Tuesday, July 24, 2012
My learned and astute co-editor, Solomon Wisenberg, bridled at the thought of a criminal investigation of the Libor bank scandal (see here), which he believes will be a waste of time, and of the JP Morgan Chase trading loss (see here), which he believes lacks evidence of criminality. While I do not know enough about these matters to dispute his reasons, I nonetheless strongly believe a criminal investigation is warranted in both instances.
Financial manipulations which cost shareholders and customers of large institutions millions (or billions) of dollars require criminal investigation, and, if identifiable provable criminal wrongdoing is found, criminal prosecution. It has become clear that those institutions and their employees are incapable or unwilling to police themselves, and, as Mr. Wisenberg points out, the responsible regulatory agencies have often been asleep at the switch or even compliant.
That is not to say that every massive financial loss involves criminality or that weak or questionable criminal prosecutions should be brought to soothe the popular thirst for criminal punishment. It is not to say that genuine defenses, such as estoppel due to government approval or acquiescence, should not prevent prosecution. But for the huge financial institutions, even a penalty of almost a half billion dollars, as in the Barclays Bank "deferred prosecution" deal (effectively a "non-prosecution" deal), is merely a cost of doing business passed on to shareholders. And for many of the traders and manipulators, who always weigh risk but rarely morality, only the risk of a criminal prosecution (which for them involves potential prison sentences) will have any serious deterrent effect.
To be sure, criminal investigations, even without prosecutions, may deter innovation and creativity in financial vehicles and dealings (although I am not so sure that is a bad thing). Additionally, investigations themselves cause mental distress, potential loss of reputation, and considerable legal fees. Criminal investigations, therefore, should not be started without careful consideration by law enforcement or prosecutorial agencies. But massive losses of other people's money should almost always require an examination beyond a regulatory or civil one by our historically inept financial regulatory agencies.
Every death by other than natural causes, every fire of any proportion, and every serious automobile accident is reviewed by authorities for possible criminal prosecution. Is there any reason an unusual massive financial loss of other people's money should be exempt from scrutiny for possible criminality? I think not.
Tuesday, July 17, 2012
Joe Paterno was buried a second time last week -- partly by a report of former judge and FBI Director Louis Freeh and partly by accounts like that of the New York Times, which in a four-column lead story headlined "Abuse Scandal Inquiry Damns Paterno and Penn State," wrote "Mr. Freeh's investigation makes clear that it was Mr. Paterno . . . who persuaded the university president and others not to report Mr. Sandusky to the authorities . . . ." (emphasis added). See here. A reading of the report, however, shows that its conclusions as to Paterno are based on hearsay, innuendo and surmise. While a report such as the Freeh Report certainly need not be based on court-admissible testimony, if indeed the evidence referred to in the report constituted the sole basis for a criminal and/or civil charge against Paterno, the case undoubtedly would be thrown out and would not reach a jury.
The relevant evidence involving Paterno is as follows:
- In May 1998, with respect to an allegation that Sandusky had showered with an eleven year-old on the Penn State campus, Tim Curley, the Penn athletic director, notified his superiors that he had "touched base" with Paterno about the incident and days later sent to them an email "Anything new in this department? Coach [Paterno] is anxious to know where it stands."
- In February 2001, after he observed Sandusky sexually molesting a youth in a Penn State shower room, Mike McQueary, a graduate assistant, reported the incident to Paterno, who told him, "You did what you had to do. It is my job now to figure out what we want to do." The following day, a Sunday, Paterno reported the incident to Curley and Gary Schultz, a Penn State vice-president. Paterno waited a day or so not to "interfere with their weekend."
- Later in the month, Graham Spanier, the Penn State president, Schultz and Curley devised an action plan which included reporting the incident to the state welfare agency. A day or so later, Curley emailed Schultz and Spanier and said that he had changed his mind about the plan "after giving it more thought and talking it over with Joe [Paterno] yesterday," and now felt that they should instead tell Sandusky to seek professional help and not report him to the welfare authorities unless he did not cooperate.
The first item, the 1998 Curley email, merely demonstrates that Paterno showed an interest in what was happening with reference to the 1998 incident, which ultimately was reported to both the welfare department and the local prosecutor and resulted in no findings or charges. Paterno reportedly in 2011, after the incident involving Sandusky's 2001 conduct and the failure to report it to authorities raised public attention, denied that he was aware of the 1998 incident. In fact, Paterno's testimony in the grand jury in which he purportedly denied any such knowledge was in response to an imprecise, general and unfocused question, and his answer was accordingly unclear. Additionally, the reported statement denying any prior knowledge was by his "family" and not by him.
In any case, while a denial, if made directly by Paterno or even an authorized agent, might arguably be admissible in court as evidence of consciousness of guilt, such evidence is weak proof of guilt since even wholly blameless people often make false statements distancing themselves from wrongdoing.
The second item, Paterno's response to McQueary is by itself of little moment and says no more than that Paterno, having been apprised of the incident, would now have to figure out what he and the others will do. Of course, one can read into that facially bland statement a more sinister meaning -- that Paterno intended to tell McQueary to remain silent. Such a meaning, however, is supported only by surmise and suspicion. The report also states that Paterno waited a day before reporting the information to Curley and Schultz so as not to "interfere with their weekends." This one-day delay is not meaningful.
The third item, Curley's change of mind after "talking it over with Joe," might, not unreasonably, albeit with a considerable leap, be construed to indicate that Paterno suggested not reporting the incident to the authorities. However, it might also be that Curley changed his mind on his own after airing his thoughts with Paterno and deciding that the earlier plan was not preferable. It is, of course, also possible that whatever Curley wrote, his mention of discussions with Paterno (without any direct or indirect report of Paterno's own views) was an attempt by Curley to minimize or shift personal responsibility from himself. In any case, any probative value this email has as to Paterno's intent is also based on speculation.
Freeh himself seems to recognize that his conclusions are far from "clear." He mentions that Curley and Schultz contended that they acted "humanely" and sought "the best way to handle vague and troubling allegations," that Paterno had told a reporter he had "backed away and turned it over to . . . people I thought would have a little more expertise," and that Spanier had denied knowledge "Sandusky was engaged in any sexual abuse of children."
He then rejects these explanations and concludes, "Taking into account the available witness statements and evidence, the Special Investigative Counsel finds that is more reasonable to conclude that, in order to avoid the consequences of bad publicity, the most powerful leaders at the University -- Spanier, Schultz, Paterno and Curley -- repeatedly concealed critical facts relating to Sandusky's child abuse from the authorities, the University's Board of Trustees, the Penn State community, and the public at large" (emphasis added). During a press conference specifically focusing on Paterno's culpability, Freeh, seemingly inconsistently with the qualified "available witness statements and evidence" language of the report, appeared to exaggerate, "There's a whole bunch of evidence here." He continued, "And we're saying that the reasonable conclusion from that evidence is that [Paterno] was an integral part of this active decision to conceal" (emphasis added).
I tend to agree that Freeh's conclusion is the "more reasonable" hypothesis, but I do so based more on a visceral feeling and some understanding of Paterno's power and status at the university than an evidentiary basis. The "facts" demonstrating Paterno's "active" role in the cover-up are insubstantial and equivocal. The case against Paterno is, as a Scotch jury might say, "not proven." Perhaps we should require more substantial proof before we topple Paterno's statue -- figuratively and actually.
As I mentioned here last Wednesday:
"By ignoring material financial falsehoods, the regulators and examiners allow frauds to continue and decrease the likelihood of future accountability through the criminal process."
The New York Fed's Friday data dump reveals beyond question that some of its officials, including Timothy Geithner, were aware of intentionally misreported Libors by 2008 at the latest. Today's Wall Street Journal editorial lays out the damning transcripts.
What does this mean? For openers it means that DOJ's announcement of a criminal investigation is a joke. Regulators and government officials at the highest levels knew of the misrepresentation. By not immediately raising bloody hell and putting a stop to it they either sanctioned the conduct, rendering it non-criminal, or themselves became co-conspirators.
Do you really think DOJ is about to investigate Geithner or drag him into somebody else's criminal defense? Get real. These people can't even prosecute robo-signers.
Wednesday, July 11, 2012
The news that Barclays officials told the New York Fed in 2007 about potential problems with Libor highlights key differences between the regulatory mind and the prosecutorial mind. It also shows the difficulty in successfully prosecuting white collar fraud in the wake of regulatory incompetence.
When the typical federal prosecutor learns that a financial institution or corporation has lied, his instinct is to prove and charge a crime against the individuals responsible for the falsehood. Virtually any material lie in the context of publicly traded or federally insured entities constitutes a federal crime.
When a regulator learns that he has been lied to, the response is not necessarily the same. A famous example of this occurred during one of the SEC’s many examinations of Bernie Madoff’s shop. Madoff was caught flat out lying to SEC examiners. Did the scope of the examination expand? No. Were prosecutors immediately informed? No. Madoff was given a slap on the wrist. His massive Ponzi scheme continued for several years, claiming thousands of new victims.
While prosecuting S&L fraud twenty years ago, I was appalled to discover repeated instances in which the very fraud I was investigating had been contemporaneously revealed in some format to federal banking regulators and/or examiners who had often done nothing in response. This put putative defendants in the position of arguing that their frauds really weren’t frauds at all, because they had not deceived anyone. They argued that the regulators knew all about their conduct and failed to act, so: 1) it wasn’t deceptive conduct; and 2) they thought they had a green light going forward. Sometimes our targets and subjects were right. Sometimes they had only disclosed the tip of the iceberg.
By ignoring material financial falsehoods, the regulators and examiners allow frauds to continue and decrease the likelihood of future accountability through the criminal process.
But sophisticated fraudsters often reveal their conduct to regulators through a glass darkly. They are hoping that overworked regulators, with whom they are friendly, will miss, or misunderstand, the half-assed disclosures being made. The trick is to disclose just enough, but not too much. The typical regulator, unlike the typical prosecutor, does not distrust mankind or see a fraudster around every corner. The typical regulator has known the institution and executives he is currently monitoring for years. Often his ass has been kissed during that period in perfectly appropriate ways. He has been respected and deferred to. These intangibles, and his workload, may prevent him from noticing or following up on potential red flags.
We don’t have the full story yet on what the New York Fed knew about Barclay’s Libor problems, but the alacrity of the New York Fed’s acknowledgement that it knew something is striking. Timothy Geithner ran the New York Fed at the time, and we know that he has never met a wrist that couldn’t be slapped or a falsehood that couldn’t be excused.
The question remains—how can we bridge the regulatory/prosecutorial mental divide in order to punish real corporate fraud? Here is one answer—by training regulators and examiners to have zero tolerance for misleading or obstructionist behavior. The discovery of any lie or intentionally misleading conduct by a publicly traded or federally insured institution in any context should result in immediate fast-tracking to appropriate civil and/or criminal enforcement officials and/or federal prosecutorial authorities. This does not mean that prosecution should automatically or even usually ensue. It does mean that individuals who actually know something about fraud can take a critical and timely look at red flag behavior.
Once this process is in place, it may create a business climate in which elite corporate and financial institutions, and their officers, directors, and employees, will know that lying in any form will not be tolerated. The success of such a structure depends on the DOJ green-lighting prosecutors fearless enough to investigate and charge the flesh and blood financial elites who commit fraud. Almost every indication to date (outside of the insider trading context) is that current DOJ leadership is not up to the task.
Thursday, June 28, 2012
Today's New York Times was a virtual treasure trove of white collar crime stories. Among them were the following:
"South Carolina House Panel to Hear Ethics Complaints Against Governor" (see here) - South Carolina Governor Nikki Haley is facing a legislative hearing on whether she acted unethically during her term in the legislature when she was paid $110,000 annually as a fundraiser for a hospital whose legislative goals she advocated. Knowing nothing about South Carolina legislative ethics rules or criminal law, I do not venture to opine whether the Governor did anything improper. However, the broad facts here are strikingly close to a series of cases in New York in which a hospital CEO, a state senator and a state assemblyman all were convicted and went to prison. See here. It seems to me there should be a restriction against a legislator working for an entity, at least in a loosely-defined job such as consultant or fundraiser, and advocating or supporting favorable legislation for that entity.
* * *
"Madoff's Brother Sets Plea Deal in Ponzi Case" (see here) - Peter B. Madoff, the brother of Bernard Madoff and the No. 2 man at Bernard L. Madoff Investment Securities, will reportedly plead guilty tomorrow to falsifying documents, lying to regulators and filing false tax returns. Peter Madoff reportedly served as the nominal compliance officer of his brother's wholly-owned securities firm and apparently exercised little or no oversight of the firm's operations, thereby providing his brother the freedom to steal billions.
Placing an investment firm's proprietor's brother as compliance officer is akin to asking the fox to guard the henhouse. It seems there should be, if there is not, a law, rule or regulation prohibiting a close relative, like a spouse, parent, child or sibling, from being the responsible compliance officer in a substantial investment firm owned entirely (as here) or largely by one's relative.
* * *
"JP Morgan Trading Loss May Reach $9 Billion" (see here) - The amount of JP Morgan's trading losses from its London office could be as much as $9 billion -- four and one-half times as much as the company announced originally. While JP Morgan has in view of its considerable profits downplayed the magnitude of the loss, which its chief executive officer Jamie Dimon estimated in May could possibly be as much as $4 billion, obviously a $9 billion loss takes a much greater bite out of the firm's profitability, and conceivably may even raise some questions as to the firm's viability.
We now know, in the wake of bailouts and government support, that the federal government is both the de facto and de jure insurer of major banking institutions. One might ask whether a government insurer, like a private insurance company, should not be able to set specific rules to curb risky activities which might trigger the insurer's support. To update Congressman Barney Frank, there are now nine billion more reasons for increased governmental regulation.
* * *
Like many other white collar defense lawyers, I am strongly against overcriminalization. On the other hand, I am equally strongly against underregulation. One of the principal reasons I favor greater and clearer rules and regulations is to give potential white-collar offenders reasonable notice of what is criminal and what is not, and not leave that decision, as frequently happens now, to a federal prosecutor's interpretation of the amorphous fraud laws.
A significant portion of the white-collar defendants I have represented in the last forty years, including many of those who were convicted, have actually believed that their actions were not criminal. In some cases, this was simply because they lacked a moral compass. In the financial world, where the primary, and often sole, goal is to take other people's money away from them, many people do not consider whether what they do is morally right or wrong, or are so amoral that they are incapable of making that distinction. Tighter regulation will at least tell them what is prohibited and what is not.
Monday, May 21, 2012
Here is the Houston Chronicle's take on today's proceedings in U.S. v. William Roger Clemens. Brian McNamee was allowed to testify on re-direct that he injected three other players with HGH. Judge Walton gave the jury a limiting instruction that the testimony could only be used to bolster McNamee's credibility--not to infer Clemens' guilt. Still, this was a significant break for the government.
I am now batting 0 for 2 in my most recent predictions. I predicted that Judge Walton would strike some of Andy Pettitte's testimony and that the judge would not let McNamee talk about injecting other players. So take this next observation wiht a grain of salt. To me, the jurors' questions at the end of each day show their skepticism regarding the government's case and the credibility of key government witnesses.
Sunday, May 20, 2012
The name says it all. On Friday the Clemens prosecutors filed the Government's Motion to Admit Evidence of Brian McNamee's HGH-Based Interactions With Other Players and His Cooperation Relating to the Same to Rehabilitate the Witness. Call it anything you want, it is nothing more than an attempt to convict Clemens through guilt by association. As Judge Walton said before the first trial, in keeping this evidence out:
"I’m just still having some real problems with this because I can see how even with a cautionary instruction, assuming I could craft one that would be intelligible to the jury, I could see how they could still potentially misuse that evidence. I mean, I don’t know. I mean, I use to get cortisone shots when I was playing football in college. And I had to rely upon what the trainer was giving me. And I would not want to be held responsible for having done something inappropriate based upon what that trainer was giving to other people. And that’s the concern that I have.”
“I fully appreciate that the jury is going to have to assess Mr. McNamee’s credibility, and that his credibility is going to be seriously attacked by the defense. But I don’t think, at least at this point, that the mere fact that they are going to seriously attack his credibility necessarily opens the door to bring in evidence regarding Mr. McNamee’s dealing with other players. Because as I say, my main concern is that if Mr. Clemens’ position, and I understand it is at least in part his position that he did not know what he was receiving, it seems to me that there’s a real danger, that the jury may say, well, if they all knew, and that’s especially I guess true in reference to players who are also on the same team, that why wouldn’t Mr. Clemens know? And I think that would be a problem, for them to in some way use the evidence regarding what he was doing with these other players to impute knowledge on the part [of] Mr. Clemens."
Judge Walton's original ruling, which shocked the government, was provisional:
"I’ll reserve a final ruling until I see what transpires during the trial. And if somehow I feel that the door has been opened, I may be inclined to change my position. But my tentative position is that the evidence is not going to come in.”
Now the government is making its move. Of course the prosecutors would have filed this motion irrespective of how McNamee's cross-examination actually went. They immediately violated the Court's order during opening statement of the first trial by mentioning other Yankee players who received illegal substances.
I'm betting that Judge Walton keeps the evidence out.
Thursday, May 17, 2012
Judge Walton says that the jury is bored at the Clemens trial, and of course he blames the lawyers. Maybe he should look in the mirror. The proceedings would have moved much faster had the Court put a stop to the government's pettifogging objections to cross-examination questions that allegedly strayed beyond the scope of direct.
The judge has also, according to the latest press reports, characterized Rusty Hardin's lengthy cross-examination of Brian McNamee as confusing.
I stopped in on the trial yesterday morning during Hardin's cross-examination of McNamee. Although there was no smoking gun moment, it was an accomplished cross that ably exposed McNamee's shifty, evasive personality. Near the end, Hardin asked a perfectly acceptable question, the point of which was to stress that McNamee would have been valuable to Clemens as a private trainer irrespective of McNamee's ability to provide illegal drugs. The prosecution objected. Rather than simply ruling on the objection, Walton engaged in an unnecessarily lengthy exchange with the attorneys on the finer points of evidentiary law. You would have thought they were discussing the Ex Post Facto Clause or the Magna Carta.
The trial judge has great discretion to move a case along--even a big case. This doesn't mean that the Court should prevent either side from putting on its evidence or vigorously questioning witnesses. The Clemens case would benefit from quicker bench rulings on objections, particularly objections that only serve to break the other side's pace and stride. The government objections that I witnessed on Wednesday did not merit the lengthy treatment they were given by the Court.
Tuesday, May 15, 2012
Some years ago, I represented a landlord who was indicted and convicted for offering a bounty to a thug if he beat up the leader of the tenants' committee, which was opposing a rent increase. This behavior does not seem all that much different from what the National Football League has alleged New Orleans Saints linebacker Jonathan Vilma did. Vilma, four other players, and his coach Sean Payton and others, have been disciplined by NFL Commissioner Roger Goodell for allegedly conspiring to offer rewards to teammates to maim opposing players, particularly star quarterbacks.
News about this alleged conspiracy has been widely publicized, but I have yet to read of any current or impending federal or state criminal or legislative inquiry. While certain violence in football is accepted, deliberate maiming goes beyond any acceptable norms. Nonetheless, it would not surprise me that neither federal nor state prosecutors, especially in the New Orleans area, where Vilma and his alleged player co-conspirators played, view such an investigation as crowd-pleasing. Realistically, it is quite possible that a New Orleans jury would nullify and acquit Vilma even if there were convincing evidence against him.
In virtually every other area of business activity where there is a tenable allegation that a person had conspired to maim a competitor or opponent, there would be a serious prosecutorial investigation. In sports, what is ordinarily considered criminality, at least physical criminality, is often given a bye.
One might think that Congress has a legitimate reason and special responsibility to investigate alleged orchestrated maiming in professional football, a national sport/business. The National Football League, as it is now, exists due to Congressional largess. Congress has given the NFL a special exemption to antitrust rules which allows it to function as a lucrative monopoly with an all-powerful commissioner. Professional football (which to my wife's chagrin I watch virtually every fall Sunday), if fairly and properly played, is a dangerous game, as reflected by the frequent injuries and limited career span of its players, and the reported unusual rates of early brain damage, suicides and deaths among its retirees. When improperly played -- played with a purpose of injuring others -- it is even more brutal.
Of course, just as an indictment might not be popular with local fans, a Congressional investigation into football brutality would probably not be favorably received by the voters back home, who like their contact sports (at least professional sports) such as football and hockey to be rough. Congress appears to be more interested in whether baseball players engage in taking illegal drugs, which, if it harms anyone, hurts only themselves or perhaps also competing players who perform at a comparative disadvantage without such presumed aids. Such an investigation also continues to feed the anti-drug attitude Congress has fostered and to justify the harsh drug laws Congress has enacted. Of course, Congress might also be gunshy in view of the embarrassment that the baseball steroid investigation and resulting Roger Clemens trial became.
This is not to say that I presume Vilma is guilty. I have not seen or heard any concrete evidence that he in fact did orchestrate a bounty program. The NFL investigation was conducted in secret and with only a sparse controlled public report by the NFL of its findings. Vilma's attorney, in a letter roughly equivalent to a motion for discovery in a criminal case, has asked for 17 points of information. The NFL's response is essentially that its special counsel, Mary Jo White, a respected and liked, and generally prosecution-minded, former United States Attorney, has reviewed the secret evidence and has found it sufficient. The NFL also claims that it had shared some of the evidence with the alleged offenders and the NFL Players Association. The association, while supporting the players' right to arbitration, presumably represents both Vilma and the alleged offenders, and is barely a substitute for a single-minded advocate on Vilma's behalf.
Thus, Vilma, subject to possible reversal by arbitration or court action, will be punished with a suspension of one year (a significant time in a football player's limited career span), and the loss of millions of dollars without even rudimentary due process. And, unlike many persons suspended or fired from jobs, Vilma is practically unable to ply his trade anywhere else besides the monopolistic NFL.
I do not know enough about the NFL's collective bargaining agreement, which apparently allows the Commissioner to be both prosecutor and judge, or about labor law to know whether Vilma has been treated properly. I do, however, have a visceral feeling that he deserves more rights than a secret investigation and a conclusory decree by a commissioner with dictatorial power.
Few things are more exhilarating to a criminal defense attorney than turning the government's witness into your own. This is exactly what Rusty Hardin did with Yankees GM and Senior VP Brian Cashman to close out last week's testimony in the Roger Clemens trial. It's not as if Cashman provided that much to the government in the first place. He testified on direct that the Yankees acquired Clemens from Toronto after the 1998 season. Clemens contemporaneously asked the Yankees to hire Toronto strength coach Brian McNamee. Cashman declined. There is no evidence that Clemens pressed the matter further at the time. Clemens was injury plagued in 1999, and had his worst ERA ever. After getting shelled in a 1999 playoff game at Fenway Park, Clemens asked Cashman to hire McNamee for the 2000 season. Cashman obliged. In 2000 Clemens rebounded with a great year.
On cross Hardin established that Clemens had experienced a very poor season with the Red Sox ten years previously, yet similarly rebounded the next season with a banner year. Hardin also had Cashman confirm that Clemens never complained when the Yankees ultimately fired McNamee. And Cashman smeared McNamee's character in response to Hardin's questions concerning the circumstances of McNamee's firing. Sprinkled throughout Cashman's responses to Hardin were glowing testaments to Clemens' work ethic, competitive spirit, decency, and sportsmanship.
At the end of the day, the Court accepted proposed questions for Cashman from the jury. One of them was as follows:
"Over the years that you've known Roger Clemens, is it fair to say you admire him as a great player and a leader?"
Judge Walton, who has been needlessly Talmudic in his approach to cross-examination questions veering "beyond the scope" of direct, nevertheless allowed the question, transposing it slightly. He asked Cashman:
"[O]ne of the jurors wants to know what your feelings are about Roger Clemens as a player and as a leader."
Here was Cashman's out of the ballpark response:
"One of the greatest players that I've ever seen, one of the best people, which goes to his leadership abilities. He, you know, he worked harder than everybody. He led by example. So a lot of times, you know, someone like Roger Clemens was given a great deal of ability. But not everybody honors that ability with the work ethic they put behind it. Roger did that.
And Roger at the same time was inclusive. You know despite his, you know, extreme accomplishments and his abilities and therefore celebrity that came from that, you know, his leadership is also shown in the fact that he, you know, treated the 25th man the same way he'd treat maybe the second best player on the team as well as the support staff. So, you know, there's a lot of aspects of being a leader. It's, you know, a true leader leads everybody, you know, the good ones and the bad ones. Roger led them all. So, he was a great player, a hard worker. His work ethic as well as his leadership ability was unquestionable."
Wednesday, May 9, 2012
I mentioned in a recent post that Reggie Walton is a fair judge. That fairness was on display again yesterday in the Roger Clemens trial, when Walton prohibited federal prosecutors from introducing testimony and documents pertaining to Clemens' fat salary as a pitcher. Walton correctly concluded that the prejudicial effect of this evidence outweighed its supposed probative value. It is a very rare federal judge who will bar this kind of "lavish lifestyle" evidence. The government always wants it in, ostensibly to show that a defendant's alleged criminal conduct was part of an effort to maintain a lavish lifestyle. In reality, prosecutors simply want to prejudice the defendant in the eyes of jurors by showing them how rich he is, how "high-on-the-hog" he lives, and how different he is from you and me.
Monday, May 7, 2012
I'd say you had a pretty good week if you got a key government witness to agree there is a 50-50 chance he misheard or misunderstood a purportedly damning admission by your client. That's what happened last week (week one) in the Roger Clemens re-trial, through Mike Attanasio's cross of Andy Pettitte. This morning, team Clemens filed Defendant's Motion to Strike Portions of the Trial Testimony of Government Witness Andy Pettitte. The Motion is an excellent piece of work. The argument?
1. The threshold for establishing admissibility of a preliminary fact question under Federal Rule of Evidence 104 is preponderance of the evidence. Fifty-fifty doesn't cut it.
2. Under Federal Rule of Evidence 401, relevant evidence "means evidence having any tendency to make the existence of any fact that is of consequence to the determination of the action more probable or less probable than it would be without the evidence." Fifty-fifty doesn't cut it.
3. Even if relevant, the testimony's probative value is substantially outweighed, under Federal Rule of Evidence 403, by the "danger of unfair prejudice, confusion of the issues, or misleading the jury." This is particularly true in light of the Government's statement to the jury, during its opening, that Clemens told Pettitte "he had used human growth hormone and that it helped him with recovery." The real-life fifty-fifty version on the stand didn't cut it.
4. Judge Walton specifically warned the parties before trial about making promises they couldn't keep in opening statements. He said that if it occurred here he would "not hesitate to tell this jury that they must totally disregard any such statements of that nature. I'll specifically identify what those statements were and tell them there was no evidence to that effect, and therefore, they cannot consider that in deciding this case." Judge Walton should make good on his promise, because fifty-fifty doesn't cut it.
Team Clemens also noted that the government could have revisited the conversation during re-direct, but deliberately skirted the issue.
My prediction is that this motion will be granted in some form. It certainly doesn't mean that Clemens is out of the woods. Ted Stevens' outstanding trial team won several motions during trial and Judge Sullivan gave Stevens some very scathing anti-government jury instructions--to no avail. (Of course, in the Stevens case, the government was deliberately hiding important exculpatory material.) But such an instruction will undoubtedly greatly benefit Clemens. It will essentially knock-out a key portion of the government's case.
Kudos to the defense team for an outstanding cross and an excellent motion. One of the nice things about this trial is that co-counsel Attanasio is finally getting some of the national media attention he has long deserved.
Friday, May 4, 2012
Nobody messes with Judge Reggie Walton. Here is a great post from Mike Scarcella of BLT (Blog of Legal Times) on recent bench conferences in the Roger Clemens case. Defense attorney Mike Attanasio incited Walton's wrath this week when he ignored Walton's ruling and tried to go "beyond the scope of direct" during the cross-examination of Andy Pettitte.
According to Scarcella, Attansio was questioning Pettitte about a specific Clemens pitching performance that took place in 1999. Attansio wanted to delve into whether "Clemens was so depressed and beaten up then that he would start taking drugs to perform better." Prosecutor Steve Durham objected that this went beyond the scope of direct. Walton sustained the objection.
Attanasio then asked Pettitte whether he had ever seen Clemens "broken and beaten" after a game. This ticked Walton off: “I’m getting sick and tired of making rulings and counsel not listening to my rulings." Walton reminded Attanasio "that the defense does not have a right to build its case during the government’s pitch to jurors."
That's preposterous of course. Every good defense attorney tries to make his case during cross-examination, and Attanasio was allowed to ask other questions that technically went beyond the scope of direct. For example, Attanasio elicited Pettitte's key testimony that Clemens had never appeared to be pitching on steroids. I haven't read the transcripts yet, but it is unclear to me how far out of the strike zone the additional questioning strayed.
As any experienced litigator knows, courts are all over the map on the scope of cross-examination. Most federal judges allow a relatively expansive cross for reasons of judicial economy. Why make the defense call a witness to the stand in its own case, when you can save time by questioning the witness on cross? But a federal judge's ruling on whether to allow narrow or open-ended cross is virtually unassailable on appeal.
Attanasio did what most good defense attorneys would do in this situation. He ignored (sub silentio) a dubious ruling from Judge Walton and attempted to make the same point through a slightly altered question. That will work with many judges who aren't paying close attention, but it didn't phase Judge Walton.
Judge Walton has many fine qualities. He is intelligent, fair, and couragoeus. But he tends toward rigidity.
Friday, March 16, 2012
Here is the Williams & Connolly Analysis of the Schuelke-Shields Report. It is an excellent dissection, by Brendan Sullivan and Robert Cary, of the rampant prosecutorial misconduct permeating the Ted Stevens case.
Thursday, March 15, 2012
In the interest of fairness, here are the responses of the federal prosecutors mentioned in the Schuelke-Shields Report. Submission of Brenda K. Morris, Submission of Edward P. Sullivan, Submission of James A. Goeke, Submission of Joseph W. Bottini, Submission of William M. Welch III, Submission on behalf of Nicholas A. Marsh.
Mr. Goeke also submitted his own separate appendix. Here it is. James A. Goeke Appendix.
Wednesday, February 8, 2012
One of the supposed hallmarks of the American criminal justice system is the prudent exercise of prosecutorial discretion. But prosecutorial discretion, even when it works, is a blessing and a curse. A blessing, because it allows for the flexibility and compromise without which most systems, even well-constructed ones, cannot function. A curse, because liberty should not depend upon the the character and wisdom of the person temporarily wielding power.
The U.S. Attorney's Office for the Central District of California has decided not to prosecute Lance Armstrong. An announcement to that effect was made last Friday. The L.A. Times story is here. A good Washington Post piece is here. Today's Wall Street Journal discusses the declination and a potential future probe of of improper leaks related to the case. (An internal investigation of some kind appears to be warranted given the massive leaking that has occurred.) According to the WSJ, the declination decision by U.S. Attorney Andre Birotte and his top aides went against the recommendation of the two line AUSAs handling the case. Maybe, but take it with a grain of salt. News stories about the internal machinations of prosecution teams often get it wrong.
Based on what I know about the case, the decision to decline appears to have been a no-brainer. Recent federal prosecutions involving alleged drug use by star athletes have expended enormous sums of money with mixed or poor results. In the Armstrong matter, the doping, if it occurred, was not itself a federal crime. Prosecutors would have been peddling a wire fraud theory under which Armstrong allegedly defrauded team sponsors by intentionally violating a contractual obligation to avoid improper drug use. Not very sexy. Twelve typical American jurors might well wonder at the start of such a case, "Why are we even here?" Finally, Armstrong is enormously popular and has a sterling defense team with unlimited resources.
The U.S. Anti-Doping Agency (USADA) vows to continue its investigation, accurately noting that its "job is to protect clean sport rather than enforce specific criminal laws." But USADA wants the grand jury materials. This would be a travesty, and is unlikely to happen. Federal grand jury materials are presumptively secret by law for good reason. Don't count on a federal court sanctioning transfer of grand jury materials to an agency like USADA.
In other declination news, the DOJ attorneys prosecuting the Gabon sting case have informed U.S. District Judge Richard Leon that DOJ is considering dropping all future prosecutions. A decision will be made by February 21. The BLT piece is here. Full disclosure: I briefly represented one of the defendants, and considered representing another of the defendants, neither of whom has gone to trial. My comments here are based on the public record. The two cases brought to date have resulted in three acquittals and two hung juries. Nobody going to trial has been convicted in what DOJ thought was a sure win. Whatever merit there was in initially bringing the case, reconsideration is in order. The two trials to date have revealed a number of weaknesses. First, this was a sting--a crime engineered by the U.S. Government. Second, the informant who helped orchestrate it was far more compromised than the typical informant in a white collar case. Third, in a key tape recorded conversation between that informant and one of the defendants, the defendant seeks to back out of the alleged unlawful transaction, but the informant reels the defendant back in by telling him that attorneys have approved the deal. Fourth, the inherent ambiguities and weaknesses in the FCPA itself.
If there has been a benefit to the Gabon FCPA prosecution it is this--it has taught the white collar defense bar that FCPA cases can be fought and won and, presumably, has taught DOJ that FCPA cases aren't as easy to win as they first appear.
February 8, 2012 in Celebrities, Corruption, Current Affairs, FCPA, Fraud, Government Reports, Grand Jury, Investigations, Media, Prosecutions, Prosecutors, Sports, Statutes | Permalink | Comments (0) | TrackBack (0)
Saturday, February 4, 2012
Last week, after President Obama announced a purportedly new initiative, see here and here, to combat fraud, government law enforcement officials, criticized for their lack of activity, promised action in the very near future. It is not clear whether the indictment returned Wednesday in the Southern District of New York for crimes committed four years ago is the action referred to. It certainly is not an earth-shattering case.
On Wednesday, three former Credit Suisse traders were indicted for inflating the worth of collateralized debt obligations (CDOs) to avoid recognition of market losses and thereby increase their bonuses. See here.
The CDOs consisted of pooled, presumably at least in part subprime, mortgages that were sold to investors in packages by presumably reputable institutions with high ratings provided by presumably reputable credit agencies. The presence of large amounts of overvalued CDOs in firm inventories is considered by some a major cause of the financial crisis.
Unlike securities such as listed stocks, there was no liquid market for these mortgage securities and therefore no easily ascertainable market value. Some financial firms were hesitant to mark down these failing obligations because it would considerably decrease reported earnings. Here, it is alleged -- and two of the three indicted have pleaded guilty -- that the traders knowingly concealed the loss in value and secured a bogus evaluation from a friendly small investment bank in order to support the inflated value of the securities. The overvaluation -- or failure to recognize the loss -- resulted in increased compensation for the traders, whose year-end bonuses were based considerably on the profits of their groups.
This case is interesting for several reasons. It is one of the relatively few brought so far that concern alleged criminal wrongdoing after the financial crisis arose. Most previous criminal prosecutions involving failed mortgages have focused on the origination of mortgages and comparatively small-time people such as aggressive mortgage brokers, perjurious buyers and conniving lawyers, and not their securitization.
It is also one of the few instances in which employees of a major financial institution have been prosecuted criminally in a case related to the financial crisis. Nonetheless, it would be a stretch to say that this overvaluation, discovered and corrected by Credit Suisse in days, had a major impact.
This is one of the rare criminal accusations, to my knowledge, involving mismarking or deliberately overvaluing illiquid assets in order to inflate profits. These valuations have a major effect on the profit and loss statements of financial institutions, including hedge funds, and the consequent bonuses or incentive compensation of traders and managers. False marking, often using evaluations by supposed experts or comparable institutions of the worth of securities with no easily-defined market value, is an area which deserves more governmental scrutiny and probably more governmental legal action.
Of course, care must be taken to distinguish deliberate falsity from good faith but erroneous evaluation in this uncertain area.
Monday, January 30, 2012
Virtually every presidential State of the Union speech, or its gubernatorial equivalent, calls for tougher criminal laws and/or new investigative resources. President Obama's address last week was no exception. The President called for the establishment of a new unit "to crack down on large scale fraud and protect people's investments." As blog editor Ellen S. Podgor wondered, see here, it was unclear how this unit would differ from the Financial Fraud Enforcement Task Force established in 2009. I too asked whether this purportedly new unit was anything other than a repackaged version.
The announcement of a new prosecutorial unit also was perhaps an unintended implicit admission that existing federal law enforcement agencies had been less than successful in dealing with serious alleged crimes which some believed had caused the financial crisis. Both Attorney General Eric Holder and SEC Enforcement Director Robert Khuzami defended their record, stating that not every mistake is a violation of law. Holder said, "We also have learned that behavior that is reckless or unethical is not necessarily criminal," a statement which (aside from leading me to ask why it had taken him so long to realize it) should be painted on the walls of every prosecutorial office.
The principal apparent structural difference between this unit, entitled the Unit on Mortgage Origination and Security Abuses ("UMOSA"), and the prior one is, besides its more focused jurisdiction, that this is a joint task force of both federal and state officials. One of its co-chairs -- albeit one of five, four being DOJ or SEC officials -- is New York State Attorney General Eric Schneiderman, who has shown his independence and aggressiveness toward Wall Street by pushing for stronger sanctions against financial institutions for robo-signing and other improprieties committed after the crisis arose.
Generally, joint federal-state task forces are a one-way street. The feds take the best criminal cases and leave the dregs to the state. One purported justification for such selection is that federal laws and rules of evidence make it easier for federal prosecutors to bring cases and win convictions. Schneiderman has indicated somewhat to the contrary -- that New York and other state laws give state attorneys general greater means to bring both civil and criminal prosecutions.
The idea of combining federal and state resources is generally a good one. Too often law enforcement agencies refuse to share information with other agencies, if at all, until they have determined the information was insufficient for them to act on, often too late for use by the other agencies. On the other hand, I fear that some task force constituents might attempt to make an end run around constitutional and statutory laws and rules, specificially Fed.R.Crim.Pro. 6(e), which, generally, as relevant here, prohibits disclosure of grand jury information to non-federal officials. Of particular concern is whether information secured by federal grand juries, much of which is through immunized testimony, will be provided for use by the states. Both Attorneys General Holder and Schneiderman seem aware of this restriction, but both appear to view it as an obstacle to overcome rather than a right to ensure. How scrupulous they will be in upholding the rule and spirit of grand jury secrecy will be seen.
Thursday, January 26, 2012
The L.A. Times reports here that Mitt Romney did not "explicitly disclose" certain foreign and offshore bank accounts on his required federal campaign disclosure forms. These same accounts were reported, however, to the IRS. Doesn't look like there's much to the story. There are different reporting requirements on campaign forms and IRS returns and some of the items revealed to the IRS were apparently listed at a higher level of generality on the campaign forms. Even assuming that there was some misreporting, one would be hard pressed to call it anything other than inadvertent.