Tuesday, September 11, 2012
Tuesday, July 24, 2012
My learned and astute co-editor, Solomon Wisenberg, bridled at the thought of a criminal investigation of the Libor bank scandal (see here), which he believes will be a waste of time, and of the JP Morgan Chase trading loss (see here), which he believes lacks evidence of criminality. While I do not know enough about these matters to dispute his reasons, I nonetheless strongly believe a criminal investigation is warranted in both instances.
Financial manipulations which cost shareholders and customers of large institutions millions (or billions) of dollars require criminal investigation, and, if identifiable provable criminal wrongdoing is found, criminal prosecution. It has become clear that those institutions and their employees are incapable or unwilling to police themselves, and, as Mr. Wisenberg points out, the responsible regulatory agencies have often been asleep at the switch or even compliant.
That is not to say that every massive financial loss involves criminality or that weak or questionable criminal prosecutions should be brought to soothe the popular thirst for criminal punishment. It is not to say that genuine defenses, such as estoppel due to government approval or acquiescence, should not prevent prosecution. But for the huge financial institutions, even a penalty of almost a half billion dollars, as in the Barclays Bank "deferred prosecution" deal (effectively a "non-prosecution" deal), is merely a cost of doing business passed on to shareholders. And for many of the traders and manipulators, who always weigh risk but rarely morality, only the risk of a criminal prosecution (which for them involves potential prison sentences) will have any serious deterrent effect.
To be sure, criminal investigations, even without prosecutions, may deter innovation and creativity in financial vehicles and dealings (although I am not so sure that is a bad thing). Additionally, investigations themselves cause mental distress, potential loss of reputation, and considerable legal fees. Criminal investigations, therefore, should not be started without careful consideration by law enforcement or prosecutorial agencies. But massive losses of other people's money should almost always require an examination beyond a regulatory or civil one by our historically inept financial regulatory agencies.
Every death by other than natural causes, every fire of any proportion, and every serious automobile accident is reviewed by authorities for possible criminal prosecution. Is there any reason an unusual massive financial loss of other people's money should be exempt from scrutiny for possible criminality? I think not.
Tuesday, July 17, 2012
Joe Paterno was buried a second time last week -- partly by a report of former judge and FBI Director Louis Freeh and partly by accounts like that of the New York Times, which in a four-column lead story headlined "Abuse Scandal Inquiry Damns Paterno and Penn State," wrote "Mr. Freeh's investigation makes clear that it was Mr. Paterno . . . who persuaded the university president and others not to report Mr. Sandusky to the authorities . . . ." (emphasis added). See here. A reading of the report, however, shows that its conclusions as to Paterno are based on hearsay, innuendo and surmise. While a report such as the Freeh Report certainly need not be based on court-admissible testimony, if indeed the evidence referred to in the report constituted the sole basis for a criminal and/or civil charge against Paterno, the case undoubtedly would be thrown out and would not reach a jury.
The relevant evidence involving Paterno is as follows:
- In May 1998, with respect to an allegation that Sandusky had showered with an eleven year-old on the Penn State campus, Tim Curley, the Penn athletic director, notified his superiors that he had "touched base" with Paterno about the incident and days later sent to them an email "Anything new in this department? Coach [Paterno] is anxious to know where it stands."
- In February 2001, after he observed Sandusky sexually molesting a youth in a Penn State shower room, Mike McQueary, a graduate assistant, reported the incident to Paterno, who told him, "You did what you had to do. It is my job now to figure out what we want to do." The following day, a Sunday, Paterno reported the incident to Curley and Gary Schultz, a Penn State vice-president. Paterno waited a day or so not to "interfere with their weekend."
- Later in the month, Graham Spanier, the Penn State president, Schultz and Curley devised an action plan which included reporting the incident to the state welfare agency. A day or so later, Curley emailed Schultz and Spanier and said that he had changed his mind about the plan "after giving it more thought and talking it over with Joe [Paterno] yesterday," and now felt that they should instead tell Sandusky to seek professional help and not report him to the welfare authorities unless he did not cooperate.
The first item, the 1998 Curley email, merely demonstrates that Paterno showed an interest in what was happening with reference to the 1998 incident, which ultimately was reported to both the welfare department and the local prosecutor and resulted in no findings or charges. Paterno reportedly in 2011, after the incident involving Sandusky's 2001 conduct and the failure to report it to authorities raised public attention, denied that he was aware of the 1998 incident. In fact, Paterno's testimony in the grand jury in which he purportedly denied any such knowledge was in response to an imprecise, general and unfocused question, and his answer was accordingly unclear. Additionally, the reported statement denying any prior knowledge was by his "family" and not by him.
In any case, while a denial, if made directly by Paterno or even an authorized agent, might arguably be admissible in court as evidence of consciousness of guilt, such evidence is weak proof of guilt since even wholly blameless people often make false statements distancing themselves from wrongdoing.
The second item, Paterno's response to McQueary is by itself of little moment and says no more than that Paterno, having been apprised of the incident, would now have to figure out what he and the others will do. Of course, one can read into that facially bland statement a more sinister meaning -- that Paterno intended to tell McQueary to remain silent. Such a meaning, however, is supported only by surmise and suspicion. The report also states that Paterno waited a day before reporting the information to Curley and Schultz so as not to "interfere with their weekends." This one-day delay is not meaningful.
The third item, Curley's change of mind after "talking it over with Joe," might, not unreasonably, albeit with a considerable leap, be construed to indicate that Paterno suggested not reporting the incident to the authorities. However, it might also be that Curley changed his mind on his own after airing his thoughts with Paterno and deciding that the earlier plan was not preferable. It is, of course, also possible that whatever Curley wrote, his mention of discussions with Paterno (without any direct or indirect report of Paterno's own views) was an attempt by Curley to minimize or shift personal responsibility from himself. In any case, any probative value this email has as to Paterno's intent is also based on speculation.
Freeh himself seems to recognize that his conclusions are far from "clear." He mentions that Curley and Schultz contended that they acted "humanely" and sought "the best way to handle vague and troubling allegations," that Paterno had told a reporter he had "backed away and turned it over to . . . people I thought would have a little more expertise," and that Spanier had denied knowledge "Sandusky was engaged in any sexual abuse of children."
He then rejects these explanations and concludes, "Taking into account the available witness statements and evidence, the Special Investigative Counsel finds that is more reasonable to conclude that, in order to avoid the consequences of bad publicity, the most powerful leaders at the University -- Spanier, Schultz, Paterno and Curley -- repeatedly concealed critical facts relating to Sandusky's child abuse from the authorities, the University's Board of Trustees, the Penn State community, and the public at large" (emphasis added). During a press conference specifically focusing on Paterno's culpability, Freeh, seemingly inconsistently with the qualified "available witness statements and evidence" language of the report, appeared to exaggerate, "There's a whole bunch of evidence here." He continued, "And we're saying that the reasonable conclusion from that evidence is that [Paterno] was an integral part of this active decision to conceal" (emphasis added).
I tend to agree that Freeh's conclusion is the "more reasonable" hypothesis, but I do so based more on a visceral feeling and some understanding of Paterno's power and status at the university than an evidentiary basis. The "facts" demonstrating Paterno's "active" role in the cover-up are insubstantial and equivocal. The case against Paterno is, as a Scotch jury might say, "not proven." Perhaps we should require more substantial proof before we topple Paterno's statue -- figuratively and actually.
As I mentioned here last Wednesday:
"By ignoring material financial falsehoods, the regulators and examiners allow frauds to continue and decrease the likelihood of future accountability through the criminal process."
The New York Fed's Friday data dump reveals beyond question that some of its officials, including Timothy Geithner, were aware of intentionally misreported Libors by 2008 at the latest. Today's Wall Street Journal editorial lays out the damning transcripts.
What does this mean? For openers it means that DOJ's announcement of a criminal investigation is a joke. Regulators and government officials at the highest levels knew of the misrepresentation. By not immediately raising bloody hell and putting a stop to it they either sanctioned the conduct, rendering it non-criminal, or themselves became co-conspirators.
Do you really think DOJ is about to investigate Geithner or drag him into somebody else's criminal defense? Get real. These people can't even prosecute robo-signers.
Wednesday, July 11, 2012
The news that Barclays officials told the New York Fed in 2007 about potential problems with Libor highlights key differences between the regulatory mind and the prosecutorial mind. It also shows the difficulty in successfully prosecuting white collar fraud in the wake of regulatory incompetence.
When the typical federal prosecutor learns that a financial institution or corporation has lied, his instinct is to prove and charge a crime against the individuals responsible for the falsehood. Virtually any material lie in the context of publicly traded or federally insured entities constitutes a federal crime.
When a regulator learns that he has been lied to, the response is not necessarily the same. A famous example of this occurred during one of the SEC’s many examinations of Bernie Madoff’s shop. Madoff was caught flat out lying to SEC examiners. Did the scope of the examination expand? No. Were prosecutors immediately informed? No. Madoff was given a slap on the wrist. His massive Ponzi scheme continued for several years, claiming thousands of new victims.
While prosecuting S&L fraud twenty years ago, I was appalled to discover repeated instances in which the very fraud I was investigating had been contemporaneously revealed in some format to federal banking regulators and/or examiners who had often done nothing in response. This put putative defendants in the position of arguing that their frauds really weren’t frauds at all, because they had not deceived anyone. They argued that the regulators knew all about their conduct and failed to act, so: 1) it wasn’t deceptive conduct; and 2) they thought they had a green light going forward. Sometimes our targets and subjects were right. Sometimes they had only disclosed the tip of the iceberg.
By ignoring material financial falsehoods, the regulators and examiners allow frauds to continue and decrease the likelihood of future accountability through the criminal process.
But sophisticated fraudsters often reveal their conduct to regulators through a glass darkly. They are hoping that overworked regulators, with whom they are friendly, will miss, or misunderstand, the half-assed disclosures being made. The trick is to disclose just enough, but not too much. The typical regulator, unlike the typical prosecutor, does not distrust mankind or see a fraudster around every corner. The typical regulator has known the institution and executives he is currently monitoring for years. Often his ass has been kissed during that period in perfectly appropriate ways. He has been respected and deferred to. These intangibles, and his workload, may prevent him from noticing or following up on potential red flags.
We don’t have the full story yet on what the New York Fed knew about Barclay’s Libor problems, but the alacrity of the New York Fed’s acknowledgement that it knew something is striking. Timothy Geithner ran the New York Fed at the time, and we know that he has never met a wrist that couldn’t be slapped or a falsehood that couldn’t be excused.
The question remains—how can we bridge the regulatory/prosecutorial mental divide in order to punish real corporate fraud? Here is one answer—by training regulators and examiners to have zero tolerance for misleading or obstructionist behavior. The discovery of any lie or intentionally misleading conduct by a publicly traded or federally insured institution in any context should result in immediate fast-tracking to appropriate civil and/or criminal enforcement officials and/or federal prosecutorial authorities. This does not mean that prosecution should automatically or even usually ensue. It does mean that individuals who actually know something about fraud can take a critical and timely look at red flag behavior.
Once this process is in place, it may create a business climate in which elite corporate and financial institutions, and their officers, directors, and employees, will know that lying in any form will not be tolerated. The success of such a structure depends on the DOJ green-lighting prosecutors fearless enough to investigate and charge the flesh and blood financial elites who commit fraud. Almost every indication to date (outside of the insider trading context) is that current DOJ leadership is not up to the task.
Wednesday, June 27, 2012
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
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
Tuesday, June 19, 2012
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."
Wednesday, May 23, 2012
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.
Tuesday, May 15, 2012
Some years ago, I represented a landlord who was indicted and convicted for offering a bounty to a thug if he beat up the leader of the tenants' committee, which was opposing a rent increase. This behavior does not seem all that much different from what the National Football League has alleged New Orleans Saints linebacker Jonathan Vilma did. Vilma, four other players, and his coach Sean Payton and others, have been disciplined by NFL Commissioner Roger Goodell for allegedly conspiring to offer rewards to teammates to maim opposing players, particularly star quarterbacks.
News about this alleged conspiracy has been widely publicized, but I have yet to read of any current or impending federal or state criminal or legislative inquiry. While certain violence in football is accepted, deliberate maiming goes beyond any acceptable norms. Nonetheless, it would not surprise me that neither federal nor state prosecutors, especially in the New Orleans area, where Vilma and his alleged player co-conspirators played, view such an investigation as crowd-pleasing. Realistically, it is quite possible that a New Orleans jury would nullify and acquit Vilma even if there were convincing evidence against him.
In virtually every other area of business activity where there is a tenable allegation that a person had conspired to maim a competitor or opponent, there would be a serious prosecutorial investigation. In sports, what is ordinarily considered criminality, at least physical criminality, is often given a bye.
One might think that Congress has a legitimate reason and special responsibility to investigate alleged orchestrated maiming in professional football, a national sport/business. The National Football League, as it is now, exists due to Congressional largess. Congress has given the NFL a special exemption to antitrust rules which allows it to function as a lucrative monopoly with an all-powerful commissioner. Professional football (which to my wife's chagrin I watch virtually every fall Sunday), if fairly and properly played, is a dangerous game, as reflected by the frequent injuries and limited career span of its players, and the reported unusual rates of early brain damage, suicides and deaths among its retirees. When improperly played -- played with a purpose of injuring others -- it is even more brutal.
Of course, just as an indictment might not be popular with local fans, a Congressional investigation into football brutality would probably not be favorably received by the voters back home, who like their contact sports (at least professional sports) such as football and hockey to be rough. Congress appears to be more interested in whether baseball players engage in taking illegal drugs, which, if it harms anyone, hurts only themselves or perhaps also competing players who perform at a comparative disadvantage without such presumed aids. Such an investigation also continues to feed the anti-drug attitude Congress has fostered and to justify the harsh drug laws Congress has enacted. Of course, Congress might also be gunshy in view of the embarrassment that the baseball steroid investigation and resulting Roger Clemens trial became.
This is not to say that I presume Vilma is guilty. I have not seen or heard any concrete evidence that he in fact did orchestrate a bounty program. The NFL investigation was conducted in secret and with only a sparse controlled public report by the NFL of its findings. Vilma's attorney, in a letter roughly equivalent to a motion for discovery in a criminal case, has asked for 17 points of information. The NFL's response is essentially that its special counsel, Mary Jo White, a respected and liked, and generally prosecution-minded, former United States Attorney, has reviewed the secret evidence and has found it sufficient. The NFL also claims that it had shared some of the evidence with the alleged offenders and the NFL Players Association. The association, while supporting the players' right to arbitration, presumably represents both Vilma and the alleged offenders, and is barely a substitute for a single-minded advocate on Vilma's behalf.
Thus, Vilma, subject to possible reversal by arbitration or court action, will be punished with a suspension of one year (a significant time in a football player's limited career span), and the loss of millions of dollars without even rudimentary due process. And, unlike many persons suspended or fired from jobs, Vilma is practically unable to ply his trade anywhere else besides the monopolistic NFL.
I do not know enough about the NFL's collective bargaining agreement, which apparently allows the Commissioner to be both prosecutor and judge, or about labor law to know whether Vilma has been treated properly. I do, however, have a visceral feeling that he deserves more rights than a secret investigation and a conclusory decree by a commissioner with dictatorial power.
Tuesday, May 1, 2012
In an ironic twist, the New York County (Manhattan) District Attorney's Office is investigating the recently-deposed chairman of Dewey LeBouef, the firm that still carries the name of Thomas Dewey, the near-president who rose to national prominence as a gangbusting nonpolitical Manhattan District Attorney.
The investigation, apparently based on facts brought to the District Attorney's attention by disgruntled partners as the firm teeters on the verge of extinction, concerns whether the former chairman, Steven H. Davis, committed financial improprieties. One area of investigation reportedly is whether Davis misled investors, presumably insurance companies and/or banks, about the firm's financial condition, see here, perhaps involving its commitments to highly-compensated partners, many lateral hires. American Lawyer last month announced that it was revising the figures it published based on the firm's report of its finances since those numbers differed from what the firm reported to the media. The firm defended its numbers, claiming that it used different methodologies at different times.
Certainly, different financial reports made at different times using different methodologies for different purposes may reasonably be different. And, even giving false figures to American Lawyer may not be criminal (I hesitate to state so definitively in this day of overcriminalization of law and overreaching by law enforcement). However, false statements to lenders or investors, who potentially will incur severe losses, because of the firm's inability to pay its debts, is a less certain matter.
The firm has mounted its own internal investigation -- by two of its partners. While I have no reason to believe that the investigation will be less than thorough and fair (and will likely save considerable money), the firm might have more prudently hired independent investigators invulnerable to accusations of conflict of interest, if only for public relations purposes. Of course, if the firm dissolves, any internal investigation may fall by the wayside.
Sunday, April 29, 2012
Here are ten basic observations regarding criminal discovery. They send a loud message that the proposed Senator Lisa Mukowski (Alaska) (along with Senators Inouye, Hutchinson, Begich and Akaka) "Fairness in Disclosure of Evidence Act" legislation is needed to codify the holding in Brady and add teeth to making certain that defendants receive a fair trial.
Ten Basic Premises:
- Most prosecutors play by the rules.
- One of the rules is you have to give up Brady material.
- Brady is going to be 50 years old in 2013.
- The ethics rules require prosecutors to give up exculpatory material.
- Some prosecutors have no clue what Brady material really is.
- In some cases prosecutors can’t tell if something is favorable to the defense because they don’t know what the defense will be presenting.
- Discovery in national security cases, terrorism, and cases where someone will get hurt needs to be treated differently.
- The chances of prosecutors being caught if they fail to give up Brady material is slim.
- If Brady material is not given or given late, most courts will find it to be harmless error.
- The chances of a prosecutor being disciplined for not giving up exculpatory material is slim.
Wednesday, April 25, 2012
I expect that any day now one of my non-white-collar criminal clients will come to my office and ask me to incorporate him to protect him from future criminal liability. Of course, incorporation does not immunize an individual from criminal liability. Nor, generally, does it protect small corporations from prosecution.
However, it appears that just as massive corporations are "too big to fail," they are too big to prosecute. In the wake of the government's destruction of Arthur Andersen because of an ill-conceived, aggressive and ultimately unsuccessful indictment which caused the loss of thousands of jobs, DOJ has been highly reluctant to aggressively prosecute major corporations.
Although there are occasionally indictments of major corporations, most often these are disposed of by "deferred prosecutions," which are essentially delayed dismissals with financial penalties in numbers that are large in absolute terms but meager in comparison to the profits and assets of the corporation. To be sure, even when prosecuted to conviction, corporations do not go to jail and thus there may be little practical difference between a conviction of a corporation and a deferred prosecution. However, to the extent a goal of the criminal justice system is to achieve apparent fairness and equality, there is a genuine, if symbolic, reason for the prosecution of the large and powerful, whether they be individuals or corporations.
According to a thorough account in the New York Times this past Saturday, April 21, see here, Wal-Mart in Mexico, where the company has, according to the Times, one-fifth of its stores, engaged in a systemic countrywide scheme in which it spent millions of dollars to bribe hundreds of Mexican officials to gain favorable and expedited treatment and a competitive advantage. According to the Times, this conspiracy was not, as is often the case in corporate wrongdoing, the act of a rogue individual or group. Rather, it was orchestrated from the very top of the Wal-Mart Mexican hierarchy. Additionally, again according to the Times, when reports of this corruption reached Wal-Mart's U.S. headquarters, top executives took great pains to cover up the wrongdoing.
The alleged conspiracy, if the Times report is accurate, appears to be the kind of corporate crime, therefore, that deserves aggressive prosecution (not just an indictment and a deferred prosecution), especially if the government wants the Federal Corrupt Practices Act ("FCPA") to be taken seriously. Of course, there may be statute of limitations or other fact-finding or evidentiary problems involved in putting together a case involving facts from 2005, the year, according to the article, the bribe payments were made. It is far easier to write an article reporting corruption than to prove it under the rules of evidence beyond a reasonable doubt. It will be interesting to see what, if anything, DOJ does with respect to this matter.
Sunday, April 15, 2012
Many companies, as part of their compensation and benefits packages, have indemnification agreements that allow for payment of attorney fee expenses to company officers, directors, and others. Some may be surprised to learn that Fannie Mae and Freddie Mac have such agreements as part of Enterprise Bylaws or individual agreements. "Between 2004 and October 31, 2011, Fannie Mae advanced $99.4 million in legal expenses to cover the representation of" three former officers "in connection with government investigations and lawsuits stemming from accounting irregularities uncovered in 2004." The Office of Inspector General issued a report that offers some suggestions on reducing future costs. The "evaluation was led by Director of Special Projects David Z. Seide, and Investigative Counsel Stephen P. Learned contributed to its completion." The report can be found here.
Saturday, March 3, 2012
This panel was moderated by Joseph G. Block (Venable). Panelists were Richard E. Byrne (Exxon), Marc R. Greenberg (Keesal, Young, & Logan), Gregory F. Linsin (BlankRome), and Stacey H. Mitchell (Chief, Environmental Crimes Section of the Environment and Natural Resources Division of the Department of Justice). The panel covered issues related to the ongoing investigation into Deepwater Horizon, Lacey Act violations, vessel pollution, and a host of other white collar related environmental matters.
The panelists talked about how to handle legal issues arising with emergency responders. Several panelists noted that the most important thing is to mitigate damages to injured, being candid to first responders, and telling them what they need to know - such as where folks may be.
When there is death or significant environmental damage occurs, you can expect that the government might investigate. Richard Bryne said you need to presume investigation - you need to set up a privileged internal investigation
The panelists talked about how to handle searches. Some panelists on the corporate side commented that you should have a developed plan in place; get to the facility as quickly as possible; instruct individuals to cooperate with the search warrant but also telling them that there is no way they must agree to be interviewed. The importance of truthfulness was stated. From the government perspective there is concern about the safety of agents.
The corporate and defense attorney panelists discussed approaches in giving Upjohn warnings to employees being interviewed. It was noted that Upjohn warnings can trigger questions from the employees being interviewed. It may be difficult for the company because they may not know at this point whether they will cooperate with the government in resolving the matter. There is also the question of whether to appoint counsel for company employees.
(esp)(blogging from Miami Beach, Florida)
Internal Investigations in the Age of Voluntary Disclosure
This breakout session, moderated by Keely Rankin (Dechert), concerned internal investigations. A hypothetical, about a telephone message left by a rambling anonymous whistleblower reporting on activities from another country, was used to discuss a variety of issues unique to internal investigations.
Catherine Razzano started the discussion from the perspective of corporate counsel trying to decide whether to investigate and who should do the investigation. She said that you need to do some immediate investigation just to decide how to proceed (e.g., can you do a routine audit; can you trace the call; can local counsel be of assistance). It is important to keep in mind that if it is a public company it has certain reporting obligations. If an HR person does the initial investigation, and the individual is not an attorney, you may lose the privilege. In house counsel brings a certain expertise and outside counsel brings a certain independence. It was emphasized that one needs to take a measured and consistent approach – these investigations cost money.
Angela M. Machala (Scheper Kim & Harris) looked at whether there might be a reason to launch more of an investigation and she also spoke to the advantages and disadvantages of starting with the most culpable employees in setting up interviews. Cultural differences can play a part in how you proceed.
Jonathan Leiken (Jones Day) looked at the problem of what happens when you're reviewing emails and you find more problems. He said to remember - when the movie gets played back, how will the client look the most responsive.
Ryan K. Stumphauzer (O'Quinn Stumphauzer) emphasized the importance of sitting down with the control group to define expectations.
On one hand you don’t want to give incomplete or inaccurate information and on the other hand you want to act quickly. The panelists discussed the possibility that the whistleblower could beat the company to the DOJ in reporting a problem.
One thing was clear - Dodd-Frank is very scary for counsel. Ms. Razzano notes - "[w]e want to protect our employees but we want to protect company to."
(esp)(blogging from Miami)
Wednesday, February 22, 2012
Dominique Strauss-Kahn is once again in trouble with the law in relation to an investigation involving sexual activity. Strauss-Kahn was detained overnight in Lille, France, for questioning in a French investigation related to an alleged prostitution ring that purportedly supplied women for sex parties with Strauss-Kahn in Brussels, Paris and Washington.
Strauss-Kahn contends that he had no reason to believe that the women at these parties were prostitutes. His French lawyer bared that defense to French radio in December, "People are not always clothed at these parties. I challenge you to tell the difference between a nude prostitute and a classy lady in the nude." Reuters article, see here. This lack of scienter defense ironically appears to be the converse of what many believed would have been Strauss-Kahn's defense had the New York case in which he was accused of sexual assault gone to trial. In that case, it was expected that his defense would have been that he did believe that the woman in question was a prostitute.
The investigation, in which eight people have been charged, involves alleged misuse of corporate funds to pay for the services of the prostitutes. Engaging prostitutes is not illegal in France (although it is in Washington), but if the investigators determine that Strauss-Kahn had sex with prostitutes he knew had been paid for out of company funds, he might be charged as a beneficiary of that misuse of funds. Most likely, it will be difficult to prove that Strauss-Kahn, even if he were found to have known the women involved were prostitutes, knew how they were paid.
High-profile cases in other jurisdictions often affect prosecutorial priorities. One wonders whether this case will lead American prosecutors to scrutinize corporate books to determine whether corporate funds have been used to supply prostitutes to customers, political figures and others. I suspect that such payments (and consequent tax deductions as business expenses) are not wholly uncommon, at least for non-public businesses. Any resulting cases, involving both sex and corporate corruption, are sure to draw media attention.
Wednesday, February 8, 2012
One of the supposed hallmarks of the American criminal justice system is the prudent exercise of prosecutorial discretion. But prosecutorial discretion, even when it works, is a blessing and a curse. A blessing, because it allows for the flexibility and compromise without which most systems, even well-constructed ones, cannot function. A curse, because liberty should not depend upon the the character and wisdom of the person temporarily wielding power.
The U.S. Attorney's Office for the Central District of California has decided not to prosecute Lance Armstrong. An announcement to that effect was made last Friday. The L.A. Times story is here. A good Washington Post piece is here. Today's Wall Street Journal discusses the declination and a potential future probe of of improper leaks related to the case. (An internal investigation of some kind appears to be warranted given the massive leaking that has occurred.) According to the WSJ, the declination decision by U.S. Attorney Andre Birotte and his top aides went against the recommendation of the two line AUSAs handling the case. Maybe, but take it with a grain of salt. News stories about the internal machinations of prosecution teams often get it wrong.
Based on what I know about the case, the decision to decline appears to have been a no-brainer. Recent federal prosecutions involving alleged drug use by star athletes have expended enormous sums of money with mixed or poor results. In the Armstrong matter, the doping, if it occurred, was not itself a federal crime. Prosecutors would have been peddling a wire fraud theory under which Armstrong allegedly defrauded team sponsors by intentionally violating a contractual obligation to avoid improper drug use. Not very sexy. Twelve typical American jurors might well wonder at the start of such a case, "Why are we even here?" Finally, Armstrong is enormously popular and has a sterling defense team with unlimited resources.
The U.S. Anti-Doping Agency (USADA) vows to continue its investigation, accurately noting that its "job is to protect clean sport rather than enforce specific criminal laws." But USADA wants the grand jury materials. This would be a travesty, and is unlikely to happen. Federal grand jury materials are presumptively secret by law for good reason. Don't count on a federal court sanctioning transfer of grand jury materials to an agency like USADA.
In other declination news, the DOJ attorneys prosecuting the Gabon sting case have informed U.S. District Judge Richard Leon that DOJ is considering dropping all future prosecutions. A decision will be made by February 21. The BLT piece is here. Full disclosure: I briefly represented one of the defendants, and considered representing another of the defendants, neither of whom has gone to trial. My comments here are based on the public record. The two cases brought to date have resulted in three acquittals and two hung juries. Nobody going to trial has been convicted in what DOJ thought was a sure win. Whatever merit there was in initially bringing the case, reconsideration is in order. The two trials to date have revealed a number of weaknesses. First, this was a sting--a crime engineered by the U.S. Government. Second, the informant who helped orchestrate it was far more compromised than the typical informant in a white collar case. Third, in a key tape recorded conversation between that informant and one of the defendants, the defendant seeks to back out of the alleged unlawful transaction, but the informant reels the defendant back in by telling him that attorneys have approved the deal. Fourth, the inherent ambiguities and weaknesses in the FCPA itself.
If there has been a benefit to the Gabon FCPA prosecution it is this--it has taught the white collar defense bar that FCPA cases can be fought and won and, presumably, has taught DOJ that FCPA cases aren't as easy to win as they first appear.
February 8, 2012 in Celebrities, Corruption, Current Affairs, FCPA, Fraud, Government Reports, Grand Jury, Investigations, Media, Prosecutions, Prosecutors, Sports, Statutes | Permalink | Comments (0) | TrackBack (0)
Monday, January 30, 2012
Virtually every presidential State of the Union speech, or its gubernatorial equivalent, calls for tougher criminal laws and/or new investigative resources. President Obama's address last week was no exception. The President called for the establishment of a new unit "to crack down on large scale fraud and protect people's investments." As blog editor Ellen S. Podgor wondered, see here, it was unclear how this unit would differ from the Financial Fraud Enforcement Task Force established in 2009. I too asked whether this purportedly new unit was anything other than a repackaged version.
The announcement of a new prosecutorial unit also was perhaps an unintended implicit admission that existing federal law enforcement agencies had been less than successful in dealing with serious alleged crimes which some believed had caused the financial crisis. Both Attorney General Eric Holder and SEC Enforcement Director Robert Khuzami defended their record, stating that not every mistake is a violation of law. Holder said, "We also have learned that behavior that is reckless or unethical is not necessarily criminal," a statement which (aside from leading me to ask why it had taken him so long to realize it) should be painted on the walls of every prosecutorial office.
The principal apparent structural difference between this unit, entitled the Unit on Mortgage Origination and Security Abuses ("UMOSA"), and the prior one is, besides its more focused jurisdiction, that this is a joint task force of both federal and state officials. One of its co-chairs -- albeit one of five, four being DOJ or SEC officials -- is New York State Attorney General Eric Schneiderman, who has shown his independence and aggressiveness toward Wall Street by pushing for stronger sanctions against financial institutions for robo-signing and other improprieties committed after the crisis arose.
Generally, joint federal-state task forces are a one-way street. The feds take the best criminal cases and leave the dregs to the state. One purported justification for such selection is that federal laws and rules of evidence make it easier for federal prosecutors to bring cases and win convictions. Schneiderman has indicated somewhat to the contrary -- that New York and other state laws give state attorneys general greater means to bring both civil and criminal prosecutions.
The idea of combining federal and state resources is generally a good one. Too often law enforcement agencies refuse to share information with other agencies, if at all, until they have determined the information was insufficient for them to act on, often too late for use by the other agencies. On the other hand, I fear that some task force constituents might attempt to make an end run around constitutional and statutory laws and rules, specificially Fed.R.Crim.Pro. 6(e), which, generally, as relevant here, prohibits disclosure of grand jury information to non-federal officials. Of particular concern is whether information secured by federal grand juries, much of which is through immunized testimony, will be provided for use by the states. Both Attorneys General Holder and Schneiderman seem aware of this restriction, but both appear to view it as an obstacle to overcome rather than a right to ensure. How scrupulous they will be in upholding the rule and spirit of grand jury secrecy will be seen.
Tuesday, January 24, 2012
President Obama's State of the Union Address spoke to many important issues. One was financial crime. He said "[w]e will also establish a Financial Crimes Unit of highly trained investigators to crack down on large-scale fraud and protect people's investments." (see full text Wash Po here). He later states, "[s]o pass legislation that makes the penalties for fraud count."
Some may recall that back in 2009 President Obama created the Financial Fraud Enforcement Task Force that had as its purpose "to hold accountable those who helped bring about the last financial crisis as well as those who would attempt to take advantage of the efforts at economic recovery." (see here) I am a bit uncertain how this existing body will or will not interact with the new Financial Crimes Unit, but the concept of further enforcement in this area sounds impressive. Perhaps more funding will be supplied to the SEC through this initiative so that they can properly regulate improprieties and avoid Ponzi schemes of the past. Perhaps more FBI investigators will be hired to work on building these cases. I applaud the President for this one - especially if he goes in this direction.
On the other hand, we really do not need new legislation to make "the penalties of fraud count." The legislation is there, and if one looks at the website of the Financial Fraud Enforcement Task Force, there have been a significant amount of prosecutions with existing statutes. (see here). The statutes are there -it is the money that is needed to make these difficult and often complex cases. Please don't add more to the already approximately 4,500 federal statutes out there.
So more regulatory oversight, more prosecutors and SEC folks working on financial matters will help. But the legislation and penalties are already there. I look forward to seeing this Financial Crime Unit up and running and cracking down on improprieties in our financial world.
Joe Paterno is dead, his legacy as one of the greatest coaches in the history of sports tarnished by his termination -- unjust, I believe -- on the grounds that he inappropriately failed to pursue vigorously an allegation of child sex abuse (see here, here and here).
Paterno's death and absence as a witness will likely have little or no effect on the trial of Jerry Sandusky, the former Penn State assistant coach who was the subject of the allegation reported to Paterno by a Penn State graduate assistant coach, Mike McQueary. Paterno's only information about the Sandusky issues appears to have been the hearsay report by McQueary, and thus it is unlikely that he would have been a witness.
Paterno's unavailability, however, may have a considerable impact on the trials of Tim Curley, the former university athletic director, and Gary Schultz, a former university senior vice president, both of whom have been charged with failure to report the suspected child abuse and perjury. Both have been charged with falsely testifying that McQueary, when he spoke with them, did not mention serious or criminal sexual conduct. McQueary, whom the grand jury report (presumably written by the prosecutors) deemed "extremely credible," testified that he reported the specific act to both Curley and Schultz, and seemingly also to Paterno. Paterno's grand jury testimony, however, apparently was that what McQueary related to him was far less specific, and thus more ambiguous. Accordingly, while the grand jury report indicated that Paterno would be a corroborative witness for the prosecution in that he was told by McQueary of the alleged "sexual exploitation" and then reported what McQueary had said to Curley and Schultz, his testimony would apparently also have to an extent corroborated their defenses that McQueary was less explicit than he now claims.
In another highly-publicized investigation involving a former college sports coach, former Syracuse University assistant basketball coach Bernie Fine, it has been reported that two of the four men who had accused Fine of molesting them when they were children have admitted that they committed perjury in connection with the case. One has admitted that he lied when he claimed Fine molested him. The second, the only one whose allegations fall within the applicable criminal statute of limitations, while still claiming that abuse occurred, has admitted doctoring purportedly supporting emails.
The Fine situation is a reminder that not every allegation of child sexual abuse is true. Indeed, in my experience, there is a far higher percentage of false accusations of sexual misconduct than of any other criminal activity. Thus, such accusations should be scrutinized especially carefully before they are acted upon by law enforcement or others.