Saturday, August 12, 2006
When a lawyer claims that he or she was unaware that something is against the law, they may have a tougher time in maintaining their ignorance. If they cross the line, they can be facing jail time.
The August 11th ABA E-Journal Report here has a superb story on the recent decision of the Third Circuit Court of Appeals in United States v. Flores here where an attorney was sentenced to 32 months imprisonment following convictions for conspiracy to commit money laundering, money laundering, and conspiracy to structure a currency transaction.
Perhaps the most telling evidence against the attorney is noted in the court's statement that, "Flores received a letter from the Republic National Bank explaining what 'structured' transactions are and why they are illegal, and informing him that 'when an account receives a large incoming wire and immediately sends an outgoing wire or wires for approximately the same amount, without apparent commercial justification, it mirrors the activity of an account opened by money launderers';"
(esp) (w/ a hat tip to my colleague Professor Clark Furlow)
Five doctors and two others were Indicted in the Northern District of Georgia. According to a press release of the U.S. Attorney for the Northern District of Georgia here, two of the individuals were owners of a business that is:
"based in Marietta, Georgia. These business sought customers who would request specific controlled substances and prescription drugs. The businesses forwarded these requests to doctors who would click electronic prescriptions causing the drugs to be sent to the customers. The doctors allegedly never met the customers, nor would they typically even speak to the customers over the telephone. Thus, customers were able to obtain controlled substances and prescription drugs without any genuine medical need and outside of a legitimate doctor-patient relationship."
As expected, a grand jury indicted former Brocade Communications CEO Gregory Reyes and former human resources VP Stephanie Jensen, supplanting the securities fraud complaint issued on July 20. Reyes is indicted on twelve charges and Jensen on eight, comprised of conspiracy, securities fraud, mail fraud, false entries in the company's books, and four counts of making false statements to the company's accountants (Reyes is the only defendant on these). The factual allegations in the indictment (available below) do not vary much from the earlier complaint, and the securities fraud charges under Section 10(b) and Rule 10b-5 simply recite the language of those provisions and allege both a scheme to defraud and causing Brocade to file false Form 10-Ks with the SEC. The mail fraud charge alleges both the traditional money/property form of fraud and also an alleged deprivation of the right of honest services owed to Brocade by both defendants. Once again, the issue of intent will be the key to the fraud charges because neither Reyes nor Jensen profited directly from the backdating of the options grants and they were authorized to issue the options to the new hires, albeit without falsifying records. Each is charged with a narrower books-and-records violation, which may be easier for prosecutors to establish.
One thing I noticed in the indictment is that it is dated "July 20, 2006" on the last page where the foreman signed it as a "True Bill," although it was not filed until August 10. I had wondered why prosecutors used a criminal complaint earlier rather than a grand jury indictment, which would have obviated the need for a hearing on the propriety of the complaint that was held before a magistrate on August 9. A complaint is judged by a different standard than a grand jury indictment, although the threshold for an acceptable complaint is still rather low. I suspect that the prosecutors hoped to have the grand jury return the indictment on Thursday, July 20, but for whatever reason it could not be completed in time. Rather than let the moment pass, they filed the complaint and now, three weeks later -- this is obviously a "Thursday" grand jury, and could even be the same one that is hearing the Barry Bonds perjury investigation -- the indictment was ready for a vote. A previously scheduled preliminary hearing to review the basis for the securities fraud charge in the complaint is now out the window because a grand jury indictment is based on probable cause, so the case will proceed from here into the discovery phase. Look for the defense to file a motion to dismiss and for a bill of particulars to get the government to identify the victim(s) of the alleged violations and its basis for inferring criminal intent, among other things. (ph)
Former Wal-Mart executive Tom Coughlin, who was with the company from its founding by Sam Walton and served most recently as vice-chairman of the board of directors, received a 27-month term of home confinement after pleading guilty to defrauding the company and tax evasion. Coughlin admitted to taking gift cards for use at company stores and submitting bogus invoices to pay for personal expenses, totaling over $300,000. Wal-Mart initiated the prosecution when it turned over information to the U.S. Attorney's Office that it developed in an internal investigation. Among the items purchased with one gift card was a cooler and two cases of beer. Coughlin's salary for his last three years he worked at Wal-Mart totaled approximately $2.9 million, and when he left the company he owned almost 700,000 shares (see 2005 Proxy here), which at the current price would be worth approximately $30 million. What is missing in this type of case is an explanation for why one would put so much at risk for an amount less than the annual dividend on Coughlin's shares.
Although the Sentencing Guidelines called for a prison term of over two years, and prosecutors recommended six to twelve months in prison, U.S. District Judge Robert Dawson accepted the testimony from Coughlin's doctor that various illnesses made him too fragile to serve a prison term because he was "57 going on 87." Defense counsel's sentencing submission is available below and includes a summary of a number of letters submitted on Coughlin's behalf. Coughlin also must pay almost $411,000 in restitution to Wal-Mart and the IRS. A Reuters story (here) discusses the sentencing. (ph)
Friday, August 11, 2006
Former Comverse Technology CEO Kobi Alexander was charged with conspiracy along with two other senior executives, but has not been located at this point. While a Department of Justice press release (here) notes that two brokerage accounts with $45 million of Alexander's assets have been frozen, it appears that he transferred over $57 million to accounts in Israel in what the government asserts was a money laundering scheme "in an effort to conceal the funds from U.S. authorities." The FBI has declared Alexander a fugitive, and is conducting a worldwide search.
There is certainly a good possibility that Alexander is in Israel, so it may be difficult to extradite him to the United States. An article in the Israeli newspaper Ha'aretz (here) quotes a local attorney who states that the extradition treaty between the countries dates back to 1963 and the alleged fraud from the options timing may not be a covered offense allowing for Alexander's return. Should Alexander return to the United States to face the charge, expect to see some fairly onerous conditions if bail is granted, which is probably unlikely. If Alexander shows up in a country that will not extradite him, then we may have a new Marc Rich, who fled to Switzerland in the face of tax evasion charges in the early 1980s. (ph)
Federal prosecutors in Chicago and Lord Conrad Black have been involved in a nasty dispute over whether his financial disclosure in connection with the bail application was complete and truthful. The U.S. Attorney's Office requested that U.S. District Judge Amy St. Eve revoke Black's $20 million bond and send him to jail pending a trial scheduled for 2007, a long time to stay in the pokey. Judge St. Eve determined that Black had misrepresented his assets, but denied the request to revoke the bond and instead ordered him to put up an additional $1 million in cash. The bond is already secured by property with an estimated value of $30 million, but the additional liquid assets should give the court some comfort that Black will continue to show up for court appearances. A Reuters story (here) notes that Black's attorney said his client would put up the additional funds -- I hope the check clears. (ph)
The SEC filed a civil securities fraud action against Jon W. James and his firm, Jon W. James & Associates (JWJA), for a program targeting retirement funds that would be invested in real estate and generate "double-digit returns" for participants. James solicited investors by inviting them to free dinners that advertised "Retirement Secrets of the Rich: What your Accountant and Stockbroker don’t want you to know.” According to the SEC Litigation Release (here):
[I]nvestors are falsely told that their funds will be used for profitable real estate transactions that will provide returns, which at times were represented to be as high as 24%. The complaint alleges that the defendants offered and sold promissory notes and, later, interests in limited liability companies.
The Commission’s complaint alleges that, throughout 2004 and 2005, defendants did not purchase any real estate or real estate related assets from which to pay investor returns. Additionally, the complaint alleges that the defendants misrepresented to investors that their investments would be secured by real property or by monies owed to JWJA from real estate transactions. The complaint also alleges that defendants fraudulently failed to disclose that they used new investor money to pay returns to previous investors.
In investing, there just aren't that many secrets, except the one that if it sounds to good to be true . . . (ph)
Thursday, August 10, 2006
The Houston Chronicle reports (here) that former Enron CEO Ken Lay's appellate attorney has moved to appear before the federal district court on behalf of his estate to seek dismissal of the indictment and conviction against him. As discussed in an earlier post (here), under the abatement doctrine as applied in the Fifth Circuit, a defendant who dies before having his first appeal as of right decided by the court of appeals can move to have the case expunged. An attorney usually must represent a party to appear in a proceeding, so this procedural step is necessary before U.S. District Judge Sim Lake can issue the order to remove Lay's indictment and conviction from the record.
With the criminal conviction abated, the Enron Task Force is limited to a civil asset forfeiture action under 18 U.S.C. Sec. 981 if it wants to pursue that route to obtain property traceable to the violations from Lay's estate. One limitation on civil asset forfeiture actions is that the government can only obtain "[a]ny property, real or personal, which constitutes or is derived from proceeds traceable to a violation" but not substitute assets. Also, a claimant to the property can raise an "innocent owner" defense to the forfeiture under Sec. 983(d). All in all, civil asset forfeiture is not as simple as a criminal forfeiture after a conviction, especially because the government will have to prove the underlying violation by Lay all over again, without the benefit of using the criminal conviction as proof that the assets are forfeitable. In the end, it may not be worth the effort to pursue the asset forfeiture further, but that decision will come another day. (ph)
The second criminal case coming from the options-timing investigations, against three former Comverse Technology executives, should send every executive at the 80 or so companies that have disclosed being caught up in the various criminal and civil investigations looking for their own counsel. The prospect of criminal charges naturally has the effect of putting everyone in the vicinity of an investigation on the defensive even more than they already were. An article in The Recorder (here) discusses how Apple executives are hiring their own lawyers in light of recent disclosures of questionable options grants, including two by its former general counsel, Nancy Heinen. Among those charged in the Comverse case is the company's former chief legal counsel, which highlights the potential for in-house lawyers to become targets of the investigations and certainly subjects of great interest to the grand jury and the SEC. With all those companies hiring law firms to conduct internal investigations, along with lawyers to advise the audit committee and counsel for the individuals, the suggestion that the end of the Enron-related prosecutions means white collar practices will recede in significance at private firms looks misguided. Ladies and gentlemen, start your billing. (ph)
There was a lawyer licensed to practice law in Pennsylvania named Jeffrey A. Riddell who gave up his bar card and left the state. Along came another man, one Jeffrey P. Riddell, who began representing clients by apparently assuming the identity of Jeffrey A, or at least his credentials. This went on for a while until a local prosecutor became suspicious because Jeffrey P. sent a letter described as threatening and "goofy" in connection with a drug case involving his putative client; it's not clear how the letter distinguished the correspondence from other cases. A bit of investigating turned up Jeffrey P.'s criminal record and, even worse, lack of a law license. He is now in jail on an unauthorized practice of law charge. In an unsurprising turn, an AP story (here) notes that Jeffrey P. plans to represent himself. You know the old saying about the lawyer who represents himself, although he can now write as many goofy letters as he wants. (ph)
Wednesday, August 9, 2006
Three former senior executives of Comverse Technology, Inc., CEO Kobi Alexander, CFO David Kreinberg, and chief legal counsel William Sorin, have been charged with conspiracy to commit securities, mail, and wire fraud in a criminal complaint filed in the Eastern District of New York (Brooklyn). The charge relates to backdating options by the former executives, including an alleged "slush fund" options account in the name of a fictitious employee -- nicknamed after Phantom of the Opera -- to park options that could be doled out to attract employees. According to the complaint (here -- courtesy of the Wall Street Journal Law Blog), each of the defendants received backdated options that permitted Alexander to reap additional gains of $6.4 million, and Kreinberg and Sorin over $1 million each.
An interesting aspect of the complaint is the lengthy recitation of efforts by the three executives to slow down the company's internal investigation and to make false responses to a Wall Street Journal reporter inquiring about the timing of the options grants that triggered the entire investigation. According to the complaint, the defendants tried to dissuade a corporate lawyer from hiring outside counsel to investigate the options-timing issue, and that Sorin's responses were "half-truths" and vague. What is not clear from the complaint is how these acts relate to the conspiracy, which involved filing false statements with the SEC and defrauding the company's shareholders. The alleged acts may go to show guilty knowledge, but it is not a separate crime to lie to a reporter -- even one from the Journal -- nor are false statements in an internal investigation illegal in themselves. It is possible that prosecutors could obstruction of justice to the conspiracy (or as a separate charge) in a subsequent indictment, similar to what was charged in the Computer Associates case that included misleading conduct directed at lawyers doing the internal investigation. Whether such a charge is permissible, even under the broader obstruction statute adopted in the Sarbanes-Oxley Act (18 U.S.C. Sec. 1519), is an open question.
It is clear that Comverse cooperated in the criminal investigation, including waiving its attorney-client privilege, because the complaint recounts in detail conversations between corporate counsel and one or more defendants. Such waivers have been heavily criticized recently, but in this case it was clearly in the company's interest to waive the privilege, although prosecutors may have demanded it early on. It will be interesting to see if any of the defendants assert that Comverse was pressured into waiving its attorney-client privilege to avoid charges against the company, and seek to have those conversations suppressed.
This is the second criminal case to come out of the various options-timing investigations. Similar to the charge against two former executives of Brocade Communications (see earlier post here), the government chose to proceed with a criminal complaint rather than an indictment, although it is not clear why. Kreinberg and Sorin surrendered, but to this point Alexander has not, and an AP story (here) notes that prosecutors fear he may not be in the country. Unlike the Brocade case, the Comverse defendants received a portion of the backdated stock options, so it may be easier to prove their intent if a securities fraud count is added to the case.
Finally, in an effort to show Alexander's knowledge of the company's filings, the complaint quotes him as stating once to an employee, "How many CEOs do you know who read every word of the footnotes?" That probably puts the "honest-but-ignorant CEO" defense out of reach. (ph)
Perhaps emboldened by recent decisions by Judge Kaplan in the KPMG tax shelter prosecution (U.S. v. Stein), the American Bar Association adopted the Report (here) issued by its Task Force on Attorney-Client Privilege that urges the Department of Justice to disavow certain practices related to the determination of whether to charge a corporation with a crime. The Task Force earlier recommended that the Thompson Memo, which sets forth the Department's basic principles on charging corporations, be amended to eliminate a provision encouraging corporations to waive their attorney-client privilege and work product protections as a sign of the company's cooperation. The new Report argues that commentary in the Thompson Memo on the payment of attorney's fees, joint defense agreements, and terminating uncooperative employees is improper and undermines the rights of employees. The Task Force makes four recommendations (text here):
(1) that the organization provided counsel to an employee or agreed to pay an employee’s legal fees and expenses;
(2) that the organization entered into or continues to operate under a joint defense, information sharing and common interest agreement with an employee or other represented party with whom the organization believes it has a common interest in defending against the investigation;
(3) that the organization shared its records or other historical information relating to the matter under investigation with an employee or other represented party; or
(4) that the organization chose to retain or otherwise declined to sanction an employee who exercised his or her Fifth Amendment right against self-incrimination in response to a government request for an interview, testimony, or other information.
None of these issues relate directly to the attorney-client privilege and waiver issues, and perhaps the Task Force should be renamed the Corporate Prosecution Principles Group.
I find the fourth recommendation interesting. If an employee states that he/she will assert the Fifth Amendment in response to an interview request, that is at least some indication of potential wrongdoing, even if the assertion is protective and not a reflection of a view that actual criminal conduct occurred. As an employer, would you continue to employ a person who refused to testify or make a statement because of the potential to incriminate that person, and in many instances the company? Especially if the person is a senior executive, there are serious issues regarding whether a corporation is well-served by having the person remain in office under such a cloud. An assertion of the Fifth Amendment does not mean the person did anything illegal, but it raises a red flag, and a company that professes to be cooperative while retaining the employee/executive in a position of authority is not a very good sign because the government will have legitimate concerns about the integrity of business records and the propriety of transactions. While the first three recommendations by the ABA Task Force do not strike me as particularly controversial, at least if one accepts the proposition that hiring a lawyer is an acceptable response to a government investigation, but the fourth may be a bit far afield. (ph)
On most items, co-blogger Peter Henning and I agree, but this is one time we don't. So in response to his comment above on the 4th item of the ABA Memo, I would note that I agree with what the ABA has issued, and would respond to Professor Henning with:
1. An assertion of the Fifth Amendment should never be interpreted as an indication of guilt here, especially in a business context where the lines between what are legal and illegal are oftentimes vague.
2. The Fifth Amendment may be taken on a temporary basis until there is an assurance of immunity, even when there has been no criminally culpable conduct. Attorneys usually request immunity for clients, even those that are mere witnesses.
3. A company may have invested time and education into an individual, do they want to throw this all away without knowing first that the person might really have committed criminal acts, or have more commonly been around criminal acts that they failed to report.
4.Is this not pitting the individual and company against each other, and is this really good for the shareholders who have invested in this company?
5. I thought we lived in a country that is founded on "innocent until proven guilty" and that a person should not be compelled to testify against themselves. If you lose your job because of maintaining that innocence and asserting constitutional rights that accompany that innocence are we losing sight of the basic principles that founded this country? More importantly, when the Government is the one asking or giving a benefit to a company that discards the rights of the individual, the power of the government is entering into private contractual arrangements in the employer-employee context, and most importantly interfering with an individual's constitutional rights. (Note- this latter point is not in reponse to what is stated by Professor Peter Henning, as I know we both agree on these principles).
The United States Attorney for the Western District of Virginia has charged the founder and CEO of Wellspring Academy in Sutherlin, Virginia with "bank fraud, assisting in the preparation of false tax returns, mail fraud, wire fraud, perjury, and money laundering." The 36 count indictment emanating from a bankruptcy proceeding alleges that the accused, in an effort to stay afloat, was committing a variety of crimes including an allegation that he "knowingly made a false material declaration in regards to the licensing of the counselors that worked at Wellspring Academy." According to the US District Attys Press Release, the school, which closed, charged from $43,000 to $49,000 per student. For more details see the press release here from the US District Attorneys Office for the Western District of Virginia.
(esp)(w/ a hat tip to fraud update).
Tuesday, August 8, 2006
One advantage that white collar offenders seem to get more often than the street offenders, is that they often are allowed to report directly to prison. Oftentimes street offenders are either in jail at the time of trial, or immediately incarcerated upon conviction.
As noted in the Atlanta Jrl Constitution here, Bill Campbell is being told he can report directly to prison, a facility near Miami. This is a big plus for someone about to serve prison time. It means they will not be incarcerated in jails throughout the country while they are being transferred to the final facility. On the other hand, why are some allowed to remain free pending the trial and appeal and others, like Campbell, are deprived of this opportunity now that he has been convicted and is awaiting a decision on appeal? Do courts rule consistently in determining whether an individual merits an appeal bond?
Federal prosecutors filed the first criminal charge from the various stock options-timing investigations against the former CEO of Brocade Communications, Gregory Reyes, and a human resources executive, Stephanie Jensen, on July 20. Rather than seeking a grand jury indictment at the time, however, prosecutors chose to proceed by issuing a criminal complaint, which contains a general description of the alleged misconduct filed in the name of an FBI case agent working on the investigation. Reyes has filed a motion to dismiss the complaint (brief available below), arguing that the government's complaint does not adequately allege the elements of securities fraud, the only crime charged, by not identifying the basis for the specific intent to defraud.
A hearing is scheduled for Wednesday, August 9, on the motion to dismiss, and if the complaint survives then a preliminary hearing is scheduled for August 16 to determine whether there is probable cause for the charge. Proceeding by way of criminal complaint is uncommon in white collar crime cases in which a defendant has not agreed to a plea bargain because the preliminary hearing requires the government to give a preview of its case and open up one or more of its witnesses to cross-examination by the defense. Under Federal Rule of Criminal Procedure 5.1(a), the preliminary hearing requirement is obviated if a grand jury returns an indictment. I suspect the motion to dismiss, even if granted, will not slow the case because prosecutors are likely to obtain a grand jury indictment rather than go through a preliminary hearing. Look for some further movement before August 16 to shift the case from a criminal complaint to an indictment. (ph)
Monday, August 7, 2006
The Columbus Dispatch here reports that Bob Ney, a republican congressman from Ohio, will remove himself from running for re-election. Ney has had his name mentioned in connection with former lobbyist Jack Abramoff. For background see the following here, here, and here.
The SEC has issued a press release here announcing a settlement on the "insider trading charges against Martha Stewart and Peter Bacanovic relating to Stewart's sale of ImClone Systems stock in December 2001." The press release states:
"Under the settlement, Stewart agrees to an injunction, disgorgement of losses she avoided, and the maximum penalty of three times the losses she avoided, for a total of about $195,000 in monetary relief. Stewart also agrees to a five year bar from serving as a director of a public company and a five year limitation on the scope of her service as an officer or employee of a public company. Bacanovic agrees to an injunction and to pay disgorgement of commissions and a penalty totaling approximately $75,000. In a separate order, the Commission previously barred Bacanovic from associating with a broker, dealer or investment adviser."
And although they have settled, "[t]he defendants consented to the judgments without admitting or denying the allegations in the complaint." The court has to approve this settlement.
This is a win-win situation. The SEC gets to announce that they reached a settlement with Martha Stewart and Martha Stewart can move forward putting this entire matter behind her. The amount, $195,000 is a small price to pay to have this finished. Not having to continue to pay attorney fees in handling this matter alone makes this advantageous to Stewart. (See current report stock report on Imclone here).
The options-timing investigations have hit approximately 80 companies, with the first criminal charges filed recently and more may be coming in the next few weeks involving former senior executives at Comverse Technology, including possibly the company's former in-house counsel (see Law.Com story here). The first response at companies targeted in the various government investigations has been to announce an internal investigation along with a pledge of support. For Affiliated Computer Services, Inc. (ACS), a Dallas-based tech company, a quick announcement that an initial investigation found nothing problematic in its options-granting practices may have backfired. In a May 15 SEC filing (here), ACS stated: "Notwithstanding the above-referenced accounting determination, based on the initial findings of its internal investigation (which is on-going and not complete as of the date of this filing), ACS does not believe that any director or officer of the Company has engaged in the intentional backdating of stock option grants in order to achieve a more advantageous exercise price." In a press release (here) issued on August 7, however, it now states that its earlier assertion "can no longer be relied upon . . . ." Much like Ron Ziegler called prior statements "inoperative" or Emily Litella said "Never mind," ACS would rather just skip over that earlier admission, tempered as it was with the claim that the investigation was "not complete." The company earlier received a grand jury subpoena from the Southern District of New York, and federal prosecutors there will be eager to hear about what has changed in a little less than three months. (ph)
Sunday, August 6, 2006
Former Gov. Don Siegelman (Alabama) and former CEO of HealthSouth Richard Scrushy moved for the dismissal of their criminal convictions. According to the Birmingham News here and the Wall Street Jrl here, the two are arguing that campaign contributions should not be the basis for the indictment. This is not a new argument, and the Supreme Court has struggled on two prior occasions with the role of campaign contributions when the Hobbs Act (extortion) is charged. The Court required a quid pro quo (McCormick), but allowed passive acceptance to be a basis of a Hobbs Act violation involving a campaign contribution. (Evans).
It also sounds like there will be an argument claiming that the prosecution exceeded the statute of limitations in bringing a charge.
According to the Washington Post here a German prosecutor is investigating possible money laundering conduct related to the transfer of funds by a contractor who may owe money resulting from a civil action regarding possible defrauding of the U.S.-led Coalition Provisional Authority in Iraq.
The United States has used "objective territoriality" as a basis for prosecuting conduct occurring outside the United States that has an effect on this country. But will those in this country find it acceptable if another country uses a similar principle to prosecute US citizens? Does it make a difference that the conduct is alleged to have occurred outside this country?