Saturday, January 6, 2007
The reversal of the convictions against two former Westar executives may wind up being one of the most talked about white collar decisions of the year. A discussion of the case is here, and commentary is here. And there is no doubt that many white collar defense attorneys are scrutinizing their fraud cases to see if there were any required/compelled documents that formed the basis of the charge/conviction. But what is so significant about this decision?
1. To the two defendants it is clearly important as their huge sentences may be lost to history. Professor Doug Berman here questions whether the size of these sentences caused the intense appellate scrutiny that resulted in this reversal.
2. The use of the "legally compelled mailing (wiring)" doctrine is what makes this a "talked about" decision. This is a doctrine that has been used by defense counsel in the past (Parr), noted as something that exists by the Supreme Court (McNally, footnote 2), but for the most part is seldom argued. It seemed to have been lost in history when there was a continual rise in cases that held that the mailing or wiring portion of mail/wire fraud was not the essence of the crime. Historically, the mailing was the key as the statute for mail fraud was passed in 1872 as a mere section within a larger recodification of the Postal Act. The wire fraud statute is more recent, passed in 1952, and is clearly a part of the newer trend to focus on the fraud, as opposed to the jurisdiction hook that allows the statute to thrive. But even today, it is necessary that the mailing be "in furtherance" of the scheme to defraud, and a "legally compelled mailing/wiring" is not in furtherance of that scheme to defraud.
3. With respect to the counts dismissed on insufficiency of the evidence, the government may have enormous hurdles before it. (e.g. Smalis v. Pa.) What happens with the rest of the case remains to be seen.
4. What perhaps may make this a more important case today is that so many documents in white collar cases will fit the bill as required/compelled documents. The Sarbanes Oxley Act, as well as other reporting requirements, may find an array of mailings or wirings to form the basis of a prosecution. If the documents are false then the exception (see here) may apply. In this regard prosecutors may now be careful to make certain that in selecting the mailing or wire transmission that forms the federal jurisdiction hook for the case - they select one that is not a compelled document. And it they do use a compelled document, then it will be important to make certain that there is some falsity in that document. Will this be difficult? Probably not. But it will be a new step in the checklist to make certain that convictions obtained are convictions maintained.
Judge Hartz's decision in the Lake case (Westar executives) provides a comprehensive analysis of the "legally compelled mailing" doctrine, a doctrine that seldom comes into play in the mail and wire fraud context. As quoted in this court opinion, the Supreme Court in United States v. Parr held that
"[W]e think it cannot be said that mailings made or caused to be made under the imperative command of duty imposed by state law are criminal under the federal mail fraud statute, even though some of those who are so required to do the mailing for the District plan to steal, when or after received, some indefinite part of its moneys."
Compelled mailings, whether they be under state or federal law, cannot be a basis for a mail fraud charge. This applies also to wire fraud (compelled wire submissions) as mail fraud operates in parallel to the wire fraud statute. The one exception that has developed over the years to this doctrine involves mailing that are themselves false (see Leona Helmsley's case at 941 F.2d 71 (2d Cir. 1991)).
The court in the Lake case references several cases that have applied the "legally compelled mailing" doctrine," including how it was an important issue for the lower court in the McNally case, a case that initially destroyed for prosecutors the ability to bring cases using the "intangible rights" doctrine (later changed by Congress when they passed 18 U.S.C. s 1346). Interestingly, when the McNally case went to the Supreme Court, the Court dropped a footnote, footnote 2, that explicitly recognized that six counts had been dismissed based on the mailing of tax returns. The footnote stated, "[t]he Court of Appeals held that mailing required by law cannot be made the basis for liability under section 1341 unless the documents themselves [are] false." The Court also noted that the government had not sought review of this aspect of the lower court decision.
Judge Hartz reminds readers here that this particular case being decided yesterday is even stronger than Parr (and thus it would also be stronger than McNally) because of the nature of the documents and the fact that they are not false documents.
It may sometimes cause confusion to see the distinction between the "legally compelled mailing" doctrine and the fact that in mail fraud, the mailing only has to be incidental to the mailing. Although the mailing need only be "incident to an essential part of the scheme" (Pereira v. U.S.) or "a step in the plot," (Badders v. U.S.) it does not negate the fact that the mailing cannot be something that is required by law to be mailed.
Hats off to Judge Hartz for recognizing this fine distinction in the law and explaining it well.
The convictions of former Westar executives David Wittig and Douglas Lake were overturned by the Tenth Circuit in what can only be described as a stinging rebuke to the government's theory that they committed fraud. The opinion in United States v. Lake (here) states that the alleged "far-reaching scheme to milk the company for all they could through a pattern of fraud and deceit . . . hung by a thin legal thread." The Tenth Circuit summarized the weakness of the government's central wire fraud counts that were based on the transmission of false information to the SEC:
Despite the scope of the alleged fraudulent scheme, all the counts of the indictment depended on proving the efforts of the defendants to conceal from the United States Securities and Exchange Commission (SEC) their personal use of corporate aircraft. The attempt to prove concealment was flawed, however, because the government produced no evidence that the defendants failed to comply with SEC regulations governing the reporting of such personal use and the jury was never instructed regarding the SEC’s reporting requirements.
The government alleged that the reports were deceptive because they failed to disclose the great value to the defendants (about $1 million each) of their personal use of corporate aircraft. But SEC regulations require reporting only the additional cost to the corporation incurred as a result of the corporate officer’s personal travel, and then only if the total additional cost exceeds a certain threshold per year for the officer. The government offered no evidence that the additional cost to Westar of either defendant’s personal travel ever exceeded this threshold; indeed, it offered no evidence of the additional cost to Westar for any of the personal trips. Therefore, the jury could not possibly determine that the reports, which disclosed no personal travel by the defendants, were false.
The Tenth Circuit reversed money laundering charges based on the wire fraud, and also reversed convictions for conspiracy and circumventing the SEC's internal control provisions because of a faulty jury instruction. Most importantly for Wittig and Lake, the court's conclusion that the government did not introduce sufficient evidence to prove the wire fraud counts means that those charges cannot be retried under the Double Jeopardy Clause because the reversal, if it stands, means that the defendants should have been found not guilty by the jury, a decision that bars any future proceedings. The conspiracy and circumvention charges, however, can be retried if the government so chooses, although the loss of the wire fraud counts might make it more difficult to win a retrial because prosecutors may not be able to allege the circumvention was part of a broader fraudulent scheme. The appellate court did reject the defendants' request to reassign the case to another district court judge if there is a retrial because of alleged bias.
Although overshadowed by the Enron and WorldCom prosecutions that took place around the same time, the trials of Wittig and Lake -- the first proceeding ended in a mistrial -- had all the hallmarks of the use of criminal rather than civil charges against corporate executives for their alleged excesses and abuse of office. In many ways, the Westar prosecution was similar to the New York state prosecution of former Tyco CEO Dennis Kozlowski and CFO Mark Swartz, charged with taking stealing company funds for not properly disclosing their inflated pay. Wittig and Lake received eighteen- and fifteen-year sentences, respectively, and Wittig had begun serving his sentence, but presumably will be released while the government decides what to do next in the case.
Needless to say, the Tenth Circuit's decision is likely to be featured prominently in the appellate brief of former Enron CEO Jeffrey Skilling, who is gearing up for his appeal. As the reversals pile up in high-profile corporate cases (Andersen, Quattrone, Enron Nigerian Barge), will the government reassess its approach to pursuing CEOs and other high ranking executives by using criminal charges only in the clearest cases of fraud? (ph)
An earlier post (here) discussed recent hires into the White House counsel's office of lawyers with experience in white collar crime investigations. Now President Bush's chief legal counsel, erstwhile Supreme Court nominee Harriet Miers, has stepped down amid claims that the White House needs a lawyer with greater experience in dealing with investigations, something outside Miers' experience. A Washington Post story (here), citing the usual anonymous sources (this is Washington DC, where leaking is a contact sport), states that the Democrats takeover of Congress will result in a slew of investigations of the Administration, ranging from the war in Iraq to favoritism in the award of contracts and the like. With the power to subpoena comes the inevitable conflict over issues like Executive privilege and the attorney-client privilege.
The article notes that Senator Leahy, the new chair of the Senate Judiciary Committee, was denied documents related to advice given the President on acceptable interrogation methods related to the CIA's program of secret overseas prisons, with the Department of Justice asserting the memos were confidential legal advice. It will be interesting to see if Congress is as solicitous of the Executive's privilege claims as it is for the attorney-client privilege in the context of government investigations of possible corporate crime. (ph)
Friday, January 5, 2007
KPMG entered into a deferred prosecution agreement with the government, offering cooperation and money as a part of the agreement. Carrie Johnson of the Washington Post reports that the government has now dismissed the criminal charge it filed (conspiracy) finding that KPMG had met the terms of the agreement. The terms of the agreement included a 456 million dollar payment to the government. One issue now raised is whether the dismissal presents new arguments in the Stein case, a case that considered whether the Thompson Memo provisions and application improperly deprived some defendants of their attorney fees. But there is a more fascinating part of the deferred prosecution agreement. It is found near the end when the government and KPMG are agreeing that KPMG can continue to audit government books. It states in part:
"KPMG has been involved in an engagement to audit the Department of Justice's financial statements. The Department of Justice's debarring official has determined that KPMG is currently a responsible contractor."
Thursday, January 4, 2007
Malcolm Gladwell's article titled, Open Secrets, in The New Yorker Magazine is a required reading assignment for all teaching, learning, or writing about white collar crime. It is a truly amazing commentary on what happened at Enron, and what didn't happen by outsiders. The piece provides a whole new perspective to the Skilling sentence and the events at Enron. It offers context.
Some questions one may ask after reading this piece: Did the government really need Andrew Fastow to make their case? Should Skilling get the Nixon pardon? Has this information world gone on overload? Will people now understand what defense attorneys face when the government gives them discovery in the form of a "document dump." Also check out Tom Kirkendall's (Houston Clear Thinkers) blog entry on the Gladwell article. Enjoy.
Many a company are examining their stock option grants to see if any were engaged in backdating. They may be asking whether the grants deliberately set dates that would allow some individuals to secure a higher income. As noted in the New York Times, this inquiry occurred at Marvell Technologies with a result that several would be paying back money. Marvell Technologies' January SEC report provides some interesting data.
Wednesday, January 3, 2007
Two former college administrators of Morris Brown College in Georgia were sentenced for their involvement in "a financial aid fraud scheme." A press release of the U.S. Attorney of the Northern District of Georgia finds the US Attorney supporting the sentence of no prison time, following the entry of guilty pleas. He stated, "[t]he facts of the case and the personal circumstances of the defendants support the sentences imposed upon these defendants today." He noted that this was a
"difficult case on many levels. When the defendants arrived at Morris Brown, the college was already in serious financial condition. Thereafter, these defendants misappropriated and misapplied federal Department of Education money in fairly complicated ways to what appears to have been a misguided and ultimately criminal attempt to keep Morris Brown afloat."
This is indeed a sad case. One has to wonder the extent to which university administrators are trained to handle difficult financial situations. The Atlanta Jrl Constitution article notes that defense counsel stated at the sentencing hearing that neither of their clients "benefited personally from the fraud."
The Boston Globe is reporting that Tom Finneran, the former speaker of the Massachusetts House of Representatives is anticipated to be pleading guilty this coming Friday. The federal indictment had charged Finneran with perjury and obstruction of justice. (see Worcester Telegram & Gazette) Some details on the investigation are posted at Common Cause.
Richard Causey, former chief accounting officer of Enron, was to report to prison yesterday. (See Houston Chronicle) He received a 66 month sentence for his role in the Enron debacle, after pleading guilty to one count of securities fraud. Causey had been scheduled to be tried with Ken Lay and Jeffrey Skilling, but then entered into a plea agreement immediately prior to the start of the trial. His sentence of 5 plus years is in sharp contrast to that given to Jeffrey Skilling, who received a 24 year sentence following the trial.
The Washington Post (Bloomberg) notes that Causey is to serve his time in a federal prison in Bastrop, Texas. The article notes that this facility is within a few hours of his Texas home and within an even shorter distance to one of his children. Some have not been as lucky as Causey. Take, for example, Jamie Olis who was hopsotched across the United States, being placed in detentions centers for long periods of time, and today remains a "true prisoner" of the Bureau of Prisons (BOP) system. Others have been placed in prisons many miles from those who may be assisting them. One wonders in these situations who is really being punished - the one being sentenced, or the caregivers who often are innocent and who often are left to contend with the aftermath. Further, as noted here, the BOP has not always been in accord with federal judges in assigning individuals to prisons.
Tuesday, January 2, 2007
Yet another voice critiques the McNulty Memo. This time it comes from Kaye Scholer White Collar Litigation and Internal Investigations Group Update. Their take on the memo - Download white_collar_update_jan_2007.pdf like so many others, finds flaws in the latest Justice Department attempt to keep Congress from intervening. Unlike some others, they are not as optimistic on whether Congress will intervene. Other comments can be found here, here, here, and here. One thing is certain, and that is that Larry Thompson owes a thank you to McNulty for taking his name off of the revised Holder Memo.
A press release of the U.S. Attorney's Office in Connecticut reports on a plea entered by a Connecticut Attorney to the crime of bank fraud. The case arises from the attorney acting as "a closing attorney in connection with the refinancing of mortgage loans." The press release states that after receiving the money "from the bank as part of the refinancing transactions, he converted the money – more than $1.2 million – to his own use."
Monday, January 1, 2007
Not surprisingly, Eliot Spitzer's website as N.Y.'s 54th Governor is up and running, and his inaugural address touching on an ethics agenda was noted by the NYTimes. In his final days as Attorney General he settled the MetLife case to the tune of 19 million dollars. The press release notes that:
"The agreement settled allegations by the Attorney General of deceptive practices in the sale of group insurance products, arising out of MetLife’s use of 'contingent commissions' or 'overrides' to reward brokers who induced their clients to purchase insurance from the company. MetLife is the largest life insurer in the United States, selling one in every five group policies purchased."
But another interesting change in the guard also occurred. And that is that Andrew Cuomo took over as the 64th Attorney General of New York. His transition team was an impressive list of individuals related to the legal arena, with its chair being Robert Abrams, a partner at Stroock & Stroock & Lavan LLP. Abrams served as the New York Attorney General from 1978-1994. The team represented a wealth of knowledge, diversity, and understanding of the important issues of this office (e.g., Julian Bond, Barry Scheck, and Mary J White). The team had goals of attracting "top-flight talent to join the staff currently serving in the Office of the Attorney General and to suggest initiatives and ideas to help protect the needs and interests of all New Yorkers." And the appointments so far are impressive. It will be interesting to see if Cuomo moves in a direction different than what was taken by his predecessor.
Representative John Conyors was the subject of a public statement issued by Chair Doc Hastings and Ranking Minority Member Howard L. Berman concerning "an informal inquiry in December 2003 into reports that members of the congressional staff of Representative John Conyers had performed campaign activity on official time and in some instances using official resources, and that some staff members may have been compelled to do campaign work or personal work for Representative Conyers." If the assertions had proved to be true it "could implicate" house rules and perhaps if egregious it might have risen to the level of being subject to a criminal inquiry. But the matter did not progress in that fashion. The public statement issued states that:
"After reviewing the information gathered during the inquiry, and in light of Representative Conyers’ cooperation with the inquiry, we have concluded that this matter should be resolved through the issuance of this public statement and the agreement by Representative Conyers to take a number of additional, significant steps to ensure that his office complies with all rules and standards regarding campaign and personal work by congressional staff."
The list of six conditions might be a good model for others in Congress to follow in establishing their own compliance or "effective" programs.
Cybercrime is becoming more and more of a problem and it is likely that we will see more prosecutions in the coming year. The Washington Post discusses here some of the new difficulties faced in detecting the perpetrators of these crimes. The DOJ's Computer Crime and Intellectual Property Section will be a place to watch this coming year as they work to prosecute crimes that can often be difficult to prove.
Sunday, December 31, 2006
The New Year will deliver a variety of interesting cases and issues in the white collar crime field, and here are a few developments (and predictions) that may be of importance in 2007 (in no particular order):
- The options-timing cases will come in waves, mostly civil SEC actions with the usual settlements, civil monetary penalties, and perhaps D&O bars, and a few will involve criminal charges against individual executives, especially general counsels who were responsible for the paperwork.
- The Attorney-Client Privilege Protection Act, first previewed by Senator Arlen Specter in December 2006, will be an important legislative development.
- Along the same lines, the Department of Justice's newly-christened McNulty Memo will be the subject of close Congressional scrutiny.
- The trial of I. Lewis Libby on perjury, false statement, and obstruction of justice charges should begin, unless it is derailed by problems under the Classified Information Procedures Act (CIPA).
- Trials of former corporate chieftains will take place, although they won't involve the accounting and financial issues that arose in the Enron-WorldCom round of prosecutions. Instead, they will involve discrete issues like conflicts of interest (Lord Black of Hollinger International), pretexting (Patricia Dunn of Hewlett-Packard), and options-timing issues (Gregory Reyes of Brocade Communications). Don't expect former Comverse Technology CEO Kobi Alexander to alight on these shores from Namibia during the year (or even the next couple).
- The judicial application of the Federal Sentencing Guidelines will come in for further refinement when the Supreme Court decides two cases applying the "reasonableness" standard, U.S. v.Claiborne and U.S. v. Rita.
- The Capitol Hill corruption investigations, spurred on in part by former lobbyist and current federal inmate Jack Abramoff, may bring down more elected officials and staffers. The investigation of Louisiana Representative William Jefferson, stalled as the D.C. Circuit reviews the FBI's search of his congressional office, should come to a head.
- Increased prosecutions related to defense procurement.
- Re-examination of the Sarbanes-Oxley Act to soften its effect on businesses.
We appreciate the number of readers who contact us with suggestions and comments, and hope we provide you with helpful information and commentary (even if you don't always agree with one or both of us). We wish everyone a happy, healthy, and peaceful New Year.
(ph & esp)