Wednesday, December 12, 2007

Fraud Without Loss in the Reyes Case

Former Brocade CEO Gregory Reyes got a dose of pretty good news from U.S. District Judge Charles Breyer about his upcoming sentencing for options backdating at the company.  In an opinion (available below) discussing various sentencing issues, Judge Breyer determined that the government did not propose any reasonable method for determining the loss from the backdating, and therefore he would not apply an enhancement under the Sentencing Guidelines for loss to increase the offense level.  The Judge did not find the loss was zero, which could be a more problematic conclusion, but instead found that the government's various proposed methods of calculating the loss were inadequate to fairly estimate the harm.  Complicating matters in this case, which may make it sui generis, is that Reyes did not personally profit from the backdating, at least not as charged in the indictment, so intended gain is not available.  The government argued that Reyes did profit from other the backdating of other options not charged in the case, but the court rejected that as not proven by the government.

One method proposed by the government was to look at the decline in Brocade's stock price on the day the company disclosed the improper accounting for the options, which triggered a loss of over $3 million.  Judge Breyer rejected that method, finding that it did not adequately measure any loss directly from the backdating but only how the market reacted on one particular day to a news event.  The Judge also rejected using a "recissory" method to estimate the value of the options as backdated because in fact they turned out to be worthless, due to the significant decline in Brocade's stock price when the tech bubble burst and all the options ended up under water.  Finally, he rejected using the amount of the SEC fine Brocade paid, which was $7 million, and the tax liability it assumed for covering the tax consequences of the backdating, which was over $3 million.  On the SEC fine, the court stated that this method had never been used before, and for such a significant enhancement he would not adopt a novel method of calculating the loss.  The amount of the loss is the primary driver of sentences under the Guidelines, and by finding no loss from the backdating, Reyes avoided a sentence that could have stretched past twenty years if a particularly high figure was calculated. 

Judge Breyer did enhance the sentence on two grounds: Reyes' role as an officer of a public company and as an organizer of the criminal conduct.  Together with the base offense level, the Guidelines sentencing range is 15-21 months, based on an Offense Level of 14.  Not a walk in the park for Reyes, for sure, but substantially less than what has been seen in other CEO prosecutions.

After the Supreme Court's recent decisions in Gall and Kimbrough granting district judges considerably more discretion in sentencing, I suspect Judge Breyer may depart from the Guidelines recommendation.  It would not surprise me if he gave Reyes a split sentence, perhaps the old "double nickel" of five months in prison and five of home confinement, and could even give a pure home confinement/probation sentence.  Prior to Gall, I would have expected prosecutors to appeal the district court's loss analysis.  But now that the standard of review is abuse-of-discretion, I doubt the Judge's analysis is so off base as to draw a reversal from the Ninth Circuit.  Reyes is sure to appeal the conviction, but I think the sentencing will be good news, at least to the extent one can ever say that being sentenced in federal court provides a measure of good news.

The court's loss determination is definitely good news for Stephanie Jensen, Brocade's former human resources manager who was also convicted in a separate trial on conspiracy and false SEC filings charges for the Brocade backdating.  Given that she is unlikely to qualify for the organizer enhancement like Reyes, and probably was not in a senior position to trigger the four-level enhancement for being an officer of a public company, her offense level would be 6, leading to a sentencing range of 0-6  months.  At that level, she would be eligible for probation, or home confinement at worst, a far better outcome for her than a term of imprisonment. (ph)

Download us_v_reyes_sentencing_guidelines_loss_opinion_nov_27_2007.pdf

December 12, 2007 in Fraud, Securities, Sentencing | Permalink | Comments (0) | TrackBack (1)

Tuesday, December 11, 2007

The Lawyer Gets Probation

With the recent focus on the Conrad Black sentencing of 6.5 years, many failed to notice the co-defendants.  Yet there were three and one was an attorney.  Judge Amy St. Eve placed Conrad Black's former corporate counsel at Hollinger International on five years probation.  The government wanted significantly more time, but the court recognized that the attorney had received no profit/gain and was the least culpable individual.  (see Chicago Tribune here, Wall St Jrl here). 

A July 17, 2007 DOJ Corporate Task Force News Release reporting on the prior five years states that "23 corporate counsel or attorneys" had been convicted during this time span - a number that Alice Fisher proudly spoke to at the Second Annual ABA Securities Fraud Conference. (see here)  Perhaps this number seems low to some, but it actually should be considered very high. If a client fails to follow the advice of outside counsel it is easy for the lawyer to disclaim responsibility. But when the attorney is inside counsel, more responsibility may fall into his or her lap. The question now becomes: how far must corporate counsel protest when conduct within the corporation presents problems, especially problems that a prosecutor may decide to call criminal down the road.

Although corporate counsel here will not have to suffer prison time, the conviction in this white collar case carries severe consequences -especially to the ability to continue to practice law.  This conviction, even with a sentence of probation, sends a clear message that corporate counsel should dust off the resume when there is any possibility that corporate management is not following the law. But one has to wonder if fleeing corporate counsel when matters get tough will be in the best interest of the corporation and its shareholders.

(esp)   

December 11, 2007 in Sentencing | Permalink | Comments (0) | TrackBack (0)

Upcoming Conferences

12/13/07 - ABA - Thompson/McNulty Memorandum and Beyond - details here.

12/6-7/07 - ABA - Criminal Tax Fraud - details here

1/9/08 - Strafford - Foreign Corrupt Practices Act - Voluntary Disclosures - details here

3/5-7/08 - ABA 22nd National White Collar Crime Institute - details here.

5/1-4/08 - NACDL - White Collar Crime Track - details here.

(esp)

December 11, 2007 in News | Permalink | Comments (0) | TrackBack (0)

We Mourn the Passing of Professor Stanton Wheeler

Wheeler_stanton We mourn the passing of Professor Stanton Wheeler. Professor Wheeler was the Ford Foundation Professor Emeritus of Law and Social Sciences and Professorial Lecturer in Law at Yale Law School. Bio here.  NYTimes Obit here. A list of his extraordinary works in the area of white collar crime can be found here. He was well known for his leadership on the Yale White Collar Crime Studies and for reminding us that sociology plays an important role in this area of the law.

(esp & ph)

December 11, 2007 in News | Permalink | Comments (0) | TrackBack (0)

Monday, December 10, 2007

The Timing on Libby Dropping His Appeal

Yesterday was Sentencing Day.  From the Gall and Kimbrough decisions by the Supreme Court (here), the sentencing of Michael Vick (here) and Conrad Black (here), Libby dropping his appeal could easily have slipped by without much notice.  But in the new world of blogs, that seldom happens.  It was mentioned here, as well as Doug Berman's Sentencing Law & Policy Blog, Jerri Meritt's Talk Left, Huffington Post here, and a host of other places.  And many were speculating on why I "Scooter" Libby would make this strange move of dropping his appeal.  Several things to notice here:

  • Although Libby might not have known that the Supreme Court decisions would be issued Monday, the sentencing of Conrad Black was a foregone conclusion. How best to remove oneself from being a "front-pager" then to move when other news is hot.
  • Some are speculating as to whether this dismissal is in anticipation of a possible pardon (see here)- but that's just speculation, and a pardon might not be a positive act to assist in a legal disciplinary matter.

The Libby Legal Defense Trust Fund contains a statement by Libby's lawyer Ted Wells (here) that includes the statement that

"the realities were, that after five years of government service by Mr. Libby and several years of defending against this case, the burden on Mr. Libby and his young family of continuing to pursue his complete vindication are too great to ask them to bear."

In many ways this statement tells it all for anyone who has been through a government investigation, followed by a trial, and then a conviction.  This may in some ways have been the worst part, both on Libby and his family. The strain of a long white collar investigation is grueling on not only the individual being investigated, but also those around that person.  At some point one says - enough is enough and lets move on.  Irrespective of whether Libby gets a pardon or not, one has to credit him with doing something that may not have been best for him (a possible vindication if completely successful on appeal and retrial) but is probably best for those around him. 

(esp)

December 10, 2007 in Sentencing | Permalink | Comments (0) | TrackBack (0)

Conrad Black Sentenced to 6 1/2 Years

Conrad Black received a sentence of  6 1/2 years. (see here, here, and here).  This is far from the 24 years requested by the government. (Sun Times calls it giving him a break here) But it is also above some predictions (see here).  Black made a statement at the sentencing hearing (he did express regret to shareholders), but an apology with an admission was not forthcoming (see here).  With an appeal of the conviction about to start, it would be difficult to provide an apology that admitted to wrongdoing as the statement could prove detrimental to his claim of innocence. 

Defendants are placed in a precarious situation of wanting to show remorse to reduce their sentence, but also wanting to continue their claims of innocence for appeal.  This is yet another example of when going to trial severely disadvantages the accused.  Not only does the person accused of the crime lose out on the opportunity for a lower sentence via a plea, but they also lose on reducing their sentence by not presenting acceptance of responsibility and remorse, factors that mitigate a sentence.  After all, how can one claim that they have remorse or accept responsibility if they are arguing that they are legally innocent.

Conrad Black can be very thankful to the judge, in that according to the Star he was given 12 weeks before having to report to prison.  (see here).   More on this later.  

(esp)

December 10, 2007 in Sentencing | Permalink | Comments (0) | TrackBack (0)

Vick Sentenced to 23-Month Term

Things are happening so fast today that it's hard to keep up.  Former Atlanta Falcons quarterback Michael Vick received a 23-month prison term, at the higher end of the Sentencing Guidelines range.  The sentencing played out along the same lines as two co-defendants in the dog fighting case, who also were sentenced on the higher end of the Guidelines to 18 and 21 months.  Interestingly, while one co-defendant had a prior criminal record that would usually trigger a longer sentence, Vick received the longest term so far, by two months.  The district court's Sentencing Minutes (available below) indicate that U.S. District Court Judge Henry Hudson rejected Vick's request for a reduction in the applicable Guidelines range based on his acceptance of responsibility, which is usually granted in cases in which the defendant pleads guilty.  Vick also surrendered in advance to begin serving his expected prison term, but that was insufficient to persuade the Judge that he had truly accepted responsibility for his conduct.  The denial of the two-level reduction probably kept Vick from falling in the 12-18 month range under the Sentencing Table.

A 23-month sentence means that Vick will have to serve about 20 months in prison because he will most likely receive a 15% good time reduction under the Bureau of Prisons rules.  In addition, he could be released to a half-way house for the last part of his term, so he could be out of a federal correctional institution by June 1, 2009, or thereabouts.  While residing in a half-way house he could begin training for the upcoming football season.  Vick was also sentenced to a three-year term of supervised release, but the only significant conditions there are that he undertake a drug/alcohol abuse program -- recall that he tested positive for marijuana while awaiting sentencing -- and not acquire any dogs.  So Vick may be able to point to returned for the 2009 NFL season, assuming Commissioner Roger Goodell's suspension does not stretch into that season.  Will an NFL team take a chance on Vick?  Given the state of quarterback play this past weekend, I think you can count on it. (ph)

Download us_v_vick_sentencing_minutes.pdf

December 10, 2007 in Sentencing | Permalink | Comments (0) | TrackBack (0)

What do Gall and Kimbrough Mean for White Collar Cases

The Supreme Court issued opinions today in the long awaited cases of Kimbrough v. United States and Gall v. United States.  Both decisions provide added deference to the district court decision on sentencing. In Kimbrough the Court finds that a "judge may consider the disparity between the Guidelines' treatment of crack and powder cocaine offenses." And in Gall the Court finds that "while the extent of the difference between a particular sentence and the recommended Guidelines range is surely relevant, courts of appeals must review all sentences -- whether inside, just outside, or significantly outside the Guidelines range-- under a deferential abuse-of-discretion standard."  In Gall, the Court found "that the sentence imposed by the experienced District Judge.... was reasonable."

These decisions may be important in white collar cases, especially those with absurd loss values that provide unreasonable and draconian sentences. One need only look to our President's words in pardoning commuting the sentence of I "Scooter" Libby when he found a guideline sentence "excessive" in a white collar case to say that a below guidelines sentence may be more reasonable.

Justice Stevens in Gall is critical of the exclusive mathematical computation as the end-all decision.  He places much power in the hands of the district court -- the trier of fact.  He states,  "if the sentence is outside the Guidelines range, the court may not apply a presumption of unreasonableness.  It may consider the extent of the deviation, but must give due deference to the district court's decision that the section 3553(a) factors, on a whole, justify the extent of the variance."

What does this mean in the white collar world?

  • For the defendant - you have much to gain in the trial court, but you also have a lot to lose -  be sure and present strong sentencing evidence before the district court judge.
  • For the district court judge - you now have more power and your decision carries a lot more weight; you also have discretion to move beyond the guidelines when the guideline sentence is "excessive."
  • For the government - don't just assume the guidelines will be imposed.

(esp)

Addendum - CNN reports that I Scooter Libby is dropping his appeal. (see here)

December 10, 2007 in Judicial Opinions, Sentencing | Permalink | Comments (0) | TrackBack (0)

Every Man Has His Price

Professor Stuart Green is joining us this week as a guest blogger.  He is Louis B. Porterie Professor of Law at the Paul M. Hebert Law Center at Louisiana State University, where he has taught since 1995.  His current project is a monograph entitled Property, Crime, and Morals: Theft Law in the Information Age, which will be published by Harvard University Press.  Stuart has written extensively on white collar crime issues, and his post is about a subject near and dear to our hearts here are the White Collar Crime Prof Blog: corruption.  Welcome, Stuart, and thanks for joining us.

                                                                                                                                                

My thanks to Peter Henning and Ellen Podgor for inviting me to serve as a guest blogger this week at White Collar Crime Prof Blog. I am a professor of law at Louisiana State University and author of Lying, Cheating, and Stealing: A Moral Theory of White Collar Crime (OUP, 2006), now available in paperback.

I plan to spend at least some of the week talking about bribery. The last several weeks have brought a steady stream of such cases in the news: That of Dickie Scruggs, the big time Mississippi torts lawyer who has been indicted on charges that he offered $50,000 to sway a local judge in a relatively small fee dispute, has already received some excellent discussion on this site. Reports out of Iraq indicate that widespread theft and bribery are hindering the country’s ability to achieve political and social stability. And Pete Kott, former Speaker of the Alaska House, was sentenced to six years in a federal prison for accepting $9,000 in bribes from the founder of an oil field services company, in a case that may well end up implicating Alaska Senator Ted Stevens.

Bribery is an elusive crime. Particularly in the United States, where the political process is so thoroughly permeated by private contributions and log-rolling, it can be hard to distinguish between what’s truly corrupt and what’s not. The British, though less encumbered with the problem of political contributions, have nevertheless struggled to make sense of bribery, and the Law Commission of England and Wales has just issued a major new consultation paper calling for reform in this area. (Full disclosure: I served as a consultant on the report, writing an Appendix on the law of bribery in the U.S.) The study recommends a complete overhaul of the law of bribery.

Among its most striking recommendation is that bribery in the private sector be treated on the same terms as bribery in the public sector. The study offers both moral and instrumental reasons for abrogating the traditional distinction. It views the moral wrong of bribery as involving the "breach of a legal or equitable duty that involves a betrayal of a relation of trust or a breach of a duty to act impartially or in the best interests of another." It says that "[w]here a person breaches such a duty in return for the conferral or promise of an advantage from another, both should be guilty of bribery irrespective of whether the recipient is a public official." ¶1.16. As for practical reasons, according to the report, "the main objection to having separate offences is that it is very difficult to define with sufficient clarity the distinction between public sector and private sector functions. Increasingly, what were formerly public sector functions are sub-contracted out to the private companies while public bodies now frequently form joint ventures with private companies." ¶1.14.

Both propositions seem to me problematic. First, it could be argued that government officials who accept bribes breach a duty to the public good that is more significant than the duty breached by employees of a private firm. Second, while it is true that the lines between public and private functions has become increasingly blurred in recent years, it may make more sense simply to err on the side of treating some quasi-private functions as public (as in the case of U.S. federal program bribery) without going so far as to treat all private functions as public. Those, at least are a couple of my initial reactions to the report. I’ll have more to say about it tomorrow.

Stuart Green

December 10, 2007 in About This Blog, Corruption | Permalink | Comments (0) | TrackBack (0)

Sunday, December 9, 2007

Conrad Black - Bail Pending Appeal?

With Conrad Black most certainly facing jail time, there are three possible scenarios here: 1) he could be ordered to go directly to jail; 2) he could be ordered to go to jail but allowed time for the specific placement to be made and then he could be allowed to report to that facility; 3) he could be granted bail pending the appeal.  My co-blogger, Peter Henning lays out the test and some examples here for this last category.  In the mix here also is the fact that he can serve his sentence in Canada under the terms of a prisoner transfer treaty.   Lets look a little closer at this particular issue:

1. Conrad Black's past conduct provides strong evidence that he is not a flight risk.  This speaks well for bail pending appeal.  But, today, this factor seems to play more of a role in holding people who are flight risks than in saying those who are not a risk should be released.

2. There is no evidence that he would pose a danger in society - a typical realization in a white collar case.  The conviction in a white collar case usually strips the person of any power that would allow them to do further damage.

3. So it all comes down to whether he has a substantial question of law or fact that might result in reversal.  In many ways the trial judge being the person to evaluate this issue is somewhat strange as it is the trial judge who ruled throughout the trial on the issues that are likely to be presented on appeal. Most often the issues fall into four categories: jury instruction (whether it is an improper one or an offered one not admitted), insufficiency of the evidence, admissibility or inadmissibility of evidence, and constitutionality.

Although case law exists on what constitutes a "substantial question," much is left to the judge - who often issues very little guidance for future courts, as courts often rule on this issue without explanation.   

Some get the bail -

  • Gov. Ryan - bail for the appellate stage, but not the Supreme Court stage;
  • Bernie Ebbers - bail granted pending the appeal, but once affirmed told to report to prison;
  • Martha Stewart - bail granted pending the appeal by the 2d Cir.- although she then decided not to take it

Some do not get bail -

  • "Scooter" Libby - denied bail pending appeal - but then pardoned; having his sentence commuted;
  • Jeff Skilling - no bail pending appeal;
  • Former Atlanta Mayor Bill Campbell - no bail pending appeal;
  • Jamie Olis -ordered directly to prison;
  • Former Alabama Gov. Siegelman & Richard Scrushy - no bail;
  • Chalana McFarland - no bail 

In an attempt to reach a classless sentencing structure we may be moving the emphasis to this third category - the substantial question.  This poses a problem as it attempts to measure error in a stage before the issues have been raised.  The defense is placed in the position of showing their appellate cards prior to the game beginning.

Additionally, one issue that seems to be overlooked is whether the individual reports to the prison or is taken on the spot.  For the individual already incarcerated, the answer is usually easy - they just stay in prison.  But for the white collar offender who poses no risk of flight, or to society - should they be subject to immediate incarceration that places them in a holding pattern pending their assignment to a facility?  And what standard is being used here to make the decision of who gets to report directly to the prison facility, and who does not?  Shouldn't all white collar and non-white collar offenders who pose no risk of flight or harm to society be given this privilege? And yes, it can be an important privilege to not have to wait in prison for the placement orders and then be transferred by prison authorities to the eventual destination.  Reporting directly to the facility, although it may be at the cost of the defendant, is often a better way to be enter the prison system.

(esp)

December 9, 2007 in Sentencing | Permalink | Comments (1) | TrackBack (0)

An Interesting Twist in the Reyes Case

The prosecution of former Brocade Communications CEO Gregory Reyes has taken a new turn with the defense filing a motion for a new trial (available below) based on newly discovered evidence, specifically a witness who may not have been entirely truthful in her testimony.  Reyes was the first defendant convicted for fraud based on options backdating, and the company's former human resources manager, Stephanie Jensen, was just convicted on conspiracy and false statement charges. 

In preparation for Jensen's trial, the witness, who worked in Brocade's finance department, had been listed as a prosecution witness.  Right before a pretrial interview with prosecutors, her lawyer from Wilson Sonsini informed the prosecutors that she would assert her Fifth Amendment self-incrimination privilege, and the law firm withdrew from her representation.  The witness had been important to the government's case, with the brief noting that her testimony was cited more than twenty times in the prosecution's closing arguments.  Even more, the defense points out that the "Court, in its order denying the Rule 29 and Rule 33 motions, emphasized the importance of the fact that Ms. Moore did not know about the retroactive pricing of options, and articulated its belief that “the human resources department did not pass along information about the scheme to people in the finance department like Elizabeth Moore." 

In support of its motion, the defense filed affidavits from three individuals who assert that the witness believes her testimony was misconstrued by the prosecutors, and that she was not ignorant about the backdating.  It's not clear whether her testimony at Reyes' trial was diametrically opposed to what she is now stating, so she may not have committed perjury.  But the withdrawal of her counsel and assertion of the Fifth Amendment certainly give the defense fodder to seek a new trial. 

The U.S. Attorney's Office disclosed her assertion of the self-incrimination privilege to Reyes and Jensen as soon as they learned of it, sending an e-mail that stated:

Please be informed that we have been notified by George Niespolo, counsel to Elizabeth Moore, that Ms. Moore will assert her Fifth Amendment privilege if called to testify at the Jensen trial. Mr. Niespolo did not share with us the grounds for that assertion, and he declined to tell us whether he considered the information Brady material as to either Mr. Reyes or Ms. Jensen.  We asked Mr. Niespolo for further details, which he declined to provide except to add that the information was somehow related to her prior testimony.

A government witness who testifies in one trial and then decides to assert the Fifth Amendment in a second trial on the same transactions is certainly suspicious.  Whether Moore is truly a "key" witness remains to be seen, because the conviction of Jensen may provide a basis for prosecutors to argue that her testimony was not so important to the Reyes conviction that different, or even contrary, testimony from her would make a material difference. 

Reyes has not been sentenced yet, and the district court will need to straighten this out before getting to that point, if in fact the cases even reaches sentencing.  While "newly discovered evidence" claims can be brought on just about any ground, this one might gain some traction.  (ph)

Download us_v_reyes_new_trial_motion_dec_3_2007.pdf

December 9, 2007 in Prosecutions, Securities | Permalink | Comments (0) | TrackBack (0)

Saturday, December 8, 2007

How Do You Charge a Dead Person With Fraud?

Frauds come in many different forms. There is mail fraud, wire fraud, securities fraud and even computer fraud. But death fraud? And how do you charge a dead person with fraud? The Washington Post discusses such a charge in a recent case in England.(see here).

(esp)

December 8, 2007 in Fraud | Permalink | Comments (0) | TrackBack (0)

What to Watch For at Lord Black's Sentencing

Lord Conrad Black and his three codefendants, Peter Atkinson, Jack Boultbee, and Mark Kipnis, are scheduled to be sentenced by U.S. District Judge Amy St. Eve on December 10.  An earlier post (here) discussed the contentions of the U.S. Attorney and the defendants over various Sentencing Guidelines issues, and the Judge has a range of issues to decide that will affect the sentence.

Unlike a movie or play, which builds to a climax, the sentencing of the four former Hollinger International executives goes in reverse order of public interest and corporate authority.  Lord Black's sentencing is scheduled for 10:00 a.m. (CST), then comes Atkinson at 1:00, Boultbee at 2:30, and finally Kipnis at 3:30.  It looks like Judge St. Eve has set aside two hours for Black, which may not be enough time given the number of issues the court will have to resolve.  If you're looking for a Playbill for the proceedings, here's my run-down of the major issues that will affect the sentencing:

  1. Which Set of Guidelines: First up will be which version of the Sentencing Guidelines the Judge applies.  The presentence report (PSR) recommends the 2007 edition for Black, which will trigger a substantially higher sentence than the 2000 version that is recommended for the other three defendants.  The basis for recommending the current edition for Black is his conviction for obstruction of justice that occurred in 2005 when he was caught on camera removing files from his Toronto office.  If Judge St. Eve opts for the PSR recommendation, and I think she will, then Lord Black is looking at a substantial prison term.  For the other three defendants, the decision on this issue in Black's sentencing will be the tip-off for their sentencings.  I expect Judge St. Eve to follow most of the recommendations in the PSR, so if she follows it for Black there's a good chance she will do the same for the other three.
  2. What Loss Amount:  The loss figure applied to the crime is the primary driver of the sentence, and the PSR recommends $5.5 million as the applicable amount.  The government wants $32 million, while the defendants want much less, to a low of $15,000 offered by Atkinson.  The decision on which Guidelines to use plays into this issue because the 2007 version increases the sentence by four more levels with a $5 million loss than the 2000 Guidelines, resulting in a sentencing range that is about 50% greater.  If Judge St. Eve opts for a figure other than that recommended in the PSR, that will tell you which direction the sentences are headed -- the higher the loss, the longer the sentence. 
  3. Public Company Executive.  After adoption of the Sarbanes-Oxley Act in 2002, the Sentencing Commission added a provision to crack down on senior corporate executives who engage in misconduct by adding a four-level enhancement for officers convicted of crimes in their role at the company.  The PSR recommends against this enhancement for Black -- and it is inapplicable to the other three if the 2000 Guidelines are used -- because he did not misuse his position.  This is the one issue on which I think Judge St. Eve might well reject the PSR's position because the enhancement is fairly clear and, based on the parties' briefs, the Probation Office may not have interpreted the provision correctly.  If the four-level enhancement is added to Black's Guidelines calculation, then he's looking at a sentence 200% higher than he would receive under the 2000 Guidelines when the loss enhancement is taken into account.  Add in the obstruction of justice enhancement recommended in the PSR, and his sentencing range is 97-121 months.
  4. Departures: The Sentencing Guidelines are advisory only, not mandatory, but Judge St. Eve is a former Assistant U.S. Attorney and unlikely to stray far from them.  Once the Guidelines analysis is complete, then the Judge will have to address grounds for departure offered by the defendants.  I doubt she will adjust the sentences significantly from the Guidelines range, but she could grant a small downward adjustment for each as a means of establishing the "reasonableness" of the prison terms, the requirement for all federal court sentences these days.  This is a means but "bullet-proofing" the sentence.
  5. Bail Pending Appeal.  After announcing of the sentence for each defendant, the court will have to decide on bail pending appeal.  The presumption in the federal statute, 18 U.S.C. Sec. 3143, is that the defendant starts the prison term unless there is a substantial basis for an appeal that would result in overturning the conviction -- there's no issue that any of these men pose a threat to the community that requires incarceration immediately.  It is really a crapshoot in white collar crime cases these days trying to figure out whether a judge will allow a defendant to remain out on bail until the conclusion of the appeal.  While I think there's about a 1% chance of the defendants being taken into custody immediately, as happened to Richard Scrushy and Don Siegelman in Alabama, I suspect Judge St. Eve will not grant bail pending appeal and instead will give them a reporting date four to six weeks out -- after the holidays, to be sure.  I base this on her opinion rejecting the defendants' motion for a post-verdict judgment of acquittal, which reads like a decision finding an inadequate basis for believing the court of appeals will overturn the verdicts.  That is not a strong feeling, but more of a hunch.  Even if Judge St. Eve denies bail, the defendants can appeal that decision immediately to the Seventh Circuit under Federal Rule of Appellate Procedure 9, which they are sure to do if their request is denied.  While those motions are difficult to win, it is not impossible, as demonstrated by the Tenth Circuit's decision to order bail for former Qwest CEO Joseph Nacchio after the trial judge denied his motion.
  6. Where Will They Go to Prison.  If Judge St. Eve denies bail pending appeal, then the Bureau of Prisons will determine where they will start to serve their prison terms.  The defendants can request the court to recommend a specific facility, which Judge St. Eve would probably do, but the final decision is up to the BOP and it is even more of a crapshoot trying to figure out where they will end up.  The BOP tries to place prisoners within 500 miles of their residence, but Jeffrey Skilling is enjoying the cold weather in the FCI in Waseca, Minnesota, which is not exactly a short hop from Houston.  Because they are not U.S. citizens, the BOP rules require that Black, Atkinson, and Boultbee be assigned to a low-security facility, which would likely preclude an initial assignment to a prison camp.
  7. Can a Prisoner Be Transferred to Another Country to Serve The Term.  As Canadian citizens, Atkinson and Boultbee could take advantage of the prisoner transfer treaty between the U.S. and Canada and request that their term be served there.  Lord Black is a British citizen, having given up his Canadian citizenship to become a Lord, so he is not eligible under the U.S.-Canada treaty.  He could seek to be transferred to the U.K., or under an international convention that both Canada and the U.S. have signed, he could seek a transfer to Canada as a "national" of that country, even though his citizenship is British.  It all depends on how Canada defines who is a "national," a point on which I'm ignorant, and whether that country would be willing to accept him.  This is all a bit premature, however, because the treaties require that the conviction be "final" and so long as an appeal is pending in the case I don't think there is the necessary finality.

I hope I got everything right in here, and if you see anything mistaken, aside from my judgment which is usually flawed, please let me know.  Now, for the final question: What sentence will Black and the others receive?  There's enough uncertainty that I can't make a firm prediction, but I can give an over/under based on two scenarios.  If Judge St. Eve follows the PSR on the Guidelines version to apply to each, I would put the over/under on Lord Black at 100 months, with 45 months for Atkinson and Boultbee, and 36 months for Kipnis.  If Lord Black is sentenced under the 2000 version, then the over/under for him would be 50 months.  We shall see. (ph

December 8, 2007 in Fraud, Sentencing | Permalink | Comments (1) | TrackBack (4)

Friday, December 7, 2007

Update on Bonds' Appearance in Federal Court

Above the Law has eyewitness reports (here) on the initial appearance and arraignment of Barry Bonds.  In addition to the usual procedures, such as Bonds being released without having to post bond or surrender his passport, it appears that the conflict of interest issue with one of his new attorneys, Christine Arguedas, is an issue, at least for the moment.  From various reports, it sounds like prosecutors raised the question about one of Bonds' lawyers representing other witnesses in the case, which is probably Arguedas' representation of witnesses in the Balco grand jury investigation in which Bonds allegedly committed perjury.   Of course, a defendant can waive the conflict, but the court is not required to accept it.  This may be the first test regarding the relationship between the two sides, and if the government takes a hard line and files a motion to disqualify then things are likely to get pretty frosty. 

The defense also said it will seek dismissal of the indictment, which will probably require briefing and a hearing on the motion.  The next court date is February 7, at which time the judge may set a trial date.  With a flurry of motions like to come soon, it is unlikely the case will be completed before the end of the 2008 season, which raises the question whether any major league team will take a chance and sign Bonds to a contract.  (ph)

                                                                                       

UPDATE:  Here's the text of the court's order recounting the hearing:

The defendant’s appearance maybe waive at the next appearance. The appropriate waivers shall be filed in advance of the next hearing.  The government indicated that there may be a conflict issue with certain defense counsel. The government shall e.file a letter indicating the situation as they see it and the Court will determine if a hearing is necessary. If the Court determines that a hearing is necessary, the defendant must be present.  Defendant indicated that they may file a motion to dismiss the indictment.

(ph)

December 7, 2007 in Obstruction, Perjury, Prosecutions | Permalink | Comments (0) | TrackBack (0)

Would You Take Barry Bonds As a Client?

Home run king Barry Bonds is supposed to appear in federal court for his initial appearance -- and most likely an arraignment -- on perjury and obstruction of justice charges contained in a federal indictment issued in San Francisco.  A Wall Street Journal article (here), by Bay Area legal maven Justin Scheck, points out the problems Bonds has had in hiring a new attorney with significant federal court experience to conduct the defense at trial.  The article notes that Bonds met with John Keker, of Keker & Van Nest, a nationally-known white collar defense lawyer who has defended, among others, former investment banker Frank Quattrone, who was also charged with obstruction of justice arising from a forwarded e-mail.  There may have been an issue in hiring Keker because he represented the baseball players union in its fight to keep the government from getting the results of drug tests players took (see a New York Daily News story here).  In discussing the approach to Keker, and various in-fighting among Bonds' current legal team, the WSJ article raises in my mind the question whether a lawyer would really even want Bonds as a client.

There are obvious benefits to being the attorney for one of the most famous players in professional sports history, in a trial that will gain national -- and probably even international -- attention.  Bonds' lead counsel will be on television daily whenever there is any court proceeding, and the chance to have your picture appear over the shoulder of an ESPN SportsCenter anchor on a regular basis is publicity you just can't buy.  The lawyer will join the pantheon of well-known defense counsel in this country, one of the "usual suspects" who will begin to appear regularly in a variety of cases, or be asked to comment on them.  Pretty tempting, isn't it?

But from this ivory tower, I have to say that there are certainly a few major red flags that a lawyer has to think about seriously before undertaking the representation.  The article notes that Bonds asked Keker for a discount on his $900 hourly rate, and wanted another law firm to review the billings.  That certainly goes against the grain in white collar cases, in which cost is often not an obstacle.  Bonds' past baseball income plus future earnings potential, regardless of the outcome of the case, probably means he can afford Keker's rate.  There's nothing wrong with asking for a discount, and it makes good business sense to double check bills.  Not the best way to begin a relationship, but it shouldn't be a showstopper, either.

If that was all, then the fact that Bonds wants a discount and will flyspeck bills would hardly be of interest beyond the stereotype of the allegedly cheapskate athlete.  But the article also says that "Keker was concerned he wouldn't have control over Mr. Bonds's public relations and legal strategies and bridled at the prospect of collaborating with the player's current legal team." [Italics added] That starts to spell trouble for the lawyer.  The fact that Bonds' current legal team is a bit on the dysfunctional side is problematic, but if the strings in the case will be pulled by someone else, then there is a significant danger for the lawyer.  A defense lawyer being pulled in different directions, or forced to clear legal strategies through the "home office," may not be effective.  Trust is a two-way street, and if the lawyer is not going to be trusted, then why take on the case? 

It is always difficult to control a high-profile client who is used to being in charge of everything -- look no further than Lord Conrad Black, when the judge in his case threatened to take action against him for out-of-court comments during the trial if his lawyers didn't muzzle him.  I'm not saying the lawyer has to control everything, but a trial is a lot like any theatrical production in which everyone has a role to play.  The client who believes he or she can "talk my way out of this" or who showers the government with disdain, no doubt believing it is richly deserved, is looking for trouble.  Heaven forbid the client demand the opportunity to testify to "explain" everything for the jury so they will understand how misunderstood the defendant really is -- that drooling person would be the prosecutor waiting for the cross-examination.  Especially in a perjury and obstruction prosecution, portraying the defendant as an honest person whose statements were just misunderstood is paramount, but the defendant may be the worst person to say that.  The hardest decision in a case, especially a white collar prosecution, is whether the defendant will testify, and there can only be two people involved: the lead counsel and the client.  If there is a fight over control of the case from the beginning, then it means other agendas may be playing out, with the trial lawyer getting the blame if things go wrong.

So, would you really want to be Barry Bonds' lawyer?  Tough call, but it would be pretty cool to appear on SportsCenter right after the Patriots highlights. (ph)

                                                                                              

UPDATE:  The San Jose Mercury News reports (here) that Bonds has added two Bay Area attorneys: Allen Ruby and Christine Arguedas.  Ruby has represented the NFL in one of Oakland Raiders owner Al Davis' many lawsuits against the league, and Arguedas is well-known in white collar crime circles for her work recently on behalf of various corporate executives caught up in options backdating, including the former GC at Apple, and the former general counsel of Hewlett-Packard in that company's pretexting imbroglio. 

Arguedas has represented others in connection with the Balco (Bay Area Laboratory Cooperative) steroids investigation, including witnesses who appeared before the grand jury.  That gives her some familiarity with the case.  While it can be dicey to represent different people involved in a grand jury investigation, I doubt there is a conflict of interest problem for her because there does not seem to be any overlap between the witnesses who testified before the Balco grand jury and those who are likely to be called in the Bonds trial.  It remains to be seen, however, whether prosecutors will look for a potential conflict of interest as the basis to move to knock Arguedas off the case.  Another interesting question will be whether Ruby or Arguedas takes the lead in the case, or whether they are co-leaders of the defense -- which one gets to be on SportsCenter.  No word yet on whether either discounted his/her fees for the case. (ph)

December 7, 2007 in Defense Counsel, Obstruction, Perjury | Permalink | Comments (1) | TrackBack (0)

Thursday, December 6, 2007

How Do You Lose a Search Warrant?

Compared to a grand jury subpoena, obtaining a search warrant involves quite a bit of hassle for the prosecutor.  While the subpoena is just mailed out, a warrant requires a detailed affidavit, preparation of the warrant that meets the Fourth Amendment specificity requirements for the place to be searched and items to be seized, and then approval by a "neutral and detached magistrate."  Warrants are still uncommon in white collar crime cases, and the decision to try to get one is usually of some significance in an investigation.  Once the warrant is issued, the next phase can be even more daunting, requiring the organization of the volume of records obtained by the agents.  It is not unknown for agents to cart away hundreds of boxes of documents from a search because the descriptions are usually so broad, such as "all documents related to the sale of X since 2003."  That's why an article in Corporate Counsel (available on Law.Com here) is so strange because it states that the prosecutors in a corporate investigation thought a search warrant had been executed but it does not appear that the search ever occurred.

The case involves the investigation of Chiquita for protection payments to a Columbian right-wing paramilitary group that was designated as a terrorist organization.  An earlier article in Corporate Counsel about the case (available on Law.Com here), which Chiquita settled, stated that a warrant was executed at the company's headquarters in 2004.  That statement was based on informationi provided by two prosecutors on the case, but counsel for the company denied that a search ever occurred.  No one can seem to locate the records related to the warrant, and the Department of Justice has refused to comment on the matter. 

What is so odd about this is that executing a warrant involves steps that create a paper trail.  Federal Rule of Criminal Procedure 41(f) requires that "[a]n officer present during the execution of the warrant must prepare and verify an inventory of any property seized," and then the "officer executing the warrant must promptly return it — together with a copy of the inventory — to the magistrate judge designated on the warrant."  Not to mention the documents that are seized in a search, which have to go somewhere.  How is it that the prosecutors could think a warrant was issued when it appears no search ever took place?  Did they ever ask to see the records seized, or to review the inventory to make sure the agents seized all the records covered by the warrant? 

It's a little hard to believe something like this could have fallen through the cracks, and the article notes that the mystery remains about what happened to the Chiquita warrant -- no one at the Justice Department is talking much about it.  Maybe this one joins the Loch Nest monster and the flying saucers over Roswell as another great mystery: the Case of the Disappearing Search Warrant. (ph)

December 6, 2007 in Investigations | Permalink | Comments (0) | TrackBack (0)

The Slow Moving Freight Train That Is U.S. v. Stein

If you've ever sat at a railroad crossing waiting for a freight train to pass, it is such agony as an endless stream of cars rolls by.  I suspect the participants in the KPMG tax shelter prosecution may be feeling the same way as the case moves at a languid pace.  U.S. District Judge Lewis Kaplan issued an order on November 29 (available below) scheduling the trial for the remaining defendants in the case, with voir dire to begin on September 25, 2008, and the opening arguments on October 2.  The original indictment came down in October 2005. 

The case has been through a number of proceedings, including the dismissal of thirteen defendants after the district court determined that prosecutors violated their Fifth and Sixth  Amendment rights related to pressuring KPMG to cut off payment of their attorney's fees.  That issue is now before the Second Circuit, which has granted an extension to the defendants to file their brief until January 11, 2008, with the government reply due on January 25.  At that point the case will be ready for oral argument, and it's anyone's guess how quickly the court of appeals can rule on the case. 

There is a possibility that the Second Circuit will issue its decision by September 2008, and it if reverses Judge Kaplan's order and reinstates the indictment, then the current trial may be postponed yet again to figure out whether to try all the defendants together.  I think that regardless of who wins in the Second Circuit, there's at least a decent chance of the case going to the Supreme Court because the issues involving the right to counsel are coming up with greater regularity in corporate crime investigations.  Will there be a trial by 2009?  2010?  Perhaps even 2011?  Keep counting those freight cars.  (ph)

Download us_v_stein_order_setting_trial_nov_29_2007.pdf

December 6, 2007 in Prosecutions, Tax | Permalink | Comments (0) | TrackBack (0)

Wednesday, December 5, 2007

Former Brocade HR Manager Found Guilty

The second defendant from Brocade Communications was found guilty by a jury in San Francisco on charges related to options backdating at the company.  Stephanie Jensen, the former human resources manager for the company, was convicted on one count of conspiracy and one count of filing false records with the SEC.  Jensen was charged with former Brocade CEO Gregory Reyes in 2006, and initially there were eight charges against her.  After the district court granted a severance motion, the government dismissed six counts, presenting a simpler case that focused on her work with Reyes to backdate options grants to a number of new hires at Brocade and the resulting false statements to the SEC because the backdated options were not properly accounted for in the financial statements.  According to an AP story (here), Jensen's primary defense was her lack of knowledge about the accounting for stock options.

Similar to the Reyes conviction, the government's case did not include evidence that Jensen benefited personally from the backdating, which is often a key component in such prosecutions.  The government relied in large part on the testimony of co-workers who raised questions about the backdating practices and Jensen's reassurances about who would be held responsible.

For a white collar crime case, this one was over almost before it began, with the trial lasting just a bit over one week.  The district court postponed the sentencing of Reyes until after Jensen's trial, so that should take place in the near future. (ph)

December 5, 2007 in Prosecutions, Securities, Verdict | Permalink | Comments (0) | TrackBack (0)

The Defense of Dickie Scruggs

The week since the indictment of Mississippi tort lawyer Dickie Scruggs and four other defendants for allegedly trying to bribe a state court judge to rule in their favor in a dispute over $26.5 million in attorney's fees has had enough twists and turns to qualify for the first few chapters of a John Grisham potboiler.  Speaking of whom, the well-known novelist is a friend of Scruggs, and in an interview with the Wall Street Journal (here) described the indictment as "a boneheaded bribery scam that is not in the least bit sophisticated."  Those writers sure know how to turn a phrase, don't they?  Grisham's comment does contain a kernel of Scruggs' likely defense to the charge: "If I was going to bribe a judge, I'd do a whole lot better job of it than this."

One twist in the case was the fact that a key codefendant, Tim Balducci, the payer of the bribe, was not arraigned with the other four defendants in the case, leading to speculation that he was a cooperating witness.  Then, on December 4, Balducci appeared and entered a not guilty plea to the indictment.  If he had been cooperating in the case, the U.S. Attorney's Office likely would have had him plead to a separate criminal information and not be charged in the main indictment.  At least that's the usual way of proceeding, so it does not appear at this point that Balducci is cooperating, although he could down the road.

The indictment (available below) quotes extensively from various conversations among the defendants, which in addition to Scruggs and Balducci include Scruggs' son, another attorney at the Scruggs law firm, and Balducci's non-lawyer partner, Steven Patterson, a former Mississippi State Auditor [NB: How is it that Patterson and Balducci are partners in a firm that includes a law practice when Patterson is not a lawyer?  Mississippi Rule of Professional Conduct 5.4(b) provides "[a] lawyer shall not form a partnership with a nonlawyer if any of the activities of the partnership consist of the practice of law."  Just wondering]  The speculation about Balducci's cooperation was based on the indictment's quoting of conversations between the defendants.  It is possible that Balducci gave a proffer to the government in the hope of striking a deal, but that never occurred and any proffer agreement should prohibit the government from using his statements directly against him.  Another possibility is that the government had a wiretap on the telephone in Balducci's firm.  A number of the conversations appear to be telephone calls to or from Balducci and Patterson and others in the conspiracy, and that may be the source of the information.

If there are recorded telephone conversations on top of videotapes of the meetings between Balducci and the state judge, something that has already been disclosed, then the defense will have to begin by attacking any ambiguity in those conversations.  That would be one component of what I suspect will be a two-prong legal strategy: first, throw Balducci under the bus as someone who lied to Scruggs and the others to carry out his own (delusional) bribery scheme, and then argue that someone as smart as Scruggs would never concoct a "boneheaded bribery scam" with the scheming Balducci. 

The first step is to portray -- or demonize -- Balducci as a misguided sycophant who wanted to curry favor with Scruggs in order to jump on his gravy train.  Then, assert that Balducci lied to Scruggs and the others in order to win a favorable ruling in the attorney's fee dispute -- a variant on the Richard Scrushy Defense in the HealthSouth prosecution.  This is a delicate maneuver, of course, because it requires Scruggs and the others to come across as gullible enough to fall for the entreaties of Balducci.

The second phase is to castigate the bribery scheme described by the government as a product of Balducci's imagination.  The fact that there was any documentation for the payments shows that Scruggs and the others thought Balducci was on the up-and-up because who in their right mind creates a paper trail for a bribe?  This is the flip-side of the gullibility argument, that if this really was a bribery scheme then Scruggs would have done a better job of hiding it.  That argument is dangerous, however, because it risks having the jury conclude that Scruggs was really using Balducci as a cut-out to hide the scheme, and the "boneheaded" paperwork was part of a grand plan to hang him out to dry if necessary. 

This type of argument essentially says to the government (and the jury) that "if you could find it, I couldn't have been doing anything wrong because I would have hidden it better."  Pointing out how much smarter you are than the investigators could be problematic, and recall that one of the seven deadly sins is "superbia," i.e., pride but also sometimes translated as hubris.  Offering intelligence as a defense to charge may backfire.

Balducci is certainly the linchpin of the case, and the defendants and their supporters have already begun to attack him.  We haven't heard anything yet from Balducci, and his lawyer would be smart to keep him quiet for now.  As it turns out, his lawyer for the moment is none other than Tim Balducci, who has to avoid validating the adage that a lawyer who represents himself has a fool for a client.  Staying quiet for now is his best defense, because his conversations with the state judge certainly put him in a bad light. (ph)

Download us_v_scruggs_indictment_nov_28_2007.pdf

                                                                                 

UPDATE: The AP reports (here) that Balducci pleaded not guilty at a hearing at 1:30, then at 4:00 the same day pleaded guilty to one count of conspiracy and has been cooperating in the investigation of Scruggs et al. (plea agreement available below).  Indeed, Balducci's cooperation has already qualified as substantial under Section 5K1.1 of the Sentencing Guidelines and the government will move for a reduced sentence so long as he continues to assist the prosecutors. 

The procedure here is rather strange.  Balducci was not arrested, so the prompt appearance requirement of Federal Rule of Criminal Procedure 5 does not apply, and Rule 10, which governs arraignments, does not have any time requirements.  Why have a defendant plead not guilty, only to turn around and plead guilty?  It could be as simple as the U.S. Attorney's Office not having the paperwork ready, but it is yet another twist in the Scruggs prosecution.  The post above was written based only on Balducci pleading not guilty.  With him cooperating, the defense strategy of demonizing him remains the key. (ph)

Download us_v_balducci_plea_agreement_dec_4_2007.pdf

December 5, 2007 in Corruption, Prosecutions | Permalink | Comments (1) | TrackBack (1)

The Oracle of Omaha On the Witness Stand

The prosecution of four former senior officers of General Reinsurance, including its former CEO, and a former officer from American International Group (AIG) is set to begin shortly in Connecticut.  General Re is a subsidiary of Berkshire Hathaway, and the case involves a transaction between the company and AIG that the government alleges was designed to help AIG prop up its reported loss reserves, thus creating false financial statements because the transaction was not a bona fide reinsurance agreement.  AIG subsequently restated its financials for the transaction, and the government claims that the General Re defendants knew that the contract was to help AIG falsify its records.  Doesn't that sound like something to keep jurors on the edge of their seats?  The superseding indictment (available below) has sixteen counts, charging conspiracy, securities fraud, false statements to the SEC, and mail fraud.

The government's list of possible witnesses (available below) includes the CEO of Berkshire Hathaway, famed investor Warren Buffett, nicknamed the "Oracle of Omaha" for his legendary ability to buy assets on the cheap.  If there is any such thing as an investment rock star, the 77-year old Buffett certainly qualifies.  Buffett was interviewed in the government's investigation, and media reports indicated that he asserted the General Re defendants, which include the company's former general counsel and CFO in addition to its CEO, did not tell him the real purpose of the AIG transaction.  Buffett no doubt brings a little star power to a case that has all the potential to be a major snoozer given the complexity -- or perhaps impenetrability -- of reinsurance.

If Buffett testifies for the government, how will the defense lawyers handle someone referred to as an "oracle"?  The defense counsel in the case come from some of the leading firms with well-known white collar defense groups -- Steptoe & Johnson (including Reid Weingarten, who defended Bernie Ebbers), Covington & Burling (including Alan Vinegrad, former U.S. Attorney in Brooklyn), Cadwalader & Wickersham (including Jim Robinson, former head of the Criminal Division at DOJ), Proskauer Rose, and litigation boutique Hafetz & Necheles.  How these different lawyers handle Buffet will the interesting to watch, should he testify.

The government lists thirty witnesses it may call, not including possible rebuttal witnesses, while the defense has sixty-five potential witnesses.  Those lists of witnesses are usually inflated so that neither side can be accused of calling a witness who the other side didn't know about.  Even these inflated numbers indicate that the case is unlikely to be a quick one.  (ph)

Download us_v_ferguson_superseding_indictment_oct_2006.pdf

Download us_v_ferguson_government_witness_list_dec_3_2007.pdf

December 5, 2007 in Fraud, Prosecutions | Permalink | Comments (0) | TrackBack (0)