Saturday, May 19, 2007
Although the setting is an immigration case, the language in the decision sends a strong message with respect to government conduct in parallel proceedings. In the case of United States v. Carriles, (2007 WL 1433458 (WD Tex.) Judge Cardone of the Western District of Texas states, ". . . In addition to engaging in fraud, deceit, and trickery, this Court finds the Government's tactics in this case are so grossly shocking and so outrageous as to violate the universal sense of justice. As a result, this Court is left with no choice but to dismiss the indictment."
The accused had argued that "the Government ha[d] been assembling a criminal case against Defendant from as early as April 21, 2005, and that even though Defendant did not qualify for naturalization due to his prior convictions in Panama, the Government nonetheless granted him a naturalization interview for the sole purpose of gathering information for use in a criminal prosecution." In the court's Order one finds an incredible discussion of the caselaw that supports dismissal of a matter when the government oversteps its bounds in a parallel matter. As you might suspect, there is reference to the Scrushy case. This is clearly an important case for those litigating SEC and IRS cases.
(esp) (w/a hat tip to Stephanie Martz)
UPDATE: Below is the District Court's order and opinion, issued on May 8, 2007.
Working for the government certainly has its rewards, but the pecuniary benefit is not one of them. White collar criminal defense work is definitely a growth area for firms, who can be called in at any time to deal with issues great and small. A couple recent articles highlight how valuable the experience of representing the government can be for those who decide to cross over (or back, in some cases) to private firms or to in-house legal positions. An article in the New York Times "What Happened to the Lawyers Who Worked For Spitzer" discusses the dispersal of Governor Eliot Spitzer's legal team from his days at Attorney General who pursued the high-profile Wall Street cases that made him a national figure. Former deputies who headed up investigations of insurance companies, mutual fund late-trading, and stock analyst conflicts have now landed at leading firms like Paul Weiss, Proskauer Rose, and Weil Gotshal to work on white collar and corporate advisory matters. Up I-95 from Manhattan, an article in the Connecticut Law Tribune (here) discusses the move by a former supervisory Assistant U.S. Attorney in the District of Connecticut to the Fairfield County firm Pullman & Comley to start up a white collar crime group there.
Both articles note that lawyers coming from the government cannot bring clients with them, and of course they would have to recuse themselves from any matters on which they worked while a prosecutor. But the absence of a book of business does not seem to be too much of a handicap when the former prosecutor brings in a wealth of experience and, perhaps more importantly, the ability to get telephone calls returned and meetings scheduled quickly. And for the lawyers, the money ain't bad either when you consider first-year associates in Wall Street firms make more coming out the chute than any government attorney will make after a decade. (ph)
A recent article by Joshua Berman and Machalagh Proffit-Higgins, from the D.C. office of Sonnenschein Nath & Rosenthal, analyzes the history and development of the Department of Justice's policy memoranda on prosecuting corporations that culminated recently with the issuance of the third in the series, the McNulty Memorandum. The article, "Prosecuting Corporations: The KPMG Case and the Rise and Fall of the Justice Department's 10-Year War on Corporate Fraud" (available below), looks at the earlier versions of the corporate charging policy, the Holder and Thompson Memos, and the decision by U.S. District Judge Lewis Kaplan in the KPMG tax shelter prosecutions that found the application of the Thompson Memo unconstitutional by denying the defendants their rights to due process and counsel. The article, published in the Criminal Law Brief by the Washington College of Law at American University, considers how the district court's opinion in KPMG has shaped the Department of Justice's most recent effort to blunt criticism of its approach to corporate crime investigations that makes waiver of the attorney-client privilege and work product protection a featured part of the case. The article notes that "[i]n the end, the eventual impact of the McNulty Memorandum is likely to depend more on DOJ's incorporation of the Memorandum into their efforts to combat corporate fraud than the actual words on the page." (ph)
Friday, May 18, 2007
The private equity deals are coming fast and furious these days, as the multitude of posts on the recently-launched M&A Law Prof Blog can attest -- written by my colleague Steven Davidoff, make sure to check it out. Almost every deal seems to be preceded by an inevitable bump in trading in out-of-the-money call options in the week(s) before the announcement. The transaction at issue this time is one of the "smaller" ones this week, the May 16 disclosure of the acquisition of Acxiom Corp. by Silver Lake Partners and ValueAct Capital Partners L.P. for $27.10 per share, a total value of $2.24 billion. Bigger deals announced in just the past couple days include the Bausch & Lomb acquisition for $4.5 billion by Warburg Pincus and Alliance Data by Blackstone for $7.8 billion. But the trading in Acxiom is particularly striking, and hints strongly at insider trading. According to a Bloomberg article (here), average volume in the call options was 135 contracts a day, but 1,400 traded on May 10 and another 1,300 on May 14, 15, and 16. To make things worse -- or better, depending on your point of view -- most of the transactions were in May 25 call options that would expire on May 19, and the stock price was almost two dollar below that price and hadn't traded above $25 in months. Risky, you say? Add the fact that all the trading on May 16 took place in the last seventy minutes of trading, and the deal was announced after the market closed, and the SEC will be burning the midnight oil to figure out who was behind the trading, especially because the calls increased in value by 1,000% after the disclosure. Timing in life is everything, of course, and can be a good starting point for an insider trading investigation, but it won't end there. Another day, another deal, another SEC investigation no doubt. Anybody getting tired of this yet? (ph)
Democrat Senators Charles Schumer and Diana Feinstein announced that they will introduce a "No Confidence" resolution on Attorney General Alberto Gonzales (AP story here). While the firing of nine U.S. Attorney's has generated significant controversy, that issue seemed to be dying down as President Bush made clear his continuing confidence in the Attorney General. The recent testimony by former Deputy A.G. James Comey about Gonzales personally pressuring a serious ill Attorney General John Ashcroft to approve the administration's telephone surveillance program seems to have stirred things up again. A fifth Republican Senator, Norm Coleman of Minnesota, joined the ranks of those calling for the AG to step down. But the only real power Congress has to remove a cabinet officer is impeachment, and that has only been done to one such officer in history -- Secretary of War William Belknap in 1876 on corruption charges, and he resigned before the trial in which the Senate acquitted him.
A "No Confidence" resolution and five bucks gets you a double decaf latte at Starbucks because the Attorney General serves at the pleasure of the President, and the President seems to remain pleased with Gonzales. President Bush dodged questions from the press about Comey's testimony during a briefing with outgoing Prime Minister Tony Blair. The exchange (here) was:
Thank you, sir. There's been some very dramatic testimony before the Senate this week from one of your former top Justice Department officials, who describes a scene that some senators called "stunning," about a time when the wireless -- when the warrantless wiretap program was being reviewed. Sir, did you send your then Chief of Staff and White House Counsel to the bedside of John Ashcroft while he was ill to get him to approve that program? And do you believe that kind of conduct from White House officials is appropriate?
PRESIDENT BUSH: Kelly, there's a lot of speculation about what happened and what didn't happen; I'm not going to talk about it. It's a very sensitive program. I will tell you that, one, the program is necessary to protect the American people, and it's still necessary because there's still an enemy that wants to do us harm. And therefore, I have an obligation to put in place programs that honor the civil liberties of the American people; a program that was, in this case, constantly reviewed and briefed to the United States Congress. And the program, as I say, is an essential part of protecting this country. And so there will be all kinds of talk about it. As I say, I'm not going to move the issue forward by talking about something as highly sensitive -- highly classified subject. I will tell you, however, that the program is necessary.
Q Was it on your order, sir?
PRESIDENT BUSH: As I said, this program is a necessary program that was constantly reviewed and constantly briefed to the Congress. It's an important part of protecting the United States. And it's still an important part of our protection because there's still an enemy that would like to attack us. No matter how calm it may seem here in America, an enemy lurks. And they would like to strike. They would like to do harm to the American people because they have an agenda. They want to impose an ideology; they want us to retreat from the world; they want to find safe haven. And these just aren't empty words, these are the words of al Qaeda themselves. And so we will put in place programs to protect the American people that honor the civil liberties of our people, and programs that we constantly brief to Congress.
Until the President says "Go" then the Attorney General stays. (ph)
The former marketing director for U.S. Foodservice received an 84-month prison term after being convicted in November 2006 on accounting fraud charges. Mark Kaiser was described by the sentencing judge as the "the organizer and the leader" of a scheme to inflate earnings by creating fake rebates from suppliers. The company's former CFO entered a guilty plea and testified against Kaiser. The seven-year sentence slightly exceeded the Sentencing Guidelines range for the offense of 63 to 78 months. The judge did allow Kaiser to remain free on bail pending appeal, something that is much more common in white collar crime cases. A Reuters story (here) discusses the sentencing. (ph)
The attorney for former Dynegy executive Jamie Olis won a civil fraud claim against the company for failing to pay the legal fees in defending Olis in a criminal prosecution arising from his work at the company. Although Olis was convicted and has now served four years in prison, the issue at the trial concerned whether Dynegy's by-laws required it to advance attorney's fees for an officer subject to judicial proceedings for conduct undertaken in the course of employment. Although it is a standard by-law provision to advance such fees, at least during an investigation and trial, the government pressured Dynegy into denying fees to Olis' counsel. A jury in Houston found Dynegy liable for $450,000 in fees and recommended $2 million in punitive damages for Olis' lawyer, Terry Yates. A Reuters story (here) discusses the verdict.
The theory here is interesting because attorney's fees claims are usually brought as a contract law action, or as an equitable proceeding under the law of the state of incorporation. Dynegy is a Delaware corporation, so that state's liberal indemnification laws would have required payment of at least a portion of Olis' attorney's fees. But, such an action could not have been the basis for punitive damages, which are limited to tort cases. Rather than a claim by Olis for reimbursement, Yates brought a fraud action in his own right, apparently claiming that the denial of fees after he undertook the representation defrauded him of the payment because of his obligation to defend Olis regardless of whether he was paid by the company. A novel theory, and one that may result in a punitive damage award, although courts tend not to give what a jury recommends. I have not seen this theory used to recover attorney's fees under a corporate by-law, and Dynegy could pursue an appeal challenging what appears to be a new application of civil fraud.
Tom Kirkendall of the Houston's Clear Thinkers blog has an interesting post (here) discussing the government's policy of pressuring organizations to deny attorney's fees for their officers and employees, including the KPMG tax shelter case in New York. The most recent iteration of the government's policy on charging corporations -- the McNulty Memo -- no longer mentions payment of legal fees for employees as a sign of a lack of cooperation, but whether there is a real change in attitude on this front remains to be seen. (ph)
Thursday, May 17, 2007
Four Democrat Senators sent a letter to Attorney General Alberto Gonzales (here) questioning the accuracy of testimony he gave in February 2006 about the Department of Justice's position on the government's warrantless wiretapping program. Former Deputy Attorney General James Comey testified before the Senate Judiciary Committee on May 15 about a hospital meeting in which Gonzales, when he was Counsel to the President, and Chief of Staff Andrew Card pressured then-Attorney General John Ashcroft about giving the Department of Justice's blessing to the program. At the time, Ashcroft was recovering from serious gall bladder surgery, and rejected the request to reauthorize the program. The letter from Senators Durbin, Schumer, Feingold, and Kennedy quotes AG Gonzales' testimony about the meeting as follows: "Senator, here is a response that I feel that I can give with respect to recent speculation or stories about disagreements. There has not been any serious disagreement, including - and I think this is accurate - there has not been any serious disagreement about the program that the President has confirmed. There have been disagreements about other matters regarding operations, which I cannot get into." The Senators pose the following question: "In light of Mr. Comey's testimony yesterday, do you stand by your 2006 Senate and House testimony, or do you wish to revise it?"
The Judiciary Committee's hearing was ostensibly about the firing of nine U.S. Attorneys, a matter about which Comey testified earlier before the House Judiciary Committee. The highlight of the hearing was the recounting of the meeting in the intensive care unit with Ashcroft, who refused to override Comey's judgment on the matter of reauthorizing the classified program, which has nothing to do with the firings. Was this a set-up by the Judiciary Committee to put more heat on Gonzales? The testimony did provoke a reaction from Republican Senator Chuck Hagel of Nebraska, who called for the Attorney General to resign (see AP story here). In response to a question about Comey's testimony, White House spokesman Tony Snow said (here): "Well, again, Jim Comey gave his side of what transpired that day. The President still has full confidence in Alberto Gonzales." Don't be surprised if Andrew Card is asked to provide his version of what took place. (ph)
The Senate Judiciary Committee seems to be gearing up for a fight with the Administration over documents related to the firing of nine U.S. Attorneys in 2006. With Attorney General Alberto Gonzales having been haled up to Capitol Hill twice, with little to show for the hearings except a batch of unanswered questions, the Committee has demanded the production of documents and access to White House aides. Pursuant to a subpoena to AG Gonzales issued on May 2, the Department of Justice provided (here) a grand total of two e-mails in which Rove's name appears as a recipient, which were sent by an aide in the White House Office of Political Affairs. The e-mails concern the firing of New Mexico U.S. Attorney David Iglesias and issues related to contacts with him by two members of Congress; both e-mails were sent in February 2007 and do not relate to the decision to fire any of the U.S. Attorneys. The Committee subpoena also sought e-mails from Special Counsel Patrick Fitzgerald's investigation of the Valerie Plame leak because he received a large volume of Rove's e-mails. There is an interesting statement in the cover letter accompanying the e-mails about where they might be found:
In response to your subpoena, the Office of Special Counsel Patrick Fitzgerald also conducted a search using the same search terms referenced above and we have been advised that this effort did not identify any responsive documents. Mr. Fitzgerald noted that his Office did not obtain all of Mr. Rove's e-mails, but rather obtained access to his electronic media for the purpose of searching for documents responsive to search terms relevant to his investigation. Only records responsive to Mr. Fitzgerald's investigative search terms were retained by his Office and none of those records are responsive to the Committee's subpoena. The electronic media was returned to Mr. Rove's counsel, Mr. Robert Luskin, in a sealed condition. [Italics added]
The Committee may seek to obtain the documents from Luskin if he still has the "electronic media" in his possession rather than go directly to the White House for Rove's e-mails. Luskin could not assert the attorney-client privilege for the items, and it may be that when Fitzgerald provided them to a third party, that negates a claim of Executive privilege by the Administration.
Indeed, the issue of Executive privilege may well be raised by a letter (here) from Judiciary Committee chairman Senator Patrick Leahy to Fred Fielding, Counsel to the President, threatening to issue subpoenas to the White House for documents related to the U.S. Attorney firings. The letter asserts that the Administration's denial of any wrongdoing is not consistent with its refusal to turn over documents or make any Presidential aides available for on-the-record testimony. Leahy writes:
Even though the White House has not provided a single document or witness, the President and others speaking for the Administration continue to state that “nothing improper” has occurred and that “there is no credible evidence of wrongdoing.” I continue to await an answer to my April 5, 2007, letter to you asking for the “reviews by White House staff” that led the President to conclude as of March 20, 2007, that there was no wrongdoing, including any information that has led the President to discount the mounting evidence of impropriety revealed as the investigation continues.
The White House cannot have it both ways—it cannot withhold the documents and witnesses and thereby stonewall the investigation and, at the same time, claim that it knows of nothing improper. The involvement of Mr. Rove was initially denied but must now be conceded, as it was by the Attorney General and by the Attorney General’s former chief of staff during their Senate Judiciary Committee testimony.
A subpoena to the White House will surely provoke an assertion of Executive privilege and a long fight with Congress. (ph)
Former investment banker Bert Fingerhut entered a guilty plea and settled SEC civil charges related to a scheme to purchase shares in initial public offerings of mutual savings bank stock when they converted to publicly-traded companies. A mutual bank is owned by its depositors, and many of these banks have converted into corporations with shares traded on a securities exchange in order to tap the capital markets for funding. When the bank converts, it is required to offer shares to its owners -- the depositors -- at a price that is often a substantial discount to the subsequent market price. Fingerhut's scheme involved opening accounts in 65 different mutual savings banks in his name and those of his nominees in order to get an in on buying the shares at a discount. Because these conversions are heavily oversubscribed, Fingerhut got far more shares than he otherwise would have been eligible to purchase, and realized a profit of over $12 million on the trades. Fingerhut and one of his nominees entered a guilty plea to one count of conspiracy to commit securities fraud, and Fingerhut and three nominees settled the SEC's civil action. The SEC Litigation Release (here) describes the scheme:
The defendants deliberately evaded these and other applicable banking regulations and offering terms contained in the converting Bank's prospectuses that imposed maximum purchase limits and prohibited the transfer of depositor's purchase rights. These priority purchase rights allow the depositors to purchase up to a certain number of shares at a relatively low price, and shares are allocated among depositors according to various criteria if an offering is oversubscribed. To ensure that only depositors benefit from their priority purchase rights, federal and state banking regulations prohibit depositors from transferring ownership of their purchase rights or from entering into any agreement regarding the sale or transfer of shares purchased in the offering.
Bert Fingerhut funded the opening of accounts in his own name and the names of his nominees at mutual savings banks throughout the country. When any of the banks undertook a conversion, he secretly funded his nominee's stock purchases, controlled the sale of his nominee's shares and retained most of the trading profits. He also had the nominees submit stock order forms in which they falsely certified to the banks that they were purchasing the stock for their own account and had no agreement to transfer the shares or the proceeds of their sale. Bert Fingerhut caused his nominees to make these material misrepresentations in 65 public stock offerings by banks. The 65 offerings were oversubscribed, and the defendant's misconduct therefore limited the amount of stock available to legitimate depositors, some of whom received less stock than they requested or were completely shut out. Bert Fingerhut and his nominees made over $12 million from the scheme at the expense of other depositors.
A press release (here) issued by the U.S. Attorney's Office for the District of New Jersey describes the criminal charges, and Fingerhut faces a likely sentence of approximately five years. (ph)
Wednesday, May 16, 2007
What started out as a squabble between a small natural gas options-trading firm and its biggest customer has ballooned into something a bit more sordid, especially for investors in the firm. Optionable Inc. operates an electronic trading system and the Bank of Montreal was its biggest customer, until it suffered over $400 million in trading losses and pulled the plug on doing any more business with Optionable. Among the investors in Optionable is Nymex Holdings, which operates the New York Mercantile Exchange (NYMEX), one of the leading commodities exchanges. Nymex bought a 19% stake in Optionable in April, but it doesn't seem to have done as much due diligence as it might have liked. It turns out that Optionable's CEO at the time, Kevin P. Cassidy, has a bit of a questionable past, with convictions in the 1990s on credit card fraud and tax evasion charges; he resigned on May 14. A quick check of the Bureau of Prisons website's inmate locator for one "Kevin Patrick Cassidy" shows that the prisoner was released from federal custody in March 1999. Optionable's public filings make no reference to Cassidy's past brushes with the law. For example, its 8-K filed in 2006 (here) announcing his appointment as CEO only states: "Mr. Cassidy, age 46, previously served as the Company's Chief Executive Officer from February 2000 through March 2004. Additionally, Mr. Cassidy is a 50% stockholder of and serves as the Managing Director of Capital Energy Services LLC ("CES") and as a principal of Sleepy Hollow Coffee Roasters, Inc. ("Sleepy Hollow")." Questions about the trading losses are starting to swirl, and Optionable's stock has lost over 90% of its value in the past few weeks. As a publicly-traded company, the SEC is likely to start asking questions about Optionable's disclosures and financial statements. A Bloomberg story (here) discusses the controversy. (ph)
Tuesday, May 15, 2007
Professor Paul Marcus from William & Mary, one of the leading criminal law scholars in the U.S., is seeking assistance in pursuing comparative criminal law research on white collar crime topics involving Scandanavian countries, particularly Sweden. Paul is a gifted scholar who also writes books that are quite helpful to those in practice, especially on the law of entrapment and criminal conspiracy. Any help or contacts would be much appreciated. If any of our readers know of individuals in the white collar field in this part of the world, please pass them along to Professor Marcus (firstname.lastname@example.org), or one of the editors of this Blog (email@example.com or firstname.lastname@example.org). Thanks. (ph & esp)
Monday, May 14, 2007
Deputy Attorney General Paul McNulty's resignation letter is a short three paragraphs (see WSJ here). As noted here, he is resigning to return to the private sector in order to pay tuition for college age children. But this raises some questions. First he doesn't seem to have another job lined up to pay that college tuition, and second is that the timing of this decision raises some eyebrows. Now in fairness to question one, he does intend to stay on for awhile to assure a "smooth transition," so one can say that this leaves him time to find a job that will assist him with the college tuition payments. But the bottom line is that this is not the first person walking away from Attorney General Gonzales. Whether the reason is the pressure of recent weeks with respect to the Attorney General "firings" or the poor funding for this position, McNulty's departure should cause some re-evaluation within the DOJ. And what will this mean to corporate prosecutions? From the Holder Memo, to the Thompson Memo, to the most recent McNulty Memo, we have seen each Deputy AG place his fingerprints on what will be the operating guidance with respect to corporate prosecutions. At some point you have to stop and ask whether prosecutorial discretion should be dependent on the individual filling the shoes of the Deputy AG.
See here AG Gonzales statement on McNulty's departure.
The Toronto Star tells of the cross-examination of the government's star witness, David Radler. And there were no surprises in seeing the credibility of this witness being questioned. The issue for the jury will be to assess the testimony of this witness and determine whether it is truthful. The defense will argue that it is tainted by the "deal" Radler received. Defense questions focused on the "deal" and whether the leniency provided to this witness was the motivating factor behind Radler's statements implicating Black.
Deputy Attorney General Paul McNulty, the number two person in the Justice Department, resigned his position effective at the end of the summer. According to an AP story (here), the official reason is to pursue higher-paying opportunities in the private sector to pay for the college tuition of his children. Another reason advanced by aides, however, is his anger at being linked to the firing of eight (or nine) U.S. Attorneys for political reasons. McNulty testified before the Senate Judiciary Committee in February 2007 (statements here and here) about the firings, and his testimony about the reasons may not have been exactly as the White House wanted. Attorney General Alberto Gonzales issued a statement (here) thanking McNulty and including the "best of luck in your future endeavors" wish that may not be entirely sincere: "Paul is an outstanding public servant and a fine attorney who has been valued here at the Department, by me and so many others, as both a colleague and a friend. He will be missed. On behalf of the Department, I wish him well in his future endeavors." Whether the resignation means any change in the direction of the U.S. Attorney firings investigation is a different question, because it's unlikely McNulty will contradict anything he has said earlier. (ph)
Sunday, May 13, 2007
According to a press release of the Department of Justice, The SCOOTER Store Inc reached an agreement with DOJ that calls for them to pay "$4 million, and give up many millions more in pending claims for reimbursement to Medicare, to settle allegations that the company violated the civil False Claims Act and defrauded the United States." The civil agreement is somewhat unique in that it includes a settlement for one of the individuals associated with The SCOOTER Store. The founder of the company agreed to pay $500,000 and to "forego dividends from his shares in the company for the next year in exchange for a release of his personal liability." SCOOTER has an incredible history of helping individuals. Their website has a list of the wonderful donations they make every day and the assistance they provide to people.
Cooperation is an important part of investigations. But the cooperation is not merely a function of the police or government agents finding someone to provide them with information. In some instances, it is the pooling of information by local, state, and federal officers. In the white collar area, administrative agencies also play an important function in the investigative process. A recent task force that netted arrests demonstrates the effective combination of several entities working together to investigate and arrest individuals. According to a Press Release of the DOJ, recent arrests in "the Southern District of Florida are the result of the establishment of a multi-agency team of federal, state and local investigators designed specifically to combat Medicare fraud through the use of real-time analysis of Medicare billing data." The press release also notes that "[s]ince the first phase of strike force operations began on March 1, 2007 in southern Florida, the strike force has obtained indictments of individuals and organizations that have collectively billed the Medicare program for $142,061, 059."
It is clear that the pressure on AG Gonzales over the United States Attorney firings is not lessening. Within the last few days it has been prominent in the New York Times here, LA Times here, and Washington Post here. But perhaps the most interesting aspect to now note is that AG Gonzales appears to be on the defensive, offering his explanations on the front of the DOJ page. His testimony is here and a statement from his acting director or public affairs is here.