Saturday, August 4, 2007
A press release of the US Attorney's Office of the Central District of California reports on the arrest of two individuals for their alleged "roles in a[n alleged] scheme to extort actor Tom Cruise for $1.3 million in exchange for copies of Mr. Cruise’s wedding photos which had been stolen." One claim is that one of the individuals maintained that "he could sell the images in foreign countries where U.S. copyright laws are not enforced."
The U.S. Attorney's Office for the Northern District of California announced the guilty plea of a defendant for trying to send to China the computer source code for a visual simulation software program used for training military fighter pilots. The defendant pleaded guilty to violating the Economic Espionage Act, because the code constitutes a trade secret, and for violating the Arms Export Control Act along with the International Traffic in Arms Regulations. According to a press release (here) issued by the USAO: "This conviction, the first in the nation for illegal exports of military-related source code, demonstrates the importance of safeguarding our nation’s military secrets and should serve notice to others who would compromise our national security for profit." (ph)
The former president of E.S. Bankest, a south Florida factoring company, received a twenty-year term of imprisonment for convictions for a decade-long bank fraud and money laundering scheme that resulted in over $164 million in losses to the Espirito Santo Bank, a Portuguese bank. According to a press release (here) issued by the U.S. Attorney's Office for the Southern District of Florida:
[The defendant] was convicted of 39 felony counts, including bank fraud, wire fraud, money-laundering, conspiracy and submitting false statements to the Federal Deposit Insurance Corporation. Evidence at trial showed that E.S. Bankest, a factoring company in the business of funding clients secured by clients’ accounts receivable, borrowed multi-millions of dollars of money from Espirito Santo Bank clients based on fraud, including fabricated accounts receivable; Espirito Santo Group eventually took the debt positions of the clients, and absorbed the loss. The indictment charged a conspiracy from approximately June, 1994, until August, 2003, when an examiner was appointed by the federal court to look into the affairs of the company, which collapsed.
According to a Miami Herald article (here) on the sentencing, "[T]he judge said he based the sentence on the severity of the crime and a wish to have it serve as a deterrent to other white-collar crime." The defendant is 62, so this is virtually a life sentence. (ph)
The SEC filed an amended complaint (here) identifying a heretofore unknown purchaser of out-of-the-money call options in Petco in July 2006 before the company announced it was being taken private. The SEC identified suspicious overseas trading in the weeks before the announcement, and filed an "unknown purchasers" complaint three days after the deal became public in order to freeze the proceeds from the transactions before they could leave the United States. According to the Litigation Release (here):
The amended complaint alleges that Suterwalla entered into the transactions while aware of material nonpublic information regarding the pending acquisition of Petco, and that he took highly leveraged and speculative positions in the price of Petco's securities, which exposed him to the potential for millions of dollars in losses if Petco's price declined. The amended complaint further alleges that Suterwalla made all of his purchases within 17 days of Petco's acquisition announcement, that he made a number of his purchases the day before the announcement, and that his illicit profit from these transactions was more than $3 million.
No word yet on whether the newly identified defendant will show up to defend the SEC complaint and seek to regain his profits -- but I rather doubt it because there may well be a sealed indictment with his name floating around. (ph)
Friday, August 3, 2007
The District of Columbia Circuit Court of Appeals ruled that the search of Louisiana Representative William Jefferson's House office violated the Speech or Debate Clause to the extent FBI agents viewed "legislative materials" there. On the issue of the interference by members of the Executive Branch in the operation of the Legislative Branch, the opinion (available below) explains:
The search of Congressman Jefferson’s office must have resulted in the disclosure of legislative materials to agents of the Executive. Indeed, the application accompanying the warrant contemplated it. In order to determine whether the documents were responsive to the search warrant, FBI agents had to review all of the papers in the Congressman’s office, of which some surely related to legislative acts. This compelled disclosure clearly tends to disrupt the legislative process: exchanges between a Member of Congress and the Member’s staff or among Members of Congress on legislative matters may legitimately involve frank or embarrassing statements; the possibility of compelled disclosure may therefore chill the exchange of views with respect to legislative activity. This chill runs counter to the Clause’s purpose of protecting against disruption of the legislative process.
The Court rejected the Congressman's claim that all materials seized in the search, including non-privileged documents, must be returned. The D.C. Circuit held: "Although the search of Congressman Jefferson’s paper files violated the Speech or Debate Clause, his argument does not support granting the relief that he seeks, namely the return of all seized documents, including copies, whether privileged or not." Instead, the case is remanded to the District Court to sort through the documents and computer files seized from the office to determine which are subject to the privilege, so that the government can then review any records that fall outside the privilege afforded by the Speech or Debate Clause. The Court rejected the argument that legislative offices are immune from searches by the members of the Executive Branch. The Court noted, "This particular search needlessly disrupted the functioning of the Congressman’s office by allowing agents of the Executive to view legislative materials without the Congressman’s consent, even though a search of a congressional office is not prohibited per se."
Circuit Judge Karen LeCraft Henderson concurred in the judgment, and would have found no violation of the Speech or Debate Clause from the viewing of legislative material by the Executive Branch. In her view, the privilege afforded Members of Congress works to keep any such material from being admitted at trial, but does not prevent a search that involves the viewing of legislative documents because that is not questioning under the Speech or Debate Clause, which provides that "they shall not be questioned in any other Place."
While a partial victory for Representative Jefferson, since the search he has been indicted on corruption charges in the Eastern District of Virginia, so the records seized do not appear to have had a significant effect on the case. The opinion is unlikely to make Capitol Hill very happy because it acknowledges that their offices are subject to searches, just like everyone else's. (ph)
The Department of Justice released more documents (here) related to the firing of nine U.S. Attorneys in 2006. An e-mail from Kyle Sampson, Attorney General Alberto Gonzales' former chief of staff, to fellow DOJ officials Michael Elston, Williams Moschella, and Monica Goodling, has an interesting redaction. There was an exchange of e-mails in mid-January 2007 related to a newspaper story about the resignation -- soon to be confirmed as a firing -- of Carol Lam, the U.S. Attorney for the Southern District of California. The article quotes the head of the FBI's San Diego office as stating that the way her resignation/removal was handled was "unfair," and the DOJ people were more than a little upset that an FBI official would break from the united front that these were just resignations in the ordinary course of business. At the end of the chain (see page 9 of the documents), Sampson writes, "Monica was checking out __________________. For obvious reasons, _____________ would be best." [Italics added] DOJ has routinely excised the names of individuals not involved in the firings from the documents submitted to the House and Senate Judiciary Committees. But the second redaction is intriguing: What are the "obvious reasons," and does it refer to an individual or perhaps to a particular trait or background for a candidate that would make the person an acceptable U.S. Attorney? Recall that the office had already convicted one sitting Congressman, Representative Randy "Duke" Cunningham, and was pursuing an investigation of at least one other Representative. One phrase used by Sampson in another e-mail referred to some U.S. Attorneys as "loyal Bushies," and there was certainly a measure of sensitivity to appointing those with close ties to the Administration.
The redaction appears to be more than a single word, and perhaps it is a specific reference to that person's current job that would effectively identify the individual referenced in the first sentence. Needless to say, each batch of documents is intriguing. One also has to wonder why this e-mail string was not disclosed earlier. The recipients, along with Sampson, have had their e-mail accounts thoroughly reviewed, and all have testified before Congress, including Goodling under a grant of immunity. It is clear from this batch that the press inquiries were quite unwelcome, and the toll taken on DOJ from the firings has been far more than anyone could have anticipated. (ph)
The Wall Street Journal (here) and Washington Post (here) have interesting articles on possible criminal charges against board members of Chiquita Brands International for payments to a Columbian paramilitary group to protect the company's operations. While Chiquita settled the case by pleading guilty and paying a $25 million fine, the investigation of individuals has moved forward because the payments continued after the company informed the government of them. Chiquita apparently believed it could not simply cut off paying the paramilitary organization, which was designated a terrorist group on September 10, 2001, without endangering its workers. While the government never said they could continue, it appears that federal prosecutors, including the then-head of the Criminal Division, Michael Chertoff, the current secretary of the Department of Homeland Security, did not tell Chiquita it had to stop.
As co-blogger Ellen Podgor points out in the WSJ story, "This case will make companies think twice about self-reporting." At a minimum, the government's consideration of criminal charges against individual board members signals that when a company decides to cooperate it better be ready to stop all illegal activity it plans to disclose. It may be that Chiquita did not have a Plan B in case the government did not authorize it to continue the payments because prosecutors clearly look askance at cooperation that does not include a cessation of the underlying activity. The prosecution of Stolt-Nielsen is an example of a company accused of wrongdoing after agreeing to cooperate due to what prosecutors alleged is continued misconduct. In addition to the decision to cooperate, the timing of the disclosure is an important issue if a company wants to show that it has made a clean break for prior illegal conduct. (ph)
Scott Jennings, the White House deputy political director, showed up on Capitol Hill to testify -- somewhat -- before the Senate Judiciary Committee looking into the firing of nine U.S. Attorneys. But top Presidential aide Karl Rove did not appear, based on the assertion of Executive Privilege (letter from Counsel to the President Fred Fielding here) that purports to allow a close adviser to the President to not even appear when subpoenaed. The same rationale was applied to Harriet Miers, the former Counsel to the President, and former chief of staff Josh Bolton, and the House Judiciary Committee has taken steps to hold them in contempt for their refusal to appear. Whether the Senate will do likewise with Rove is an open question, and it may be an easier case with a former aide, such as Miers or Bolton, than one still working in the White House.
Because the White House only asserted the "no show" Executive Privilege for Rove, Jennings was stuck going before the Committee and getting beat up. He refused to answer any questions about the firings based on Executive Privilege, according to a CCN.Com article (here). He did testify about his use of a Republican National Committee e-mail account for which he was provided a Blackberry, but the White House refused to provide him with one for his governmental e-mail. Jennings testified that over time he used his RNC account as his default e-mail address, even to conduct official business, which violates the law regarding Presidential communications. Given the addictive nature of the "Crackberry," it's no surprise that Jennings found it much easier to use his handheld device to access all his e-mail. Somehow, I doubt he will become a spokesperson for Research in Motion any time soon. (ph)
Thursday, August 2, 2007
Attorney General Alberto Gonzales sent a letter to Senate Judiciary Committee Chairman Pat Leahy (available below) trying to clarify his testimony that there was not any serious dispute within the Administration over the Terrorist Surveillance Program, despite testimony from former Deputy Attorney General James Comey and FBI Director Robert Mueller that seemed to be to the contrary. In the letter, Gonzales tries to explain that his reference to the lack of serious dispute concerned the legal basis for the program:
As I testified, however, I recall that there was not a serious disagreement between the Department and the White House in March 2004 about whether there was a legal basis for the particular activity later called the Terrorist Surveillance Program. That is not to say that the legal issues raised by the Terrorist Surveillance Program were insubstantial; it was an extraordinary activity . . . .
Gonzales said that the serious disagreement concerned "other aspects" of the program, referring to a letter he attached from Director of National Intelligence McConnell "explaining" that there were different activities under the label of the Terrorist Surveillance Program. Therefore, Gonzales' statement about the lack of disagreement was not about the same aspect of the program that Comey and Mueller testified about and what the Senators were asking about -- at least in his mind.
Is that a defense to perjury? To prove that offense, prosecutors would have to establish his knowledge of the falsity of his statement, and that the question was not ambiguous. When asked about the Terrorist Surveillance Program, it appears that there are different programs that can fall under that label, so an answer about one aspect does not apply to other aspects even if the testimony does not make it clear what part of the program is being discussed. Got that? It seems that we are back to the conclusion of Emily Litella: "Never mind." Senator Leahy seemed to be less than impressed by Gonzales' explanation, issuing a statement (here), "The Attorney General’s legalistic explanation of his misleading testimony under oath before the Senate Judiciary Committee last week is not what one should expect from the top law enforcement officer of the United States." (ph)
U.S. District Judge Amy St. Eve turned down Lord Conrad Black's request that he be allowed to return to his home in Toronto while he awaits sentencing. After his recent conviction on wire fraud charges, the court permitted him to remain free until the sentencing scheduled for November 30 by continuing his $21 million bail conditions that included a restriction on leaving Illinois and requiring him to surrender his U.K. passport. According to a Vancouver Sun article (here), Judge St. Eve found that Black had not provided sufficient assurances that he would return from Canada and not force the government to seek his extradition, which would delay sentencing by months if not years. While finding that he is not a flight risk, the Judge expressed concern that a prospective waiver of extradition would be ineffective, raising the prospect of possible delay in the case. Under the applicable provision, 18 U.S.C. Sec. 3143, Black bears the burden of proving that he will appear at future hearings, and the Judge may have been a bit suspicious of him after his conduct during trial that provoked her ire at one point when she told his attorneys to control their client or she would undertake the task. So, here he stays for the foreseeable future. (ph)
The Antitrust Division of the Department of Justice announced that British Airways and Korean Air entered guilty pleas for violating the Sherman Act for fixing prices for passenger tickets and freight charges. Each airline will pay a $300 million fine and cooperate in the government's continuing investigation. According to a DOJ press release (here):
The Department said that passengers who flew on British Airways flights between the United Kingdom and the United States during the charged period paid more for their tickets as a result of the illegal cartel. In 2004, British Airways’ fuel surcharge for round-trip passenger tickets was around $10 per ticket. By the time the passenger conspiracy was cracked in 2006, the surcharge was nearly $110 per ticket–a 10-fold increase, said the Department. The Department noted that during the air cargo conspiracy, British Airways’ fuel surcharge on shipments to and from the United States changed more than 20 times and increased from four cents per kilogram of cargo shipped to as high as 72 cents per kilogram.
The Department charged Korean Air with agreeing with air cargo competitors on rates charged to customers in the United States and elsewhere for international air cargo shipments. The Department noted that the conspirators agreed to increase the fuel surcharge over time from 10 cents per kilogram to as high as 60 cents for each kilogram of cargo shipped from the United States. The Department also charged that Korean Air reached an agreement with its rival to fix certain passenger fares for flights from the United States to Korea.
Two other airlines, Virgin Atlantic and Lufthansa, were admitted into the Antitrust Division's Corporate Leniency Program, which allows the first company to report violations to avoid criminal charges, but not civil damages, by cooperating in the investigation. (ph)
High tech circuit manufacturer Integrated Silicon Solution, Inc. (ISSI) and its former chief financial officer settled SEC civil fraud charges related to options backdating at the company from 1997 through 2005. According to the SEC Litigation Release (here):
The Commission's complaint against ISSI and Fischer, filed in the Northern District of California, alleges that Fischer routinely used hindsight to select option grant dates when ISSI's stock traded at or near monthly or quarterly lows, and at prices below the closing price on the date when Fischer actually selected the grant date. According to the complaint, the dates Fischer selected were then incorporated into Stock Option Committee resolutions and Compensation Committee minutes, even though the committees rarely, if ever, met on the date listed on the minutes and resolutions.
The former CFO paid $414,830 in disgorgement and a civil penalty of $125,000. In what may be a trend in SEC settlements in the options backdating cases, the company settled the case by agreeing to an injunction but will not pay any civil penalty, similar to the recent resolution of options backdating charges involving Silicon Valley company KLA-Tencor. (ph)
Wednesday, August 1, 2007
The House overwhelmingly passed a Congressional ethics "reform" law, now called The Honest Leadership and Open Government Act of 2007, and the Senate is likely to send it to the President. One provision of the law, Sec. 401, would strip a member of Congress of his or her pension if convicted of certain specified offenses related to conduct in office. Among the statutes that can trigger the pension loss are bribery and unlawful gratuities (Sec. 201), foreign lobbying (Sec. 209), obstruction of justice, wire fraud/honest services, perjury, money laundering, and RICO, along with conspiracy to violate any of these laws. The list is more interesting for what it leaves out, however. A conviction under the wire fraud statute, Sec. 1343, triggers the pension loss, but not one under the companion mail fraud provision, Sec. 1341. These two statutes are interpreted identically regarding fraud, and are often charged together based on how the fraud was perpetrated, i.e. whether through wire communications or if the mail and interstate carriers were used. Similarly, the bill identifies Sec. 1957 of the money laundering statute, which has a $10,000 minimum for the financial transactions, but does not include Sec. 1956, which covers concealment through monetary transactions. The obstruction provision listed, Sec. 1512, is broad, but left our are Sec. 1505, which covers obstruction of Congressional committee and federal agency investigations, and Sec, 1519, an even broader provision adopted as part of the Sarbanes-Oxley Act. One perjury statute, Sec. 1621, is on the list but not the other, Sec. 1623. And not even included is Sec. 1001, the false statements statute, which covers a broader array of conduct than the perjury provisions and is frequently used in federal prosecutions involving government filings and false statements to agents.
Why the selective inclusion of some federal criminal provisions but not others covering similar conduct? Maybe I'm getting too cynical in my old age, but one possible explanation is to give future Representatives and Senators a way to protect their pensions and still plead guilty if caught in an investigation. For example, rather than pleading to a wire fraud/honest services charges, the official could offer to plead to a mail fraud charge covering the same conduct -- except that a mailing or delivery by an interstate carrier would be identified as part of the execution of the scheme. Same basic offense, and the same sentence, but no loss of pension. Is this a potential bargaining chip for prosecutors: "Take a Sec. 1001 charge, or we'll charge you with perjury so you'll lose your pension?" I'm sure there's an innocent explanation for the selective inclusion of some crimes. (ph)
Tuesday, July 31, 2007
The U.S. Attorney's Office for the Central District of California issued a press release of a plea in an export case where according to the information, the accused failed to secure the "required expert license to export vibration amplifiers, cable assemblies, and vibration processor units." The accused "was an international sales manager and was responsible for all exports at Endevco Corporation, an Orange County, California company that manufactures electronic sensors, vibration testing equipment, and other technology with both civilian and military applications. The information alleges that [the defendant] illegally exported a variety of sensitive items in 1999 and 2000 from the United States to Hindustan Aeronautics Limited (HAL), Engine Division, in Bangalore, India."
Plea Agreement -
Fraud in the education arena is not something new. An article by Audrey Williams June in the Chonicle of Higher Education (subscription required) describes how college business officers may be forced to deal with fraud on campus. The example of kickbacks/bribes of contractors is one item covered in the article, which is titled "Business Officers Get Advice on Guarding Against Fraud and 'Going Green' Frugally."
Professor Stephanie Aleong of Nova SouthEastern University Law School presented a talk at the SouthEast Association of Law Schools (SEALS) on counterfeit drugs. She argued for an extension of environmental models (e.g., RCRA, CERCLA) to combat the existing problems of distributors presenting counterfeit drugs into the market place. Professor Aleong calls for manufacturers to be held liable when the distributor engages in the sale of counterfeit drugs. Although she limits the remedy to civil tort actions, one has to wonder if this extension will eventually reach the criminal arena.
The Southeast Association of Law Schools (SEALS) included a panel discussion titled, White Collar Crime in the Post-Enron Era: Substance and Scholarship, with Joan Hemingway (Tennessee) moderating the panel.
The first speaker, John Hasnas (Georgetown Business School), spoke of the existing "Commander & Control" Approach and how it is detrimental to the corporate structure in creating an adversarial relationship among the parties. Hasnas called for a "Procedural Justice" approach. He noted how punishing the innocent is not justified for retribution standards and this occurs under the existing model.
Lisa Nicholson (University of Louisville, Louis D. Brandeis School of Law), started by discussing the growing debate between those who think the existing punishment is not enough and those who think Congress has gone too far. She advocated for removing the economic incentive of the criminal conduct and proposed use of asset forfeiture to accomplish this.
Chris Slobogin (U of Florida) focused on the "law of counts," looking at the overlapping situation ("redundant charges") when prosecutors charge different crimes for the same conduct. Looking at the Martha Stewart case he noted the deficiencies of redundant charging.
Lisa Fairfax (Maryland) looked at outside director liability. She noted how these individals can be an integral role in the fraud in their failure to provide proper oversight. But that said, she did not advance making this criminal liability.
Monday, July 30, 2007
Just days ago the press was reporting that Senator Ted Stevens (R. Alaska) was under scrutiny. The scrutiny appears to have increased with the recent search of his residence in Alaska. (See Washington Post here; Yahoo News here) This search required a showing of probable cause, approval by a judge, and execution of the search warrant by the feds. There are several interesting things to point out here -
1. In many white collar cases, the government uses its subpoena powers to secure documents. It is less common that we see searches being used in white collar cases. In recent years, however, searches have been in seen in everything from environmental to corruption investigations.
2. The benefit of a subpoena is that probable cause is unnecessary and there is no requirement of court approval prior to issuing the subpoena. The feds also do not have to search the premises for certain documents when the items are produced by the subpoenaed individual.
3. A benefit of using a search is the surprise factor. Items cannot be destroyed when the search occurs without notice. There is also the possibility that the government may observe other evidence in plain view while conducting the search.
So did the government not trust the Senator, and was there a fear that he would destroy evidence in making the decision to proceed with a search as opposed to asking him to produce documents to a grand jury? Or was this such a high profile case that the government wanted court approvals? In either event, what is on the premises of this Senator that warrants this extreme invasion?
Dan Eggen of the Washington Post has yet another article on beltway news. This time it is Vice President Cheney, and he is expressing disagreement with the Libby verdict. Does he have information that wasn't presented to the jury? Does he know something that the rest of us don't know? And if he knew something, shouldn't he have disclosed it to LIbby's attorneys.
And one finds in this article that Cheney is supporting Gonzales - and saying that the Attorney General has the support of the President. But does he have the support of the civil servants in his office? And does he have the support of the people?
A DOJ Press Release reports that "[t]wo former ITXC Corporation executives have pleaded guilty and one former executive has been sentenced" "in relation to their participation in a foreign bribery scheme." This case from the District of New Jersey charged in a one count information, conspiracy to violate the foreign corrupt practices act and the travel act.