Saturday, August 11, 2007

Massachusetts Considering Changes in Criminal Fines

According to Boston.com, some Massachusetts legislators may be considering proposals to revise the fines given when there is a conviction of certain criminal laws. Criminal fines became a source of concern when a contractor was charged with a crime that carries a penalty of a fine of One Thousand ($1,000) Dollars.  The case charges involuntary manslaughter. 

The use of criminal penalties against corporations has developed over the years with increased responsibility being placed on corporations.  In recent years, the federal system has placed increased scrutiny on corporations with corporate compliance programs being the norm for businesses.  As corporations cannot be put into jail, the fines are the basis for punishing the business.  In reality, however, the shame caused a company charged with a crime can cause more significant ramifications.  Just ask Arthur Andersen, LLP - a company charged with a crime that had its conviction reversed by the U.S. Supreme Court.  The reversal meant little as the company was already devastated by the publicity surrounding the charges filed.

(esp)(w/ a hat tip to Jack King)

August 11, 2007 in Sentencing | Permalink | Comments (0) | TrackBack (0)

False Statement Plea for Two Businessmen

According to a DOJ Press Release, two South Carolina businessmen "have pleaded guilty to causing numerous federal campaigns to make false statements to the Federal Election Commission." The plea was to a one count Information of "causing a false statement to be made."

(esp)

August 11, 2007 in Settlement | Permalink | Comments (0) | TrackBack (0)

Will Subprime Become the Next Source for White Collar Crime?

The fallout from the collapse of the subprime mortgage market has been spreading to hedge funds and financial firms that invested in various securities tied to mortgages, and when there's financial turmoil it has usually been the case that civil and even criminal actions are not too far behind.  Reuters reports (here) that the SEC has begun looking at the pricing of securities tied to subprime mortgages, particularly collateralized debt obligations (CDOs), to see whether Wall Street investment banks have been valuing them properly.  These firms, and the hedge funds they deal with, have to follow "mark-to-market" rules that require a fair valuation of the securities on a regular basis.  Given the precipitous drop in the value of many mortgage-related CDOs over the past month there may be some undisclosed time bombs ticking away inside the financial statements of investment houses.  While such investigations do not necessarily lead to criminal prosecutions, when the market heads south any number of questionable practices usually rise to the surface that can trigger the interest of the Department of Justice.  Already, there is a federal criminal investigation of the lending practices of Beazer Homes, and state AGs have been looking at the mortgage program at subprime lender New Century Financial, which declared bankruptcy back in April 2007 -- almost a lifetime ago, it seems. 

Perhaps an even better signal that governmental investigations are on the way -- kind of like the swallows returning to San Juan Capistrano -- is the formation of practice specialty groups at major law firms to "help" clients deal with the turmoil.  A post on the Wall Street Journal Law Blog (here) notes that firms like Paul Hastings, Patterson Belknap, and Pillsbury Winthrop have assembled teams of lawyers to provide assistance, including members of the white collar crime departments.  If the firms smell an opportunity, don't be surprised to see this area develop over the next few months with a range of internal investigations that may well bring criminal behavior to the surface. (ph)

August 11, 2007 in Investigations | Permalink | Comments (1) | TrackBack (0)

Republican National Committee Continues to Resist Subpoena for Documents

When Congress is out of session, especially in the dog days of summer, little of interest emerges from Capitol Hill, especially on a Friday.  What better day to deliver a letter explaining the decision to refuse to comply with a Congressional subpoena, which is what the Republican National Committee did regarding documents related to the firing of nine U.S. Attorneys.  It turns out a number of senior White House officials used their RNC e-mails to conduct what is ostensibly government business, and the House Judiciary Committee subpoenaed the documents that it has been unable to get directly from the President's offices.  Unfortunately, as explained in a letter from the RNC's counsel to Chairman John Conyers (here), the President's claim of Executive Privilege means the party organization will not provide the documents until the dispute with Congress is resolved.  The letter states, "We believe the RNC's decision to defer to the President's assertion of executive privilege is particularly appropriate here in light of the absence, short of a contempt proceeding, of a meaningful opportunity for the RNC to obtain judicial relief if a negotiated agreement cannot be reached."  No great shock in that position.  (ph)

August 11, 2007 in Investigations, Prosecutors | Permalink | Comments (0) | TrackBack (0)

Friday, August 10, 2007

O.C. Treasurer Being Investigated for Misuse of Bankruptcy Assets

The Orange County Register reports (here) that the Orange County Treasurer is being investigated by the FBI for misuse of the assets of a bankrupt company that he was appointed to liquidate.  The funds were allegedly used to pay for, among other things, a family vacation, gym memberships, and Botox injections, in addition to paying himself large bonuses.  Another focus in the investigation is the award of a $23,000 no-bid contract to a person involved in the bankruptcy.  The Register also notes that the Treasurer spent nearly $1 million to remodel his offices that includes a new trading floor outside his personal office -- I'm not sure what the O.C. is trading these days, but it filed for bankruptcy a little over ten years ago after losing $1.6 billion when its then-Treasurer made risky investments in derivatives.  The investigation began in the District Attorney's office, and switched to the U.S. Attorney at that office's request. (ph)

August 10, 2007 in Investigations | Permalink | Comments (0) | TrackBack (1)

BP Discloses Expanded Probe of Its Commodity Trading

Oil giant BP plc had earlier disclosed that its commodity trading operation was being investigated by the CFTC and the Department of Justice, and its most recent disclosure (here) indicates that the probe is expanding.  The company's initial disclosure was that the government was looking at trading back to 2002, but it latest filing states: "The US Commodity Futures Trading Commission and the US Department of Justice are currently investigating various aspects of BP’s commodity trading activities, including crude oil trading and storage activities, in the US since 1999, and have made various formal and informal requests for information. BP has provided, and continues to provide, responsive data and other information to these requests."  Expansion, in this case, is probably not a good thing. (ph)

August 10, 2007 in Investigations | Permalink | Comments (0) | TrackBack (1)

SEC Files Securities Fraud Charges Against Former Executives for Revenue Inflation

The SEC filed civil fraud charges against three former senior executives of Nicor, Inc., an Illinois natural gas distribution company.  The alleged scheme involved manipulating the value of the company's natural gas inventory through the LIFO (last-in-first-out) method -- how's that for exciting accounting.  The defendants are the former CEO, CFO, and treasurer of the company, and according to the SEC Litigation Release (here):

[The defendants devised] a method by which Nicor could profit by accessing its low-cost last-in, first-out ("LIFO") layers of gas inventory. As a result, from 1999 through 2002, the former officer defendants engaged in or approved improper transactions, and made material misrepresentations in financial statements and documents filed with the Commission. They also failed to disclose material information regarding Nicor's rigged reductions in gas inventory levels that enabled it to improperly manipulate its earnings and to increase Nicor's revenues under a performance-based utility rate plan. In addition, the former officers materially understated Nicor's expenses during the first and second quarters of 2001 by improperly bundling a weather-insurance contract with an agreement to supply gas to Nicor's insurance provider at below-market prices. Moreover, they caused the losses on the supply agreement with the insurance provider to be improperly charged to Nicor's utility customers. These improper transactions enabled Nicor to understate its expenses and to manipulate its earnings to achieve its earnings targets. As a result of the manipulative scheme, Nicor materially overstated its reported income for the years ending 2000 and 2001, and for each of the quarters within those years and the financial statements filed with those reports.

Nicor settled an SEC complaint in March 2007 by agreeing to pay a $10 million civil penalty. (ph)

August 10, 2007 in Civil Enforcement, Fraud, Securities | Permalink | Comments (1) | TrackBack (0)

Thursday, August 9, 2007

Will the Reyes Conviction Lead to More Options Backdating Prosecutions?

The conviction of former Brocade Communications CEO Gregory Reyes on fraud charges for options backdating may well embolden prosecutors in San Francisco and elsewhere to pursue criminal cases against other executives. There is one prosecution already pending against the former general counsel of McAfee, then known as Network Associates, that is similar to the Reyes indictment (indictment here).

The SEC has been more aggressive lately in filing civil enforcement actions against senior executives related to options backdating, and those cases may soon be ripe for criminal prosecution if there’s sufficient evidence to establish intent to defraud. Among the SEC cases filed recently that could conceivably trigger criminal charges include:

  • KLA-Tencor and its former CEO (here).
  • Mercury Interactive, which is now part of Hewlett-Packard, and its former CEO, two former CFOs, and its former general counsel (here).
  • Apple Inc.’s former CFO and former general counsel (here), although the company has not been charged at this point.

The Apple investigation involves backdated options awarded to company co-founder and CEO Steve Jobs, perhaps the rock star CEO of a Silicon Valley company. To this point, the SEC has not pursued any charges against Jobs, even though the company found that he had some participation in setting the price for the options.  I think it is quite unlikely prosecutors would pursue charges against him unless a "smoking gun" document or testimony from a highly credible witness emerges.

Each case has factors different from the Reyes prosecution. Many of the former executives from these companies received backdated options so that they would benefit personally, something that did not happen at Brocade yet the government was still able to obtain a conviction. On the other hand, Reyes was deeply involved in the options process by acting as a "committee of one" to make the awards, and he apparently made admissions – "It’s not illegal if you don’t get caught" – that may have eased the burden of proving intent to defraud.  The involvement of other potential defendants will likely vary.  A conviction in one case does not mean others will turn out the same, but federal prosecutors have to like their chances if they choose to bring new cases. (ph)

                                                   

UPDATE: An earlier version of this post noted that Reyes had been convicted of mail fraud under the right of honest services theory.  That theory was dropped from the trial and so is not an issue in his case.  Thanks to a reader for pointing out the issue. (ph)

August 9, 2007 in Prosecutions, Securities | Permalink | Comments (2) | TrackBack (1)

Kobi Gets the Run of Namibia

Former Comverse Technology CEO Kobi Alexander seems to be prospering in Namibia, where he moved – or fled, depending on your point of view – prior to being indicted for his role in options backdating at the company. Since his arrival in August 2006, Alexander has begun investing in low-cost housing in the country and creating scholarships for Namibian students. Now, the High Court has granted Alexander’s request to be allowed to move about country with the permission of the head of the local Interpol office, rather than being confined to the capitol city of Windhoek, where he lives with his family. The extradition proceeding has been moving at a snail’s pace, if that, with no substantive hearings but many postponements at his attorney’s request.

According to an article in The Namibian (here), there may be one bump in the road for Alexander remaining in Namibia. Apparently, Alexander received a two-year work visa when he entered Namibia, and the Ministry of Home Affairs and Immigration is planning to open an investigation into whether he fully disclosed his U.S. residence and potential criminal problems when he applied for the visa. Although Alexander denies any problems, if he lost his visa there’s a chance he could be expelled from the country and sent to a place where the United States may have a better chance of extraditing him – but don’t count on it. The recent conviction of former Brocade CEO Gregory Reyes on options backdating charges can’t make Alexander comfortable, so efforts to resist extradition or expulsion will likely intensify. (ph)

August 9, 2007 in International, Prosecutions, Securities | Permalink | Comments (0) | TrackBack (0)

Wednesday, August 8, 2007

The Reyes Sentencing

The conviction of former Brocade Communications Systems, Inc. CEO Gregory Reyes on ten counts for conspiracy, fraud, and filing false financial statements related to options backdating at the company raises interesting questions for sentencing.  A key driver in fraud cases is the amount of the loss from the misconduct, or gain to the defendant.  Because Reyes did not receive any of the options improperly backdated, gain is most likely off the table, although prosecutors may try to make an argument that his sale of almost $400 million of company stock around the time of the options backdating could be attributed as a  type of gain -- but that's quite a stretch.  For the Brocade options at issue, virtually all of them became worthless in the dot-com meltdown in 2000-2001, so there no way to measure loss by looking at the gain to those who received them by way of Reyes' backdating.

The options themselves were proper, so the issue is the reporting of them as an expense, which brings with it certain tax consequences.  The problem of measuring of loss is rather thorny because it is not clear whether the backdating resulted in any direct harm to the company.  The impact on the stock price could be one measure of loss, but the disclosure in 2005 of the backdating did not have much of an effect on Brocade's price.  It's hard to say that backdating options five to six years earlier was a direct cause of any price fluctuation as much as the questions that would surround the integrity of its financial statements.  I think the government is likely to argue that Brocade's restatement of its financial statements in 2005 is the best way to measure the harm to the company.  In an amendment to its 2005 10-K (here), Brocade disclosed that it had to restate its income for the relevant years by approximately $50 million for the non-cash compensation expense related to the backdating.  Using that as the loss figure would result in an offense level of 23 under the 2000 Federal Sentencing Guidelines, which is the most likely edition to be used because the bulk of the alleged backdating occurred in 1999 and 2000.  Potential enhancements that could add two points each are for "more than minimal planning" and "abuse of a position of trust," bringing the offense level to 27.  Under the Sentencing Table, that would lead to a potential sentence of 70-87 months -- interestingly, the same offense level calculated for former Qwest CEO Joseph Nacchio, who received a seven-year prison term for insider trading back in 2001.

Reyes will argue rather strenuously that the loss figure is much lower, and at trial the defense argued that there was no direct harm from the backdating so the likely loss counsel will advance is zero.  Even with the other enhancements, a zero loss calculation would result in a sentencing range of 6-12 months, which would allow U.S. District Judge Charles Breyer to impose a sentence of home confinement or assignment to a half-way house rather than a term in a federal correctional institution.  Reyes' lawyers will also seek a downward departure from any higher Guidelines calculation based on his history of community service and charitable contributions, if past practice in other CEO sentencings (e.g., Bernie Ebbers, Jeff Skilling, Joseph Nacchio) is a guide.  In addition, Reyes could analogize his case to that of former Vice Presidential aide I. Lewis Libby to argue that a prison term would be "excessive" because he did not gain anything from the misconduct but only intended to help the company.

Of course, Judge Breyer is not required to follow the advisory Guidelines, but the calculation provides the starting point for a punishment decision.  Sentencing is set for November 21, 2007, just a bit before the sentencing of former Hollinger International CEO Conrad Black.  Being a CEO just isn't as much fun as it used to be. (ph)

August 8, 2007 in Fraud, Securities, Sentencing | Permalink | Comments (1) | TrackBack (0)

Tuesday, August 7, 2007

American Express Bank International Gets Deferred Prosecution Agreement

According to a DOJ Press Release, American Express International has landed a deferred prosecution agreement with the government.  The alleged charges were a failure to have an effective anti-money laundering program and the government will be 55 million richer as a result of this settlement, and that's without even mentioning civil penalties. The government will dismiss the charge against the company if "the bank fully implements significant anti-money laundering measures required by the agreement."

(esp)

August 7, 2007 in Prosecutors | Permalink | Comments (0) | TrackBack (0)

Govt. Drops Charges Against Wife in Return for Husband's Plea

The Providence Journal (projo.com) reports that the former fire safety chief at the Rhode Island School of Design has plead guilty to mail fraud and filing a false tax return. (see also Chronicle of Higher Education here).  The prosecution claims that the accused had fled to Ireland, but the defense contested that position. Interestingly, the court in this case permitted the defendant to remain at home (w/ bracelet) pending sentencing.  The charges will be dropped against his wife in return for his guilty plea.  Should the government be able to use a spouse or partner as a bargaining chip in a plea agreement?

(esp)

August 7, 2007 in Settlement | Permalink | Comments (0) | TrackBack (0)

Reyes Convicted on All Counts for Options Backdating

A federal court jury in San Francisco convicted former Brocade Communications CEO Gregory Reyes on all ten counts related to options backdating at the Silicon Valley company (see San Jose Mercury-News story here).  Among the charges against Reyes are securities fraud and mail fraud for engaging in a scheme to defraud Brocade investors and deprive them of the right of honest services.  Reyes was represented by Richard Marmaro from Skadden Arps, and the case involved some significant head-butting between Marmaro and U.S. District Judge Charles Breyer, including accusations of judicial bias.  These issues are likely to be brought up on appeal. 

This case represents a significant victory for federal prosecutors, and may well encourage U.S. Attorney's Offices to pursue charges in other cases.  The Reyes prosecution was challenging because the defendant did not "line his own pocket" by receiving any of the backdated options, so a key piece of evidence found in fraud cases to support an inference of intent -- self-dealing -- was missing, yet the jury still returned a guilty verdict on the key securities and mail fraud counts.  At a minimum, Reyes' co-defendant, former Brocade human resources manager Stephanie Jensen, whose trial was severed, has to be concerned about her exposure. (ph)

August 7, 2007 in Fraud, Securities, Verdict | Permalink | Comments (0) | TrackBack (0)

Monday, August 6, 2007

Rigas Talks

John Rigas, former Adelphia chair, has decided to talk. But unlike James Brown, former Adelphia's vice president of finance, Rigas' discussion is post-trial and offers no benefit to the soon-to-be incarcerated defendant.  Reporting on the conversation is Lesly Cauley of USA Today, who presents the words of this 82 year old man who is facing 15 years incarceration.

With such incredible consequences faced by defendants if they risk going to trial, it is not surprising to see that a key witness chooses to provide witness testimony to the government as opposed to being prosecuted as a target.    And with a civil action to compare the testimony of this witness to that provided in the criminal case, issues of truth can be examined.

But irrespective of what Rigas says or does, one still has to wonder whether such a crime deserves such a harsh penalty.  Should first offenders be sentenced to 15 and 20 years in prison?  Should a former CEO be given a sentence of life minus 3 months (he is entitled to be released when an MD certifies that he has less than 3 months to live).  Will all of this really deter others, especially when Rigas continues to maintain that his actions do not constitute crimes?  And do they constitute crimes, or was this an example of blaming the driver of a wrecked vehicle, irrespective of whether he or she caused the accident.

(esp)

August 6, 2007 in Prosecutions | Permalink | Comments (1) | TrackBack (0)

Another Court Order from Judge Kaplan

With 13 defendants dismissed from the KPMG related case (see here), the remaining five defendants are moving to continue the case, with the government asking for a severance of one of the defendants.  Neither the prosecution or defense find themselves successful with their respective motions. The prosecution's severance is denied, and the defense motion for a continuance was also rejected.

Order - Download 2007080320order.pdf

(esp)

August 6, 2007 in Judicial Opinions | Permalink | Comments (0) | TrackBack (0)

Putting a Hold on Ethics Investigation of Rep. William Jefferson

Roll Call reports that a House subcommittee has decided to suspend the investigation of Rep. William Jefferson.  This comes just days after the DC Circuit rejected the search of privileged materials from the Congressman's office (see here).

(esp)

August 6, 2007 in Fraud | Permalink | Comments (0) | TrackBack (0)

Sunday, August 5, 2007

30 Years to Non-violent First Offender in White Collar Case

The case of Chalana McFarland, pending in the 11th Circuit, is a case that should be closely watched as it involves a sentence of 30 years for a non-violent first offender in a white collar case. The defendant argues that this sentence is unreasonable.  The preliminary briefs are below:

Download final_11_cta_brief.pdf

Download appellee_brief_feb_28_06.pdf

Download mcfarland_reply_06.pdf

The parties also filed briefs in response to the Rita case. As noted in McFarland's supplemental brief -

"Ms. McFarland also has a young child and has lost her reputation in the legal community as well as in the general community.  Her incarceration has been very difficult for her parents and young child.  If President Bush is correct that Libby's sentence of 30 months is 'excessive' than surely Chalana McFarland's 360 month sentence is excessive as well, and should be reversed."

(esp)

August 5, 2007 in Fraud | Permalink | Comments (0) | TrackBack (0)

US Attorney Firings - Behind the Scenes

Author Jeffrey Toobin has an incredible story in the New Yorker that presents two scenarios - the "firing" of former US Attorney John McKay and the death of AUSA Tom Wales. The article asks the question - "What does the firing of a U.S. Attorney have to do with a murder case?"

Several things are apparent from this article: 1) McKay was doing an excellent job in his position as US Attorney ; 2) McKay failed to bring charges against the Democratic Party; 3) Before the House Judiciary Committee Kyle Sampson, AG Gonzales' Chief of Staff, stated that "McKay might have been fired because he had been too aggressive in his advocacy of the investigation of Tom Wale's murder."

Since this statement, AG Gonzales has backtracked and provided support in the investigation of the death of Tom Wales. But the statements flying around here certainly warrant investigation. When an AUSA is murdered and the investigation is not given a top and immediate priority, questions need to asked and answered.  And when the person most able to ask the questions does so, and is later dismissed whether it be for asking questions and making demands or this reason is given pretextually to hide a political motivation,  someone needs to investigate.

When it comes to needing testimony before a grand jury investigating a murder, there is mush less of a basis to claim executive privilege. Harriet Miers and others need to provide answers to a Grand Jury that looks at the homicide, obstruction of this homicide investigation, and whether individuals should be charged for impeding the due administration of justice.

(esp) (w/ a hat tip to Geraldine Moohr)

August 5, 2007 in Prosecutors | Permalink | Comments (0) | TrackBack (0)

Politics and Prosecutions

Courts often refuse to allow evidence in a trial that would demonstrate that the prosecution was politically motivated. Selective prosecution claims place an enormous burden on the defense to produce evidence, evidence that often is in the hands of the prosecution.  But exposing the possibility that politics has motivated some high profile prosecutions is something that the legislature and press needs to focus upon.  It is good to see an editorial in the NYTimes that discusses this important issue. Perhaps the case where this scrutiny is the most needed is with respect to former Alabama Governor Don Siegelman.  With statutes that are overbroad, and allow prosecutors enormous discretion, it is important to have checks on whether the use of charges in these circumstances have political motivations.

(esp)

August 5, 2007 in Prosecutors | Permalink | Comments (0) | TrackBack (0)