Saturday, June 23, 2007

Money Laundering Charges in Routine White Collar Case Against Civil Rights Attorney

It seems like there are more and more cases of money laundering charges being added onto routine white collar cases. One has to wonder if Congress intended for this statute to be used this way. (See Teresa E. Adams, Tacking on Money Laundering Charges to White Collar Crimes: What Did Congress Intend, and What Are the Courts Doing?, 17 Ga. St. L.Rev. 531 (2000)). For example, in a press release of the U.S. Attorney's Office for the Central District of California, one sees that a civil rights attorney was convicted of bankruptcy and tax charges.  But in addition to the bankruptcy and tax charges were convictions for "seventeen counts of money laundering (engaging in monetary transactions in criminally-derived property)." And its no wonder that the Government would want to add the money laundering charges as the tax and bankruptcy charges have a statutory maximum of five years, while the money laundering charges have a maximum of ten years.  But were these extra charges really necessary in this case, a case of a civil rights attorney who the LATimes describes as having "brought hundreds of cases against the Los Angeles Police Department and other law enforcement agencies."

Press Release - Download postverdict_press_release.pdf


June 23, 2007 in Money Laundering | Permalink | Comments (0) | TrackBack (0)

McNulty Fires Back at Goodling

The congressional investigation into the firing of nine U.S. Attorneys is attracting much less attention these days, but the House Judiciary Subcommittee on Administrative and Commercial Law presses on, with testimony from outgoing Deputy Attorney General Paul McNulty on June 21.  In May, Monica Goodling, former White House liaison for Attorney General Alberto Gonzales, told the Subcommittee (here) that when McNulty first testified about the firings in February 2007, "I believe that the Deputy [Attorney General] was not fully candid about his knowledge of White House involvement in the replacement decision . . . ."  As recounted in a Bloomberg story (here), McNulty responded by asserting that his testimony was "very accurate" based on his limited knowledge at the time and minimal role in the decision.  Of course, Gonzales testified that he relied on McNulty as his primary adviser on the terminations.  But in a private interview with the Judiciary Committee staff in April, McNulty stated (here) he first heard about the planned firings in October or November from Gonzales' former chief of staff, Kyle Sampson. 

It seems that no one was really responsible for the decision, or is at least willing to accept responsibility for it beyond pro forma assertions about where the buck stops and all that.  Will we ever get an answer as to who provided the impetus for the firings?  It may be a situation in which the decision took on a life of its own, as happens in a bureaucracy when different players believe their superiors want something accomplished but there is no paper-trail showing who was actually responsible.  Then again, with much of the White House e-mail traffic missing from the Republican National Committee accounts or unavailable because of Executive Privilege claims, there is a chance that at least a partial answer is out there somewhere but will not emerge for at least quite a while, if ever.  Many top level DOJ staffers have resigned since the U.S. Attorney firings controversy flared up in February, and while it has largely abated it looks like Gonzales may be the last one left standing.  (ph)

June 23, 2007 in Investigations, Prosecutors | Permalink | Comments (0) | TrackBack (0)

Friday, June 22, 2007

The Next Big Wave of Prosecutions to Hit Wall Street?

BusinessWeek has an interesting article (here) about a developing criminal investigation related to the stock lending practices at some of Wall Street's leading brokerage firms, including Morgan Stanley.  The case involves possible kickbacks and other gratuities to employees who work in the stock loan departments of the firms from middlemen who help obtain shares as part of a shorting strategy in which borrowed shares are sold in the hope that the price will decline when the shares are repurchased at a later date.  For those who like to play craps, it's a bit like betting the "don't come" line, and the strategy is not one that endears practitioners to other investors, most of whom are "long" on stocks.  With the growth of large funds that use shorting to "hedge" their positions -- hence the term "hedge fund" -- there has been a corresponding increase in the demand for shares.  The short interest ratio on the exchanges has hovered near an all-time high, and those shares have to come from some place. 

It's not a great stretch to hear that some may have viewed such a situation as an opportunity to line their own pockets while their employers reaped lucrative fees from the business.  Who gets hurt anyway, a bunch of rich hedge fund managers and even wealthier investors? An interesting question is how any such criminal charges will be framed, whether as a type of securities fraud or based on the right of honest services route with mail and wire fraud.  The article notes that there are already three defendants who are cooperating, so look for a big media splash in the near future.  Prosecutors in the Southern District of New York are probably hoping this investigation turns out better than the recent round of charges against floor brokers for alleged front-running that resulted in a number of acquittals and voluntary dismissals. (ph -- thanks to YMH for the "tip")

June 22, 2007 in Fraud, Prosecutions, Securities | Permalink | Comments (0) | TrackBack (0)

Allied Capital Settles with the SEC

Business development and private lending company Allied Capital Corp. settled an administrative action with the SEC related to maintaining records for the valuation of the company's investments in the securities of other corporations.  According to the administrative order (here):

From the quarter ended June 30, 2001 through the quarter ended March 31, 2003, Allied violated recordkeeping and internal controls provisions of the federal securities laws relating to the valuation of certain securities in its private finance portfolio for which market quotations were not readily available. During the relevant period, Allied failed to make and keep books, records, and accounts which, in reasonable detail, supported or accurately and fairly reflected certain valuations it recorded on a quarterly basis for some of its securities. In addition, Allied’s internal controls failed to provide reasonable assurances that Allied would value these securities in accordance with generally accepted accounting principles. Further, from the quarter ended June 30, 2001 through the quarter ended March 31, 2002, Allied failed to provide reasonable assurances that the recorded accountability for certain securities in its private finance portfolio was compared with existing fair value of those same securities at reasonable intervals by failing to: (a) provide its board of directors ("Board") with sufficient contemporaneous valuation documentation during Allied’s March and September quarterly valuation processes; and (b) maintain, in reasonable detail, written documentation to support some of its valuations of certain portfolio companies that had gone into bankruptcy.

The settlement did not require the payment of a civil penalty or any sanctions, only than that Allied Capital continue to employ a chief valuation officer and independent valuation consultants.  The company has been involved in a long-term battle with a hedge fund regarding the valuation of its assets, and its most recent 10-Q (here) discusses a grand jury investigation of possible pretexting by an agent to obtain telephone records of the hedge fund manager:

In late December 2006, the Company received a subpoena from the U.S. Attorney for the District of Columbia requesting, among other things, the production of records regarding the use of private investigators by the Company or its agents. The Board established a committee, which was advised by its own counsel, to review this matter. In the course of gathering documents responsive to the subpoena, the Company became aware that an agent of the Company obtained what were represented to be telephone records of David Einhorn and which purport to be records of calls from Greenlight Capital during a period of time in 2005. Also, while the Company was gathering documents responsive to the subpoena, allegations were made that the Company’s management had authorized the acquisition of these records and that management was subsequently advised that these records had been obtained. The Company’s management has stated that these allegations are not true. The Company is cooperating fully with the inquiry by the United States Attorney’s office.

Hewlett-Packard learned its pretexting message the hard way, and the course of this investigation remains to be seen. (ph)

June 22, 2007 in Civil Enforcement, Securities | Permalink | Comments (0) | TrackBack (0)

Thursday, June 21, 2007

Reasonableness Presumption for Guidelines Sentences Upheld

The Supreme Court upheld the appellate presumption of the reasonableness of a sentence falling within the parameters of the Federal Sentencing Guidelines in Rita v. United States (available here).  The majority opinion by Justice Breyer states, "[T]he presumption reflects the fact that, by the time an appeals court is considering a within-Guidelines sentence on review, both the sentencing judge and the Sentencing Commission will have reached the same conclusion as to the proper sentence in the particular case. That double determination significantly increases the likelihood that the sentence is a reasonable one." (Italics in original)  Rita involved a perjury conviction, and the defendant received a 33-month sentence, which was at the bottom of the Guidelines range.  The decision upholds the preeminence of the Sentencing Guidelines in federal cases, which means that the loss calculations in Sec. 2B1.1 for fraud cases will continue to have a significant, and perhaps even inordinate, impact on sentences in a wide range of white collar crime prosecutions.  For prominent defendants awaiting sentencing, such as former Qwest CEO Joseph Nacchio, or those challenging their sentences, such as former senior Cheney aide I. Lewis Libby and former Enron CEO Jeffrey Skilling, there is one less issue to raise on appeal because their sentences fell within the general confines of the Guidelines.  For the best coverage of the Rita decision and its impact on sentencing, please check Prof. Doug Berman's Sentencing Law & Policy blog (here). (ph)

June 21, 2007 in Judicial Opinions | Permalink | Comments (0) | TrackBack (0)

"It's Not Illegal If You Don’t Get Caught"

There's an old saying in the NFL that "it's not holding if you don't get caught."  A variation of that adage came up in the prosecution of former Brocade CEO Gregory Reyes for options backdating when a former human resources employee testified that Reyes once stated, "It's not illegal if you don’t get caught."  While the witness could not recall the circumstances of the comment, she did say that the only conversations she had with Reyes concerned the dating of options grants, leading to the inference -- at least the government will argue -- that he knew the backdating was illegal.  A key component of the defense case is the lack of intent to defraud by Reyes, and that the accounting rules on options were so unclear he did not understand them.  According to a blog entry on the CAL LAW Legal Pad (here), U.S. District Judge Charles Breyer rejected a defense argument to prevent the witness from recounting the statement because prosecutors had not previously disclosed it, and asked that the examination be curtailed.  Judge Breyer stated, "I’m not going to rein in anything. I’m not the ringleader of a three-ring circus.” 

Judge Breyer's decision highlights an important point about the scope of discovery in a federal criminal case.  The prosecutors said they first learned of the witness' recollection about Reyes' statement during pre-trial preparation, and there was no written record of the interview because it was only with the prosecutor and not with an FBI agent, who would likely write up notes of the interview in a Form 302 report.  The government's Brady obligation is to turn over exculpatory evidence, and Reyes' purported statement is certainly not in that category, being rather inculpatory.  Under the Jencks Act, now in Rule 26.2, the government must turn over a witness statement, but Rule 26.2(f) defines a "statement" to include only a written statement, a substantially verbatim recital or recording of an oral statement, or a statement in the grand jury.  While a defendant might wish to know the inculpatory evidence the government intends to introduce, the disclosure obligation in Rule 16 is not so broad that all relevant evidence must be disclosed before trial. Because the witness' recollection did not fall within any of the categories triggering one of the clear disclsoure obligations, the government was within its rights not to disclose it to the defense, unless a court were to find that it violated the defendant's due process right due to unfair surprise.  The Legal Pad entry notes that Reyes' defense counsel asserted that the Ninth Circuit has shown a tendency to reverse convictions in similar situations, to which Judge Breyer replied, "That comes with the territory.”

The witness' testimony is, of course, highly prejudicial to the defense, but that's hardly a reason to keep out a statement made by the defendant who contests the allegation that he acted with an intent to defraud.  Moreover, the statement could be a basis for the court to give an "ostrich instruction" so that the jury can infer the requisite intent based on Reyes being aware of the problems with options backdating but turning a blind eye to them.  As discussed in an earlier post (here) about the instruction in the trial of Lord Conrad Black, the deliberate ignorance instruction can be very helpful to the prosecution by effectively lowering the intent element for the offense. 

Another interesting question is whether this testimony will be enough to cause Reyes to testify.  Even though the context of the statement is not clear, such an assertion is not the type of thing a defense lawyer wants hanging out there unchallenged because the government will make it a featured part of its closing argument.  If Reyes intends to dispute having ever said anything about illegal conduct, or claims that it was just a joke or unrelated to the backdating of options, he would most likely need to testify.  This could be one of those uncommon "he said-she said" situations in a white collar crime case in which the defense cannot dispute the statement without calling the defendant to testify.  That decision, of course, is fraught with any number of risks, but the witness' testimony about what she recalls Reyes said increases the pressure on him to take the witness stand.  (ph)


UPDATE:  Reyes' lawyers apparently missed the witness' statement in notes the government turned over prior to trial, and so the defense dropped the claim that the government violated its disclosure obligation or that the testimony constituted unfair surprise.  That left the defense to argue that the testimony was inadmissible because it was vague regarding the context and prejudicial, which Judge Breyer rejected.  An appellate issue just got a lot less important if Reyes is convicted.  A story in The Recorder (here) discusses the testimony. (ph)

June 21, 2007 in Prosecutions, Securities | Permalink | Comments (0) | TrackBack (0)

Conrad Black = "Stubborn but Innocent"

The prosecution of Lord Conrad Black and three other defendants has reached the final argument stage, when pithy phrases are tucked into seemingly endless discussions of the details of the case.  Lord Black's attorney, Edward Genson, completed his closing by going into a second day that reiterated themes set forth in the opening, such as "Being wealthy doesn't make you a bad man" and "He is a little bit of a stubborn man but an innocent man."  Unlike television shows, which make closing arguments appear to be little more than soundbites that take only a few minutes to summarize the case, this one promises to stretch into a second week of listening to the lawyers for the four defendants and the federal prosecutors, according to a Chicago Tribune story (here).  Then come the jury instructions, which could well take most a day to deliver to the jurors.  Only then might peace and quiet reign as everyone waits for the jury to return its verdict. (ph)

June 21, 2007 in Prosecutions | Permalink | Comments (0) | TrackBack (0)

Former Enron Finance Officer Settles SEC Securities Fraud Action

Former Enron treasurer Jeffrey McMahon, who later became its CFO and then president, settled an SEC civil enforcement action related to the company's accounting for the Nigerian Barge transaction in 1999 designed to boost its income and other financial disclosure issues.  McMahon succeeded former CFO Andrew Fastow in October 2001, and became Enron's president and chief operating officer after it entered bankruptcy in 2002.  According to the SEC Litigation Release (here):

[T]he Commission's Complaint alleges that McMahon participated in a fraudulent transaction involving the "sale" of an interest in Nigerian power generating barges to Merrill Lynch that allowed Enron to improperly report $12 million in earnings in the fourth quarter of 1999. Enron never should have recorded profits from this purported sale because the risks and rewards of ownership in the barges never passed to Merrill Lynch due to an oral side agreement made by McMahon and others. The Complaint also alleges that while serving as Enron's Treasurer from April 1998 through March 2000, McMahon made false and misleading statements to the national credit rating agencies regarding Enron's financial position and cash flow. The Complaint alleges that the false and misleading statements included statements about Enron's cash flow from operations that failed to disclose that a portion of such cash flow was a result of structured financings and debt-like obligations that had nothing to do with Enron's operations or trading business. In addition, the Complaint alleges that McMahon made additional false and misleading statements to the rating agencies after he became Enron's Chief Financial Officer on October 24, 2001 through Enron's bankruptcy filing in December 2001.

McMahon agreed to disgorge profits of $150,000 and to pay an equal amount as a civil penalty, along with an administrative bar from appearing before the Commission as an accountant with a right to reapply in three years.  McMahon was not charged with any crimes, one of the few senior executives to avoid criminal prosecution.  He was removed as treasurer in 2000 after he complained about conflicts of interest related to Fastow's various investment vehicles that played such a key role in the company's collapse.  A Houston Chronicle story (here) discusses the settlement. (ph)

June 21, 2007 in Civil Enforcement, Enron, Settlement | Permalink | Comments (0) | TrackBack (0)

Tuesday, June 19, 2007

Reyes Trial Opens - Backdating

The backdating cases opened with the trial of Gregory Reyes, the former CEO of Brocade Communications. Justin Scheck reports at the Recorder, on, on how intent will be key defense argument. This argument is coupled with a claim of reliance on others - the accountants.  With intent inferred from the circumstances, this can be a difficult position to maintain.  But this case may be unique in that these practices are difficult to understand.  Will the jury be confused enough to appreciate that a defendant might rely on others to handle these matters?  Will they find that the backdating was not done with a fraudulent intent?


June 19, 2007 in Prosecutions | Permalink | Comments (0) | TrackBack (0)

Political Emailing

Were white house aides using political email accounts for official business when they should have been using their official accounts?  This first question may lead to the next question, and that is whether they were deliberately trying to conduct political business without government scrutiny.  And are there many more emails that need to be examined to truly understand what happened with respect to the U.S. Attorney "firings"? (see Washington Post here)  And if some of these emails are now missing, (see are we moving into criminal territory?  Gonzales may have skated, but it is clear that this investigation is far from over.


June 19, 2007 in Prosecutors | Permalink | Comments (0) | TrackBack (0)

Closing Arguments in the Conrad Black Case

The prosecution finished its initial closing argument and the defense is now before the jury box. After they finish, the government will get to respond as they have the burden of proof.  As suspected, a key focus is on the credibility of the government cooperator - David Radler. When the government offers enormous benefits to a cooperator in return for his or her testimony, the testimony becomes suspect.  But whether the jury will appreciate the benefits a witness receives for his or her cooperation is an unknown. Equally unknown is the veracity of the individual testifying when they face severe consequences if they fail to provide government cooperation.  Now clearly the government demands that the testimony be truthful - but the decision of the truthfulness is left to the individuals in the jury box. See WSJ, Chicago Tribune


June 19, 2007 in Prosecutions | Permalink | Comments (0) | TrackBack (0)

Monday, June 18, 2007

A Plea is a Plea

Courts, using contract law, sometimes hold a plea agreement to its strict language, despite the government trying to change the language due to an error in the agreement.  Paul Caron at taxprof blog reports that

"the U.S. District Court for the District of Columbia on Friday refused to correct the Government's botched plea agreement with telecommunications mogul Walter Anderson, who pled guilty to hiding over $365 million in income and evading over $140 million in federal income taxes during the 1990s in the largest case of individual tax fraud in history.  The Government's plea agreement failed to order Anderson to make restitution, and District Judge Paul Friedman rejected the government's request to 'correct clear error' in the agreement..."

Professor Caron provides at TaxProf blog the full details of this case and the accompanying documents.


June 18, 2007 in Tax | Permalink | Comments (0) | TrackBack (0)

27 Months for Enron Cooperator

The Wall Street Jrl reports that Kenneth Rice received a sentence of 27 months.  Rice had testified against Jeff Skilling.  Here again, we see a sharp disparity in sentence between those who cooperate and those who risk trial.  (see also Houston Chronicle story)


June 18, 2007 in Enron | Permalink | Comments (0) | TrackBack (0)

Job Opening for U.S. Attorney

The Tampa Tribune reports that  filling the position of U.S. Attorney in the Middle District of Florida started slowly - and this wasn't even filling the position of a U.S. Attorney who was part of the group that left office under terms that have been very publicized. Former U.S. Attorney Paul Perez left to go into the private world. Initially only one person applied, but the Tribune now reports that there are nine applications.


June 18, 2007 in Prosecutors | Permalink | Comments (0) | TrackBack (0)

Sunday, June 17, 2007

U.S. Attorney "Firings" Plays Out in the Courts

Check out this article in the LA Times discussing how defense attorneys are raising the "firings" of U.S. Attorneys as an argument in pending cases. Tangential matters of this nature normally are not admitted into evidence in cases.  But one has to wonder if prosecutorial discretion was ever influenced by the actions of U.S. Attorneys who did not make the cut list, or by those who did not retain their position.


June 17, 2007 in Prosecutors | Permalink | Comments (0) | TrackBack (0)

The Latest at Bristol Myers

According the the Wall Street Journal, the Bristol Myers deferred prosecution agreement may be nearing its end - and with a deferred prosecution this means that criminal charges will not get filed.  The possibility of charges are left behind when a company does not misstep in abiding by the terms of the agreement.  But what happened to the ethics chair at Seton Hall, a part of this deferred prosecution agreement.  Check out this press release from the Seton Hall website, and this article in the Corporate Crime Reporter here.  So who gets the chair? 


June 17, 2007 in Settlement | Permalink | Comments (0) | TrackBack (0)

Nevada Power to Pay 60.7 Million

In a press release of the Department of Justice, it tells that Nevada Power will be paying 60.7 million in a Clean Air Act settlement. The release notes that "this is the first NSR settlement with an electric utility concerning alleged violations at a gas-fired power plant. It is also the second NSR settlement in the past year in the Western United States."


June 17, 2007 in Environment | Permalink | Comments (0) | TrackBack (0)