Saturday, October 28, 2006
The prosecution of I. Lewis Libby, former chief of staff to Vice-President Dick Cheney, has been in an extend quiet period but reemerged at a hearing in U.S. District Court on October 26. One of the defenses to the perjury and false statement charges has been the "honest-but-overworked-civil-servant" claim, that Libby's misstatements to the grand jury and federal agents were the result of his having wide-ranging responsibilities so that he simply forgot what he said. The defense is premised on the fact that former CIA agent Valerie Plame's identity was of no real interest to him, and therefore he misspoke but did not intend to mislead.
In furtherance of that position, the defense is seeking to use an expert on memory, Dr. Elizabeth F. Loftus from the University of California-Irvine. The government challenged the defense effort to call Dr. Loftus as a scientific expert who would testify that jurors do not understand the limits of memory and that she can explain how a busy person like Libby could have simply forgotten what he said to reporters about Plame. Special Counsel Patrick Fitzgerald apparently had a field day cross-examining Dr. Loftus, according to a Washington Post story (here).
Among other things, Fitzgerald got Dr. Loftus to admit that her methods are not particularly scientific, which may well be the kiss of death for calling her as an expert under Daubert. In a backhanded way, she may have established the point about faulty memory. Fitzgerald asked her whether they had ever met, to which Dr. Loftus stated they had not. At that point, Fitzgerald asked about a case in New York in which she testified for the defense, when he was an assistant U.S. Attorney and cross-examined her. Rather than simply not remembering, perhaps Dr. Loftus wiped that memory clean.
It certainly does not help an expert on memory to be unable to recall someone who cross-examined her once before and to admit that her conclusions are not the result of a rigorous scientific analysis. Whether that keeps her from testifying is another matter. It may be that U.S. District Judge Reggie Walton will permit Dr. Loftus to give limited testimony on memory issues so that there is not a complete denial of evidence on the question that can be raised on appeal if there is a conviction. I'm hopeful Dr. Loftus remembers to submit her bill for the time spent in Washington D.C. at the hands of the Special Counsel. (ph)
David Safavian received an 18-month prison term for obstruction of justice and making false statements to federal agents in connection with an investigation of lobbyist Jack Abramoff. Safavian participated in the Scotland golf trip that has also ensnared Ohio Congressman Bob Ney, who entered a guilty plea as part of the widening investigation of Capitol Hill corruption. The sentence handed out by U.S. District Judge Paul Friedman fell between the government's request for a sentence under the Guidelines of 30-37 months and Safavian's request for probation or home confinement. According to an AP story (here), the Judge found that Safavian's testimony at trial was "incredible" and "hard to believe" but did not apply the two-level sentence enhancement for perjury. Judge Friedman followed the Sentencing Guidelines in imposing the sentence without applying any of the enhancements that government sought that would have increased the prison term.
At the hearing, the Judge seemed to be asking Safavian to take some responsibility for what he had done. While Safavian said that he was "contrite" for what he did, Judge Friedman said, "Get up here and tell me, 'I agree I concealed. I agree I obstructed justice,' . . . I don't believe he's done that." While the Judge might hope to hear such a statement, Safavian's defense at trial was that he did not do anything wrong, so it may be unrealistic to think that he would do a complete about-face that would undermine his appeal that there was insufficient evidence of his intent to obstruct justice and lie. (ph)
Friday, October 27, 2006
Bristol-Myers Squibb has run into some rough times dealing with the Department of Justice after thinking it had left those troubles behind when it entered into a deferred prosecution agreement in June 2005. That case involved "channel stuffing" by the company to pump up its revenue figures, and resulted in a settlement with the SEC and the agreement with the U.S. Attorney's Office for the District of New Jersey. In July 2006, however, it came out that the company's purported agreement to keep a generic version of Plavix, a major revenue source, from the market was the subject of an antitrust investigation by the Department of Justice. That led to the termination of CEO Peter Dolan after the compliance monitor appointed as part of the deferred prosecution agreement, along with U.S. Attorney Christopher Christie, recommended his removal for the Plavix affair (or fiasco, if you prefer). Now comes the latest disclosure that the USAO's criminal investigation includes looking into whether the conduct related to Plavix violated the injunction issued as part of the SEC case, which could subject Bristol-Myers to a criminal contempt. A company press release (here) describes the state of the investigations:
As previously disclosed, the Antitrust Division of the United States Department of Justice is conducting a criminal investigation regarding the proposed settlement of the pending PLAVIX® patent litigation with Apotex. The company is cooperating fully with the investigation. It is not possible at this time reasonably to assess the outcome of the investigation or its impact on the company. It is also not possible at this time reasonably to assess the impact of the investigation, if any, on the company’s compliance with the Deferred Prosecution Agreement (DPA) with the United States Attorney’s Office for the District of New Jersey (USAO). Also as previously disclosed, the USAO initiated an investigation that is being conducted by the Monitor and the USAO into corporate governance issues relating to the company’s negotiations of the proposed settlement with Apotex. This investigation has been expanded to include a review of whether there was any violation of Federal securities laws in connection with the proposed settlement with Apotex under the terms of the previously disclosed Consent Order the company entered into with the U.S. Securities and Exchange Commission in August 2004 (SEC Consent). It is not possible at this time reasonably to assess the outcome of the investigation or its impact on the company. (Emphasis added)
The SEC Litigation Release (here) from August 6, 2004, describes the settlement that included "a permanent injunction against future violations of certain antifraud, reporting, books and records and internal controls provisions of the federal securities laws." This sounds like the standard, broad "sin no more" injunction agreed to in many cases. The problem for Bristol-Myers is that the company's disclosures about potential threats to its Plavix sales may have been inadequate and the negotiations for the ill-fated agreement to keep the generic version off the market should have been disclosed earlier. Disclosure problems in turn may violate the books and records and internal control provisions of the securities laws, which the company is enjoined from doing. As discussed in an earlier post (here), a violation of the securities law may also violate the deferred prosecution agreement and could restart the channel-stuffing case along with anything that might arise from the Plavix investigation. The company would have virtually no defenses on the channel stuffing after having admitted its liability as part of the agreement with the USAO. Look for Bristol-Myers to be more than cooperative in this new investigation in order to avoid any thoughts that it violated the terms of the deferred prosecution agreement. (ph)
Former White House aide David Safavian faces sentencing for his conviction on four counts of obstruction of justice and false statements related to his contacts with former superlobbyist Jack Abramoff. Prosecutors have requested that the court apply the Sentencing Guidelines, which calls for a sentence in 30-37 month range, while defense counsel have asked for probation or home confinement. Safavian has received support from his former Capitol Hill boss, Utah Representative Chris Cannon, who sent a strong letter urging a light sentence. The letter takes an approach quite different from that seen in Congress in support of longer sentences and greater adherence to the Sentencing Guidelines:
As a member of the Judiciary Committee, I have personally struggled with sentencing issues, particularly post-Booker although certainly not to the extent you have. This episode has punctuated for me the importance of taking into account all facets of a person and the unique facts of each case, when determining what the proper and just punishment should be.
Has David made mistakes? Of course. But as you consider his sentence, I hope you will keep some of my personal observations in mind. This is a decent man who made an error in judgment. He has paid a terrible price and will continue to do so for the rest of his life. Separating him from his wife (who is also in public service) and his three-year old daughter will not do anyone any good.
The approach urged by Representative Cannon is almost the exact opposite of the Guidelines, which largely ignore "all facets of a person and the unique facts of each case." It will be interesting to see if this is a one-shot situation to help out a former aide -- Safavian served as Cannon's chief of staff -- or a signal that Congress will not move to make the Guidelines "topless" or limit judicial discretion after Booker. A Salt Lake City Tribune article (here) discusses Representative Cannon's letter and the sentencing. (ph)
A common means of committing a fraud is to target small groups with whom the perpetrator shares a common characteristic that engenders a degree of trust. Many frauds prey on ethnic groups, as demonstrated by an SEC civil injunctive action filed against Hyun Soo Jang and Kangsan Kim for targeting Korean investors in the Los Angeles area. According to the SEC Litigation Release (here), Jang and Kim operated through two now-defunct securities firms, Unus Capital Management, Inc. and PeopleN Investment Corp., to defraud forty investors of approximately $4.5 million. According to the SEC:
The complaint alleges that Jang and Kim did not use investor funds to purchase securities as promised. Instead, according to the complaint, Jang, age 39, formerly of Los Angeles, Calif., and Kim, age 34, of Anaheim, Calif., misappropriated the funds entrusted to them, including about $2.5 million taken by Jang, and $500,000 taken by Kim and Unus. The complaint also alleges that Jang used an additional $500,000 to repay existing investors with money that had been deposited by new investors.
The Commission's complaint alleges that, between January 2003 and August 2005, Unus attracted investors through broadcasting morning stock market reports hosted by Jang and Kim that were aired on Korean-language radio stations. As alleged in the complaint, after being contacted by interested investors, Jang and Kim falsely portrayed Unus and PeopleN as established and regulated entities. The complaint alleges that Jang and Kim misrepresented PeopleN as a broker that was registered and a member of various securities industry organizations, such as the New York Stock Exchange, the Securities Investor Protection Corporation and The Nasdaq Stock Market, Inc. In addition, the complaint alleges that Jang and Kim continued to hold out Unus as a registered investment adviser even after the firm had withdrawn its registration with the California Department of Corporations.
Interestingly, the Commission also issued its Litigation Release in Korean (here). (ph)
Thursday, October 26, 2006
The fallout from the collapse of futures-trading firm Refco in October 2005 has hit in Austria, where prosecutors in Vienna charged nine individuals for their role in transactions between Refco and Austrian bank Bank Fuer Arbeit und Wirtschaft AG (BAWAG) that led to large losses at the bank. BAWAG lent former Refco CEO Phillip Bennett over $400 million right before Refco's collapse, which he used to repay debts owed to Refco that were not properly accounted for by the firm. It turns out BAWAG had significant losses on trading by Wolfgang Floettl, son of a former CEO of BAWAG, in Refco accounts. The charges include embezzlement, fraud, and false entries in the bank's books, and the defendants include Floettl, two former chief executives, and an auditor from KPMG's Austrian branch. An AP story (here) discusses the charges.
Back in the U.S., federal prosecutors said in court that a new indictment will be filed in the next two weeks in prosecution of Refco executives, which comes on top of a new indictment on October 24. Bennett and former Refco CFO Robert Trosten both entered not guilty pleas to the most recent indictment, and it's not clear whether the new indictment will include additional defendants. Given the speed with which Refco collapsed, less than a week, it is not surprising that the investigation has taken time to sort out how it's demise occurred so quickly. The quick filing of charges against Bennett in November 2005 has meant that prosecutors will have to deal with an increasingly exasperated judge who wants the case pushed along, according to a New York Post story (here). (ph)
The New York State Ethics Commission issued a report accusing Comptroller Alan Hevesi of misusing state resources for his own benefit. The report comes only two weeks before the election. The violation centers on his use of a state chauffeur for his wife, purportedly because of "threats" that were never substantiated, and a low-ball repayment to the state for the benefits. According to the report (here):
The relevant facts are not in dispute. The record demonstrates that Mr. Hevesi, as both City Comptroller and State Comptroller, used a government employee under his supervision to provide transportation for his wife. In each instance, he did not make reimbursement until the issue became a matter of public concern. As he acknowledges, no records exist at OSC upon which an accurate accounting for those services can be made. Because Mr. Hevesi’s recent $82,688.82 reimbursement is based in its entirety on the recollection and rough estimates of Acquafredda [the chauffeur], the Commission cannot endorse this estimate. In fact, the Commission believes that this estimate understates the cost of all State services provided to Mrs. Hevesi. Moreover, the OSC’s failure to keep any record that would allow for proper reimbursement suggests that Mr. Hevesi did not intend to reimburse the State.
The record in this case does not support Mr. Hevesi’s assertion that there was a nexus between his role as Comptroller and any threats to Mrs. Hevesi’s safety. There were no threats of any kind to Mrs. Hevesi, and any threats to Mr. Hevesi, to the extent they existed, did not warrant special protection for Mrs. Hevesi.
A Rochester Democrat & Chronicle article (here) notes that Hevesi defended himself at a debate, citing his wife's poor health and noting that any threat against him was also a threat to his family. His opponent in the Comptroller election, J. Christopher Callaghan, has called for Hevesi to resign. Governor George Pataki will decide soon whether to initiate impeachment proceedings. Quite a way to move into the last days of a campaign. (ph)
Wednesday, October 25, 2006
With more companies doing business abroad, it becomes more important to understand international criminal laws. According to the New York Times here Royal Dutch Shell is having to deal with Russian authorities to avoid criminal prosecution of some of its employees. The issue for Shell and two partners from Japan relates to environmental laws.
A former partner at the law firm of Kirkland and Ellis was convicted of tax evasion for selling a "fraudulent CD from which he received approximately $1.8 million dollars," and then hiding the income from the government. The DOJ press release is here.
Unlike some defendants who are immediately taken into custody upon conviction, Jeffrey Skilling has a little bit of remaining time in the semi-free world. He was ordered to report to prison once the Bureau of Prisons has assigned him to a facility. He was not given bond pending the appeal.
The Houston Chronicle here has an interesting story on Jeffrey Skilling's choice of prison. And if given this placement, he will be in a place with at least one other mentioned on this blog (Former Rep. Randy "Duke" Cunningham). Wall Street Jrl blog reports here that he is going to the Federal Correctional Center in Butner, N.C. (see here)
Tuesday, October 24, 2006
As expected (here), Comverse CFO David Kreinberg plead guilty. He plead guilty to "a two-count felony information charging one count of conspiracy to commit securities fraud, mail fraud, and wire fraud, and one count of securities fraud." In addition to the guilty plea, he also settled civil matters the SEC. The DOJ press release states here that the agreement
"provides for a permanent injunction enjoining him from violating or aiding and abetting violations of the antifraud, reporting, record-keeping, internal-controls, false-statements-to auditors, Sarbanes-Oxley certification, and ownership-reporting provisions of the federal securities laws; a permanent officer-and-director bar; the payment of $2,394,917.68 in disgorgement and prejudgment interest; and a permanent suspension from appearing or practicing before the Commission as an accountant."
This stresses the importance of thinking globally in settling white collar cases. One cannot just think in terms of the criminal action, but also it is necessary to think about the civil ramifications and collateral consequences that can accrue to the individual.
The Wall Street Jrl reports here that the former CFO of REFCO was indicted. The press release of the U.S. Attorney's Office for the Southern District of New York states the Robert C. Trosten was indicted for his alleged:
"participation in a scheme to defraud Refco’s investors that resulted in losses of more than one billion dollars. TROSTEN is charged with assisting PHILLIP R. BENNETT, formerly Chief Executive Officer of Refco, in hiding from Refco’s auditors and investors hundreds of millions of dollars of debt owed to Refco by a company controlled by BENNETT."
The new indictment also added new fraud charges against former CEO of Refco Phillip R. Bennett.
With increased technology, we will probably be seeing more and more cases involving the misuse and criminal conduct related to information. So it is not surprising to see a prosecution related to trade secrets.
Michael Kanell of the Atlanta Jrl Constitution reports here that two individuals plead guilty to conspiracy in a case involving trade secrets at Coca Cola. And of all places to go with the alleged trade secrets - Pepsi. (Although there is no mention of Former Deputy Attorney General Larry Thompson here, it is interesting to note that he is General Counsel at PepsiCo) According to the DOJ press release the investigation started when Pepsi reported receipt of a letter offering the alleged secrets to Coca Cola and Coca Cola contacted the FBI.
Although sentencing remains to be seen on these two, a third individual who is also charged did not enter a plea. One has to wonder whether there will be cooperation with the DOJ to reduce their sentence. Clearly accepting responsibility should serve to mitigate the sentence of the cooperating defendants. The accused were represented by Atlanta attorneys Don Samuel & Anna Blitz.
Monday, October 23, 2006
The Daily Business Review reports on law.com here that the government is seeking forfeiture of attorney fees on a recent white collar case in Miami. The case, a bank fraud case, has prosecutors claiming that the attorney fees came from tainted money. In this particular case the attorneys tried the case in a 4½-month trial. Obviously they also had pre-trial preparation and the cost of experts. Federal prosecutors in Miami are also going after attorney fees in another case, the Hamilton Bank-related case discussed here. In that case the defendant received a 30-year sentence.
Taking away attorney fees after representation of a client at a long trial can be devastating to the attorney's business and livelihood. In some cases it may also place in jeopardy the right to counsel, as attorneys in other white collar cases start weighing whether they should represent a client who might be subject to a forfeiture.
(esp)(w/ a hat tip to Erick Cruz)
According to Peter Lattman's Wall Street Jrl. blog here, David Kreinberg, the former CFO of Comverse Technology is expected to plead guilty today. It is interesting how the CFOs are pleading with incredible deals, while the CEOs end up facing trial (e.g. Sullivan/Ebbers). What, if any deal, might have happened here remains unknown. In this particular case, the former CEO Kobi Alexander still needs to be returned to the United States to face the charges against him. He is presently in Namibia awaiting possible extradition. (see here). For background on this case, see here.
Carrie Johnson at the Washington Post has a wonderful article here discussing the effect of the statute of limitations on matters related to the AOL Investigation. Although mid-level executives are on trial this week, the investigation may have been cut short when prosecutors had the clock run out by the statute of limitations.
What are others in blogsphere saying about Jeff Skilling's sentence:
Doug Berman - Sentencing Law & Policy here
NormPattis - Crime & Federalism here
Larry Ribstein - Ideoblog here
Tom Kirkendall -Houston's Clear Thinkers here
Howard J. Bashman -How Appealing here
Addendum - Carrie Johnson of the Washington Post reports here that the Enron Task Force was "closing its doors."
Commentary on Jeffrey Skilling's sentence of 24 + years (292 months) by Peter & Ellen -
Will we ever see sentences like these again?
Peter - The collapse of Enron, WorldCom, and Adelphia Communications due to large-scale accounting fraud was, in many ways, unprecedented, the "perfect storm" so to speak. Executives have never been sentenced to such substantial terms before, and I doubt we will see these types of sentences again. Not because corporate crime will cease, but because the ability to engage in these types of accounting tricks is now much more difficult. For one thing, the accountants and the lawyers are paying much more attention to the details, in part because of Sarbanes-Oxley but perhaps even more because the job of those professions is more directed toward policing management. Rogue executives can still engage in criminal conduct, but I would be very surprised if we saw the type of brazen accounting fraud perpetrated by WorldCom. There will be another cycle of corporate misconduct, and I don't think anyone can predict where it will strike. But like the S&L crisis of the 1990s, it is unlikely to be spread across industries and involve conduct at major enterprises. I don't think we'll see another Bernie Ebbers or Jeffrey Skilling on trial for destroying a company, in effect, so corporate crime prosecutions will be for more isolated misconduct. Not that corporate executives should forget these sentences, but they are not at risk of suffering them because at least for the foreseeable future the types of crimes that Ebbers and Skilling engaged in are not going to take place.
Ellen - I also rather doubt we will see sentences like this again, but not because the Enron & Worldcom wave are over or because Sarbanes -Oxley is going to solve the problem. There have always been corporate fraud scandals and there will likely be scandals down the road. Just as we saw new frauds developed throughout our past history, most likely we will see new forms of fraud in the future. What they will be, and how extensive they will be, remains to be seen. And just as Congress reacted to the scandals of today with new legislation (Sarbanes-Oxley) so too will we find reactive legislation passed in the future to handle the new types of criminality that appears on the scene.
But I don't think we will see sentences like this in the future because people will eventually realize the worthlessness of issuing such draconian sentences in non-violent white collar cases. The bottom line is that these sentences are not likely to deter future criminality, as many who engaged in the conduct just did not see themselves as committing crimes. Jeff Skilling's claim of innocence, even at his sentencing, is a statement that in order to deter criminality we need to start teaching law in business schools so that those going into the business world are fully apprised of where the line is between acceptable business practices and criminal conduct.
Do these sentences match the harm in other white collar crime cases?
Peter -While Jeffrey Skilling receives 24 years for presiding over the collapse of Enron, former Congressman Randy (Duke) Cunningham sells his office to a string of defense contractors for a bit over $1 million and receives a sentence of 8 years. Soon-to-be former Congressman Bob Ney will likely be sentenced to less than 3 years in prison for selling out his office to lobbyists led by Jack Abramoff. How can there be such a disparity between the sentences for public corruption and the corporate frauds perpetrated by Ebbers and Skilling? The harm from public officials, especially those elected to office, who abuse their positions for personal gain is, in my opinion, nearly as great as that caused by corporate chieftains who preside over collapsing companies. While one might argue that it is wrong to "criminalize agency costs" by prosecuting corporate officers, we never hear that argument applied to public corruption. The sentences in those cases need to be increased significantly to send an even stronger message to public officials that selling their offices, and the public's trust, is intolerable. Investors don't lose pensions, but the harm is just as great, I believe.
Ellen - I agree that in recent cases we see lighter sentences in corruption cases than we see in the corporate sphere and that this disparity is not warranted. If anything, having the public's trust should be considered a greater threat to society than criminal activity in the private sphere. But I do disagree that this warrants increasing the sentences in corruption cases. More appropriately, this sends the message that recent corporate sentences are not aligned with reality. Sending non-violent offenders to prison for life sentences serves no utilitarian purpose. Sending a person to prison for 25 years as opposed to 10 years for a corporate crime does not offer increased rehabilitation to the individual. After all this person will never be in this position again to commit a like crime. It also serves no deterrent if the individual has no recognition of what is legal and what is illegal. Further, a 10 year sentence would send an equally strong message to anyone entering the corporate world that they need to act properly. The only purpose here is retribution. And the shame of this conviction, a sentence of 10 years, and the collateral consequences faced by the white collar offender easily send that same message.
If we are so intent on punishing the wrongdoer with heavy prison time, then how can we accept Andrew Fastow being sentenced to 6 years, or Scott Sullivan receiving 1/5 of the sentence received by Bernie Ebbers. It becomes clear that what we are really doing here is punishing individuals who exercise their right to a jury trial. And permitting the government to continue this practice is not proper.
Not surprisingly, Jeff Skilling received a sentence in excess of 24 years in prison (292 months). (see Wall Street Jrl here) Surprisingly, he will not be allowed to remain free on bail pending the appeal, although he can remain free until such time as the Bureau Prisons determines his new residence and he has to report there. (see Houston Chronicle here). If one were expecting remorse to mitigate the sentence, it did not happen as Skilling continued to maintain his innocence. More to come....
Jeff Skilling's Forthcoming Sentence & The Role of Cooperation here
The Skilling Sentence here
Skilling Takes Another Shot at Overturning the Guilty Verdict here
More on Fastow here
What the Lay/Skilling Jury Heard from Fastow here
Fastow Receives a Six Year Sentence here
Fastow to Be Sentenced this Week here
Joint and Several Liability and Jeff Skilling here
Court Rejects Overturning Skilling's Convictions here
Asset Forfeiture- Skilling & Lay here
A Hint About How Causey's Guilty Plea Affected the Skilling Defense here
Skilling and Lay Seek to Delay Sentencing here
On to the Sentencing here
The Parameter for CEO Sentencing here
Lay & Skilling Appellate Issues here
Lay & Skilling Convicted here
The Skilling/Lay Closing Argument here
Commentary on Lay/Skilling Trial and Possible Aftermath here
Skilling/Lay Trial Defense Rests here
Here Comes an Ostrich (Instruction) here
Ken Lay's Testimony Ends here
This Week in Enronville here
Tough Day for Skilling here
Cross-Ex of Skilling here
Was Skilling on the Witness Stand Too Long here
Blame Fastow here
It is All Skilling here
Ae Ken Lay and Jeff Skilling Assisting the President here
Will Lay & Skilling testify? And Who Else? here
Intent- Key Issue in Skilling/Lay Trial here
Government Rests its Case Against Lay and Skilling, and Asks for 4 Counts to be Dropped here
Not a Good Day for Skilling here
They're On to Us here
This Week in Enronville here
Another Day in Enron Country here
Lay/Skilling Trial a New Week here
Opening Statements Lay & Skilling Case here
Skilling & Lay Selecting a Jury here
Enron Playbill here
The Latest Pre-Trial Events in the Lay/Skilling Trial here
Using Skillings SEC Testimony Against Him here
Skillings Motion to Dismiss Insider Trading Charges Against Him here
Where Do Nice Guys Finish here
There are many additional entries on this blog related to Jeff Skilling - see here