Saturday, October 21, 2006

The Skilling Sentencing

The conclusion of the District Court phase of the prosecution of Jeffrey Skilling should come with the sentencing scheduled before U.S. District Judge Sim Lake on Monday, October 23.  The original sentencing date was September 11, and the Judge rather grudgingly granted a defense motion for a postponement.  With the end of the highest profile prosecution of Enron defendants nearly upon us, there will be plenty of discussion about the meaning of the case and what comes next, so here are my two cents worth (and that's an overestimation):

  • The Sentence:  The sentencing materials have been filed under seal, but the government is seeking to use the 2001 version of the Federal Sentencing Guidelines, which provides for a higher sentence based on the amount of the loss.  There will be fighting over the loss, which is the main driver of the sentence under the Guidelines.  Unlike the Olis/Dynegy case, also presided over by Judge Lake, there are plenty of ways for him to view the collapse of Enron as being traceable to the securities fraud of Skilling (and the now-deceased Ken Lay) that can easily exceed the $400 million threshold for the greatest enhancement.  After Booker, the Judge has some flexibility in determining the final sentence, but the Olis sentencing (and resentencing) show that he will hew pretty closely to the Guidelines.  As for the final sentence, if the over/under line is twenty years I would bet the over, while a twenty-five sentence strikes me as the likely upper-end.  The sentencing of John and Timothy Rigas of Adelphia (fifteen and twenty years respectively) and Bernie Ebbers of WorldCom (twenty-five years) are probably the parameters for CEO sentencing.  While former Enron CFO Andrew Fastow received a six-year sentence, I doubt that will play much (if any) role in Judge Lake's final determination.
  • Collateral Issues: The Judge is likely to decide the asset forfeiture issue along with the sentence, plus enter a restitution order.  The government is looking for $183 million, which includes the amount owed by Lay but lost as a criminal forfeiture due to his death that triggered application of the abatement doctrine.  While that's probably more than the Judge will order against Skilling, forfeiture and restitution make it unlikely that Skilling's lawyer, Daniel Petrocelli, will get any of the $30 million O'Melveny & Myers claims it is still owed.  Then again, after being paid approximately $40 million so far, not many will shed tears over that unpaid bill (see BusinessWeek article here).  I expect the Judge will grant a motion for bail pending appeal, especially after the Fifth Circuit denied en banc review of its decision in the Enron Nigerian Barge prosecution, U.S. v. Brown (see earlier post here).  That decision overturned the conviction of three defendants on mail fraud charges involving the same honest services theory used in Skilling's case.  I think it's unlikely Skilling will see the inside of an FCI in 2006.
  • The Appeal: Plenty of issues, starting with the mail fraud/honest services instruction that may violate the holding in Brown.  The problem for Skilling on that issue is that the honest services theory was one part of a few counts, and is unlikely to affect the conviction on other charges.  Another issue will be the "ostrich instruction" as a basis for finding knowledge for the securities fraud and conspiracy charges.  A significant sentence may be challenged as unreasonable, although Judge Lake may grant a small downward departure from the range recommended by the Sentencing Guidelines to demonstrate that the sentence was the product of a thorough review of the facts and law.
  • The Punditry:  Every April 15 demands a story about lines at the post office to mail tax returns, and what would the Thanksgiving holiday be without stories of it being the heaviest travel period of the year.  Articles on the sentencing I expect will quote at least one former Enron worker (or retiree) who views any sentence less than death or life imprisonment as inadequate.  There will be complaints from academics and defense lawyers about the severity of the sentence questioning why non-violent first offenders must spend "X years" in jail when they present no threat to society.  The question whether the sentence was "fair" is ultimately unanswerable beyond an assertion of one's opinion, at least when it does not violate the Supreme Court's rather skimpy "cruel and unusual punishment" jurisprudence.  Between the extremes of complete judicial discretion and rigid mandatory Sentencing Guidelines, the judge makes an educated guess.

With my track record of predictions, I am a good negative indicator.  (ph)

October 21, 2006 in Enron, Sentencing | Permalink | Comments (1) | TrackBack (1)

Heads I Win, Tails I Win More

Dr. William McGuire, the retiring CEO of health insurer UnitedHealth Group, Inc., is making quite a name for himself in the field of options back-dating and excessive executive pay.  His stock options, even after a repricing to eliminate the effects of back-dating, will still be worth over a billion dollars, at least as long as he keeps them.  An AP story (here) notes that a sizable slug of those options may have been the result of a award of the same options twice.  In 1999, when a set of UnitedHealth options were "under water" because the exercise price was below the current stock price, Dr. McGuire recommended to the board that the options be reissued at a lower price.  Those options were backdated so they were already worth more, but then later Dr. McGuire recommended that the original options be reactivated after the stock price had risen significantly, meaning he and a number of employees effectively received the options award twice.  Needless to say, that little sleight of hand resulted in improper accounting, but even more problematic will be the attention this will draw from the SEC and criminal investigators.  Dr. McGuire's reactivated options are now worth over $250 million.

For companies enduring options back-dating investigations and the accompanying government scrutiny, a San Francisco Chronicle story (here) notes that the Directors & Officers insurers may object to paying the costs of defending the company and resulting settlements to the government and shareholders when the problem is self-inflicted.  Of course, that was also true in the last round of corporate accounting problems, so look for the insurers to raise their rates even more to insure corporate malfeasance. (ph)

October 21, 2006 in Investigations | Permalink | Comments (0) | TrackBack (0)

More Campaign Tomfoolery

A letter sent to 14,000 Democrat voters in Orange County warned that if they were immigrants and tried to vote they could be jailed and deported.  Viewed as an attempt at voter intimidation, the letter turns out to have come from the campaign office Tan Nguyen, who is challenging incumbent Loretta Sanchez for a House seat.  Nguyen has acknowledged his campaign is the source, but denied personal knowledge of it.  Despite calls from party leaders that he withdraw from the race, Nguyen has vowed to remain in the race, and the U.S. Immigration Reform Political Action Committee even reiterated its endorsement of Nguyen.  Things may get a bit dicier for Nguyen, however, as an AP story (here) notes that ten agents from the California Department of Justice executed a search warrant at Nguyen's campaign office.  Agents later searched Nguyen's home and that of a campaign staffer.  This is probably not the kind of publicity Nguyen was looking for. (ph)

October 21, 2006 in Investigations | Permalink | Comments (0) | TrackBack (0)

Friday, October 20, 2006

When Campaign Tricks Turn Into Crimes

Colorado gubernatorial candidate Congressman Bob Beauprez's campaign may be in a bit of hot water, and a federal employee could be subject to prosecution, because of an improper search of the federal National Crime Information Center (NCIC) database.  Representative Beauprez aired a commercial criticizing his opponent, Bill Ritter, for a crime committed by an illegal immigrant who entered into a plea bargain to a heroin charge when Ritter was District Attorney in Denver.  The ad asserts that the defendant should have been deported, and reflects an effort to show Ritter is "soft on crime" and not tough enough on illegal immigrants, both well-worn campaign themes.  The problem is that the information about the illegal immigrants conduct came from the NCIC database, and according to an AP story (here), a computer search has been traced to a federal employee.  The Privacy Act, 5 U.S.C. Sec. 552a(i), provides as follows:

Any officer or employee of an agency, who by virtue of his employment or official position, has possession of, or access to, agency records which contain individually identifiable information the disclosure of which is prohibited by this section or by rules or regulations established thereunder, and who knowing that disclosure of the specific material is so prohibited, willfully discloses the material in any manner to any person or agency not entitled to receive it, shall be guilty of a misdemeanor and fined not more than $5,000.

Disclosing NCIC information for use in a political campaign definitely is prohibited.  The Beauprez campaign stated that it received the information about the illegal immigrant from an "informant." When juicy political information comes up, however, it might be a good idea to check the propriety of the informant's conduct.  That does not appear to have slowed down Representative Beauprez, however, and he pressed Ritter in a debate to explain why his office entered into the plea bargain.  The negative fall-out from an FBI investigation of the source of the information used in the ad may cost Representative Beauprez far more than any harm it might have caused Ritter. (ph)

October 20, 2006 in Investigations | Permalink | Comments (0) | TrackBack (1)

The SEC Zeros in on Delphi

A number of former Delphi Corp. executives are in line to be sued by the SEC for securities fraud related to accounting problems at the company, according to a Detroit News story (here).  Once the largest auto supplier after its spin-off from General Motors in 1999, Delphi filed for bankruptcy in October 2005, and its accounting for various transactions have been the subject of civil and criminal investigations for over two years.  The investigation focused on round-trip transactions that inflated Delphi's income and the booking of loans from suppliers as "rebates" that allowed them to be recognized as income.  In addition, a $300 million payment to its former parent was accounted for differently by each company, which resulted in GM being dragged into the investigation.  Among those identified as likely to be sued include Delphi's former v-p of treasury, the former director of financial accounting and reporting, and the former chief accounting officer.  At this point it is unclear whether Alan Dawes, the former chief financial officer terminated in 2005, will be sued by the SEC.  An ongoing grand jury investigation may result in charges against one or more of the Delphi executives, and the SEC may be waiting to sue Dawes and others until the criminal investigation is complete to avoid any problems with discovery.  No word either whether the Commission is preparing a case against GM.  Because Delphi is still in bankruptcy and will emerge as a significantly different company, the SEC may forgo filing charges against it. (ph)

October 20, 2006 in Civil Enforcement, Fraud, Securities | Permalink | Comments (0) | TrackBack (1)

Thursday, October 19, 2006

Throwing All the Lawyers Into the Grand Jury

A New York Times article (here) discusses the direction of the government's ongoing investigation of Anthony Pellicano, the so-called "PI to the Stars" who worked with, most prominently, leading Los Angeles attorney Bert Fields.  Pellicano has been under indictment since February 2006 on conspiracy and wiretapping charges that allege he engaged in illegal wiretaps to help out attorneys in various cases, many involving leading Hollywood stars and some of them represented by Fields' Century  City firm, Greenberg, Glusker, Fields, Claman & Machtinger.  According to the Times, approximately ten lawyers from Greenberg Glusker have been called before a federal grand jury to testify about Fields' involvement in Pellicano's activities.

There are a couple of interesting aspects to this phase of the grand jury investigation.  First, the lawyers are being questioned about the firm's representation of clients, so there are probably some sticky attorney-client privilege and work product issues that had to be worked out.  Perhaps the clients waived the privilege and allowed the attorney's to testify, although that would probably involve a number of waivers, and some might not be particularly willing to do that if it turns out Pellicano worked on their cases.  The government could argue the crime-fraud exception as the basis for obtaining the testimony, but that would require proving possible criminal or fraudulent conduct in every representation.  Courts are leery of simply ordering wide-spread disclosure of otherwise privileged or protected information in the name of the crime-fraud exception without proof that a specific representation involved such conduct.

Second, the article states that counsel for the lawyer-witnesses "refused to speak publicly, citing grand jury secrecy rules."  While that excuse for not talking to the press sounds plausible, under Federal Rule of Criminal Procedure 6(e) the secrecy requirement does not apply to witnesses before the grand jury.  While they may not want to discuss what the witnesses said in the grand jury session, the secrecy rules are not a bar to discussing the testimony, even if prudence counsels silence.

Finally, while the investigation is focused on Fields' involvement with Pellicano, it may be that the grand jury sessions will turn up additional evidence that can be used in prosecuting Pellicano.  The grand jury cannot be used as a discovery tool for a pending case, but if a continuing investigation produces admissible evidence in such a case, then courts generally allow its use at trial.  Whether or not prosecutors can build a case against Fields, they may get a benefit out of the grand jury sessions for the Pellicano case.  The Times articles hints at weaknesses in the government's case, so the Fields investigation may be a vehicle to help out on the pending prosecution.  That case has already been postponed to February 2007, and Pellicano has been in jail since the indictment.  At some point, the case has to move forward. (ph)

October 19, 2006 in Grand Jury, Investigations | Permalink | Comments (0) | TrackBack (0)

Hoisted on the Statute of Limitations Petard

The prosecution of Peter Davis in connection with corruption at the Springfield (Mass.) Housing Authority came to a precipitous end when U.S. District Judge Michael Ponsor dismissed the charges as barred by the statute of limitations.  Davis, a retired contractor, was among thirteen defendants charged in 2004 in a 100-count indictment involving Housing Authority executives and outside contractors who allegedly provided benefits in exchange for contracts.  Unfortunately for the government, Davis retired from his business in 1998, and so the indictment only covered his conduct within the past five years, i.e. back to 1999.  The RICO and conspiracy charges could survive if there were acts within the limitations period.  The government alleged that Davis made false statements to agents about the misconduct as late as 2003, relying on the cover-up as an additional overt act in the conspiracy and as part of the RICO enterprise.  While some conspiracies incorporate a cover-up as part of the criminal agreement, courts have been chary about extending this rationale too far because it would effectively mean conspiracies never end. 

Judge Ponsor, who from experience is a very thoughtful jurist, entered the judgment of acquittal right before the jury was to hear closing arguments.  The defense team, led by James Rehnquist, son of the late Chief Justice, argued to the jury that the case fell outside the statute of limitations in addition to a defense that Davis did not pay any bribes.  Because the statute of limitations was an issue before the jury, the Judge's decision on the issue is a factual determination, rather than a legal one, and so double jeopardy attaches and it cannot be appealed.  A Springfield Republican story (here) discusses the decision to end the trial abruptly. (ph)

October 19, 2006 in Corruption, Prosecutions | Permalink | Comments (0) | TrackBack (0)

Schnitzer Steel Settles Criminal and Civil FCPA Cases

Schnitzer Steel Industries, Inc., a Portland, Oregon, based-company that purchases and recycles scrap steel in the U.S. and abroad.  The company settled an SEC action alleging that its employees paid bribes to managers of Korean and Chinese steel mills that are both privately-owned and government enterprises to ensure continued business in violation of the Foreign Corrupt Practices Act.  Schnitzer Steel also entered into a deferred prosecution agreement with the Department of Justice, and its wholly-owned subsidiary, SSI International Far East Ltd., based in Korea, entered a guilty plea to violating the FCPA, conspiracy, and wire fraud charges.  According to a DoJ press release (here):

In the information and plea documents, SSI Korea admitted that it violated the FCPA and the conspiracy and wire fraud statutes in connection with more than $1.8 million in corrupt payments paid over a five-year period to officers and employees of nearly all of Schnitzer Steel’s government-owned customers in China and private customers in China and South Korea to induce them to purchase scrap metal from Schnitzer Steel. Additionally, in the deferred prosecution agreement, Schnitzer Steel agreed to accept responsibility for the conduct of its employees, and the employees of its subsidiary, in making corrupt payments and aiding and abetting the making of false books and records entries; to adopt internal compliance measures; and to cooperate with ongoing criminal and Securities and Exchange Commission (SEC) civil investigations.  The deferred prosecution agreement also provides that an independent compliance consultant will be appointed to review Schnitzer Steel’s compliance program and monitor its implementation of and compliance with new internal policies and procedures related to the FCPA and private bribery.

The case will likely continue, with prosecutors and the SEC looking at the conduct of one or more Schnitzer Steel executives.  In the SEC's Administrative Order (here), it states:

In May 2004, Schnitzer’s compliance department uncovered the improper payments and Schnitzer began to investigate the potential FCPA violations. At that time, a senior executive of Schnitzer prohibited any further payments, but nonetheless authorized Schnitzer employees to pay at least two additional bribes that Schnitzer previously had promised private customers. The same senior executive also authorized Schnitzer employees to increase entertainment expenses in lieu of cash payments to its private and government-owned scrap metal customers. In response, Schnitzer employees gave managers of Schnitzer’s scrap metal customers additional gifts, including gift certificates worth $10,000 and a watch worth $2,400.

Not the kind of response expected when a company uncovers an FCPA violation.  Schnitzer Steel's cooperation earned it a deferred prosecution agreement, and only the subsidiary has to plead guilty to the criminal charge. (ph)

October 19, 2006 in FCPA | Permalink | Comments (0) | TrackBack (0)

Operation Truth or Consequences

The Department of Justice announced a number of indictments for bankruptcy fraud as part of a program called "Operation Truth or Consequences."  The charges are part of a nationwide "sweep" aimed at protecting the integrity of the bankruptcy system, including eighteen cases charged on October 17 and 69 prosecutions in total.  According to the press release (here) issued by Deputy Attorney General Paul McNulty:

Collectively, the Operation Truth or Consequences bankruptcy fraud sweep includes charges filed against nine attorneys, two bankruptcy petition preparers, and one former law enforcement officer; alleged concealment of more than $3 million in assets; use of false Social Security numbers and false identities; submission of forged documents and use of false statements; defrauding of individuals whose homes were in foreclosure; fraudulent receipt of government loans and benefits; and various other unlawful acts.

While certainly an important initiative, I wonder who is in charge with coming up with such hokey names for these prosecutorial efforts. (ph)

October 19, 2006 in Fraud, Prosecutions | Permalink | Comments (0) | TrackBack (0)

Wednesday, October 18, 2006

Former Homestore CEO Sentenced to Fifteen Years

Former, Inc. CEO Stuart Wolff received a fifteen-year prison sentence for his role in the company's accounting fraud through "round-trip" transactions to inflate revenues during the technology bubble.  A jury convicted Wolff on charges of conspiracy, insider trading, filing false reports with the SEC, falsifying corporate records, and lying to company auditors.  The insider trading counts relate to Wolff's exercise of stock options and then sale of the shares while inflated its revenue related to on-line advertising.  A press release issued by the U.S. Attorney's Office for the Central District of California (here) notes that Wolff remains free on bond, and the court will hold a hearing on November 13 to decide whether to grant bail pending appeal. (ph)

October 18, 2006 in Securities, Sentencing | Permalink | Comments (0) | TrackBack (0)

Tuesday, October 17, 2006

Does Congress Need an "Effective Program?"

Does Congress need an effective compliance program? 

The New York Times reports here on a  congressional investigation that reveals that Randy Cunningham had been pressuring individuals to place federal business with certain military contractors.  This comes in the wake of recent allegations of lack of oversight and quick action in the Mark Foley matter. 

So the question is whether congress needs to reexamine its compliance program.  If this were a corporation or business operating under the federal sentencing guidelines, the corporation could face consequences for failing to have an "effective [compliance] program."  Should Congress be held to this same standard?  Does Congress need an effective program to prevent and detect misconduct - see here - as set forth in the organizational guidelines?


October 17, 2006 in Corruption, Government Reports, News | Permalink | Comments (0) | TrackBack (0)

Indictment Against Ken Lay Dismissed

There were no surprises in today's dismissal of the indictment against Ken Lay. (see CNN here).  As previously noted, the Fifth Circuit in an en banc decision ruled clearly on the status of a criminal conviction after the death of the accused but prior to a review of the case on appeal. (see here and here). And yet despite the clear law, prosecutors opposed the motion for abatement of the conviction. (see here) Tom Kirkendall, at Houston ClearThinkers, offers some commentary here.


October 17, 2006 in Enron | Permalink | Comments (0) | TrackBack (0)

Wesley Snipes Charged with Tax Violations

Well-known action movie actor Wesley Snipes and two tax shelter promoters, Eddie Kahn and Douglas Rosile, were indicted (here) in Florida on tax, conspiracy, and false claim charges.  They are accused of obtaining over $7 million in tax refunds from the IRS based on the "861 argument" that taxes are only owed on certain foreign earned income.  An earlier post (here) quoted from a Department of Justice press release that described the "861 argument" and noted that "[c]ourts have consistently held that Section 861 does not provide authority for United States citizens to fail to file income tax returns on income earned in the United States . . . ."

A press release issued by the U.S. Attorney's Office for the Middle District of Florida (here) states:

The indictment alleges that Snipes, Kahn, and Rosile attempted, through dishonest means, to make it appear as if Snipes had no liability for federal income taxes, when, in fact, Snipes had such tax liabilities. As part of the scheme, the defendants allegedly prepared and filed two amended federal income tax returns for Snipes, fraudulently claiming refunds of 1996 and 1997 income taxes previously paid, totaling almost $12 million. The indictment also alleges that Snipes did not file his 1999 through 2004 federal income tax returns, even though the law required him to do so.

Snipes is charged with six counts of failing to file a tax return in addition to the conspiracy and false claim counts.  It looks like we may not get to see the fourth installment of the Blade series any time soon.  Darn! (ph)

October 17, 2006 in Tax | Permalink | Comments (2) | TrackBack (1)

Homes of Representative's Close Friend and Daughter Searched in Corruption Probe

In a potential new avenue for federal corruption investigators looking at Capitol Hill, the FBI searched the homes of a close friend and the daughter of Pennsylvania Representative Curt Weldon.  The search warrants are related to an investigation of Representative Weldon involving possible assistance he gave a company, Solutions North America, owned by his daughter and the close friend, to obtain lobbying contracts from foreign clients.  Neither Representative Weldon's congressional offices nor his home were searched.  The FBI also searched properties in Florida owned by a Russian natural gas company that paid Solutions $500,000 for lobbying work.  According to an AP story (here), the Department of Justice executed the warrants because of the disclosure of its investigation over the past few days, and the concern that documents might be destroyed.  While search warrants used to be uncommon in white collar crime cases, any indication that documents may "disappear" will usually trigger a broad search for an array of records.  Although more cumbersome than a grand jury subpoena, a warrant allows for the quick seizure of documents that can be sorted out later, rather than trusting the recipient to produce relevant records.  A warrant certainly does not mean wrongdoing occurred, and the FBI's description of probable cause used to obtain it may indicate little more than the surmise of agents. (ph)

October 17, 2006 in Corruption | Permalink | Comments (0) | TrackBack (0)

Former FDA Chief to Plead Guilty to False Statement Charge

Dr. Lester Crawford, former Commissioner of the Food and Drug Administration for a bit over two months before he abruptly resigned in September 2005, will plead guilty to two misdemeanor counts of making a false writing and conflict of interest related to his failure to disclose stock ownership and income on his government disclosure forms.  The two-count information (available on Findlaw here) charges violations under the false writing (18 U.S.C. Sec. 1018) and conflict of interest (18 U.S.C. Sec. 208) statutes.  Prosecutors did not pursue a more serious charge under the general false statement provision, 18 U.S.C. Sec. 1001, which is a felony.

Dr. Crawford chaired an FDA Obesity Working Group while he and his wife owned shares in Kimberly-Clark, PepsiCo, Wal-Mart and Sysco Corp, which qualified as "significantly regulated organizations" in which he could not own shares.  The Group met with representatives from the packaged food industry and he testified before Congress about proposals for package labeling without having disclosed his ownership of shares of the companies that would be affected by the FDA recommendations.  He is also accused of not reporting income from the exercise of stock options in Embrex Corp., which was regulated by the FDA while he was Deputy Commissioner and then Commissioner.  The charges carry up to a year in prison each, although I think it's likely that Dr. Crawford will not receive any prison time for the violations in light of the absence of any claim that his decisions were impacted by the undisclosed income and stock ownership.  An AP story (here) discusses the charges. (ph)

October 17, 2006 in Prosecutions | Permalink | Comments (0) | TrackBack (0)

Lynne Stewart Receives 28-Month Prison Term

Civil rights lawyer Lynne Stewart received a 28-month prison term for her convictions in 2005 for helping her client, an Egyptian sheik convicted of terrorist plots in 1995, communicate with his followers.  The government sought the maximum sentence of thirty years, but U.S. District Judge John Koeltl found that Stewart had championed the poor in her long career and had lost her law license after the conviction as grounds for imposing a significantly lower sentence.  One of her co-defendants who assisted in smuggling the messages out of prison received a twenty-month term instead of the twenty years the government sought, while a second co-defendant received a 24-year prison term based on his direct contact with terrorists overseas, again short of the government's recommended life term.  Stewart will remain free on bail pending her appeal, and given the disparity between the U.S. Attorney's Office's recommendations, largely based on the Federal Sentencing Guidelines, and Judge Koeltl's sentences, a cross-appeal of the sentences by the government is very likely.  A New York Times story (here) discusses the sentencing. (ph)

October 17, 2006 in Sentencing | Permalink | Comments (0) | TrackBack (0)

Another Day, Another GC

The options-timing investigations claimed another general counsel, this time at KLA-Tencor, a Silicon Valley company, which announced that Stuart J. Nichols has resigned immediately from the position he held since 2000.  According to a company press release (here), "incorrect measurement dates for certain stock option grants were used for financial accounting purposes, principally during the period July 1, 1997 through June 30, 2002, and as a result, the Company will restate its financial statements to correct the accounting for retroactively priced stock options. The Company now anticipates that the total additional non-cash charges for stock-based compensation expenses will not exceed $400 million."  KLA-Tencor probably would have fired its CEO at the time of the back-dating, except that Kenneth Schroeder retired in 2005, so instead it has terminated all employment relationships with him, which means the usually lucrative "consulting" contract handed out to former CEOs is gone.  The company also announced that it will "cancel all outstanding retroactively priced stock options held by Mr. Schroeder and to re-price all outstanding retroactively priced stock options held by Mr. Nichols."  Welcome to the club. (ph)

October 17, 2006 in Investigations, Securities | Permalink | Comments (0) | TrackBack (0)

Monday, October 16, 2006

UnitedHealth CEO Ousted Over Options-Timing

UnitedHealth Group, Inc. CEO Dr. William McGuire has been forced out by the board of directors over suspiciously-timed options grants, reports the Wall Street Journal (here).   The company's general counsel, David Lubben, is also leaving after an internal investigation in which assertions by company executives that options were not back-dated were not entirely credible.  The report on the investigation, which the company made available (here), states that many of the options grants to senior executives "were likely backdated" and that "certain facts run contrary" to Dr. McGuire's assertions about the options award process.

Dr. McGuire became something of a poster child for exorbitant executive pay, with unexercised options worth almost $1.75 billion -- that's right, billion not million -- and gains of almost $115 million in 2004 and $124 million in 2006 from exercising a small slug of his options.  The Journal story notes that twelve option grants from 1994 to 2002 to Dr. McGuire, among ohters, were made shortly before an increase in UnitedHealth's stock price, and in three years the grants were at the low price for that year, a remarkable coincidence that may explain in part the high value of his stock options.  It appears that at least some of the grants involved back-dating, which has become the kiss of death for CEOs and other senior officers.  The company postponed filing its 10-Q in August 2006 and still has not filed any financial statements due to accounting issues related to the options back-dating. 

The timing of Dr. McGuire's departure likely means that a restatement will be coming soon, or at least an estimate of the financial hit from the manipulation of the options grants.  After the CEO dismissals in the past week (see earlier posts here and here), UnitedHealth may have set the tone for the coming week of more of the same.  The problem for Dr. McGuire will be that his gains from the options exercises is likely to draw even greater interest from federal prosecutors in the results of UnitedHealth's internal investigation.  The U.S. Attorney's Office for the Southern District of New York has subpoenaed the company, and that district has not yet brought a criminal case from the options back-dating investigations yet, unlike the Northern District of California (Brocade Communications) and Eastern District of New York (Comverse Technology).  The SDNY prosecutors may be looking to make a big splash soon, and Dr. McGuire could be the unlucky target. (ph)

October 16, 2006 in Investigations, Securities | Permalink | Comments (1) | TrackBack (0)

Will Prosecutors Get Another Shot at Fastow's Sentence?

The six-year sentence given to former Enron CFO Andrew Fastow came as a surprise to many who thought that he would receive a ten-year term of imprisonment for his role in the fraud at the company.  Fastow even testified that he would be sent to prison for ten years.  According to a Houston Chronicle article (here), the government may appeal the sentence, although it's not clear whether that will be successful because prosecutors do not appear to have objected to the lower term at the sentencing hearing.  According to Fastow's plea agreement (here), "The parties agree that Defendant's sentence under the Sentencing Guidelines shall include 120 months in the custody of the Bureau of Prisons.  Defendant agrees that he will not move for a downward departure from the offense level or the guideline range calculated by the Court and that no grounds for a downward departure exist."  The agreement seems to restrict what Fastow's attorneys could argue to obtain a lower sentence, and so the basis for U.S. District Judge Kenneth Hoyt's decision to impose the lower sentence will be important.  At the hearing, prosecutors extolled the benefits of Fastow's cooperation, so it did not sound like the government had any objection to the lower sentence and may even have silently acquiesced in the six-year prison term.

The judge met with prosecutors and defense counsel in a closed session the day before the sentencing, however.  It is not known at this point what was said there, and the court denied a request by prosecutors for immediate access to a transcript of that hearing in order to decide whether to appeal the sentence.  Another Houston Chronicle story (here) quotes Judge Hoyt that "because the government was present, it is already in a position to know whether the government itself or the defense committed some act that violated a term of the plea agreement."  One hint at what was discussed at that hearing is a request by Fastow's counsel that medical information not be revealed, which may indicate that his attorneys provided information about his condition that may have been a basis for a lower sentence.

But even if Fastow's counsel sought a lower sentence in violation of the plea agreement, the government's failure to object to the lower sentence may put it in the position of establishing a plain error if it decides to appeal.  Under Federal Rule of Criminal Procedure 52(b), "A plain error that affects substantial rights may be considered even though it was not brought to the court's attention."  If prosecutors did not object to statements by Fastow's attorneys at the time they were made, then the government would have to show that the sentence works a significant injustice and calls into question the integrity of the judicial process.  Perhaps even worse, if prosecutors appear to have acceded to the lower sentence, then there would be a waiver of any claim that Fastow violated the plea agreement and the sentence cannot be challenged even for plain error.  Given the lack of any objection to the sentence during the hearing or even immediately afterwards, it certainly looks like prosecutors have been inconsistent in their position.  (ph)

October 16, 2006 in Enron | Permalink | Comments (0) | TrackBack (0)

Yet Another Foreign Insider Trading Case Filed by the SEC

The SEC filed a civil insider trading action against foreign purchasers of call options in CNS Inc., the maker of consumer health products such as the Breathe Right nasal strip, in advance of the disclosure that the company agreed to be taken over by GlaxoSmithKline PLC.  The defendants traded through Swiss accounts by purchasing out-of-the-money CNS call options in the week before the announcement of the deal, given them a profit of over $650,000.  The SEC Litigation Release (here) quotes from the Commission's complaint:

Between September 27 and October 2, 2006, Unknown Purchasers bought a total of 1186 out-of-the-money CNS call option contracts. These purchases represented approximately 67% to 100% of the daily volume of the various CNS options series on the days purchased.

The Unknown Purchasers' trading coincided with key non-public and confidential events leading up to the announcement that Glaxo would acquire CNS. Specifically, Glaxo was one of several companies contacted by investment bankers on behalf of CNS in August 2006. After Glaxo had executed a confidentiality agreement, Glaxo was invited to submit a binding offer for CNS by September 29, which it did. On October 2, the CNS Board met to review the offers, and Glaxo was informed that it was one of two finalists and that it should submit a best and final offer by October 4.

On Monday, October 9, 2006, before the opening of the New York securities markets, CNS and Glaxo announced the execution of an agreement whereby Glaxo would acquire CNS for a price of $37.50 per share - a 31% premium over the closing price of CNS stock on Friday, October 6. On the date of the announcement, CNS shares closed at $36.72 - a 28.5% increase over the closing price of CNS stock on Friday, October 6.

On October 9 and 10, 2006, following the announcement of the merger between CNS and Glaxo, the Unknown Purchasers sold the CNS options in both accounts and realized net profits of approximately $651,895.

As is common in cases involving foreign purchasers, the SEC sought a freeze order to keep the funds from leaving the United States, which was granted by the U.S. District Court for the Eastern District of Pennsylvania. 

The trading in CNS call options is similar to a recurrent pattern of insider trading, particularly by foreign purchasers.  In August 2005, the SEC filed against then-unknown purchasers of Reebok call options before a takeover by Adidas, a case that turned out to be part of a much larger insider trading network.  More recently, in June 2006, the Commission filed suit against defendants in Argentina who purchased Maverick Tube call options before an announced takeover by Tenaris.  What made the trades particularly suspicious is that the options were out of the money at the time of the purchases and had fairly short expiration dates, making them especially risky -- unless the purchaser knew that the price of the company would increase significantly due to a pending extraordinary announcement.  Given the frequency with which these types of insider trading cases occur, particularly when it involves overseas purchasers, it is starting to sound like repeat episodes of Desperate Housewives. (ph)

October 16, 2006 in Civil Enforcement, Insider Trading, Securities | Permalink | Comments (0) | TrackBack (0)