Saturday, September 2, 2006

What's Going on in Alaska?

The Wall Street Jrl here and Washington Post (AP) here  are reporting that the FBI has entered state Alaska lawmakers offices and removed items pursuant to a warrant. The newspapers both include a reference to Veco, a "oil-fields-service" company.  The commonality between the lawmakers is that they are all Republican.

There is nothing new about having the feds probe something related to the states.  One of the rationales often expressed for the federal government investigating state activity is that it is easier for them to be above the local or state politics.  Many state and local prosecutors run for office, making it extremely difficult for them to investigate or indict local state persons.  Additionally, the feds often have more expertise and more resources to conduct these investigations. Finally, many federal statutes are written generically to allow a wide breadth of conduct, even conduct that may be state related.


September 2, 2006 in Investigations | Permalink | Comments (0) | TrackBack (0)

Friday, September 1, 2006

Should Felons Receive Their Pension

The Atlanta Jrl Constitution has an article here looking at whether white collar offenders should be able to receive their pensions.  The cases they examine are in some cases related to corruption (although Former Mayor Bill Campbell was not convicted of a corruption related crime).  The article outlines some of the convictions, the crimes, the sentences, and the amounts being received by these individuals in pensions.

It is important to note that courts may have an option to order Restitution. The Federal Sentencing Guidelines, Guideline 5E1.1 speaks directly to the method for determining restitution.


September 1, 2006 in Sentencing | Permalink | Comments (0) | TrackBack (0)

Thursday, August 31, 2006

Corruption in South Jersey

The president of the Atlantic City council and a Camden (N.J.) city council member each pleaded guilty to corruption charges related to payments for contractors for receiving government work.  Craig Callaway, from Atlantic City, and Ali Sloan El, from Camden, each entered guilty pleas, and a press release issued by the U.S Attorney's Office (here) describes the conduct:

During his guilty plea, Callaway, 47, of Atlantic City, admitted to taking approximately $36,000 in six different payments between 2003 and 2005, in exchange for using his position to assist a contractor, Terry Jacobs of Pleasantville, in obtaining construction work in Atlantic City projects. Those projects include development of the Garwood Mills site, a 6.4-acre waterfront site on the northeast inlet of Atlantic City, named for a department store that once occupied the land.

Sloan El, 52, of Camden admitted during his guilty plea to taking approximately the same amount, $36,000, in six different payments between 2003 and 2005, in exchange for steering Camden redevelopment work to the contractor. The promised projects included concrete, sidewalk and other construction work including regarding Camden’s Cooper’s Ferry project and parking for the New Jersey Aquarium.

An article in The Press of Atlantic City (here) notes that two other member of the Atlantic City council are targets of the three-year federal corruption investigation.  It sure sounds like local elected officials in South Jersey aren't too expensive to buy these days. (ph)

August 31, 2006 in Corruption | Permalink | Comments (0) | TrackBack (2)

Are Lawyers Getting Away Unscathed?

An article in the Washington Post (here) makes the provocative point that lawyers have largely avoided the fallout from the recent rounds of corporate and accounting scandals, asserting that "lawyers serving fraud-ridden companies have emerged relatively unscathed."  The article contrasts lawyers with the two large accounting firms, Arthur Andersen and KPMG, that have been involved in criminal cases, with Andersen forced out of business even though the conviction was later reversed by the Supreme Court.  That may not be the best comparison, however.  Andersen was prosecuted for obstruction of justice for shredding documents, not for its audit of Enron, and KPMG's deferred prosecution agreement involved the firm's direct work selling tax shelters to clients, a product much like any other, and not for its professional advisory role.  The Milberg Weiss case is somewhat analogous to these accounting firm prosecutions, in that the subject of that prosecution is not work on behalf of clients but how the firm went about doing its business.

The recent options-timing cases may well put lawyers squarely in the sights of prosecutors, particularly in-house counsel at the companies involved in the questionable -- although perhaps not necessarily illegal -- transactions.  William Sorin, former general counsel at Comverse Technologies, was charged along with two other executives for his role in the options back-dating, and the charges recite how he used his position to facilitate the awards and make them look legal.  McAfee Inc. fired its general counsel, Kent Roberts, because of his involvement in an instance of options back-dating, and federal prosecutors subpoenaed the company for information related to his termination.  At some companies being investigated, outside law firms drafted the compensation policies while partners at the firms served as directors of the corporations, even being involved in the now-scrutinized option grants.  These lawyers are sure to be questioned by civil and criminal authorities, and are likely targets of those investigations.

Although lawyers were not caught up in the criminal prosecutions generated by some of the spectacular corporate collapses of recent years, the options-timing investigations will put the acts of legal counsel under a microscope.  It will not be surprising to see more than a few lawyers involved as defendants in the various cases in the future. (ph)

August 31, 2006 in Legal Ethics, Prosecutions | Permalink | Comments (3) | TrackBack (0)

Is Kobi Alexander Really in Sri Lanka?

We passed along last week the report that former Comverse Technologies CEO Kobi Alexander, a fugitive from a Brooklyn indictment charging him in connection with stock options backdating at the company, had been located by a private detective, Moshe Buller, hiding out in Sri Lanka.  A report in the Israeli newspaper Ha'aretz (here) raises some interesting questions about the veracity of the private detective's claim to have located Alexander by tracing an Internet telephone call.  The story points out inconsistencies in the private detective's accounts to the media of how he located Alexander, when he saw him, and even how far he traveled after seeing him.  As the story notes, the U.S. has an up-to-date extradition treaty with Sri Lanka (see earlier post here) that most likely would allow for his extradition, so it's unlikely Alexander would pick that place to be a fugitive.  Moreover, since the reported sighting of Alexander last week, no news has emerged from the government of either country regarding an extradition request.  Maybe the earlier question "Where the Heck is Kobi Alexander?" is still quite pertinent. (ph)

August 31, 2006 in Fraud, Prosecutions, Securities | Permalink | Comments (1) | TrackBack (0)

Is the Government Padding Its Stats?

An earlier post (here) discusses the settlement between federal prosecutors and Schering-Plough related to Medicare and Medicaid fraud in the pricing of certain drugs produced by the company and possible kickbacks paid to doctors.  Rather than enter a deferred prosecution agreement, which is more the norm these days, a subsidiary, Schering Sales Corporation, entered a guilty plea to conspiracy to make a false statement to the FDA and will be barred from participating in federal health care programs, a virtual death penalty for a drug provider.  While that sounds like a rather draconian collateral consequence from the conviction, I think looks are a bit deceiving here.  Only the subsidiary entered the guilty plea, not the parent, and so only Schering Sales will "suffer" the debarment from federal programs.  A Wall Street Journal story (here) quotes a spokesman for Schering-Plough stating that the subsidiary "is an entity whose sole purpose is to plead guilty in these matters" -- a good thing to have lying around in case you get in trouble, just throw a subsidiary on to the fire.  If that's the case, and Schering-Plough can forge ahead by creating a new sub -- a remarkably easy process that can be done in a few minutes over the Internet -- to take over Schering Sales' functions, then the guilty plea and program bar are much less than they appear. 

While the government gets to count the guilty plea when it compiles statistics regarding corporate and health care prosecutions, and can tout the bar as proof that it will take drastic action against offenders, Schering-Plough is largely unaffected by settlement, except of course for paying out $435 million, including $180 million as a criminal fine.  The fine doesn't help the bottom line, but then that seems to be the least of the company's worries because its press release noted that it had already set up a reserve for the costs of the settlement.  At the end of basketball games when one team is way ahead, some players will take advantage of "garbage time" to pad their stats.  Is the government doing the same thing here, making the settlement with Schering-Plough look tougher than it really is? (ph)

August 31, 2006 in Fraud, Prosecutions, Prosecutors | Permalink | Comments (0) | TrackBack (0)

Lord Black's Assets Frozen

A judge of the Ontario Superior Court of Justice issued an order freezing the Canadian assets of Lord Conrad Black, former CEO of Hollinger International and a defendant (along with three other former Hollinger executives) in a federal court indictment charging fraud, conspiracy, and RICO related to transactions with the company.  Black is out on a $20 million bond secured by a home in Florida and, more recently, $1 million in cash because of certain disclosure "problems" in his orignial bail application (see earlier post here).  The order in the Ontario court arises from a civil suit in which Hollinger seeks repayment of approximately $700 million that it accuses Black of looting from the company, involving many of the same issues charged in the U.S. prosecution. 

The judge's order, called a "Mareva injunction" in Commonwealth jurisdictions, allows Black and his wife up to $20,000 per month in living expenses, a mere pittance for the jet-set couple.  According to an article in the Globe and Mail (here), while Mareva injunctions are usually granted ex parte with no involvement by the defendant, the court will allow Black's attorney to challenge the freeze order in a hearing, which they will no doubt contest vigorously.  An earlier agreement between Hollinger and Black requires the company to pay 75% of his attorney's fees in the federal prosecution, but it's unlikely the company will have to pay the lawyer's bills in this action, unless perhaps Black prevails. (ph)

August 31, 2006 in Fraud, Prosecutions, RICO | Permalink | Comments (1) | TrackBack (0)

Former CFO Settles SEC Insider Trading Case Over Trading in Takeover Target

Maybe he didn't think he was doing anything wrong, or perhaps just fell asleep at the switch, but one expects more from a CFO, so whatever caused Tom Mitchell to buy a piddling amount of stock in a company has turned out not to be worth the hassle.  Mitchell was CFO of Ferguson Enterprises, a large plumbing distributor, and bought 1,454 shares of Noland Company in 2005 while Ferguson was considering making a tender offer for Noland.  He bought the shares in his account and those of two sons, so if he was trying to cover his tracks he didn't do a very good job.  Interestingly, Ferguson passed on the acquisition, but another company did buy Noland, and the sale of the shares netted Mitchell a profit of $35,214.  He settled the SEC civil fraud case and agreed to disgorge his profits and pay a one-time penalty.

An interesting aspect of the case is that the profits were not derived from the inside information on which Mitchell traded, but on a different transaction about which he does not appear to have had any knowledge, except perhaps that Noland was "in play."  The fraud in insider trading occurs when the fiduciary trades on the material nonpublic information, not when a profit is realized, so the violation of the antifraud provisions of the securities laws occurred regardless of the outcome of the trade.  Mitchell may have been able to make a good argument that his profits were not from the violation, however, but just the luck of having traded on information that never came to fruition and then holding the shares as an investment.  Perhaps good in theory, but probably not worth fighting over in a case that settled for less than $75,000.  Accident or mistake, the trading certainly doesn't make the former CFO look good.  The SEC Litigation Release (here) describes the settlement. (ph)

August 31, 2006 in Civil Enforcement, Insider Trading, Securities | Permalink | Comments (1) | TrackBack (0)

Wednesday, August 30, 2006

What Not to Do at Trial

The  Sixth Circuit affirmed the insider trading, conspiracy, obstruction, and false statement convictions of former Ohio State University business school professor Roger Blackwell (United States v. Blackwell here), and the case contains an important, if rather obvious, lesson in what a defendant should not do during testimony of a crucial witness.  Blackwell was convicted of tipping a number of family members, friends, and colleagues about an impending purchase by Kellogg of Worthington Foods while Blackwell was a member of Worthington's board.  The NASD and then the SEC began an investigation of suspicious trading in Worthington stock, and Blackwell and his wife, Kristina Stephan-Blackwell, denied tipping anyone.  Blackwell, Stephan-Blackwell, and her parents testified in the Commission investigation.  In fact, however, Stephan-Blackwell tipped her parents, and after she and Blackwell split up in 2003, she contacted the government and worked out an immunity deal.  Not much later, another tippee, a friend of Blackwell's, worked out a similar arrangement, at which point the government indicted Blackwell and others.

At trial, Stephan-Blackwell was a key witness for the government, and during her testimony Blackwell allegedly mouthed "I hate you" to her.  As recounted in the Sixth Circuit's opinion, this little tidbit appears to have been observed by three jurors and the judge, along with Stephan-Blackwell, and the government was allowed to cross-examine Blackwell about what he purportedly mouthed because the court viewed it as witness intimidation.  Blackwell denied having done so, but the damage was done to his case.  While Blackwell denied having tipped anyone, and offered a rather dubious "leakage theory" for how the purchasers decided to buy Worthington in advance of the Kellogg deal, the jury convicted him, perhaps in large part because he was not believable.   An article published about the trial noted that the jurors who say they saw what Blackwell mouthed believed that it "destroyed his credibility" -- which is certainly not surprising.  While there is something to be said for looking your accuser in the eye, communicating your feelings about her is not a particularly good idea. 

The Sixth Circuit also affirmed the six-year sentence imposed on Blackwell even though he did not profit directly from the transactions in Worthington stock. (ph)

August 30, 2006 in Insider Trading, Judicial Opinions | Permalink | Comments (0) | TrackBack (0)

Tuesday, August 29, 2006

No Deferred Prosecution Agreement to Schering Sales Corporation

According to a press release of the US Attorney's Office in Boston here,

"Delaware corporation Schering-Plough Corporation, together with its subsidiary, Schering Sales Corporation have agreed to pay a total of $435,000,000 to resolve criminal charges and civil liabilities in connection with illegal sales and marketing programs for its drugs Temodar for use in the treatment of brain tumors and metastases, and Intron A for use in treatment of superficial bladder cancer and hepatitis C. The resolution also pertains to Medicaid fraud involving Schering’s drugs Claritin RediTabs, a nonsedating antihistamine, and K-Dur, used in treating stomach conditions."

Deferred prosecution agreements may start looking better to some companies after seeing the ramifications of the criminal conviction to Schering Sales Corporation.  Schering Sales Corporation, by pleading guilty to a "one count criminal conspiracy to make false statements" will mean that the company is "excluded permanently from participation in all health care programs." Although The Wall Street Journal does note here that the company's "marketing functions have been taken over by other parts of the company, which are permitted to continue doing business with Medicaid and Medicare." (The Wall Street Jrl. article by Sylvia Pagán Westphal, Zachary M. Seward, and John Carreyrou, also provides other background information on this case)

The collateral consequences can sometimes be the strongest effect of a criminal conviction. When there is a possibility of license forfeiture, debarment, or program exclusion -- as seen here -- the effect of the conviction goes well beyond the actual guilty plea.

The DOJ press release does state that "[a]fter the activities were uncovered by the government, Schering-Plough cooperated with the investigation and actively worked on compliance issues through a significantly expanded compliance department."


August 29, 2006 in Settlement | Permalink | Comments (0) | TrackBack (0)

Katrina Fraud

With hurricane season started, it is not surprising to see the government continuing to indict individuals related to Katrina.  According to Alabama News (AP) here, 15 individuals were just indicted on allegations of falsely claiming money from FEMA. A DOJ press release here , reports on the sentencing of another individual for filing a false claim.

The DOJ Hurricane Katrina Task Force web site has a long list of press releases issued for the indictments and convictions of individuals on criminal charges related to Katrina (see here). Alice S. Fisher, Assistant Attorney General of the U.S. Department of Justice's Criminal Division, and Chair of the Task Force, can claim an impressive record of prosecutions (see here).  The timeliness of these prosecutions should be well served as we enter a new hurricane season.


August 29, 2006 in Fraud | Permalink | Comments (0) | TrackBack (0)

Monday, August 28, 2006

Yet Another Deferred Prosecution Agreement - Prudential Equity Group

DOJ issued a transcript today here of Deputy Attorney General Paul J. McNulty's Press Conference regarding  the deferred  prosecution agreement entered into by Prudential Equity Group, a broker-dealer subsidiary of Prudential Financial, Inc.  The agreement calls for Prudential to "pay $600 million in fines, restitution and penalties."  According to McNulty, this settlement is the "largest resolution of a market timing case to date."

When questioned about the agreement including a provision waiving the attorney-client privilege, McNulty answered in part as follows:

"The waiving of attorney-client privileged information is a standard piece of the settlements that the Department of Justice has reached in the past. And as you know, there are many agreements that we've reached in our effort to combat corporate fraud.

"This agreement contains a provision of a similar nature. However, I'd note that in this waiver provision, there are some distinctions made. And it represents the kind of distinctions that the Department of Justice has been prepared and has made and is willing to continue to make as we try to work these out on a case-by-case basis.

"Here we have an agreement that makes a distinction between providing information that the company has that preceded the date on which the discovery and the discontinuance of -- I shouldn't say discovery, necessarily, but the discontinuance of the practices.

"It doesn't include information that the company received after that date from attorneys that might involve strategic planning or other defense-related things, things that to go what might be seen as more of a core of attorney-client communications.

"So this agreement represents an effort to try to make some distinctions in the area of the waiver, not that we have to always make those distinctions, because there may be circumstances where that's not appropriate. But certainly it requires a waiver where that information is a part of the overall cooperation environment.

"And that's the key here. There is every reason for Prudential to be cooperative. This is an agreement involving a different corporate structure really from then until now, which by the way, is why this deferred prosecution agreement is being reached as opposed to a criminal prosecution, because there are some real differences in terms of structure from past to present."

For many, this response will not be satisfactory.  For one, the decision of waiving the attorney-client privilege is being accomplished because a company has basically no bargaining power in making this agreement.  They either fold or face the possible consequences faced by Arthur Andersen, LLP. Yes, he is correct that there is "every reason for Prudential to be cooperative."

Additionally, to say in essence that there are different degrees of the attorney client privilege ignores the strong Supreme Court precedent in this area. Does DOJ not recall the case of Swidler & Berlin v. United States, the case that held that the privilege even extends beyond the death of the client?

Finally, the DOJ has all the cards in the deck. The judiciary is not a part of this deferred prosecution agreement.

In many ways, this deferred prosecution, like so many of these agreements are an excellent way to resolve corporate wrongdoing.  It is especially good to see here that "$270 million will be distributed to harmed mutual funds and their shareholders."  But is it really necessary to go so far in these deferred prosecution agreements to make the company "mini-prosecutors" against individuals within the company?  And is it really valuable to continued trust within the company to have waivers of the attorney-client privilege? Maybe it isn't such a wise move for prosecutors to use shortcuts that circumvent the hard work of investigating the matters themselves.

See Prudential's press release here; Wall Street Jrl here; New York Times here.


August 28, 2006 in Settlement | Permalink | Comments (0) | TrackBack (0)

Anderson Back in Jail for Contempt

Greg Anderson, former personal trainer for San Francisco Giants slugger Barry Bonds, is back in jail for another stint after being held in civil contempt for refusing to answer questions about steroid use by Bonds and other athletes.  Anderson served a little over two weeks in jail in July for refusing to testify before the earlier grand jury investigating Bonds for possible perjury and tax evasion, and was released only because the grand jury's term expired.  Anderson was subpoenaed immediately upon the empanelment of a new grand jury, and while his most recent appearance included answers to a few questions, such as his name, he refused  to respond about whether he ever injected Bonds with steroids and whether he knows New York Yankee outfielder Gary Sheffield.  Bonds and Sheffield testified in 2003 about steroids produced by Balco (Bay Area Laboratory Co-operative), where Anderson obtained designer steroids.  Bonds has denied ever using steroids, an issue in the current grand jury perjury investigation.  With the new panel's term lasting at least sixteen more months, Anderson looks to settle in for the long haul, unless he unlocks the jail cell by answering questions or if prosecutors have sufficient evidence to indict Bonds, which probably would obviate the need for his testimony.  Even in the latter situation, Anderson is unlikely to testify if called to a trial, so there's a chance he could even go to jail a third time for civil contempt.  An AP story (here) discusses the latest civil contempt. (ph)

August 28, 2006 in Grand Jury, Investigations | Permalink | Comments (0) | TrackBack (2)

Sunday, August 27, 2006

Scrushy Has a Tough Week

Although Richard Scrushy was found not guilty in his initial criminal trial, he has not been as fortunate in other matters.  This past week, the Alabama Supreme Court ruled that the former CEO of HealthSouth owes HealthSouth "$51.5 million" "as repayment for bonuses he earned while" at the company. (see Alabama News here) (see also Wall Street Jrl here) This is an example showing that a not guilty finding is not always definitive of the outcome in collateral civil matters.

Scrushy was also asking the federal court this past week to reconsider his conviction on bribery and fraud charges resulting after a jury trial. (see here)  He is arguing insufficient evidence on the bribery charge.(see Alabama News here)


August 27, 2006 in HealthSouth | Permalink | Comments (0) | TrackBack (0)

Computer Hacker Gets Three Years

A computer hacker who launched a "botnet" into the system was given a sentence of three years. (See Seattle Times here; Yahoo News here).   The government asked for six years.  According to Yahoo news, the computer attack "hit tens of thousands of computers" including a hospital. He plead guilty to "one count of conspiracy to intentionally damage a protected computer and one count of intentional computer damage that interferes with medical treatment."  His co-conspirators were juveniles.


August 27, 2006 in Computer Crime | Permalink | Comments (0) | TrackBack (0)