Wednesday, December 19, 2007
The lead outside lawyer for the now-defunct commodities brokerage Refco Inc. was indicted on charges of aiding the company's CEO in hiding debts by engaging in "round-trip" transactions at the end of quarters. The eleven-count indictment (available below) includes conspiracy, false filing, wire fraud, bank fraud, and securities fraud counts in connection with the spectacular collapse of Refco, which went into bankruptcy only two months after its initial public offering. The prosecution is part of a growing trend in which corporate lawyers are finding themselves as targets of investigations and defendants in criminal and civil enforcement actions -- the SEC filed charges against the lawyer, too.
The prosecution raises an interesting question for me about the payment of attorney fees for the indicted lawyer. The defense will probably cost at least $10 million if the criminal case goes to trial, and could reach $20 million is there is a conviction and an appeal. Defense counsel is from Cooley Godward's New York office, so the rates will not be cheap. The lawyer is a partner at Mayer Brown and was head of its derivatives group, so he certainly has been well-paid, but the financial drain in this type of case is enormous. For executives at public companies, there is usually an indemnification clause in the corporate by-laws or an employment agreement to cover the attorney's fees that also includes in most cases an advancement requirement. For example, corporate defendants like Conrad Black and Joseph Nacchio had a substantial portion of the attorney's fees in their prosecutions covered by their former corporate employers.
I doubt an outside lawyer would be covered by a corporate indemnification clause for work on behalf of the business. It may be that the retainer agreement would require the company to cover any costs related to the representation, although in this case Refco is in bankruptcy and unlikely to pay anything toward the defense, especially when the alleged fraud is what triggered its collapse. Mayer Brown is an LLP, and its partnership agreement may have an indemnification clause similar to what one would see in a corporation. I'm not familiar enough with such things -- being up in an ivory tower -- so I can't say whether that is a realistic possibility. Advancement of fees is perhaps of greater importance because a defendant would prefer not to have to wait until the end of the case to get the funds to pay the lawyers, who cannot work on a contingency basis in a criminal case.
A recent filing by former Milberg Weiss partner Stephen Schulman seeks payment of his attorney's fees in a criminal prosecution against the firm and a number of its former partners that is illustrative of a claim for fees by outside counsel. Schulman filed his claim to compel arbitration (available below) because the firm cut off payment of the fees after he agreed to plead guilty and a grand jury indicted former name partner Melvyn Weiss. The legal fees until Schulman's guilty plea were $4.5 million, which have been paid, and he has incurred another $1.2 million since then that the firm has refused to pay. The Milberg Weiss partnership agreement states, "Any amounts for which a Partner becomes liable in connection with the rendition of services to a client . . . whether or not insured or insurable against (and whether or not insurance has been or is obtained) shall be an expense of the Partnership." Schulman's claim is not based solely on this provision, but it does provide an example of a partnership provision that may provide some protection for outside lawyers who are charged with a crime or in a civil enforcement action related to their work for a client.
With the increased focus on attorneys by federal prosecutors and the SEC, it may be a good time for lawyers to check the indemnification provisions in their firm's organizing documents to see just how much protection they have. (ph)
New Jersey Congressman Bill Pascrell, Jr., has proposed that the House Judiciary Committee and the Department of Justice work together on legislation, or at least adopt internal policies, to guide the drafting and implementation of deferred prosecution agreements. Hardly a month goes by without a DPA or non-prosecution agreement being reached with a company under investigation, the most recent one in the District of Rhode Island with the local Blue Cross & Blue Shield insurance provider related to improper payments to elected officials (see earlier post here). While these agreements are now the preferred means for resolving a wide array of corporate crime investigations, there are no guidelines for when a company can receive one or how the outside monitors, a common feature of most agreements, should be selected and compensated.
Representative Pascrell submitted to the Committee and Department a Statement of Principles on Deferred Prosecution Agreements that outlines four areas that should be addressed:
- Require guidelines on deferred prosecution agreements;
- Restore judicial oversight of deferred prosecution agreements;
- Take the selection of federal monitors out of the hands of U.S. Attorneys;
- Require full disclosure of deferred prosecution agreements.
A letter to Attorney General Mukasey from Congressman Pascrell (available below) notes that these issues could be addressed by internal DoJ guidelines, but at this point there has not been any apparent move in that direction. Now that Congress has started to pay attention to DPAs, the issue most likely is whether future regulation is done internally or through legislation. For the U.S. Attorneys who have enjoyed substantial freedom in crafting these agreements, the process of negotiating and implementing DPAs probably will get a bit more complicated. (ph)
Tuesday, December 18, 2007
It is not surprising to hear from TalkLeft that the 10th Circuit Court of Appeals scrutinized the materiality issue in the Nacchio case. (see here) As co-blogger Peter Henning said to the Denver Post (here) "the most compelling argument relates to jury instructions on the materiality or significance of information Nacchio had and publicly disclosed." "'If he's going to win, I believe it will be on the materiality argument,' Henning said." The defense raised a multi-faceted approach on the materiality issue. The crux of the argument is that: "the jury was improperly instructed on the elements of materiality and scienter" and "that expert opinion testimony was erroneously excluded." (see here). The Rocky Mountain News (here) provides a lay-person's guide to understanding this issue and other issues raised by the defense.
Monday, December 17, 2007
The 2007 Government Accountability Office Report can be found here. How would the DOJ use this evidence if this were a private company and they were proceeding against this private company in a criminal case? Will criminal/corporate defense counsel be permitted to use this report as a point of comparison when under scrutiny by DOJ?
In part the report states:
"A significant number of material weaknesses (fn5) related to financial systems, fundamental recordkeeping and financial reporting, and incomplete documentation continued to (1) hamper the federal government’s ability to reliably report a significant portion of its assets, liabilities, costs, and other related information; (2) affect the federal government’s ability to reliably measure the full cost as well as the financial and nonfinancial performance of certain programs and activities; (3) impair the federal government’s ability to adequately safeguard significant assets and properly record various transactions; and (4) hinder the federal government from having reliable financial information to operate in an economical, efficient, and effective manner. We found the following:
• Certain material weaknesses in financial reporting and other limitations on the scope of our work (fn6) resulted in conditions that continued to prevent us from expressing an opinion on the accompanying accrual basis consolidated financial statements for the fiscal years ended September 30, 2007 and 2006. (fn7)
• The 2007 Statement of Social Insurance (fn8) is presented fairly, in all material respects, in conformity with GAAP; we disclaim an opinion on the 2006 Statement of Social Insurance.(fn9)
• The federal government did not maintain effective internal control over financial reporting (including safeguarding assets) and compliance with significant laws and regulations as of September 30, 2007.
(fn5) A material weakness is a significant deficiency, or combination of significant deficiencies, that results in more than a remote likelihood that a material misstatement of the financial statements will not be prevented or detected. A significant deficiency is a control deficiency, or combination of control deficiencies, that adversely affects the entity’s ability to initiate, authorize, record, process, or report financial data reliably in accordance with generally accepted accounting principles such that there is more than a remote likelihood that a misstatement of the entity’s financial statements that is more than inconsequential will not be prevented or detected. A control deficiency exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent or detect misstatements on a timely basis.
(fn6) Three major impediments continue to prevent us from rendering an opinion on the accrual basis consolidated financial statements: (1) serious financial management problems at the Department of Defense, (2) the federal government’s inability to adequately account for and reconcile intragovernmental activity and balances between federal agencies, and (3) the federal government’s ineffective process for preparing the consolidated financial statements.
(fn7) We previously reported that certain material weaknesses prevented us from expressing an opinion on the consolidated financial statements of the U.S. government for fiscal years 1997 through 2006.
(fn8) The valuation date is January 1 for all social insurance programs except the Black Lung program, for which the valuation date is September 30.
(fn9) We disclaimed an opinion on the fiscal year 2006 consolidated financial statements, including the Statement of Social Insurance."
Tom Kirkendall at Houston ClearThinkers calls it a "trial penalty," (see here), I see it as the "value of cooperation." But whatever one wants to call it, there is yet another example this week of the high cost associated with the risk of taking a chance on a trial. Unlike Conrad Black who risked trial and received a 6.5 year sentence (see here) upon a finding of guilt by a jury, F. David Radler, the former Chicago SunTimes publisher plead guilty, cooperated, and assisted the government in Conrad Black's prosecution. Radler received a sentence of less then one-half of that given to Conrad Black, as Radler's sentence came in at 29 months. But like Conrad Black, Radler is given time to report to prison.
As usual, the Chief Operating Officer (in some cases we have seen it as the CFO) is the one obtaining the plea agreement. After all, the one who handles the business dealings or knows the money trail is perhaps the most valuable witness for the government. In this case the judge recognized the equal culpability of the testifying witness saying at Conrad Black's sentencing hearing that "Mr. Radler is at least as culpable as Mr. Black on the fraud." (See Chicago Tribune here) But there is a quantifiable "value for cooperation" and in this case it is 49 months.
A press release of DOJ states, "HealthSouth Corporation and two physicians have agreed to pay the United States a total of $14.9 million to settle allegations that the Birmingham, Ala.-based company submitted false claims to the government and paid illegal kickbacks to physicians who referred patients for care in some of its hospitals, outpatient rehabilitation clinics, and ambulatory surgery centers."
Sunday, December 16, 2007
Professor Doug Berman on his Sentencing Law & Policy Blog here writes about David Voreacos and Bob Van Voris' Bloomberg News article titled, "Bush Fraud Probes Jail Corporate Criminals Less Than Two Years." But I guess I want to see more. I am not as convinced that the white collar offenders are getting off so easy. For example, do the statistics include all the money laundering cases that started as typical white collar cases of fraud, but had money laundering tacked onto them? Does it include cases with a RICO charge, since after all RICO has wire fraud, bank fraud, and mail fraud as its predicates? And admittedly there is no way of actually knowing what percentage of these cases were reduced because of pleas, tokens for acceptance of responsibility, and cooperation agreements with the government.
The latter portion of this article points out the "trial penalties" (see Houston ClearThinkers here) and the lack of available information on some matters. And clearly there is a disparity between the sentences given to those who go to trial and those who plea. But is it to the extent of the Andy Fastow/Jeff Skilling disparity? And most important I want to know if they included the Chalana McFarland's of the world, who were given 30 years for mortgage fraud. Or is this not within the confines of corporate fraud?
And if the numbers show this "less than two years" why did Conrad Black get such a greater sentence?
So, I liked the article, but I think we all need to know exactly what is included in white collar or corporate criminality. (see here)
Michelle Singletary (here) at the Washington Post found a good YouTube site that may assist those who might be scammed by mortgage fraudsters. It seems that Freddie Mac has realized the a good place to find viewers is YouTube. And the YouTube scene may help those facing foreclosure in realizing that the deal being presented is really a fraud. You'll find some of their advice on mortgage fraud here.
Saturday, December 15, 2007
It may be snowy and icy in Chicago these days, but Patrick J. Fitzgerald, U.S. Attorney for the Northern District of Illinois, has been keeping things pretty hot when it comes to prosecuting people. His latest this week may at first blush seem like an simple tax fraud charge as he states in his press release that "[a] suburban businessman was indicted today on federal tax fraud charges for allegedly understating his true personal and business income by more than $1.3 million over five years, in part by concealing the use of corporate funds for personal expenses including gambling debts to sports bookmakers."
But the Chicago Tribune points out that these charges, charges that the government will be required to prove to sustain this criminal case, just happen to be against a person close to the governor, this time Gov. Rod Blagojevich. The Chicago Tribune also notes that others around the governor also seem to be having some legal problems. (see here) Attorney Michael Monico, representing the individual indicted on the tax charges aptly points out that there is nothing related to politics in the indictment. And looking at the document, this proves accurate. But the indictment does raise a few eyebrows. For one it hardly seems like a simple tax case when there are 12 counts and a forfeiture action, and when there are words in the indictment like bookmaking, sports wagers, 2 pizza companies, Vegas, Saudi Arabia, and yes, Florida. It may not be politics, but one has to wonder how much time and energy the government put into investigating this case.
A new bill (available below) introduced by Senate Judiciary Committee Chairman Patrick Leahy and cosponsored by Senator Arlen Specter, the Committee's ranking member, would add a new Rule 502 to the Federal Rules of Evidence to deal with waiver of the attorney-client privilege and work product protection when a litigant discloses such information to a federal office or agency or in federal litigation. Companies are often reluctant to disclose the results of internal investigations to the government because giving protected information to an adversary means the privilege and work product claims are waived for all other cases, and it may be difficult to determine in advance how broadly the waiver will be construed. The new legislation seeks to give a measure of protection by limiting waiver to those materials actually disclosed unless the party intended the waiver to reach undisclosed information or communications. The new rule also addresses inadvertent disclosures in the same way.
An earlier proposal to add a provision to the FRE to allow for "selective waiver" of protected information appears to have been dropped, so this new legislation is taking a different tack. Rather than an across-the-board rule allowing such a waiver, the proposed rule would put the issue in the hands of a federal judge when the disclosure occurs in litigation. The bill, S. 2450, provides: "A Federal court may order that the privilege or protection is not waived by disclosure connected with the litigation pending before the court — in which event the disclosure is also not a waiver in any other Federal or State proceeding." Importantly, the new rule also overrides state provisions that would construe the waiver in one proceeding as applying in others, so that the protection afforded by a federal court order will also apply in state court litigation. This is an important protection for companies disclosing internal investigations because they are subject to shareholder derivative suits in state court, so if adopted new Rule 502 will apply uniformly.
The legislation is new, and there have not been any hearings on it at this point. But the sponsors are the leaders of the Judiciary Committee, so it's likely to get a favorable reception. (ph)
The on-going corruption probe in Rhode Island -- dubbed Operation Dollar Bill -- snared another non-profit when Blue Cross & Blue Shield of Rhode Island entered into a deferred prosecution agreement with the U.S. Attorney's Office. The case involves payments by BCBSRI to three members of the state Senate while the insurer was lobbying for favorable legislation. The illicit payments involved $75,000 to a communications company for a cable television show one senator hosted, $175,500 to a second Senator for 10 million paper bags for a pharmacy promotion by BCBSRI but only 2 million were delivered, and $400,000 in insurance commissions to the president of the state Senate.
The DPA is similar to others we are seeing with increased regularity. BCBSRI will pay a $20 million fine, which will go to a foundation to be used to provide affordable health services, and must appoint an independent monitor with the U.S. Attorney's approval. The attorney-client privilege waiver provision is a bit more onerous than I've seen in recent DPAs. BCBSRI agrees not to assert the attorney-client privilege or work product protection for any factual material generated in its internal investigation, except for communication with counsel about the criminal investigation. Another provision states that providing the materials does not constitute a waiver of the protections as to third parties, but that may be worthless under the majority rule on selective waiver.
Prior to the disclosure of the DPA, four BCBSRI executives were terminated by the company, and I suspect we will see one or more indicted on corruption charges in the near future. Two of the state Senators who received money from the company have entered guilty pleas, and Roger Williams Medical Center, a Rhode Island hospital caught up in Operation Dollar Bill, got its own DPA in 2006, one of the first cases involving a non-profit organization. (ph)
Blog emperor Paul Caron has a post (here) on the Tax Prof Blog linking to an interview actor Wesley Snipes gave to Entertainment Weekly (here) discussing his pending criminal tax fraud case. Snipes claims that he was simply following the advice of two accountants who said he could claim a substantial refund, which turns out to have been based on an interpretation of an Internal Revenue Code provision that has been roundly rejected by all courts to consider it. Snipes then offers what may be his core defense to the charges: "I never got a dime . . . I didn't defraud the government by taking money that was not mine. We never got it!" This is a defense heard before, that the intended victim of a fraud was not in fact defrauded, so the defendant is not guilty without proof of a gain. While the defense has an intuitive appeal, and may well be Snipes' position at trial, it is not an assertion that works in most cases. A fraudulent scheme does not have to be successful to be a criminal violation, and the fact that the refund was sought, not whether it was paid, can establish the offense.
Snipes also points the finger at the two accounts who are also his codefendants, accusing them of suggesting the tax strategy he followed without understanding what they were doing. If the case dissolves into finger-pointing by the defendants, that could ultimately redound to the government's benefit because the skirmish among the defendants may cause the jury to believe that all are guilty and now just want to escape blame. (ph)
Friday, December 14, 2007
I’ve been talking during my week-long guest stint at White Collar Crime Prof Blog about the crime of bribery and some of its enduring problems. The Second Circuit has recently issued an opinion in United States v. Ganim (available below), that reminds us of just how thoroughly confused the law in this area has become. The case involves a former mayor of Bridgeport, Connecticut, who was convicted of numerous counts of racketeering, mail fraud, conspiracy, filing false income tax returns, and federal programs bribery.
In appealing his conviction, Ganim relied on United States v. Sun-Diamond Growers of California, 526 U.S. 398 (1999). That case involved a prosecution for gratuities under 18 U.S.C. § 201(c)(1)(A), which makes it a crime to give anything of value to a public official "for or because of any official act performed or to be performed by such public official." The question in the case was whether the prosecution had to prove a link between the gift and some specific official act, or whether it was enough that the gift was given in the interest of building goodwill between the giver and official. The Court held that the former interpretation was the correct one: in order to prove a gratuity, the prosecution had to prove a nexus between the gift and a specific official act.
In Ganim, the defendant argued that the demanding rule in Sun-Diamond should be extended beyond gratuities to apply as well to extortion and other bribery-related offenses. In upholding the conviction, the Second Circuit rejected this approach, reasoning that the nexus requirement is limited to gratuities. As a matter of statutory interpretation, this is surely correct. There is simply no basis for reading such a requirement into the extortion and bribery statutes. But the case also demonstrates just how wrongheaded the original decision in Sun-Diamond really was. For the fact is that there was no basis for reading such a requirement into the gratuities statute in the first place.
As the court in Ganim put it, "[u]ndergirding the Court’s decision in Sun-Diamond was a need to distinguish legal gratuities (given to curry favor because of an official’s position) from illegal gratuities (given because of a specific act)." Framed this way, one gets a sense of what was wrong with the Court’s holding in Sun-Diamond. Could Congress really have intended to protect from liability gifts given to public officials for the purpose of "curry[ing]" their favor? This seems to me quite unlikely. Gifts given merely to curry favor with officials are hardly less troubling to the political process than gifts given to obtain action on specific acts. The rule in Sun-Diamond has the effect of blurring the distinction between bribes and gratuities by grafting onto the gratuities provision what amounts to a quid pro quo requirement that Congress never intended to be there.
The long-awaited report by former Senator George Mitchell and a cast of associates and partners from DLA Piper has landed -- all 400+ pages counting appendices -- and the sensational headlines are already available. The report (here) names a few prominent players for their use of performance enhancing drugs, including future Hall of Famers Barry Bonds (no great shock there) and Roger Clemens (plus Gary Sheffield if you think he'll make the Hall), and many who were at best obscure (including one I taught when he was an undergrad). Mitchell relied primarily on two witnesses who spoke with him as a condition of their agreements with federal prosecutors, plus statements from a few players and club officials. The recurrent theme in the report is the lack of cooperation from the players identified.
With so many individuals named as having purchased illegal substances, will we see the federal government unleash a tide of prosecutions? My short answer is "no." While one should never say "never," the report is just that -- a conclusion by Senator Mitchell based on the evidence he accumulated, without any outside scrutiny of his determinations. Is there enough there for a criminal case? Federal prosecutors have heard much the same thing, and I think it is unlikely that they would seek indictments based primarily on the word of cooperating witnesses who are admitted steroids dealers. Mitchell also has some documentary evidence for transactions with a few players, which would bolster a case against them. But going after the end-users is not very appealing when the bad guys -- the dealers -- provide the bulk of the evidence.
Even if prosecutors wanted to pursue prosecutions, they would have a substantial statute of limitations problem for a number of players. The federal statute of limitations period is five years, as provided in 18 U.S.C. sec. 3282, so any transaction before December 2002 would be out, unless prosecutors could charge a conspiracy to bring the case within the limitations period. For example, in looking at the information about Clemens, much of the discussion involves supposed steroids use before 2002, and while the report insinuates it continued there are no claimed instances of use within the limitations period. Mitchell smartly doesn't talk about prosecution because it would be difficult for most of the players.
Because Mitchell didn't get much if any cooperation from players, most of those named -- excluding former players like David Segui and Jose Canseco who have admitted to steroid use -- have not boxed themselves in with prior statements that can be used to undermine their credibility. They may be able to assert the "Barry Bonds Defense" offered in his 2003 grand jury testimony: I didn't know what I took was steroids, I thought it was _______ [flaxseed oil in his case]." Do prosecutors want to bring a series of cases throughout the country against athletes, some with very deep pockets, who may be quite appealing to jurors? Never say never, but I have to think that we won't see any criminal cases emerging from the Mitchell report because there's unlikely to be much public support for such a use of resources. (ph)
The Senate Judiciary approved by a 12-7 vote -- Senators Specter and Grassley joined the ten Democrats in favor -- contempt citations (here) for former White House aides Karl Rove and Josh Bolten for their refusal to produce documents or even appear before the Committee as part of its investigation of the firing of eight U.S. Attorneys in 2006. The contempt citation for Rove sets forth the crux of the dispute over Executive Privilege:
WHEREAS, Mr. Fielding, in an August 1, 2007 letter to the Chairman and Ranking Member, informed the Committee that the President would invoke a claim of executive privilege and a claim of immunity from congressional testimony for Mr. Rove, and directed Mr. Rove not to produce responsive documents or testify before the Committee about the firings, and that Mr. Rove would not appear in response to the Committee’s subpoena;
WHEREAS, Mr. Rove refused to appear or to produce documents or to testify at the Committee’s August 2, 2007, hearing in compliance with the subpoena;
Bolten, the President's former chief of staff, has the dubious honor of also being named, along with former White House Counsel Harriet Miers, in the earlier contempt citations approved by the House Judiciary Committee over the same claim of Executive Privilege. Whether either side on Capitol Hill seeks a full vote of the chamber to authorize the contempt remains to be seen. Of course, all Congress can do in these citations is ask the Department of Justice to pursue the case. Whether or not Attorney General Mukasey would authorize a contempt proceeding remains an open question. (ph)
Thursday, December 13, 2007
An Iowa state Senator charged with one count of attempted extortion under the Hobbs Act was found not guilty of by a jury. As discussed in an earlier post (here), the defense had filed a motion to dismiss for prosecutorial misconduct. The case involved recordings by a prosecuting witness with the state Senator, and he was rather substantially impeached by the defense. A Des Moines Register story (here) discusses the jury verdict. (ph)
Margaret Colgate Love, who served as US Pardon Attorney for seven years, comments on the recent Bush pardons as follows:
"It has been more than a year since Bush issued any post-sentence pardons so it was encouraging to see a fairly substantial batch of cases this time -- though, as in the past, most of the offenses involved were dated and minor (car theft, moonshining, teller embezzlement, letter carrier mail theft, etc.). Most of the sentences involved probation and/or a fine, and the longest prison term was five years. While there are a few new law drug cases, the sentences suggest that they were very minor crimes indeed.
"Bush has now granted 142 pardons, which puts him on track to being the stingiest two-term president in U.S. history. While he may overtake his father in absolute number of grants by the end of his term, if you compare the number of cases available for consideration in each administration, the comparative compassion quotient is not even close. Ditto for his general housekeeping practices: there are now over 1000 pardon cases awaiting consideration, in addition to more than 3000 commutation cases, no applications in either category having been denied in over a year. Some applications (including those of a couple of my clients) have been awaiting consideration since the Clinton Administration. One can only hope that he picks up the pace in his final year or he will leave a frighteningly large backlog of cases for his successor.
"If Monday's pardons were pretty thin gruel, the same cannot be said for the sentence commutation granted crack offender Michael Dewayne Short. The President's personal intervention to reduce Short's 235-month prison sentence could be read as an indication that he too believes that crack sentences are excessively lengthy, which puts him on the side of the courts and the angels, and in opposition to Congress and his own Justice Department. (I found it interesting that DOJ held the press release announcing the grants until after the Attorney General's Tuesday press conference, at which he reaffirmed the Department's position against making the reduction in the crack guidelines retroactive.) I think you have to regard the timing of this grant as particularly significant, given the really minuscule number of commutations he has granted to date (three, not counting the outlier Libby). It came just hours after the Supreme Court recognized the unjust nature of crack sentencing in Kimbrough, and just the day before the Sentencing Commission was scheduled to act on the highly politicized crack retroactivity issue. So I would like to read it as a message to Congress from the president's bully pulpit, joining his voice to that of the judicial branch to urge comprehensive reform of these unjust laws.
"On the other hand, the possibility that this was an entirely random act whose timing was entirely fortuitous cannot be ruled out, and the fact that Short's prison sentence was reduced by less than a year made it a pretty safe grant. Short was a very minor player in a large conspiracy who had nothing to bargain with, and I would be willing to bet that there were other indices of low risk. President Clinton had already commuted the sentence of one of Short's co-defendants, Derrick Curry, years before. While the realist in me will wait to see if President Bush grants any more of the 3000 pending commutation applications before I change my view of his clemency policies, this doesn't mean I won't try to argue the symbolic importance of the Short grant wherever it would help the cause of law reform."
An article on Law.Com (here) discusses how counsel for public companies have to deal with that new animal, the corporate monitor, if there is a government investigation of significant wrongdoing at the organization. The advent of deferred and non-prosecution agreements since the demise of Arthur Andersen made federal prosecutors chary about indicting companies, has usually included the company paying for an independent monitor to ensure that it implements the terms of the agreement, which usually includes beefing up the internal compliance program and developing better reporting mechanisms to prevent a recurrence of the misconduct. The article concludes, "Since monitorships -- whether bane or benefit -- are likely to remain a fixture in the legal and regulatory landscape for the foreseeable future, corporations and their counsel must learn how to deal with them." I suspect most corporate counsel would vote for "bane" but there's not much they can do about them.
With deferred and non-prosecution agreements becoming almost the norm in corporate crime investigations, I think we should expect at some point to see the Department of Justice create some routine procedures for the appointment of monitors, the scope of authority, and their reporting responsibilities. To this point, however, the agreements have been developed fairly haphazardly, with different districts following their own internal rules for appointing the monitor and the scope of authority to intervene in corporate affairs. The monitor for Bristol-Myers Squibb essentially got the company's CEO and general counsel fired because of a criminal investigation initiated while the company was operating under a deferred prosecution agreement -- a rather significant level of involvement in corporate governance. The appointment of individuals or firms as monitors has drawn criticism in a few instances for the possible appearance of impropriety, with former colleagues of the U.S. Attorney appointed in one district.
The monitorships can be quite lucrative, and the company has almost no power to control the costs. As discussed in an earlier post (here), former Attorney General John Ashcroft's firm will likely bill a medical device manufacturer between $29 million and $52 million for work as a monitor for 18 months, which is between $1.5 and $3 million per month. A company has no real avenue to object to the bills, because the key to escaping the deferred prosecution agreement is cooperating fully with the monitor. The cost of the monitor is a fairly small price for a company to pay for getting an investigation resolved without a criminal conviction.
As deferred and non-prosecution agreements become more routine, will the Department of Justice, or perhaps even Congress, try to institute regular procedures for them? Perhaps one day there will be a group of approved corporate monitors who will work for a fixed fee or discounted rate that a company could chose from. The lack of regular procedures works to the benefit of the local U.S. Attorney's Offices at this point, because without procedures there can be no real oversight. The day may come, however, when the "wild west" aspects of these agreements comes to an end. (ph)
Wednesday, December 12, 2007
Yesterday, I talked a bit about a new consultation paper on the law of bribery issued by the Law Commission of England and Wales. One of the report’s most striking recommendations is that bribery in the private sector be treated the same as bribery in the public sector. From an American perspective, the recommendation is surprising. The law of bribery, particularly at the federal level, is focused primarily on bribes involving public officials engaged in official acts. Legislation concerning bribes in the commercial sphere occurs only in the case of certain specific industries in which side payments have proved to be a problem, such as in the case of investment advising, banking, labor unions, radio disc jockeys, and television quiz shows. Only a few states have more general laws broader laws that apply broadly in all commercial contexts.
The consultation paper’s principal rationale for treating public and private sector bribery the same is that both involve a "betrayal of a relation of trust or a breach of a duty to act impartially or in the best interests of another." At the most abstract level, perhaps, this is true. But the problem is that the nature of the relation of trust in the private sphere tends to be much more varied and complex than in the public sphere.
Consider the following hypotheticals: (1) a waiter at a restaurant accepts a payment from a customer in return for reserving a particular table; (2) a supermarket manager accepts a payment from a breakfast cereal sales representative in return for ensuring prominent shelf space for a product; (3) a teacher accepts a gift from a favorite student at Christmas time shortly after the teacher has written the student a recommendation letter. In each case, it’s unclear that any relation of trust or duty to act impartially has been betrayed. Waiters regularly receive money from customers for their services. Indeed, they depend on such payments for their livelihood. There is no clear line between payments given to recognize service given and payments to receive some special treatment. The same is true in the case of the supermarket. Sales representatives regularly pay money for prominent product placement. Unless there is a clear rule that prohibits sales managers from taking side payments, we cannot know whether the manager has done anything wrong. Similarly in the case of the teacher, without more context, we have no indication that there has been a breach of any duty of impartiality.
In the public sector, the lines are much clearer. It’s hard to imagine any circumstances in which it would be appropriate for a public official to accept a gift from anyone in connection with his official duties. (One possible exception might be a case in which an official receives a gift from a foreign head of state or diplomat, but even here it’s doubtful that it would be appropriate for the public official to keep the gift for his own use.) We have no problem in categorically prohibiting public officials from accepting payments beyond the regular salaries they receive from the state. But private industry functions very differently. There are various industries in which it is expected and appropriate for such side payments to be made. To regard all such payments as bribes would entail significant chilling effects on business practices. For this reason, the ad hoc, industry-by-industry approach to legislation seems more likely to provide an optimal level of criminalization.