Thursday, July 12, 2012
Last month, in a thorough 64-page opinion, Southern District of New York Judge William Pauley ordered a new trial for three of four defendants convicted in what he described as "the largest tax fraud prosecution in U.S. history" because a juror, Catherine M. Conrad, had lied her way into being accepted as a juror. United States v. Daugerdas, et al., 09 Cr. 581.
There appears to be little question Ms. Conrad, a suspended lawyer, connived to make herself in her own word "marketable" so that she could have "an interesting trial experience" as a juror. In voir dire, she lied about her education, claiming the highest level she had reached was a B.A. when in fact she had a law degree. She concealed not only her membership in and suspension from the bar but her own criminal convictions -- for shoplifting, DWI, contempt and aggravated harassment -- as well as her husband's extensive criminal history, which included a seven-year prison stay. She made, according to the court, a "calculated, criminal decision to get on the jury."
At a post-trial hearing at which she was granted use immunity, Conrad stated that if the truth were known, "defense counsel would be wild to have me on the jury." In fact, however, Conrad turned out to be extremely biased against the defendants. In a congratulatory letter she sent to the prosecutors after the trial, she said she was "privileged to observe la creme de la creme -- KUDOS to you and your team." In that letter, she mentioned that she had fought against but ultimately had "thrown[n] in the towel" on a not guilty verdict on one of the counts concerning defendant David Parse. At the hearing, she testified that "most attorneys" are "career criminals." Two of the four convicted defendants were practicing lawyers; Parse was a non-practicing lawyer.
Judge Pauley, clearly upset by the need to retry a case which took three months, strongly urged the government to prosecute Conrad. Perhaps concerned that the government might feel that prosecuting her would be inconsistent with its opposition to a new trial, he added, "The prospect of preserving a tainted jury verdict should not temper the Government's resolve to call Conrad to account for her egregious conduct." Any prosecution of Conrad, however, obviously would have Kastigar obstacles because of her immunity.
The judge, following the Supreme Court's decision in McDonough Power v. Greenwood, 464 U.S. 548 (1984), found that in order to obtain a new trial, the moving party must "first demonstrate that a juror failed to answer honestly a material question on voir dire and then further show that a correct response would have provided a valid basis for a challenge for cause" (emphasis added). Apparently, even in a criminal case, the mere existence of a juror who deliberately lied her way onto the jury may not be sufficient to require a new trial. See United States v. Martha Stewart, 433 F.3d 273 (2d Cir. 2006). The McDonough test appears to be "If the juror hypothetically had answered truthfully, would her truthful answers have led to a challenge for cause?" Thus, unknown facts that might have affected her fitness to serve as a juror which would not in any case have been revealed by accurate responses to voir dire questioning presumably should not be considered.
In a lengthy analysis, mingling those hypothetical answers to questions asked during jury selection with, somewhat questionably, facts learned and impressions formed at the post-verdict hearing -- including Conrad's discovered dishonesty, bias and her animus to lawyers -- the court found that the McDonough criteria had been amply met. Accordingly, it ordered a new trial for all the convicted defendants -- except Parse, who the court ruled had "waived" his claim for a new trial since his attorneys knew or "with a modicum of diligence would have known" that Conrad's statements in jury selection were false and misleading and failed to disclose that knowledge to the court.
Judge Pauley felt that Parse's lawyers, the firm of Brune and Richard, knew or at least suspected (or alternatively should have known) that Conrad was an imposter certainly by the start of jury deliberations, but made a decision not to reveal their belief or suspicion to the court. The court was apparently affected by what seems to be a carefully-crafted, literally true but arguably misleading, statement in the lawyers' new trial motion that they were "prompted" by disclosure of Conrad's post-verdict letter to investigate and conduct records searches "in the wake of Conrad's . . . post-verdict letter." The court found that the motion contained "significant factual misstatements" and that its "clear implication" was to give the false impression that Parse's lawyers had no idea of Conrad's true identity until well after the verdict. In fact, as demonstrated in a later letter from the firm, in the firm's e-mails during trial, which were ordered by the court to be produced, and in testimony by the lawyers at a hearing, the firm apparently had concerns about and suspicion of Conrad's deception, initially at voir dire and later, after further record search revelations, during the judge's charge to the jury. A most graphic example was one lawyer's e-mail during the charge, "Jesus, I do think it's her."
The court believed that the attorneys' submission was designed to foreclose any government claim that their pre-verdict knowledge doomed their post-verdict motion on the grounds that they failed to act with "due diligence." The court found unconvincing the attorneys' claim that notwithstanding the similarities between the juror and the suspended lawyer discovered by electronic research -- name, home town, father's occupation, approximate age -- and the juror's use of previously unmentioned legal terms (such as respondeat superior) in jury notes she authored, the attorneys did not believe until after her letter to the government was disclosed that juror Conrad and suspended lawyer Conrad were the same person.
The court thus found that Parse's attorneys had "actionable intelligence" that Conrad was an imposter and that they had been required, but failed, to undertake "swift action" to bring the matter to the court's attention. The court apparently felt that the attorneys had attempted to "sandbag" it by remaining silent about the defect and only raising the issue when and if the trial did not conclude favorably, in effect providing them and their client with an "insurance policy against an unfavorable verdict." By his attorneys' conduct, the court ruled, Parse waived any error.
It may well be that during the trial the attorneys chose not to report their suspicions because they felt that Conrad, who appeared from web research to be potentially anti-government, would be a favorable juror for the defense, and they did not want to lose her. It may also be that, whatever the objective evidence that the juror and the suspended lawyer were one and the same might look like with hindsight, they actually thought that the juror and the suspended lawyer were different people since, as they claimed, they could not believe that the juror -- a lawyer -- would blatantly lie. Under either alternative, the court found, they had an obligation to share their knowledge with the court.
Some may argue that an attorney, in her duty of zealous representation of a client, may remain silent if she learns during jury selection that a juror misrepresented herself. Judge Pauley's contrary view is clear: "An attorney's duty to inform the court about suggested juror misconduct trumps all other professional obligations, including those owed a client." I agree. See New York Rules of Professional Conduct 3.3(b).
Some may also question whether Parse, the client, should suffer from his lawyer's purported misconduct or lack of diligence (of which he had no apparent knowledge). While generally a client is bound by a lawyer's strategic decision, and cannot cry foul if it backfires, Parse did suffer the same denial of a fair jury as the other defendants. Nonetheless, the court held that his attorneys' failure to report waived any objection by Parse, but granted new trials to the other three convicted defendants (whose lawyers apparently had no knowledge of Conrad's deception).
There are several ironies in this case: Parse, about whom, according to Conrad's letter to the prosecutors, the jurors "had qualms," is the only one whose conviction stands. Further, his attorneys were the ones responsible for investigating and presenting the motions which succeeded in a new trial for the others (who joined the motion), but not for him. And, lastly, if Conrad had told the truth at voir dire and revealed her suspension from the bar and her and her husband's criminal record, she undoubtedly would have been successfully challenged -- whether by cause or peremptory -- on the motion of the prosecution she so strongly favored, and not be the defense she despised.
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.
Tuesday, July 3, 2012
This $3 billion settlement between GlaxoSmithKline and the government is the largest settlement in the health care fraud arena. But DOJ's focus on health care fraud is not limited to this one case.According to TRAC reports here for "FY 2011 the government reported 1,235 new health care fraud prosecutions." This is particularly noteworthy because it demonstrates a number that is "up 68.9% over the past fiscal year when the number of criminal prosecutions totaled 731" in the health care fraud area. If one looks at the percentage change from 5 years ago, it is up 134%, from ten years ago 95.7% and 20 years ago 740%. This increase in prosecution of health care fraud is incredible. And the place showing the highest amount of fraud is in the Southern District of Florida.
The government took some wrong turns initially in the GlaxoSmithKline case when they proceeded against the former VP and Associate General Counsel of the company. Lauren Stevens had been initially charged with a 6-count Indictment for the alleged crimes of obstruction (1512), falsification and concealment of documents (1519) and false statements (1001). The case was dismissed here with all kinds of revelations (like what co-blogger Sol Wisenberg noted on June 2011 - how the Maryland US Attorney refused to sign the indictment here). See also David Stout, Main Justice, Lauren Stevens: A Case the DOJ Would probably Like to Forget. To me it seemed like an indictment of a possible discovery violation, if that, by none other then the DOJ, who had its share of discovery violations in failing to provide Brady material in cases like the Ted Stevens case.
But this latest settlement with the company is an important step forward in saying that the current administration is concerned not only about providing health care to all, but also in not allowing companies to commit fraudulent acts. The GlaxoSmithKline website has its 2011 Corporate Responsibility Report on its front page here and a statement here, which includes a statement from CEO Sir Andrew Witty saying "[o]n behalf of GSK, I want to express our regret and reiterate that we have learnt from the mistakes that were made."
White collar cases can take many years to resolve and many, such as whistleblowers (see here & here), may have difficult times in the process of waiting. But it is important to congratulate the DOJ on not going for a quick "short-cut" resolution here and instead taking the time, energy, and money, to investigate a company on multiple levels. Resolving it also is a strong cost-saving measure.
(esp)(with disclosure that she received her B.S. from Syracuse - the home of TRAC).
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.
Saturday, June 16, 2012
The Tenth Circuit recently affirmed the convictions, but remanded the sentence of Howard O. Kieffer. Kieffer, who for several years was practicing criminal defense law, had a problem - he never went to law school and had no license to practice law. A court in the Eighth Circuit in 2010 upheld his convictions for mail fraud and making false statements. But he was also convicted in 2010 in Colorado for wire fraud and contempt of court. That decision was recently affirmed in the Tenth Circuit with a remand on sentencing here.
There is one aspect of this Tenth Circuit decision that raises eyebrows. The issue is what constitutes interstate wires for purposes of the wire fraud statute. This is a particularly important issue in these days of the WorldWideWeb. For example, in United States v. Phillips, 376 F. Supp2d 6 (D. Mass. 2005) the court rejected the government argument that “in order to satisfy the elements of this offense, it was not necessary to present evidence that the pertinent wire communications themselves actually crossed state lines, as long as the communications (whether interstate or intrastate) traveled via an ‘instrument of an integrated system of interstate commerce,’ such as the interstate phone system.” Even in the Tenth Circuit in United States v. Schaefer, 501 F.3d 1197 (10th Cir. 2007), the court previously held that one person’s use of the internet, “standing alone” was insufficient evidence that the item “traveled across state lines in interstate commerce.”
So it is surprising to read in Keiffer that the Tenth Circuit is now saying, "“[t]he presence of end users in different states, coupled with the very character of the internet, render this inference permissible even absent evidence that only one host server delivered web content in these two states.”
Clearly Keiffer's conduct was appalling, but the ramifications of the language in this decision could be huge. Could individuals from outside this country be charged with crimes against the United States merely because they put something on the web?
(esp)(hat tip to John Wesley Hall)
Thursday, May 10, 2012
The white collar crime blog, for two years (see here and here), has given the collar for the case most needing review to the case of Sholom Rubashkin. The case has an incredible gathering now from a spectrum of individuals and groups across political and ideological views. The Petition for Cert is here and background on the case is here. Here are some of the interesting updates on this case -
Washington Legal Foundation - Urges High Court to Review Unreasonably Harsh Sentence for Small-Business Owner
Amici Brief for Justice Fellowship & Criminal Law & Sentencing Professors and Lawyers - Download 11-1203 amici brief (a wonderful brief authored by David Deitch and Alain Jeff Ifrah that points out the jurisdiction split among Circuits and why it is important for Appellate "judges to state on the record that they have considered each non-frivolous argument for variance under the factors listed in Section 3553(a)" and how and why each such argument affected the sentence imposed.
Amicus Brief of the Association of Professional Responsibility Lawyers (APRL) - Download APRL Amicus Brief in Rubashkin (a strong brief written by W. William Hodes that provides the importance of this case from the perspective of "an independent national organization of lawyers and legal scholars whose practices and areas of academic inquiry are concentrated in all aspects of the law of lawyering." The brief focuses on the jurisdiction split regarding Rule 33 of the Federal Rules of Criminal procedure. The brief also points out important ethics issues that warrant review in this case.)
Hopefully, someone is listening.
Sunday, April 29, 2012
Thursday, February 9, 2012
Wednesday, February 8, 2012
The New York Times has the story here. The official announcement may come as early as tomorrow. As always, the devil will be in the details. Here is the $64,000.00 question. What if any limitation of liability for past criminal acts will the banks obtain through this agreement? If there is any limitation on the ability of federal authorities to prosecute the obvious, widespread, and easily provable robosigning fraud that took place in this country, the agreement will constitute a disgrace.
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)
Monday, February 6, 2012
In criticizing Judge Jed Rakoff's refusal to rubber-stamp its proposed settlement agreement with Citibank, the SEC has claimed that if it has to require companies to admit wrongdoing as a condition of settlement, there will be far fewer settlements and more trials. As a result, says the SEC, its resources would be so strained so that it would bring considerably fewer enforcement actions. The New York Times on Friday, February 3, cited unnamed "legal experts" as endorsing that view, saying that companies will be less likely to admit facts which could be used against them in shareholder lawsuits. See here.
There is a certain logic to that argument. Companies that have committed misconduct now do choose to pay the SEC rather than admit or reveal their wrongdoing to the public (and to class action lawyers). Companies that believe they have not committed misconduct sometimes decide it is less costly to pay the SEC than fight it. Few SEC cases go to trial. This settlement model works well for the SEC, which gets a check with less sweat, and for most defendants, which conceal their misconduct and/or save money.
But is that in the public good? More trials should lead to more public knowledge, promote more curative government action, and add an additional deterrent to corporate misconduct. Additionally, it should force the SEC to be more scrupulous in bringing marginal or questionable cases since they would more often be required to justify the charges in court.
I also question whether these "experts" are right in their expectation that there would be far more trials. I am not so sure that many corporate executives want public airings of the factual details of the company's wrongdoing. "Experts" predicted that the enactment of the Sentencing Guidelines would overwhelm the federal courts with trials since many more criminal defendants would exercise their right to trial because of the perceived (and actual) harshness and rigidity of the Guidelines upon a conviction. That simply has not happened. The percentage of cases settled by plea has remained relatively constant, if not increased, since the enactment of the Guidelines.
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.
Tuesday, January 17, 2012
The Third Circuit in United States v. Wright held that the Skilling decision requires an new trial in this case on the honest services fraud convictions and that "prejudicial spillover tainted their traditional fraud convictions." The court stated:
"An honest services fraud prosecution for bribery after Skilling thus requires the factfinder to determine two things. First, it must conclude that the payor provided a benefit to a public official intending that he will thereby take favorable official acts that he would not otherwise take. Second, it must conclude that the official accepted those benefits with the intent to take official acts to benefit the payor."
The court also stated that, "[i]n light of Skilling, the jury should have been instructed on the bribery theory but not the conflict-of-interest theory."
Wednesday, December 7, 2011
Friday, November 25, 2011
"I don't know if there was a stench that developed in this case, but there was a bad odor at times, and so the issue that I'm inviting both sides to address is...whether either through a finding of due process violations or in the exercise of my supervisory power...something akin to the whole being greater than the sum of its parts justifies throwing out this conviction, because a lot of the parts that led up to this conviction are extremely troublesome." U.S. District Court Judge Howard Matz during 6-27-11 post-trial hearing.
The briefs are in and the hearing is set for this Tuesday at 10:00AM in the Lindsey Manufacturing FCPA prosecution. At issue is the Lindsey-Lee Defendants' Motion to Dismiss the Indictment With Prejudice Due to Repeated and Intentional Government Misconduct. A potential bad sign for the Government, as if it needed another one, is the Court's November 16th Order requiring the U.S. Attorney's Office to file certain Government and Court exhibits in the record by November 18. The Court had already publicly criticized the Government for its use and handling of some or all of these exhibits. The Government filed the exhibits in question on November 17, and they are now available through PACER.
Judge Matz has previously characterized the Government's investigation and prosecution of the case as "extraordinarily sloppy at best." He was apparently so troubled by the Government's actions that he generated and kept a post note during trial in order to keep track of them.
Thursday, November 17, 2011
The Second Circuit yesterday reversed and dismissed (without prejudice) the conviction of former New York State Senate Majority Leader Joseph L. Bruno for theft of honest services fraud on his failure to disclose alleged conflicts of interest. The reversal was based on the Supreme Court decision in United States v. Skilling, which limited 18 U.S.C. 1346, the honest services statute, to cases involving bribery and kickbacks. Even though some circuit courts have upheld honest services fraud convictions over Skilling challenges, the reversal here was no surprise since, among other things, the government conceded error.
In an earlier blog (see here), we discussed what might have been the most important issue in the case: whether the Court should for double jeopardy purposes analyze the sufficiency of the government's evidence at trial based on the "new" standard set forth in Skilling or the "old" standard existing at the time of the trial.
Bruno argued that if there were insufficient evidence at trial to justify a conviction under the Skilling bribery and kickback theory of honest services fraud, the Court must bar retrial on double jeopardy grounds. The government argued that sufficiency review under a standard different from that at the time of trial was inappropriate and unfair. (The defense did not contend there was insufficient evidence based on the law at the time of trial.) At oral argument, the government stated that the evidence at the new trial would be the same as in the first.
The Court, declining to enact any black letter law, and relying considerably on the government's concession that the evidence would not change at a second trial, agreed to analyze the sufficiency of evidence based on the new, narrower Skilling standard. Nonetheless, after reviewing the facts, the Court held that the evidence was sufficient under that standard. Bruno, therefore, won the battle but lost the war. The government announced that it will reindict him under an honest services fraud theory based on bribery and kickbacks.
Last week, a Southern District of New York jury acquitted William Boyland, Jr., a New York State Assemblyman, of honest services fraud for allegedly receiving bribes from David Rosen, the chief executive of a hospital conglomerate, apparently because of lack of sufficient proof of a quid quo pro. Interestingly, Rosen had two months earlier been convicted in a non-jury trial before Judge Jed S. Rakoff for conspiracy to bribe Boyland based on the same payments at issue. (The cases were not mirror images. Rosen was also charged and convicted of conspiring with two others -- a state senator and another assemblyman.)
Tuesday, November 8, 2011
Second Circuit - United States v. Bahel - Honest Services - Post-Skilling, courts have struggled with what gets included as bribery and kickbacks and what gets omitted from the new contours of honest services. In Bahel, the defendant was convicted of four counts of mail and wire fraud premised on a deprivation of the United Nations, his former employer, and a 666 violation and conspiracy. Issues of immunity were considered, but the court said that the "United Nations expressly waived Bahel's immunity" and that irrespective he waived the issue. The court held that "Section 1346 is broad enough to encompass honest services fraud committed by a foreign worker at the United Nations."
Bahel also argued "that ‘[n]o reading of [18 U.S.C. § 666] could plausibly be extended to the charges in this case,’ because ‘[t]he United States’ membership in the United Nations is not a "federal program" under [Section] 666(b), and the contributions made to the United Nations under the United States treaty obligation in the U.N. Convention and Charter is not a "benefit" or "form of Federal assistance" under that same sub-section.’ Bahel argues accordingly that Section 666 cannot reach the conduct at issue in this case." The court, however, held that "the United Nations Participation Act, which authorizes the payment of the United States' dues to the United Nations (UN), is both a "federal program" and a "benefit" within the meaning of section 666, which encompasses bribes as well as illegal gratuities."
Wednesday, October 26, 2011
Here is the Reuters story. Nothing posted yet on PACER. WSJ Law Blog also has coverage. This will be a much tougher case than Rajaratnam was for the government to prove. This morning's WSJ has a decent background piece (subscription required) on the case.
Saturday, October 22, 2011
The indictment returned against former United Commercial Bank senior officers Ebrahim Shabudin and Thomas Yu on September 15, 2011, was unsealed on October 11 in the Northern District of California. This is one of the very few significant bank/securities fraud cases, related to the financial meltdown, that has been brought by Attorney General Holder's Department of Justice. Here is a copy of the Ebrahim Shabudin-Thomas Yu Indictment. A virtually identical criminal information was brought against former UCB senior officer Lauren Tran on May 24, 2011. It was not unsealed until October 13, but Tran pled guilty on June 15. The plea agreement is currently unavailable on PACER, despite the Court's order unsealing the record. The essence of the various charges is that senior bank officials systematically deceived the market and bank regulators about the bank's condition, through false entries and statements.
The invaluable William K. Black has written an outstanding article in Credit Writedowns about the pathetic and long-running failure of federal banking regulators to take any meaningful action against UCB. According to Black:
"In 2002, a court found that UCB’s senior managers had engaged in fraud to hide losses on a large loan for the purpose of fraudulently inducing another bank to bear the losses. It found the senior officers’ conduct so outrageous that it awarded substantial punitive damages. The FDIC, the SEC, and the Department of Justice did nothing in response to the fraud."
The bank continued to grow at an alarming rate, continued to receive high regulatory grades, and even obtained hundreds of millions in TARP funds, despite its sordid history and the credible warnings of a concerned whistleblower.
This will be a case to follow.