Saturday, December 30, 2006
The Third Circuit Court of Appeals reversed a health care fraud conviction providing an important interpretation of 18 U.S.C. s 1347(2). The court held that the government had failed to establish the elements of the statute because it failed to show that the accused had "used false or fraudulent pretenses, representations, or promises to obtain money or property from Progressive in connection with the delivery of, or payment for, health care benefits, items, or services." The court makes a clear distinction between what constitutes theft and fraud. The court states:
"Under the common law and the Model Penal Code, theft is synonymous to larceny – the taking of another’s property by trespass with intent to deprive permanently the owner of the property. Id. at 171. Fraud, which did not exist at common law, "means to cheat or wrongfully deprive another of his property by deception or artifice," id. at 178 (quoting United States v. Thomas, 315 F.3d 190, 200 (3d Cir. 2002)), and "implies deceit, deception, artifice, trickery," id. at 177 (citations and quotations omitted)."
(esp)(w/ a hat tip to Peter Goldberger)
Professor Peter Margulies (Roger Williams) has an article online in the Business Law Journal of U-California-Davis. He summarizes the five parts of the article as follows:
" The article is in five parts. Part I discusses the catalysts for corporate insider misconduct: agency costs, moral hazard, cognitive bias, the race to the bottom, and lax government enforcement. Part II argues that a corporation's subsidy of legal fees and indemnification agreements clashes with legal ethics as the corporation may require attorneys to contest charges even though the defendant may benefit from a plea deal. Part III discusses the government's attempt to strengthen enforcement through the Thompson Memorandum. Part IV describes the response to the government's enforcement initiatives, in particular the Stein Court's view on fee subsidies. Part V discusses the interaction between civic and corporate governance on fee subsidies, and the appropriate stance of federal courts.
The immortal words of Quick Draw McGraw to his trusty sidekick, Baba Looey, may be what government investigators from the SEC and U.S. Attorney's Office are saying in light of Apple Computer, Inc.'s disclosure of CEO Steve Jobs' involvement in the company's options issuance practices. Apple disclosed in October 2006 that Jobs was "aware" of options backdating, and stressed that he did not receive any of the options or benefit financially from any timing. In its 10-K (here) filed on December 29, the last business day of the year, Apple added a little extra to its description of Jobs' involvement: "Although the investigation found that CEO Steve Jobs was aware or recommended the selection of some favorable grant dates, he did not receive or financially benefit from these grants or appreciate the accounting implications." The earlier disclosure did not mention him making any recommendations, and only said he was "unaware of the accounting implications," while this one says he did not "appreciate them." The difference between awareness and appreciation is a fine one, but it moves Jobs a bit closer to potential problems. Nevertheless, the company has stressed that Jobs did nothing wrong in its view, and that the board continues to support him as outlined in a statement (here) it issued along with the 10-K:
"The special committee, its independent counsel and forensic accountants have performed an exhaustive investigation of Apple’s stock option granting practices,” in a joint statement said Al Gore, chair of the special committee, and Jerome York, chair of Apple’s Audit and Finance Committee. “The board of directors is confident that the Company has corrected the problems that led to the restatement, and it has complete confidence in Steve Jobs and the senior management team.”
Regardless of what the board thinks, government investigators may not have the same sanguine view of Jobs. While being "aware" of backdating may mean something as innocuous as being cc'd on an e-mail, making recommendations about favorable issuance dates connotes much more active involvement. The only way to know a date is "favorable" is if the decision is made after the fact, and the key issue will be whether Jobs was cognizant of any falsification of documents or other misleading conduct. Moreover, Jobs' appreciation of the "accounting implications" of backdating sounds like the beginning of an ignorance defense, but whether he can offer such a position will depend on his level of involvement in the options issuance. One need not know the minutiae of the accounting and tax issues related to options to understand that changing the dates to increase their value will have an impact on Apple's financial statements.
The company's disclosure of Jobs' involvement tries to put him in the best light, but I think it is likely that the investigation will probe deeply into the involvement of Jobs and other Apple executives in the backdating. While the lack of any financial gain to Jobs may cut against a securities fraud claim, the creation of false or misleading documents that cause the company's financial statements to be incorrect is a separate violation, and often the tipping point between a civil and criminal proceeding. The indictment earlier in 2006 of former Brocade Communications CEO Gregory Reyes involved the very situation in which the executive did not benefit directly from the backdating, but the creation of allegedly false records led to criminal charges. Look for investigators to act more like Quick Draw in viewing the results of Apple's internal investigation. (ph)
The hard-fought corruption prosecution of former HealthSouth CEO Richard Scrushy and former Alabama Governor Don Siegelman is taking an even uglier turn over the latest issue of juror e-mails. As discussed in an earlier post (here), the defense received what it claimed were two more e-mail messages between jurors showing alleged improprieties during the deliberations that support the request for a new trial. According to a detailed review (here) of the latest salvos by television station WSFA in Montgomery, the e-mails were sent anonymously to a number of media outlets in addition to the defense lawyers. The government has responded to the latest defense filings by insinuating that the defendants created the e-mails. An assistant U.S. Attorney is quoted as stating, "If we had to satisfy every convicted criminal in their effort to escape responsibility for their actions, there would be no point in having any laws. They got a fair trial. They elected not to testify...There's no need to run down that rat trail in all likelihood manufactured by one of these defendants." Defense counsel responded, "We say to the DOJ why don't you stop jawing about your speculations and figure out whether there is a basis for your slanderous remarks? The reason - and the whole world can see it -- is because you know that if the emails are authentic the defendants will be entitled to a new trial. No slander -- no rhetoric -- simple, hard facts." The war of words is unlikely to sway Chief U.S. District Judge Mark Fuller, who rejected the earlier new trial motion. The appellate brief probably just got a little bit longer. (ph -- with a correction on the source of the AUSA's statement)
Friday, December 29, 2006
In the finest end-of-the-year tradition of various media outlets, we have decided to honor individuals and organizations for their work this year in the white collar crime arena by bestowing "The Collar" on those who deserve our praise, scorn, acknowledgment, blessing, curse, or whatever else you can think of that would be appropriate. Comments are open if any readers would like to suggest additional categories or winners (or losers?), remembering to keep any offerings reasonably mature and somewhat well-meaning, at least to the extent ours meet those criteria (and do not open us up to a libel suit).
With the appropriate fanfare, we present The Collars for 2006:
The Collar for Best Naming -- Paul J. McNulty for finally getting Larry Thompson's name off of the revised Holder Memo.
The Collar for Best Parent -- second year in a row -- Bill Olis for all his work on behalf of his son Jamie. One more and we retire the award in Bill's name.
The Collar for the Best Government Move -- The DOJ for entering into a deferred prosecution agreement with Frank Quattrone that reads like an agreement in a juvenile case.
The Collar for the Best Cooperating Witness -- Jack Abramoff for causing politicos to fall as a result of this cooperation.
The Collar for the Best Avis -- Jeff Skilling for receiving a sentence below Bernie Ebbers.
The Collar for the Best Deal -- Andy Fastow for obtaining a sentence below the agreed amount in the plea agreement.
The Collar for Missed Opportunities -- Federal prosecutors who failed to object when Andy Fastow's counsel presented a below-plea agreement statement at sentencing.
The Collar for Shaking Up the Government -- Judge Lewis Kaplan for his decision in the Stein case.
The Collar for Worst E-Mail Response -- Former Hewlett-Packard chief ethics officer Kevin Hunsaker asked whether pretexting was legal, and after getting a response saying it was near the edge, replied, "I shouldn't have asked."
The Collar for Best Fugitive -- former Comverse Technology CEO Kobi Alexander, who has "settled" in Namibia with his family while facing a federal indictment for securities fraud for options backdating at the company.
The Collar for Best Practice Group Profit Machine -- Options-timing investigations, which trigger internal probes conducted by hordes of lawyers, separate counsel for various directors and officers, and new counsel for the board to sort out all those lawyers.
The Collar for Best Ignoring of a Federal Judge -- The U.S. Bureau of Prisons, which has not sent one of the high profile defendants from the Enron and WorldCom cases (Skilling, Ebbers, Fastow, etc.) to the federal correctional institution recommended by the sentencing judge.
The Collar for Best Defense Motion -- Attorney David Spears, who filed for bail pending appeal for his client, William Fuhs, one of the defendants in the Enron Nigerian Barge trial. The Fifth Circuit released Fuhs first because Spears had the presence of mind to file the motion immediately after oral argument, buying his client a little bit of extra freedom.
The Collar for Best Swag Auction -- Jody Nelson, former CFO of Patterson-UTI Energy, embezzled $77 million from the company, and saw his unfinished 19,000 square foot Lubbock mansion go on the auction bloc. That's a lot of house, even in Texas.
Steve Jobs, one of the world's leading high-tech executives, has become enmeshed in the options issuance scandal that is plaguing a number of companies. According to media reports (see Reuters story here), Jobs received options on 7.5 million shares of Apple Computer, Inc. in October 2001, and documents showing the approval of the grant by the board of directors may have been falsified to make it appear that proper procedures were followed. Jobs returned the options unexercised and received restricted shares at a later date. On October 4, 2006, Apple disclosed the preliminary conclusions of its internal investigations, summarizing them in a press release (here):
- The investigation found no misconduct by any member of Apple’s current management team.
- The most recent evidence of irregularities relates to a January 2002 grant.
- Stock option grants made on 15 dates between 1997 and 2002 appear to have grant dates that precede the approval of those grants.
- In a few instances, Apple CEO Steve Jobs was aware that favorable grant dates had been selected, but he did not receive or otherwise benefit from these grants and was unaware of the accounting implications.
The investigation raised serious concerns regarding the actions of two former officers in connection with the accounting, recording and reporting of stock option grants. The company will provide all details regarding their actions to the SEC.
“I apologize to Apple’s shareholders and employees for these problems, which happened on my watch. They are completely out of character for Apple,” said Steve Jobs, Apple’s CEO.” We will now work to resolve the remaining issues as quickly as possible and to put the proper remedial measures in place to ensure that this never happens again.”
While Jobs may not have benefited from the options grant, any falsification of records will be a serious concern to the SEC and federal prosecutors investigating the company, who will want to know exactly how "aware" Jobs was of the company's practices. Apple continues to cooperate with investigators, a stance taken by every company that has discovered options-timing issues, and no claims of government pressure regarding cooperation have arisen to this point. The Times reports (here) that Jobs has met with Mark Pomerantz, a leading white collar crime specialist at Paul Weiss, about representing him in the government's investigation. You know it is getting serious when the heavy hitters start showing up. (ph)
Former HealthSouth CEO Richard Scrushy and former Alabama Governor Don Siegelman struck out the first time in seeking a new trial on corruption charges based on evidence of potential juror misconduct when U.S. Chief District Judge Mark Fuller rejected their motion (see earlier post here). One ground advanced in that motion involved two e-mails purportedly between jurors discussing the case that showed possible bias and improper communications outside the jury room. Chief Judge Fuller found that the e-mails had not been authenticated as coming from a juror, and so he refused to consider them. Scrushy and Siegelman are trying again with a claim that there are two more e-mails (available below) between jurors, and have requested reconsideration of the new trial motion, citing the additional e-mails as evidence.
Like the earlier e-mails, these latest missives were sent anonymously to defense counsel, and the source is unknown. The problem, of course, is that the same authentication issue will likely arise. A story in the Mobile Press-Register (here) quotes the alleged recipient of the e-mails as stating, "Well, this is ridiculous. It's absolutely fabricated . . . This is completely bogus. I don't know what they're up to, but I sure would like to move on to my life." While Chief Judge Fuller was willing to hold an evidentiary hearing on the first motion, it will probably be much more difficult to get him to reconsider his prior ruling without more evidence about the source of the newly-submitted e-mails. (ph -- thanks to a loyal reader for sending along the information and another reader for correcting the source of the quote)
Thursday, December 28, 2006
The investigation of possible perjury in the Balco (Bay Area Laboratory Co-Operative) steroids investigation took another interesting turn with the release of a Ninth Circuit opinion (here) overturning lower court orders directing the government to return drug tests because the searches were unconstitutional. The government originally subpoenaed two drug testing labs in early 2004 for the results of drug tests of ten major league baseball players with Balco connections who may have tested positive for steroids. The most famous player linked to Balco is San Francisco Giants slugger Barry Bonds, who testified before a federal grand jury in 2003 that he did not knowingly take steroids provided by his trainer, Greg Anderson, who was involved with Balco. After the labs refused to provide the drug tests, investigators obtained search warrants for the facilities and seized records of the drug tests of all major leaguers, and athletes in a number of other sports. The government then issued another subpoena to obtain many of the records it had already seized. District court judges in Los Angeles, Las Vegas, and San Francisco ordered the return of the records and granted a motion to quash a subpoena at the urging of the baseball players union, which intervened to represent the interests of all the players whose records were seized.
In its decision in United States v. Comprehensive Drug Testing, Inc., a divided panel upheld the search warrants, including the seizure of computer records, and ordered the lower court to segregate records that fall outside the scope of the warrant for review by a magistrate judge. A second issue decided by the Ninth Circuit majority was to reverse the district judge's order quashing the subpoena issued after the search as unreasonable. The appellate court determined that the government may issue a subpoena for documents held by a third party even after a search for the same records.
A strong dissent by Circuit Judge Sidney Thomas, which runs 60+ pages, accuses the government of acting improperly in both the search and subpoena issuance. Judge Thomas concluded about the seizure of private medical records not covered by the warrants:
In discussions of the alleged use of steroids by baseball players, much is made about “the integrity of the game.” Even more important is the integrity of our legal system. Perhaps baseball has become consumed by a “Game of Shadows” [a book written about Bonds' steroid use], but that is no reason for the government to engage in a “Prosecution of Shadows.” The district judges were entirely right to order the government to return the thousands of private medical records it wrongfully seized by use of pretext and artifice.
The Ninth Circuit decision raises a number of interesting issues that are coming up more often in white collar crime cases, such as the scope of a warrant to search a computer, plain view of computer files, the government's right to seize intermingled documents, and the prosecutor's authority to use both a search warrant and a grand jury subpoena for the same records. These are not issues the Supreme Court has confronted in the context of white collar-related investigations, and much of the Court's Fourth Amendment jurisprudence arises in drug and gun cases that are not always a good fit when applied in corporate and business crime investigations -- how often does the auto search exception arise in a mail fraud case?
The union has some very deep pockets, and a strong interest in keeping the drug testing results secret, so I expect the players' lawyers (from leading San Francisco firm Keker & Van Nest) will seek rehearing en banc and, if that fails, certiorari from the Supreme Court. While the government has won this round, don't look for a quick resolution of the question whether prosecutors can use any drug test taken by Bonds as evidence for a potential perjury prosecution. Bonds has denied failing a drug test, so the value of the evidence remains to be seen. (ph)
UPDATE (12/28): Not surprisingly, Donald Fehr, head of the baseball players union, said the union will consider further action to overturn the Ninth Circuit panel's 2-1 ruling allowing prosecutors access to player drug tests in 2003. In a prepared statement (here), Fehr said, "We will consult with our counsel, and then determine what our next step should be in our fight to protect the Constitutional rights -- including the basic right to privacy -- of our members." (ph)
The time between Christmas and the New Year is supposed to be quiet, with little news emerging because so many people are on vacation. That is not the case with the options-timing investigations, which continue to percolate. With over 100 companies having acknowledged potential problems with their issuance practices, and responses ranging from internal investigations that trigger multi-year restatements to SEC and criminal probes, it's not surprising that news pops to the surface almost daily, even during the holiday lull; maybe that's the whole idea why some companies make the disclosures this week, perhaps getting lost in the shuffle. Three recent disclosures and one news story caught my eye:
- Monster Worldwide, Inc. announced (here) that as of December 26 former SEC Commissioner Philip Lochner (1990-1991) has joined the board of directors, and will begin service immediately on the special committee investigating its options practices. On November 22, the company announced that it had fired its general counsel, Myron Olesnyckyj, "for cause" related to the options issuance. Welcome aboard, Mr. Lochner.
- HCC Insurance Holdings, Inc. announced that its founder and former CEO, Stephen Way, had back-dated documents, but that he did not intend to misstate any financial records. An amended 10-K (here) also implicates the company's former general counsel in the options issues: "The Special Committee found that Stephen L. Way, Chief Executive Officer, retroactively priced options, that he should have known he was granting options in a manner that conflicted with our stock option plans and public statements, and that this constituted a failure to align the stock option granting process with our stock option plans and public statements. Although finding his actions were inconsistent with the duties and obligations of a chief executive officer of a publicly-traded company, the Special Committee also found that Mr. Way’s motivation appeared to be the attraction and retention of talent and to provide employees with the best option price. The Special Committee also concluded that Christopher L. Martin, Executive Vice President and General Counsel, was aware that options were being retroactively priced in a manner inconsistent with applicable plan terms and the procedures memoranda that he had prepared, that granting in-the-money options had accounting implications, and that he did not properly document our Compensation Committee’s informal delegation of authority to Mr. Way. The Special Committee also found that there was no evidence that Mr. Way or Mr. Martin intended to falsify the consolidated financial statements." Of course, the board's determination is not binding on federal investigators, and good intentions are not an excuse for falsifying records, so the SEC and perhaps federal prosecutors will ask tough questions about the conduct of Messrs. Way and Martin.
- UnitedHealth Group Inc. announced (8-K here) on December 26 that on "December 19, 2006, the Company received from the SEC staff a formal order of investigation. The Company has cooperated and will continue to cooperate with the SEC." I guess they didn't want to ruin the annual holiday party with a public announcement of this news, so they held off until the day after Christmas. I can't say this for certain, but I believe this is the first formal SEC investigation of a company since the options-timing issue hit in March 2006. A formal order means that the Enforcement Division staff can subpoena records and need not rely any longer on the cooperation of others to obtain records. This step by the Commission is often viewed as reflecting the seriousness of the investigation.
- A story in The Recorder (here) discusses the criminal probe of possible falsified documents at Apple, Inc. related to its options practices. Earlier in 2006, the company's CFO and general counsel left their positions, and there is always speculation about how high up the managerial ladder any options-timing goes. As one of the highest profile tech companies caught up in the options investigations, Apple will be a top priority for federal prosecutors in the U.S. Attorney's Office for the Northern District of California, which brought the first criminal case over options-timing practices at Brocade.
As the calendar turns to a new year, look for the SEC and various U.S. Attorney's Offices to begin filing cases against individuals and, at least on the civil side, companies alleged to have engaged in back-dating options, falsification of documents, and perhaps most ominously, securities fraud. (ph)
Tuesday, December 26, 2006
In the upcoming days, the media will be focusing on the life of former President Gerald Ford, as they should. And as pointed out by the Washington Post in an article by J.Y. Smith and Lou Cannon, his life was influenced by the actions of others. In his case, the white collar crimes of others allowed for him to rise to the Presidency.
First it should be noted that Ford took over the presidency following Nixon's resignation, a resignation resulting from the Watergate Scandal. But the reason for Ford being in a position to assume the presidency also related to white collar crime, as he became vice-president when Spiro T. Agnew resigned following a tax charge. Thus two white collar crime incidents provided him with the opportunity to serve as president of the United States.
And perhaps one of the most controversial aspects of his Presidency also concerned a white collar crime matter, as Ford pardoned former President Nixon.
He was neither a perpetrator nor a victim. But like so many, white collar crime touched his life and made a difference in many events in his life. We mourn the passing of former President Gerald Ford.
Getting ready for a Congressional investigation usually involves hiring lawyers, and things are no different at the White House. An article (here) in the Baltimore Sun discusses recent hires in the counsel's office at the White House since the mid-term elections, when Democrats took control and promptly vowed to increase oversight of the Bush administration. Among the recent hires are Christopher G. Oprison and Paul R. Eckert. Oprison is a former Marine JAG who was a senior associate in the white collar crime group at Skadden Arps' DC office, home of Robert Bennett, who defended, among others, former President Clinton in the Whitewater investigation. Eckert was a partner at powerhouse DC law firm WilmerHale in their securities group, which is headed by former SEC Enforcement Division director Bill McLucas. Needless to say, their experience in dealing with government investigations will serve them well as they face a deluge of subpoenas and other requests from Congressional committees. And, as Congress gets into the swing of things come January, look for private firms to show up at the side of administration witnesses called to testify on Capitol Hill. (ph -- thanks to my colleague Greg Fox for passing along the article)
The N.Y.Times reports that Alan G. Hevesi, comptroller for New York State, resigned from office and also plead guilty to a felony. The alleged wrongdoing involved conduct related to using an office employee for work outside of his state responsibilities (e.g., chauffeuring his wife) (see N.Y. Sun - AP here). The ironic aspect to this incident is that the N.Y. State Comptroller "audits State Agencies, Public Authorities, and all local governments in New York State, including New York City." Hevesi, a long-time state employee, will not receive jail time, but will resign from office. It appears that in New York, no one is immune from scrutiny.
Financial irregularities are not unique to the United States. This week we see the New York Times (AP) reporting that two senior executives would be resigning from Nikko Cordial Corporation, a brokerage firm, following "accounting irregularities." A press release issued by the company reports on the establishment of a special investigating committee "to identify the fact of the matter that results the need to adjust its financial statements." The company will be using individuals external to the company for this audit. They are also implementing measures to make certain this will not occur in the future. Compliance programs can be beneficial no matter where in the world the company exists.
Monday, December 25, 2006
So far the McNulty Memo has not fared well in the public comments. Many still criticize the DOJ for failing to recognize the importance of the attorney-client privilege. Others contend that the memo does not go far enough in that it still allows prosecutors to procure waivers, albeit now with supervisory consent. Finally some object to the designations used by DOJ in deciding when they will allow the attorney client privilege to be waived. Others are upset that the Memo is an exercise of executive power without judicial oversight. Clearly the Memo fails to address the concerns raised by the ABA in Resolution 302B, a resolution that passed the ABA unanimously.
The jury returned a verdict convicting Dr. Luis Jacinto Marti of one count of conspiracy to defraud and fifteen counts of health care fraud. The verdict related to Medicaid claims in "2000-01 for payment for expensive drugs used to treat AIDS and HIV patients." A press release of the U.S. Attorney for the Southern District of Florida states:
"The evidence at trial showed that various, expensive blood-based immune globulins were fraudulently prescribed by Marti and dispensed at a local pharmacy. The evidence showed that there was no medical need for the medications. The pharmacy that dispensed the drugs billed the Florida Medicaid program for the cost of the medications, which were never delivered to the Medicaid patients and were instead fraudulently diverted for illegal resale."
The initial indictment included charges against others, including another Florida-licensed physician. These individuals plead guilty to the scheme before Marti's trial, and like Marti now await sentencing.
Gary Fields has an incredible article in the Wall Street Journal today that focuses on whether Congress will again revisit the sentencing guidelines for convictions by crack offenders. The 100:1 sentencing disparity between crack and cocaine has long been a issue of concern for many critics of the guidelines. The mandatory minimum sentences involved in drug cases also influence the enormous sentences received by these offenders. But two items in this article also say something, albeit indirectly, about white collar crime.
First is that while there are 94,434 individuals incarcerated on drug convictions, there are only 7,454 on extortion, fraud, and bribery. An additional statistic reported in this article that is relevant to this blog, is that violent crime "in 2005 rose more than it has in any of the last 15 years."
Clearly white collar individuals play a smaller number in our prisons when compared to groups such as drug offenders. Also clear is that the recent increased government focus on corporate criminality may need to be revisited if it turns out that there is a correlation between the expense of resources in this direction as opposed to the money being spent on prosecuting violent crimes and thus a resulting increase in violent crimes. The additional question is what does it mean that violent crime is increasing despite increased sentences and more incarceration -- has the move away from a rehabilitative model failed? Should we also be looking at this question with respect to white collar crime? Will draconian sentences really serve to deter criminality, and should we be more focused on rehabilitating individuals? Or perhaps even an education model that attacks the criminality prior to it occurring?
Instapundit's Glenn Reynolds (U. of Tennessee law prof), and his wife Helen, host "A Martha Stewart Christmas" podcast that features Professor Joan Hemingway's new book, "Martha Stewart's Legal Troubles." As a contributer to this book ( two chapters), it was a pleasure to join Joan, Helen, and Glenn in discussing the Martha Stewart indictment and the use of government resources to pursue this form of criminal activity. The podcast examines issues of overcriminalization, the Sarbanes-Oxley Act, and the recent draconian sentences being issued in white collar cases.
Sunday, December 24, 2006
As noted here an Alaskan state representative was recently indicted. But it looks like this might not be the end of things. According to the Anchorage Daily News , the investigation continues. Richard Mauer of the Anchorage Daily News provides an incredible detailed account of the investigation from start to present. But what remains to be seen is if the feds have a direction that is causing them to subpoena certain records. And is that direction one that looks at possible state corruption or federal corruption.