Saturday, February 9, 2008
With the subprime mortgage meltdown undermining the balance sheets of companies ranging from bond insurers to banks and brokerage firms, the possibility that fraud crept into the market is being explored by the SEC, the FBI, and the Department of Justice. According to various media reports, the United States Attorney's Offices for the Southern and Eastern Districts of New York have begun to look at Merrill Lynch and UBS related to their pricing of CDOs tied to mortgages, if the firms issued false information about the value of the securities they were peddling. The SEC has bumped up its inquiries into the companies' practices to formal investigations, which means subpoena authority for the Commission staff. More broadly, the FBI disclosed that it is looking at fourteen companies for their roles in the subprime mortgage market, including possible insider trading. (See articles from MarketWatch here, the Toronto Star here, and CNN.Money here)
With all these federal resources being brought to bear on the subprime market, should we expect a cascade of criminal and civil enforcement actions in the near future? The government never moves all that quickly, of course, so "near future" could be anywhere from one to two years from now. The investigations themselves are at a fairly early stage at this point, with the SEC still gathering information. The Department of Justice usually waits until the Commission is fairly well along in the investigation before jumping in because the SEC can help winnow down the mountain of documents such investigations generate. Even then, I would not expect to see many criminal cases come out of these investigations, and it's unlikely any company would be charged. At most we might see a few deferred or non-prosecution agreements, because no one wants to risk a prosecution that could put a major financial firm out of business -- the Arthur Andersen effect once again.
Trying to track down the appropriate price of CDOs and other mortgage related securities is probably just this side of impossible, so proving that prices were inflated might not be achievable. The Wall Street firms were not involved in the actual writing of the subprime or other mortgages, only the process of securitizing pools of mortgages to sell to investors. Regardless of whether any of the firms made misstatements in marketing the securities, or placing clients in inappropriate investments, these investigations will not do anything to provide relief from the rising number of foreclosures that are spreading through the market as housing prices drop. Part of the problem with the subprime market was that it worked so well, encouraging firms to make riskier and riskier loans because they could be sold off quickly to investors. Stupidity is not a federal offense, at least not yet, and losing the game of financial musical chairs by being left with cratering securities on your balance sheet does not mean the company committed fraud. Firms no doubt cut corners, but whether there are real fraud cases that go beyond second-guessing remains to be seen. (ph)
Would the government actually indict an attorney premised upon allegations that the attorney wrote several opinion letters for another lawyer? As surprising as it might seem, the answer is "yes." The government has indicted Attorney Ben Kuehne for his alleged writing of six opinion letters based upon his investigation of whether funds being paid to an attorney were proceeds of criminal conduct.
Several observations and comments on the Indictment and the accompanying Motion to Seal:
- The indictment is preceded by a page titled - "Motion to Seal." It is signed by a "trial attorney - DOJ." It requests the indictment be sealed "for the reason that the named defendants may flee and the integrity of the ongoing investigation may be compromised." - Did the government really believe that Attorney Ben Kuehne would flee? A later sentence states that"many of the named defendants are foreign nationals." But the government fails to limit the language used in the prior sentence that explicitly states "that the named defendants may flee" to only those who might be foreign nationals. That is a powerful statement to claim that a prominent Miami attorney might flee. If they didn't mean to apply this statement to him, is it prosecutorial over-reaching, an attempt to taint the accused, or just sloppy drafting?
- The indictment alleges that Kuehne's opinion letters were inaccurate in stating that some of the moneys had come from an individual/company that "his investigation" "had determined.... were reputable and well-established, without any connection to illegal activities." The indictment claims that some of these opinions were untrue because moneys had in fact come from "undercover law enforcement operations." ---- Isn't the very purpose of an undercover operation to make it seem like things are real? Is this a situation of accusing someone of issuing incorrect opinion letters because the government did a good job of misleading him?
- Count Six of the Indictment charges Obstruction of Justice. The charge is expressed in a total of 2 sentences. It states:
"From on or about January 23, 2003, continuing to the date of this indictment, the defendants, .......did corruptly endeavor to influence, obstruct and impede the due administration of justice; that is investigations by the grand jury; to wit, endeavoring to influence, obstruct, and impede a federal investigation, as set forth above. In violation of Title 18, United States Code, s 1503." (names omitted)
A charge without any facts? Did the government actually put a mere restatement of section 1503 as the basis of a criminal charge against an attorney? Co-blogger Peter Henning called the Indictment of Ben Kuehne a "head-scratcher," but that was prior to receiving the document. But after reading it, I'd go a step further - they have actually indicted an attorney for obstruction of justice and alleged no facts in this count to support the charge. It almost sounds like a case the 11th Circuit reversed, U.S. v. Thomas, 916 F.2d 547 (11th Cir. 1990).
Perhaps the most troubling aspect of this indictment is that it represents yet another instance of the government interfering in the payment of attorney fees for the criminally accused. As opposed to going to court and asking for the fees to be returned as improper, they have opted to proceed with criminal charges that in some cases carry up to 20 years.
Indictment - Download us_v_kuehne_indictment_oct_2007.pdf
Friday, February 8, 2008
If you've ever been tempted to say "I've seen everything," then the absurd theater that took place in the Rayburn House Office Building between Roger Clemens and his former trainer Brian McNamee should give you pause. With a phalanx of cameras and reporters at every turn, Clemens visited a number of Congressional offices to pitch his story, no doubt signing a few autographs for starry-eyed staffers, and may even a couple Representatives, too. This is all in preparation for the very public House Oversight and Government Reform Committee hearing scheduled for Wednesday, February 13, when Clemens, McNamee, and two other players, Andy Pettitte and Chuck Knoblauch, will testify about performance-enhancing drugs in major league baseball.
How often does a witness meet with most of the Committee members in advance to just shoot the breeze and hang out? The timing of Clemens' appearance put him in the same building as McNamee, who met for eight hours with investigators from the Committee for his deposition in advance of the hearing, thus stealing at least some of the limelight from his former trainer. In the pre-hearing jousting, McNamee's lawyers fired back by releasing pictures of syringes and gauze pads that their client claims were used for the steroid and HGH injections of Clemens, and they purportedly may have traces of The Rocket's DNA on them.
Is this the "smoking gun" that will somehow prove whether McNamee or Clemens is lying? The answer, of course, is that there are no smoking guns -- or syringes in this instance -- except if you're reading a Sherlock Holmes story or listening to the Nixon White House tapes. McNamee's evidence dates from six to eight years ago, and may not yield any link to Clemens. But even if it does, will that somehow prove that Clemens knowingly took steroids and has been lying about his use of performance-enhancing drugs? While everyone talks about perjury charges, none have been filed or are even in the offing at the moment, so this is all a bit premature. Moreover, remember that Clemens did say earlier that McNamee gave him vitamin B-12 injections, so there is surely a Barry Bonds "I thought it was flaxseed oil" defense available, if it comes to it. On a second front, Clemens' lawyer, Rusty Hardin, has been hard at the vilification of McNamee: "How do you deal with someone who comes out with a psycho thing like sitting on a syringe for nine years?" The fact that McNamee kept such items for a number of years raises questions about what he intended to do with the materials, assuming they are what he claims them to be. Even if there are traces of Clemens' DNA on the syringes, that does not establish what was in his mind, which is required for any perjury (or false statement) charge. It isn't just what you say, but more importantly your knowledge that the assertion was not truthful that gets you convicted. And proving what's in a person's mind, especially if the syringes could be explained as coming from vitamin B-12 injections, makes a perjury charge very difficult to establish. The absurdity of the whole process certainly raises the questions about why the valuable time of Congressmen and their staff is being used for meetings with Clemens and a deposition of McNamee. In the end, does any of this really matter, aside from the opportunity to appear on camera?
On the lighter side, one of the photographs (here) released by McNamee's lawyers was of a syringe in a pile of rather nasty looking gauze and cotton balls, with a crushed Miller Lite beer can in the background. Are we being asked to believe that Clemens drinks Miller Lite along with his steroids and HGH injections? Or is the can there to give a little perspective to the pile? I doubt we will see this shot in a future Super Bowl commercial. A Newday story (here) discusses the day's events. (ph)
A highly-regarded Miami attorney, Ben Kuehne, was charged with money laundering for his role in approving payments to well-known defense lawyer Roy Black that allegedly were funds from a drug smuggling operation of the Medellín cocaine cartel. According to a story in the Miami Herald (here), Kuehne was retained by Black in connection with his representation of the head of the Medellín cartel to ensure that the funds were not tainted. According to the article, "Kuehne's research gave Black the confidence -- in the form of legal opinion letters -- to accept payments totaling $3.7 million in fees and $1.3 million in expenses from Ochoa, according to several sources. Kuehne earned a portion of the expense payments -- $220,000 to $260,000 -- from Black for vetting Ochoa's payments." Kuehne is a past president of the Dade County Bar Association and one of the fifty-two members of the Florida Bar Board of Governors, elected from the Eleventh Circuit. The Board of Governors "has exclusive authority to formulate and adopt matters of policy concerning the activities of the Bar," according to the Bar website (here).
Kuehne and his two co-defendants maintain their innocence, and it is not immediately apparent what the government's theory is in the case. The amount he received for his work may well be on the high side, at least if he were charging an hourly rate for his work on Black's behalf, which could have triggered the government's interest. If he received a percentage of Black's fee, then that could call into question the objectivity of his legal opinion. But when an attorney is asked to opine on the legality of funds to pay for the defense of a drug lord, it seems counterintuitive to say the least that he would give his imprimatur knowing that the funds were in fact the proceeds of narcotics transactions that the government was likely to scrutinize carefully. Given Kuehne's pristine reputation, it is hard to believe he would risk his entire legal career for an amount that, while significant, is hardly worth the loss of prestige and income he would suffer from a money laundering conviction. Would you sell your law license and career for a quarter of a million dollars? The documents in the case are not yet available, so I can't say at this point what approach the government plans to take or the evidence it is like to put on. It is certainly a head-scratcher at this point. (ph)
Thursday, February 7, 2008
A Press Release of the US Attorneys Office for the Central District of California tells of a recent fraud conviction that started when an individual in the U.S. had a visa expire and decided that advertising for someone to marry on craigslist might remedy the problem. So she placed 12 advertisements on the list and the evidence was that she "offered her would-be spouse as much as $15,000, stating: 'Green Card Marriage – Will pay $300/month Total $15,000' and 'This is strictly platonic business offer, sex not involved. NOT required to live together.'”
A response followed, and the two were married. And let me not forget that the press release says that the minister marrying the two was the boyfriend of the individual who advertised for the husband on Craigslist. Now both parties to the marriage are facing up to ten years in prison, as the individual who answered the advertisement previously plead guilty.
That's an easy question: with one you pay out money (and take an injunction prohibiting future violations) while the other sends you to jail. But two insider trading cases this week raise the issue of why some go criminal while others remain only as civil enforcement actions. The SEC announced on February 5, 2008, the filing of a settled insider trading complaint against a former director of Dow Jones, David Li, who tipped a close friend about a potential offer by News Corp. for the owner of the Wall Street Journal and other publications. According to the Commission's Litigation Release (here):
On May 8, 2007, the Commission filed an emergency action in the United States District Court for the Southern District of New York against Kan King Wong ("K.K. Wong") and Charlotte Ka On Wong Leung ("Charlotte Wong"), alleging that the husband-wife couple traded Dow Jones securities based on inside information. Specifically, the Wongs purchased approximately $15 million worth of Dow Jones securities in their account at Merrill Lynch and, after the Offer became public, made approximately $8.1 million in trading profits. The court entered a Temporary Restraining Order freezing those assets and imposing other relief. See LR-20106 (May 8, 2007). Today the Commission filed an amended complaint alleging that Dow Jones board member David Li tipped his close friend, Michael Leung Kai Hung ("Michael Leung"), before the Offer's public disclosure, and Michael Leung, with the Wongs' assistance, traded Dow Jones stock in their Merrill Lynch account. The Commission further alleged that K.K. Wong bought 2,000 Dow Jones shares in his TD-Ameritrade account and made approximately $40,000 in profits. Charlotte Wong is Michael Leung's daughter, and K.K. Wong is his son-in-law.
Li is quite prominent in the Hong Kong business community, serving as the CEO of Bank of East Asia and as a member of Hong Kong's Legislative Counsel and Executive Committee. This was not a small case as Mr. Li paid a civil penalty of $8.1 million and Michael Leung, the main trader, disgorged $8.1 million and paid a one-time penalty of the same amount, so that total from the case was over $24 million. There is no indication that any criminal charges will be brought because of the trading, which involved the purchase of over 400,000 Dow Jones shares through a third party's account to hide the identity of the actual purchaser. Of course, there is a chance that a sealed indictment was returned and prosecutors could be seeking to arrest either David Li or Michael Leung if they return to the United States, but it does not sound like that's the case given the civil settlement.
Meanwhile, on February 4, 2008, the U.S. Attorney's Office for the Southern District of New York announced that a jury convicted Hafiz Naseem of twenty-eight counts of insider trading and one count of conspiracy based on tipping a Pakistani banker, Ajaz Rahim, about impending deals that he learned about while working at J.P. Morgan and then Credit Suisse. According to a press release (here):
Credit Suisse was engaged to advise either the target company or the acquiring entity in connection with business combination transactions involving the Issuers (the "Subject Transactions"). NASEEM, who was not assigned to work on any of the Subject Transactions, repeatedly searched Credit Suisse’s internal computer databases for confidential documents relating to the Subject Transactions, opened and read these documents, and passed the material non-public information concerning the Subject Transactions in these documents to RAHIM (the "Credit Suisse Inside Information"). NASEEM also was observed rummaging through papers on the desks of several analysts when the analysts were not present.
Naseem is not a U.S. citizen, and after the conviction the court revoked his bail and he was remanded into custody, most likely because he was a flight risk. The total profits realized from the various tips was $7.9 million, the bulk of it from trading in TXU call options. Under the Federal Sentencing Guidelines, Naseem is looking at a sentencing range of at least 78-97 months based only on the gain before any other enhancements that could easily take him up to a ten-year prison term.
While there are some differences between the two cases, there are many similarities, so it's not clear to me why one is criminal and the other only civil. The loss amount is the roughly the same in each, and the violation of a fiduciary duty is clear for both tippers. Each involved trading overseas, a particular problem that can threaten the integrity of the U.S. securities markets. While Naseem was involved in a systematic course of conduct, Li was a director of a major corporation tipping a close friend. The trading by the tippees was similar in the sense that each tried to hide his true identity, and substantial profits were made.
Could it be that the decision was influenced by the fact that Li and Leung are prominent businessmen while Naseem is a lower-level investment bank employee who tipped a less-prominent Pakistani banker? While it may be a consideration that Li and Leung might not be extraditable to the U.S., the U.S. Attorney's Office did indict Rahim despite the fact that it has not yet been able to get him into this country yet to face charges. It may just have been the timing of the discovery, because Naseem was nabbed around the same time that the U.S. Attorney's Office was cracking down on others on Wall Street engaged in insider trading -- he was in the wrong place at the wrong time. There may also be considerations about the strength of the government's evidence relating to Li and Leung that influenced the decision not to pursue criminal charges. While the SEC complaint (here) presents the case in stark terms that makes it appear to be a straightforward insider trading case, the Commission does not have to test its evidence in court, and may only have a circumstantial case that the defendants were willing to settle so long as no criminal charges were filed. But from the outside, at least, it is difficult to distinguish between them, and raises the question about what the appropriate criteria are for determining whether a criminal prosecution is used in addition to the civil enforcement mechanism. That it could just be who wins or loses the criminal prosecution lottery is not very comforting. (ph)
Wednesday, February 6, 2008
As if defense contractor Brent Wilkes isn't in a heap of trouble already from his convictions for bribing former Representative Randy ""Duke" Cunningham to obtain no-bid Pentagon contracts, now he's accused of lying about his finances to get court-appointed counsel for a second corruption trial. As discussed in a recent post (here), the Presentence Report on the Cunningham convictions recommends a sixty-year prison term -- essentially life -- based on the gains from the bribery to Wilkes company, ADCS Inc. The second case involves alleged bribery of former top CIA official Dusty Foggo, and because of national security issues, all the lawyers in the case needed to have a top secret clearance to review materials. Unfortunately for Wilkes, his lawyer from the first trial, Mark Geragos, declined to undergo the background check required for the clearance -- it's not clear why -- and so Wilkes needed new counsel. He briefly had another lawyer, Eugene Iredale,* who never officially entered an appearance, and then sought court-appointed counsel based on an ex parte financial affidavit, which the district court granted. Wilkes is now represented by the Federal Defenders office, but the government is seeking to have them removed from the case because of alleged misstatements about his purported financial need in the affidavit.
In a brief (available below) seeking to revoke the appointment of counsel, reimbursement of the costs of the Federal Defenders, and release of the financial affidavit, the government asserts:
Based upon a sealed ex parte financial affidavit, defendant Wilkes convinced the Court that he was unable to retain counsel to represent him in Criminal Case No. 07CR0329. Yet, at the time this affidavit was provided to the Court, Defendant and his wife were: (1) in the process of distributing over $2.5 million in cash proceeds; (2) the owners of a residence in Poway that had equity of approximately $800,000; and (3) owners of two properties in Rancho Bernardo and one in Chula Vista. Following the appointment of public counsel, defendant Wilkes, unknown to the Court or the government, distributed over $1 million in assets, including $100,000 in cash provided to the Wilkeses (apparently for spending money), $40,000 to their divorce attorneys, and an untold amount of cash that was transferred to their children’s trust accounts. The use of public funds while defendant continues to spend his ill-gotten gains must stop.
If the court strips Wilkes of the court-appointed lawyers, then the pending trial will have to be postponed until he retains new counsel, who will have to undergo the requisite background check. Moreover, if the court finds that Wilkes' financial affidavit was false, it could lead to a separate perjury charge and a sentencing enhancement for obstruction of justice -- although if he receives anything near the recommended sentence for the Cunningham bribery, any additional term won't matter too much. Wilkes has filed a motion (available below) for a new trial on the first convictions, arguing that the government violated its Brady obligation and that he was prejudiced by the denial of a continuance. These motions are difficult to win, and the grounds asserted are not the type that usually lead to overturning a verdict. (ph)
* Law-Geek Trivia: The attorney who briefly entered the case on Wilkes's behalf before the appointment of the Federal Defenders, Eugene Iredale, is a well-known defense lawyer who was disqualified because of a potential conflict of interest in Wheat v. United States, 486 U.S. 153 (1988), the Supreme Court case that established the broad discretion district courts have in criminal cases to disqualify counsel.
Tuesday, February 5, 2008
Monday, February 4, 2008
Professor Alan Dershowitz, writing at Huffington Post, has an entry titled, "Why Roger Clemens, Even If Innocent, Should Take the 5th."
Although I am a bit more neutral when it comes to baseball- although admittedly a Yankee fan - I concur with Dershowitz's assessment. Speaking - even if innocent - can be harmful to your freedom. But the problem is more complicated. It's a problem faced by anyone who is a celebrity or politician -- Silence is not golden.
If you speak you run the risk of having anything you say used against you - even if innocent. If you don't speak people make assumptions of guilt. And if a politician or celebrity this can tarnish your career.
Why is it that truthful testimony can be used against an individual?
- For one the individual may not remember the exact words used in the prior statement and when subject to a sharp cross-examination, the person may come across as confused - or not telling the truth in a later trial.
- Second, there is always the missing statement that is used against the individual. The person answers the questions asked and fails to include every little detail - after all they might be a bit nervous in testifying. Hitting a ball in front of a good number of fans and non-fans is not quite the same as answering questions from those in Congress. So what if something is omitted? What will the cross-examination look like if it is pointed out that this statement was not included in the legislative testimony?
- Finally, people view evidence from many different angles. The same event may be told differently by several different people. Will this be viewed as a lie if it is ever presented at a later trial?
But there's a more important question here. Is it fair to place celebrities and politicians in this catch -22? Is the testimony really needed for the hearing? How would the politician feel if the tables were turned and they were being asked questions because one person had implicated them? And don't tell me this is an invitation, I read co-blogger Peter Hennings entry here.
Some of us continue to harp on prosecutorial discretion and the many possible abuses that can arise from allowing prosecutors unbridled discretion. But maybe this is a place to discuss legislative discretion, and think about when Congress should take a step back and consider whether the testimony is really needed here and now.
Several posts have focused on the Wesley Snipes case, the trial and the verdict (see here, here, and here). Actor Snipes was convicted on 3 misdemeanor tax counts, but acquitted on all other charged conduct including a count charging conspiracy. As previously discussed, the conspiracy count may have had a venue basis when charged, as venue can be found in either the place of the agreement or where any of the acts occurred. But the tax counts have been argued as improper from the initial days.
Can the two be separated? One case, United States v. Ebersole, 411 F.3d 517 (4th Cir. 2005) does a good job of noting an important policy argument in this area of law -
"The Supreme Court has cautioned that the question of venue in a criminal case is more than a matter 'of formal legal procedure'; rather, it raises 'deep issues of public policy in the light of which legislation must be construed.' United States v. Johnson, 323 U.S. 273, 276 (1944). The Court also has observed that the venue provisions of the Constitution are meant to act as safeguards, protecting the defendant from bias, disadvantage, and inconvenience in the adjudication of the charges against him. Travis v. United States, 364 U.S. 631, 634 (1961) (citing U.S. Const. Art. III, § 2 (pertaining to venue)); U.S. Const. amend. VI (pertaining to jury trials)."
Was Snipes biased and disadvantaged here? Does the fact that the jury venire that he as selecting jurors was all-white make a difference?
For comments from Paul Caron's Tax Prof Blog, see here.
Check out Tom Kirkendall of Houston Clear Thinker's post on the Human Cost of Questionable Prosecutions. He remarks on the void in "US mainstream media" on the many collateral consequences of prosecutions, especially prosecutions lacking validity.
Tom Coughlin, the former Chief Operating Officer and key executive at Wal-Mart, received a 27-month term of home confinement with five years probation after pleading guilty to five wire fraud counts (aiding and abetting) and one false tax return filing count. The government appealed the sentence and the appellate court spoke by remanding the case back for re-sentencing finding it unreasonable. In the interim the Supreme Court issued the Gall decision. The district court, on remand, has now issued its new sentence and it's probably not quite the way the government hoped. The court added 1,500 hours of community service.
In failing to impose jail time, the court states:
"[This] punishment is far from an act of leniency, and its characterization as such deprives sentencing courts of a valuable and effective form of punishment.
That form of punishment is especially appropriate in cases such as Coughlin’s, where there is little concern for future criminal activity on the part of the defendant and the defendant is in need of medical attention."
The Hon. Robert T. Dawson should be credited for demanding individualized sentencing and explaining all the rationales that support his issuing this particular sentence. He states:
"Punishment is imposed parsimoniously and with respectful consideration for the individuality of each peculiar defendant. A court that mechanically doles out precalculated sentences on a wholesale basis to categories of faceless defendants fails to do justice. A court that succumbs to apathy, bred by repetition, will cease to see defendants as individuals, with pasts and potentials, with humanity and promise."
Sunday, February 3, 2008
A DOJ Press Release tells that "the director of a Singapore-based aviation company was arraigned [this past week] in federal court in Brooklyn on charges that she illegally exported controlled U.S. military aircraft components and shipped commercial aircraft components to Iran."
Defendants were "indicted with one count of conspiring to export aircraft parts to Iran and 15 counts of exporting aircraft parts to Iran, in violation of the International Emergency Economic Powers Act (IEEPA); one count of conspiring to export defense articles without a license and two counts of exporting and attempting to export defense articles without a license, in violation of the Arms Export Control Act (AECA) and the International Traffic in Arms Regulations (ITAR); and one count of conspiring to launder the proceeds of the unlawful export of defense articles."
Previously blogged was the acquittal of Wesley Snipes on the conspiracy and fraud counts, and also on three of the six tax filings counts. (see here). Peter Goldberger sent in an important comment on the Wesley Snipes three misdemeanor convictions. He stated:
"Also worth noting is that Snipes was convicted only on counts where venue was much contested, both legally and factually. Was he really a legal resident, for tax-filing purposes, of the Florida town where he went to high school, while living for years in NYC and LA as a movie star? If not, the counts of conviction are precisely those most vulnerable on appeal."
This is an important point because conspiracy cases allow the prosecutor to bring charges in a host of different venues. It can be the place of agreement or the place of any of the overt acts. With the acquittal of the conspiracy charge, is venue is lacking? Also lacking perhaps is the venue that might have been present if Snipes had been convicted on the fraud count (a count that included an aiding and abetting aspect). So how does one get this case to Florida? Couple these questions with a strong objection raised by defense counsel pre-trial to the venue, and the fact that the venire failed to include the race of the accused. But does the fact that the issue gains viability after trial, because of the acquittal of several counts, make a difference?