July 29, 2006
Commentary on Ebbers Decision
The Second Circuit ruling upholding the conviction and sentence of Bernard Ebbers is discussed here. As noted, the court states, "[t]wenty-five years is a long sentence for a white collar crime, longer than the sentences routinely imposed by many states for violent crimes, including murder, or other serious crimes such as serial child molestation." The court decides to place the power with the legislature and uphold the sentence. What does this say:
- In some cases money losses may be more important when it comes to determining a sentence, then loss of life.
- The courts will take a hands off approach when determining reasonableness - the bottom line is that the federal sentencing guidelines still rule.
- There is no fear of white collar sentences being overly lenient in a post-Booker world.
- Being a first offender doesn't mean much if the loss is high - the sentence basically ends up placing the convicted defendant in prison for the rest of his life.
- If you decide to take the risk of trial and don't plead guilty and cooperate with the government, you may be spending the rest of your life in prison if the jury convicts you.
The more important questions here are: - Is this what Congress wanted? Have we gone overboard in sentencing white collar offenders? Have we failed to consider the potential future harmfulness in sentencing white collar offenders? Do we really need these extreme sentences to deter others who may be contemplating these crimes? Should being a first offender mean something when it comes to the sentence imposed? And yes - should a white collar offender who commits an economic crime be receiving a greater sentence than someone who commits a murder?
Ebbers Conviction Upheld
The Second Circuit Court of Appeals upheld the conviction of Bernard J. Ebbers, the former CEO of WorldCom. Ebbers argued four basic issues on appeal: defense witness immunity, the giving of a conscious avoidance instruction, the failure to require to prove violations of GAAP, and the sentence.
The court rules that "[t]he government is under no obligation to grant use immunity to witnesses the defense designates as potentially helpful to its cause but who invoke the Fifth Amendment if not immunized." Although the court recognizes that prosecutor's have a "powerful tool," it will take the defendant showing "that the government has used immunity in a discriminatory way" and "that the evidence to be given by an immunized witness 'will be material, exculpatory and not cumulative and is not obtainable from any other source.'" The court places the burden on the defendant to show that "the non-immunized witness's testimony would materially alter the total mix of evidence before the jury." The court also held it was not error to deny a missing witness instruction here.
The mens rea required to be proved by the government would not be undermined by the giving of a conscious avoidance instruction or the failure to require to prove violations of GAAP.
Finally the court upheld the 25 year jail sentence Ebbers received. The court upheld the loss calculation, found that there was a basis for the sentencing disparity between Ebbers sentence and CFO Scott Sullivan. The court admits that the sentence is "harsh but not unreasonable."
Although the decision does specify that Ebbers was a Category I with respect to criminal history, the court does not dwell on the fact that Ebbers is a first offender who in a white collar case is receiving a 25 year sentence. The court does state, "[t]wenty-five years is a long sentence for a white collar crime, longer than the sentences routinely imposed by many states for violent crimes, including murder, or other serious crimes such as serial child molestation." Basically it comes down to - this is what Congress wants, this is what Congress gets. The court finds that the sentence for Ebbers was not unreasonable.
Decision can be found via Wall Street Jrl website here.
Check out Analysis of Harlan J. Protass - Second Circuit Sentencing Blog here - where he states -"Is 'reasonableness' an objective or subjective standard? Which should it be?"
Settlements With DOJ
Are settlements with DOJ tax deductible? According to Paul Caron, on the tax prof blog, Boeing has decided not to deduct. (see here). Some, however, are not too happy with DOJ, for not considering the tax implications when reaching the settlement. (see here). As stated by Senator Grassley in a press release:
"It’s good Boeing won’t seek a tax deduction for its $615 million settlement. That’s the right decision. However, Boeing’s lawyers believed the settlement was tax deductible. This tells me Department of Justice lawyers failed to take into account the settlement’s tax treatment and allowed Boeing’s lawyers to effectively negotiate a 35 percent discount. Any junior lawyer knows to look at a settlement’s tax treatment, yet Justice lawyers were asleep at the switch. That’s inexcusable. The Justice Department has to pay attention to the tax treatment in these big settlements."
July 27, 2006
30 Year Sentence in White Collar Case
The message to white collar criminal defendants is becoming clear - exercise your right to trial and you face the possibility of what in essence may end up being a life sentence. This week in Miami a banker received a 30 year sentence for his alleged role in a bank fraud. (see Miami Herald here) According to the Miami Herald, Masferrer was found guilty for his role in "masterminding the securities fraud at the defunct Hamilton Bank."
Two co-defendants, however, received sentences of 28 months. (see here) They plead guilty.
Two things are apparent here:
1. Anyone who might have been concerned that sentences in white collar cases would decrease in a post-Booker world can feel pretty secure in this not happening when seeing this sentence.
2.Irrespective of guilt or innocence, there is always a risk if one goes to trial. With sentence differentials like these, it may start coming down to whether the accused is willing to take a risk, as opposed to whether the person believes they are innocent and have a constitutional right to a jury trial.
Addendum - Check out Professor Doug Berman's Sentencing Blog on this sentence and another white collar sentence. (see here)
The "Hot Stock Tip" Scam
In a variation on the misdirected fax scam, the U.S. Attorney for the District of Columbia and the SEC filed criminal and civil fraud charges against three defendants alleging that they left of number of "mistaken" voicemail messages talking about a hot stock and creating the impression the caller had inside information. Much like the faxes utilizing the same approach, and even all those wonderful e-mails from various third-world countries, the lure of easy money can hook gullible investors who believe that money can be made with so little effort. The three defendants, Anna and Roderic Boling, who were married at the time of the scam, and Jeffrey Mills, left hundreds of thousands of messages. According to the SEC Litigation Release (here):
The messages, which were left on telephone voicemail recording machines throughout the country, were designed to make each recipient believe the caller had dialed the number by mistake. Many of the messages were left by a woman calling herself "Debbie" who sounded as if she had misdialed when calling a friend to pass along a hot stock tip . . . The [SEC] complaint alleges that Anna Boling recorded many of the messages over the phone from her Altamonte Springs [Fla.] home while her then husband, Roderic Boling, directed an Augusta, Georgia-based telemarketer to broadcast the messages. The complaint further alleges that Jeffrey Mills, who profited from trading in at least two of the touted stocks, paid Roderic Boling with a blue duffel bag of cash during a trip to a Gulfport, Mississippi casino. During that same trip, Roderic Boling paid the telemarketer with cash taken from that duffel bag.
Court Suppresses Two Statements in KPMG Defendants' Cases
Judge Lewis Kaplan has issued yet another Order in the KPMG defendants case that indicates that government coercion will not be tolerated. In a thoughtful and well-written Order he states:
"Having considered the evidence, the Court is persuaded that the government is responsible for the pressure that KPMG put on its employees. It threatened KPMG with the corporate equivalent of capital punishment. KPMG took the only course open to it. In the words of its chief legal officer, KPMG did everything it could "to be able to say at the right time and with the right audience, we’re in full compliance with the Thompson Memorandum." It exerted substantial pressure on its employees to waive their constitutional rights. (footnote omitted)"
In the conclusion of the 37 page Order the court states:
"In this case, the pressure that was exerted on the Moving Defendants was a product of intentional government action. The government brandished a big stick – it threatened to indict KPMG. And it held out a very large carrot. It offered KPMG the hope of avoiding the fate of Arthur Andersen if KPMG could deliver to the USAO employees who would talk, notwithstanding their constitutional right to remain silent, and strip those employees of economic means of defending themselves. In two instances, that pressure resulted in statements that otherwise would not have been made. In seven, the evidence does not warrant that conclusion. The coerced statements and their fruits must be suppressed.
It is no answer for the government to say that these aspects of the Thompson Memorandum are needed to fight corporate crime. Those responsible should be prosecuted and, if convicted, punished. But the end does not justify the means."
Although the suppression of these two statements may not prove consequential to the government's case, the court is making it very clear that undue coercion on the part of the government will not be tolerated. The fact that the court did not suppress all statements in this case further indicates the thoughtfulness of the decision.
July 26, 2006
Rep. Jefferson's Documents Remain Locked Up
The documents seized from Representative William Jefferson's office in the Rayburn House Office Building in May will remain sealed while he pursues an appeal of U.S. District Judge Thomas Hogan's decision upholding the search. The D.C. Circuit issued an administrative injunction prohibiting the Department of Justice from beginning its review of the records, in response to a deadline of July 26 set by Attorney General Alberto Gonzales after which investigators would being looking through them. An AP story (here) quotes the order: "The purpose of this administrative injunction is to give the court sufficient opportunity to consider the merits of the motion for a stay pending appeal and should not be construed in any way as a ruling on the merits of that motion." As discussed in an earlier post (here), one issue that will likely arise before the appellate court is whether Jefferson can challenge the search because the district court's decision may be a collateral order, which means it cannot be appealed until after the conclusion of the criminal case. Once again, it is time to hurry up and wait as the investigation stalls awaiting further judicial action on the legality of the search. (ph)
He's Back, and No More Talkative
Greg Anderson, the former personal trainer for San Francisco Giants slugger Barry Bonds, will be called back to testify before the new grand jury being scheduled to be empaneled on July 27 to take up the perjury investigation where the prior panel left off. The earlier grand jury's term expired on July 20, at which time Anderson was released from his civil contempt for refusing to testify about possible steroid use by Bonds. With a fresh panel in place, Anderson could be held for up to eighteen months if he refuses to testify again, as he has asserted he plans to do. While he is likely to land back in jail, the issue will be whether the civil contempt has any possibility of driving him to testify. If it appears that he will simply continue to refuse to answer questions, at some point the court will have to let him go, although federal district judges have fairly broad discretion in determining when the coercive effect of the civil contempt has become fruitless. An AP story (here) discusses the next step in Anderson's merry-go-round life with the grand jury and the local federal lockup. (ph)
SEC Adds Three More Croatian Defendants to Insider Trading Case
The SEC amended its complaint in the insider trading case that grew out of suspicious call option purchases of Reebok before its announced takeover by Adidas in August 2005 by adding three new overseas defendants, all with ties to Croatia: Bruno Verinac, Antun Dilber, and Anto Krsic. The case began with trading by a person identified as a retired seamstress in Croatia, and has grown into a large-scale insider trading ring involving tips from workers at the printer for BusinessWeek, an analyst at Merrill Lynch, and a member of a federal grand jury in New Jersey investigating Bristol-Myers Squibb. The three new defendants, along with three others already named, traded through accounts at Direktanlage.at AG, an Austrian bank. According to the SEC litigation release (here):
The complaint also identifies additional insider trading by the Direktanlage Traders based on newly-obtained information, bringing the total illicit gains netted by the insider trading ring to over $6.8 million. In total, the Direktanlage Traders netted over $445,000 of these illicit gains in trades placed in 17 different securities through Direktanlage based on material, non-public information stolen by a former investment banker employed at Merrill Lynch & Co., Inc., and two former employees at a printing plant where BusinessWeek magazine is printed.
A number of individuals have been charged criminally in the Southern District of New York, and the case is one the most widespread insider trading cases seen in years. (ph)
Sixth Circuit Rejects Government Taint Team to Review Subpoenaed Documents
In the usual case in which a grand jury issues a subpoena for documents, the recipient determines what is responsive and, if necessary, asserts any attorney-client privilege and work product protection claim by refusing to turn over the records. At that point, the ball is in the government's court to either challenge the claimed privilege or protection, or to assert the crime-fraud exception to undermine the claim. A recent decision by the Sixth Circuit in In re Grand Jury Subpoenas 04-124-03 and 04-124-5 (here) essentially follows that model when a third party held the documents and was willing to turn them over to the government despite a privilege claim by the target of the investigation.
The investigation concerns Venture Holdings and possible looting of the company by its former owner, Larry Winget, before it went into bankruptcy. As a result of the bankruptcy, new ownership took control of Venture (called "New Venture" in the opinion), and when a grand jury investigation began regarding questionable transactions at Venture, New Venture received a subpoena for documents that it was more than happy to comply with, including waiving any corporate attorney-client privilege. At this point, Winget stepped in and claimed that records held by New Venture included documents covered by his personal attorney-client privilege. The district court accepted the government's suggestion that a "taint team" made up of a prosecutor and investigator with no connection to the case -- behind the so-called "Chinese Wall" -- review the documents and determine which ones were subject to a privilege claim. Under the government's proposal, if the taint team determined that a document was not privileged, it would go straight to the personnel assigned to the grand jury investigation without a chance for Winget to challenge that decision, at least not until after disclosure of the document.
It was this step in the process that cause the Sixth Circuit to reject the taint team and instead permit the privilege claimant to make the initial determination on the privileged nature of the documents, as if the subpoena were served directly rather than on a cooperative the third party. The court expressed some hesitation about the fairness of the proposed government review, stating:
It is reasonable to presume that the government’s taint team might have a more restrictive view of privilege than appellants’ attorneys. But under the taint team procedure, appellants’ attorneys would have an opportunity to assert privilege only over those documents which the taint team has identified as being clearly or possibly privileged. As such, we do not see any check in the proposed taint team review procedure against the possibility that the government’s team might make some false negative conclusions, finding validly privileged documents to be otherwise; that is to say, we can find no check against Type II errors in the government’s proposed procedure. On the other hand, under the appellants’ proposal, which incidentally seems to follow a fairly conventional privilege review procedure employed by law firms in response to discovery requests, the government would still enjoy the opportunity to challenge any documents that appellants’ attorneys misidentify (via the commission of Type I errors) as privileged. We thus find that, under these circumstances, the possible damage to the appellants’ interest in protecting privilege exceeds the possible damage to the government’s interest in grand jury secrecy and exigency in this case. Therefore, we reverse the district court, and hold that the use of a government taint team is inappropriate in the present circumstances. Instead, we hold that the appellants themselves must be given an opportunity to conduct their own privilege review; of course, we can presently make no ruling with respect to the merits of any claimed privilege that may arise therefrom.
Government taint teams have been used primarily in law office search cases in which documents seized are within the government's control, and there has been quite a bit of controversy about them because the same incentives identified by the Sixth Circuit are present. While In re Grand Jury Subpoenas is a subpoena case, so the court is merely putting the privilege claimant in the same position he would have been in if the he received the subpoena directly, the court's rationale regarding taint teams could be applied to challenges to searches involving privileged documents. (ph)
July 25, 2006
NACDL Seeks New Executive Director
National Association of Criminal Defense Lawyers Executive Director
Search under way for Executive Director of the National Association of Criminal Defense Lawyers (NACDL), a $4 million budget, 12,500-member member organization with 90 affiliates. Seek individual to direct overall operations, oversee 20-person staff, lobbying, and legislative programs, publication of monthly magazine and other periodicals, organization of quarterly Board of Directors meetings and extensive CLE program, manage budget and investments, and direct NACDL’s charitable foundation. Need legal experience, a familiarity with criminal law, budgetary acumen, a demonstrated commitment to individual rights and liberties, and excellent management and people skills. Send cover letter, resume & salary requirements by August 31, 2006 to Viviana Sejas at firstname.lastname@example.org Full position description available at www.nacdl.org/executivedirector
Court Rejects Overturning Skilling's Convictions
It is extremely rare that a trial court overturns a jury conviction. More likely one finds the court granting a motion mid-trial to dismiss certain counts when there was insufficient evidence presented by the government. It is, therefore, not surprising to see the trial court refusing a request to reverse Jeffrey Skilling's conviction. (see Houston Chronicle AP here). In addition to an upcoming sentencing, the government also has a case to present on forfeiture.
July 24, 2006
Where Has All the Money Gone?
Do prosecutors need a Gideon-like decision to assist them in obtaining more funding for government prosecutions? Or has DOJ mismanaged money resulting in a shortfall?
Irrespective of why the money to prosecute is low, it is certain that two representatives Henry Waxman and John Conyors Jr. have had enough of the situation. In a letter dated July 24, 2006 to AG Alberto Gonzales, asking for some answers, they state in part:
" We are writing to express our concern that U.S. Attorney offices across the nation are suffering from staffing shortages and lack of funds. The consequences appear to be severe. According to Assistant U.S. Attorneys, the lack of staff and resources force federal prosecutors to forego prosecutions in some important cases and to reach plea bargains in others. In some offices, there are shortages of even basic office supplies, like binder clips and envelopes."
But the letter also notes that:
"According to budget information from the Department of Justice, appropriations for the U.S. Attorneys account have increased from $1.349 billion in fiscal year 2001 to $1.588 billion in fiscal 2006. This is an increase of 15%, representing an increase in real dollars even after inflation is taken into account. The disparity between increased funding for U.S. Attorneys overall and drastic shortages in staff and supplies in individual offices raises questions about Justice Department management."
And what about all the money obtained from forfeitures, especially the enormous amounts paid in the recent white collar crime prosecutions? You mean it doesn't go to them? (See Washington Post here)
So how do we handle this - a special prosecutor to investigate possible fraud and abuse at DOJ? a deferred prosecution agreement with DOJ requiring them to waive the attorney-client privilege so that someone can go after individuals in the "company"? does DOJ have an "effective" corporate compliance program? perhaps Congress needs to step in to investigate this situation? The bottom line is that when U.S. Attorneys force "indigent defendants to pay for access to potentially exculpatory evidence," this is unacceptable.
Letter - Download usao_ltr_final.pdf
Was it "Manna from Heaven?"
Perhaps one of the most complicated areas of the law to understand is "act of production" when confronted with an immunity grant. How far can the government go in indicting a person when materials received from the individual were obtained pursuant to a grant of immunity?
A recent decision of the U.S. D.C. Circuit Court (United States v. Ponds) tackles this issue in a case involving a criminal defense attorney who was convicted of tax evasion, wire fraud, and fraud in the first degree in D.C. The case is the sad story of a criminal defense attorney who allegedly received a white 1991 Mercedes 500SL and failed to inform the court of the whereabouts of the automobile for forfeiture purposes. The accused was granted act-of-production immunity under 18 U.S.C. s 6002. Once granted the act-of-production immunity he appeared before the grand jury and produced the requested documents. The problem here is that the government later indicted him and "failed to establish its previous knowledge of the existence or location of the documents." This presents a problem for the government under the Supreme Court's decision in the famed Hubbell case, where the Supreme Court reversed a conviction rejecting the "'manna from heaven theory' by holding the use of contents of produced documents to be barred derivative use of the compelled testimonial act of production." (Ponds, at * 7).
Now mind you, the above skips many steps in presenting the law of the Hubbell and Fisher cases. But the bottom line is - is it proper for the government to give someone immunity and then use something that the person gives to the government pursuant to the grant of immunity, against them in a criminal trial. The real question is whether an immunity grant really carries any value to the individual if the government can then indict the person and use the documents given to them pursuant to an immunity grant.
In Ponds the court reverses the conviction and remands the case to the district court to examine "the degree of the government's impermissible use" and to determine if this was harmless error.
Decision can be found here.
Universities Implementing Fraud Hotlines
Sometimes academics are well ahead of the corporate world, but sometimes they can also lag behind.
Many corporations, as part of their compliance or "effective" programs, have implemented measures to allow anonymous reporting of fraud or other noncompliance within a corporation or business. The Chronicle of Higher Education reports here (subscription required) that a growing number of universities are establishing hotlines for anonymous reporting of fraud activity. Fraud does exist at universities and colleges, so having measures in place may be an added layer of protection against such abuses.
Here are just a few examples of the government investigating or proceeding (civil and/or criminal) against a college or university, or individual associated with this entity, for alleged frauds occurring on campus:
Track Coach Convicted of Fraud for Misusing Student Aid Money (here)
Does Yale University Need a Compliance Program? (here)
Former Texas Tech Students Sentenced for Defrauding Student Loan Program (here)
Harvard Pays $26 Million to Settle False Claims Case (here)
GW Professor Pleads Guilty to Embezzling Nearly $1 Million From Grants (here)
July 23, 2006
Will the Government Retry Quattrone
The case often cited for a prosecution that emanates from an email, is the failed prosecution of Frank Quattrone. The first time the jury hung; the second time the court reversed the conviction; and now Quattrone stands again before the court for perhaps a third trial. According to the Wall Street Jrl here, it sounds like the prosecution and defense are talking, and hopefully they will reach a resolution acceptable to both sides. Clearly the cost of attorney fees to Qauttrone, of two prior trials and now preparation for a third, should be an enormous deterrence irrespective of whether he engaged or not in illegal conduct. And this is not to mention the cost to taxpayers for two prior trials and now possibly a third (could the money be better spent in fixing up the electrical problems for people in parts of Queens, N.Y.-even if it is a different juridictional base)? For Commentary on the what should happen now, see here.
According to reports here on a government affidavit, $ 90,000 was found in the refrigerator of Rep. William J. Jefferson. But why he had this money, is of course the key question. And how, if at all, does this connect to Atiku Abubakar, the vice president of Nigeria, who denies involvement in any illegal activities with Rep. Jefferson?
The Washington Post here tells a sad story of money found in a refrigerator. But whether that money was a fruit of illegal activity, remains to be seen. The allegations here present a host of questions for DOJ lawyers and the FBI to try and unravel. Should anyone from this investigation become part of a criminal matter, it certainly could present some challenging international issues. The issues could range anywhere from who is entitled to immunity from criminal jurisdiction, to whether a witness from another country has constitutional rights, to how to procure official and unofficial records from abroad. On the other hand, prosecutors learning from other white collar cases of the past few years have noticed that keeping things simple assists in procuring a criminal conviction. But first, of course, needs to be decided whether anyone committed any crimes that warrant indictment, and if so, who in fact committed the crimes.
Spitzer's Start in the Fund Investigation
Washington Post here has an excerpt from the 2006 book "Spoiling for a Fight: The Rise of Eliot Spitzer" by Brooke A. Masters. It details from the very first tip received, the investigation of mutual funds.
Morgan Stanley's Mack Will Testify in SEC Insider Trading Probe
John Mack, CEO of investment bank and broker Morgan Stanley, agreed to an SEC request that he testify in its probe of possible insider trading by hedge fund manager Pequot Capital Management, where he served briefly as chairman before becoming CEO of the investment bank a second time in 2005. The Commission investigation became a bit of a cause célèbre when Gary Aguirre, a former SEC staff attorney in the Enforcement Division, alleged that higher-ups in the Division blocked his effort to have Mack testify as part of the insider trading investigation.
Aguirre's allegations surfaced as part of a Senate Judiciary Committee hearing into hedge fund regulation, or perhaps better the lack thereof, in which his written statement (here) described, without naming names, the scope of the investigation: "By May 2005, one of the insider trading matters dwarfed all others: the hedge fund’s trading in two companies just before the announcement of a cash tender offer by one for the other at a 50% premium over the last trading price. The hedge fund profited by $18 million in 30 days. The evidence suggested that the hedge fund’s CEO acted on an unlawful tip in directing the hedge fund’s trades. But the question remained: who tipped him?" Aguirre believed it was the CEO of a major investment bank, i.e. Mack, and sought to issue a subpoena for his testimony. According to Aguirre's statement: "A high-powered attorney, Mary Jo White, bypassed the normal protocol of discussing the investigation with the assigned staff attorney. Instead, she went directly to Enforcement Director Linda Thomsen, despite the fact Director Thomsen had no prior involvement in the case. For the first time, senior staff left me out of meetings when they discussed the case." Lo and behold, the subpoena was not issued and, although Aguirre received a two-step pay increase as part of his annual review, he was terminated a little over a week later. SEC Chairman Cox has ordered the Commission's Inspector General to review Aguirre's termination, and now Mack will come in to testify.
Will Mack's testimony change the course of the investigation? I think it's highly unlikely his statement will make a difference now, or would have earlier in the case. Mack has maintained consistently that he never tipped Pequot, and SEC cases are rarely made by witness admissions unless there is powerful circumstantial evidence showing abnormal contacts and sudden, aggressive trading. Pequot is a hedge funds that makes large stock bets, and Mack is a long-time investor in the firm with close ties to its management, so any contacts with them are unlikely to be unusual. There are few "Perry Mason" moments in SEC depositions (or anywhere else for that matter), and a person of Mack's stature starts out with a high degree of credibility, so assertions that "we don't believe his denials" are unlikely to carry the day in seeking authorization to file an insider trading action against Mack and Pequot. Absent someone on the inside of Pequot who could testify about tipping -- and it's unlikely the Commission has heard from such a person -- then Mack's testimony probably will be the end of the investigation. A Bloomberg story (here) notes that he will be accompanied by Morgan Stanley's general counsel, Gary Lynch, former head of the Enforcement Division, so this will not be an unprepared witness who may be surprised by the staff's questions. I suspect the case will end quietly and the transactions will leap back into lucrative obscurity. (ph -- in the interest of full disclosure, I worked at the SEC when Lynch was head of Enforcement, but not all mistakes in hiring were his fault, especially of lowly staff attorneys)