Saturday, October 6, 2007
Former Olympic triple gold medal winner Marion Jones pleaded guilty to making false statements to federal agents in connection with the investigation of the Bay Area Laboratory Co-operative (Balco) steroids operation. Jones admitted to lying about her use of what she was told at one time was flaxseed oil but came to learn was a steroid known as "The Clear" -- a specialty of Balco. Jones had long denied taking steroids, going so far as to sue Balco's founder for $25 million for libel when he identified her as a steroids user. Her former coach is scheduled to go to trial on November 26 for three counts of making false statements to federal agents during the Balco investigation. The Balco investigation has caught up with a number of leading track stars, including former 100 meter world record holder Tim Montgomery, who earlier entered a guilty plea. Under Olympic rules, Jones may be stripped of the five medals she won in the 2000 Games in Sydney.
With Jones' guilty plea, the spotlight falls -- once again -- on baseball home run king Barry Bonds, who has been cut loose by his long-time team, the San Francisco Giants. Bonds testified before a federal grand jury in 2003 that he took what he too thought was flaxseed oil, and he did not learn until much later that it was actually The Clear. Bonds' former trainer, Greg Anderson, remains in custody for civil contempt for his refusal to testify before a federal grand jury in San Francisco about steroid use at Balco; he earlier pleaded guilty to drug charges. Whether the grand jury will charge Bonds with perjury has been an issue now for well over a year now, and there has been no apparent movement to file charges or drop the case. With Bonds' chase to break the all-time home run record complete, will federal prosecutors make a move on Bonds? An AP story (here) discusses Jones' guilty plea. (ph)
As if the meltdown of two of Bear Stearns' large hedge funds over the summer wasn't enough, it appears federal prosecutors are looking into whether the collapse of the funds involved any criminal conduct. The two funds, the High-Grade Structured Credit Strategies Fund and High-Grade Structured Credit Strategies Enhanced Leverage Fund, suffered over $1.6 billion in losses when the maelstrom from the subprime mortgage market caused the value of their investments to decline so quickly that the funds could not meet the requirements for large loans taken out to leverage their assets. When you lose that much money in a short period of time, prosecutors are likely to ask at least a few questions. According to reports (here), the U.S. Attorney's Office for the Eastern District of New York has only requested that Bear Stearns provide information, and no grand jury subpoenas have been issued to this point.
While a preliminary inquiry is understandable, will a criminal case develop? The loss of $1.6 billion is striking, but the amount alone does not signal the likelihood of illegal conduct. In September 2006, Amaranth Advisors LLC lost over $6 billion in just a couple weeks due to wayward bets on natural gas prices, but no criminal case has emerged. It's the nature of the hedge fund beast that high-risk strategies, particularly the use of leverage to increase returns, means there is a commensurately greater possibility of significant losses, and those can accumulate very quickly. While one can fault the Bear Stearns funds for not anticipating the problems in the subprime mortgage market when there were plenty of indicators that housing prices were declining, that's not a crime -- at least not yet. Absent evidence of shuffling of assets or intentional misstatements to investors, the inquiry may turn out to be a small blip. (ph)
Friday, October 5, 2007
Time magazine reports (here) that a key witness in the prosecution of former Alabama Governor Don Siegelman on corruption charges also told federal investigators that he made illegal campaign contributions to Republican officials, but that none of them were ever investigated. The Siegelman prosecution is the subject of an October 11 hearing before the House Judiciary Committee, and the documents Time claims to have reviewed have been requested by the Committee from the Department of Justice, which has so far resisted producing them. The prosecution has become wrapped up in the larger issue of the politicization of the Department of Justice, and includes a claim by an Alabama attorney that during a 2002 meeting with Republican operatives there was an assurance that Karl Rove would have Siegelman removed as a potential electoral threat.
This latest report will add fuel to the fire on Capitol Hill, but it's not clear exactly how any of this will affect the convictions of Siegelman, who has started serving his 88-month prison sentence while the case is on appeal to the Eleventh Circuit. The allegations raised in the Time article are that federal investigators ignored credible evidence against Republicans and only pursued the Democrat. Siegelman was acquitted on 25 of the 32 counts in the indictment, including those based on the testimony of the key witness. The charges on which he was convicted relate mostly to transactions with Richard Scrushy, former CEO of HealthSouth, who was also convicted and is serving a prison term. Even if the federal prosecutors should have looked into other allegations of corruption, that does not necessarily call into question the propriety of Siegelman's convictions. A claim of selective prosecution is virtually impossible to win, and a decision by prosecutors to pursue a case that turned up more wide-ranging evidence of corruption (i.e. the Scrushy transactions) does not mean the decision to ignore other possible leads violated Siegelman's rights. It is, of course, deeply troubling if prosecutors selected a defendant because of his party affiliation, or avoided pursuing other reasonable lines of inquiry because of their ties to other Republican officials. The ethical lapses of the prosecutors, if in fact they occurred, does not necessarily call into question the strength of the evidence that led to Siegelman's convictions, and the Eleventh Circuit in all likelihood will focus on the narrower legal issues related to the sufficiency of evidence and other possible legal errors and not on whether he was selected for prosecution based on his politics. (ph)
Multinational industrial giant Siemens A.G. settled with German prosecutors the probe of corrupt overseas payments by its telecom unit by agreeing to pay €201 million. The company will also pay an additional €179 million to the tax authorities because it improperly deducted the foreign payments as ordinary business expenses. As discussed in an earlier post (here), the scope of the questionable overseas payments is much broader than first suspected, with Debevoise & Plimpton's internal investigation raising questions about as much as €1.6 billion in transfers throughout the company and not just the telecom unit. While the settlement with the German prosecutors closes one avenue of problems, Siemens still faces investigations by the SEC and Department of Justice in the United States and an inquiry by the Italian authorities. Given the size of the payments and their occurrence in different parts of the company, this is the type of case that the federal government will pursue vigorously. A Bloomberg story (here) discusses the settlement. (ph)
The SEC filed a settled insider trading enforcement action accusing the defendant of trading on information about the impending takeover of Commercial Federal Corp. According to the Commission's complaint (here), the defendant learned about the transaction from his brother, who received the information from his wife, an administrative assistant to Commercial Federal's CEO at the time who discussed her concerns about job losses from an acquisition of the bank. The SEC asserts that by trading on the information, the defendant breached a fiduciary duty to his brother, based on the fact that they "had a history of sharing and maintaining confidences." The defendant is a self-employed farmer/rancher, and the nature of the confidences the brothers shared is not described in the complaint.
That's not the classic duty of trust and confidence described by the Supreme Court in Chiarella v. United States, 445 U.S. 222 (1980), which discussed legal fiduciaries like trustees and lawyers as examples of those with the duty of confidentiality. But it does fit within the SEC's more expansive definition of such a duty in Rule 10b5-2(b)(3), which covers, inter alia, any person who "receives or obtains material nonpublic information from his or her spouse, parent, child, or sibling." The broader definition of "duty of trust and confidence" in the SEC rule has never been tested in court, and won't be in this case because it is a settled matter. But it's an open question whether a court would find the requisite duty based solely on the familial relationship and the trading of confidences. The defendant settled the matter by disgorging over $39,000 in profits from his trading and a tippee's, and a civil penalty of $31.150 based on his profits.
Thursday, October 4, 2007
A preliminary investigation by the French financial regulator Autorité des marchés financiers (AMF) indicates that a number of senior executives at Franco-German aircraft manufacturer European Aeronautic Defense & Space Co. NV (EADS) sold shares before the announcement of problems with the company's largest development project ever, the A380. The AMF report was discussed in the French newspaper Le Figaro and the trading allegedly occurred between November 2005 and March 2006, before the June 2006 announcement of technical problems with the superjumbo A380 and also the A350 aircraft. The stock dropped over 25% on that announcement, and it is not clear how far in advance the information was known to 21 managers and executives who sold shares. The AMF issued a statement (here) that
it submitted an interim memorandum to the prosecuting authorities in Paris in early September, in accordance with law; it obviously has no comment on the Le Figaro report; it insists that it has not completed its investigations and is unlikely to do so before the beginning of 2008; consequently, the AMF Board, which has sole authority to commence regulatory proceedings against persons suspected of infringing its General Regulation, has not given an opinion on the matters reported in the article and, at this stage, has decided solely to inform the criminal court thereof; at this stage of the procedure, which is still a standard inquiry, the persons concerned have not had the opportunity to exercise their right of defence.
Insider trading cases in the European Union are fairly uncommon, at least as compared to the United States. It will be interesting to see how the investigation develops, especially when it involves a company with the political significance of EADS. A story on CNN.com (here) discusses the report. (ph)
The imbroglio over the firing of eight U.S. Attorneys in 2006 has largely receded into the background, and there does not appear to be much interest in pursuing the issue on Capitol Hill. Judiciary Committee Chairman Patrick Leahy sent a letter to Attorney General nominee Judge Michael Mukasey seeking his assurances that the problems arising from the firing of the U.S. Attorneys will not come to the surface again, and that he will not interfere with any contempt citation Congress might issue regarding the refusal of former White House aides Harriet Miers and Josh Bolten to testify about the firings. The letter (here) states:
The mass firings of the U.S. Attorneys appointed by this President were unprecedented. I will inquire whether you share my view that the integrity and independence of federal law enforcement should not be compromised by political operatives from the White House. I will ask for your assurance that the Department of Justice and, in particular, our U.S. Attorneys, will not be employed in upcoming elections to seek to affect the outcome. The Department of Justice should be working to protect Americans’ right to vote and have their vote count, not seeking to swing close elections into a partisan column by leaking allegations of corruption or bringing last minute legal actions alleging voter fraud. * * *
Under applicable statutes and practices, contempt citations against Administration officials by the House and Senate would be certified to the U.S. Attorney for the District of Columbia to bring before a grand jury for its action. If the House or Senate certified a contempt citation against current or former White House officials arising from the U.S. Attorney investigation, would you permit the U.S. Attorney to carry out the law and refer the matter to a grand jury as required by 2 U.S.C. § 194? If the White House sought to prevent the U.S. Attorney from bringing contempt charges to a grand jury as required by law, would you take any action to prevent the U.S. Attorney from doing so?
More generally, what would you do as Attorney General if you learned that a White House official had called a U.S. Attorney asking for information about an on-going criminal investigation? What would you do as Attorney General if you learned that a Member of Congress had called a U.S. Attorney asking for information about an on-going criminal investigation?
The issue raised in the last question might be better addressed to Representatives and Senators rather than putting the onus on the Department of Justice to resist such inquiries. Whether Judge Mukasey will give anything close to an acceptable response remains to be seen, but it's unlikely he will address hypotheticals beyond asserting that he will "call them like I see them" and act in the best interests of the citizenry. Senator Leahy takes a somewhat conciliatory tone at the end the letter, bemoaning the White House's alleged failure to cooperate with the Committee that has "left you to answer the unanswered questions and left longstanding disputes unresolved." (ph)
Jury selection began for the trial of defense contractor Brent Wilkes, who is accused of giving former California Representative Randy "Duke" Cunningham over $600,000 in bribes and other benefits in exchange for the award of no-bid contracts. Wilkes had earlier subpoenaed twelve Representatives to testify at trial, which drew a motion to quash from the counsel to the House of Representatives (see earlier post here). The subpoenas have been withdrawn, but new ones may be issued to former House Speaker Dennis Hastert and four California Congressmen, Duncan Hunter, Jerry Lewis, John Doolittle and Darrell Issa, who allegedly were present on trips with Cunningham. According to a story in The Hill (here), U.S. District Judge Larry Burns said he would enforce subpoenas to Representatives only if they have information relevant to the defense. Any new subpoenas will probably trigger another motion to quash from the House counsel, who earlier asserted an absolute privilege under the Speech or Debate Clause that prevents members of Congress from testifying -- it's not clear whether such a broad assertion of the constitutional protection will fly. (ph)
Wednesday, October 3, 2007
York International Corp., now a subsidiary of Johnson Controls, settled an investigation of overseas bribes by agreeing to a deferred prosecution agreement (available below) with the Department of Justice and a civil settlement with the SEC. The case involves a wide range of payments in violation of the Foreign Corrupt Practices Act, as described in the SEC's Litigation Release (here):
The Commission's complaint alleges that York International's Delaware subsidiary paid approximately $522,500 to an intermediary while knowing that most of the money was intended to bribe United Arab Emirate officials; York International's Dubai subsidiary authorized and made approximately $647,110 in kickback payments under the U.N. Oil for Food Program; and that York International's subsidiaries devised elaborate schemes to conceal kickback payments of over $7.5 million made to secure orders on certain commercial and government projects in the Middle East, India, China, Nigeria and Europe.
The company agreed to pay a $10 million criminal fine, a $2 million civil penalty, and disgorge profits and pre-judgment interest of over $10 million, for a total cost of $22 million.
An interesting part of the deferred prosecution agreement concerns waiving the attorney-client privilege and work product protection, an issue that has become quite contentious. The agreement provides that the Department of Justice can request documents and information from the company, including those covered by the privilege, and that York can assert the privilege and protection in response and refuse to provide the requested materials on that basis. However, the agreement goes on to state that "[i]n the event that York withholds access to the information, documents, records, facilities and/or employees of York, the Department may consider this fact in determining whether York has fully cooperated with the Department." While the company has not agreed to waive the privilege, assertion of it could come at the cost of determining whether (and to what extent) it has been cooperative. (ph)
The conviction of former Cendant chairman Walter A. Forbes on conspiracy and filing false statement with the SEC, which resulted in a 107-month prison term, was affirmed by the Second Circuit. The court's decision was issued in an unpublished order (here), and the discussion -- if you can call it that -- of the issues is just a little more than one page. While Forbes raised nine issues on appeal, only three are addressed briefly, and the decision concludes, "We have considered all of the issues raised, including those noted above, and the relevant law, and conclude that all of defendant’s arguments are without merit." While many appellate decisions are unpublished, cases involving high-level corporate officers usually have published opinions because the issues are often fairly close. I can't recall a recent conviction after trial of a corporate officer in a position like Forbes' whose appeal has not resulted in a published opinion, and it's surprising that the issues were treated so tersely in a case involving Williams & Connolly as defense counsel. (ph)
Tuesday, October 2, 2007
Erik Prince, CEO of Blackwater, says it is up to the Justice Department to investigate "and, if warranted, prosecute personnel involved in the deaths of Iraqi civilians." (Washington Post here)
But the question should also be whether Blackwater, the company, could be held criminally liable if DOJ or the FBI finds conduct that demonstrates that the company failed to promote a culture that avoided criminality within its midst. Can a corporation be prosecuted if its employees commit criminal acts when discharging their employment? And how many criminal acts by the employees will warrant an investigation of the entity?
Corporate criminality dates back to the New York Central case in 1909, when a company was criminally liable for violations of the Elkins Act. Federal courts today use the common law theory of respondeat superior (as opposed to the Model Penal Code) which examines whether the agent was acting within the scope of his or her employment in behalf of the corporation. Courts also use a "collective knowledge" approach that allows the bits and pieces of knowledge from the different parts of the corporation to be combined together.
Now maybe Blackwater has no criminal culpability here and Prince is right that this was a rogue employee. And maybe any acts that were improper were not within the scope of that person's employment. But perhaps the questions here need to also include: 1) whether the company had a corporate compliance program - which maybe it did ( it has an ethics statement here); 2) whether there was oversight to make certain that people would not be working while intoxicated or committing other possible improper acts; and 3) whether the companies actions were in violation of any criminal laws. Maybe there will be nothing to write home about here - and that's good, as companies that act in good faith should not be held criminally liable for acts committed by rogue employees. But as long as corporate criminal liability exists, and as long as a good faith defense for corporations is not embodied in the law, there can always be a question to ask regarding whether there was any corporate criminality liability.
Monday, October 1, 2007
Jess Westbrook, Bloomberg News has an article in the Houston Chronicle titled, "Former Dynegy Figure Settles With SEC." According to this article it would appear that Chief Financial Officer Robert Doty agreed to pay $376,650 to settle SEC allegations related to Project Alpha at Dynegy. Jamie Olis initially received over 24 years in prison, a sentence that was then reduced following a Fifth Circuit remand to 6 years in prison for his role in Project Alpha. Olis asserted his constitutional right to a trial by jury. (see here and here) For full details on the settlement with the SEC see here. The Order issued discusses the roles of individuals in Project Alpha at Dynegy, although the civil findings were without "admitting or denying" the Commission's findings.
Check out this article by Paul Shukovsky and Daniel Lathrop at Seattlepi.com entitled, "FBI Faces Deep Cuts in Programs to Fight Crimes." The article notes that the Bush Administration 2008 budget will seriously affect the FBI's "ability to tackle white-collar fraud."
Oscar Wyatt and the Oil for Food Program have certainly been a topic in the news (see here). But Wyatt wants to move on and has agreed to a plea that will allow him to do so. According to the media he is agreeing to a guilty plea to one count - conspiracy to commit wire fraud - that will mean he faces a sentence of 18 to 24 months and an 11 million dollar forfeiture. (See Wall St Jrl here, USA Today -AP- here). Interestingly this plea comes in the middle of his trial (see NYTimes here).
So why might someone plead guilty in the middle of trial? Here are some possibilities, although this is not to imply that one or any of these apply to this situation -
- Cost - The cost of going to trial can be enormous to someone accused of a crime. Ending the process certainly helps in reducing the cost.
- Risk - Going to trial is taking a risk. These days with the federal sentencing guidelines, the risk can be enormous. Having a plea provides certainty and usually a much lesser sentence absent a not guilty finding. Hearing the evidence and how that evidence is playing with a jury, may motivate one to avoid additional risk.
- Moving On - The toll taken psychologically, on someone accused of a crime, is enormous. Ending the process with a certainty allows for "life after" - which in white collar cases can be important, especially after an extremely long investigation.
- New Discovery - Unfortunately, not all prosecutors turn over discovery well in advance of trial. Receiving the discovery can provide a very good reason for wanting to plea, as one now sees the evidence the government has available.
- Jencks Material - By statute, the government does not have to turn over witnesses statements until after the witness testifies. Many prosecutors realize the value of turning over this material well in advance of trial. After all, if the accused sees the evidence against him or herself, there is more likely to be a quick plea. It certainly saves taxpayer money.
Sunday, September 30, 2007
The WSJ via an article by Even Perez comments on remarks made by Judge Kaplan at the recent National Association of Criminal Defense Lawyers (NACDL) & Georgetown University's White Collar Crime conference. It is not surprising to see his concern about the government's power in securing agreements with companies.
The KPMG related case stands as a headline to those monitoring fairness in the system that government power in this context needs to be re-evaluated. The bill to curb government requests for waivers of the attorney-client privilege are a step in the right direction (see here).