Thursday, April 26, 2007

Former Utility Officers Settle SEC Accounting Case

Four former senior executives with South Dakota-based utility NorthWestern Corp. agreed to settle SEC civil charges that they overstated the performance of the company and its telecommunications unit, Expanets, in 2002.  The four defendants are former CEO Merle D. Lewis, former chief operating officer Richard R. Hylland, former CFO Kipp D. Orme,and former controller Kurt D. Whitesel.  According to the SEC Litigation Release (here):

The Commission alleges that, in NorthWestern's quarterly filings, debt and equity offering filings, and other public information, these four defendants were responsible for overstating performance and concealing problems at Expanets and NorthWestern. The Commission alleges that each defendant knew or was reckless in not knowing about the inaccuracy of NorthWestern's public claims that Expanets' new computer system was "operational" or "fully operational." The Commission further alleges that each defendant knew or was reckless in not knowing that Expanets had failed to take appropriate charges for uncollectible accounts receivable and billing adjustments related to the computer system problems, resulting in the overstatement of NorthWestern's income from continuing operations by 90% in the second quarter of 2002 and 109% in the third quarter of 2002. The Commission also alleges that each defendant was responsible for NorthWestern's failure to disclose that a material portion of Expanets' and NorthWestern's income was derived from the reduction of various accounting reserves and through Expanets' receipt of unusual non-compete payments. Finally, the Commission alleges that each defendant was responsible for NorthWestern's failure to disclose significant intercompany cash advances to its subsidiaries during the first half of 2002, which impacted the company's liquidity position and demonstrated the subsidiaries' continuing financial difficulties.

The four defendants settled the case, with Lewis and Hylland paying a $150,000 civil penalty, Orme paying $100,000, and Whitesel paying $25,000.  NorthWestern agreed to be acquired by Babcock & Brown Infrastructure Ltd. in April 2006. (ph)

April 26, 2007 in Civil Enforcement, Securities | Permalink | Comments (0) | TrackBack (0)

Wednesday, April 25, 2007

The Senate Judiciary Committee Calls Out Gonzales

If Attorney General Alberto Gonzales thought his testimony before the Senate Judiciary Committee went well, a quick reading of a letter from Chairman Patrick Leahy and Ranking Member Arlen Specter will disabuse him of that notion.  The letter requests -- perhaps even demands -- a response within a week that clarifies the many instances in which the Attorney General professed ignorance or a lack of recall about the process leading to the firing of eight U.S. Attorneys in 2006.  The letter (here) puts things quite bluntly:

You spent weeks preparing for the April 19th hearing.  Yet during your testimony, in response to questions from Senators on both sides of the aisle, you often responded that you could not recall.  By some counts you failed to answer more than 100 questions, by other counts more than 70, but the most conservative count had you failing to provide answers well over 60 times.  As a result, the Committee’s efforts to learn the truth of why and how these dismissals took place, and the role you and other Department and White House officials had in them, has been hampered.

The questions asked by Senators should not have been a surprise.  You were alerted in letters to you well in advance of last Thursday’s hearing.  By letter sent April 4, you were asked to include in your written testimony a “full and complete account of the development of the plan to replace Untied States Attorneys, and all the specifics of your role in connection with that matter.”  That account was not included in your written testimony nor in your answers to questions at the hearing.  You were also alerted in advance of the hearing, by a letter sent on April 13, that you would be asked about information derived from the staff interviews of your senior aides.  You were, nevertheless, unprepared to answer those questions.   

While the Attorney General's role in the firings had slid to the third page of the major newspapers (see earlier post here), I suspect it may move back to the front page soon. (ph)

April 25, 2007 in Investigations, Prosecutors | Permalink | Comments (0) | TrackBack (0)

An Odd Twist in the Apple Options Timing Case

The SEC's filing against two former Apple executives related to options backdating had all the hallmarks of a typical civil enforcement action, with one defendant, former CFO Fred Anderson, settling the matter and another, former general counsel Nancy Heinen, stating through her lawyers that she will fight.  Anderson's settlement came with the usual caveat that he neither admitted nor denied liability, and in most such instances the defendant takes the one-day news hit and moves on.  In an interesting development, however, Anderson's attorney, Jerome Roth of Munger Tolles, released a statement regarding his client's roll in the backdating that seems to take a shot at CEO Steve Jobs' role in the transactions.  Jobs was not charged by the SEC, and appears at this point to have avoided any enforcement action even though the company disclosed his involvement in the selection of the dates for pricing the options grants.  The press release (available here) states:

Fred [Anderson] was told by Steve Jobs in late January 2001 that Mr. Jobs had the agreement of the Board of Directors for the Executive Team grant on January 2, 2001. At the time Mr. Jobs provided Fred this assurance, Fred cautioned Mr. Jobs that the Executive Team grant would have to be priced based on the date of the actual Board agreement or there could be an accounting charge.  He further advised Mr. Jobs that the Board would have to confirm its prior approval in a legally satisfactory method. He was told by Mr. Jobs that the Board had given its prior approval and the Board would verify it. Fred relied on these statements by Mr. Jobs and from them concluded the grant was being properly handled.

It's unclear what reason Anderson has for making these statements, at least if he wants to avoid having his role in the backdating dragged through the news even further.  The SEC is concerned about post-settlement statements that call into question the defendant's role in the underlying conduct, although Anderson has not done that directly.  Instead, the statement deflects attention toward Jobs as a way to show that Anderson's culpability is perhaps not quite as significant, which could draw a rebuke from the SEC.

Whether Anderson's statement is enough to lead to civil -- or even criminal -- charges against Jobs is questionable.  I have to believe the SEC knew Anderson's position on Jobs' involvement in the backdating, and chose not to go forward with a case against one of an icon CEO of the high tech industry, perhaps because there was no documentary evidence to back up the claims.  Filing civil fraud charges against Jobs would require the Commission to have a very strong case because the effect on the company, and indeed the industry, would be so significant that the government could not take a chance on a weaker case.  For those who remember the bank crisis of the 1980s, it could be an example of the "too big to fail" approach: you can't charge Steve Jobs with fraud because of the devastating consequences on shareholders and employees if he were brought down.  While no one is above the law, some may be slightly elevated.  (ph)

April 25, 2007 in Civil Enforcement, Securities, Settlement | Permalink | Comments (0) | TrackBack (0)

Gonzales Stays on Page Three

The Gonzales Matter instigated by the "firings" of Eight U.S. Attorneys continues to occupy the news. Although it has moved from page one to page two, and most recently to page three, it is not leaving the news arena.  The latest in the Washington Post is Republican Senators expressing discontent with the Attorney General, although not calling directly for his resignation.


April 25, 2007 in Prosecutors | Permalink | Comments (0) | TrackBack (0)

More Settlements in Student Loan Investigation

New York Attorney General Andrew Cuomo announced (press release here) additional settlements with schools as part of the wide-ranging investigation of ties between lenders and student loan offices.  The settlement involved Washington University in St. Louis and two for-profit schools, DeVry University and Career Education Corporation, which runs secondary schools in New York and is based in Illinois.  The case involves the first settlement by multiple state AG offices, with Missouri and Illinois joining with New York in entering the agreements.  Although Wash U. entered into the settlement, the school did not receive any money from a revenue-sharing arrangement with a lender. (ph)

April 25, 2007 in Civil Enforcement, Investigations, Settlement | Permalink | Comments (0) | TrackBack (1)

Tuesday, April 24, 2007

Abramoff Related: FBI Contacting the Press for Info

Just when you think the Jack Abramoff matter is over, the newspaper reports something new.  The Orlando Sentinel reports that the DOJ has asked for more information of fellow Scotland golfer, the former speaker of the Florida  House,  Rep. Tom Feeney.  But the more interesting aspect of this article relates to a telephone call received by an Orlando Sentinel reporter.  The telephone call from an FBI agent sought information from the newspaper reporter, and the editor of the paper is saying that they didn't have "a firm understanding of what the FBI is looking for."  If one calls the press and asks for information on a matter that would be press worthy, it seems likely that the press will follow the lead.  One has to wonder if this article in the Orlando Sentinel would have been written, at least at this time, if the telephone call had not been made.  And why was a call also made to the St Pete Times?


April 24, 2007 in News | Permalink | Comments (0) | TrackBack (0)

Abramoff Related: Zacheres Pleads

A DOJ Press Release reports that "[a] former high-level staffer of the U.S. House of Representatives Transportation & Infrastructure Committee has pleaded guilty to a charge of conspiracy to commit honest services wire fraud."  This plea provides another individual who will provide cooperation in matters related to the investigation resulting from former lobbyist Jack Abramoff's cooperation with the government.


April 24, 2007 in Fraud | Permalink | Comments (0) | TrackBack (0)

Apple's Former CFO Settles With SEC

According to the Wall Street Jrl here, Apple's Former CFO settled civil matters with the SEC.



UPDATE (4/24):  The SEC filed its civil case against Apple's former CFO, Fred D. Anderson, and former general counsel, Nancy R. Heinen, for their role in backdating two options grants in 2001.  Anderson settled the case without admitting or denying liability, and will pay $3.5 million in disgorgement and a civil penalty.  The settlement does not include a director/officer bar, perhaps largely because Anderson's role in the backdating involved his failure to prevent the creation of documents allegedly falsifying the date of board meetings authorizing the grants.  Heinen did not settle the matter, and she is accused in the complaint (here) of ordering the creation in one instance of fictitious board minutes and then signing them.  According to the SEC Litigation Release (here):

The Commission's complaint also alleges improprieties in connection with a December 2001 grant of 7.5 million options to CEO Steve Jobs. Although the options were in-the-money at that time, Heinen — as with the Executive Team grant — caused Apple to backdate the grant to October 19, 2001, when Apple's share price was lower. As a result, the Commission alleges that Heinen caused Apple to improperly fail to record $20.3 million in compensation expense associated with the in-the-money options grant. The Commission further alleges that Heinen then signed fictitious Board minutes stating that the Board had approved the grant to Jobs on October 19 at a "Special Meeting of the Board of Directors" — a meeting that, in fact, never occurred.

Apple CEO Steve Jobs has avoided any entanglement with the SEC to this point, even though he had some awareness of the backdating, according to company filings in late 2006.  The U.S. Attorney's Office for the Northern District of California has also been investigating the Apple backdating, and there is no word yet on whether any criminal charges will be filed. (ph)

April 24, 2007 in Securities | Permalink | Comments (0) | TrackBack (0)

Monday, April 23, 2007

Gonzales Moves to Page 3

The controversy regarding the "firing" of the U.S. Attorneys, and the role played by Attorney General Alberto Gonzales remains in the news. The Washington Post, for example, reports that President Bush continues to support the Attorney General. This same article, however, spends time discussing comments by Senate members on the benefits of replacing Gonzales.   

Initially this entire matter was a front page story.  It then moved to page two.  Now we are finding this article on page three of the Washington Post. But this less visible placement may be a function of the competing news in recent days.


April 23, 2007 in Prosecutors | Permalink | Comments (0) | TrackBack (0)

Scrushy Settles SEC Matter for 81M

The Securities Exchange Commission issued a release today stating that an order had been entered that "permanently bars Scrushy from serving as an officer or director of a public company, permanently enjoins Scrushy from committing future violations of the antifraud and other provisions of the federal securities laws, and requires Scrushy to pay $81 million in disgorgement and civil penalties." The Wall Street Jrl provides some details here.

But Scrushy, former CEO of HealthSouth, was also in the news about his recent travels and possible future ones. reports that Scrushy has to wear a electronic monitor on his ankle. The article also discusses some disputes over his travel restrictions.


April 23, 2007 in HealthSouth | Permalink | Comments (0) | TrackBack (0)

Sunday, April 22, 2007

Gonzales Still a Top News Story

With more pressing news, and with his testimony over, one would expect that Gonzales would no longer be a press item.  But that is hardly the case - although he does appear to have moved from page one to page two of the Washington Post.  The Wash Post reports here that Senator Arlen Specter thinks Gonzales hurts the DOJ, but the paper also says that Specter isn't "directly" calling for him to resign. The New York Times story is here. So....


April 22, 2007 in Prosecutions | Permalink | Comments (0) | TrackBack (0)

Nelnet Pays and Plays

Nelnet, a student loan provider, issued a press release stating that "[t]hrough a voluntary letter of agreement with Nebraska Attorney General Jon Bruning, Nelnet pledges to adopt the Nelnet Student Loan Code of Conduct, post a copy of a review of the company’s business practices on its Web site, and commit $1 million to help educate students and families on how to plan and pay for their education." (See also Wall Street Jrl here)  The Code of Conduct, which may likely become a model for the rest of the industry, has ten points.  The headings of each of these points are:

I. Prohibition of Certain Remuneration to Institutions of Higher Education / Revenue Sharing Prohibition

II. Prohibition of Certain Remuneration to Higher Education Employees / Gift and Trip Prohibition

III. Limitations on Lender Advisory Boards / Advisory Board Compensation Rules

IV. Limitations on Staffing of Financial Aid Offices

V. Prohibition on Use of Opportunity Loans

VI. Maintenance of Borrower Benefits

VII. Full Disclosure of Sales of Loans to Another Lender

VIII. Disclosure at the Request of Institutions of Higher Education

IX. Private Education loans

X. Preferred Lender Lists

The press release emphasizes that there was self disclosure in this case.


April 22, 2007 in News | Permalink | Comments (0) | TrackBack (0)

Drexel to Fight; Other Schools Settle - Loan Cases

The student loan industry is definitely in a state of heightened alert, as the Wall St. Jrl reports here that Attorney General Cuomo takes on Drexel U. and other schools are settling.


April 22, 2007 in News | Permalink | Comments (0) | TrackBack (0)

Emshwiller Article on "Benron"

John Emshwiller has a fascinating piece titled, "'Benron' Behind Bars" that looks at Ben Glisan Jr's life of cooperation and prison.  Although not the focus of this piece, it is interesting to note that the risk and cost of trial weigh heavily in the decision to plea. Glisan, like Martha Stewart realized the value of "getting it over with," and "moving on."  But is that the way the justice system is supposed to work? 


April 22, 2007 in Enron | Permalink | Comments (0) | TrackBack (0)

Saturday, April 21, 2007

Willful Blindness

Michele Berry at Crimprof - has a fascinating post on a recent en banc decision from the Ninth Circuit.  The Heredia case is not a white collar case, but this decision will likely influence the white collar world.  With Ken Starr as one of the authors of the National Association of Criminal Defense Lawyers (NACDL) amici briefs, this case was certainly not a lightweight in the legal field.

The government in a drug case sought to have the jury instructed on willful blindness. This court was thus left to decide the fate of the long established precedent of the Jewell case.  Jewell, a case from 1976, is well recognized with many referring to the willful blindness instruction as the "Jewell Instruction."  And although the en banc court does not overturn the Jewell decision, it does reverse a panel opinion.   The court in Heredia states, "while the particular form of the instruction can vary, it must, at a minimum, contain the two prongs of suspicion and deliberate avoidance."  A concurrence focuses on "motive," and a 4-person dissent demonstrates the tenuous nature of this decision.  One walks away from this case realizing that the standard for giving a "willful blindness" instruction can be extremely low.

Willful blindness comes up in cases beyond drug offenses and it will be interesting to see if this becomes a prominent issue in white collar cases.

(esp) (w/ a hat tip to Stephanie Martz)

April 21, 2007 in Judicial Opinions | Permalink | Comments (1) | TrackBack (0)

Congressman's Wife Subject of FBI Search in Abramoff Probe

FBI agents searched the Virginia home of California Congressman John Doolittle as part of the continuing probe of the Capitol Hill connections of former superlobbyist Jack Abramoff.  Representative Doolittle's wife, Julie, runs Sierra Dominion Financial Services, which was paid over $60,000 by Abramoff's firm from 2002 to 2004 for event planning, and other Abramoff clients made substantial contributions to Representative Doolittle's campaigns.  Interestingly, the company was subpoenaed for its records earlier, so the search was likely triggered by additional information about records that were not furnished and, perhaps, a fear that they would disappear.  Abramoff has been cooperating with the government's continuing corruption investigation that has already netted guilty pleas from one Congressman and a number of House aides.  Representative Doolittle stepped down from his position on the House Appropriations Committee, and has vowed to fight any federal charges if they are brought.  Doolittle has been in Congress since 1991, although he won reelection in 2006 by only 49%-45%.  A News10 (Sacramento) story (here) discusses the search, although Representative Doolittle's blog (here) makes no mention of it or the investigation. (ph)

April 21, 2007 in Corruption, Investigations | Permalink | Comments (0) | TrackBack (0)

Investment Banker Convicted of Tax Evasion

Investment banker Richard Josephberg was convicted of 21 counts of tax evasion, conspiracy, and health care fraud for his failure to pay taxes owed since 1977.  In the mid-1980s, the IRS determined that Josephberg owed over $1.5 million in taxes from the illegal tax shelter scheme his firm sold, and over the next fifteen years he took various measures to avoid paying the taxes, including putting assets into accounts in the names of his children, one of whom was an infant at the time.  The jury also convicted Josephberg of failing to file his taxes for a three-year period and conspiracy.  Interestingly, one tax evasion count alleged that Josephberg paid his housekeeper/nanny in cash to avoid filing the required tax reports and paying FICA and social security taxes for her.  This is one of the few times the failure to pay the "nanny tax" -- made famous in 1993 when a nominee for Attorney General was tripped up on the same issue -- has been the basis for a criminal charge.  The last count, which seems to be the icing on the cake, accused Josephberg of lying to his investment firm's health insurer that his wife was an employee of the company and therefore covered by the health plan.  Anything to avoid a co-payment, I guess.  A press release issued by the U.S. Attorney's Office for the Southern District of New York (here) discusses the conviction, and the indictment is below. (ph)

Download us_v_josephberg_indictment.pdf

April 21, 2007 in Tax, Verdict | Permalink | Comments (0) | TrackBack (1)

How Much Is That Lawyer in the Window?

The prosecution of Lord Conrad Black and three other former executives of Hollinger International trudges forward into its fifth week with more testimony from the company's lawyers explaining not only the deals at issue, but their mistakes and fees.  Hollinger had leading firms in Canada (Torys) and the U.S. (Cravath) representing it in the CanWest transaction that is at the heart of the government's corporate looting case.  The jury listened to the videotaped testimony of Elizabeth DeMerchant from Torys, who was the lead lawyer on the transaction that involved an $80 million non-compete payment to Black and others.  When asked about her compensation in 2000, DeMerchant replied, "Is that a fair question?" before conceding it was between $600,000 (Cdn.) and $900,000 (Cdn).  Cravath lawyer John Saunders, who insisted that the non-compete payment be disclosed, could not recall his hourly billing rate, finally saying, "I guess if you have to ask, you can't afford it."  I doubt many lawyers forget their billing rate at the end of the year when trying to collect on their unpaid bills. 

The defense has argued that these expensive lawyers were the ones responsible for structuring the deal, and that Lord Black and the others followed their advice and did not try to hide anything by only doing what was approved by the attorneys.  The fact that they make so much money could blunt some of the prosecution's claims that the defendants enriched themselves when Hollinger's lawyers were not exactly reticent on their fees. Whether any of this is making an impression on the jury is difficult to tell, of course. A Toronto Globe & Mail story (here) discusses the testimony of DeMerchant and Saunders. (ph)

April 21, 2007 in Prosecutions | Permalink | Comments (0) | TrackBack (0)

Friday, April 20, 2007

Nacchio Convicted on 19 Counts of Insider Trading

Former Qwest CEO Joseph Nacchio was convicted on 19 counts of insider trading and acquitted on 23 other counts by a jury in Denver, Colorado.  According to a report from the Rocky Mountain News (here), the acquittals came on the counts during the earlier part of the five-month period charged in the indictment, and the convictions were for the later transactions, totaling $52 million in sales.  Under the Federal Sentencing Guidelines in effect for 2001, that amount of gain would result in a sentence of 57-71 months, but it could increase if the district court were to add any enhancements for abuse of a position of trust or more than minimal planning, which could take the range up to 8-10 years.  Of course, the Sentencing Guidelines are no longer mandatory, but judges frequently use them as the starting point for the determination of an appropriate sentence, and they give a good idea of the general range for a likely prison sentence. 

In light of the defense's decision to go with a scaled-down presentation and not deal with the whole "national security" information that was only available to Nacchio, a natural question will be whether the defense was over-confident that the government had not established its case.  Of course, the decision not to call Nacchio to testify will be second-guessed, but it is always difficult to say whether that would have made a difference, and if he had come across poorly, he could well have been convicted on all 42 counts and even faced an obstuction of justice enhancement to the sentence. (ph)

April 20, 2007 in Insider Trading, Verdict | Permalink | Comments (0) | TrackBack (0)

Grilled Gonzales

Attorney General Alberto Gonzales faced sharp questioning for five+ hours before the Senate Judiciary Committee as he discussed the process by which eight U.S. Attorneys were fired in December 2006.  Having listened to a fair amount of the hearing, the Attorney General's testimony boiled down to the following three points, reiterated ad nauseum: he does not recall participating in the decision; the decision-making process was flawed; the decision was, in hindsight, the correct one.  The last point is premised on the President's authority to terminate the U.S. Attorneys at will, and the use of that power in this case was not flawed because there were no improper motives, just a flawed process.  For all the hullabaloo, the hearing shed little light on the decision because, as Gonzales admitted repeatedly, he did not participate in the decision and could not recall any details.  It is unlikely the Attorney General's critics will be sated by his statements, and supporters will cite the lack of a "smoking gun" showing the decision was improper.  With another Republican Senator (Coburn of Oklahoma) joining the call for his resignation, Gonzales may become completely irrelevant to the investigation if he decides to leave. 

Like so much in this Congressional investigation, it will be the e-mail traffic that tells the tale, particularly communications through the Republican National Committee e-mail accounts maintained by White House political aides.  With the Attorney General off the hot seat, at least for the moment, the issue becomes whether there are any more e-mail "shoes" to drop, and whether the testimony of former Gonzales adviser Monica Goodling will provide fresh information, assuming she receives a grant of immunity (see earlier post here).  A Washington Post article (here) discusses the Senate Judiciary Committee hearing. (ph)

April 20, 2007 in Investigations, Prosecutors | Permalink | Comments (0) | TrackBack (0)