Thursday, January 24, 2008

Houston Grand Jury Went Bad

The controversy over the indictment and subsequent dismissal of charges against a Texas Supreme Court Justice and his wife in Houston (see earlier post here) took another bizarre turn when it was discovered that the grand jury was without authority to act for over two months.  According to the Houston Chronicle (here), Harris County DA Chuck Rosenthal's office filed improper paperwork to extend the grand jury's term past its expiration in early November 2007, so all of its work, including the now-dismissed indictment, was for naught because its term had expired.  A grand jury only sits for a designated period, and once its term ends it must be disbanded.  The extension was supposed to be to complete a large mortgage fraud case in which indictments were returned, but those and others are now gone.  An assistant DA took the blame, but the conspiracy theorists out there are certainly wondering if there was something more sinister afoot.  Needless to say, the grand jury problem is black eye for the Harris County DA's office.

Meanwhile, over in federal court in Houston, DA Rosenthal is facing a contempt hearing related to his attempt to delete e-mails that were to be produced in a civil rights suit against the sheriff's office.  The inadvertent disclosure of the messages, some of which were a bit on the salacious side involving Rosenthal's assistant, were the start of a series of events that led to Rosenthal dropping his bid for re-election.  The plaintiff's attorney in the civil rights cases plans to call a number of witnesses related to the e-mail issue at a hearing set to begin on January 31, so the cascade of negative publicity for the DA probably won't end any time soon.  Another Houston Chronicle story (here) discusses this portion of the saga. (ph)

January 24, 2008 in Prosecutions | Permalink | Comments (0) | TrackBack (0)

Wednesday, January 23, 2008

Wilkes May Get Whacked

Brent Wilkes, the former owner of defense contractor ADCS, was convicted for paying bribes to former Congressman Randy (Duke) Cunningham to obtain contracts for his company.  The Presentence Report filed in the case recommends a 720-month sentence -- that would be sixty years for those who (like me) are a bit math challenged.  Wow!  That is by far the longest prison sentence I've ever seen recommended for a corruption defendant, and dwarfs the extensive sentences seen in corporate fraud cases, like those received by former CEOs Bernie Ebbers (25 years) and Jeffrey Skilling (24+ years).  Cunningham received a 100-month prison term, and Wilkes will definitely pay the price for going to trial if he receives anything close to the PSR recommendation.  Moreover, note that this is the Probation Office's recommendation in the PSR and not the position of the U.S. Attorney's Office, which can be expected -- despite the unseemliness of this approach -- to seek the highest potential sentence, thus fulfilling its role as an advocate.  Recommendations in the PSR usually carry great weight with the court, and even if U.S. District Judge Larry Burns does not accept the entire set of suggestions under the Sentencing Guidelines, I suspect Wilkes is looking at a sentence that may well put him in jail for much of the rest of his life.

How did the Probation Office get to this point?  The sentencing recommendation is discussed in a filing by Wilkes (available below).  Under the Guidelines, Sec. 2C1.1 governs bribery cases, and the starting point is an offense level of 18 because the bribe was paid to an elected official.  The bulk of the sentencing increase comes from the estimation of the gain from the bribe, which requires application of the fraud loss table of Sec. 2B1.1.  The PSR recommends a twenty-level enhancement, which means the gain to Wilkes and ADCS from the bribes was between $7 million and $20 million.  Throw in a two-level increase for obstruction of justice -- Wilkes testified at trial and was convicted on all counts by the jury, so there's a decent ground for this enhancement -- and another four levels for leadership role, and you've got the very top of the Guidelines (it only goes to 43) that calls for a life sentence

The sentencing was originally set for January 28, but the PSR did not arrive in time so Judge Burns has pushed it back to February 19, thus meeting the statutory 35-day period between receipt of the Report and the sentencing.  Wilkes' counsel, Mark Geragos, will have to take aim at the gain amount, and unless that figure is reduced substantially, Wilkes is looking at a sentence that could be greater than any we've seen to date in a federal white collar crime case.  In its response to the defense motion for a delay in sentencing, the government asked the district court to take Wilkes into custody on the original sentencing date because he is likely to receive a prison term and does not meet the requirements for bail pending appeal.  If Judge Burns does sentence Wilkes to a significant prison sentence, it would not surprise me if Wilkes was ordered to be taken into custody immediately because of the severity of the punishment and possible concerns about flight in light of the sentence.  (ph)

Download us_v_wilkes_motion_for_production_of_documents_jan_15_2008.pdf

January 23, 2008 in Corruption, Sentencing | Permalink | Comments (1) | TrackBack (0)

Tuesday, January 22, 2008

Post Stoneridge

Check out the Enron Related Cases Here-

WSJ - Jess Bravin & Mark H. Anderson, Justices Rebuff Enron Holders

Chicago Tribune (AP) - Supreme Court Refuses to Review Enron Investors' Lawsuit

But Stoneridge did have influence in another case, unrelated to Enron, as the Court in Avis Budget Group, Inc., et. al. v. Ca. State Teachers' Retirement granted a petition for a writ of certiorari vacating the judgment and remanding the case to the U.S. Court of Appeals for the 9th Circuit "for further consideration in light of" Stoneridge. (see here)

(esp)

January 22, 2008 in Enron | Permalink | Comments (0) | TrackBack (0)

Proportionality in Sentencing - Padilla versus Ebbers, Skilling, and McFarland

A federal judge in Miami sentenced Jose Padilla to 17 years and 4 months today.  (see WSJ here; Miami Herald here).   The judge decided to give a lesser sentence because of the harsh conditions previously experienced by Padilla in his prior designation as an "enemy combatant." This below guideline sentence was for "terrorism conspiracy charges." (see AP here)  For complete coverage of the sentencing see Professor Douglas Berman's Sentencing Law & Policy Blog here and here and Howard Bashman's How Appealing Blog here.

But the question that we need to examine from the eyes of one examining white collar sentences is whether this sentence is proportional.  Should Padilla receive a lesser sentence than Bernie Ebbers (25 years), Jeff Skilling (24 years) and Chalana McFarland (30 years)?  Should these three white collar offenders be sent to prison for a greater period than someone who commits a crime related to "terrorism conspiracy?"  Perhaps the problem here is not the length of the sentence that Padilla received, but the draconian sentence being given to first offenders who commit economic crimes. (See Podgor, Yale Pocket Part here). Is this proportional, and if not which sentence(s) should be modified?

(esp)

January 22, 2008 in Sentencing | Permalink | Comments (2) | TrackBack (1)

Monday, January 21, 2008

Honest Services Fraud Convictions Overturned

The First Circuit overturned the convictions of two former senior officers at Roger Williams Medical Center in Providence, Rhode Island, because the jury instructions allowed the honest services theory of mail fraud to roam a bit too far from the core of the statute.  The case highlights, once again, that honest services is among the most slippery of concepts in the federal criminal code, and any claim that it can be defined is a chimera.  The statute, Sec. 1346, says only that "the term 'scheme or artifice to defraud' includes a scheme or artifice to deprive another of the intangible right of honest services" but no where does it try to explain what that means.  Courts have struggled with it ever since Congress adopted the provision to overturn McNally because there is virtually no legislative history and the government has not been shy about using one of its most potent anti-corruption statutes in a variety of contexts.

The First Circuit decision, United States v. Urciuoli (available below), concerns the hiring of an influential Rhode Island state Senator, Joseph Celona, for what the government claimed was a sham job on behalf of a subsidiary of RWMC when in fact he was using his position to help out the hospital in the state Senate.  The government alleged three activities that aided the deprivation of honest services owed by Celona: influencing legislation to help RWMC, pressuring local mayors to use RWMC for ambulance services on so-called "rescue runs," and pressuring an insurance company to settle a dispute with the hospital favorably.  The First Circuit found the first activity clearly violative of the honest services fraud provision because it was a misuse of office of personal gain by Celona.  The third activity also can be the basis for a mail fraud conviction because Celona brought representatives of the insurer into his office and implied -- rather pointedly -- that things would not go well in the legislature if RWMC didn't receive a favorable resolution. 

The problem was the second activity, in which Celona had the mayors of local municipalities come into his office and urged them to follow the law by sending their ambulances to the hospital, even though he never disclosed his financial ties with RWMC.  The government called this the "cloak of office" misuse of public authority that constituted mail fraud.  The First Circuit described the weakness of this theory of honest services fraud:

The government says that a legislator's informal duties commonly extend to representing constituents with local officials and engaging in oversight functions and so to this extent should be regarded as official; but Celona's conduct falls in a borderland where analogies can easily be drawn both to public and private conduct and there is no indication that Celona invoked any purported oversight authority or threatened to use official powers in support of his advocacy. The government says the mayors can be affected by state legislation, but it did not show by context or threat that Celona sought deliberately to exploit this leverage.

Certainly his title and (possibly improper) use of senate letterhead assured him access and attention . . . ; but his position guaranteed that in any event and its invisible force would have existed even if he emphasized that he was present solely as a paid advocate. Indeed, even the legitimate work that Celona performed on behalf of [RWMC] traded in part on the reputation, network and influence that comes with political office. That much is an unavoidable result of Rhode Island's decision to retain a system of government in which legislators hold outside employment without very stringent restrictions.

The government's rationale for introducing this evidence is that having Celona advocating on behalf of the hospital worked to subtly -- or perhaps overtly -- put pressure on the mayors, who would want to curry favor with a powerful member of the state Senate.  But the First Circuit rejected this kind of "wink-and-a-nod" approach to honest services fraud as conduct that did not involve any misuse of office nor a clear violation of any state law prohibition that would take it beyond at most an arguable ethics violation.

While the government had two good theories and only one problematic one, the indictment and jury instructions did not distinguish among them, so that the jury simply convicted the defendants of mail fraud (and conspiracy to commit mail fraud).  Therefore, much like the convictions based in part on the private right of honest services theory in the Enron Nigerian Barge trial that were overturned in United States v. Brown, the presence of one bad theory taints the entire case and requires a new trial.  Whether the outcome will be any different remains to be seen, but the defendants will get a second bite at the apple. (ph)

Download us_v_urciuoli_first_circuit_opinion_jan_18_2008.pdf

January 21, 2008 in Corruption, Fraud, Judicial Opinions | Permalink | Comments (0) | TrackBack (1)

Student Loans to Study Abroad Programs

Attorney General Andrew Cuomo is not letting up on school-related investigations. His latest target appears to be summer abroad programs. Jonathan Glater at the New York Times reports in an article titled, "Investigation of Study Programs Widen" of recent schools receiving subpoenas. The focus is on whether there are perks related to these programs. Some thoughts:

  • There is an interesting aspect to this article in that one sees "a senior lawyer" in the office providing or confirming information. One does not - as of yet- see a press release on Cuomo's website. Should an attorney general be providing information to the public in the investigation stage?
  • And is it really necessary to issue subpoenas if the ultimate goal is to provide a code of conduct for study abroad programs.   
  • Should the investigators recognize that when dealing with foreign countries things might operate differently.  For example, even the Foreign Corrupt Practices Act (FCPA) recognizes that it is necessary to allow for payments that might be "lawful under the written laws and regulations of the foreign official's, political party's, party official's, or candidate's country;" and allows for "reasonable and bona fide expenditure(s), such as travel and lodging expenses."  And although we are not dealing with the FCPA statute here, it does present a thought process that might need to be considered when one operates outside this country.
  • And how far will this investigation go? Will he be looking at what top officials visit different programs (e.g., Supreme Court Justices visiting law school programs). 
  • And does the fact that nothing may be improper in all of this make a difference? 

Andrew Cuomo is certainly trying to set new ground, and it appears that one of his targets is the education world. 

(esp)

January 21, 2008 in Investigations | Permalink | Comments (1) | TrackBack (0)

Sunday, January 20, 2008

Lawyer Sentencings

Two lawyers received federal sentences this past week. The first, a former lawyer in the Western District of Louisiana entered a plea that will net him 41 months in prison.  A Press Release of the US Attorney's Office of the Western District of Louisiana states the attorney "pleaded guilty to one count of making false statements to a bank and one count of forging securities of private entities." The release states that:

"beginning in 2002 while practicing law in Lafayette, [the attorney] established attorney/client lines of credit at a local bank which he used to finance his personal injury lawsuits. [The attorney] was obligated to pay off the bank’s line of credit after receiving funds generated by settling civil cases. On numerous occasions, when settlement proceeds were received by [the attorney], instead of repaying the bank’s line of credit, he requested extensions of time with the local bank and gave false reasons as to why the extensions were needed. In some instances, [the attorney] never repaid the line of credit.

Further investigation revealed that in 2003, [the attorney] opened several business accounts at another local bank, including a trust account, checking and payroll checking account, and personal accounts. [The attorney] admitted to forging the settlement checks from insurance companies received for certain clients and depositing the proceeds into his account without the client’s knowledge or consent.

The attorney was allowed to report to prison.  See also ABA Jrl here; Daily Advertiser here.

The second attorney received a sentence of 6 1/2 years. The ABA Jrl states that the accused had pursued "baseless diet drug litigation on behalf of clients." See ABA Jrl here and Mississippi Sun Herald here.

(esp) (w/ a hat tip to John Wesley Hall)

January 20, 2008 in Sentencing | Permalink | Comments (0) | TrackBack (0)

More Money to Prosecute White Collar Crime

The Seattle Times (here) reports on the need for more money and agents for the prosecution of white collar crime in the Seattle area. With increased focus on terrorism, white collar crime investigations are often placed on the shelf.  The article discusses crimes needing recognition, such as cybercrime and identity theft.

(esp)

January 20, 2008 in Prosecutions | Permalink | Comments (0) | TrackBack (0)

Wesley Snipes Trial: A Week in Review

This past week was the first week of the Wesley Snipes trial.  The actor is being tried along with two other individuals on charges related to an alleged tax scheme. Because of the multiple number of people alleged to have participated in this conduct, the government is in part presenting this case through the conspiracy statute. Some key points so far:

  • Jury - Stephen Hudak of the Orlando Sentinel reported here that the jury pool was made up of 138 all-white jurors.  Caselaw is very clear that neither the prosecution nor the defense can strike jurors premised on race.  But when only one race is presented in the jury pool, the issue of improper strikes becomes moot.  And although Snipes loses the ability to challenge a prosecutor who might have tried to strike a juror based upon race, he probably strengthens his pre-trial claim that the venue could not provide him with a fair trial.  Because the court had denied his motion for a change of venue, the issue will only be one for him to argue if he is convicted, and it can be a tough appellate issue. Should he be convicted and this argument become necessary, the all-white pool presented here would enhance this argument. 
  • Venue - The jury pool also raises questions about the venue selected by the prosecution.  In conspiracy cases, prosecutors get to select venue premised on the place the alleged conspiracy was formed or where any alleged act occurred.  This prosecutorial power can be enormous when circuits vary on the law, as a prosecutor may seek to bring the charges in the jurisdiction with the most favorable position on an issue of importance to the government.  Although the prosecution has enormous prosecutorial power in selecting the venue, defendants do not have this same luxury. In this case, it is obvious that there was a choice of venue on the conspiracy charge as the Indictment states, "From in or about 1999 through the date of this Indictment, in Lake and Orange Counties in the Middle District of Florida and elsewhere,..." 
  • Opening Statements - see here and here.  Was Snipes a victim of tax schemers or was he a tax schemer - this may be a key question in the case (check out Scott Maxwell of the Orlando Sentinel's "Taking Names Blog").   And just how responsive was the IRS to questions by Snipes? (see here)
  • A Key Government Witness - The government presented Snipes' former tax adviser. (see here)  It is clear that this testimony was offered in an attempt to show that Snipes had "knowledge" of the illegality of his conduct. But whether Snipes had knowledge of the illegality of his conduct remains to be seen. When it comes time for determining what instructions will be given to the jury, the case of Cheek v. United States, 498 U.S. 192 (1991) may provide some support for Snipes. The Court in Cheek provides special treatment in tax cases "largely due to the complexity of the tax laws." 

For background on the indictment and pretrial motions see here and here.

(esp)

January 20, 2008 in Celebrities, Prosecutions, Tax | Permalink | Comments (0) | TrackBack (1)

Saturday, January 19, 2008

Saturday Wrap-Up

Maybe it's the post-New Year rush, but the pace of white collar crime stories has picked up noticeably since January 1, so much so that your intrepid bloggers can't keep up with everything.  So here's a sampling of developments this past week that will keep us -- and more importantly, the defense bar and prosecutors -- busy in the near future.

  • An "Invitation" From Congress: The House Oversight and Government Reform Committee sent out letters (available here) to baseball players Roger Clemens, Andy Pettitte, and Chuck Knoblauch, along with their purported steroids and HGH enablers, Brian McNamee and Kirk Radomski, to appear at a hearing on February 13.  Is it really an invitation, as the letter states, or would a polite declination draw a subpoena?  Each letter also asks the witness to meet with the Committee staff for a deposition or transcribed interview, either of which could trigger criminal charges under Sec. 1001 if the person lied.  Only Knoblauch is not represented by counsel, and the reason for his invitation has been something of a mystery, at least to him.
  • Another Athlete Pleads to Lying About Steroid Use: Add former NFL All-Pro defensive lineman Dana Stubblefield to the list of athletes to plead guilty to lying to federal agents in connection to receiving steroids from Balco (Bay Area Laboratory Co-Operative).  Stubblefield entered a guilty plea to one count of violating Sec. 1001 for denying, among other things, that he used "the clear" and that he never dealt with Balco.  Stubblefield was a member of the Oakland Raiders at the time, and is the first football player charged in connection with the Balco investigation.  An ESPN.com story (here) by Mark Fainaru-Wada, co-author of the famous book about Barry Bonds Game of Shadows, discusses the guilty plea.  The guilty plea does not bode well for Houston Astros shortstop Miguel Tejada, who is now the target of an FBI preliminary investigation for making allegedly false statements to investigators from the House Oversight Committee regarding steroid use by Rafael Palmeiro -- is anyone starting to spot a trend here?
  • Representative Jefferson On the Hot Seat: Representative William Jefferson testified at a hearing on motions to suppress evidence about the treatment he received from FBI agents executing a search warrant at his New Orleans home during which they found, among other things, $90,000 in cash in a freezer.  The Congressman has asked the district court to suppress his statements to agents because they did not give him Miranda warnings, and so his testimony focused on facts showing that he was in custody at the time even though the interview took place in his home.  Thus, Representative Jefferson regaled the courtroom with the statement from one agent demanding "Where is my ******* money?" and how another agent followed him into the bathroom during the early morning execution of the warrant.  He is also asking the court to prohibit the government from using approximately 1,700 pages of records seized during the raid as falling outside the scope of the warrant.  Suppression motions are difficult to win, and this is the rare white collar case in which Miranda is an issue.  Interestingly, what Representative Jefferson is not trying to suppress is the $90,000 from the freezer, which was part of a $100,000 payment made to him with money supplied by the FBI, and hence traceable.  That strikes me as fairly damaging evidence, but corruption cases can take odd twists so there may be a plausible explanation for putting the money on ice.  A Washington Post story (here) discusses Representative Jefferson's testimony -- and for those who were wondering, his statements at the hearing cannot be used by the government in its case-in-chief, and he did not waive his Fifth Amendment right not to testify at the trial scheduled to begin in late February.
  • A Former Congressman Charged With Aiding a Terror Group: Former Congressman Mark Siljander was named in a superseding indictment in Kansas City on charges of money laundering, conspiracy, and obstruction of justice related to his work as a lobbyist on behalf of the Islamic American Relief Agency, which has been identified as a terrorist organization.  Siljander is alleged to have lied to a grand jury and federal agents regarding his work on behalf of the organization, which was seeking to be removed from the list of terror-related entities.  An L.A. Times story (here) discusses the indictment.
  • Maybe Everything Is Weirder in Texas, Too: Well, at least when you're talking about the DA's office Houston, things can get a bit strange.  We've discussed the travails of Harris County DA Chuck Rosenthal, whose salacious (and in one instance racist) e-mails came to light recently in a federal civil rights case that caused him to drop his re-election bid.  Now, a Harris County grand jury indicted a member of the Texas Supreme Court and his wife on charges related to an alleged arson at their home, and the next day the DA's office announced it was dropping the charges because there was insufficient evidence to support them.  A runaway grand jury or possible favoritism from the DA's office?  While the prosecutors did not want to move forward with the case, the grand jury did, so it voted its indictment despite the lack of support from the DA's office.  Now, the Justice wants two of the grand jurors sanctioned for violating the secrecy rules that cover grand jury proceedings for discussing the case and claiming that DA Rosenthal's refusal to prosecute was politically motivated.  An investigation of the investigators?  A Houston Chronicle story (here) discusses the latest developments, and my friends in Austin are more than a little bemused by all the happenings in Houston.

Whew!!  And those were not the biggest stories, either, but each is certainly worthy of some attention.  Our little slice of the world remains an interesting place reside. (ph)

January 19, 2008 in Congress, Investigations, Prosecutions | Permalink | Comments (1) | TrackBack (0)

Friday, January 18, 2008

The Next Battle in the Scruggs Case

A recently unsealed defense motion (available below) filed by Dickie Scruggs and two other attorneys at his firm gives some insight into where the defense is headed in their prosecution for attempting to offer a bribe to a Mississippi state court judge.  The motion seeks a continuance in the trial, which the district court granted by postponing its start until March 31.  The defense also discusses pre-trial motions is plans to bring, the most important being one to suppress all evidence from the wiretaps and search of Scruggs' law office, on the ground that the government misled the magistrate in its warrant applications.  The defense is asking for a Franks hearing, and outlines what it claims are inconsistent and exculpatory statements that were not disclosed in the applications.  Here, the defense points to statements by the state court judge indicating that he wanted it made clear that the bribe was from Scruggs, and some backpedaling by Tim Balducci, who was the person dealing directly with the judge.  It is difficult to win a Franks claim because the requirement for issuing the warrant is probable cause, and the fact that there may be modestly exculpatory evidence that was not included in the government's presentation is usually not sufficient to suppress evidence. 

While I doubt the Franks motion has much chance of success, the filing shows the approach the defense is likely to take at trial.  Not only will Balducci be vilified, because he was the key go-between and is cooperating, but also the state court judge will be the target, and indirectly the government for creating the appearance of a crime.  The defense will point to the judge trying to bait Balducci into implicating Scruggs, and perhaps even suggest that the "bribe" was all a figment of the judge's imagination, and that he manipulated poor, weak-willed Tim Balducci into paying money to curry favor on behalf of an unknowing Dickie Scruggs.  This is not an entrapment defense per se, but more an outrageous government conduct claim that portrays the prosecutors as creating a crime where there was none.  Whether it flies or not remains to be seen, but it is clearly the type of defense that would appeal to those who like conspiracy theories.  The defense has also said it will seek dismissal of the indictment for the government's outrageous conduct, but that type of motion succeeds about as often as the Detroit Lions make the NFL playoffs.

With the trial not set to start for two months, an interesting question is whether Sidney Backstrom, another defendant from the Scruggs firm along with Zach Scruggs, Dickie's son, will make a deal with prosecutors.  The government will put as much pressure as it can on him to cooperate because to this point all the prosecutors have is testimony from people on the outside of the Scruggs firm -- Balducci and his former partner, Steven Patterson, who entered a guilty plea recently.  The key to the three defendants' position is a united front in which they can claim ignorance of the alleged bribe and paint a picture of an overzealous judge who created the appearance of Scruggs' involvement.  Backstrom is the most likely person to plead guilty at this point simply because I can't see Dickie Scruggs admitting to a crime -- absent a "smoking gun" document -- nor Zach Scruggs rolling over on his father.  I am only speculating about this, but these types of corruption cases rely on the testimony of insiders, and Backstrom seems like the best candidate at this point.  (ph)

Download us_v_scruggs_motion_for_continuance_jan_11_2008.pdf

January 18, 2008 in Corruption | Permalink | Comments (1) | TrackBack (0)

Will Siemens Have the Mother of All Monitorships?

With each passing quarter the internal investigation at Siemens AG keeps delivering more bad news about the company's overseas bribes.  A case that started with accusations of a few payments in one division has now stretched across what seems like the entire company, with total payments exceeding $2 billion, by far the largest FCPA case seen to date.  The latest letter (here) from Debevoise & Plimpton, the law firm conducting the internal investigation, now indicates that the wrongdoing stretches into Siemens' executive suite, specifically members of its Managing Board.  The firm states, "Since November 28, 2007, we have obtained significant new information and developed very substantial leads from participants in Siemens' amnesty program, as well as other sources, regarding topics relevant to our investigation.  In particular, certain of this new information pertains to the conduct and knowledge of a number of individuals who have served on the Managing Board during the past several years." [italics added]  That is certainly bad news for a company that tried to downplay the bribery problems and insisted, at least to this point, that the payments were a localized issue that did not implicate senior managers.  That line of defense is now pretty much over.

Under German corporate law, there are two Boards at a company.  The Managing Board is responsible for the day-to-day management of the enterprise, the equivalent of the senior managers in a U.S. company.  At Siemens, there are eight members of the Managing Board, including CEO Peter Löscher, and they are responsible for the different operating units.  Above them is the Supervisory Board, which has oversight responsibility for the company and appoints (or dismisses) the members of the Managing Board.  This is the equivalent of the board of directors at a U.S. company, although only half the Supervisory Board members are elected by the shareholders, while the other half represent employees, many of whom are members of unions.  That is quite different from the board of an American company, which is elected only by shareholders and the members are usually picked by management to stand for election.

Siemens has already settled an investigation by local German prosecutors, and the SEC and Department of Justice are conducting FCPA investigations.  The latest revelations will make settling the case more difficult, and the involvement of senior management will require that any deferred prosecution agreement include a monitor with wide-ranging responsibilities.  Siemens had almost €87 billion in sales in 2007, and has nearly 475,000 employees in every major country and region in the world.  The scope of the overseas bribery will require a monitor to go into almost every part of the operation, and given the extensive sales in countries like China, where corruption is endemic, it could take years for an outside agency to assess Siemens' compliance with a DPA.

I suspect the Debevoise investigation has already cost Siemens upwards of $50 million, and quite possibly more as it expands -- the letter states that "significant new information continues to be developed on virtually a daily basis."  The monitorship could well cost it over $250 million.  There has been quite a bit of controversy lately over the appointment of monitors in cases settled by DPAs  (see Washington Post story here), and much has been made of the estimated cost of former Attorney General John Ashcroft's monitorship for Zimmer Holdings that will cost the company between $28 million and $52 million.  That case is fairly straightforward, involving illicit payments to doctors to use the company's devices in replacement surgeries.  Indeed, it's not clear how Ashcroft can charge that much for a fairly simple monitorship, but if that's the going rate, Siemens will easily cost ten times as much, and possibly even more. 

The Department of Justice has been formulating guidelines for the appointment of monitors to regularize the process and remove any appearance of impropriety from positions that can be quite lucrative.  The Siemens monitorship will be the big prize, so let's hope that a program is in place for the appointment of the inevitable outside monitor.  And look for Siemens to create a hefty reserve to settle the case, because I suspect the federal government will be looking for a sizable fine and appointment of a long-term monitor to police the global enterprise. (ph) 

January 18, 2008 in FCPA, Investigations | Permalink | Comments (0) | TrackBack (0)

Thursday, January 17, 2008

Yet another Brief in the KPMG Case

We have been collecting the briefs in the KPMG related case - Stein, et. al. see here, here, and here, and now have a new one to add to the collection.  The brief of Appellee Ritchee is one of the longer separate briefs, although like the others it joins the main brief on many of the arguments.  This brief focuses on the appellee's "Sixth Amendment right to be represented by counsel of his choice."  Appellee states that "[c]ontrary to the government’s argument, the validity of the district court’s ruling does not turn on whether the government 'coerced' KPMG’s decision. The district court found that the USAO deliberately caused the deprivation of Ritchie’s constitutional right."

This brief also refutes the government use of forfeiture literature to support its position.  The appellee response here is:

"Finally, the government’s reliance on Supreme Court forfeiture decisions for the proposition that the USAO may lawfully block funding that would otherwise be available to the defense is misplaced. The forfeiture cases are inapposite. Those decisions hold only that a criminal defendant has no Sixth Amendment right to use forfeitable assets — that is, property that belongs to the government — to fund his defense. The forfeiture cases do not hold that the government may obstruct a defendant’s access to lawfully available resources; and other cases make clear that such interference with the freedom to retain counsel of one’s choice violates the Sixth Amendment."

But perhaps the most ironic aspect of the brief is found near the beginning when the appellee argues waiver by the government.  One so often finds the government claiming that defense counsel has waived an issue on appeal by failing to properly preserve the issue or properly present it in the opening brief.  With the tables turned in this case - and the government being on the defensive - it will be fascinating to see how the government handles a claim of waiver when they are in the shoes of an appellant, a position the government seldom holds on appeal.  The waiver claim is:

"The government does not directly challenge the district court’s finding that the USAO violated Ritchie’s Sixth Amendment rights by depriving him of the ability to proceed with counsel of his choice. Indeed, the government’s brief scarcely mentions that ground for dismissal. Issues not sufficiently argued in an appellant’s opening brief are deemed waived."

Download ritchie_final_brief_11108.pdf

(esp)

January 17, 2008 in KPMG | Permalink | Comments (0) | TrackBack (0)

Reyes Receives 21-Month Sentence for Options Backdating

Former Brocade Communications CEO Gregory Reyes received a 21-month prison term from U.S. District Judge Charles Breyer for his convictions related to backdating options grants at the company.  I expected the Judge to impose a lower sentence, perhaps dropping all the way down to home confinement or a split sentence, but he said that this was a case about "honesty" and that ""[e]very time Gregory Reyes falsified documents over a three-year period, he was lying . . . Corporate fraud is not a victimless crime. If widespread, it can affect the overall economy, employment, and, as we've seen with Enron, people's life savings."  Once the dreaded "E" word is invoked, no mercy will be shown.  A San Francisco Chronicle story (here) discusses the sentencing.

While Reyes got the benefit of Judge Breyer's decision to find no provable loss from the backdating (see earlier post here), thus sparing him a sentence that could have easily exceeded ten years, he did feel the court's wrath when the Judge bumped up the sentence two levels under the Sentencing Guidelines for obstruction of justice.  The basis for that decision was a statement in an affidavit Reyes filed in support of his co-defendant Stephanie Jensen's severance motion.  Reyes' key statement was, "I told Ms. Jensen that the options grant dates were the dates that I made the granting decisions.  Options were priced at the fair market value on the grant dates."  The district court granted the motion, relying on Reyes' affidavit that in a joint trial this exculpatory evidence would not come out.  At his trial, however, Reyes' counsel conceded that the options were priced based on "look backs" -- the defense didn't dare call it backdating -- and not as described in the affidavit, which was sealed. 

Judge Breyer obviously was perturbed by the affidavit because it led him to conduct two trials rather than one, and he announced that the sentence would have been fifteen months rather than the twenty-one months he imposed because of the obstruction.  The Judge and Reyes' counsel did not get along all that well during trial, and I suspect Judge Breyer felt he had been played by the defense.  One wonders why counsel allowed Reyes to file an affidavit with that kind of statement when the trial strategy on the selection of the options prices was not entirely consistent with it.  It may be the defense did not really focus on what was in the affidavit, which was filed well before Reyes' trial, when it made the final trial preparations, or perhaps did not think the Judge would grant the severance so the affidavit would not be of any significance.  Regardless of the reason, Reyes is sure to challenge the obstruction determination, no doubt arguing that his statement was not untruthful and did not exclude the "look backs" his lawyer conceded at trial.  The enhancement resulted in a 40% increase in the prison time, so the decision to file the affidavit turned out to be a costly one, at least for Reyes.

Reyes will remain free on bond pending appeal, with Judge Breyer acknowledging that because this was the first options backdating case to go to trial there were novel legal issues involved.  It is unlikely Reyes will have to report to prison for at least a year, assuming the conviction is upheld.  The sentence certainly sends a message to other defendants charged in backdating cases that they are likely to face prison terms if convicted.  And, unlike the Reyes case, other prosecutions involve defendants who benefited from the backdating, so the loss (or gain) issue will not be resolved quite as favorably as it was in this case if there is a conviction. (ph)

January 17, 2008 in Securities, Sentencing | Permalink | Comments (1) | TrackBack (0)

Another Brief in the KPMG Appeal

We've been collecting the briefs in the government's appeal of the dismissal of charges against the thirteen former KPMG partners and employees by U.S. District Judge Lewis Kaplan.  Below is the appellee brief filed on behalf of Larry DeLap (tax partner), Steven Gremminger (associate general counsel), Carol Warley (tax partner), and Philip Wiesner (tax partner).  Similar to the briefs of the other appellees in the case, they argue that the government overstepped its bounds when it pressured KPMG into not paying the attorney's fees for former employees and partners:

The essential question here is whether the government could constitutionally use the threat of indictment to prevent one of the nation’s largest accounting firms from paying the legal fees of several of its professional employees, not because there would have been anything improper about the payment of the fees but simply because it served the government’s purposes to reduce or eliminate the ability of those employees to retain independent counsel and to defend themselves. The net effect of the prosecution’s conduct was to deprive the 13 defendant-appellees of their ability to defend against their indictment in what is claimed to be the largest tax fraud prosecution in the nation’s history.

The case for these four will be argued by John S. Martin, Jr., former U.S. Attorney for the Southern District of New York (he was Rudy Giuliani's predecessor) and former U.S. District Court Judge for thirteen years before leaving the bench in 2003 to set up shop with another former U.S. Attorney, Otto Obermaier.  The heavy hitters are appearing in this case, which pretty much guarantees the Second Circuit will have the best legal arguments available in deciding the case. (ph)

Download us_v_stein_appelle_brief_delap_et_al_jan_11_2007.pdf

January 17, 2008 in KPMG | Permalink | Comments (0) | TrackBack (0)

Wednesday, January 16, 2008

Homestore CEO's Conviction Overturned

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)

Download us_v_wolff_ninth_circuit_opinion_jan_14_2008.pdf

January 16, 2008 in Fraud, Judicial Opinions | Permalink | Comments (0) | TrackBack (0)

Is There a Cop on the Securities Beat?

The Supreme Court's decision in Stoneridge Investment Partners, LLC v. Scientific-Atlanta, Inc. (see earlier post here) to reject "scheme liability" as a means to apply Rule 10b-5 to those who provide some assistance in a company's allegedly fraudulent scheme was hardly a surprise.  The tone for the Court's view of the scope of the private right of action for securities fraud was set in its earlier decision in Central Bank v. First Interstate Bank, 511 U.S. 164 (1994), which eliminated aiding and abetting liability and limited Rule 10b-5 actions to those who qualify as so-called "primary violators."  After Central Bank, third parties who assist a securities fraud, most importantly accountants and lawyers, cannot be sued unless they participated directly in the misstatement or omission, which effectively requires proof that they disseminated the false statements or omitted material information from a disclosure.  The Private Securities Litigation Reform Act (PSLRA), adopted the following year as part of the "Contract With America" agenda advanced by the newly-elected Republican majority in Congress, restored aiding and abetting liability in SEC actions but did not extend it to private suits.  As such, it was easy for the Supreme Court to reject "scheme liability" that was little more than a back-door way to impose liability on those who would not otherwise meet the requirements to be a primary violator. 

In the last section of the opinion, the majority discounts the idea that denying "scheme liability" effectively makes Rule 10b-5, the primary anti-fraud provision of the federal securities laws, unenforceable.  The Court stated, "Secondary actors are subject to criminal penalties, and civil enforcement by the SEC.  The enforcement power is not toothless." (Italics added).  Is there a cop on the securities beat to ensure that fraudulent schemes do not occur?  If enforcement is to be entrusted largely to the government, then the answer may well be that there is a shortfall in policing the public securities markets.  As far as criminal enforcement is concerned, securities cases remain fairly uncommon, despite the rash of CEO prosecutions and insider trading cases seen the past few years.  Indeed, there has been a consistent clamor that federal prosecutors are "criminalizing ordinary business decisions" by using the criminal laws against corporate officers for conduct that is claimed to be at best a civil regulatory violation.  Securities fraud cases are difficult to win because of the problem of proving the requisite intent and the time-consuming nature of the investigations.  Criminal prosecution is a necessary weapon to police the capital markets, but is hardly the most effective -- or efficient -- tool because of the costs involved and the limited number of cases that can be pursued.

Surely, then, the SEC can keep the markets honest and safe for investors, can't it?  The answer there is a resounding "maybe, but not as much as you might think."  To start with, the Commission's budget in FY2007 was $882 million, and it has a total of about 3,500 employees spread across four divisions, eighteen functional offices, and eleven regional offices (see SEC 2007 Annual Report here).  That's not a lot of people, and it is not like all, or even most, of them are devoted to enforcing the securities laws.  In considering the size of the SEC's annual budget, consider what is being spent in Iraq to fight the war there.  In FY2007, according to Congressional Budget Office testimony (here), the government spent $113 billion, and since 2003 a total of $368 billion.  What is spent in three days in Iraq is about the SEC's total annual budget, and what has been spent to date on the war probably exceeds the total expenditure on financial regulation by the federal government over the last 100 years.  My point is not that one is more important than the other, but that an independent agency viewed as the primary enforcement mechanism for the capital markets operating with a comparatively puny budget and only a few thousand employees (who leave the agency at a clip of about 8.5% a year) is not exactly the toothy enforcer the Supreme Court may be envisioning.

The amount of capital available for investment in United States is staggering in comparison to the size of the SEC, and the securities markets are undergoing a significant transformation.  The public markets trade in the trillions of dollars daily, while mutual funds regulated by the SEC control over $10 trillion in assets.  Add to that the $14 trillion held by pension funds and an addition $1 trillion+ by hedge funds -- which always have the moniker "lightly regulated" placed in front of them -- and you have massive accumulations of capital that are invested in a wide range of markets subject to varying degrees of SEC oversight.  My colleague, Steven Davidoff, argues persuasively that the SEC has not responded to the development of new securities markets, for example those in derivatives, and that the individual investor focus of the law may be out dated.  His article, Paradigm Shift: Federal Securities Regulation in the New Millennium (available on SSRN here), asserts that "Congress and the SEC are politically unlikely to rework the entirety of securities regulation to reflect [the new capital markets paradigm].  That is, until a new scandal inevitably arises."  When the scandal comes, will the SEC be overwhelmed, so that enforcement may be viewed as "toothless"?

Stoneridge Investment Partners was a correct application of the law in light of Central Bank, and makes sense from an economic point of view because private litigation is hardly an efficient means to regulate the markets.  But the SEC may not be up to the task either, not because it is inept or bumbling, but because it is simply overwhelmed by the changes in the marketplace it is charged with regulating and underfunded in its monitoring role.  In that sense, then, Stoneridge Investment Partners may effectively insulate those who help other companies cut corners and skirt near the edge of the securities laws because there need not be any real fear of enforcement of the anti-fraud provisions, at least as to those who are not primary violators.  Private litigation is not a substitute for the "cop on the beat," but is may be misguided to assert that there is a cop out there when the agency given that job does not have the tools to regulate and enforce the law effectively.  One of the great strengths of the capital markets in the United States has been the strong enforcement mentality that gives it credibility, and it is fair to ask whether that view will continue. (ph)

Addendum - See also Robert Barnes & Carrie Johnson, Corporate Fraud Lawsuits Restricted.

January 16, 2008 in Judicial Opinions, Securities | Permalink | Comments (0) | TrackBack (0)

Oh Great, Another Player Investigated for Lying About Steroids

The Congressional hearing on steroid use in baseball played out largely as expected with Representatives beating up on Commissioner Bud Selig and union head Donald Fehr.  The session began with a bit of a surprise, though, when House Oversight and Government Reform Committee chairman Henry Waxman announced that he and the ranking Republican, Representative Tom Davis, sent a letter (available below) to the Department of Justice asking for an investigation of a player for possibly lying to Committee investigators.  The object of the referral is Miguel Tejada, a former American League MVP who was recently traded from the Baltimore Orioles to the Houston Astros.  Tejada was interviewed by the Committee when it investigated one of his teammates, Rafael Palmeiro, who famously testified in the first round of steroid hearings in March 2005 by asserting that he had never used steroids.  A few months later, Palmeiro tested positive for steroids, and claimed that he might have gotten them when Tejada gave him an injection of what he thought was vitamin B-12 -- interestingly enough, the very same thing Roger Clemens admitted Brian McNamee injected him with, but not steroids.  To investigate whether Palmeiro committed perjury, Committee investigators interviewed Tejada and had the following exchange:

Committee Staff: And you, I believe, testified to this earlier, but I just want to make sure, have you ever taken a steroid before?

Mr. Tejada: No.

Committee Staff: Have you ever taken any illegal performance-enhancing drugs?

Mr. Tejada: No.

Committee Staff: Have you ever taken Andro or any other steroid precursor?

Mr. Tejada: No.

Unfortunately, Tejada is mentioned in the Mitchell Report as having received from an Oakland A's teammate testosterone or Deca-Durabolin, as well as human growth hormone, and the Report includes copies of three checks from Tejada to his teammate.  In asking for an investigation, the two Congressmen assert, "In light of the conflicts between the statements that Mr. Tejada provided to the Committee and the evidence in Senator Mitchell's report, we ask the Justice Department to investigate whether Mr. Tejada made knowingly false material statements to the Committee in violation of 18 U.S.C. 1001." 

Is another investigation of an athlete for lying about steroid use really necessary?  In addition of the perjury prosecution of Barry Bonds, we've seen former Olympic gold medalist Marion Jones given a six-month prison term for making false statements to federal agents, one of which concerned steroids received from Balco.  Unlike those criminal investigations, however, this one involved a Congressional Committee interview on a topic that was at best peripheral to any real legislative business.  The March 2005 steroids hearing that featured a number of players, including the ill-fated non-assertion of the Fifth Amendment by Mark McGwire, was for the most part the typical grandstanding seen on Capitol Hill.  No legislation emerged from hearing, and nothing of any real importance from a policy perspective occurred in the testimony of the players.  Now, the interview of an individual (Tejada) on issues that were at best peripheral to an unimportant -- albeit stupid -- witness (Palmeiro) may become the basis for a federal criminal prosecution. 

I generally make it a point not to beat the "waste of government resources" drum about a criminal investigation for false statements because I think telling the government the truth is important.  But at some point you have to wonder whether every contradiction needs to be the subject of a separate federal investigation.  Simply making a public statement at the hearing, that it appears Tejada was less than completely truthful, may well have been sufficient to accomplish whatever purpose Chairman Waxman and Representative Davis had in mind when they began the hearing by announcing their letter to the Department of Justice.  Unfortunately, don't think that the upcoming hearings in February with Clemens and McNamee will be any less of a circus. (ph)

Download oversight_government_reform_committee_tejada_letter_jan_15_2008.pdf

January 16, 2008 in Investigations, Obstruction | Permalink | Comments (0) | TrackBack (0)

Tuesday, January 15, 2008

Another Brief of An Appellee in the KPMG Related Case

In this post  one finds the main brief of appellees and the Hastings appellee brief in the Stein, et. al. case.  These briefs support the court's dismissal of the government's case against individual defendant's related to KPMG. Below is the brief of appellee Eischeid.  This appellee presents specific facts in support of a claim against the government's conduct in securing cooperation to the detriment of this appellee. Appellee states, "[t]he Government's conduct in this case is, and has been 'conscience-shocking,' downright dishonest and mean-spirited." 

Brief of Eischeid - 

Download 20904_arkin.pdf

(esp) 

January 15, 2008 in KPMG | Permalink | Comments (0) | TrackBack (0)

Supreme Court Rules in Stoneridge Case

The Supreme Court ruled in the case of Stoneridge Investment Partners, LLC v. Scientific-Atlanta, Inc. et. al, and there were no surprises in this 5-3 decision (Breyer not participating). The Court finds that "the implied right of action does not reach the customer/supplier companies because the investors did not rely upon their statements or representations."  In the decision, the Court reaffirms its holding in Central Bank of Denver, N.A. v. First Interstate Bank of Denver, N.A..

This case again reminds us that private causes of action are different from criminal actions.The Court states:

"Secondary actors are subject to criminal penalties, see, e.g., 15 U. S. C. §78ff, and civil enforcement by the SEC, see, e.g., §78t(e). The enforcement power is not toothless. Since September 30, 2002, SEC enforcement actions have collected over $10 billion in disgorgement and penalties, much of it for distribution to injured investors. See SEC, 2007 Performance and Accountability Report, p. 26, http://www.sec.gov/about/secpar2007.shtml (as visited Jan. 2, 2008, and available in Clerk of Court’s case file).And in this case both parties agree that criminal penalties are a strong deterrent. See Brief for Respondents 48;Reply Brief for Petitioner 17. In addition some state securities laws permit state authorities to seek fines and restitution from aiders and abettors. See, e.g., Del. Code Ann., Tit. 6, §7325 (2005). All secondary actors, further-more, are not necessarily immune from private suit. The securities statutes provide an express private right of action against accountants and underwriters in certain circumstances, see 15 U. S. C. §77k, and the implied right of action in §10(b) continues to cover secondary actors who commit primary violations. Central Bank, supra, at 191. Here respondents were acting in concert with Charter in the ordinary course as suppliers and, as matters then evolved in the not so ordinary course, as customers. Unconventional as the arrangement was, it took place in the marketplace for goods and services, not in the investment sphere. Charter was free to do as it chose in preparing its books, conferring with its auditor, and preparing and then issuing its financial statements. In these circumstances the investors cannot be said to have relied upon any of respondents’ deceptive acts in the decision to purchase or sell securities; and as the requisite reliance cannot be shown, respondents have no liability to petitioner under the implied right of action. This conclusion is consistent with the narrow dimensions we must give to a right of action Congress did not authorize when it first enacted the statute and did not expand when it revisited the law."

It is important for the Court and Congress to distinguish the ability of private actors to bring actions under generic statutes.  Although prosecutors do not always act wisely in using their prosecutorial discretion, their oversight is important when there are criminal implications.  Civil litigants do not have the same ability to pick those cases that serve the public good as they represent individual clients.  Thus, it is important for Congress and the Court to place added restrictions on the use of these statutes when it involves civil litigants.

See also Scotus Blog here

(esp)

January 15, 2008 in Judicial Opinions, Securities | Permalink | Comments (0) | TrackBack (0)