Saturday, August 27, 2005

Pssst: KPMG Will Get a Deferred Prosecution Agreement

The worst-kept secret these days is the deferred prosecution agreement that KPMG will enter into with the U.S. Department of Justice regarding its tax shelters.  Media reports (see New York Times article here) peg the firm's penalty at $456 million (that's a nice round figure), and former SEC Chairman Richard Breeden will serve as KPMG's outside monitor.  Breeden has been the outside monitor or conducted internal investigations for a number of companies, including MCI after it settled the case involving its predecessor, WorldCom, so KPMG is certainly going top-drawer.  The agreement will likely be announced officially on Monday, Aug. 29, barring any last minute snags.

The next step will be the prosecution of former partners.  A Bloomberg report (here) notes that a defense attorney for a former KPMG tax partner stated that eight individuals will be indicted for their role in the creation and selling of the tax shelters.  The New York Times article on the firm's settlement notes that KPMG agreed to limit its funding of attorney's fees for its former partners in a step to show its cooperation and avoid a criminal charge that could have put it out of business.  This is a relatively new approach by the Department of Justice, in which it considers the company's payment of attorney's fees as an indication of whether it is cooperating when it comes time to decide whether to charge the organization.  The effect can be to keep individuals involved in cases from having their lawyers paid for by the organization and having to foot the bill themselves, which can be quite expensive.  Contractual and statutory requirements may limit a company's authority to deny an employee (current or former) the payment of attorney's fees (see earlier post here).  KPMG is a limited liability partnership, so it is not subject to state corporation laws that often provide a statutory mechanism for recovering attorney's fees.  Although I would not be surprised if the partnership agreement provided for some right to have the firm pay legal costs, those provisions often contain "good faith" requirements that can result in any demand for fees by a partner being tied up in litigation, to the detriment of the individual who has to pay the attorneys today and not later. 

Finally, it will be interesting to see if the delay in finalizing the deferred prosecution agreement and the announcement of the indictments of tax partners was due to working out plea agreements with any of them.  While a united front might be in the best interests of the group, the pressure to cooperate may result in one or more agreeing to plead guilty and testifying against the others.  (ph)

August 27, 2005 in Prosecutions, Settlement, Tax | Permalink | TrackBack (0)

Dealing with the FCPA While Winning Business in China

The Washington Post has an extensive article (here) about the problem U.S. companies have in gaining a foothold in China while avoiding violations of the Foreign Corrupt Practices Act (FCPA).  The clash is inevitable because any company with a global presence views China (and India) as crucial to building market share, lest a competitor take the business.  The business and regulatory culture in China, however, is much more akin to the "Wild West" than more developed markets.  It is a place in which payments to government officials and middlemen are expected, and favors must be granted to gain access to lucrative contracts and the necessary licenses to conduct business.  That is a recipe for an FCPA investigation by the SEC and DoJ, particularly in the years since the adoption of the Sarbanes-Oxley Act.  For publicly-traded companies, the CEO and CFO must certify the company's financial statements, and any hint of an improper overseas payment to secure business means that those financial cannot be certified, or the executive runs the risk of a criminal prosecution.  After being dealt a setback in the Scrushy/HealthSouth prosecution on the criminal certification provision of Sarbanes-Oxley (18 U.S.C. Sec. 1850 here), I suspect the DoJ is itching to find an easy case to bring to show that the law can have a real impact, and an FCPA case may be a prime one to use the provision if a CEO turned a blind eye to foreign bribery.

A recent example of a company having to deal with an FCPA investigation related to sales in China involves Schnitzer Steel Industries Inc.  The company disclosed (here) that the SEC had issued a formal order of investigation involving possible FCPA violations related to transactions in Asia:

On August 23, 2005, the Company received from the Securities and Exchange Commission (the “SEC”) a formal order of investigation relating to the Company's previously announced independent investigation of the past practice of paying improper commissions to purchasing managers of customers in Asia in connection with export sales of recycled ferrous metals. The Company had voluntarily notified the Securities and Exchange Commission and the U.S. Department of Justice of the independent investigation; and instructed its outside law firm to provide those agencies with the information obtained as a result of the investigation; and continues to cooperate fully with those agencies. The previously announced investigation is being conducted by an independent law firm working under the supervision of the Audit Committee of the Company's Board of Directors (the “Board”).

According to the company's most recent 10-Q (here), its primary overseas markets are China and South Korea.  An article in The Oregonian (here) discusses Schnitzer's disclosure.

For those interested in this area, an outstanding book published recently is The Foreign Corrupt Practices Act and the New International  Norms, by Stuart H. Deming (who also sent along the Washington Post story).  The book is published by the International Law Section of the ABA (here), and is the most current treatment of the subject. (ph)

August 27, 2005 in FCPA | Permalink | TrackBack (0)

Did Hedge Fund Assets Disappear from Bayou Securities?

The shadowy world of hedge funds turned up another case of potentially missing investor money with the disclosure that the Connecticut Banking Commission is probing Bayou Securities LLC, a fund advisor that claimed at one time to have over $400 million in assets under management but apparently there is much less than that these days.  Bayou's founder, Samuel Israel, announced in July that the firm's hedge fund was closing due to his impending divorce, but a troubling sign is the fact that less money is in the firm's accounts than had been touted. That is often a sign that the firm overstated its returns -- to keep investors happy and not trigger a rush of withdrawals -- and usually a prelude to the appearance of those always-friendly FBI agents equipped with grand jury subpoenas or, worse, search warrants.  If the money is gone, this will be another example that can be used in the SEC's push for more regulatory oversight of hedge funds. A CNN.Com story (here) discusses the investigation, which is only just beginning. (ph)

August 27, 2005 in Investigations, Securities | Permalink | TrackBack (0)

New York Attorney Convicted of Forging a Magistrate's Signature

In less than an hour, a jury in the U.S. District Court for the Eastern District of New York returned a verdict of guilty against Perry Reich, a Long Island attorney with an extensive litigation practice.  Reich was convicted of forgery, obstruction, and lying to government agents in connection with an order in a civil case in which the Magistrate Judge's signature was forged and faxed to Reich's opposing counsel in a case.  In a defense that is uncommon in white collar crime cases, Reich denied having anything to do with the forgery or the fax.  In most white collar cases, the defendant acknowledges the underlying transaction or documents, and tries to explain why it was not wrongful or that the person lacked the requisite intent.  Here, Reich presented a defense seen more in street crime cases: you've got the wrong guy. 

For the government, the key piece of evidence was a telephone record showing a call from Reich's office to the adversary's fax machine that lasted three minutes, which was placed at the same time that the fax was sent, at least according to the recorded time on the paper.  Reich testified that he called the number by accident and hung up, but apparently the line remained open, and that he had no reason to forge the Magistrate Judge's signature in a case that was going well for his client.  An article in the New York Law Journal (available on Law.Com here) discusses the verdict. (ph)

August 27, 2005 in Obstruction, Verdict | Permalink | TrackBack (0)

Corruption Roundup: New Jersey

If it's Saturday, then it is time for a dose of corruption cases.  Here are two from New Jersey, a reliable source of such prosecutions:

  • Paul Zambrano, the former Mayor of West Long Branch, NJ, entered a guilty plea to accepting a bribe.  According to the U.S. Attorney's Office press release (here): "At his plea hearing, Zambrano admitted that, during his tenure as mayor in West Long Branch, from September 2003 to November 17, 2004, he accepted cash payments totaling $15,000 dollars from a confidential FBI informant and an undercover FBI agent, to reward him for helping obtain public contracts in West Long Branch and other places. Zambrano stated that he accepted the payments believing that the cooperating informant was an individual involved in the contracting and demolition business and that the undercover agent was one of his employees. Zambrano also admitted that he accepted the cash payments knowing the payments were intended to reward him for helping the cooperating informant and the undercover agent to obtain public contracts in West Long Branch and in other municipalities where Zambrano introduced the cooperating informant and the undercover agent to public officials.
  • Harry Parkin, the former chief of staff to the Mercer Country Executive and a former member of the Delaware River Joint Toll Bridge Commission, received a 90-month prison term after a jury convicted him of violating the mail fraud statute (right of honest services).  According to the USAO press release (here): "In reaching the guilty verdicts, the jury found that Parkin schemed to deprive the public of his honest services in several ways: by concealing a $150,000 loan that he made for the benefit of Central Jersey Waste and Recycling (CJWR), a Hamilton company that collected recyclables from Mercer County residents; by working to steer demolition contracts in order to protect and advance his secret financial interests; and by attempting to obtain an ownership interest in CJWR through extortion. According to testimony, in September 2000, Parkin, then chief of staff to the Mercer County Executive, discussed with Alex Abdalla and James Lambert his desire to obtain a secret one-third ownership interest in CJWR, which was in the first year of a five-year, $14.5 million contract in Mercer County. Parkin sought to partner with Abdalla, the owner of CJWR, and Lambert, the former executive director of the Mercer County Improvement Authority, in his efforts to acquire his secret ownership interest in CJWR."


August 27, 2005 in Corruption | Permalink | TrackBack (0)

Friday, August 26, 2005

U.S. is Not the Only Country that Can Look at Extraterritorial Companies

The United States in the case of United States v. Nippon, 109 F.3d 1 (1st 1997) prosecuted antitrust activity occurring entirely outside the United States.  The conduct was found to have a substantial "effect" on the U.S. The U.S. may now be seeing how other countries respond, although the conduct being examined here is not alleged to be extraterritorial, but the company has its offices in New York. 

The Atlanta Jrl Const. (AP) here reports that Russia has "opened a probe on PepsiCo." and although there is no allegation of antitrust, the newspaper reports that the conduct relates to an alleged practice of "forbid[ding] retailers from selling products made by its competitors." The article notes that this is not the first time that Russia has looked at a US company for this type of alleged conduct.  The prior case with another company was resolved.


August 26, 2005 in Investigations | Permalink | TrackBack (0)

Alleged to Have Committed Bribery Without Being Charged With A Crime

A stigma of criminality can be achieved without even charging someone with a crime.  That appears to be the situation with Rep. Randy "Duke" Cunningham, a congressperson from California.  The Washington Post here tells of despite no criminal charges being filed against the congressman, the government has alleged in a civil complaint that the congressman "'demanded and received' an inflated price for the sale of his home from a Washington defense contractor in 2003 in violation of the federal bribery statute."  Obviously the government is trying to seize the home.

Civil actions that allege white collar crimes, especially when levied against a politician, can carry enormous stigma in society. 


August 26, 2005 in Civil Enforcement | Permalink | TrackBack (0)

Avoiding Another Arthur Andersen

The Washington Post reports here that we may soon be seeing a deferred prosecution agreement between KPMG and the government.  Perhaps nothing new - see the post here.  The question will be whether the company will be rolling over and providing information that will allow the government to proceed criminally against individuals. Stay tuned. 


August 26, 2005 in Settlement | Permalink | TrackBack (0)

Spamming Indictment

DOJ has decided to stop individuals who are spamming - especially ones that send out unwanted pornographic emails.  In a press release here DOJ tells of its recent indictment of three individuals for a violation of the CAN-SPAM Act of 2003 and "[a] fourth defendant involved in the conspiracy outlined in the indictment has pleaded guilty to related charges, marking the first conviction related to the transmission of obscene spam e-mails."

Prosecuting cases related to computers and the internet pose unusual difficulties for law enforcement.  One of the major issues often faced by law enforcement is discerning who in fact committed the crime. This appears to be an issue in this case as well, as the DOJ press release states that:

"the spam e-mails were sent in a manner that would impair the ability of recipients, Internet service providers processing the e-mails on behalf of recipients, and law enforcement agencies to identify, locate, or respond to the senders. This deception was accomplished in a number of ways, including the following: sending the spam e-mails from Internet Protocol addresses registered in the Netherlands and domain names registered in Mauritius; falsifying the “From:” line in the e-mails; installing the computers sending the e-mails and related equipment in the Netherlands; and remotely controlling these computers from the United States."


August 26, 2005 in Computer Crime | Permalink | TrackBack (0)

Dirty Politics

AP (Tampa Bay) reports here that a federal prosecutor will in fact call a grand jury to hear evidence about individuals who jammed Democratic phone lines on election day, telephone lines that had been established for the purpose of receiving calls from individuals needing rides to polling places. Two individuals previously plead guilty, including the 2002 state GOP executive director.


August 26, 2005 in Grand Jury | Permalink | TrackBack (0)

Thursday, August 25, 2005

Ebbers Gets Medium Security Prison

Bernard Ebbers, former CEO of WorldCom, has been assigned to a medium security prison to serve his sentence. See Washington Post here and the Securities Litigation Watch here (who were kind enough to alert us to the Post article), Although it should be noted that the particular facility he has been assigned to does have both a medium security section and a "[a]n administrative Federal Detention Center (FDC) with a satellite prison camp that houses minimum security male inmates."  See here.  Ebbers sentence of 25 years was not only unusually long for a white collar offender, but now the location of serving that sentence (if it is in fact in the medium security facility) presents something new for white collar offenders.

In the past, most white collar offenders were assigned to camps or minimum security facilities.  At the worst they might receive a low security facility.  As there was little chance of escape, there was no need to place those convicted of white collar crimes in a prison setting that warranted the level of security needed for someone who had committed a crime of violence.

Camps and minimum security facilities are described by the Federal Bureau of Prisons as follows:

"Minimum security institutions, also known as Federal Prison Camps (FPCs), have dormitory housing, a relatively low staff-to-inmate ratio, and limited or no perimeter fencing. These institutions are work- and program-oriented; and many are located adjacent to larger institutions or on military bases, where inmates help serve the labor needs of the larger institution or base.

"Low security Federal Correctional Institutions (FCIs) have double-fenced perimeters, mostly dormitory or cubicle housing, and strong work and program components. The staff-to-inmate ratio in these institutions is higher than in minimum security facilities."

In contrast:

" Medium security FCIs have strengthened perimeters (often double fences with electronic detection systems), mostly cell-type housing, a wide variety of work and treatment programs, an even higher staff-to-inmate ratio than low security FCIs, and even greater internal controls.

Placement to specific prisons is often premised on the number of years of the defendant's sentence.  After all, a person receiving a higher sentence would normally be a greater threat to society. 

But the judge in the Ebbers case recognized the distinction here and requested that Ebbers serve his time in a minimum security facility.  Unfortunately, the prison officials were not convinced, or unable to make such a designation, and Ebbers has been assigned to serve his sentence in a medium security facility.

With white collar offenders receiving high sentences, and assignment to prisons often being premised upon the length of the sentence, we may find white collar offenders being placed in more secure facilities.  But is this really necessary?  Do we really have to fear that Bernard Ebbers will escape?  And now that he is removed from his position with the company, can he truly hurt individuals?   Maybe someone needs to rethink prison assignment in white collar cases to match the offender to the facility as opposed to being matched to the length of the sentence.


August 25, 2005 in Sentencing, WorldCom | Permalink | TrackBack (2)

3 months to a cooperator in HealthSourh

AP reports here that Aaron Beam, a government witness in the Richard Scrushy trial, received a sentence of three months in prison and a year probation. Beam, the former CFO of HealthSouth, testified in the Scrushy trial, a trial that resulted in a not guilty verdict for Scrushy. Prosecutors asked the court for leniency in light of the substantial cooperation provided by Beam.  Yes, in some cases the cooperators get a greater sentence than the person they are cooperating against.  Obviously this is true when the accused is found not guilty, like Richard Scrushy.


August 25, 2005 in HealthSouth | Permalink | TrackBack (0)

Are Blacks Being Targeted in Corruption Cases?

Are blacks being targeted in corruption prosecution cases being brought by the Department of Justice?This question is raised in a news article in the Dallas Morning News here.  In addition to listing the many blacks that have faced or are facing recent indictments (e.g. former Mayor Bill Campbell, Atlanta), the article presents the views of some who are studying this issue.

Actually, though, it is not the first time this issue has been raised.  One will find an article titled, "Selective Prosecution: Are Blacks Officials Investigative Targets, in 78 A.B.A. J. 54 (Feb. 1992) that looked at this same issue years back and presented some statistics and studies that made one seriously question whether in fact the government was targeting blacks in criminal corruption cases.


August 25, 2005 in Investigations, Media, Prosecutions | Permalink | TrackBack (0)

Corporate Crime Reporter Ranks Top Ten Prosecutors

Corporate Crime Reporter ranks the top ten white collar and corporate prosecutors here.  The analysis provided for the selection of these ten individuals is interesting. 

How should one rank prosecutors? 

Should it be based on guilty verdicts? Clearly it should not be based on "wins" as prosecutors always win, irrespective of the jury verdict, since they are "ministers of justice." (Model Rules of Professional Conduct, Comment) 

Should it be based upon number of cases prosecuted? Will that encourage prosecutors to bring worthless prosecutions just to make the top ten list?

Should it be based on the total time received by convicted individuals?  Will this cause prosecutors to forget their role of serving society and cause them to start counting numbers?

Again, how should one rank prosecutors?  Or, better yet, should one rank prosecutors?   By the way, it looks like only a few went to what some might see as "top ten" law schools - or maybe the law school rankings don't tell it all either.


August 25, 2005 in Prosecutors | Permalink | TrackBack (0)

If You Want Change - Run for Political Office

If you want to make a change in the government, they say you should run for political office.

And according to the Wall Street Journal here,  that is exactly what Mikhail Khodorkovsky has decided to do.  The only problem for this oil tycoon is that he is serving time in a Russian jail. 

If he wins, does he get to pardon himself?


August 25, 2005 in International | Permalink | TrackBack (0)

International Smuggling & Counterfeit

According to a DOJ Press Release here, 59 have been arrested ( 87 indicted) in a counterfeit smuggling operation. The indictments, although mostly for street crime offenses such as narcotics trafficking, do include some offenses that may be considered within the white collar arena.    For example, in New Jersey, Operation Royal Charm resulted in six indictments charging 57 people. The press release states:

"The FBI undercover operation revealed that the organization smuggled highly deceptive counterfeit U.S. currency, manufactured in a foreign country, into the United States on container ships with false bills of lading for toys, rattan furniture and other goods. The indictments allege that in October 2004, a container loaded with approximately $338,000 in counterfeit currency arrived in Newark, followed by a shipment of nearly $3 million in counterfeit currency in December 2004. A third shipment of nearly $2 million in counterfeit U.S. currency was ordered from the subjects. The containers were allegedly sent by defendants after extensive meetings with FBI undercover agents."


August 25, 2005 in International | Permalink | TrackBack (0)

Wednesday, August 24, 2005

Spitzer Gets AOL to Pay Money

AOL will be paying $1.25 million into New York State in penalties and costs to settle with Attorney General Spitzer's Office.  According to a press release issued by AG Spitzer:

"In response to approximately 300 consumer complaints, Spitzer’s office began an inquiry of AOL’s customer service policies. The investigation revealed that the company had an elaborate system for rewarding employees who purported to retain or 'save' subscribers who had called to cancel their internet service. In many instances, such retention was done against subscribers’ wishes, or without their consent."

The AG's press release includes a website for consumers who wish to make claims. The press release is located here.


August 24, 2005 in Settlement | Permalink | TrackBack (0)

11th Circuit Win for F. Lee Bailey

The 11th Circuit Circuit issued an opinion this week in "a civil action for conversion and civil theft brought by the United States against F. Lee Bailey."  Examining a line of forfeiture related cases the court held that, "the relation-back doctrine operates retroactively to vest title in the Government effective as of the time of the act giving rise to the forfeiture."  The court shows how the Moffit, Zwerling, & Kemler, P.C. decision of the 4th Circuit does not resolve the issue of this case.  The 11th Circuit finds that "the better understanding of the relation-back doctrine is that it does not satisfy the state-law tort requirement that 'the plaintiff. . . establish that he was in possession of the goods, or entitled to possession, at the time of the conversion.'"

This decision does not leave the government without available avenues to avoid defense counsel from dissipating assets they desire to forfeit.  The court added a "postscript" as follows:

“we want to dispel any impression that the Government is powerless to prevent a defense attorney or any other third party from dissipating assets that will be subject to forfeiture upon conviction. Under 21 U.S.C. § 853(e)(1), “[u]pon application of the United States, the court may enter a restraining order or injunction, require the execution of a satisfactory performance bond, or take any other action to preserve the availability of property” subject to forfeiture under the statute. Here, the Government could have sought such an order when it indicted the McCorkles simply by alleging that the legal trust fund was subject to forfeiture upon conviction."

The opinion can be found here.


August 24, 2005 in Judicial Opinions | Permalink | TrackBack (0)

SEC Files Securities Fraud Suit Against Former Kmart CEO and CFO

Just last week, former Kmart CEO Joseph Conaway was exonerated on the bankruptcy trustee's claim that he breached his fiduciary duty to the company in taking actions that caused its bankruptcy while receiving approximately $23 million in compensation for 20 months work (earlier post here).  The SEC has now joined the fray by filing a securities fraud action alleging that Conaway and former CFO John McDonald made misleading statements in the Management's Discussion and Analysis (MD&A) section of quarterly and annual reports filed by Kmart.  According to the SEC's Litigation Release (here):

The Commission alleges that, in the MD&A section, Conaway and McDonald failed to disclose the reasons for a massive inventory overbuy in the summer of 2001 and the impact it had on the company's liquidity. For example, the MD&A disclosure attributed increases in inventory to "seasonal inventory fluctuations and actions taken to improve our overall in-stock position." The Commission alleges that this disclosure was materially misleading because, in reality, a significant portion of the inventory buildup was caused by a Kmart officer's reckless and unilateral purchase of $850 million of excess inventory. According to the complaint, the defendants dealt with Kmart's liquidity problems by slowing down payments owed vendors, thereby effectively borrowing $570 million from them by the end of the third quarter. According to the complaint, Conaway and McDonald lied about why vendors were not being paid on time and misrepresented the impact that Kmart's liquidity problems had on the company's relationship with its vendors, many of whom stopped shipping product to Kmart during the fall of 2001. Kmart filed for bankruptcy on January 22, 2002.

After a 3+ year investigation by both the SEC and the Department of Justice, the Commission's case is really quite narrow, alleging only that the MD&A did not disclose the true extent of Kmart's inventory and liquidity problems, but not that Conaway or McDonald failed to properly account for the inventory or engaged in other types of accounting fraud. 

Making a securities fraud case under Section 10(b) and Rule 10b-5 out of misleading MD&A disclosure -- assuming that it is indeed misleading -- may be difficult for the Commission.  A fraud claim requires proof of intent or recklessness, and that by withholding information from the MD&A Conaway and McDonald knew or recklessly disregarded the effect that would have on investors.  Can the Commission establish intent, and not just that bad business decisions were made by Conaway and McDonald?

While the MD&A section in the periodic reports is designed to provide management's perspective on a company's prospects, it is just that: an estimation from a particular point of view.  The market takes a somewhat jaundiced view of MD&A, and there is no allegation that the underlying financials were misstated by Conaway or McDonald.  While disclosure should be be a "connect the dots" exercise, whether the MD&A was material to investors at the time is another issue.  The SEC complaint (here) does not include any allegations of a specific market effect from the inadequate disclosures, and market participants surely were aware of Kmart's precarious financial situation.  Indeed, Conaway was hired (and paid such outlandish compensation) because he was a turnaround specialist, and many understood the weaknesses in K-Mart.  Is the failure to disclose everything about the company's delayed payment program for vendors of sufficient importance to investors that it influenced their investment decision?  That question is inherently fact-bound, but the Commission will have to make its case that the failure to disclose had an impact on the market.

Finally, among the relief sought by the Commission is disgorgement of ill-gotten gains, and mention is made of Conaway and McDonald's compensation in this period.  Is there a claim that the MD&A somehow affected the compensation?  It will be interesting to see if the Commission will be able to show a link between what appears to be excessive management compensation and the rather narrow claim that the executives did not make adequate disclosure, particularly when their compensation was approved by the board of directors. (ph)

August 24, 2005 in Civil Enforcement, Securities | Permalink | TrackBack (0)

Mother of Michael Jackson Accuser Charged with Fraud

The mother of the young man who accused Michael Jackson of molesting him, a trial which resulted in an acquittal, has now been charged with welfare fraud for not disclosing completely her financial assets, including a $150,000 settlement in a case involving a department store. The woman testified for the prosecution at the Jackson trial and asserted her Fifth Amendment right on cross-examination when defense counsel sought to impeach her regarding the false welfare claim.  Although the judge did not strike her testimony, asserting the privilege against self-incrimination likely damaged her credibility.  The Los Angeles County District Attorney's Office filed the welfare fraud charges alleging that she improperly received a little less than $19,000 in welfare payments, and a copy of the criminal complaint is available on The Smoking Gun (here).  An AP story (here) discusses the charges.  Just when you thought things could not get any weirder . . . (ph)

August 24, 2005 in Fraud | Permalink | TrackBack (0)