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)

Sentencing Reyes -- Are Attorney's Fees Subject to Restitution?

Former Brocade Communications CEO Gregory Reyes will be sentenced by U.S. District Court Judge Charles Breyer on January16 for his role in backdating options at the company.  There are the usual Federal Sentencing Guidelines issues in the case, including the government's request for an obstruction of justice enhancement based on Reyes' affidavit in support of a severance motion filed by his co-defendant, Brocade's former human resources manager, who was also convicted in a separate trial.  The argument is pretty thin for the enhancement, and I doubt Judge Breyer will buy it.  Under the now-advisory Guidelines, the Probation Office appears to have recommended an Offense Level of 15, comprised of a base offense level of 7 plus two four-level enhancements for leadership role and Reyes' position as CEO of a publicly-traded company at the time of the offense.  That would put the sentencing range at 18-24 months.  Reyes' sentencing memorandum (available below) argues for a below-Guidelines sentence on a variety of grounds, including extraordinary family circumstances that are redacted from his filing and the fact that Judge Breyer earlier determined there was no calculable loss from the violations (see earlier post here).  His attorneys have asked for a below-Guidelines sentence, recommending a short period of confinement in a half-way house and then home detention along with a term of community service, including a proposed project with the Boys & Girls Club.  The government recommends a sentence of 30-33 months, based on adding in sentencing enhancements for sophisticated means, which Judge Breyer earlier rejected, and obstruction.  The Probation Office also recommends a fine of over $17 million, which prosecutors want bumped up to over $40 million; not surprisingly, Reyes' counsel argues for no fine.  I suspect Judge Breyer will impose a substantial fine, given Reyes' economic means, and go to the low end of the Guidelines at a minimum.  It would not surprise me if he imposed a below-Guidelines sentence, perhaps a split term with a period in an FCI and then home confinement -- the ol' double-nickel (five in and five on the house).

The most interesting argument by the government is not on the sentencing but a proposal that Judge Breyer require Reyes to repay most of the cost of the attorney's fees Brocade has incurred for its employees, including Reyes, under indemnification agreements and its corporate by-laws.  As detailed in a letter from the company's counsel, Cooley Godward (available below), Brocade has paid over $64 million to date in attorney's fees from the criminal and SEC cases, along with shareholder derivative lawsuits spawned by the backdating.  The largest amount of attorney's fees is for Reyes, at $46.7 million, with another $7.1 million for his co-defendant in the criminal case, $3.7 million for a co-defendant in the SEC case, and the rest for various officers and directors caught up in the investigation.  The government asserts that Reyes should be liable for at least $57 million of the attorney's fees.

The government's argument for restitution is that Brocade would not have suffered these costs if Reyes had not backdated the options, and that the corporation is the victim of his offenses.  The government also argues that Reyes should pay the $28 million it has cost Brocade for the internal investigations and defending itself in the various cases, the $7 million fine paid to settle the SEC action, and the $3.3 million paid for taxes for its employees whose options were backdated in violation of certain IRC provisions. 

The Victims and Witnesses Protection Act (VWPA) provides that the court "“shall order restitution to each victim in the full amount of each victim’s losses as determined by the court . . . ."  18 U.S.C. Sec. 3664(f)(1)(A).  Are attorney's fees paid by a corporation pursuant to a contractual agreement or corporate by-law a "loss" that is subject to the VWPA, particularly for costs incurred by other officers and directors in the course of the investigation?  As first blush, the term "loss" usually is understood to mean the amount directly attributable to the crime and not consequential damages, but that term does not necessarily preclude including the effects of one's crime on a corporate enterprise.  The problem with the government's argument is that the company agreed to pay the defense costs regardless of whether Reyes committed a criminal act.  The indemnification agreement (available below) is a broad contractual arrangement that is not conditioned on an officer avoiding a criminal conviction, and the company can even commit to paying a fine on behalf of an officer or director.  Brocade made the agreements with its people as a matter of its own choice, and it seems contradictory to say that it can now recover costs from Reyes through the VWPA that it would not get back under the contract. 

Indemnification agreements are common in the corporate world, and indeed I doubt any publicly-traded corporation does not have provisions similar to Brocade's in its by-laws.  While the payment of attorney's fees for an officer convicted of a crime while acting on the company's behalf seems incongruous -- why should the company pay for the lawyer of an officer who engaged in misconduct on the company's time -- as a matter of corporate and contract law broad indemnification agreements are fully accepted (and enforced) by courts, particularly the Delaware courts that handle so many corporate cases.  I doubt Judge Breyer will order Reyes to repay the attorney's fees, leaving it to Brocade to try to get them back under its contract, if that's possible, rather than using the VWPA as a back-door means of negating indemnification.

The government's disclosure does give us a rare inside look at the cost of paying for lawyers for various corporate officials caught up in a large-scale investigation.  Needless to say, the amounts are significant, and I would not be surprised if the final tally for the legal fees hits $100 million when you include the charges for counsel to the board and in the internal investigations.  We can add Reyes' $46 million in fees to the list of totals in corporate prosecutions, such as the estimated $75 million spent by Jeffrey Skilling.  And that total continues to grow, because the appellate process will add to the cost of defending Reyes. (ph)

Download us_v_reyes_defendant_sentencing_memo_jan_10_2008.pdf

Download us_v_reyes_government_sentencing_memo_jan_10_2008.pdf

Download brocade_attorneys_fees_letter_jan_10_2008.pdf

Download brocade_reyes_indemnification_agreement.pdf

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

Anticipated Settlement With Sigue Corp?

There have been reports of a forthcoming settlement with California's Sigue Corp., a money-services business. The terms of any forthcoming deferred prosecution agreement, however, remain to be seen. (Damian Paletta of the Wall Street Jrl has the amount and some terms of the alleged agreement see here).  It would seem unlikely that the agreement would include a waiver of attorney-client privilege, as this government practice has recently been extremely controversial. (see here and here)

Also to be seen would be any possible aftermath resulting from the government and a money services business reaching an agreement. Many deferred prosecutions agreements include company cooperation which can serve as a prelude to future criminal prosecutions against individuals.

See  also PR Newswire here.

Read About Sigue Corporation's Anti-Money Laundering Compliance Efforts here

(esp)

January 15, 2008 in Settlement | Permalink | Comments (1) | TrackBack (0)

Monday, January 14, 2008

The Attorney Merry-Go-Round In the Scruggs Cases

I discussed in an earlier post (here) that you "Can't Tell the Attorneys in the Scruggs Case Without a Scorecard" because of all the shuffling of counsel in the case.  The latest round of plea agreements down in Mississippi sheds a little light on why there was such a flurry of activity on January 9, when lawyers from The Langston Firm who represented Dickie Scruggs dropped out of the case and he tried to add new counsel, Kenneth Coghlan, who had earlier represented a co-defendant, Steven Patterson.  Meanwhile, Dickie's son Zach, a co-defendant, terminated his attorney, Anthony Farese, who attempted to withdraw.  The smoke has now cleared a bit on the counsel issue as Dickie's former lawyer, Joseph Langston, entered into a plea agreement for conspiracy to pay a bribe to a Mississippi state court judge in a case involving a fee dispute between Dickie and two former partners -- what a shock, because this is the same basic transaction alleged in Dickie's current indictment in Mississippi.  The plea agreement (available below) is dated January 7, 2008, and was sealed, but obviously it required Langston to withdraw from representing Dickie because he is named in the criminal information as a coconpirator despite not being charged . . . yet.

Just to make things even more complicated, Langston's attorney is Farese, who was also representing Zach.  Both Langston and Zach filed conflict waivers (available below), but it would be a bit difficult to represent a defendant's son in one case and a lawyer who states that the father paid a bribe in a similar case.  Even if there's no risk of disclosure of confidential information, it just doesn't engender the kind of trust necessary between a lawyer and client, so Farese's motion to withdraw as Zach's attorney was essentially a foregone conclusion.  According to filings in the case, Zach is now being represented by Todd Graves from Missouri.  In case that name sounds familiar, Graves was the U.S. Attorney for the Western District of Missouri who became the "eighth" fired U.S. Attorney in 2006 when it came out ther he too had been removed for political reasons by Alberto Gonzales' Justice Department.  Odd how the streams have crossed in this case (for the Ghostbusters fans out there).

Dickie's attempt to hire Coghlan could be problematic because of the second plea agreement (available below) in the case, this time by co-defendant Patterson to the conspiracy charge.  Given the prior representation of a co-defendant, it will be hard for the judge to allow Coghlan to appear on Dickie's behalf in the case because of the potential (or actual) conflict of interest.  Courts are generally loath to allow one lawyer to represent a current defendant after previously representing another one now cooperating in the case and likely to testify against the current client -- that's just playing with fire.  Patterson had been a partner of Tim Balducci, who dealt with the judge who was to receive the bribe, and filings in the case indicate that the government has a number of taped conversations between Balducci and Patterson.  Patterson will likely be the next person vilified by the defense, but his plea could give the prosecutors a big boost because he can support Balducci's testimony.  Like Balducci, Patterson can receive a 5K1.1 motion for a lower sentence based on his cooperation, so the first line of attack is clear -- the "deal with the devil" argument.  The remaining defendants in this case are all from the Scruggs law firm, so to this point the government's witnesses remain on the outside.   

Things seem to come in bunches in Mississippi, and the trial is currently set to start on February 25.  With the Patterson guilty plea and the arrival of Graves to represent Zach, don't be surprised to see the defense move to push the trial back. (ph)

Download us_v_langston_plea_agreement_jan_7_2007.pdf

Download us_v_langston_criminal_information_jan_7_2008.pdf

Download us_v_langston_waiver_of_conflict_of_interest_langston.pdf

Download us_v_langston_waiver_of_conflict_of_interest_scruggs.pdf

Download us_v_patterson_plea_agreement_jan_10_2008.pdf

January 14, 2008 in Corruption, Defense Counsel | Permalink | Comments (0) | TrackBack (0)

Sunday, January 13, 2008

Wesley Snipes Trial Opens Today

The Wesley Snipes tax trial starts today, and it sounds like the trial will be opening with many watching.  Tom Krause of The Tampa Tribune had two articles yesterday: Ocala Rejects 'Prejudice' and Snipes Was Asking Questions, Not Scheming IRS, Defense Says.   Some of the initial issues likely to arise:

  • Jury - Snipes has questioned whether the City of Ocala can provide him with a fair trial.   For the government, there can be the dislike for the IRS.  Picking a neutral jury may be tough for both sides.
  • Celebrity - How will the jury react to the celebrity? What would Martha Stewart say here? Being a celebrity can both hurt or help.  Jurors can be elated to have met the star and been that close to the actor.  On the other hand will they hold him to a higher standard?
  • Finger-pointing - Will the three co-defendants be finger-pointing and will the government just need to sit back and wait for the trial to end.
  • The Charges - The Indictment has an odd array of charges including two outside the typical tax realm - charges from title 18. Conspiracy charges are usually relatively easy ones for the government as the agreement does not have to be written and can be a mere nod of a head.  Equally detrimental for Snipes is that there are 6 counts of 26 U.S.C. 7203, a failure to file tax returns.  If the government can show that these tax returns were not filed, that's a lot of years for the defense to overcome.
  • Knowledge is Crucial in Tax Cases - The statute requires that Snipes have acted "willfully."   In Cheek v. United States, 498 U.S. 192 (1991)  the Supreme Court held that  the standard for willfulness is the "voluntary, intentional, violation of a known legal duty."  This can be a tough standard for the government, especially when there is no showing of a desire to obtain a monetary gain.

For background on this case, see these prior posts:

Stick to Acting

A Nasty Turn in the Wesley Snipe Tax Prosecution

Wesley Snipes Moves to Dismiss Tax Charges

Girls Gone Wild Producer Charged With Tax Evasion

Wesley Snipes Surrenders on Tax Charge

Prosecutor Says Snipes Has No Deal?

No Jail Time for Wesley Snipes?

Wesley Snipes Charged With Tax Violations

(esp)

January 13, 2008 in Prosecutions, Tax | Permalink | Comments (0) | TrackBack (0)

KPMG - Appellee Brief Filed

The Appellee Brief in Jeffrey Stein et. al. - the KPMG related case - was filed late this past week. And as anticipated by the fact that the appellees requested that the court permit them to file an oversized brief of 25,690 words -- it's long.  The filed brief comes in at 25,604 words, which is slightly less than the 25,690 words filed by the government (see here). 

The opening words of this brief capture the essence of the argument - "may prosecutors, without justification, deprive a criminal defendant of funds that otherwise would lawfully be available for his defense?"  At the heart of this case are alleged violations of the Fifth and Sixth Amendments. The brief notes that KPMG for 30 years had "an unbroken practice of advancing, and indemnifying employees against, legal fees incurred in defending actions arising out of their employment."  That practice was not followed in this case with questions raised about the prosecutor's use of the Thompson Memo.

The Brief of Appellees questions the deprivation of attorney fee funds for these defendants, with the issues presented as to whether there was a Sixth Amendment deprivation of the right to the assistance of counsel and a Fifth Amendment right to due process.  Claimed here is that the government "interfer[ed] with the criminal defendants’ access to resources that would otherwise be lawfully available to finance their defense." 

When the government starts interfering with the accused's right to secure legal counsel, it is a serious deprivation. An individual brief is filed by one appellee to emphasize the unique circumstances in his case - the deprivation of counsel of choice. The predicament this individual was placed in by being told that his failure to cooperate with the government would cause legal fees to cease stresses the importance of what is before the appellate tribunal.   

Many of the issues raised in this case were resolved by the trial court, as they are factual issues.  This is important as the trial court's factual findings have a strong chance of being adhered to by the appellate tribunal. One issue that presents discussion is whether the appropriate remedy for a violation is dismissal.

And yes,  it was good to see a reference to my co-blogger, Peter Henning's 2005 law review article, Targeting Legal Advice, 54 Am. U. L. Rev. 669 in the main brief.

Brief of Appellees - Download us_v_stein_defense_reply_bried_jan_11_2008.pdf

Brief of Hastings - Download hasting_brief_11108.pdf

(esp)

January 13, 2008 in KPMG | Permalink | Comments (0) | TrackBack (0)