Saturday, September 30, 2006

Sensenbrenner - Topless Guidelines

Sensenbrenner introduced on Friday a "topless guidelines Booker fix."  For full details check out Professor Doug Berman's Sentencing Blog here. A perfect reason why this should not be considered is found in the very statistics of the Sentencing Commission which reports in March 2006 that "The majority of federal cases continue to be sentenced in conformance with the sentencing guidelines."  The report also noted that the average sentence pre-Protect Act for the category theft and fraud under United States Sentencing Guideline 2B1.1 was sixteen months. This increased to twenty months post-Protect Act and twenty-three months post-Booker. Report on the Impact of United States v. Booker on Federal Sentencing, United States Sentencing Commission 71 (March 2006).  Is there really any need for topless guidelines if the sentences are going up in the one area, white collar crime, that seems to be of enormous concern?


September 30, 2006 in Sentencing | Permalink | Comments (0) | TrackBack (0)

Second Day ABA Securities Fraud Institute

Parts of the first day of the ABA Securities Fraud Institute are discussed here. Day Two included a panel breakout on Securities Fraud Sentencing After Booker. The panel members were Hon. Melinda Harmon, who moderated, and Eric Bustillo, David Gerger, Stephen Prowse, James Robinson, and myself. 

One interesting theme that arose in the panel's discussion was the cost to the accused in computing fraud loss.  The Olis case was a perfect example of why one would not want to just accept an expert report submitted by the government and why it is necessary for the defense to hire and prepare their own report. David Gerger, the attorney who handled the Olis re-sentencing, spoke about the pro bono services offered by Professor Joseph Grundfest (see here) and others.  Jim Robinson also remarked, "where do you get the resources?"   One has to begin wondering whether the sentencing guidelines really can operate fairly when some individuals are placed at a disadvantage because they do not have the funds to properly prepare a defense to the government's computation of loss.

One other highlight of the program was when David Gerger, attorney for Andrew Fastow and Jamie Olis, discussed the concept that "cooperation should be valued; non-cooperation should not be punished."


September 30, 2006 in News | Permalink | Comments (1) | TrackBack (0)

Could the H-P Pretexting Trigger a Conspiracy Charge

The sight of ten witnesses taking the Fifth Amendment at the House Subcommittee hearing looking into Hewlett-Packard's conduct of its internal investigation sure makes it look like everyone was working together, although each has his or her own reasons for asserting the privilege.  The key question for the two top H-P lawyers caught up in the case, former general counsel Ann Baskins and former chief ethics officer Kevin Hunsaker, is whether their links with the phalanx of private investigators who conducted the pretexting are sufficiently close to tie them into potential illegal conduct.  Evidence revealed at the hearing shows that their contacts with the PIs may have been closer than it first appeared when H-P took the position that the pretexting was unknown to -- and unauthorized by -- company executives.

Handwritten notes of Baskins from June 2005, at the start of the first leak probe by the company (Kona I), show her writing "Obtaining phone #'s is a time consuming process . . . Call carriers (Nextel/Sprint) via pretext to extract info.  I didn't make the call."  The notes are from a meeting to brief H-P about the conduct of the internal investigation.  Like any set of sketchy notes, it's not entirely clear what was meant, except that the magic word "pretext" appears in an early phase of the internal investigation and seems to tie Baskins directly into the conduct of the outside investigators.  An e-mail from a member of H-P's security department to  Hunsaker in February 2006 called into question the legality of the pretexting, shortly after Hunsaker's earlier exchange with former H-P security officer Anthony Gentilucci in which Hunsaker was told pretexting was "at the edge" of legality and responded, "I shouldn't have asked . . . ."  The e-mails and notes seem to link Baskins and Hunsaker much more closely to the use of pretexting while it was occurring and not just down the line when the results of the probe were made known. 

The more the two lawyers were involved in the oversight and, perhaps, even decision-making in the internal investigation, the more likely prosecutors will look at them as targets of the investigation.  One way to tie them in with the PIs is through a conspiracy charge, which under the Pinkerton doctrine means that a person is liable not only for the conspiracy but also all the offenses committed by the co-conspirators.  In the face of clear warnings about the legality of pretexting, the H-P employees and outside investigators may have agreed to move forward with an investigation that used illegal means to gather information.  Under conspiracy law, an agreement need not be express, and the co-conspirators need not know all aspects of the illegal conduct so long as there is an agreement to engage in criminal conduct, or to use illegal means to reach an otherwise lawful objective.  An interesting question will be whether there is in fact a crime from pretexting, because the object  of the conspiracy must be illegal.  As more information comes out about the involvement of Baskins and Hunsaker in the internal investigation, the greater the reason for them to assert the Fifth Amendment before the Subcommittee.  A Wall Street Journal story (here) discusses the new information about H-P's internal investigation. (ph)

September 30, 2006 in Investigations | Permalink | Comments (1) | TrackBack (0)

Royal Ahold Lands a Nonprosecution Agreement

Royal Ahold N.V. and its American subsidiary, U.S. Foodservice, entered into a nonprosecution agreement (available below) with the Department of Justice related to accounting fraud that inflated the company's earnings.  The former CEO and CFO of U.S. Foodservice and a number of vendors pleaded guilty in 2005 to fraud charges for inflating vendor allowances that allowed them to meet earnings targets.  Royal Ahold achieved the Holy Grail of agreements by not even being charged and, perhaps more importantly, being able to call this a nonprosecution agreement (see earlier post here on the importance of the label for companies).  Its obligations require it to continue to cooperate in the Department of Justice's prosecution of individual defendants and do not provide any protection from criminal tax charges, although none appear on the horizon.  If Royal Ahold can keep its nose clean and cooperate for the next two years (or until all the government litigation is concluded), then it will have completely put behind it a nasty episode without any criminal charges ever having been filed.   A Washington Post story (here) discusses the agreement.  (ph)

Download ahold_nonprosecution_agreement1.pdf

September 30, 2006 in Fraud, Settlement | Permalink | Comments (0) | TrackBack (0)

Friday, September 29, 2006

Florida Representative Resigns over Inappropriate E-Mails

The AP reports (here) that Florida Representative Mark Foley has resigned from Congress because of five inappropriate e-mails he sent to a then 16-year old former Congressional page, one of which asked for his picture.  The e-mails have been posted on the website for Citizens for Responsibility and Ethics in Washington (CREW) and were reported by ABC News.  Although Foley's campaign initially denied the e-mails were sent by the Congressman, he has now issued the following statement, "I am deeply sorry and I apologize for letting down my family and the people of Florida I have had the privilege to represent."  Foley's House website touts his leadership of the Missing and Exploited Children Caucus and the "legislation he authored and introduced overhauling our nation’s sex offender registration and notification laws." (press release here)  Foley is the third member of Congress to leave the institution under a cloud this year, assuming Rep. Bob Ney resigns in the wake of his guilty plea to corruption charges. (ph)


UPDATE:  ABC News (here) has information about additional e-mails between former Representative Foley and other former Congressional pages that contain more explicit communications that may violate federal law. (ph)

September 29, 2006 in News | Permalink | Comments (0) | TrackBack (1)

Attorney's Fees and the Fifth Amendment Privilege

It is not every day that a company's most recent general counsel and corporate ethics officer assert their Fifth Amendment privilege at the same hearing, but that's what happened at the hearing before the House Energy & Commerce Subcommittee investigating Hewlett-Packard's internal investigation that involved "pretexting" to obtain personal records.  Ann Baskins, the general counsel during the investigation who the company announced was leaving her position just hours before the hearing, and Kevin Hunsaker both refused to answer questions.  Asserting the Fifth Amendment is often a ground for being terminated, particularly when the person is the general counsel, and having the company cut you off from receiving any future benefits.  Moreover, the Thompson Memo (here) states that one factor in determining whether to charge a company with a crime is "whether the corporation appears to be protecting its culpable employees and agents," which can include "the advancing of attorneys fees."  The recent district court decision in U.S. v. Stein, involving former partners and employees of KPMG, held that the Thompson Memo's position on the payment of attorney's fees is unconstitutional. 

The Stein decision may have an effect on whether the government views Baskins' separation agreement (here) with H-P as an indication of a lack of cooperation by the company.  In addition to receiving unvested stock options that will be worth $1 million, the agreement contains the following language:

To the extent doing so is consistent with the exercise of my rights under the federal and state Constitutions, I agree that I will cooperate with the Company in connection with any internal investigation, and the defense or prosecution of any claim that may be made against or by the Company (with the exception of any claims that may be asserted by the Company against me), or in connection with any ongoing or future investigation or dispute or claim of any kind involving the Company, including any proceeding, civil or criminal, before any arbitral, administrative, judicial, legislative, or other body or agency, including testifying in or in connection with any proceeding, to the extent such claims, investigations or proceedings relate to services performed or required to be performed by me, pertinent knowledge possessed by me, or any act or omission by me.

The key to this provisions is that an assertion of the Fifth Amendment by Baskins does not mean she has failed to cooperate with the company in connection with any investigations.  The agreement further provides that "[t]he Company agrees to indemnify me to the fullest extent permitted by the Company’s bylaws and applicable law to include but not limited to Section 2802 of the California Labor Code," and that "the Company agrees to advance Expenses actually and reasonably incurred by me in connection with any Proceeding  provided I acted in good faith and in a manner I reasonably believed to be in or not opposed to the best interests of the Company and, with respect to any criminal action or proceeding, I had reasonable cause to believe my conduct was lawful."  Baskins' right to receive attorney's fees permits her to assert the Fifth Amendment and still be viewed as acting in good faith, so her invocation of the privilege against self-incrimination at the Subcommittee hearing will not affect her right to have H-P pay the cost of her lawyers, which could be considerable over the next few months.

The Stein decision took dead aim at the Thompson Memo's statement regarding attorney's fees, and it may be that the U.S. Attorney's Office does not want to pick this fight again, at least not while the district court's decision is on appeal.  The government's credibility on Capitol Hill is not all that high at the moment, so it may not want to raise the issue of attorney's fees at this time.  It will be interesting to see if the two other former H-P executives, Hunsaker and security chief Anthony Gentilucci, who asserted the Fifth Amendment have similar agreements with the company.  If so, then the government could raise the issue of cooperation with H-P, although I don't think it is a particularly strong basis on which to judge whether a company is being cooperative. (ph)

September 29, 2006 in Investigations, Privileges | Permalink | Comments (0) | TrackBack (0)

Abramoff Gets a Little More Time on the Outside

In a joint request by federal prosecutors and defense counsel, U.S. District Court Judge Paul Huck postponed the prison reporting date for former superlobbyist Jack Abramoff from October 2 until November 15.  Judge Huck expressed some reluctance to grant the request, according to an AP story (here), stating that "there comes a time when people have to pay the piper, so to speak. I think that time has come."  The government requested a 90-day postponement, and the judge only granted about half of that.  The reason for postponing the start of the prison term is to allow Abramoff to continue his cooperation in the continuing corruption investigation that recently resulted in the guilty plea of Ohio Rep. Bob Ney.  With a cut-off of November 15 to have Abramoff readily available, prosecutors may move more quickly to bring charges against additional defendants.  This can't be good news for those on Capitol Hill who dealt with him, and perhaps the White House.  An AP story (here) discusses a draft report by the House Government Reform Committee that details 485 contacts Abramoff had with the Administration, although it notes that he was largely unsuccessful in helping his clients. (ph)

September 29, 2006 in Corruption, Investigations | Permalink | Comments (0) | TrackBack (0)

Kobi Alexander On Ice for the Weekend

Former Comverse Technology CEO Kobi Alexander will be sitting in a Namibian jail for the weekend after a magistrate postponed a hearing on his extradition to the United States until Monday, October 2.  Alexander was arrested on Sept. 27, after the Parliament enacted a provision authorizing the government to extradite him to the United States to face conspiracy, securities fraud, and related charges related to options backdating at the company.  Alexander's lawyers requested that he be released on bail pending the extradition hearing, a position the U.S. and Namibian government will oppose because of the potential risk of flight, given that he was declared a fugitive after the initial charge was filed on August 9 and his large bank transfers into Namibia that helped to identify him.  A Bloomberg story (here) discusses the status of the case. (ph)

September 29, 2006 in International, Securities | Permalink | Comments (0) | TrackBack (0)

CSK Auto Finds Accounting Problems and Fires Employees

CSK Auto Corp. announced that its internal investigation turned up problems with its accounting that triggered the firing to two senior executives and others who worked on the finance side of the company.  A press release (here) states:

[T]he Audit Committee of its Board of Directors has substantially completed its previously announced internal investigation (commenced in March 2006), which was conducted with the assistance of independent counsel and a separate accounting firm. The scope of the investigation focused primarily on the Company’s accounting for inventory and vendor allowances associated with the Company’s merchandising programs, but was not limited in any way by the Audit Committee. The investigation identified accounting errors and irregularities that materially and improperly impacted various inventory accounts, vendor allowances, other accrual accounts and related expense accounts.

The Company announced that Martin Fraser (President and Chief Operating Officer), Don Watson (Chief Administrative Officer and former Chief Financial Officer), as well as several other individuals in the Company’s finance organization are no longer employed by the Company. In addition, the Company intends to implement remedial measures expected to include enhanced accounting policies, internal controls and employee training.

Although not identified as a related move, the company also announced that is has begun a search for a new CEO.  Current CEO Maynard Jenkins will take over the duties of COO, retiring when the new CEO is appointed.  CSK Auto will have to restate its financial for two prior years, and still has not issued audited financials for 2006 yet.  If the SEC request for information -- or worse, a subpoena -- has not arrived yet, it will in a few days, so look for the company to disclose that event soon.  If the accounting problems are bad enough, a U.S. Attorney's Office may enter the picture, too. (ph)

September 29, 2006 in Fraud | Permalink | Comments (0) | TrackBack (0)

Thursday, September 28, 2006

ABA National Institute on Securities Fraud

The first day of the ABA’s National Institute on Securities Fraud provided interesting perspectives on a host of issues. Catching the luncheon speaker and two afternoon panels confirmed to me that this was a well balanced program, that was offering both government and defense perspectives. It was also nice to see the judiciary participating. Details of the program can be found here.

The luncheon speaker Commissioner Annette L. Nazareth, after stating the usual government disclaimer of not speaking in her government capacity, opened by stating that securities fraud would be with us for years. Setting forth guidelines used by the SEC, she emphasized the amount of discretion truly available in deciding what avenue should be taken in a specific case. And although the word "discretion" may not have been uttered, there was a recognition that the remedy could be tailored to fit the facts of the case.

Who to indict, who will only be subjected to a civil action, and who will receive a total pass, are prominent concerns in the securities fraud area. But should this discretion be reconsidered by the court when an individual who is convicted, faces sentencing? Should defense counsel be arguing for a lesser sentence because cases of equal culpability were deemed civil and not prosecuted?

One afternoon panel moderated by Professor John Coffee examined a hypothetical that looked at a back-dating option scenario initially with a charge of mail fraud. Perhaps the most fascinating part of this panel was to hear the Hon. Jed Rakoff speak about the mail fraud statute, as he authored many years back the leading article on this statute.  The article includes in the title that it is Part I, but Part II has never surfaced in the law reviews.  It was interesting to hear what might be included in Part II, should he ever decide to write the next chapter of mail fraud. The panel discussed the Fifth Circuit decision in the Brown case (Enron Nigerian Barge case - see here) and how this decision might fare in other jurisdictions.

The panel moved through a well crafted hypothetical exploring issues related to the Stein case, the Thompson Memo, and sentencing issues.  This was a hypothetical perfect for a law school exam.


September 28, 2006 in Securities | Permalink | Comments (0) | TrackBack (0)

Everyone Takes the Fifth

The first panel before the House Energy & Commerce Subcommittee investigating "pretexting" by Hewlett-Packard has come and gone, and all of them asserted their Fifth Amendment privilege and refused to answer questions.  Among those who asserted the Fifth were H-P's former general counsel, Ann Baskins, who announced her resignation shortly before the hearing, former chief ethics officer Kevin Hunsaker, and former security chief Anthony Gentilucci.  In addition, all the private investigators who assisted in the pretexting for H-P asserted their self-incrimination privilege. 

After the dismissal of the witnesses, Rep. Joe Barton, the chairman of the full committee, said that he had never seen an entire panel take the Fifth Amendment and lamented the inability of the Subcommittee to gather information.  It is clear, however, that holding a hearing while there are ongoing federal and state criminal investigations, including an assertion by the California State Attorney General that crimes took place, is almost a guarantee that witnesses who were involved in the alleged misconduct will assert their constitutional privilege before knowing where the criminal investigations are going.  It may be hard for Congress to hear this, but criminal liability is much more important to a witness than what a committee or subcommittee wants to hear. For those interested in listening to the hearing, it is available on the Subcommittee website (here). (ph)

September 28, 2006 in Investigations, Privileges | Permalink | Comments (0) | TrackBack (0)

March of the Private Investigators

The impending House Energy and Commerce Subcommittee hearing promises to have some potential fireworks, or a parade of witnesses taking the Fifth Amendment, with the issuance of subpoenas the day before the hearing to five private investigators who purportedly did the "pretexting" on behalf of Hewlett-Packard.  According to an AP story (here), the five PIs are: Bryan Wagner, Charles Kelly (CAS Agency), Cassandra Selvage (Eye in the Sky Investigations), Darren Brost, and Valerie Preston (InSearchOf Inc.).  I doubt any of them will remind us of Jim Rockford, but they do have a couple of catchy agency names.  Wagner is reported to have said he destroyed his home computer with a hammer after the news about H-P's investigation hit, so I suspect that's at least one witness likely to assert the privilege against self-incrimination in the face of a possible obstruction of justice investigation.  The hearing starts at 10:00 a.m., and now includes a second day when the Subcommittee will hear from telecom companies about their efforts to combat pretexting. Let the games begin. (ph)

September 28, 2006 in Investigations | Permalink | Comments (0) | TrackBack (0)

Dropping the Hammer on Kobi Alexander

Former Comverse Technology CEO Kobi Alexander went into hiding in July when criminal charges appeared on the horizon, along with $57 million, according to the government, and wound up in a place few would have expected.  Alexander was arrested in Namibia, which was once part of South Africa and only gained independence in 1990.  The country does not have an extradition treaty with the United States, and while there is one between the U.S. and South Africa, it does not appear that it applies now that Namibia is independent.  Therefore, the Republic of Namibia's Parliament enacted a law, at the request of the Justice Ministry, that went into effect on September 27 to permit Alexander to be extradited to the U.S.  A Bloomberg article (here) discusses the Parliament's enactment.  A press release issued by the U.S. Attorney's Office for the Eastern District of New York (here) states, "The arrest was made pursuant to a provisional warrant issued by a Namibian court at the request of the United States government. ALEXANDER will be brought before a court in Windhoek, Namibia within 48 hours. The United States intends to seek ALEXANDER’s extradition to the United States . . . ."

When he returns to the U.S., Alexander will face an extensive criminal indictment (available below courtesy of the Wall Street Journal Law Blog) related to backdating options at Comverse that was returned on September 20 and sealed until the arrest.  Two other Comverse executives, former CFO David Kreinberg and former general counsel William Sorin, were initially charged in a criminal complaint with conspiracy along with Alexander in July, but they are not named in the current indictment.  Given the timing of the indictment, and the decision not to include Sorin and Kreinberg in it at this time, I suspect prosecutors learned that Alexander was in Namibia and worked behind the scenes with the Namibian government to have the extradition law enacted, at which point he could be arrested and the indictment unsealed.

The 32-count indictment charges Alexander with conspiracy, securities fraud, filing false documents with the SEC, mail/wire fraud, and money laundering.  Forfeiture counts seek $138 million and two apartments he owns in New York City (on West 57th and West 56th for those keeping score).  The 18 mail/wire fraud counts, based largely on the filing of the false documents, allege that the scheme was to defraud "the investing public."  Rather than charging Alexander with defrauding Comverse shareholders, which is the more common basis supporting a fraud claim related to options backdating, the government seems to have opted for a much more amorphous theory of the fraudulent scheme.  Given that the investing public includes virtually anyone with a brokerage, mutual fund, or retirement account -- probably a large percentage of the adults in this country -- it doesn't seem that this type of allegation meets the requirements for a "money/property" scheme.  Usually the government charges that the defendant gained something of value from a victim, but when that victim is just about everyone, none of whom dealt directly with the defendant, it may be harder to prove that Alexander schemed to defraud "the market."  Moreover, the government does not allege a "right of honest services" fraud under Sec. 1346, which might have been a plausible charge for depriving Comverse of his honest services through the breach of fiduciary duty by filing false documents and backdating options grants.resulting in the personal gains from the options grants.  I expect the defense will seek to knock out these charges early on through a motion to dismiss for failure to allege properly all the elements of the offense.  (ph)

Download alexander_indictment_september_2006.pdf


UPDATE: A Wall Street Journal article (here) discusses the circumstances surrounding the arrest of Alexander in Namibia.  Apparently he did not do much, if anything, to hide his identity while living there.  It may be that he believed, or was told, that the absence of an extradition treaty between Namibia and the U.S. would protect him.  That assessment turned out to be wrong.

September 28, 2006 in Fraud, International, Prosecutions, Securities | Permalink | Comments (0) | TrackBack (0)

SEC Files Accounting Fraud Charges Against Three Former RenaissanceRe Executives

The SEC filed a civil action (here) in the U.S. District Court for the Southern District of New York alleging that James Stanard, the former CEO of RenaissanceRe Holdings, which is based in Bermuda, Martin Merritt, the company's former controller, and Michael Cash, a former executive at a RenRe subsidiary, alleging fraud in a pair of sham transactions designed to smooth the company's earnings in 2001-2003.  According to the SEC Litigation Release (here):

In its complaint, the Commission alleges that Stanard, Merritt and Cash committed fraud in connection with a sham transaction that they concocted to smooth RenRe's earnings. The complaint concerns two seemingly separate, unrelated contracts that were, in fact, intertwined. Together, the contracts created a round trip of cash. In the first contract, RenRe purported to assign at a discount $50 million of recoverables due to RenRe under certain industry loss warranty contracts to Inter-Ocean Reinsurance Company, Ltd. in exchange for $30 million in cash, for a net transfer to Inter-Ocean of $20 million. RenRe recorded income of $30 million upon executing the assignment agreement. The remaining $20 million of its $50 million assignment became part of a "bank" or "cookie jar" that RenRe used in later periods to bolster income.

The second contract was a purported reinsurance agreement with Inter-Ocean that was, in fact, a vehicle to refund to RenRe the $20 million transferred under the assignment agreement plus the purported insurance premium paid under the reinsurance agreement. This reinsurance agreement was a complete sham. Not only was RenRe certain to meet the conditions for coverage; it also would receive back all of the money paid to Inter-Ocean under the agreements plus investment income earned on the money in the interim, less transactional fees and costs.

RenRe accounted for the sham transaction as if it involved a real reinsurance contract that transferred risk from RenRe to Inter-Ocean, when in fact, the complaint alleges, each of these individuals knew that this was not true. 

Merritt entered into a partial settlement with the Commission in which he will be barred from serving as an officer or director of a public company and be enjoined from future violations of the securities laws; the issue of disgorgement and a civil penalty will be determined at a later time.  All three defendants left RenaissanceRe in 2005, when the company restated its results related to the transactions.  According to an AP story (here), attorneys for Stanard and Cash declared that their clients did not commit securities fraud in the transactions. (ph)

September 28, 2006 in Civil Enforcement, Fraud, Securities | Permalink | Comments (0) | TrackBack (0)

Wednesday, September 27, 2006

Kobi Alexander Found in Namibia

According to the Wall Street Jrl here, Kobi Alexander, former Comverse Energy's CEO has been found in Namibia and now awaits extradition or return to the United States. Although there is no extradition treaty with the US, this does not always mean that the individual cannot be sent to the United States. The Wall St.Jrl reports that "the Namibia government enacted a law to establish an extradition treaty with the U.S., prompted by this case." For background on the Kobi Alexander matter see here.

Extradition treaties often formalize two basic principles that operate in international law. The first is the Rule of Speciality.  "The essence of the rule of speciality is that a defendant may be tried only for the crimes for which he or she is extradited." (See Podgor, Understanding International Criminal Law 98 (2005).  The second principle is Dual Criminality which requires that in order for extradition to be proper, the crime must be a crime in both countries.  The interesting question here is whether the alleged crime is in fact a crime in Namibia.


September 27, 2006 in International, Securities | Permalink | Comments (0) | TrackBack (0)

Apparently You Can't Trust Your Summer House Manager, Either

The SEC filed a civil insider trading case against Graham Lefford for using confidential information he gleaned from faxes about a pending deal to buy a company.  The faxes were sent to the summer house he managed that was owned by Robert Sillerman, the creator of American Idol, who bought a shell company, Sports Entertainment Enterprises, Inc. (SPEA), to use it as a vehicle for licensing Elvis Presley products.  Other media reports describe Lefford as the butler at Sillerman's South Hampton summer home. According to the SEC's complaint (here), Lefford signed an agreement with Sillerman to maintain the confidentiality of all business and financial information he learned while managing Sillerman's summer home in South Hampton.  The SEC Litigation Release (here) states:

Lefford found out about Sillerman's acquisition of SPEA from one or more of the several deal-related documents that were faxed between Sillerman's office in Manhattan and his South Hampton residence that summer. Within minutes of faxing Sillerman's signed authorization for the SPEA acquisition back to Sillerman's office, Lefford bought 5,000 shares of SPEA stock at 12 cents per share. The price of SPEA stock shot up by over 9,000% after Sillerman's acquisition of SPEA and the Presley deal were both announced in December 2004, and Lefford made $48,525 in total profit on his $600 investment when he later sold all his SPEA stock.

While the total gain is rather small, the investment return is something that certainly catches the eye, and may have triggered the SEC's interest in pursuing the matter.  The confidentiality agreement likely relieves the Commission from having to prove that the master-servant relationship, to use the traditional terminology, creates a fiduciary duty between Lefford and Sillerman to keep the information confidential.  Lefford denies that he traded on material nonpublic information and is fighting the action at this point.

The same day the SEC filed the complaint, the Senate Judiciary Committee held a hearing on whether the SEC and Department of Justice are bringing enough insider trading cases.  There have been a number of deals recently, many of them involving going-private transactions, in which there was suspicious trading in advance of the announcement, particularly in call options.  SEC Enforcement Division Director Linda Thomsen explained in her prepared statement (here) that suspicious trading is not necessarily illegal insider trading, or at least proving it can be very difficult. 

It is important to understand how difficult it is to build an insider trading case. They are unquestionably among the most difficult cases we are called upon to prove, and despite careful and time-consuming investigations, we may not be able to establish all of the facts necessary to support an insider trading charge. The challenge is not to establish facts that show suspicious trading—the surveillance records alone are often sufficient to establish that much. The real challenge is to establish that a particular individual was in possession of material non-public information and in fact traded on it in breach of a duty, and to establish those facts based on admissible evidence that can withstand challenge at trial.

Piecing together an insider trading case can be a complex and painstaking process. It is rare to find a “smoking gun;” virtually all insider trading cases hinge on circumstantial evidence. It is quite common for insider traders to come up with alternative rationales for their trading—rationales that the staff must refute with inferences drawn from the timing of trades, the movement of funds and other facts and circumstances. And because many insider trading cases involve secret communications between two people – the tipper and his tippee – assembling compelling circumstantial evidence is often difficult. In some cases, such as when a corporate insider trades on company information or when an outsider steals nonpublic information, there are no communications at all to use as evidence at trial, but only the facts of the wrongdoer’s access and trading. Building an insider trading case based on circumstantial evidence can be frustrating, risky and time-consuming. Because of these challenges, we also have to accept that a number of the insider trading investigations we open may not result in a filed enforcement action—not for any lack of diligence on the part of the staff, but for lack of evidence.

Pressure from Congress will likely trigger more investigations and perhaps even more cases, although that could result in more questionable prosecutions and civil enforcement actions.  Insider trading may be easy to spot, but as Thomsen points out that does not necessarily mean it is easy to prove. (ph)

September 27, 2006 in Civil Enforcement, Insider Trading, Securities | Permalink | Comments (0) | TrackBack (0)

House Subcommittee Subpoenas Two Former H-P Executives

The hearing on September 28 before the House Energy & Commerce Subcommittee looking into the Hewlett-Packard internal investigation's use of "pretexting" to obtain private records has become a bit more threatening for two former H-P executives.  The Subcommittee issued subpoenas, rather than invitations, to its former ethics officer, Kevin Hunsaker, and a former security chief, Anthony Gentilucci.  Both left the company in the past few days because of their roles in the internal investigation. The Subcommittee invited the other witnesses from the company, Patricia Dunn, Mark Hurd, and Ann Baskins, to appear, although it is not an invitation one turns down easily.  Hunsaker and Gentilucci were identified during a company press briefing on September 22 as those inside the company with primary responsibility for the internal investigation and the use of outside investigators who engaged in pretexting to obtain the telephone records of journalists, board members, and other executives.

The interesting question will be whether Hunsaker and Gentilucci testify at the hearing or assert their Fifth Amendment privilege.  A New York Times article (here) indicates that Gentilucci's attorney said that a decision on that issue has not been made, and Hunsaker's lawyer has not indicated whether his client will testify.  Given that California Attorney General Lockyer has asserted that criminal conduct took place in connection with H-P's investigation, and the U.S. Attorney's Office for the Northern District of California also is conducting an investigation, it may be prudent for those closest to the alleged misconduct to protect themselves by asserting the Fifth Amendment at this point.  It is certainly not good publicity, and the Subcommittee members may force them to assert the constitutional privilege publicly at the hearing, but the more important issue is what comes down the road.  If there is some assurance that neither will be charged by California, or that they are not targets of a federal grand jury investigation, then cooperating with the Subcommittee by answering questions may be the better course.  Without that comfort, it may be that a "protective" assertion of the self-incrimination privilege is the better course at this point in time.  It is a difficult decision, and one that often has to be made with less-than-complete knowledge of the situation or the consequences. (ph) 

September 27, 2006 in Investigations | Permalink | Comments (0) | TrackBack (0)

Tuesday, September 26, 2006

Ebbers & Fastow Finally Report to Prison, Campbell Went Immediately

Yesterday Andrew Fastow, who received a sentence of six years despite a plea agreement allowing him to receive ten years, was sent to prison. Also yesterday, Bernie Ebbers, who went to trial and received a 25 year sentence, reported to prison to begin serving his sentence. 

Both men were given the luxury of waiting a period of time to begin serving their sentences.  In the case of Fastow it was to allow his wife to first serve her sentence and also allow him to remain free to assist the government.  In the case of Bernie Ebbers it was because he was permitted to remain free pending his appeal.

The freedom each of these individuals experienced prior to starting to serve their sentence is yet another indication that the public does not fear these individuals.  Their sentences were for deterrence and retribution purposes and not for incapacitation.

In contrast, former Mayor Bill Campbell was ordered to serve his sentence immediately.   His sentence for a tax offense surprisingly was much shorter than both Ebbers and Fastow. (see here)


September 26, 2006 in Enron, Sentencing, Tax, WorldCom | Permalink | Comments (1) | TrackBack (0)

More on Fastow

Some more thoughts on the Fastow sentence:

1.  Some may argue that this sentence is another example of why we need strict sentencing guidelines that do not allow for judicial discretion. This is inaccurate.  Even with strict guidelines in a pre-Booker world, the court would have had the discretion to give this sentence to Fastow.  Sentences premised upon cooperation, that is sentences where the accused receives a 5K1.1 cooperation benefit, are allowed to be outside the guidelines.  Thus, even with strict guidelines - Fastow's sentence could have been the same.

2. Are the sentences proportional here?  There may be room for argument here in that clearly those who plead are receiving substantially less for the same crime than those who risk a trial. Some may argue that saving the government time and money warrants this disparity.  But on the other side, does this diminish the constitutional right to a jury trial?

3. Peter Lattman at the Wall Street Jrl here asks the question, "Did Plaintiffs’ Lawyers Win Andy Fastow a Lighter Sentence?"  As noted here, it was the University of California system that was asking for leniency for Fastow. It is rare that one finds a victim asking for leniency for the convicted defendant.  But when they personally receive a benefit, it is understandable that they will come forward and be there at the sentencing.  This is somewhat bothersome, however, in that poorer individuals, those with no information to offer the government, and those who are last in the prosecution line are individuals who have nothing left to offer in cooperation and are just plain out of luck. 


September 26, 2006 in Enron, Sentencing | Permalink | Comments (1) | TrackBack (1)

What the Lay/Skilling Jury Heard From Fastow

Tom Kirkendall's Houston ClearThinkers has a tremendous post here that includes portions of Fastow's testimony during the Lay/Skilling trial. One of the pieces of testimony he presents is a part of the re-direct examination by Hueston on March 13th, when Fastow testified as follows:

"Q. And as a result of your pledge to cooperate, did you agree to plead guilty to a 10-year minimum sentence of imprisonment?

A. A 10-year maximum imprisonment.

Q. And what is the minimum amount of time that that plea agreement calls for?

A. It calls for a 10-year sentence.

Q. So after January 14th, can your cooperation lower that 10 years?

A. My understanding is that I will be sentenced to 10 years. The Judge ultimately has a discretion; but in my plea agreement, I agreed to the 10-year sentence."

Was it proper for the jury in the Lay/Skilling trial to hear that Fastow would do 10 years in prison and then have him receive a significantly lesser sentence?   This may provide another issue for Jeffrey Skilling on his appeal.  Check out the other segments that Tom Kirkendall's Houston ClearThinkers provides - here.


September 26, 2006 in Enron, Sentencing | Permalink | Comments (1) | TrackBack (0)