Thursday, November 29, 2012
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.
Wednesday, November 7, 2012
As the New York Times reports (see here), once again a trader has apparently taken an enormous bet with his employer's money and lost, thereby costing his employer, a small Connecticut brokerage firm, millions of dollars and threatening its continued existence. David Miller, described by the Times as a "journeyman" with a career that includes stints at some of Wall Street's less distinguished firms, bought roughly $1 billion of Apple stock hours before Apple was to announce its earnings for his employer Rochdale Securities in what the firm's president called an "unauthorized trade." When the announced earnings were below expectations, Apple's stock price fell and the firm was then forced to sell the securities at a considerable loss.
I have no idea whether Miller's trading was a calculated effort of his own to secure a huge gain for his employer and perhaps a corresponding large bonus for himself, an execution of a strategy approved by supervisors, a ministerial error resulting from a "fat finger" (as Rochdale has reportedly told potential financial rescuers) or something else. However, this situation, along with better-known recent examples of purportedly unauthorized trades which have caused massive losses (some of which, potentially at least, might eventually be borne by taxpayers) lead me to wonder whether there should be a criminal statute prohibiting "reckless" trading of other people's money. Many statutes, generally state, prohibit reckless behavior which causes, or just puts people at risk of, death or physical harm, including in New York reckless assault, reckless endangerment, and reckless driving. I wonder whether just as the law criminalizes reckless conduct which may cause physical harm, it should criminalize reckless conduct which may cause monetary harm. Such a statute might criminalize conduct when one "takes a substantial and unjustifiable risk in making trades with money other than his own and that such risk is a gross deviation from the standard of conduct a reasonable person would observe in that position." (Cf. N.Y. Penal Law Section 15.05).
The bonus system which gives great incentives to hugely successful trading by one whose own funds are not put at risk (at least directly) and lesser disincentives to hugely unsuccessful trading encourages taking long-shots. Perhaps that is the way the markets should work. However, contrary to my visceral feeling that governments enact too many penal statutes, I believe a prohibition of reckless trading which results in severe financial loss might be worthy of consideration.
Monday, October 29, 2012
DC has its share of outstanding white collar practitioners, but some of the very best of them don't often make it into the news. Why? Because they are quietly busy, around the clock and the globe, protecting the reputations, pocket-books, and other interests of their clients. They do this by conducting internal investigations, defending against government inquiries, creating state of the art compliance programs, and offering sound strategic advice. The whole point is to keep your clients out of the news. Two of the very best of these trusted white collar counselors are former Deputy AG George J. Terwilliger III and my old friend Bob Bittman, who are moving this Thursday from White & Case to Morgan Lewis. Terwilliger and Bittman will be Partners in the White Collar Litigation & Government Investigations Group. George and Bob are moving over with experienced white collar hands (and fomer AUSAs) Dan Levin and Matt Miner. Here is the Morgan Lewis Press Release. Congratulations to George, Bob, Dan, and Matt.
Monday, September 24, 2012
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.
Tuesday, August 28, 2012
Monday, August 27, 2012
Jane Meinhardt, Tampa Bay Business Jrl, Weinberg awarded for work in prosecuting, defending
King & Spalding Press Release, Former WellCare Executive Rejoins King & Spalding
Jean Eaglesham & Joe Palazzolo, WSJ, Ex-UBS Traders Offered Deal by U.S. in Rate Probe
Rosa M. Abrantes-Metz & D. Daniel Sokol, Harvard Business Law Review, The Lessons from Libor for Detection and Deterrence of Cartel Wrongdoing
James E. Felman is the recipient of the FBA's Earl W. Kintner Award for Distinguished Service of the Tampa Bay Chapter of the Federal Bar Association
Sue Reisinger, Corporate Counsel, SEC Hands Out First Whistleblower Payment, Hints at More
Tuesday, August 14, 2012
Sergey Aleynikov, a former Goldman Sachs programmer whose federal conviction for stealing source code from the firm's computers had been vacated by the Second Circuit on the grounds that the statutes under which he was prosecuted did not cover his conduct, has been charged by Manhattan District Attorney Cyrus Vance with state charges relating to the same activities.
Arguably, the Fifth Amendment double jeopardy clause does not apply here because the United States and the State of New York are separate "sovereignties." That "dual sovereignties" exception to the double jeopardy clause has been occasionally questioned but generally remains in force. One possible exception that may apply here since presumably the D.A.'s case will rely on the federal investigation and prosecution (the federal case agent signed the affidavit supporting the state complaint) is when the two governments are acting in concert.
Although there may be no federal constitutional bar because of the "dual sovereignties," New York statutory law does in some circumstances preclude a state prosecution after a trial for the same or similar offenses in another jurisdiction. See New York Criminal Procedure Law Article 40. Additionally, there is always the possibility that eventually the New York Court of Appeals, which recently has dusted off the New York State Constitution's equivalent of the Bill of Rights (Article 1, Section 6) in Fourth Amendment Cases, may apply the state's constitutional double jeopardy bar more broadly than federal courts have applied the federal constitutional bar.
A New York Times article (see here) about the case quotes Joshua Dressler, an Ohio State University law professor, as saying that this case provides "an exceptionally justifiable reason for the state prosecutor to use a state law to bring a prosecution." I disagree. Mr. Aleynikov has already undergone the trauma and expense and disruption of life that a criminal trial entails. He has already served almost one year in prison for a crime he did not commit. Even if convicted on state charges, I predict he will never serve an additional day in jail.
Thus, in some ways Mr. Aleynikov is a poster boy for application of the double jeopardy clause. This case does not involve a situation in which a dismissal or acquittal in the initial proceeding was tainted by misconduct or was so bizarre that it seems viscerally unjust. Rather, Mr. Aleynikov's case was reversed by a highly-respected court because a highly-respected prosecutorial office charged and convicted him and sent him to prison under statutes that did not apply. This is not the kind of case that justifies a prosecutorial end-run around the Constitution.
The Department of Justice's "Petite Policy" concerning federal prosecutions after state trials, as it has been applied, militates against a second prosecution after an unsuccessful prosecution in another jurisdiction when the first prosecution was generally fair. Apparently, the New York County District Attorney has no such policy.
Monday, August 13, 2012
Benjamin Weiser, NYTimes, Bronx Councilman Is Convicted of Fraud and Loses Seat
Basil Katz, Reuters, Key cooperator in Galleon insider cases gets probation
Sophia Tareen, Boston.com, Ex-Ill. Gov. Ryan contests corruption convictions
Ryan McConnell, Daniel Trujillo, and Katelyn Richardson, Corporate Counsel, Playing Moneyball in the Compliance Department
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.
Thursday, June 28, 2012
Today's New York Times was a virtual treasure trove of white collar crime stories. Among them were the following:
"South Carolina House Panel to Hear Ethics Complaints Against Governor" (see here) - South Carolina Governor Nikki Haley is facing a legislative hearing on whether she acted unethically during her term in the legislature when she was paid $110,000 annually as a fundraiser for a hospital whose legislative goals she advocated. Knowing nothing about South Carolina legislative ethics rules or criminal law, I do not venture to opine whether the Governor did anything improper. However, the broad facts here are strikingly close to a series of cases in New York in which a hospital CEO, a state senator and a state assemblyman all were convicted and went to prison. See here. It seems to me there should be a restriction against a legislator working for an entity, at least in a loosely-defined job such as consultant or fundraiser, and advocating or supporting favorable legislation for that entity.
* * *
"Madoff's Brother Sets Plea Deal in Ponzi Case" (see here) - Peter B. Madoff, the brother of Bernard Madoff and the No. 2 man at Bernard L. Madoff Investment Securities, will reportedly plead guilty tomorrow to falsifying documents, lying to regulators and filing false tax returns. Peter Madoff reportedly served as the nominal compliance officer of his brother's wholly-owned securities firm and apparently exercised little or no oversight of the firm's operations, thereby providing his brother the freedom to steal billions.
Placing an investment firm's proprietor's brother as compliance officer is akin to asking the fox to guard the henhouse. It seems there should be, if there is not, a law, rule or regulation prohibiting a close relative, like a spouse, parent, child or sibling, from being the responsible compliance officer in a substantial investment firm owned entirely (as here) or largely by one's relative.
* * *
"JP Morgan Trading Loss May Reach $9 Billion" (see here) - The amount of JP Morgan's trading losses from its London office could be as much as $9 billion -- four and one-half times as much as the company announced originally. While JP Morgan has in view of its considerable profits downplayed the magnitude of the loss, which its chief executive officer Jamie Dimon estimated in May could possibly be as much as $4 billion, obviously a $9 billion loss takes a much greater bite out of the firm's profitability, and conceivably may even raise some questions as to the firm's viability.
We now know, in the wake of bailouts and government support, that the federal government is both the de facto and de jure insurer of major banking institutions. One might ask whether a government insurer, like a private insurance company, should not be able to set specific rules to curb risky activities which might trigger the insurer's support. To update Congressman Barney Frank, there are now nine billion more reasons for increased governmental regulation.
* * *
Like many other white collar defense lawyers, I am strongly against overcriminalization. On the other hand, I am equally strongly against underregulation. One of the principal reasons I favor greater and clearer rules and regulations is to give potential white-collar offenders reasonable notice of what is criminal and what is not, and not leave that decision, as frequently happens now, to a federal prosecutor's interpretation of the amorphous fraud laws.
A significant portion of the white-collar defendants I have represented in the last forty years, including many of those who were convicted, have actually believed that their actions were not criminal. In some cases, this was simply because they lacked a moral compass. In the financial world, where the primary, and often sole, goal is to take other people's money away from them, many people do not consider whether what they do is morally right or wrong, or are so amoral that they are incapable of making that distinction. Tighter regulation will at least tell them what is prohibited and what is not.
Don't overlook the Supreme Court's Alvarez decision today when reading about another important decision issued by the Court today - the one that upholds the Affordable Care Act. The Court's finding the Stolen Valor Act unconstitutional opens up some First Amendment arguments in the criminal sphere.
The test provided by the plurality decision is that "there must be a direct causal link between the restriction imposed and the injury to be prevented."
Justice Kennedy (joined by Roberts, Ginsburg, and Sotomayor) found that the respondent who lied about receiving a Congressional Medal of Honor, in direct contravention of a federal criminal statute - the Stolen Valor Act of 2005 (18 U.S.C. s 704) had a first amendment protection. The decision reminds us that there are certain content-based restrictions that are permitted -
"Among these categories are advocacy intended, and likely, to incite imminent lawless action, obscenity, defamation, speech integral to criminal conduct; so-called 'fighting words'; child pornography; fraud; true threats; and speech presenting some grave and imminent threat the government has the power to prevent" (citations and parentheticals from the decision omitted here)
This opinion states that "[t]hese categories have a historical foundation in the Court’s free speech tradition. The vast realm of free speech and thought always protected in our tradition can still thrive, and even be furthered, by adherence to those categories and rules." But the Court also notes that there is no "general exception to the First Amendment for false statements." And specifically when considering defamation it says "that falsity alone may not suffice to bring the speech outside the First Amendment. The statement must be a knowing or reckless falsehood."
That said, this opinion distinguishes statutes such as the false statement statute (s 1001); perjury (s 1623) and false representing that one is speaking on behalf of the Government (s 912).
Although this opinion stresses the importance of the military medals - as it should, it questions whether the "government's chosen restriction on the speech at issue [is] 'actually necessary ' to achieve its interest."
The key test used here - "There must be a direct causal link between the restriction imposed and the injury to be prevented."
The opinion ends by stating:
The Nation well knows that one of the costs of the First Amendment is that it protects the speech we detest as well as the speech we embrace. Though few might find respondent’s statements anything but contemptible, his right to make those statements is protected by the Constitution’s guarantee of freedom of speech and expression. The Stolen Valor Act infringes upon speech protected by the First Amendment."
Justices Breyer and Kagan offer a concurrence that stresses that there is a less restrictive way to achieve the government's goal. They suggest using "intermediate scrutiny" here in evaluating this case, but also hold that "[t]he Government has provided no convincing explanation as to why a more finely tailored statute would not work."
Dissenting are Justices Alito, Scalia, and Thomas. They note that the statute is limited in several different ways. They argue that "false statements of fact merit no First Amendment protection in their own right" and that it is a narrow law.
Commentary to follow.
Tuesday, June 26, 2012
Katherine Frey, Wash Post, Judge who had ‘no passion for punishment’ retires after 31 years (with a hat tip to Donna Elm and Mark O'Brian)
T. Markus Funk, Law360, Exposing Online Service Providers to Criminal Liability
Joe Nocera, NYTimes, Suspense Is Over in Madoff Case
Dan Strumpf, Chad Bray, Ashby Jones, Fox Business (Dow Jones), Former Executives Agree to Fines in AIG Transaction Case; David Voreacos, Bloomberg-Business Week, Gen Re, AIG Defendants May Win Dismissal of Fraud Cases
Mike Tolson, Houston Chronicle, Clemens' acquittal just latest in string of federal court flops
Associated Press, NYTimes,Two LulzSec Hackers Plead Guilty in Britain (with a hat tip to Ivan Dominguez)
Friday, June 15, 2012
Peter Lattman & Azam Ahmed, NYTimes, Rajat Gupta Convicted of Insider Trading
Patricia Hurtado & David Glovin, Bloomberg, Ex-Goldman Director Rajat Gupta Convicted of Insider Trading
Thursday, June 14, 2012
DOJ Press Release, Allen Stanford Sentenced to 110 Years in Prison for Orchestrating $7 Billion
Investment Fraud Scheme; Emily Wilkinson, Houston Business Chronicle, Stanford Sentenced to 110 Years for Ponzi Scheme
Bob Van Voris & David Glovin, Bloomberg News, BDO Seidman to Pay $50 Million in Deferred Prosecution
Grant McCool & Basil Katz, Reuters, US says Gupta guilty; defense: "Where's the beef?"
Manuel Roig-Franzia, Washington Post, John Edwards will not be retried, Justice Department
Tuesday, June 12, 2012
The New York Times reported yesterday that Rajat K. Gupta, a former Goldman Sachs director on trial in the Southern District of New York for providing inside information to his friend and business colleague Raj Rajaratnam so that Rajaratnam could make trades based on those tips, will not testify, according to a letter his highly respected lawyer, Gary Naftalis, submitted to the court on Sunday night. See here. The prior Friday, Mr. Naftalis told the court and the prosecutors it was "highly likely" that Mr. Gupta would testify. I was quite surprised by that declaration and even suspected that it might be a feint to divert prosecutorial resources from the preparation of cross-examination of other witnesses and the summation to preparation for the cross-examination of Mr. Gupta. (While I personally have never made such a feint, I have on occasion considered doing it.)
The government's case against Mr. Gupta is a circumstantial one -- essentially a pattern of incidents in which Mr. Gupta allegedly received secret information at board meetings and very shortly thereafter telephoned Mr. Rajaratnam, and Mr. Rajaratnam then placed trades based on the matters discussed at the board meeting. Most of the critical evidence -- Mr. Gupta's presence at the board meetings at which the information in question was discussed, his calls to Mr. Rajaratnam and Mr. Rajaratnam's firm's trading -- are virtually irrefutable. On the other hand, there is no "smoking gun" in the form of testimony or recordings as to what was said in the critical conversations.
On the witness stand, Mr. Gupta would no doubt be thoroughly and harshly cross-examined on whatever explanation he provided about the substance and timing of the phone calls. Interrogation about these repeated events would allow the prosecutors in effect an extra summation to hammer on these facts, indeed perhaps even better than a summation since the defendant would have to respond directly to each of the allegations, whereas in summation an attorney would have the option of ignoring, glossing over or generalizing about all or portions of the evidence.
In any case, white-collar or not, I believe that when a defendant testifies, the standard of proof beyond a reasonable doubt is diluted. Jurors, rather than asking themselves whether the prosecutor has proved the case beyond a reasonable doubt, focus more on whether the defendant probably told the truth.
I would not be surprised if Mr. Gupta's legal team had spent much of this past weekend cross-examining him and trying to convince him that the better choice for him was to decline to testify. The decision whether to testify is one of the very few that virtually all lawyers, and all ethics rules, decree belongs ultimately to the client. It is often difficult to convince white collar clients, especially those whose egos have become enlarged because of their extreme success, that they will be unable to convince a jury.
While my reading leads me to believe that this is a difficult case for the defense, I believe Mr. Gupta's decision not to testify is a correct one. A similar decision seems to have worked for John Edwards.
Friday, June 8, 2012
The New York Times this Monday reported that Bank of America (BOA) executives, including its then chief executive, Kenneth D. Lewis, in 2008 concealed from shareholders about to vote whether to approve the bank's purchase of Merrill Lynch that the expected losses that the bank would absorb from the purchase were far greater than reflected in the proxy documents they had received relating to the purchase. See here. Further, according to the report, Mr. Lewis at the meeting at which the stockholders voted whether to accept the deal, in response to a question about whether the purchase would dilute or add to the bank's income in coming years, sidestepped the question and referred the questioners to the proxy statement, which he knew seriously understated the loss. In court papers, the shareholders' lawyer called this response referencing the inaccurate proxy statement "materially false when made."
According to the Times, Mr. Lewis in recently-filed court papers claimed he had been advised by the bank's counsel, Wachtell, Lipton, Rosen & Katz, and by other bank executives that it was not necessary to disclose the actual projected losses.
The question of whether one must correct earlier inaccurate statements is sometimes murky, at least in law, and I would hesitate even to attempt to second-guess Wachtell Lipton, a highly-respected law firm, if in fact it did tell Mr. Lewis he need not correct the proxy statement before the vote. I do, however, find it hard to believe that Wachtell Lipton would have advised him to give the shareholders an obfuscating, misleading and arguably false statement.
There may well be wholly legitimate and defensible reasons for Bank of America to withhold the revised loss statements or for Mr. Lewis to answer as he did. The civil case, in which Mr. Lewis apparently has not asserted his privilege against self-incrimination, may provide these.
In the proxy statement, the projected loss of BOA profits from the merger was three percent in 2009, and nothing (and perhaps even a slight gain) in 2010. In the estimate provided to the executives before the vote but not communicated to the shareholders, it was 13 percent in 2009 and 2.8 percent in 2010. According to the Times, BOA's purchase of Merrill Lynch, which was ultimately urged by the government, required an additional $20 billion in bailout money beyond what the bank had received earlier. In addition, when Merrill's fourth-quarter losses were disclosed along with the bailout, shareholders in four days lost half of their value in BOA stock -- roughly $50 billion.
I suspect that there will be some governmental interest in this matter, if there is not already. I do not contend that Mr. Lewis' statement violated securities, criminal or other laws or regulations. If regulations did not prohibit him from concealing the latest reports from the voting shareholders, however, they should have. This may be another instance of questionable conduct that clear and specific regulations would have prevented.
Sunday, June 3, 2012
Corporate Social Responsibility and Supply Chains Practice: Proposed Dodd-Frank Conflict Minerals Rules
Thursday, May 31, 2012
As noted here, John Edwards was found not guilty on one count, and the jury was unable to reach a verdict on the remaining counts. Prosecutors should now move on and not retry Edwards on these remaining counts.
The government has expended enough taxpayer money on this case and Edwards most likely has had to incur the cost of his defense. Prosecutors have already hurt Edward's reputation with the evidence presented at trial - so there is no punishment basis for proceeding further. Evidence not presented at trial left the murky question of whether this money was even a political contribution, and the testimony of Federal Election Commissioner Scott E. Thomas that was not heard by the jury raises additional issues on campaign contributions. But the place to resolve this is not in the criminal courtroom. More importantly, if skilled folks can differ on this question then one certainly should not hold someone criminally liable.
No one walks out unhurt by this trial. And that is the huge cost that comes with a prosecution. It is for this reason that prosecutors need to consider carefully prior to charging anyone with criminal conduct.