Saturday, July 22, 2006
The so-called NatWest Three, British investment bankers David Bermingham, Giles Darby and Gary Mulgrew, will be residing in or around the Houston area while they await trial on fraud charges related to an Enron deal in which they are accused of defrauding their employer out of a $7.3 million gain. The extradition of the three U.K. citizens caused a major row in Parliament over the one-sided application of the treaty that only Britain has ratified but not the U.S. After their extradition, the three defendants asked to be allowed to return to their homes, but U.S. Magistrate Judge Stephen Smith denied the request and ordered that they live apart from one another in the Southern District of Texas and that they not leave the United States. In addition, the defendants must post a bond of $1 million, and cannot speak with one another without their attorneys present, an interesting condition that I don't recall seeing before in a white collar crime case. Bermingham is quoted in a Houston Chronicle story (here) stating after the Magistrate Judge's bail decision: "This is going to be tough. We are tough people, but I'm not underestimating the difficulties we face. It might be regarded as a form of psychological torture, if you wish." I've heard that Houston in August is not very pleasant, but I didn't know it amounted to torture, a conclusion that the Chamber of Commerce might disagree with -- then again, maybe the unavailability of fine British fare might be considered a reprieve. (ph)
This one isn't exactly a white collar crime, but it involves a person running for elected office and has a rather appealing bizarreness to it. Mark Albertini is running for the Republican nomination for Governor in Tennessee, and was arrested on the evening of July 20 for public intoxication. Early the next morning, Albertini entered a plea of no contest to the charge and was released. He promptly proclaimed his innocence, stating that he only entered the plea because he did not want to plead not guilty and go through the ensuing legal proceeding. Usually a plea of "no contest" is neither an admission nor denial of guilt -- the equivalent of "whatever" in teen-speak -- but it's uncommon to enter such a plea two weeks before a primary election in the apparent hope that making the case go away quickly will look good. Albertini's explanation, according to an article in The Tennessean (here), is: "I don't think I was intoxicated in public. I only had a glass of red wine at lunch . . . This was a good four hours afterward." Apparently, Albertini was invited to leave a candidates function and was passing out campaign literature when arrested. Albertini has said he will drop out of the race "[i]f I get a slew of e-mails saying I should, I'll honor that." Let's hope the e-mail address does not become known to those who perpetuate Nigerian 419 scams, I'd hate to think what might happen. (ph)
Friday, July 21, 2006
Former Brocade Communications Systems, Inc. CEO Gregory Reyes and Stephanie Jensen, former VP for human resources at the company, were charged in a criminal complaint with securities fraud in the first prosecution arising from the many stock options-timing investigations. The SEC filed a civil securities fraud action (complaint here) against Reyes, Jensen, and Antonio Canova, Brocade's former CFO, who was accused of not reporting the backdating of options to the company's board or audit committee. A press release issued by the U.S. Attorney's Office for the Northern District of California (here) describing the alleged securities fraud:
According to the criminal complaint and the Commission’s civil complaint, Reyes, 43, of Saratoga, Calif., and Jensen, 48, of Los Altos, Calif., regularly caused Brocade to grant “in-the-money” options (i.e., the exercise price is below the stock’s market price on the day of grant, giving the recipient an immediate paper gain) to both new and current employees between 2000 and 2004, but backdated documents to make it appear that the options were “at-the-money” (i.e., the exercise price is the same as the stock’s market price on the day of the grant) when granted, thus concealing millions of dollars in expenses from investors. Under well-settled accounting principles applicable at the time, options granted “at-the-money” did not need to be expensed. In contrast, options granted “in-the-money” needed to be recorded as a compensation expense.
The separate criminal and civil complaints allege that Reyes repeatedly used hindsight to select a date with a lower stock price from the recent past as the supposed option grant date. To facilitate the scheme, Jensen created, or directed others to create, paperwork making it appear that the options had been granted on the earlier date. In some instances, employment offer letters and compensation committee minutes were falsified and purported to document option grants to employees before they had even been hired by the company. As a result of this practice, Brocade was able to give employees “in-the-money” stock options without having to recognize compensation expenses as required by accounting rules. When these stock option abuses surfaced, Brocade was required to restate and revise its financial statements for fiscal years 1999 through 2004.
It's not clear why prosecutors chose to proceed by criminal complaint rather than seeking a grand jury indictment. Usually, criminal complaints are used in cases in which a defendant will plead guilty to the charge, so it may be that Jensen has a plea agreement and Reyes will be indicted in the near future. It also could be that there was a looming statute of limitations problem for some of the options grants so charges had to be filed immediately. If neither defendant agrees to a plea, then we should expect to see a grand jury return an indictment in the next few weeks that may well contain more charges, perhaps including books-and-records accusations.
The Wall Street Journal Law Blog (here) quotes Reyes's attorney, Richard Marmaro, stating: "Greg Reyes is innocent, and if necessary, we will prove his innocence in a court of law. Financial gain is always the motive in securities fraud cases, and here there was none. There is not even an allegation of self-enrichment, or self-dealing. Nor is there any evidence of an intent to misstate the financial statements of the company." While the charges allege numerous instances of options grants involving backdated documents, it remains unclear what constitutes the securities fraud. As Marmaro asserts, Reyes did not gain from the transactions, and while Brocade certainly lost quite a bit of money because of the tax consequences of the backdating practices, it is not clear what constituted the fraudulent scheme when the employees received the proper amount of options while their additional paper gains were not "taken" from the company. To the extent that fraud is a type of larceny, it is not easy to see the company as the victim of a deception, and Reyes did not gain from the transactions, at least not directly. Not all lies are frauds, and the government's case may be a difficult one, at least on a securities fraud charge. (ph)
[Note: The following is a corrected post in light of updated media reports] The investigation of San Francisco Giants slugger Barry Bonds will shift to a new grand jury so that prosecutors can continue to determine whether to indict him on perjury and tax evasion charges. The grand jury panel that had been hearing evidence against Bonds related to his 2003 grand jury testimony as part of the investigation of steroids distribution by Balco (Bay Area Laboratory Cooperative) expired on July 20 at the end of its 18-month term of service. By empaneling a new grand jury, prosecutors will not have to race any deadlines in deciding whether to seek charges. I suspect prosecutors decided to hold off for now rather than risk running afoul of the adage "act in haste, repent in leisure." Bonds is unlikely to even consider a plea offer, and the statute of limitations is not a concern, so it is better to wait until the case is clear -- one way or the other -- than to rush something through a grand jury on its last day and then have to clear up the mess later. That is especially the case with tax counts, which require approval from the Tax Division in Washington, D.C.
The downside to shifting to a new grand jury is that evidence heard by the prior panel must be presented again to the new set of grand juros, which includes reading transcripts to them, a process that can be deadly dull. A new grand jury allows prosecutors to subpoena Bonds' former personal trainer, Greg Anderson, to appear once again. In June, Anderson refused to testify and the district court ordered him to jail on July 6 for civil contempt, but he only served the two weeks until the prior grand jury's term expired. His time on the outside may be fairly short, however, depending on when prosecutors subpoena him to testify, which most likely will trigger another refusal to testify and another trip to jail.
While Bonds has dodged an indictment at this time, and probably for the next few months, the U.S. Attorney's Office stated that its investigation has not ended. Pulling out a well-worn aphorism, an AP story (here) quotes Michael Rains, an attorney for Bonds, as saying, ""They don't even have enough to indict a ham sandwich, much less Barry Bonds." I'm not sure what a ham sandwich could do that would trigger federal charges, but it's probably not perjury or tax evasion. (ph)
Four St. Louis County deputy sheriffs were indicted on corruption charges for taking cash payments from moving companies to schedule evictions. The four sheriffs took money in exchange for recommending movers to landlords and owners who had obtained eviction orders that were subject to enforcement by the Sheriff's Office. A press release (here) issued by the U.S. Attorney's Office for the Western District of Missouri states:
The indictments allege that Curley Hines, David Rodriguez, Marcus Lipe, and Richard Robinson accepted cash payments from representatives of several St. Louis area commercial moving companies to facilitate evictions. Deputy sheriffs have discretion as to the scheduling of evictions assigned to them. They decide the number of eviction orders to be enforced in one day and which order the evictions will be done. As part of the ongoing practice of making cash payments to the deputies, the commercial movers also sought the advantage of being recommended by a deputy sheriff to a landlord or property owner who had obtained a court order of eviction but had not hired a moving company. According to the indictments, these four deputies unlawfully received cash payments totaling thousands of dollars in time frames from 2003 through 2006.
Due to the conduct of these deputies, a commercial mover which stopped making cash payments risked losing a competitive advantage to other movers who complied with the practice. The commercial movers made the payments in order to remain competitive and, if possible, gain an edge on the competing businesses.
Thursday, July 20, 2006
The SEC's role policing insider trading continued with a complaint filed in federal court in San Diego freezing the accounts of unknown call option purchasers of Petco before the leveraged buy-out announced on July 14 at $29 per share, a nearly 50% premium over its market price. The SEC complaint (currently unavailable) alleges that purchasers through accounts in the United Kingdom and Switzerland accounted for more than 70% of the trading volume in July $22.50 and August $20 call options, and the purchases began at the end of June. The July $22.50 options are particularly aggressive because they would expire in less than a month, were well out of the money, and the buying was into a down market at the time. A Bloomberg story (here) notes that the district court issued a temporary asset freeze to keep $862,000 in proceeds from leaving the country, where it likely would have disappeared. This is the second case in a little over a month involving call options purchased by overseas traders, similar to the Maverick Tube case involving purchasers in Argentina and Uruguay (see earlier post here). Like all unknown purchaser cases, the SEC will have to link the purchasers to the inside information about the deal, so stay tuned for further developments. (ph)
A summary discussion of the sentencing of former Impath Inc. President, Richard Adelson, appears here, in a post that noted how white collar offenders in the fraud/theft category were receiving increased sentences in recent years. As noted in that post:
"Are white collar offenders getting the biggest breaks in this post-Booker world? Some may think this case and other "variances" in sentencing indicate that white collar offenders are getting the big "breaks." But what is quantified also is that white collar offenders, at least those in the fraud/theft category have had increased sentences in recent years. According to the Report on the Impact of United States v. Booker on Federal Sentencing, United States Sentencing Commission 71 (March 2006) the average sentence pre-Protect Act for the category theft and fraud under United States Sentencing Guideline 2B1.1 was sixteen months. This increased to twenty months post-Protect Act and twenty-three months post-Booker. Report on the Impact of United States v. Booker on Federal Sentencing, United States Sentencing Commission 71 (March 2006). The report attributes two factors to this increase: First, the fact that "statutory and guideline penalties increased for many fraud offenses as a result of the Commission’s Economic Crime Package of 2001, the 2002 Sarbanes-Oxley Act and other recent legislation." And second the increased number of prosecutions (although the Trac Report may indicate a somewhat different story here). Perhaps another factor may be inflation, which will increase the amount of loss and thus the sentence issued by a court."
The sentencing memorandum in the Adelson case, now available, provides additional thoughts on the rationale by the court (Hon. Jed Rakoff), in his decision, to reduce the sentence below the guidelines. The Hon. Rakoff speaks to the incredibly low sentence (3 months) provided to a co-defendant, a sentence that the Government failed to appeal. He notes that those "who actually designed the fraud" received substantially reduced sentences through cooperation agreements. Some other highlights from this decision:
- "But, as the Government conceded, Adelson was not the originator of the fraud, and, as the jury found in effect. Adelson did not participate in the fraudulent conspiracy until its final months."
- "What this exposed, more broadly, was the utter travesty of justice that sometimes results from the guidelines’ fetish with abstract arithmetic, as well as the harm that guideline calculations can visit on human beings if not cabined by common sense."
- "Numerous colleagues at Impath who personally suffered from the fraud here perpetrated nevertheless also wrote the Court on Adelson’s behalf, describing the defendant’s commitment to Impath and to its mission to improve the lives of cancer patients."
- "[T]he evidence showed that Adelson was sucked into the fraud not because he sought to inflate the company’s earnings, but because, as President of the company, he feared the effects of exposing what he had belatedly learned was the substantial fraud perpetrated by others."
- "In the end, the Court, confronted with an absurd guideline result that not even the Government seriously defended, and with inapt analogies to other cases and defendants, chose to focus its primary attention on the non-guidelines factors set forth in § 3553(a), including both those of general applicability and those that had special relevance to Adelson’s particular circumstances."
The court's decision provides a thoughtful and detailed breakdown and computation of the sentence. See here -
Wednesday, July 19, 2006
Katherine Harris achieved a measure of fame in 2000 as Florida's Secretary of State from her involvement in the vote counting there, and then moved on to the House of Representatives a couple years later. Her campaign for the U.S. Senate has bogged down over various issues, and now the whiff of scandal is hitting. A Tampa Tribune story (here) discusses an investigation of campaign contributions to Harris from Mitchell Wade, who entered a guilty plea related to disguising corporate campaign contributions to former California Representative Randy "Duke" Cunningham. The Cunningham case is just one of a variety of corruption investigations embroiling Representatives from, among others, Ohio and Louisiana, in addition to staff and Bush administration officials. Federal prosecutors are seeking to determine whether Wade sought to have Harris earmark defense funds for his company in exchange for contributions to her campaign, a key issue in the Cunningham case that resulted in the Congressman being sentenced to an eight-year prison term for accepting bribes. Former Harris campaign director Ed Rollins, well known for his work for various Republican candidates, said that he was interviewed by the Department of Justice and that from the questioning Harris appears to be a focus of this phase of the investigation. This is not a good time to have a candidate's name in headlines linking her to corruption. (ph)
A Wall Street Journal article (here and Law Blog entry here with access to the article) discusses the response of major law firms to the current spate of SEC and grand jury investigations of companies related to the timing of their options awards. Not surprisingly, the firms have viewed this as a marketing opportunity, informing current and potential clients that the best strategy is, of course, to consult with competent counsel. For example, national law firm Latham & Watkins is touting its "Options Timing Working Group" that comes complete with a page on the firm's website (here) and offers missives written by Jim Barrall in The Executive Comp Insider that tout, again not surprisingly, the need to obtain legal counsel. The burgeoning investigations have already touched over fifty companies, and that's just the ones publicly disclosing pending investigations. The number of companies conducting their own internal reviews is much higher than that, and we will see more disclosures of problems in the coming months. With all the lawyers getting involved in these cases, the interesting question will be whether firms are conflicted out of certain representations, either because they were involved in the drafting of the stock option agreements or their conduct of an internal investigation means they cannot defend individual officers or directors in subsequent cases. As Peter Lattman notes in the WSJ article, this is another instances of lawyer full employment -- not that there's anything wrong with that. (ph)
Medical device maker Medtronic Inc. settled a civil action with the Department of Justice by agreeing to pay $40 million and entering into a corporate integrity agreement for alleged kickbacks paid to spinal surgeons to use devices manufactured by its Medtronic Sofamor Danek division. According to a DoJ press release (here), "The government had alleged that, between 1998 and 2003, Medtronic paid kickbacks in a number of forms, including sham consulting agreements, sham royalty agreements and lavish trips to desirable locations. The Justice Department contended that these kickbacks violated the Anti-Kickback Statute and the False Claims Act." Among the alleged sham consulting agreements included a $400,000 payment to one doctor for eight days of consulting -- not bad work if you can get it. A St. Paul Pioneer Press article (here) notes, however, that the settlement is on the low side when compared with payments made by some of the drug companies, and could indicate that the government's case was not as strong. (ph)
Tuesday, July 18, 2006
Monday, July 17, 2006
The DOJ is cracking down on online gambling as seen by the unsealing of an indictment that had been issued by a federal grand jury in the Eastern District of Missouri. The "22-count indictment charg[es] 11 individuals and four corporations on various charges of racketeering, conspiracy and fraud." (see DOJ Press Release here; see also Wall Street Journal here) The Press Release states:
"The indictment alleges that Gary Kaplan started his gambling enterprise via operation of a sportsbook in New York City in the early 1990s. After Kaplan was arrested on New York state gambling charges in May 1993, Kaplan moved his betting operation to Florida and eventually offshore to Costa Rica. According to the indictment, BetonSports.com, the most visible outgrowth of Kaplan’s sports bookmaking enterprise, misleadingly advertised itself as the “World’s Largest Legal and Licensed Sportsbook.” The indictment also alleges that Kaplan failed to pay federal wagering excise taxes on more than $3.3 billion in wagers taken from the United States and seeks forfeiture of $4.5 billion from Kaplan and his co-defendants, as well as various properties.
"The indictment alleges that Gary Kaplan and Norman Steinberg, as the owners and operators of Millennium Sportsbook, Gibraltar Sportsbook, and North American Sports Association, took or caused their employees to take bets from undercover federal agents in St. Louis who used undercover identities to open wagering accounts. The indictment also alleges that Kaplan and Mobile Promotions illegally transported equipment used to place bets and transmit wagering information across state lines and that DME Global Marketing and Fulfillment shipped equipment to Costa Rica from Florida for BetonSports.com."
This indictment raises a host of questions including questions on the criminality of the alleged activities, the appropriate jurisdictional base for prosecution of these alleged activities, and the credibility of witnesses who obtained their evidence via an undercover operation (a jury might be very accepting of undercover evidence when the activities involve drugs or fraud; but will they be as accepting for conduct related to gambling?). For an interesting discussion on whether online gambling should be illegal see the Wall Street Journal discussion here between Rep Jim Leach (Iowa) and David Carruthers, Chief Executive of BetOnSports Plc (both Carruthers and BetOnSports were charged in this indictment). It is interesting to see that this case comes out of the Eastern District of Missouri. With alleged online gambling, could other jurisdictions in the United States have investigated and prosecuted this case? Is the selection of this venue another example of prosecutorial discretion?
The U.S. Attorneys Office in the Southern District of New York announced in a press release here, that it reached a civil settlement with Mario Gabelli for $130 million. This civil case emanates from a whistleblower. According to the government press release:
"the complaint alleges various friends and relatives of Mr. Gabelli were recruited to serve as officers of bogus small or very small businesses that existed only on paper, solely to certify that they met the FCC's eligibility rules. The Complaint alleges that these purported telecommunications entrepreneurs included a former aerobics instructor, the caretaker of Mr. Gabelli's vacation home, a retired professional basketball player, and a relative of Mr. Gabelli who did not know that 'spectrum' was or what 'FCC' stood for."
According to the press release, "neither Mr Gabelli nor any of affiliated entities or individuals admitted any wrongdoing or liability."
According to the Wall Street Journal here, a former Merrill Lynch analyst has plead guilty to insider trading. Prosecutors have been investigating this insider trading ring (see prior post here), an investigation concerning the alleged passing of information to two Goldman Sachs employees. Like so many cases these days, the investigation has international aspects.
Two former employees of Kodak have now plead guilty in a kickback scheme. According to a Press Release here of the U.S. Attorneys Office of the Western District of New York, this is the culmination of a joint postal and FBI investigation. The press release states:
"During the years 1997 through 2000, the inflated contracts awarded to Pro-Mold, Inc. resulted in a total loss to Kodak of $189,174."
Both individuals plead guilty to mail fraud, and are set to be sentenced on September 19th.
(esp)(hat tip to Fraud Update here)
Sunday, July 16, 2006
According to Smoking Gun here, Valerie Plame Wilson and Joesph C. Wilson IV have filed a civil action against Karl Rove, Lewis "Scooter" Libby, Richard Cheney and John Does 1-10. The action is for alleged First and Fifth Amendment Violations, Civil Rights Conspiracy, Failure to Prevent Civil Rights Violations, Public Disclosure of Private Facts, and Civil Conspiracy.
What may prove to be the more complicated aspect of this action is the civil discovery. In civil actions, counsel use interrogatories and depositions to obtain evidence. When there is an ongoing criminal action, as in the case against "Scooter" Libby, defense counsel may be reluctant to turn over information that may eventually find its way into the criminal trial.
National Association of Criminal Defense Lawyers (NACDL) - Conference Call
Topic: Fighting Back Against the Thompson Memo: Can It Be Done? -- The Implications of U.S. v. Stein (KPMG). Includes a Q & A Session.
Date & Time: Friday, July 21, 2006 -- 12:30 p.m. EST
Speakers: Gerald B. Lefcourt & John "Rusty" Wing
Details: See here
ABA Criminal Justice Section - Conference Call
Topic: The panel will discuss recent developments in the area of criminal tax enforcement, including the renewed attention on the conduct of tax professionals, evidenced in part by the case of US v. Stein (the KPMG case), enhanced IRS and DOJ enforcement efforts in the tax shelter area and in criminal tax enforcement generally, and emerging trends in matters concerning parallel proceedings in tax cases and the use of conspiracy charges.
Date & Time: July 24,2006 3:00 -4:00 P.M.
Speakers: Dana Boente, Cono Namorato, Scott Michel, Justin A. Thornton, Moderator: Tom Zehnle
Details See here