Thursday, June 26, 2008
The 11th Circuit Court of Appeals denied Richard Scrushy's motion for bail pending appeal. His co-defendant former Alabama Governor Don Siegelman had been granted bail. Scrushy argued that Siegelman's release warranted review of his claim for bond pending appeal. The court, however, ruled that Scrushy had failed to prove the preliminary step to obtain bail in that he failed to demonstrate "by clear and convincing evidence that he is unlikely to flee if he is released pending resolution of this appeal."
Order -Download scrushyorder.pdf
A DOJ Press Release reports that "[m]ajor international airlines–Socit Air France (Air France), Cathay Pacific Airways Limited (Cathay), Koninklijke Luchtvaart Maatschappij N.V. (KLM Royal Dutch Airlines), Martinair Holland N.V. (Martinair), and SAS Cargo Group A/S (SAS)– have agreed to each plead guilty and pay criminal fines totaling $504 million for participating in a multi–year conspiracy to fix prices for air cargo rates. . . . " Of the $504 million in fines, Air France-KLM, which now operates under common ownership by a single holding company, has agreed to pay a $350 million criminal fine, the second highest fine ever levied in a criminal antitrust prosecution."
Wednesday, June 25, 2008
Twenty (20) days following the oral argument, the 7th Circuit in an opinion authored by Hon. Posner affirmed Conrad Black's conviction ( Opinion - Download conrad_black.pdf ). The trial lasted four months, and Conrad Black was sentenced in December 2007. The opinion is 16 pages long and the last sentence of it states: "[t]he defendants raise some other points in their 161 pages of briefs, but none that has sufficient merit to require discussion."
The court examines both 1341's money element and 1346's honest services provision. To get a sense of the opinion, here's a paragraph:
"They are making a no harm-no foul argument, and such arguments usually fare badly in criminal cases. Suppose your employer owes you $100 but balks at paying, so you help yourself to the money from the cash register. That is theft, e.g., State v. Winston, 295 S.E.2d 46, 51 (W. Va. 1982); Edwards v. State, 181 N.W.2d 383, 387-88 (Wis. 1970); State v. Self, 713 P.2d 142, 144 (Wash. App. 1986), even though if the employer really owes you the money you have not harmed him. You are punishable because you are not entitled to take the law into your own hands. Harmlessness is rarely a defense to a criminal charge; if you embezzle money from your employer and replace it (with interest!) before the embezzlement is detected, you still are guilty of embezzlement."
The court rejects materiality being needed for obstruction. With regard to the ostrich defense, the ostrich is a clear winner, as the court states:
"The first is whether an "ostrich" instruction should have been given. The reference of course is to the legend that ostriches when frightened bury their head in the sand. It is pure legend and a canard on a very distinguished bird. Zoological Society of San Diego, Birds: Ostrich, www.sandiegozoo.org/animalbytes/t-ostrich.html (visited June 12, 2008) ("When an ostrich senses danger and cannot run away, it flops to the ground and remains still, with its head and neck flat on the ground in front of it. Because the head and neck are lightly colored, they blend in with the color of the soil. From a distance, it just looks like the ostrich has buried its head in the sand, because only the body is visible"). It is too late, however, to correct this injustice."
The court, however, rejects defendant Conrad Black's argument on this issue.
What Others say:
Chicago Tribune here
Wall Street Jrl Blog here
Abha Bhattarai, NYTimes, Sentences Reduced for Adelphia Founder and Son
Ashby Jones, WSJ Blog, A Rigas Reprieve: Father and Son Receive Lighter Sentences
Curt Anderson, Yahoo News (AP) - Abramoff's ex-partner
These articles are yet additional support that cooperation brings enormous benefits. You pay the price if you risk trial and lose.
The Report titled an Investigation of Allegations of Politicized Hiring in the Department of Justice Honors Program and Summer Law Intern Program presents a review of appalling conduct occurring with respect to DOJ hiring practices. There is no excuse for hiring civil servants based upon politics. Yet the Report provides ample evidence that this is what occurred in DOJ. The Report states " based on the results of our data analysis, we found that Honors program candidates whose applications reflected liberal affiliations were deselected at more than three times the rate (55 percent) of candidates whose applications reflected conservative affiliations (18 percent) and more than twice the rate of candidates whose applications reflected neutral affiliations (23 percent)." The Report in its conclusion states that "[t]he evidence in our investigation -- including the documentary evidence, the testimony of witnesses, and the analysis of the applications of candidates who were selected for interviews and who were deselected by the 2006 Screening Committee -- supports the conclusion that political or ideological affiliations were used to deselect candidates from the Honors Program and from SLIP (Summer Law Intern Program)."
Kudos go to the Office of the Inspector General and OPR for issuing this Report. But it is not enough. It is clear that DOJ did not have a proper compliance program in place, and still has insufficient measures to assure that conduct such as this will not happen again. It is also clear that an independent body needs to examine what has happened here and make recommendations as to how best to proceed.
The bottom line is that DOJ needs a better compliance program - yes, an "effective program" like they require of others. And there needs to be oversight to make certain this never happens again. It is ironic that the department that requires others, namely corporations, to have appropriate compliance programs in place, failed to have one that would meet their own criteria.
AG Mukasey's assurance of - it's wrong and I'll change - is not enough. He stated that he "accept[s], and have directed the implementation, of all of those recommendations" in the Report. (See AG Mukaseys' comment here) But would such a response be sufficient if this was a corporation that had failed to abide by the law? Wouldn't they be asking for the appointment of a monitor? And what would the fine be, even if they did give a deferred prosecution agreement?
And is the statement of "no more politics" sufficient. Should there not be a review of those who secured jobs via this appointment process to see if they were the most qualified? Should there not be contact made with those who were deprived of the jobs because of this hiring practice to see if they would like to be a part of DOJ? It is pretty frightening to think that the department that will monitor elections has been compromised and continues to be compromised by political hiring practices. More needs to be done here to rectify these past practices.
What Others Are Saying:
Carrie Johnson, Washington Post - here (noted previously)
Dan Slater, WSJ - here
Eric Lichtblau, NYTimes here -
Tuesday, June 24, 2008
Guest Blogger Professor Peter Henning (Wayne State Law School & Blog Editor Emeritus):
Two former Bear Stearns hedge fund managers were paraded in handcuffs through Brooklyn while the FBI touted charges against 406 defendants for mortgage fraud. This must mean that those to blame for all the problems caused by declining home prices and mortgage foreclosures are finally being called to account – right? Unfortunately, it is only a crime to lie to the government, so don’t believe everything you hear about efforts to find a few scapegoats for the current economic problems in the housing market.
On June 19, Ralph Cioffi and Matthew Tannin were arrested at their homes and brought to Brooklyn to take part in an unseemly perp walk before a media throng hungry to give a picture for all that is wrong with the economy. At the same time, an FBI press release linked those charges to the inartfully named Operation Malicious Mortgage that has resulted in 144 mortgage fraud cases since March 1. These two events have absolutely nothing to do with one another, other than the fact that the government chose to announce them together, but it provides an opportunity for prosecutors to tout the "cop on the beat."
The indictment of Cioffi and Tannin at best is only coincidentally related problems in the mortgage market. The two hedge funds they manages into oblivion were heavily invested in securities tied to the subprime mortgage market, but that just happened to be the vehicle they chose – the could just as easily have invested in junk bonds or natural gas futures (think Amaranth Advisors and its $6 billion meltdown). The charges against them allege conspiracy, securities and wire fraud for what they told their customers, not what was done with the underlying securities.
The charges under Rule 10b-5 and the wire fraud statute (18 U.S.C. § 1343) require the government to prove more than just dissembling. Fraud is a type of larceny, so the defendants have to make misstatements or omit to disclose information to gain something from their victims. A false hope that the hedge funds would pull through, no matter how misguided, can be a defense to a fraud charge. Showing that Cioffi and Tannin were of two minds, or conflicted about where the market was headed, does not mean that their statements to investors were part of a fraudulent scheme.
As a Wall Street fraud case, the charges seem a bit thin to me. Hedge fund managers are essentially salesmen, touting their wares in much the same way that the man on the used car lot has a great deal for you. Tannin is accused of telling investors that he was investing more in the hedge funds when in fact he did not. When the car salesman tells you his daughter drives the same car and he wouldn’t put her in a shoddy vehicle, do you actually believe him? Perhaps credulity among the so-called sophisticated investors in hedge funds is higher than the caveat emptor every used car buyer must possess.
The indictment brings us interesting tidbits, like the vodka toast before Cioffi warned Tannin and others not to discuss the funds’ difficulties. Speaking of toast, Tannin wrote in an e-mail that "the subprime market is toast" yet only three days later said nothing of the sort to investors on a conference call. The fact that Wall Street salesmen talked out of both sides of their mouths is nothing new. Didn’t former Bear Stearns CEO Alan Schwartz go on CNBC a few days before the firm’s collapse and say he was not aware of any imminent threat to its liquidity?(see here) Whether Cioffi and Tannin are guilty of fraud remains to be seen.
Cioffi’s withdrawal of $2 million from one of the funds gives an economic motive that is otherwise missing from the alleged scheme. However, withdrawing your own money is not the type of theft one expects to see in a fraud case. The case against Cioffi and Tannin essentially charges them with crossing the line between aggressive salesmanship and fraud, but where is that line? Hedge fund managers whose assets are struggling had better be careful about what the do – and don’t – say lest they too be accused of defrauding investors who lose money. And, of course, be careful what you write in an e-mail.
Operation Malicious Mortgage, on the other hand, involves the classic type of fraud we’re used to seeing. [Personal aside: Who thinks up these stupid names? I’ve never heard of a mortgage being malicious, even if it does come back to bite you one day.] But the victims are not, for the most part, those who are suffering from foreclosures or underwater mortgages with ballooning principal balances. Instead, they are the banks, commercial lenders, and other creditors who got taken in scams involving false documentation and inflated appraisals for the most part.
There is an old adage that every generation thinks they discovered sex, and the same seems to be the case in the current mortgage fraud crackdown – this not a new type of crime. Does anyone remember the Savings & Loan Crisis, when the collapse of the real estate market brought to the surface any number of lending abuses? The fact that scam artists took advantage of the housing price bubble should not come as a startling revelation, and charging 406 defendants in a three-month period is a nice start but nothing to trumpet from the rooftops.
Mortgage-related fraud is a serious problem, in much the same way that insurance fraud and shoplifting causes all of us to pay higher prices. The FBI’s assertion in a press release that Operation Malicious Mortgage will help "to combat the threat mortgage fraud poses to the U.S. housing industry and worldwide credit markets" is more than a bit overblown. Even the billion dollar loss caused by the alleged mortgage frauds is surely just a drop in the bucket in the international credit markets.
Cioffi and Tannin risk becoming the poster children for a perceived crackdown on abuses in the mortgage markets, but the charges against them have virtually nothing to do with increased foreclosures and declining economic prospects for a number of Americans. Operation Malicious Mortgage shows the government’s concern with a type of fraud that raises the cost of home mortgages, but it will not make the lives of people who are losing their homes any better. But maybe we can all sleep a bit better at night knowing the cop is on the beat, ready to arrest corporate executives and parade them in handcuffs. Maybe.
DOJ Hiring Practices - Carrie Johnson, Washington Post, Report Says Partisanship Reigned in Justice Department Hiring Program
Plea in Options Backdating - "Dr. Henry Samueli, the co-founder and former chief technical officer of Broadcom, Inc., pleaded guilty . . . to making a false statement in testimony before the Securities and Exchange Commission relating to that agency’s investigation into options backdating at the Irvine-based technology company." His "plea agreement calls for a sentence of five years probation, a $250,000 criminal fine, and the payment of $12 million to the United States for making a false statement to the SEC." DOJ Press Release - Download broadcom_samueli_plea.086.pdf ; See also LaTimes - E. Scott Reckard and Christopher Goffard, Broadcom co-founder Samueli pleads guilty in stock options fraud case
El Paso Corruption Investigation - DOJ Press Release reporting on a guilty plea to conspiracy to defraud in El Paso County, Texas. This is part of an ongoing corruption Investigation in El Paso. The individual admitted that "he conspired with others to pay cash money to an elected member of the El Paso County Commissioner's Court to secure their support and vote for contracts between the County and various vendors seeking to do business with the County."
Criminal Investigation Leads to Bankruptcy - Sean P. Murphy and Jonathan Saltzman, Boston.com (Globe) - Accused Big Deal Firm Files for Ch. 11 - facing US Charges, seeks financial shield
I attended the first day of the ABA sponsored 2nd Annual National Institute on Cyberlaw today. The two hour panel discussion was a general overview of cyberlaw essentials. The panel discussed some hot issues such as the difference between identity theft and identity fraud, problems with using biometrics for identification or authorization, data mining, and how the government uses data brokers to aggregate information that it would not otherwise be able to use for criminal prosecutions.
The panel discussed the reasons for the large amount of identity theft in the U.S. The main reason is the use of the same information to identify someone and to authorize that person's access to private information. Everyone agreed that identity should be determined by one piece of information while another piece of information that is a shared secret between the user and the information holder should be used to allow access.
One audience member asked why companies should not have fiduciary duties to customers whose personal information they hold. One answer was that some states are mandating that companies notify customers when there is a security breach and customers' personal information is compromised. Fiduciary duties would have to be legislated, though.
Data brokers are companies that have compiled information gathered from various public records, such as criminal, property, and drivers' license records, then aggregated the data into a single piece of comprehensive information about a person. The government can buy the information, and this information apparently does not have the same Fourth Amendment protection as information the government collects itself.
There was also a short discussion about the National Security Agency and how limited public knowledge is about this agency, and about digital forensic science.
Monday, June 23, 2008
Alex Bunin, Federal Public Defender from the Northern District of New York has produced an incredible document, a document he has been updating since 1995, that provides by categories reversals of federal convictions from U.S. Courts of Appeal and the United States Supreme Court. Some white collar cases are included, such as cases with charges of money laundering, fraud, RICO, false statements, and perjury.
The document (updated version) - Download federal_convictions_reversed_6.08.pdf
Sunday, June 22, 2008
A letter signed by 33 former United States Attorneys was sent to Senator Leahy, chair of the Judiciary Committee, asking that he support S. 186, the Attorney-Client Privilege Protection Act. The letter states that "[t]his bill is crucial to stemming the Department of Justice’s widespread practices and policies that pressure businesses to waive the attorney-client privilege in return for avoiding a harsher charging decision." It further states:
"The attorney-client privilege, the oldest of the evidentiary privileges, is a cornerstone of our justice system. The Department of Justice must end the practice of demanding that an organization place its employees in legal jeopardy in return for leniency. The time has come to pass legislation that protects the existing rights of individual employees and business organizations. As Chairman of the Senate Judiciary Committee, you are in the position to ensure this legislation is given proper consideration. The Department of Justice has failed to make necessary changes. Therefore, we respectfully ask you to support S. 186, the Attorney Client Privilege Protection Act of 2007, and take appropriate action to bring it to the floor of the Senate."
Addendum - See WSJ Blog here.
A DOJ Press Release reports on the Cincinnati packaged-ice manufacturer, The Home City Ice Company (Home City Ice), pleading guilty to a one-count information under the Sherman Act, charging the company with conspiracy. (The Plea Agreement). The press release states that "Home City Ice and co-conspirators carried out the conspiracy by:
- Participating in meetings and conversations to discuss packaged-ice customers and territories in southeastern Michigan and the Detroit metropolitan area;
- Agreeing during those meetings and conversations to allocate packaged-ice customers and territories in southeastern Michigan and the Detroit metropolitan area;
- Exchanging information during those meetings and conversations, for the purpose of monitoring and enforcing adherence to the agreements to allocate customers and territories in southeastern Michigan and the Detroit metropolitan area; and
- Refraining from competing for packaged-ice customers and territories that were so allocated."
The Agreement has a cooperation section that calls for the company to cooperate with the government. In this regard, the Agreement also provides for a reduction of the fine if the cooperation is satisfactory to them. It states:
"If the United States determines that the defendant has provided substantial assistance in any investigation or prosecution, and has otherwise fully complied with all of the terms of this Plea Agreement, it will file a motion, pursuant to U.S.S.G. §8C4.1, advising the sentencing judge of all relevant facts pertaining to that determination and requesting the Court to impose a fine departing from the lower end of the guideline range of $24 million to $48 million in light of the factors set forth in U.S.S.G. §8C4.1(b)(1)-(3). The defendant acknowledges that the decision whether it has provided substantial assistance in any investigation or prosecution is within the sole discretion of the United States. It is understood that, should the United States determine that the defendant has not provided substantial assistance in any investigation or prosecution, or should the United States determine that the defendant has violated any provision of this Plea Agreement, such a determination will release the United States from any obligation to file a motion pursuant to U.S.S.G. §8C4.1, but will not entitle the defendant to withdraw its guilty plea once it has been entered. The defendant further understands that, whether or not the United States files a motion pursuant to U.S.S.G. §8C4.1, the sentence to be imposed on it remains within the sole discretion of the sentencing judge."
This case may be the start of more-to-come as there is "an ongoing investigation into the packaged-ice industry."