Saturday, September 9, 2006
In just a few short days, Hewlett-Packard Co. has gone from newly-christened market darling to the focus of intensifying state and federal investigations spawned by the company's disclosure of an internal investigation of leaks that included "pretexting" to obtain private records of board members. Oddly enough, the details of the investigation were first revealed by the company in an 8-K filing (here) disclosing the reason why a current board member would not be renominated because it was determined that he had leaked information to reporters during the period when its prior CEO was being ousted. That disclosure stated:
HP’s Nominating and Governance Committee thereafter engaged the outside counsel to conduct an inquiry into the conduct and processes employed with respect to HP’s investigation of leaks of confidential information (the outside counsel was not involved in the investigations of the leaks initiated by the Chairman or the internal HP group). The Committee was advised that HP had engaged an outside consulting firm with substantial experience in conducting internal investigations and that this firm had retained another party to obtain phone information concerning certain calls between HP directors and individuals outside of HP. The Committee was further advised that the Chairman and HP had instructed the outside consulting firm to conduct its investigation in accordance with applicable law and that the outside consulting firm and its counsel had confirmed to HP that its techniques were legal. After its review, the Committee determined that the third party retained by HP’s outside consulting firm had in some cases employed pretexting. The Committee was then advised by the Committee’s outside counsel that the use of pretexting at the time of the investigation was not generally unlawful (except with respect to financial institutions), but such counsel could not confirm that the techniques employed by the outside consulting firm and the party retained by that firm complied in all respects with applicable law.
It turns out that advice from outside counsel may not be entirely correct. The California Attorney General has announced that one or more persons may have committed a crime, and the fact that the work was undertaken by agents of Hewlett-Packard means that the company will be on the hook for any criminal violations. The SEC is also investigating the company's disclosure in May of the resignation of another director, Tom Perkins, who had objected to the pretexting, that did not give any reasons for his decision.
An interesting question will be whether the case turns into a federal criminal investigation. There are a few possibilities for a federal prosecution, aside from a possible securities disclosure violation, which would be enough to launch grand jury subpoenas. There is a federal identity theft statute, 18 U.S.C. Sec. 1028, but only section (a)(7) arguably seems to apply: "Whoever . . . knowingly transfers, possesses, or uses, without lawful authority, a means of identification of another person with the intent to commit, or to aid or abet, or in connection with, any unlawful activity that constitutes a violation of Federal law, or that constitutes a felony under any applicable State or local law . . . ." It would require finding another violation of federal or state law related to the identity theft used in the pretexting, but that is certainly possible. The computer fraud statute, 18 U.S.C. Sec. 1030, in (a)(2)(C) has a broad provision reaching any person who "intentionally accesses a computer without authorization or exceeds authorized access, and thereby obtains--information from any protected computer if the conduct involved an interstate or foreign communication . . . ." This crime does not require proof of any economic harm, and a "protected computer" is broadly defined to include a computer "which is used in interstate or foreign commerce or communication."
It's not clear whether the pretexting involved computer use, but if not, then there are the old, reliable friends of federal prosecutors everywhere: the mail and wire fraud statutes. While one would think that there was no fraud in pretexting in the sense of a theft from the victim, the Supreme Court's decision in Carpenter v. United States, 484 U.S. 19 (1987), could support a prosecution. The Court held that a scheme to deprive the Wall Street Journal of its confidential business information constituted a fraud designed to obtain "property" even though it was intangible and the victim lost nothing of monetary value. The pretexting to obtain a person's private telephone and internet communications records could conceivably fit into Carpenter's definition of property, and while it would be a stretch, that would not deter a federal prosecutor from initiating an investigation. I would not be surprised to hear in the next week or so that the U.S. Attorney's Office for the Northern District of California, which has taken an increasingly high-profile role in white collar investigations recently, issued grand jury subpoenas to the company and the various players in the case.
There is a second aspect of the case that is perhaps even more disturbing. The Wall Street Journal's Law Blog has reproduced a series of e-mails (here) between Larry Sonsini, perhaps the leading lawyer in Silicon Valley, and former board member Perkins, who raised questions about the legality of the internal investigation. The final e-mail is the most interesting, and potentially troubling for Sonsini. He wrote:
I looked into the conduct of the investigation and got a report from counsel at HP who was responsible for the effort. I confirmed his input by talking to Ann Baskins. Here is what I learned:
- There was no recording, review or monitoring or director e-mail.
- There was no electronic surveillance to monitor director communications.
- There was no phone recording or eavesdropping.
- The investigating team did not attempt to obtain the phone records of non-employee directors.
- The investigating team did obtain information regarding phone calls made and received by the cell or home phones of directors. This was done through a third party that made pretext calls to phone service providers. Apparently a common investigatory method which was confirmed with experts. The legal team also checked with outside counsel as to the legality of this methodology.
- There was no “secret spying” i.e. no electronic gear, listening devices, etc., were used.
It appears, therefore, that the process was well done and within legal limits. The concerns raised in your e-mail did not occur.
Let me know if you think I should proceed further.
This missive, giving Hewlett-Packard a clean bill of health, brings to mind a potentially analogous situation that occurred a few years ago. For those of you familiar with Mister Rogers' Neighborhood, "Can you say Vinson & Elkins?" This has all the hallmarks of a quick-and-dirty review based on limited consultations with in-house counsel and those with a stake in making sure that a potential whistleblower goes away quietly. Paragraph #5 is the key: was the outside counsel perhaps Mr. Sonsini's own firm, Wilson Sonsini, so that he would never question its conclusions? Does the fact that "everyone does it" really make it legal? While one might adopt such a view when dealing with financial professionals, wouldn't the fact that private investigators who might operate near the edge of the law require just a little bit more attention?
This is not Sonsini's first brush with a potential investigation involving his firm's role in advising corporations. He was a director at Brocade Communications and his firm helped draft that company's management compensation policy, including the award of bonuses. Recently, the company's former CEO and another executive were indicted for securities fraud related to options back-dating. Moreover, Wilson Sonsini advised a number of other companies caught up in the options-timing investigations by the SEC and federal prosecutors. It is certainly not always the case that where there's smoke there's fire, but this is a situation in which prosecutors, the SEC, and, inevitably, the shareholders -- through derivative suits that may already have been filed -- will demand answers from the board and Hewlett-Packard's outside counsel. Settle in, this one may last quite a while. (ph)
Walter Anderson has been in jail since his indictment in 2005 for failing to pay what the government alleged were taxes on hundreds of millions of dollars he made on investments in the telecommunications industry. As discussed in an AP story (here), Anderson entered a guilty plea to two tax evasion charges and one count of tax fraud for avoiding paying over $200 million in taxes. Blog Emperor Paul Caron, who describes the case as the "largest personal tax-evasion case in U.S. history," has a number of links on the TaxProfBlog (here) to various stories about Anderson and, even better, the website www.justiceforwalt.com. The banner at the top states that it is "a call for reason and fairness in the case of U.S. vs. Walter Anderson," and states that "[h]e has committed no fraud against customers, business associates or employees. He has made substantial contributions to local, national and international communities. The charges against him do not appear realistic, and his continued incarceration seems to be designed to prevent him from preparing for a defense against those charges. Walter Anderson's fundamental rights are being violated by the US Justice department, in their zeal to get a conviction, any way they can. He is being held without bond, on a charge that virtually everyone else ever so charged was allowed to post bond, or in many cases, were released on recognizance." The guilty plea will not prevent him for continuing to assert the unfairness shown by the federal government in prosecuting him, but the agreement means that he will be looking at up to ten years in jail. Because he was held without bail based on a finding that he was a flight risk -- Anderson admitted that he moved hundreds of millions of dollars to off-shore trusts, so the denial of bail was plausible -- the sentence should include credit for that time. (ph)
Friday, September 8, 2006
In what will likely be the final chapter in the prosecution of former WorldCom CEO Bernie Ebbers, assuming the Supreme Court does not grant certiorari to review the conviction, U.S. District Judge Barbara Jones ordered him to report to the Bureau of Prisons on September 26 to begin serving his 25-year prison term. The Second Circuit affirmed the conviction and sentence in July, and so the next step will be determining where Ebbers will be incarcerated. Judge Jones recommended that Ebbers be sent to the federal correctional institution (FCI) at Yazoo City, Mississippi, which has both low- and medium-security facilities in the complex. A Jackson Clarion-Ledger article (here) notes that former WorldCom controller David Myers served his term at the same facility. The company's former CFO, Scott Sullivan, a star witness at the Ebbers trial, is serving his five-year sentence at the FCI in Jesup, Georgia, and according to the Bureau of Prison's website (here) is scheduled for release in March 2010.
With Ebbers apparently headed to prison, one of the only remaining issues in the case is completing the sale of his assets to satisfy the forfeiture to which he agreed to settle claims by prosecutors, the SEC, and the plaintiffs in the securities fraud class action against the company and its officers. The Clarion-Ledger article notes that the assets "include the Brookhaven Country Club, an 18-hole golf course, clubhouse, swimming pool and tennis courts; the 28,000-acre Angelina Plantation that is a commercial farming operation about 30 miles west of Natchez and located in Louisiana; and majority interest in KLLM Transport Services Inc., one of the largest temperature-controlled, over-the-road truckload carriers in the United States." The Angelina Plantation is scheduled to be auctioned shortly and there is an offer of $31 million. The president of the company overseeing the auction noted that "[w]e have nothing but gratitude for the gracious way that Bernie has dealt with us." (ph)
U.S. District Judge Lewis Kaplan rejected KPMG's argument that its sixteen former partners, who have been indicted for their roles in the firm's peddling of questionable tax shelters, should be required to arbitrate their claims to have the firm pay their attorney's fees. The judge's opinion (available below) is, as usual, lengthy -- 68 pages -- and heavily footnoted -- 180 of them -- although it's not nearly as long as his earlier decision holding that the Department of Justice's Thompson Memo was unconstitutional. While the rejection of KPMG's request is hardly surprising, given the judge's apparent exasperation with both the federal prosecutors from the Southern District and KPMG, this decision may be subject to challenge by the firm on the arbitration issue. While the court determined that one group of former partners was not subject to KPMG's 2003 partnership agreement requiring arbitration of disputes involving former partners, the rest of them appear to be parties to that agreement. For those partners, however, Judge Kaplan decided that requiring arbitration would be against public policy, which may be a tough position to sustain given the strong federal policy in favor of arbitration.
Regardless of how the arbitration issue is ultimately resolved, the judge has set a trial date of October 17 to decide whether KPMG must pay the attorney's fees of the defendants. Given how the firm has fared to this point, the outcome of that proceeding is likely a foregone conclusion, which means that the costs to the firm will mount rather quickly when it must pay for the phalanx of lawyers defending the sixteen defendants. Once KPMG lose that round, at that point it can appeal to the Second Circuit, which may well weigh in on the various matters that have arisen in the case regarding the application of the Thompson Memo. (ph)
A group of former senior Department of Justice officials, including former Attorney Generals Griffin Bell and Dick Thornburgh, and former Solicitor Generals Ted Olson, Ken Starr, and Seth Waxman, sent another letter (available below) to Attorney General Alberto Gonzales asking that the Department revise the Thompson Memo "to state affirmatively that waiver of attorney-client privilege and work-product protections should not be a factor in determining whether an organization has cooperated with the government in an investigation." The letter comes in advance of a hearing before the Senate Judiciary Committee on September 12 on "The Thompson Memorandum’s Effect on the Right to Counsel in Corporate Investigations." Virtually all of the former Department officials are now in private practice, and many of their firms represent corporate clients. Moreover, two signatories, Ted Olson and Seth Waxman, were in the Department when the Thompson Memo and its predecessor, the Holder Memo, were issued. It would be interesting to learn whether they took the same position on this issue during their time in government. A Legal Times story (here) discusses the letter sent to A.G. Gonzales. (ph)
Thursday, September 7, 2006
Tracy Costin, the former owner of polling company DataUSA Inc., entered a guilty plea to conspiracy to commit mail fraud for fabricating the results of polls the company conduct on behalf of, among others, President Bush in 2004. Costin was indicted along with a DataUSA manager in March 2005 on fraud and conspiracy charges, and the indictment (here) alleged that they instructed "DataUSA employees to alter survey data and to fabricate surveys and otherwise falsify their contents in order to meet job quotas and deadlines. The term 'talk to cats and dogs' was one of the terms used by the defendants to instruct employees to fabricate surveys." It's not clear if any of the alleged feline or canine poll respondents would have been witnesses at the trial. An AP story (here) discusses Costin's guilty plea. (ph)
If the case is not going your way, wouldn't it be great if you could just change the law in your favor? A pipe-dream in most cases, at least outside of the corporate context ,where sometimes companies can change the rules in the middle of the takeover fight, and tax, where everything can be made retroactive. In a criminal case, one would certainly expect that the rules cannot be changed after the fact. In the wake of the death of Ken Lay, however, the government has asked U.S. District Judge Sim Lake to hold off on deciding the motion of Lay's estate to abate his conviction and indictment while it seeks to have Congress adopt legislation to overturn the abatement doctrine that controls the case. In a filing with the court (available below, courtesy of the Houston Chronicle), the government acknowledges, in effect, that the abatement doctrine applicable in the Fifth Circuit will result in having Lay's criminal record expunged, preventing prosecutors from using the conviction to support the criminal asset forfeiture it sought. As described by the government, this is "radical relief" that "unnecessarily harms crimes victims" by depriving them of the use of the conviction in seeking recovery, although it is the doctrine applied in every federal court and a number of states.
The legislative proposal would be retroactive to July 1, conveniently timed for five days before Lay's death, and it would create a new "special civil forfeiture proceeding" that would essentially preserve the conviction in those cases in which the defendant dies after the conviction but before a decision on the forfeiture or the completion of the first appeal as of right. The proposed legislation covers seven pages, and is followed by another seven-page analysis of the statute -- all to overturn one high profile case in which the government will be forced to proceed with a civil asset forfeiture case if it still wants Lay's assets, an avenue that presents greater hurdles to recovery.
The proposed bill and accompanying documents seem to represent a significant effort on the part of the Department of Justice, and raises in my mind this question: Does the Enron Task Force have too much free time? The number of cases in which abatement will occur is fairly small, I suspect, and it's not as if the government does not have access to civil forfeiture to recover Lay's assets. A less expeditious tool, but then Lay did die, so it's not as if he's trying to duck out on a potential penalty.
The government has framed the issue in terms of the rights of victims, noting that a civil forfeiture at this point could take years. While that may be true, does the fairly uncommon situation require that a well-established legal doctrine be overturned to permit the government to achieve a quicker result in only a few cases? Moreover, the assets in Lay's estate subject to forfeiture, assuming there are any, are not going to disappear, and they represent only a minute fraction of the losses suffered by Enron shareholders. It's ironic that the government's brief does not appear to acknowledge its recent position that Jeffrey Skilling is responsible, under principles of joint liability, for the entire amount sought through the criminal forfeiture (over $180 million). If that is the case, then is there really a need for the legislation to reach Lay's assets?
The government's position is that the abatement doctrine is a common law principle, and opinions discussing it certainly seem to reflect that it is an exercise of the court's equitable power. But could there be a constitutional basis for it? The right to appeal is not guaranteed by the Constitution, but if there is a statutory appeal as of right then due process and equal protection require that all defendants be treated similarly. Because the criminal conviction cannot be challenged after death, would it be a denial of due process if the conviction is not abated? Along the same lines, a defendant has a right to consult counsel, but of course that is denied in the "special civil asset forfeiture" incorporated in the legislation because the defendant is -- of course -- dead and cannot be consulted even though the conviction effectively continues. It may not be as simple as the Department envisions to just roll back the clock in this case.
And even if it can put the criminal forfeiture in the way-back machine, is it worth the effort, especially when it is certainly an open question whether Congress will choose to address the issue during its remaining few weeks right before an election when most of the federal budget has not been passed? (ph)
The snail-like pace of the resentencing of former Dynegy financial executive Jamie Olis may be getting closer to resolution as the government has recommended that the district court find the loss from Olis' fraud was approximately $79 million. Prosecutors continue to make the perfunctory argument that the diminution in the value of Dynegy's stock -- a figure well over $100 million -- after the disclosure of the transactions in which Olis participated is the proper measure, but that simplistic assessment which triggered the original 24-year sentence was overturned by the Fifth Circuit. The Department of Justice now offers another, somewhat less substantial, loss figure based on the tax revenue loss the Treasury would have suffered from the tax-related transactions designed to pump up Dynegy's income. The $79 million figure offered by the government would put the potential sentence under the Guidelines at over 10 years, and the government recommends 12 1/2 years for Olis. One initial problem with the government's theory is that the conviction was not for defrauding the Treasury, although the Sentencing Guidelines contain some flexibility in determining the amount of loss through alternative measures when a simple calculation cannot be made. An interesting question will be how far U.S. District Judge Sim Lake wants to go in coming up with a loss figure, or whether he will view the 2+ years Olis has been in jail as sufficient punishment. A Houston Chronicle article (here) notes that the hearing on the loss determination will take place on Sept. 12, but a sentencing date has not yet been set. For all concerned, that decision should be made sooner rather than later in a case that has dragged on for quite a while. (ph)
The SEC filed a civil complaint alleging that two former executives of ITXC Corp. arranged for the payment of bribes to officials of African state-owned telephone companies to secure business. The defendants are Steven Ott, the former vice president of global sales, and Roger Young, a former managing director for the Middle East and Africa. According to the SEC's Litigation Release (here):
ITXC was a publicly-held international telecommunications carrier based in Princeton, New Jersey that sought to do business in Africa. According to the complaint, Ott and Young approved, and in some cases negotiated, bribes that ITXC paid to senior officials of government-owned telephone companies in Nigeria, Rwanda and Senegal, in order to obtain contracts that were necessary for ITXC to be able to transmit telephone calls to individuals and businesses in those countries. The complaint alleges that Ott and Young were responsible for $267,468.95 in bribes that ITXC paid between August 2001 and May 2004. The complaint further alleges that ITXC made $11,509,733 in net profits from the contracts. In 2004, ITXC merged with Teleglobe International Holdings Ltd., which was subsequently acquired by Videsh Sanchar Nigam Ltd. in 2006.
Wednesday, September 6, 2006
Former Illinois Governor George Ryan was sentenced to serve 6 and one-half years in federal prison for his convictions on corruption and RICO charges following a seven-month trial. The charges related to conduct when Ryan was the Illinois Secretary of State and involved gifts related to the issuance of drivers licenses and other government contracts. A number of former aides have been convicted, and Ryan received the same sentence as his top aide. The government sought a sentence within the Guidelines range of 8-10 years, and the defense argued for a 30-month sentence due to Ryan's poor health. Although U.S. District Judge Rebecca Pallmeyer did not impose the sentence called for by the Sentencing Guidelines, the term of imprisonment is significant and means that Ryan will not be released until he is at least 78 years old, assuming the conviction is upheld on appeal. A Chicago Tribune story (here) discusses the sentencing.
Former NBA all-star Ralph Sampson has tentatively agreed to plead guilty to a perjury charge and will serve two months in jail. Sampson tussled with federal prosecutors in Northern Virginia in 2005 when he was charged with failing to pay over $250,000 in child support for two of his children. After entering a guilty plea to that charge, he was then indicted on perjury, false statement, and mail fraud charges related to his financial filings in that case made in connection with a request for court-appointed counsel (see earlier post here). According to an AP story (here), Sampson will plead guilty to the perjury charge to avoid a trial scheduled to begin on Sept. 7. He has not been sentenced yet for the earlier child support conviction, and it's not clear whether the agreement in this prosecution will cover both cases. (ph)
San Francisco Chronicle reporters Lance Williams and Mark Fainaru-Wada have avoided being sent to jail for civil contempt, at least for a little while. The two reporters were subpoenaed to testify before a grand jury investigating the leak of the testimony of major league baseball players, most prominently San Francisco Giants slugger Barry Bonds, who testified in 2003 during the Balco (Bay Area Laboratory Co-operative) steroids investigation. The reporters quoted extensively from Bonds' testimony in which he denied knowingly using steroids provided by his personal trainer, Greg Anderson. The current investigation includes possible perjury by Bonds and the potential violation of Federal Rule of Criminal Procedure 6(e) related to the improper disclosure of grand jury materials. While a federal district court judge ordered the two reporters to testify or be subject to civil contempt sanctions (see earlier post here), they worked out an agreement with prosecutors that they do not have to go to jail while they appeal the district court's order to the Ninth Circuit. They are in a better position than Anderson, Bonds' former trainer, who is in jail for a second time because he refused to answer questions before the grand jury about his knowledge of Bonds' use of steroids. Given the recent spate of cases enforcing subpoenas to reporters, it seems unlikely that Williams and Fainaru-Wada will avoid jail if they carry through with their assertion that they will not testify. The grand jury has over 15 more months in its term, so they could face a substantial period of incarceration for civil contempt. An AP story (here) discusses the agreement with federal prosecutors. (ph)
TaxProf blog here has the lineup and some wonderful resources on today's Senate Hearing on Back-Dating Options. The lineup includes:
- Paul J. McNulty, Deputy Attorney General
- Mark Everson, Commissioner, Internal Revenue Service
- Linda Thomsen, Director, Division of Enforcement, United States Securities and Exchange Commission
- Nell Minow, Editor, The Corporate Library, Portland, ME
- Lucian A. Bebchuk, Harvard Law School
- Charles M. Elson, University of Delaware
- Steven Balsam, Temple University
Tuesday, September 5, 2006
It seems that land is a common theme is white collar cases. This time the case relates to timber on the land. According to a DOJ press release here, the head of Berry College’s Land Resources Department in Rome, Georgia, pleaded guilty "to charges of conspiracy and interstate transportation of stolen property." The scheme to defraud related to the sale of timber on land that was sold without Berry College receiving the approximately $2.5 million in profits. Because of the high loss here, the sentence could have been very high. According to the plea agreement he, "agreed to forfeit his interest in his residence," and "faces a maximum sentence of fifteen years in federal prison, although his actual sentence will be determined by the Court after consideration of the federal sentencing guidelines."
A 14th term Republican Congressman seems to be having some questions pointed his way. According to Yahoo News (AP) here a land deal involving Rep. Jerry Lewis is being scrutinized by DOJ. The article states that the investigation is investigating his ties to lobbyists.
After the Abramoff success, of using the cooperation of a lobbyist to secure other indictments, one has to wonder if the DOJ/FBI have decided to try this model elsewhere.
Business Week Online here and Wall Street Jrl. here discuss the fact that Takafumi Horie's trial starts today (actually with the time difference it already started). The former CEO of Livedoor, a Japanese internet company, faces a court in Japan for securities violations. In the Japan Times here are some comments on the opening day of the trial - e.g. 2,000 people waited in line out outside the courthouse for 61 gallery seats.
The possible penalty is 5 years in prison and a fine. This contrasts with the possible penalties one might face if charged with these crimes in the U.S. In the U.S. the amount of fraud loss would be crucial in determining the sentence if one were convicted. Just ask Jamie Olis, who initially was sentenced to 24+ years before the court overturned the sentence.
Takafumi Horie is pleading innocent to the charges and fighting them in court. This is definitely a case to follow.
Monday, September 4, 2006
ABA National Institute on Securities Fraud Conference
The ABA National Institute on Securities Fraud is set for September 28-29 in Washington, D.C. The program can be found here. According to the program, some of the topics to be covered in the conference are:
How to handle/represent whistleblowers
How to cope with and conduct internal investigations
Compliance: Is your client making it or faking it?
How to cope with parallel investigations by the SEC, DOJ and plaintiffs
Multiple charges: Fighting the two, three, and four-front war
Criminal provisions of Sarbanes-Oxley
When regulatory violations become criminal prosecutions
Outside accountants as gatekeepers
Fraud Update references here a news release titled, "Co-Leader of $30 Million Telemarketing Fraud Pleads Guilty." What is particularly noteworthy about this case is that it involves "a Canadian citizen who was the co-owner of a company in Montreal that engaged in a massive telemarketing fraud." This is yet another example of the DOJ using extraterritorial jurisdiction to prosecute an individual outside the United States. Although outside the United States, jurisdiction is often premised on it affecting this country, a theory called "objective territoriality"