Wednesday, October 31, 2007
The grant of immunity by State Department investigators to the Blackwater guards involved in a firefight in Iraq on September 16 that killed a number of civilians is raising a furor on Capitol Hill about who authorized the immunity and whether it was cleared through the Department of Justice. ABC News reports (here) the language of the immunity grant to each guard who made a statement: "I understand this statement is being given in furtherance of an official administrative inquiry . . . I further understand that neither my statements nor any information or evidence gained by reason of my statements can be used against me in a criminal proceeding, except that if I knowingly and willfully provide false statements or information, I may be criminally prosecuted for that action under 18 United States Code, Section 1001." This appears to be the common "use/fruits" immunity (see earlier post here) given to a person to obtain testimony over an assertion of the Fifth Amendment privilege. Department of Justice approval is required before any authorized grant of immunity can be made, which appears to be missing here. That does not mean the immunity is invalid, however, and the guards are protected regardless of whether the legal requirements were followed.
Foreign Relations Committee chairman Senator Joseph Biden and House Oversight and Government Reform Committee chairman Representative Henry Waxman sent letters to Secretary of State Rice asking for further information about the immunity grants. Senator Biden's letter (here) asks, "Press reports today indicate that DS agents offered grants of immunity to Blackwater employees after the September 16 shooting incident in Baghdad. Are these reports accurate? If so, who authorized these grants of immunity? Was there consultation with the Department of Justice prior to such grants of immunity?" Representative Waxman's letter (here) states, "This rash grant of immunity was an egregious misjudgment. It raises serious questions about who conferred the immunity, who approved it at the State Department, and what their motives were."
One justification offered for giving this type of immunity is that it does not preclude a subsequent criminal prosecution of the immunized witness, unlike "transactional immunity" that prohibits prosecution for any crime discussed by the witness. Of course, arguing that an even greater protection could have been given is a bit like claiming "I could have caused a lot more damage than I did to the investigation" -- small comfort at best. Nevertheless, government spokespersons have asserted that criminal prosecutions will still be pursued. For example, Dana Perino at the White House stated (here) that "Secretary Rice has made it very clear that she takes the situation very seriously. It is under review. She said that anyone who has engaged in criminal behavior will be prosecuted." A State Department spokesman took the same approach, stating (here) "[t]he kinds of, quote, 'immunity' that I've seen reported in the press would not preclude a successful criminal prosecution." Perhaps there was a Dr. Evil moment in putting quotation marks around "immunity" because the term is quite clear.
Can the government still pursue a criminal prosecution of any of the guards? Leaving aside thorny issues regarding jurisdiction, the grant of use/fruits immunity makes a subsequent criminal prosecution very difficult, at best. Under the Supreme Court's decision in Kastigar v. United States, 406 U.S. 441 (1972), the government has the "heavy burden" in any prosecution of an immunized witness of meeting "the affirmative duty to prove that the evidence it proposes to use is derived from a legitimate source wholly independent of the compelled testimony." (Italics added) Perhaps the most chilling term a prosecutor ever hears is "Kastigar hearing" because the proof requirements -- especially when immunity is granted early in an investigation -- are so onerous.
What is more striking about the immunity given to the Blackwater guards is the manner of granting the protection appears to violate two of the basic precepts in securing testimony in the face of a Fifth Amendment claim. First, it does not appear that the investigators had any idea what the guards would say, not even a proffer from them, so it was a blind grant of immunity. The common adage is that prosecutors should not buy a "pig in a poke" (see earlier post here on the meaning of that phrase), i.e. check the value of the goods before the transaction is completed. Indeed, it is not clear whether any of the guards ever asserted the Fifth Amendment, so it's possible the immunity grant was unnecessary for some. Second, even if you do have to buy a pig in a poke, you don't buy it from everyone. Immunity grants are usually given parsimoniously, and only to those on the lower level or on the outside ring of the investigation. A blanket grant of immunity to all participants likely means that no one can be prosecuted because separating out the information in a Kastigar hearing would be impossible -- remember Col. Oliver North. Handing out immunity like Halloween candy is not the way to pursue an investigation if a criminal prosecution is viewed as a possibility, although if the expectation was that no charges would be filed then this would be the best means to ensure that result. (ph)
Tuesday, October 30, 2007
Recent false claim settlements will be adding money to the government. Neither of the two recent cases involve criminal allegations.
The DOJ reports that "Hexcel Corporation of Stamford, Conn., has agreed to pay the United States $15 million to resolve allegations it violated the False Claims Act in connection with its role in the manufacture and sale of defective Zylon bullet-proof vests to federal, state, local and tribal law enforcement agencies, the Justice Department announced today. As part of the agreement with the government, the manufacturer has pledged their cooperation in the government’s on-going investigation of other participants involved in the fraudulent conduct."
The DOJ in another press release states that "Dianon Systems Inc. has agreed to pay the United States $1.5 million to resolve claims under the False Claims Act that the company mischarged Medicare and TRICARE for certain tests it performed."
Monday, October 29, 2007
David Johnston of the New York Times is reporting here that immunity deals were offered to certain Blackwater employees. And it sounds like the immunity may have come from the State Department as opposed to the DOJ. Who gave the immunity, the validity of the immunity, and the evidence procured may remain open questions for awhile. But in the interim it is interesting to look at some of the law in this area.
Federal immunity is governed by 18 U.S.C. § 6001 et. seq. and it provides use immunity as opposed to transactional immunity. This means that "no testimony or other information compelled under the order (or any information directly or indirectly derived from such testimony or other information) may be used against the witness in any criminal case, except a prosecution for perjury, giving a false statement, or otherwise failing to comply with the order." (18 U.S.C. § 6002).
But who has the authority to grant this immunity and in what contexts does this immunity apply? One place to look is 18 U.S.C. § 6004, which provides:
(a) In the case of any individual who has been or who may be called to testify or provide other information at any proceeding before an agency of the United States, the agency may, with the approval of the Attorney General, issue, in accordance with subsection (b) of this section, an order requiring the individual to give testimony or provide other information which he refuses to give or provide on the basis of his privilege against self-incrimination, such order to become effective as provided in section 6002 of this title.
(b) An agency of the United States may issue an order under subsection (a) of this section only if in its judgment--
(1) the testimony or other information from such individual may be necessary to the public interest; and
(2) such individual has refused or is likely to refuse to testify or provide other information on the basis of his privilege against self-incrimination.
(emphasis added). Whether this is the controlling procedure, whether other statutes may offer more guidance, and whether there are cases that may assist here remains to be seen. The Washington Post (here) discusses Garrity and Kalkines warnings. (see here for the FCC's explanation).
DOJ's antitrust division reports that "[a]n Oregon-based freight forwarder pleaded guilty to rigging bids and allocating shipments for its role in a conspiracy involving its participation in the U.S. Department of Defense (DOD) program for shipping the household goods of military and civilian DOD personnel between the United States and foreign countries." The press release states that:
"Criminal charges were filed today in U.S. District Court in Alexandria, Va. against Lift Forwarders Inc. (Lift). Under the terms of a plea agreement, Lift pleaded guilty to participating in a conspiracy to restrain trade, in violation of the Sherman Antitrust Act, and agreed to pay a $140,000 criminal fine."
Sunday, October 28, 2007
With the Seventh Circuit affirming his conviction (see here), former Illinois Governor George Ryan has been ordered to report to prison. The date for him to start serving his 6 1/2 year sentence is November 7th. (see here and here). Ryan has had the benefit of remaining free pending his appeal. Some white collar individuals have had this luxury (e.g., Bernie Ebbers). while others have not ( e.g., Bill Campbell, Jeffrey Skilling). It certainly was justified to have Ryan free pending the appeal as his issues were strong (after the fact we can confirm this as he secured three dissenters) and he certainly was not a flight risk or an individual who would cause harm. At 73 years of age, Ryan had a strong position of securing bail pending the appeal. But bail post appeal, that may be a lot more difficult.
The 11th Circuit Court of Appeals reversed an environmental conviction, and in the process provided a clearer understanding of what constitutes navigable waters. Finding that a "significant nexus" test was not used in the jury instruction, the court found error and further found that the government had not met its burden of showing this as harmless error. The case was remanded for a new trial. The opinion can be found here.
(esp)(w/ a hat tip to Steve Glassroth)
The topic was "Corporate Deferred Prosecution Agreements: Issues in Hybrid Enforcement," and the place was the Press Club in DC. Last Friday afternoon, Steven A. Tyrrell, chief of the Fraud Division of the US Department of Justice, along with Stephanie Martz, Director of the White Collar Crime Project of the National Association of Criminal Defense Lawyers (NACDL), and I, talked about the benefits and problems of corporate deferred prosecution agreements. As one might suspect, there was ample discussion of attorney-client privilege and attorney fee waivers. Concerns that some deferred prosecution agreements may contain a clause that placed a breach of the agreement in the sole determination of the government also caused discussion. Finally, several panelists talked about pending legislation. The panel was moderated by Professor Lisa Kern Griffin, visiting professor Duke Law School. For more information, see here.
Saturday, October 27, 2007
Former Governor George Ryan (Illinois) lost his request for a rehearing en banc (here) in the Seventh Circuit Court of Appeals. But there was a strong three person dissent to the decision. The dissent by Judges Posner, Kanne and Williams includes the following language: "But harmlessness is not the test of reversible error when a cascade of errors turns a trial into a travesty." Whether this dissent will sway the U.S. Supreme Court to accept the case on a Petition for Certiorari, remains to be seen.
Ray Reyes of the Tampa Tribune reports here on the defense filing a new motion in the Spellissy case. (see here for background on this case). According to the paper there is an allegation that the "government tampered with a defense witness by preventing that person from testifying on Spellissy's behalf." If true, this is a serious allegation. And if the tampering is unlawful, it could raise concerns about the evidence presented in the case and might also raise ethical issues. But as the defense should not be judged until all the evidence has been presented, so too should the prosecution first be allowed to respond to this serious allegation before it is determined whether there is merit to this claim. Some questions that need answering here are - when did the defense become aware of the conduct claimed here; was there an opportunity for the defense to be able to secure court assistance to compel the witness to testify; was the omission of this evidence harmful to the defendant's case?
BP plc settled three government investigations by agreeing to pay a total of $373 million in fines, restitution, and civil penalties. The company pleaded guilty to a violation of the Clean Air Act, a subsidiary pleaded guilty to a violation of the Clean Water Act, and another subsidiary agreed to a deferred prosecution agreement on a charge of conspiracy to violate the Commodity Exchange Act (CEA). According to a Department of Justice press release (here), the payments include:
$50 million in criminal fines to be paid as part of an agreement to plead guilty in the Southern District of Texas to a one-count felony violation of the Clean Air Act. The agreement resulted from the prosecution of BP by the Department of Justice for a catastrophic explosion that occurred at the BP Texas City refinery on March 23, 2005, that killed 15 contract employees and injured more than 170 others;
$12 million in criminal fines, $4 million in payments to the National Fish and Wildlife Foundation, and $4 million in criminal restitution to the state of Alaska, as part of an agreement to plead guilty by British Petroleum Exploration (Alaska), Inc. (BPXA) to a violation of the Clean Water Act to resolve criminal liability relating to pipeline leaks of crude oil onto the tundra as well as a frozen lake in Alaska;
A criminal penalty of $100 million, a payment of $25 million to the U.S. Postal Inspection Consumer Fraud Fund, and restitution of approximately $53 million, plus a civil penalty of $125 million to the Commodity Futures Trading Commission, as part of an agreement to defer the prosecution of a one-count criminal information filed in the Northern District of Illinois charging BP America Inc. with conspiring to violate the Commodity Exchange Act and to commit mail fraud and wire fraud.
The deferred prosecution agreement calls for the appointment of a monitor for three years to oversee the company's compliance with its terms and to ensure no future violations of the CEA. In addition to the charges against BP, four former commodities traders at its BP America subsidiary were charged in a twenty-count indictment (here) with conspiracy, violations of the CEA, and wire fraud. According to the press release, the traders conspired
to manipulate and corner the TET propane market in February 2004, in violation of the Commodity Exchange Act, and to sell TET propane at an artificially inflated index price in violation of the federal mail and wire fraud statutes. The indictment further charges the defendants with substantive violations of the Commodity Exchange Act and the wire fraud statute. According to the proposed indictment, from Feb. 5, 2004, through March 15, 2004, the defendants allegedly agreed to manipulate the market for February 2004 TET propane.
Friday, October 26, 2007
The search of WellCare Health Plan's headquarters by, among others, FBI agents (earlier post here) triggered -- as expected -- an immediate response: let's hire lawyers! A press release (on Business Wire here) states that since the search and carting away of boxes of documents, the company has:
- Been in direct contact with its Board of Directors, including members of the audit committee;
- Committed to cooperating with the federal and state authorities involved in the investigation;
- Retained the law firms of King & Spalding and Greenburg [sic] Traurig to assist the Company with responding to the investigation;
- Engaged with the Company’s auditors, Deloitte & Touche LLP;
- Been in contact with key constituents, including state and federal regulators in each of the Company’s markets.
It's not clear why two national law firms have been retained, but maybe two -- or twenty counting all the partners and associates -- heads are better than one. WellCare's stock lost over 60% of its value the day following the search, showing the devastating effect a criminal investigation can have for a company's investors. While the scope of the investigation is not yet clear, any inquiry into possible healthcare fraud carries a serious danger of criminal and civil fines and penalties, and could even include exclusion from the Medicaid program if an extensive fraudulent scheme were uncovered. (ph)
Speaking as the keynote luncheon speaker at the ABA Second Annual Securities Fraud Institute, Former Deputy Attorney General Paul J. McNulty defended his DOJ McNulty Memo. Referencing Senator Specter's recent Wall Street Journal commentary titled, "A Question for Mr. Mukasey," McNulty was not happy having his efforts called a "swing and a miss." It's at least "a standup double" he said. And then McNulty proceeded to be on the offensive, taking on Senator Specter's proposed legislation.
McNulty may believe that companies will waive because it is in their best interest to do so, but there are still many folks out there who believe that it is important to make certain that DOJ attorneys are not making requests for attorney-client waivers and that the best way to accomplish this is via legislation. The ABA Section of Administrative Law and Regulatory Practice has a program today called, "Corporate Deferred Prosecution Agreements: Issues in Hybrid Enforcement," at the Press Club in DC. starting at 3:45 P.M. I am confident (I am one of the speakers) that there will be responses provided to McNulty's comments. The question will be whether the response(s) will send him back to dugout. Stay tuned.
The opening session of the Second Annual Securities Fraud Institute provided "trends and expectations in securities fraud enforcement cases and criminal prosecutions" to a near filled large room. Moderator Tom Hanusik asked questions to Professor James Cox (Duke), Alice Fisher (DOJ), Hon. Michael G. Oxley (a father of SOX), and Linda Chatman Thomsen (SEC).
The opening question to Mike Oxley was - is SOX working? The former legislator discussed how SOX was passed in response to the public outcry of corporate scandals, with a purpose to restore investor confidence. He said that the Powers Report gave them the road-map to craft the legislation. And although he was very supportive of the legislation he crafted, he did state that there were "things I would have done differently." He did not elaborate on these items. But later in the program he did state that it is hard to imagine another Enron or Worldcom taking place.
Alice S. Fisher, Assistant Attorney General who heads the Criminal Division of DOJ, was quick to say that SOX is a "great law" and "we love it." She noted the better compliance programs and the real "robust programs" coming after the legislation. In speaking about new tools provided to DOJ, she said that last year it was 313 convictions, but with the new tools it is 672 convictions. She said that new tools "really changed behavior."
Linda Chatman Thomsen, Director of Enforcement at the SEC, also remarked on the new tools provided. She noted that four times they had used the freezing of extraordinary payments prior to an action being brought. She said that this helps in keep employees from pulling money from the company.
Fair Funds, a topic that will also be covered by a later panel in this program, was also discussed by Ms. Thomsen. She said they had collected 9 billion dollars and noted that they were getting better at distributing these funds. Hon. Mike Oxley noted that this provision was not in the House or Senate version, but that it came out of conference.
Professor James Cox, Duke Law School, provided commentary on several points including issues related to globalization.
The most shocking number heard by this blogger came from Alice Fisher who said that the Corporate Fraud Task Force had 23 convictions of corporate counsel.
Many other items were discussed at this opening panel, but it will be interesting to hear what defense counsel has to say about all of this as the program progresses. The ABA site for this program can be found here.
(esp) (w/ disclosure that she is later speaker at this conference)
The former CEO of military armor supplier DHB Industries, now known as Point Blank Solutions, was arrested on a superseding indictment (available below) that charges him with insider trading involving proceeds of over $185 million from the sale of company stock in 2004. Also named as a defendant is the the former chief operating officer of the company, who was indicted initially back in August 2006. In addition to the insider trading, the indictment charges obstruction of justice, lying to company auditors and to the SEC, tax evasion, and accounting fraud involving undisclosed compensation and overstated inventory. According to a Wall Street Journal story (here), the diversion of company resources for personal benefits included:
more than $350,000 in expenses related to Mr. Brooks horse business; more than $36,000 expenses related to his son's Bar Mitvah; $11,420 for acupuncture treatments for his family members; $7,900 for a face lift for his wife; $10,000 for his children's summer camp; $122,000 for the purchase of iPods and digital cameras to give as gifts at his daughter's Bat Mitzvah; and $101,500 for the purchase of an armored vehicle for Mr. Brooks and his family members' personal use.
The party for his daughter was broadcast as part of MTV's "My Sweet Sixteen" series, a favorite in my house. The indictment also alleges that over $1 million of DHB money was used for family vacations, ranging from $100,000 for a trip to St. Johns to $3,200 on meals and merchandise at the Bellagio in Las Vegas. In addition to the criminal charges, the SEC filed a civil enforcement complaint (here) in the U.S. District Court for the Southern District of Florida. (ph)
Thursday, October 25, 2007
The offices of WellCare Health Plans, Inc. in Tampa were searched by federal and state agents. The company issued a terse press release (here) that states, "Today federal and state officials executed a search warrant at our Tampa headquarters. We are cooperating with the authorities. Our number one priority is making sure that our members have access to needed care and services. Our essential services are operational and will remain uninterrupted." WellCare provides services to state Medicaid programs, with Florida the largest one, with over 350,000 beneficiaries. The search was conducted by FBI agents along with investigators from the Department of Health and Human Services as well as the state.
The use of a search warrant, while uncommon in white collar crime cases, is a tactic being used more frequently, particularly in healthcare fraud investigations. It is usually an indication that documents might not be available by subpoena, and there could be a concern that certain items will be destroyed or removed, such as a second set of financial records or documentation for certain off-books transactions. The government has to provide information to obtain the warrant, so there is probably an affidavit from an agent outlining the scope of the investigation and the potential violations. Whether the affidavit emerges any time soon remains to be seen, but execution of a search warrant shows that the government is serious about the case, which will get the attention of WellCare's board of directors. Some defense lawyers are going to be burning the midnight oil trying to figure out the company's status and potential targets of the investigation. A story in the Tampa Tribune (here) discusses the search. (ph)
UPDATE: A message from WellCare CEO Todd Farha is available here. He states that the company cannot provide additional details about the investigation at this time, and will do so "as appropriate." The stock is down approximately 50% as of 11:00 a.m. October 25.
The grand jury investigations of I. Lewis Libby and Barry Bonds involved subpoenas to reporters for their communications with sources who had been promised confidentiality. The federal courts unfailingly found that the demand for information trumped the media's confidentiality claims, with reporters being threatened with civil contempt and jail for refusing to respond to the subpoenas. The House passed the "Free Flow of Information Act of 2007" (H.R. 2102 here) on October 16, and the Senate Judiciary Committee passed a similar bill on October 4 (S. 2035 here), to create a federal journalists privilege for communications with sources. Senator Patrick Leahy, the Judiciary Committee chairman, has had the House bill placed on the Senate calendar to expedite consideration of the two legislative proposals. According to a Judiciary Committee press release (here), the legislation would:
- Establish a federal qualified reporters’ privilege to protect and encourage the free flow of information between journalists and sources;
- Reconcile a reporter’s need to maintain confidentiality -- in order to ensure that sources will speak openly and freely -- with the public’s right to effective law enforcement and fair trials;
- Balance the public interest in combating crime and protecting national security and the public interest in ensuring a free and vibrant press by providing that a federal court can only force a journalist to reveal confidential source information when the information is truly essential or crucial to a case or investigation;
- Provide exceptions to the privilege for those situations where information sharing is critical.
Among the exceptions to the privilege in a criminal case is when the court finds that "the testimony or document sought is critical to the investigation or prosecution, or to the defense against the prosecution." The statute does not explain what constitutes "critical" testimony or documents. The use of that term rather than a more commonly used evidentiary term in criminal cases like "material" likely means that the courts will favor the privilege absent exceptional circumstances.
If the legislation passes, it will certainly make subpoenas to members of the media less common, if not almost extinct, because the threshold for obtaining the information will be so much greater that prosecutors may well not even want to pick the fight because it is an almost sure loser. Whether that result is good or bad remains to be seen, but the legislation is certainly something for journalists to cheer. (ph)
This one is not a white collar crime, at least not strictly, but the apparent ease with which it took place makes me wonder about how well valuable items are protected. The U.S. Attorney's Office for the District of New Jersey announced the indictment (here) of a defendant for violating 18 U.S.C. Sec. 668 for theft of an object of cultural heritage, Goya's oil painting "Children with a Cart." The theft of the 1778 painting made the FBI's Top Ten Art Crimes list (here) when it was taken on November 8, 2006, while being transported from the Toledo Museum of Art to the Guggenheim in New York for an exhibition of Spanish painters. A high tech theft, along the lines of It Takes a Thief? Well, not really, at least according to an FBI press release (here) announcing the painting's recovery almost two weeks after the theft. The release states, "The painting was stolen from a transport truck as it was parked overnight in a hotel parking lot in Stroudsburg, Pennsylvania." I hope it was at least padlocked in the lot, given that the painting is valued at over $1,000,000. The painting did make it to the Guggenheim for the exhibit, and is now back home in Toledo. (ph)
The SEC filed a civil fraud action that includes a temporary asset freeze for what is describes as a Ponzi scheme executed by Calypso Financial, LLC and related entities. The lure to purchase the notes was the promise of monthly returns of 4% to 15%, which works out to a compound annual rate of return of over 50% to an amount in excess of 200%. You can't get those types of returns from any legitimate investment, at least not on a regular basis. The SEC Litigation Release (here) describes the case:
The complaint alleges the defendants have obtained investments of at least $20 million from the fraudulent offering of notes issued by Calypso and the other six entities, all of which are controlled by Petersen. The defendants allegedly promised returns to investors of 4% to 15% a month ostensibly through investments in real estate. However, it is alleged that the defendants actually operated a Ponzi scheme in which returns paid to earlier investors were paid from funds invested by new investors.
It's not clear how much money was frozen by the court, but it is usually the case that any amount recovered will not come close to covering the investor losses, especially the late-comers to the party. (ph)
Wednesday, October 24, 2007
The former general counsel for Amkor Technology, Inc. was convicted on securities fraud charges related to his trading in company stock (indictment here). According to a press release (here) issued by the U.S. Attorney's Office for the Eastern District of Pennsylvania:
Heron traded Amkor securities while in possession of material, non-public information including, among other things, the company’s financial condition, proposed mergers and/or acquisitions, and potential litigation exposure. He generally made his trades via the Internet using his office computer to access his online personal brokerage account. As a result of his illegal trades, Heron realized approximately $290,000 in gains and/or avoided losses.
The trades included buying put options on Amkor's stock as a bearish bet on the stock before the announcement of an earnings decline that caused a 32% drop in the share price. It's not clear whether the former GC tried to hide his trading by using a fictitious name on the account, and he placed the trades from his office computer, so it was easy to trace. This was not exactly the most sophisticated insider trading scheme even launched. The SEC has a pending civil injunctive action (here) alleging the same violations. (ph)