February 10, 2006
Betting on the Outcome of the Enron Trial
In a sure sign the the Enron conspiracy trial is a major event in American legal history, or that internet entrepreneurs will stop at nothing to create a gambling opportunity (although probably not with Rick Tocchet's former operation), there are at least two places on which one can place a bet on the outcome of the trial. A New York Post story (here) discusses the internet gaming site betCRIS.com, which has the odds of a conviction overwhelmingly favoring a conviction (see AP story here). The site operates out of Costa Rica, and it's not clear whether the person setting the betting line has any legal training, or has been put to sleep in the courtroom by the turgid pace of the trial. Unlike a sporting event in which all wagering closes at the start of the contest, the Enron trial is a very slow moving train, so the odds will likely fluctuate with ebbs and flows of the proceeding. CNN.Com reports (here) that Intrade Exchange, a Dublin, Ireland-based futures firm, has set up futures contracts on the outcome of the trial, with purchasers able to buy units pegged to whether Skilling will be convicted on four or more of the seven counts against him and Lay convicted on 16 or more of the 31 counts against him. Intrade has a number of futures contracts based on different types of events, including whether the U.S. will bomb Iran before June 2006 and the 2008 presidential nomination races.
Given the pace of the Enron trial, which started with a bang when Judge Sim Lake picked a jury in one day and has now had the first government witness chew up seven trial days with at least one more to come, anyone who bet the under on trial length has a sure loser (see Tom Kirkendall's post (here) on the Houston's Clear Thinkers blog discusses the timing issues). Rather than betting on a conviction, which is rather unseemly, an interesting exercise would be to figure out other prop bets on the trial that have nothing to do with the outcome, similar to prop bets on the Super Bowl like which team will win the coin toss or score the first touchdown. For example, who will be the first attorney to attempt a Johnnie Cochran rhyme, which defendant will testify first, or will the judge will hold anyone in contempt. Feel free to add suggestions in the comment section. (ph)
The Strange Assertion of Fitzgerald Regarding Libby's Grand Jury Testimony
A National Journal story (here) has sparked widespread interest in its report on a letter sent by Special Counsel Patrick Fitzgerald to the lawyers for I. Lewis Libby that states, "Mr. Libby testified in the grand jury that he had contact with reporters in which he disclosed the content of the National Intelligence Estimate ("NIE") … in the course of his interaction with reporters in June and July 2003 .… We also note that it is our understanding that Mr. Libby testified that he was authorized to disclose information about the NIE to the press by his superiors." Speculation abounds regarding who "authorized" Libby to disclose the information, if that was the case at the time of the disclosure of Valerie Plame's CIA status. What I find interesting, and a bit confusing, is the second quoted sentence, in which Fitzgerald states that "it is our understanding that Mr. Libby testified" about the authorization. Isn't that a strange choice of words from the prosecutor's office that conducted the entire grand jury investigation and has access to all of the witness testimony and FBI reports of interviews? It should be more than their "understanding" about his testimony, they should know whether or not Libby testified as such or not. It may be that the Special Counsel is trying to bolster the position that the defense requests for other classified information are irrelevant to the case if Libby testified, or at least implied, that he was authorized to leak information about Plame. In other news reports (AP story here), one of Libby's attorney's asserted that he would not try to shift the blame to superiors for authorizing any leaks of classified information. That statement does not deny the assertion in Fitzgerald's letter about the grand jury testimony, which under Federal Rule of Criminal Procedure 16(a)(1)(A) has to be produced to the defense upon request.
Fitzgerald may be hinting at the government's line of attack to neutralize the "honest-but-overworked-public-servant" defense that Libby's team has advanced to this point. If Libby did try to justify the disclosures to the media about Plame and related items in his grand jury testimony or an FBI interview, then his claim that he did not recall having disclosed the information would be weakened. Because it is likely that Libby will have to testify at trial, the government could try to impeach him by asserting that a defense that he was unaware of any improper disclosure is merely the "defense du jour" and that he had a different approach in the grand jury to justify his actions. Libby's various statements in the investigation may hamstring the defense to a degree, and it shows how dangerous it can be to have a client testify before the grand jury or submit to a full-scale interview with investigators. Yet, a person in Libby's former position could hardly refuse to cooperate or assert the Fifth Amendment and have any realistic hope of keeping his job. (ph)
A Second Mistrial for Cendant Executive
The prosecution of former Cendant executive Walter Forbes ended in a second mistrial after 27 days of jury deliberations. Forbes was CEO of CUC International before its merger with HFS, which created Cendant. Shortly after the merger, details of significant accounting fraud at CUC emerged, leading to multibillion dollar settlements of securities fraud civil suits and the prosecution of CUC's CFO, another senior executive, Kirk Shelton, and Forbes. The CFO entered a guilty plea and was the star witness in the two trials, the first ending in a guilty verdict on some counts for Shelton -- who has been sentenced to a ten-year prison term -- and a hung jury for Forbes. That jury was out 33 days, so the case is clearly a close one. Whether the government will try a third time is not clear at this point, and after two trials it may be that the case cannot be won.
In his trial, Forbes offered the "honest-but-ignorant CEO" defense. A New York Times column by Floyd Norris (here) notes Forbes' testimony that he did not read the company's quarterly filings with the SEC (Form 10-Q): "I don't think they would have expected me to be reading 10-Q's." All that accounting stuff is really confusing, anyway. Much of the government's case hung on the testimony of the CFO, who was permitted to retain $5 million from his days at CUC as part of the plea agreement, a decision that opened him to significant impeachment. A Bloomberg story (here) discusses the government's prosecution of Forbes. (ph)
February 9, 2006
AIG Resolves State and Federal Fraud Claims
As expected (see earlier post here), American International Group Inc. reached a global settlement with federal and state authorities, including the civil suit filed by New York Attorney General Eliot Spitzer, to resolve the various investigations of insurance and securities fraud at the company. AIG's total payment will be $1.64 billion, comprised of the following: $700 million in disgorgement and a $100 million penalty to the SEC; $375 million to AIG policyholders; $344 million to states harmed by AIG's practices involving underreporting for workers' compensation funds; and, fines of $100 million to New York and $25 million to the U.S. Department of Justice. The SEC's settled complaint (here) concerns the reinsurance transaction with General Re that led to the indictment of four defendants on Feb. 1 on conspiracy and securities fraud charges in the Eastern District of Virginia (indictment here), including three senior General Re executives. According to the SEC's Litigation Release (here): "The Commission’s complaint, filed today in federal court in Manhattan, alleges that AIG’s reinsurance transactions with General Re Corporation (Gen Re) were designed to inflate falsely AIG’s loss reserves by $500 million in order to quell analyst criticism that AIG’s reserves had been declining. The complaint also identifies a number of other transactions in which AIG materially misstated its financial results through sham transactions and entities created for the purpose of misleading the investing public." The settlement with New York covers a broader array of conduct, including the bid-rigging with Marsh & McLennan and other firms that first triggered the regulatory scrutiny (see NYAG settlement here).
With the company settlement, the remaining issue is whether federal prosecutors will pursue criminal charges against former AIG CEO Maurice Greenberg and former CFO Howard Smith. Attorney General Spitzer has already stated that no criminal charges against them will be filed, only the civil case in which the company reached the settlement. Whether prosecutors will be able to put together a case against Greenberg is very much an open question. The prosecution in Virginia arising out of the AIG-General Re "finite insurance" transaction will probably be the key to any further criminal actions. Unless former General Re CEO Ronald Ferguson or former AIG reinsurance executive Chris Milton, both defendants in the criminal case, agree to cooperate and provide solid evidence against Greenberg and Smith, it is unlikely the government will be able to file charges absent the discovery of a "smoking gun" document, which is unlikely to occur at this point in the investigation. An AP story (here) describes the settlement. (ph)
Will the Tax Man Come Looking for the Gretzkys?
An AP story (here) reports that hockey great Wayne Gretzky, the coach and co-owner of the Phoenix Coyotes, is captured on tape discussing large-scale betting by his wife, Jenny Jones, with assistant coach Rick Tocchet. The gambling ring Tocchet is alleged to have financed took in approximately $1.7 million from the end of December 2005 through the Super Bowl on February 5, and Jones is reputed to have made large bets on football games. The existence of wiretaps is not a great surprise because of the alleged Mafia connections in the case, and the recordings may reveal the names of others who bet through Tocchet, including current NHL players. Given the amount of money involved, this is the type of case in which the IRS is likely to take a very serious interest, at least for a civil audit and possibly a criminal investigation. Large sums of cash wagered through a bookmaking operation are unlikely to show up on various tax records that must be filed related to gambling winnings, and Uncle Sam will want his cut of the action, so tax issues may surface in addition to any potential criminal violations from the betting. Tocchet and two other defendants are scheduled to be arraigned on Feb. 21 in New Jersey. (ph)
The Campbell Trial Takes a Sordid Turn
The RICO corruption trial of former Atlanta Mayor Bill Campbell took a sordid turn when the government called Marion Brooks, who had been a television anchor in Atlanta in the late 1990s, to discuss Campbell's lavish spending during their secret four-year affair. The government is trying to establish that Campbell took large sums of cash from businesses with city contracts, and Brooks testified about his cash expenditures for various trips they made during the affair. Prosecutors showed photographs of the two from a trip to Paris that the government alleges was paid for in part by a contractor, United Water, that had a $21 million-a-year contract with the city to privatize its water system. In response to the defense contention that Campbell had the cash from his gambling winnings, Brooks testified that Campbell told her he mostly broke even. According to the Atlanta Journal-Constitution (here), the defense did not dispute the fact of the affair and conducted only a limited cross-examination of Brooks. The testimony certainly enlivened what the newspaper described as the "tedious" pace of a trial in which the government is essentially taking a net worth approach usually seen in tax evasion cases to establish its corruption allegations by showing that Campbell spent far more than he is supposed to have made from his job as Mayor. (ph)
February 8, 2006
Potential Hiding of Losses At Omnicom
The Wall Street Journal reports (here) that advertising firm Omnicom Group Inc. transferred internet assets to a "special purpose entity" in 2001 that may have been almost worthless at the time, but did not account for the decline in value by recognizing a loss. The documents came to light in connection with discovery in a shareholder suit, and show that assets in 16 entities were transferred to Seneca Investments, which may have allowed Omnicom to avoid recognizing a loss of almost $90 million that year. The company's lawyers assert that the transaction was approved by Arthur Andersen and KPMG, but the specter of transfers to an SPE brings chills to the spines of accountants and others who recall the downfall of Enron triggered by transactions with similar entities that occurred later in 2001. The SEC has initiated an informal investigation of Omnicom's accounting, but there is no indication at this time that the matter has progressed to a formal investigation or that any further action will be taken.
One interesting aspect of the case is that the documents were included in a filing by counsel for the shareholders as part of a motion to obtain communications between the company and its lawyers under the crime-fraud exception to the attorney-client privilege. The plaintiffs assert that the transactions were fraudulent, and under the applicable analysis the lawyers must have provided assistance in the transaction that was a crime or fraud, although the lawyers need not have known that the transaction was fraudulent. A judicial ruling in favor of the plaintiffs could well spark further interest from the SEC. (ph)
Is Boies Being Investigated?
A Wall Street Journal article (here) with the headline "Judge Orders Probe Into Boies Firm" discusses the Adelphia Communications bankruptcy in which David Boies was accused of failing to disclose a conflict of interest in connection with recommending two document-management companies to assist Adelphia in the case. The two companies, Amici LLC and Echelon Group LLC, had financial ties to Boies' children and a former partner who served time for fraud, none of which was disclosed to Adelphia or the court. The creditor's committee and the U.S. Trustee supported the appointment of an examiner to review the conduct of the firm, Boies, Schiller & Flexner, which has sought approval of almost $30 million in fees, but U.S. Bankruptcy Judge Robert Gerber denied the request. According to a Law.Com story (here), the judge will allow the parties an opportunity to investigate the matter further and then to present their findings to the court. Boies has denied engaging in any misconduct, and it is not clear whether the bankruptcy judge's decision can be termed a "probe" into the firm. A sub-headline to the Journal story states that there is an "ethics inquiry," which to me means an investigation by the bar disciplinary authority or even by the court, not permission to a party to continue discovery on a matter. Anyone, including Adelphia or the U.S. Trustee, could file a complaint with the bar that may result in an investigation of Boies, but there is no indication that such a complaint has been lodged at this point. While one could view the judge's decision to let the matter continue as indicating a potential problem for Boies Schiller in having its fees authorized, that is by no means the only, or even most likely, outcome of the bankruptcy case. (ph)
Sex, Drugs, and Corruption
Lonoke, Arkansas, a town of 4,300 east of Little Rock, has a bit of a leadership crisis this week. On Feb. 6, the mayor, the police chief and his wife, and two bail bondsmen were arrested for alleged conduct that might seem too outlandish for a Desperate Housewives episode. The mayor is accused of having used state prisoners to do work at his home, while the police chief is charged with conspiring with the bondsmen to manufacture methamphetamine. Meanwhile, the chief and his wife are charged with stealing antique jewelry from a home and pawning it. As if that's not sordid enough, the chief's wife is also accused of taking two inmates from the jail to have sex with them in various locations, leading to escape charges. All are well-known in the town, and no doubt the local chatter has been in overdrive. The town's website (here) states that the police force has twelve officers, and it is served by a 20-member volunteer fire department. An AP story (here) discusses the charges. (ph)
Tocchet on the Docket
Former NHL player and current Phoenix Coyotes assistant coach Rick Tocchet (career stats here) will be arraigned in Burlington County, New Jersey, on charges that he financed a large-scale gambling operation. Two other defendants, including a New Jersey state trooper, will also be arraigned in the next week to ten days, after which a grand jury will consider evidence and determine whether to move forward with charges. The state investigation, dubbed "Operation Slap Shot" by someone with an affinity for the Paul Newman movie, is also looking into potential ties between the gambling and organized crime families in the Philadelphia-South Jersey area.
Tocchet played in the NHL for six teams (including the Flyers twice) during his 18-year career, and is among the league's best known players. The gambling involved over 1,000 wagers of over $1.7 million, so it is much more than an NCAA or Super Bowl pool. In addition to Tocchet, others whose names have come up in the investigation include Wayne Gretzky's wife, actress Janet Jones (see Wall Street Journal Law Blog here on favorite Jones movies), and active NHL players who placed bets through Tocchet's operation.
An ESPN.Com story (here) notes that while the gambling appears to have involved only sports other than hockey, investigators are still looking at whether at least some wagers were placed on NHL games. In larger-scale gambling, it would not be surprising that those with an intimate knowledge of a sport would be tempted to place bets to take advantage of their insider knowledge and ability to judge the teams. The Pete Rose case involving gambling on major league baseball began in much the same way, with denials of any betting on baseball until, to no one's great surprise, Rose finally admitted to betting on baseball games, although he claims never against his own team. With possible organized crime involvement in the gambling, one would not be taken aback to learn that NHL games were the subject of bets. The issue then becomes whether information was passed by players, even innocently, to bettors, or worse, whether the outcome of any games were affected. For the NHL, the case promises to provide the type of negative publicity that no sports league wants. (ph -- Sorry, I couldn't resist the title)
February 7, 2006
Abramoff and Rove
Rove, still uncertain of his status in the Plame investigation, now seems to be having media issues related to his association with Jack Abramoff. The Wall Street Journal reports here that a conservative group is upset that the white house will not release information on its association with Jack Abramoff. And the article talks about more. Do prosecutors want former White House aide David Safavian to talk? (according to the WSJ his attorney seems to think so) And if he does, who will be next?
Governor Ryan's Trial
While the Enron trial has been moving quickly, in the north, Governor Ryan's case is moving slowly. The latest, as reported by the Chicago Tribune here is the admission of a log that displays a long list of gifts received by Ryan. So it looks like he received some beanie babies as gifts. Were they Maple, or Izzy, or what? Which beanie babies could make a difference. Then again, will the defense be arguing that getting things like beanie babies and teashirts really are just a perk of the job? For prior posts on the Ryan trial, see here, here, here, here, and here.
The Private (and now Public) Eye Case
Everyone is talking about it. Yes, as AP reports here Anthony Pellicano, the private eye for many Hollywood stars, after finally finishing a firearms related sentence was arrested on federal wiretap charges. Check out the Wall Street Journal Blog here and here. And now, to add to all the commotion, we see that Attorney Bertram Fields may also have something to say about this case.
Defense counsel started ripping at the first prosecution witness Mark Koenig (see Hoston Chronicle here). Some of the reported questions were excellent closed questions, questions that only elicit a "yes" or "no" response. But other reported questions might have been a bit too open-ended - questions that permit the witness to wander and cause the questioner to lose control of the witness. Many criminal defense lawyers use the Terry McCarthy approach to Cross-Examination - short, specific questions, even sometimes a one word question. But the defense attorneys have a lot to cover here and this takes time. With a judge that wants to move the trial quickly, it may be difficult to break down every point into too many questions.
Washington Post Audio here
More Proof That We Are Reactive In Creating New Laws
Many of the white collar laws that are created come from reactions to criminal activity. Clearly Sarbanes-Oxley, as well as increased financial institution fraud fines, demonstrate this reaction. This is not new, as one can even go back as far as the 1872 mail fraud statute that was created as part of a revision of the Postal Act, and was initially targeted to prohibit lottery schemes occurring at this period of time.
Some individuals, perhaps, would not have committed the crimes if the statutes had been in place originally. This usually doesn't help them much in making a defense as the prosecution usually has ample tools to prosecute the conduct as there are an array of extremely broad statutes like mail and wire fraud. But it is interesting to see new legislation created each time new white collar conduct becomes a "hit" in the media.
The NYTimes reports here on new lobbying laws in Tennessee. And as noted in their article, it is in "response to an undercover F.B.I. bribery investigation that ensnared four lawmakers."
What I always wonder is whether the crimes would have occurred if the legislation were already in place. Perhaps if we approached criminality proactively, as opposed to reactively, we might reduce criminal conduct further.
Drugs, But Not Drugs
The health law white collar area has been booming these last few years, as many prosecutions have related to fraud in this industry. Just as one thinks that the government is moving in a different direction, more cases pop up. Sometimes the cases add a new dimension - like the use of the internet. Fraud Update here has links to two recent ones:
1. USA Chuck Rosenberg, Southern District of Texas reports a conviction here for:
"counterfeit labeling and false trademarks on pharmaceutical drugs. United States District Judge Ewing Werlein found [the accused] guilty after pleading guilty on Friday, February 3, 2006, to the federal charge. . . . The investigation leading to the August 2005 indictment of [the accused] began in the fall of 2004 when investigators of Eli Lilly and Company became aware that [the accused] was using the website address of bestonlineviagra.com to advertise and sell prescription drugs, including Cialis, at prices that led them to believe the drugs were either stolen or counterfeit."
2. R. Alexander Acosta, USA for the Southern District of Floirda reports an 84 count indictment that involves an alleged "multimillion dollar health care fraud scheme." (here)
" As set forth in the Indictment, between June 2001 and September 2005, the defendants conspired to commit health care fraud by submitting fraudulent prescription drug claims to more than one hundred private health insurance companies . . . for prescription medications that were either not prescribed, not requested, and/or not delivered to the patients named in the claims."
As seen in so many recent white collar cases, the government tacked on money laundering charges in this indictment.
White Collar Crime Conferences
There are several upcoming conferences on white collar crime.
1. NACDL - Philadelphia (here)
2. Boston Bar - Boston (here)
3. ABA - San Francisco (here)
4. Center for the Study of Economic Crime - Miami (here)
February 6, 2006
Will AIG Settle This Week
The New York Times is reporting here the possibility of a forthcoming settlement between regulators and AIG -- the number 1.6 billion. (The Wall Street Journal says here - "of at least $1.5 billion"). Whether it is -1.5 or 1.6 billion, it is a number that the Wall Street Journal is calling the "largest finance-industry regulatory settlement with a single company in U.S. history."
What would such a settlement indicate -
1. That wrongdoing in a company no longer should be considered a "cost of doing business," as the ramifications of the wrongdoing are far graver than can be anticipated.
2. That companies need to be attuned not only to federal criminal penalties and investigations, but also state and regulatory bodies.
3.That juggling all the entities that might be waiting to jump down the throat of a company can be difficult to manuever and a new type of corporate counsel needs to be cognizant of this.
4. Having an "effective" corporate compliance program REALLY is necessary.
The story of AIG's troubles has been a long one. And with individual prosecutions on the horizon, it is far from over. But one is likely to find the federal/state approach as a key discussion in the business classes that use AIG as a case sudy.
People ask us how does one pull up all the prior posts on AIG. It's really very simple. Below this post is the date and next to it is the topic AIG. Just click the AIG and all the prior posts can be seen. They will be listed by date with the most recent ones first.
February 5, 2006
What do Enron, Jack Abramoff, and Ralph Reed Have in Common?
The Atlanta Journal Constitution has a political insider piece here that talks about the connection between Abramoff, Enron, and Ralph Reed, a Republican candidate for lieutenant governor in Georgia. And it looks like the paper has some possible direct evidence - - an email (emails have become very problematic for many recently - just ask Frank Quattrone.) And this one sounds like it may raise a few issues, especially for the individuals mentioned in the email.
Grand Jury Secrecy - Libby Case
The Washington Post reports here on the DC Circuit Court of Appeal's Order releasing previously undisclosed grand jury material related to the Libby case. The actual court Order releasing the information is here. The court states that the release of part of this previously undisclosed document came about because:
"Now that the grand jury has returned an indictment against I. Lewis Libby for perjury, obstruction of justice, and making false statements to federal investigators, amicus curiae Dow Jones & Company moves to unseal the eight pages—or, failing that, portions thereof relating to matters that are now public."
The rationale for the release of some of this information now is explained as follows by the court:
"to prevent the unauthorized disclosure of a matter occurring before a grand jury.' Fed. R. Crim. P. 6(e)(6) (emphasis added); cf. Dow Jones, 142 F.3d at 502 (explaining that identical language in Rule 6(e)(5) requires courts to open judicial hearings ancillary to grand jury affairs to the public whenever consistent with grand jury secrecy). Our case law, moreover, reflects the common-sense proposition that secrecy is no longer 'necessary' when the contents of grand jury matters have become public."Grand jury secrecy is not unyielding, however. Judicial materials describing grand jury information must remain secret only 'to the extent and as long as necessary
But not everything will be released. As stated by the court:
"That the special counsel’s investigation is ongoing only heightens the need for maintaining grand jury secrecy, for the special counsel is entitled to conduct his investigation out of the public eye and with the full cooperation of witnesses who have no fear their role in the investigation will lightly be disclosed."
The previously redacted Order that now has portions disclosed can be found on the Wall Street Journal website here. But the more interesting question is what is on pages 34-37 of Judge Tatel's concurring opinion. It starts by saying "Regarding Cooper" and is then redacted. It sounds like Special Prosecutor Fitzgerald is still working on this case.