Saturday, October 14, 2006
President Bush signed into law the Security and Accountability For Every Port Act of 2006, or the "SAFE Port Act" stating that "[t]he Act strengthens the Government's ability to protect the Nation's seaports and maritime commerce from attack by terrorists." (see here) But the add-on to this Act is what is focused on here, that being the Unlawful Internet Gambling Enforcement Act.
The new law basically outlaws some online gambling. But it is controversial to say the least. (see Washington Post here). The ramifications of this prohibition are far reaching with the LATimes (AP) reporting that the companies of Sportingbet and Leisure & Gaming have decided to leave the US business. (see here) This will certainly assist the government in its recent move to crackdown on online gambling (see here). The statute can be found here.
The 23rd Annual National Institute on
Criminal Tax Fraud
October 26-27, 2006
Hilton Washington/Washington, DC
December 7-8, 2006
Hotel Nikko | San Francisco, CA
This year the Institute will continue its focus on a number of important areas. Given the ever increasing complexity of IRS criminal tax investigations, the role of the forensic accountant has become even more important. The IRS also has increased its use of money laundering charges, forfeitures and asset freezes. Over the past year, the government has continued its crackdown on tax shelters with a number of high profile indictments and grand jury investigations. Similarly, the Supreme Court’s decision in Booker has continued to raise significant questions regarding the application of the federal sentencing guidelines. The program also will provide nuts and-bolts techniques for responding to a criminal tax fraud investigation.
For More Information See here
Friday, October 13, 2006
The Wall Street Jrl here tells of the life Conrad Black is leading despite charges pending against him. Oftentimes those who are alleged to have committed white collar crimes remain hidden during the pendency of the case. Lord Black, however, has been on the social scene, even serving as a speaker at Toronto's Empire Club.
The article also speaks of whether Black is trying to reinstate his Canadian citizenship in case he is convicted, thus allowing him to serve any sentence issued in Canada. Prisoner Transfer Treaties allow a person convicted in one country to serve their sentence in another country. (see here). "However, a prisoner is not eligible for transfer until the judgment and sentence in his case is final; that is, when no appeals or collateral attacks are pending." (Id.) But perhaps this entire conversation is premature as Conrad Black has only been indicted, and that does not mean the government will be successful in proving a case against him.
The SEC brought civil charges against a former Enron executive and accountant, and two former Enron executives. They were accused of violating the antifraud provisions of the federal securities laws and aiding and abetting Enron's violations of the reporting, record-keeping and internal controls provisions. (see SEC Notice here). One of the individuals "agreed to pay $52,150 to settle the charges, while the cases against the other two are pending." Although agreeing to pay a settlement, there was no admission or denial of the allegations, "as is customary in such SEC settlements."
The Providence Jrl online is reporting here that after a deliberation of six days, the jury has returned verdicts in the case against former executives of Roger Williams Medical Center. Although the former hospital president Robert A. Urciuoli was convicted of conspiracy and all but one of the mail fraud counts he was charged with, a partner at the assisted living center was cleared of the mail fraud charges against him and a former hospital vice president was found not guilty of conspiracy but convicted of a count of mail fraud.
The Providence Jrl notes that U.S. Attorney Robert Corrente may not be stopping with these verdicts and may be pushing to investigate public corruption as a result of testimony from this case. This could prove particularly beneficial to those who were just convicted as it may provide them with a basis for lowering their sentence in return for cooperation in the future investigations. On the other hand, if the government can secure needed testimony elsewhere, the individuals may have lost their ability to secure a lesser sentence premised upon cooperation.
One thing is for certain, and that is that the Roger Williams Medical Center escaped prosecution via a deferred prosecution agreement. See here. For additional background on the deferred prosecution agreement see here.
Representative Bob Ney has entered a guilty plea to conspiracy and making false statements. (see Wall Street Jrl here). He stated that he will resign from office prior to his sentencing. Bloomberg reports here that despite prior denials of guilt, Ney was now admitting his guilt. He also was noting alcohol dependence as an issue. (see here)
When entering this plea the Wall Street Journal reports that he stated, "I accept responsibility for my actions and I am prepared to face the consequences of what I have done." Using the term "acceptance of responsibility" is particularly noteworthy as this factor allows a sentence to be lowered under the guidelines. The sentencing guidelines include the following section:
"§3E1.1. Acceptance of Responsibility
(a) If the defendant clearly demonstrates acceptance of responsibility for his offense, decrease the offense level by 2 levels.
(b) If the defendant qualifies for a decrease under subsection (a), the offense level determined prior to the operation of subsection (a) is level 16 or greater, and upon motion of the government stating that the defendant has assisted authorities in the investigation or prosecution of his own misconduct by timely notifying authorities of his intention to enter a plea of guilty, thereby permitting the government to avoid preparing for trial and permitting the government and the court to allocate their resources efficiently, decrease the offense level by 1 additional level.
This case emanates from the Abramoff investigation.
White Collar Crime Prof Blog has a 6.1 "Blog Juice Rating," determined by:
- Number of Bloglines subscribers (40%)
- Alexa rank (15%)
- Technorati ranking (30%)
- Number of inbound links via Technorati (15%)
Here are the Blog Juice Ratings for various law professor blogs:
(esp) (chart supplied by Professor Paul Caron - Tax Prof Blog - here)
Former Comverse Technology CEO Kobi Alexander's days of freedom could come to an end in the near future. After fleeing -- or deciding to resettle -- in Namibia in July, shortly before federal prosecutors filed charges against him for securities fraud related to options back-dating at Comverse, he was arrested by Namibian authorities at the request of the U.S. A magistrate in Windhoek, the capitol, released Alexander after he posted $1.3 million bail and surrendered his Israeli passport. Now, Prosecutor General Olivia Imalwa has appealed that decision to the High Court, arguing that Alexander is a flight risk and could sneak out of Namibia even without the surrendered passport. Alexander has been accused by federal prosecutors of transferring over $50 million shortly before he was charged, and could have considerably more in assets available.
The U.S. is still preparing its extradition request to have Alexander returned under a law adopted by the Namibia Parliament at the request of the Justice Ministry; the two countries do not have an extradition treaty. According to an article (here) in Ha'aretz, an Israeli newspaper, the extradition request is due this week. If the court determines that Alexander can be extradited to the United States, he will be held in jail while he appeals that decision to the High Court, a process that can take years rather than months.
Meanwhile, on the U.S. side of the case, a grand jury in the Eastern District of New York returned a superseding indictment that adds obstruction of justice, bribery, and a new securities fraud charge to the thirty-two counts in the earlier indictment (see Bloomberg story here). The obstruction and bribery counts involve an alleged offer by Alexander in March 2006 to a Comverse executive to "name your price" to take the blame for the options back-dating at the company. It is not clear yet who the executive is, but the roster of those cooperating with the government may rise. Federal prosecutors disclosed that they are negotiating possible plea bargains with the two other former Comverse officers charged along with Alexander, CFO David Kreinberg and general counsel William Sorin. The defendants originally were charged in a criminal complaint, and the government requested that the court grant a thirty-day extension before a grand jury has to return an indictment because the parties were engaged in plea discussions. If either agrees to cooperate, it is very likely they will provide additional information about Alexander's involvement in the options back-dating, probably strengthening the government's case. An AP story (here) discusses the status of the case against Kreinberg and Sorin. (ph)
A long-time fundraiser and adviser to Illinois Governor Rod Blagojevich, Tony Rezko, was indicted by U.S. Attorney Patrick Fitzgerald's office on extortion and bank fraud charges. The indictment comes only a few weeks before the general election in which Governor Blagojevich is running for reelection, and marks another blow to the Illinois Governor's office after the earlier conviction of Blagojevich's predecessor, George Ryan. The charges come in two separate indictments (here and here), and a press release (here) states, "One indictment alleges that Rezko participated with Chicago businessman Stuart Levine in a scheme to obtain millions of dollars by shaking down firms doing business before two Illinois regulatory boards on which Levine served. The second indictment alleges that Rezko fraudulently obtained more than $10 million in loans for a pizza restaurant business from General Electric Capital Corp. (GECC) and also defrauded investors in that business." Rezko has been traveling out of the country for the past few weeks, and a Chicago Tribune story (here) notes that there is some concern whether he will return for his arraignment, although his attorney states that he's trying to notify Rezko of the charges. (ph)
The "resignations" are coming fast and furious now in the options-timing investigations. Boston Communications Group, Inc. CEO EY Snowden stepped down, staying on as non-executive chairman, although I expect that will only be for a little while before he decides to pursue "other exciting opportunities" or the like. Also felled in the internal investigation was CFO Karen Walker, who resigned "effective immediately," while general counsel Alan Bouffard "decided to accelerate his retirement effective immediately." Lots of things are happening "immediately" yet none was termed a termination . . . funny thing. (See BCGI's 8-K here).
Meanwhile, over at circuit maker Sanmina-SCI, the company disclosed that a former executive and current manager had improperly back-dated options, and that the manager had "resigned" although it refused to identify him/her. Sanmina, which is headquartered in San Jose, also disclosed that it has received a grand jury subpoena from the U.S. Attorney's Office for the Northern District of California. A Marketwatch story (here) discusses the investigation. (ph)
Thursday, October 12, 2006
As the internal investigations into options-timing practices at various companies start to come to fruition, more CEOs are starting to leave their position over questionable practices. Computer security company McAfee, Inc. earlier announced that its general counsel had been relieved of his position, and now the company disclosed that its CEO, George Samenuk, has retired, and its president, Kevin Weiss, has been terminated after a special committee reported its conclusions regarding the timing of options grants to corporate officers. According to McAfee's 8-K (here), "Following the substantial completion of the Special Committee’s previously announced internal review of McAfee’s stock option grant practices, conducted with the assistance of independent counsel and forensic accountants, McAfee has determined that it will need to restate historical financial statements to record additional non-cash charges for stock-based compensation expense over a ten year period. Based on that preliminary review, McAfee announced that it currently believes that the amount of the restatement required to record such charges is likely to be in the range of $100 to 150 million."
Internet media company CNet Networks Inc. announced that its CEO and co-founder, Shelby Bonnie, has resigned as CEO. According to a company press release (here), the "key findings" of its special committee investigating options issuances practices are:
There were deficiencies with the process by which options were granted at CNET, including in some instances the backdating of option grants, during the period from the Company’s IPO in 1996 through at least 2003. These deficiencies resulted in accounting errors, which the Company has previously announced will result in a restatement. A number of executives of the Company, including the former CFO and the recently resigned CEO, General Counsel and SVP of Human Resources, bear varying degrees of responsibility for these deficiencies. The report does not conclude that any current employees of the Company or any recently resigned employees engaged in intentional wrongdoing.
Bonnie will remain on the board, although that will probably be for only a short time. Having quoted Freddie Mercury's lyrics once before on this subject (see earlier post here), it's time to bring out Another One Bites the Dust again:
How do you think I'm going to get along
Without you when you're gone
You took me for everything that I had
And kicked me out on my own
Are you happy ? Are you satisfied ?
How long can you stand the heat
Time wil tell whether more CEOs join the exodus over options-timing problems.
The Antitrust Division of the Department of Justice appears to be gearing up for an investigation of leading private equity investment firms, including luminaries like Kohlberg Kravis Roberts (KKR), Silver Lake Partners, and Carlyle Group, over possible anticompetitive behavior in bidding to take firms private by buying out their public shareholders. The Antitrust Division is asking the firms for information at this point on deals going back to 2003, and the issues revolve around whether there was collusion in the prices offered for companies or whether firms agreed not to submit competing bids to protect other deals from additional offers. Given my woeful lack of knowledge about antitrust matters, I asked my friend and colleague, Professor Steve Calkins, a leading authority on antitrust and former general counsel at the FTC, for some brief thoughts on the investigation at this early stage. Steve is kind enough to let me pass along the following:
Press reports of DOJ Antitrust Division letters to private-equity firms raise a series of fascinating issues. Under the Bush Administration the Division has concentrated on challenging mergers (typically resolved by consent) and criminally challenging naked cartels usually uncovered through the Division’s highly effective amnesty program. The kinder, gentler commencement of this initiative – reportedly with two-page letters – suggests that the Division is at least initially thinking civil, not criminal. It is investigating an industry quite different from those that have felt the wrath of its anti-cartel program. And it is venturing into an area where proof of an agreement – the sine qua non of a classic antitrust violation – may turn on subtle interpretations of parallel behavior. Ironically, the Division (through the SG) recently filed an amicus brief in the Supreme Court Twombly case which urges the Court to reverse a Second Circuit opinion that made it more easy to avoid dismissal of just such a case.
The amicus brief in Twombly is available (here). (ph)
Former Enron CEO Jeffrey Skilling filed another motion seeking to overturn his conviction, relying on the Fifth Circuit's recent decision that threw out the mail fraud convictions of three defendants in the Enron Nigerian Barge trial. In U.S. v. Brown (here), the Fifth Circuit held that the government's "right of honest services" theory for mail fraud did not apply because the defendants believed they were working in the company's best interests when they engaged in the transaction designed to inflate Enron's earnings. In the Lay/Skilling, the government referenced the right of honest services as one theory of fraud, although the main feature of the government's case was the improper disclosure and omission of important information and not the structure of any particular deal. Nevertheless, the mention of honest services raises a question about the verdict. The Enron Task Force has asked for en banc review of Brown, and it is unlikely that U.S. District Judge Sim Lake will overturn the entire verdict against Skilling on this basis, even if he were inclined to grant the motion as to some counts. If Judge Lake denies the request, then the motion preserves the issue for appeal, which may be the ultimate goal behind the filing. The motion also seeks to have the court grant bail pending the appeal, which has been done for a number of high-profile white collar criminal defendants after their conviction, including Bernie Ebbers, John Rigas, Frank Quattrone, and Martha Stewart. A Houston Chronicle story (here) discusses Skilling's motion. (ph)
Wednesday, October 11, 2006
Salvatore Favata will enter a guilty plea to a mail fraud charge and settled an SEC civil enforcement action for selling "private money note investments" purportedly to raise money for his mortgage firm, National Consumer Mortgage, LLC, that was essentially a Ponzi scheme. According to the SEC Litigation Release (here), Favata "raised more than $30 million from over 200 investors by offering rates of return from 30-60 percent on the investment. In fact, investor funds were used to pay Favata's gambling debts in excess of $10 million, personal debts and monthly living expenses, including leased luxury vehicles, lavish house parties and community music festivals." Note once again that the promise of outsized returns is too good to be true because it isn't. Favata is scheduled to appear on the criminal charge on October 16, and a press release issued by the U.S. Attorney's Office for the Central District of California (here) states that he is expected to receive the maximum five year prison sentence authorized under the mail fraud statute.
The interesting part of the case is a line near the end of the USAO release stating, "The investigation of Favata's fraud started in April when Favata's attorney reported the criminal conduct to the United States Attorney's Office." It's not clear what basis the attorney had for disclosing the information to prosecutors, especially if it was confidential information gained in the course of the attorney-client relationship. If the attorney provided legal services that were used by Favata to commit the fraud, then the attorney could be compelled to testify under the crime-fraud exception, but that does not appear to be the case from the wording of the release. Assuming the attorney is licensed in California, then under Rule 3-100(B), "A member may, but is not required to, reveal confidential information relating to the representation of a client to the extent that the member reasonably believes the disclosure is necessary to prevent a criminal act that the member reasonably believes is likely to result in death of, or substantial bodily harm to, an individual." While many states, and now the ABA, permit disclosure of client fraud, California appears to apply the older approach limiting disclosure only if there is a risk of death or serious harm by the client. It may be that the attorney represented the mortgage company rather than Favata personally, so it might have waived the privilege when the misconduct came to light. The release, however, states that it was "Favata's attorney" and not the company's counsel. However it came to light, a Ponzi scheme has been stopped, although like weeds in a garden another one will pop to the surface again soon. (ph)
The Wall Street Journal has an interesting article (here) about the competition between the U.S. Attorney's Offices for the Southern and Eastern Districts of New York, aka Manhattan and Brooklyn. Much like the Dodgers of days gone by, the EDNY has been viewed as the second-string team as compared to the SDNY, which some claim means "Sovereign District of New York" for its impervious manner. Brooklyn has come on lately in the options-timing investigations, nearly matching Manhattan for the number of investigations of companies for possible back-dating and filing the second criminal case against a CEO (Kobi Alexander of Comverse Technology). Lost in the shuffle of what the WSJ Law Blog (here) terms the "Legal Subway Series" is the fact that other offices have been equally aggressive in pursuing options-timing cases, such as the Northern District of California, which covers Silicon Valley, and the District of Massachusetts, which is also a leader in health care fraud cases involving medical device and pharmaceutical companies. Not to be left out are the cousins across the Hudson River in New Jersey, which knocked out the CEO of Bristol-Myers Squibb with the equivalent of a glare. As discussed in an earlier post (here), the Department of Justice has formed a Procurement Fraud Task Force, which likely will involve cases with far higher dollar figures than most of the securities fraud cases. From the New Yorker point of view, of course, those other districts hardly exist, and Main Justice is there to be ignored. Does any of this strike one as a bit unseemly? (ph)
U.S. District Judge Sam Cummings hit former Patterson-UTI Energy CFO Jody Nelson with a twenty-five year prison term for embezzling over $77 million from the company over nearly ten years. Judge Cummings has a reputation for being a tough sentencer, and a press release issued by the U.S. Attorney's Office for the Northern District of Texas (here) states that the Judge noted "corporate malfeasance was a major problem in our society and that such conduct cannot be tolerated" in handing down the sentence. Judge Cummings did drop the sentence down five years from the thirty-year term permitted under the Sentencing Guidelines because of Nelson's cooperation once the crime came to light. The USAO release details how Nelson used corporate funds to invest in a number of ventures and support an expensive lifestyle that included buying his own jet, and an earlier post (here) discusses the auction of Nelson's property obtained through the fraud. The U.S. Attorney also thanked the SEC for its assistance in the case. The Commission filed the first action to freeze Nelson's assets, and assisted in determining the scope of the false entries in the company's books, an example of the cooperation that occurs frequently in sorting out complex financial frauds. (ph)
Tuesday, October 10, 2006
The Department of Justice announced today the formation of a National Procurement Fraud Task Force (see here). The task force will involve numerous government agencies and will be modeled after the Katrina Fraud Task Force (see here). Included in the list of priorities for the task force are: "Identification and prosecution of viable procurement fraud cases through coordination with U.S. Attorneys’ Offices and OIG field offices." Interestingly, a white paper was issued by a US Attorney in Virginia on the issue of procurement fraud (see here) back in February of 2005. That white paper (see here) was the work of Eastern District of Virginia USA Paul McNulty. The new initiative of the DOJ is headed by the same Paul McNulty, who now serves as the Deputy Attorney General. Did he bring to this new office his agenda, or did this agenda bring him to the office of Deputy Attorney General. Or does it really make any difference as long procurement fraud gets prosecuted.
In a bizarre resolution to the sending of Canadian drugs to the United States, Reuters reports here that U.S. customs officials will continue to take Canadian prescription drugs sent by mail to individuals in the U.S., but they will turn the drugs over to the FDA.for screening. The assumption made here is that the individual will eventually receive the drugs.
Now let me see if I understand this -
Lets start with three basic premises: 1) The government is saying it is illegal for individuals to import Canadian drugs. 2) The US government has also instituted HIPAA requirements to protect individuals' privacy in medical matters. 3) The US government also enforces strict antitrust controls.
Now lets examine the reality: 1) Is the government now allowing individuals to violate the law by allowing individuals to order drugs from Canada? 2) By violating the law will the government be monitoring what drugs individuals order into the United States and thus individuals will lose a dimension of their privacy? 3) And is the monitoring of drugs in any way a violation of the US government's antitrust rules or are we really protecting individuals by screening drugs entering the US? 4) And if the FDA is planning to screen drugs entering the US, then shouldn't the government be making it legal to order Canadian drugs?
The Reuters article has a quote from Senator Bill Nelson (Florida) stating that "[n]ow it looks like the government is getting out of the business of harassing these consumers." But do we really know that? In the white collar crime area, knowing whether something is criminal or not, can sometimes be difficult. This can be particularly true when dealing with the actions of agencies.
Monday, October 9, 2006
In January 14, 2005 a district court judge enjoined the Department of Justice from indicting Stolt-Nielsen S.A., a foreign freight carrier, and a company executive vice-president, for antitrust violations for allegedly fixing prices. The company had received immunity under DOJ's Antitrust Corporate Leniency Program (see here). Fast forward to September 2006 and we saw here Stolt-Nielsen S.A. and two of its subsidiaries, along with two individuals, indicted for alleged antitrust violations. Noteworthy here was that this was the first time the Department of Justice had indicted a company that had participated in the Antitrust Division's Corporate Leniency Policy.
Lyle Denniston at Scotus Blog here notes that before the Supreme Court on October 27th is "the mootness question . . .[that] turns on whether a criminal indictment of a company that is trying to head off any such charges is enough to moot the company's case, when company executives are still at risk of new but not yet filed charges." The blogger notes that "this case also provides the first test of the Justice Department Antitrust Division's freedom to withdraw a promise of immunity to a company, and then seek to end the controversy over that authority by bringing an indictment and suggesting mootness."
With the increase of deferred prosecution agreements that provide exclusive power to the government to determine breaches of the agreements, this case provides a review of how much power should the government have when it comes to possible breaches of agreements. When a company performs its side of the bargain, by cooperating, should the government be allowed to come back and re-litigate the matter? How much money can the government cause a company to have to spend in re-litigation? And yes, how much taxpayer money is the government spending here?
(esp) (w/ a hat tip to Peter Goldberger)
The US Attorney's Office in Massachusetts has a press release here informing the public of a recent white collar sentencing. The former executive of North Andover Corporation was sentenced for convictions on 8 counts of securities and wire fraud to a sentence of 2years and 6 months’ imprisonment, to be followed by 3 years of supervised release. According to the government press release, "[t]he evidence established that the [defendant] falsely overstated the sales and revenues of Interspeed by approximately $9 million, over 60% of the company’s publicly reported revenues, through various fraudulent acts." But one paragraph in the press release is particularly interesting as it states:
"The Securities and Exchange Commission filed a parallel civil proceeding against the defendant. The U.S. Attorney appreciates greatly the cooperation and assistance of the SEC in this matter."
Should a civil agency be permitted to provide materials to the criminal body prosecuting a case?