Tuesday, August 30, 2011
Compiled and edited by white collar defense lawyers Daniel J. Fetterman of Kasowitz, Benson, Torres & Friedman LLP and Mark P. Goodman of Debevoise & Plimpton LLP, the book is being published by West/Thomson Reuters. The chapters are authored by key former government prosecutors, such as James B. Comey. For details see here.
Here is William Roger Clemens' Reply Memorandum supporting his Motion to Prohibit Retrial and Dismiss the Indictment, which was filed on Friday. Like the original defense Motion and the Government's Response, it is well written. I was surprised, however, by the defense's failure to spend more time on a particularly disingenous aspect of the Government's Response, relating to the prosecution's violation of a court order during opening argument. I'll have some commentary on this issue in a few days.
Sunday, August 28, 2011
Audra D.S. Burch, Miami Herald, Medical licenses targeted in pill mill crackdown
Zoe Tillman, BLT Blog, FCPA Attorneys Gear up for Round Two in Gabon Bribery Case
Peter Henning, Dealbook, How Serious a Crime Is Insider Trading?
Markus Funk & Assad H. Clark, The SEC Releases Whistleblower Bounty Rules - So Now What?
Chad Bray, Wall St Jrl, Ex-Analyst Hit With Penalty in Insider Probe
Kyle Cheney, Enterprise News, Prosecutors seek 12.5-year sentence for DiMasi
Amanda Bronstad, Nat LJ, Government drops appeal of former Hollywood couple's FCPA sentences
Mike Scarcella, BLT Blog,In FCPA Sting Case, Prosecutors Revise Discovery Process
Thursday, August 25, 2011
There are certain imbalances in the trial of a criminal case. Some favor the defense – most obviously, that the prosecution must prove guilt beyond a reasonable doubt, not merely by a preponderance of the evidence. Some favor the prosecution – such as the ability to force witnesses to testify by grant of immunity, an ability the defense does not have.
Essentially, the prosecution may require testimony from any available witness if the testimony is relevant and admissible and not protected by constitutional or evidentiary privilege. If a witness refuses to testify on fifth amendment grounds, the prosecution has the option of granting the witness immunity and thus eliminating, at least theoretically, her fear of self-incrimination and consequently her right not to testify. Prosecutors routinely in white-collar and other cases rely at trial on immunized testimony of accomplices, co-conspirators and others involved in the alleged criminal activity at issue.
The defense, on the other hand, is hampered by its inability to secure the testimony of such witnesses, who, fearful of prosecutorial use of their trial testimony against them in a later proceeding and/or retaliation for their testimony for the defendant, often assert their fifth amendment privilege against self-incrimination to avoid testifying. Although the defense may request that the prosecution, or the court, grant immunity to a defense witness, such requests are almost invariably denied. Prosecutors, generally not interested in helping the defendant, never or virtually never grant such requests, even if there is virtually no possibility that the witness will ever be prosecuted, commonly claiming that the witness might be immunized for other, unknown crimes. Judges routinely refuse to grant immunity out of fear of giving a potential wrongdoer immunity, deference to the prosecutor’s decision, or separation of powers concerns.
In re Nagle (3d Circuit, 10-3974, August 17, 2011), 2011 WL 3610120, a non-precedential opinion, involved such a situation. The underlying indictment charged Nagle and his uncle and business co-owner Fink with defrauding the United States by setting up a phony Disadvantaged Business Enterprise (DBE) to act as a subcontractor so that the business was eligible to, and did, receive government projects. Nagle claimed Fink had excluded him from the day-to-day operations of the business and that he was unaware of any fraud. After Fink pleaded guilty to conspiracy, Nagle subpoenaed him and Fink replied that he would invoke his fifth amendment right and decline to testify.
The defendant requested that the government grant the witness immunity. Not surprisingly, the government refused, contending it did not know what the witness would say and that it feared giving him an "immunity bath." Then, the district court, upon application of the defendant, itself granted Fink immunity.
The case reached the Third Circuit on the government’s interlocutory appeal and writs of mandamus and prohibition challenging the district court’s immunity grant to Fink. The Court of Appeals denied both the appeal and the writs on procedural grounds. While the court did not rule on the merits of the district court’s decision by holding it was not challengeable by either appeal or writ, it did say that the district court "neither committed clear legal error nor clearly abused its discretion," thereby putting its finger, but not its thumb, on the scale favoring the grant of immunity here.
Thirty-seven years ago, a federal judge, denying a motion I made for defense witness immunity, called it "the stupidest motion I ever heard." According to the knowledgeable Ardmore, PA attorney Peter Goldberger, who co-wrote the NACDL amicus appellate brief supporting Nagle, this case is the first Circuit Court decision upholding a grant of immunity. The law sometimes moves slowly.
To be sure, the court’s non-precedential decision is not a strong or unqualified approval of judicial grants of defense witness immunity. The court said only that the grant here was neither a clear error of law nor a clear abuse of discretion. Additionally, the district court’s order was made after the witness Fink had pleaded guilty (but apparently before he was sentenced) and thus the immunity grant did not absolve him of criminal liability, at least for the conduct to which he admitted guilt. Most requests for grants of defense witness immunity are for testimony of persons who have not been charged, let alone convicted. In those instances, the prosecutorial objection that immunity might let a criminal go free has more substance.
Defense lawyers should nonetheless celebrate -- albeit with beer, not champagne. The decision should give some support to district judges (at least in the Third Circuit) who are hesitant to grant defense immunity because of questions of judicial power or fear of reversal. And, it should suggest to prosecutors that they may no longer be able to continue to deprive defendants of essential testimony solely based on the boilerplate, unspecific argument that it might give the witness an "immunity bath" for unknown crimes.
Nagle Mandamus Petition -Download Nagle mandamus petition
Brief of Appelle/Respondent Joseph W. Nagle - Download 3BrNagle e032111
Rply Brief of Appellant/Petition - Download 3USReply e040611
NACDL-PACDL Amicus - Download 3MemAmi NACDL-PACDL e112410
Wednesday, August 24, 2011
The New York County District Attorney’s Office, in moving to dismiss the case against Dominique Strauss-Kahn, attempted to seize the high ground. Rather than merely stating that it could not prove the defendant guilty beyond a reasonable doubt, as it invariably does in motions to dismiss and as its motion persuasively demonstrates, the prosecution justified its position on the grounds that it was ethically bound to dismiss the case because it was not convinced of the defendant’s guilt. "If, after a careful assessment of the facts, the prosecutor is not convinced the defendant is guilty beyond a reasonable doubt, he or she must decline to prosecute," said District Attorney Cyrus Vance Jr. That position, however laudable, is not the standard set forth by either the American Bar Association Standards on the Prosecution Function or the New York State Rules of Professional Conduct.
In its written motion, the prosecution contended (without citation to policy statements, ethics rule, case or statute), that its position reflected the policy of "felony prosecutors" in New York County "for generations." Defense practitioners, however, would dispute that, frequently having been told by prosecutors in New York County (and elsewhere) that it does not matter what the prosecutor personally believes, but rather "that’s what juries are for."
As I wrote in an earlier blog piece, here, the American Bar Association Standards for Discretion in the Charging Decision (Standard 3-3.9) do not preclude a district attorney from prosecuting a case in which he is not convinced of the defendant’s guilt, as long as the charges are supported by probable cause and admissible evidence. Similarly, the New York Rules of Professional Conduct only preclude a prosecutor from going forward if "the charge is not supported by probable cause." N.Y. Rules Prof’l Conduct R. 3(8)(a).
The District Attorney’s pronouncement, whether a new policy fashioned for the Strauss-Kahn case or a reiteration of past practice, is a commendable one. The ABA should reconsider its position allowing a prosecutor to go forward even if he or she does not believe the defendant is guilty.
The National Association of Criminal Defense Lawyers (NACDL) filed an amicus brief in the Ian Norris case - Download Norris v United States (11-91) Brief of NACDL as Amicus Curiae in Support of Petitioner_FINAL It highlights some of the important issues in this case. (for background see here). It brings out important issues such as:
- "[T]he Third Circuit's ruling renders effective representation of both the corporate and individual clients ensnared in a government investigation impossible, and encroaches on the rights embodied in the Sixth Amendment."
- "The decision endorses Government efforts to compel counsel to testify against their clients."
The Supreme Court raised in footnote 7 of Arthur Andersen LLP that there was a split in interpreting "corruptly persuades"in 18 USC 1512(b). The Court did not resolve this split in Andersen.
The NACDL brief places front and center the question of what should be the scope of the Bevill test. It also shows the ramifications of continuing with this test, a test that runs counter an important constitutional principle. Lower courts have been looking to the Third Circuit Bevill test, but it has yet to be endorsed in any Supreme Court opinion. Norris, presents this issue with an added dimension of a statute that has mixed interpretations.
In United Staets v. Singletary, the Eleventh Circuit looked at issues of loss amount in a mortgage fraud decision. The Federal Defender's Office for the Middle District of Florida (with special thanks to Steven Kruer, chief paralegal) writes:
"Anyone with a mortgage fraud case presenting issues of loss amount or restitution payable should read this published decision from Monday, August 15, 2001, in which the Eleventh Circuit vacated the judgment and remanded for re-sentencing.
"In reversing, the Court noted that the government had the burden of proving, with respect to each of the mortgages for which it sought restitution, that the mortgage was the product of a fraudulent misrepresentation, and that it had not met this burden. The district court’s statement in the restitution order that “restitution of at least $1,000,000 has been established by the Government” did not identify the mortgages that had been fraudulently obtained and caused losses totaling that sum. To enable meaningful appellate review, the Court wrote, a district court’s calculation of restitution must be supported by specific factual findings. The district court failed to carry out this task, the Court held, and thus vacated the restitution provisions of the Singletarys’ judgments and remanded the case so that the court could perform this task.
In remanding, the Court wrote:
We do so with this caveat: the Government is not receiving another bite of the apple. The district court shall render the necessary findings of fact and conclusions of law with respect to each of the 56 mortgages at issue on the basis of the evidentiary record as it now exists.
(esp)(reprinted with permission of the PD's Office MD Fl.)
Monday, August 22, 2011
The Norris case provides an opportunity to consider the role of corporate counsel in dealing with a CEO, in addition to resolving a circuit split with the witness-tampering statute - 18 USC 1512(b). The defense raises the issue as to "whether a person 'corruptly persuades' another in violation of the statute by persuading him or her to decline to provide incriminating information to authorities, where the other person enjoys a privilege or right to so decline."
The underlying factual basis that sets the stage for this issue raises concerns that could use Supreme Court clarification. As noted here and here, the Third Circuit ruled that the district court "did not legally err in applying" the Bevill test. Deferring to the district court, the Third Circuit held that permitting the company's former counsel to testify at trial was not error as Norris had not met "his burden in asserting his privilege pursuant to the five-factor test set forth in Bevill. The defendant had argued that the Bevill standard should not "apply here, as here, both the individual and the corporation have an express attorney-client relationship with counsel."
Ian Norris, CEO of Morgan Crucible, originally faced three counts of obstruction of justice. He was acquitted of two counts following his extradition and trial in the United States, but was convicted of conspiracy to tamper with grand jury witnesses. A key witness against the defendant was corporate counsel. The trial court allowed corporate counsel to testify despite the defendant's argument that corporate counsel had represented Norris. Some of the evidence offered by the defense is included in the attachments to the cert petition. For example, the Antitrust Division explicitly asked counsel who he represented, saying "if your representation is limited to the corporation only, I would greatly appreciate your confirming that fact for me so that there are no misunderstandings as to the scope of your representation." (p. 181-82a). The exchange of letters has counsel telling the Antitrust Division that "[w]e presumptively also represent all current employees of the companies in connection with the matter." It also states - "[s]hould you wish to call other current employees, I assume that we would also represent those individuals." (p. 185a). Norris presents many other documents in the appendix to support his argument that corporate counsel represented him.
Norris Cert Petition - Download Norris Cert Petition (efile)
The government did not file a responsive brief and the Supreme Docket has the case distributed for a conference of September 26, 2011. See here.
See also Sue Reisinger, Corporate Counsel, Jailed CEO Ian Norris Appeals His Conviction to SCOTUS; D. Daniel Sokol, Antitrust & Competition Policy Blog, Norris Cert Petition to the Supreme Court
For many, this week starts the first week of classes. So it seems appropriate to remind everyone that hi-tech grade changing schemes can land students with criminal convictions and prison time.
The Eleventh Circuit upheld the conviction and sentence of an undergraduate student at Florida A & M University (FAMU) who had received a sentence of 84 months and was appealing. (U.S. v. Barrington) This student, along with two co-defendants, "all undergraduate students at Florida A&M University ("FAMU"), were indicted and charged in a five count indictment with conspiracy to commit wire fraud using a protected computer in violation of 18 U.S.C. §§ 371 and 1349; fraud using a protected computer in violation of 18 U.S.C. §§1030(a)(4) and (c)(3)(A) and 2; and three counts of aggravated identity theft in violation of 18 U.S.C. §§ 1028A and 2." Two of the students "pleaded guilty pursuant to plea agreements, received substantial assistance departures pursuant to U.S.S.G. § 5K1.1, and were each sentenced to 22 months in prison and 3 year terms of supervised release."
In this case it started with using "blank grade change slips." But it then moved to installing "keylogger software on various University computers, including an office computer used by a Registrar employee and four terminals placed in the University's grand ballroom during registration." They captured the Registrar's usernames and passwords which allowed them access to the system so that they could change grades. They even went so far as to change "the residencies of several non-resident students to qualify them for in-state tuition." The court noted that an investigation "revealed that in excess of 650 unauthorized grade changes had been made, involving at least 90 students."
The 11th Circuit rejected the appealing defendant's legal error claims and also claims that the sentence was improper.
Sunday, August 21, 2011
In Skilling, the Court limited section 1346 to bribes and kickbacks. But this decision has left courts with several unresolved issues. The Stinn case raises an important issue, and the briefs highlight an interesting position being taken by the government.
The defense files a 2255 motion in Stinn saying that Skilling applies and the conviction should be vacated. - Download Omnibus Memo of Law ISO Stinn's Mtn to Vacate They note that "[i]t is immaterial that the government and the trial court did not use the phrase 'honest services' in the indictment or the jury instructions. The government argued the same invalid theory as it did in Skilling throughout the trial and relied on that theory to convince the jury to convict Stinn."
The government argues that Skilling does not apply because they did not file the case under 1346. Download Gov's Memo in Opp to D's Mtn to Vacate Convictions & Grant Bail They note "the Supreme Court's holding in Skilling is irrelevant to the defendant's case, as he was not prosecuted under an honest services theory of fraud."
The defense replies, however, with several arguments including - isn't this the exact opposite position the government took in the Redzic case. Download REPLY TO GOVT'S OPP TO MTN TO VACATE Redzic, an unusual case, had the court finding that the "money or property" portion of the case was problematic and could not stand. But even though the defendant was not charged under 1346, the court went on to uphold the conviction saying that 1346 did not "create a separate substantive offense, it merely defines a term contained in sections 1341 and 1343." The court held it was not necessary to cite 1346 in the charging instrument.
Redzic raised issues of whether the accused had truly been advised under due process of the charges against the defendant since the government was using an uncharged basis for asking that the conviction be upheld. But now the government in Stinn is saying that it makes a difference whether the government charges a case under 1346. Is the government taking the opposite position in these two cases (Redzic and Stinn), and is this problematic?
Last Call - Sept. 1 Deadline - Call for Roundtable Workshop Submissions: Reducing Reliance on Incarceration
Call for Roundtable Workshop Submissions: Reducing Reliance on Incarceration
On Oct. 27-28, 2011, the ABA and the AALS will present a joint conference, Reducing Reliance on Incarceration, at the Liaison Capitol Hill Hotel in Washington, D.C. The first event of the conference, on the afternoon of Thursday Oct. 27th, is a workshop for scholarly papers relating to the conference theme. Participants will present their work in a roundtable format. Abstracts or drafts will be shared among presenters and discussants in advance of the workshop. Workshop presenters must commit to attending both days of the conference, which will include a plenary and multiple break-out sessions on the topic of reducing reliance on incarceration. For a description of the program, please visit here Workshop presenters will be responsible for their own travel and hotel costs, and will be required to pay the conference registration fee. To apply to workshop a paper, please email an abstract of 500 words to both email@example.com and firstname.lastname@example.org by Sept. 1, 2011. Space is limited and presenters will be chosen by members of the organizing committee.
Friday, August 19, 2011
Matthew Huisman, David Ingram, & Zoe Tillman, BLT Blog, Abbe Lowell Joins John Edwards' Legal Defense Team As Skadden Withdraws
Zoe Tillman, BLT Blog, Prosecutors: Clemens Seeking 'Unwarranted Windfall' from Trial Error
Peter Lattman, NYTimes, Lawyer Tied to Galleon Case Gets 3 Years in Prison
Jie Jenny Zou, The Chronicle, QuickWire: Former IT Director at Southern U. Pleads Guilty to $157,000 in Fraud
Thursday, August 18, 2011
George Bennett, Palm Beach Post, Behind the razor wire with contrite Mary McCarty: 'I took my life for granted. I had a wonderful life. And I blew it'
Laura Olson, Pisttsburgh Post-Gazette, 2 former Perzel aides plead guilty in GOP corruption case
DOJ Press Release, Four Individuals Convicted in $4.7 Million Louisiana Medicare Fraud Scheme
David Ingram, BLT Blog, White House Counsel Brings in New Staff
Zoe Tillman, BLT Blog, Guards Investigated for Accepting Baseballs Signed by Clemens
Tuesday, August 16, 2011
Nathan Koppel, WSJ Blog, Alleged Juror Misconduct Surfaces in Daugerdas Case; Mark Hamblett, NYLJ, Tax Shelter Defense Seeks New Trial Over Juror's Hidden Identity
David Abel, Boston.com, Arroyo cleared in fraud verdict
Zack Needles, Legal Intelligencer, Ciavarella Sentenced to 28 Years in Prison - Former Judge Was One of the Key Figures In the Luzerne Co. Courthouse Scandal
John May, Daily Business Review, Are U.S. corporations becoming the world's police?
Tiffany Hsu. LATimes, IPad covers made from Madoff's clothes are hot items
Mark Hamblett, NYLJ, Circuit Upholds Convictions Against Defense Attorney Simels
Bob Van Voris & Chris Dolmetsch, Bloomberg, Galleon’s Rajaratnam Loses Motion for Acquittal on Insider-Trading Charges
Jonathan Stempel, Reuters, Rajaratnam sentencing may be a fight to the death (hat tip to Tiffany Joslyn at NACDL); Walter Pavlo, Forbes, Rajaratnam Sentence Recommendations Give Judge No Guidance
NACDL Press Release, Ohio Attorney William R. Gallagher Receives Criminal Defense Bar's Top Honor (and a member of the NACDL White Collar Crime College at Stetson)
Bob Van Voris, Bloomberg, Galleon Probe’s Danielle Chiesi Must Surrender Sept. 20; Fred Strasser & Glenn Holdcraft, San Francisco Chronicle, Galleon Probe's Danielle Chiesi Must Surrender Sept. 20
Steve Vaughan, Virginia Gazette, Hamilton receives 9.5 years for bribes
BBR Review, US Prosecutors Extend Swiss Bank Tax Probe
Chad Bray, WSJ, Judge Upholds Galleon Founder's Conviction
High B. Kaplan and Tom P. Taylor do a wonderful review of this past Supreme Court term in BNA's Criminal Law Reporter. They include discussion of the Global-Tech decision. It is titled, "Prosecutors, Scholars,
and Defense Lawyers Pick Most Important Decisions of Last Term."
Reproduced with permission from Criminal Law Reporter, 89 CRL 698(8/10/2011). Copyright 2011 by
The Bureau of National Affairs, Inc. (800-372-1033) <http://www.bna.com>
With many thanks to BNA for allowing me to post this.
Sunday, August 14, 2011
I write again about the non-white collar case of Dominique Strauss-Kahn because that case in many ways provides a primer on many criminal justice issues which arise in white-collar cases.
The principal issue on the table is the most basic one in all criminal cases – whether or not to prosecute. That decision has been recently discussed by my colleague, Professor Ellen Podgor, with respect to the Roger Clemens here and AIG Five here cases. The issues there are somewhat, but not totally, different from those here in that they involve a decision after a mistrial and appellate reversal, respectively. In Strauss-Kahn, while there has been an indictment, the trial is far off. Additionally, that indictment, as a result of the District Attorney’s aggressive and short-sighted decision to insist initially that Strauss-Kahn be held without bail, was hurriedly returned without sufficient time for the prosecutor to investigate at least the background of the complaining witness.
Her story appears to be coherent, corroborated by clear evidence of sexual conduct between her and Strauss-Kahn, some evidence of force, and a timely outcry. On the other hand, as the District Attorney revealed to the defense (and the world) by his extremely unusual early disclosure of Brady material, the complaining witness has given arguably inconsistent statements as to what she did around the time of the event, had apparently discussed with a friend receiving some monetary benefit from pursuing the case, and had lied on an application for asylum, including a false accusation of rape. And, this week, she filed a civil damages suit against Strauss-Kahn.
To my knowledge, relatively little has been written about what criteria are to be used in the crucial decision of whether to prosecute. The American Bar Association Standards for Discretion in the Charging Decision (Standard 3-3.9), which to me are surprisingly far from clear, state that a prosecutor has considerable discretion in the charging decision and, indeed, case law strongly supports that. The Standards say that a prosecutor should not pursue a case unless the charges are supported by probable cause or sufficient admissible evidence to support a conviction, but do not preclude a prosecutor from pursuing a case in which he or she has a reasonable (or even stronger) doubt about the guilt of the accused (although he or she "should not be compelled by his or her supervisor to prosecute a case in which he or she has a reasonable doubt"). Thus, it appears that under the ABA Standards, a prosecutor may pursue a case in which he or she does not believe beyond a reasonable doubt, or conceivably does not even believe, that the defendant is guilty. Similarly, the prosecutor may prosecute if he or she believes the case will likely result in an acquittal, as long as there is legally sufficient admissible evidence and probable cause to believe the defendant committed the crime.
The Standards state, impractically, that a prosecutor in making the charging decision should give "no weight" to any "personal or political advantages or disadvantages which might be involved." Additionally, the Standards state, a prosecutor should also give no weight to "a desire to enhance his or her record of convictions."
There certainly are legitimate reasons not to prosecute Strauss-Kahn. (There may well be others that have been privately revealed to the District Attorney.) The case against Strauss-Kahn, while it seems to allegedly involve clear evidence of sexual conduct between him and the complainant (whom he apparently had never met before) and some physical corroboration, essentially comes down to a "he says/she says" situation with respect to whether there was force or consent. Additionally, the complainant’s now-documented desire to seek personal gain (a desire quite common in cases in which there are deep-pocket defendants, but nonetheless always worrisome to prosecutors), and her alleged lies in her asylum application, especially the false rape accusation, make her an impeachable witness. On the other hand, her blemishes are not terribly different from those of other witnesses upon whose testimony juries have in New York City convicted defendants in sexual assault cases, the category of cases in which I find it most difficult to predict the outcome.
The decision whether to prosecute here is a difficult one. The unprecedented early provision of considerable Brady material by the prosecution leads one to suspect that it was a prelude for dismissal. The complainant's filing of the civil suit, obvious fodder for cross-examination, suggests that she (or her attorney) has given up on persuading the District Attorney to go forward. On the other hand, women’s groups and others have lately called for the District Attorney to prosecute the case.
Perhaps this is one of those cases which, as one senior New York County prosecutor told me some years ago, "need to be tried." Although I believe that a prosecutor should not pursue a case in which he or she has a reasonable doubt as to the defendant’s guilt, a higher criterion for going forward than the ABA Standards, I also believe there are some rare cases in which a prosecutor should perhaps pursue a case he expects to lose. An alleged organized crime boss, a suspected serial killer, or a suspected serial rapist might fall into this category.
I expect that the case will be dismissed, but not necessarily based on the permissible factors listed in the ABA Standards. Although I suspect that the prosecutors are convinced of Strauss-Kahn’s guilt, the case looks like a probable loser. And, the District Attorney -- who has received some bad press because of several recent losses of high-profile cases -- despite the ABA Standards prohibiting political considerations – cannot help but think of the political effect of another loss in this extremely high-profile case.
Friday, August 12, 2011
SEC's Dodd-Frank Whistleblower Regulations Take Effect Today. Corporate America Expects More FCPA Woes.
Politico has a story about it here. The new regs implement Section 21F of the Dodd-Frank Act, which authorizes the SEC to award 10 to 30 percent of the monetary sanctions it recovers in a given case to a qualified whistleblower. What seems to most annoy the business community about the implementing regs is the SEC's insistence that whistleblowers are under no obligation to make use of a company's internal complaint procedures before running to the SEC. But the regs do say that an employee who goes through internal company whistleblower protocols is eligible for a Dodd-Frank whistleblower award if his/her employer subsequently self-reports to the SEC, based on the whistleblower's complaint, and a recovery is had. Further, an employee has a 120-day grace period after whistleblowing to his/her company, within which to bring his/her complaint to the SEC. Finally, in determining the amount of a whistleblower reward, the SEC will consider whether the whistleblower made use of his/her internal company procedures. The new regs contain enhanced anti-retaliation provisions as well, which prohibit direct or indirect retaliation for making whistleblower complaints to the SEC and other government entities.
There is an inherent tension between the anti-retaliation provisions and the SEC's and DOJ's often-emphasized warnings to companies that they should have vigorous and authentic internal whistleblower procedures. What if a company's pre-existing compliance policy requires the prompt internal reporting of whistleblower complaints? Can a company punish an employee who ignores such a provision and goes straight to the SEC? What if the employee declines to internally report, even after going to the SEC, because he/she feels that the company procedure is a sham? My guess is that such punishments will occur and that they will be deemed to run afoul of the anti-retaliation provisions. The retaliatory response is an instinctiual, persistent, and virtually universal impulse. It is really hard to eradicate.
Wednesday, August 10, 2011
Last week was Family Week for insider trading actions. Two highly-publicized cases concerned the disclosure and misuse of inside information received from a close relative -- one a spouse, the other a parent.
Both cases implicate the question of whether disclosure of confidential information to a close relative should form the basis of a criminal or regulatory proceeding. While the law provides no safe haven from prosecution for unlawful disclosure to a spouse or child (although the marital privilege may provide some protection to a spouse), respect for family relations may in some cases militate against such a prosecution. Here, however, the facts and circumstances of each case – one justifying prosecution, the other working against it – seem to make that issue moot.
In one, SEC v. William A. Marovitz, 1:11-CV-05259 (N.D. Ill. August 3, 2011), the husband of former Playboy Enterprises CEO Christy Hefner agreed (with the usual non-admission and non-denial of wrongdoing) to pay approximately $170,000 to settle a civil action. The husband, William Marovitz, according to the SEC, traded and made profits on sales of Playboy stock based on information he received from his wife concerning, among other things, a sale of the company. According to the SEC, Hefner had talked with her husband about her concerns with his trading and had the company counsel also speak with him. The counsel sent Marovitz a memo warning of the "serious implications" of his trading Playboy shares and asked him to consult counsel before he did. According to the complaint, Marovitz never did.
Hefner was not charged. Not only was she uninvolved in his trading, she took precautions, however unsuccessful, to prevent her husband’s purported misuse of the information. Of course, she could have prevented any misappropriation of insider information by him by simply not disclosing it.
The settlement amount includes civil penalties. One wonders what, if any, additional penalties Hefner will inflict upon her husband for his apparent betrayal of marital trust.
In another case, U.S. v. H. Clayton Peterson, 11 Crim. 665 (S.D.N.Y.) (see also SEC v. H. Clayton Peterson, etc. al., 11-CV-5448 (S.D.N.Y.)), a father and son both pleaded guilty to criminal securities fraud and conspiracy violations in connection with providing, using, and disseminating inside information concerning the 2010 takeover of Mariner Energy in Denver by the Apache Corporation. H. Clayton Peterson, a Mariner director, pleaded guilty to tipping off his son, Drew Peterson, who traded for himself, clients and a friend for a $150,000 profit and tipped off another friend, reportedly Bo K. Brownstein, a hedge fund executive, who traded for his fund and relatives and friends for profits of more than $5 million.
Peterson Sr. apparently took an active role in the wrongdoing, not only on several occasions providing confidential information to his son, but also directing him on two occasions to purchase Mariner stock for his sister. His conduct, thus, was apparently far more culpable than Hefner’s.
Drew Peterson is reportedly cooperating against Brownstein and others, as, to the extent he can, most likely is his father. Often, the family that steals together squeals together.
Monday, August 8, 2011
David Hilzenrath, Wash Post, SEC withdraws insider trading complaint against Gupta; Channing Turner, Main Justice, SEC Drops Proceeding Against Rajat Gupta
(esp)(blogging from Ottawa)