Tuesday, February 21, 2006

Podgor from Georgia State to Stetson

Stealing a page from the Leiter's Law School Report blog on the Law Professor Blog Network, co-editor Ellen Podgor will be making the move from Georgia State University to Stetson University permanently when she becomes the Associate Dean of Faculty Development and Distance Education on June 1, 2006.  She will also continue her teaching and research in white collar crime and international criminal law.  Congratulations! (ph)

February 21, 2006 in About This Blog | Permalink | Comments (0) | TrackBack (0)

Skip TV and Movies - Go Watch Ryan's Case

You can skip TV and the movies and just go sit in the courtroom trial of former Governor Ryan, as the stars have been parading to the witness stand.  According to the Chicago Tribune here, the defense witnesses have included "Hollywood actor Mike Farrell, who played B.J. Hunnicut on TV's 'M.A.S.H'" and Sister  Helen Prejean, who authored best-selling movie "Dean Man Walking."  The defense has also managed to secure testimony from "U.S. Attorney Edward E. McNally, chief federal prosecutor in the Southern District of Illinois." (See CNN here) But the most important witness for the defense may be Ryan's doorman, a witness who will be able to provide direct  knowledge that Ryan is an honest and caring man.


February 21, 2006 in Celebrities, Media, Prosecutions | Permalink | Comments (0) | TrackBack (0)

Monday, February 20, 2006

Prosecutors Seek Stiff Sentence for Cunningham

Perhaps one of the saddest cases of last year was that of Rep. Randy (Duke) Cunningham, who plead guilty to conspiracy and tax evasion charges related to approximately $2.4 million in bribes and benefits.  (see here) From a position on the Defense Subcommittee of the House Appropriations Committee, to now being a convicted felon facing sentencing, is a huge fall in power and prestige. Despite this extraordinary collateral consequence, according to the Washington Post here the government wants him to do ten (10) years in prison.  They claim that he engaged in witness tampering and fabricating evidence. 

Individuals with power who face criminal charges often think they can find their way out of the mess by using their power.  Unfortunately, in many instances this can aggravate the case against them.  Obstruction of justice, false statements, and perjury charges are common when a person is struggling to save themselves from an indictment. It is sad to watch those with significant problems make matters worse because of irrational acts made in last minute efforts to survive the oncoming storm.

Clearly the criminality is wrong.  But does this non-violent conduct warrant a sentence of  ten (10) years?   


February 20, 2006 in Sentencing | Permalink | Comments (0) | TrackBack (0)

Sunday, February 19, 2006

Hedge Fund Meltdown May Cost NFL Players

A Wall Street Journal article (here) discusses another case of a small hedge fund operator that appears to be on the brink of collapse, and this time the investors include a group of current and former National Football League players.  The players, mostly affiliated at one time with the Denver Broncos, include 8-time Pro Bowl safety Steve Atwater and running back Terrell Davis, the MVP of Super Bowl XXXII.  The hedge funds, managed by International Management Associates LLC (IMA), have had their assets frozen by a Georgia state court judge, after a suit by the players alleging theft, fraud, and forgery by the principals of the firm, which reported total investments at one time of $150 million.  Problems appeared in December 2005 when the firm refused redemption requests, and Kirk Wright, a founder of IMA, said that redemptions have risen since two principals left the firm recently.  Among the other officers of the hedge fund are chief operating officer Nelson Bond and CFO Fitz Harper, Jr., both of whom are anesthesiologists -- it's not clear which jobs they did in their spare time.  Wright stated that Bond and Harper have been been "poaching" clients after starting a rival firm, and that the results for IMA's hedge funds have not been audited in the past two years.

The firm's website (here) states that it "is an Atlanta-based private investment advisory firm formed to provide investment management services to mutual funds, hedge funds, pension plans, endowments, foundations and high net worth individuals."  That same entry is on almost all the linked pages on IMA's website, although it lists offices in Las Vegas, Los Angeles, and New York in addition to its Atlanta headquarters. 

Like the collapse of other, small hedge fund operations, such as Bayou Securities, this case has all the hallmarks of a possible securities fraud through the misstatement of investment returns to hide losses.  Investors were supposedly offered a 10% monthly return on their funds, a sure sign of a highly risky venture, or even a fraudulent one.  Hedge funds operate in an area with minimal federal regulation and almost no state oversight, so firms can sometimes stay in business without much outside scrutiny until it is too late.  While the size of IMA is comparatively small, and the number of victims is unlikely to be great, the harm comes from the fact that hedge funds, unlike brokerage firms, operate without the safety net of any insurance, such as that provided by SIPC, and instead depend on the integrity of those who operate the firms.  It would not be a great surprise if the NFL players and others who invested receive back little of their investment.  (ph)

February 19, 2006 in Fraud | Permalink | Comments (0) | TrackBack (0)

America- A Land of Opportunity

The Boston Globe here provides a gripping story of an alleged pyramid scheme occurring in a United States Cambodian community.  The net result is that several individuals face criminal charges and significant monies have been lost by people. The close culture may have factored into the scheme's widespread acceptance and failure of law enforcement to intercede until significant damage was alleged to have occurred. This story emphasizes the importance of having diversity in federal law enforcement, and that the diversity be in both white collar and non-white collar investigations.


February 19, 2006 in Fraud | Permalink | Comments (0) | TrackBack (0)

Is Any Computer Really Safe?

The Washington Post provides an indepth story of recent computer issues here. The article, titled "The Invasion of Computer Snatchers," looks at whether "botnets" are shaking down companies to purchase protection from computer activities that might hurt their business. The article also examines the far-reaching activities of some botnets and the problems faced by businesses who have had to contend with Phishing and unwanted spam.  It is clear in reading this article that law enforcement is far behind  the new technology crimes. Once law enforcement does move to arrest and prosecute individuals who may be committing computer crimes, the interesting aspect will be whether 18 U.S.C. sec. 1030, the computer crimes statute, will prove sufficient ti handle new developing technology crimes.


February 19, 2006 in Computer Crime | Permalink | Comments (0) | TrackBack (0)

Saturday, February 18, 2006

Abramoff - Let Me Talk More

The Washington Post reports here that Jack Abramoff, with government agreement, asked for more time before sentencing.  Although sentencing was originally set for March 16th, the parties would like to delay the sentencing for no more than 90 days.  This delay is a clear benefit to both sides. 

For the government a delay provides additional time to secure information and more importantly check the information being provided by Abramoff.   The government does not want to make a sentencing recommendation to the court until it can make certain that the information provided by this future witness is supported by other evidence.  They need documents or testimony to corroborate what Abramoff states. 

In some cases the government might like to delay a sentencing in the hopes that other nervous witnesses might contact the individual to dissuade that person from cooperating with the government. Attempting to keep a witness from providing this information to the government can sometimes be a way for the government to secure obstruction of justice charges against an individual.  This is probably not likely here as everyone knows that Abramoff is cooperating. 

For the defense, the longer the delay the more opportunity to talk.  In Abramoff's case, the more information he can provide to the government, the more likely they will state to the court that the witness has cooperated in their investigation and therefore deserves a lesser sentence.


February 18, 2006 in Prosecutions | Permalink | Comments (0) | TrackBack (0)

Friday, February 17, 2006

The CIPA Battle Heats Up

I. Lewis Libby's demand for a large number of classified documents, including almost nine months of Presidential daily intelligence briefings, is being resisted by Special Counsel Patrick Fitzgerald as an attempt at "greymail" to trigger a dismissal of the charges.  Under the Classified Information Procedure Act (CIPA), if the government decides that it will not permit the disclosure of  national security information that it is directed to provide to the defendant, then one remedy is the court can dismiss the indictment.  Section 6(e)(2) of CIPA (here) provides:

(2) Whenever a defendant is prevented by an order under paragraph (1) from disclosing or causing the disclosure of classified information, the court shall dismiss the indictment or information; except that, when the court determines that the interests of  justice would not be served by dismissal of the indictment or information, the court shall order such other action, in lieu of dismissing the indictment or information, as the court determines is appropriate.  Such action may include, but need not be limited to -

       (A) dismissing specified counts of the indictment or information;

       (B) finding against the United States on any issue as to which the excluded classified information relates; or

       (C) striking or precluding all or part of the testimony of a witness.

An order under this paragraph shall not take effect until the court has afforded the United States an opportunity to appeal such order under section 7, and thereafter to withdraw its objection to the disclosure of the classified information at issue.

According to defense counsel, the classified information is necessary to show that Libby was involved in more important matters than the status of Valerie Plame as a CIA agent -- the "honest-but-overworked-public-servant" defense.  Fitzgerald argues that revealing the contents of those briefings would open up the deepest secrets held by the government, and is an effort to force the dismissal of the indictment because prosecutors could never agree to such wide-ranging disclosure of national security secrets.  Unlike the "honest-but-ignorant-CEO" defense, which emphasizes the defendant's lack of knowledge of details, Libby's defense is that he knew too much to have dallied over such trifling issues as Plame and her husband, Joseph Wilson, and will try to prove how much he knew (or at least had on his mind).  An AP story (here) discusses Fitzgerald's response to Libby's request for classified information. 

For those holding their breath until the scheduled January 2007 start of the Libby trial -- not that I recommend such a thing -- check the last paragraph of Section 6(e)(2) above.  If Libby were to be successful in obtaining the dismissal of any charges or a judicial factual finding against the government, that decision can be appealed to the DC Circuit and even the Supreme Court.  Could we have a new President before Libby goes to trial?  If the CIPA issues get too hot to handle, might there be a pardon in the wings to avoid a fight over the issue, particularly if it were headed to the Supreme Court?  Just speculating, mind you. (ph)

February 17, 2006 in Plame Investigation | Permalink | Comments (0) | TrackBack (0)

More Insider Trading

The U.S. Attorney's Office for the District of Massachusetts announced that Michael K.C. Tom entered a guilty plea to five counts of insider trading.  Tom, who was a co-founder and manager of the hedge fund Global Time Capital Growth Fund, received information from an analyst at Citizens Bank that the bank was completing its due diligence before purchasing a Cleveland-based bank.  A press release issued by the U.S. Attorney's Office (here) states:

Armed with this inside information, and with his knowledge of the banking industry, TOM was able quickly to narrow the possible targets to the eventual target, Charter One Financial. Over the next few business days, TOM traded aggressively in Charter One securities, making fifty-two purchases of either common stock or call options contracts. He made these trades in his own name, as well as on behalf of GTC Growth Fund and some of his relatives.

Tom's purchases of Charter One securities resulted in profits of approximately $750,000.  The Citizens Bank analyst and her husband entered guilty pleas in November 2005 to insider trading charges.

Meanwhile, the SEC filed a settled civil securities fraud suit against Dr. Sanjiv Agarwala, an Associate Professor at the University of Pittsburgh Medical Center and the director of its melanoma program, for insider trading.  Dr. Agarwala was a consultant for Maxim Pharmaceuticals, Inc. in 2004 when it conducted successful clinical trials on the drug Ceplene to treat two forms of cancer while another trial was unsuccessful.  According to the SEC's Litigation Release (here):

[I]n April, May, and September 2004, while aware of the material nonpublic information, Agarwala used his father's brokerage account to purchase or sell Maxim stock before the public announcements of that information. Agarwala's profits and loss avoided from his repeated insider trading totaled $14,784. By engaging in such trading, Agarwala breached his duty to Maxim not to trade on the basis of confidential information.

In addition to disgorging his gains and losses avoided, Dr. Agarwala paid almost a double civil money penalty of $29,568. (ph)

February 17, 2006 in Civil Enforcement, Insider Trading, Securities | Permalink | Comments (0) | TrackBack (0)

Investigation of Former Spokane Mayor Closed

The federal investigation of former Spokane Mayor Jim West ended with the FBI determining that there was no evidence that he intended to engage in honest services fraud related to offering jobs to men he met through internet chat rooms.  The federal inquiry was conducted through the U.S. Attorney's Office for the Western District of Washington in Seattle because the Eastern District's Office recused itself (earlier post here).  West was recalled in December 2005 when approximately 65% of Spokane's voters favored removing him from office.  No word yet on whether state or local prosecutors will pursue any charges, although the federal exoneration (if it can be called that) could set West on the road to political rehabilitation, as an AP story (here) notes here that he has not ruled out another run for elected office. (ph)

February 17, 2006 in Corruption, Investigations | Permalink | Comments (0) | TrackBack (0)

Former Impath President Found Guilty of Securities Fraud

Former Impath Inc. president and chief operating officer Richard Adelson was found guilty of securities fraud, conspiracy, and filing false statements with the SEC in connection with a scheme to inflate the medical information company's earnings and revenues.  Adelson was acquitted on seven other false statement and soliciting false proxy counts.  The company's former CEO, Anuradha Saad, received a three-month prison term in January 2006 after pleading guilty to soliciting false proxies that did not disclose her charges of over $120,000 in personal expenses to the company through her corporate credit card; four other executives entered guilty pleas related to the fraudulent accounting.  Adelson was accused of helping to inflate Impath's revenues by approximately $64 million from 2000 to 2002, and the company collapsed into bankruptcy in 2003. An AP story (here) discusses Adelson's conviction. (ph)

February 17, 2006 in Fraud, Securities, Verdict | Permalink | Comments (0) | TrackBack (0)

Thursday, February 16, 2006

Tough Times for a Couple CEOs

With the high salaries, perquisites, stock options, and adulation heaped upon CEOs, one would think that the living is easy once a person enters the corner office.  That may be true, but if you're caught padding your resume a bit, it can trigger all sorts of negative publicity and a board of directors investigation.  It seems that RadioShack Corp. CEO David Edmondson may have misstated the college degree he holds.  His biography on the company website (here) states, "Edmondson graduated from Pacific Coast Baptist College in San Dimas, Calif., where he earned a degree in theology. He is also a graduate of Harvard Business School's Advanced Management Program."  While that is sufficiently vague, in the past Edmondson has claimed that he received a Bachelor of Science degree in theology and psychology.  Unfortunately, his alma mater, Pacific Coast Baptist, does not offer a psychology major, and his degree is a ThG, which only requires three years of course work, not the the four years required for the B.S.  A Reuters story (here) states that the Board of Directors has hired outside counsel to conduct an investigation and advise it on proper employment policies.  Resume padding is nothing new, but it always amazes me that people would put down incorrect or non-existent degrees and think that it will pass unnoticed.

Things are even dicier at Chicago Bridge & Iron Co. N.V., which fired its CEO, Gerald Glenn, and chief operating officer on February 3.  Although the company's terse disclosure said nothing about the reasons for the termination, it has been involved in an extensive internal investigation into possible accounting fraud, and the terminations appear to be related to those issues.  Rather than go away quietly, however, Glenn has filed a challenge to his termination in the Netherlands, where the parent company is headquartered.  According to CB&I's Form 8-K (here): "While as previously announced Gerald M. Glenn has been terminated as our Chairman, President and Chief Executive Officer effective February 3, 2006, Mr. Glenn remains a member of the Chicago Bridge & Iron Company N.V. Supervisory Board and a member of the management board of Chicago Bridge & Iron Company B.V. Effective February 8, 2006, Chicago Bridge & Iron Company B.V. resigned as the managing director of Chicago Bridge & Iron Company N.V. Mr. Glenn has filed suit in The Netherlands contesting the circumstances and effectiveness of his termination as Chief Executive Officer."  Unlike resume padding, which may be embarrassing but probably not much more, accounting fraud is likely to draw significant attention from the SEC and U.S. Attorney's Office in Houston, where CB&I's U.S. subsidiary is headquartered. (ph)

February 16, 2006 in Fraud, Investigations | Permalink | Comments (0) | TrackBack (0)

Deducting Expenses from the Corruption Gain for Sentencing

The Eleventh Circuit had its third look at U.S. v. Devegter, a "pay-to-play" corruption case involving a payment of over $41,000 for an investment bank to conduct a bond refinancing for Fulton County, Georgia.  On this trip, the issue concerns calculating the gain from the corruption, a key issue in determining the sentence in that type of case. The defendants were charged with wire fraud under a right of honest services theory, and the sentencing involved the application of Sec. 2B4.1 of the Federal Sentencing Guidelines, the commercial bribery provision under which the judge uses the greater of the gain from the corruption or the amount of the bribe.  The district court found that the gain could not be estimated because the government could not establish that amount, and therefore used the $41,000 amount in sentencing, and then departed downward.  The Eleventh Circuit reversed (here), finding that the bases for the downward departures, including aberrational conduct, could not support the departure (a Booker remand was also required, but did not affect the analysis). 

Regarding the calculation of the gain from the bribery, the court considered whether indirect costs should be deducted.  The government argued that the gain to the investment bank from the bond refinancing deal was over $600,000, but the district court found that the government did not incorporate year-end bonuses paid to employees as reducing the gain, and therefore went with the amount of the bribe, a much lower figure.  The Eleventh Circuit rejected that position, holding:

The district court’s order ignores the distinction between variable and fixed overhead costs by equating year-end bonuses with commissions. Commissions are specifically identified and readily apportioned to a given transaction, but year-end bonuses usually depend on employee performance on multiple deals throughout the year and cannot be readily apportioned to a particular bond deal. The inherent difficulty of apportioning a year-end bonus to a specific transaction takes it outside the realm of direct costs that should be subtracted from profits in determining the net improper benefit. The government’s failure to include these costs therefore did not preclude the district court from relying on the net improper benefit as opposed to the bribe amount for sentencing purposes. Moreover, the defendants’ have the burden of proving what direct costs should be subtracted in determining the net improper benefit, and they have not satisfied this burden in regards to the bonuses.

In other words, a general cost of doing business is not a basis to reduce the gain from an otherwise corrupt transaction.  It would hardly be appropriate to deduct the amount of the bribe from the gain, even though that could be considered a "direct" cost. (ph)

February 16, 2006 in Judicial Opinions, Sentencing | Permalink | Comments (0) | TrackBack (1)

Civil Insider Trading Charges Dismissed for Lack of Fiduciary Duty

A federal judge in Los Angeles dismissed the SEC's insider trading complaint against J. Thomas Talbot because the Commission did not adequately allege a breach of fiduciary duty to support the charges.  Talbot was a director of Fidelity National Financial Inc., which owned 12% of the shares of Lending Tree Inc., then a publicly-traded company.  In 2003, Talbot learned from Fidelity National's CEO at a company board meeting that Lending Tree would be bought by USA Interactive at a premium to its market price.  Talbot purchased 10,000 shares of Lending Tree over the next week and then sold them after the announcement, realizing profits of over $67,000.  According to the SEC's Litigation Release (here):

At the Fidelity Board meeting, the Complaint alleges, Talbot heard the CEO's comments about the potential acquisition, and wrote "LendingTree" on the top of his meeting agenda. These words constituted the only notes that Talbot made during the four-hour Board meeting. The Complaint alleges that after this information was conveyed to the Board of Directors, a Fidelity Board member cautioned the directors not to trade in LendingTree securities because they had been provided with confidential information.

The SEC accused Talbot of insider trading, alleging that his position as a director of Fidelity National and the admonition not to trade created the fiduciary duty necessary to support an insider trading case.  According to a Los Angeles Times article (here), the district judge dismissed the case because Talbot did not owe a fiduciary duty to Lending Tree, the original source of the information.

While the information is sketchy, it appears that the SEC sued under the misappropriation theory endorsed by the Supreme Court in U.S. v. O'Hagan, 521 U.S. 642 (1997), which permits an insider trading case under Section 10(b) and Rule 10b-5 to proceed so long as the government proves that the trader breached a fiduciary duty by trading the securities, not necessarily one owed to the company whose shares were traded.  The judge, however, seems to be applying the narrower rule of Chiarella v. U.S., 445 U.S. 222 (1980), which requires that the trader owe a fiduciary duty or "other duty of trust and confidence" to the issuer of the securities traded, in this case Lending Tree.  It is hard to tell whether the district court somehow rejected the SEC's misappropriation claim, or found it unsupportable.  The SEC's position on misappropriation, as spelled out in Rule 10b-5-2 (here), is quite broad, that a "duty of trust and confidence" is created in the following circumstances:

(1) Whenever a person agrees to maintain information in confidence;

(2) Whenever the person communicating the material nonpublic information and the person to whom it is communicated have a history, pattern, or practice of sharing confidences, such that the recipient of the information knows or reasonably should know that the person communicating the material nonpublic information expects that the recipient will maintain its confidentiality

Talbot would seem to come within this definition, although whether Rule 10b-5-2 is consistent with the Supreme Court precedents in the area is another question.  I'm not aware of any opinions that have considered the validity of the SEC's definition, and it may not be an issue in this case because the presentation of the information to a director seems to fit within the standard view of a fiduciary duty, so this broader definition may not even be needed to bring Talbot within the insider trading prohibition.  The SEC may well appeal in this case. (ph -- thanks to Peter Lattman on the Wall Street Journal Law Blog (here) for noticing the district court's decision)


UPDATE: A Wall Street Journal article (here) sheds a bit more light on the case, noting that Lending Tree and Fidelity National did not have a confidentiality agreement in place.  Nevertheless, for the purposes of the misappropriation theory of insider trading liability, it may be that the duty owed by Talbot as a director of Fidelity National to maintain the confidentiality of information received through that company could be the basis for insider trading charges.  No word yet on whether the SEC will appeal. (ph)

February 16, 2006 in Civil Enforcement, Insider Trading, Securities | Permalink | Comments (1) | TrackBack (0)

Wednesday, February 15, 2006

L.A. Attorney Charged With Conspiring with PI Pelicano -- What Did Ovitz Know About Pellicano's Peccadillos?

The Wall Street Journal reports (here) that Los Angeles attorney Terry Christensen, from the law firm Christensen, Miller, Fink, Jacobs, Glaser, Weil & Shapiro (yes, that's the Shapiro who was on the O.J. Simpson defense team), was charged with conspiring with private investigator Anthony Pellicano to tap the telephones of Lisa Bonder Kerkorian.  She is the ex-wife of billionaire investor Kirk Kerkorian, who has made headlines recently with his large investment in General Motors and efforts to shake-up the declining auto giant.  Christensen has represented Kerkorian for years, and served briefly as president of his holding company, Tracinda.  The alleged wiretap came while Christensen was involved in litigation against Mrs. Kerkorian related to threats against Kerkorian and a four-year old child who he thought was his daughter.  To make matters more complicated, or at least worthy of consideration in a future Desperate Housewives episode, it turns out the young girl was not Kerkorian's child, although she was born during the brief marriage.  Christensen's law firm denies that he did anything wrong.

Meanwhile, one-time super agent Michael Ovitz might be getting tired of testifying.  In 2005, Ovitz testified in Delaware Chancery Court as part of the breach of fiduciary duty shareholder suit against Disney's board related to the $140 million payout to Ovitz after his failed 14-month term as president of Disney.  Needless to say, he did not come out of that trial smelling like a rose, although the court found in favor of the company.  Now, a New York Times article (here) states that Ovitz testified before a federal grand jury in the summer of 2005 about his contacts with Pellicano, whose 110-count racketeering and wiretapping conspiracy indictment (here) was unsealed upon his release from federal prison, where he served over two years on a weapons charge.  The indictment alleges that Pellicano, along with a police officer and telephone company technician, tapped phones and conducted criminal background checks through data bases only available to law enforcement.  Pellicano was working for law firms involved in cases in the entertainment industry in representing their clients.  The Times notes that at least four of the instances alleged in the indictment involved cases in which Ovitz was a party, and the story discusses other instances in which a former agent from Ovitz's firm alleges that he learned of her secret conversations.  Like others who used Pellicano, Ovitz denied (through his attorney) that he had any knowledge of how Pellicano obtained information.

Are the Christensen charges a case of "hear no evil, see no evil"?  If Christensen (or Ovitz) received information about allegedly secret conversations, then it might be hard to deny having, at a minimum, suspicions about how Pellicano obtained the information.  Absent some discussion of wiretapping, however, it will be difficult to establish the agreement for a conspiracy.  Many of the cases mentioned in the Times article involving Ovitz in which Pellicano is alleged to have engaged in wrongdoing involved conducting criminal background checks on opponents through, for example, FBI's National Crime Information Center, which can only be done for official law enforcement purposes.  This is the type of stuff seen in almost every Rockford Files episode, and if it was all right for Jim Rockford, can it be said that someone like Ovitz should have known that what Pellicano was doing was illegal?  It may be that turning a blind eye to what a private investigator does is not unreasonable, and tough to prosecute criminally.  Of course, the entire calculus changes, and Hollywood will shudder collectively, if Pellicano decides to plead guilty and testify.  For a previous offender, a RICO conviction could trigger a substantial term of imprisonment, so there is a strong enticement to cooperate.  Could it be that the Christensen indictment is an indication that someone close to Pellicano, or even Pellicano himself, is cooperating in the investigation? (ph)

February 15, 2006 in Investigations | Permalink | Comments (0) | TrackBack (0)

Proposed Mortgage Fraud Crime

Senator Barack Obama of Illinois introduced legislation to combat mortgage fraud that includes an interesting provision that would create a new federal criminal law.  The bill, S. 2280 (available below), is entitled (unfortunately) the "Stop Transactions which Promote Fraud, Risk, and Underdevelopment Act" or "STOP FRAUD Act," and it would provide for a central data base to track mortgage fraud and fund federal and state anti-fraud efforts in the area.  Section 2 of the bill would create Section 1351, "Mortgage Fraud," that would make it a federal crime for a "mortgage professional" to engage in a scheme to defraud or make false/fraudulent statements in connection with a real property loan, with a maximum punishment of 35 year and a $5 million fine.  The statute is narrower than the mail and wire fraud statutes, which are often used to prosecute mortgage fraud cases, because of the limitation to conduct by mortgage professionals.  That term is defined as including appraisers, lawyers, real estate brokers, mortgage underwriters, and "any other provider of professional services engaged in the mortgage process" -- how is that for a circular definition: mortgage professionals are providers of professional services related to mortgages.  Mortgage scams in which straw purchasers engage in sham transactions to inflate the value of property and then take out a large mortgage would not be covered by the statute unless the perpetrators were themselves mortgage professionals.

Even more interesting is proposed Section 1351(c), which permits private parties to bring a private right of action for violations of the provision, regardless of the amount in controversy, citizenship of the parties, or exhaustion of administrative remedies.  Creating such a broad private right of action, with no real guidelines on the scope of the potential suit, is uncommon, and perhaps unprecedented.  Off the top of my head, the only criminal provisions that I am aware of that also include express private rights of action are the False Claims Act and RICO, while the antitrust and securities laws also rely on private actions as a means of enforcement along with federal civil and criminal enforcement.  RICO and qui tam actions have very specific pleading requirements, while the mortgage fraud suit would seem to be, in effect, a federal common law fraud action limited to mortgage professionals.  If enacted, this provision would raise interesting questions about whether the principle of respondeat superior would permit a law suit against the mortgage professional's employer, whether punitive damages are recoverable, and perhaps most importantly, whether a prevailing party could be awarded attorney's fees.  On a different note, is there any way that the use of silly acronyms for laws can be stopped, or at least curtailed? (ph)

Download mortgage_fraud_legislation.pdf

February 15, 2006 in Fraud, Statutes | Permalink | Comments (7) | TrackBack (1)

German Bank Enters Into a Deferred Prosecution Agreement Related to KPMG Tax Shelter Sales

Bayerische Hypo und Vereinsbank (HVB), which is headquartered in Munich, Germany, and its U.S. subsidiary, HVB U.S. Finance Inc., entered into a deferred prosecution agreement related to the bank's financing of transactions used for some of the tax shelter transactions sold by KPMG to wealthy individuals to help avoid significant tax liabilities.  HVB's involvement in the shelters comes through its former senior vice president at its structured finance group, Domenick DeGiorgio, who got the bank to finance KPMG shelters known as BLIPS and CARDS (don't ask for a translation, it's not worth it) from 1996 through 2002.  In August 2005, DeGiorgio entered a guilty plea to four counts of tax evasion arising from his work arranging financing through HVB for loans to the individuals purchasing the tax shelters, as described in a press release issued by the U.S. Attorney's Office for the Southern District of New York (here):

According to DEGIORGIO, the loan proposed and put in place by the BLIPS promoters was a sham because among other things, as designed, no money ever left the bank and because HVB never set aside any of its own money or procured funds from the banking market in order to fund any of these loans. DEGIORGIO admitted that, at the time he participated in BLIPS, he was well aware of these facts. DEGIORGIO also admitted that he had reviewed the draft BLIPS tax opinion letter and knew that BLIPS was falsely described as involving, as an important part of the transaction, these purported loans, and he also knew that this false description was created in order that BLIPS clients would claim BLIPS tax losses and keep for themselves money that they should have paid in taxes. DEGIORGIO further admitted that he agreed to participate in these transactions, and in furtherance of the scheme, he and others caused HVB to prepare and execute various false documents that made it appear that HVB was providing real loans, when in reality, it was not.

The Statement of Facts (available below) notes that DeGiorgio used two different law firms who provided form opinion letters to support the transactions.

The Deferred Prosecution Agreement (available below), which lasts for eighteen months, is not as wide-ranging as that entered into with KPMG, which played a much greater role in the tax shelter sales.  HVB agrees to adopt a compliance program, with no outside monitor, and to cooperate in the government's prosecution of the former KPMG tax partners.  Unlike other such agreements, there is no mention of a waiver of the attorney-client privilege or work product, perhaps because the case involves only bank documents that would not otherwise be subject to a privilege/protection claim.  HVB will pay $29 million in disgorgement, penalties, and fines. (ph)

Download hvb_deferred_prosecution_agreement.pdf

Download hvb_dpa_exhibit_c_statement_of_facts.pdf

February 15, 2006 in Prosecutions, Settlement, Tax | Permalink | Comments (0) | TrackBack (0)

Tuesday, February 14, 2006

Another Day in Enron Country

Mark Koenig finally finished testifying in the Lay/Skilling trial, to be replaced on the witness stand with Ken Rice.  This is not the first time Ken Rice is testifying as he previously appeared at the Enron Broadband trial. (see Houston Chronicle here)  The Houston Chronicle notes that Rice is testifying against his "pal," a man who he went with on a "dirt-bike tour of Baja California, a race across the Australian outback and an outdoorsy trip to the southern tip of South America."

It is common to see someone testify against their best friend in a federal criminal trial.  The pressure placed upon an individual to talk or face years in prison can be overwhelming.  Some argue that this government pressure results in false testimony, while others claim that this pressure just allows the prosecution to secure information that they normally would not have been able to obtain.  Irrespective of the view one takes on this issue, the net result is clearly going to be that the person who is subjected to having their best friend testify against them will likely never trust anyone again.  Perhaps that is acceptable if the accused is convicted.  But what happens to that person if they are acquitted?

(esp) (Note - check out Tom Kirkendall's Houston Clear Thinkers Blog here for some fascinating comments on Koenig's testimony.

February 14, 2006 in Enron | Permalink | Comments (0) | TrackBack (0)

Noe Faces A State Indictment

Is it my imagination, or does it seem lately that there are more instances of state prosecutors bringing corruption related charges (e.g. Tom DeLay)?  This is particularly noteworthy as state prosecutors often do not have something comparable to the Petite Policy, an internal DOJ policy that advises against proceeding federally when the state has already prosecuted the case.

According to the Todelo Blade here, Tom Noe was indicted by a Lucas County, Ohio grand jury for 53 counts including forgery, money laundering, tampering with records, aggravated theft, grand theft, and RICO.  The theft and money laundering charges include allegations that Noe placed state money into a rare coin business. Noe, a former chair of the Lucas County Republican Party, also faces federal charges "related to the alleged laundering of $45,400 into the Bush-Cheney re-election campaign." See also here.


February 14, 2006 in Prosecutions | Permalink | Comments (0) | TrackBack (0)

"Wheelchair Scam"

Fraud Update here includes a link to a press release of the U.S. Attorney for the Southern District of Texas. The accused was sentenced to 63 months in federal prison after pleading guilty to one count of conspiracy and one count of health care fraud.  He was accused of operating a "wheelchair scam" that "caused Medicare and Medicaid to be fraudulently billed for almost $5 million through his durable medical equipment company. . ." According to the press release:

"[The Company] billed Medicare and Medicaid for supposedly providing beneficiaries’ motorized wheelchairs, wheelchair accessories, as well as for alternating pressure mattresses, which are used for patients with advanced bed sores. [The defendant] either provided beneficiaries no equipment at all or provided less expensive or used equipment, such as scooters and regular mattresses."


February 14, 2006 in Prosecutions | Permalink | Comments (1) | TrackBack (0)