October 27, 2007
Ryan Loses En Banc Request, But Gains Support in Dissent
Former Governor George Ryan (Illinois) lost his request for a rehearing en banc (here) in the Seventh Circuit Court of Appeals. But there was a strong three person dissent to the decision. The dissent by Judges Posner, Kanne and Williams includes the following language: "But harmlessness is not the test of reversible error when a cascade of errors turns a trial into a travesty." Whether this dissent will sway the U.S. Supreme Court to accept the case on a Petition for Certiorari, remains to be seen.
Spellissy Defense Files New Motion
Ray Reyes of the Tampa Tribune reports here on the defense filing a new motion in the Spellissy case. (see here for background on this case). According to the paper there is an allegation that the "government tampered with a defense witness by preventing that person from testifying on Spellissy's behalf." If true, this is a serious allegation. And if the tampering is unlawful, it could raise concerns about the evidence presented in the case and might also raise ethical issues. But as the defense should not be judged until all the evidence has been presented, so too should the prosecution first be allowed to respond to this serious allegation before it is determined whether there is merit to this claim. Some questions that need answering here are - when did the defense become aware of the conduct claimed here; was there an opportunity for the defense to be able to secure court assistance to compel the witness to testify; was the omission of this evidence harmful to the defendant's case?
BP Takes a $373 Million Hit
BP plc settled three government investigations by agreeing to pay a total of $373 million in fines, restitution, and civil penalties. The company pleaded guilty to a violation of the Clean Air Act, a subsidiary pleaded guilty to a violation of the Clean Water Act, and another subsidiary agreed to a deferred prosecution agreement on a charge of conspiracy to violate the Commodity Exchange Act (CEA). According to a Department of Justice press release (here), the payments include:
$50 million in criminal fines to be paid as part of an agreement to plead guilty in the Southern District of Texas to a one-count felony violation of the Clean Air Act. The agreement resulted from the prosecution of BP by the Department of Justice for a catastrophic explosion that occurred at the BP Texas City refinery on March 23, 2005, that killed 15 contract employees and injured more than 170 others;
$12 million in criminal fines, $4 million in payments to the National Fish and Wildlife Foundation, and $4 million in criminal restitution to the state of Alaska, as part of an agreement to plead guilty by British Petroleum Exploration (Alaska), Inc. (BPXA) to a violation of the Clean Water Act to resolve criminal liability relating to pipeline leaks of crude oil onto the tundra as well as a frozen lake in Alaska;
A criminal penalty of $100 million, a payment of $25 million to the U.S. Postal Inspection Consumer Fraud Fund, and restitution of approximately $53 million, plus a civil penalty of $125 million to the Commodity Futures Trading Commission, as part of an agreement to defer the prosecution of a one-count criminal information filed in the Northern District of Illinois charging BP America Inc. with conspiring to violate the Commodity Exchange Act and to commit mail fraud and wire fraud.
The deferred prosecution agreement calls for the appointment of a monitor for three years to oversee the company's compliance with its terms and to ensure no future violations of the CEA. In addition to the charges against BP, four former commodities traders at its BP America subsidiary were charged in a twenty-count indictment (here) with conspiracy, violations of the CEA, and wire fraud. According to the press release, the traders conspired
to manipulate and corner the TET propane market in February 2004, in violation of the Commodity Exchange Act, and to sell TET propane at an artificially inflated index price in violation of the federal mail and wire fraud statutes. The indictment further charges the defendants with substantive violations of the Commodity Exchange Act and the wire fraud statute. According to the proposed indictment, from Feb. 5, 2004, through March 15, 2004, the defendants allegedly agreed to manipulate the market for February 2004 TET propane.
October 26, 2007
Here Come the Lawyers to WellCare
The search of WellCare Health Plan's headquarters by, among others, FBI agents (earlier post here) triggered -- as expected -- an immediate response: let's hire lawyers! A press release (on Business Wire here) states that since the search and carting away of boxes of documents, the company has:
- Been in direct contact with its Board of Directors, including members of the audit committee;
- Committed to cooperating with the federal and state authorities involved in the investigation;
- Retained the law firms of King & Spalding and Greenburg [sic] Traurig to assist the Company with responding to the investigation;
- Engaged with the Company’s auditors, Deloitte & Touche LLP;
- Been in contact with key constituents, including state and federal regulators in each of the Company’s markets.
It's not clear why two national law firms have been retained, but maybe two -- or twenty counting all the partners and associates -- heads are better than one. WellCare's stock lost over 60% of its value the day following the search, showing the devastating effect a criminal investigation can have for a company's investors. While the scope of the investigation is not yet clear, any inquiry into possible healthcare fraud carries a serious danger of criminal and civil fines and penalties, and could even include exclusion from the Medicaid program if an extensive fraudulent scheme were uncovered. (ph)
McNulty Defending the McNulty Memo
Speaking as the keynote luncheon speaker at the ABA Second Annual Securities Fraud Institute, Former Deputy Attorney General Paul J. McNulty defended his DOJ McNulty Memo. Referencing Senator Specter's recent Wall Street Journal commentary titled, "A Question for Mr. Mukasey," McNulty was not happy having his efforts called a "swing and a miss." It's at least "a standup double" he said. And then McNulty proceeded to be on the offensive, taking on Senator Specter's proposed legislation.
McNulty may believe that companies will waive because it is in their best interest to do so, but there are still many folks out there who believe that it is important to make certain that DOJ attorneys are not making requests for attorney-client waivers and that the best way to accomplish this is via legislation. The ABA Section of Administrative Law and Regulatory Practice has a program today called, "Corporate Deferred Prosecution Agreements: Issues in Hybrid Enforcement," at the Press Club in DC. starting at 3:45 P.M. I am confident (I am one of the speakers) that there will be responses provided to McNulty's comments. The question will be whether the response(s) will send him back to dugout. Stay tuned.
ABA Second Annual Securities Fraud Institute - 23 Corporate Counsel Convictions
The opening session of the Second Annual Securities Fraud Institute provided "trends and expectations in securities fraud enforcement cases and criminal prosecutions" to a near filled large room. Moderator Tom Hanusik asked questions to Professor James Cox (Duke), Alice Fisher (DOJ), Hon. Michael G. Oxley (a father of SOX), and Linda Chatman Thomsen (SEC).
The opening question to Mike Oxley was - is SOX working? The former legislator discussed how SOX was passed in response to the public outcry of corporate scandals, with a purpose to restore investor confidence. He said that the Powers Report gave them the road-map to craft the legislation. And although he was very supportive of the legislation he crafted, he did state that there were "things I would have done differently." He did not elaborate on these items. But later in the program he did state that it is hard to imagine another Enron or Worldcom taking place.
Alice S. Fisher, Assistant Attorney General who heads the Criminal Division of DOJ, was quick to say that SOX is a "great law" and "we love it." She noted the better compliance programs and the real "robust programs" coming after the legislation. In speaking about new tools provided to DOJ, she said that last year it was 313 convictions, but with the new tools it is 672 convictions. She said that new tools "really changed behavior."
Linda Chatman Thomsen, Director of Enforcement at the SEC, also remarked on the new tools provided. She noted that four times they had used the freezing of extraordinary payments prior to an action being brought. She said that this helps in keep employees from pulling money from the company.
Fair Funds, a topic that will also be covered by a later panel in this program, was also discussed by Ms. Thomsen. She said they had collected 9 billion dollars and noted that they were getting better at distributing these funds. Hon. Mike Oxley noted that this provision was not in the House or Senate version, but that it came out of conference.
Professor James Cox, Duke Law School, provided commentary on several points including issues related to globalization.
The most shocking number heard by this blogger came from Alice Fisher who said that the Corporate Fraud Task Force had 23 convictions of corporate counsel.
Many other items were discussed at this opening panel, but it will be interesting to hear what defense counsel has to say about all of this as the program progresses. The ABA site for this program can be found here.
(esp) (w/ disclosure that she is later speaker at this conference)
Former CEO Charged With Insider Trading That Netted Over $185 Million
The former CEO of military armor supplier DHB Industries, now known as Point Blank Solutions, was arrested on a superseding indictment (available below) that charges him with insider trading involving proceeds of over $185 million from the sale of company stock in 2004. Also named as a defendant is the the former chief operating officer of the company, who was indicted initially back in August 2006. In addition to the insider trading, the indictment charges obstruction of justice, lying to company auditors and to the SEC, tax evasion, and accounting fraud involving undisclosed compensation and overstated inventory. According to a Wall Street Journal story (here), the diversion of company resources for personal benefits included:
more than $350,000 in expenses related to Mr. Brooks horse business; more than $36,000 expenses related to his son's Bar Mitvah; $11,420 for acupuncture treatments for his family members; $7,900 for a face lift for his wife; $10,000 for his children's summer camp; $122,000 for the purchase of iPods and digital cameras to give as gifts at his daughter's Bat Mitzvah; and $101,500 for the purchase of an armored vehicle for Mr. Brooks and his family members' personal use.
The party for his daughter was broadcast as part of MTV's "My Sweet Sixteen" series, a favorite in my house. The indictment also alleges that over $1 million of DHB money was used for family vacations, ranging from $100,000 for a trip to St. Johns to $3,200 on meals and merchandise at the Bellagio in Las Vegas. In addition to the criminal charges, the SEC filed a civil enforcement complaint (here) in the U.S. District Court for the Southern District of Florida. (ph)
October 25, 2007
WellCare's Headquarters Searched
The offices of WellCare Health Plans, Inc. in Tampa were searched by federal and state agents. The company issued a terse press release (here) that states, "Today federal and state officials executed a search warrant at our Tampa headquarters. We are cooperating with the authorities. Our number one priority is making sure that our members have access to needed care and services. Our essential services are operational and will remain uninterrupted." WellCare provides services to state Medicaid programs, with Florida the largest one, with over 350,000 beneficiaries. The search was conducted by FBI agents along with investigators from the Department of Health and Human Services as well as the state.
The use of a search warrant, while uncommon in white collar crime cases, is a tactic being used more frequently, particularly in healthcare fraud investigations. It is usually an indication that documents might not be available by subpoena, and there could be a concern that certain items will be destroyed or removed, such as a second set of financial records or documentation for certain off-books transactions. The government has to provide information to obtain the warrant, so there is probably an affidavit from an agent outlining the scope of the investigation and the potential violations. Whether the affidavit emerges any time soon remains to be seen, but execution of a search warrant shows that the government is serious about the case, which will get the attention of WellCare's board of directors. Some defense lawyers are going to be burning the midnight oil trying to figure out the company's status and potential targets of the investigation. A story in the Tampa Tribune (here) discusses the search. (ph)
UPDATE: A message from WellCare CEO Todd Farha is available here. He states that the company cannot provide additional details about the investigation at this time, and will do so "as appropriate." The stock is down approximately 50% as of 11:00 a.m. October 25.
Media Privilege Bill Advances
The grand jury investigations of I. Lewis Libby and Barry Bonds involved subpoenas to reporters for their communications with sources who had been promised confidentiality. The federal courts unfailingly found that the demand for information trumped the media's confidentiality claims, with reporters being threatened with civil contempt and jail for refusing to respond to the subpoenas. The House passed the "Free Flow of Information Act of 2007" (H.R. 2102 here) on October 16, and the Senate Judiciary Committee passed a similar bill on October 4 (S. 2035 here), to create a federal journalists privilege for communications with sources. Senator Patrick Leahy, the Judiciary Committee chairman, has had the House bill placed on the Senate calendar to expedite consideration of the two legislative proposals. According to a Judiciary Committee press release (here), the legislation would:
- Establish a federal qualified reporters’ privilege to protect and encourage the free flow of information between journalists and sources;
- Reconcile a reporter’s need to maintain confidentiality -- in order to ensure that sources will speak openly and freely -- with the public’s right to effective law enforcement and fair trials;
- Balance the public interest in combating crime and protecting national security and the public interest in ensuring a free and vibrant press by providing that a federal court can only force a journalist to reveal confidential source information when the information is truly essential or crucial to a case or investigation;
- Provide exceptions to the privilege for those situations where information sharing is critical.
Among the exceptions to the privilege in a criminal case is when the court finds that "the testimony or document sought is critical to the investigation or prosecution, or to the defense against the prosecution." The statute does not explain what constitutes "critical" testimony or documents. The use of that term rather than a more commonly used evidentiary term in criminal cases like "material" likely means that the courts will favor the privilege absent exceptional circumstances.
If the legislation passes, it will certainly make subpoenas to members of the media less common, if not almost extinct, because the threshold for obtaining the information will be so much greater that prosecutors may well not even want to pick the fight because it is an almost sure loser. Whether that result is good or bad remains to be seen, but the legislation is certainly something for journalists to cheer. (ph)
Who's Minding the Goya?
This one is not a white collar crime, at least not strictly, but the apparent ease with which it took place makes me wonder about how well valuable items are protected. The U.S. Attorney's Office for the District of New Jersey announced the indictment (here) of a defendant for violating 18 U.S.C. Sec. 668 for theft of an object of cultural heritage, Goya's oil painting "Children with a Cart." The theft of the 1778 painting made the FBI's Top Ten Art Crimes list (here) when it was taken on November 8, 2006, while being transported from the Toledo Museum of Art to the Guggenheim in New York for an exhibition of Spanish painters. A high tech theft, along the lines of It Takes a Thief? Well, not really, at least according to an FBI press release (here) announcing the painting's recovery almost two weeks after the theft. The release states, "The painting was stolen from a transport truck as it was parked overnight in a hotel parking lot in Stroudsburg, Pennsylvania." I hope it was at least padlocked in the lot, given that the painting is valued at over $1,000,000. The painting did make it to the Guggenheim for the exhibit, and is now back home in Toledo. (ph)
Repeat After Me: "If It Sounds Too Good to Be True . . . "
The SEC filed a civil fraud action that includes a temporary asset freeze for what is describes as a Ponzi scheme executed by Calypso Financial, LLC and related entities. The lure to purchase the notes was the promise of monthly returns of 4% to 15%, which works out to a compound annual rate of return of over 50% to an amount in excess of 200%. You can't get those types of returns from any legitimate investment, at least not on a regular basis. The SEC Litigation Release (here) describes the case:
The complaint alleges the defendants have obtained investments of at least $20 million from the fraudulent offering of notes issued by Calypso and the other six entities, all of which are controlled by Petersen. The defendants allegedly promised returns to investors of 4% to 15% a month ostensibly through investments in real estate. However, it is alleged that the defendants actually operated a Ponzi scheme in which returns paid to earlier investors were paid from funds invested by new investors.
It's not clear how much money was frozen by the court, but it is usually the case that any amount recovered will not come close to covering the investor losses, especially the late-comers to the party. (ph)
October 24, 2007
Former General Counsel Convicted of Insider Trading in His Company's Stock
The former general counsel for Amkor Technology, Inc. was convicted on securities fraud charges related to his trading in company stock (indictment here). According to a press release (here) issued by the U.S. Attorney's Office for the Eastern District of Pennsylvania:
Heron traded Amkor securities while in possession of material, non-public information including, among other things, the company’s financial condition, proposed mergers and/or acquisitions, and potential litigation exposure. He generally made his trades via the Internet using his office computer to access his online personal brokerage account. As a result of his illegal trades, Heron realized approximately $290,000 in gains and/or avoided losses.
The trades included buying put options on Amkor's stock as a bearish bet on the stock before the announcement of an earnings decline that caused a 32% drop in the share price. It's not clear whether the former GC tried to hide his trading by using a fictitious name on the account, and he placed the trades from his office computer, so it was easy to trace. This was not exactly the most sophisticated insider trading scheme even launched. The SEC has a pending civil injunctive action (here) alleging the same violations. (ph)
October 23, 2007
Selective Prosecution Hearing
What role has politics played in DOJ activity? The House Judiciary Subcommittees on Crime, Terrorism and Homeland Security and Commercial and Administrative Law held a hearing today on "Allegations of Selective Prosecution: The Erosion of Public Confidence in Our Federal Justice System." A key focus was on the extent that politics played in department decisions. For example, there was discussion of cases that were filed immediately prior to an election.
Former Attorney General Thornburgh, a Republican, spoke to how local state matters were being prosecuted in the federal system because of broad statutes like mail fraud. He expressed opposition to overreaching. He stated that the recent DOJ was 7 times more likely to prosecute Democrats then Republicans. And the witness following, Dennis C. Shields, provided statistics that supported the skewed prosecution statistics premised on political party.
J. Doug Jones, former US Attorney in Alabama, provided details of a prosecution in Alabama that was controlled by DOJ in D.C. In this regard, former Governor Siegelman's case was mentioned several times. Also noted was that 44 State Attorney Generals were questioning what happened in this case.
The testimony was damaging to our justice system as it was clear that politics in DOJ was playing a factor in prosecutions. The question will now be whether the next AG will restore confidence in the office and make certain that politics does not factor into the decision-making process.
A webcast of the hearing can be found here.
Settlement with BP - Is it Forthcoming
The Wall Street Jrl is reporting a forthcoming settlement with BP that would include a guilty plea and hefty fine. For details see here.
October 22, 2007
Selective Prosecution Hearings Today
The House Judiciary Subcommittees on Crime, Terrorism and Homeland Security and Commercial and Administrative Law will hold a hearing today on "Allegations of Selective Prosecution: The Erosion of Public Confidence in Our Federal Justice System." The hearing starts at 10:00 a.m. and the witnesses scheduled to appear are: Former Attorney General Dick Thornburgh, Former Alabama U.S. Attorney Doug Jones, Professor Donald C. Shields and Professor Emeritus, Department of Communication, University of Missouri.
The Walker Case
Harper's Magazine has a story on the Charles Walker case. This blog discussed the trial, sentencing, and post trial. Including his conviction of 127 counts after a trial that went from 8:00 a.m. to 7:00 p.m., seven days a week, including holidays and Sundays -and yes, even worked through Memorial Day weekend and on Memorial Day. It was a sharp contrast to another southern jury at that time, that is former CEO Scrushy's first trial that ended with a verdict of not guilty (see here). Walker received a sentence of ten years (see here). The 11th Circuit rejected the appellate arguments affirming the conviction of former Georgia State Senator Charles Walker, specifically rejecting defense arguments that “(1) during jury selection, the district court erroneously disallowed four of Walker’s peremptory strikes after finding a Batson violation; (2) honest services mail fraud was improperly charged in the indictment and not supported by sufficient evidence; (3) prosecuting Walker for mail fraud violates basic principles of federalism; and (4) various sentencing enhancements were improperly imposed by the district court.”
Harper's Magazine provides new items for consideration. The most fascinating is a 2004 letter to a highly respected white collar defense attorney from the Office of Professional Responsibility of DOJ. Although this letter does not directly discuss the Walker case, it discusses the actions of a particular U.S. Attorney. The article mentions a forthcoming magazine story of Professor Dershowitz discussing this case.
U.S. Attorney "Firings" - Even More
The ABA Law Journal News Now reports on what former U.S. Attorney Carol Lam of San Diego told the Stanford Lawyer. She argues for DOJ independence.
(esp)(w/ a hat tip to John Wesley Hall)
Responding to DOJ Investigations: "Toss Them Under the Bus"
When government investigators come knocking on a company's door to obtain information, it may not be of much comfort to the employees that their employer may be looking to "toss them under the bus," according to former U.S. Attorney Roscoe Howard, Jr. An article in the Fulton County Daily Report (here) discusses a presentation Howard, now a partner at Troutman Sanders, made in Atlanta to the local chapter of the Association of Corporate Counsel at a continuing legal education program. In discussing how to deal with a criminal investigation, Howard recommended that counsel become friendly with the investigators and prosecutors to learn the scope of the investigation and who the individual targets are, because "[y]our goal is to find out those individuals, separate them and if necessary toss them under the bus . . . The goal is to protect the company." Howard also makes a good point about separating out the compliance function from the general counsel's office. If the company's lawyer is also responsible for compliance, then that person can become invested in the decision and not look at it critically. He said, "If you ask me about my kids, I'm going to tell you they are beautiful and they are great people, but I'm invested in them. If your in-house counsel is also your compliance officer, he may say, 'Hell yeah, it's legal. I've looked at it.' You want somebody who isn't invested." Hewlett-Packard learned that lesson the hard way when its chief ethics officer was from its general counsel's office and oversaw the internal investigation that ultimately included pretexting to obtain private information from reporters and employees. (ph)
New York Lawyer Among Six Charged in $55 Million Securities Fraud
A partner in the New York office of Baker & McKenzie and five other defendants were charged with conspiracy, securities fraud, and money laundering that totaled $55 million, according to a nineteen-count indictment returned on August 30 but only unsealed on October 19 (available below). The case involves so-called PIPE transactions, which are private-investment-in-public-equity deals that allow unregistered stock to be acquired in publicly-traded companies at below market prices because they are a cheap source of capital for the issuer. The other defendants are three officers of the public companies, which have gone into bankruptcy, and two investors from Israel. According a press release issued by the U.S. Attorney's Office for the Eastern District of New York (here):
The indictment alleges that EDWARD and STEVEN NEWMAN, BROWN, and WEISBERG caused Xybernaut and Ramp, two publicly traded companies, to issue hundreds of millions of heavily discounted shares through private investments in public equity, or “PIPE” transactions, to dozens of offshore nominee entities created and secretly controlled by SALTSMAN and EITAN. In order to lock in profits, SALTSMAN and EITAN sold the shares “short” in advance of the PIPE transactions and later “covered” the short positions with the discounted stock.
The U.S. Attorney's Office noted that one of the defendants was arrested in London prior to the unsealing of the indictment, and another was arrested in Virginia. Another defendant is residing in Israel, and prosecutors will seek the extradition of the foreign defendants, while arrest warrants have been issued for two other defendants.
Baker & McKenzie announced that the partner had been placed on leave after the announcement of the indictment. A New York Law Journal story (here) discusses the indictment. (ph)
Misconduct Claim in Prosecution of Iowa State Senator
The prosecution of an Iowa state Senator on corruption charges has triggered a filing seeking dismissal of the indictment on the ground of prosecutorial misconduct. The trial is set to begin on October 29 on an indictment (here) charging a single violation of the Hobbs Act for extortion under color of official right related to an alleged demand for payment for home security systems in what the state Senator called a business deal that went sour. The defense motion (available below) argues that
the government has withheld exculpatory evidence, has provided deliberately false and misleading answers to discovery, has made false and misleading representations to the Court, has manipulated the Grand Jury process and stood silent in the face of testimony that the AUSA knew constituted perjury and did nothing to correct the record. In isolation, any one of these outrageous acts would warrant dismissal. Collectively, these actions mandate dismissal and additional sanctions to curb blatant prosecutorial abuse.
A copy of the correspondence between defense counsel and the prosecutors is also available below as exhibits to the motion to dismiss. In addition to seeking dismissal of the indictment, the defense asks for the postponement of the trial. (ph)