White Collar Crime Prof Blog

The House Serves Up Its Subpoenas

The crack of the bat, the pop of the catcher's mitt, and the service of subpoenas -- it sure sounds like Spring Training.  The House Government Reform Committee issued subpoenas to the eleven players and executives (earlier post here listing scheduled participants) who it wishes to hear from on March 17 at a hearing into baseball's steroid policy.  The Committee was even kind enough to post copies of the subpoenas (here) for all to see, and you get the autograph of Rep. Tom Davis (Committee chair) at the bottom of each for free.  A release by the Committee explains the reason for its scheduled hearing:

The Committee will conduct a thorough, fair, and responsible investigation. It is important the American people know the facts on baseball’s steroid scandal. And it is important that all Americans, especially children, know about the dangers of drug use. Consistent with our jurisdiction over the nation’s drug policy, we need to better understand the steps MLB is taking to get a handle on the steroid issue, and whether news of those steps – and the public health danger posed by steroid use – is reaching America’s youth.

Interestingly, the Committee did not invite (and then subpoena) Barry Bonds, the best-known player and an admitted, albeit unknowing according to his grand jury testimony, user of steroids.  Does Bonds bring too much star power, drawing attention away from the topic -- and, perhaps, overshadowing Chairman Davis and the other Representatives during their moment in the spotlight (and, more importantly, on ESPN's SportsCenter)? 

Jose Canseco has asked for immunity (despite writing a book about his and others steroid use), and he identified Rafael Palmeiro as a steroid user in the book, which Palmeiro vehemently denies. Their appearance together at the hearing promises to be testy.  Jason Giambi testified in 2003 before a federal grand jury under a grant of immunity, and he will likely demand another grant to testify again before the Committee.  To this point, only Curt Schilling, who has been critical of steroid use by players, has agreed to testify without any reservations.  Just like Spring Training games, this doesn't count in the standings, but that doesn't detract from the circus.  An article on ESPN.com by Jayson Stark (here) raises question about the Committee's motive for the hearing. (ph)

Orlando Mayor and Three Others Indicted For Improper Payments to Collect Absentee Ballots

Orlando (FL) Mayor Buddy Dyer, Circuit Judge Alan Apte, and two campaign workers were indicted by a grand jury in Florida for "providing pecuniary gain for absentee ballot possession or collection" in violation of a state law prohibiting such conduct (indictment here).  The indictment alleges that Dyer and Apte paid campaign workers to pick up absentee ballots and have them delivered to be counted during the 2004 election.  Allegations of fraud in the 2004 mayoral race surfaced, and Dyer avoided a run-off election by only 234 votes.  His main opponent in that election claims that there was widespread fraud related to the collection of absentee ballots from neighborhoods that favored Dyer and Apte.  Florida Governor Jeb Bush suspended Dyer from office after the indictment, and a special election will be held.  Dyer and Apte have claimed that the charges are politically motived because the special prosecutor bringing the charges against them is a Republican and they are Democrats. 

A disputed election in Florida -- that's novel, isn't it? An Orlando Sentinel story here discusses the charges.

Allen/Dynamite Charge?

As the jury in the Bernie Ebbers prosecution spends more time deliberating, the possibility of a deadlock certainly increases.  If the jury indicates that it cannot reach a unanimous agreement on one or more charges, the court may give an Allen charge -- also known as a dynamite charge -- to break the deadlock.  A decision by the D.C. Circuit on March 10 (U.S. v. Yarborough) reverses a conviction because the trial judge gave an improper Allen charge (in a gun possession case).  This is yet another area fraught with danger on appeal if there were to be a conviction after such a charge. (ph)

Three More WorldCom Underwriters Bite the Dust

Add three more deep-pocketed underwriters to the list (see earlier post here) who have settled WorldCom bond investor claims that they failed to conduct adequate due diligence about the company.  Deutsche Bank will be paying the largest amount in this group -- $325 million -- while West LB settles for $75 million and Caboto for $37.5.  The brings the total settlements to approximately $4 billion (check the Securities Litigation Watch blog here for its scorecard), with one big fish out there waiting for the trial scheduled to begin March 17: J.P. Morgan.  As discussed in a Wall Street Journal article (here), Morgan used Bernie Ebbers in a video touting the Morgan-Chase merger in 2001, with Ebbers saying (to the jury, I might note): "J.P. Morgan Chase is really like MCI WorldCom . . ."  How's that for a ringing endorsement of a defendant accused of failing to adequately review financials of a favored client.  Morgan turned down an offer last year to settle the case for approximately $1.3 billion, and that number will likely climb higher as the pool of potential defendants with those deep pockets shrinks. I sure feel good about being a Morgan shareholder.

On the Ebbers trial front, the jury watch has now surpassed watching paint dry for the level of boredom induced.  If the jury does not reach a verdict today, the sixth day of deliberations, the question of deadlock (and the dreaded Allen charge) arises. (ph)

Getting the SEC on Your Side

The My Shingle blog (Carolyn Elefant) has an interesting post (here) highlighting an article in the Seattle Times (here) about how a former SEC attorney, Peter Romeo of Hogan & Hartson, was able to persuade the SEC to file an amicus brief on behalf of a selling shareholder accused of violating Section 16 (the short-swing insider trading profits provision) and being liable for returning $247 million to his company.  The executive, Naveen Jain, was the founder of InfoSpace, a casualty of the dot.com boom that is the subject of numerous shareholder lawsuits.  The newspaper article raises questions about why the SEC supported Jain on appeal of the district court's Section 16 ruling rather than investigating him for insider trading.  Moreover, the article seems to question whether Romeo traded on his contacts at the agency to get it to support Jain's position.  In reading the article, it seems that the writers may have gotten Section 16 mixed up with Section 10(b), the anti-fraud provision.  While Section 16 (here) deals with so-called short-swing trades by directors, officers, and 10% shareholders, it is not something the SEC ever pursues for enforcement purposes, and the provision is designed for companies (and individuals who discover the violations) to recover profits in private actions.  The law is also notoriously difficult to understand, as any corporate counsel can attest -- sometimes the statute is almost a "gotcha" provision that does not require any proof of scienter or even negligence.  Section 10(b) and Rule 10b-5 are the classic anti-fraud provisions used to prosecute insider trading, such as the recent civil and criminal cases involving ImClone Systems (earlier post here).  There may well be an insider trading (or other type of securities fraud) case against Jain, it's just not the one that Romeo represented him on related to his sales of InfoSpace shares.  The fact that Romeo was able to convince the SEC's General Counsel's office to file an amicus brief is not nefarious, or even surprising, if the lower court's ruling truly was incorrect.  In fact, the Ninth Circuit reversed the district court's decision, vindicating the Commission's intervention in the proceeding, and Jain eventually settled for a $65 million payment. Romeo may have known who to call at the SEC, but that is about as far as his contacts will get him.  Moreover, Romeo worked at the Commission from 1969 to 1984, and I doubt whether there are many colleagues left from his tenure that ended over 20 years ago. (ph)

More Indictments in FBI Undercover Operation in Monmouth County, NJ

As discussed in a previous post (here) about a number of arrests of public officials in Monmouth County, New Jersey, charges against three additional defendants for money laundering were filed on March 10 as part of a widening crackdown on public corruption resulting from an extensive undercover FBI operation.  A press release issued by the U.S. Attorney's Office details charges against the defendants:

Criminal complaints were unsealed today charging a Monmouth County truck and equipment contractor, a transportation service owner and a Far Hills councilman with laundering large sums of cash in exchange for kickbacks from undercover agents in an FBI corruption investigation, U.S. Attorney Christopher J. Christie announced.

One of the complaints charges Stephen Appolonia, 52, of Colts Neck, the co-owner of International Trucks of Central Jersey, based in Howell and Hillside. The company sells International-brand trucks and other equipment to Monmouth County and various municipalities in Monmouth and elsewhere.

The same complaint charges Far Hills Councilman and police commissioner Thomas A. Greenwald, 52, a friend of Appolonia whom Appolonia introduced to undercover agents when Greenwald also wanted to participate in the money-laundering scheme, according to the criminal complaint. Greenwald and Appolonia ultimately laundered more than $350,000, according to the criminal complaint.

The indictment quotes the third defendant as describing his limousine business as "the greatest washing machine in the world" -- that may be tough to explain to a jury.  The criminal complaints filed in the case are here and here. (ph)

If You Can't Trust a Poll

Everyone reads reports about surveys and political polls as if they were gospel, but what if the pollster is taking liberties with the data?  An indictment returned in the District of Connecticut presents that very scenario involving DataUSA Inc . (now called ViewPointUSA Inc.), which has been charged along with its owner (Tracy Costin) and a manger (Darryl Hylton) with conspiracy and wire fraud for providing political and business clients with falsified data. The indictment alleges that employees were told to speak with cats and dogs for information.  The company's website (www.datausainc.com) has the following statement: "DataUSA upheld the highest standards in data collection as demonstrated in the excellence of our data. DataUSA's predictions of voting behavior and  consumer behavior routinely reflected to be within 1% to 2% of actual behavior. We are proud of the quality data collected and want to thank you for teaming with DataUSA and for your support over the years."

A press release by the U.S. Attorney described the allegations:

According to the Indictment, DATAUSA INC. (“DataUSA”) conducts surveys and political polls for numerous clients throughout the United States. The surveys or polls are conducted through the use of computers and telephones. COSTIN, the owner and director of operations for DataUSA, was charged with conspiracy to engage and engaging in a wire fraud scheme to defraud clients of DataUSA by falsifying and fabricating survey results. According to the Indictment, both COSTIN and HYLTON, a DataUSA manager, and others not named in the indictment, engaged in a scheme to defraud by unilaterally instructing DataUSA employees to alter survey data and to fabricate surveys and otherwise falsify their contents in order to meet job quotas and deadlines. The Indictment charges the defendants with falsifying survey data by instructing employees to alter the gender and political affiliation of the interviewees. In addition, the Indictment also charges the defendants with falsifying survey results by altering data on survey responses originally taken by DataUSA employees after the surveys were completed.

Maybe some of the pollsters who predicted a Kerry victory finally have someone else to blame -- dogs are notoriously liberal. (ph)

WorldCom Bond Underwriters Scorecard

The Securities Litigation Watch blog has a very handy scorecard (here) of the settlements by investment banks that served as underwriters for WorldCom's various bond issues while it engaged in accounting fraud.  The total paid in the settlements so far is $3.564 billion, with Citigroup contributing the largest amount to date ($2.58 billion).  The latest to settle are: ABN Amro ($268 million), Mitsubishi ($75 million), BNP Paribas and Mizuho International ($37.5 million each). Among the defendants who have not settled yet are J.P. Morgan and the former directors of WorldCom, whose earlier settlement was not accepted by the judge. (ph)

Insider Trading on the Floor of the NYSE

The SEC and the U.S. Attorney for the Eastern District of New York (Brooklyn) have filed civil and criminal insider trading charges against Frank Furino, who was employed as a clerk for one of the floor brokers at the New York Stock Exchange.  The floor brokers are responsible for maintaining an orderly market in the stocks they are responsible for overseeing, and the government accused Furino of tipping off a day-trader about large block trades so the trader could buy or sell ahead of the larger transaction, i.e. front-running.  Accord to the SEC's Litigation Release:

As a floor clerk, Furino had access to the purchase and sell orders of the floor broker’s customers. Furino routinely informed the day trader by telephone of the security, quantity, price, and side (buy or sell) associated with large customer orders, after the floor broker received, but before it executed, these orders. On at least 58 occasions, the day trader used the information obtained from Furino to trade ahead of the floor broker’s customers. For example, after Furino informed the day trader about a customer’s block order to purchase shares of Computer Associates International, Inc. stock on October 25, 2000, the day trader bought 17,000 shares of Computer Associates stock at an average price of $28.27. Within one minute, the day trader sold the 17,000 shares of Computer Associates stock through the floor broker at $29 per share, at the same time that the floor broker’s customer’s buy order for 84,500 shares was executed. The rise in share price resulted in the day trader making a profit of approximately $12,091. Overall, the day trader made more than $300,000 from this scheme. Additionally, the day trader compensated Furino for the confidential order flow information through undisclosed cash payments (approximately $50,000) and commissions.

Furino was arrested and arraigned on the criminal charge.  The press release issued by the USAO is here. (ph)

Pizza For Lunch

The jury in the Bernie Ebbers prosecution may be near a verdict, although they also asked the court to order out for Dominos pizza for lunch today because they're tired of the food from the cafeteria -- no great surprise there for those who have spent more than a day in most federal courthouses.  The jury asked the judge if they had to agree unanimously on supplemental charges related to sentencing issues that the government had added to the indictment after the Supreme Court's decision in Blakely threw the Sentencing Guidelines into question.  After Booker, those supplemental charges on sentencing factors became irrelevant, and apparently there was never a ruling on the defense motion to strike the language from the indictment as surplusage.  Judge Jones informed the jury they should ignore the supplemental charges, and denied a defense motion for a mistrial. If Ebbers is convicted, this will be one more issue to raise on appeal, largely due to the court's failure to rule on the motion in a timely manner.  The jury appears to have reached the final part of the indictment, so they may be ready to deliver a verdict -- after the pizza, of course.  See an AP story here discussing the jury's dealings with the court. (ph)

The pizza bit has definitely been noticed by more than one journalist.  See the Wall Street Journal story here.  (esp)

More Indictments from ImClone

It looks like the government has not stopped with Martha Stewart and Peter Bacanovic when it comes to indictments related to ImClone.  CNN reports here how two individuals have been indicted on securities fraud and conspiracy to commit securities fraud for allegedly selling some ImClone stock after receiving a tip from Waksal.  The criminal complaint can be found here.  The SEC also brought a civil action pertaining to this matter.  According to the SEC Complaint, discussions were had in 9 telephone calls between the hours of 5:59 A.M. and 9:08 A.M. on December 27, 2001.

(esp)

Downward Departures After Booker

A Sixth Circuit opinion on March 8 (U.S. v. Hamm) discusses the issue of downward departures after the invalidation of the Sentencing Guidelines in Booker.  The defendant, convicted of trying to meet with a fourteen year old "girl" he met through an internet chat room, sought a downward departure on the grounds of diminished capacity, aberrant behavior and extraordinary postoffense rehabilitation.  The district court referred to the restrictions imposed by the PROTECT Act limiting downward departures, but did not explicitly rely on that provision in rejecting the downward departure (which was adopted after the defendant's conviction, and therefore was not directly applicable anyway).  The Sixth Circuit found that, because it was unclear whether the judge would have given a downward departure if Booker had been decided -- and the restrictions on downward departures lifted -- there was a plain error requiring a remand for another sentencing hearing.  The court stated:

Based upon the district court’s imposition of a sentence at the low end of the range and its apparent sympathy for Hamm, we believe that the court might have sentenced Hamm to fewer than 33 months in prison if it had felt that it were free to do so. Of course, the district court might also have opted not to depart from the recommendation of the Sentencing Guidelines, but it never had the opportunity to make that decision. We therefore conclude that the error affected Hamm’s substantial rights.

Hamm is important for those cases still on appeal in which a downward departure was sought, which is frequently the case in white collar crime cases.  Also check Sentencing Law & Policy (here) for its discussion of Hamm and related developments. (ph)

                                                                                        

UPDATE: The Second Circuit took a similar position as Hamm in remanding for resentencing when the district judge's comments on the authority to depart downward are ambiguous and may indicate the judge believed the Guidelines would not permit a departure that would now be allowed under Booker.  See U.S. v. Zedner (available on Second Circuit website here), in which the underlying offense was bank fraud. (ph)

Are We There Yet?

The jury in the Bernie Ebbers trial continued through a third day a deliberations by, among other things, reviewing a video of Ebbers at a 2000 investment conference, excerpts of his cross-examination, and testimony from two other government witnesses who entered guilty pleas, former accounting executives Betty Vinson and Troy Normand.  It will be interesting to see how long it takes for a verdict, and if we're getting close to a potential deadlock. An AP story here discusses the third day of deliberations. (ph)

The Second Time is Even Better

The Securities Litigation Watch blog noticed (here--including the dialog from a great scene with Nicholas Cage in Raising Arizona, an all-time underrated movie) an SEC settlement on March 3 involving Richard DeBoe and one Peter N. Brant, who the SEC Litigation Release noted was a recidivist.  Showing great recall, the author, Bruce Carton, remembered the name Peter Brant from the well-known Wall Street Journal "Heard on the Street" insider trading case that made its way to the Supreme Court (U.S. v. Carpenter), and asked whether it is the same person.  The answer is: Yes.  The SEC Complaint (Download brant_complaint.pdf ) describes the relationship between Brant and DeBoe as follows:

DeBoe and Brant worked together as registered representatives in the 1970’s at Kidder Peabody & Company, Inc. and remained social friends from that time through the events relevant to this Complaint. In 1984 Brant was convicted of felony securities fraud for insider trading and incarcerated. In a parallel civil action brought by the Commission, Brant was permanently enjoined from violating the antifraud provisions of the federal securities laws and permanently barred from the securities industry. DeBoe knew of Brant’s fraud conviction, and had contact with Brant during his incarceration, including visiting Brant during his incarceration at a halfway house.

In the current action, the SEC states that "Brant misappropriated client funds for his personal use, made unsuitable and unauthorized investment decisions, and traded in speculative stocks. The Complaint alleges that as a result of his fraud, Brant obtained at least $173,402.80 and caused his clients' accounts to drop dramatically in value."  Brant (but not DeBoe) agreed to settle the case by paying disgorgement and a $3 million fine, plus a permanent bar from the securities industry.  Is a second trip to jail around the corner, perhaps?  It's always nice to see a "blast from the past" (in addition to recalling how enjoyable Raising Arizona is). (ph)

Do People Think E-Mail Doesn't Exist?

The firing of Harry Stonecipher yesterday as CEO of Boeing for his affair with a company executive was triggered by an anonymous tip that included a "very graphic" e-mail Stonecipher sent to the woman.  Somehow, the e-mail made it out to a broader audience -- is anyone surprised about that? -- and reached the company's lead director, who had corporate counsel conduct an investigation.  This is another example of how some people view e-mail as non-existent ether that dissipates as quickly as a water-cooler conversation. We have reached the point where the lack of an e-mail trail is considered an oddity, as in the prosecution of Bernie Ebbers in which there is virtually no e-mail traffic from Ebbers, and only a few to him. An AP story here discusses the termination of Stonecipher. (ph)

Scrushy Trial Resumes

The prosecution of Richard Scrushy enters its seventh week with the continuing cross-examination of Michael Martin, the third of five former CFOs who will testify for the government that Scrushy knew about and directed the accounting fraud at the company.  Martin is known for having a rather strong temper, including punching another HealthSouth employee in the face at a going-away party in 1999.  James Parkman, Scrushy's lead trial counsel, set the tone for the cross-examination early on in noting the rather light sentence Martin received -- six months of home confinement that included at least one round of golf -- by asking, ""So you don't have that bumper sticker that says, `I'd rather be playing golf than go to jail?'" [I think I need one of those.] The trial promises to continue for a while longer, with the two remaining CFOs scheduled to testify and, no doubt, an assortment of other witnesses before the defense gets its opportunity, which will likely include calling Scrushy to the witness stand. See AP story here discussing the cross-examination of Martin. (ph)

After-the-Fact Mailings for Mail Fraud Prosecution

An area fraught with contradictory opinions in mail fraud prosecutions concerns whether mailings that occur after the defendant gains the benefits of the fraudulent scheme are sufficiently "in furtherance" to bring the case within Section 1341.  A recent Fourth Circuit decision, United States v. Pierce (here), involves a 2-1 decision in which the majority found mailings reporting sales of bingo lottery tickets after they had been taken and cashed be sufficiently part of the scheme to meet the mailing element (I'm loath to call it the jurisdictional element because it is really more than that) for the federal prosecution.  The dissent argued that the sales reports were unrelated to the fraud.  A footnote in the majority opinion explained the different approaches:

The dissent argues that the mailings at issue here — the daily reports of bingo sales — did not further Pierce’s fraudulent scheme because "[t]he fraud was effectively concealed when Pierce and Hoss II made their oral reports to Linda Pierce each night but omitted their sales from the off-the-books games. The fact that Linda Pierce wrote the sales down and later mailed a report is unrelated to furthering the fraud because all that was necessary to further the fraud had already occurred." In fact, Linda Pierce’s reporting to Wright — an agent of the victim of the fraud — was necessary to conceal the fraud because it kept Wright from suspecting any misconduct in the bingo operation. These mailings "help[ed] cloak the scheme with an aura of legitimacy, thereby preventing its detection and allowing it to continue." Indeed, it was the use of the mails in this case — reasonably foreseen by Pierce — that allowed the fraudulent scheme to continue undetected for more than two years and allowed Pierce to retain the fruits of his fraud during that period.

Cases on the mailing element are so fact-specific, and test from Schmuck so vague ("incident to an essential part of the scheme"), that it is difficult to draw much guidance from them, with each side arguing that its facts are sufficiently similar to a previously decided case in its favor that should control the decision.(ph)

Look What Sarbanes-Oxley Has Wrought

The Sarbanes-Oxley Act requires corporate counsel and directors to investigate all reports of potential wrongdoing at a corporation, and an anonymous tip appears to have led to the removal of Boeing CEO Harry Stonecipher because he was having an affair with another Boeing executive.  A press release issued by the company (here) discusses an investigation of Stonecipher by inside and outside cousnel that led to the Board's decision to fire him:

The Board actions were taken following an investigation by internal and external legal counsel of the facts and circumstances surrounding a personal relationship between Stonecipher and a female executive of the company who did not report directly to him. The Board determined that his actions were inconsistent with Boeing’s Code of Conduct.“ The Board concluded that the facts reflected poorly on Harry’s judgment and would impair his ability to lead the company,” said Platt.

Stonecipher will no doubt receive a nice severance package, although the assertion that the other excutive did not report to him "directly" seems a bit disingenuous -- doesn't everyone report to the CEO?  Stonecipher's demise probably is not nearly as damaging to the company as the firing of his predecessor, Phil Condit, because of the scandel involving the aborted hiring of former Air Force procurement chief Darleen Druyun in 2003.  Moreover, the Pentagon's suspension of Boeing from bidding on rocket contracts because of its misuse of information from Lockheed Martin was lifted just last week.  At least the company is finding new ways to act improperly. (ph)

More Settlements by WorldCom Bond Underwriters

At the end of last week, more investment banks agreed to settle claims by purchasers of WorldCom bonds underwritten by the firms before the company's collapse in 2002.  On Thursday, March 3, Bank of America agreed to pay $460 million to the claimants, and on Friday, March 4, four more investment banks paid up: Lehman Brothers for $62.7 million, and CSFB, Goldman Sachs, and UBS Warburg each for $12.5 million.  This is on top of the rather hefty $2.58 billion -- yes, that's a B -- payment by Citigroup.  Among the investment banks that have not yet entered into a settlement are J.P. Morgan, Deutsche Bank, and ABN AMRO.  And, of course, a rather closely watched criminal prosecution should wrap up in the next few days against former CEO Bernie Ebbers.  An AP story here discusses the settlements in the bondholder suit. (ph)

Did Prison Change Martha?

Along the lines of a previous post (here) about Charles Colson's thoughts on the effect of prison on Martha Stewart, an AP story (here) quotes co-editor Ellen Podgor along with a few former white collar crime miscreants on the effect the term of imprisonment had on Stewart -- not that Ellen is a miscreant. (ph)