March 17, 2007
The recent conference at Georgetown University Law Center (here) titled "Corporate Criminality: Legal, Ethical, and Managerial Implications," provided outstanding discussion on a host of different topics related to corporate criminal liability. The following is a discussion of one panel from that day:
Panel moderated by Brian Walsh (Heritage) on Regulation Through Criminalization.
Professor Gerri Moohr (Houston) spoke about the duty of loyalty to a firm, noting how it can be the basis for "doing something wrong for the right reasons." She used the Nigerian barge case as her example. She concluded by advocating a fault based system for corporate convictions and presented strong arguments for having a fault based system.
Professor Craig Lerner (George Mason) spoke about his forthcoming co-authored piece that looked at whether in the wake of SOX, people would leave the scene and who would be left. He focused on "risk" in drawing his conclusions, conclusions that were premised on economic analysis.
Professor Christine Hurt (Illinois) talked about how Jeff Skilling would have had to kill five people in Texas to get a comparable sentence to the 24 years he received. She noted the absurdity of using loss as a factor. Her talk looked back at common law larceny and looked at the purposes behind making this conduct criminal, noting that the crime was one related to "breach of peace." She applied this to today by stating, "[t]he new breach of peace are orderly markets."
Some Thoughts on the McNulty Memo
David Z. Seide has a piece in the Corporate Goverance Advisor (Aspen) that is shared here by himself and his publisher. The title of the article: "Is the Department of Justice's McNulty Memorandum A Cure-All?"
Ready to Roll in the Black Trial
U.S. District Court Judge Amy St. Eve. narrowed the jury pool to twenty, from which a twelve-person jury with six alternates will be chosen to hear opening arguments on March 19 in the conspiracy, securities fraud, and RICO prosecution of Lord Conrad Black and three former senior executives of Hollinger International (now Sun-Times Media Group). The jury will have a blue-collar tint, according to an article in Canadian Business (here). Black's three co-defendants are John Boultbee, Hollinger's former CFO, former executive vice president Peter Atkinson, and former general counsel Mark Kipnis, and they have been largely ignored in the media's focus on Black. It will be interesting to see if they will present a united front at trial, and whether any (or all) will testify. While Black is reputed to have a rather imperial manner, little is known about the other three defendants, who may be able to connect with the jury better than the former CEO.
The government's key witness, former Hollinger chief operating officer and long-time Black lieutenant David Radler, settled the SEC's civil securities fraud action by agreeing to pay disgorgement (plus interest) of $23.7 million, a $5 million civil penalty, and a lifetime officer/director bar (SEC Litigation Release here). Radler earlier entered a guilty plea, and the SEC settlement may be a means to bolster his credibility by allowing prosecutors to point to the costs of his agreement to cooperate, which will also include a prison term. Of course, given the long relationship between Black and Radler, it's unlikely that either has many secrets the other does not know, so look for Radler's cross-examination to be particularly lively. (ph)
Lawyer Convicted of Theft for Threatening Suits Against His Wife's Paramours
A Texas jury found lawyer Ted Roberts guilty of two counts of theft and one count of a scheme to commit theft for threatening to file law suits against two men who had affairs with his wife. The evidence at trial was that Roberts told the men he would give some of the money they paid to avoid litigation to a children's charity he founded, but then he took money from the charity. Roberts' lawyer said he will pursue an appeal of the convictions, and the jury returned not guilty verdicts for threats Roberts made against two other men for similar conduct. Roberts' wife, who is also an attorney, is facing charges for the threats that will be tried later. A Texas Lawyer article (here) discusses the verdict. (ph)
March 16, 2007
Subpoenas to DOJ in U.S. Attorney Firing Investigation
The U.S. Attorneys firing fracas will take another turn with the Senate Judiciary Committee authorizing the issuance of subpoenas to five current or former senior-level Department of Justice attorneys to testify at a hearing:
- Michael Elston, chief of staff for Deputy Attorney General Paul McNulty.
- Kyle Sampson, recently resigned chief of staff for Attorney General Alberto Gonzales whose e-mail correspondence with the White House is at the center of the controversy.
- Monica Goodling, senior counsel to AG Gonzales and his White House liaison.
- Bill Mercer, the acting Associate Attorney General, the number three position in the Department.
- Michael Battle, who was director of the Executive Office for U.S. Attorneys and delivered the bad news to the seven (or eight) fired U.S. Attorneys.
AG Gonzales indicated earlier that he would allow DOJ attorneys to testify in the investigation, and an AP story (here) quotes a spokesman for Gonzales stating, "We have clearly communicated to the Congress our willingness to make available voluntarily department employees whom the Congress wishes to interview privately and in public hearings . . . We are disappointed that some members of the Judiciary Committee chose to disregard these facts and have sought to pursue unnecessary and seemingly political act of authorizing the issuance of subpoenas."
An interesting question will be whether any of the subpoenaed witnesses will invoke the Fifth Amendment, especially Sampson. Recent statements by AG Gonzales and Deputy AG McNulty that they were not aware of all the facts about contacts with the White House puts Sampson on the spot based of his e-mail correspondence with then-Counsel to the President Harriet Miers about terminating the U.S. Attorneys. Sampson's lawyer -- I assume he's retained counsel and won't try to deal with this alone -- may have him assert the privilege at this point until it becomes clear whether there will be a criminal inquiry into possible false disclosures to Congress and who might be the targets of an investigation, if there is one.
Next up for the Judiciary Committee is deciding whether to subpoena aides to the President, including Karl Rove and Ms. Miers. The Department of Justice released another e-mail exchange involving Sampson (here) that specifically references Rove's interest in the termination of some U.S. Attorneys in January 2005. The subpoena issue has been postponed for a week while issues of Presidential privilege got sorted out. (ph)
Ten Defendants Convicted in Mortgage Fraud Scheme
A jury in the Northern District of Georgia returned guilty verdicts against ten defendants accused of a mortgage fraud scheme that involved 50 houses and 250 condominiums in the Atlanta area. The lead defendant, Phillip Hill, operated through his company, Pinnacle Development Property, in a series of transactions involving inflated appraisals and straw borrowers that led to charges of conspiracy, mail and wire fraud, and money laundering. According to a press release issued by the U.S. Attorney's Office (here):
Each property was sold at an inflated price to a “straw purchaser” who applied for a mortgage loan based upon the inflated price. Such a fraudulent transaction is called a mortgage “flip.” The straw purchasers who participated in these mortgage flips were paid a kick-back out of the excess loan proceeds for the use of their name and credit. The victim-lenders granted the loans based upon numerous false representations and documents regarding the credit qualifications of the straw purchaser, as well as false representations that the straw purchaser had paid a down payment, would reside in the home, and would be responsible for the loan payment. In addition, the lenders were induced to make the loans based on fraudulently inflated appraisals. Some of the properties were “flipped” more than one time.
The nine other defendants were released on bail while they await sentencing, but the court ordered Hill to be held because he posed a flight risk due to the lengthy sentence he faces from a scheme that caused $41 million in losses. Two co-defendants were acquitted at the close of the evidence, and two more await trial. An Atlanta Journal-Constitution article (here) discusses the convictions. (ph)
March 15, 2007
Charges From H-P Pretexting Dropped
The prosecutions brought by California against four defendants for pretexting as part of an internal investigation by Hewlett-Packard have been dropped. Former chairwoman Patricia Dunn had the charges dismissed completely, while the three other defendants, former H-P ethics officer Kevin Hunsaker and private investigators Ronald DeLia and Matthew DePante, will have their charges dismissed after completing 96 hours of community service and payment of restitution. Dunn is undergoing treatment for cancer. The dismissal could be particularly important for Hunsaker because his law license was in jeopardy if he was convicted of the charged offenses, particularly the felony count. California has a new Attorney General, former Governor and Oakland Mayor Jerry Brown, and much of the impetus for the case seemed to disappear after his predecessor, Bill Lockyer, left office.
Although the defendants are largely clear of the state charges, it remains to be seen whether the U.S. Attorney's Office for the Northern District of California will pursue a case against any of them. A fifth defendant in the state case, private Investigator Bryan Wagner, earlier entered a guilty plea to federal charges, resulting in the dismissal of the state prosecution under a California statute prohibiting a second prosecution for the same conduct. Wagner agreed to cooperate in the federal investigation, but it's uncertain what knowledge, if any, he has about the conduct of Dunn, Hunsaker, or any other H-P employees. Turnover in the U.S. Attorney's Office may affect the investigation, with former U.S. Attorney Kevin Ryan among the seven (or eight) fired earlier this year by the Department of Justice. An AP story (here) discusses the dismissal.
Former CFO Settles SEC Insider Trading Case
The SEC is unleashing its insider trading cases with near abandon, filing and settling a case against the former CFO of a company who was working there as a consultant when he got wind of an impending takeover. Melvyn C. Goldstein was CFO of Del Laboratories, Inc. until he retired in 1997, and he returned at the end of the quarters to help out the finance department (see SEC complaint here). In 2004, he figured out that Del was in the process of being acquired by another company, and he bought shares a week before the announcement, realizing a $38,000 profit. As part of the settlement, he will disgorge his profits and pay a one-time penalty plus interest, totaling $81,498.31, according to the Litigation Release (here). The SEC Enforcement Division's current push on insider trading cases means that they will pursue even the small ones. (ph)
Former Peregrine CEO Pleads Guilty
Former Peregrine Systems CEO Stephen Gardner and two other former executives entered guilty pleas to securities fraud charges related to manipulating revenue to make it appear the company was hitting its targets. Gardner was set to go to trial in April on the charges, along with other Peregrine officers, for their role in the accounting fraud that included holding open the company's books and misusing reserves to pad earnings. Ten defendants have now entered guilty pleas in the case. A San Diego Business Journal article (here) discusses the case. (ph)
March 14, 2007
That "Overblown Personnel Matter"
It is funny how dismissive phrases have a way of coming back to bite the speaker. Watergate was first described as a "two-bit burglary," and the termination of seven (or eight, depending on the count) United States Attorneys was denigrated as an "overblown personnel matter" by Attorney General Alberto Gonzales. That little bump in the road required him to hold a press conference to apologize for the Department of Justice providing misinformation to Congress about the role of the White House in the decision. It turns out that a set of e-mails, an always-dependable gold mine of information, shows that Harriet Miers, then Counsel to the President, and Gonzales' chief of staff, Kyle Sampson, corresponded about the termination of all U.S. Attorneys beginning in early 2005, and the White House played a key role in shaping the process. The House Judiciary Committee, which released the e-mails (see Committee website here) sent a letter to Ms. Miers (here) asking her to agree to an interview with Committee investigators. Imagine what a problem this would have been if her nomination to the Supreme Court had been approved.
An e-mail between Sampson, who resigned over the issue, and Miers on March 2, 2005 (here on page 3), discusses a breakdown of the U.S. Attorneys that lists the qualities of those federal prosecutors who would be retained: "strong U.S. Attorneys who have produced, managed well, and exhibited loyalty to the President and the Attorney General." (italics added) This last point may be the cause of some consternation. Those who would not be retained were described as "weak U.S. Attorneys who have been ineffectual managers and prosecutors, chafed against Administration initiatives, etc." (italics added) While it is accepted that the U.S. Attorney position is a political appointment, continuing political loyalty may not be consistent with the requirements for being the chief federal law enforcement officer in a district. It's not clear what it means to "chafe" against Administration initiatives, but one of the standard phrases used by prosecutors is that they "call them like they see them" without regard to politics. Is that consistent with the Administration's initiatives?
I also wonder where Patrick Fitzgerald, the U.S. Attorney for the Northern District of Illinois, would rate on this scale. I suspect he might might be viewed as chafing against the Administration for the prosecution of I. Lewis Libby, although his role as Special Counsel probably makes him bulletproof at this point. The "overblown personnel matter" shows no signs of abating, especially with the Democrats in control of the Congress, so don't be surprised to hear questions at hearings along the line of "What did you know, and when did you know it?" (ph)
Au Revoir, New Century Financial?
The shake-out in the subprime lending market may well take down mortgage lender New Century Financial, which disclosed that its banks have cut off most of its access to credit, the lifeblood of any financial institution. While executives scramble to prevent a complete meltdown, with the company's shares having lost most of their value and now delisted from the New York Stock Exchange, they also have to deal with grand jury and SEC investigations that will likely target individuals at the company. According to New Century's 8-K filing on March 13 (here):
On February 28, 2007, the Company received a letter from the United States Attorney’s Office for the Central District of California (the "U.S. Attorney’s Office") indicating that it was conducting a criminal inquiry under the federal securities laws in connection with trading in the Company’s securities, as well as accounting errors regarding the Company’s allowance for repurchase losses. The Company has subsequently received a grand jury subpoena requesting production of certain documents. The Company intends to cooperate with the requests of the U.S. Attorney’s Office.
On March 12, 2007, the Company received a letter from the staff of the Pacific Regional Office of the Securities Exchange Commission stating that the staff was conducting a preliminary investigation involving the Company and requesting production of certain documents. The staff of the SEC had also previously requested a meeting with the Company to discuss the events leading up to the Company’s previous announcement of the need to restate certain of its historical financial statements. The Company intends to cooperate with the requests of the SEC.
If New Century ends up declaring bankruptcy, then the trustee is likely to undertake its own investigation while also providing information to government investigators, which would likely include a waiver of the attorney-client privilege and work product protection. It is not clear what trading is being looked at, but accounting issues are sure to involve senior management among those who will be questioned. (ph)
March 13, 2007
Just Bad Timing & The Emails
The departure of the US Attorney for Tampa appears to just be coincidental to have occurred in the midst of the recent uproar about US Attorneys leaving different offices (see here, here, here, here, and here). TBO.Com reports on the lucrative offer received by US Attorney Paul Perez. Don't count on getting more information from the office spokesperson right now - he is off this week. (see here).
And a quick glance through the incredible emails posted online by Peter Lattman of the Wall Street Jrl (see here), makes one want to ask: Is it the new technology that makes it all public, or has something really changed in the AG's office?
Tampa US Attorney Resigns
TBO News reports here that the US Attorney in Tampa has announced his resignation.
March 12, 2007
J & J Having to Contend with Three US Attorneys Offices
Discussed here was Johnson & Johnson's disclosure regarding improper payments that might be under the purview of the FCPA. But this may be only one issue the company is facing from government action. According to the Wall Street Jrl here, Johnson & Johnson is having to contend with subpoenas from three different U.S. Attorneys Office. With companies doing business in more than one state, and oftentimes globally, it becomes more difficult for companies to contend with all the different prosecutor's offices.
Gonzalez - Now Tell Me Again - Why Did All These U.S. Attorneys Get Fired?
The press has not let up in its reporting and investigation of the firing of U.S. Attorneys across the United States. Law.com here discusses some of the latest comments. Also check out Washington Post (AP) here. It looks like the name Karl Rove is back in the news.
Addendum - And Yahoo News here talks about the initial considerations of firing all US Attorneys.
Second Addendum - Gonzalez Accepts Responsibility - CNN here
A DOJ Press Release discusses the recent indictment on 23 counts of alleged hackers who are based in India. The release states that "[a] federal grand jury in Omaha, Neb., has indicted three individuals on charges of conspiracy, fraud and aggravated identity theft stemming from a high-tech, international fraud scheme designed to hijack online brokerage accounts for profit . . ." The press release also states, that "[a]s part of this ongoing investigation, at least 60 customers and nine brokerage firms in the United States and elsewhere have been identified as victims, with one of the brokerage firms reporting more than $2 million in losses." The release does not tell why the case was filed in Omaha, Nebraska.
Peter Lattman of the WSJ Blog has a link to SEC Enforcement Chief Linda Thomsen's recent speech at Georgetown's Corporate Counsel Institute. Lattman focuses on one aspect of this speech and seeks comments on this one point. Co-blogger Peter Henning and I provide our comments there.
March 11, 2007
Libby Juror Writes Opinion Piece
Jurors often talk after a trial, but it is not often that a juror writes an opinion piece for the Washington Post. But perhaps it is not so strange considering that the juror is Denis Collins, a former reporter for the Washington Post. Collins is listed in the piece as being the author of a book titled - Nora's Army. The piece does not mention a second book by Collins, which is - Spying the Secret History of History.
KPMG Guest Posting - Part IV
Professor J. Kelly Strader (Southwestern) - Guest Blogging - KPMG PART IV -
What lessons can we draw so far from the KPMG case? First, by any measure this is an enormously complex case. In pre-trial discovery, the government has produced over 11 million pages of documents, the transcripts of 335 depositions, and 195 income tax returns. The government has named 68 trial witnesses and identified over five thousand trial exhibits. The trial is estimated to last from four to eight months.
Second, this case has produced an extraordinary amount of pre-trial litigation, even for a complex financial fraud case. As of last summer, well over 1,000 pages of pretrial briefs had been filed, and it’s probably over 2,000 pages by now. (Most recently, the defendants filed a motion to vacate an order granting the government’s request to dismiss the criminal case against KPMG. The court recently denied the motion (see here).
What does all the pre-trial litigation and maneuvering mean? At one point last month, as I watched the mounds of KPMG-related briefs pile up on my desk, I had a nightmare flashback to the time when I was a junior litigation associate at a large New York law firm. One day, I was told that I would be working on the mergers and acquisitions litigation team (otherwise known to junior associates as the hell realm). Such litigation produces furious motion practice that is often more tactical than substantive and that seems to have no end. (The silver lining is that I ended up in a career of white collar criminal defense.)
I wonder whether the issues surrounding the Thompson and McNulty Memorandums is transforming white collar litigation into similarly overly-complicated litigation. So long as the government continues to seek to obtain attorney-client privilege waivers, to exert pressure on entities to decline to pay individuals’ attorneys’ fees, and to deem assertion of the Fifth to be non-cooperation, we are likely to see more KPMGs. This does not bode well either for the efficient use of our resources in fighting white collar crime, or for the functionality and fairness of the criminal justice system.
NACDL Spring Meeting
The National Association of Criminal Defense Lawyers (NACDL) Spring Meeting, to be held in Cincinnati, Ohio April 25-28, 2007. The conference will have a separate white collar crime track. For details see here.