White Collar Crime Prof Blog

The Attorney Firings Controversy Continues

The firing of eight U.S. Attorneys remains in the forefront of the news. Some recent articles and commentary include:

Amy Goldstein & Dan Eggen, Washington Post, Prosecutor Posts Go to Bush Insiders: Less Preference Shown to Locals, Senators' Choices

Professor Michael Seigel (Florida) writes an op-ed in the Orlando Sentinal that advocates against allowing executive privilege here.  He states, "Congress has the constitutional authority to investigate executive wrongdoing, and the possibility of criminal wrongdoing in the U.S. attorney firings is real."

And President Bush continues to support Attorney General Gonzales (See Wall Street Jrl here).

(esp)

Attorney General Cuomo of NY Examines Student Loan Practices

New York Attorney General Andrew Cuomo issued a press release stating that he found "deceptive practices in the college loan industry."  His response was to send "letters to more than 400 colleges and universities cautioning them of potential conflicts of interest."  His press release included seven areas in the student loan industry that are problems, including "Lenders pay financial kickbacks to schools based on a percentage of the loans that are directed to the lenders. The kickbacks are designed to be larger if a school directs more student loans to the lender. And the kickbacks are even greater if the schools make the lender their 'exclusive' preferred lender."

(esp)

Make Sure You List the Statute Correctly

Web CPA reports in an article titled, " DOJ Puts Tax Cheat in Jail, But Doesn't Get Hands on $100M" that
listing the wrong statute in a plea agreement has cost prosecutors enormously - they will not be permitted to proceed against an individual on a forfeiture action.

(esp) (w/ a hat tip to Joel Podgor)

Gonzales on U.S. Attorney Firings: "I Don't Recall Being Involved in Deliberations"

After Attorney General Alberto Gonzales' former chief of staff, Kyle Sampson, testified that the AG was involved in the decision to terminate eight U.S. Attorneys, Gonzales responded that "[f]rom time to time, Kyle would tell me things that would tell me that this effort was ongoing. I don't recall being involved in deliberations involving the question of whether or not a U.S. attorney should or should not be asked to resign. I didn't focus on specific concerns about individuals."  He did acknowledge that "I signed off on the recommendations and signed off on the implementation plan, and that's the extent of my involvement."  So we have to determine whether making the ultimate decision means one is "involved" but not really "involved" because you don't participate in the deliberations leading up to the decision you made.  It almost sounds like a lack of knowledge defense, or worse, the rubber-stamp excuse for a decision (along with the tired aphorism "The buck stops here" of course).

The investigation of the firings continued on Capitol Hill, even as Congress heads off for its Spring recess, with investigators from the House and Senate Judiciary Committee's interviewing Michael Elston, the chief of staff to Deputy Attorney General Paul McNulty and another key player in the decision-making process.  Unlike Sampson, Elston did not have to appear at a public Committee hearing, which may signal that Congress will reach an accommodation with the White House to have Harriet Miers and Karl Rove provide information about their roles in the decision to fire the U.S. Attorneys.  With Gonzales not scheduled to testify before Congress until April 17, the controversy will continue its slow burn. An AP story (here) discusses the latest developments. (ph)

New Jersey State Senator Charged with Corruption

New Jersey state Senator Wayne R. Bryant and the former dean of the School of Osteopathic Medicine (SOM) in New Jersey, R. Michael Gallagher, where charged in a twenty-count indictment with violations of Sec. 666 and the mail and wire fraud statutes for illicit arrangements to triple Bryant's state pension through no-show jobs.  According to a press release (here) issued by the U.S. Attorneys Office for the District of New Jersey, Gallagher is accused of obtaining the deanship through Bryant's assistance, and alegedly rewarded him by helping to arrange a no-show job at the SOM.  Bryant is also accused of holding other no-show jobs at the Gloucester County Board of Social Services and Rutgers-Camden law school.  According to the press release:

Bryant allegedly used his power and influence as Senator and Chairman of the Senate Budget and Appropriations Committee to directly lobby state agencies, high-level officials (including the state Treasurer), legislators and their staffs and personally directed changes in the state budget to bring millions of dollars in extra funding to SOM. All the while, Bryant failed to reveal that he was simultaneously on the payroll at SOM, receiving a high salary of $40,841 in 2004. He also used various means to conceal his purported role there, according to the Indictment.

The case comes out of the investigation by an outside monitor of the operations of the University of Medicine and Dentistry of New Jersey (UMDNJ), which entered a deferred prosecution agreement in 2005 because of Medicare and Medicaid fraud.  The indictment also accuses Gallagher of inflating profits at the University Headache Center -- imagine the one-liners about that place -- so that he could earn higher bonuses as its chairman.  (ph)

That's What a Subpoena Is For

Every once in a while a line in a company's discussion of a government investigation catches your eye when it appears to miss the point.  Beazer Homes USA is facing a government investigation of its mortgage lending practices, as discussed in a prior post (here).  On March 29, the company filed an 8-K(here) about the investigation, after the media stories first reported the FBI's confirmation of the investigation, that states, "The Company has received a grand jury subpoena from the United States Attorney’s Office in the Western District of North Carolina seeking the production of documents.  The subpoena was issued upon application of the Office of Housing and Urban Development, Office of Inspector General and focuses on the Company’s mortgage origination services.  The Company has not received a request for information or documents from the FBI or IRS in this regard. (Italics added)  Of course, a grand jury subpoena means the FBI is going to get the documents, and it does not have to "request" any information because the subpoena requires Beazer to provide it.  Similarly, if there is a criminal tax investigation, then the IRS can't ask for documents, or even issue a summons, because the case is now in the exclusive jurisdiction of the Department of Justice.  Once the grand jury subpoena arrives, rest assured that a federal investigative agency will be looking at the materials provided for any potential criminal violations -- they don't even need to say "Please" any more. (ph)

What Sampson Remembered

Attorney General Alberto Gonzales' former chief of staff, Kyle Sampson, testified before the Senate Judiciary Committee about the firing of eight U.S. Attorneys and dodged any potential perjury trap (see earlier post here) by not recalling too much detail.  As recounted in a Washington Post story (here), Sampson responded to a number of questions by saying that he "did not remember" or "did not remember specifically."  It would be virtually impossible to charge someone with perjury for not responding to a question by claiming a lack of memory, unless there was clear evidence that the person did recall, which is unlikely.  That said, a lack of memory statement does lock the person into that position, because it is unlikely their memory will improve if incriminating evidence emerges later. 

Sampson's lack of memory -- an affliction that seems to trouble others in the Administration -- did not prevent him from recalling the participation of his former boss in the decision to dismiss the U.S. Attorneys.  Sampson stated that AG Gonzales' statement about his lack of involvement in the decision was not "accurate," which will boost the pressure on the Attorney General.  Sampson also denied that the decision to fire the federal prosecutors was made by inexperienced Department of Justice attorneys, stating that "[t]he decision makers in this case were the attorney general and the counsel to the President" -- Gonzales and Harriet Miers.  Of course, neither of them would rate as experienced prosecutors with much law enforcement background, but they were in the position of authority to make the final decision.  Sampson's testimony may trigger the kind of hair-splitting we haven't seen since the late 1990s as each side analyzes how much one can be "involved" without really being "involved" -- remember hearing that "it depends on what is means"?  An AP story (here) discusses Sampson's testimony. (ph)

Dell's Accounting Woes Mount

Dell Inc. issued a press release that it will not be able to file its annual financials because of a continuing internal investigation of account problems, and its cryptic press release hints that the issues may involve violations of the federal securities laws.  The press release (here) states, "The Audit Committee’s investigation has identified a number of accounting errors, evidence of misconduct, and deficiencies in the financial control environment. The Audit Committee is working with management and the company’s independent auditors to determine whether the accounting errors necessitate any restatements of prior period financial statements, and to assess whether the control deficiencies constitute a material weakness in Dell’s internal control over financial reporting." (Italics added)  Notice how the mention of "evidence of misconduct" gets slipped into the middle of the recounted issues, and there is no further discussion of what that misconduct entails, or whether it was intentional.  Dell has not discussed the particular accounting issues it faces, but the computer industry has seen problems related to revenue recognition issues, such as timing or the proper treatment of reserves. 

The SEC has been investigating Dell, and surely it will be interested in hearing about any improprieties.  Perhaps more ominiously, such a statement may well draw the interest of federal prosecutors because of the size of Dell and the deterrent effect a case could have.  The company's disclosure gives only the bare minimum, so look for details to emerge over the next few weeks as Dell pushes to complete its annual audit so that it does not risk possible delisting from NASDAQ for filing tardy reports. (ph)

Jenkens & Gilchrist Enters Non-Prosecution Agreement and Shuts Down

Dallas-based law firm Jenkens & Gilchrist settled the government's long-running investigation of its role in tax shelter sales by agreeing to pay the IRS a $76 million penalty and entering into a non-prosecution agreement (available below) with federal prosecutors.  While the firm avoided criminal charges, it announced that it was shutting its doors because of the significant hit it took from the settlement.  The tax shelters were sold to wealthy investors through devices that were "Son of BOSS" variants with such quaint names as BLISS, BEDS, COBRA, SOS, HOMER, and BART -- tax lawyers definitely have a great sense of humor.  The agreement requires the firm, even though it is out of business, to continue to cooperate with prosecutors and the IRS, and undertake its best efforts to make former partners and employees available as witnesses.  Unlike the KPMG deferred prosecution agreement that caused prosecutors such problems, there is no mention of attorney's fees, although I suspect that the firm's partnership agreement did not provide much if any coverage for such costs. 

The non-prosecution agreement further provides that Jenkens & Gilchrist did not waive its attorney-client privilege and work product protection "with respect to its representation in connection with [the] criminal investigation, its representation in the IRS  promoter penalty audit, and its representation in private civil litigation."  This provision may be an acknowledgment of criticisms of the Department of Justice's McNulty Memo that can make waiver of the protections of confidential attorney information a condition for not prosecuting the organization.  Jenkens & Gilchrist cannot assert the tax privilege regarding its shelter transactions, but the nature of the underlying tax shelters put that narrow protection out of reach anyway.

The firm's closing shows that lawyers have to be able to trust one another because each lawyer carries the wallet of all the partners.  The tax shelters were promoted out of Jenkens & Gilchrist's Chicago office, yet the entire firm collapsed over the conduct of one group of partners. An AP story (here) discusses the case. (ph)

Download jenkens_gilchrist_nonprosecution_agreement.pdf

Scrushy's Yacht Trip Under Scrutiny

Former HealthSouth CEO Richard Scrushy's little jaunt on a yacht from Palm Beach to Miami when, according to the government, he was supposed to be in Orlando with his family visiting Disney World, has gotten him in some hot water.  Since his conviction on corruption charges, he has been on bail while awaiting sentencing and the resolution of motions for a new trial.  The U.S. Probation Office has requested that Scrushy be remanded to home confinement for violating the restrictions imposed for his Florida trip, and the home confinement would entail the following:

The defendant shall participate in the Home Confinement Program to begin at a time and residence designated by the probation officer. During this time, the defendant will remain at his place of residence except for employment and other activities approved in advance by the probation officer. The defendant will maintain a telephone at his residence, without a modem, "call forwarding", "Caller ID", "call waiting", or portable cordless telephones. At the direction of the probation officer, the defendant shall wear an electronic monitoring device and follow electronic monitoring procedures specified by the probation officer. The electronic monitoring may include an active GPS device in order to monitor your compliance. The defendant shall pay the cost of electronic monitoring as directed by the probation officer.

Scrushy's attorney's claim that the conditions of the trip allowed him to travel to south Florida to visit family friends.  A hearing has been set for April 9 to resolve the request for home confinement.  A story on WSFA-TV12 in Montgomery (here) discusses the case and quotes from the Probation Office filing. (ph)

Is the Senate Judiciary Committee Setting a Perjury Trap?

A Wall Street Journal editorial (here) asserts that the Senate Judiciary Committee hearing on the removal of eight U.S. Attorneys is really a "perjury trap" designed to set up the aides to Attorney General Alberto Gonzales subpoenaed to testify.  The editorial argues that Judiciary Committee Chairman Leahy and other Democrats should not be surprised "if government officials decide they'd rather not step into this obvious perjury trap."  In the context of grand jury investigations, the claim of a perjury trap is part of an argument seeking dismissal of charges on the ground that a prosecutor calling a person to testify with the knowledge that the witness may lie, creating the basis for a separate criminal prosecution, is an unacceptable use of the grand jury and violates the witness's due process rights.  Of course, to be a good perjury trap, the witness must not be aware of the pitfall awaiting their false statements, and the prosecutor presumably knows the truth in setting up the witness.  I'm not sure one can say that a perjury trap is being set if the Judiciary Committee does not know the truth in advance.  That such traps have been set is certainly true -- note the impeachment charges against former President Clinton for perjury based on his grand jury testimony -- but they can be avoided if the witness tells the truth or asserts the Fifth Amendment.  Monica Goodling, senior counsel to AG Gonzales, took the privilege route and avoided the trap, if there was one, although she may be subjected to the unseemly practice of being excoriated by Committee members for her decision.  A Congressional committee can't really set a perjury trap because it does not control the decision whether prosecute the perjury case, which only the Department of Justice can do, although it can offer the bait.

Unlike Goodling, AG Gonzales' former chief of staff, Kyle Sampson, will testify and probably take the brunt of the questioning regarding inaccurate statements provided to Congress about the reasons for the U.S. Attorney firings.  In prepared remarks (here courtesy of the Wall Street Journal), Sampson states that "[t]he distinction between 'political' and 'performance-related' reasons for removing a United States attorney is, in my view, largely artificial."  It depends, of course, on what one means by "political."  If "political" means favoring one party over another, then that statement would seem to contradict the idea that a prosecutor must dispense justice even-handedly.  If the point is that following the President's law enforcement initiatives is important, and hence one must show "political" support, then there is a stronger basis for finding the distinction "artificial."  The question is whether the decision to terminate the U.S. Attorneys was "political" in the latter sense when the so-called "performance" issues may have been a cover for the decision, particularly the removal of Bud Cummins from the Eastern District of Arkansas. 

Senators will also focus on Sampson's e-mails, including a newly released set (here) in which he helps prepare a letter in response to Senators questioning the appointment of Cummins' replacement, Tim Griffin.  In his e-mail dated February 8, 2007, drafted for the signature of Acting Assistant Attorney General Richard Hertling, Sampson wrote, "I am not aware of Karl Rove playing any role in the Attorney General's decision to appoint Griffin."  That statement later appears in the letter delivered to Senate Majority Leader Harry Reid.  Unfortunately, other e-mail traffic indicates White House involvement in the decision, including references to Rove.  Needless to say, the Senators will have their long knives out, but whether we learn anything new from the hearing is an open question.  According to Sampson, "This is a benign rather than sinister story," but that remains to be seen.  (ph)

Time to Pick on Enron's Lawyers

After plowing through the upper levels of Enron's management, the SEC is now targeting two former in-house lawyers for the company by charging them with securities fraud in a civil action.  The Commission filed the complaint (here) against Jordan H. Mintz, former general counsel of Enron's Global Finance group (EGF) and Rex R. Rogers, a former associate general counsel.  The case concerns a transaction involving Enron's Cuiaba, Brazil power plant to one of former CFO Andy Fastow's special purpose entites, LJM, and the reporting of the transaction.  According to the SEC Litigation Release (here):

Mintz, as General Counsel of EGF, was responsible for managing the related party disclosures in Enron's 2000 Proxy Statement (incorporated in its 2000 Form 10-K) and second quarter 2001 Form 10-Q, and closing a fraudulent related party transaction while knowingly or recklessly disregarding that the transaction was in fulfillment of a secret oral side agreement. Rogers, as Enron's top securities lawyer, was responsible for the timing and content of all Enron's SEC filings, including Enron's 2000 Proxy Statement, second quarter 2001 Form 10-Q and relevant 2001 Form 4 filings.

The Commission is seeking the usual remedies of disgorgement, a civil penalty, and director/officer bars against the two defendants, who deny the charges.  The violations took place more than five years ago, and there is a split in the circuits whether an SEC enforcement action is subject to the five-year statute of limitations period for collection of a penalty under 28 U.S.C. Sec. 2462.  Enron's lawyers, both in-house and outside counsel, have largely avoided government enforcement actions, but this case is consistent with the Commission's approach to look at the "gatekeepers" as potentially liable for reporting violations. (ph)

New Criminal Law Review

University of California Press Journals + Digital Publishing is proud to announce that commencing with Volume 10, Issue 1, it will assume publication of New Criminal Law Review: An International and Interdisciplinary Journal. The journal, formerly known as Buffalo Criminal Law Review, is focused on examinations of crime and punishment in domestic, transnational, and international contexts. New Criminal Law Review provides timely, innovative commentary and in-depth scholarly analyses on a wide range of criminal law topics. The journal will move to a quarterly publication schedule and will release issues in January, April, July and October.

"The New Criminal Law Review picks up where the Buffalo Criminal Law Review left off, by providing an international and interdisciplinary outlet for cutting-edge scholarship on issues related to criminal law and state punishment, featuring a mix of articles, essays, commentaries, and book reviews, along with symposium issues on topics of theoretical and practical importance."  -- Markus D. Dubber & Lindsay Farmer, Editors-in-Chief.

For more information on New Criminal Law Review, go to:

http://www.ucpressjournals.com/journal.asp?jIssn=1933-4192

(ph)

Tough Times at Beazer Homes

As if the meltdown in residential real estate is not enough, homebuilder Beazer Homes USA is facing a federal probe of its lending practices.  A BusinessWeek Online report (here) notes that the FBI, HUD, and IRS are conducting an investigation of its mortgage lending to low-income borrowers that comes with federal loan guarantees.  Like others in the subprime market, the default rate on Beazer Homes loans has skyrocketed in recent months as real estate values declined and borrowers have been unable to make increased payments for their ARMs.  This is not all that different from what happened in the S&L crisis in the early 1990s, when the decline in real estate -- which also included commercial properties -- led to the revelation of a number of fraudulent practices in the loan process.  When real estate values are rising, no one quite notices that corners were cut, like inflated appraisals, falsified income and asset statements, and false entries in loan documents like HUD-1s.  When they fall, however, the bodies start to pop to the surface like there's been a spring thaw.  Don't be surprised to see the investigation spread to other builders and mortgage lenders.

Beazer Homes is facing the investigation without its general counsel or CFO.  GC Kenneth Gary was fired in February "for cause, under the terms of his employment agreement, for a pattern of personal conduct which includes violations of company policies." (8-K here)  CFO James O'Leary left the company on March 27 to become CEO of another company (8-K here).  Losing two top officers can't be helpful. (ph) 

Former CFO Charged for Options Backdating

The former CFO at defense contractor Engineered Support Systems, Inc. was charged for his role in options backdating at the company.  A ten-count indictment obtained by the U.S. Attorney's Office for the Eastern District of Missouri charges Gary Gerhardt with making false statements to the SEC, books and records violations, mail and wire fraud, and conspiracy.  The company's former controller entered a guilty plea to a charge of causing a false statement in the books and records filed with the SEC and is cooperating in the case.  A press release issued by the U.S. Attorney's Office (here) describes the charges. (ph)

ITT Pleads

A DOJ Press Release reports that ITT Corporation "the leading manufacturer of military night vision equipment for the U.S. Armed Forces, has admitted sending classified materials overseas and will pay a $100 million penalty." The release states that "ITT Corporation will also be the first major defense contractor convicted of a criminal violation of the Arms Export Control Act."  The release states:

"As part of the $100 million penalty, ITT Corporation will pay a $2 million criminal fine, a $50 million deferred prosecution penalty, and will forfeit $28 million to the United States as the proceeds of its illegal actions. ITT Corporation will also pay a $20 million monetary penalty to the Department of State."

The plea agreement actually speaks to collateral consequences, although offering little relief to the company.  It states:

"ITT acknowledges that nothing in this plea agreement limits the rights of any department or agency of the United States government to seek and take civil or administrative action against ITT, including but not limited to any action relating to suspension, debarment or listing."

(esp)

Are There More Emails

The Sun Sentinel reports that Senator Bill Nelson is asking some questions about the recent resignation of Paul Perez, U.S. Attorney for the Middle District of Florida.  In asking these questions, one has to wonder if this will mean that the DOJ will be turning over all emails regarding this resignation. (See here for prior discussion of this resignation). Perez denies that his resignation is related to the recent "firings."

(esp) (w/ a Stetson hat tip to Dean Dickerson)

Taking the Fifth - U.S. Attorney Firings

Monica Goodling, senior counselor to AG Gonzalez, plans to take the 5th Amendment when called to testify by the legislature. (see Wall Street Jrl here, N.Y. Times here).  Her attorney's letter here explains the reasons for this course of conduct.

Now if this had taken place in a corporation that was under investigation, legal counsel for the corporation would be calling the parties in and asking the employees to answer questions. Either internal or external counsel would be investigating to determine if there was wrongdoing involved in the activities.  In all likelihood the individual would have no attorney-client privilege in a world where deferred prosecution agreements allow the corporation to act as mini-prosecutors and turn over evidence of the individuals to the government.  And if the individual refused to speak with counsel - the result would be - you're fired.  Will that happen here? And perhaps, more importantly, should that happen here?

What it is important to remember here is that we are all entitled to exercise constitutional rights, even those who work at the Department of Justice.

(esp)

Stockman Indicted

The Indictment against David Stockman, the former Director of Management & Budget under President Ronald Reagan, was anticipated (see here) and it has now become a reality.  It relates to his alleged activities when employed at Collins & Aikman, a supplier of automobile parts. The Indictment, a 65 page document, charges as follows:

Count One- Conspiracy To Commit Securities Fraud, Make False Statements In Annual and Quarterly Reports, Make False Entries In Books And Records, Lie To Auditors, Commit Bank Fraud, Wire Fraud, and Obstruction of An Agency Proceeding

Count Two- Securities Fraud

Count Three-Securities Fraud

Count Four- Securities Fraud

Count Five - Bank Fraud

Count Six - Bank Fraud

Count Seven- Wire Fraud

Count Eight- Obstruction of Agency Proceedings

It also calls for a forfeiture of millions of dollars. The Wall Street Journal provides a preview of the defense position in this link to a statement by the defendant.

(esp)

Special Privilege - DOJ "Firings" Investigation

If there was an investigation occurring of possible criminal activity, federal agents would proceed by either subpoenaing the documents from the accused or obtaining a search warrant. DOJ has not been intimidated in their investigations, even going so far as to allow a search of a congressman's office. (see discussion of search of Rep. William Jefferson office here)

With this backdrop, one has to wonder why the DOJ is being allowed to produce what it wants in emails.  Why are the calendars allowed to be redacted so that no one can see the remaining entries, and is anyone checking to see that DOJ officials are really producing all the necessary documents? Perhaps there should be judicial oversight making these decisions, and perhaps that requires a special prosecutor. Is this a mere employment matter? Was there no criminal wrongdoing here?  And should we trust them on calling this one correctly?

(esp)