Wednesday, January 16, 2008
The Ninth Circuit overturned the fraud conviction of former Homestore CEO Stuart Wolff because the trial judge had a conflict of interest based on his ownership of shares in AOL. The unpublished opinion (available below) -- which may explain why the case did not get noticed initially when it was issued on January 14 -- found that the trial judge, Percy Anderson, should have been removed from the case because AOL was a party to Homestore's revenue inflation scheme alleged in the indictment. A number of Homestore executives pleaded guilty to inflating the company's revenue by engaging in round-trip transactions that gave the appearance of economic activity when in fact no real money was changing hands. Wolff was convicted of securities fraud, falsifying books and records, conspiracy, and insider trading, and was sentenced to fifteen years.
The recusal motion was not decided by Judge Anderson, but by another district court judge who determined that Anderson's financial interest was insufficient to influence him. The Ninth Circuit panel disagreed, holding that the involvement of AOL and its employees in the underlying scheme, which resulted in testimony at Wolff's trial from four AOL witnesses, was enough to require recusal. The result is automatic reversal of the conviction without any showing of prejudice by Wolff. I suspect the government may try to seek en banc review from the Ninth Circuit, and perhaps even certiorari from the Supreme Court. Judge Anderson's financial interest was not specified, and I suspect he owned only a small number of shares in the company, which at one time had a market capitalization of over $50 billion after the merger with Time-Warner. It will be interesting to see if an en banc panel will decide whether small-scale stock ownership in a large public company that is only indirectly involved in a case will be enough to require recusal by the trial judge. (ph)