Saturday, October 13, 2007

Two Louisiana Judges Charged With RICO

Undercover investigations of courts, judges, bailiffs, and attorneys are not new.  There was Operation Corkscrew, Operation Greylord, Operation Bartab and many others.  Now there is Operation Broken Gavel. And coming from this investigation is the indictment of two sitting state court judges in Louisiana. The ABA Reports here and the Shreveport Times here, pertaining to whether these judges will remain on the bench and whether they will hear cases during the pendency of the action against them. One of the judges sits in a drug court. The allegations concern bribery.

(esp)

October 13, 2007 in Prosecutions | Permalink | Comments (0) | TrackBack (0)

Prosecutors File the Opening Brief Challenging Dismissal of 13 KPMG Defendants

The U.S. Attorney's Office for the Southern District of New York filed its brief (available below) with the Second Circuit in United States v. Stein seeking to overturn U.S. District Judge Lewis Kaplan's order dismissing the tax fraud charges against thirteen former KPMG partners and employees related to sales of allegedly abusive tax shelters.  Judge Kaplan found that the government violated the defendants' constitutional rights by pressuring KPMG into denying payment of their attorney's fees.  He determined that the then-named Thompson Memo -- now revised as the McNulty Memo -- violated the Sixth Amendment right to counsel, the defendants' substantive due process rights under the Fifth Amendment, and that the actions of prosecutors constituted "outrageous government conduct" requiring dismissal of the indictment. 

The government contests Judge Kaplan's factual findings and legal analysis.  The brief argues:

Because the defendants had no legal right to receive legal fees from KPMG, any Government involvement in KPMG’s decisionmaking did not violate the defendants’ Sixth Amendment rights. The outer limit of Sixth Amendment protection encompasses a criminal defendant’s right to use his own funds to finance his defense, but the Supreme Court has explicitly rejected the notion that a defendant has a similar right to funds from third parties.

The District Court also erred when it engaged in a Fifth Amendment substantive due process analysis of the Thompson Memorandum in Stein I. The “fundamental right” identified by the District Court in Stein I “to obtain and use in order to prepare a defense resources lawfully available to him or her, free of knowing or reckless government interference”—if found anywhere—falls within the Sixth Amendment right to counsel. And the Supreme Court has instructed that where a particular Amendment provides an explicit textual source of constitutional protection against a particular sort of government behavior, that Amendment, not the more generalized notion of substantive due process, must be the guide for analyzing such claims.

Moreover, the District Court’s substantive due process analysis was itself flawed. The District Court erroneously identified the right to use resources “lawfully available” for one’s defense free from knowing or reckless Government interference as a “fundamental right” deeply rooted in American tradition and values, on par with the rights to marry, to have children, to direct the education and upbringing of one’s children, to marital privacy, to use contraception, to bodily integrity, and to abortion. Whatever its importance, the right to use an employer’s resources for one’s defense is not “objectively, deeply rooted in this Nation’s history and tradition, and implicit in the concept of ordered liberty, such that neither liberty nor justice would exist if [it was] sacrificed.” As a result, to the extent that the Thompson Memorandum is evaluated as legislation, it must meet only a rational basis test, which it does easily.

The government's brief comes in at a hefty 25,690 words -- 106 pages -- and comfortably exceeds the Second Circuit's 14,000 word limitation.  A motion to accept the brief has also been filed, so the version below may not be the final one if the court rejects it.  Lengthy briefs in white collar crime cases are certainly not unknown, and the KPMG brief is less than half the length of former Enron CEO Jeffrey Skilling's opening brief, which came in at well over 200 pages.  Former Qwest CEO Joseph Nacchio's brief, also filed this week, is a veritable short story at a bit over 60 pages, below the 17,000 word maximum authorized by the Tenth Circuit in the case.  With the trial of the four remaining defendants in the Stein case set to start shortly, the government's evidence will be on display well before the Second Circuit decides on the dismissal of the other defendants. (ph)

Download us_v_stein_government_opening_2d_cir_brief_oct_10_2007.pdf

                                                                           

SidebarWall Street Journal reporter Paul Davies has written extensively on the KPMG case, providing very cogent analysis of a complicated prosecution.  According to the WSJ Law Blog (here), Paul is heading to the Philadelphia Inquirer as an editorial page editor.  I would like to wish him good luck, and his reporting on the case will be missed. (ph)

October 13, 2007 in Prosecutors, Tax | Permalink | Comments (0) | TrackBack (0)

Lawyers Don't Come Cheap These Days

All the recent investigations and subsequent prosecutions of senior executives, especially CEOs, is creating a boomlet for white collar criminal defense lawyers and some significant costs for companies on the hook for the attorney's fees.  A Bloomberg article (here) notes that Brocade Communications Systems Inc. has paid over $38 million in legal fees related the investigation of options backdating along with the defense costs of former CEO Gregory Reyes and other executives charged in criminal and SEC civil enforcement actions.  That does not include the $7 million Brocade paid as a civil penalty to settle the SEC case against the company.  In the most recent quarter ending in July, the company spent over $18 million on legal fees while making a profit of $10.7 million.  In all likelihood that amount does not include the bulk of the costs for Reyes' criminal trial that ended with a conviction in August, for which his lawyers from Skadden Arps probably didn't submit bills until after the quarter ended.

An American Lawyer article (here) discusses other high-price legal defenses for corporate executives and the costs for intensive internal investigations -- conducted by lawyers, of course -- related to options backdating:

  • Mercury Interactive spent $72 million before it was acquired by Hewlett-Packard, which no longer breaks out its results separately;
  • KLA-Tencor spend $38.6 million;
  • Monster, Inc. spent $32 million;
  • CNET Networks spent $21 million.

A case that generated significant legal fees outside the backdating realm was the defense of former Enron CEO Jeffrey Skilling, which came in at around $75 million before the most recent work on his criminal appeal -- and don't think his 200+ appellate brief to be argued by former Solicitor General Walter Dellinger will come cheap.  A recent district court case involving a former executive of Westar involved claimed attorney's fees of over $15 million, including nearly $3 million spent on the successful appeal of a conviction that will lead to a third criminal trial.

For anyone contemplating serving as an officer or director of a public company, a good indemnification clause is an absolute must.  Corporations paying out these fees are never very happy when the conduct of executives ends up being so costly, but it seems to be the price to be paid for hiring and retaining CEOs, directors, and other officers.  (ph)

October 13, 2007 in Defense Counsel | Permalink | Comments (0) | TrackBack (0)

Friday, October 12, 2007

Beazer Homes Reveals the Damage

Residential home builder Beazer Homes USA Inc. issued an 8-K (here) disclosing the results of its internal investigation of accounting irregularities and problems in its mortgage unit.  On the accounting side, the investigation coordinated by Alston & Bird found problems with its reserves and accruals for certain land development costs, i.e. cookie jar reserves, and the improper recording of sale-leaseback transactions.  The company will have to issue a restatement and adjust its financials going back to 1999.  At its mortgage unit, Beazer Homes disclosed that there were violations of "certain U.S. Department of Housing and Urban Development (HUD) regulations, particularly in relation to Down Payment Assistance programs, in certain Federal Housing Administration (FHA) insured loans originated by Beazer Mortgage Corporation dating back to at least 2000."

The company states that it hopes to resolve the regulatory violations through a settlement, which it estimates will cost anywhere from $8 to $15 million.  In addition, Beazer Homes previously disclosed receiving a grand jury subpoena from the U.S. Attorney's Office for the Western District of North Carolina and that the SEC issued a formal order of investigation related to its accounting.  Resolving those investigations might be a bit more difficult because, at least on the criminal side, the government is likely to want the company to enter into a deferred prosecution agreement, given all the attention being paid to abuses in some mortgage lending sectors.  The problems in its FHA loans probably means that there were falsified documents, such as verification of income and assets or the amount of a down payment, which can be a violation of Sec. 1001.  To the extent employees of the mortgage subsidiary were involved in the creation of any false records or approving transactions in violation of HUD rules, that would make the company criminally liable.  Resolving investigations with at least three different federal agencies is not an easy process, so it may be a while before Beazer can put these issues behind it.  Too bad the downturn in the housing market can be negotiated away. (ph)

October 12, 2007 in Fraud, Investigations, Securities | Permalink | Comments (0) | TrackBack (0)

A Nasty Turn in the Wesley Snipes Tax Prosecution

LawProf Blog emperor Paul Caron on the TaxProf Blog reports (here) on actor Wesley Snipes changing counsel for his upcoming tax fraud trial in Florida.  The judge initially denied the request for a continuance because of the change of counsel, finding that Snipes was improperly trying to delay the trial.  The judge has now ordered a ninety-day continuance (see order below), in response to a motion for reconsideration (also available below) that is amazing for its attack on Snipes' prior attorney.  In the motion, the new lawyer attacks all aspects of the prior representation, including the interesting claim that the attorney's lack of due diligence came to Snipes' attention from his representation of former Atlanta Falcons quarterback Michael Vick on dog fighting charges. 

How does the Vick case have anything to do with a tax evasion charge, you might ask?  According to the motion, Snipes -- who played Indians center fielder Willie May Hays in the two Major League movies (YouTube clip here) -- became concerned because his former counsel seemed to misunderstand the dual sovereignty doctrine that permitted state prosecutors to indict Vick for conduct that was the subject of the federal prosecution.  At that point, Snipes sought out his new lawyer, who had earlier represented him on a New York state civil matter.  It's hard to see how the representation of Vick influenced Snipes' decision to change counsel, but that apparently is what got the ball rolling.  The motion notes that Snipes plans to raise a selective prosecution claim, which is a difficult one to win.

The district court refused to credit new counsel's claims of ineffective representation by his predecessor.  According to the continuance order, the judge asked whether Snipes planned to file a bar complaint against his prior attorney, and the answer was negative, so "the Court declines to place any credence in the claim of ineffective assistance of counsel."  Instead, the court granted the motion due to the "irreconcilable differences" between Snipes and his prior counsel, although it probably didn't help much that the old lawyer labeled his last filing a "Motion to Withdrawal."  The tone of the continuance order makes it clear the judge remains suspicious of Snipes, which usually does not bode well.  The case will now begin in January 2008. (ph)

Download us_v_snipes_emergency_motion_oct_9_2007.pdf

Download us_v_snipes_continuance_order_oct_10_2007.pdf

October 12, 2007 in Defense Counsel, Prosecutions, Tax | Permalink | Comments (0) | TrackBack (0)

DoJ Sets National Counter-Proliferation Initiative

The Department of Justice is using the task force approach targeting illegal exports of restricted U.S. military and dual-use technology to foreign nations and terrorist organizations.  According to a press release (here) states that the National Counter-Proliferation Initiative will address a growing problem, and that "China and Iran pose particular U.S. export control concerns. The majority of U.S. criminal export prosecutions in recent years have involved restricted U.S. technology bound for these nations as opposed to others. Recent prosecutions have highlighted illegal exports of stealth missile technology, military aircraft components, Naval warship data, night vision equipment, and other restricted technology destined for China or Iran." The Initiative involves the Department’s National Security Division, which will meet with "districts with large concentrations of high-tech businesses and research facilities -- all of which are potential targets for illegal foreign acquisition efforts -- as potential venues for new task forces."  A report (here) summarizes export control prosecutions in the past year. (ph)

October 12, 2007 in International, Prosecutors | Permalink | Comments (0) | TrackBack (0)

Stockman Prosecution Will Be Covered by the Race to the Bottom Blog

The Race to the Bottom Blog, which provides excellent coverage of the prosecution of former Qwest CEO Joseph Nacchio, will take the same approach to the upcoming trial of former Congressman and OMB Director David Stockman on securities fraud charges.  According to Professor J. Robert Brown from the University of Denver Sturm College of Law, who runs the Blog:

The Race to the Bottom has as part of its mission the analysis and examination of cases that raise important issues of corporate governance.  This Blog will follow the case of David Stockman, the former Congressman and head of the Office of Management and Budget under President Reagan.  During the era of trickle down and the Laffer curve, Stockman helped push through the Reagan budgets.  His most famous moment was probably an unguarded comment made in an interview published in The Atlantic when he referred to the Reagan tax cuts as a "trojan horse." 

He left politics, went to Wall Street, and helped found the Blackstone Group, leaving the public eye but presumably becoming very rich in the process.  He's back, having been indicted for his role in overseeing Collins & Aikman, a auto parts manufacturer.  In defending himself from charges he manipulated financial information, one article reported that Stockman will rely on the "I am a moron defense". 

Students will obtain all filings in this case and post on them.  Jeff Hartje, a faculty member at the University of Denver Sturm College of Law, and an expert on litigation and evidence will discuss the filings with students and supervise the posts.  Most of the posts will appear in a separate tab on this page labeled "Stockman".  When developments occur of high significance, the posts will be on the main page. 

Enjoy the coverage.

(ph)

October 12, 2007 in Prosecutions | Permalink | Comments (0) | TrackBack (0)

Thursday, October 11, 2007

Gonzales Is Lawyering Up

Former Attorney General Alberto Gonzales has made the standard move of any person subject to a governmental inquiry involving a white collar crime -- he hired his own defense counsel.  Gonzales retained George Terwilliger, a former Deputy Attorney General during the administration of the first President Bush.  The Department of Justice's Inspector General informed the Senate Judiciary Committee in August that it was investigating a number of issues involving the firing of eight U.S. Attorney's and whether Gonzales's testimony before the Committee constituted perjury, so there's a very good reason to lawyer up.  According to the IG's letter (here):

The OIG has ongoing investigations that relate to most of the subjects addressed by the Attorney General's testimony that you identified. In particular, the OIG is conducting a review relating to the terrorist surveillance program, as well as a follow-up review of the use of national security letters. In addition, the OIG is conducting a joint investigation with the Department's Office of Professional Responsibility into allegations regarding the removal of certain United States Attorneys and improper hiring practices.

Terwilliger is a partner at White & Case so he will not come cheaply, and Gonzales has been working for the state and federal government since 1994 so his economic resources may be limited.  Don't be surprised to see a legal defense fund organized soon to help out with the legal costs, if it hasn't begun already.  An AP story (here) discusses Gonzales retaining Terwilliger. (ph)

October 11, 2007 in Defense Counsel | Permalink | Comments (0) | TrackBack (1)

Obstruction Trial of Former Federal Prosecutor Begins

The prosecution of former Assistant U.S. Attorney Richard Convertino and a former State Department Security Service officer opened in Detroit with the kind of start the government certainly did not want.  Convertino was indicted on conspiracy, obstruction, and false declaration charges (available below) in 2006 related to his conduct of the first post-September 11 terrorism trial, United States v. Koubriti, involving four North Africans accused of being involved in a terrorist plot to blow up a hospital in Jordan.  After the conviction of three of the defendants, the government later confessed error because Convertino allegedly failed to turn over exculpatory evidence to the defendants that purportedly undermined the government's theory of the case.  The undisclosed evidence involved photographs the government had taken of the hospital, which the prosecutors in the case denied existed in response to defense discovery requests.  The issue in this prosecution is unusual, if not unique, because it involves a determination whether withholding Brady material -- exculpatory evidence -- rises to the level of obstruction of justice.  The defense asserts that it was not material and therefore no obligation to disclose existed, and that the subsequent dismissal of the convictions was in retaliation for Convertino testifying before a Senate committee about problems in terrorism prosecutions.

The government's case began on a down note with the disclosure that its intended first witness had lied at a hearing the day before.  The witness, a Jordanian official who was to testify about the pictures being taken, stated at the hearing that he had refused to speak with defense counsel before trial on the advice of his lawyer in Jordan.  Right before opening statements, however, the federal prosecutor revealed that the witness had not spoken with his lawyer, and therefore the statement was not truthful.  The issue at the hearing was whether the government was trying to interfere with the defense trial preparation by having the witness refuse to be interviewed.  It's still unclear why the witness did not cooperate, and he has been bumped back on the witness list.  Needless to say, the defense lawyers have seized on the government's admission, noting the irony of their lack of access to evidence and a lying witness in a case about those very issues. 

I am not aware of any obstruction cases involving a prosecutor based only on a Brady violation, although the case of Durham County District Attorney Mike Nifong in the Duke lacrosse team case probably comes the closest.  The exculpatory nature of the DNA evidence withheld in that case was obvious, while the photographs from the Koubriti case don't seem to leap off the page as clearly favorable to the defendants.  The prosecution raises interesting issues about whether the failure to turn over disputed evidence can rise to the level of an obstruction of justice, and whether it is proper to have a jury effectively decide whether evidence is subject to the Brady disclosure requirement as a precursor to determining whether the defendants violated the law.  A Detroit News article (here) discusses the beginning of the trial. (ph)

Download us_v_convertino_indictment_march_2006.pdf

October 11, 2007 in Obstruction, Prosecutions | Permalink | Comments (0) | TrackBack (0)

The Thin Line Between Lobbying and Bribery

The trial of defense contractor Brent Wilkes for allegedly paying bribes to former Representative Randy "Duke" Cunningham began with his attorney, Mark Geragos, asserting that there were no improper payments but instead just the usual business of a Congressman lobbying the Pentagon.  According to a San Diego Union-Tribune story (here), Geragos said in his opening statement that Cunningham lobbied on behalf of a constituent (Wilkes) with the usual currency of Capitol Hill in dealing with the bureaucracy: threats and other forms of pressure.  This is the "business as usual" defense, that if everyone does it then it can't be bribery.  Any benefits conferred on Cunningham were not connected to the lobbying, and so the argument would be that a quid pro quo cannot be established for a bribery conviction.  Needless to say, the government takes a somewhat less benign view of Cunningham's efforts on Wilkes' behalf, and has already threatened to bring out testimony about the presence of prostitutes in a hot tub as one of the unseemly benefits Wilkes gave in exchange for Cunningham's help to obtain $85 million in no-bid contracts.  Whether the jury will accept the defense assertion that there is an "innocent explanation" for the benefits is an open question, and Geragos made it clear that if the government doesn't call the former Congressman the defense will.  That testimony promises to generate a few fireworks. (ph)

October 11, 2007 in Corruption | Permalink | Comments (0) | TrackBack (0)

Wednesday, October 10, 2007

Former CFO Pleads Guilty for Options Backdating

The former chief financial officer at data encryption software company SafeNet Inc. pleaded guilty to one count of securities fraud for her role in options backdating at the company, which was taken private in April 2007.  She was indicted in July 2007, and on August 1 the SEC filed a civil enforcement action against her.  According to the SEC Litigation Release (here):

Argo was aware that SafeNet routinely granted in-the-money options, and she knowingly or recklessly failed to cause SafeNet to record compensation expense as required by Generally Accepted Accounting Principles ("GAAP"). Consequently, SafeNet reported materially misstated financial results for periods beginning in late-2000 through early-2006. The complaint further alleges that Argo regularly prepared, reviewed and/or signed proxy statements, periodic reports and registration statements that she knew, or was reckless in not knowing, contained materially false and misleading statements and omissions concerning SafeNet's financial condition and options granting practices.

In October 2006, SafeNet announced that both the CFO and its chairman and CEO resigned from their positions because of the options backdating at the company (see 8-K here).  To this point, the CEO has not been charged nor has the SEC filed an action against him.  The CFO's plea agreement and likely cooperation may well lead to charges against the CEO in the near future.  In the options backdating cases, the government has looked at the top in pursuing its investigations. (ph)

October 10, 2007 in Fraud, Prosecutors, Securities | Permalink | Comments (1) | TrackBack (0)

Former R.I. House Majority Leader Will Plead Guilty to Corruption Charges

The former majority leader of the Rhode Island General Assembly, Gerard Martineau, entered a guilty plea to two counts of honest services fraud for taking nearly $900,000.  The criminal information (available below) identifies the payors as "The Pharmacy" and "The Health Insurance Company," and a Providence Journal article (here) names CVS and Blue Cross as the ones who paid Martineau.  The payments were disguised as contracts to purchase paper and plastic prescription bags from a company that Martineau controlled.  In exchange, Martineau helped block "freedom of choice" legislation that would allow consumers to purchase prescriptions from any pharmacy, which would hurt CVS and Blue Cross, both of which operated restricted pharmacy benefits networks.  The case resulted from an ongoing investigation of corruption in the Rhode Island legislature called "Operation Dollar Bill," and a state Senator previously entered a guilty plea to accepting bribes.  (ph)

Download us_v. Martineau Criminal Information October 2007.pdf

October 10, 2007 in Corruption, Prosecutions | Permalink | Comments (0) | TrackBack (0)

Tuesday, October 9, 2007

Nacchio Appeals

Former CEO of Qwest Communications, Joseph Nacchio, filed his appeal in the Tenth Circuit.  (The Wall Street Journal discusses the appeal here and provides a copy of the appellate brief here).  The defense argues that there is insufficient evidence, and focuses as one aspect of his brief -- on the element of materiality.  The defendant argues that:

"The prosecution's evidence fell short in three ways: it failed to demonstrate that Nacchio traded on the basis of inside information; that any undisclosed information in Nacchio's possession was material; or that Nacchio knew that information was material and intended to violate the law."

For background on the Nacchio case, see Nacchio Convicted on 19 Counts of Insider Trading here; Nacchio Sentenced to Six Years in Prison here; and Nacchio Granted Bail Pending Appeal here.

(esp)

October 9, 2007 in Prosecutions | Permalink | Comments (0) | TrackBack (0)

Monday, October 8, 2007

The Jamie Olis Story - The Next Round

The Jamie Olis Story has been one that needs to be followed.  From an initial draconian sentence, to a more modest term in prison, to watching those around him receive minimal sentences or fines -- this case has been a case to continue to draw interest - as it should.  The bottom line here has always been - if you risk the trial - you risk an outrageously high punishment.

But today there is a new dimension to the Jamie Olis story.  It comes in the form of a motion filed by Olis' new counsel, and is a Motion to Set Aside Jamie Olis' Conviction Pursuant to 28 U.S.C.§ 2255.  The 105 page motion, not including introductory material, presents the argument that "[t]he United States Attorney’s Office (“USAO”) acted purposefully to sabotage Olis’ ability to prepare and defend his case by blocking funding from his former employer, Dynegy, despite the fact that Dynegy was legally and contractually obligated to pay the funds." 

The KPMG related case also contested DOJ interference with the company's payment of individual attorney fees.  The Stein case brought to light DOJ practices in a deferred prosecution agreement.  The question is now whether Olis was deprived of his right to counsel and whether a court should examine this issue.  Olis, in his Memo "requests a hearing with evidence" and argues that "[t]he violation of Olis’ fundamental right to prepare and present his defense using funds lawfully available to him requires that the Court vacate Olis’ conviction and dismiss the charges against him with prejudice."

Memo - Download 2255_Olis_Memorandum_Final.pdf

See also - Tom Kirkendall's Houston ClearThinker's here; Larry Ribstein's Ideoblog here; Paul Davies - Wall Street Journal here; Mary Flood - Houston Chronicle here; John Porretto - Houston Chronicle (AP) here; Loren Steffy - Houston Chronicle here.

(esp)

October 8, 2007 in Sentencing | Permalink | Comments (0) | TrackBack (0)

Pardon Power

The American Constitution Society has on its website an issue brief written by Margaret Colgate Love, entitled, "Reinventing the President's Pardon Power."  A description of the piece states:

"[n]oting that public confidence in pardons has been justifiably diminished, Love urges that '[O]ur next president ought to identify the values pardon serves, define a clear role for it in the criminal justice system, and establish a system for administering the power that will maximize its potential for correcting injustice and encouraging reform.'”

(esp)

October 8, 2007 in News | Permalink | Comments (0) | TrackBack (0)

Sunday, October 7, 2007

Educator's Trial

Tom Kirkendall over at Houston's Clear Thinkers provides an update and analysis on the trial of former Texas Southern University President (see here). The final arguments in this case are set for today. Kirkendall notes that the accused elected not to take the stand, a move that often does not play well in white collar cases. Although all defendants have a right to remain silent, and although the prosecution must prove the case beyond a reasonable doubt, when the accused is a white collar defendant there is a risk involved in remaining silent. But sometimes, the risk in taking the witness stand can be greater.

(esp)

October 7, 2007 in Prosecutions | Permalink | Comments (0) | TrackBack (0)

Economist Pleads Guilty

Wall Street Jrl (AP) reports that "Economan Pleads Guilty" - see here.

(esp)

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

Two Attorneys Plead Guilty

A press release of the U.S. Attorneys Office of the Central District of California states that a "name partner and an attorney at one of the West Coast’s largest immigration law firms have pleaded guilty to charges related to the filing of fraudulent employment visa applications on behalf of foreign nationals, including some of the law firm’ s own workers."

Press Release -Download kaf_visa_fraud_partner_pleads.130.pdf

(esp)

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