Saturday, October 7, 2006

Another Enron Executive Sentenced

Former Enron executive Paula Rieker received a sentence of 2 years probation for her guilty plea to a charge of insider trading for reaping nearly $500,000 from sales of stock when she knew the company was facing severe financial problems.  Rieker was among the eight former Enron officials who entered guilty pleas and later testified against former CEOs Ken Lay and Jeffrey Skilling in the conspiracy and securities fraud prosecution.  The government moved for a downward departure in the sentencing of Rieker, noting that she provided valuable evidence implicating Lay in givingmisleading information to analysts during 2001 about the prospects of Enron's broadband unit, a centerpiece of the government's case that Lay committed securities fraud.  Rieker was an executive in the investor relations department and then became corporate secretary, reporting directly to Lay.  Under the Sentencing Guidelines applicable to Rieker's offense, she was looking at an 18-24 month term, so the probation term means U.S. District Judge Melinda Harmon gave a substantial downward departure for her cooperation.  A Houston Chronicle story (here) discusses the sentencing. (ph)

October 7, 2006 in Enron, Sentencing | Permalink | Comments (0) | TrackBack (0)

The Pequot Insider Trading Investigation Fades Away

Allegations that senior management in the SEC's Enforcement Division quashed an insider trading investigation largely came to naught as the Commission decided not to file any civil insider trading charges in the case.  Former SEC staff attorney Gary Aguirre alleged to the Senate Judiciary Committee that after he sought to take the deposition of Morgan Stanley CEO John Mack in connection with an investigation of possible insider trading at a hedge fund run by Pequot Capital Management, upper-level managers in Enforcement refused to permit the testimony and then fired him two days after giving him an outstanding performance appraisal (see earlier post here and Aguirre's statement to the Judiciary Committee here).  With the glare of publicity, the SEC relented and authorized taking testimony from Mack, who was thought to be a potential source of the information about an impending transaction.  As expected, the renewed investigation had little effect on the final outcome as Pequot received notice from the Enforcement Division that it will not recommend the filing of charges against the firm or any individuals.  Consistent with SEC practice, the staff maintained that the investigation remains open -- essentially on the off chance that manna from heaven in the form of a confession from some unknown participant emerges.  The circumstances surrounding Aguirre's dismissal remain under investigation, but it's unlikely that anything further will come out about the case. An AP article (here) discusses Pequot's disclosure that the SEC investigation into its trading is complete. (ph)

October 7, 2006 in Insider Trading, Investigations, Securities | Permalink | Comments (0) | TrackBack (0)

Friday, October 6, 2006

Bonds' Former Trainer Freed Again, For At Least a Little While

Greg Anderson, the former personal trainer for (perhaps the former) San Francisco Giants slugger Barry Bonds, was released from jail by U.S. District Judge William Alsup because of what the judge termed a "legal snafu."  Judge Alsup sent Anderson to jail for civil contempt twice because of his refusal to testify before a grand jury investigating whether Bonds committed perjury in denying before a federal grand jury that he knowingly used steroids.  Anderson pleaded guilty in the Balco (Bay Area Laboratory Co-operative) case to supplying steroids, and according to the government possessed records showing possible steroid use by Bonds.  Anderson's first contempt ended in July when the grand jury's term expired, and this time he was released because the Ninth Circuit did not complete its review of Anderson's appeal of the civil contempt within the required thirty days.  Under the Recalcitrant Witness Act, 18 U.S.C. Sec. 1826(b), "Any appeal from an order of confinement under this section shall be disposed of as soon as practicable, but not later than thirty days from the filing of such appeal."  The Ninth Circuit issued a memorandum opinion (here) on September 28 rejecting most of Anderson's arguments, but it remanded the case because the district court's findings on an secret tape recording that Anderson alleges was the result of an illegal wiretap were insufficient for appellate review.  The district court was given one week to make a record of its position on the wiretap issue so the appellate panel could review it, but that meant the Ninth Circuit had not decided the appeal within the requisite thirty days, which expired on Oct. 5. 

While Anderson is free once again, he could be back in jail rather quickly if the Ninth Circuit agrees with the district court's findings that the government's proposed examination of him in the grand jury will not entail any use of the tape recording and therefore does not violate his rights.  If the Ninth Circuit does not release him, then Anderson may have to sit in jail until the grand jury's term expires in January 2008, unless he decides to cut his losses and testify about Bonds. An AP story (here) discusses District Judge Alsup's reluctant ruling. (ph)

October 6, 2006 in Grand Jury | Permalink | Comments (0) | TrackBack (0)

Where Is the KPMG Trial Headed?

The prosecution of sixteen former KPMG partners and employees, along with an outside lawyer and investment adviser, may be headed for separate trials.  A New York Times story (here) discusses a letter sent to U.S. District Judge Lewis Kaplan by federal  prosecutors suggesting that the case can be divided into two parts, with the higher level partners, including the firm's former number two and its chief financial officer, in one proceeding and the lower-level partners and employees in another.  It is not clear who would go first, and there is certainly a risk to prosecutors in dividing the case along these lines because each group may well point the finger at the other.  The government's suggestion appears to be in response to a continuing line of criticism of the prosecution from Judge Kaplan, who questioned the government's tactics in indicting so many defendants that creates the risk of prejudicial spillover.

KPMG is not a defendant in the case, but it has been dragged into litigation in an ancillary proceeding over whether it must pay the attorney's fees of the defendants who worked for the firm.  Judge Kaplan has been insistent that KPMG appears to be obligated to pay the fees, rejecting claims that the firm decided not to pay any fees independently of pressure by prosecutors through the implementation of the Thompson Memo, which he found to be unconstitutional, or that an arbitration clause governed the dispute.  In a small ray of sunshine for KPMG, the Second Circuit postponed a trial before Judge Kaplan on the attorney's fee issue so that the court can hear the firm's appeal that the arbitration clause requires that the claims proceed in that type of forum rather than as an adjunct to the criminal case.  An New York Law Journal story (here) discusses the Second Circuit's order postponing the attorney's fees trial. (ph)

October 6, 2006 in Prosecutions | Permalink | Comments (0) | TrackBack (0)

Thursday, October 5, 2006

Five Charged in H-P Pretexting Case

It took a few weeks from the initial assertion that a crime took place, but California Attorney General Lockyer's office finally filed charges against five defendants in the Hewlett-Packard  pretexting case, the most prominent being former chairwoman Patricia Dunn.  The other defendants are former chief ethics officer Kevin Hunsaker, and outside investigators Ronald DeLia (Massachusetts), Matthew Depante (Florida), and Bryan Wagner (Colorado).  DeLia served as the main contact between the various firms retained to conduct the investigation of leaks from H-P's board and journalists that included pretexting and corporate executives.  The felony complaint (available below) charges the defendants with conspiracy, wire fraud, misuse of computer data, and unauthorized use of personal identity data.  The major focus is on the actions of Hunsaker and DeLia, and Dunn's role, at least as recounted in the overt acts for the conspiracy, appears to be supervisory more than anything else, although she is accused of giving DeLia the home, cellular, and office telephone numbers for H-P board members. 

Depante and Wagner go unmentioned in the list of overt acts for the conspiracy, and the other charges simply recite the statutory provision.  The supporting declaration (available below) provides a bit more detail regarding the State's evidence, particularly the role of Depante's and Wagner's firms, but not  much beyond what is already known about the investigation.  While Depante and Wagner were among the investigators who actually carried out the pretexting, their conduct occurred outside California, and hence beyond the Attorney General's jurisdiction except through the conspiracy count (recall the scope of Pinkerton liability for the acts of co-conspirators).

Two other senior H-P executives who were not indicted are mentioned in the overt acts: former general counsel Ann Baskins and former security chief Anthony Gentilucci.  The overt acts seem to put Gentilucci in the middle of the action involving Hunsaker and DeLia, and it may be that he has agreed to cooperate and so is not named as a defendant but will enter a plea agreement later.  Baskins rates a single mention in Overt Act 3 describing a communication from DeLia to Dunn and Baskins about obtaining telephone records by a "ruse."  It's not clear to me why Baskins was not included in the indictment, but she may be cooperating with the investigation and will avoid charges because of a relative lack of involvement compared to Hunsaker and Dunn.  She may prove to be a crucial witness, and could receive immunity for her testimony.

All of the defendants except Dunn asserted the Fifth Amendment at the House Subcommittee hearing on September 28 (see earlier post here).  Dunn testified extensively, and advanced her position that she did not know that pretexting was wrong and thought that personal telephone records could be obtained by asking the company for them -- an assertion that drew ridicule.  For Dunn, the "honest-but-ignorant-chairwoman" defense has already been laid out before the Subcommittee, so it is unlikely she will deviate from that course.  Information also came out that Dunn will begin undergoing treatment for ovarian cancer (see Reuters story here). (ph)

Download dunn_felony_complaint.pdf

Download dunn_felony_complaint_supporting_declaration.pdf

October 5, 2006 in Prosecutions | Permalink | Comments (0) | TrackBack (0)

One Heck of a Deposition

Bruce Carton on the Securities Litigation Watch Blog has an interesting post (here) calculating the cost of a pending deposition of former Enron CFO Andrew Fastow in the civil securities fraud lawsuit against a number of banks that advised the company and financed its deals.  The deposition is expected to take two weeks (ten working days), and eighty (!!!) attorneys are expected to be involved.  According to Bruce, using $400 per hour as the average hourly billable rate, that works out to $3.2 million for the deposition alone.  A Houston Chronicle story (here) notes that U.S. District Judge Hoyt passed on a motion by the plaintiffs' attorneys to temporarily release Fastow each day from the federal lock-up in Houston so he can prepare for the deposition, saying that the lawyers should approach U.S. District Judge Harmon with that request because she is presiding over the civil case.  If Judge Harmon grants the request, Fastow may be spending some time in Houston in the care and custody of his lawyers while he preps for the deposition, and then gets the joy of spending two weeks being grilled by lawyers for the defendant banks.  I'm not sure if an FCI is better or worse, it's a tough call.  Regarding the $3.2 million estimate, you should also throw in the costs of daily transcripts and the various paralegals and support staff that have to attend to the very important needs of so many lawyers.  I wonder whether Fastow will get to keep his witness fee when he finally goes to whatever prison awaits him. (ph)


UPDATE: The Houston Chronicle reports (here) that District Judge Harmon granted the plaintiffs' request that Fastow be released during daylight hours to be deposed in the securities fraud suit.  He will be in the custody of U.S. Marshals during the time he is out of the federal detention facility in Houston, and his "liberty" ends on Halloween. (ph)

October 5, 2006 in Enron | Permalink | Comments (1) | TrackBack (0)

You Pick Up the Spinach

The U.S. Attorney's Office for the Northern District of California announced that FBI agents executed search warrants at the plants of two Central Valley food processors in connection with an investigation of spinach from Salinas contaminated with E. coli.  In September, over 200 people fell ill due to contaminated spinach, and one person died from eating spinach infected with E. coli 0157:H7 traced to the Salinas area.   A press release (here) issued by U.S. Attorney Kevin Ryan states, "I want to reassure the public that there is no indication in this investigation that leaf spinach was deliberately or intentionally contaminated. We are investigating allegations that certain spinach growers and distributors may not have taken all necessary or appropriate steps to ensure that their spinach was safe before they were placed into interstate commerce. Moreover, the investigation has not revealed any evidence of a new or continuing threat to public health in connection with the matters under investigation."  A San Francisco Chronicle story (here) indicates that agents searched the two plants for documents related to quality assurance and whether FDA guidelines were followed in the packaging of the spinach.  The execution of the search warrants means that the spinach investigation has moved from a public health issue to a full-scale criminal investigation. (ph)

October 5, 2006 in Investigations | Permalink | Comments (0) | TrackBack (0)

Legal Profession Blog

A new member of Paul Caron's ever-expanding empire -- could he be the Alexander the Great of the law blog world one day? -- is the Legal Profession Blog (here).  Its editors are S. Alan Childress of Tulane, Michael S. Frisch from the D.C. Bar and a PR teacher at Georgetown, and Jeffrey M. Lipshaw of Tulane.  The blog just started up a couple weeks ago, and for anyone interested in issues related to the legal profession, this is the place to go (along with the Legal Ethics Forum).  Please be sure to check it out. (ph)

October 5, 2006 in Legal Ethics | Permalink | Comments (0) | TrackBack (0)

Did Sonsini Receive Spring-Loaded Stock Options?

Silicon Valley superlawyer Larry Sonsini has been in the news a lot lately, most likely to his chagrin.  His name surfaced in cases ranging from the Hewlett-Packard pretexting investigation -- he serves as one of the company's outside counsel and advised the board related to the internal investigation of its practices -- to options-timing issues at various technology companies, include Brocade Communications, where he was on the board and its former CEO has been indicted on securities fraud charges.  Now comes an article in The Recorder (here) questioning an options grant in 1999 at Novell that included an award of options on 50,000 shares to each board member, which included Sonsini.  The issue is not back-dating, which raises serious concerns about the propriety of the company's books-and-records, but whether the grant was "spring-loaded."  A company can time the grant of options to occur prior to the release of positive news, so that the exercise price is at a lower amount than if the award took place after the disclosure, making them more valuable.  While some have questioned whether the practice is illegal or not, in light of the fact that the company is not deceived in connection with the grant, it can appear to be a bit unseemly.  The options granted by Novell to Sonsini and other directors had an exercise  price of approximately $16 per share, and two months later the price hit almost $40 after the company released rosy financial projections.  Not that this did Sonsini and others much good, because this was 1999, and when the technology bubble burst the options became worthless.

Should an attorney take stock or options in a client corporation?  The ABA has blessed the practice, at least somewhat, in Formal Opinion 00-418, issued in 2000 (note the timing).  The Opinion ends with the following admonition:

Although a lawyer's representation of a corporation in which the lawyer owns stock creates no inherent conflict of interest, circumstances may arise that create a conflict between the corporation's interests and the lawyer's economic interest as a stockholder. In such event, the lawyer must consult with the client and obtain client consent if, as a result of her ownership interest, the representation of the corporation in a particular matter may be materially limited. The lawyer may in some circumstances be required under Rule 1.7(b) to withdraw from representing the client in a matter if her financial interest in the client is such that she cannot reasonably conclude that the representation would not be adversely affected.

Lawyers have to be particularly careful when a member of their firm is a director of the company and they remain as counsel to the corporation.  The Novell grant to Sonsini is not a breach of the ethics rules, and most likely did not violate the federal securities laws, but it is not particularly good publicity, either, given all the other controversies where his name has emerged as a central player. (ph)

October 5, 2006 in Securities | Permalink | Comments (1) | TrackBack (0)

Wednesday, October 4, 2006

Some HP Execs to be Indicted Today

The New York Times is reporting here that the California Attorney General is expected to file indictments today against several HP executives.  The felony charges also are anticipated to be levied against a former lawyer at HP, a private investigator, and others. More will follow, but for background now on this case, see the following posts:

Making "Pretexting" a Crime - here

Could the HP "Pretexting" Trigger a Conspiracy Case - here

Everyone Takes the Fifth - here

March of the Private Investigators - here

House Committee Subpoenas Two Former HP Execs - here

HPs Mea Culpas - here

Lets Paper the Place with Subpoenas - here

Getting Ready for the HP Hearing in Congress - here

HP Lawyer at the Ethical Edge - here

The Latest on HP - here

Congress Starts Sniffing Around the HP Internal Investigation - here

Tough Times for Two GCs - here

Look Who's Knocking on HP's Door - here

What's Next for Hewlett Packard - here


October 4, 2006 in Prosecutions | Permalink | Comments (0) | TrackBack (0)

Causey Sentencing

Richard Causey, former Chief Accounting Officer at Enron, has had his sentencing hearing moved from October 19, 2006 to November 15th. This means that Causey would be sentenced after Jeffrey Skilling who is presently set to be sentenced on October 23, 2006.


October 4, 2006 in Enron, Sentencing | Permalink | Comments (0) | TrackBack (0)

Split Verdict In Alabama Bribery Case

It was not a good day for most of the defendants in the Alabama Sewer case as the former sewer chief Jack Swann, three businessmen and three companies were convicted in a conspiracy/bribery case. One executive was cleared of charges. Swann was found guilty of conspiracy, bribery, and mail fraud. He was found not guilty of one bribery count and he and others were found not guilty of 17 counts of mail fraud that were premised on 18 USC 1346, the honest services provision. (See Birmingham News here). The investigation had previously produced some guilty pleas. (see here).


October 4, 2006 in Corruption, Fraud, Verdict | Permalink | Comments (0) | TrackBack (0)

Former FBI Agent Sentenced to Six Years

Former FBI special agent Jeffrey Royer received a six year prison sentence for his role in feeding information about pending criminal investigations of companies to Anthony Elgindy, who would then trade on the information.  Royer and Elgindy were convicted on conspiracy and securities fraud charges, and Elgindy received a sentence of over eleven years.  Royer's then girlfriend, Lynn Wingate, another former FBI agent, received probation for assisting Royer in making inquiries in the FBI computer to gather information about Bureau investigations of companies.  An AP story (here) discusses Royer's sentencing. (ph)

October 4, 2006 in Securities, Sentencing | Permalink | Comments (0) | TrackBack (0)

Kozlowski & Swartz Appeal

Former Tyco executives L. Dennis Kozlowski and Mark Swartz were sentenced to  8 1/3 years to 25 years in prison. (see here).  According to the Wall Street Jrl here, they argued on appeal that their sentences were excessive. They also argued that the moneys they received were legitimate under their executive compensation plan.

Although one might think that their sentencing argument was strengthened by the recent reductions seen for Andrew Fastow and Jamie Olis, the reality is that the Kozlowski and Swartz cases are in the New York State system, a system very different from the federal system. The more interesting argument will be whether as a matter of law the items they received were executive compensation.


October 4, 2006 in Prosecutions | Permalink | Comments (0) | TrackBack (0)

Tuesday, October 3, 2006

Kobi Alexander Gets Bail

Kobi Alexander, former CEO of Comverse who was found in Namibia (see here), has now appeared in court and according to the Wall Street Journal he was granted bail. (see here

The question will now be whether Namibia will extradite Alexander back to the United States. Bloomberg News reports here that the initial charges related to alleged backdating may not be all that is involved in this matter, as a US rep argued that Alexander allegedly "tried to bribe a colleague to take the blame."

This raises some new questions.  Can Alexander be extradited premised upon charges related to backdating, or is this not a crime in Namibia and therefore beyond the Dual Criminality Rule (see here)?  Would having a charge of bribery be a better basis for permitting the extradition so that the dual criminality rule is not violated? 


October 3, 2006 in Investigations, Securities | Permalink | Comments (1) | TrackBack (0)

ABA Money Laundering Conference

The ABA Money Laundering Conference is scheduled for October 8-10 in Washington, D.C.  Details can be found here and the program can be found here.


October 3, 2006 in Money Laundering | Permalink | Comments (0) | TrackBack (1)

Monday, October 2, 2006

Wire Fraud Plea Nets Two Years

A former US Army contract officer received a two year prison sentence, supervised release, and restitution after entering a plea to wire fraud. According to the DOJ press release here,

"Johnson admitted that from 2000 to 2005, he used his official position to obtain more than $150,000 from the Army by directing two prime contractors to subcontract with two companies in which Johnson secretly held a financial interest. Johnson also admitted that he falsely certified that the prime contractors and their subcontractors had provided services to the government when, in fact, such services were not provided."


October 2, 2006 in Sentencing | Permalink | Comments (0) | TrackBack (0)

What Will Causey's Sentence Be?

After watching Andrew Fastow's sentence be reduced to six (6) years, despite a clear plea agreement that called for ten (10) years, one has to wonder what sentence will be imposed on Richard Causey.  Tom Kirkendall at Houston ClearThinkers has a discussion of the plea here and the plea agreement can be found here

The language in the plea agreement is clear.  It states, "Defendant cannot and will not be sentenced to a period of incarceration of less than 60 months.  Defendant further agrees that he will not move for a downward departure on any grounds and that no such grounds are applicable."

According to the agreement, Richard Causey faces a minimum sentence of five years.  Will the court place Causey's sentence on the lower end of the range in light of the new circumstance - the reduction of Fastow's sentence.  Or will the court go below the 60 months despite the agreement, as occurred in the Fastow sentencing? Stay tuned - October 19th is the day.   


October 2, 2006 in Enron, Sentencing | Permalink | Comments (0) | TrackBack (0)

Who Knew What When About Representative Foley's Communications

The investigation of the inappropriate e-mail and text messages sent by former Representative Mark Foley to former House pages threatens to become a much broader investigation.  While Speak Dennis Hastert initially asserted he did not learn of the communications until they came to light this week, Representative Thomas Reynolds asserts that he informed the Speaker last year about some of the messages involving Foley, according to a Washington Post article (here).  Congress likes nothing better than an investigation -- see the recent Hewlett-Packard hearings and the hearings last year on steroid use in baseball -- but when it gets close to home then the analysis may be different. 

With Congress out of session now as legislators tend to their reelection campaigns, Speaker Hastert requested the Department of Justice conduct a criminal investigation of Foley's communications.  His letter to Attorney General Gonzales on Sunday, October 1, states that the investigation should include anyone "who had specific knowledge of the content of any sexually explicit communications between Mr. Foley and any former or current House pages and what actions such individuals took, if any, to provide them to law enforcement." The relationship between the House of Representatives and the Department has been rather testy since the search of Congressman William Jefferson's office in May related to a corruption probe, with the claim that the Executive Branch overstepped its bounds by searching a legislator's office.  By being invited by Congress to conduct the investigation, the Department of Justice and FBI will likely be unopposed in seeking records from Representative Foley's office related to a potential violation of federal child exploitation laws, such as 18 U.S.C. Sec. 2422(b) (here) on use of a means of interstate commerce to solicit a minor to engage in sexual conduct.  The investigation is likely to be run through the Department's Child Exploitation and Obscenity Section in the Criminal Division, and could put a number of members of the House leadership under an very uncomfortable microscope.  (ph)

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

Making "Pretexting" a Crime

At the House Energy & Commerce Subcommittee hearings on the Hewlett-Packard internal investigation that involved pretexting to obtain private telephone records, some of the Representatives railed at the H-P witnesses, particularly former chairwoman Patricia Dunn and outside counsel Larry Sonsini, that the practice is already a crime.  Yet, it is not entirely clear what federal statute the "pretexting" violated, although as discussed in an earlier post (here) prosecutors could stretch the wire fraud statute to cover the conduct of the private investigators, although defense lawyers would certainly challenge the application of that law to their clients.  Whenever conduct appears to slip through the cracks, the legislature is often quick to fill it in.  California adopted a law (here), signed by Governor Schwarzenegger on Sept. 29, that will make the following a crime:

Any person who purchases, sells, offers to purchase or sell, or conspires to purchase or sell any telephone calling pattern record or list, without the written consent of the subscriber, or any person who procures or obtains through fraud or deceit, or attempts to procure or obtain through fraud or deceit any telephone calling pattern record or list shall be punished by a fine not exceeding two thousand five hundred dollars ($2,500), or by imprisonment in a county jail not exceeding one year, or by both a fine and imprisonment. If the person has previously been convicted of a violation of this section, he or she is punishable by a fine not exceeding ten thousand dollars ($10,000), or by imprisonment in a county jail not exceeding one year, or by both a fine and imprisonment.

The House of Representatives passed a bill, HR 4709 (here), in April 2006, by a 409-0 vote no less, that would add the following to the federal criminal code:

Criminal Violation -- Whoever, in interstate or foreign commerce, knowingly and intentionally obtains, or attempts to obtain, confidential phone records information of a covered entity, by --

(1) making false or fraudulent statements or representations to an employee of a covered entity;

(2) making such false or fraudulent statements or representations to a customer of a covered entity;

(3) providing a document to a covered entity knowing that such document is false or fraudulent; or

(4) accessing customer accounts of a covered entity via the Internet, or by means of conduct that violates section 1030 of this title, without prior authorization from the customer to whom such confidential phone records information relates;

shall be fined under this title, imprisoned for not more than 10 years, or both.

The statute defines a "covered entity" as a telecommunications company or those who provide internet calling service.  The House bill has been held up in the Senate by a jurisdictional fight between the Commerce Committee and Judiciary Committee, which have competing bills.  Always nice to see that sharing toys remains a problem long after people have stopped playing in sandboxes.  An AP story (here) discusses the turf war in the Senate blocking the legislation.  (ph)

October 2, 2006 in Statutes | Permalink | Comments (0) | TrackBack (0)