Friday, November 1, 2013

Field Acquitted, Daugerdas Re-Convicted, In Tax Fraud Case

Business Week has the story here. Former BDO Seidman CEO Denis Field, represented by Sharon McCarthy of Kostelanetz & Fink LLP, was acquitted on all seven counts he faced. Paul Daugerdas, former head of now-defunct Jenkens & Gilchrist's Chicago office, was convicted on seven of 16 counts. The original convictions against Daugerdas and Field were thrown out by SDNY Judge William Pauley after  a juror's misconduct was brought to light.

(wisenberg)

November 1, 2013 in Investigations, Prosecutions, Tax | Permalink | Comments (0) | TrackBack (0)

Monday, October 28, 2013

Worst Practices 101: The Composite Interview Report

We live in an age of massive arrogance, misconduct and lawlessness--individual, governmental and corporate. In the realm of federal criminal investigations, as each new outrage reveals itself, a federal law enforcement flak is trotted out to announce that "this program is entirely legal" or "you can trust us not to abuse our power" or my all-time personal favorite, "we have always done it this way."

"We have always done it this way," is particularly pernicious, because, generally speaking, the longer a practice has been engaged in by law enforcement, the more likely it is to be unlawful. This is because such practices typically begin inside of law enforcement agencies without the benefit of legal advice and review by DOJ prosecutors. The prosecutors find out about these practices in after-the-fact, incremental, and desultory fashion and often do not pay attention to, or care about, the unconstitutional or improper nature of said practices.

"We have always done it this way," as an excuse for impropriety, can also be false. What is really meant is "we have always done it this way since 9-11, because now we can pretty much do whatever we want." The original Stellar Wind warrantless wiretapping program and various forms of parallel construction are good examples of this phenomenon. These questionable practices go on until some person with integrity, sanity, and authority, a Jack Goldsmith or a Donald Verrelli, steps forward to remind everybody that the emperor has no clothes.

This post will be the first in an occasional series about current improper and/or "worst practices" taking place within federal law enforcement.

One such practice is the composite interview report. Federal law enforcement agents are required to write interview reports of the witness interviews that they conduct. The most common report is the FBI 302. Prosecutors read and rely upon these reports in conducting their investigations. These reports are often handed over to the defense as potential Jencks material (witness statements, usually of a testifying case agent) or Brady/Giglio material (statements containing exculpatory or impeachment information). The vast majority of such reports are records of a particular interview at a particular place and time.

But a composite interview report purports to document several interviews occurring over an extended time period. A key witness might be interviewed six times during the course of a year. The composite interview report memorializes in one document the information obtained in all of the interviews without revealing what particular statement was made in which distinct interview.

What is wrong with this practice? The accused does not get an accurate picture of the interview subject's story as it evolves, which it inevitably does. Take the following example. Jane Doe, a key government witness in a bank fraud prosecution, is interviewed nine times between 2007 and 2009. The 16-page composite interview report presents an overall narrative of what Jane allegedly told the agents.  According to the composite interview report, Jane said that the defendant told her in 2006: "I am scared about the government's investigation. I don't look good in stripes."

The problem is that Jane did not reveal this tidbit until the seventh government interview. That Jane sat through six government interviews without revealing this highly incriminating statement by the defendant says a lot about her credibility. A good defense attorney will have a field day with this information on cross. But the defense attorney does not know about this information because the composite interview report will not pinpoint when Jane revealed the defendant's bombshell admission. The Giglio material gets hidden through the format of the composite report.

Assume further that Jane's seventh interview occurs two weeks before the new bank managers are about to announce a major layoff. These same managers are cooperating closely, and regularly, with the FBI and FDIC in an effort to avoid having the bank shut down. Perhaps Jane is becoming a better witness, because she wants to become indispensable to the FBI and have the agents put in a good word for her with bank officials. A composite interview report will reveal nothing about the crucial timing of Jane's key disclosure.

In  the above hypothetical, the prosecutor is still duty bound to reveal that Jane did not remember the defendant's admission until her seventh interview. Why? Because the tardy nature of Jane's revelation weakens her credibiltiy as a witness and is therefore impeaching and exculpatory. But what if the prosecutor does not know the precise timing of Jane's bombshell, because he is only looking at a composite report? Or, what if the prosecutor participated in the interview, but does not remember or focus on the tardiness of Jane's recollection, because he is only reviewing the composite report? What happens is that the material exculpatory information gets buried--a constitutional violation.

In reality, the prosecutor may be directing the agents to file a composite report for the precise purpose of limiting exculpatory disclosures. Hiding exculpatory evidence seems to me to be the whole point of the composite interview report. Even if he is not explicitly directing the agents to create a composite 302, the prosecutor implicitly ratifies the composite 302 by tolerating its creation. Any AUSA worth his salt will have no problem directing the case agent to prepare individual interview reports of each interview session. The case agent does not technically work for the prosecutor, but as a practical matter he takes orders from the prosecutor regarding the conduct of the investigation. As an AUSA, I would have never tolerated a composite 302, as described above, for one moment.

Of course, case agents usually take handwritten notes of each interview report. Why can't the prosecutor solve his Brady/Giglio composite interview problem by reviewing these notes and  turning over any Brady/Giglio materials to the defense? Because prosecutors rarely do this. Most of them are under the incorrect impression that handwritten interview reports never need to be turned over to the defense once they are "incorporated" into a final 302. But this is only true if the final interview report includes the Brady/Giglio material contained in the rough interview notes. And the composite interview reports that we have been discussing, by their very nature, hide Brady/Giglio material.

Many prosecutors never even review agent interview notes, simply assuming that the agents will transfer all relevant information from the notes to the final interview report. But agents are not trained or programmed to decipher exculpatory information. Some piece of information that is unimportant to the agent, might be critical to the seasoned criminal defense attorney. For example, the timing of Jane Doe's recollection in relation to her fear of an impending layoff, and the significance of that timing, is not likely to even register with the typical case agent or federal prosecutor. They are simply not hard-wired to look for such impeaching information, and would in all sincerity be shocked to be accused of hiding it. This professional myopia would not be a problem, in our hypothetical case, if there were nine interview reports for Jane Doe's nine interviews. The diligent defense attorney would have learned about the proposed layoff through case investigation and would immediately recognize the added potential significance of Jane Doe's belated bombshell. She not only forgot about the defendant's supposed confession through the first six interviews, but conveniently remembered it in time to help stave off her forced retirement. All of this is lost, if her interviews are compressed into a composite 302 that does not account for the nuanced changes in Jane's story from interview to interview. 

When you step back and think about it, in addition to all of its other problems, the type of composite interview report that I have been discussing is an inherently false and artificial document. It is not in fact a report of a law enforcement interview.  It is a narrative report of several different interviews that distorts those individual interviews by failing to identify what was asked and what was said in each particular interview session.

The composite interview report as I have described it is a sham and a disgrace.  No ethical prosecutor should tolerate it. No ethical FBI SAC should tolerate it. James Comey should not tolerate it. Astonishingly, current FBI policy does not explicitly prohibit the use of composite interview reports. This must change.

(wisenberg)

October 28, 2013 in Investigations | Permalink | Comments (0) | TrackBack (0)

Friday, October 25, 2013

FHFA Cuts Own Deal With JPMorgan Chase: No Admission Of Wrongdoing

According to the New York Times (Deal Book), the Federal Housing Finance Agency has announced its own $4 billion dollar settlement with JPMorgan Chase, covering the bank's sale of mortgage-backed securities to Fannie Mae and Freddie Mac in the period (2005-2007) leading up to the financial crisis. FHFA's original suit alleged that JPMorgan Chase, and predecessor entities Bear Stearns and WAMU, sold mortgage-backed securities to Fannie and Freddie without sufficiently full disclosure of their risky nature. This FHFA settlement was supposed to be part of the broader $13 billion dollar tentative settlement that has been the subject of so much public speculation in the past week. Apparently FHFA got tired of waiting for the broader deal to be finalized. Here is the signed settlement agreement and FHFA press release, posted on FHFA's web site. Under the terms of this particular settlement agreement, JPMorgan Chase pointedly does NOT admit "any liability or wrongdoing whatsoever, including, but not limited to, any liability or wrongdoing with respect to any of the allegations that were or could have been raised in the Actions." Further, "[t]he Parties agree that this Agreement is the result of a compromise within the provisions of the Federal Rules of Evidence, and any similar statutes or rules, and shall not be used or admitted in any proceeding for any purpose including, but not limited to, as evidence of liability or wrongdoing by any JPMorgan Defendant." Deal Book reports that the broader non-FHFA portion of the $13 billion tentative settlement includes fine payments "to prosecutors in California." I had not heard this before today. Hard to believe that any fines will be paid to prosecutors by JPMorgan Chase unless such fines are part of a final agreement to shut down the ongoing federal criminal investigation being run out of California.

(wisenberg)

October 25, 2013 in Investigations, Securities | Permalink | Comments (0) | TrackBack (0)

Monday, September 30, 2013

Does Government Have Cooperating Employee in J.P. Morgan Probe?

This story just in from the Wall Street Journal (subscription required).

(wisenberg)

September 30, 2013 in Investigations | Permalink | Comments (0) | TrackBack (0)

Thursday, August 29, 2013

DOJ Releases Statement on U.S.-Swiss Tax Evasion Investigations

The DOJ issued a press release today telling of "a program that will encourage Swiss banks to cooperate in the department's ongoing investigations of the use of foreign bank accounts to commit tax evasion."  The release also notes that "Switzerland will encourage its banks to participate in the program."  A joint statement was agreed upon by the DOJ and Swiss Federal Department of Finance." (see here). The program excludes those presently under investigation.  It offers others a non-prosecution agreement under a list of terms that include, "cooperat[ion] in treaty requests for account information," "agree to pay substantial penalties," and "make a complete disclsure of their cross-border activitites." The press release notes that

"banks seeking a non-prosecution agreement must agree to a penalty in an amount equal to 20 percent of the maximum aggregate dollar value of all non-disclosed U.S. accounts that were held by the bank on Aug.1, 2008.  The penalty amount will increase to 30 percent for secret accounts that were opened after that date but before the end of February 2009 and to 50 percent for secret accounts opened later than that."   

It will be interesting to see how many banks come forward to obtain a non-prosecution agreement. And if they do, will the disclosures result in tax prosecutions of individuals within the U.S.

(esp)

August 29, 2013 in International, Investigations, Tax | Permalink | Comments (0) | TrackBack (0)

Wednesday, June 5, 2013

Sideshow: DC District Court Staff's Failure to Unseal the James Rosen Affidavit

by: Solomon L. Wisenberg

FBI Special Agent Reginald Reyes' affidavit supporting DOJ's search warrant application for Fox News Reporter James Rosen's Google email account was ordered unsealed in November 2011. But it wasn't actually unsealed by the DC U.S. District Court's staff until late May of 2013. In other words, the affidavit was only unsealed several days after AG Holder testified that, "[w]ith regard to potential prosecution of the press for the disclosure of material, that is not something that I have ever been involved in, heard of, or would think would be a wise policy." Once the affidavit and search warrant application were unsealed, it became clear that Holder's testimony was inacurrate, as he had personally authorized the search warrant application. See here for yesterday's post on this issue.

DC Chief Judge Royce Lamberth is not happy about his staff's failure to unseal the affidavit and related documents. Here is Chief Judge Royce Lamberth's 5-23-2013 Order expressing his unhappiness.

(wisenberg)

June 5, 2013 in Congress, Current Affairs, Investigations, Judicial Opinions, Legal Ethics, Perjury, Prosecutions, Prosecutors | Permalink | Comments (0) | TrackBack (0)

Tuesday, June 4, 2013

The Holder Mess

by: Solomon L. Wisenberg

“Well, I would say this. With regard to potential prosecution of the press for the disclosure of material, that is not something that I have ever been involved in, heard of, or would think would be a wise policy.” Attorney General Eric Holder testifying under oath before the House Judiciary Committee on May 15, 2013.

"For the reasons set forth below, I believe there is probable cause to conclude that the contents of the wire and electronic communications pertaining to SUBJECT ACCOUNT, are evidence, fruits and instrumentalities of criminal violations of 18 U.S.C. [Section] 793 (Unauthorized Disclosure of National Defense Information), and that there is probable cause to believe that the Reporter has committed or is committing a violation of section 793(d), as an aider and abettor and/or co-conspirator to which the materials relate." FBI Special Agent Reginald B. Reyes' May 28, 2010, Affidavit in Support of Search Warrant Application for Fox News Chief Washington Correspondent James Rosen's Google email account. The warrant was authorized by Attorney General Holder.

Note than in addition to identifying "the Reporter" as a probable aider, abettor and/or criminal co-conspirator, the affidavit explains that the Department of Justice is not bound by the Privacy Protection Act, otherwise prohibiting warrants for First Amendment work product, precisely because "the Reporter" was "suspected of committing the crime [18 U.S.C. Section 793(d)] under investigation."

There is no doubt that AG Holder gave false testimony to House Members under oath. He is an idiot if he did so intentionally, and he isn't an idiot. What should Holder have done to fix this mess? Corrected the record, of course. In the immortal words of Richard Nixon, "that would have been the easy thing to do."

Holder should have said: "Dear Representatives Goodlatte and Sensenbrenner. I screwed up. My testimony to you is now inoperative. I forgot that I authorized this affidavit, which clearly identifies a 'Reporter' as somebody under investigation for a crime. I did not intentionally try to deceive you. My statement was careless and overbroad. Please accept my apologies."

But the Attorney General apparently cannot not bring himself to do anything as straightforward as that. Instead he spends days sending out spinmeisters, most recently, and regrettably, Deputy Assistant AG Peter Kadzik, as reported here by Sari Horwitz in today's Washington Post.

How sad. Can you imagine anything like this happending under Attorney General Griffin Bell? Bell, a genuine protector of our civil liberties, most likely would have nixed the supboena in the first place. But if Bell had authorized it, he never would have shied away from the ensuing controversy or hidden behind his DOJ underlings.

Mr. Holder has received his fair share of undeserved, demagogic criticism from the kooky right. He deserves what he's getting now. 

Here is a copy of the Reyes Affidavit.

(wisenberg)

June 4, 2013 in Congress, Current Affairs, Investigations, Legal Ethics, Perjury, Prosecutions, Prosecutors | Permalink | Comments (0) | TrackBack (0)

Friday, March 29, 2013

White Collar Criminal Law is Heating Up?

Two news items today highlight that the white collar area continues to be a key component of the criminal justice system.  In Atlanta we see a Fulton County Grand Jury issuing indictments for claims that an alleged test cheating scandal involves criminal activity. See Michael Winerip, NYTimes, Former Atlanta Schools Chief Is Charged in Testing Scandal

And the headline of the Tampa Bay Times is FBI Raid Signals End of Universal - an article describing the FBI raid of Universal Health Care.

(esp)

March 29, 2013 in Investigations, News, Searches | Permalink | Comments (1) | TrackBack (0)

Wednesday, December 26, 2012

Wiretaps

Monday, December 17, 2012

HSBC Settlement: The Unanswered Questions

by: Solomon L. Wisenberg

You can debate all day whether the government should allow any financial institution to get too big to fail. You can also debate whether such an institution, if it is too big to fail, should be too big to prosecute, even when it engages in blatantly criminal conduct over a lengthy period of time. However, you cannot seriously debate whether to prosecute senior bank officials of an international mega-bank who knowingly directed the criminal enterprise in question. Corporations only act through agents. Those agents are human beings.

We are not talking about technical matters here. This is not a question of whether each party to a complex transaction understood the fine print which revealed, or obscured, that an investment bank was betting against the deal it was pushing.  According to the published reports and press statements, obvious narcotics-related money laundering was repeatedly facilitated by the bank, despite multiple regulatory warnings. The sources of funds connected to outlaw regimes were intentionally and repeatedly hidden. If this stuff happened, people did it. And they were no doubt high-ranking people.

No credible person will contend that the prosecution of corrupt bank officers can ever endanger the financial community. No matter how important the institution or high-ranking the officer, employees are fungible. The global financial impact of prosecuting these officers, no matter how important they think they are, will always be negligible.

Assistant AG Lanny Breuer said at his press conference that individual prosecutions were not being ruled out. (Similar statements were made at the time of the robo-signing settlement press conference, and we all know what an avalanche of individual DOJ prosecutions followed in the wake of that!) But other comments Breuer made, discussing how hard it supposedly is to prosecute the individuals involved, appear to be window-dressing rehearsals for future DOJ declinations.

Reporters should not let this issue slide into oblivion. The DOJ does not typically comment upon pending investigations of individuals. (Of course this does not stop some FBI and IRS agents from telling all of a target's friends that he is being criminally investigated, thereby ruining the target's life.) Here is an occasion where the policy should be ignored, particularly since the DOJ can comment on a pending investigation without revealing the names of the subjects and targets. 

The question every self-respecting reporter should be asking AG Holder and Assistant AG Breuer is not whether individual indictments have been ruled in or out. The questions to be asked at every opportunity in the coming weeks and months are:

"What is the status of the investigation?"

"Is there really any investigation?"

"Are you treating this investigation like you treat the investigation of other individuals suspected of facilitating murder and drug crimes?"

Here is an account by Rolling Stone's Matt Taibbi of his appearance on Eliot Spitzer's Viewpoint program discussing the HSBC settlement. Taibbi's account contains a link to the Spitzer interview. Hat tip to Jack Darby of Austin's Krimelabb. com for alerting me to this posting. Taibbi also has an interesting opinion piece about the HSBC settlement on his Rolling Stone TAIBBLOG.

(wisenberg)

December 17, 2012 in Current Affairs, Deferred Prosecution Agreements, International, Investigations, Money Laundering, Prosecutors | Permalink | Comments (1) | TrackBack (0)

Thursday, November 29, 2012

BP: Can Civil Remedies Be More of a Sting

We recently saw BP settling with a record $4 billion in criminal fines and penalty. See here. And as noted then -

"The guilty plea entered by BP provides that the 'Department agrees
that, if requested to do so, it will advise any appropriate suspension or
debarment authority that, in the Department's view, the defendant has accepted
criminal responsibility for its conduct relating to the Deepwater Horizon
blowout, explosion, oil spill and response by virture of this guilty plea and
that BP is obligated pursuant to this agreement to cooperate in any ongoing
criminal investigation by the Department relating to the Deepwater Horizon
blowout, explosion, oil spill and response.'  But it does state that '[n]othing
in this agreement limits the rights and authority of the United States of
America to take further civil or administrative action against the defendant
including but not limited to any listing and debarment proceedings to restrict
rights and opportunities of the defendant to contract with or receive
assistance, loans and benefits from United States government agencies.'" 

Reports are showing now that it is federal regulators that are temporarily suspending BP from government contracts.  Although as noted on law.com by Jenna Greene, Feds slam BP's ethics, bar oil giant from contracts  it is unclear how long of a period  this suspension will last. (see also Michael Pearson, CNN, The spill: How much should BP suffer?)

The real question will be whether the criminal fine or the civil suspension will carry the most deterrence and punishment.  This raises an important issue of whether corporate criminal liability is really the best route, or whether civil remedies can provide better compliance with the law and regulations. Most importantly, it is good to see regulators acting.  It would be even better if regulatory actions were proactive, as opposed to reactive - after something has occurred.

(esp)

November 29, 2012 in Environment, Investigations, News | Permalink | Comments (0) | TrackBack (0)

Monday, September 24, 2012

Deferred Prosecution Agreements - Definitely A Plus

On September 13th Assistant Attorney General Lanny A. Breuer spoke to the New York City Bar extolling the virtues of DOJ's strategy for corporate prosecutions (see here). Former co-blogger Peter Henning here, also authored an article which focuses on the use of deferred prosecution agreements by the government.

One clearly has to credit the government with raising the bar in the corporate world to comply with legal mandates. Corporations throughout the world now have strong compliance programs and conduct internal investigations when questionable activities are reported to them.  Likewise, post-Arthur Andersen, LLP, corporations are shy to go to trial - although there are some who have done so successfully (e.g. Lindsey Manufacturing- see here).

When the government first started using deferred and non-prosecution agreements, in a prior administration, there were government practices that were questionable.  For example, allowing for huge sums to money to go to a former attorney general as a monitor, giving a chair to a law school that happened to be the same school the US Attorney graduated from, and negotiating for continuing work with the government as part of the agreement. (see Zierdt & Podgor, Corporate Deferred Prosecutions Through the Looking Glass of Contract Policing-here)  Without doubt there were terms within the agreements that needed revision. Some terms that give complete control to prosecutors in deciding who can determine breaches of agreements present problems. But many of the questionable practices are not seen in recent deferred prosecution agreements, and this is good. 

Agreements that still provide an imbalance between corporate misbehavior and individual miscoduct is creates an imbalance, but much of this is created by the fact that corporations have greater resources and can control the discussion with DOJ, to the detriment of the individual. Clearly there needs to be a better recognition of corporate constituents during the internal investigations, the subject of a forthcoming article that I author with Professor Bruce Green (Fordham) titled, Unregulated Internal Investigations: Achieving Fairness for Corporate Constituents.  But this issue may not be one strictly for DOJ to resolve.

What is particularly impressive about the DOJ use of deferred prosecution agreements today is that it uses an educative model to reform corporate misconduct. One can't put a corporation in prison, so with fines as the best alternative it is important to focus on motivating good conduct.  Corporate deferred and non-prosecution agreements are an important step in achieving this positive result.  So, it is important to credit today's DOJ with how it is tackling the problem of corporate misbehavior.

(esp)  

September 24, 2012 in Deferred Prosecution Agreements, Investigations, News, Prosecutions, Prosecutors | Permalink | Comments (1) | TrackBack (0)

Tuesday, September 11, 2012

IRS Whistleblower Birkenfeld Hits The Jackpot

Reuters reports here on the astounding award. Yours truly and other luminaries are quoted.

(wisenberg)

September 11, 2012 in Investigations, Prosecutions, Qui Tam, Tax | Permalink | Comments (0) | TrackBack (0)

Tuesday, July 24, 2012

Serious Financial Allegations Deserve Criminal Investigation

My learned and astute co-editor, Solomon Wisenberg, bridled at the thought of a criminal investigation of the Libor bank scandal (see here), which he believes will be a waste of time, and of the JP Morgan Chase trading loss (see here), which he believes lacks evidence of criminality.  While I do not know enough about these matters to dispute his reasons, I nonetheless strongly believe a criminal investigation is warranted in both instances.

Financial manipulations which cost shareholders and customers of large institutions millions (or billions) of dollars require criminal investigation, and, if identifiable provable criminal wrongdoing is found, criminal prosecution.  It has become clear that those institutions and their employees are incapable or unwilling to police themselves, and, as Mr. Wisenberg points out, the responsible regulatory agencies have often been asleep at the switch or even compliant.

That is not to say that every massive financial loss involves criminality or that weak or questionable criminal prosecutions should be brought to soothe the popular thirst for criminal punishment.  It is not to say that genuine defenses, such as estoppel due to government approval or acquiescence, should not prevent prosecution.  But for the huge financial institutions, even a penalty of almost a half billion dollars, as in the Barclays Bank "deferred prosecution" deal (effectively a "non-prosecution" deal), is merely a cost of doing business passed on to shareholders.  And for many of the traders and manipulators, who always weigh risk but rarely morality, only the risk of a criminal prosecution (which for them involves potential prison sentences) will have any serious deterrent effect.

To be sure, criminal investigations, even without prosecutions, may deter innovation and creativity in financial vehicles and dealings (although I am not so sure that is a bad thing).  Additionally, investigations themselves cause mental distress, potential loss of reputation, and considerable legal fees.  Criminal investigations, therefore, should not be started without careful consideration by law enforcement or prosecutorial agencies.  But massive losses of other people's money should almost always require an examination beyond a regulatory or civil one by our historically inept financial regulatory agencies.

Every death by other than natural causes, every fire of any proportion, and every serious automobile accident is reviewed by authorities for possible criminal prosecution.  Is there any reason an unusual massive financial loss of other people's money should be exempt from scrutiny for possible criminality?  I think not.

(goldman)

July 24, 2012 in Current Affairs, Deferred Prosecution Agreements, Fraud, Investigations | Permalink | Comments (0) | TrackBack (0)

Tuesday, July 17, 2012

Freeh Report on Paterno Reaches Speculative But Reasonable Conclusion

Joe Paterno was buried a second time last week -- partly by a report of former judge and FBI Director Louis Freeh and partly by accounts like that of the New York Times, which in a four-column lead story headlined "Abuse Scandal Inquiry Damns Paterno and Penn State," wrote "Mr. Freeh's investigation makes clear that it was Mr. Paterno . . . who persuaded the university president and others not to report Mr. Sandusky to the authorities . . . ." (emphasis added).  See here.  A reading of the report, however, shows that its conclusions as to Paterno are based on hearsay, innuendo and surmise.  While a report such as the Freeh Report certainly need not be based on court-admissible testimony, if indeed the evidence referred to in the report constituted the sole basis for a criminal and/or civil charge against Paterno, the case undoubtedly would be thrown out and would not reach a jury.

The relevant evidence involving Paterno is as follows:

  • In May 1998, with respect to an allegation that Sandusky had showered with an eleven year-old on the Penn State campus, Tim Curley, the Penn athletic director, notified his superiors that he had "touched base" with Paterno about the incident and days later sent to them an email "Anything new in this department?  Coach [Paterno] is anxious to know where it stands."
  • In February 2001, after he observed Sandusky sexually molesting a youth in a Penn State shower room, Mike McQueary, a graduate assistant, reported the incident to Paterno, who told him, "You did what you had to do.  It is my job now to figure out what we want to do."  The following day, a Sunday, Paterno reported the incident to Curley and Gary Schultz, a Penn State vice-president.  Paterno waited a day or so not to "interfere with their weekend."
  • Later in the month, Graham Spanier, the Penn State president, Schultz and Curley devised an action plan which included reporting the incident to the state welfare agency.  A day or so later, Curley emailed Schultz and Spanier and said that he had changed his mind about the plan "after giving it more thought and talking it over with Joe [Paterno] yesterday," and now felt that they should instead tell Sandusky to seek professional help and not report him to the welfare authorities unless he did not cooperate.

The first item, the 1998 Curley email, merely demonstrates that Paterno showed an interest in what was happening with reference to the 1998 incident, which ultimately was reported to both the welfare department and the local prosecutor and resulted in no findings or charges.  Paterno reportedly in 2011, after the incident involving Sandusky's 2001 conduct and the failure to report it to authorities raised public attention, denied that he was aware of the 1998 incident.  In fact, Paterno's testimony in the grand jury in which he purportedly denied any such knowledge was in response to an imprecise, general and unfocused question, and his answer was accordingly unclear.  Additionally, the reported statement denying any prior knowledge was by his "family" and not by him.

In any case, while a denial, if made directly by Paterno or even an authorized agent, might arguably be admissible in court as evidence of consciousness of guilt, such evidence is weak proof of guilt since even wholly blameless people often make false statements distancing themselves from wrongdoing.

The second item, Paterno's response to McQueary is by itself of little moment and says no more than that Paterno, having been apprised of the incident, would now have to figure out what he and the others will do.  Of course, one can read into that facially bland statement a more sinister meaning -- that Paterno intended to tell McQueary to remain silent.  Such a meaning, however, is supported only by surmise and suspicion.  The report also states that Paterno waited a day before reporting the information to Curley and Schultz so as not to "interfere with their weekends."  This one-day delay is not meaningful.

The third item, Curley's change of mind after "talking it over with Joe," might, not unreasonably, albeit with a considerable leap, be construed to indicate that Paterno suggested not reporting the incident to the authorities.  However, it might also be that Curley changed his mind on his own after airing his thoughts with Paterno and deciding that the earlier plan was not preferable.  It is, of course, also possible that whatever Curley wrote, his mention of discussions with Paterno (without any direct or indirect report of Paterno's own views) was an attempt by Curley to minimize or shift personal responsibility from himself.  In any case, any probative value this email has as to Paterno's intent is also based on speculation.

Freeh himself seems to recognize that his conclusions are far from "clear."  He mentions that Curley and Schultz contended that they acted "humanely" and sought "the best way to handle vague and troubling allegations," that Paterno had told a reporter he had "backed away and turned it over to . . . people I thought would have a little more expertise," and that Spanier had denied knowledge "Sandusky was engaged in any sexual abuse of children."

He then rejects these explanations and concludes, "Taking into account the available witness statements and evidence, the Special Investigative Counsel finds that is more reasonable to conclude that, in order to avoid the consequences of bad publicity, the most powerful leaders at the University -- Spanier, Schultz, Paterno and Curley -- repeatedly concealed critical facts relating to Sandusky's child abuse from the authorities, the University's Board of Trustees, the Penn State community, and the public at large" (emphasis added).  During a press conference specifically focusing on Paterno's culpability, Freeh, seemingly inconsistently with the qualified "available witness statements and evidence" language of the report, appeared to exaggerate, "There's a whole bunch of evidence here."  He continued, "And we're saying that the reasonable conclusion from that evidence is that [Paterno] was an integral part of this active decision to conceal" (emphasis added).

I tend to agree that Freeh's conclusion is the "more reasonable" hypothesis, but I do so based more on a visceral feeling and some understanding of Paterno's power and status at the university than an evidentiary basis.  The "facts" demonstrating Paterno's "active" role in the cover-up are insubstantial and equivocal.  The case against Paterno is, as a Scotch jury might say, "not proven."  Perhaps we should require more substantial proof before we topple Paterno's statue -- figuratively and actually.

(goldman)

July 17, 2012 in Celebrities, Current Affairs, Investigations, Media, News, Sports | Permalink | Comments (1) | TrackBack (0)

Libor: The Regulatory Mind And the Prosecutorial Mind (2)

As I mentioned here last Wednesday:

"By ignoring material financial falsehoods, the regulators and examiners allow frauds to continue and decrease the likelihood of future accountability through the criminal process."

The New York Fed's Friday data dump reveals beyond question that some of its officials, including Timothy Geithner, were aware of intentionally misreported Libors by 2008 at the latest. Today's Wall Street Journal editorial lays out the damning transcripts.

What does this mean? For openers it means that DOJ's announcement of a criminal investigation is a joke. Regulators and government officials at the highest levels knew of the misrepresentation. By not immediately raising bloody hell and putting a stop to it they either sanctioned the conduct, rendering it non-criminal, or themselves became co-conspirators.

Do you really think DOJ is about to investigate Geithner or drag him into somebody else's criminal defense? Get real. These people can't even prosecute robo-signers.

(wisenberg)

July 17, 2012 in Civil Enforcement, Current Affairs, International, Investigations, News | Permalink | Comments (0) | TrackBack (0)

Wednesday, July 11, 2012

Libor: The Regulatory Mind And the Prosecutorial Mind

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.

(wisenberg)

July 11, 2012 in Civil Enforcement, Current Affairs, Fraud, Insider Trading, Investigations, News | Permalink | Comments (0) | TrackBack (0)

Wednesday, June 27, 2012

Barclays Bank to Pay - $160 Million - as Part of Non-Prosecution Agreement

A DOJ Press Release reports, Barclays Bank PLC Admits Misconduct Related to Submissions for the London Interbank Offered Rate and the Euro Interbank Offered Rate and Agrees to Pay $160 Million Penalty

Some highlights of the press release -

  • "Barclays Bank PLC, a financial institution headquartered in London, has entered
    into an agreement with the Department of Justice to pay a $160 million penalty
    to resolve violations arising from Barclays’s submissions for the London
    InterBank Offered Rate (LIBOR) and the Euro Interbank Offered Rate (EURIBOR),
    which are benchmark interest rates used in financial markets around the world..."
  • "To the bank’s credit, Barclays also took a significant step toward accepting
    responsibility for its conduct by being the first institution to provide
    extensive and meaningful cooperation to the government."
  • "Barclays’s cooperation has been extensive, in terms of the quality and type of
    information and assistance provided, and has been of substantial value in
    furthering the department’s ongoing criminal investigation." 
  • "The agreement requires Barclays to continue cooperating with the department in
    its ongoing investigation."
  • "As a result of Barclays’s admission of its misconduct, its extraordinary
    cooperation, its remediation efforts and certain mitigating and other factors,
    the department agreed not to prosecute Barclays for providing false LIBOR and
    EURIBOR contributions, provided that Barclays satisfies its ongoing obligations
    under the agreement for a period of two years.  The non-prosecution agreement
    applies only to Barclays and not to any employees or officers of Barclays or any
    other individuals."

Commentary - As a non-prosecution agreement it does not go through the courts and DOJ has the power to enforce or proceed should it believe there is a violation of the agreement. It also sounds like the white collar defense bar may have some new clients as the government has secured the cooperation of the company to go after individuals.

See also Jenna Greene, BLT Blog, Barclays Agrees to Pay $360M to Settle with CFTC, DOJ
over Interest Rate Manipulation

(esp)

June 27, 2012 in Defense Counsel, Deferred Prosecution Agreements, Investigations, Prosecutors, Settlement | Permalink | Comments (1) | TrackBack (0)

Tuesday, June 19, 2012

Reactions to Gupta Verdict

The jury deserves credit - they clearly evaluated all the counts as evidenced by their finding of guilt in some and not guilty in others.  The judge deserves credit - Hon. Jed Rakoff is a leading scholar and superb jurist. 

But should this be a crime? And exactly what is the crime? Should individuals who obtain little or no personal profit be subject to criminal penalties?

And what evidence should a jury hear during the trial?  Should wiretaps that are select conversations of the government be allowed to be used against a defendant in a securities fraud case, when this crime is not included in the criminal activity of our wiretap laws (see here)?

There is an interesting interplay here.  On one hand we have someone being convicted for using "secret" information - the insider trading. On the other hand we have the government using "secret" information to convict the individual - the wiretaps.  I keep wondering if there is anything that can be "secret" anymore.  In this information age it seems like information is so accessible that it is difficult to claim anything as being "insider."

 (esp)

June 19, 2012 in Investigations, Securities, Verdict | Permalink | Comments (0) | TrackBack (0)

Wednesday, May 23, 2012

FBI Investigates JPMorgan Chase Trading Loss. Why?

Here is a Huffington Post piece from several days ago on the FBI probe of JPMorgan Chase's $2 billion trading loss. Can anybody tell me what the crime is here? Doesn't there have to be a potential crime before the FBI investigates? Can somebody please identify that potential crime? The probe is a farce, and the mainstream press's failure to ask the most obvious question is par for the course.

(wisenberg)

May 23, 2012 in Investigations, Media | Permalink | Comments (1) | TrackBack (0)