Tuesday, July 4, 2006

Two More Grand Jury Subpoenas for Silicon Valley Companies in Options-Timing investigation

For those of you keeping score over the long holiday weekend, add two more Silicon Valley companies to the list of those who have received grand jury subpoenas from the Northern District of California in the ever-widening stock options-timing probe.  Maxim Integrated Products, Inc. -- not to be confused with the magazine -- and Zoran Corp. disclosed (here and here) that they were served with the grand jury subpoenas and, as usual, will cooperate in the criminal investigation, in addition to providing documents to the SEC in its informal investigation of the issuance of the stock options.  On top of Apple's recent disclosure of possible problems in the grant of options in the 1990s to its executive, including Steve Jobs, these latest subpoenas show that the investigation is still in its growth phase.  Given the near-addiction high tech firms have for stock options, look for more announcements of the receipt of grand jury subpoenas and pledges of cooperation. (ph)

July 4, 2006 in Grand Jury, Investigations, Securities | Permalink | Comments (0) | TrackBack (0)

Friday, June 30, 2006

Bonds' Former Trainer Refuses to Testify Before a Grand Jury

Greg Anderson, the former personal trainer for San Francisco Giants slugger Barry Bonds, refused to testify before a federal grand jury in San Francisco investigating whether Bonds committed perjury in 2003 when he testified about his lack of knowledge in taking steroids.  Anderson was connected to Victor Conte's drug lab, Balco (Bay Area Laboratory Cooperative), and provided Bonds with a then-undetectable steroid called "the clear."  Bonds testified during the Balco investigation that he did not know the substance Anderson gave him contained steroids.  Anderson plead guilty to drug charges and served a three-month prison term, and prosecutors subpoenaed him to testify about Bonds' steroid use. 

Anderson did not assert the Fifth Amendment, which may not have been available because of his guilty plea or, in the alternative, prosecutors may have been willing to grant him immunity.  Instead, the basis for his refusal was that prosecutors wanted to examine him about a tape-recording in which he discusses Bonds using the clear in 2003 to avoid major league baseball's drug-testing program.  Anderson's attorney, Mark Geragos (from the Scott Peterson murder case), argued that the tape was made illegally, but an AP story (here) notes that a federal district court judge decided that the government was not involved in the taping so prosecutors could use it to examine Anderson.  By refusing to testify, Anderson faces a civil contempt proceeding and may be sent to jail if he continues to refuse to testify, at least for the term of the grand jury.  If the court holds him in contempt, he could then appeal to the Ninth Circuit, although it is hard to see how he can avoid testifying about other matters unless her asserts the Fifth Amendment. 

While Anderson is unlikely to be a particularly strong witness in any prosecution of Bonds, the tape recording could be important contemporaneous evidence used to link him to knowing steroid use near the time of his grand jury testimony.  It certainly appears that, as the pennant races heat up, so is the investigation of Bonds. (ph)

June 30, 2006 in Grand Jury, Investigations, Perjury | Permalink | Comments (0) | TrackBack (0)

Northern District of California USAO Cranks Up Its Options-Timing Investigation

As if the investigation of Barry Bonds for perjury wasn't keeping the U.S. Attorney's Office in San Francisco busy enough, two more grand jury subpoenas have been issued by the Office to companies as part of the ever-widening options-timing investigation.  Intuit Inc. and Equinix, Inc., both headquartered in the district, disclosed that they have received grand jury subpoenas dated June 26, 2006, and continuing a pattern seen in numerous other such disclosures, they promise to cooperate in the investigation.  Intuit's press release (here) actually goes a small step further by pointing out that a number of other companies have also been subpoenaed, similar to the playground tactic of blending into the crowd when the principal suddenly appears to investigate the broken window:

On June 26, 2006, Intuit Inc. (Nasdaq: INTU) received a subpoena from the United States Attorney for the Northern District of California requesting documents related to the company’s historical stock option practices. It is our belief that similar subpoenas have been served on many of the companies named in a recent report from the Center for Financial Research and Analysis (CFRA). As disclosed on June 9, 2006, Intuit received an informal request from the Securities and Exchange Commission for information on historical stock option practices. We will fully cooperate with the U.S. Attorney’s office.

Equinix takes the straightforward approach, stating in its 8-K (here) that "it received a grand jury subpoena from the U.S. Attorney for the Northern District of California and that it intends to cooperate fully with the U.S. Attorney's Office in connection with this subpoena. The subpoena requests documents relating to Equinix's stock option grants and practices."

The issuance of subpoenas has become almost routine now, and the interesting question is if any cases will move beyond the investigatory stage and result in plea agreements that might lead to additional prosecutions. (ph)

June 30, 2006 in Grand Jury, Investigations, Securities | Permalink | Comments (0) | TrackBack (0)

Wednesday, June 14, 2006

It's Raining Grand Jury Subpoenas in the Options-Timing Probe

The U.S. Attorney's Office for the Southern District of New York may now be in the lead in issuing grand jury subpoenas to companies for documents related to the timing of stock options granted to senior executive.  RSA Security Inc. issued a press release (here) on June 13 stating that the company "announced that it has received a document subpoena from the U.S. Attorney for the Southern District of New York requesting records from 1996 to the present relating to the Company’s granting of stock options. The Company plans to cooperate fully with the office of the United States Attorney in connection with this subpoena."  On June 12, Monster Worldwide Inc., parent company of Monster.Com, issued a press release (here) that "the company has been served with a subpoena from the United States Attorney for the Southern District of New York relating to stock option grants. Monster Worldwide intends to cooperate fully in this matter."  Strikingly similar language, but then there is no way for counsel to spin the receipt of a grand jury subpoena other than to promise cooperation, something companies are virtually required to do these days if they hope to avoid indictment should the investigation come to that point. 

A Wall Street Journal scorecard (here) tracking the various government and internal investigations of stock option timing now lists twenty companies that have received grand jury subpoenas, from U.S. Attorney's Offices in New York, Brooklyn, San Francisco, and Boston.  The question is whether anything will come of these various inquiries -- aside from the tidal wave of attorney's fees, of course.  A key step to watch for is a plea agreement and SEC settlement with a corporate officer involved in backdating documents, which will indicate the types of violations prosecutors and the SEC are looking at in the cases. (ph)

June 14, 2006 in Grand Jury, Investigations, Securities | Permalink | Comments (0) | TrackBack (0)

Monday, June 12, 2006

Does Barry Bonds Really Want to Talk to George Mitchell?

An AP story (here) reports that San Francisco Giants slugger Barry Bonds is willing to speak with former Senator George Mitchell in his investigation of steroid use in baseball, conditioned on one very big "if."  The if is that Bonds must be assured the information will not be given to the Department of Justice for use in the grand jury investigation of whether Bonds committed perjury in 2003 when he testified about steroids supplied by Balco (Bay Area Laboratory Cooperative).  The grand jury has already heard from a number of witnesses, and the recent search of the home of former major league player Jason Grimsley has also been linked to the Bonds investigation.

Can Bonds get the assurances his attorney says he needs, or is this all a smokescreen to make it appear that Bonds is willing to cooperate but that his hands are tied because of those mean federal investigators?  The parties could agree to a type of civil protective order, although whether that would be enforceable in the absence of a judicial officer's endorsement is an open question.  More importantly, under Ninth Circuit precedent (the case is being investigated by the U.S. Attorney's Office for the Northern District of California), In re Grand Jury Subpoena Served on Meserve, Mumper & Hughes, 62 F.3d 1222 (9th Cir. 1995), grand jury subpoenas trump such protective orders even when issued by a federal judge in civil litigation.  Any agreement between Bonds and Mitchell would have no effect on the grand jury's power to obtain the evidence, which would not be subject to any privilege claim or the like.

Would the Department of Justice join such an agreement not to used Bonds' statements to Mitchell's investigators?  That sounds like a type of quasi-immunity, something prosecutors are unlikely to grant without first hearing from Bonds or his attorney about the content of his statements -- that whole "buying a pig in a poke" problem.  It is not clear what upside, if any, prosecutors would see in agreeing not to use any statements Bonds might make about steroid use.  If he simply reiterates his grand jury testimony, there is nothing gained.  If he were to contradict that testimony and be indicted for perjury, not only could the statements not be used, but Bonds could argue for a type of "use fruits" protection on the ground that disclosure of his statements would be an impermissible use that has tainted the government's investigation.  One of the scariest phrases to federal prosecutors is "Kastigar hearing," which is a hearing to determine whether the government has used immunized testimony in any way in a subsequent prosecution.  That was the ground on which Oliver North's convictions were overturned, and the mere mention of a Kastigar hearing sends chills down the spine of prosecutors because it means they have to show an independent basis for all their evidence, a difficult standard to meet.  Any hint of immunity for Bonds, even informal immunity, creates this possibility, and the San Francisco U.S. Attorney's Office is unlikely to see the Mitchell investigation as worth creating that kind of risk to a perjury prosecution.

Bonds' attorney surely is aware of all these considerations, and how unlikely it is that the government will grant such protection to statements by Bonds.  I suspect that spin has already begun, with Bonds trying to show how "cooperative" he is and that federal prosecutors are unwilling to hear his side of the story.  The grand jury investigation promises to get warmer as the summer moves on and the pennant races heat up.  (ph)

June 12, 2006 in Grand Jury, Investigations, Perjury | Permalink | Comments (0) | TrackBack (0)

Friday, June 9, 2006

The Bull's-Eye Is on Barry Bonds

The recent search of (now-former) major league pitcher Jason Grimsley's home for steroids and human growth hormones has been linked to the on-going grand jury investigation of San Francisco Giants slugger Barry Bonds for perjury.  An AP story (here) states that Grimsley's lawyer said that federal agents asked Grimsley to secretly record conversations about Bonds' alleged steroid use, a proposition he refused.  Grimsley spent most of his career in the American League while Bonds has been in the National League since coming to the majors with the Pittsburgh Pirates in 1986, so  it is unlikely Grimsley would have been able to obtain much direct evidence against Bonds.  The government's search warrant affidavit alleges that Grimsley named other players who used steroids and HGH, so it may be that investigators were using Grimsley to get evidence on those closer to Bonds who could then testify against him.

On a related front, the lawyer for Kimberly Bell, a purported former mistress of Bonds, has informed former Senator George Mitchell that federal investigators told his client not to cooperate in baseball's steroids investigation because of her involvement in ongoing grand jury proceedings.  Bell testified before the grand jury in San Francisco that has also heard from the Giants' team trainer and Bonds' personal physician in connection with Bonds' possible steroid use, which would be at odds with his earlier grand jury testimony.  Investigators are following the old adage about not creating discovery material or Jancks statements that would have to be disclosed before a trial and could be used to impeach a witness' s credibility if there are any inconsistencies.

The government clearly is putting a great deal of effort into the Bonds investigation, and taking approaches, such as searches and wires, usually not seen in such cases.  Whether there is enough there to make out a case remains to be seen.  Now that the request to Grimsley to tape conversations has been revealed, all baseball players, especially Bonds, will be wary of any discussion of steroid or HGH use. (ph)

June 9, 2006 in Grand Jury, Investigations, Perjury | Permalink | Comments (1) | TrackBack (1)

Friday, June 2, 2006

Journalists Subpoenaed in the Bonds Perjury Investigation

A New York Times article (here) discusses a motion to quash grand jury subpoenas issued to the two San Francisco Chronicle journalists who broke the story about the grand jury testimony of San Francisco Giants slugger Barry Bonds in the Balco (Bay Area Laboratory Cooperative) steroids investigation.  The journalists are co-authors of the book Game of Shadows that contains a number of detailsdescribing alleged steroid use by Bonds.  The Times article discusses the affidavit submitted by Mark Corallo, former Department of Justice spokesman for Attorney General Ashcroft, blasting the issuance to subpoenas to journalists for information about confidential sources absent a significant need related to national security or a threat of harm to innocent third-parties.

While most of the attention has been on the issue of the propriety of journalist subpoenas, the fact that federal prosecutors have taken such a dramatic step may indicate that the Bonds investigation is in its final stages.  Subpoenaing journalists to track down confidential sources who may be eyewitnesses to possible steroid use by Bonds seems to show that, to this point, the government does not have enough independent evidence to make a perjury case.  Bonds denied having knowingly used steroids before the grand jury in 2003, and prosecutors would have to prove the falsity of those statements and not merely that they were not completely truthful.  The grand jury has heard from Bonds' personal physician and a Giants team trainer, but it is unlikely that they would have direct evidence of any steroids use.  Bonds' personal trainer, Greg Anderson, may have testified about what Bonds put into his body, but having pled guilty in the Balco case, Anderson's testimony may not be sufficiently credible to warrant a perjury prosecution.  Similarly, a former supposed girlfriend of Bonds would have similar issues if she were a government witness. 

Issuing subpoenas to journalists looks like a last -- and possibly desperate -- step to build the perjury case.  Whether the government can obtain what it wants remains to be seen. (ph)

June 2, 2006 in Grand Jury, Investigations, Perjury | Permalink | Comments (0) | TrackBack (0)

Wednesday, May 31, 2006

Massachusetts U.S. Attorney Jumps Into the Options-Timing Investigation

There are now four U.S. Attorney's Offices looking into the timing of stock options granted to senior executives with the issuance of a grand jury subpoena from the District of Massachusetts to Sycamore Networks, Inc., a Chelmsford, Mass., company.  According to an 8-K filed on May 30 (here):

In addition to the previously reported investigation by the Securities and Exchange Commission (the “SEC”) of the practices of Sycamore Networks, Inc. (the “Company”) related to certain stock option grants, the Company is also cooperating with the U.S. Attorney’s Office for the District of Massachusetts (“U.S. Attorney's Office”) in its investigation of the Company’s stock option practices. On May 26, 2006, the U.S. Attorney's Office issued a grand jury subpoena to the Company requesting that the Company produce documents relating to stock option grants. The Company is cooperating, and will continue to cooperate, with the SEC and the U.S. Attorney's Office in their investigations.

The U.S. Attorney's Offices for the Southern and Eastern Districts of New York, i.e. Manhattan and Brooklyn, have taken the lead by subpoenaing over a dozen companies between them, while the U.S. Attorney's Office for the Northern District of California issued a subpoena to Altera Corp. related to its options grant practices (see press release here).  It remains unclear whether there is a coordinated investigation by the U.S. Attorney's Offices, although the companies subpoenaed in Massachusetts and California are within the districts, while the New York investigations are nationwide.  The SEC is also conducting investigations of the companies that have received grand jury subpoenas, so there is likely at least some coordination through that agency, although there are important limitations on how closely the civil and criminal investigators can work together.  Of particular concern, after two district court decisions in the past year dismissing criminal charges, will be how the SEC deals with witnesses who may also be the targets of grand jury investigations.

The Wall Street Journal has a very helpful chart (here) detailing the companies that so far have disclosed governmental and internal investigations of possible options-timing issues.  The investigations have already resulted in the dismissal of a few senior executives related to the probes, including the firing of the general counsel at McAfee discussed in an earlier post (here).  With the U.S. Attorneys in New York, Boston, and San Francisco conducting investigations, can the offices in Chicago and Los Angeles be too far behind?  Moreover, look for the SEC investigations, most of which have been identified as "informal" to this point, to move into the "formal" category in the near future, which will trigger a wave of civil subpoenas. (ph)

May 31, 2006 in Grand Jury, Investigations, Securities | Permalink | Comments (0) | TrackBack (0)

Tuesday, May 23, 2006

Dueling Grand Jury Investigations

The grand jury subpoenas to companies with suspiciously-timed stock option grants to their senior executives seem to be coming fast and furious, and from two different districts separated only by the East River.  The U.S. Attorney's Office for the Eastern District of New York launched the first subpoena, to Comverse Technology, and then went quiet while the Southern District of New York unleashed a set of subpoenas on May 17 to companies such as Vitesse Semiconduct and UnitedHealth.  Now comes word that additional companies have received grand jury subpoenas from one or the other district: KLA-Tencor (apparently SDNY); Brooks Automation (EDNY); F5 Networks (EDNY); Juniper Networks (EDNY) (see Wall Street Journal story here).  Are the two districts competing over the investigation of companies that have options-timing issues, or is it a matter of dividing a potentially very large field so that one office is not overwhelmed by the truckloads of documents that should be arriving shortly from each corporation that has promised full cooperation? (ph)

May 23, 2006 in Fraud, Grand Jury, Investigations, Securities | Permalink | Comments (0) | TrackBack (0)

Friday, May 19, 2006

The List of Grand Jury Subpoena Recipients in the Options Pricing Probe Keeps Growing

Add three more companies to the list of those that have received grand jury subpoenas from the Southern District of New York probing the pricing of stock options granted to senior executives, including the veracity of documents for the awards.  The subpoenas, all delivered on Wednesday, May 17, were received by Affiliated Computer Services, Inc. (8-K here), Caremark Rx, Inc. (press release here), and SafeNet, Inc. (press release here).   Each company also disclosed receiving an inquiry from the SEC as part of its informal investigation -- which will go formal sometime soon, I expect -- and each states that it will cooperate in the investigation.  UnitedHealth and Vitesse Semiconductor also received subpoenas on that day (see post here), and no doubt there will be more companies disclosing the receipt of grand jury subpoenas, with the disclosures likely to come late Friday afternoon after the markets close.  It is not clear whether the SEC requests for information were received at the same time as the grand jury subpoenas, but the Commission and the Southern District of New York have a long history of close cooperation so these investigations most likely are being coordinated.  A Wall Street Journal story (here) discusses the expanding investigation. (ph)

May 19, 2006 in Fraud, Grand Jury, Investigations, Securities | Permalink | Comments (0) | TrackBack (3)

Thursday, May 18, 2006

Southern District Jumps Into Options Pricing Investigation

The U.S. Attorney's Office for the Southern District of New York has issued grand jury subpoenas to Unitedhealth Group and Vitesse Semiconductor concerning the timing of options grants to senior executives and allegations that documents were backdated to allow the options to be issued at a lower price to enhance their value.  Unitedhealth announced the subpoena in a press release (here), and a Wall Street Journal story (here) discusses the subpoenas.  A grand jury in the Eastern District of New York has already subpoenaed Comverse Technology related to options timing issues at that company (see earlier post here), and it's not clear at this point whether the U.S. Attorney's Offices will be conducting a coordinated investigation. The SEC has already begun an informal investigation of a number of companies related to their options grants, and that investigation is likely to become a formal one, if it hasn't already happened, followed by the issuance of subpoenas.  Companies will be facing parallel investigations, along with the usual host of shareholder lawsuits.

Vitesse Semiconductor also announced that it had terminated its CEO, CFO, and executive vice president, who had earlier been placed on leave, and the company faces a delisting of its stock by NASDAQ because it has not been able to file its quarterly report.  More ominously for the former executives and the company is the disclosure that the internal investigation has raised questions about revenue recognition, and that its financial statements should not be relied on.  This raises an interesting question whether the options grants were linked to possible accounting violations designed to make the company look better and thereby enhance the value of the options, something that the grand jury will likely review.  An AP story (here) discusses the termination of the Vitesse Semiconductor officers. The various investigations are likely to expand rather quickly over the next few weeks. (ph)

May 18, 2006 in Fraud, Grand Jury, Investigations, Securities | Permalink | Comments (0) | TrackBack (1)

Wednesday, May 17, 2006

Adieu, Milberg Weiss?

The investigation of alleged kickbacks to representative plaintiffs in class actions looks like it will ensnare two name partners at Milberg Weiss and perhaps even the firm itself.  While there has been media speculation that the firm might be able to work out a deferred prosecution agreement with the Department of Justice -- the preferred method these days for dealing with organizational misconduct -- the New York Times reports (here) that talks for an agreement may be foundering over issues such as "the waiver of client-attorney privileges; new compliance and monitoring systems and personnel the firm would be required to put in place; and the size of any potential payments . . . ."  Milberg Weiss announced that name partners Steven Schulman and David Bershad have taken leaves of absence from the firm (see Law.Com story here), and a press release issued by the firm (here) states that the leave "will allow Mr. Bershad to focus fully on other matters."  Those other matters include a federal grand jury in Los Angeles that meets on Thursdays, and an indictment of the two partners could come as early as May 18, assuming neither is negotiating a plea agreement.  Whether the firm is also named is a key decision that may not be decided until the last minute.

Indicting Milberg Weiss would not necessarily put it out of business because, unlike accounting firms such as Arthur Andersen, law firms are not licensed by the state, only the individual lawyers, and the professional responsibility rules only indirectly govern law firms.  That said, lawyers know that reputation is an attorney's most valuable asset, so a criminal indictment would likely cause such serious harm to the law firm and its laywers that it would break up in all likelihood.  If that happens, I expect that at least one new firm, with different named partners, will emerge to take on some of the same client matters while unencumbered by the taint of criminal charges against Milberg Weiss.

Is a deferred prosecution agreement practical for a law firm?  The hurdles to crafting such an agreement may be too great, at least if the Department of Justice insists on provisions similar to those in other such agreements.  For example, many agreements contain an attorney-client/work product waiver, which Milberg Weiss could not do without permission from its clients.  Obtaining that type of waiver would be even more difficult given the types of cases the firm takes because class actions involve multiple clients (and law firms).  Another standard provision is the appointment of an outside monitor, which raises a different set of attorney-client privilege issues that might make it impossible to have a third-party being privy to all the law firm's operations.  A limitation on the types of cases the firm could accept might cripple its ability to retain lawyers, the firm's most valuable asset, so an agreement that makes it more difficult to maintain the firm's profitability could end up killing it. 

Unlike Time Warner or Bristol-Myers Squibb, companies that entered into deferred prosecution agreements and have extensive ongoing businesses with significant fixed assets, law firms have few tangible assets and a work force that is highly mobile, so there would be little incentive to stay if an agreement imposed terms viewed as too onerous.  A deferred prosecution agreement for Milberg Weiss may result in a situation where there is no party on the other side shortly after the ink dries because lawyers can reconstitute their practices with relative ease while clients can switch to new counsel on a moments notice.  Unlike corporations or even non-profits (such as hospitals) with continuing businesses in fixed locations, law firms may not be amenable to deferred prosecution agreements, which raises the question whether a criminal prosecution of the firm is even worth the effort. (ph)

May 17, 2006 in Fraud, Grand Jury, Investigations, Legal Ethics | Permalink | Comments (0) | TrackBack (0)

Friday, May 12, 2006

Another Strange Turn in Insider Trading Saga

The story of the insider trading ring organized by David Pajcin and Eugene Plotkin, who met while working at Goldman Sachs, took another turn with the arrest of Pajcin's high school friend, Jason Smith, on insider trading and criminal contempt charges.  Pajcin and Plotkin showed a voracious appetite for inside information, as discussed in an earlier post (here), that involved obtaining deal information from an analyst at Merrill Lynch and hiring two men to work at a printing plant in Wisconsin to get a sneak peak at advance copies of Business Week.  Pajcin first came to the government's attention in August 2005 when large-scale call option purchases in Reebok right before the announcement of its acquisition by Adidas, including trades through an account in the name of his aunt in Croatia, first surfaced and caused the SEC to look at a variety of trading accounts for suspicious transactions.

The latest twist involves a letter carrier who was a member of a federal grand jury in New Jersey.  Smith is accused of leaking information to Pajcin and Plotkin about the pending investigation of Bristol-Myers Squibb and its executives for accounting fraud related to channel stuffing that was before the grand jury.  That investigation ultimately resulted in a deferred prosecution agreement for the company and indictments of two of its former financial officers on June 14, 2005.  According to a press release issued by the U.S. Attorney's Office for the District of New Jersey:

Smith allegedly kept Pajcin abreast of progress and developments in the grand jury and what he believed was the anticipated indictment of one particular BMS officer who appeared multiple times before the grand jury. The two allegedly discussed trading in BMS stock and also met in Manhattan with another of Pajcin’s co-conspirators, Eugene Plotkin, then an associate at Goldman Sachs’ fixed-income research unit . . . According to Pajcin, as related in the criminal Complaint from the District of New Jersey, Pajcin told Smith of the insider trading scheme with which he, Plotkin and others were engaged. Pajcin said he opened a brokerage account in the fall of 2004 with about $6,000 or $7,000 provided by Smith, as well as with money from a $20,000 bank loan taken by Plotkin.  Pajcin said Smith told him to use Smith’s money in the insider trading scheme. Subsequently Smith began passing along information on the progress and status of the BMS grand jury investigation. Smith and Pajcin allegedly agreed to share in any profits made as a result of Smith’s information.

Pajcin has been cooperating with the government's investigation since late 2005, and it appears that he assisted in an undercover contact with Smith in April 2006.  According to the press release, "During a recorded telephone conversation on April 12, 2006, according to the Complaint, Pajcin told Smith he was considering cooperating with authorities. If he did, Pajcin told Smith, he might have to tell the government about 'the jury thing.' In response, Smith expressed, among other things, serious concerns for himself and discussed possibly fleeing, according to the Complaint."

It is not clear whether Pajcin and Plotkin made any money on their short sales of BMS, although the U.S. Attorney's Office for the Southern District of New York and the SEC are pursuing insider trading charges against them (and Smith) for that trading (see SEC Litigation Release here).  While trading based on material nonpublic information usually results in a gain or loss avoided, a Rule 10b-5 violation does not require the defendant to realize a profit from the transaction, and it is not a defense that the trade turned out to be a loser if it was made while the person had inside information that caused the transaction.  Of even greater concern for Smith is the contempt charge for violating Federal Rule of Criminal Procedure 6(e), which strictly prohibits disclosure of grand jury information.  Courts are particularly concerned about leaks of grand jury information, so if the allegations prove to be true, then Smith will probably face a much more severe sentence than would be the case for the insider trading, particularly because the contempt statute does not contain a statutory maximum (18 U.S.C. Sec. 401 here). (ph)

May 12, 2006 in Grand Jury, Insider Trading, Prosecutions | Permalink | Comments (0) | TrackBack (0)

Wednesday, April 26, 2006

List of Witnesses in the Bonds Grand Jury Investigation Grows

The number of witnesses keeps growing in the San Francisco federal grand jury investigation of whether Giants slugger Barry Bonds committed perjury in 2003 in his testimony before the grand jury investigating steroid distribution through Balco (Bay Area Laboratory Cooperative).  In addition to previously disclosed subpoenas to Bonds' personal physician and the Giants team trainer, media reports are that a former Balco executive, James Valente, and Bonds' personal trainer, Greg Anderson, have been subpoenaed to testify.  Valente and Anderson entered guilty pleas in 2005 to charges related to the distribution of steroids through Balco.  Bonds admitted in his testimony that Anderson gave him substances that turned out to contain steroids, but he denied knowing that at the time he used them. 

Anderson can be a key witness regarding  Bonds' knowledge of what those substances included, and whether he provided Bonds any other of the so-called "designer" steroids developed at Balco to avoid drug testing measures.  The problem with Anderson, of course, is that as a convicted felon he may not be a credible witness.  Nevertheless, he was likely at the "scene" of any steroid use that may have occurred, so unlike most white collar crime cases, he may be an important eyewitness, regardless of the credibility issues.  An AP story (here) discusses the latest grand jury subpoenas.  (ph)

April 26, 2006 in Grand Jury, Investigations, Perjury | Permalink | Comments (0) | TrackBack (0)

Friday, April 21, 2006

How NOT to Respond to a Subpoena

A Third Circuit opinion discusses the application of the crime-fraud exception to the attorney-client privilege in an investigation that shows how a subpoena recipient should not respond unless the person wants to move into the "target" category in a hurry.  In In re: Grand Jury Investigation (here), the court reviewed a challenge to the district court's order to an attorney to testify about his communication with his client -- Jane Doe -- about the content of a grand jury subpoena for e-mail records.  Doe was the executive director of an Organization that was affiliated with the primary target of the investigation involving possible corruption of a public official, and her attorney forwarded to her a grand jury subpoena seeking e-mail records of the Organization.  The government apparently was unsatisfied with the response, setting in motion a chain of events that led to the attorney being called to testify before the grand jury:

On February 10, 2005, pursuant to an agreement among the parties, an FBI computer technician went to the Organization’s place of business and "imaged" the hard drive on Jane Doe’s computer. The Government thus made an exact copy of the contents of the hard drive, including deleted email files. It uncovered numerous stored messages which could be construed to show a conscious effort by the Organization’s staff to destroy emails.

Concerned about the potential obstruction of justice by Jane Doe and others at the Organization, the Government issued a subpoena duces tecum to Attorney on March 1, 2005. It sought to compel grand jury testimony regarding his discussions with Jane Doe as to her compliance (or apparent non-compliance) with the prior subpoenas for production of the Organization's e-mails.

The Third Circuit held that there was sufficient evidence of a pending or future crime by Doe, namely obstruction of justice, for not preventing the deletion of the e-mails.  The court upheld the district court's order directing the attorney to testify.

Interestingly, the court cited to the Second Circuit's recent decision in United States v. Quattrone as support for the proposition that failing to stop the destruction of e-mails after learning of a subpoena for those records can constitute obstruction.  The court stated: "The Government’s position in this case is that the communication between Attorney and Jane Doe provided her with knowledge of the type of material the Government sought, comparable to the documents relating to the IPO allocation process sought in Quattrone."  While the conviction in Quattrone was overturned due to faulty jury instructions, the Second and Third Circuit decisions do show that the handling of e-mail can rise to the level of obstruction of justice, showing once again how important this type of evidence is in white collar crime investigations and prosecutions. (ph)

April 21, 2006 in Corruption, Grand Jury, Privileges | Permalink | Comments (1) | TrackBack (1)

Wednesday, April 19, 2006

Giants Trainer Subpoenaed in Bonds Perjury Investigation

The federal grand jury investigating possible perjury by San Francisco Giants slugger Barry Bonds has subpoenaed the team's head trainer to testify on April 27, in addition of Bonds' personal physician.  Bonds testified before a grand jury in 2003 about whether he used steroids from Balco (Bay Area Laboratory Co-operative), where his personal trainer worked.  Bonds denied knowingly taking steroids, and recent publications cast doubt on whether his testimony was truthful.  By seeking testimony from the personal physician and team trainer, the government likely is focusing on learning if health care professionals observed if Bonds exhibited any of the outward signs of steroid use, which can cause substantial physical changes.  The witnesses may also have spoken with Bonds about whether he was using steroids or human growth hormones.  While his physician may be able to raise a privilege claim to conversations, the team's trainer is unlikely to be able to throw up a similar roadblock to testifying. 

Whether either witness can provide the type of circumstantial evidence needed to establish that Bonds' testimony was false -- which will be necessary to meet the high standard for a perjury conviction -- is certainly an open question.  Both may well by sympathetic to Bonds, and so could provide only equivocal statements regarding his physical condition.  To this point, the government's evidence appears to be coming from those convicted in connection with the Balco operation, a jilted former girlfriend, and claims made by anonymous sources as reported in a book and in the media.  The government likely needs objective evidence of steroid use and not anecdotal claims if it wants to make a case against Bonds.  A San Francisco Chronicle story (here) discusses the grand jury investigation. (ph)

April 19, 2006 in Grand Jury, Investigations, Perjury | Permalink | Comments (0) | TrackBack (0)

Friday, April 14, 2006

Bonds Is the Target of a Grand Jury Investigation

It should not come as a great shock that a federal grand jury in San Francisco is investigating star slugger Barry Bonds for perjury related to his testimony in December 2003 in the Balco (Bay Area Laboratory Co-operative) steroid investigation.  CNN.com reports (here) that the grand jury began hearing testimony about one month ago, around the time reports emerged about the book "Game of Shadows" that asserts Bonds began using steroids in 1998, after Mark McGwire broke Babe Ruth's single-season home run record.  The San Francisco Chronicle reported in 2004 that Bonds told the grand jury that he used two items that he did not know contained steroids, but that he never knowingly used steroids. 

The grand jury has subpoenaed, among others, Bonds' personal physician, according to an AP story (here).  The doctor accompanied Bonds to Balco's offices and drew his blood there, according to "Game of Shadows."  In March 2005, a reputed former girlfriend of Bonds testified before the Balco grand jury that he took steroids (see earlier post here).  The testimony of the physician may corroborate assertions by others about Bonds' use of steroids at the time he testified before the grand jury, contradicting his testimony.  As an earlier post (here) noted, however, a perjury prosecution will depend on the specificity of the questions and answers from the 2003 testimony.

Mike Rains, Bonds' attorney, may already be setting up the defense to an indictment by arguing that the government set a "perjury trap."  According to the CNN.com story, Raines said, ""Look no further than Martha Stewart. The trap is perjury . . . You offer immunity and you get him in there and then you ask them questions and you get them on lying to federal officers.  That's the trap. That's exactly what they got Martha for."  I think the comparison to Martha Stewart is rather inapt.  Even if one accepts that it was unfair to prosecute Stewart for false statements but not the underlying subject of the investigation, she did not receive immunity and her statements were not under oath.  Bonds received immunity for the purpose of telling the truth, and the government had no desire to obtain false testimony from him.  Indeed, the reason why immunity is granted in most cases is because the person will provide evidence against others and avoids prosecution.  The immunity grant states explicitly that false testimony can be used against the person, and this appears to be the exact type of situation in which a perjury prosecution is most appropriate.  The witness agrees to tell the truth to assist an investigation, and then gives false testimony -- that strikes me as the paradigmatic scenario for a perjury prosecution.  Granting immunity is probably the least likely situation in which a so-called "perjury trap" would be set by prosecutors. (ph)

April 14, 2006 in Grand Jury, Investigations, Perjury | Permalink | Comments (0) | TrackBack (0)

Wednesday, April 12, 2006

Round Two of the Scrushy Prosecution

The second criminal prosecution of former HealthSouth CEO Richard Scrushy is getting ready to launch, unless he can succeed in having the indictment thrown out because the pool of potential grand jurors did not include a sufficient number of African-Americans.  Scrushy was indicted in 2005 along with former Alabama Governor Don Siegelman and two former Siegelman aides on corruption charges.  The case is set to go to trial in Montgomery, the state capital which is in the Middle District of Alabama, at the end of April.  Scrushy and the other defendants have filed a motion to dismiss the indictment because the District has a 30% African-American population but the jury pool is less than that figure, although a government witness testified that African-Americans made up 21% of the pool, which meets the requirements of federal law.  Even if Scrushy does not win this motion -- and it is very difficult to establish such a violation for grand jury selection -- he can still challenge the pool of jurors available for selection to the petit jury, although a Sixth Amendment claim would also be very difficult to win because Supreme Court precedent does not require that the actual jury reflect the racial or ethnic composition of the District.  An AP story (here) discusses the hearing on Scrushy's challenge to the indictment.

On an related topic, Scrushy recently began running his television program Viewpoint in Montgomery.  The program features a number of local ministers, and began running in Birmingham in 2004 around the time he was indicted there on fraud charges related to HealthSouth.  Scrushy denies that there is any connection between the location of the next prosecution, assuming it survives the motion to dismiss, and the decision to run the show in  Montgomery.  Instead, it is part of a plan to roll out the program on a national basis, as noted in a Birmingham News story (here).  Surely it is just a coincidence, although I doubt American Idol is particularly worried about its ratings. (ph)

April 12, 2006 in Corruption, Grand Jury, Prosecutions | Permalink | Comments (2) | TrackBack (1)

Friday, March 31, 2006

Six Aides to Rep. Jefferson Subpoenaed in Corruption Probe

Six aides to Louisiana Rep. William Jefferson have been subpoenaed to testify before a grand jury in the Eastern District of Virginia investigating corruption charges.  A former aide to the Congressman, Brett Pfeffer, entered a guilty plea to conspiracy and corruption charges in January in which he detailed kickback demands by Rep. Jefferson related to two transactions involving companies seeking contracts in African countries.  Five of the aides work in Jefferson's New Orleans district offices and the sixth is a legislative assistant in his Capitol Hill office.  The subpoenas were not issued recently, but came to light because, as required by House rules, the recipients contacted the House Office of the General Counsel, which disclosed them and found that the aides can testify.  A New Orleans Times-Picayune story (here) notes that Jefferson's spokeswoman stated that the subpoenas were not "new news," but that certainly does not make them into good news. (ph)

March 31, 2006 in Corruption, Grand Jury, Investigations | Permalink | Comments (0) | TrackBack (0)

Wednesday, March 29, 2006

Now It's a Criminal Investigation of GM

As noted in an earlier post (here), GM had to delay the filing of its annual 10-K due to accounting problems that cropped up at its ResCap residential mortgage division.  The company filed the report on March 28, and it includes the disclosure that an investigation of its accounting for certain supplier credits and rebates involves a federal grand jury, which issued a subpoena to GM.  The 10-K (here) describes the many and varied government investigations of the company:

The SEC has issued subpoenas to us in connection with various matters that it is investigating. These matters for which we have received subpoenas include our financial reporting concerning pension and OPEB [Other Postretirement Employee Benefits], certain transactions between us and Delphi, supplier price reductions or credits, and any obligation we may have to fund pension and OPEB costs in connection with Delphi’s Chapter 11 proceedings. In addition, the SEC recently issued a subpoena in connection with an investigation of our transactions in precious metal raw materials used in our automotive manufacturing operations, and a federal grand jury recently issued a subpoena in connection with supplier credits. Separately, SEC and federal grand jury subpoenas have been served on GMAC entities in connection with industry-wide investigations into practices in the insurance industry relating to loss mitigation insurance products such as finite risk insurance. We are cooperating with the government in connection with all these investigations. A negative outcome of one or more of these investigations could require us to restate prior financial results (in addition to our recent restatements) and could result in fines, penalties, or other remedies being imposed on GM, which under certain circumstances could have a material adverse effect on our business.

By my count, that's at least four accounting investigations -- pensions, raw material trading/income reporting, supplier rebates/credits, and finite risk insurance -- and two of them involve criminal inquiries.  In the jargon of disclosure documents, "a material adverse effect on our business" means GM could get whacked hard, at a time that it is struggling with declining market share and significant labor cost issues.  An interesting question will be whether any of the investigations will result in charges against individuals, and if so, how high up the corporate ladder the investigation could stretch. (ph)

March 29, 2006 in Fraud, Grand Jury, Investigations, Securities | Permalink | Comments (0) | TrackBack (0)