Saturday, November 18, 2006
Bloomberg News is reporting here that DOJ officials are reconsidering their practice of requesting waivers of attorney-client privilege by corporations. But it also sounds like they aren't ready to just plain ban this DOJ practice. Instead, it may just be a baby step in this direction.
One change mentioned is to require approval from top DOJ officials before seeking a waiver from a company of their attorney-client privilege. Approvals from high level DOJ officials are common in existing DOJ guidelines. For example, using RICO requires approval, as does some actions involving international affairs. But these actions that require approval are a far cry from the present practice of disregarding a basic common law privilege.
This is the second time that DOJ would be modifying the practice, with the first time requiring merely a set practice within each USA's office. (see here) This new step would bring the issue to a higher level, but it certainly will not alleviate the problem.
Defense costs in white collar crime prosecutions, and the inevitable wave of parallel proceedings, can run into the millions. Recent cases involving a high level of defense legal fees includes the prosecution of Jeffrey Skilling, which came in at over $70 million, the $17 million Richard Scrushy was awarded from HealthSouth, and the various KPMG defendants who will spend at least $5 million each, and quite possibly much more as the government buries the eighteen defendants in documents. While directors and officers usually have a right to be indemnified for their attorney's fees, and even a right to have the company pay the fees in advance of a final judgment in the matter, the back end of the deal is often overlooked. The requirement to pay attorney's fees can be conditioned on requiring the recipient to provide an agreement to repay any amounts advanced if it turns out the officer or director is guilty of a crime, which would show the person did not act in good faith. Such is the case involving former Computer Associates CEO Sanjay Kumar, sentenced to twelve years for securities fraud and obstruction of justice related to a scheme to inflate the company's revenue. CA Inc., at it is now known, filed suit against Kumar to recover $14.9 million in attorney's fees advanced to him during the government's three year investigation. According to a Reuters story (here), the company obtained an order from a New York state court attaching Kumar's property as security for the attorney's fee claims, including his "$9 million home, two Ferrari sports cars, Volvo and Land Rover sport utility vehicles, and a 57-foot Italian Azimut yacht."
CA's by-laws are typical of most public corporations in providing for a right to repayment of attorney's fees if the covered employee is found (or pleads) guilty to a crime. The relevant provision (here) states:
Expenses (including attorneys’ fees) actually and reasonably incurred by any such person in defending any such threatened, pending or completed action, suit or proceeding shall be paid on behalf of such person by the Corporation in advance of the final disposition of such action, suit, or proceeding and within 30 days of receipt by the Secretary of the Corporation of (1) an application from such person setting forth the basis for such indemnification, and (2) an undertaking by or on behalf of such person to repay such amount if it shall ultimately be determined that such person is not entitled to be indemnified by the Corporation as authorized in this Article. A plea of guilty to a felony charge arising out of misconduct committed by such person in his or her capacity (a) as a director or officer of the Corporation, (b) as a director or officer of, or in a similar capacity with respect to, any subsidiary or joint venture of the Corporation or other entity or enterprise referred to in the preceding paragraph of this Article, or (c) as a fiduciary, trustee or administrator or in a similar capacity with respect to any employee benefit plan or other plan or program sponsored by the Corporation or any subsidiary of the Corporation shall, for purposes of the mandatory advancement of expenses provided in the preceding sentence, constitute a final disposition of such action or proceeding. The financial ability of any person to make a repayment contemplated by this provision shall not be a prerequisite to the making of an advance.
The guilty plea triggers Kumar's undertaking to repay the attorney's fees that he gave to secure the advancement of funds, so the company's claim is pursuant to the terms of the by-law provision. As a Delaware corporation, CA is permitted under the Delaware General Corporation Law to condition an advancement on such an undertaking, so it will be difficult for Kumar to stop the court from ordering repayment or seizing property to satisfy the claim. (ph)
A jury in New York acquitted Osama Awadallah of two counts of perjury the government charged took place during testimony before a grand jury in October 2001 investigating the September 11 terrorist attacks. Awadallah was a student in San Diego in 2000 when he became acquainted with one of the hijackers who was on the plane that flew into the Pentagon, and he was arrested as a material witness shortly after the attacks. In grand jury testimony given while he was handcuffed and had been held in solitary confinement for weeks, he admitted knowing Nawaf al-Hazmi but denied knowing the name of al Hazmi's companion, Khalid al-Mihdhar, or that it was his handwriting in a notebook with their first names in it. In a subsequent grand jury appearance, he testified that he was mistaken about knowing Khalid, whom he met a few times, and in not recognizing his handwriting, but he was charged anyway with perjury. The first trial ended in a hung jury with a single juror holding out for an acquittal, while the second case ended with a unanimous verdict in his favor. According to an AP story (here), the jury forewoman stated that Awadallah's testimony appeared to be immaterial to the government's investigation because it already knew the identity of the two hijackers, so he could add little to the inquiry. (ph)
Friday, November 17, 2006
The sentencing of the major Enron players who reached plea agreements and testified for the government against former CEOs Ken Lay and Jeffrey Skilling concluded this week. Michael Kopper, an aide to former CFO Andrew Fastow who helped set up the special purpose entities that caused much of the accounting troubles at the company, received a 37-month sentence from U.S. District Judge Ewing Werlein. Mark Koenig, the head of Enron's investor relations department, received an 18-month term. Kopper was the first Enron executive to plead guilty, and his cooperation was instrumental in the case against Fastow, who in turn provided evidence against Lay and Skilling. Koenig was the government's first witness at trial and described the misstatements made to investors by Enron's management, a key part of the government's case. Judge Werlein, who earlier gave Fastow four years less than his plea agreement called for, accepted the government's recommendation to give Kopper and Koenig reduced sentences for their cooperation, again highlighting the significant benefits that can flow from a plea agreement. An AP story (here) discusses the sentencing. (ph)
California Senator Diane Feinstein and Alabama Senator Jeff Sessions introduced a bill in the Senate to enact the Department of Justice's proposal to overturn the abatement doctrine that led to the dismissal of the indictment and conviction of former Enron CEO Ken Lay after his death in July 2006. The Department had asked U.S. District Judge Sim Lake to postpone dismissing the case while it sought Congressional action to enact a retroactive reversal of the abatement doctrine (see earlier post here), but the bill was never introduced before Judge Lake finally acted on a motion by Lay's estate on October 18. The Fifth Circuit affirmed that decision a short time later.
The effect of the abatement doctrine, as discussed in an earlier post (here), is that the entire case disappears, which means that any asset forfeiture action must proceed as a civil case against the estate and not as an adjunct to the criminal conviction, and there can be no restitution order because the conviction is removed from the record. A Houston Chronicle story (here) quotes Senator Feinstein reiterating the victims rights rationale first offered by the DOJ for getting rid of the abatement doctrine. Given that a majority of the federal departments do not have a budget yet and the change of party control in Congress will cause much distraction, it is unlikely the bill will go anywhere during the lame duck session. While it can be reintroduced in the new Congress in January, the Senate Judiciary Committee may have more pressing business, although bi-partisan sponsorship certainly gives the bill a chance. (ph)
UPDATE (Nov. 25): The text of S. 4005, entitled "Preserving Crime Victims' Restitution Act of 2006" is available here. (ph)
Comverse Technology, Inc. became embroiled in the options-timing controversy when former CEO Kobi Alexander, former CFO David Kreinberg, and former general counsel William Sorin, were charged with securities fraud in July 2006. Kreinberg and Sorin have agreed to plea bargains with the government, and reports are that Kreinberg will finger Alexander for offering to pay him to take the blame for the back-dating. The latest news from the company is that problems go much deeper than the options practices and involve possible wide-scale accounting fraud. A Comverse press release (here) states:
[I]n connection with the ongoing investigation by the Special Committee of the company’s Board of Directors of the company’s stock option practices and related accounting matters, the company identified errors in the recognition of revenue related to certain contracts, errors in the recording of certain deferred tax accounts and the misclassification of certain expenses in earlier periods. In addition, based on information provided to the company, areas of financial reporting under investigation include the possible misuse of accounting reserves and the understatement of backlog in fiscal 2002 and prior periods.
If there are significant misstatements in Comverse's books and records, it may put the options back-dating in a new light. Rather than just executives lining their own pockets, it could be a systematic fraud to inflate the stock and then cash in surreptitiously by further inflating the value of the options by timing them for a low price that was then artificially surpassed through accounting fraud -- greed squared, if you will. Alexander is reputed to have boasted of his attention to the company's financial filings, which makes it even more difficult to offer the "honest-but-ignorant" CEO defense.
Alexander is still in Namibia awaiting an extradition hearing that is now scheduled to start on April 25. He left the United States in June 2006, shortly before prosecutors filed charges in the case. With five months before the hearing, prosecutors will have time to gather evidence that could link Alexander to a broader fraud at the company and strengthen the case so that it is more than just options-timing. A Long Island Business News article (here) discusses the extradition proceeding. (ph)
Even with the 2006 midterm elections past, there is still fall-out in New Hampshire from the elections four years ago from an effort to jam the telephones of organizations involved in a get-out-the-vote effort on behalf of Democratic candidates. A fourth defendant in the case, Shaun Hansen, entered a guilty plea to two counts of harassment by interstate telephone calls through a marketing firm, Mylo Enterprises, he used to own. Two defendants entered guilty pleas, Allen Raymond, former president of a Virginia communications consulting company, and Charles McGee, former Executive Director of the New Hampshire Republican State Committee, while James Tobin, former New England Regional Chairman of the Republican National Committee, was convicted by a jury in December 2005 for his part in the scheme. According to a Department of Justice press release (here):
Hansen admitted that he was contacted by others involved in the scheme and asked to assist in making harassing phone calls to five telephone numbers associated with the New Hampshire Democratic Party and one number associated with the Manchester Professional Firefighters Association on Election Day, November 5, 2002. Hansen agreed that, in return for $2,500, employees of Mylo Enterprises would place repeated hang-up calls to those numbers on that day. At Hansen’s direction, employees of Mylo Enterprises in Idaho placed several hundred hang-up calls to those New Hampshire telephone numbers on that morning before the scheme was discontinued.
For the political junkies in the crowd, in the most recent election, Democrats won both House seats in New Hampshire and the governorship, something that has not happened since 1912 in the Granite State (see Boston.Com article here). (ph)
Thursday, November 16, 2006
The Houston Chronicle reports (here) that U.S. District Judge Sim Lake has ordered former Enron CEO Jeffrey Skilling to report to the federal correctional institution in Waseca, Minnesota (link here), about 75 miles south of the Twin Cities. This is a low-security facility. Judge Lake had recommended that Skilling be placed in the FCI in Butner, North Carolina, but as seen in former Enron CFO Andrew Fastow's assignment to the FCI in Oakdale, Louisiana, rather than the recommended facility outside Austin, the Bureau of Prisons makes its own decisions on prisoner assignments. Skilling has been ordered to surrender by December 12 at 2:00 p.m., although the Fifth Circuit could order release on bail pending his appeal, which is uncommon but certainly not impossible. If Skilling is not permitted by the Court of Appeals to remain free on bond, it would not surprise me if he reported before December 12 to avoid a media circus on that day. (ph -- thanks to Tom K. for noticing an error in the date in an earlier version)
Dell Inc. announced that it will postpone disclosure of its current financial results and that the SEC has upgraded its inquiry of the company's accounting to a formal investigation. Dell disclosed in August 2006 (here) that the "SEC has requested information relating to revenue recognition and other accounting and financial reporting matters for certain past fiscal years." The company downplayed the investigation earlier, stating that "[w]hile the company does not believe that these issues have had or will have any material impact on its financial position or the reported results of operations for the relevant years, the company's audit committee, upon the recommendation of management, has initiated an independent investigation." No such disclaimer in the current press release (here): "The company also announced it has been informed that the SEC has entered a formal order of investigation. The delay in announcing earnings is not related to that development. Dell continues to cooperate with the SEC, and is committed to resolving all issues in connection with the investigation and regaining compliance with all SEC filing requirements as soon as possible." It's still not clear exactly what the focus of the SEC investigation is, but a formal order gives the Enforcement Division staff the authority to issue subpoenas to compel testimony and the production of documents, so the case may involve third-party transactions. Subpoenas will give some clue as to the time periods involved and the types of transactions under scrutiny, so information may leak out over the next few months. (ph)
Former superlobbyist Jack Abramoff headed off to the federal correctional institution at Cumberland (link here), in Western Maryland. The facility has a medium-security prison and a satellite camp, where he will serve his six-year prison term on bank fraud and corruption convictions. Before entering the FCI, Abramoff sent a final e-mail (here) to friends that talks about where he finds himself at this point in his life and some of the mechanics of the federal prison system. Near the closing, he makes the following statement that may send chills down the spines of many on Capitol Hill (and perhaps even the White House): "This nightmare has gone on for almost 3 years so far and I expect we are not even half way through." Half way through what? Abramoff will likely spend over four years in prison, even with the good time credits and a possible reduction for participating in an alcohol rehabilitation program, so he may be talking about his incarceration. On the other hand, if he's referring to possible testimony in future cases, they must be prosecutions that have not yet come to light in criminal indictments because everyone who has been charged so far has entered a guilty plea. While Abramoff is in Cumberland for a while, he's awfully close to Washington D.C. and perhaps not too far from the attention of some. (ph)
One can add delay to the list of inevitables, along with death and taxes, at least when it involves a multi-defendant white collar crime prosecution. U.S. District Judge Lewis Kaplan postponed indefinitely the trial of sixteen former KPMG partners and employees, along with two other non-KPMG defendants, on conspiracy and tax fraud charges because of delays over resolution of the issue of whether KPMG is liable to pay the attorney's fees of the defendants it once employed. Judge Kaplan ruled earlier that the government's Thompson Memo violated the defendants' due process rights when prosecutors pressured the firm to deny payment of the attorney's fees (U.S. v. Stein, 435 F.Supp.2d 330 (S.D.N.Y. 2006). He had set a trial on the right to payment of the fees to begin in October, but that has been postponed by the Second Circuit as it considers the government and KPMG's appeal.
In an opinion delaying the trial (available below), Judge Kaplan states that "[t]he importance of this issue for the prompt and fair resolution of the charges in this case would be difficult to overstate." If the Second Circuit reverses the district court's decision, I suspect the defendants will appeal to the Supreme Court. Judge Kaplan would delay the trial further in all likelihood, pending the outcome of the certiorari petition, causing even more delay. In a more ominous message to the government, Judge Kaplan also wrote: "If KPMG is obliged to pay, payment could greatly mitigate the impact of the government’s improper actions. This in turn could diminish the advisability of dismissal or other potentially serious sanctions. If KPMG is not obliged to pay, or if a prompt determination is not feasible, the issue of sanctions could be considered after exhaustion of that possibility." (Emphasis added) The only party that can be sanctioned directly by the court is the United States, and I think the Judge is clearly hinting that he will consider dismissing the indictment for prosecutorial misconduct, which would trigger yet another round of appeals.
The government has produced approximately fifteen million pages of documents, including seven million since the discovery cut-off in October, so any hope of a quick trial even after the Second Circuit's decision is faint. Trial is probably at least a year off, and a 2008 starting date is a definite possibility. But then, even if it starts, imagine how interesting it will be to listen to testimony about the marketing of tax shelters. (ph)
Wednesday, November 15, 2006
Former Enron chief accounting officer Richard Causey received a five and one-half year prison term from U.S. District Judge Sim Lake for his guilty plea to one count of securities fraud. Causey had been scheduled to be tried along with former CEOs Ken Lay and Jeffrey Skilling, but then entered into the plea agreement just a couple weeks before the scheduled start of trial. Neither side called Causey as a witness at the trial that resulted in the convictions of Lay and Skilling, and it remains unclear whether he would have been particularly helpful to either side. Causey's sentence puts him just a bit below the prison term imposed on his direct boss, former CFO Andrew Fastow. Under Bureau of Prisons rules, Causey must serve 85% of his sentence, or a bit less than five years. An AP story (here) discusses the sentencing. (ph)
The government's effort to convict executives from Enron's Broadband Unit on fraud charges suffered another blow when prosecutors conceded error in four of the five counts of conviction of Kevin Howard, the former CFO of the unit. After the first Broadband proceeding against five defendants ended in a mistrial after a mind-numbingly dull presentation, the government broke the prosecution into three parts and succeeded in convicting Howard in May on conspiracy, wire fraud, and false books-and-records charges. The unit's former chief accounting officer was acquitted. Problems arose in August, however, when the Fifth Circuit reversed the fraud convictions of three defendants from the Enron Nigerian Barge trial that were based on a right of honest services theory, which the court found did not apply to corporate officers who believed they were acting in the company's best interests (U.S. v. Brown, 459 F.3d 509 (5th Cir. 2006).
In a brief filed with U.S. District Judge Vanessa Gilmore (available below), prosecutors state that the same problem that infected the convictions in Brown are present in Howard's case, so the court should vacate four convictions. The indictment alleged both money/property and right of honest services fraud, so prosecutors could retry him on the theory that his misstatements deprived Enron of property, although that may be a more difficult case to establish because the government must prove a loss to the victim. Prosecutors also argued that the fifth count should stand because it is not based on the right of honest services theory, which only applies to fraud charges and not false records. A key issue will be whether the court finds that there was prejudicial spillover from the conspiracy and fraud counts that taint the books-and-records conviction, which may result in a new trial on all the charges. If Judge Gilmore denies the motion to vacate the fifth count, it will certainly come up in an appeal to the Fifth Circuit. (ph)
"Scooter" Libby is arguing that there was no underlying crime, no motive to lie, and thus the jury should be allowed to hear evidence that he had no reason to lie. From a legal perspective this is a tough argument as perjury (actually false declarations here) does not require a motive and a lack of a motive does not negate the elements of the offense. From a practical perspective, however, this may be a hook for a jury, if it is so inclined, to find that he did not have the mens rea to commit the offense.
The basic elements of this charge are that the accused acted "1) under oath; 2) before or ancillary to any court or grand jury of the United States; 3) made a false; 4) material statement; 5) with knowledge of its falsity." See Podgor & Israel, White Collar Crime in a Nutshell 3rd Ed. (Thomson/West 2004).
The Wall Street Jrl reports here that Republican fundraiser Tom Noe has been convicted of state charges of "theft, money laundering, forgery, and tampering with evidence." The case involved the Ohio Bureau of Workers' Compensation. Noe's involvement with rare coins and the use of such a fund for investment has been controversial. For background see here, here, and here. The conviction was to 29 state counts and it included triggering a mandatory minimum sentence of 10 years. (For details See ToledoBlade.com here)
Monday, November 13, 2006
It started as three - Lay, Skilling, and Causey.
Lay is gone, Skilling is embarking on a 24+ sentence that awaits appeal, and Richard Causey, former Chief Accounting Officer at Enron, who dropped off the team middle of the road - that is, after indictment, but before trial --by entering a plea - now will be sentenced tomorrow.
His plea is pretty definitive and calls for 84 months incarceration with a possible reduction to not less than 60 months with a 5K1.1 motion recognizing cooperation. 5K1.1 motions can only be filed by the government, although courts now have some discretion in this post-Booker world. But this plea calls for the court to follow the federal sentencing guidelines, so reductions may only be in the hands of the prosecutor, and only if the government determines that they want a sentence reduction for cooperation.
Just weeks ago, we saw that Andy Fastow's plea called for 10 years and he in fact received 6 years. Causey's plea, however, clearly provides that the agreement is "null and void" if the court fails to follow its terms. But non-compliance with the terms of the agreement are irrelevant if the parties fail to object to the non-compliance.
And in an odd turn of events, it may be possible that Causey will receive a sentence in excess of Fastow's sentence (see Houston Chronicle here) If this happens then the government would be saying that some cooperation is worth more than other cooperation. The government may advocate that the timing of the agreement to cooperate is what counts, or they may base it upon unknown factors that the public will never hear. But one has to continually ask whether the federal government should be the one with the power to hold this cooperation factor over the heads of the accused and what happens when our judiciary merely becomes a rubber stamp to prosecutorial power. (see here)
Professor J. Kelly Strader (Southwestern) guest blogging writes:
Two developments raise questions concerning the future of federal sentencing in the post-Booker era. The first development arises from the shift in the Supreme Court’s composition since the Court decided Booker in 2005, and the second from the results of last week’s mid-term elections. In Booker, Justice Stevens wrote the "merits" majority opinion, and was joined by Justices Scalia, Souter, Thomas, and Ginsburg. In the "remedial" opinion, the dissenters from the merits opinion held that the Guidelines could be constitutionally applied if they were considered advisory rather than mandatory. Justice Breyer wrote the remedial decision, and was joined by late Chief Justice Rehnquist, Justice Kennedy, Justice O’Connor, and Justice Ginsburg, who provided the swing vote. Under the remedial majority’s approach, sentences are to be reviewed for "reasonableness." (The latest Sentencing Commission statistics show that the percentage of Guidelines-range sentences has fallen by about ten percent, to 62 percent, under the Booker advisory sentencing scheme.)
Two of the dissenters from the Booker merits opinion, Rehnquist and O’Connor, have been replaced by Chief Justice Roberts and Justice Alito. As discussed here, the Court has agreed to examine the Booker sentencing scheme to determine (a) whether Guidelines-range sentences are presumptively reasonable and (b) whether non-Guidelines range sentences should be subject to special scrutiny. If the Court adopts a presumption of reasonableness, the holding may signal a return to a sentencing scheme that looks little different from the pre-Booker scheme – a result that Justice Scalia predicted in his remedial dissent when he stated that the "reasonableness" approach "may lead some courts of appeals to conclude -- may indeed be designed to lead courts of appeals to conclude -- that little has changed." Bloggers have much commented on the possibility of a return to what are essentially mandatory Guidelines – an outcome the remedial majority (save perhaps Ginsburg) would seem to support.
Based upon the tone and substance of the remedial dissents, I suspect that it is likely that the remedial dissenters will reject a presumption of reasonableness. If Roberts or Alito joins with the remedial dissenters, then that block will have a majority. If not, then Ginsburg will once again provide the pivotal vote.
Another interesting question is whether the new Congress will be inclined to revisit the federal sentencing scheme in response to Booker. One approach would be to enact wide-ranging mandatory minimum sentences. Republican members of Congress have historically viewed mandatory minimum sentences favorably, while Democrats have generally opposed mandatory minimum. So, the adoption of a mandatory minimums scheme may be unlikely for the time being. Stay tuned.
Sunday, November 12, 2006
A press release of the US Attorney of the Northern District of Georgia tells of a plaintiff's attorney who plead guilty to federal criminal charges. The press release states in part that the defendant:
"was a plaintiff’s lawyer who specialized in construction litigation and represented many individuals who suffered physical injury and property damage resulting from mold infestations in their homes. Unbeknownst to his clients, Peebles would settle their cases, forge their signatures on the checks, and eventually convert the money to his own use. When the clients called and asked about the settlement money, Peebles would lie to them, and if necessary, pay the complaining client with settlement proceeds that belonged to his other clients."
The defendant, disbarred from the practice of law, was initially "charged with nine counts of fraud and four counts of aggravated identity theft," but "pleaded to one count of wire fraud and one count of aggravated identity theft."
This week will be a week of sentencing as many of the Enron-related cases reach their final stages. Set for this week is Richard Causey, who will be sentenced on Wednesday, and Mark Koenig and Michael Kopper are set for Friday. Analysis on this upcoming sentencing will follow throughout this week. (see Houston Chronicle here)
The court removed, in the middle of trial, one defendant as a result of his attorney asking to withdraw from the case. The Washington Post reports here that the court allowed former PurchasePro Inc.CEO Charles E. Johnson Jr.'s attorney to withdraw from the case despite the fact that they were three weeks into the trial. Even when at attorney argues an ethical issue and asks to be removed from representing a defendant, courts seldom permit this to happen if the trial has commenced. In contrast, ethical concerns raised to courts prior to the commencement of trial can be a basis for recusal and in some cases a delay in the trial in order for the accused to secure new counsel. Some courts are reluctant to allow mid-trial withdrawals for fear that defendants will abuse this process in order to secure separate trials. The reasons for the mid-trial withdrawal in this case remain under seal.