Sunday, April 30, 2006
Robert " Bob" Ritchie, Past President of the National Association of Criminal Defense Lawyers (NACDL), lost his battle with cancer. (See obituary from the Knoxville News Sentinel here). Ritchie had also served as a President of the Tennessee Association of Criminal Defense Lawyers and as Knoxville Bar Association President. Bob Ritchie had lectured at the National College of Criminal Defense Lawyers (NCDC) and had given lectures at NACDL. He will be missed.The guest book can be found here.
I had the pleasure of being a commentator at the recent Harvard Blogging Conference. Many at this conference have spent incredible amounts of time reporting in their blogs the details of this event. Although it was truly wonderful (with enormous credit to Professor Paul Caron and the Harvard Berkman Center), I will refrain from reporting here on all the blog discussion and return to our topic - white collar crime. But for those with an interest, Ian Best here has a wonderful compilation of blog discussion of this conference.
The Tampa Tribune here tells about the latest tour in Houston - The Enron Tour. Yes, it cost thirty (30) dollars and its a bus guided tour of key Enron spots in Houston. ( see tour here) For example, the tour includes a stop at Fastow's place. And the Tampa Tribune reports that it was booked solid in the immediate days before Ken Lay testified .
Richard Scrushy, previously acquitted in a federal trial involving his activities with HealthSouth, will begin his second trial today. Scrushy is charged with conspiracy, bribery, and mail fraud for "allegedly making two hidden payments totaling $500,000 in 1999 and 2000 to then-Alabama Gov. Don Siegelman in return for a spot on a state regulatory panel that oversees HealthSouth and other health-care providers. " See Wall Street Journal here.
His co-defendants at trial include former Governor Don Siegelman, who is on trial in the height of his campaign for the Democratic Nomination for Governor of Alabama.
This trial may prove to be as fascinating at Scrushy's last trial. The Wall Street Journal here describes events occurring outside the courtroom.
Ken Lay will be back on the witness stand Monday as he answers questions on cross-examination. This will be followed by a defense re-direct of Lay. After Lay, the defense is likely to present some character witnesses. For full details see the Washington Post answer to questions here. And for a wonderful review of events from last week, check out the Tom Kirkendall's Houston Clear Thinkers here.
Addendum - For a "descriptive" view of Ken Lay's testimony see the Wall Street Jrl here.
Saturday, April 29, 2006
According to the Washington Post here, Rush Limbaugh agrees that he will attend treatment for drug addiction in return for the prosecution dropping the fraud charges against him in eighteen (18) months.
Yes, the classic deferred prosecution agreement. But there is no Thompson Memo here - so we won't be seeing any waiver of attorney-client privilege or other like provisions that we seem to find in the corporate deferred prosecution agreements.
The government's investigation of securities class action law firm Milberg Weiss for alleged kickbacks paid to representative plaintiffs in lawsuits took a significant step forward with a plea agreement by retired real estate mortgage broker Howard Vogel. Vogel or members of his family served as the named plaintiffs in a number of class actions for which Milberg Weiss served as class counsel, and he admitted to receiving $2.5 million for services in 40 cases, including a $1.1 million payment from the attorney's fees in a class action against Oxford Health. More importantly, according to a New York Times article (here), the payments occurred as recently as 2005, avoiding any statute of limitations issues.
In 2005, a grand jury indicted Seymour Lazar and an attorney for the receipt of alleged kickbacks from Milberg Weiss, and that case is scheduled to go to trial later in 2006. In that case, Lazar has asserted that any payments were referral fees from one lawyer (or law firm) to another, and Lazar is an attorney although he did not work on the class action suits and his receipt of attorney fees was not disclosed to the court as part of the settlement. Vogel is not an attorney, so alleged payments of a portion of the attorney's fees by Milberg Weiss could not be defended on the ground that they are otherwise acceptable referral fees because the professional rules do not permit lawyers to share fees with non-lawyers, particularly with the representative plaintiff in a class action. One payment to Vogel involved cash in an envelope given to him by a law firm partner, not the usual method of splitting attorney's fees.
Although Milberg Weiss is not named in the Vogel plea documents, it has acknowledged that it is the law firm referred to as the "New York law firm" that made the payments. Partners at the law firm, which broke up in 2004, are described by letter, for example as "Partner E" and "Partner D." Will the law firm be indicted? Prosecutors could name the firm, and its successor, in a conspiracy count in order to tie together a continuing course of conduct over a significant period of time that involves multiple representatives of the firm and different cases. The benefit of a conspiracy charge for the government is that it can include conduct outside the usual five-year limitations period if they are part of the same agreement. Along the same lines, prosecutors could seek RICO charges against the individuals, including partners, which is another means to avoid statute of limitations issues for conduct before 2001. An indictment could allege that the firm is the RICO enterprise, which might spare Milberg Weiss from being indicted while still having the law firm as a featured player in a prosecution. (ph)
According to the Wall Street Jrl here, the former head of the Food & Drug Administration (FDA) is under investigation by a grand jury. What is perhaps interesting here is that this disclosure seems to have come out in a civil matter. The Washington Post (AP) here provides some details on the civil matter. It seems that the former head of the FDA is taking the fifth amendment in the civil matter because of this pending grand jury matter.
Friday, April 28, 2006
Tim Montgomery won a gold medal in the 2000 Olympics as a member of the United States 400-meter relay team, and set the record for the 100-meter dash in 2002. That record was wiped from the books and he was banned from international competition for two years because of accusations arising from his involvement in the Balco (Bay Area Laboratory Cooperative) steroid scandal. Now, Montgomery has been stopped in his tracks by an arrest for alleged involvement in a scheme to cash stolen or forged checks and launder the funds. In February, Montgomery's one-time coach, 1976 Olympic gold medalist Steve Riddick, was charged with being part of the scheme, and now the U.S. Attorney's Office for the Southern District of New York announced that Montgomery has been added to the indictment as a defendant and arrested in Virginia. The press release (here, from the Wall Street Journal Law Blog) states that Montgomery is accused of depositing three checks into his account, totaling $775,000, for which he received $20,000 from Riddick for assisting in the transactions. Riddick is also accused of depositing three checks for over $900,000 into accounts with which he was associated.
Montgomery and Riddick are two of twelve defendants charged, and appear to be peripheral players in a multimillion dollar scheme organized out of New York City. Whether the former Olympians knowingly participated in a check fraud or were duped into allowing their accounts to be used will have to be sorted out later, either at trial or through a plea agreement. For now, Montgomery's reputation continues to sink. An AP story (here) discusses the charges against Montgomery. (ph)
On April 17, Vitesse Semiconductor Corp. announced that it placed its CEO, executive vice president, and CFO on leave while it conducted an investigation of the timing of stock options grants to the executives (see 8-K here). The SEC has begun looking at companies, such as UnitedHealth Group Inc., that engaged in what appears to be backdating of stock options issued to senior officers so that the issuance date is at the low price for the shares, thus enhancing the value of the option grant. Just nine days later, on April 26, Vitesse announced that its internal investigation had turned up much more significant accounting problems which appear to involve its senior executives in conduct much worse than tinkering with the dates for pricing the stock options. Issues have now arisen regarding revenue recognition and recording credits, leading the company to announce that its financial statements for the past three years should no longer be relied on by investors, a sure sign of material problems with its accounting. According to the company's 8-K (here):
The Board has appointed a Special Committee of independent directors to conduct an internal investigation relating to past stock option grants, the timing of such grants and other related accounting and documentation issues. In the course of its investigation, issues have arisen relating to the integrity of documents concerning the Company's stock option grants. Also during the internal investigation, issues have arisen concerning the Company's practices in connection with credits issued to or requested by customers (for returned products or otherwise) and the related accounting treatment, as well as the application of payments received to the proper accounts receivable. The Special Committee is reviewing these issues and, pending further investigation, believes that the Company's accounts receivable and revenues may have been misstated during certain periods. Whether the Company's accounts receivable and revenues were misstated and, if so, the extent of such misstatements are still under investigation.
The SEC no doubt will be sending its subpoena shortly, if it hasn't been served already, and don't be surprised to see a federal grand jury begin an inquiry into Vitesse's accounting after the Enforcement Division completes an initial inquiry along with the company's internal investigation. For shareholders, their stock has dropped by almost 50% in the last month, and an extended investigation could result in a delisting of the company's shares from NASDAQ if the financial statements cannot be filed. (ph)
Thursday, April 27, 2006
The Wall Street Journal reports (here) that the investigation spawned by the bribery of former San Diego Congressman Randy "Duke" Cunningham has branched out to include looking into whether prostitutes were supplied to Congressmen and staffers by defense contractors. Cunningham has been sentenced to a 100-month prison term, and Mitchell Wade, listed as coconspirator #2 in filings in the case, agreed to plead guilty and cooperate. The target of the investigation is coconspirator #1, identified as Brent Wilkes, who the article asserts may have played a role in providing prostitutes to Cunningham and possibly others in order to gain no-bid defense contracts for his company, ADCS Inc. The FBI has already sought records from the Watergate Hotel, which is part of the complex made famous by a third-rate burglary undertaken on behalf of another former California Congressman, along with records from limousine and escort services.
The Journal article notes that Wilkes has not entered into a plea agreement with the government and indicates that he will fight any charges that might be brought against him. That could turn a trial in the case into a truly sordid affair in which the government's prime witnesses may have been a purveyor and user of prostitutes, in addition to the payment and acceptance of large sums of money. Those are not the most appealing witnesses for the prosecution, but then bribery cases almost demand the use of cooperators who are hardly pristine. Look for the case to become even more tawdry if the government can confirm the use of prostitutes as a currency for the bribes. (ph)
U.S. District Judge Reggie Walton rejected I. Lewis Libby's challenge to the authority of Special Counsel Patrick Fitzgerald to conduct the investigation of the leak of Valerie Plame's identity as a covert CIA operative. In a thirty-one page opinion (available below), the judge found wanting Libby's statutory and constitutional challenges to the appointment of Fitzgerald to oversee the investigation and seek his indictment. First, the court held that the delegation of the Attorney General's authority to Fitzgerald was proper under 28 U.S.C. Sec. 510. Second, under the Appointment's Clause in Article II, Judge Walton determined that Fitzgerald is an "inferior" officer for purposes of whether his appointment required the advice and consent of the Senate. The opinion applies Morrison v. Olson, 487 U.S. 654 (1987), which upheld the appoint of an Independent Counsel under now-expired provisions of the Ethics in Government Act on the same ground. The court noted in its conclusion that "[t]here must therefore be a process by which the perception of fairness withstands the scrutiny of the American public when prosecution authority is called upon to investigate public officials." Libby will have to hold further challenges to Fitzgerald's authority until any appeal after a conviction because the judge's decision appears to come within the "collateral order" doctrine that prohibits interlocutory appeals of such issues in criminal cases, and it is unlikely Libby could succeed in bringing a mandamus action. The battle will continue, but will move on to the myriad other fronts in the case. (ph)
Jody Nelson was a senior financial officer of Patterson-UTI Energy, Inc., a Snyder, Texas, based oil rig company, for nearly ten years, and he seems to have spent a good deal of that time engaging in a series of schemes to defraud the company of over $77 million, an astounding amount of money. Nelson moved up from controller to CFO in 1999, and served in that position until the SEC filed an emergency action freezing his assets once the embezzlement came to light. Nelson entered a guilty plea to wire fraud and money laundering charges, and a press release issued by the U.S. Attorney's Office for the Northern District of Texas (here) describes four different schemes by which he siphoned off millions from the company. He first forged a series of checks from 1998 to 2000, totaling $4,639,750, an ostensibly substantial amount but merely a warm-up for what was to come. Nelson moved to his biggest scam that involved fictitious invoices authorizing payments to companies he controlled, and a series of wire transfers totaling $69,434,342 were made from 2001 to 2005. While he was at it, in 2004 Nelson has Patterson-UTI buy him an executive airplane, billing the company the $2,126,891 it cost. Finally, by forging the company's chief operating officer's signature, Nelson was able to obtain payment of a bogus invoice for $1,586,666 so he could buy shares in a construction company.
Where was the internal audit department at Patterson-UTI, or its outside auditors? Neither apparently paid much attention to the millions of dollars flowing out of the company over an extended period of time, so look for a lawsuit at some point raising these issues. Moreover, if Nelson received assistance from anyone inside or outside Patterson-UTI, the investigative focus will shift to that person. In the meantime, unless Nelson can pay back a substantial portion of the money or provide significant cooperation before his sentencing, he will be looking at an extended term of imprisonment. (ph)
Wednesday, April 26, 2006
The SEC filed civil insider trading charges against hedge fund manager Nelson Obus, Peter Black, an analyst at the hedge fund firm, and Thomas Strickland, who formerly worked at GE Capital. The inside information concerned the acquisition in 2001 of SunSource, Inc. by Allied Capital Corp. in a deal financed by GE Capital. According to the SEC complaint (here), Black and Strickland are close friends, and on May 24, 2001, Strickland allegedly told Black about the upcoming transaction, who in turn told Obus, who then called SunSource's CEO to discuss the transaction. According to the complaint, "Obus told the CEO that a 'little birdie' at Capital had told him that SunSource management was planning to sell the company to a financial buyer." The complaint goes on to note that "Black was present when Obus spoke with Sunsource's CEO. When Black heard what Obus told the CEO, he jumped out of his chair and began waving his arms because he was concerned that his friend Strickland would get into trouble. When Obus finished his conversation with Sunsource's CEO, Black told Obus of his concern, and Obus responded that, if GE Capital fired Strickland, Obus would offer Strickland a job or find him a job elsewhere on Wall Street."
To this point, the SEC case describes a fairly mundane insider trading case. The issue in the case will be whether the defendants traded on the inside information, because they did not purchase any shares until June 8, when Obus bought 287,000 shares and apportioned them to three hedge funds his firm manages. When the deal was announced on June 19, SunSource's stock increased by over 90%, and the funds had a profit of over $1.3 million. The tricky part of the case is the following allegation in the complaint: "Following Strickland's May 24,2001, conversation with Black, Strickland continued to work on, and thus receive nonpublic information about, the progress of the proposed transaction between SunSource and Allied. On June 4,2001, Black called Strickland, and they had a four-minute conversation. That conversation provided Black with the opportunity to receive an update on the progress of the transaction and to update Obus." The italicized language does not say that Strickland actually provided additional information to Black and Obus, only that it could have happened. While the complaint has many details about the interactions of the defendants, like the arm waving, it is curiously vague on whether Strickland provided additional information to Black and Obus that can show the transaction was based on material nonpublic information.
Obus and his firm, Wynnefield Capital, have vigorously denied the SEC's allegation. A press release (here) issued in response to the Commission complaint states:
We will detail our factual and legal case in our court filings, but you should know that the allegations are baseless and unsupported by the documentary or testimonial evidence. Our attorneys have advised us that the lawsuit lacks merit. We intend to contest this vigorously in the courts. Specifically, the facts are these:
- We acted ethically and legally;
- We followed and researched the stock for more than 10 years - and repeatedly invested in it for more than five years;
- We did not engage in insider trading;
- Our actions were consistent with our long-standing strategy to build positions in small-cap value investments;
- Our actions were consistent with the protection and enhancement of value for the company's shareholders; and
- Our actions were intended to provide continued excellent results for our funds' investors.
The press release notes that the trading took place nearly five years ago, and they cooperated in the investigation. Obus claims that he and his firm thought the matter had been been dropped, an assumption that should never be made with a government agency.
It is a fair question why the case took so long to come to fruition. None of the three defendants settled the matter, so it does not appear that the Enforcement Division would have received information from a cooperating witness at a late date to propelled the case forward. It may be that, due to staff turnover or other extraneous factors, the investigation became inactive for a period of time and only recently got restarted. Regardless of the reason for the delay, the defendants show no inclination to settle at this point, and given the pace of civil litigation, the trial may not begin until seven or eight years have elapsed since the trading. (ph)
White House adviser Karl Rove made his fifth appearance before the grand jury investigating the leak of the identity of Valerie Plame as a CIA covert agent, although this time the grand jurors themselves were different because the earlier grand jury expired in October 2005. In his last appearance, which came shortly before the indictment of I. Lewis Libby, Rove spent a considerable amount of time in the grand jury room (see earlier post here). Since then, additional information has emerged about contacts between Rove's counsel, Robert Luskin, and Newsweek reporter Viveca Novak, about whether Rove disclosed Plame's identity to fellow Newsweek reporter Matt Cooper. In addition, Special Prosecutor Patrick Fitzgerald's office has received additional e-mails from the Office of the Vice President that may shed further light on Rove's role in an alleged campaign to counter the allegations of Plame's husband, Joseph Wilson, disputing administration claims about attempts by Iraq to obtain materials in Africa to produce WMD.
The key question at this point is whether Rove's role in the case has changed in the eyes of Fitzgerald. Is he a target of the investigation? Luskin is quoted as stating that "[i]n connection with this appearance, the special counsel has advised Mr Rove that he is not a target of the investigation. Mr Fitzgerald has affirmed that he has made no decision concerning charges." (See AP story here) The grand jury cannot be used for discovery purposes for the Libby prosecution, so Fitzgerald must be able to articulate a plausible basis for a continuing investigation of someone connected to the disclosure of Plame's identity, or who may not have been completely forthright with investigators or in the grand jury. If Libby's defense team has the slightest suspicion that the grand jury is being used to assist the case against him, then there will be a motion filed in the district court in short order seeking to block any further use of the grand jury for that purpose.
Although I doubt such statistics are kept anywhere, I suspect Rove must be getting close to the record for most appearances before a grand jury in a single investigation, at least by a witness who has not asserted the Fifth Amendment privilege against self-incrimination. (ph)
The number of witnesses keeps growing in the San Francisco federal grand jury investigation of whether Giants slugger Barry Bonds committed perjury in 2003 in his testimony before the grand jury investigating steroid distribution through Balco (Bay Area Laboratory Cooperative). In addition to previously disclosed subpoenas to Bonds' personal physician and the Giants team trainer, media reports are that a former Balco executive, James Valente, and Bonds' personal trainer, Greg Anderson, have been subpoenaed to testify. Valente and Anderson entered guilty pleas in 2005 to charges related to the distribution of steroids through Balco. Bonds admitted in his testimony that Anderson gave him substances that turned out to contain steroids, but he denied knowing that at the time he used them.
Anderson can be a key witness regarding Bonds' knowledge of what those substances included, and whether he provided Bonds any other of the so-called "designer" steroids developed at Balco to avoid drug testing measures. The problem with Anderson, of course, is that as a convicted felon he may not be a credible witness. Nevertheless, he was likely at the "scene" of any steroid use that may have occurred, so unlike most white collar crime cases, he may be an important eyewitness, regardless of the credibility issues. An AP story (here) discusses the latest grand jury subpoenas. (ph)
An otherwise mundane fraud case out of the Southern District of Florida caught my eye because of the name of the prosecutor. The case involves a rather straightforward check-kiting type scheme involving multiple accounts at a brokerage firm resulting in a loss of over $200,000. What I noticed was the following sentence near the end of the press release (here): "The case was prosecuted by Assistant United States Attorney Hugo L. Black III." A heck of a good name to go into court with. (ph)
The role of lawyers involved in corporate crime investigations just keeps getting more treacherous. The Thompson Memo puts the issue of waiver of the attorney-client privilege and work product protection front and center in every investigation, and raises questions about whether the company should pay for outside counsel to represent employees and directors involved in the investigation. Counsel for the corporation must deal with how to best represent the client while considering the status of individuals who often have worked for the company for years. Similarly, the lawyer retained to represent an individual in the investigation clearly owes a duty to represent the client, but if the fees are paid by the company, then there will be at least some tension in the attorney's representation. To make matters even more complicated now for the employee's attorney, a New York Law Journal article (here) discusses a malpractice suit against Kaye Scholer related to its representation of a former vice president of Computer Associates Inc. who was terminated from her position shortly after answering questions in an internal investigation.
Computer Associates was involved in an accounting fraud investigation that resulted in the company entering into a deferred prosecution agreement and its former CEO pleading guilty to securities fraud and obstruction of justice charges. Irene Salvatore was represented by Kaye Scholer in 2004 in the internal investigation, and her malpractice suit claims that the firm did not advise her that she could have refused to cooperate. In denying summary judgment to the firm, the trial court found that the payment of Salvatore's attorney's fees by Computer Associates was sufficient to raise an issue of fact whether Kaye Scholer had a conflict of interest. The trial court did dismiss wrongful termination, conspiracy, and defamation claims filed by Salvatore. The malpractice claim is premised on the assertion that the investigation sought to make scapegoats of lower-level employees to protect senior management, so that by not advising her to refuse to cooperate Kaye Scholer assisted the company to her detriment. The law firm responded that because Salvatore was an at-will employee, she could be terminated at any time and if she had failed to cooperate then she would have lost her job anyway.
We have seen other instances of company's firing employees or terminated the benefits of retired employees who asserted their Fifth Amendment privilege in responding to a subpoena or refused to cooperate with lawyers conducting an internal investigation, for example in the AIG-General Re investigation. Former employees in particular have a strong interest in having the company pay their attorney's fees, and the KPMG tax shelter prosecution involves a claim that the firm's decision to terminate the payment of fees violates their Sixth Amendment right due to improper government pressure on KPMG. If lawyers who have their fees paid by the corporation could also face malpractice claims for advising their clients in a way that is helpful to the company, then that may discourage law firms from undertaking such representation. No attorney wants to be in a "damned if you do, damned if you don't" situation, and the malpractice claim against Kaye Scholer certainly seems to put the firm in just that position. If successful, this type of claim will be another factor lawyers have to consider in undertaking representation in an internal investigation. (ph)
Tuesday, April 25, 2006
Which of these three "I's" apply to Ken Lay?
Were his actions illegal as the prosecution seeks to prove, just basic incompetent, or ignorant - did Fastow keep him in the dark about the improprieties going on in the company?
The key may not rest on the technical items presented to the jury, but more likely on credibility -- who do they believe. As usual Mary Flood (Houston Chronicle) here provides a wonderful review of Ken Lay's testimony. See also Carrie Johnson's take in the (Washington Post) here.
Bob Weninger, a law professor at Texas Tech University School of Law, is surveying lawyer reaction to a proposed amendment to Federal Rule of Evidence 408. The proposal is now before the Supreme Court and may soon be before Congress. Under the amendment, statements made in settlement talks in civil cases brought by public agencies might be admissible in later criminal cases. He asked readers if they might take 10-15 minutes to complete a brief questionnaire online. He stated that responses will remain anonymous. Here is the link to his survey.