Monday, February 19, 2007
An opinion piece in the Washington Post by Victoria Toensing, a former deputy assistant attorney general in the Reagan administration and now a Washington lawyer, provides a long list of "possible" indictments resulting from the circumstances surrounding the Libby trial. It includes everyone from the prosecutor J. Patrick Fitzgerald, the CIA, to the DOJ. It is the kind of article that makes one wonder whether we really do need to reexamine the wide breadth of prosecutorial power given individuals who have the ability to ruin people's lives, put people in jail, and also decide who will walk free.
In yet another example of the wide disparity between those who went to trial and those who cooperated and plead guilty in Enron related cases, CNN Money reports that "two former energy traders" received sentences of two years probation and a fine.
Is it too risky for an accused to go to trial in white collar cases, especially fraud related cases that include a possible significant "fraud loss" if a conviction results? Are defendants being deprived of their constitutional right to a jury trial when there is an enormous disparity between going to trial and being convicted and pleading and cooperating?
A press release of the DOJ reports that "a former Department of Defense (DOD) employee, pleaded guilty to accepting illegal gratuities while serving as an operational support planner in the Future Operations Division of the U.S. Army Headquarters, Special Operations Command–Europe (HQSOCEUR)." This case comes out of the recent National Procurement Fraud Initiative. The case appears to involve $24,000 and a job offer by an individual who "served in the U.S. Air Force until January 2005, when he left active duty and began work as a DOD civilian employee." One question is whether this plea and others will be used to secure indictments of individuals who are in higher roles. Another question is whether there were adequate compliance programs in effect to avoid the cases being examined by the National Procurement Fraud Initiative.
Sunday, February 18, 2007
According to CCN Money, the government has decided not to appeal the decision in U.S. v. Brown. This Enron-related case involved executives at Merrill Lynch. The Fifth Circuit Court of Appeals reversal of the conspiracy and wire fraud counts against the defendants was based on the use of the "honest services theory." (see here).
Although the government does not maintain a conviction here, it does leave for future use, the honest-services theory of prosecution. Honest services cases have been a source of concern since the adoption of the statute, 18 U.S.C. Sec. 1346. In the Rybicki case, the dissenters called for Congress to "repair this statute."
Arkansas Online (subscription required) is reporting that Interim USA Griffin has decided not have his name go forward for the permanent position if he has to go through the confirmation process. Attorney General Alberto Gonzalez had appointed Tim Griffin in one of the recent surprise changes in U.S. Attorneys. Attorney John Wesley Hall questioned this appointment in legal documents (see here) Griffin appears to be concerned about the process, if he has to go through a confirmation hearing. Is this not the same legislative process that creates the laws he will be enforcing?
(esp) (w/ a hat tip to Jack King)
The case of I. "Scooter" Libby is likely to head to the jury this coming week with closing arguments set for Tuesday. The Washington Post has an interesting piece titled, "Almost Everyone Lies, Often Seeing it as a Kindness." The article speaks with Robert Feldman, "a social psychologist at the University of Massachusetts, who studies lying in everyday life." I guess I keep wondering what Martha Stewart would say about all of this.
Talkleft here has Libby's Revised Proposed Theory of the Defense Instruction. And the government has filed an objection to this Instruction and proposed its own final jury instructions. (see here from TalkLeft).
Instructions can be important in a case. Most juries try to follow the law and the instructions provide them with the applicable law to follow. Many instructions are difficult for a jury to follow, as the legal language can be problematic, especially for those without a legal background. Instructions can also be crucial if there is a conviction, as this is an avenue that can be used to present issues for review in the appellate court. For example, the Arthur Andersen case was reversed premised on an instruction given in the trial court.
Saturday, February 17, 2007
Law.com reports on an bar investigation being conducted against a former Assistant United States Attorney. The essence of the bar complaint relates to alleged "misconduct in a witness payment scandal." But what really raises concerns here is that " [t]he Justice Department completed its investigation of [the former AUSA] in February 1998, but did not refer its findings to the D.C. Bar Counsel until October 2002. " One has to wonder what happened here and why DOJ failed to apprise the disciplinary committee during this period of time. Did they find no misconduct, or did they fail to report misconduct that they found?
The U.S. Attorney's Office in Los Angeles issued a press release that reports:
"An attorney who represented a criminal defendant in the Bay Area Laboratory Cooperative steroid prosecution pleaded guilty [Friday] afternoon to four federal charges, admitting that he leaked confidential grand jury transcripts of testimony from Major League Baseball players to the San Francisco Chronicle and sought to obstruct justice."
Further reported is:
"The leak of the grand jury transcripts – specifically, the testimony of Tim Montgomery, Jason Giambi, Barry Bonds and Gary Sheffield – occurred during the prosecution of four defendants linked to the Bay Area Laboratory Cooperative. During this criminal case, Ellerman represented defendant James Valente, who was the vice president of BALCO."
The DOJ Press Release can be found here - Download balco_ellerman_pleads.pdf
Friday, February 16, 2007
Newly-elected Nevada Governor Jim Gibbons is being investigated by the FBI for possible bribery and unlawful gratuities received from a friend and campaign contributor whose company received substantial military contracts. Warren Trepp allegedly provided the gifts to Gibbons while he was in the House of Representatives, including a Caribbean cruise and private jet flight that was not reported on the required Congressional disclosure statements. An e-mail exchange between Trepp and his wife has surfaced in which she purportedly wrote "[p]lease don’t forget to bring the money you promised Jim and Dawn [Gibbons]" a few days before the cruise. Trepp responded, “Don’t you ever send this kind of message to me! Erase this message from your computer right now!” Unfortunately, the "Delete" key does not get rid of this kind of evidence, which may go a long way in the government's investigation. Governor Gibbons has denied any impropriety in his relationship with Trepp. An AP story (here) discusses the FBI's confirmation of the existence of the investigation. (ph)
The general counsel of another corporation pleaded guilty to charges related to options backdating at his company. Former Monster Worldwide GC Myron F. Olesnyckyj entered a guilty plea to one count of conspiracy and one count of securities fraud in the first options-timing case brought by the U.S. Attorney's Office for the Southern District of New York, coming fast on the heels of a prosecution by Manhattan DA Robert Morgenthau. William Sorin from Comverse Technology pleaded guilty to similar charges in the Eastern District of New York. According to a government press release (here):
OLESNYCKYJ and his co-conspirators concealed their options backdating practices from Monster’s outside auditors, BDO Siedman, LLP ("BDO"), primarily by failing to maintain a complete set of records regarding the company’s option grants and providing BDO with documents falsely identifying the dates on which options were granted by the Compensation Committee.
In substantially the foregoing manner, the coconspirators backdated every one of Monster’s broad-based annual options grants to its employees from 1997 to 2002. During the same period, the co-conspirators also backdated a number of "one-off"grants –- i.e., grants to new employees, or to current employees for the purposes of retention. In fact, new hires at Monster were promised that they would be granted options at the lowest price within the 30 days following their start date. To conceal this practice from Monster’s auditors, OLESNYCKYJ instructed an employee in Monster’s Human Resources department, by email, that "No written document should ever state lowest price over next 30 days! The auditor[s] will view that as backdating options and we’ll have a charge to earnings ..." OLESNYCKYJ subsequently prepared model language to be used in all of Monster’s letters to new hires, which made no reference to granting options at low prices.
None of Monster’s backdated, in-the-money options grants were properly accounted for as a compensation expense in Monster’s public filings with the SEC. As a result, Monster’s publicly-filed financial statements for the years 1997 to 2005 understated the company’s expenses, and inflated its earnings by a total of approximately $339,000,000. In 1999 and 2000, years in which Monster reported itself as a profitable company, the company actually lost nearly $40 million.
Once again, an e-mail provides key information. Monster fired Olesnyckyj in 2006 during its internal investigation, and Andrew McKelvey, the former CEO, resigned from the board when he refused to meet with the internal investigators for an interview. The reference to "coconspirators" likely means that Olesnyckyj will be providing information about other executives, so charges against additional defendants are likely to follow. The SEC also filed civil securities fraud charges against Olesnyckyj (complaint here), a case that will most likely settle in the near future. (ph)
New York attorney Anthony Bellettieri entered a guilty plea to mail and bank fraud charges for defrauding clients of his real estate law firm located in White Plains. According to a press release (here) issued by the U.S. Attorney's Office for the Southern District of New York, Bellettieri took the money from his firm's bank account and then engaged in an elaborate check-kiting scheme to hide the fraud. He used "the stolen money, in part, to purchase real estate interests in commercial and vacation destinations, make home improvements (including the construction of a kitchen extension and a pool), pay credit card debts for himself and others, fund [law firm] salaries that the business . . . could not sustain from its earnings, pay for a family wedding, and purchase and lease automobiles for himself and others." Bellettieri also pleaded guilty to defrauding a client by stealing $2 million and providing false mortgage documents to show the funds were secured. As part of the guilty plea, he was ordered to pay $22 million in restitution, although it is often the case that the victims will receive only a small portion of their losses because much of the money will never be recovered. (ph)
Thursday, February 15, 2007
The mystery about who leaked the grand jury transcript of erstwhile San Francisco Giants slugger Barry Bonds has been solved, much to the relief of the two reporters who published stories based on the testimony. Sacramento attorney Troy Ellerman, who at one time represented Balco founder Victor Conte in the steroids prosecution, agreed to plead guilty to permitting San Francisco Chronicle reporters Lance Williams and Mark Fainaru-Wada view the transcripts that had been produced as part of the pre-trial discovery in the case. Williams and Fainaru-Wada were held in contempt for refusing to testify about the identity of their source of the transcripts that is part of a larger investigation of Bonds for perjury. Their case was before the Ninth Circuit, and given how the appellate courts have ruled on such media confidentiality claims lately, the two reporters did not have a strong chance of avoiding jail. As it is, they are now off the hook, and only Bonds' former trainer, Greg Anderson, remains incarcerated for civil contempt for refusing to testify about steroid use by the baseball star. At some point, a decision will have to be made about whether to move forward with a prosecution of Bonds or drop the case. A story on ESPN.com (here) discusses the latest twist in the Bond perjury saga. (ph)
The Office of Legislative Services (OLS) for the New Jersey State Legislature is fighting a federal grand jury subpoena seeking records related to possible conflicts of interest in the state budgeting process, according to an article in the Newark Star-Ledger (here). The investigation grows out of an earlier investigation of Medicaid and Medicare fraud at the University of Medicine and Dentistry of New Jersey (UMDNJ) that was settled with a substantial penalty and appointment of a monitor. A report by the monitor identified a possible no-show job for a state Senator at UMDNJ, and federal prosecutors are now looking at a wider range of possible corruption involving the award of discretionary grants by legislators. OLS, which is a non-partisan arm of the legislature that received the subpoena, asserts that the records sought, including e-mails and internal memos, are confidential, and seeks to quash the subpoena.
The problem the state legislature faces is that federal grand juries are entitled -- in a time-worn phrase sure to appear in the district court's decision -- "to every man's evidence." A state confidentiality statute is unlikely to win out over the authority of a federal grand jury to compel the production of records, and state legislative privileges are not recognized under the federal Speech or Debate Clause, so that road is unavailable to prevent enforcement of the subpoena. Public corruption investigations of state and local officials always raise sensitive issues of federal authority, and the fact that a Republican U.S. Attorney leads the office investigating the actions of Democratic state officials makes it even more complicated. But on the narrow issue of the enforceability of a federal grand jury subpoena, the smart money is usually on the federal government getting what it demands. (ph)
Silicon Valley software company BEA Systems, Inc., announced that it is taking an accounting charge of $340 to $390 million for a number of options grants that involved backdating and other questionable employment practices to ensure recipients received favorable strike prices. According to a press release (here), the timing issues involved senior management at the company. Two major findings in the internal investigation conducted by New York law firm Simpson Thacher are:
- Most options granted between June 1997 and June 2006 were approved via Unanimous Written Consents (“UWCs”). The Company used the effective date on the UWC as the grant date, and as per the Company’s stock option plans used the closing price of the trading day immediately prior to the grant date as the exercise price for the options. During that time period, the majority of grants were not final as of the effective date stated on the face of the UWC. As a result, the grant date recorded by the Company was not the appropriate accounting measurement date, resulting in compensation expense that, in most instances, was not recorded.
- With respect to a number of grants, most made prior to 2003 when certain improvements were made to the stock option granting process, some members of senior management appear to have chosen grant dates with the benefit of hindsight and submitted those grants for approval through UWCs to be executed by the Chief Executive Officer. The UWC approving such grants reflects the chosen date of the grant rather than the date of the approval. As a result, the grant date recorded by the Company was not the appropriate accounting measurement date, resulting in compensation expense that, in most instances, was not recorded.
Unlike other companies involved in options backdating of this variety, the CEO did not lose his job, nor apparently will any other senior officers, although some will be demoted and all will have their options repriced and pay back any improper gains from an exercise. BEA Systems' current general counsel will step down from that position, and the office "will be strengthened by providing that the position will be filled with a new executive officer who reports directly to the CEO and who also has a reporting responsibility to the Board’s Nominating and Governance Committee." It is always a welcome development when the GC's office is not treated like an ugly step-child to be tolerated when necessary but otherwise avoided at all costs. The company's former CFO, who was promoted to being an executive vice president in 2005, will give up that title and become a regular vice president, another apparent demotion. Whether the SEC, which is conducting an informal investigation, will push ahead with a case remains to be seen. (ph)
The big finale of the trial of I. Lewis Libby was something of a dud, with neither Libby nor Vice-President Cheney called to testify. Indeed, the last day involved no new witnesses, and Special Counsel Patrick FItzgerald did not even put on a rebuttal case, apparently unconcerned about not having the last word in the evidentiary phase of the trial. The end was not without some legal controversy, however, as U.S. District Judge Reggie Walton refused to permit the defense to introduce various items of classified information to butress Libby's claim that his focus in June and July 2003 was on matters of great national importance, and not little ol' Valerie Plame and her husband, Josephy Wilson.
Judge Walton came across, from the sound of the media reports (see CNN.com here), a bit peeved at the defense for claiming before trial that Libby would testify and needed the access to extensive classified information, and then declining to call him to testify but still seeking to introduce the evidence. The requirements for handling such information, under the Classified Information Procedures Act (CIPA), are quite complicated and appear to have occupied a significant amount of the judge's time and energy. By not testifying, Judge Walton determined that the information was irrelevant or inadmissible hearsay because only Libby could provide the context for the information. Judge Walton's position was clear when he said that "[i]f I get reversed on that one, maybe I need to hang up my spurs." The exclusion of evidence that a defendant claims is central to his defense is likely to be a significant issue if there is a conviction.
Professor Doug Berman of the estimable Sentencing Law & Policy blog raises an interesting question (here) about the defense's decision not to call Libby to testify after indicating repeatedly in pre-trial proceedings, particularly the CIPA hearings, that he would testify: did the lawyers intentionally mislead the court? As he notes, if Libby were convicted, one possible enhancement under the now-advisory Federal Sentencing Guidelines is obstruction of justice under Section 3C.1.1. If the defense lawyers misled Judge Walton, it could be a basis for an increased sentence under that provision. I suspect it's unlikely a judge can increase a defendant's sentence for exercising his Fifth Amendment right, but then, defendants are penalized all the time for just going to trial, so an increased sentence for invoking a constitutional right is nothing new.
General Douglas MacArthur once said that "old soldiers never die, they just fade away." The end of the Libby trial certainly has the feel of a proceeding just fading away. Closing arguments are set for Tuesday, February 20, and the case will likely go to the jury shortly thereafter. Then, the really boring part begins -- waiting for a verdict. (ph)
Ryan Brant, the founder and former CEO of Take-Two Interactive Software Inc., which inflicted the "Grand Theft Auto" videogame on the world, entered a guilty plea and settled an SEC action related to options backdating. Brant resigned as CEO of Take-Two in October 2006, as the company's internal investigation of its options practices reached a conclusion, and now admits to having received a large slug of options with favorable strike prices based on after-the-fact selections of the issuance date over a seven-year period. The SEC settlement calls for Brant to pay disgorgement of $4,118,093, prejudgment interest of $1,143,513, and a $1,000,000 civil penalty (see SEC Litigation Release here).
The criminal part of the case involves a new, but familiar, sheriff on the options backdating beat: Manhattan DA Robert Morgenthau. His office is well-known for its involvement in various white collar crime cases, including the recent prosecution of former Tyco CEO Dennis Kozlowski and former CFO Mark Swartz on larceny charges, In this instance, Brant pled guilty to first degree falsification of business records, and will pay an additional $1 million to the City and State of New York. While the offense, a Class E felony, is punishable by up to four year imprisonment, the plea agreement only calls for the fine, a significant benefit for Brant in avoiding jail time. According to a press release (here) issued by Morgenthau's office:
In a seven year period, from 1997 to 2003, BRANT received ten backdated option grants for a total of approximately 2.1 million shares of Take-Two stock, all of which he exercised before resigning from the company in October 2006. For example, Take-Two’s records reflect that, on February 22, 2002, fifteen people received grants of 511,000 stock options, 100,000 of which went to BRANT. On February 22, 2002, Take-Two stock closed at $15.25 per share, the lowest price during the company’s February to April 2002 fiscal quarter. In fact, however, the decision to award many of those options was not made until mid-April 2002, when the stock price was above $20 per share. Take-Two’s business records, including purported Compensation Committee minutes, were falsified after the fact to reflect the earlier grant date.
On the "Where's Waldo" front, it is interesting that the Southern District of New York does not appear to be involved in the case, and has yet to file criminal charges in any of the options-timing cases. If the Manhattan DA has gotten into the game, can the SDNY's prosecutors be too far behind? (ph)
Wednesday, February 14, 2007
I. Lewis Libby made it official in responding to a question by U.S. District Court Judge Reggie Walton that he decided against testifying in his perjury, obstruction, and false statements trial. While once almost a foregone conclusion that Libby would take the stand to offer his memory (or "dedicated but overworked public servant") defense, his lawyers have succeeded in getting at least some information before the jury about how busy he was during the relevant time. John Hannah, Libby's successor as Vice-President Cheney's national security adviser, testified that Libby was very forgetful -- what a surprise -- and that he dealt with a wide variety of pressing issues that could easily distract him. Earlier media witnesses testified that Libby did not tell them about Valerie Plame's status with the CIA, apparently to buttress the claim that he did not speak to anyone about her because he did not know her role (except for the forgotten information from Vice-President Cheney). Another potential witness who will not be called is the Vice-President, who may have done Libby harm regarding the focus on Joseph Wilson's charges against the Adminnistration. While the outlines of Libby's defense have been presented to the jury, an AP report (here) states that Judge Walton will not allow references to whether Libby considered the Niger trip of Wilson, Plame's husband, to be something of importance because only Libby can testify as to what was on his mind, and that won't be happening now.
The decision whether to testify, particularly in a white collar crime case, is always risky, and there is no template to tell a witness or defense counsel which is the better course. The list of cases in which a defendant testified and was convicted (e.g. Bernie Ebbers, Jeffrey Skilling) can be matched by those who did not and were acquitted (e.g. Richard Scrushy). The jury's verdict will be ascribed, at least in part, to this decision, so if there's a conviction the defense lawyer will be wrong either way, while an acquittal will be attributed to the prescience of the decision. (ph)
Perhaps it was inevitable that there would be a movie, and there are reports that leading man Leonardo DiCaprio will star in a movie about the demise of Enron. According to a CNN story (here), the screenplay will be based on Kurt Eichenwald's book "Conspiracy of Fools," and DiCaprio will play a newly-hired employee who exposes the fraud at the company. I suspect the role of Sherron Watkins will be downplayed, and no doubt hints about a conspiracy involving President Bush and major energy companies will have to enliven what is an otherwise mundane story -- it's awfully hard to make the use of an off-shore special purpose entity to transfers assets to avoid the proper accounting treatment of a loan sound the least bit interesting. DiCaprio starred in Titanic, so it will be difficult to resist comparisons to that disaster, and I doubt there will be any scenes on the roof of the Enron tower in Houston. Then again, there are those who claim the government's prosecution of Lay, Skilling, and others was a work of complete fiction anyway, the so-called "criminalization of agency costs" argument, so this story can't be viewed as any more of a fabrication. (ph)
The controversy over the termination of seven U.S. Attorneys that brought to light a largely unnoticed provision of the USA Patriot Act renewal shows no signs of abating (see earlier post here). As a National Law Journal article (here) discusses, the Department of Justice supports the newly-adopted system under which the Attorney General can appoint an interim U.S. Attorney for what appears to be an unlimited period of time, although Justice officials have vowed they will not use this authority to avoid the Senate confirmation process. Bills in the House and Senate have been introduced to return the authority to the local U.S. district court judges, which the prior law allowed but DOJ views as a violation of separation of powers.
The original law, 28 U.S.C. Sec. 546, permitted the Attorney General to appoint an interim U.S. Attorney for up to 120 days, and after that "the district court for such district may appoint a United States attorney to serve until the vacancy is filled. The order of appointment by the court shall be filed with the clerk of the court." The USA Patriot Act renewal deleted that subsection and the law now provides that when there is a vacancy in the position, "A person appointed as United States attorney under this section may serve until the qualification of a United States Attorney for such district appointed by the President under 541of this title." The old 120-day limit on Attorney General appointments is now gone, and theoretically the appointment could last for the term of the administration. A bill introduced in the House, H.R. 580 (here), would revert to the prior provision allowing the District Judges to appoint after the 120-day interim appointment ends. The Senate bill, S. 214 (here), seems to take a more restrictive approach by eliminating the Attorney General's authority to appoint an interim U.S. Attorney. The text of the bill, entitled "Preserving United States Attorney Independence Act of 2007" -- don't you just love these hokey names -- provides:
Section 546 of title 28, United States Code, is amended to read as follows:
`Sec. 546. Vacancies
`The United States district court for a district in which the office of the United States attorney is vacant may appoint a United States attorney to serve until that vacancy is filled. The order of appointment by the court shall be filed with the clerk of the court.'.
There is no provision for the 120-day appointment by the Attorney General, and S. 214 seems to cut the Attorney General out of the process completely. That really could present a separation of powers problem if the District Court judges had the sole authority to appoint an interim U.S. Attorney. While the kinks are likely to be worked out to avoid this outcome, don't be surprised if the President vetoes the bill if Congress seeks to restore the status quo. The lesson for Congress is to pay attention to the bills you pass. (ph)
The former number three official at the Central Intelligence Agency was indicted in San Diego on eleven counts of conspiracy, honest services fraud, conflict of interest, and money laundering. Kyle "Dusty" Foggo is accused of accepting gifts from Brent Wilkes in exchange for steering contracts to Wilkes' Southern California company, ADCS Inc. Foggo was executive director of the CIA until he resigned suddenly in May 2006. Wilkes was charged in a thirty-five count indictment with bribery, conspiracy, honest services fraud, and money laundering involving not only Foggo, but also former San Diego Congressman Randy "Duke" Cunningham, who is serving an 8+ year prison sentence after pleading guilty to corruption charges in 2006. A third defendant was charged with obstruction of justice for lying to a grand jury about Wilkes paying off a $500,000 second mortgage on Cunningham's home. The indictments come at the end of the term of U.S. Attorney Carol Lam, one of the seven federal prosecutors forced from office by the Department of Justice, some for supposed "performance issues" that have not been further identified. She's certainly going out with a bang. A CNN.com story (here) discusses the indictments. (ph)
UPDATE: The two indictments are available below.