White Collar Crime Prof Blog

In the News & Around the Blogopshere

DOJ Press Release, Department of Justice Forfeits More Than $400,000 in Corruption Proceeds Linked
to Former Nigerian Governor

Mike Scarcella, BLT Blog, Two Prosecutors in Stevens Case Appeal Disciplinary Action

Lawrence Bader, Forbes, Why do people have a negative view of cooperators?

Second Circuit Affirmed Lynne Stewart Sentencing - opinion

Patricia Hurtado, Bloomberg, Rajaratnam Cooperator Smith Granted Two Years’ Probation

(esp)

AG Holder's Response to Contempt Vote

The media is reporting that the house voted to hold AG Holder in Contempt (see here, here, and here).  AG Holder's response is here.

So let's see - President Obama wins on the health care decision with the Supreme Court, and later the same day the Attorney General is held in contempt of Congress. So which item ends up at the top of a blog. Was this political?

(esp)

Haley, Madoff, JP Morgan Situations Show Need for Greater Regulation

Today's New York Times was a virtual treasure trove of white collar crime stories.  Among them were the following:

"South Carolina House Panel to Hear Ethics Complaints Against Governor" (see here) - South Carolina Governor Nikki Haley is facing a legislative hearing on whether she acted unethically during her term in the legislature when she was paid $110,000 annually as a fundraiser for a hospital whose legislative goals she advocated.  Knowing nothing about South Carolina legislative ethics rules or criminal law, I do not venture to opine whether the Governor did anything improper.  However, the broad facts here are strikingly close to a series of cases in New York in which a hospital CEO, a state senator and a state assemblyman all were convicted and went to prison.  See here.  It seems to me there should be a restriction against a legislator working for an entity, at least in a loosely-defined job such as consultant or fundraiser, and advocating or supporting favorable legislation for that entity.

                                 *                    *                    * 

"Madoff's Brother Sets Plea Deal in Ponzi Case" (see here) - Peter B. Madoff, the brother of Bernard Madoff and the No. 2 man at Bernard L. Madoff Investment Securities, will reportedly plead guilty tomorrow to falsifying documents, lying to regulators and filing false tax returns.  Peter Madoff reportedly served as the nominal compliance officer of his brother's wholly-owned securities firm and apparently exercised little or no oversight of the firm's operations, thereby providing his brother the freedom to steal billions.

Placing an investment firm's proprietor's brother as compliance officer is akin to asking the fox to guard the henhouse.  It seems there should be, if there is not, a law, rule or regulation prohibiting a close relative, like a spouse, parent, child or sibling, from being the responsible compliance officer in a substantial investment firm owned entirely (as here) or largely by one's relative.

                               *                    *                    * 

"JP Morgan Trading Loss May Reach $9 Billion" (see here) - The amount of JP Morgan's trading losses from its London office could be as much as $9 billion -- four and one-half times as much as the company announced originally.  While JP Morgan has in view of its considerable profits downplayed the magnitude of the loss, which its chief executive officer Jamie Dimon estimated in May could possibly be as much as $4 billion, obviously a $9 billion loss takes a much greater bite out of the firm's profitability, and conceivably may even raise some questions as to the firm's viability.

We now know, in the wake of bailouts and government support, that the federal government is both the de facto and de jure insurer of major banking institutions.  One might ask whether a government insurer, like a private insurance company, should not be able to set specific rules to curb risky activities which might trigger the insurer's support.  To update Congressman Barney Frank, there are now nine billion more reasons for increased governmental regulation.

                                 *                    *                    * 

Like many other white collar defense lawyers, I am strongly against overcriminalization.  On the other hand, I am equally strongly against underregulation.  One of the principal reasons I favor greater and clearer rules and regulations is to give potential white-collar offenders reasonable notice of what is criminal and what is not, and not leave that decision, as frequently happens now, to a federal prosecutor's interpretation of the amorphous fraud laws.

A significant portion of the white-collar defendants I have represented in the last forty years, including many of those who were convicted, have actually believed that their actions were not criminal.  In some cases, this was simply because they lacked a moral compass.  In the financial world, where the primary, and often sole, goal is to take other people's money away from them, many people do not consider whether what they do is morally right or wrong, or are so amoral that they are incapable of making that distinction.  Tighter regulation will at least tell them what is prohibited and what is not.

(goldman)

National Federation v. Sebelius In A Nutshell

Roberts and the 4 libs (that makes 5) agree that the individual mandate can be fairly construed as a tax, AND that Congress has the power to levy this tax.

The 3 other conservatives and Kennedy (aka "the joint dissenters") dissent.

Roberts and the 3 other conservatives and Kennedy (that makes 5) agree that Congress lacks the Commerce Clause power to make you buy wheat, vegetables, or health insurance.

The 4 libs say that Congress DOES have the Commerce Clause power to make you buy wheat, vegetables, health insurance, granola, soy milk, and a lifetime subscription to Mother Jones.

Roberts, the other conservatives and Kennedy, Breyer, and Kagan (that makes 7) agree that you can't coerce states into expanding their Medicaid coverage by withholding pre-existing Medicaid funding from the states that do not agree to the expanded coverage.

Eat your heart out, Justice Story.

(wisenberg)

Commentary on the Court's Decision Finding the Stolen Valor Act Unconstitutional

It is important to honor those who served our country and received medals.  It is especially important for us to recognize those few who received the Congressional Medal of Honor.  These individuals are our heroes and there are not enough words to say thanks to them. It is also important to note that those who did not receive these medals and who lie about having received them have committed despicable acts. 

But the question here is whether these acts of lying are criminal.

Congress thought it should be criminal.  The Supreme Court in Alverez says otherwise, in light of the First Amendment.  The opinion and a summary of that decision are here. What does this case mean for other criminal cases, especially white collar ones -

The Court is clear to distinguish this decision from lies like those occurring when one violates the false statement statute (s 1001) or perjury (s 1623).  But could other statutes be implicated by the decision?  And can other conduct be implicated?  It would seem so.  

This opinion, although not stated, reminds us that it is important for criminal defense counsel to remember the First Amendment when evaluating a case.  Under the test used by the plurality in Alvarez, if the First Amendment is implicated one needs to ask whether there is "a direct causal link between the restriction imposed and the injury to be prevented."  If the government argues that a statement is false and therefore it is criminal, it would seem that under this decision that would be insufficient.  But if it were a false statement under oath, that would be different because it affects the "rights and liberties of others."

One also needs to ask, per the concurrence, whether there is a less restrictive way to achieve the government's goal.

(esp)

Stolen Valor Act Unconstitutional - Alvarez Decision

Don't overlook the Supreme Court's Alvarez decision today when reading about another important decision issued by the Court today - the one that upholds the Affordable Care Act.  The Court's finding the Stolen Valor Act unconstitutional opens up some First Amendment arguments in the criminal sphere.

The test provided by the plurality decision is that "there must be a direct causal link between the restriction imposed and the injury to be prevented."

Justice Kennedy (joined by Roberts, Ginsburg, and Sotomayor) found that the respondent who lied about receiving a Congressional Medal of Honor, in direct contravention of a federal criminal statute - the Stolen Valor Act of 2005 (18 U.S.C. s 704) had a first amendment protection. The decision reminds us that there are certain content-based restrictions that are permitted -

"Among these categories are advocacy intended, and likely, to incite imminent lawless action, obscenity, defamation, speech integral to criminal conduct; so-called 'fighting words'; child pornography; fraud; true threats; and speech presenting some grave and imminent threat the government has the power to prevent" (citations and parentheticals from the decision omitted here)

This opinion states that "[t]hese categories have a historical foundation in the Court’s free speech tradition. The vast realm of free speech and thought always protected in our tradition can still thrive, and even be furthered, by adherence to those categories and rules."  But the Court also notes that there is no "general exception to the First Amendment for false statements."  And specifically when considering defamation it says "that falsity alone may not suffice to bring the speech outside the First Amendment.  The statement must be a knowing or reckless falsehood."

That said, this opinion distinguishes statutes such as the false statement statute (s 1001); perjury (s 1623) and false representing that one is speaking on behalf of the Government (s 912).

Although this opinion stresses the importance of the military medals - as it should, it questions whether the "government's chosen restriction on the speech at issue [is] 'actually necessary ' to achieve its interest."

The key test used here - "There must be a direct causal link between the restriction imposed and the injury to be prevented."

The opinion ends by stating:

The Nation well knows that one of the costs of the First Amendment is that it protects the speech we detest as well as the speech we embrace. Though few might find respondent’s statements anything but contemptible, his right to make those statements is protected by the Constitution’s guarantee of freedom of speech and expression. The Stolen Valor Act infringes upon speech protected by the First Amendment."

Justices Breyer and Kagan offer a concurrence that stresses that there is a less restrictive way to achieve the government's goal. They suggest using "intermediate scrutiny" here in evaluating this case, but also hold that "[t]he Government has provided no convincing explanation as to why a more finely tailored statute would not work."

Dissenting are Justices Alito, Scalia, and Thomas. They note that the statute is limited in several different ways. They argue that "false statements of fact merit no First Amendment protection in their own right"  and that it is a narrow law.

Commentary to follow.

(esp)

Barclays Bank to Pay - $160 Million - as Part of Non-Prosecution Agreement

A DOJ Press Release reports, Barclays Bank PLC Admits Misconduct Related to Submissions for the London Interbank Offered Rate and the Euro Interbank Offered Rate and Agrees to Pay $160 Million Penalty

Some highlights of the press release -

• "Barclays Bank PLC, a financial institution headquartered in London, has entered
  into an agreement with the Department of Justice to pay a $160 million penalty
  to resolve violations arising from Barclays’s submissions for the London
  InterBank Offered Rate (LIBOR) and the Euro Interbank Offered Rate (EURIBOR),
  which are benchmark interest rates used in financial markets around the world..."
• "To the bank’s credit, Barclays also took a significant step toward accepting
  responsibility for its conduct by being the first institution to provide
  extensive and meaningful cooperation to the government."
• "Barclays’s cooperation has been extensive, in terms of the quality and type of
  information and assistance provided, and has been of substantial value in
  furthering the department’s ongoing criminal investigation." 
• "The agreement requires Barclays to continue cooperating with the department in
  its ongoing investigation."
• "As a result of Barclays’s admission of its misconduct, its extraordinary
  cooperation, its remediation efforts and certain mitigating and other factors,
  the department agreed not to prosecute Barclays for providing false LIBOR and
  EURIBOR contributions, provided that Barclays satisfies its ongoing obligations
  under the agreement for a period of two years.  The non-prosecution agreement
  applies only to Barclays and not to any employees or officers of Barclays or any
  other individuals."

Commentary - As a non-prosecution agreement it does not go through the courts and DOJ has the power to enforce or proceed should it believe there is a violation of the agreement. It also sounds like the white collar defense bar may have some new clients as the government has secured the cooperation of the company to go after individuals.

See also Jenna Greene, BLT Blog, Barclays Agrees to Pay $360M to Settle with CFTC, DOJ
over Interest Rate Manipulation

(esp)

In the News & Around the Blogosphere

Katherine Frey, Wash Post, Judge who had ‘no passion for punishment’ retires after 31 years (with a hat tip to Donna Elm and Mark O'Brian)

T. Markus Funk, Law360, Exposing Online Service Providers to Criminal Liability

T. Markus Funk, Bloomberg BNA, Marketing Opportunity to Business Imperative: How yesterday's 'Dolphin-Safe' Tuna Became Today's Child, Human Trafficking, and Slave Labor-Free Product 

DOJ Press Release, Veteran D.C. Defense Attorney Charles F. Daum and Two Investigators Found Guilty of Obstruction of Justice Charges

DOJ Press Release, Data Systems & Solutions LLC Resolves Foreign Corrupt Practices Act Violations and Agrees to Pay $8.82 Million Criminal Penalty

DOJ Press Release, Former Arizona State Representative Sentenced to 27 Months in Prison for Wire Fraud and Tax Evasion Related to the Misuse of More Than $140,000 in Charity Funds  

Joe Nocera, NYTimes, Suspense Is Over in Madoff Case

Dan Strumpf, Chad Bray, Ashby Jones, Fox Business (Dow Jones), Former Executives Agree to Fines in AIG Transaction Case; David Voreacos, Bloomberg-Business Week, Gen Re, AIG Defendants May Win Dismissal of Fraud Cases

Mike Tolson, Houston Chronicle, Clemens' acquittal just latest in string of federal court flops

Associated Press, NYTimes,Two LulzSec Hackers Plead Guilty in Britain (with a hat tip to Ivan Dominguez)

(esp)

Southern Union Co. - Apprendi Applies to Fines - But Will it Matter?

The Supreme Court issued an opinion in Southern Union Co. v. United States. The company was convicted of a RCRA violation, which carries a penalty of a fine of not more than $50,000 for each day that there is a violation. Justice Sotomayor, writing the opinion for the Court, considered whether juries need to decide the fine given, in order to comply with the Court's prior decisions in Apprendi and Blakely that "reserves to juries the determination of any fact, other than the fact of a prior conviction, that increases a criminal defendant's maximum potential sentence."

The Court held that "where a fine is so insubstantial that the underlying offense is considered 'petty' the Sixth Amendment right of jury trial is not triggered and no Apprendi issue arises."  But the Court then went on to say that "not all fines are insubstantial, and not all offenses punishable by fines are petty."  The final ruling was that "Apprendi applies to the imposition of criminal fines."  And it applied here.

A dissent by Justice Breyer, that was joined by Justices Kennedy and Alito, argued that "the Sixth Amendment permits a sentencing judge to determine sentencing facts - facts that are not elements of the crime but are relevant only to the amount of the fine the judge will impose." They believed that the Court's position would "lead to increased problems of unfairness in the administration of our criminal justice system."  They discuss the existing high rate of plea agreements in the case.

The real question here is whether this decision will matter. As noted by the dissent, 97% of federal convictions result from guilty plea.  But what went unnoticed is that very few companies - the object of many fines - go to trial.  Often these cases are resolved with non-prosecution and deferred prosecution agreements.  So will it really make any difference that juries can determine these fines, when the corporation in a post Arthur Andersen LLP world will seldom be going to trial.

(esp)

Politics and Justice

AG Holder has issued a statement in response to the House Panel Vote (on party lines) to recommend holding him in contempt for not providing items to the committee -

In his statement, Holder states-

“In recent months, the Justice Department has made unprecedented accommodations to respond to information requests by Chairman Issa about misguided law enforcement tactics that began in the previous administration and allowed illegal guns to be taken into Mexico.  Department professionals have spent countless hours compiling and providing thousands of documents -- nearly 8,000 -- to Chairman Issa and his committee.   My staff has had numerous meetings with congressional staff to try and accommodate these requests and yesterday, I met with Chairman Issa to offer additional internal Department documents and information that would satisfy what he identified as the Committee’s single outstanding question." (more here)

(esp)

The Cost of a White Collar Case

The financial cost of a white collar case can be a huge deterrent in itself.  But often, the corporation or company where the individual is employed will be footing the bill. Check out - Peter Lattman, N.Y.Times, Goldman Stuck With a Defense Tab, and Awaiting a Payback

(esp)(w/ a hat tip to Professor Jerold Israel)

Call For Nominations For the 2013 White Collar Criminal Defense Award

CALL FOR NOMINATIONS FOR THE 2013

WHITE COLLAR CRIMINAL DEFENSE AWARD

The NACDL White Collar Criminal Defense College at Stetson University College of Law is an intensive “boot-camp” style program for practitioners wishing to gain key advocacy skills and learn substantive  white collar law. In conjunction with this event, the Advisory Board of the White Collar Criminal Defense College announces a call for nominations for its Annual White Collar Criminal Defense Award.  The following criteria have been established for the award:

•  Nominees shall have distinguished him or herself in the white
  collar defense bar;
• Length of service to the white collar bar and sustained excellence
  will be considered;
• Nominees should have enjoyed a recent success in a trial or other
  major result involving a white collar matter;
• Membership in NACDL is not required but is encouraged and
  will be considered; and
• Nominees may be self-nominated or nominated by others.

All nominations should be submitted to both Daniel Weir at [email protected] and Ellen S. Podgor at [email protected] .  The deadline for submissions is July 15, 2012. Information about the NACDL White Collar Criminal Defense College at Stetson, including an agenda, list of faculty, and registration form will be available soon at www.nacdl.org.

(esp)

Reactions to Gupta Verdict

The jury deserves credit - they clearly evaluated all the counts as evidenced by their finding of guilt in some and not guilty in others.  The judge deserves credit - Hon. Jed Rakoff is a leading scholar and superb jurist. 

But should this be a crime? And exactly what is the crime? Should individuals who obtain little or no personal profit be subject to criminal penalties?

And what evidence should a jury hear during the trial?  Should wiretaps that are select conversations of the government be allowed to be used against a defendant in a securities fraud case, when this crime is not included in the criminal activity of our wiretap laws (see here)?

There is an interesting interplay here.  On one hand we have someone being convicted for using "secret" information - the insider trading. On the other hand we have the government using "secret" information to convict the individual - the wiretaps.  I keep wondering if there is anything that can be "secret" anymore.  In this information age it seems like information is so accessible that it is difficult to claim anything as being "insider."

 (esp)

Government Strikes Out in Clemens - Ballgame Over

As noted here, here, and here - Roger Clemens has been acquitted.

This nine week trial cost us how much? And what about the first mistrial, too (here)?

And while this was going on, how many cybercrimes and identity thefts have gone unnoticed. And when the investigation of this case was occurring, did we miss some Ponzi schemes and mortgage frauds?

We have limited resources - we need to use them wisely.

Hats off to Michael Attanasio and Rusty Hardin.

(esp)

Keiffer Decision Extends Wire Fraud

The Tenth Circuit recently affirmed the convictions, but remanded the sentence of Howard O. Kieffer.  Kieffer, who for several years was practicing criminal defense law, had a problem - he never went to law school and had no license to practice law.  A court in the Eighth Circuit in 2010 upheld his convictions for mail fraud and making false statements.  But he was also convicted in 2010 in Colorado for wire fraud and contempt of court. That decision was recently affirmed in the Tenth Circuit with a remand on sentencing here.

There is one aspect of this Tenth Circuit decision that raises eyebrows.  The issue is what constitutes interstate wires for purposes of the wire fraud statute.  This is a particularly important issue in these days of the WorldWideWeb. For example, in United States v. Phillips, 376 F. Supp2d 6 (D. Mass. 2005) the court rejected the government argument that “in order to satisfy the elements of this offense, it was not necessary to present evidence that the pertinent wire communications themselves actually crossed state lines, as long as the communications (whether interstate or intrastate) traveled via an ‘instrument of an integrated system of interstate commerce,’ such as the interstate phone system.” Even in the Tenth Circuit in United States v. Schaefer, 501 F.3d 1197 (10th Cir. 2007), the court previously held that one person’s use of the internet, “standing alone” was insufficient evidence that the item “traveled across state lines in interstate commerce.” 

So it is surprising to read in Keiffer that the Tenth Circuit is now saying, "“[t]he presence of end users in different states, coupled with the very character of the internet, render this inference permissible even absent evidence that only one host server delivered web content in these two states.”

Clearly Keiffer's conduct was appalling, but the ramifications of the language in this decision could be huge.  Could individuals from outside this country be charged with crimes against the United States merely because they put something on the web?

(esp)(hat tip to John Wesley Hall)

Gupta Convicted On Some Counts & Acquitted On Others

Peter Lattman & Azam Ahmed, NYTimes, Rajat Gupta Convicted of Insider Trading

Patricia Hurtado & David Glovin, Bloomberg, Ex-Goldman Director Rajat Gupta Convicted of Insider Trading 

AP, Ex Goldman Sachs director Rajat Gupta convicted

(esp)

Government's Response to Brady Reform Relies on Fear Not Fact

Guest Blogger Jon May

Last week Deputy Attorney General James M. Cole presented a thoughtful argument why Congress should not enact the Fairness in Disclosure of Evidence Act of 2012 which would for the first time codify the obligation of prosecutors to disclose favorable evidence to the accused. (see testimony here) Distilled to its essence, DOJ contends that reform is unnecessary since there has been no showing of a systemic failure of the current system to deny exculpatory evidence to defendants. Moreover, various provisions of the proposed law would further endanger the lives of witnesses and undermine the government’s ability to convict some of the most violent criminals in the country. These are serious objections, likely to find a receptive audience by Congressman afraid of being accused of helping gang members escape justice.

Fear may be the most powerful motivator. And it is an appeal to fear that is at the core of Mr. Cole’s testimony. But that does not mean his concerns are unfounded. Criminal defense counsel often represent witnesses who are very afraid of those charged with a crime. Those of us who have represented witnesses who have been harmed, as I have, understand that in some federal cases, the danger of death or injury is very real. But that danger exists regardless of whether prosecutors must turn over exculpatory evidence or favorable evidence, or whether such discovery must be made after arraignment or a few days before trial. So long as the Sixth Amendment guarantees the accused the right to confront his or her accusers, witnesses will always testify at their peril. This is why there is the Witness Protection Program.  Fundamentally, the flaw in Mr. Cole’s testimony comes from the very examples he cites. Under the current system, witnesses are sometimes harmed. He fails to make a convincing case that either a broader standard or earlier disclosure will lead to an increased risk. And he ignores the fact that the proposed legislation provides for a protective order where the government can show a reasonable basis to believe that a required disclosure would lead to an effort to tamper with a witness. Similarly in claiming that the proposed legislation would undermine national security he fails to explain why the Classified Information Procedures Act is insufficient to protect our nation’s secrets. He just claims it is.

Mr. Cole also relies upon a statistical analysis that purports to show that serious allegations of government mishandling of Brady material has occurred in only a very small percentage of cases, less than three hundredth of one percent of the nearly 800,000 case brought in the last ten years. This is a significant argument because the burden is on the proponents of reform to demonstrate that there exists a problem that is in need of remedy. Mr. Cole’s analysis fails to take into consideration the fact that some 90% of the cases brought by the government result in pleas. Since there is no obligation to provide Brady material during plea negotiations such material is not provided unless the accused actually goes to trial. Mr. Cole’s statistical analysis also contains a built in bias since allegations of Brady violations are almost always evaluated under a harmless error standard. The upshot here is that regardless of the language of the Supreme Court’s decision in Kyles, circuit courts will rarely find a Brady violation absent a showing that the material withheld contributed to the jury’s verdict. Under such a standard, Mr. Coles can contend that reform is not needed since there has been no demonstration of systemic failure; systemic failure defined in such a way as to insure that no such showing could be made.

Finally, Mr. Cole contends that the government already provides greater discovery than is required by the law. Once again, there is no evidentiary support for this contention. While it may be DOJ policy that such evidence should be disclosed, because the law does not currently require such disclosure, prosecutors are under no legal obligation to actually apply DOJ guidelines and suffer no punishment when they fail to do so. Indeed, the current regime incentivizes prosecutors to evade Brady since prosecutors can enhance the odds of conviction through non-disclosure knowing that after a conviction appellate courts are loath to reverse.

The government’s strategy to defeat Brady reform is based upon convincing Congress that the existing system already strikes the right balance between the defendant’s right to a fair trial and the government’s interest in the wellbeing of its witnesses and preserving national security. New laws are not needed, DOJ contends, just more effective compliance with the existing law. The government is wrong. But in this instance, as in many decisions regarding criminal justice, fear trumps facts and despite the justifiable outrage at what happened to Senator Stevens, Congress is not likely to change the status quo.

(May)

In the News & Around the Blogosphere

DOJ Press Release, Allen Stanford Sentenced to 110 Years in Prison for Orchestrating $7 Billion
Investment Fraud Scheme; Emily Wilkinson, Houston Business Chronicle, Stanford Sentenced to 110 Years for Ponzi Scheme

Bob Van Voris & David Glovin, Bloomberg News,  BDO Seidman to Pay $50 Million in Deferred Prosecution

Grant McCool & Basil Katz, Reuters, US says Gupta guilty; defense: "Where's the beef?"

Manuel Roig-Franzia, Washington Post, John Edwards will not be retried, Justice Department
announces

(esp)

Gupta in Turnabout Decides Not to Testify

The New York Times reported yesterday that Rajat K. Gupta, a former Goldman Sachs director on trial in the Southern District of New York for providing inside information to his friend and business colleague Raj Rajaratnam so that Rajaratnam could make trades based on those tips, will not testify, according to a letter his highly respected lawyer, Gary Naftalis, submitted to the court on Sunday night.  See here.  The prior Friday, Mr. Naftalis told the court and the prosecutors it was "highly likely" that Mr. Gupta would testify.  I was quite surprised by that declaration and even suspected that it might be a feint to divert prosecutorial resources from the preparation of cross-examination of other witnesses and the summation to preparation for the cross-examination of Mr. Gupta.  (While I personally have never made such a feint, I have on occasion considered doing it.)

The government's case against Mr. Gupta is a circumstantial one -- essentially a pattern of incidents in which Mr. Gupta allegedly received secret information at board meetings and very shortly thereafter telephoned Mr. Rajaratnam, and Mr. Rajaratnam then placed trades based on the matters discussed at the board meeting.  Most of the critical evidence -- Mr. Gupta's presence at the board meetings at which the information in question was discussed, his calls to Mr. Rajaratnam and Mr. Rajaratnam's firm's trading -- are virtually irrefutable.  On the other hand, there is no "smoking gun" in the form of testimony or recordings as to what was said in the critical conversations.

On the witness stand, Mr. Gupta would no doubt be thoroughly and harshly cross-examined on whatever explanation he provided about the substance and timing of the phone calls.  Interrogation about these repeated events would allow the prosecutors in effect an extra summation to hammer on these facts, indeed perhaps even better than a summation since the defendant would have to respond directly to each of the allegations, whereas in summation an attorney would have the option of ignoring, glossing over or generalizing about all or portions of the evidence.

In any case, white-collar or not, I believe that when a defendant testifies, the standard of proof beyond a reasonable doubt is diluted.  Jurors, rather than asking themselves whether the prosecutor has proved the case beyond a reasonable doubt, focus more on whether the defendant probably told the truth.

I would not be surprised if Mr. Gupta's legal team had spent much of this past weekend cross-examining him and trying to convince him that the better choice for him was to decline to testify.  The decision whether to testify is one of the very few that virtually all lawyers, and all ethics rules, decree belongs ultimately to the client.  It is often difficult to convince white collar clients, especially those whose egos have become enlarged because of their extreme success, that they will be unable to convince a jury.

While my reading leads me to believe that this is a difficult case for the defense, I believe Mr. Gupta's decision not to testify is a correct one.  A similar decision seems to have worked for John Edwards.

 (goldman)

Did Bank of America CEO Wrongly Mislead Voting Shareholders Concerning Purchase of Merrill Lynch?

The New York Times this Monday reported that Bank of America (BOA) executives, including its then chief executive, Kenneth D. Lewis, in 2008 concealed from shareholders about to vote whether to approve the bank's purchase of Merrill Lynch that the expected losses that the bank would absorb from the purchase were far greater than reflected in the proxy documents they had received relating to the purchase.  See here.  Further, according to the report, Mr. Lewis at the meeting at which the stockholders voted whether to accept the deal, in response to a question about whether the purchase would dilute or add to the bank's income in coming years, sidestepped the question and referred the questioners to the proxy statement, which he knew seriously understated the loss.  In court papers, the shareholders' lawyer called this response referencing the inaccurate proxy statement "materially false when made."

According to the Times, Mr. Lewis in recently-filed court papers claimed he had been advised by the bank's counsel, Wachtell, Lipton, Rosen & Katz, and by other bank executives that it was not necessary to disclose the actual projected losses.

The question of whether one must correct earlier inaccurate statements is sometimes murky, at least in law, and I would hesitate even to attempt to second-guess Wachtell Lipton, a highly-respected law firm, if in fact it did tell Mr. Lewis he need not correct the proxy statement before the vote.  I do, however, find it hard to believe that Wachtell Lipton would have advised him to give the shareholders an obfuscating, misleading and arguably false statement.

There may well be wholly legitimate and defensible reasons for Bank of America to withhold the revised loss statements or for Mr. Lewis to answer as he did.  The civil case, in which Mr. Lewis apparently has not asserted his privilege against self-incrimination, may provide these.

In the proxy statement, the projected loss of BOA profits from the merger was three percent in 2009, and nothing (and perhaps even a slight gain) in 2010.  In the estimate provided to the executives before the vote but not communicated to the shareholders, it was 13 percent in 2009 and 2.8 percent in 2010.  According to the Times, BOA's purchase of Merrill Lynch, which was ultimately urged by the government, required an additional $20 billion in bailout money beyond what the bank had received earlier.  In addition, when Merrill's fourth-quarter losses were disclosed along with the bailout, shareholders in four days lost half of their value in BOA stock -- roughly $50 billion.

I suspect that there will be some governmental interest in this matter, if there is not already.  I do not contend that Mr. Lewis' statement violated securities, criminal or other laws or regulations.  If regulations did not prohibit him from concealing the latest reports from the voting shareholders, however, they should have.  This may be another instance of questionable conduct that clear and specific regulations would have prevented.     

(goldman)