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.
Friday, October 21, 2011
In an otherwise unremarkable bank and mail fraud affirmance, the Fifth Circuit reminds us that losses cannot be included as relevant conduct unless they are bottomed on criminal and/or fraudulent behavior. The appellant in U.S. v. Bernegger (loss must be criminally derived to count as relevant conduct), obtained two grants of $250K each from the State of Mississippi, which secured a first lien on the underlying collateral. Appellant later pledged the same collateral to other entities, but there was literally no evidence indicating that the original grants were procured through fraud. Nevertheless, the probation officer included the grants in the PSR's loss calculation and the trial court accepted the figure. The Fifth Circut also reiterates that "bare assertions" in a PSR are not, standing alone, evidence. This particular error did not affect appellant's Guidelines range, but did result in a reduced restitution award. The panel consisted of Judges Wiener. Clement, and Elrod. Opinion by the Dutchman.
Thursday, October 13, 2011
Prosecutors have decided to drop the charges against an individual who had been arrested last year as part of "Operation Copout," a mortgage fraud investigation. The individual had initially been charged with 34 criminal charges, including multiple counts of mail and wire fraud. The case had been tried in a five month jury trial that had ended in a hung jury.
Attorney Michael Pasano, a white collar crime attorney at the law firm of Carlton Fields, who represented the client stated, "The strain on the client and his family was enormous and it is with great relief that we heard today that the Government agreed not to reprosecute and dismissed the case as to Mr. Stoll. It was a hard fought case, and I applaud the prosecutors for doing the right thing,”
It is difficult for prosecutors to be "ministers of justice" with the public outcry for retribution on mortgage fraud cases. It's nice to see that there are prosecutors out there who can do the right thing when the situation warrants it.
Wednesday, September 28, 2011
I get emails almost every day touting the latest FCPA seminars, webinars, panel discussions, compliance programs, and treatises. Many of these events are no doubt helpful to the white collar practitioner. But what really happens in the trenches for the few brave individuals who take the government to trial in FCPA cases? What do the final FCPA jury instructions look like? The following links are to selected portions of actual instructions given to juries by federal district courts in some recent prominent FCPA cases. Enjoy.
Hat tip to Todd Foster for the Patel instructions.
Tuesday, September 27, 2011
The Lindsey Manufacturing Reply Brief was filed Sunday night by Defendants Lindsey Manufacturing Company, Keith E. Lindsey, and Steve K, Lee. This is a reply to the Government's Opposition to Defendants' Supplemental Brief in Support of Their Motion to Dismiss the Indictment With Prejudice Due to Repeated and Intentional Government Misconduct. The case is in front of U.S. District Judge Howard Matz in the Central District of California.
Sunday, September 25, 2011
The Washington Post's Chris Cillizza thinks Solyndra had the worst week in Washington, because its CEO and CFO invoked the Fifth Amendment's Privilege Against Self-Incrimination in front of the House Energy and Commerce Committee. According to Cillizza, the silence of the executives "won't win them any allies in Washington." What allies? These guys already have bruises all over their bodies from where politicians have been touching them with eleven foot poles. Cillizza believes that their taking five "ensures that the probe into how Solyndra won the initial loan in 2009...will not only continue...but grow." This is silly. A vigorous criminal investigation is already assured. If the execs had talked they only would have made the DOJ's job easier.
The first place a bank looks when a big loan goes bad is the borrower's application, including the financial statement. For decades the DOJ has operated as a criminal collection agency for our country's financial institutions. It only gets worse if the loan, in this case about a half billion, is guaranteed by Uncle Sugar. Add in the DC gang mentality attendant upon what has become a political scandal and you would have to be a cretin to open yourself up to possible charges of false statements, perjury, or obstruction of justice. This one was a no-brainer. Kudos to the executives and their attorneys for not being idiots.
Tuesday, September 20, 2011
Hon. Ellen Segal Huvelle issued a 42 page memorandum opinion regarding the sentencing of Kevin Ring. It was accompanied by a two page chart that includes what were the government recommendations in other related cases (here). The court notes the sharp difference in recommendationbetween the government and defense in this case - a 17 year difference. The case comes from the Jack Abramoff lobbying scandal that caused several Greenberg Traurig lobbyists to "pled guilty to participating in an influence peddling and bribery scheme."
A key issue raised by the defense is "that the government is retaliating against him for exercising his Sixth Amendment right to trial." The court notes that "the government cannot retaliate against defendant for exercising his rights." The detailed sentencing methodology follows with the court's conclusion of a guidelines range of 46-57 months.
See also Doug Berman, Sentencing Law & Policy Blog here; Mary Jacoby, Main Justice, Judge Rejects Recommended Sentence for Ex-Abramoff Lobbyist
Monday, September 19, 2011
A DOJ Press Release here reports that "Saudi Arabia-based Tamimi Global Company Ltd (TAFGA) has agreed to pay the United States $13 million to resolve criminal and civil allegations that the company paid kickbacks to a Kellogg Brown & Root Inc. (KBR) employee and illegal gratuities to a former U.S. Army sergeant, in connection with contracts in support of the Army’s operations in Iraq and Kuwait." The press release states:
"Under the terms of that agreement, TAFGA will pay the United States $5.6 million as part of a deferred prosecution and institute a strict compliance program to ensure that the company and its employees will abide by the legal and ethical standards required for government contracts. If TAFGA meets its obligations under the agreement without violation for 18 months, the United States will dismiss the criminal charges."
Thursday, September 15, 2011
UBS is having another "ouch" moment as the media is reporting on a rogue trader. The typical questions are - how could this have happened; why was it not discovered sooner; who should be held liable; and should there be criminal liability? It is too soon to answer many of these questions. But here are some points of interest -
UBS has a corporate responsibility policy that states:
"UBS is firmly committed to corporate responsibility and actively strives to understand, assess, weigh and address the concerns and expectations of the firm's stakeholders. This process supports UBS in its efforts to safeguard and advance the firm’s reputation for responsible corporate conduct. In very direct ways, responsible corporate conduct helps create sustainable value for the company."
Its policies include a host of different preventative measures, such as money laundering prevention here. It takes pride in employees and notes that "[o]ur employees have the breadth of our businesses, global career opportunities and a collaborative, performance-oriented culture as a platform for individual success."
Rogue employees are not a new development for the corporate arena. No matter how many controls are in place and no matter how much oversight there might be, it is a problem to have full compliance. Knowing this, it seems important to provide companies with a "good faith" defense when a rogue employee commits acts that might be considered criminal. Unfortunately, to date, courts have only seen fit to insert such as defense in the civil area and not the criminal sphere. (See Podgor, A New Corporate World Mandates a Good Faith Affirmative Defense) But corporate criminality in the federal system is premised on respondeat superior and the acts of a rogue employee are hardly for the benefit of the company.
See also -
Frank Jordans & Paisley Dodds, Houston Chronicle, Rogue trader suspected in $2 billion UBS loss
Nathan Vardi, Forbes, Rogue Trader Deals Big Blow To UBS
Victoria Howley & Emma Thomasson, Reuters, UBS $2 billion rogue trade suspect held in London
The Telepgraph, UBS rogue trader: statement to employees in full
Monday, September 12, 2011
A DOJ Press Release here states that "Maxim Healthcare Services Inc., one of the nation’s leading providers of home healthcare services, has entered into a settlement to resolve criminal and civil charges relating to a nationwide scheme to defraud Medicaid programs and the Veterans Affairs program of more than $61 million." The Deferred Prosecution Agreement (DPA) provides that Maxim will pay "a criminal penalty of $20 million and to pay approximately $130 million in civil settlements in the matter." The DPA, which requires the company to meet reform and compliance measures, lasts for two years.
As with many companies who enter into DPAs, there are also individuals being prosecuted. In this case the press release notes that "[t]o date, nine individuals – eight former Maxim employees, including three senior managers and the parent of a former Maxim patient – have pleaded guilty to felony charges arising out of the submission of fraudulent billings to government health care programs, the creation of fraudulent documentation associated with government program billings, or false statements to government health care program officials regarding Maxim’s activities."
The press release also states that "[t]he government’s willingness to enter into a DPA with Maxim is due, in significant part, to the company’s cooperation and the reforms and remedial actions the company has taken – beginning particularly in May 2009 – including significant personnel changes: terminating senior executives and other employees the company identified as responsible for the misconduct; establishing and filling of positions of chief executive officer, chief compliance officer, chief operations officer/chief clinical officer, chief quality officer/chief medical officer, chief culture officer, chief financial and strategy officer, and vice president of human resources; and hiring a new general counsel."
Friday, September 9, 2011
In United States v. Langford, the Eleventh Circuit Court of Appeals found sufficient evidence in reviewing a post-Skilling case. The court notes in this decision that "[w]e have not expressly explored at length what manner of concealment, if any, is necessary to prove honest services mail or wire fraud. However, we have said that honest services fraud 'may be proved through the defendant's non-action or non-disclosure of material facts intended to create a false and fraudulent representation."(citations omitted). There is also an interesting question of "in furtherance" here.
(esp)(w/ a hat tip to Linda Friedman Ramirez)
Tuesday, September 6, 2011
Coram nobis is without doubt an extraordinary remedy and one that has limited application. That said, the Eastern District of Pennsylvania granted such a petition in the case of United States v. Lynch and Campenella. The court found that "where an indictment fails to allege any criminal conduct, a petitioner is excused from the showing of actual innocence."
The smoking gun in this case came from the government when "during both change-of-plea hearings the Government corrected the Court by clarifying that the crime at issue was an undisclosed conflict of interest, rather than bribery." Further the court notes that "[a]t no point during the change-of-plea hearings or in its guilty plea memoranda did the Government mention a quid pro quo bribery theory."
Enter the Supreme Court's opinion in Skilling and without the bribery, there is problem in the case. Lynch gets a grant of the petition for coram nobis and Campenella a 2255 motion to vacate the conviction and sentence.
The bottom line - if you have no crime, relief needs to be granted.
Court's Opinion - Download Opinion granting coram nobis
Addendum - See also Joseph Tanfani, Philly.com, Fraud convictions overturned for Philly assessor and developer