June 8, 2012
Did Bank of America CEO Wrongly Mislead Voting Shareholders Concerning Purchase of Merrill Lynch?
The New York Times this Monday reported that Bank of America (BOA) executives, including its then chief executive, Kenneth D. Lewis, in 2008 concealed from shareholders about to vote whether to approve the bank's purchase of Merrill Lynch that the expected losses that the bank would absorb from the purchase were far greater than reflected in the proxy documents they had received relating to the purchase. See here. Further, according to the report, Mr. Lewis at the meeting at which the stockholders voted whether to accept the deal, in response to a question about whether the purchase would dilute or add to the bank's income in coming years, sidestepped the question and referred the questioners to the proxy statement, which he knew seriously understated the loss. In court papers, the shareholders' lawyer called this response referencing the inaccurate proxy statement "materially false when made."
According to the Times, Mr. Lewis in recently-filed court papers claimed he had been advised by the bank's counsel, Wachtell, Lipton, Rosen & Katz, and by other bank executives that it was not necessary to disclose the actual projected losses.
The question of whether one must correct earlier inaccurate statements is sometimes murky, at least in law, and I would hesitate even to attempt to second-guess Wachtell Lipton, a highly-respected law firm, if in fact it did tell Mr. Lewis he need not correct the proxy statement before the vote. I do, however, find it hard to believe that Wachtell Lipton would have advised him to give the shareholders an obfuscating, misleading and arguably false statement.
There may well be wholly legitimate and defensible reasons for Bank of America to withhold the revised loss statements or for Mr. Lewis to answer as he did. The civil case, in which Mr. Lewis apparently has not asserted his privilege against self-incrimination, may provide these.
In the proxy statement, the projected loss of BOA profits from the merger was three percent in 2009, and nothing (and perhaps even a slight gain) in 2010. In the estimate provided to the executives before the vote but not communicated to the shareholders, it was 13 percent in 2009 and 2.8 percent in 2010. According to the Times, BOA's purchase of Merrill Lynch, which was ultimately urged by the government, required an additional $20 billion in bailout money beyond what the bank had received earlier. In addition, when Merrill's fourth-quarter losses were disclosed along with the bailout, shareholders in four days lost half of their value in BOA stock -- roughly $50 billion.
I suspect that there will be some governmental interest in this matter, if there is not already. I do not contend that Mr. Lewis' statement violated securities, criminal or other laws or regulations. If regulations did not prohibit him from concealing the latest reports from the voting shareholders, however, they should have. This may be another instance of questionable conduct that clear and specific regulations would have prevented.
June 6, 2012
New Trial Ordered for ESI Discovery Violation - Electronic Evidence Must be Usable
Guest Blogger – Rochelle Reback
In light of the prevalence of ESI discovery in white collar cases it is ironic that an important principle regarding electronic discovery is developed for us in an indigent's drug smuggling case. But, we'll take it! In United States v. Stirling ( Download Altonaga order granting new trial(1)) yesterday, District Judge Altonaga found that notwithstanding the government’s technical compliance with its ESI discovery obligations under Federal Rule of Criminal Procedure 16(a)(1)(B) by furnishing an exact replica of defendant's hard drive to the defense, the government's electronic discovery dump in this case so seriously impaired the defendant’s trial strategy that there should be a new trial. Not known to defendant's attorney, on the disclosed and mirrored hard drive were some of defendant's Skype chat logs which the government's forensic expert was able to open and view only by using a specialized computer program. The Skype chats were not visible in any other way. But neither the existence of the Skype chats on the hard drive, nor the expert's employment of the specialized program to view them were disclosed to the defense until after defendant testified. In rebuttal the prosecutor called their expert and used these Skype chats to impeach defendant to devastating effect as they contradicted much of his trial testimony. Stirling was convicted.
Under Federal Rule of Criminal Procedure 33, Judge Altonaga ordered a new trial in "the interest of justice," even though the government had warned the defense that if Stirling took the stand and testified falsely, there was [unidentified] evidence on the computer which the Government would use in its rebuttal to impeach him. Finding that this was not like the cases cited by the government where courts have consistently refused to require the government to identify exculpatory or inculpatory evidence within a larger mass of disclosed evidence, Judge Altonaga wrote that the standard of Federal Rule of Civil Procedure 34(b)(2)(E)(ii) should also apply in criminal cases and the government should be required to produce ESI in a "reasonably usable form." She found the government's "technical compliance with its discovery obligations under Federal Rule of Criminal Procedure 16 (a)(1)(B) by the furnishing of an exact replica of the hard drive" to not be enough. The government "never told defense counsel that incriminating Skype chats could be extracted from the disk or that they even existed." Judge Altonaga agreed with defense counsel that "production of something in a manner which is unintelligible is really not production." She ruled that "If, in order to view ESI, an indigent defendant such as Stirling needs to hire a computer forensics expert and obtain a program to retrieve information not apparent by reading what appears in a disk or hard drive, then such a defendant should so be informed by the Government, which knows of the existence of the non-apparent information. In such instance, and without the information or advice to search metadata or apply additional programs to the disk or hard drive, production has not been made in a reasonably usable form. Rather, it has been made in a manner that disguises what is available, and what the Government knows it has in its arsenal of evidence that it intends to use at trial."
One has to wonder if the "interest of justice" result would have been the same if the defendant in this case was not indigent and did not have to seek the court's assistance for experts and more sophisticated computer resources to unlock the hidden mysteries of the electronically stored information.
(reback) –(with hat tips to Donna Elm and Robert Godfrey)
June 5, 2012
Fifth Circuit Decision Has Many Inviting Issues for the Supremes
The Fifth Circuit affirmed the convictions and sentences in U.S. v. Brooks, a case involving alleged "false reporting of natural gas trades in violation of the Commodities Exchange Act and the federal wire fraud statute."
Although the court distinguishes the Stein decision from the Second Circuit with the facts in this case, both cases had individual defendants who had their attorney fees cut off. In Brooks, the defense claimed it was from government pressure, but the Fifth Circuit said the factual findings were not present to confirm this conduct. The court found that the company's policy on payment of attorney fees was a discretionary policy. But when a company gets a deferred prosecution agreement one has to wonder if there is an incentive to show cooperation, albeit payment of attorney fees can not be a factor used.
There is also an interesting question of what constitutes "reports" for purposes of the CEA or CFTC regulations. This is an intriguing issue as one is basically violating federal law through a submission document. The Fifth Circuit rejected a void for vagueness argument here.
The Fifth Circuit also found the Fifth Circuit Pattern Jury Instruction as meeting the recent Supreme Court decision in Global Tech, although they admit it does not use the same language. The question here is whether deliberately closing one's eyes is the same as taking "deliberate actions to avoid learning of the fact," the test set forth in Global Tech. I see a difference in that one is passive and the other is active. The Court seems to be satisfied with the evidence in this case, but one has to wonder if the Fifth Circuit should be quickly looking to change its pattern jury instruction to avoid this issue in future cases.
Then there is the question of defense witness immunity. A witness is on the prosecution witness list and is not called to testify because the prosecution has concerns about the witnesses truthfulness. The witness has not yet been sentenced (the government postponed sentencing for 39 months- obviously to be after this trial) and decides to take the Fifth Amendment. The prosecution called the witness the evening before the witness was to testify, but says the call was to determine if they needed to prepare the witness for cross-examination. The defense argues that the witness has exculpatory evidence for the defense. The defense asks for defense witness immunity and doesn't get it. One has to wonder whether the jury really had full information to resolve guilt or innocence? But the Fifth Circuit held otherwise.
And this is not a case where defendants are receiving light sentences. All the defendants were level one and yet all of their sentences exceeded 11 years imprisonment, with one receiving a 14 year sentence. Whoever thinks white collar offenders are getting off easy, needs to just look at this case to see that this is not the situation.
June 3, 2012
Corporate Social Responsibility and Supply Chains Practice: Proposed Dodd-Frank Conflict Minerals Rules
Federal Sentencing Guidelines Conference - Fraud Panel
The recent federal sentencing guideline conference had a panel moderated by Professor Doug Berman (Ohio State) on fraud/theft - it was part two for this conference on the topic of the fraud/theft sentencing guidelines. The panelists were: Harry Chernoff (AUSA Southern District of NY); Lisa Mathewson (Law Offices of Lisa A. Mathewson); Tracy A. Miner (Mintz Levin Cohn Ferris Glovsky & Popeo).
Harry Chernoff emphasized his belief that who the judge is can make a difference in the sentence received in a fraud/theft case. Lisa Mathewson noted how "loss is an imperfect" statement of culpability. Tracy A. Miner suggested that one needs to "look at the motivation of the particular individual." In this regard there was discussion how a corporation may be getting a pass because of a deferred prosecution. Looking at 2B1.1 and how to assess "gain or loss," Lisa Mathewson reminded listeners that when the loss is "0" that is a number that can and should be used. Tracy Miner noted that prosecutors are trained to increase the loss figure. In this regard it was noted that loss in some cases can end up as 360 to life, because there are so many potential aggravators. It was noted that is important to look at lack of gain as a mitigating factor that warrants a move downward.
Harry Chernoff emphasized his belief that who the judge is can make a difference in the sentence received in a fraud/theft case. Lisa Mathewson noted how "loss is an imperfect" statement of culpability. Tracy A. Miner suggested that one needs to "look at the motivation of the particular individual." In this regard there was discussion how a corporation may be getting a pass because of a deferred prosecution.
Looking at 2B1.1 and how to assess "gain or loss," Lisa Mathewson reminded listeners that when the loss is "0" that is a number that can and should be used. Tracy Miner noted that prosecutors are trained to increase the loss figure. In this regard it was noted that loss in some cases can end up as 360 to life, because there are so many potential aggravators. It was noted that is important to look at lack of gain as a mitigating factor that warrants a move downward.
It was noted how courts set the bar extremely low in what will be considered "sophisticated means." Tracy Miner noted that computers being used should not make the conduct sophisticated, as even kindergarten students use computers these days.
Some panelists noted that one needs to look at what was the real conduct and whether it being increased just because this was conduct highlighted in recent days. Tracy Miner reminded listeners to try and convince the government of the benefits of the defendant’s conduct. For example, there may be good collateral consequences such as did special education kids benefit and will there be severe consequences if the loss is placed very high.
The end of the panel discussion looked at commission considerations on the horizon and one position taken by some was that the commission should look at the whole guideline as opposed to just tweaking parts.