Friday, June 18, 2010

Farkas Indictment


Here is the Lee Bentley Farkas Indictment, unsealed this week in the EDVA. Farkas is charged with conspiracy, bank fraud, wire fraud, and securities fraud. I'm surprised they didn't throw in dancing with a mailman or impersonating Smoky the Bear. The government alleged securities fraud under 18 U.S.C. Section 1348, which, surprisingly, has seen very limited use since it was enacted as part of Sarbanes-Oxley. It will be interesting to see if this is part of a new trend. There are three securities fraud counts (Counts 14-16) based upon three separate reports (10-K, 8-K, and 10-Q) filed with the SEC, each one charged as an execution of the securities fraud scheme.


June 18, 2010 in Current Affairs, Fraud, Mortgage Fraud, Prosecutions, SEC, Securities, Statutes | Permalink | Comments (0) | TrackBack (0)

Thursday, June 17, 2010

Operation Stolen Dreams - Mortgage Fraud Prosecutions

The catchy title for this latest government initiative was announced today as a "nationwide takedown" and "the largest collective enforcement effort ever brought to bear in confronting mortgage fraud." (see press release here) The press release states:

"Starting on March 1, to date Operation Stolen Dreams has involved 1,215 criminal defendants nationwide, including 485 arrests, who are allegedly responsible for more than $2.3 billion in losses. Additionally, to date the operation has resulted in 191 civil enforcement actions which have resulted in the recovery of more than $147 million."


June 17, 2010 in Fraud | Permalink | Comments (0) | TrackBack (0)

In the News & Around the Blogosphere

Wednesday, June 16, 2010

Ninth Circuit Affirms Brokers' Duty To Disclose Material Commissions


Last week, in a significant decision construing SEC Rule 10b-5 in the context of criminal prosecutions, the Ninth Circuit held that "if a broker and a client have a trust relationship...then the broker has an obligation to disclose all facts material to that relationship." The case is United States v. Laurienti and can be accessed here. Laurienti involved a pump and dump scheme in which brokers failed to disclose commissions they received equal to 5% of the purchase price of certain "house stocks" sold to clients. The defendant brokers argued that they had no legal duty whatsoever to disclose the 5% commissions to their clients. The Ninth Circuit disagreed, and noted that the 5% commissions were clearly material under the facts developed at trial, since "every former client who testified said that he or she would not have bought the house stocks had he or she known about the bonus commissions." The case was brought under all three subsections of Rule 10b-5. The Court noted in dictum that "[u]nder subsection (b) of Rule 10b-5, even in the absence of a trust relationship, a broker cannot affirmatively tell a misleading half-truth about a material fact to a potential investor." The Court also held that the defendants could have been found guilty of conspiracy in the pump and dump scheme even if the disclosure of bonus commissions had not been required by law, because "a reasonable juror...could have concluded that Defendants intentionally acted contrary to the interests of their clients by pushing house stocks as part of a fraudulent scheme to line Defendants' pockets without regard for the interest of their clients." The undisclosed bonus commissions were "circumstantial evidence of Defendants' agreement to join the conspiracy." The Court relied heavily on the Supreme Court's opinion in Chiarella v. United States, and on Second Circuit precedent, in reaching its decision.


June 16, 2010 in Judicial Opinions, SEC, Securities, Statutes | Permalink | Comments (0) | TrackBack (0)

In the News & Around the Blogosphere

Zachary A. Goldfarb, Wash Post, SEC is hiring more experts to assess complex financial systems

Mike McKee,, 9th Circuit Backs Barry Bonds in Perjury Case

John Pacenti, Daily Business Review,, Rothstein Gets 50-Year Sentence for $1.2 Billion Ponzi Scheme

Eliane Engeler,, (AP), Swiss Parliament Approves Tax Deal With U.S. in UBS Dispute

Chicago Tribune, Blagojevich on Trial (running blog on the trial)

Houston Chronicle (AP), Dallas City Hall corruption figure sentenced

Megan O'Matz, Sun Sentinel, Records sought in Broward schools corruption investigation

DOJ Press Release, Acting Deputy Attorney General Gary G. Grindler Speaks at the National Association of Attorneys General Summer Meeting (sounds like health care fraud and financial fraud are included at the top of the priorities list)

Amanda Bronstad, NLJ, 9th Circuit reinstates criminal charges against Pierce O'Donnell

Jenna Greene, NLJ, Imprisoned ex-Mayer Brown partner settles SEC charges

NYTimes, AP,3 Years in Prison for an Ex-Official

Opinion, NYTimes, Can the U.S. Punish BP’s Shareholders?  (inlcudes pieces by Professor Lynn A. Stout, William K. Black, and J.W. Verret)


June 16, 2010 in News | Permalink | Comments (0) | TrackBack (0)

Tuesday, June 15, 2010

Mass State Court Rejects Collective Knowledge

In determining the mens rea under corporate criminal liability, federal courts have sometimes used a theory of "collective knowledge." In U.S. v. Bank of New England, 821 F.2d 844 (1st Cir. 1987), the court found that the knowledge of a corporation "is the sum of the knowledge of all of the employees." This appears not to be the case in Massachusetts state court, which held in Commonwealth v. Life Care Centers of America, Inc., 926 N.E.2d 206 (2010), that "this theory is illogical and such an argument cannot succeed.  If at least one employee did not act wantonly or recklessly, then the corporation cannot be held to a higher standard of culpability by combining various employees' acts."  The court notes several federal cases that have not endorsed collective knowledge, and also notes that this case is different from the Bank of New England case because it does not involve a Federal regulatory offense. In this case the crime charged was involuntary manslaughter, which the court noted "requires an act taken in disregard of a high probability of harm to others so that the act is wanton or reckless."

(esp)(w/a hat tip to Professor Robert Batey)

June 15, 2010 in Judicial Opinions | Permalink | Comments (0) | TrackBack (0)

Monday, June 14, 2010

BP Redux

Guest Blogger - Benson Weintraub

The daily images of oil soaked wildlife and soiled beaches—not to mention the loss of human life from British Petroleum’s Deepwater Horizon explosion on April 20, 2010—is a reminder that corporate crime can only be reduced by a change in corporate culture. However, BP failed to heed this organizational imperative.

In United States v. BP Products of North America, Inc., 610 F.Supp.2d 655, 660 (S.D. TX. 2009),"BP Products North America, Inc. entered a plea of guilty to an information charging a felony violation of the federal Clean Air Act. The charge arises from the March 23, 2005 explosion at the Texas City, Texas plant that killed 15 and injured scores. The plea agreement stipulates the sentence: a $50 million fine and three years of probation with the conditions that BP Products comply with a Settlement Agreement reached with the Occupational Safety and Health Administration ("OSHA") and an Agreed Order imposed by the Texas Commission on Environmental Quality ("TCEQ")."). BP also paid more than $1 billion in restitution. 

The 74 page decision addresses restitution, corporate fines, Apprendi, and claims under the CVRA.

DOJ has now commenced a criminal investigation of BP’s handling of the 2010 explosion and events leading up to it.

Be assured that one focus of BP’s counsel is on application of the Corporate Sentencing Guidelines and the firm’s prior criminal history. One point would be assessed under USSG §8C2.5(c)(1) because the instant offense was committed by "the organization (or separately managed line of businesses)" after a "criminal adjudication based on similar misconduct" within the past 10 years. Id.

Before the threat of receivership takes hold, BP’s lawyers would be well-advised to get ahead of this problem by enforcing their compliance programs and making voluntary disclosures rather than obstructive comments.


June 14, 2010 in Environment, Investigations | Permalink | Comments (0) | TrackBack (0)

Skilling Magazine Article - Well Worth the Time to Read

With no ruling on the Jeffrey Skilling case today, you might have time to read what Dr. Archelle Georgiou has written in CNN Money - Fortune titled, Skilling speaks: Enron CEO's jailhouse interview.


June 14, 2010 in Enron | Permalink | Comments (0) | TrackBack (0)

No Supreme Court Opinions on Mail Fraud Today

Many anxiously await the trilogy of cases pending on section 1346.  But today will not be the day.

(esp)(back in Gulfport, Florida)

June 14, 2010 in Judicial Opinions | Permalink | Comments (0) | TrackBack (0)

Saturday, June 12, 2010

Charging Many Counts Can Result in Hearing the Words "Not Guilty" Many Times

Sholom Rubashkin, the manager of a kosher meat plant in Iowa, had been unsuccessful in federal court as he was found guilty of bank fraud and related charges resulting from a raid premised on illegal immigration. He awaits sentencing in that case (see background here).  But the same result is not seen on the state side in charges that came from the federal case, albeit different allegations.  Following a five-week trial (yes - five weeks), he was found not guilty of 67 counts (yes - 67 counts) of child labor.   What is particularly noteworthy here is that he was initially charged with 9,311 counts of child labor violations as the state had charged a separate criminal charge for each day of the 31 minors alleged in the case. Prior to trial they reduced this to 67 counts and the judge granted a directed verdict as to 16 of these counts. This was not an easy case for the defense as the court's instructions included a mistake of fact instruction that stated that any mistaken belief in the age of the workers had to "be because of a good faith reasonable belief" and that the defendant "must inquire or determine what is true when to do so would be reasonable under the circumstances." A change of venue had been granted in this case, but it remained in Iowa where jurors may have been aware of the federal case. Despite these obstacles for the defense, the jury returned not guilty verdicts. The defendant was represented by Mark E. Weinhardt and Holly Logan of Belin McCormick, PC (Des Moines, Iowa) and F. Montgomery Brown of Brown Scott, PLC (West Des Moines, Iowa). 
(esp) (blogging from Marseille, France)

June 12, 2010 in Verdict | Permalink | Comments (0) | TrackBack (0)

In the News & Around the Blogosphere

Friday, June 11, 2010

The Constitution (and its Confrontation Clause): An Inconvenience Pact


The Boston Globe carries this article today by John R. Ellement, echoing Massachusetts prosecutors' complaints that defense lawyers in the Bay State are "exploiting" the Supreme Court's 2009 Confrontation Clause decision in Melendez-Diaz v. Massachusetts. (Melendez-Diaz applied the Supreme Court's earlier Crawford v. Washington holding to forensic analysts' laboratory reports.) According to the article, "the state’s 35 chemists have been ordered to prepare for court 1,606 times, but actually testified only 184 times." Allegedly, some defense attorneys insist that state chemists appear for trial in hopes that scheduling conflicts will prevent their attendance and result in dismissal. Imagine that.

Although the story is generally well-written, Ellement fails to explain, in even the most rudimentary form, the Confrontation Clause principles behind the high Court's ruling. Thankfully, he does quote Massachusetts Association of Criminal Defense Lawyers' President John H. Cunha Jr., who reminds Ellement that "[t]o just come in there with a piece of paper that says somebody is guilty is contrary to our system,’’ and that “[c]ross-examination is supposed to test the evidence. . . . The U.S. Constitution is not a technicality.’’ No doubt Cunha made the Confrontation Clause point in more detail that failed to make its way into print. 

The article is not without some irony. One of the bellyachers who Ellement quotes, concerning the supposed deleterious effects of Melendez-Diaz, is John A. Grossman, "the Patrick administration’s top specialist on forensic sciences." Grossman seems to have spoken to the press as part of an official effort to negatively assess Melendez-Diaz. Yet Ellement also reports, near the tail end of the piece, that, "yesterday, the Patrick administration announced it had appointed a UMass Memorial Medical Center official to take over the State Police lab, a job that has been vacant since 2007 after mismanagement of forensic evidence was discovered."  (emphasis added).


June 11, 2010 in Current Affairs, Privileges, Prosecutors, Science | Permalink | Comments (1) | TrackBack (0)

Thursday, June 10, 2010

Welcome Guest Blogger Solomon L. Wisenberg

I am pleased to announce that Solomon L. Wisenberg of Barnes & Thornburg LLP will be joining me for the next couple of weeks as a guest, blogging at the white collar crime prof blog.  You can read more about his extensive background here.


June 10, 2010 in About This Blog | Permalink | Comments (1) | TrackBack (0)

The SEC's Stat Scam


Zachary Goldfarb has an interesting story in today's Washington Post about past turmoil and alleged retaliation in the SEC's Fort Worth District Office. The story highlights the difficulties facing the new SEC regime as it tries to kick-start an agency that rather miserably failed to spot the Madoff and Stanford frauds.

You may recall the name of Julie Preuitt. She is the Fort Worth Examination Branch official who sounded the alarm bell for years about R. Allen Stanford's alleged activities, only to see her complaints ignored or quashed by supervisors in the Fort Worth Enforcement Branch. All of this is detailed in SEC Inspector General H. David Kotz's excellent and shocking Report of Investigation of the SEC's Response to Concerns Regarding Robert Allen Stanford's Alleged Ponzi Scheme.

In 2007, according to Goldfarb, Preuitt's Examination Branch boss, Kimberly Garber, instituted a new super-short method, known as a rave, of examining certain brokerage firms. The exams lasted half a day. Only management personnel were interviewed during the raves, and the examiners did not actually examine any records, although company policies were reviewed. The raves were instituted by Garber, purportedly to boost Fort Worth's exam stats. Preuitt complained vociferously about the raves, and was rewarded with reassignment and demotion. This same management focus on stats over substance was what led to the Fort Worth Enforcement Branch's failure to publicize and halt Stanford's alleged activities in a timely fashion, according to Kotz's Report.

The story also reveals that Garber is alleged to have violated the SEC's ethics rules by using her office for the private gain of relatives. During an official trip to Kansas, Garber arranged for her staff to stay at a bed and breakfast owned by her brother and sister-in-law.

The SEC has discontinued the raves, but hard feelings between management and staff persist in Fort Worth.

This is all interesting stuff, and it points toward a larger and endemic problem within federal regulatory and law enforcement--that is, the obsession with statistics as a sign of progress in the war against white collar crime. Too much of a focus on stats leads management to favor the quick hit and the easy, often small, target. Think about that every time you see an FBI press release touting the latest mortgage fraud guilty plea. My guess is that most of the mortgage fraud convictions in the last two years involved small fries.


June 10, 2010 in Investigations, SEC, Securities | Permalink | Comments (0) | TrackBack (0)

Friday, June 4, 2010

In the News & Around the Blogosphere

Thursday, June 3, 2010

In the News & Around the Blogosphere

Helene Cooper & Peter Baker, NYTimes,U.S. Opens Criminal Inquiry Into Oil Spill;DOJ Press Release, Attorney General Eric Holder on Gulf Oil Spill

Catherine Whittenburg, Tampa Tribune, Ex-Florida GOP chairman Jim Greer charged with felony theft

Sarah Randag, ABA Jrl Law News Now, Alleged Ponzi Schemer Tells Judge He Doesn’t Know How His Lawyers Have Billed $6M So Far (w/ a hat tip to Ivan Dominguez)

Samuel Rubenfeld, Dow Jones, Nasdaq, US Attorney General Urges OECD to do More to Fight Corruption;Bloomberg BusinessWeek (AP), Holder pushes anti-corruption treaty; DOJ Press Release, Attorney General Holder Delivers Remarks at the Organization for Economic Co-Operation and Development

DOJ Press Release, Alaska Department of Transportation and Public Facilities to Pay Nearly $1 Million for Alleged Clean Water Act Violations

Peter Slevin, Washington Post, Blagojevich trial will be key performance for ex-governor

Jonathan Saltzman, Boston Globe, Wilkerson to plead guilty in corruption case 

Angela Couloumbis, Philadelphia Inquirer,  Preliminary Hearing Advances Perzel Corruption Case to Trial

Jennifer Emily, Dallas Morning News, Special Prosecutor to Examine Corruption Allegations Involving Dallas County Constables

Solomon L. Wisenberg, Letter of Apology, The SEC And Rattner

DOJ Press Release, Former New Jersey Investment Company Executive Charged with Embezzling More Than $600,000 from Company

Cathy Hayes, Irish Central, Ireland to crack down on white-collar crime

DOJ Press Release, Department of Justice Recovers More Than $40 Million in Fraud Proceeds from Foreign Ponzi Scheme

DOJ Press Release, Two Securities Broker-Dealers Indicted for Securities Fraud Scheme in Texas


June 3, 2010 in News | Permalink | Comments (0) | TrackBack (0)

Wednesday, June 2, 2010

DA Vance on Attorney-Client Privilege and Fees

As noted here, New York County District Attorney Cyrus R. Vance issued via his Chief Assistant District Attorney Daniel R. Alonso a Memo pertaining to charging organizations. One aspect caught my eye - privileges and attorney fees.  The Memo states:

"... although the Office will not ordinarily request that an organization waive valid claims of attorney-client privilege or work product protection in order to be credited for its cooperation, where an organization relies on the attorney-client privilege or the work product doctrine to obstruct the investigation, or when it refuses to disclose relevant facts that will further the investigation, these factors will militate against cooperation credit. Similarly, although the Office will not ordinarily be influenced by an organization’s decision to provide for the legal expenses of its directors, officers, employees, or agents, or its decision to enter into an appropriate joint defense agreement, if such practices are made as part of an effort to obstruct, in any way, an investigation or prosecution, or if they result in relevant information’s becoming unavailable to the investigation, they will be considered in any decision whether to prosecute the organization." (footnote omitted)

On a brighter note, the policy does recognize the importance of collateral consequences in making a decision to charge a corporation.

Being corporate counsel seems to be more challenging these days in that the individual needs to be apprised of all the laws in the applicable jurisdictions - which these days can be international.  He or she also has to be familiar with the policy guidelines for the different entities they operate within - which could be many states. 


June 2, 2010 in Attorney Fees, Privileges, Prosecutions | Permalink | Comments (0) | TrackBack (0)

Manhattan DA Issues Policy on Prosecution of Businesses & Organizations

The charging policy of the United States Attorney, when it comes to charging corporations, has been controversial in some past years (see here & here). But the U.S. Attorney's Office is not the only office with policy regarding the charging of entities.  In an effort to "offer transparency and uniformity to the business community in understanding the factors the Office looks to in corporate investigations," Manhattan DA Cyrus R. Vance, Jr. issued new guidelines via his chief assistant Daniel R. Alonso. This new policy here, mirrors much of DOJ's policy on whether to charge a corporation.  It then applies New York law to many of these principles.  But the policy does provide for approvals from the DA or Chief Assistant DA in some instances such as financial institutions, political parties, and labor unions.  Alonso's Corporate Charging Policy endorses the use of deferred prosecution and non-prosecution agreements. More details to follow.


June 2, 2010 in News, Prosecutors | Permalink | Comments (0) | TrackBack (0)