November 4, 2006
Prosecutor Says Snipes Has No Deal
Despite reports here, the prosecutor handling Wesley Snipe's tax case is stating that there has been no deal. The Tampa tribune reports here the details of the prosecutor's comments. Several things are interesting here:
- First is the initial report that appears to be inaccurate.
- Second is that a prosecutor is actually commenting on the inaccuracy of the report, as opposed to the standard line of "no comment."
- Third is that the Tampa Tribune article states that Wesley Snipes is presently filming in Namibia.
Has Namibia become the new haven for those charged by U.S. authorities? Yes, Namibia is where Kobi Alexander presently is located. (see here)
Court Denies Use of Expert in Libby Case
Discussed here are some of the pre-trial matters being presented in the case against I. Lewis "Scooter" Libby. One matter has now been ruled upon by the court. In a memorandum order, the court denied the defense permission to present a witness, Dr. Robert A. Bjock, at his trial. The court concludes:
"In Daubert, the Supreme Court designated the trial judge as a gatekeeper on the question of the admissibility of expert testimony. Daubert, 509 U.S. at 589. To permit the introduction of the testimony proposed by the defendant would be an abdication of that responsibility and would therefore leave the gate this Court is obligated to protect unguarded and without a sentry. This the Court cannot do, in light of the mandate given to it by the highest Court in the land. As noted above, this Court has concluded that the defendant has failed to satisfy his burden of establishing that the testimony of Dr. Bjork would be helpful to the jury and thus, he has failed to satisfy the second prong of Daubert. Moreover, even if this Court could conclude that the defendant satisfied his burden under Daubert, Dr. Bjork’s testimony would nonetheless have to be excluded under Federal Rule of Evidence 403, as the probative value of the proposed testimony is outweighed not only by the delay and waste of time that would be occasioned by the introduction of the testimony, but also by the risk that the jury will be misled and confused by the testimony
November 3, 2006
Trial of Former McKesson Executives Ends with Acquittal and Partial Mistrial
Professor J. Kelly Strader (Southwestern), guest blogging on the white collar crime prof blog, writes:
After a six week trial on seven counts of various accounting-fraud related charges, two former McKesson executives were acquitted on one count today (AP report) The court declared a mistrial on the remaining counts. The report states that eleven of the twelve jurors were prepared to convict the defendants on three securities fraud counts, but were unable to persuade the holdout. Four other executives had previously pleaded guilty in the case, which arose from yet-another scheme to inflate revenues by falsifying earning reports.
The trial result proves the old defense adage, “it just takes one.” Assuming more reports from the deliberations are forthcoming, it will be interesting to see if the complex proof required in such cases led the jurors to throw up their hands and call it quits.
Fortune Magazine Details the Milberg Weiss Investigation
Professor J. Kelly Strader (Southwestern Law School) - Guest Blogging on the White Collar Crime Prof Blog writes-
The current issue of Fortune magazine provides a detailed history of the events leading to May 2006 indictment of the country’s leading plaintiff’s class action law firm, Milberg Weiss, and others. Entitled “The Law Firm of Hubris, Hypocrisy, and Greed,” the article paints a portrait of the firm and its principals that is, to say the least, unflattering. The article also notes that the government has advised the judge in the case that there is “a significant chance” of a new indictment naming other defendants, apparently the firm’s principal founders, Mel Weiss and Bill Lerach. According to the article, both have received target letters.
The indictment contains 20 counts, but fundamentally rests on mail and wire fraud charges. The essence of the charges is that for over two decades the defendants arranged for $11.3 million in kickbacks to be paid to named plaintiffs in suits for which the firm acted as lead plaintiffs’ counsel, defrauding the unnamed class members. The government alleges that this arrangement also enabled the firm to have named plaintiffs at the firm’s disposal so that the firm could be first to the courthouse.
What the article does not mention is that, as previously discussed here, the mail and wire fraud theories are open to serious challenge. All this raises the age-old question about the proper exercise of prosecutorial discretion – should the government target the individual or the crime?
The article also cites the law firm’s assertion of the attorney-client privilege during the investigation as a lack of cooperation that justified the firm’s indictment. This once again raises issues arising from the Thompson Memorandum, now under attack in the KPGM case. (see here) .
No Jail Time for Wesley Snipes?
Paul Caron over at TaxProf is reporting here that "'Hollywood actor Wesley Snipes will avoid any time in jail on tax fraud charges as part of a recent settlement with the Internal Revenue Service.'" (quoting Daily Variety here) For background on this case see here.
Addedum - see new reports 11/5/06.
Seoul Court Gives Sentence of 8 1/2 Years in Major White Collar Case
For many years, the United States was considered a country that did not render draconian sentences in white collar cases. But court applications of the federal sentencing guidelines may present a new picture. Recently in the U.S. CEOs have faced sentences that may translate into life or close to life sentences. For example, we see Jeff Skilling receiving a 24+ year sentence and Bernie Ebbers' sentence coming in at 25 years.
In contrast, we see that former Daewoo CEO and founder just received a sentence of 8 1/2 years from the Seoul High Court. (see AP here) The sentence also includes a forfeiture of approx. 19 billion dollars.
Like so many recent cases in the U.S., this case involved alleged accounting fraud. But unlike so many cases in the U.S. where there are large dollar figures representing loss, the sentence here did not match the loss figures of the U.S.
The federal sentencing guidelines were enacted to promote uniformity. One question that no one seems to focus on is whether the uniformity should be limited to this country. In a transnational business world, if uniformity is an aim, then would it be more appropriate to consider like sentences in other countries.
November 2, 2006
AG Spitzer Cracking Down on Attorney Fee Payments
David Hechler has a piece in Corporate Counsel and law.com here that notes that federal prosecutors are not the only ones trying to stop the payment of attorney fees to indicted corporate employees. The article discusses how AG Spitzer has also been inserting a "no indemnification" clause in some of his agreements.
Corporate employees are increasingly subject to agency investigations, state prosecutions, and federal investigations. When an individual is guilty, having a no indemnification clause may seem acceptable to some. The problem with this reasoning is that we operate in a system of justice in which individuals are innocent until proved guilty and the deprivation of attorney fees may significantly affect the ability of the accused to respond to the government prosecution.
Do You Trust Your Employer With Identifying Information?
It is common to hear of individuals in companies stealing information, or outsiders to a business obtaining confidential information. These are the typical prosecutions for identity theft. But could it happen that the one charged with compromising the information might be your boss? The Atlanta Jrl Constitution has a story here about a CEO of a computer company who has been accused of stealing employee's identities.
Executive Sentences - Do You Dare to Risk Trial?
The Wall Street Jrl has a chart here listing recent sentences given to corporate executives. Noticeable on this chart is the sentencing disparity between those who went to trial and those who cooperated and plead guilty.
Kumar Receives 12 Years
Former CEO of CA Inc., Sunjay Kumar, who plead guilty to securities fraud, obstruction of justice, conspiracy, and false statements received a 12 year sentence. The Wall Street Journal reports here that Kumar accepted responsibility at his sentencing. Kumar had been indicted "for participating in an ongoing fraud that involved booking revenues in one quarter even though the contracts had not yet been concluded." (see here) As much as we all want more hours in the day, and more days in a week, adding this extra time into a reporting results can be fraud.
November 1, 2006
InterMune Inc Enters Deferred Prosecution Agreement
The U.S. Attorney's Office for the Northern District of California reports that DOJ & InterMune, Inc. have entered into a deferred prosecution agreement (see press release here). Purusant to this agreement, the biopharmaceutical company agreed to "pay nearly $37 million to resolve criminal charges and civil liability in connection with its illegal promotion and marketing of its drug Actimmune (Interferon gamma-1b)." The agreement calls for a deferred prosecution of a criminal Information that charges the company with "one count of violating the Food, Drug, and Cosmetic Act (FDCA), 21 U.S.C. 331(k), by promoting, with intent to defraud or mislead, its drug Actimmune for the treatment of idiopathic pulmonary fibrosis (IPF), a condition for which Actimmune has not been approved by the Food and Drug Administration (FDA)." The settlement is a global one (see company press release here).
Second Plea Expected in Comverse Case
The Wall Street Jrl is reporting here the likelihood of a second plea being entered in the stock options backdating scheme related to Comverse. The report is that corporate executive William Sorin (former senior general counsel) will enter a plea to one count - criminal conspiracy. Former CFO David Kreinberg recently plead guilty (see here) and is cooperating with the government. The key figure remaining in this case is former CEO Kobi Alexander, who remains free on bail in Namibia. (see here)
It is apparent that this investigation is now moving extremely quickly, and this is not surprising. When the government secures a high level cooperator it is much easier to accelerate an investigation. Individuals who cooperate are often anxious to provide information to the government to lower their sentence. The government is then able to use the material obtained through this cooperation to secure additional cooperation. Like dominoes falling, as each individual provides additional information more tiles fall. The individual who is last in the chain is placed at a disadvantage in that they have nothing to offer the government as everyone has already fallen. Clearly those who cooperate near the beginning of an investigation provide a greater benefit to the government. In some cases, one sees a "race to the courthouse" to obtain the best cooperation agreement.
When The Chips Are Down
Sony Corporation's US subsidiary, Sony Electronics Inc. stated in a corporate press release to investors here that they had "received a subpoena from the U.S. Department of Justice (DOJ) Antitrust Division seeking information about its static random access memory (SRAM) business." The company stated that it intended to cooperate with the government in its investigation.
Martin Fackler of the NYTimes reports here some background on this investigation including how four other companies have come under investigation related to SRAM business. SRAM stands for Static Random Access Memory. (See Wikepdia here)
The Wall Street Jrl reports on the raid of offices of Samsung in Germany by EU Investigators. (see here) This investigation also appears to be related to SRAM chips.
The Blog Turns Two
We started way back on November 1, 2004, and now are heading into the "Terrible Twos." We'll try not to throw too many tantrums. Thanks for stopping by to visit, we certainly appreciate the many comments and suggestions received from readers. (ph & esp)
Pre-Trial Sparring in the Libby Prosecution
With the January 2007 trial approaching, Special Counsel Patrick Fitzgerald and I. Lewis Libby have filed motions in limine to set the parameters for the proceeding (available below). The parties filed motions on October 30 to prevent the other side from presenting certain evidence and arguments that each asserts is extraneous to the issues and potentially prejudicial. The government motion seeks to prevent Libby's lawyers from discussing the government's decision to charge only Libby, and not to charge anyone for violating the federal law prohibiting the disclosure of the covert status of an intelligence agent. According to the motion:
The evidence, comment, and argument this motion seeks to preclude are not relevant in the trial of the charged crimes; they have zero probative value in the case. The investigation that led to the indictment of defendant did not result in a charge against Libby or any other person for the act of disclosing classified information, nor was any person other than Libby charged with obstruction of justice, perjury, or making material false statements. The fact that neither Libby nor anyone else has been charged with a crime for the disclosure of classified information is irrelevant to whether Libby committed the crimes charged in the indictment. Likewise, the fact that no one but Libby has been charged with obstruction of justice, perjury, or making material false statements is irrelevant as to whether Libby committed the charged crimes. Evidence, comment, and argument about the government’s charging decisions have no tendency to make any matter of consequence to the determination of the action more or less probable.
The government's concern is that the defense will put it on trial by raising questions about the reason for the charges and the failure to find any "real" wrongdoing. This in turn leads to the position that the Special Counsel opted for the obstruction/perjury/false statement charges to justify the large expenditure of resources to investigate the leak of Valerie Plame's identity that did not turn up evidence of a substantive offense. To the extent the defense can build sympathy for Libby, which may be difficult, it would help make the argument that he has been singled out unfairly.
Libby's motions strike a similar tenor. One seeks to prevent the government from offering evidence that Plame's position with the CIA was classified or covert, and to exclude arguing that national security was damages by the disclosure of her CIA status. The defense argues:
Notwithstanding the clarity of the Court's prior rulings (and the government's own narrow view of relevance during discovery), Mr. Libby is concerned that the government intends to raise at trial both Ms. Wilson's actual employment status and "evidence" regarding "potential" damage that Mr. Libby knew nothing about at the relevant time . . . Having steadfastly refused to provide discovery relating to these issues (other than conclusory assertions contained in two brief "summaries" prepared by the CIA), the government cannot now be permitted to inflame the jury -- and encourage it to punish uncharged and unfounded national security violations -- by offering irrelevant and largely speculative evidence that sheds no light on Mr. Libby's guilt or innocence of the charges that were brought. Specifically, the government should be prohibited from referring to Mrs. Wilson's employment status as classified or covert, or to any actual or potential damage caused by disclosure of that status, except for evidence and argument of what Mr. Libby, or others he spoke with, knew about those mattes at the relevant time.
The motion is built on the District Court's earlier denial of defense motions for broad discovery about Plame's CIA role and the knowledge of it in a variety of offices in the Administration. To frame the case, the Special Counsel will want to discuss Plame's status with the CIA, so at least that part of the motion is likely to be vigorously opposed. The second motion concerns references to the reporters whom Libby is alleged to have leaked to about Plame. The defense seeks to exclude the following:
1. Whether any news reporters refused to testify in the government’s investigation of the disclosure of Valerie Wilson’s identity (the “investigation”);
2. Litigation involving news reporters and relating to the investigation, including any news reporters’ motions to quash grand jury subpoenas;
3. Threatened or actual contempt proceedings against any news reporter, including Judith Miller and Matthew Cooper, relating to the investigation; and
4. Judith Miller’s imprisonment for contempt of court, including the letter dated September 15, 2005 that Mr. Libby sent to Ms. Miller in jail.
Libby seeks to exclude this evidence to undermine the government's argument that Libby thought he could leak information freely because the reporters would protect their source, an argument the motion calls "implausible." The relationship between Libby and the reporters will certainly be important, although the subsequent contempt proceedings against the reporters is the type of evidence the judge may well exclude or substantially limit because it appears to be irrelevant to the core issues of lying to the grand jury, federal agents, and obstructing justice.
As trial gets ever closer, look for the sparring between Fitzgerald's prosecutors and the defense team to intensify. (ph)
Former CUC International CEO Convicted in Third Trial
Former CUC International CEO Walter Forbes, who became chairman of Cendant Corp., which was formed when his company merged with HFS in 1997, was convicted of one count of conspiracy and two counts of making false statements to the SEC. The jury acquitted him of a securities fraud charge. The prosecution came after an accounting fraud at CUC was disclosed that caused Cendant's stock to drop 46% in one day, wiping out over $14 billion in the company's value, a loss that it never recovered from. In the first trial, former CUC president E. Kirk Shelton was convicted and sentenced to a ten year prison term. The maximum penalty for the false reporting counts is ten years each, and courts rarely impose consecutive sentences in white collar crime cases so Forbes is unlikely to receive a longer sentence than Shelton.
The first two trials ended with a hung jury for Forbes, with the jury deliberations dragging out 33 and then 27 days before the court declared mistrials. The third proceeding was before a different district court judge, who sped up the process and the jury returned its verdict in only three days. One difference in the evidence presented at the third trial was calling Henry Silverman, the CEO of of HFS and then Cendant (which has now been broken up), to testify about Forbes' role in attempting to cover-up the accounting problems at CUC. Forbes' attorney, high-profile defense lawyer Brendan Sullivan, has vowed to appeal. A Bloomberg story (here) discusses the prosecution.
The Cendant prosecution was the first case in the most recent wave of accounting frauds that involved senior corporate executives, and the sentence given to Shelton was among the most severe handed out before the verdicts in the WorldCom, Adelphia Communications, and Enron cases. With a ten year statutory maximum sentence on the false statement counts, it will be interesting to see if the judge gives Forbes a sentence close to the one received by Shelton. (ph)
Cooperation and the Jury Trial Right
Co-blogger Ellen Podgor has an editorial on Law.Com (here) discussing the disparity between the sentences received by those who have cooperated in the recent round of corporate crime prosecutions and the CEOs and others who went to trial and received long prison terms. Ellen argues: "The government needs cooperators to make their cases. Cooperators also provide a more efficient system that reduces the costs for a government prosecution. But when the risk of a conviction after trial is so distinct from that received for cooperating with the government, it diminishes the right to a trial by jury, an essential part of our constitutional democracy." (ph)
October 31, 2006
Former Delphi CEO and Other Executives Charged by SEC with Securities Fraud
Delphi Corp. and a number of its former senior executives, most prominently CEO J.T. Battenberg and CFO Alan Dawes, were accused of securities fraud by the SEC in connection with the company's accounting for four transactions. The SEC Litigation Release (here) describes the four items that affected the company's earnings, revenue, or cash flow:
In 2000, Delphi engaged in two fraudulent accounting and disclosure schemes, which had the purpose of and ultimately resulted in Delphi hiding a $237 million warranty claim asserted by its former parent company and inflating its net income by $202 million.
In the fourth quarter of 2000, Delphi entered into two improper inventory schemes, through which it agreed to sell approximately $270 million of metals, automotive batteries and generator cores to two third parties at year end, while simultaneously agreeing to repurchase the inventory in the following quarter for the original sales price, plus interest charges and structuring fees. The purpose and result of the schemes was for Delphi to inflate its cash flow from operations by $200 million, engineer $270 million in inventory reductions and improperly report $80 million in net income.
In the fourth quarter of 2001, Delphi solicited a $20 million lump sum payment from an IT company in return for Delphi providing new business to the IT company. Delphi agreed to repay the $20 million over five years, with interest, which made the payment, in substance, a loan to the IT company. However, in order to meet earnings forecasts for the quarter, Delphi improperly accounted for the $20 million payment as if it was a nonrefundable rebate on past business, rather than a liability.
From 2003 to 2004, Delphi hid up to $325 million in factoring, or sales of accounts receivable, in order to improperly boost non-GAAP, pro forma measures of Delphi's financial performance that were relied upon by investors, analysts and rating agencies. Hiding this factoring allowed Delphi to overstate materially its "Street Net Liquidity," a pro forma measure, during that two-year period. In addition, in one quarter, Delphi also manipulated the hidden factoring to create a false $30 million boost in its "Street Operating Cash Flow," another pro forma measure.
Note that the transactions appear at the end of the year, or bridge two years, so that the prior year's financial statements were dressed-up for Wall Street. The numbers involved are not all that large, at least for a company with billions of dollars in annual revenues, but the deals provided the last little bit of earnings to make the quarterly/annual numbers, or hide problems in Delphi's auto parts business from Wall Street, at least for a little while. The company entered bankruptcy in 2005, and by settling the SEC action it gets itself all ready to emerge from that process, most likely under the control of a private equity firm. The firm will not have to pay a penalty, and the Litigation Release notes that Delphi's cooperation in the investigation earned it a pass on having to make a payment.
The 2000 warranty issue implicates Delphi's former parent, General Motors, in the accounting issues. According to the SEC's complaint (here), Battenberg and Dawes met with GM executives to resolve a dispute about how much Delphi owed GM for warranty claims from before the spin-off. At a meeting, GM executives apparently suggested "asymmetrical" accounting for the payment so that the effects on each company would appear differently. Needless to say, such a suggestion, if true, would cast doubt on GM's books if it did not properly record the transaction in order to help Delphi hide the true nature of the $237 million payment to settle the claim.
Naming Delphi's former CEO Battenberg, who retired just before disclosure of the SEC investigation, shows that the SEC is serious about holding senior management responsible. The only high level executive to settle the case was former CFO Dawes, who agreed to a a five-year ban from serving as an officer or director of a public company, and to pay disgorgement of $253,000, interest of $134,000, and a $300,000 penalty. The company's former chief accounting officer and its treasurer are also named and have not agreed to settle. Dawes will likely play a key role in the case, assuming he is cooperating. There is an ongoing grand jury investigation of the transactions, and Dawes may have agreed to a guilty plea in that phase if there is sufficient evidence of criminal conduct, which would probably entail cooperation in any criminal and civil cases. Once again, the former CFO can be the key witness in an accounting fraud case that targets the CEO of a company. (ph)
What Happens When the Former CEO Skips a Meeting with the Internal Investigators
Cooperation is the watchword in the options back-dating cases, as corporations almost fall all over themselves promising to provide any necessary assistance to the SEC and U.S. Attorney's Offices that have come knocking on their doors. When the company's internal investigation hits a roadblock, then the individual is usually shown the door, which can even happen to a company's former CEO and current board member. Monster Worldwide, Inc. announced that "[o]n October 29, 2006, Andrew J. McKelvey resigned as a member of the Board of Directors of Monster Worldwide, Inc., effective immediately. Mr. McKelvey also resigned immediately as Chairman Emeritus of the Company. Mr. McKelvey’s counsel advised the Special Committee of the Board reviewing stock option grants that Mr. McKelvey had declined to be interviewed by the Special Committee on the previously agreed date and Mr. McKelvey would not provide assurance that he would appear at a later date." Interesting that someone would resign on a Sunday, not a normal business day.
An 8-K filed by Monster Worldwide includes a letter (here) from McKelvey's lawyer -- who is no doubt being paid by the company -- to the law firm conducting the internal investigation explaining the reason why his client would not be appearing for the interview and would not do so in the near future:
It had been our hope that notwithstanding our recent entry into the case we would be able to provide you with at least a preliminary assessment of the facts within the existing schedule. We have come to conclude, however, that despite our best efforts, and despite the valuable assistance you have provided in the form of documents and information, we need a good deal more time to get up to speed on this fact-intensive matter that covers a period of many years. As a result, I have reluctantly decided that we cannot go forward with tomorrow’s meeting. And, notwithstanding Mr. McKelvey’s desire to help, as his lawyer I cannot provide you with assurances that you will be able to have such a meeting with him in the future. You and outside counsel for the company have told us about certain topics that are a priority for you and we are ready to try to find a way to provide you with whatever information we can. I hope you will agree at least to proceed in that way. Once again, I regret that we are unable to meet tomorrow, but hope you understand the difficult situation we face and the fact that we cannot effectively represent our client when we do not have a firm grasp on the facts of the case.
Because Mr. McKelvey understands that my inability to meet with you is contrary to the wishes of the Special Committee, and because he continues to have the best interests of the company very much at heart, he today has submitted with regret his resignation as a Director of Monster Worldwide, Inc. and as Chairman Emeritus.
No one actually believes the second paragraph, but it sure sounds nice. This would not be an interesting story, except for the final paragraph of the letter -- also dated October 29, which means there were lots of those nice weekend billable hours. The letter discusses a meeting over the summer between counsel conducting the internal investigation and McKelvey that may have involved some answers that, in hindsight, might be construed as less than completely correct:
During your meeting, Mr. McKelvey was asked questions that he understood were designed to assess whether people in the company had engaged in improper options “backdating,” and whether he knew that such a practice was improper when it occurred. In retrospect, he recognizes that he misunderstood your questions and focused too narrowly on the issue of whether he knew at the time that improper conduct had occurred, and not on the more general issue of whether backdating had occurred. During the time period relevant to your questions, he did not understand that it was improper for the exercise price of stock options to be different than the price on the grant dates, nor did he understand that there were legal or accounting implications associated with that difference. Mr. McKelvey hopes that this clarifies any misperceptions that may have been created during his meeting with you in July.
I think this is a bit of an Emily Litella moment -- "never mind" -- or the equivalent in golf of a mulligan. Monster Worldwide has not issued its final report on options practices at the company, but McKelvey's counsel may be looking down the road at how the SEC and U.S. Attorney's Office views the conclusions of the internal investigators. Being branded as less-than-truthful is not how lawyers want their clients portrayed. Peter Lattman on the Wall Street Journal Law Blog has an interesting post (here) on McKelvey's resignation. (ph)
Supreme Court Turns Down Stolt-Nielsen's Cert Petition
International shipping company Stolt-Nielsen S.A. lost out on its bid to have the Supreme Court review a Third Circuit decision overturning an injunction against the Department of Justice that prohibited it from seeking an indictment of the company for antitrust violations. Stolt-Nielsen had participated in the Antitrust Division's amnesty program that rewards the first company to report a violation with immunity from prosecution, but after it provided documents the DoJ decided that the firm had not been cooperative and began the process of seeking an indictment. A district court granted an injunction prohibiting an indictment, but the Third Circuit reversed on the ground that a federal court does not have the authority to stop the Executive Branch from pursuing a criminal prosecution. A grand jury then handed up an indictment in August 2006. The Supreme Court denied Stolt-Nielsen's petition for certiorari (here) without comment. With the case now on the road to trial, the company will pursue a motion to dismiss the indictment on the grounds that the decision to revoke the immunity was improper. A press release (available here) states:"The Company plans to file its motion to dismiss the indictment on November 22nd in accordance with the scheduling order issued by the United States District Court for the Eastern District of Pennsylvania. As we have said previously, it is critical for the Justice Department to honor the solemn promises it makes." (ph)