someone (in this case the President of Kia Motors). In the United States, individuals are often left in limbo not knowing if they continue to be a target of an investigation, or if they are in fact no longer under scrutiny. Again, Korean prosecutors should be applauded for letting people know that they are no longer being considered for indictment.
Hoop Dreams and Insider Trading
If you don't share the basketball with your teammates, you are likely to lose the game. When you share insider information with them, however, you may well come to the attention of the SEC and be sued for insider trading. Such is the fate of Matthew Roszak, Douglas Jozwiak, Darrin Edgecombe, and two others when Roszak learned from a director of Blue Rhino that the company was in the process of being acquired by Ferrellgas Partners. Roszak worked with the director closely, including serving as the CFO of a company controlled by the director. The director first told Roszak in December 2003 that he would be doing significant work on a deal involving Blue Rhino, and on January 9, 2004, after spending two days together, Roszak made his first purchase of Blue Rhino shares and tried to figure out how to buy call options on the stock -- a much more cost-effective way of trading on inside information.
If the trading had stopped there, Roszak might have stayed underneath the radar because he had once before bought Blue Rhino shares. Inside information is like a wad of cash in one's pocket, however, and pretty soon it burns a hole and has to be let out. On January 29, the director told Roszak that he would be in daily Blue Rhino board meetings, a clear signal that the deal was close to completion. That evening, Roszak called basketball teammates Jozwiak, his brother-in-law, and Edgecombe, his friend for 15 years, apparently to tell them about the deal. The SEC complaint (here) details a number of telephone calls between the three men, the type of circumstantial evidence on which these types of cases are often built. Roszak also called two relatives, who are not identified in the complaint, that evening. The next morning, the Blue Rhino spigot was turned on as the tippees began buying up shares at a rapid clip. Jozwiak bought $56,000 worth of stock the next morning, his largest trade since opening the account, and Edgecombe bought almost $300,000 the moment the market opened the next morning -- nothing like trying to be subtle about using your inside information.
Edgecombe tipped two other friends, Trifon Beladakis and Mark Michel, who also started buying Blue Rhino. The complaint details the calls on January 29 down to the minute as the information burned up the telephone wires in Illinois, where all the defendants reside. To compound matters by making it more likely that the securities exchanges and the SEC would notice the trading, Michel, a registered rep at Wachovia Securities, also bought $1.2 million worth of Blue Rhino for relatives and clients in addition to his own purchases. When the companies announced the deal on February 9, Blue Rhino jumped almost 20%, and the defendants reaped the following profits: Roszak $23,230; Edgecombe $65,017; Jozwiak $14,136; Beladakis $29,783. Michel made almost $32,000 for himself, $92,381 for relatives, and almost $202,000 for clients. Not bad for less than two weeks worth of investing. I vaguely recall an adage about hogs getting slaughtered.
According to the SEC Litigation Release (here), four of the five defendants settled on the following terms: "Roszak, Edgecombe and Beladakis have agreed to pay disgorgement, plus prejudgment interest thereon, and civil penalties totaling $240,740, $114,805 and $62,353, respectively. To settle charges against him, Jozwiak agreed to pay a civil penalty in the amount of $14,136." Michel did not settle the case, and likely faces some pretty unhappy Wachovia Securities clients (and if he hasn't been fired yet, he probably will be very soon) who do not want to have to return their ill-gotten Blue Rhino bonanza. (ph)
Pennsylvania Attorney Indicted for Defrauding Clients
Pennsylvania attorney Michael Kasprenski was indicted for allegedly embezzling over $1.5 million from the decedent estates of his clients. Twenty of the 24 counts allege mail and wire fraud, and a press release issued by the U.S. Attorney's Office for the Eastern District of Pennsylvania (here) describes the schemes:
Counts one through nine charge KASPRENSKI with a mail fraud scheme in which he defrauded decedent estate clients by forging names on documents which he submitted to financial institutions and investment firms. The indictment alleges that KASPRENSKI used the mail to devise a scheme to defraud various individuals who were clients of defendant MICHAEL D. KASPRENSKI, and to obtain money and property by means of false and fraudulent pretenses, representations and promises.
Counts ten through twenty charge KASPRENSKI with a wire fraud scheme in which he defrauded decedent estate clients by forging names on documents which he submitted to financial institutions and investment firms. In addition to decedent estate clients, the indictment alleges that KASPRENSKI also defrauded various real estate transaction clients. The indictment further alleges that KASPRENSKI used client funds without their authorization and had those funds wired to his attorney IOLTA account, which he then used for his personal use and benefit.
Kasprenski was also charged with bank fraud for passing a check on a closed bank account and filing false tax returns. The Pennsylvania state bar suspended Kasprenski's law license in December 2005, and he has been receiving treatment to restore his competency to face the charges. An article in The Legal Intelligencer (available on Law.Com here) discusses the indictment. (ph)
June 9, 2006
The Bull's-Eye Is on Barry Bonds
The recent search of (now-former) major league pitcher Jason Grimsley's home for steroids and human growth hormones has been linked to the on-going grand jury investigation of San Francisco Giants slugger Barry Bonds for perjury. An AP story (here) states that Grimsley's lawyer said that federal agents asked Grimsley to secretly record conversations about Bonds' alleged steroid use, a proposition he refused. Grimsley spent most of his career in the American League while Bonds has been in the National League since coming to the majors with the Pittsburgh Pirates in 1986, so it is unlikely Grimsley would have been able to obtain much direct evidence against Bonds. The government's search warrant affidavit alleges that Grimsley named other players who used steroids and HGH, so it may be that investigators were using Grimsley to get evidence on those closer to Bonds who could then testify against him.
On a related front, the lawyer for Kimberly Bell, a purported former mistress of Bonds, has informed former Senator George Mitchell that federal investigators told his client not to cooperate in baseball's steroids investigation because of her involvement in ongoing grand jury proceedings. Bell testified before the grand jury in San Francisco that has also heard from the Giants' team trainer and Bonds' personal physician in connection with Bonds' possible steroid use, which would be at odds with his earlier grand jury testimony. Investigators are following the old adage about not creating discovery material or Jancks statements that would have to be disclosed before a trial and could be used to impeach a witness' s credibility if there are any inconsistencies.
The government clearly is putting a great deal of effort into the Bonds investigation, and taking approaches, such as searches and wires, usually not seen in such cases. Whether there is enough there to make out a case remains to be seen. Now that the request to Grimsley to tape conversations has been revealed, all baseball players, especially Bonds, will be wary of any discussion of steroid or HGH use. (ph)
Two More Enron Nigerian Barge Trial Defendants Freed on Bail
Former Merrill Lynch investment bankers Daniel Bayly and Robert Furst will be joining co-defendant William Fuhs outside the federal prison system after the Fifth Circuit granted them bail while the court considers their appeals. The three were among the five defendants convicted in the Enron Nigerian Barge trial in 2004, the first prosecution by federal prosecutors related directly to Enron transactions (Arthur Andersen's conviction, while related to Enron, did not involve the company's business directly). It is uncommon for an appellate court to grant bail unless there is a significant question regarding the propriety of the conviction, especially after the oral argument has taken place. Two other defendants, former Enron vice president Daniel Boyle and former Merrill Lynch executive James Brown, who received the longest prison terms, have not been released. An AP story (here) discusses the Fifth Circuit's decision. (ph)
Texas Southern University Completes Termination of Its President
Texas Southern University in Houston took the last step to firing its president, Dr. Priscilla Slade, for allegedly charging over $650,000 in personal expenses to the school during her seven-year tenure. The University's board of regents first voted to terminate her in April, and Dr. Slade requested a hearing that she then did not attend. At the hearing on June 8, the regents voted unanimously to terminate her, and her attorney stated that she would not appear at a "charade" but instead would pursue a civil suit. To make matters more complicated for Dr. Slade, her home was searched by investigators from the Harris County prosecutors office, and the Houston Chronicle reports (here) that a grand jury is looking into whether her expenditures violated any state laws. Although Dr. Slade is no longer TSU's president, this battle promises to be messy for all involved. (ph)
June 8, 2006
When the Company Is Your Piggy-Bank
Three former executives of restaurant company Buca Inc. were indicted on fraud charges and two (along with another former officer) were sued by the SEC for their role in looting the company, including having cooperative vendors submit false invoices to cover up their purchases. The SEC filed complaints against Joseph Micatrotto, Buca's former CEO, Greg A. Gadel, its CFO, and Daniel Skrypek, the controller, alleging securities fraud in connection with the secret payments and false records. Micatrotto settled the civil complaint by agreeing to disgorgement of $65,000 and a civil penalty of $500,000 related to over $849,000 in illicit payments, as described in the SEC's Litigation Release (here):
The complaint charges that Micatrotto improperly sought and obtained reimbursement for, among other things, $131,000 in ATM withdrawals; $127,000 in airline tickets submitted for reimbursement multiple times; the entire bill for the groom's dinner at his son's wedding; and other personal expenses, including dog kenneling and the remodeling of his homes in California, Las Vegas and Minneapolis. The complaint further alleges that, since these payments were for personal expenses, not legitimate business expenses, they constituted additional compensation to Micatrotto that should have been reflected in Buca's proxy statements. According to the Commission's complaint, Buca's proxy statements failed to disclose any of these payments as additional compensation to Micatrotto. As a result, Buca's proxy statements for this time period understated Micatrotto's annual compensation by amounts ranging from 27% to 74%.
The Commission's complaint further alleges that Buca's public filings, which Micatrotto reviewed and approved, failed to disclose two related party transactions involving Micatrotto. First, Micatrotto sought reimbursement from Buca for his purchase and renovation of an Italian villa titled in Micatrotto's and his wife's names. Second, Micatrotto deposited into his personal bank account a payment of $65,000 from one of Buca's vendors, even though this payment was intended as a contribution towards one of Buca's corporate conferences.
The SEC complaint against Gadel and Skrypek alleges that, among other things, they "routinely approved Micatrotto's inappropriate requests for reimbursement of a wide variety of personal and non-business expenses resulting in undisclosed compensation to Micatrotto of $849,100. The complaint further alleges that Gadel and Skrypek knew about and failed to ensure disclosure of a series of related party transactions totaling more than $1 million between Buca and an information technology company of which Gadel was a director and shareholder." (Litigation Release here) Neither has settled the SEC action at this point.
Micatrotto was indicted on one count of wire fraud related to the $65,000 payment. Gadel was charged with one count each of mail and wire fraud related to his receipt of approximately $96,000 in undisclosed compensation from Buca, including reimbursements for family vacations and visits to strip clubs -- I assume those expenditures took place at different times, or at least I hope so. A third defendant charged in federal court is John Motschenbacher, another former Buca controller not charged by the SEC in a civil action, who was indicted on two counts of mail fraud for soliciting payments from two Buca vendors for cash and a Chevy Tahoe. A New York Times article (here) states that the three will plead guilty to the charges. Skrypek was charged with theft in state court related to benefits he received through Buca.
Even though executives are fond of speaking in terms of "my company" and "our business," in fact it is not "their" corporation at all. The money belongs to the shareholders, and using it for one's ATM withdrawals and strip club trips hardly meets the requirements for a fiduciary. A Minneapolis Star-Tribune story (here) discusses the criminal charges.
What Happens When the Donation Is Made With Money Obtained by Fraud
Former New York University undergraduate Hakan Yalincak entered a guilty plea to bank and wire fraud charges related to a scheme to float worthless multimillion dollar checks between banks in Connecticut, New York, and Switzerland. Yalincak and his mother were indicted after it came to light that his purported hedge fund was non-existent and he was not a member of a wealthy Turkish family. According to a press release (here) issued by the U.S. Attorney's Office for the District of Connecticut at the time of his indictment in May 2005:
[O]n March 14, 2005, YALINCAK sent two counterfeit checks totaling $17,748,000, purportedly from his business account at Bank of New York, to his account in a bank in Switzerland, UBS Zurich AG. The checks, which appeared to be official Bank of New York checks, were marked “certified funds.” On March 23, YALINCAK deposited a counterfeit J.P. Morgan Chase check in the amount of $25,000,000 into that same business account at the Greenwich branch of Bank of New York. The day before depositing the counterfeit $25,000,000 check, YALINCAK instructed UBS Zurich AG to transfer $2,500,000 to a second business account at Bank of New York that he controlled. UBS Zurich AG transferred the funds as instructed. On March 24, YALINCAK attempted to withdraw $1,700,000 from the business account into which the $2,500,000 had been deposited by UBS Zurich AG. By that time, however, Bank of New York had determined that the $25,000,000 check was counterfeit and froze all accounts on which YALINCAK was a signatory.
The government alleges that investors in Yalincak's bogus fund lost over $7 million, although he disputes the amount of the loss, and that he used the money to purchase a Porsche, Tiffany diamond, and, somewhat incongruously, made a $1.25 million donation to NYU.
An AP article (here) states that the school plans to return the donation, which was the first payment on a $21 million pledge by Yalincak's family, once it determines who the money should be given to. The article also notes that an NYU development director was used by Yalincak to speak with two investors to verify the gift and pledge, part of his scheme to make it appear that he and his family had a significant net worth. The explains why the money was given to the school, which is not the usual modus operandi in a fraud scheme Yalincak's mother has not entered into a plea agreement with the government and is scheduled to go to trial. (ph)
Latest Telephone Scam: Selling Someone Else's VOIP Calls
I won't pretend that I have any more than the faintest idea how Voice Over Internet Protocol (VOIP) telephone service works, or why Vonage's IPO has done so poorly. But anything that involves the internet as a key component means that it is possible to engage in fraudulent conduct. The U.S. Attorney's Office for the District of New Jersey arrested the owner of two Miami-based companies on a criminal complaint (here) charging wire and computer fraud for selling deep-discounted VOIP calling plans to businesses by having a hacker route the calls through another company that had to pay the freight for over 500,000 calls made through its network. A press release (here) issued by the USAO states:
A Miami man who purported to be a legitimate wholesaler of Internet-based phone services was arrested today for allegedly running a sophisticated fraud, by secretly hacking into the computer networks of unsuspecting Voice Over Internet Protocol (VOIP) telephone service providers, including one Newark-based company, to route his customers’ calls . . .
Through his scheme, defendant Edwin Andres Pena, is alleged to have sold more than 10 million minutes of Internet phone service to telecom businesses at deeply discounted rates. The victimized Newark-based company, which transmits VOIP services for other telecom businesses, was billed for more than 500,000 unauthorized telephone calls routed through its calling network that were “sold” to the defendant’s unwitting customers at those deeply discounted rates, according to a criminal Complaint unsealed with Pena’s arrest . . .
As a result of not having to pay the Newark-based company or other actual VOIP providers, revenues for Pena’s telecom companies – Fortes Telecom, Inc. and Miami Tech & Consulting, Inc. – were virtually all profit. The Complaint states that law enforcement was able to identify more than $1 million he received from his telecom business customers that were directed into various bank accounts connected to Pena.
To disguise the money obtained from the hacking scheme, Pena purchased real estate, new cars, and a 40-foot motor boat, and put all of that property except for one car in the name of another individual identified in the complaint only as A.G.
A separate criminal complaint (here) was filed against Robert Moore for his role as the computer hacker who obtained access to the network of another provider that permitted Pena to sell the VOIP plans without having to pay for the calls. (ph)
Adoption Fraud -- The Worst Kind of Scam
The U.S. Attorney's Office for the Northern District of Texas announced the indictment of Tawana Howard on eight counts of mail and wire fraud related to defrauding three different families that she led to believe would be adopting her unborn child. According to a press release (here) from the USAO:
According to the indictment, from July to December 2004, Tawana Lynn Howard used materially false and fraudulent representations to solicit money from families and adoption agencies. During this time frame, Howard contacted Adoption Ad Network, Family to Family Adoptions, Inc., and Abby’s One True Gift Adoptions, Inc. to assist her in locating a family to adopt her unborn child and each of these three agencies found a family that agreed to adopt Howard’s child. At no time did Howard inform any of the agencies or families that she was involved with any other entity in the adoption of her unborn child.
One family retained Care Adoption, a Texas child placement agency to coordinate their adoption of Howard’s child. Another family retained Family to Family Adoptions to coordinate their adoption of Howard’s child and the third family retained Little Flower Adoptions, also a Texas child placement agency, to coordinate their adoption of Howard’s child. Howard falsely and fraudulently represented that she was not working with any other adoption agencies or prospective adoptive parents. Howard also knew that it was illegal to accept money from one agency while working with another agency, yet, during this time period of approximately six months, she obtained approximately $6,618.85 from various adoption agencies for her living expenses. The total loss sustained by the victims, which includes attorneys’ fees, administrative fees, and travel expenses, totaled $34,678.25. In November and December 2004, Howard informed the three families and the respective adoption agencies that she no longer wished to place her child for adoption.
For the families, the monetary loss pales in comparison to losing the opportunity to adopt a child each believed would become part of their family, and the time wasted in the fruitless process can never be reclaimed. (ph)
June 7, 2006
Co-blogger Peter Henning has a wonderful Enron recap here on law.com. He focuses on the fact that the defendants took the witness stand and testified. He states, "[t]he defendants undermined their own defense when they testified, however, because they made the case into one about their credibility and not the business.
National League Pitcher's Home Searched in Steroid Investigation
The Balco (Bay Area Laboratory Cooperative) investigation into steroid use by athletes took a new turn when agents searched the home of Arizona Diamondbacks pitcher Jason Grimsley, who has bounced around the major leagues since 1989 (career statistics here). An AP story (here) states that thirteen federal agents searched the home for "any and all records showing contact or relationship with any and all amateur or professional athletes, athletic coaches or athletic trainers" regarding steroid use. Grimsley purportedly had been cooperating with investigators until April 2006, which is around the time when Baseball Commissioner Bud Selig appointed former Senator George Mitchell to conduct an internal investigation of steroid use in baseball. That investigation began after the publication of a book about steroid use by Barry Bonds, who is being investigated for possible perjury before a grand jury in San Francisco in 2003 that was looking into Balco. The affidavit supporting the search warrant application apparently contains the names of other players, although they have been blacked out at this point.
It is not clear what documents the government thinks Grimsley would have at his home, and agents were there for approximately six hours. What is almost inevitable is that the names of other players believed to have used steroids will leak out, and the investigation may involve another round of grand jury testimony involving a new set of athletes. In 2003, major league players Jason Giambi and Gary Sheffield testified before the Balco grand jury in addition to Bonds. The more immediate impact of the search at Grimsley's home was that shortly after it happened the D'backs lost to the Phillies, 10-1. (ph)
June 6, 2006
What to Say When Arrested
The New York Times here discusses the arrest of a Japanese businessman. Arrested for allegedly participating in insider trading, the arrestee in Japan appears to take a different position than would be taken if this arrest were in the United States.
In the US, the individual's attorney would likely tell the accused to avoid making any comments, especially to the press. This makes certain that statements are not used against the defendant when he or she goes to trial. In the rare case that a statement is made, it is scripted to send a message that will assist in the case.
But a Japanese businessman, even before the issuing of the indictment, publicly admitted that he had "broken the law." (see here) Even though facing three years in prison if convicted, he openly "apologize[d] for the violation."
If the sentences in the United States were reasonable, as opposed to white collar offenders now being subject to what can amount to life sentences, might more individuals be amenable to coming forward and entering pleas? Might this shaming suffice to deter future criminality? Would this provide more efficiency in that we would not have to spend the astronomical costs for a trial? Should our studies go beyond learning the Japanese business model, and include a study of how shaming can promote business compliance.
Wrestling With Fraud?
Business Week (AP) reports here on the indictment of a "former licensing agent for World Wrestling Entertainment, Inc." The charges allege kickbacks on licensing of merchandise.
Neal Sonnett to Chair New ABA Task Force on Separation of Powers
American Bar Association President Michael Greco announced today the formation of a Task Force on Presidential Signing Statements and the Separation of Powers Doctrine. The news release here states that the task force will "examine constitutional and legal issues raised by presidents of the United States attaching legal interpretations to federal legislation they sign." It also states that, "[t]he task force will study thoroughly the implications of presidential signing statements for the constitutional doctrine of separation of powers and interpretation of laws." The work of this task force could have implications in the prosecution of white collar crime, most likely in the area of extraterritorial prosecutions.
June 5, 2006
Non-Prosecution Agreement in Case Related to Refco
The United States Attorney for the Southern District of New York (Michael Garcia), announced today that there will be no prosecution of BAWAG or the ÖGB. This comes from an agreement of the parent company and government that includes a forfeiture of $337.5 million. The agreement calls for the funds to be distributed to victims of the alleged fraud.
This appears to be a win-win situation. Victims will recover funds, the government will not incur extraordinary additional expenses for a prosecution, and although the defense will be paying many dollars, the result beats a criminal prosecution.
The SEC release on this settlement here states that the US Attorney's "Office also announced that BAWAG would pay at least $675 million (including the forfeited $337.5 million) to settle its non-prosecution agreement and related claims against it by the Refco bankruptcy estate."
In the government press release here (Download bawag20nonprosecution20agreement20pr.pdf) it states:
"The decision to enter into the non-prosecution agreement was based on, among other things, the following factors: BAWAG’s full cooperation with this Office’s investigation; the commitment by BAWAG and the ÖGB to continue that cooperation in the future; BAWAG’s and the ÖGB’s commitment to pay substantial restitution to the victims of the Refco fraud harmed by their conduct; BAWAG’s and the ÖGB’s agreement to settle related claims brought by the Refco bankruptcy estate, providing further restitution to victims of the Refco fraud; and the potential harm to BAWAG’s depositors and innocent employees that would likely result from a criminal prosecution. After new management took over control of BAWAG’s affairs in January 2006, the Bank took steps to investigate its involvement with the Refco fraud and disclosed to the public in Austria the deficiencies in its own balance sheet that prior management and the ÖGB had been hiding for years; these steps by the Bank were relevant to this Office’s decision not to prosecute BAWAG for its conduct in the Refco fraud. In view of these factors, Mr. GARCIA stated that a criminal prosecution of BAWAG and the ÖGB is not necessary to serve the public interest."
Abramoff Related Matters
The Washington Times (AP) reports here that David Safavian, a former chief of staff in the GSA’s (General Services Administration) Office of Inspector General, admitted to some conduct but denied that he tried to conceal his conduct from government investigators. He is charged with making false statements and obstructing an investigation by the GSA’s (General Services Administration) Office of Inspector General. (see post here). The relationship of this case to lobbyist Jack Abramoff is that Safavian is alleged to have given "'nonpublic information" about federal properties to lobbyist Jack Abramoff."
Both false statements and obstruction of justice, the crimes alleged here, are statutes often used in white collar cases. They offer prosecutors shortcuts to obtain convictions without having to investigate and prosecute the underlying conduct. They are also offenses that juries can easily understand. Whether that means an understanding to return a guilty or not-guilty verdict remains to be seen.
Supreme Court Imposes Stricter Proximate Cause Requirement for Civil RICO
The Supreme Court reemphasized that private RICO claims must meet a fairly high standard of proximate causation if they will survive a motion to dismiss in its decision in Anza v. Ideal Steel (here). The civil cause of action granted under RICO is unique in federal law by providing private parties a means to recover treble damages plus attorney's fees for a claim based on conduct by defendants that can be shown to violate a variety of federal criminal laws, most importantly the mail and wire fraud statutes. The "catch-all" provision of RICO, Sec. 1962(c), arguably allows almost every business dispute to be turned into a RICO claim because the plaintiff only needs to show that the defendants conducted or participated in the conduct of the enterprise through a pattern of racketeering activity. Because the pattern requirement is fairly minimal -- only two illegal acts, one of which is within the past ten years -- a creative lawyer can make most contractual claims into possible RICO actions because there will be mailings, faxes, e-mails, and the like in most of them that can support a complaint.
A key limitation on the civil claims is Sec. 1964(c), which requires that the plaintiff be "injured in his business or property by reason of a violation of" RICO, which the Court has interpreted as requiring proof of proximate cause. Anza involves a fairly straightforward scheme by the defendant, National Steel (owned by the Anzas), in which it did not charge customers who paid cash the applicable (and purportedly exorbitant) New York City and State sales taxes on purchases, a rather substantial discount for purchasers. The plaintiff, Ideal Steel, was a competitor of National, and filed the RICO suit alleging that the Anzas and National engaged in mail and wire fraud by not paying the requisite taxes, which resulted in an injury to the plaintiff's business. Simple enough, but the Supreme Court rejected the claim, holding that the plaintiffs were not harmed by the racketeering activity directly, applying its earlier decision in Holmes v. SIPC. The Court stated in Anza:
The proper referent of the proximate-cause analysis is an alleged practice of conducting National’s business through a pattern of defrauding the State. To be sure, Ideal asserts it suffered its own harms when the Anzas failed to charge customers for the applicable sales tax. The cause of Ideal’s asserted harms, however, is a set of actions (offering lower prices) entirely distinct from the alleged RICO violation (defrauding the State).
The Court also considered who was better able to vindicate their interests, the state which was directly affected by the harm and a competitor only indirectly harmed. The Court noted that RICO is not the proper vehicle protecting the indirect victim:
Ideal accuses the Anzas of defrauding the State of New York out of a substantial amount of money. If the allegations are true, the State can be expected to pursue appropriate remedies. The adjudication of the State’s claims, moreover, would be relatively straightforward; while it may be difficult to determine facts such as the number of sales Ideal lost due to National’s tax practices, it is considerably easier to make the initial calculation of how much tax revenue the Anzas withheld from the State. There is no need to broaden the universe of actionable harms to permit RICO suits by parties who have been injured only indirectly.
The Court did not consider the application of the proximate cause analysis to a Sec. 1962(a) claim, which requires proof of different elements than Sec. 1962(c), and remanded the case to the Second Circuit to consider that claim.
Interestingly, Justice Thomas dissented from the majority's proximate cause analysis, arguing that Ideal Steel also was directly harmed in addition to the state, and that "[t]he Court’s reliance on the difficulty of ascertaining the amount of Ideal’s damages caused by petitioners’ unlawful acts to label those damages indirect is misguided." Justice Breyer offered a slightly different analysis of causation, dissenting from the majority's analysis although not the final result (I think). He stated:
In my view, the “antitrust” nature of the treble-damage provision’s source, taken together with both RICO’s basic objectives and important administrative concerns, implies that a cause is “indirect,” i.e., it is not a “proximate cause,” if the causal chain from forbidden act to the injury caused a competitor proceeds through a legitimate business’s ordinary competitive activity. To use a physical metaphor, ordinary competitive actions undertaken by the defendant competitor cut the direct causal link between the plaintiff competitor’s injuries and the forbidden acts.
The Court's analysis in Anza now imposes a higher pleading burden on plaintiffs to establish at least the rough outlines of a direct link between the racketeering activity and the injury to their business. Anza is typical of most RICO cases in that the decision came at a preliminary stage, either in a Rule 12(b)(6) motion to dismiss for failure to state a claim or a Rule 56 summary judgment, and not after a trial. Therefore, all the plaintiff's allegations here are accepted as true, and the decision means that there is another basis to dismiss civil RICO claims before trial on the basis of the failure to plead adequately the proximate cause element. The premium for both sides is on the pleadings in the case and the sufficiency of the evidence at summary judgment, because if the plaintiff surmounts those two hurdles then the pressure on the defendant to settle will be enormous because of the possibility of treble damages. The Court's decision does not affect criminal RICO actions, such as those filed against class action firm Milberg Weiss or former Hollinger International CEO Lord Conrad Black. (ph)
June 4, 2006
The Cost of a White Collar Crime Trial
The Wall Street Journal reports here that Dennis Kozlowski, former CEO of Tyco, has filed an action concerning whether there is insurance coverage for his legal bills. What is perhaps the most telling aspect here is that Kozlowski's claim is for "nearly $17.8 million."
Seeing this amount, it is no wonder that the government secures so many plea agreements. How can mid and lower level executives, who are probably not eligible for a public defender, provide ample representation to defend themselves against government cases? And in seeing the number of individuals who plead guilty and cooperate with the government, one has to wonder whether their anxiousness to provide "good" testimony for the government is motivated by their inability to properly defend themselves because they cannot afford the cost of the litigation.
White collar cases probably cost more than the typical street crime cases in federal court. For example, as seen in recent high profile white collar cases, the trials tend to be fairly lengthy (thus increased attorney fees). The trials often require experts such as forensic accountants and individuals able to dissect the business documents of the company (thus increased fees). And the attorneys handling the cases may be conflicted out of other cases associated with the investigation (thus increased attorney fees). One has to also wonder what amounts it cost the government to prosecute these cases, and is it worth the amount being spent.
(esp) (with thanks to Professor Jerold Israel for a recent conversation that motivated this blog entry)