Saturday, November 11, 2006

Al-Arian Faces Grand Jury After Plea

Perhaps one of the worst nightmares for a convicted defendant is the thought that they will be subpoenaed before a grand jury, given immunity, and then forced to testify. Like the conviction isn't enough, the government forces cooperation with the threat of increased jail time for contempt.  For example, Susan McDougal spent many months in prison refusing to talk before a grand jury that was investigating Whitewater when prosecutors slammed a subpoena on her following trial.

The Tampa Tribune reports here that Al-Arian is facing similar treatment.  And in many respects his situation is worse as he entered a plea agreement with the government that did not call for cooperation.  Despite this agreement, the government, following sentencing decided to call for his testimony before a grand jury.  The key here may be that the prosecutors doing the investigation are in Virginia and the plea agreement does state that it "is limited to the Office of the United States Attorney for the Middle District of Florida and the Counterterrorism Division of the Department of Justice and cannot bind other federal, state, or local prosecuting authorities, although this office will bring defendant's cooperation, if any, to the attention of other prosecuting officers or others, if requested." (Plea Agreement here)


November 11, 2006 in Grand Jury | Permalink | Comments (0) | TrackBack (0)

Fastow Heads to Prison

Former Enron CFO Andrew Fastow has finally headed off to a prison in the federal correctional system after a delay of almost two months to allow him to give a deposition in the securities fraud class action against the company's banks.  Fastow is currently being held in the Federal Detention Center (website here) in Oakdale, Louisiana, which was not his first choice of facilities.  U.S. District Judge Hoyt recommended when he sentenced Fastow that the Bureau of Prisons place him at Bastrop, Texas, a minimum security FCI near Austin, but judges have no control over what the BOP decides on assignments.  The Oakdale complex includes a minimum security facility (the Oakdale FCI), where former WorldCom CEO Bernie Ebbers is serving his 25-year sentence, although Fastow is currently in the FDC there, which also includes a prison camp.  They could end up together in the same facility, proving that it is a small world of white collar criminals.

Before being dispatched on the BOP bus to Oakdale, Fastow testified for eight and a half days in Houston, taking a daily trip with U.S. Marshals to a facility where seventy lawyers listened to him, along with live internet broadcasting.  A New York Times story (here) estimates that at $450 per hour, all those lawyers billed about $2.1 million.  That figure may be on the low side because it likely does not include the costs of support personnel and associates back in the firm offices and, of course, the all-important daily transcripts and duplication costs.  If the securities fraud case goes to trial, then Fastow may well get another trip back to Houston to testify once again.  The Enron litigation just keeps going, and going, and going . . . . (ph)

November 11, 2006 in Enron | Permalink | Comments (1) | TrackBack (0)

Beware the Former IT Director

The U.S. Attorney's Office for the Southern District of Florida announced (here) the indictment of Joseph H. Shook for violating the computer crime statute, 18 U.S.C. Sec. 1030, for allegedly hacking into the computer system of his former employer.  Shook had been the Director of Information Technology for Muvico, which operates movie theaters, primarily in Florida.  He was laid off from his position in February 2006.  On May 5, 2006, the day Mission: Impossible III premiered, Muvico's computers suddenly stopped taking on-line ticket orders, and the theaters at six of its largest complexes could not process credit card payments for tickets, forcing the theaters to accept only cash.  The company estimated that the computer problem caused it to lose at least $100,000 in sales.  A few months after the problem, the government seized a wireless access device from Shook that had the same Media Access Control (MAC) address as the computer that accessed Muvico's system on May 5 and blocked electronic payments.  The indictment (here) notes that the only way to tap into the Muvico's computer system through the wireless device is to be inside its headquarters building or within five hundred feet of it.  Whoever hacked into the system literally may have been hiding in the bushes when the computer access occurred.  As the IT director responsible for implementing Muvico's computer security measures, Shook would probably know how to get around them.  It is interesting how the government used the information from the company's computers to track how the system was accessed, showing again that even in cyberspace it is very hard to hide. (ph)

November 11, 2006 in Computer Crime, Prosecutions | Permalink | Comments (0) | TrackBack (0)

Friday, November 10, 2006

Cooperate or You're Gone

The current environment in the options back-dating investigations is certainly taking a toll on the management at companies, and the pressure to cooperate is intense.  In another example of the attitude of companies toward employees who do not willingly provide information in internal investigations, ScanSource, Inc. announced that an executive vice president for administration and investor relations resigned after refusing to speak with investigators for the special committee looking into options-timing issues.  According to ScanSource's press release (here):

Prior to his resignation, Mr. Bryson's counsel had informed the Special Committee's independent legal counsel that Mr. Bryson declined to be interviewed by the independent legal counsel as a part of the Special Committee's review.

"The Company and its Board and management continue to support the efforts of the Special Committee and the review of the Company's option grant practices," said Jim Foody, Chairman of the Board. "The Company and its Board and management are committed to providing the Special Committee and its advisors with the information and cooperation they need to complete this work."

The price of not speaking "voluntarily" is a resignation, no doubt demanded. (ph)

November 10, 2006 in Investigations | Permalink | Comments (0) | TrackBack (0)

Controller Pleads Guilty to Embezzling $2.5 Million

Richard E. Davis entered a guilty plea to embezzling approximately $2.5 million over eight years from his employer, Packaging Corporation of America (PCA), where he was the controller and chief accountant at a plant in Richmond, Virginia.  The bulk of the embezzlement occurred by inflating invoices payable to a janitorial company owned by his wife, as described in a press release (here) issued by the U.S. Attorney's Office for the Eastern District of Virginia:

Between 1997 and 2005, Davis caused over 100 PCA checks to be generated and mailed via United States Postal Service to Building Services Inc. (BSI), a janitorial service operated by Davis and owned by his wife, which provided janitorial services to PCA. During this same time period, Davis caused inflated and phantom billings to be made by PCA to BSI. Investigation revealed that in 2005 alone, Davis approved expenditures for PCA janitorial services at the Richmond plant amounting to approximately $8,000 per employee, while other PCA plants outside of Richmond spent an average of $257 per employee for janitorial services. During the eight year period of the scheme, Davis misappropriated over $2.1 million of PCA funds to BSI.

In addition, Davis had approximately $200,000 diverted from the company to pay for work on his house, and another $100,000 was used to purchase gift cards from Sam's Club, some of which were given as gifts.  Davis' job included reviewing and approving all vendor invoices, and apparently no one was looking over his shoulder.  Yet another lesson in how the financial choke-point at a company (or plant in this case) can abuse his authority with no one paying any attention to wildly disparate amounts being spent -- unless the Richmond plant was really that dirty. (ph)

November 10, 2006 in Fraud | Permalink | Comments (0) | TrackBack (0)

Thursday, November 9, 2006

Playing Both Sides in High Profile Cases

The U.S. Attorney's Office for the Southern District of New York announced the arrest of Michael Lair for allegedly defrauding lawyers in two civil cases by telling them that he had information for sale about their opponents.  After taking the money, he then contacted counsel for the other side and offered to provide information that the opposing lawyers hired him to engage in illegal or unethical acts, including "pretexting" made famous by Hewlett-Packard's internal investigation.  Lair appears to have presented himself as an investigator with access to the information.  A press release (here) issued by the USAO describes the alleged scheme:

According to the Complaint, LAIR approached lawyers or parties involved in at least two highly publicized civil cases and claimed to have information regarding another party to the litigation. LAIR requested payment of funds prior to turning over the purported evidence. Over time, as LAIR failed to deliver on his promises, the party targeted by LAIR ended its relationship with him. According to the Complaint, one of these lawyers, who represents the former CEO of a large insurance company, was defrauded out of $75,000 by LAIR. 

Once LAIR had defrauded one party involved in the litigation, as described in the Complaint, LAIR then approached opposing counsel with the claim that counsel for the first party had hired LAIR and asked LAIR to take illegal or unethical investigative steps. According to the Complaint, LAIR asserted that the illegal or unethical investigative techniques employed by these attorneys included illegally hacking into computers, fraudulently obtaining financial records of potential witnesses, and “pretexting” to obtain individuals’ telephone records. In one instance, LAIR stated that he would not release evidence of these requests by opposing counsel unless he was paid $50,000. LAIR provided a forged email – which purported to be from opposing counsel asking LAIR to engage in illegal investigative techniques – to support his claims in the hopes of receiving the $50,000 payment.

A New York Law Journal article (here) identifies the former insurance company CEO as Maurice Greenberg, who is involved in litigation with AIG over his removal from the company.  The second case involves securities fraud claims between Biovail Corp. and a hedge fund accused of improperly trading its shares. 

An interesting question is whether the $75,000 payment made by Greenberg's attorneys, led by Robert Morvillo, for information about AIG may have been unethical, in addition to being naive in buying a "pig in a poke."  Depending on what information Lair purportedly told Morvillo and other counsel he had that was worth that much money, the court could look askance at one party buying information outside the usual discovery process. (ph -- thanks to Pat Clawson for passing along information about Lair not being a licensed private investigator) 

November 9, 2006 in Fraud, Investigations | Permalink | Comments (0) | TrackBack (0)

Martha Stewart Settles the Final Case

The final piece of litigation related to Martha Stewart's ill-fated sale of a little over 3,000 shares of ImClone Systems stock in December 2001 is about to be settled.  The government believed her broker had been tipped by Dr. Samuel Waksal, then CEO of ImClone who is serving a seven-year sentence for insider trading and tax evasion related to his own sales of the company's stock.  Stewart's infamous trade, which avoided the loss of a bit less than $50,000 when ImClone announced an adverse FDA action on its primary drug, resulted in an investigation by the SEC and U.S. Attorney's Office that led to her indictment and conviction on conspiracy, false statement, and perjury charges. She served about ten months in a federal prison for the convictions.  While she was not prosecuted criminally for insider trading, the SEC filed a civil securities fraud action that was settled in August 2006 with disgorgement of the loss avoided, a modest penalty, and a five-year bar on Stewart serving as a director of a public company, most importantly the corporation she controls, Martha Stewart Living Omnimedia, Inc.  According to the company's 10-Q (here), the last case is a putative class action by purchasers of stock during 2002 when Stewart denied she traded on inside information that was allegedly misleading and inflated the company's stock price.  The 10-Q states:

In late October 2006, the parties began negotiating an agreement to settle the Class Action for $30 million, approximately $15 million of which is expected to be paid by the Company, approximately $10 million of which is expected to be paid by the Company’s insurers, and approximately $5 million of which is expected to be paid by Ms. Stewart. The settlement is subject to the negotiation and execution of definitive settlement documents and to Court approval. The Company anticipates that a hearing to consider approval of the settlement will be held in late 2006 or early 2007.

While Stewart will pay $5 million of the total settlement amount, her compensation in 2005 was over $2 million, and her stock holdings in the company are worth well over $600 million.  It is hard to believe this whole affair began almost five years ago, and cost so much in time and money.  At this point, the Blog should retire the category "Martha Stewart." (ph)

November 9, 2006 in Martha Stewart, Securities, Settlement | Permalink | Comments (0) | TrackBack (0)

Marketing Executive Convicted of Accounting Fraud

Former U.S. Foodservice chief marketing office Mark Kaiser was convicted in New York of securities fraud, conspiracy, and filing false documents with the SEC in connection with an accounting fraud at the company, a subsidiary of Royal Ahold N.V.  Kaiser and a number of senior executives at the company were charged in connection with inflating revenues by recording bogus vendor rebates, totaling approximately $800 million from 2000 to 2003.  The government's chief witness was Timothy Lee, another former U.S. Foodservice executive, and the defense contended that Kaiser was duped by Lee and others, not knowing the rebates were fictitious.  Defense counsel vowed, "We'll do all our talking in the court of appeals."  An AP story (here) discusses the verdict. (ph)

November 9, 2006 in Fraud, Verdict | Permalink | Comments (0) | TrackBack (0)

UnitedHealth Gets Ready to Take Its Options-Timing Hit

UnitedHealth Group Inc. has been at the center of the options-timing scandal, and the effect of the problems has forced the company to disavow its financial statements all the way back to 1994.  UnitedHealth became a publicly-traded company in 1984, so that means about half of its financial statements are no long reliable.  The company's CEO, Dr. William McGuire, announced in October that he will resign as of December 1 after a report by the law firm investigating the suspicious timing of the options pricing that found his explanations to be a bit weak on the credibility front (see earlier post here).  In announcing the latest step to address the acccounting issues, UnitedHealth's 8-K (here) states:

UnitedHealth Group Incorporated (the “Company”) has substantially completed its internal analysis of the October 15, 2006 WilmerHale report to the Independent Committee of the Board of Directors (the “Board”) on stock option programs of the Company and is working expeditiously to complete its final review of accounting adjustments based on the determination of the applicable accounting measurement dates, the impact of variable accounting treatment for certain stock options (which principally relates to stock options granted in and prior to 2000) and the resulting tax implications. As a result, the Company expects to recognize non-cash charges for stock-based compensation expense which are likely to be material for certain periods covered in the review. Although the Company is not yet able to determine the final amount of such non-cash charges and additional cash charges resulting from potential tax liabilities, the Company anticipates that it will be significantly greater than the estimate contained in its Form 10-Q for the quarter ended March 31, 2006.

Accordingly, on November 7, 2006, management of the Company concluded, and the Audit Committee of the Board (the “Audit Committee”) approved the conclusion, that due solely to the stock option matter, the Company’s financial statements for the years ended 1994 to 2005, the interim periods contained therein, the quarter ended March 31, 2006 and all earnings and press releases, including for the quarters ended June 30, 2006 and September 30, 2006 and similar communications issued by the Company for such periods, and the related reports of the Company’s independent registered public accounting firm should no longer be relied upon. The Company will review its analysis and proposed restatement adjustments with the SEC prior to completing its restatement and is working as quickly as possible to return to current filing status.

Dr. McGuire retains a significant amount of stock options in the company, still valued at over $1 billion even after they were repriced to reflect the highest stock price in the year of issuance.  According to the 8-K, "[D]iscussions are ongoing between Dr. McGuire and the Company regarding the terms of his departure and no resolution has been reached. These discussions will likely not be completed until after his departure."  The terms of his departure may be awaiting word whether the SEC or U.S. Attorney's Office plan to take any action against him. (ph)

November 9, 2006 in Fraud, Investigations, Securities | Permalink | Comments (0) | TrackBack (0)

Former NextCard Executives Settle SEC Fraud Case

Five former senior executives of defunct credit card issuer NextCard, Inc. settled an SEC civil securities action related to accounting fraud that hid problems at the company.  The defendants are: John Hashman, CEO; Yinzi Cai, president and COO; Bruce Rigione, CFO; Douglas Wachtel, controller; and, Jeremy Lent, chairman and chief strategy officer.  According to the SEC Litigation Release (here):

[B]y late 2000 NextCard's credit card losses and delinquencies were higher than expected. The complaint alleges that, in order to conceal this information from investors, the defendants resorted to a series of undisclosed accounting adjustments that artificially lowered NextCard's reported credit losses and delinquencies for fiscal year 2000 and the first and second quarters of fiscal 2001, and misled investors about the health of the company's credit card loan portfolio. NextCard declared bankruptcy in 2002.

In addition to permanent injunctions, the defendants will pay a total of approximately $1.4 million in disgorgement of proceeds from the sale of company stock, penalties, and prejudgment interest.  Lent will pay the greatest amount, $894,000. (ph)

November 9, 2006 in Fraud, Securities, Settlement | Permalink | Comments (1) | TrackBack (1)

Wednesday, November 8, 2006

Former Homestore Executive Receives 30-Month Sentence

Peter Tafeen, formerly vice president of business development at Homestore.Com Inc., received a thirty-month prison term for his role in inflating the company's revenue from advertising through "round trip" agreements that did not generate any money for the company.  Tafeen also settled an SEC securities fraud complaint by agreeing to pay $2.6 million and accepting a lifetime bar from serving as an officer and director of a publicly-traded company.  For those interested in attorney's fees -- and who isn't these days -- Tafeen won a case before the Delaware Supreme Court in 2005 in which the company was ordered to advance his attorney's fees pursuant to its corporate by-laws (Homestore Inc. v. Tafeen, 888 A.2d 204 (Del. 2005)).  Usually, such advancements require the former officer or director to agree to repay the money if the person is found not to be entitled to it, for example by pleading guilty to securities fraud.  However, I suspect Move Inc., the corporation's new name, won't get very much from someone headed to jail for over two years who will also pay the SEC $2.6 million.  A Los Angeles Times article (here) discusses the sentencing and SEC settlement.  (ph)

November 8, 2006 in Fraud, Sentencing | Permalink | Comments (1) | TrackBack (0)

Tuesday, November 7, 2006

Fifth Circuit Repeats - Death Erases Conviction

Not surprisingly, the Fifth Circuit Court of Appeals reaffirmed the vacating of Ken Lay's conviction, as a result of his death. (see Houston Chronicle here, Wall Street Jrl. Blog here).  The Houston Chronicle reports that the court held, as the district court had, that "when a defendant who has been found guilty of a federal crime dies before exhaustion of his appeal, his prosecution must be abated, his conviction vacated and his indictment dismissed."


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

FEMA Frauds

Although Hurricane Katrina has come and gone, one area continuing is  prosecutions arising from FEMA frauds. In the past week, there have been press releases from the DOJ Katrina Task Force telling of recent prosecutions.

1. "A Dallas woman who ran a scheme that defrauded the Federal Emergency Management Agency (FEMA) of more than $80,000 was sentenced today in federal court, announced United States Attorney Richard B. Roper. United States District Judge David C. Godbey sentenced Lakietha Diann Hall, 35, of Dallas, to 70 months imprisonment and ordered her to pay $83,254 in restitution. Hall pled guilty in July to one count of conspiracy to commit theft of federal public funds and one count of aggravated identity theft. In a related case, Hall pled guilty to count one of an indictment that charged her with failure to appear. "  See here

2. "[A] grand jury sitting in Raleigh last week, returned a nine-count Indictment which contained fraud-related charges associated with fraudulent claims made after Hurricane Katrina." See here

3. Taking advantage of a hurricane evacuee - See here


November 7, 2006 in Fraud | Permalink | Comments (0) | TrackBack (0)

Monday, November 6, 2006

DOJ and Election Day

United States Attorneys Offices across the United States are planning on "deploying an unprecedented number of federal personnel to monitor tomorrow’s midterm election, sending more that 500 federal observers and more than 350 Justice Department personnel to 69 jurisdictions in 22 states – more than double the total sent on election day in 2002, which was the previous record for a midterm election." (see here - although I could not get the actual press release to open). For example, in offices like the Middle District of Alabama, the U.S. Attorney issued a press release stating that "Assistant United States Attorney Kent Brunson will lead the efforts of her office in connection with the Justice Department’s nationwide Election Day Program for the upcoming November 7, 2006 general elections. AUSA Brunson has been appointed to serve as the District Election Officer for the Middle District of Alabama, and in that capacity is responsible for overseeing the District’s handling of complaints of election fraud and voting rights abuses in consultation with Justice Department Headquarters." (see here)


November 6, 2006 in News | Permalink | Comments (0) | TrackBack (0)

Olympic Coach Indicted

A press release of the U.S. Attorney for the Northern District of California tells of the indictment of a track and field Olympic coach -Trevor Graham.  It states in part:

"The indictment charges Graham with three counts of making false statements to special agents of IRS-Criminal Investigation (IRS-CI) in connection with an investigation into the distribution of performance-enhancing drugs and related money laundering. During the criminal investigation, Graham was a witness in determining the ultimate source for illegal performance-enhancing drugs taken by many athletes who were connected with Balco. The prosecution is the result of an investigation by IRS-CI."

The Indictment can be found here.


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

Sunday, November 5, 2006

The Supreme Court and Reasonableness

The Supreme Court accepted two cases that will likely provide guidance on what is "reasonableness."   The cases are: Claiborne v. U.S. (06-5618) and Rita v. U.S. (06-5754).  Scotus Blog here sums up the essence of these cases in stating:

"In Claiborne, the Court will examine whether a sentence below the guideline range is reasonable, and whether a sentence that varies substantially from the guidelines can only be imposed in extraordinary situations. In Rita, it will decide whether a sentence within the range is reasonable, whether such a sentence may be presumed to be reasonable, and whether such a sentence may be imposed without full analysis by the judge of factors that might justify a lesser sentence."

Professor Doug Berman, at Sentencing Law & Policy has some wonderful analysis and commentary of these cases including posts here, here, here, and here.

The forthcoming decisions will likely provide lower courts with enormous guidance in how to decide arguments of reasonableness.  Most importantly it will be determinative of whether power should be given to the judiciary to balance some of the power already in the hands of the executive. Prosecutors in white collar cases choose the charges, choose the defendants, and choose who will receive the cooperation deal.  In doing this, they control a good part of the sentencing decision.  Post-Booker, courts were provided with some oversight of the prosecutorial power.  These cases provide an opportunity to clarify exactly how much power and oversight will be held by the judiciary.


November 5, 2006 in Sentencing | Permalink | Comments (0) | TrackBack (0)

Former United States Attorney Pleads Guilty

Peter Lattman at the Wall Street Jrl blog reports here that a former United States Attorney has plead guilty to money laundering and obstruction. The News & Observer reports here that Sam "Currin was a protege of former U.S. Senator Jesse Helms, who helped Currin be appointed as the top federal prosecutor in eastern North Carolina."


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

Cooperator in Prince George County Probe Pleads

The Washington Post reports here that Sienna Owens has pleaded guilty to a tax offense.  According to the Post, she is cooperating with the government in the investigation of former Prince George's County schools chief Andre J. Hornsby who has been charged with felony counts. Hornsby has pleaded not guilty to the charges against him. 


November 5, 2006 in Tax | Permalink | Comments (0) | TrackBack (0)