May 5, 2007
Newspaper Stays Silent to Assist Federal Probe
The Chicago Tribune reports on an undercover probe into what appears to be the Chicago real estate development world. But there is one fascinating aspect to the story. It seems the Tribune knew about this undercover operation, but decided to hold publication of the story at the request of the prosecutor, U.S. Attorney Patrick Fitzgerald. The story discusses the considerations in making the decision to hold the story.
Former IRS District Director Pleads Guilty to Tax Fraud
"admitted in his plea agreement that from 1997 though April 2002, the conspirators, through Renaissance, operated a scheme to defraud the government and individuals by marketing a program designed to sell illegal tax deductions through false and misleading representations."
The press release also notes that the defendant in this case:
"also admitted that he and his co-conspirators falsely assured their clients and others that Renaissance’s tax system was legal. Cota acknowledged that on Oct.16, 2000, a co-conspirator sent an e-mail message to customers falsely asserting that there existed written endorsements from “over 2,000 tax attorneys, enrolled agents and CPAs (certified public accountants) that every strategy contained in the Tax Relief System is absolutely sound, unassailable and proven over the past 40 years.” The e-mail also falsely claimed that “[t]he training offered by Renaissance, the Tax People, through the Tax Relief System . . . was approved for continuing education credit for CPAs in all 50 states.”
(esp) (w/ a hat tip to Joel Podgor)
Health Care Fraud Conference
The American Bar Association 17th Annual National Institute on Health Care Fraud is scheduled for May 16-18 in New Orleans, LA. For details see here. Alice S. Fisher, Assistant Attorney General - Criminal Division, is scheduled to speak at lunch on May 17, 2007.
Ex-Stripper Convicted of Fraud For Posing as a Psychologist
A former Boston-area stripper who entertained under the name Princess Cheyenne in the infamous Combat Zone in the 1980s was convicted in Massachusetts state court on fraud and larceny charges for treating patients for seven years at a clinic while purporting to be a licensed psychologist with a Ph.D. According to a Boston Globe story (here), the defendant argued that she never claimed to any patients to be licensed as a psychologist, and she believed that she'd earned her degree even though she withdrew from the Massachusetts School of Professional Psychology without receiving a doctorate despite taking classes for five years. She eventually received a Ph.D. from a Dominica-based university through on-line courses that turned out to be bogus. The jury convicted her on 19 of the 25 counts charges. No word on what type of therapy she practiced on her patients, although I suspect that praciting for seven years means there were a number of successes during that time. (ph)
Prosecutors Seek to Hold Credit Suisse Banker Due to Flight Risk
Hafiz Naseem, a Credit Suisse investment banker accused of conspiracy and twenty-five counts of securities fraud for allegedly tipping a senior banking official at a Pakistani bank, may be forced to stay in jail for a while. According to a story on Sharewatch (here), federal prosecutors have asked that Naseem be detained because he is a flight risk with few ties to the United States. Naseem's attorney argued that he has a wife and two children in the U.S., one of whom faces surgery in the near future, and asked for a $1 million bail. One item that came out at the hearing is that Naseem returned from a trip to his native Pakistan just a couple days before his arrest, and after his arrest he told an investigator, "One thing you guys should know is had I been guilty, I would have never come back." Perhaps not the smartest thing to say because it arguably indicates that he could flee the country. Moreover, his return may be more a sign that he thought he was getting away with tipping rather than proof that he committed no crime. Leaving the U.S. would have cut him off from his position with Credit Suisse and the source of his information if he was in fact tipping.
The criminal complaint (available below) is interesting because it does not include as separate securities fraud counts any of the options trading in TXU that generated so much of the alleged proceeds, almost $5 million, from the tips to the unnamed Pakistani banker. The SEC complaint (here) that alleges a 10b-5 violation based on the TXU options trading was filed in the Northern District of Illinois, while the criminal complaint is in the Southern District of New York and only alleges violations based on stock trades in companies other than TXU. One reason for not charging the TXU options purchases in the criminal case may be a lack of jurisdiction in New York because the transactions occurred through foreign brokers and the trades were executed through the Chicago Board of Options Exchange (CBOE). The TXU options transactions can be charged as part of a broad criminal conspiracy because jurisdiction is permissible in any district in which an overt act occurred, and the stock trades alleged as part of the conspiracy were executed through the New York Stock Exchange.
Another interesting question is whether prosecutors will be able to extradite the unnamed Pakistani banker on insider trading charges. A quick check shows that the extradition treaty that governs is the U.S.-United Kingdom extradition treaty of 1931, adopted at a time when Pakistan was a British colony. Under Article 3 of the Treaty (here), the following offenses -- which can be based on aiding and abetting -- may reach insider trading:
17. Fraud by a bailee, banker, agent, factor, trustee, director, member, or public officer of any company, or fraudulent conversion.
18. Obtaining money, valuable security, or goods, by false pretences; receiving any money, valuable security, or other property, knowing the same to have been stolen or unlawfully obtained.
Whether insider trading can fit into these provisions to meet the dual criminality requirement will be one issue, and the state of U.S.-Pakistani relations could well affect the decision. Whether the banker will ever set foot in the United States is certainly an open question. (ph)
What Has the Government Proven Against Lord Black?
From all reports, the trial of Lord Conrad Black and three other former executives of Hollinger International has turned into a tug-of-war over how incompetent the company's audit committee really was. The government called all three members, former Ambassador Richard Burt, economist Marie-Josee Kravis, and former Illinois Governor and U.S. Attorney Jim Thompson. Each testified for the government that they never approved the payment of non-compete fees directly to Black and other Hollinger executives, and on cross-examination each in turn admitted to not reading or remembering statements in various documents discussing the payments for the non-competes. It is hard to tell from media reports whether these were sprung on the witnesses on cross or just hammered home by the defense lawyers after prosecutors raised the issue first, but it certainly looks like all the government has proven conclusively to this point is that the audit committee members didn't do a very good job. That said, corporate management should not engage in disclosure by connecting the dots, and insisting that scattered tidbits of information prove the audit committee was aware of what was going on may not wash. The government's theory may be that this was a game of Three-Card Monte, in which the money went one way and the disclosure was less than pellucid.
Getting Governor Thompson to admit on cross-examination he only "skimmed" documents does not make for a very strong prosecution case, however, which means that the testimony of former Black lieutenant David Radler becomes even more important. If prosecutors want to prove a fast shuffle, they will need the dealer to convince the jury that the four defendants were in on the game by trying to disclose as little as possible to Hollinger's board. Radler is set to begin testifying on May 7, and look for the fireworks to begin once the cross-examination starts. It looks more and more like this witness will make or break the prosecution. An AP story (here) discusses Governor Thompson's testimony. (ph)
May 4, 2007
Former Deputy AG Comey Testifies in U.S. Attorneys Firing Investigation
Former Deputy Attorney General James Comey, who left the Department of Justice in 2005 to become general counsel at Lockheed Martin, testified before the House Judiciary Subcommittee on Commercial and Administrative Law as part of the continuing investigation of the firing of eight U.S. Attorneys. Comey stated that he spoke briefly with Kyle Sampson in 2005 about U.S. Attorney's with weak management, but noted that only one of the fired prosecutors -- San Francisco's Kevin Ryan -- was among those he mentioned. Comey testified he was unaware that there was a process being developed to remove U.S. Attorneys, although he left the Department well before the terminations. Comey did state his high regard for former U.S. Attorneys David Iglesias, Carol Lam, John McKay, Paul Charlton, Daniel Bogden, and Bud Cummins; he did not mention Margaret Chiarra. An article from The Hill (here) discusses Comey's testimony.
Meanwhile, on another front, McKay, from the Western District of Washington, and Charlton, from Arizona, provided written submissions (here and here) to the Committee responding to additional questions identifying conversations with Michael Elston, the chief of staff to current Deputy Attorney General Paul McNulty, that they found troubling. McKay wrote about a January 17, 2007, call initiated by Elston:
I greatly resented what I felt Mr. Elston was trying to do: buy my silence by promising that the Attorney General would not demean me in his Senate testimony. I clearly and slowly told Mr. Elston that his description of what the Attorney General would be saying would have NOTHING to do with what I said or didn’t say publicly. I told him that my silence thus far was because I believed it was my duty to resign quietly because I served at the pleasure of the President, and that I did not want to reflect poorly on him or the Department of Justice. I told him that nothing he could say in Washington D.C. could demean me in Seattle, and made clear that I did not appreciate his offer. My handwritten and dated notes of this call reflect that I believed Mr. Elston’s tone was sinister and that he was prepared to threaten me further if he concluded I did not intend to continue to remain silent about my dismissal.
After December 7, 2006, but prior to the Attorney General's testimony before the Senate Judiciary Committee [in January 2007], I received a call from Mike Elston, Chief of Staff to the DAG. In that conversation I believe that Elston was offering me a quid pro quo agreement: my silence in exchange for the Attorney General's.
Cummins, from the Eastern District of Arkansas, testified at an earlier Subcommittee hearing that he spoke with Elston four times, and in their final conversation "[h]e essentially said that if the controversy continued, then some of the USA’s would have to be 'thrown under the bus.'" (see here) Things just keep getting more interesting. (ph)
Credit Suisse Investment Banker Charged With Insider Trading
Federal prosecutors and the SEC filed criminal and civil insider trading charges against Hafiz Naseem, who worked in the Global Energy Group at Credit Suisse. Naseem is accused of tipping an unnamed Pakistani banker about the impending buy-out of TXU by private equity funds in early March 2007. In addition, he is accused of tipping the banker about a number of other deals in which Credit Suisse acted as an investment adviser. An SEC press release (here) states:
According to the SEC's complaint, after receiving the insider information from Naseem, the Pakistani banker purchased 6,700 TXU call option contracts with March 2007 expiration dates through UBS AG London, and made profits of approximately $5 million following public announcement of the buyout.
The SEC's complaint further alleges that Naseem also divulged pending, but unannounced, business combinations and deals involving eight other issuers: Hydril Company, Trammell Crow Co., John Harland Co., Energy Partners Ltd., Veritas DGC Inc., Jacuzzi Brands, Caremark Rx, Inc., and Northwestern Corporation. The complaint notes that Credit Suisse served as an investment banker or financial advisor in all of these deals, and Naseem's phone calls from his work phone to the Pakistani banker's home and cell phones were made immediately before announcements of the proposed deals. The complaint alleges that the Pakistani banker also purchased securities in those companies in advance of public merger announcements, obtaining additional profits of more than $2.4 million.
Nothing like trying to cover your tracks by using your office telephone to make the tips. The SEC initially filed a complaint against "unknown purchasers" because of the use of overseas accounts to buy TXU options, so it needed to move quickly before the money left the country, never to be seen again. The criminal complaint filed against Naseem charges him with one count of conspiracy and twenty-five counts of securities fraud. A Reuters story (here) discusses the criminal charges. (ph)
Former Serono Executives Acquitted of Kickback Charges
Four former executives of biotech pharmaceutical manufacturer Serono S.A. were acquitted on charges that they sought to bribe doctors to prescribe the company's leading medicine, Serostim, as part of a program to pump up sales. The four defendants were charged in a federal indictment in Boston in April 2005 with violating the anti-kickback statute for allegedly offering doctors an all-expense-paid trip to Cannes, France, for a medical conference in exchange for prescribing the human growth hormone that is used to treat AIDS-wasting. According to an AP story (here), the jury was out less than three hours before it returned the not guilty verdicts on all counts, after a two-and-one-half week trial. (ph)
May 3, 2007
Senate Judiciary Committee Subpoenas Rove E-Mails
Although the controversy over the firing of eight U.S. Attorneys has largely receded from the media's view, the Senate Judiciary Committee is pressing forward by issuing a subpoena to Attorney General Alberto Gonzales requiring the production of e-mails to or from senior Presidential adviser Karl Rove. The subpoena marks a turn in the investigation for the Senate Committee because this is the first subpoena for documents it has issued, although its House counterpart has subpoenaed records. The subpoena (here) requires production of the following:
Complete and unredacted versions of any and all emails and attachments to emails to, from, or copied to Karl Rove related to the Committee’s investigation into the preservation of prosecutorial independence and the Department of Justice’s politicization of the hiring and firing and decision-making of United States Attorneys, from any (1) White House account, (2) Republican National Committee Account, or (3) other account, in the possession, custody or control of the Department of Justice, including any such emails that were obtained by U.S. Attorney Patrick Fitzgerald as part of the investigation into the leak of the identity of a covert CIA officer by officials in the Administration that led to the conviction of I. Lewis “Scooter” Libby.
The third source is particularly interesting because it seeks e-mails obtained previously by Patrick Fitzgerald in the Valerie Plame leak investigation, which stretched well into 2005. By subpoenaing the Department of Justice and not the White House, the Committee should avoid any claim of executive privilege to prevent the production, and seeking the Special Counsel's documents means that some internal White House e-mails may be available. One problem may be if the Department of Justice claims the e-mails gathered by Fitzgerald are grand jury material and therefore protected by the secrecy requirement of Federal Rule of Criminal Procedure 6(e) that prevents disclosure of such information without prior judicial approval.
A bi-partisan group of Judiciary Committee members (Leahy, Specter, Feinstein, Grassley, Schumer, and Sessions) also sent a letter (here) to Gonzales requesting production of the 2006 confidential order delegating in large measure authority to hire and fire political appointees in the Department of Justice to the AG's chief of staff (Kyle Sampson) and White House liaison (Monica Goodling) . The order had gone unmentioned in Gonzales' earlier testimony before the Committee, and the Senators expressed more than a little bit of exasperation at the failure to turn it over earlier:
The Committee has issued multiple requests for the Department to produce documents in its custody, possession or control related to the Committee’s investigation into the firings of U.S. Attorneys and alleged politicization at the Department, and to provide the Committee with the precise scope of the production. Despite these requests, the order has not been produced and its existence has not been disclosed. The order appears to be responsive to the Committee’s requests insofar as it dealt with the appointment and removal of inferior officers who are not subject to Senate confirmation, which would include interim and acting U.S. Attorneys. Consequently, we ask that you please produce the order and all related documents immediately.
Is the firing of the U.S. Attorneys headed back to the front pages? An AP report (here) states that the Department of Justice's Inspector General and the Office of Professional Responsibility are investigating whether Goodling used political criteria in hiring Assistant U.S. Attorneys, a career position insulated from such considerations. It's unclear why someone in the AG's office would even get involved in hiring decisions in the local federal prosecutors offices aside from the appointment of the U.S. Attorney, even if it only occurred in offices headed by interim or acting U.S. Attorneys. The fact that the AG's White House liaison might have had a say in the hiring of line AUSAs raises substantial questions about the politicization of the U.S. Attorney's Offices. The Congressional committees show no sign of moving on from the investigation, and the House Judiciary Committee will hear testimony from Gonzales later in May, so it should stay alive at least that long. The internal DOJ investigation of Goodling may disrupt plans for Congress to grant her immunity if her participation in hiring decisions violated federal law. (ph)
Options Explosion in Dow Jones
The surprise $5 billion bid by Rupert Murdoch's News Corp. for Dow Jones & Co. may not have been quite as surprising to some who bought call options on the publisher of the Wall Street Journal before the announcement. In a continuing refrain when large offers are made for companies, trading in the options spiked in the days before the information became public, netting some "lucky" traders outsized profits. In this case, a Bloomberg story (here) notes that the average volume in Dow Jones call options in the month before the bid was a bit more than 300 per day, but on April 25, four trading days before the announcement, the volume was over 3,000 contracts; on April 30, the day before the bid emerged, the volume was over 4,300 contracts. The article notes that all the 3,464 September 45 call options, which were well out of the money, that traded on April 30 were purchased in the last eleven minutes before the market closed at 4:00 p.m. EDT. The price on these calls jumped from less than $.50 to a $12 close the next day, which is at least a 2,400% return in one day -- I won't even try to annualize it. Timing in life is everything, but that's just way too much to not draw a lot of attention from the SEC and the U.S. Attorney's Office. (ph)
May 2, 2007
Congress Considers a New Public Corruption Statute
HR 1872, "Effective Corruption Prosecutions Act of 2007" is the house bill that mirrors Senate Bill S. 118. It provides that 18 U.S.C. s 666 would be allowed as a RICO predicate. It allows for an 8-year statute of limitations for a host of statutes that are routinely used in corruption cases, as well as outside this sphere. For example, if passed into law it would allow for an 8-year statute of limitation in a simple bribery case or in a mail fraud case that uses the honest services statute (see here). The proposed legislation also calls for additional funding to investigate and prosecute corruption.
Clearly the proposal to extend the statute of limitations will be the most controversial aspect of this proposed legislation. Some anticipated questions:
- Is it really necessary for investigations (if starting immediately after the commission of the crime) to last for 8 years in these specific type of cases?
- Many of the statutes included in this proposed legislation involve simple forms of criminal conduct, and is it really necessary to provide investigators more time to proceed with these cases?
- Are these cases really more complicated than tax cases, cases that have a statute of limitations below 8 years?
- Is it necessary to place undue stress on individuals being investigated by giving the government a longer statute of limitations before some resolution is reached on a case?
- Has corruption increased so drastically from the past that warrants this legislation?
(esp) (w/ a hat tip to Stephanie Martz)
Mail Fraud Reversal
Co-blogger Peter Henning noted here the acquittal during oral argument of an individual prosecuted under the mail fraud statute. The accused was convicted for a deprivation of honest services despite a fact scenario that had this individual selecting the low bidder for a state contract. The problem here is not the jury, as they appropriately followed the law. The problem is the prosecution's use of this law, section 1346 - the "intangible rights doctrine" of the mail fraud statute, and the fact that the law allows for this type of application. The decision now released leads one wondering if there is no crime in this jurisdiction that tax dollars could be spent on this type of prosecution. One also has to wonder whether this case emphasizes the need to reign in section 1346's "honest services" provision to curtail prosecutorial discretion. Judge Easterbrook, authoring the Seventh Circuit opinion in this case, has a superb analogy in his decision. He states:
"Once again that approach has the potential to turn violations of state rules into federal crimes. When the Supreme Court reverses a court of appeals, it is apt to say (as the prosecutor says about Thompson) that public officials have failed to implement the law correctly. Does it follow that judges who are reversed have deprived the United States of their honest services and thus committed mail fraud?"
Will Lord Browne Be Prosecuted For Perjury?
The resignation of BP p.l.c. CEO Lord John Browne included his admission that he made a false statement to a British court in order to obtain an injunction preventing the publication of an embarrassing story about a personal relationship. In a statement (here) acknowledging the relationship, Lord Browne stated, "My initial witness statements, however, contained an untruthful account about how I first met Jeff. This account, prompted by my embarrassment and shock at the revelations, is a matter of deep regret. It was retracted and corrected. I have apologised unreservedly, and do so again today." He denied allegations that he allowed the person to use company resources, and BP's chairman stated that "[a]t John's explicit request, the Board instigated a review of the evidence. That review concluded that the allegations of misuse of company assets and resources were unfounded or insubstantive." I'm not sure what "insubstantive" means, although perhaps the point is the amount is insignificant and so should not be a concern to shareholders. The problem for the company is that related-party transactions must be disclosed, and any misuse of corporate resources can be a significant concern for regulators.
The British tabloid that broke the story, The Mail on Sunday, issued a statement (here) assailing Lord Browne: "That Lord Browne should have felt free to lie deliberately and repeatedly raises deeply worrying questions about the system of secret court hearings which is increasingly being used by the rich and powerful to prevent the public knowing the truth about their activities." The paper said it would make its evidence available to the Attorney-General for possible prosecution for perjury. The governing statute is the Perjury Act of 1911, which makes it a crime for a witness in a judicial proceeding to "make a statement material in that proceeding, which he knows to be false or does not believe to be true . . . ." That provision is similar to the federal perjury statute in 18 U.S.C. Sec 1621, which makes it a crime to testify about a matter "which he does not believe to be true." Lord Browne's explanation for making the false statement does not negate the intent for perjury, because a violation is based on knowledge of the falsity of the statement, not that the witness had a good explanation for lying. That said, Lord Browne is a highly-regarded business person, and the underlying story has at best a tenuous connection to BP's business, so it may be one prosecutors decide to pass on. (ph)
May 1, 2007
NACDL White Collar Conference - Part IV
Stephanie Martz, White Collar Crime Project Director at the National Association of Criminal Defense Lawyers (NACDL), guest blogs a six part series on the recent White Collar Crime Track at the NACDL Cincinnati Conference:
Session 4: Attorneys’ Fees and Asset Forfeiture
The panelists, Steve Weisbrod of Gilbert, Heintz & Randolph in Washington, DC and David Smith of English & Smith in Alexandria, VA, addressed a hypothetical accounting restatement case with parallel proceedings.
What kinds of assets can/should you accept? Smith said "no" to proceeds of fraud crimes. You should be chary of assets from the CEO who has received most of his assets from the business itself (which was financed as a start-up from his own pocket). One circuit (the 7th) has said that you don’t have to do any investigation at all to determine likely source of the proceeds. DOJ guidelines, which have not been updated since 1985, require an "actual knowledge" test. If there are no restraining orders or indictments in place yet, it would be difficult to show that anyone’s assets were subject to forfeiture. Bottom line, though, is that there are many U.S. Attorneys’ offices that have never sought to forfeit a fee – it varies widely and the politics are interesting.
How do you investigate what funds are subject to forfeiture or not? Sometimes clean property can be substituted for dirty property if the dirty property is not available for forfeiture. If clean and dirty money is co-mingled, it helps to know what percentage is each (in a money laundering case, for example) – and it’s a very messy area of the law.
Weisbrod then discussed the right to indemnification. It comes from 3 sources: employment agreements, corporate by-laws, and statutes in all 50 states. Payment in advance, as opposed to indemnification, is quite difficult to get in many circumstances. Even indemnification is mandatory under state law only when you are "wholly successful" or something close to it. Most indemnification statutes provide mandatory indemnification under limited circumstances and optional indemnification under others. Insurance policies are contracts with usually very specific terms and limits.
Both panelists talked about the case of United States v. Wittig, in which the government alleged that the pre-existing indemnification agreement itself was the product of the fraud. Smith said that this case, while extremely disturbing, is still an outlier (and the result was ultimately vacated when the convictions were overturned). However, one should note that in general, forfeiture has bled significantly outside of the original core of drug cases.
Weisbrod noted that in the last 2 years, a quarter of all of the cases ever decided in which companies or insurance companies have argued against an indemnification agreement, have come down. This certainly evidences a trend towards fighting against paying employees in fraud cases. The "ancillary" proceeding in United States v. Stein, the KPMG case, is a prime example of this.
Weisbrod also cautioned that insurance, if it exists, should be your first source of funds, rather than your last, because notice and what you say in that notice is extremely important.
(sm/posted and links by esp)
White Collar Educators
The Chronicle of Higher Education News Blog reports of a plea to one count of mail fraud by the "former chief of SUNY's (State University of New York's) Entrepreneurship Institute."
(esp) (w/ a hat tip to Dean Darby Dickerson)
Newsday (AP) reports that an Atlanta lawyer was convicted in a "pump and dump" securities case following a trial in which he represented himself.
New Blog - Audit Trail
The White Collar Crime Blog welcomes Audit Trail to the blogshere.
(esp & ph)
April 30, 2007
Gonzales Matter Continues
The Attorney General "firings" is not losing press coverage. The most recent revelation is reported by Murry Waas in the National Journal in an article titled "Secret Order By Gonzales Delegated Extraordinary Powers to Aides."
(esp)(w/a hat tip to Jack King)
Wittig to Face Third Trial
According to the Topeka Capital-Journal here, prosecutors have decided to proceed with a case against former CEO of Westar Energy, David Wittig, and former executive vice-president Douglas Lake. The first trial was a mistrial. The second trial, which resulted in a conviction, was reversed by the appellate court. Wittig had received a sentence of 18 years, and Lake 15 years when the court decided to reverse the fraud convictions. (see here) The reversal came in a case with an incredible analysis using the "legally compelled mailing doctrine." But now the prosecution wants to try for three. (see also Wall Street Jrl here) Thats a lot of attorney fees.