November 25, 2006
Grand Jury Secrecy
Rule 6(e) is important as it sets forth the importance of grand jury secrecy. And according to an article by Josh Gerstein of the New York Sun here, the secrecy may have been violated in a recent government case. The article provides details on a court's recent ruling finding a prima facie case that government officials may have violated grand jury secrecy. This means the ball is in the government's court to show otherwise. For more details see here.
NACDL Names New Executive Director
Norman L. Reimer has been named the new executive director of the National Association of Criminal Defense Lawyers (NACDL). "Reimer is a partner in Gould Reimer Walsh Goffin Cohn LLP, a six member firm that specializes in criminal defense, immigration and civil rights litigation. He is a "past president of the New York County Lawyers Association." See more here.
Preserving Crime Victims' Restitution Act of 2006
Perhaps better described as the "Recoup Ken Lay's Money Because He Had the Temerity to Die on Us Act," the text of S. 4055 (here) provides that restitution can be ordered for any case pending on July 1, 2006, in which the defendant died before sentencing and appeal. First proposed by the Department of Justice in August 2006, Senators Feinstein and Sessions introduced the bill during the lame duck session after the November mid-term elections, and at this point the bill is unlikely to pass unless it is attached to a more pressing piece of legislation. A more likely scenario is that it will be reintroduced in the next session beginning in January 2007. The basic thrust of the legislation is:
`(a) General Rule- Notwithstanding any other provision of law, the death of a defendant who has been convicted of a Federal criminal offense shall not be the basis for abating or otherwise invalidating a plea of guilty or nolo contendere accepted, a verdict returned, a sentence announced, or a judgment entered prior to the death of that defendant, or for dismissing or otherwise invalidating the indictment, information, or complaint on which such a plea, verdict, sentence, or judgment is based, except as provided in this section.
We shall see how far the proposal goes in the legislative process. (ph)
Cooperate or You're Gone (Again)
Another internal investigation of options back-dating, another executive decides not to cooperate, and another resignation -- something of a broken record on this topic. This time, it is Quest Software, Inc. announcing the resignation of a senior executive who decided not to meet with the special committee of the board of directors conducting an internal investigation of the options issuance practices, thus ending his job with the company. According to its 8-K (here):
On November 18, 2006, the Board of Directors of Quest Software, Inc. (the “Company”), upon the recommendation of the Special Committee formed to investigate the Company’s historical stock option grant practices and related accounting, unanimously accepted the resignation, effective immediately, of M. Brinkley Morse, Senior Vice President, Corporate Development of the Company. Prior to his resignation, Mr. Morse’s counsel had informed the Special Committee that Mr. Morse declined to be interviewed by the Special Committee as part of its investigation.
As discussed in an earlier post "What Happens When the Former CEO Skips a Meeting with the Internal Investigators" on this topic, such a refusal can lead to a quick resignation from the board. The pressure on companies to demonstrate their cooperation is almost overwhelming these days. According to the Wall Street Journal's options-timing investigations scorecard (here), Quest Software has not received a grand jury subpoena from a U.S. Attorney's Office . . . yet. Look for one to arrive fairly soon. (ph)
White Collar Crime in Germany and China
While our primary focus is on the United States, instances of white collar crime can occur anywhere money flows and businesses fight for a competitive advantage. A Wall Street Journal article (here) discusses pending investigations in Germany of Siemens AG and Daimler-Chrysler AG related to potentially illegal payments. The Siemens investigation involves a fraud that involving over $200 million, and German police searched a number of the company's offices and seized over 36,000 documents. Searches are becoming more common in U.S. white collar crime investigations, although the German authorities also arrested six employees, something that tends not to happen here until charges have been filed. As one would expect to hear in an American corporate crime investigation, Siemens stated that it is cooperating with investigators. The Daimler-Chrysler case involves possible violations of the FCPA for bribes paid from allegedly secret bank accounts.
An AP story (here) discusses a report issued by China's National Audit Office that over $900 million in government pension funds have been misused or stolen. China is reputed to impose severe penalties for corruption, including the possibility of a death sentence, which is a bit more extreme than the punishments imposed in the U.S. and elsewhere. (ph)
November 24, 2006
Second Circuit Upholds Former Cendant Executive's Conviction
The Second Circuit, in an unpublished summary order (available below), upheld the conviction of E. Kirk Shelton, the former vice chairman of Cendant, on conspiracy, wire fraud, securities fraud, and false statement to the SEC counts. Shelton was convicted in 2004 in a trial in which his co-defendant, former Cendant CEO Walter Forbes, had a mistrial declared because of jury deadlock. Forbes was recently convicted in a third trial in the matter. The case arose out of a large-scale accounting fraud at CUC International before it merged with HFS to form Cendant in 1997. Shelton received a ten-year sentence, and he had been free on bond pending appeal. He will likely have to report to the Bureau of Prisons to begin his term in the next four to six weeks.
The Second Circuit rejected Shelton's argument that the district court improperly gave an "ostrich instruction" to prove the conspiracy and fraud counts. The appellate court noted that the evidence at trial included testimony from a co-conspirator that while reviewing a document about using reserves to meet quarterly earnings targets Shelton tore it up and said, "I guess I never saw that document." The Second Circuit also upheld the sentence over Shelton's objection that the district court improperly enhanced his sentence for having a leadership role in the offense, arguing that he could not have consciously avoided knowledge for an ostrich instruction and been a leader of the fraud. The court found that there was sufficient evidence to support the enhancement. The fact that the Second Circuit affirmed in a short (six pages), unpublished opinion indicates that it is even less likely an appeal to the Supreme Court will be granted, if Shelton ever tries to pursue one.
Shelton's troubles are not over, even with a substantial jail sentence looming. The government has filed a civil suit challenging Shelton's transfer of approximately $37 million in assets to family members and what prosecutors allege are "straw" companies to hide assets after the fraud came to light. Cendant is also seeking repayment of $22 million it advanced to Shelton for his attorney's fees that he likely agreed to repay if found guilty of a crime that harmed the company. Working through the collateral consequences of the conviction will likely take years, from a case that began over five years ago. A USA Today article (here) discusses the case. (ph)
How Bad Was the Options Back-Dating at Monster?
Options back-dating investigations have ensnared over 125 companies so far, and it looks like things are coming to a head at on-line job search company Monster Worldwide, Inc., when it announced the termination of its general counsel for cause. The company issued a press release (here) on Wednesday, November 22, stating that "the Company’s Board of Directors has terminated Myron Olesnyckyj, the Company’s former Senior Vice President, General Counsel and Secretary, for cause. Mr. Olesnyckyj was suspended from his position on September 19, 2006. The Board’s action was taken with the concurrence of the Special Committee of independent directors reviewing the Company’s historical stock option grant practices." As discussed in an earlier post (here), Monster's former CEO, Andrew McKelvey, resigned from the board of directors after his lawyer decided not to allow him to meet with the law firm conducting the internal investigation of the timing of options grants. McKelvey's lawyer said that the meeting could not take place because he was recently hired and not prepared to have his client meet, but the firing of Olesnyckyj may well indicate that back-dating of options might not have been a result of negligence or a misunderstanding of the issuance process. The U.S. Attorney's Office for the Southern District of New York subpoenaed the company back in June for documents related to its options practices, and this office hasn't gotten into the game yet with an indictment, unlike the U.S. Attorneys in San Francisco and Brooklyn. Prosecutors in Manhattan are sure to take a close look at the results of Monster's internal investigation. (ph)
November 23, 2006
Being Thankful on Thanksgiving
Reflecting on who in the white collar crime world is giving thanks on this Thanksgiving Day --
1. Jamie Olis can be thankful to the Fifth Circuit panel that reversed his initial sentence of 24 years, with a special thank you to the Hon. Edith Jones who authored the opinion, an opinion that allowed him to be resentenced to six years.
2. Andy Fastow can be thankful to the prosecutors who did not object when his defense counsel presented reasons for a lower sentence than the ten years specified in his plea agreement.
3. The KPMG 16 can be thankful that U.S. District Judge Lewis Kaplan wrote an incredible decision that calls into question some of the government's actions with respect to the Thompson Memo.
4. Eric Holder can be thankful that Larry Thompson decided to redraft his memo so that when everyone criticizes the memo they call it the Thompson Memo.
5. Kobi Alexander can be thankful that he ended up in Namibia as opposed to country that would move quickly to extradite him back to the United States.
6. Jack Abramoff can be thankful that he had a lot of friends in high places to talk about when the government came calling.
7. U.S. District Judge Sim Lake can be thankful the Enron trial is now behind him, although the possibility of a retrial should Skilling's appeal be successful may give him a bit of dyspepsia, along with the cranberry log.
8. The Enron Nigerian Barge Defendants can be thankful the Fifth Circuit's view of "right of honest services" fraud went their way.
9. Law Firms with white collar practice groups can be especially thankful for the extra servings provided by the options back-dating turkey.
If readers have any thanks they would like to add, please do so in the comment section.
Happy Thanksgiving!!! (esp & ph)
November 22, 2006
Arguing KPMG in the Second Circuit
The Second Circuit heard oral arguments on November 21 in the appeal of U.S. District Judge Lewis Kaplan's decision providing sixteen former KPMG partners and employees with a civil claim to seek attorney's fees in the government pending prosecution of them on conspiracy and tax fraud charges. A Wall Street Journal article (here) states that senior Circuit Judge Ralph Winter said he was "dubious" of the district court's authority to permit a civil cause of action, and noted Judge Winter questioned whether Judge Kaplan "created a proceeding without any expressed authority." U.S. District Judge John Gleason, sitting on the panel by designation, raised the interesting issue of the proper remedy for a constitutional violation, stating that it could be dismissal of the indictment. As a trial court judge, I suspect Judge Gleason will be more sympathetic to Judge Kaplan's position than the appellate judges might be because he may well face the same issues in his courtroom in Brooklyn one day.
As discussed in an earlier post (here), Judge Kaplan's recent order postponing the trial indefinitely hinted that he might revisit the issue of remedy, and the defendants have asked for dismissal due to prosecutorial misconduct and a violation of their constitutional rights from the government's pressure on KPMG to deny them attorney's fees. Dismissal is the ultimate penalty, and one the Supreme Court has been loath to permit absent a clear violation of a constitutional or statutory protection. The Second Circuit's skepticism about Judge Kaplan's decision to drag KPMG into the case in a collateral proceeding may result in a remand to address directly the question of the proper remedy for a constitutional violation, assuming there is one. (ph)
Time the Options, Get a Check
Options-timing investigations triggered the resignations of two more CEOs, one of whom will receive a nice chunk of change for leaving his job. Cyberonics, Inc. CEO Robert "Skip" Cummins left the medical device maker after the disclosure in its 8-K (here) that the "Audit Committee has concluded that incorrect measurement dates were used for certain stock option grants made principally during the period from 1999 through 2003." The board announced that its "consolidated financial statements and all earnings and press releases and similar communications issued by the Company relating to periods beginning on or after June 30 1999, should no longer be relied upon. What does that get the former CEO? The company entered into a severance agreement containing the following terms:
[T]he payment of approximately $1.7 million in cash within five days, the issuance of 75,000 unregistered shares of the Company’s common stock to Mr. Cummins, and the acceleration of vesting for outstanding options and restricted stock grants and the payment of certain benefits. The Cummins Resignation Agreement also provides for the payment to Mr. Cummins of an amount equal to the cash value of 75,000 shares of the Company’s common stock within one week of the filing of the Company’s next Annual Report on Form 10-K and for the payment of cash for certain tax payments that will be incurred by Mr. Cummins as provided in Paragraph 6(f) of his Employment Agreement.
With my limited math skills, I think the cash and stock payments are worth at least $5.3 million based on a stock price of $24.50 per share: $1.7 million up front, 75,000 shares worth over $1.8 million, and another payment of about $1.8 million -- depending on the stock price -- when Cyberonics files its 10-K. The company's CFO also resigned, and only received a consulting contract that will pay her $1,200 per day.
Trident Microsystems, Inc. founder and CEO Frank Lin resigned because of options-timing issues uncovered in an investigation by a special board committee. According to the company's 8-K (here):
While the investigation is not yet complete, on November 14, 2006 the Special Committee provided a preliminary report to the Board of Directors. The Special Committee found that the Company previously used incorrect measurement dates when accounting for stock option grants made to new hires, existing employees and officers. The Company will restate its financial statements to correct the accounting for its historical stock option grants. Based on the preliminary results of the Special Committee’s investigation, the Company currently expects to record non-cash charges for stock based compensation expense in a range of approximately $40 million to $50 million, which the Company expects to recognize in periods between 1994 and 2006.
No word yet on Lin's severance package. (ph)
Another Trading Case Dropped
It will be a good Thanksgiving for five former floor traders. The Wall Street Jrl reports here that in the "interests of justice" prosecutors have decided that these cases should not be pursued. It is not easy for the government to decide not to pursue cases they were working on, but it is an important step for prosecutors who serve as "ministers of justice." A good Thanksgiving to the floor traders and also to the prosecutors who realized that mere advocacy is not the role of those who serve in the government.
A fascinating story in the Wall Street Journal titled, "To Catch Crooks in Cyberspace, FBI Goes Global" discusses the cooperation that the U.S. has provided to other countries in the investigation of international cybercrime. Without doubt, cybercrime poses unusual problems in that it crosses borders by a mere keystroke. What becomes problematic is when the U.S. decides to prosecute the conduct merely because it affects this country. The Wall Street Jrl. article puts a good face on the U.S. prosecution in that it describes the U.S. providing assistance to other countries in the investigative stage, with other countries then proceeding with the prosecution.
November 21, 2006
The "Google" Effect on Juries
With computers everywhere one has to expect that jurors are likely to be looking for answers to their questions on the web. The problem here is that the jury is supposed to limit their deliberation to what is contained in the trial and that which is provided to them by the court.
In the Siegelman/Scrushy trial this question may prove interesting. According to the Montgomery Advertiser (AP) here the jury may have downloaded copies of the indictment and one juror may have used a home computer to learn about the fore-person's role on a jury.
The problem now becomes whether their investigation and downloading tainted their deliberation. After questioning the jurors and finding no influence, the court has ordered both parties to brief the issue. Clearly the court is looking to see if this is was prejudicial to the defendant or merely harmless error. One question that may prove interesting is whether the materials downloaded replicated what was given to them by the court. If the material contained excess items that the jury had not been privy to during the trial, the question will be whether that material was prejudicial. Although the government has the burden here (See Remmer v. United States, 347 U.S. 227 (1954)) ( al.com here), it may not be a difficult burden for them to meet.
The Paxil Defense in Sentencing
A Tampa district court issued a sentence of home confinement and probation to a Tampa business executive despite prosecutors asking for jail time. According to the St. Petersburg Times here, the defendant who "methodically stole $1.8-million from [his] ex-employer" "blamed the antidepressant" "for his embezzling." For many white collar offenders, the naming and shaming in the newspapers can be devastating, and in some cases more traumatic then the actual sentence. The St. Petersburg Times does note the stellar work record and looks at family consequences in ascertaining the sentence. Irrespective of whether one agrees or not with the sentence issued by U.S. District Court Judge James Moody Jr., his consideration of factors beyond the guidelines is important. We must always remember that we are not just sentencing "acts" but rather are also sentencing "actors."
November 20, 2006
Collateral Consequences of White Collar Conviction
Former Mayor Bill Campbell (Atlanta) is feeling the collateral consequences of his recent federal conviction. Although he was convicted of tax crimes, and acquitted of other charges against him (see here), it did not stop the Georgia Supreme Court from suspending him from the practice of law (See Atlanta Jrl Constitution here). Although a bricklayer comes out of prison a bricklayer, and a welder remains a welder, a white collar offender often is precluded after prison from resuming the livelihood that he or she had prior to the conviction.
Lone Star Feeling International Pressure
Playing in the international market can have severe ramifications for a company. Not only must they fear the US Foreign Corrupt Practices Act (FCPA), but they also have to be apprised of the law of other countries and be knowledgeable of how best to operate in these countries. And it is not always easy.
It is, therefore, not surprising to see that that Lone Star Funds is having some difficulty with South Korean prosecutors. According to the Wall Street Jrl here, they have indicted the "Dallas private-equity firm Lone Star Funds and Korea Exchange Bank on stock-manipulation charges related to the bank's credit-card unit." And it sounds like this investigation opens up an array of accusations. The Korean Herald reports here on allegations related to a judge's failure to grant an arrest warrant in 2004 for an executive of Lone Star. Part of the question here will be whether this whole investigation really is anything new from what had previously been looked at in 2004.
Who Gets Oversight Control of the SEC
Will it be Rep. Barney Frank or Rep. John Dingell? (checkout Bloomberg News here) And what changes will there be to the Sarbanes-Oxley Amendment depending on who becomes the key player?
November 19, 2006
Another Plea in DRAM Cases
Another plea has been entered into in the DRAM manufacturing antitrust conspiracy cases. A DOJ press release reports here that "[a] former executive of Elpida Memory, a large Japanese manufacturer of a common computer component called dynamic random access memory (DRAM), has agreed to plead guilty, pay a $250,000 criminal fine, and serve prison time in the United States for participating in a global conspiracy to fix DRAM prices." This brings the government tally to "four companies and 17 individuals" being charged related to the DRAM cases. The government press release notes that
"Samsung, the world’s largest DRAM manufacturer, pleaded guilty to the price-fixing conspiracy and was sentenced to pay a $300 million criminal fine in November 2005. Hynix, the world’s second-largest DRAM manufacturer, pleaded guilty and was sentenced to pay a $185 million criminal fine in May 2005. In January 2006, Elpida Memory agreed to plead guilty and pay an $84 million fine. In October 2004, German manufacturer Infineon pleaded guilty and was sentenced to pay a $160 million criminal fine."
White Collar Crime Prosecutions Down?
TRAC Reporting out of Syracuse University is saying that:
"[t]imely criminal enforcement data from the Justice Department document that in July 2006, U.S. federal white collar crime prosecutions reached their lowest number (498) in the last five years. In fact, not since May 2000 (when there were 446 prosecutions) has the number been lower." (see here)
(esp) (with disclosure that she is a Syracuse grad).