Friday, April 6, 2007

They Are Dropping Like Flies

The latest in the Attorney General "firings" matter is the resignation of Monica Goodling.  Goodling had been a senior advisor to AG Gonzales, in addition to being the DOJ liasion to the White House.  Clearly this is a tough position to be in when being asked to now answer questions about the sudden departure of several United States Attorneys in various parts of the country. It was announced that she would be taking the 5th Amendment as opposed to responding to congressional questions. (see here)

Also stepping down were three AUSAs in Minnesota. 

Several things seem clear.  1) Gonzales will have a lot to explain in his upcoming testimony. 2) This matter will not just disappear. 3) Someone - who is independent - needs to obtain all the emails and information and investigate if there has been any wrongdoing here.

(See also Washington Post, CBS News - The Politico, Wall Street Jrl,).


April 6, 2007 in Prosecutors | Permalink | Comments (0) | TrackBack (0)

Is It Politics in Pennsylvania or is it an Attorney Conflict?

According to Philly.Com. the U.S. Attorneys Office located in Philadelphia, Pa. is trying to remove the law firm of Sprague and Sprague from representing State Senator Vince Fumo. Fumo, who is a democrat, is charged in an 139 count indictment (see here), The basis for the removal of the law firm from representing Fumo is an alleged conflict of interest.  But the law firm's response is also interesting as it seems that this conflict is suddenly arising after defense counsel announced that he intends to investigate the U.S. Attorney's motive for prosecuting this case. The recent happenings in the AG's office may raise some interesting arguments in cases that come from the political arena.

(esp) (w/ a hat tip to Kevin Kotch)

April 6, 2007 in Prosecutors | Permalink | Comments (0) | TrackBack (0)

Conflicts in College Financial Aid Offices

Carrying on the tradition of his predecessor, Governor Eliot Spitzer, New York Attorney General Andrew Cuomo is pursuing a wide-ranging investigation of conflicts of interest of university financial aid offices that is likely sending a chill across college campuses at this very moment. Cuomo's office has found that financial aid officers at Columbia, USC, and the University of Texas at Austin also owned shares in the parent of Student Loan Xpress, a leading lender to students and parents that is listed as a preferred lender by each of the colleges -- imagine that. To make matters worse, a Bloomberg story reports (here) that a financial aid official in the U.S. Department of Education, Matteo Fontana, sold 10,500 shares of the lender's then-parent, Education Lending Group, Inc., in its 2003 public offering. The prospectus for the offering (here) lists a number of stock owners who sold in the IPO, including the three college officials, who also held options on additional shares.  The IPO price was $9.50 per share, and a Washington Post article (here) notes that a substantial profit was made on the sales.  That is usually the case in such transactions when the insider sell shares acquired at much lower prices when the company was private.  Student Loan Xpress is now a part of CIT Group, which as been subpoenaed along with the Columbia, USC, and UT. 

Fontana's stock ownership may draw the interest of the Department of Justice, which could look into a possible violation of 18 U.S.C. Sec. 203, the federal conflict of interest statute.  It's not clear how the financial aid officials received their shares, or came to be offered an investment in a company that only started in 1999 and rose to become a preferred lender at major universities.  As the parent of a high school senior, I will be sure to take a second look at the recommendations of the college financial aid offices. (ph)

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

Once More Into the Enron Nigerian Barge Trial

The Houston Chronicle reports (here) that the government has decided to retry the three Merrill Lynch defendants accused of helping Enron by arranging a sham transaction to purchase and then resell Nigerian Barges at the year-end in 1999.  The three executives are Daniel Bayly, the firm's former head of investment banking; James Brown, who headed the asset leasing group; and Robert Furst, Merrill's former liaison with Enron.  The convictions of the three were overturned in August 2006 by the Fifth  Circuit, which found that the government's honest services fraud theory was improper and tainted the convictions (U.S. v. Brown here).  Prosecutors have eliminated that basis for the mail/wire fraud counts, so the government will have to prove a scheme to defraud Enron of money or property, which may be a bit more difficult to establish.  The defendants served a portion of their jail terms before being released on bail by the Fifth Circuit after the oral argument in the case, a clear sign that the convictions were in trouble.  While the Chronicle article mentions that there are plea negotiations, a key issue likely is whether the government will demand that any of them serve additional jail time.  The SEC also filed civil securities fraud charges against them, so any resolution will have to include the civil side of the ledger.  The new trial is scheduled for January 2008, a scant eight years after the transaction. (ph)

April 6, 2007 in Enron | Permalink | Comments (0) | TrackBack (0)

Thursday, April 5, 2007

Goodling's Attorney Fires Back at the House Judiciary Committee

Monica Goodling, the senior counsel to Attorney General Gonzales who has refused to testify about the U.S. Attorney firings by asserting the Fifth Amendment, has rejected a demand from the House Judiciary Committee that she explain why she is asserting the self-incrimination privilege.  A letter from her lawyer, Akin Gump's John Dowd (available below), states that, while Goodling is innocent of any wrongdoing, a statement by Deputy Attorney General Paul McNulty that he did not receive complete information that led to him making misstatements to Congress has created a sufficient basis for Goodling to assert the Fifth Amendment, precluding any discussion of the exact basis for her position. Dowd's letter ratchets things up a notch by citing to D.C. Legal Ethics Opinion No. 31 (1977) that states it would violate the spirit of the profession's rules to require a witness to appear before a Congressional committee just to assert the Fifth Amendment when counsel notifies the committee in advance of the witness' decision to refuse to testify. 

The House Judiciary Committee's offer to have Goodling meet for a private interview provides her with no protection because the Fifth Amendment is a "use it or lose it" right, meaning that if she were to disclose information to a government official then she could not assert the privilege down the road.  Absent a grant of immunity, which is unlikely, Goodling has two options: speak or assert the Fifth Amendment.  While Congress may not like the result, that's how the protection works.  Dowd's letter may not prevent the Committee from pursuing the unseemly spectacle of demanding Goodling appear to assert the Fifth Amendment in person, as has been done in other situations (e.g. the Hewlett-Packard pretexting hearing in September 2006), to provide the photo opportunity and a forum for Representatives to bemoan the person's assertion of a constitutional right.  (ph)

Download goodling_letter_april_4_2007.pdf

April 5, 2007 in Privileges, Prosecutors | Permalink | Comments (1) | TrackBack (0)

On to the Defense in the Nacchio Prosecution

The government rested its case-in-chief in the prosecution of former Qwest CEO Joseph Nacchio on insider trading charges related to his sales of over $100 million in stock in 2001, right before the shares went into a tailspin.  The defense now starts presenting its case, and there is a substantial controversy already about whether law professor and former University of Chicago Law School dean Daniel Fischel will be allowed to testify as an expert regarding whether the sales were based on material nonpublic information.  The government filed a motion to exclude him from testifying, and if the size of the brief is a measure of the potential importance of the witness, then the sixty-page filing (available below) means Fischel could be quite helpful to Nacchio.  The government argues that the defense did not comply with the expert disclosure rules under Federal Rule of Criminal Procedure 16, and more importantly that Fischel's opinions do not qualify as permissible testimony from an expert because he will simply be restating facts that are ultimately up to the jury to decide, giving only his interpretation.  The defense report on Fischel's opinions (available below) states he will testify that "the economic evidence is not consistent with the Government's allegation that Mr.Nacchio's stock sales during the first two quarters of 2001 . . . were made on the basis of material nonpublic information."  Instead, according to Fischel, the transactions were consistent with Nacchio's stock sales in other periods.

Exclusion of a defense expert can be dangerous because this is the type of issue that can lead to a reversal of a conviction if an appellate court determines that the testimony was admissible.  To this point, the judge has kept the parties on a short leash, prohibiting the government from questioning a witness about Nacchio's transactions in 2002 because it was outside the time frame of the indictment.  While Fischel is well pedigreed in the law and economics field, the judge may well keep his testimony very close to economic principles and away from broad conclusions about Nacchio's intent.  If Fischel is allowed to testify, look for lots of objections from the prosecutors.

The other issue facing the defense is whether it will call Nacchio as a witness.  One aspect of the defense is that Nacchio knew about top-secret national security contracts that others in Qwest's management were not privy to, so he did not sell the shares because he anticipated a decline in the stock price but rather only wanted to diversify his finances while believing good things were on the horizon.  To establish that defense, it may well be that Nacchio will have to testify because it puts his state of mind at the time of the sales directly at issue, and he's the only one who can say what he knew.  The defense could opt not to call Nacchio, but as happened in the trial of I. Lewis Libby, it risks not having any of the evidence of the secret contracts admitted to bolster the claim that he sold for reasons other than the problems with Qwest's deteriorating business -- problems that came to light the following year, leading to a collapse of the stock price.  Like most white collar crime cases, the decision to put the defendant on the witness stand depends on a number of factors, many unknowable to the defense lawyers, and whether the decision was a good or bad one ultimately awaits the jury's verdict.  (ph)

Download government_motion_fischel_testimony_april_3_2007.pdf

Download fischel_expert_testimony_report.pdf

April 5, 2007 in Insider Trading, Prosecutions | Permalink | Comments (1) | TrackBack (0)

Barnes & Noble Finds Backdating, But No One Is to Blame

A special board committee at Barnes & Noble, Inc. determined that there were numerous instances of stock options backdating, but concluded that everyone received the benefit so no one was to blame for the "mistakes" in the process because there was no intent to defraud.  According to a press release (here):

The Special Committee indicated that the Committee and its advisors received the Company's full  cooperation throughout its investigation. Based on this review, which encompassed 3.8 million pages of documents and interviews of approximately 35 persons, the Special Committee has determined that there were numerous instances of improperly dated stock option grants by the Company. Although the Special Committee determined that there were instances of stock options having been dated using favorable dates that were selected with the benefit of hindsight and that serious mistakes were made, the Special Committee did not find any intent to defraud or fraudulent misconduct by any individual or group of individuals.  The Special Committee found that the Company's dating and pricing practice for stock options was applied uniformly by Company personnel to stock options granted and was not used selectively to benefit any one group or individual within the Company.

Although the company may have exonerated those responsible, and it doesn't appear anyone lost their position over this, it remains to be seen whether the SEC or federal prosecutors will take the same benign view of the conduct.  At a minimum, backdating corporate documents violates the books and records provisions of the securities laws, and the fact that no one responsible for the backdating was a pig by favoring himself or herself to the exclusion of others does not mean there was no fraudulent intent if the goal of the backdating was self-enrichment.  The absence of a favored few receiving options makes it less likely there will be a criminal case, but the SEC will likely review the conduct with a careful eye. (ph)

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

Wednesday, April 4, 2007

Taking the Fifth -- More Problems in the AG's House

The actual procedure of taking the Fifth Amendment can present many procedural difficulties for the individual intending to invoke this Amendment.  This is particularly true in high profile and political cases, as the effect of taking the Fifth may lead some to believe that the individual is guilty.

CBSNews reports that Representatives Conyors and Sanchez want Monica Goodling, former adviser to AG Gonzales and liaison to the White House, to talk with them despite her attorney's statement that she will take the Fifth Amendment. The article focuses on whether she is entitled to use this Amendment in this context.

Whatever view one takes of the rightfulness of Goodling being able to take the Fifth Amendment, the procedure may be a problem for her.  If the Committee demands that she appear, it may find her responding to each specific question with an assertion of the Amendment.  After several questions one can find the questioning itself very telling. An alternative here would be for her to talk with the committee members informally.


April 4, 2007 in Investigations | Permalink | Comments (0) | TrackBack (0)

Another Target in the Abramoff Sphere of Influence

When former Deputy Interior Secretary Steven Griles entered a guilty plea to making a false statement to a Senate Committee, he admitted he lied when he testified that his relationship with former superlobbyist Jack Abramoff was nothing special.  In fact, Griles' then-girlfriend, Italia Federici, introduced Abramoff to him, giving Abramoff a special "in" with Griles.  It turns out that another target of the investigation is Federici, who co-founded the Council of Republicans for Environmental Advocacy (CREA) in 1997 with Gail Norton, the former Interior Secretary appointed in 2001 who was Griles' boss.  A target letter sent to Federici by the Tax Division at the Department of Justice in January 2007, available below, states that "[t]he investigation is focused on the alleged illegal manner in which you operated [CREA]."  Among the potential crimes being investigated are conspiracy, tax evasion, making false statement to a Senate Committee, and obstruction of an official proceeding.

Interestingly, one reason identified for sending the target letter is to afford Federici the opportunity to obtain court-appointed counsel, which she has done.  The letter is addressed to her care of the Federal Defender's Office in Washington, D.C., and a Legal Times story (here) notes that her attorney is from that office, due to financial problems.  Abramoff and his clients made fairly significant donations to CREA, and his cooperation may be the basis for charges against Federici. (ph)

Download federici_target_letter.pdf

April 4, 2007 in Corruption, Investigations | Permalink | Comments (0) | TrackBack (0)

Cheese Company Executives Found Guilty

Two former executives of Suprema Specialties, Inc., a publicly-traded specialty cheese company in New Jersey, were found guilty of 38 counts of conspiracy, bank fraud, and securities fraud related to fictional revenues at the company, which collapsed in 2002.  Mark Cocchiola, a founder and former CEO of the company, and Steve Venechanos, its former CFO, were found guilty after the jury initially told the judge they were deadlocked, but then returned for more deliberations and returned the guilty verdicts on all counts.  According to a press release issued by the U.S. Attorney's Office (here): "The government presented evidence at trial that between July 2000 and January 2002, Suprema reported approximately $400 million in sales to its six biggest customers, which accounted for over half of its total reported sales for that period. The government’s evidence showed that over 99 percent of that $400 million in sales were entirely fictitious, with no product actually having been sold or shipped."  A story in the Newark Star-Ledger (here) notes that the defendants used the "Richard Scrushy" defense at trial, that they did not know anything about the fraud and were lied to by various subordinates and customers who entered guilty pleas and cooperated with the government.  While that defense worked for Scrushy, it was less successful for Cocchiola and Venechanos, who maintain their innocence and will appeal. (ph)

April 4, 2007 in Fraud, Verdict | Permalink | Comments (0) | TrackBack (0)

Tuesday, April 3, 2007

Alleged Export Violations

Two from South Carolina were indicted as part of a "15-count indictment, which was returned by a federal grand jury in the District of Columbia and unsealed on March 23, [that] charges the defendants with violating the International Emergency Economic Powers Act and the Arms Export Control Act and with acting as illegal agents of a foreign government." Two individuals from India was also indicted.  The DOJ Press Release states that without proper export licenses:

"the defendants acquired in the United States for VSSC and BDL electrical components that could have applications in missile guidance and firing systems. According to the indictment, the defendants concealed from vendors the true end-users of the goods. In particular, the indictment alleges how, in the case of one vendor, Cirrus provided the company with fraudulent certificates that claimed that the end-user in India was a non-restricted entity, when, in fact, the items were for VSSC."


April 3, 2007 in International | Permalink | Comments (0) | TrackBack (0)

There Goes the Spring Break Trip

The costs of the U.S. Attorney firings has claimed another victim: Attorney General Alberto Gonzales' spring break vacation.  The father of three sons, the AG canceled a planned vacation to prepare for a hearing on the Department of Justice budget before the Senate Appropriations Committee on April 10, and then the big one before the Senate Judiciary Committee on April 17 (see AP story here).  Among the members of the Appropriations Committee is Senator Patrick Leahy, also chair of the Judiciary Committee that has been leading the investigation of the firings.  Expect at least a few questions about the terminations at the appropriations hearing.  The House Judiciary Committee is pushing forward with its interviews of DoJ officials, including (according to a Committee press release here): "Deputy Attorney General Paul McNulty, Associate Deputy Attorney General David Margolis, Michael Battle, former Director of the Office of U.S. Attorneys, Monica Goodling, Special Counsel to the Attorney General and White House Liaison, William Mercer, U.S. Attorney for Montana and Acting Associate Attorney General, and William Moschella, Principal Associate Deputy Attorney General." 

Although Goodling, AG Gonzales' former senior counsel is listed, she will be asserting her Fifth Amendment privilege, and she is on paid leave from the Department.  A Legal Times story (on Law.Com here) discusses Goodling's background, and her prosecutorial experience consists largely of a six-month program in misdemeanor court in the Eastern District of Virginia.  It's unlikely that Congress will vote to immunize Goodling, so the basis for her assertion of the self-incrimination privilege will remain a mystery for now. (ph)

April 3, 2007 in Prosecutors | Permalink | Comments (0) | TrackBack (0)

New Century Bites the Dust

Subprime lender New Century Financial delayed the inevitable as long as possible, finally declaring bankruptcy after having its lines of credit cut off and soured loans returned to it by purchasers.  With the company in bankruptcy, a key issue now will be sorting out any possible responsibility if fraud is discovered in a federal criminal investigation of the company's financial statements and lending practices.  A story in the Orange County Register (here) reprints an e-mail sent on March 16 by former New Century vice chairman for finance and board member Edward Gotschall to friends: "I do want you to know that I've got great attorneys working with me, a significant Directors and Officers Liability Policy with the company and the knowledge that I haven't done anything wrong, something you wouldn't be able to figure out if you read the papers or listen to the news."  While a D&O policy might give some reassurance, these are not always as rock-solid as they may appear.  If there was fraud at the company at the time New Century purchased the policy, it may be voided for false statements made by the insured.  Moreover, D&O policies usually do not cover criminal or intentional misconduct.  With the company in bankruptcy, it is unlikely any current or former officers or directors will be able to recover much if anything under the corporate indemnification policy or their employment contracts, and the D&O well has a way of running dry if the investigation involves a number of individual targets.  With the trustee in bankruptcy now in charge of New Century, the attorney-client privilege is likely to be waived and prosecutors will have access to a wide range of corporate documents while they investigate the case. (ph)

April 3, 2007 in Investigations | Permalink | Comments (1) | TrackBack (0)

Tenet Healthcare Settles SEC Accounting Fraud Action

Tenet Healthcare Corp. settled an SEC civil enforcement action by agreeing to an injunction and payment of a $10 million penalty for inflating its earnings by exploiting a loophole in the Medicare and Medicaid regulations called "outlier payments."  According to the Litigation Release (here):

The Commission’s complaint alleges that between 1999 and 2002, Tenet engaged in an unsustainable strategy to reach its earnings targets by deliberately exploiting the Medicare reimbursement system. Tenet’s scheme involved a loophole in the Medicare reimbursement system related to “outlier payments,” which are designed to compensate hospitals for caring for extraordinarily sick Medicare patients. Tenet’s management realized that Tenet could inflate its revenue from outlier payments by simply increasing the gross charges set by its hospitals. From 1999 to 2002, Tenet’s outlier revenue more than tripled and Tenet’s earnings goals were surpassed year after year. Tenet’s outlier growth from fiscal 1999 to fiscal 2002 accounted for over 54% of its cumulative growth in earnings per share from operations. Similarly, by fiscal 2002, Tenet’s outlier revenue comprised over 40% of its earnings per share.

In addition to the company, the complaint names four individual officers as defendants: Thomas B. Mackey, former chief operating officer and co-president; Christi R. Sulzbach, former general counsel and chief compliance officer; David L. Dennis, former CFO and co-president; and Raymond L. Mathiasen, former chief accounting officer. Dennis and Mathiasen settled the case by agreeing to pay $150,000 and $240,000 civil penalties respectively, and Mathiasen agreed to a Rule 102(e) bar from practicing before the Commission as an accountant.  .

April 3, 2007 in Civil Enforcement, Fraud, Securities | Permalink | Comments (0) | TrackBack (0)

Sunday, April 1, 2007

When Will the AG Be Allowed to Explain the "Firings"?

When will Attorney General Gonzales get to explain?

Bloomberg here reports on the problems faced by the AG -- who now wants to speak to the Senate Judiciary Committee sooner then initially planned. What is particularly ironic here is that the Attorney General is being faced with an issue seen by many charged with a crime.  Although the AG is not charged with criminal conduct, and none is alleged here, he wants to clear his name and explain the circumstances of the "firings." Those accused of crimes, who proclaim their innocence, are often faced with their names and reputations being tarnished.  Some will seek to have a hearing or trial sooner so that their innocence will be shown. Many, however, have to wait for the set trial hearings or actual trial date to finally tell their side of the story. AG Gonzales may be realizing that the collateral consequences prior to being given a chance to explain can be very harmful to individuals who believe they have done nothing wrong and seek to clear their name.


April 1, 2007 in Prosecutors | Permalink | Comments (1) | TrackBack (0)

Two Medical Related Cases Settled

1) The U.S. Attorney's Office of the District of Massachusetts, along with the Massachusetts Attorney General and the Office of Inspector General for the U.S. Department of Health and Human Services reports that it reached a settlement with the Tri-City Mental Health Center.  The Center, a "mental health and social services provider with several facilities located in suburbs north of Boston has paid $556,687 to the state Medicaid Program and the Massachusetts Department of Mental Health (DMH) to settle allegations they billed the program for services they allegedly never rendered." The Center has also entered into a compliance program.

2) The U.S. Attorney for the Southern District of New York reports that "Cabrini Medical Center (“CABRINI”) has agreed to pay $3.4 million to resolve civil charges that it defrauded the New York State Medicaid Program in the operation of its detoxification unit during the period 1995 through 1999."


April 1, 2007 in Fraud, Prosecutions, Settlement | Permalink | Comments (0) | TrackBack (0)

Defense Fraud Charges Filed

A DOJ Press Release reports that "[a]n Alabama company and its owner have been indicted on charges of illegally exporting sensitive military technology overseas, fraud involving aircraft parts, and submitting false documents to the government."  The five count indictment includes charges claiming that the defendants exported "defense articles without a license." The indictment also calls for forfeiture of property. 


April 1, 2007 in Prosecutions | Permalink | Comments (0) | TrackBack (0)

BetOnSports Founder Arrested

Wall Street Jrl reports on the arrest of BetOnSports Founder here. For background on this case see here and here. This will be an interesting case to follow.


April 1, 2007 in Computer Crime, International | Permalink | Comments (0) | TrackBack (0)