March 7, 2009
Major Criminal Tax Fraud Trial Results In Complete Defense Victory
This past week a U.S. Virgin Island (USVI) federal jury returned not guilty verdicts on all twenty-six counts in a major federal criminal tax fraud trial. The government alleged that three individuals created and promoted Kapok, a USVI limited partnership, in order to unlawfully obtain tax benefits from a USVI economic development program. The program provided a 90 percent federal income tax credit for eligible companies and individuals. Also charged were a St. Louis area auto dealer and several companies affiliated with the defendants. The government alleged a loss of more than $75 million in federal income taxes from Kapok's participating partners.
Blair G. Brown, a partner in Washington, DC's Zuckerman Spaeder, led the defense of one of the individual's accused, with assistance from associate Lani Cossette. "This case should never have been a criminal prosecution," said Mr. Brown. "The legal standards for USVI residency and qualifying income under the economic development program were vague. All of the defendants did their best in relying on the guidance of experts. The jury also correctly understood that the defendants and similar partnerships brought substantial economic benefits to the USVI."
"The defense was a real team effort that melded the strengths of all defense counsel. Sticking together and pounding our themes-vague standards, reliance, disclosure, and benefits to the USVI-were essential," added Mr. Brown. The defense presented only two witnesses, and none of the defendants testified.
Also representing the same person as Brown were Clyde Kuehn from Belleville, Ill., and USVI local counsel Lee Rohn. Other defense counsel were William Lucco of Edwardsville, Ill.; Chuck Meadows and Josh Ungerman of Dallas; Robert Webster of Dallas; Robert Smith of Dallas; and Gordon Rhea of Mt. Pleasant, S.C. The government was represented by Assistant U.S. Attorneys from the Southern District of Illinois, where the case was originally indicted before its transfer to the USVI, and the U.S. Department of Justice Tax Division.
Will Madoff Enter a Guilty Plea
News reports are indicating that an Information may be filed in the Bernie Madoff matter. This clearly sends a message that a guilty plea may be forthcoming in this case. Using an Information, as opposed to Indictment, allows the parties to negotiate the charges that will be brought. In most cases the individual will be pleading guilty to the charges in the Information. An Information is brought by a prosecutor, the United States Attorney or AUSA, as opposed to the grand jury bringing the charges via an Indictment. Limiting the charges to those explicitly set forth in the Information can control the terms between the parties, including having an influence on what sentence will be issued by the court. The court cannot give a sentence in excess of what crimes an individual pleads guilty to, although uncharged conduct can influence a sentence within the confines of the maximum set for the crime by the statute.
There have been several indications of a plea prior to the filing of the notice of an intent to file an Information. First, is the fact that the time period for filing the Indictment was extended by the parties. Second, the government did not initially push very hard to keep Madoff incarcerated (although they did request this in a later hearing). Third, information about the case seemed to be coming from the defense in the initial paperwork, which would indicate that he has been cooperative with the government. If facing sentencing, cooperation could serve to reduce the amount of time he might serve. More importantly, working with the government may be crucial to someone who wants to protect family members.
If Madoff is cooperating, are we about to see the curtain lifted on all kinds of fraudulent activity, or will this be a case where we find a wizard standing behind the curtain all by himself?
See Walter Hamilton, LATimes, Prosecutors indicate Bernard Madoff plea deal may be in works; Adam Goldman, Newsday (AP), Madoff investors prepare for court confrontation; CNBC, Madoff Guilty Plea?; Grant McCool & Martha Graybow, Reuters, Madoff expected to plead guilty to fraud charges; Larry Neumeister, Business Week, Investors could get say at Madoff plea hearing; Peter Henning, Dealbook, NYTimes, Can Ruth Madoff Keep the Penthouse?; Tom Hays & Larry Neumeister, Law.com (AP), Doubt Cast on $50 Billion Figure in Madoff Case.
More From the ABA White Collar Crime Conference
Some refer to the ABA White Collar Crime Conference as the AUSA's reunion, as one finds an extremely large crowd of people who used to work in various US Attorney's offices. Although I only had the pleasure of staying for one day at this conference, it clearly was a rich program covering truly hot topics and hopefully topics that remain in the news as DOJ cracks down on white collar criminality.
I had the pleasure of being on a panel titled, Ethical Issues in White Collar Cases. The moderator, Jane W. Moscowitz led us through a discussion of some of the key issues that are facing defense counsel. Joshua Hochberg talked about a scenario coming from the Refco case in which an outside counsel was facing criminal charges. The panel (in addition to Jane Moscowitz, Joshua Hochberg, and myself, the panelists were Brain J. Hennigan and Earl Silbert) talked about the line between criminal, malpractice, disciplinary, and legal advice to a client that would not be subject to scrutiny. How far was counsel required to investigate the activities of his or her client was a key focus of the discussion. Other topics covered included opinion letters, noting how Ben Kuehne (for background see here) was charged with crimes for writing an opinion letter. Two statutes were mentioned - the obstruction of justice and money laundering statutes in which Congress explicitly provided an exception for attorneys providing legal services.
The panel also discussed noisy withdrawals. One question that one always has to determine in corporate-employee situations is "who" is the client and has the employee been made aware of who counsel is representing. Upjohn "warnings" were referenced here, with discussion of what counsel should say to the employee when representing the corporation. It was a lively panel and looking out at the audience it was good to see a full house and more importantly that individuals were not leaving the room. For the unbiased view of this panel discussion, check out Solomon Wisenberg's comments on Letter of Apology here.
As a post script to this panel -Perhaps making ethical issues into criminal issues for counsel is something that the new DOJ needs to rethink.
(esp)(blogging back in Gulfport, Florida)
Addendum - See Steve Levin, Fraud With Peril, Steve’s Fresh Perspective (discussing health care fraud seminar)
March 6, 2009
Siegelman-Scrushy Opinion & Commentary
As noted here, the 11th Circuit issued its decision in the appellate case involving former Governor Don Siegelman and former CEO of HealthSouth Richard Scrushy. Some of the key points in the decision -
- the court found sufficient evidence "that a reasonable juror could have concluded that Siegelman and Scrushy explicitly agreed to a corrupt quid pro quo"
- the government did not prove that "Siegelman knew that Scrushy intended to defraud Alabama of his honest services while on the Board and that Siegelman personally intended to participate in this fraud."
- although the jury was exposed to extrinsic evidence, it was harmless and the court "did not abuse its discretion in holding that there was no reasonable possibility of prejudice to the defendants arising out of the exposure of the jury to this extrinsic evidence and denying the motion for a new trial"
The court affirmed Scrushy's convictions and reversed two counts of Seigelman's convictions. Seigelman gets a resentencing because of the reversal of Counts 8 and 9.
What happens now? Scrushy and Seigelman have the next step to go - asking for an en banc hearing and perhaps a petition for certiorari to the Supreme Court. But the political arena may be the avenue that we hear the most noise from in the immediate future, as Karl Rove is scheduled to appear before the House Judiciary Committee. See Huffington Post, Karl Rove Agrees to Testify
11th Circuit Rules on Siegelman & Scrushy Case
See here. More to follow later.
(esp) (w/ a hat tip to Mark Johnson)
March 5, 2009
ABA White Collar Crime Conference - The Afternoon
The lunch speaker was Neil M. Barofsky of The Office of the Special Inspector General for the Troubled Asset Relief Program ("SIGTARP"), who provided an entertaining and informative presentation that outlined the criminal activity that this office could prosecute. I stopped counting how many times he used the word "transparency" but I assure you it seemed like a good number. The website for the office is here. His conclusion was to remind attorneys that they should make sure that their retainer does not come from TARP funds.
Alice Fisher moderated a panel on corporate charging decisions that provided a primer on the history of the corporate guidelines. There was also discussion of differences between non-prosecution and deferred prosecution agreements. Two statistics (if I caught them correctly) 1) of the 100 corporations under investigation, not one was asked to waive attorney-client privilege; 2) 75% of deferred prosecution agreements have a compliance element. I found the first statistic amusing - if you have a corporation's back against the wall (indict and suffer the consequences, or sign a deferred prosecution agreement) there really is no need to ask for anything - it will all be delivered. This is especially true if you have guidelines that still allow for waivers in some situations, even if the waiver is the exception as opposed to the rule. But I am sure some will disagree with me on this.
(esp)(blogging from San Francisco)
Opening Day at the ABA White Collar Crime Conference
Although there was a pre-day afternoon of basics and parties, the first full day followed the morning opening remarks. My choice for the morning session was Recent Trials: A Roundtable Discussion. The eight male speakers covered the cases of
Michael Greg Reyes (Brocade), Joseph Nacchio (Qwest), Scooter Libby and the KPMG defendants. One recurring theme was what I call the "the context of the case." For example, in discussing the Scooter Libby case, Theodore V. Wells, Jr. noted how the Scooter Libby case could be seen as a proxy for how people felt about President Bush and the war. It was a "he said-she said" case on a 20 second phone call - but the timing of the trial was important. In the Nacchio case it was about Qwest's way of making money. And there were other points made from these four cases such as in the Reyes case, how the client received no personal benefit. Solomon Wisenberg from over at Letter of Apology blogs about all the cases having resulted in convictions.
(esp) (blogging from San Francisco)
March 4, 2009
Third Former General Re Executive Sentenced
See Dave Collins, (AP) Houston Chronicle, Ex-Gen Re executive gets 1 year in prison (w/ a hat tip to Bill Olis). See also Colleen McCarthy, Business Insurance Magazine, Former Gen Re finite exec gets one-year sentence
(esp)(blogging from the Atlanta airport)
March 2, 2009
NACDL & Heritage: Together in Bed Again
The NACDL and Heritage joined forces together again, this time opposing the Public Corruption Prosecution Improvements Act (S49) (see here). (see previously the opposition to S. 386, the Fraud Enforcement Recovery Act here). "Although the two organizations are, as they note in their letter, often 'on opposite ends of the liberal-to-conservative spectrum,' the two organizations agree that federal prosecutors already have all the tools they need (and far more) to prosecute public corruption."
(esp)(w/ a hat tip to Jack King)
Shortcuts on FCPA Due Diligence Today Will Be Costly Tomorrow
The current financial crisis and market volatility understandably focuses corporate executives and their employees on corporate survival and improved financial performance. In my experience, corporate consolidations, divestitures, restructurings, and employee layoffs create organizational distractions that can distort sound judgment and reward short-term, but ill-conceived business solutions. At a recent General Counsel Forum in Chicago last week focusing on fraud prevention and anticorruption strategies, the attendees from corporate legal departments and financial functions indicated that they will be required to operate with fewer compliance and internal controls resources. None of the attendees thought their companies will be more susceptible to fraud and corruption violations this year compared to other years. Yet, my observations over the years indicate that from late 2009 through 2012, we should expect to see several currently reputable, large U.S. companies and individual corporate managers under investigation for fraud, corruption, and other criminal and civil violations. These companies and individuals will face enforcement scrutiny because they did not fight the tendency of managers and business units to shortcut legal compliance, internal controls, and due diligence procedures designed to prevent and detect financial crimes, particularly violations of the US Foreign Corrupt Practices Act ("FCPA").
One of the most important FCPA compliance and internal controls involves the conduct of appropriate, risk-based due anticorruption diligence on third party intermediaries, agents and consultants, as well as overseas joint venture partners, and international merger and acquisition target companies in high risk countries and industries for public corruption. This risk-based approach requires companies to take into account the following factors, among others: i) the reputation of the party or agent for corruption in the industry; ii) the local country’s reported reputation for public corruption; iii) whether the party is the subject of local media scandal or enforcement scrutiny, or on any international governmental lists; iv) whether the acquiring company has industry contacts that have information about the targeted party; v) the apparent competence and qualifications of the party for the project or activity contemplated; vi) whether the party was referred by a foreign official; vii) the availability and reliability of information about the targeted party in public databases, websites, and business reporting services; viii) whether the party is a foreign government official within the meaning of the FCPA, and whether there is shareholding by a foreign official in the party ; ix) whether the party is an agency or instrumentality of a foreign government; and x) whether the party or its shareholders are a relative or close associate of a foreign government official. Appropriate FCPA anticorruption due diligence would take into account and address these issues.
A more rigorous due diligence is appropriate in situations where the third party relationship or target company acquisition is highly strategic and economic, but the public corruption risks for the country and the industry are well-documented. For this important high-risk acquisition or joint venture relationship, there is no substitute for an in-country review consisting of in-person interviews of the parties and their key personnel, as well as relevant document reviews and sampling by U.S. professionals who regularly apply U.S. FCPA standards, in consultation with local professionals, to ensure that local anticorruption, data protection, and related fraud laws and rules, are recognized. Yet, during times of tight corporate finances, some companies will forgo such FCPA due diligence in favor of database reviews only, or they will rely on background or financial investigators whose reports list "FCPA" in the report title, but unfortunately those reports do not recognize or actually examine high risk FCPA/anticorruption activities. These seemingly cost-effective due diligence shortcuts actually result in expensive FCPA legal exposure for the acquiring company due to the FCPA risk items overlooked or misunderstood by the background investigators.
U.S.enforcement agencies are watching companies, and seem more determined to ensure that FCPA compliance, and other U.S.legal and financial compliance requirements continue to be fulfilled during the financial crisis. The U.S. Securities and Exchange Commission ("SEC") Office of Compliance Inspections and Examinations issued a letter to CEOs of SEC-registered firms to remind them of the important role that compliance programs play in helping companies meet their obligations under the securities laws. The SEC emphasized that even with the current financial crisis, corporate cost cutting-measures should take into account the need to maintain adequate compliance programs and internal financial controls systems. See Lori Richards, Director, Office of Compliance Inspections and Examinations U.S. Securities and Exchange Commission, Open Letter to CEO's of SEC-Registered Firms (Dec. 2, 2008) (available here). Companies should consider this SEC notice to be an early indication that the financial crisis, standing alone, will not insulate a company against U.S. enforcement actions for fraud, FCPA violations, or other financial and reporting violations arising from a high risk environment created by the failure to maintain controls, or follow FCPA procedures, and test compliance systems.
Aggressive U.S. enforcement of financial fraud, corruption, and other criminal and civil violations is also forecast as a result of Congressional efforts with respect to the Supplemental Anti-Fraud Enforcement Markets Act ("SAFE Markets Act"). This anticipated legislation seeks to materially increase funding for investigative and prosecutorial resources by $110 million for enforcement actions involving financial fraud, corruption, ring the financial crisis may be particularly challenging for companies this year. Senator Charles E. Schumer (D-NY) and Senator Richard C. Shelby (R-Ala) of the Senate Banking Committee believe that 50 new assistant U.S. attorneys and 100 new SEC enforcement employees need to be hired to investigate and prosecute financial crimes.
Further, the U.S. Department of Justice ("DOJ") and the SEC are expected to continue aggressive investigation and enforcement of the FCPA, while imposing several millions (and possibly additional billions) of dollars in fines, penalties, and disgorgements for future violations. Thus, the lesson is clear: in the practice of FCPA due diligence for agents, joint venture partners, and merger and acquisition targets, a due diligence shortcut for savings, could ultimately become the most devastating and costly strategy for companies, managers, individual employees, and corporate boards under the FCPA.
March 1, 2009
A lawyer suddenly withdraws his appearance and "disaffirms prior oral and written representations." This is referred to as a "noisy withdrawal." The setting here, which is important, is an SEC matter - thus triggering Sarbanes-Oxley (SOX). The experts seem to find that he acted correctly (see here and here). Christine Hurt of Conglomerate Blog provides an in-depth analysis of Rule 205.3 of the Securities Exchange Act (see here). And it should be noted that the "noisy withdrawal" concept was controversial from its inception. (See letter by 79 law firms here).
The real issue here is not whether the attorney acted correctly in withdrawing his representation of client Stanford. Rather, the issue that needs to now be examined, in context, is whether this is a good rule to have. Is it good to have attorneys withdraw from client representation in these types of situations, and is it good to have them announce it to the world? In the long run will we have better compliance with the law having the attorney withdraw, or will noisy withdrawals result in criminality being kept undercover? And which way will best protect the public?
The Future of White Collar Crime Press Investigations - Bleak
With the final edition of the Rocky Mountain News (see here), with newspapers across the U.S. closing (see here for an map that tracks the newspaper layoffs), one has to wonder about the future of white collar investigations that originate from the press. Press investigations and exposure of corruption have lead to prosecutions. It is frightening to see the dying press, not only because of what this means to having a well informed public, but also from the perspective of having white collar criminality exposed.