Thursday, May 31, 2007

SEC Settles with Brocade Over Options Backdating

The SEC settled a civil enforcement action with Brocade Communications Systems, Inc., over options backdating by the company's CEO, Gregory Reyes.  The case became the poster child for Chairman Christopher Cox's new procedure that requires the SEC staff to get authorization from the full Commission before negotiating a corporate penalty rather than presenting an agreed amount for approval.  This is part of Cox's plan to exert greater control over the Enforcement Division and to address the issue of what fines are appropriate when a company's shareholders bear the burden of the harm from the underlying securities fraud and then the company pays a fine on top of those losses.  In the Brocade settlement (SEC Litigation Release here and complaint here), the company agreed to pay a $7 million civil penalty, which now sets the benchmark for future cases that can be compared to the amount of options issued and the level of executive involvement.  Reyes and Brocade's former human resources director were indicted on conspiracy and securities fraud charged, and sued by the SEC, in July 2006, so this case is likely viewed as a fairly egregious one.  I suspect that future settlements of pure options backdating cases, i.e. ones that do not also involve accounting fraud aside from the misstated income and expenses due to the backdated options issuance, will likely come in at a lower amount absent significant personal gains by executives. (ph)

May 31, 2007 in Civil Enforcement, Fraud, Securities | Permalink | Comments (0) | TrackBack (1)

Coincidence and the Milberg Weiss Prosecution

Two items in the news raise the question whether they are just a coincidence, or whether more is going on than meets the eye.  A Wall Street Journal story (from the always-interesting and entertaining Law Blog here) states that former Milberg Weiss name partner David Bershad may be negotiating a guilty plea in the prosecution of the firm and another partner for paying secret kickbacks to lead plaintiffs in class actions.  Bershad was responsible for the law firm's finances, and was accused of making cash payments from a safe hidden in a credenza in his office.  If Bershad were to plead guilty and, more importantly, cooperate with the government, this would be a significant break in the case.  For Milberg Weiss, any admission of criminal conduct by Bershad would be proof of the firm's liability, making it much more difficult, if not impossible, to defend against the charges.

Now for the coincidence.  A Washington Post story (here) indicates that William Lerach, formerly with Milberg Weiss before a nasty break-up of the firm, is planning to leave his new law firm, Lerach Coughlin.  Both Lerach and Melvyn Weiss were rumored to be involved in the federal criminal investigation, although both received letters from prosecutors at one point stating they were not targets of the investigation.  Lerach has been a leading advocate for shareholder class actions in the securities field, and it is unlikely he will leave the scene completely.  The timing of his decision, coming at the same time as news of Bershad's possible cooperation, is certainly interesting.  Then again, I've never been much of a conspiracy theorist, so it may just be a coincidence. (ph)

May 31, 2007 in Legal Ethics, Prosecutions | Permalink | Comments (0) | TrackBack (1)

The Government Rests Its Case Against Lord Black

Prosecutors rested the government's case-in-chief against former Hollinger International CEO Lord Conrad Black and three other former executives of the newspaper publisher now known as the Sun-Times Group.  In finishing its case, the government dropped the money laundering charge against Lord Black, although he still faces conspiracy, mail fraud, obstruction of justice, and RICO counts.  The money laundering count (indictment here) alleged a violation of 18 U.S.C. Sec. 1957 for transferring $2,150,000 related to one of the non-compete transactions.  I suspect prosecutors determined the count could not be established based on the evidence at trial, and so to avoid the distraction of having the jury instructed on a losing charge it simply dismissed it.  The effect is likely to be minimal on the overall case.

The government ended its presentation with an IRS agent who discussed Hollinger's tax returns in 1999 and 2000 -- not exactly closing the case with a bang, to be sure.  After the obligatory Rule 29 acquittal motion, which the judge will deny in all likelihood, the defendants will begin their case.  The question now becomes whether any of them testify, including the volatile Lord Black (see earlier post here).  If the defendants think the government's case is weak, then they may well opt for a minimal showing and rest their case quickly in the hopes that the jury will acquit with equal alacrity.  The message essentially is that they see no need to waste the jury's time any longer.  If Lord Black does testify, it certainly promises to be good theater. An Reuters story (here) discusses the end of the government's case. (ph)

May 31, 2007 in Fraud, Prosecutions | Permalink | Comments (0) | TrackBack (0)

Four E&Y Tax Partners Indicted for Tax Shelters

The rocky KPMG tax shelter prosecution has not made the U.S. Attorney's Office for the Southern District of New York gun-shy about bringing complex tax cases, as evidenced by the indictment of four tax partners from national accounting firm Ernst & Young on conspiracy, tax evasion, false statement, and obstruction charges (indictment below).  Three of the four defendants, Robert Coplan, Martin Nissenbaum, and Richard Shapiro, are tax lawyers who were partners specializing in personal income tax planning; the fourth defendant, Brian Vaughn, is an accountant who headed up the sales of the tax shelters.  Unlike the KPMG prosecution, the indictment alleges that Coplan, Nissenbaum, and Shapiro used one of the tax shelters to evade taxes on their own income, which puts the case in a bit different light by focusing on their personal gain from the tax avoidance program.  In addition to the conspiracy charge, Coplan and Nissenbaum are accused of obstructing an IRS investigation,and Coplan and Vaughn are charged with making false statements to the IRS in its investigation.  E&Y issued a press release that largely brushes aside the charges against its partners, noting that "[t]hey were part of a small group within the firm, disbanded years ago . . . ."  I assume the government would prefer to draw someone to preside over the case other than U.S. District Judge Lewis Kaplan, who is overseeing the prosecution of the eighteen defendants related to the KPMG tax shelters.    An AP story (here) discusses the charges.

Download us_v. Coplan E&Y Tax Shelter Indictment May 30 2007.pdf

May 31, 2007 in Prosecutions, Tax | Permalink | Comments (0) | TrackBack (0)

Barclays Settles SEC Insider Trading Case

Insider trading can happen in lots of different ways, and Barclays Bank PLC chose an interesting one: using information from the creditors committees of bankrupt companies to trade in their debt securities.  Steven Landzberg, a defendant in the case along with Barclays, was the bank's representative on the creditors committees for six different companies, and as a member received private information about the financial condition of the debtors.  Landzberg's more important job at Barclays was as head of its U.S. Distressed Debt Desk, which traded the bonds of companies in bankruptcy, making it very hard to resist the opportunity to trade.  According to the SEC Litigation Release (here):

The complaint alleges that Barclays and Landzberg misappropriated material nonpublic information by failing to disclose any of their trades to the creditors committees, issuers, or other sources of such information. In a few instances, Landzberg used purported "big boy letters" to advise his bond trading counterparties that Barclays may have possessed material nonpublic information. However, in no instance did Barclays or Landzberg disclose the material nonpublic information received from creditors committees to their bond trading counterparties. Three of the six committees were official unsecured creditors committees appointed by the Office of the United States Trustee under the auspices of the federal bankruptcy courts. Barclays served as "Chair" of two of these bankruptcy committees at the time of its illegal insider trading.

The complaint further alleges that Barclays' senior management authorized Landzberg to buy and sell securities for Barclays' account while he served on bankruptcy creditors committees. Barclays' Compliance personnel failed to prevent the illegal insider trading, despite receiving notice that the proprietary desk had nonpublic information and should have been restricted from trading.

The reference to "big boy letters" concerns an agreement between parties to a private securities transaction in which they acknowledge that one side may have superior information and the counter-party will hold them harmless for taking advantage of the informational disparity -- it has nothing to do with hamburgers.  The letters do not bind the SEC, however, and whether such an agreement could protect against a claim for illegal conduct in a transaction is very much an open question.  As trading becomes more sophisticated, the use of such devices is likely to increase, although how much cover they provide is something that will only be clarified over time.

Barclays settled the case by agreeing to pay over $10.9 million: $3,971,736 in disgorgement plus prejudgment interest of $971,825, and a civil penalty of $6 million. The bank has a strong incentive to settle the case because it is pursuing a deal to buy global bank ABN Amro, and will need clearance from U.S. regulators and the SEC, among others, if it wants to move forward with that deal.  Landzberg agreed to a permanent injunction barring him from participating in creditor committees in federal bankruptcy proceedings for companies that have issued securities and to pay a $750,000 civil penalty. (ph)

May 31, 2007 in Civil Enforcement, Insider Trading, Securities | Permalink | Comments (0) | TrackBack (0)

Wednesday, May 30, 2007

Scrushy and Siegelman Ask for No Prison Time

Motions have now been filed by former CEO of HealthSouth Richard Scrushy and former Alabama Governor Don Siegelman asking that the court give no prison time to the pair.(see Al.com here)  This is in sharp contrast to the government's request of 30 years for Siegelman and 25 years for Scrushy. (see here)  Perhaps what is the most fascinating part of the difference in sentences requested by the government and defense is that even if one were to follow the Sentencing Guidelines there is no agreement on what sentence should be issued.  One of the purposes behind the guidelines was to provide uniformity in sentencing.  But as reflected by this case, interpretations of how to read guidelines makes uniformity very difficult.

(esp) 

May 30, 2007 in HealthSouth, Sentencing | Permalink | Comments (0) | TrackBack (0)

Tuesday, May 29, 2007

Plea in "Property-Flipping" Mortgage Fraud Scheme

A DOJ press release of the Central District of California reminds everyone that mortgage fraud prosecutions are still a top "item."  The release tells of a plea agreement being reached with "[a] West Los Angeles mortgage banker, [who]  agreed to plead guilty to federal criminal charges in a massive mortgage fraud scam that caused more than $18.5 million in losses to banks, including his former employer."

The release notes that "[a]ccording to the Maize charges, Lehman Brothers Bank alone was deceived into funding about 40 such inflated loans from March 2000 through July 2002. These 40 loans were for more than $28 million over the true prices of the homes. According to court documents, Maize received hundreds of thousands of dollars in kickbacks for his assistance in getting the loans approved. In 2001, he failed to report more than $175,000 of these kickbacks on his federal tax return."

(esp)

May 29, 2007 in Fraud | Permalink | Comments (0) | TrackBack (0)

Death Penalty in Bribery Case

Just when one thinks that the recent white collar sentences have been usually high (e.g. Ebbers, Skilling), one finds a comparison of a sentence given outside the United States.  In this case, the sentence is death, and the place is China.  According to an article on Yahoo.com (AP), a drug regulator in China has been sentenced to death for allegedly taking "bribes to approve substandard medicines."  Arguably one could say that this is not a white collar crime case, despite it being bribery, as the report states that deaths resulted from the alleged activity.

(esp)

May 29, 2007 in Corruption, International, Sentencing | Permalink | Comments (0) | TrackBack (0)

Convictions Upheld for Samsung Execs in South Korea

The Wall Street Jrl reports that two Samsung executives convictions were upheld by the Seoul High Court.

(esp)

May 29, 2007 in International, Sentencing | Permalink | Comments (0) | TrackBack (0)

Monday, May 28, 2007

The Need to Curtail Prosecutorial Pressure in Corporate Agreements

Reading this article by Tom Fowler of the Houston Chronicle and this post by Tom Kirkendall of Houston's Clearthinkers, it is clear that government pressure in reaching corporate agreements needs to be examined carefully. The article and post tell the story of Dynegy and the corporate conduct in response to government pressures. Kirkendall tells of how "the Department of Justice threatened to put Dynegy out of business unless it threw Olis under the locomotive of the DOJ's criminal investigation of a complicated structured finance transaction called Project Alpha." When the Jamie Olis Story is finally told - from the beginning, with all the details - will the government truly see this prosecution, initial sentencing, and prison hopping as something that is proper in a civilized democratic society?

(esp)

May 28, 2007 in Settlement | Permalink | Comments (0) | TrackBack (0)

The Forthcoming Scrushy & Siegelman Sentencing

The upcoming sentencing of former Alabama Governor Don Siegelman and former HealthSouth CEO Richard Scrushy is definitely a sentencing hearing to follow. Siegelman found guilty of significantly fewer counts than charged with, but still facing sentencing on verdicts for bribery, conspiracy, mail fraud, and obstruction of justice, and Scrushy found guilty of all of the bribery, conspiracy and mail fraud counts brought against him, are set to the sentenced at the end of June. Prosecutors are seeking a sentence of 30 years for Siegelman and 25 for Scrushy (see Al.Com AP). WSFA12 provides explicit details of the government rationale for these requested sentences.  But also seen here is the other side - that is, the defense position.  The defense response to the government Memorandum is likely to be seen soon.   One issue likely to be encountered at the sentencing hearing is whether the government can use uncharged conduct and acquitted conduct in determining the sentence.

(esp)

May 28, 2007 in HealthSouth, Sentencing | Permalink | Comments (0) | TrackBack (0)

Sterling Financial Uncovers Fraud

Sterling Financial Corporation, which owns banks in Pennsylvania, disclosed that an internal investigation uncovered a loan fraud scheme at its equipment leasing division.  The company had disclosed on April 30 that its financial statements were no longer reliable, and the reason now is clear.  According to the company's 8-K (here):

[The company] has been conducting an investigation into financing contract irregularities at its financial services group affiliate, Equipment Finance LLC ("EFI"). As of this date, the preliminary results of that investigation have revealed evidence of a sophisticated loan scheme, orchestrated deliberately by certain EFI officers and employees over an extended period of time, to conceal credit delinquencies, falsify financing contracts and related documents, and subvert the Corporation's established internal controls and reporting systems. (Italics added)

The company terminated five officers from the subsidiary, including its chief operating office and a vice president.  The company's stock took a significant hit from the disclosure, dropping 35%, and it disclosed that the fraud would result in a charge of $145 million to $165 million, causing it to suspend its dividend.  A press release (here) from Sterling Financial states that it "is working closely with its regulators and all appropriate federal authorities on the ongoing investigation."  Needless to say, federal prosecutors will be on the scene very quickly to pursue a fraud case. (ph) 

May 28, 2007 in Fraud, Investigations | Permalink | Comments (0) | TrackBack (0)

Nacchio Fights With Qwest Over Attorney's Fees

Since his conviction on nineteen counts of insider trading, former Qwest CEO Joseph Nacchio has now run into problems with his former employer over payment of his attorney's fees.  The company has asked Nacchio's attorneys to meet with its general counsel to discuss payment of his April legal bills, according to an AP story (here).  Nacchio has filed a lawsuit in Delaware Chancery Court seeking payment of the fees under a 2002 separation agreement when he left the company.  Qwest is a Delaware corporation, and that state's indemnification laws are quite liberal in allowing companies to reimburse officers and directors for their attorney's fees in litigation -- including criminal prosecutions -- brought for conduct on behalf of the corporation.  Delaware General Corporation Law Sec. 145(f) authorizes a company to agree to reimburse costs beyond what the law requires, subject to a requirement that the officer or director act in good faith:

The indemnification and advancement of expenses provided by, or granted pursuant to, the other subsections of this section shall not be deemed exclusive of any other rights to which those seeking indemnification or advancement of expenses may be entitled under any bylaw, agreement, vote of stockholders or disinterested directors or otherwise, both as to action in such person's official capacity and as to action in another capacity while holding such office.

The "good faith" requirement has been read into this provision.  See Waltuch v. ContiCommodity Services, 88 F.3d 87 (2d Cir. 1996).

The cost of putting on a defense in a complex white collar crime case like Nacchio's runs into the millions of dollars, and it is not uncommon for lawyers to submit bills totaling over $25 million when all is said and done; former Enron CEO Jeff Skilling's defense reportedly cost almost $80 million.  Nacchio faces a July 27 sentencing date, and preparing for that proceeding will involve a substantial amount of time by his legal team in addition to putting together the appeal to the Tenth Circuit of the conviction.  Moreover, Nacchio still faces an SEC civil securities fraud action and shareholder lawsuits, so the meter on his attorney's fees will not stop any time soon.  The litigation over attorney's fees just adds to the melange of judicial proceedings Nacchio faces. (ph)

May 28, 2007 in Defense Counsel | Permalink | Comments (0) | TrackBack (0)

Keeping a Lid on Dow

First Dow Chemical fired a senior executive and a board member purportedly for holding secret talks with private investors about a possible buy-out of the company.  That has triggered dueling law suits in federal and state courts in Michigan and New York, and the centerpiece of the case is likely to be J.P Morgan Chase CEO Jamie Dimon, who tipped Dow's CEO, Andrew Liveris, that a couple of his company's investment bankers were part of the unauthorized discussion.  Now comes word that the SEC is probing trading in Dow shares and those of DuPont (actually E.I. DuPont de Nemours & Co.), which Dow approached in September 2006 about acquiring.  Even though no information about the talks was ever disclosed publicly, DuPont's stock popped up by about $10 per share during the period when the discussions took place, which may indicate a leak of inside information.  While most deal-based insider trading cases involve purchases of stock and call options in companies about which a transaction is at least announced (e.g. Rupert Murdoch's offer for Dow Jones) that causes the price to jump, Section 10(b) and Rule 10b-5 reach any scheme or artifice to defraud, which does not require the success of a particular trade.  With the SEC knocking on Dow's door, that opens another front for distracting litigation for the company.  A Reuters story (here) discusses the SEC's informal investigation. (ph)

May 28, 2007 in Investigations, Securities | Permalink | Comments (0) | TrackBack (0)

Sunday, May 27, 2007

No Insider Trading Is Too Small for the SEC These Days

The SEC's crackdown on insider trading is bringing in some fairly small cases.  In one case, the two defendants learned about the buy-out of Serologicals and the next day bought 500 and 400 shares.  When the deal was announced the following day, the stock jumped 34%, and the defendants made $3,785 and $2,897.  Not a bad gain on a one-day investment, but still fairly small potatoes for the SEC.  Nevertheless, the defendants settled a civil enforcement action by disgorging their profits and paying a one-time penalty plus interest, for a total of a bit less than $14,000.  The SEC Litigation Release (here) discusses the filing. In a second case, the Commission settled an insider trading claim for trading by the son of former Ohio State University business professor Roger Blackwell, who was convicted on insider trading charges and sentenced to six years (see earlier post here).  The son made $4,317.01 based on a tip from his father, and will disgorge his profits plus pay the usual one-time penalty plus interest (Litigation Release here).  The SEC's push on insider trading seems to know no minimum, so beware. (ph)

May 27, 2007 in Insider Trading | Permalink | Comments (0) | TrackBack (1)

Insider Trading Investigation of Sallie Mae Chairman

The House Education & Labor Committee released information that representatives from student loan giant Sallie Mae met with the Office of Management & Budget in December 2006, less than two months before President Bush's budget called for a significant cut in support for student loans that caused a significant drop in the company's shares.  Three days before the President announced the budget proposal, Sallie Mae's chairman sold 400,000 shares, about 1/3 of his holdings, over a two-day period (Form 4 here).  If the sale had taken place after the budget announcement, it would have resulted in about $1.4 million less in proceeds.  A Washington Post article (here) notes that a Sallie Mae representative asserted that the transaction was coincidental and there was no prior notice of what the budget proposal entailed; the chairman was not involved in the meeting with OMB.  Sallie Mae is being taken private in a $25 billion transaction, and has been subject to heavy criticism from Democrats on Capitol Hill.  The Post article notes that the SEC is looking into the trades. (ph)

May 27, 2007 in Insider Trading | Permalink | Comments (1) | TrackBack (0)

Saturday, May 26, 2007

Fitzgerald Asks for Up to Three Years for Libby

Special Counsel Patrick Fitzgerald has asked U.S. District Judge Reggie Walton to impose a sentence of 30 to 37 months on I. Lewis Libby, the former chief of staff to Vice-President Dick Cheney who was convicted on perjury, false statement, and obstruction charges.  The range is based on the Federal Sentencing Guidelines, which the Judge is likely to use in calculating the prison term.  The government's Sentencing Memorandum (available below) takes issue with letters submitted by supporters of Libby arguing that the punishment should not include a prison term because of his public service and the fact that this was a politically-motivated prosecution.  On the issue of the propriety of a perjury prosecution when there are no charges on the underlying conduct, the Special Counsel writes:

[T]he suggestion that there is something unusual or inappropriate about pursuing a prosecution for a crime of obstruction where the underlying crime is not prosecuted is a red herring (and oddly suggests that Mr. Libby’s prosecution would not have been “wrongful” if only the government had brought more charges against him or others). Such perjury prosecutions are hardly unusual; indeed, as the Supreme Court noted in Mandujano.  Our system of justice would break down if witnesses were allowed to lie with impunity. This is especially true where the lies at issue succeeded in preventing the investigators from determining with confidence what had occurred.

No word yet on what sentence Libby's lawyers will argue for, but there's no doubt it will be much lower, perhaps even a request for probation or home confinement.  Sentencing is set for June 5, 2007. (ph)

Download us_v. Libby Government Sentencing Memorandum May 25 2007.pdf

May 26, 2007 in Plame Investigation, Sentencing | Permalink | Comments (0) | TrackBack (1)

Judge Tells Lord Black to Put a Sock in It

Lord Conrad Black's reaction to the testimony of his former lieutenant, David Radler, was more than just a little bit testy.  Black assailed the former chief operating officer of Hollinger International as a liar, something his attorney Edward Greenspan spent almost three days saying, and concluded that no "jury in the world would convict anybody on the basis of what he said."  In another interview, the erstwhile Hollinger CEO said, "If there is any criminal in this case, the government's supposedly 'star witness' is the criminal."  U.S. District Judge Amy St. Eve responded to protests by the prosecutors about Black's comments, telling the defense lawyers that "[i]f you can't control him . . . I'd be happy to do it."  I suspect the good Lord will be a bit more circumspect in the future.  A CBC News article (here) discusses the Judge's response to Lord Black's commentary.

The prosecution is looking to wrap up its case-in-chief shortly, after the most recent focus on an exchange of New York co-op apartments with Hollinger International that allegedly benefited Lord Black in the transfer.  After a few clean-up witnesses, the government will rest and the defense gets its turn.  Will any of the defendants testify?  Given Lord Black's penchant for biting (and perhaps even bitter) comments, I still think he is far too dangerous to put on the witness stand.  But the decision is ultimately one that is made by the defendant, and it may be that Lord Black cannot restrain himself from explaining what he did right at Hollinger.  Among the other defendants, Mark Kipnis, the former general counsel at the company and only U.S. citizen among the defendants, is the best bet to testify.  He did not receive any money from the non-compete agreements at the heart of the case and Radler's testimony seemed more favorable than inclulpatory about him.  The defense could always pull a surprise and simply rest without calling a witness -- a risky strategy to be sure, but one that keeps the defendants from creating fodder for the jury to convict them.  With four defendants, the defense presentation could take a while, so the trial may not be concluded until we get near the Fourth of July.  (ph) 

May 26, 2007 in Fraud, Prosecutions | Permalink | Comments (0) | TrackBack (1)

Friday, May 25, 2007

Second Circuit Upholds Convictions of John and Timothy Rigas

The U.S. Court of Appeals for the Second Circuit upheld convictions on twenty-two counts of conspiracy, securities fraud, and bank fraud of the former CEO and CFO of Adelphia Communications, John Rigas and his son, Timothy.  The court reversed one bank fraud conviction for insufficient evidence.  The Rigas family controlled Adelphia, a cable company that eventually entered bankruptcy after the revelation of accounting fraud.  The underlying transactions involved "co-borrowing arrangements" under which the Rigas family was supposed to provide funds to Adelphia in connection with transactions that aided cable systems the family controlled through private entities, but in fact the funds were taken from Adelphia.  At its core, the case involved misstated financials that hid Adelphia's real debt while, according to the government, the family used the publicly-traded company as it personal piggy-bank. 

In its opinion (available on the Second Circuit's website here), the court dealt with four issues, and the primary one was whether the government had to prove a violation of GAAP.  The panel rejected the argument that the government had to establish through expert testimony a violation of accounting principles, stating:

[The defendants] contend that because FAS 5 applies to their situation, the district court should have required the prosecution to prove non-compliance, or, at the very least, offer expert testimony on the subject.  Defendants are wrong. The government was not required to present expert testimony about GAAP’s requirements because these requirements are not essential to the securities fraud alleged here.  A single reference to GAAP in the Superseding Indictment does not change that conclusion, and the district court properly instructed the jury on the elements of securities fraud and conspiracy to commit securities fraud. 

Among the cases cited in support of its position was the recent decision in U.S. v. Ebbers, 458 F.3d 110 (2d Cir. 2006), upholding the conviction of former WorldCom CEO Bernie Ebbers for securities fraud based on accounting violations. 

The Second Circuit did reverse one of the two bank fraud convictions of the defendants, finding that the government could not prove the materialilty of any misstatements made in connection with loans secured by Adelphia stock.  That decision means the case has to be remanded to the District Court for resentencing, although I doubt the judge will change the sentences of fifteen years for John Rigas and twenty years for Timothy Rigas.  The bank fraud charges had little effect on the calculation under the Sentencing Guidelines, and the prison terms were beneath the applicable Guidelines level anyway. 

Both Rigases have been out on bail pending appeal, but the affirmance of the convictions (save one) means that they will likely be sent to prison as soon as the judge resentences them.  John Rigas is now 82 and has been diagnosed with cancer, so his medical condition could affect whether (and when) he will have to report to begin his prison sentence.  The issues addressed by the Second Circuit are narrow and largely non-controversial, so the odds of the Supreme Court granting certiorari are probably nil.  (ph)

May 25, 2007 in Fraud, Judicial Opinions | Permalink | Comments (0) | TrackBack (0)

H-P Gets a Slap on the Wrist

The internal investigation of boardroom leaks at Hewlett-Packard turned into a major controversy in September 2006, garnering significant negative publicity for the company when it came out that private investigators engaged in pretexting to obtain private telephone records of employees and journalists.  All those negative headlines did not translate into any significant regulatory actions against the company, however.  In December 2006, H-P agreed to a civil settlement with the California Attorney General that involved a payment of $14.5 million to a law enforcement fund to fight privacy violations (press release here).  The SEC announced the issuance of a Cease-and-Desist Order (here) -- the lightest penalty the Commission can impose -- for the company's faulty disclosure of the reason why board member Tom Perkins resigned his position in May 2006.  Perkins objected strongly to H-P's internal investigation of a leak by another board member who was asked to resign.  The 8-K (here) filed by the company on May 22, 2006, disclosing the Perkins resignation did not discuss the reasons for it, a violation of the disclosure rules, as described in the Order:

HP concluded, with the advice of outside legal counsel and the General Counsel, that it need not disclose the reasons for Mr. Perkins’ resignation because he merely had a disagreement with the company’s Chairman, and not a disagreement with the company on a matter relating to its operations, policies, or practices. Contrary to HP’s conclusion, the disagreement and the reasons for Mr. Perkins’ resignation should have been disclosed, pursuant to Item 5.02(a), in the May 22 Form 8-K. Mr. Perkins resigned as a result of a disagreement with HP on the following matters: (1) the decision to present the leak investigation findings to the full Board; and (2) the decision by majority vote of the Board of Directors to ask the director identified in the leak investigation to resign. Mr. Perkins’ disagreement related to important corporate governance matters and HP policies regarding handling sensitive information, and thus constituted a disagreement over HP’s operations, policies or practices. (Italics added)

The outside counsel referred to in the Order is Larry Sonsini, the leading lawyer in Silicon Valley, and H-P's general counsel at the time was Ann Baskins, who resigned after the revelation of the details of the internal investigation overseen by her office.  Only the company is the subject of the Commission action, and it involves no penalty other than another small dose of bad publicity that dredges up headlines from 2006.  A quiet ending to a series of bad decisions that cost a number of officers and directors their reputations. (ph)

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