Saturday, June 2, 2007
I "Scooter" Libby is set to be sentenced Tuesday for the crimes of obstruction of justice, false statements, and perjury. The predictions are certainly the focus of much commentary (e.g., here, here, and here). But with many looking at the numbers, it is important to recognize that this sentencing presents an opportunity for a judge to look beyond numbers and sentence the individual. The defense sentencing memorandum spends the first 23 pages of the 33 page document focusing on the individual. Only after this part of the memo do we see discussion of the guidelines and the applicable law. Now there is a separate motion in opposition to the government's memo, but it is clear that the defense will be calling for the judge to sentence the individual, not individual "x" who has been convicted of committing certain crimes. The government will, as usual, likely be asking for the court to follow the strict numerical calculations of the guidelines.
In 116 Yale L.J. Pocket Part 279 (2007), I wrote, "The bottom line is that we need to return to individualizing the sentencing process because we do not sentence numbers - we sentence people. If we really believe that the time should fit the crime, then we need to start realizing that not all crimes and not all criminals are alike."
Whether this approach gives Libby a longer or shorter sentence is subject to debate. But the interesting question will be whether the judge wants to be a part of this debate, or merely plug in numbers and sentence the next defendant in the courtroom.
P.S. - Check out Professor Doug Berman's analysis on the Sentencing Law and Policy Blog here.
Although I. Lewis "Scooter" Libby was convicted of perjury, false statements and obstruction of justice, the case originates from an investigation involving the unauthorized leak of information about Valerie Plame's role as a CIA operative. It is therefore interesting to see Fox News reporting, just days before the sentencing, that Valerie Plame is suing the CIA related to a book she is writing. For details see here.
Professor Stuart Green is doing a guest stint at the PrawfsBlawg and has an interesting post (here) on sentencing in white collar crimes, "White-Collar and Red-Handed." He discusses the recent sentencing of a former Chinese government official to death for accepting bribes, and the suicide of a Japanese minister about to face a Parliamentary inquiry for possible bid-rigging. Stuart addresses the broader question of how harsh should sentences for white collar offenses be, a particularly timely topic with defendants like I. Lewis Libby, Richard Scrushy & Don Siegelman, and Joseph Nacchio facing prison terms. He writes:
What is the appropriate penalty for white collar crimes? When are they too harsh? When too lenient? Criminal law scholars traditionally distinguish between ordinal and cardinal proportionality. Ordinal proportionality concerns how wrongdoers are punished relative to each other. Cardinal proportionality deals with the absolute severity levels anchoring the penalty scheme as a whole. Most commentators believe that the sentencing scheme in the U.S. (as in China) is far too harsh from the perspective of cardinal proportionality: the whole system is ratcheted up too high. But ordinal proportionality is something else. Is there any reason why the penalties for our most serious white collar crimes should necessarily be lower than the penalties for our most serious blue collar crimes?
Maybe we'll get Stuart to join us for a little while, too. (ph)
The sentencing of I. Lewis Libby is set for June 5 before U.S. District Judge Reggie Walton, and the defense sentencing filings are now available below. In sharp contrast to the government's recommendation of a 30-37 month prison term under the Sentencing Guidelines, lawyers for the former chief of staff to Vice President Cheney ask for probation. The Probation Office's presentence report, which is not available, determined that the Sentencing Guidelines provide for a base offense level of 14, which calls for a sentence of 15-21 months. Both the prosecution and defense agree with the base offense level calculation, but the government has argued for enhancements to increase the sentence. Libby's team agrees with the Probation Office's recommendation that the Judge depart downward based on three grounds: Libby's history of public service; the collateral consequences on his career from the conviction; and, the criminal conduct represents aberrant behavior unlikely to be repeated. Based on these grounds, the defense seeks the sentence of probation.
What will the sentence be? Jeralyn Merritt from TalkLeft guesses (here) that the sentence will be the Martha Stewart double-nickel: five months imprisonment and five months home confinement. Professor Doug Berman of the Sentencing Law & Policy blog (here) hedges his bet on the sentence by guessing a range of "something between 1-2 years" -- that would cover a departure in either direction. If those interested are in a sporting mood, a better approach is to wager on the over/under. I would put that line for over/under at a sentence of one-year-and-one-day, a particular favorite in white collar crime cases. The extra day means that the prisoner is eligible for the 15% good time credit under the Bureau of Prisons rules, so the actual sentence is a bit over ten months. Moreover, the last portion can be served in a half-way house, so the time in an FCI is more like 8+ months.
I peg my own guess at a year-and-a-day because that means the Judge could depart a bit from the Guidelines range, per Probation's suggestion, and still impose a substantial prison term. Given that Judge Walton was not always pleased with the defense during the trial, I suspect he might not cut as much slack as he would otherwise. After imposing the sentence, I also suspect the Judge will allow Libby to remain free on bail pending appeal. Despite the statutory presumption that a convicted defendant goes to jail after sentencing, the trend in white collar crime cases has been to allow the defendant to remain free while pursuing the appeal, and there are certainly legal questions in the case that are sufficiently close to justify permitting Libby to remain out on bail. (ph)
Any description of the prosecution of former Alabama Governor Don Siegelman and former HealthSouth CEO Richard Scrushy that does not include words like tortuous, labyrinthine, or bizarre just doesn't quite capture how strange this case has been. Coming on the heels of Scrushy's acquittal on securities fraud charges, the corruption case against the two men has included allegations of a political witch hunt of Siegelman, who barely lost re-election in 2002 and was running for the Democratic nomination while on trial in 2006. Since the trial, e-mails allegedly between jurors discussing the case have surfaced from an anonymous source and raise questions about possible misconduct, although the court denied a motion for a new trial based on this evidence. A defense motion questioning racial discrimination in the jury selection remains undecided. Allegations that the presiding judge has secret ties to a federal prosecutor through a company in which he was an officer triggered a recusal motion that was denied. Now comes a story in Time (here) alleging that Presidential adviser Karl Rove arranged to have Siegelman investigated by the U.S. Attorney's in the Northern and Middle Districts of Alabama -- the corruption case was prosecuted in the Middle District. According to the article, "A longtime Republican lawyer in Alabama swears she heard a top G.O.P. operative in the state say that Rove 'had spoken with the Department of Justice' about 'pursuing' Siegelman, with help from two of Alabama's U.S. attorneys." The claim against Rove is hearsay, but that hardly seems to matter. Look for Siegelman -- and Scrushy, who is not shy about assailing the government -- to raise a great hue and cry about the prosecution's motives. Like their other claims, it likely will fall on deaf ears in the District Court, and probably won't get much traction in the Eleventh Circuit, either. I'm tempted to say that this case can't get much weirder, but no prediction is safe with this one. (ph)
There are indications that partners at Milberg Weiss are negotiating a plea deal with the government to put an end to the prosecution of the firm for making secret payments to named plaintiffs in class actions for which the firm was lead counsel. Recent reports that former name partner David Bershad is also negotiating to plead guilty for his role in the scheme (see earlier post here) means that any hope the firm had of defending itself on the charges goes down the tubes if Bershad admits to criminal conduct in the course of his work on behalf of Milberg Weiss clients. The criminal liability of organizations, such as law firm partnerships, is based on respondeat superior, so Bershad's conduct would be attributed to Milberg Weiss. An article in The Recorder (here) includes speculation that the firm may be required to pay a fine of $50 million to $100 million, a substantial amount of money.
For the firm, more important than the fine is avoiding having to enter a guilty plea, which would haunt it in the future as it tries to obtain appointments in securities class actions. I expect the government is willing to enter into a deferred prosecution agreement under which Milberg Weiss will admit to violations and agree to certain reforms in its operations and governance, and after a period of time the current charges will be dismissed. While not a pleasant outcome for the firm, it sure beats a criminal conviction by a jury, which would be a foregone conclusion if Bershad admits his own guilt. What reforms the government demands will be interesting -- might it seek the removal name partner Melvyn Weiss from his role at the firm he helped found and turn into a plaintiffs class action powerhouse? (ph)
Friday, June 1, 2007
The SEC filed a civil enforcement action alleging securities fraud against four former officers of Mercury Interactive, Inc. for their role in options backdating from 1997 to 2003, and for two defendants allegedly manipulating revenues. The defendants are former CEO Amnon Landan, two former CFOs, Sharlene Abrams and Douglas Smith, and the company's former general counsel, Susan Skaer (SEC Litigation Release here). The company, now a division of H-P after being acquired in 2006, settled the case by agreeing to pay a $28 million civil penalty. This comes on the heels of the Brocade Communications settlement of an options timing complaint for $7 million (see earlier post here), and in Mercury Interactive's case the accounting violations likely triggered the higher fine. One particularly notable piece of evidence cited by the SEC in its complaint (here) regarding the revenue recognition issue is a slide in a PowerPoint presentation prepared by Abrams that discussed how the company treated order backlogs that stated, "Our Hidden Backlog . . . What Any Analyst Would Love to Get Their Hands On!" This is probably worse than some of the e-mails we've seen in cases, regardless of whether there's an innocent explanation for the statement.
The role of Skaer as general counsel fits into a pattern seen with increasing frequency lately. The SEC -- along with federal prosecutors -- has shown a greater willingness to pursue charges against a company's lawyers, particularly in-house counsel, for their role as a gatekeeper who is responsible for ensuring the paper-flow is correct and that the requirements of the law are fulfilled. The number of general counsels accused of securities violations for options backdating continues to grow.
With the civil case filed, the next issue is whether federal prosecutors will file charges. The U.S. Attorney's Office for the Northern District of California has been looking at the company. The SEC's allegations of false filings, including knowing false certifications of the financial statements, is the type of violation that is more likely to trigger criminal charges. Whether the turmoil in the U.S. Attorney's Office explains why the Commission acted alone, or whether the decision was made not to pursue charges, is unknown at this point, but a criminal case can't be ruled out just yet. (ph)
The Second Circuit's recent decision (see earlier post here) invalidating the civil remedy crafted by U.S. District Judge Lewis Kaplan to overcome the constitutional violation he found in the denial of attorney's fees for sixteen KPMG defendants raises the question of how the Judge will proceed from here. In criminal cases, the usual remedy that comes to mind for violations of a defendant's rights is the exclusionary rule, except in this case there's really nothing to exclude because the violations did not yield any evidence for the government, at least not directly. In finding the pressure prosecutors put on KPMG to deny attorney's fees to its former partners and employees was a violation of the right to counsel and due process, the Judge focused on the government's conduct during the investigatory stage. But that conduct did not impact the evidence used to obtain the indictments, unlike a Fourth Amendment violation.
The Judge issued an order (here courtesy of the WSJ Law Blog) asking the parties to address the following question: "What if any sanctions other than dismissal of the entire indictment are available with respect to the constitutional violations found by the Court?" The short answer is: not many, at least if the remedy is to address the violation itself and not as form of punishment for prosecutorial misconduct. Even the dismissal option is not an easy one to reach. Controlling Supreme Court precedent makes it difficult to dismiss an indictment because of prosecutorial misconduct during the pre-charge phase, so unless the violation resulted in the government obtaining tainted evidence there are not many other options available. Not to blow my own horn, at least not too much, I wrote two articles addressing the issue of remedies for prosecutorial misconduct, and the conclusion I reached is that dismissal to punish prosecutors is difficult to justify under the Constitution and other remedies only indirectly address the misconduct because society pays the price when a prosecution is hamstrung. For those suffering from terminal insomnia, the articles are Prosecutorial Misconduct and Constitutional Remedies, 77 Wash. U.L.Q 713 (1999) [available on SSRN here], and Prosecutorial Misconduct in Grand Jury Investigations, 51 S. Carolina L. Rev. 1 (1999) [available below].
The Judge's order poses another question to prosecutors that may be a bit disingenuous. Judge Kaplan asks: "What if any steps are [sic] the government prepared to take voluntarily in an effort to remedy the constitutional violations found by the court?" The government likely does not agree with the court's findings, and no doubt is champing at the bit to appeal to the Second Circuit. Would volunteering a remedy concede that the determination of constitutional violations was correct? Moreover, there's a measure of "name your own punishment" to the order that puts the U.S. Attorney's Office in a difficult position. If prosecutors were to recommend a remedy that the court determined was inadequate, they would be castigated again for not protecting the rights of the defendants and risk further wrath from the Judge. If they propose significant remedies -- which are a bit hard to imagine at this point -- then they could make obtaining convictions even more difficult in an already complex case. I suspect prosecutors will pass on the Judge's invitation.
An interesting question will be whether the Judge crafts a remedy that prevents prosecutors from appealing the underlying finding of constitutional violations. An order dismissing the indictments is immediately appealable, as would be the exclusion of significant blocks of evidence. Less drastic remedies may not fully vindicate the constitutional violations, but could insulate the decision from appeal except through a writ of mandamus, which is difficult to obtain. Is Judge Kaplan willing to go to the limit and order dismissal of the indictments, opening up his decision to review by the Second Circuit? Oral argument is scheduled for July 2. (ph)
The Department of Justice Inspector General and its Office of Professional Responsibility disclosed in a letter (here) to Senate Judiciary Committee Chairman Patrick Leahy and ranking member Arlen Specter that they have "expanded the scope of our investigation" of possible wrongdoing in the Department. According to the letter, the two offices are now looking into "allegations of Monica Goodling's and others' actions in DOJ hiring and personnel decisions; allegations concerning the hiring for the DOJ Honors Program and Summer Law Intern Program; and allegations concerning hiring practices in the DOJ Civil Rights Division." Whether the internal investigation turns up anything of interest is an open question because the offices are a part of the Department. In her testimony before the House Judiciary Committee, Goodling, the former White House liaison for Attorney General Alberto Gonzales, said that in a few instances she allowed political affiliation to affect hiring the hiring of Assistant U.S. Attorneys, something for which she expressed "regret." Given the grant of immunity to Goodling, there is little likelihood criminal charges will be recommended against her, and to this point no one else has been identified as acting in the same way as Goodling. She may well make a convenient -- and unchargeable -- scapegoat for the IG and OPR investigation. (ph)
Thursday, May 31, 2007
The SEC settled a civil enforcement action with Brocade Communications Systems, Inc., over options backdating by the company's CEO, Gregory Reyes. The case became the poster child for Chairman Christopher Cox's new procedure that requires the SEC staff to get authorization from the full Commission before negotiating a corporate penalty rather than presenting an agreed amount for approval. This is part of Cox's plan to exert greater control over the Enforcement Division and to address the issue of what fines are appropriate when a company's shareholders bear the burden of the harm from the underlying securities fraud and then the company pays a fine on top of those losses. In the Brocade settlement (SEC Litigation Release here and complaint here), the company agreed to pay a $7 million civil penalty, which now sets the benchmark for future cases that can be compared to the amount of options issued and the level of executive involvement. Reyes and Brocade's former human resources director were indicted on conspiracy and securities fraud charged, and sued by the SEC, in July 2006, so this case is likely viewed as a fairly egregious one. I suspect that future settlements of pure options backdating cases, i.e. ones that do not also involve accounting fraud aside from the misstated income and expenses due to the backdated options issuance, will likely come in at a lower amount absent significant personal gains by executives. (ph)
Two items in the news raise the question whether they are just a coincidence, or whether more is going on than meets the eye. A Wall Street Journal story (from the always-interesting and entertaining Law Blog here) states that former Milberg Weiss name partner David Bershad may be negotiating a guilty plea in the prosecution of the firm and another partner for paying secret kickbacks to lead plaintiffs in class actions. Bershad was responsible for the law firm's finances, and was accused of making cash payments from a safe hidden in a credenza in his office. If Bershad were to plead guilty and, more importantly, cooperate with the government, this would be a significant break in the case. For Milberg Weiss, any admission of criminal conduct by Bershad would be proof of the firm's liability, making it much more difficult, if not impossible, to defend against the charges.
Now for the coincidence. A Washington Post story (here) indicates that William Lerach, formerly with Milberg Weiss before a nasty break-up of the firm, is planning to leave his new law firm, Lerach Coughlin. Both Lerach and Melvyn Weiss were rumored to be involved in the federal criminal investigation, although both received letters from prosecutors at one point stating they were not targets of the investigation. Lerach has been a leading advocate for shareholder class actions in the securities field, and it is unlikely he will leave the scene completely. The timing of his decision, coming at the same time as news of Bershad's possible cooperation, is certainly interesting. Then again, I've never been much of a conspiracy theorist, so it may just be a coincidence. (ph)
Prosecutors rested the government's case-in-chief against former Hollinger International CEO Lord Conrad Black and three other former executives of the newspaper publisher now known as the Sun-Times Group. In finishing its case, the government dropped the money laundering charge against Lord Black, although he still faces conspiracy, mail fraud, obstruction of justice, and RICO counts. The money laundering count (indictment here) alleged a violation of 18 U.S.C. Sec. 1957 for transferring $2,150,000 related to one of the non-compete transactions. I suspect prosecutors determined the count could not be established based on the evidence at trial, and so to avoid the distraction of having the jury instructed on a losing charge it simply dismissed it. The effect is likely to be minimal on the overall case.
The government ended its presentation with an IRS agent who discussed Hollinger's tax returns in 1999 and 2000 -- not exactly closing the case with a bang, to be sure. After the obligatory Rule 29 acquittal motion, which the judge will deny in all likelihood, the defendants will begin their case. The question now becomes whether any of them testify, including the volatile Lord Black (see earlier post here). If the defendants think the government's case is weak, then they may well opt for a minimal showing and rest their case quickly in the hopes that the jury will acquit with equal alacrity. The message essentially is that they see no need to waste the jury's time any longer. If Lord Black does testify, it certainly promises to be good theater. An Reuters story (here) discusses the end of the government's case. (ph)
The rocky KPMG tax shelter prosecution has not made the U.S. Attorney's Office for the Southern District of New York gun-shy about bringing complex tax cases, as evidenced by the indictment of four tax partners from national accounting firm Ernst & Young on conspiracy, tax evasion, false statement, and obstruction charges (indictment below). Three of the four defendants, Robert Coplan, Martin Nissenbaum, and Richard Shapiro, are tax lawyers who were partners specializing in personal income tax planning; the fourth defendant, Brian Vaughn, is an accountant who headed up the sales of the tax shelters. Unlike the KPMG prosecution, the indictment alleges that Coplan, Nissenbaum, and Shapiro used one of the tax shelters to evade taxes on their own income, which puts the case in a bit different light by focusing on their personal gain from the tax avoidance program. In addition to the conspiracy charge, Coplan and Nissenbaum are accused of obstructing an IRS investigation,and Coplan and Vaughn are charged with making false statements to the IRS in its investigation. E&Y issued a press release that largely brushes aside the charges against its partners, noting that "[t]hey were part of a small group within the firm, disbanded years ago . . . ." I assume the government would prefer to draw someone to preside over the case other than U.S. District Judge Lewis Kaplan, who is overseeing the prosecution of the eighteen defendants related to the KPMG tax shelters. An AP story (here) discusses the charges.
Insider trading can happen in lots of different ways, and Barclays Bank PLC chose an interesting one: using information from the creditors committees of bankrupt companies to trade in their debt securities. Steven Landzberg, a defendant in the case along with Barclays, was the bank's representative on the creditors committees for six different companies, and as a member received private information about the financial condition of the debtors. Landzberg's more important job at Barclays was as head of its U.S. Distressed Debt Desk, which traded the bonds of companies in bankruptcy, making it very hard to resist the opportunity to trade. According to the SEC Litigation Release (here):
The complaint alleges that Barclays and Landzberg misappropriated material nonpublic information by failing to disclose any of their trades to the creditors committees, issuers, or other sources of such information. In a few instances, Landzberg used purported "big boy letters" to advise his bond trading counterparties that Barclays may have possessed material nonpublic information. However, in no instance did Barclays or Landzberg disclose the material nonpublic information received from creditors committees to their bond trading counterparties. Three of the six committees were official unsecured creditors committees appointed by the Office of the United States Trustee under the auspices of the federal bankruptcy courts. Barclays served as "Chair" of two of these bankruptcy committees at the time of its illegal insider trading.
The complaint further alleges that Barclays' senior management authorized Landzberg to buy and sell securities for Barclays' account while he served on bankruptcy creditors committees. Barclays' Compliance personnel failed to prevent the illegal insider trading, despite receiving notice that the proprietary desk had nonpublic information and should have been restricted from trading.
The reference to "big boy letters" concerns an agreement between parties to a private securities transaction in which they acknowledge that one side may have superior information and the counter-party will hold them harmless for taking advantage of the informational disparity -- it has nothing to do with hamburgers. The letters do not bind the SEC, however, and whether such an agreement could protect against a claim for illegal conduct in a transaction is very much an open question. As trading becomes more sophisticated, the use of such devices is likely to increase, although how much cover they provide is something that will only be clarified over time.
Barclays settled the case by agreeing to pay over $10.9 million: $3,971,736 in disgorgement plus prejudgment interest of $971,825, and a civil penalty of $6 million. The bank has a strong incentive to settle the case because it is pursuing a deal to buy global bank ABN Amro, and will need clearance from U.S. regulators and the SEC, among others, if it wants to move forward with that deal. Landzberg agreed to a permanent injunction barring him from participating in creditor committees in federal bankruptcy proceedings for companies that have issued securities and to pay a $750,000 civil penalty. (ph)
Wednesday, May 30, 2007
Motions have now been filed by former CEO of HealthSouth Richard Scrushy and former Alabama Governor Don Siegelman asking that the court give no prison time to the pair.(see Al.com here) This is in sharp contrast to the government's request of 30 years for Siegelman and 25 years for Scrushy. (see here) Perhaps what is the most fascinating part of the difference in sentences requested by the government and defense is that even if one were to follow the Sentencing Guidelines there is no agreement on what sentence should be issued. One of the purposes behind the guidelines was to provide uniformity in sentencing. But as reflected by this case, interpretations of how to read guidelines makes uniformity very difficult.
Tuesday, May 29, 2007
A DOJ press release of the Central District of California reminds everyone that mortgage fraud prosecutions are still a top "item." The release tells of a plea agreement being reached with "[a] West Los Angeles mortgage banker, [who] agreed to plead guilty to federal criminal charges in a massive mortgage fraud scam that caused more than $18.5 million in losses to banks, including his former employer."
The release notes that "[a]ccording to the Maize charges, Lehman Brothers Bank alone was deceived into funding about 40 such inflated loans from March 2000 through July 2002. These 40 loans were for more than $28 million over the true prices of the homes. According to court documents, Maize received hundreds of thousands of dollars in kickbacks for his assistance in getting the loans approved. In 2001, he failed to report more than $175,000 of these kickbacks on his federal tax return."
Just when one thinks that the recent white collar sentences have been usually high (e.g. Ebbers, Skilling), one finds a comparison of a sentence given outside the United States. In this case, the sentence is death, and the place is China. According to an article on Yahoo.com (AP), a drug regulator in China has been sentenced to death for allegedly taking "bribes to approve substandard medicines." Arguably one could say that this is not a white collar crime case, despite it being bribery, as the report states that deaths resulted from the alleged activity.
Monday, May 28, 2007
Reading this article by Tom Fowler of the Houston Chronicle and this post by Tom Kirkendall of Houston's Clearthinkers, it is clear that government pressure in reaching corporate agreements needs to be examined carefully. The article and post tell the story of Dynegy and the corporate conduct in response to government pressures. Kirkendall tells of how "the Department of Justice threatened to put Dynegy out of business unless it threw Olis under the locomotive of the DOJ's criminal investigation of a complicated structured finance transaction called Project Alpha." When the Jamie Olis Story is finally told - from the beginning, with all the details - will the government truly see this prosecution, initial sentencing, and prison hopping as something that is proper in a civilized democratic society?
The upcoming sentencing of former Alabama Governor Don Siegelman and former HealthSouth CEO Richard Scrushy is definitely a sentencing hearing to follow. Siegelman found guilty of significantly fewer counts than charged with, but still facing sentencing on verdicts for bribery, conspiracy, mail fraud, and obstruction of justice, and Scrushy found guilty of all of the bribery, conspiracy and mail fraud counts brought against him, are set to the sentenced at the end of June. Prosecutors are seeking a sentence of 30 years for Siegelman and 25 for Scrushy (see Al.Com AP). WSFA12 provides explicit details of the government rationale for these requested sentences. But also seen here is the other side - that is, the defense position. The defense response to the government Memorandum is likely to be seen soon. One issue likely to be encountered at the sentencing hearing is whether the government can use uncharged conduct and acquitted conduct in determining the sentence.