Saturday, March 10, 2007

FBI Financial Crimes Report

The SanDiego Union-Tribune reports on the latest statistics released by the FBI regarding mortgage fraud. According to the FBI Report there has been an enormous increase in mortgage fraud  ("The number of FBI cases has grown steadily in recent years, from 436 in 2003 to 818 last year.") In the highlights of the Report it states with regard to corporate crime -

"Corporate Fraud: The highest priority of the Financial Crimes Section, the FBI was pursuing 490 cases at the end of FY2006, which ended last September, including 19 cases that individually cost investors over $1 billion. Investigations resulted in 171 indictments and 124 convictions, as well as over $1 billion in restitutions, $41 million in recoveries, and $62 million in seizures."


March 10, 2007 in Think Tank Reports | Permalink | Comments (0) | TrackBack (0)

The Aftermath of Andersen

The Andersen conviction, followed by its eventual reversal in the United States Supreme Court, is all history.  But CNN Money reports that a federal judge approved this past week a final settlement in the class action lawsuit that was brought by investors.


March 10, 2007 in Arthur Andersen | Permalink | Comments (0) | TrackBack (0)

Two Former CEOs Head to Trial

Two former CEOs will be headed to court in March to face charges related to their tenure at the top of large, publicly-traded companies.  First, Lord Conrad Black, former CEO and controlling shareholder of newspaper publisher Hollinger International, Inc. -- now the Sun-Times Media Group -- faces charges along with three former company executives related to looting the company.  The indictment (here) alleges mail and wire fraud, money laundering, and perhaps most ominously for Lord Black, RICO related to a series of deals in which he received substantial payments that the government alleges essentially stolen from the company.  The trial is set to start on March 14 in U.S. District Court in Chicago, and may last up to three months.  A Bloomberg story (here) provides a good overview of the case.

Out in Denver, former Qwest CEO Joseph Nacchio faces 42 counts of insider trading related to his sales of company stock that netted him over $100 million shortly before the share price collapsed.  While Qwest had significant accounting problems, federal prosecutors brought an insider trading case rather than a broader securities fraud case of the type seen in the Enron and WorldCom prosecutions.  The allegations against Nacchio focus on his knowledge that Qwest's financials were deteriorating over the five months of 2001 when he sold the shares.  Insider trading charges will avoid much of the accounting minutiae that has bogged down other trials.  One aspect of the defense has been the claim that Nacchio was privy to secret intelligence contracts that could bolster Qwest's revenue, and there has been an ongoing issue with discovery under the Classified Information Procedures Act, as discussed in a Denver Post story (here).  Like most securities fraud cases, including insider trading prosecutions, the issues in the trial set to start March 19 in the U.S. District Court in Denver revolve around Nacchio's intent, whether his trading was motivated by knowledge of impending financial problems at Qwest, so that he sold to avoid substantial losses. (ph)

March 10, 2007 in Fraud, Insider Trading, Prosecutions, Securities | Permalink | Comments (0) | TrackBack (0)

Friday, March 9, 2007

Was the Libby Conviction Fair or Unfair?

Professor Stuart Green, the L.B. Porterie Professor of Law at Louisiana State University, has published an interesting op-ed analyzing whether the conviction of I. Lewis Libby was fair.  Professor Green is a leading cirminal law theorist, and his recent book, Lying, Cheating, and Stealing: A Moral Theory of White Collar Crime, provides a systematic analysis of a range of criminal offenses, including perjury and obstruction of justice, that is well worth reading.  He writes that to judge whether a prosecution like the Libby case is proper, three factors should be considered: first, the seriousness of the conduct being covered up; second, the legitimacy of the government's investigation into the underlying conduct; and, third, the significance of the cover-up itself.  Professor Green argues:

In the Libby case, the answers to these questions now seem fairly clear. With respect to the first factor, being part of a scheme to leak classified information about the identity of a CIA covert operative in a time of war undoubtedly qualifies as serious. (Granted, there is controversy over whether the leak really was illegal, but it was serious enough to warrant appointment of a special prosecutor.) As for the second factor, compared to Kenneth Starr's Whitewater fishing expedition, Libby special prosecutor Patrick Fitzgerald's investigation seems to have focused fairly narrowly on finding the source of the leak.

It is the third factor, though, that is likely to be the most significant in assessing the propriety of the Libby conviction, as well as the other cover-up prosecutions. Libby's lie to the grand jury was harmful because it made it more difficult, perhaps impossible, to know the facts of the underlying leak case. As Fitzgerald himself stressed in his closing argument, Libby "threw sand in the eyes of the grand jury."

The op-ed is available from the Philadelphia Inquirer (here). (ph)

March 9, 2007 in Plame Investigation | Permalink | Comments (1) | TrackBack (1)

Charges Against Four Related to Collapse of Generic Drugmaker

Able Laboratories, Inc., which made generic drugs, collapsed in 2005 due to improper manufacturing procedures at its New Jersey facility, and now a former vice president and three former chemists at the company have been charged.  The three chemists agreed to  plead guilty to conspiracy to distribute adulterated and misbranded drugs, while Shashikant C Shah, who was Vice President of Quality Control, Quality Assurance and Regulatory Affairs, entered his plea to conspiracy to commit insider trading and selling the adulterated/misbranded drugs.  The SEC also filed a civil insider trading case against Shah, and its Litigation Release (here) describes his trading:

The Commission's complaint alleges that on eight separate occasions from August 2003 through December 2004, Shah acquired an aggregate of 58,000 shares of Able's common stock by exercising employee stock options, and in each case sold the securities either immediately thereafter or within a few days. According to the complaint, at the time he engaged in these transactions, Shah was aware that Able was concealing from the U.S. Food and Drug Administration (FDA) problems with the quality control testing of Able products that resulted in the public release of drugs failing to meet established quality control standards. Shah reaped $909,000 in ill-gotten gains as a result of his unlawful trading. In May 2005, Able's common stock price fell more than $18 per share, or 75%, in one trading day, after Able discovered faulty testing practices of the type Shah had known about, and the company suspended all product shipments. Able's stock price continued to fall in the ensuing months, and the company eventually declared bankruptcy in July 2005, selling substantially all of its assets five months later.

Prior to its collapse, Able Laboratories employed 500 people and manufactured generic drugs to treat cardiac and psychiatric problems. (ph)

March 9, 2007 in Insider Trading, Prosecutions | Permalink | Comments (0) | TrackBack (0)

Down Goes Another CEO for Options Timing

Add former Cirrus Logic, Inc. CEO David D. French to the lengthening list of chief executives fired over the timing of options grants, although the results of the internal investigation may portend considerable trouble for him with the government.  Cirrus announced that it will have to take a $22-24 million hit from the improper options grants, which is a fairly small amount as these things go.  More ominous is the description of French's involvement, contained in the company's 8-K (here):

o The Special Committee believes based on the evidence developed in the investigation that certain executive officers had knowledge of and participated in the selection of three grant dates for broad-based employee option grants in the 2000 through 2002 timeframe, either with hindsight or prior to completing the formal approval process.

o The executive officers involved in the option grant process prior to 2003, and in particular the grants described above in the 2000 through 2002 timeframe, are no longer with the Company with the exception of David D. French, the Company's President and Chief Executive Officer.

o The Special Committee believes that Mr. French was significantly involved in the grant approval process for certain grants and that he influenced the grant process with a view toward the stock price, and therefore the selection of grant dates, through his control over how quickly or slowly the process was completed. However, the Special Committee does not believe that Mr. French appreciated the significance of the procedural inadequacies or the accounting implications of the grant approval process or grant date selections, or that he was advised by his executive staff of any such inadequacies or implications.

A conclusion that a company's CEO was "significantly involved" in the approval process and "influenced" the price will draw the attention of investigators, regardless of the special committee's conclusion that French did not "appreciate the significance" of his actions.  While it's not clear whether the Department of Justice has been investigating the Austin, Texas, company, they may well appear on the scene soon. (ph)

March 9, 2007 in Investigations, Securities | Permalink | Comments (0) | TrackBack (0)

Thursday, March 8, 2007

Memo to U.S. Attorneys: Beware Who Is Calling

The Senate Judiciary Committee hearing on the dismissal of a group of United States Attorneys highlighted contacts with the federal prosecutors that call into question whether they may have been the target of political pressure to bring or speed up investigations of Democrats, or to not discuss the reason for their termination (a joint statement is here).  The former U.S. Attorney for the Western District of Washington, John McKay, described a telephone call from the chief of staff of the senior Republican Representative from Washington during the recount of the 2004 governor's race that he called "inappropriate" and that approached "dangerous territory" before he cut it off.  The U.S. Attorney's office did not pursue a vote fraud case related to the disputed election, which was won by Democrat Chris Gregoire, and McKay said that a White House official said the case was mishandled.

Former New Mexico U.S. Attorney David Iglesias confirmed that he received telephone calls from Senator Pete Domenici and Representative Heather Wilson inquiring into investigations of Democrats before the 2006 election.  The description of the call from Senator Domenici included the fact that Iglesias was called at home on a weekend and, when he said that indictments would not be brought before Election Day, the Senator hung up on him.  Finally, Bud Cummins, from the Eastern District of Arkansas, said that when he spoke on the telephone with a senior Department of Justice official about his comments to a reporter on the firings, the official implied that the Department might have to disclose additional negative information about the former U.S. Attorneys to respond to any criticisms.

The hearing came on the same day that the jury returned its guilty verdict on four counts in the Libby trial, which may have stolen some of the thunder from the testimony before the Senate.  The statements by the four former U.S. Attorneys certainly do not put the Department of Justice in the best light.  A Seattle Post-Intelligencer story (here) discusses the hearing. (ph) 

March 8, 2007 in Prosecutors | Permalink | Comments (2) | TrackBack (1)

SEC Freezes $3 Million in Market Manipulation Scheme

The SEC obtained an asset freeze on the U.S. based account of a bank in Latvia that the Commission alleged was part of a scheme to hack into the accounts of on-line brokerage customers and engage in a market manipulation scheme.  The complaint (here) does not identify the defendants, and the U.S. District Court for the District of Columbia granted issued the freeze order.  According to the SEC Litigation Release (here) describes what the Commission called a "modern-day, technological version of the traditional pump-and-dump":

The Commission's complaint alleges a complex scheme that combines electronic intrusions into online brokerage accounts with a traditional market manipulation. From at least December 2005 through December 2006, one or more foreign-based unknown traders purchased, through four sub-accounts of an omnibus trading account titled in the name of Relief Defendant JSC Parex Bank and held at Pinnacle Capital Markets LLC of North Carolina, shares in 15 U.S.-based Nasdaq-traded companies. These unknown traders then hacked into unsuspecting investors' online brokerage accounts at seven major online broker-dealers and sold off investors' existing securities holdings. They then used the proceeds to buy shares on the open market of the thinly-traded issuers the unknown traders had previously purchased in their own sub-accounts. This illicit account activity artificially heightened the share price and trading volume for each of the thinly-traded issues and enabled the unknown traders to sell their holdings at a substantial profit, realizing at least $732,941 in ill-gotten gains, and possibly more. The unknown traders also used electronic means to hide their identities and mask the means by which they intruded into accounts.


March 8, 2007 in Civil Enforcement, Fraud, Securities | Permalink | Comments (0) | TrackBack (0)

Wednesday, March 7, 2007

The Growing Libby Pardon Debate

The ink on the jury's verdict in the I. Lewis Libby prosecution was hardly dry before the issue of whether President Bush should issue a pardon came to the forefront.  The Wall Street Journal's print edition for March 7 has only two news stories on the Libby case, one primarily devoted to the pardon issue and another on the lesson to be taken from the trial about asserting the Fifth Amendment rather than testifying or speaking with investigators.  There was hardly any direct coverage of the verdict of the type seen in other major newspapers like the Washington Post or New York Times.  Interestingly, the Journal has as many editorials calling for the issuance of a pardon, one called "The Libby Travesty" and the other an op-ed by Professor Ronald Rotunda arguing "The Case for a Libby Pardon."  Professor Rotunda writes, "Among the unhappy precedents if the Libby verdict stands: Executive branch officials will hide from the press, which is unfortunate because "leaks" can be an important check on all three branches of government. And even innocent officials will not be forthcoming when it comes to cooperation with future prosecutors. ('I don't recall . . .')  Perhaps the worst precedent would be normalizing the criminalization of policy differences. Many of those who loudly demanded Mr. Fitzgerald's appointment -- and who applauded yesterday's verdict -- offered no more compelling reason than that somebody should pay for the Bush administration's decision to go to war in Iraq."  It is interesting that the Journal's coverage seems to be so heavily slanted toward the pardon issue, at least in the print edition, and I suspect the editorials were written well in advance of the jury's verdict.

The usual procedure for a pardon is to file a request through the Department of Justice's Office of the Pardon Attorney.  Under the Rules Governing Petitions for Executive Clemency § 1.2, "No petition for pardon should be filed until the expiration of a waiting period of at least five years after the date of the release of the petitioner from confinement or, in case no prison sentence was imposed, until the expiration of a period of at least five years after the date of the conviction of the petitioner. Generally, no petition should be submitted by a person who is on probation, parole, or supervised release."  Under this provision, Libby would not be eligible to go through the DOJ's normal pardon process at this point because he hasn't even been sentenced, much less served any punishment imposed for the conviction (assuming it is upheld). 

Of course, Libby is not limited to the Pardon Attorney process, and the Rules note that they are only an internal procedure and do not "restrict the authority granted to the President under Article II, Section 2 of the Constitution."  Presidents have granted pardons outside the normal channels, particularly in cases involving senior officials such as those involved in the Iran-Contra affair pardoned in 1993.  President Clinton's pardon of Marc Rich in 2001, which was also outside the usual DOJ procedure, even triggered a brief grand jury investigation regarding whether it was obtained improperly.

One of the benefits of using the Department of Justice to vet an application is that it provides a President with some cover because the decision to grant (or deny) a pardon is done by an objective review procedure.  For President Bush to pardon Libby, it will require him to take full, direct responsibility for a decision that will be made outside the normal process.  To this point, the Administration has granted a relatively small number of pardons, and all of those have been done through the Pardon Attorney procedure.  An interesting question is whether a pardon at this point would serve Libby's interests so long as the appeal process for his conviction remains open.  While Libby and his attorneys have proclaimed his innocence, would a pardon now be viewed as some type of acknowledgment that he is guilty of the crime and is simply spared any punishment? (ph)   

March 7, 2007 in Plame Investigation | Permalink | Comments (0) | TrackBack (0)

Tuesday, March 6, 2007

What Happened to All the Secret Evidence at the Libby Trial

One of the issues that slowed the prosecution of I. Lewis Libby related to national security evidence that Libby sought to use at his trial.  The procedures mandated by the Classified Information Procedures Act (CIPA) can be quite onerous, and just getting the necessary clearances for the defense lawyers can add months to a prosecution on top of the process of reviewing the documents, redacting certain classified information, and determining appropriate substitutions and stipulations.  Having fought through the CIPA issues, U.S. District Judge Reggie Walton was rather peeved when Libby's counsel announced that his client would not testify but still wanted to introduce the evidence to establish the lack of memory -- or better, the distracted public servant -- defense.  As discussed in an earlier post (here), the Judge said he agreed to allow the evidence to come in on the understanding that Libby would testify, and without him testifying, he would exclude the classified information.

I expect the decision to exclude evidence that related to a key component of the defense because Libby chose not to testify will be a major issue on appeal.  The defense is likely to argue that Libby's due process right to present a defense was undermined by Judge Walton's decision to condition admission on testifying, putting Libby in the position of being forced to waive his Fifth Amendment right if he wanted to introduce evidence to show how distracted he was at the time of the conversations with various reporters.  The Supreme Court acknowledges the defendant's right to offer a defense, but it is not an unconditional right and trials are still subject to the rules of evidence.  In Holmes v. South Carolina, 547 U.S. 319 (2006), the Court stated, "While the Constitution thus prohibits the exclusion of defense evidence under rules that serve no legitimate purpose or that are disproportionate to the ends that they are asserted to promote, well-established rules of evidence permit trial judges to exclude evidence if its probative value is outweighed by certain other factors such as unfair prejudice, confusion of the issues, or potential to mislead the jury." 

The fight on appeal will be whether Judge Walton's decision was "disproportionate to the ends that they are asserted to promote," and whether the court made Libby's decision not to testify too costly.  Unlike ordinary evidentiary rulings, for which judges have wide discretion, the presence of core due process and Fifth Amendment rights will make this a bit closer question.  The odds of Libby, like any convicted defendant, of winning on appeal are not very high, and the high-profile nature of the case made Judge Walton tread especially carefully because an appeal is inevitable after a conviction in a case of this type.  The issue is close enough, however, that predicting how the D.C. Circuit will rule is hazardous. (ph)

March 6, 2007 in Plame Investigation | Permalink | Comments (0) | TrackBack (0)

Initial Thoughts on Libby Verdict

I. Lewis "Scooter" Libby was convicted of 4 of 5 counts. After 10 days of deliberation, an 11 person jury returned with convictions of obstruction of justice, false statements and perjury.  Libby was found not guilty of one count of false statements. Some thoughts:

1.  This is clearly a victory for the CIA. The government will prosecute individuals because of a leak of classified information, no matter how high up the individual is within the administration. (Thanks to the commenter below -- Libby was not prosecuting for leaking classified information, and no one was actually charged with leaking classified information.  But it does show the government was willing to investigate based upon the leaking of information).

2. The investigation and prosecution of crimes needs to be non-political so that prosecutions such as this can continue. The recent "firings" of U.S. Attorneys causes some concern here.

3. Sentencing is set for June 5th. Obstruction of Justice comes under 2J1.2 of the US Sentencing Guidelines and has a base level of 14.  Perjury is under 2J1.3 and also has a base level of 14.  Check out Professor Doug Berman's Sentencing Blog for some of the forthcoming sentencing issues. I keep wondering if the prosecution might say that Libby had a "special skill" and try to increase the sentence for this - 3B1.3 states that "[i]f the defendant abused a position of public or private trust, or used a special skill, in a  manner that significantly facilitated the commission or concealment of the offense..."

4. Martha Stewart now has company in the obstruction of justice club.

5. Obviously he was allowed to be free pending the sentencing.  Many defendants are not given this opportunity, but rather are incarcerated immediately upon conviction. Clearly, people do not consider Scooter Libby as a threat that he needs to be incarcerated immediately.

6. President Bush should be pleased that this prosecution moved slowly and did not occur prior to his re-election.

7. Did the executive have an "effective program" to keep crimes from occurring within its midst? Did they operate with "due diligence" to make certain that confidential information was kept secret?  If these rules apply to organizations under a respondeat superior rule, should they also apply to the executive?


March 6, 2007 in Plame Investigation, Verdict | Permalink | Comments (3) | TrackBack (0)

Libby - Guilty

Libby - Guilty on 4 or 5 counts.  More to follow.  Indictment is here.


March 6, 2007 in Plame Investigation, Verdict | Permalink | Comments (0) | TrackBack (0)

Monday, March 5, 2007

Ebbers - Cert Denied

Bernard Ebbers sentenced to prison for 25 years, lost yet another possible hope for relief as the Supreme Court denied certiorari on his case today.  The listing appears among a long list of cases denied cert. -



The petition for a writ of certiorari is denied. The Chief

Justice took no part in the consideration or decision of this



March 5, 2007 in WorldCom | Permalink | Comments (0) | TrackBack (0)

Attorney Loses in Second Circuit on Forgery Case

The Second Circuit Court of Appeals affirmed the convictions of an attorney for "one count of corruptly obstructing a judicial proceeding, in violation of 18 U.S.C. § 1512(c)(2), one count of forging a judge’s signature, in violation of 18 U.S.C. § 505, and one count of making a false statement to a federal officer, in violation of 18 U.S.C. § 1001(a)(2), in connection with his fabrication of a court order."

The appeal presented five arguments:

"(1) that there was insufficient evidence to establish that his conduct would have the 'natural and probable effect' of obstructing the lawsuit, such that a conviction for obstruction of justice under 18 U.S.C. § 1512(c)(2) was inappropriate;  (2) that the jury should have been instructed to find, and evidence was required to establish, an intent to defraud under 18 U.S.C. § 505; (3) that it was error to permit the government to crossexamine Reich’s character witness by asking about an allegedly 'private' unauthorized change to his law partner’s life insurance policy; (4) that there was insufficient evidence to establish that he made a false statement to a government agent; and (5) that the district court improperly applied a 'special skills enhancement' in calculating Reich’s sentence under the United States Sentencing Guidelines Manual ('U.S.S.G.' or 'Guidelines')."

See also


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

Two Immigration Lawyers Indicted

A press release of the US Attorney's Office for the Central District of California reports that "[a] federal grand jury in Los Angeles has indicted two attorneys with one of the West Coast's largest immigration law firms on charges of filing fraudulent employment visa applications on behalf of foreign nationals, including some of the law firm's own workers."  The two attorneys were charged with 33 counts including charges of "visa fraud, making false statements and conspiring to commit visa fraud."  Others in this law firm had previously plead guilty.


March 5, 2007 in Fraud, International, Prosecutions | Permalink | Comments (1) | TrackBack (0)

White Collar Educators?

An article in the Chronicle of Higher Education is titled, "Idaho Attorney General Begins Investigation After Audit of University Research Center."

(esp) (w/ a Stetson Hat Tip to Dean Darby Dickerson)

March 5, 2007 in Investigations | Permalink | Comments (0) | TrackBack (0)

Sunday, March 4, 2007

Libby Case- What is Reasonable Doubt?

TalkLeft has a copy here of the latest notes sent out by jurors in the Libby case. So what is reasonable doubt?  Defining reasonable doubt has been a subject of some controversy. It will be interesting to see the court's response.  It will be more interesting to see if the jury is able to reach a decision.


March 4, 2007 in Plame Investigation | Permalink | Comments (0) | TrackBack (0)

SOX Used for What?

The Sarbanes-Oxley Act is without doubt a controversial piece of legislation.  Some have questioned whether the costs of compliance are too high for some businesses.  But a new dimension has been added to this controversy - can/should SOX be used against an attorney for allegations of "destroying evidence in a child pornography investigation." Yes, the legislation passed to heighten disclosure and accountability in corporate accounting is being used in a pornography case. (see Houston Chronicle AP here; see also Martin Cassidy of the Greenwich Time here).  This will be an interesting case to follow. 

(esp)(w/ a hat tip to Jack King)

March 4, 2007 in Fraud, Securities | Permalink | Comments (0) | TrackBack (0)

International Pyramid Scheme

A press release of the US Attorney of Oregon, Karin J. Immergut, reports on a recent conviction of a North Carolina man "for his role in spearheading a pyramid scheme, which he promoted in 41 countries, causing more than 5,000 victims to lose a total of $4 million."  He was convicted on 29 counts including charges of "mail fraud, money laundering, and tax fraud." The press release notes that "[t]he victims were mainly from the United States, England, and Canada, but also involved victims in Africa and Australia."


March 4, 2007 in Fraud, Investigations, Prosecutions, Verdict | Permalink | Comments (0) | TrackBack (1)