White Collar Crime Prof Blog

Jeffrey Epstein: The Unanswered Questions

1. Who in DOJ made the ultimate decision to drop the proposed felony indictment of  Jeffrey Epstein and to cap the Non-Prosecution Agreement ("NPA") sentence at two years--later reduced to 18 months? The 6-2-17 affidavit of AUSA Ann Marie Villafaña, the lead prosecutor on the original federal criminal case, largely supports Alex Acosta's account of certain key events in this week's press conference. Keep in mind, however, that her affidavit was filed as part of the Jane Doe 1 and Jane Doe 2 litigation in SDFL, which resulted in Judge Marra's ruling that SDFL violated the Crime Victim's Rights Act ("CVRA") by failing to notify Epstein's victims about the NPA.  At the time it was filed, the affidavit was focused on the effort to convince Marra that SDFL had not violated the conferral/right to be heard provisions of CVRA. On pages 8 and 9 of her affidavit, Villafaña attests that: "Prior to the Office making its decision to direct me to engage in negotiations with Epstein's counsel, I discussed the strengths and weaknesses of the case with members of the Office's management and informed them that most of the victims had expressed significant concerns about having their identities disclosed. While I was not part of the final decision-making at the Office that arrived at the two year sentence requirement, I was part of the discussions regarding sex offender registration and the restitution provision. It is my understanding from these and other discussions that these factors, that is, the various strengths and weaknesses of the case...together with the Office's desire to obtain a guaranteed sentence of incarceration for Epstein, the equivalent of uncontested restitution for the victims, and guaranteed sexual offender registration...were among the factors that informed the Office's discretionary decision to negotiate a resolution of the matter and to ultimately enter into the NPA." Translation: Villafaña disagreed with dropping the indictment and was not part of the group that made the ultimate decision to go for an NPA with a two year state prison cap. If she was even present at the meeting where the decision was made, she disagreed with the decision and was thus not "part of the final decision-making process." It is unusual, but not unheard of, for the lead prosecutor to be overruled on a case. It is very unusual to go from a 50-plus page multi-count felony sex trafficking indictment to an NPA with no federal charges, particularly when your lead prosecutor wants to go to trial. Villafaña was and is a respected career AUSA. Apparently DOJ's Office of Professional Responsibility ("OPR") is looking into how the case was handled.  OPR will want to see Villafaña's  original pros memo in the case, will seek to interview all government participants in the negotiations, and will want to know every DOJ person involved in the ultimate decision to drop the indictment.
2. Why was DOJ's standard language making it explicitly clear that the NPA bound only the SDFL not included in the NPA? Such language is employed every day by U.S. Attorneys' Offices throughout the United States and has been for years. It goes like this: "The defendant understands that this agreement is binding only on the U.S. Attorney's Office for the ________ District of _______." Why wasn't that done in Epstein's case? Epstein is now arguing that the SDFL NPA prevents his prosecution in SDNY. He will probably lose, given Second Circuit case law, but why even leave the possibility of challenge open? The NPA does not even include a standard integration clause. This is strange.
3. Why was the entire NPA placed under seal? I understand the Government's desire to protect the identity of Epstein's victims, but this could have been done through a redacted version of the NPA, and indeed this has been done in the subsequent litigation.
4. Why weren't all of Epstein's known victims notified of the NPA and its terms in a timely fashion? Acosta and Villafaña have explained that they did not want the victims to see the civil damages portion of the NPA before SDFL was certain that Epstein would be pleading to the Florida felony, because they did not want the victims to be cross-examined about having seen those provisions in the event the deal broke down and SDFL took Epstein to trial. Epstein signed the Florida plea papers only a few days before he actually pled guilty and there was not enough time to notify all the victims. I understand the explanation, and assume no bad faith on SDFL's part, but it doesn't cut the mustard. If Judge Marra is correct, CVRA required notification. And either the NPA or Florida plea deal could have been structured to prevent the fiasco of having to locate and confer with victims over a weekend. Marra ruled that SDFL affirmatively hid the NPA from the victims and essentially deceived them into thinking that the office was still investigating Epstein well after the NPA was signed. That scenario should have been avoided.
5. Why were Epstein's lawyers allowed to lobby Main Justice after the NPA was signed? I understand going to Main Justice and arguing to overturn an individual office's charging decision. Not every lawyer obtains such access and these efforts to overturn are rarely successful. But they almost always occur BEFORE an indictment has been returned. Why was Epstein's team allowed to lobby for several months AFTER the NPA was signed. The original NPA was signed by attorneys on both sides in September 2007. An addendum was signed by the attorneys in October 2007. Epstein signed in December 2007. The Oosterbaan letter, explaining why federal involvement was legitimate, was not signed until May 15, 2008. This is weird.

I do not believe that the Epstein deal was "dirty" in any way. I have heard from multiple sources that Acosta is a person of high integrity, who was well regarded within the office. I was impressed with Acosta's handling of the press conference. I don't think he should have resigned. I don't know how easy or hard it would have been for SDFL to achieve a victory at trial or how many victims would have been further traumatized by a trial. I do know that SDFL has a long history of aggressively prosecuting these types of cases--child sex trafficking and kiddie porn. And I do believe SDFL should have conferred with the victims before NPA was inked. Acosta had no criminal trial experience when he became U.S. Attorney. Was he was out-negotiated here, or overawed by the team of big name defense lawyers representing Epstein? His First Assistant Jeffrey Sloman, a veteran prosecutor who was deeply involved in the negotiations and signed the NPA, has denied this and has publicly defended both Acosta and the deal.

Still, the questions I and others have posed are legitimate and deserve answers. Perhaps we will get them from the OPR investigation.

Here are some additional documents. The first three were made available by Acosta in connection with his press conference in order to help support his explanation of the NPA. Next is the Jeffrey Sloman op-ed defending Acosta and the deal. The final three documents are the most recent filings in the SDNY case and all deal with the government's effort to detain Epstein pending trial.

 Villafana Declaration

 Kuyrkendall Second Affidavit

 Acosta Letter to Starr

 Sloman Op-Ed

 Epstein-Original Government Letter Requesting Detention

Epstein-Letter Motion for Pretrial Release

Epstein-Government Response to Bail Motion

(wisenberg)

Settlement by Trump Required Alleged Victims to Tell DA They Don't Want to Assist

The New York Times reported on Tuesday, April 5 that Donald Trump, contrary to his asserted practice of refusing to settle civil cases against him, had settled a civil fraud suit brought by disgruntled purchasers of Trump SoHo (New York) condos setting forth fraud allegations that also were being investigated by the District Attorney of New York County ("Donald Trump Settled a Real Estate Lawsuit, and a Criminal Case Was Dismissed").  The suit alleged that Trump and two of his children had misrepresented the status of purchaser interest in the condos to make it appear that they were a good investment.

What made this case most interesting to me is language, no doubt inserted by Trump's lawyers, that required as a condition of settlement that the plaintiffs "who may have previously cooperated" with the District Attorney notify him that they no longer wished to "participate in any investigation or criminal prosecution" related to the subject of the lawsuit.  The settlement papers did allow the plaintiffs to respond to a subpoena or court order (as they would be required by law), but required that if they did they notify the defendants.

These somewhat unusual and to an extent daring conditions were no doubt designed to impair the District Attorney's investigation and enhance the ability of the defendants to track and combat it, while skirting the New York State penal statutes relating to bribery of and tampering with a witness.  The New York statute relating to bribery of a witness proscribes conferring, offering or agreeing to confer a benefit on a witness or prospective witness upon an agreement that the witness "will absent himself or otherwise avoid or seek to avoid appearing or testifying at [an] action or proceeding" (or an agreement to influence his testimony). Penal Law 215.11 (see also Penal Law 215.30, Tampering with a Witness).  Denying a prosecutor the ability to speak with prospective victims outside a grand jury makes the prosecutor's job of gathering and understanding evidence difficult in any case.  Here, where it is likely, primarily because of a 120-day maximum residency limit on condo purchasers, that many were foreigners or non-New York residents and thus not easily served with process, the non-cooperation clause may have impaired the investigation more than it would have in most cases. 

A clause requiring a purchaser to declare a lack of desire to participate, of course, is not the same as an absolute requirement that the purchaser not participate.  And, absent legal process compelling one's attendance, one has no legal duty to cooperate with a prosecutor.  It is questionable that if, after one expressed  a desire not to participate, his later decision to assist the prosecutor voluntarily would violate the contract (but many purchasers would not want to take a chance).  The condition of  the contract thus, in my view,  did not violate the New York statutes, especially since the New York Court of Appeals has strictly construed their language.  People v. Harper, 75 N.Y.2d 373 (1990)(paying victim to "drop" the case not violative of statute).

I have no idea whether the settlement payment to the plaintiffs would have been less without the condition they notify the District Attorney of  their desire not to cooperate.  And, although the non-cooperation of the alleged victims no doubt made the District Attorney's path to charges more difficult, the facts, as reported, do not seem to make out a sustainable criminal prosecution.  Allegedly, the purchasers relied on deceptive statements, as quoted in newspaper articles, by Mr. Trump's daughter Ivanka and son Donald Jr. that purportedly overstated the number of apartments sold and by Mr. Trump that purportedly overstated the number of those who had applied for or expressed interest in the condos,  each implying that the condos, whose sales had actually been slow, were highly sought.  A threshold question for the prosecutors undoubtedly was whether the statements,  if made and if inaccurate, had gone beyond acceptable (or at least non-criminal) puffing into unacceptable (and criminal) misrepresentations.

Lawyers settling civil cases where there are ongoing or potential parallel criminal investigations are concerned whether payments to alleged victims may be construed by aggressive prosecutors as bribes, and often shy away from inserting restrictions on the victims cooperating with prosecutors.  On the other hand, those lawyers (and their clients) want some protection against a criminal prosecution based on the same allegations as the civil suit.  Here, Trump's lawyers boldly inserted a clause that likely hampered the prosecutors' case and did so within the law.  Nonetheless, lawyers seeking to emulate the Trump lawyers should be extremely cautious and be aware of the specific legal (and ethical) limits in their jurisdictions.  For instance, I personally would be extremely hesitant to condition a settlement of a civil case on an alleged victim's notifying a federal prosecutor he does not want to participate in a parallel federal investigation.  The federal statutes concerning obstruction of justice and witness tampering are broader and more liberally construed than the corresponding New York statutes.

 

Cosby Decision May Affect Oral Agreements in Practice of Criminal Law

 

The decision by a Philadelphia suburban trial court that a previous prosecutor's publicly announced promise not to prosecute Bill Cosby was not enforceable has virtually no precedential value anywhere, but it may affect how prosecutors, defense lawyers, defendants and targets act throughout the nation. The rule of law from this case seems to be that a former prosecutor's (and perhaps a current prosecutor's) promise not to be prosecute, at least when not memorialized in a writing, is not binding, even when the target relies on it to his potential detriment.  That promise can be disavowed by a successor prosecutor, and perhaps by the prosecutor himself.

Occasionally, cases arise where defense lawyers contend that prosecutors violated oral promises made to them and/or their clients.  Such situations include those where a prosecutor, it is claimed, promised a lawyer making an attorney proffer that if his client testified to certain facts, he would not be prosecuted or would be given a cooperation agreement and favorable sentencing consideration.  Often these instances result in swearing contests between the adversary lawyers: the prosecutor denies making any such promise and the defense lawyer says he did.  In most instances, in the absence of a writing,  the court sides with the prosecutor.  With respect to plea agreements, some courts have set forth a black-letter rule that promises not in writing or on-the-record are always unenforceable.

The Cosby case is very different.  There the (former) prosecutor in testimony avowed his promise, which was expressed in a contemporaneous press release, although there was no formal writing to defense counsel or a court, and expressly testified he did so in part in order to deprive Cosby of the ability to invoke the Fifth Amendment in a civil case brought by the alleged victim,  he also said that he believed his promise was "binding."   Cosby, according to his civil lawyer, testified at a deposition because of that prosecutorial promise.  (Generally, prudent prosecutors, when they announce a declination to prosecute give themselves an "out" by stating that the decision is based on currently-known information and subject to reconsideration based on new evidence).

To a considerable extent, the criminal justice system relies on oral promises by prosecutors (and sometimes judges) to defense lawyers and defendants, especially in busy state courts.  And, in federal courts, while immunity agreements are almost always in writing, federal prosecutors (and occasionally, but rarely,  federal judges) often make unrecorded or unwritten promises.   Sometimes such prosecutorial promises are made in order to avoid the time-consuming need to go through bureaucratic channels; sometimes they are made by line assistants because they fear their superiors would refuse to  formalize or agree to such a promise;  sometimes they are made to avoid disclosure to  a defendant against whom a benefiting cooperator will testify.  Based on the Pennsylvania judge's decision,  some defense lawyers (and some defendants) will believe that prosecutors' oral promises are not worth the breath used to utter them, and, perhaps, since there appears to be no dispute that such a promise was made here, that written promises are barely worth the paper they are written on. 

Defense lawyers are frequently asked by their clients whether they can trust the prosecutor's word in an oral agreement.  My usual answer is that they can: most prosecutors are reliable and honest.  Defense lawyers are then sometimes  asked a variant question about what will happen if the promising prosecutor leaves the office or dies.  My usual answer is that if there is no disagreement as to whether the promise was made, it will be honored.  The Cosby decision has made me reconsider that response. 

There are certain highly-publicized cases of celebrities of little precedential or legal value that have a considerable effect on the practice of law by both prosecutors and defense lawyers.  The case of Martha Stewart, who was, on highly disputed testimony,   convicted of 18 USC 1001 for lying in a voluntary proffer to prosecutors investigating her purported insider trading (which, assuming it occurred, was most likely not a crime),  is still invoked by prosecutors in cautioning witnesses not to lie to them and by defense lawyers in cautioning witnesses about making a voluntary proffer.  The Cosby case will likely be cited by defense lawyers and their clients concerning the uncertain value of oral agreements with prosecutors.  The skepticism of many defense lawyers about the reliability of agreements with the government and trustworthiness of prosecutors will grow.   I suspect the sarcastic refrain of some defense lawyers, "Trust me, I'm the government," will be said more often. 

I assume that the decision will be appealed, and also that a motion will be made to exclude Cosby's deposition because it was a consequence of the promise.  That latter motion is likely to be denied based on the judge's decision on the issue discussed here, although since the judge failed to set forth any reasoning for his decision, there may be room for distinguishing that issue from the one decided.

Although the judge's ruling has no doubt pleased those clamoring for Cosby's conviction and those desiring a decision on the merits, it may have a considerable negative effect on the perceived integrity and reliability of prosecutorial  non-memorialized promises and the actual practice of criminal law.  And it reveals once again how celebrity cases often make bad law.

Privilege and Internal Investigations

Earlier this year, the Wall Street Journal ran an interesting story about several cases in which U.S. courts refused to recognize the attorney-client privilege for communications between in-house counsel and overseas companies.  The article focused on two cases in particular – Wultz et al. v. Bank of China Limited and Anwar et al. v. Fairfield Greenwich Limited. 

Just recently, Janet Levine, Gail Zirkelbach, Derek Hahn, and Danielle Rowan wrote an article in the Summer 2015 edition of the ABA CJS Criminal Justice magazine on the topic of The Evolving Landscape of Legal Privilege in Internal Investigations.  Along with the Bank of China case, the article provides summaries of three other cases involving the privilege issue during internal investigations – In re Kellogg Brown & Root, Inc. (KBR) (previously discussed on this blog here and here), Wal-Mart Stores, Inc. v. Ind. Elec. Workers Pension Trust Fund IBEW (previously discussed on this blog), and Paterno v. NCAA).

As an update to the above excellent reads, it is important to note that the U.S. Court of Appeals for the District of Columbia recently released another opinion in the KBR matter.  This opinion vacated additional orders by the District Court that would have required KBR to turn over the materials at issue in the case.  See In re Kellogg Brown & Root, Inc., -- F.3d –, 2015 WL 4727411 (August 11, 2015).

According to the appellate court in the new KBR opinion:

More than three decades ago, the Supreme Court held that the attorney-client privilege protects confidential employee communications made during a business’s internal investigation led by company lawyers. See Upjohn Co. v. United States, 449 U.S. 383, 101 S. Ct. 677, 66 L. Ed. 2d 584 (1981). In this case, the District Court denied the protection of the privilege to a company that had conducted just such an internal investigation. The District Court’s decision has generated substantial uncertainty about the scope of the attorney-client privilege in the business setting. We conclude that the District Court’s decision is irreconcilable with Upjohn. We therefore grant KBR's petition for a writ of mandamus and vacate the District Court's March 6 document production order. 

The issue of attorney-client privilege in the internal investigation context is one that is growing in both complexity and significance.  Keep an eye out for more court decisions on this issue in the future as companies, attorneys, and courts struggle to find a balance in today’s complex legal and business environment.

(LED)

Privilege, Corporate Wrongdoing, and the Wal-Mart FCPA Investigation

The New York Times had an interesting article this week by Steven Davidoff Solomon entitled “Keeping Corporate Lawyers Silent Can Shelter Wrongdoing.”  The piece centers on the recent decision out of the Delaware Supreme Court in the case of Wal-Mart Stores, Inc. v. Indiana Electrical Workers Pension Trust Fund IBEW,Del. Supr., No. 614, 2013 (July 23, 2014), and notes that the attorney-client privilege can be used to “shelter potential wrongdoing, perhaps to the detriment of many people, including shareholders.”  As discussed at length in the article, the IBEW case permits stockholders to unilaterally breach the attorney-client privilege when there is suspected wrongdoing at a corporation. 

The IBEW case is one many have followed in recent years.  The controversy began after the New York Times broke the story of potential Foreign Corrupt Practices Act violations by Mar-Mart in April 2012.  In response to that initial article, the IBEW, a Wal-Mart stockholder, sent a letter to the company demanding inspection of a number of documents related to the potential FCPA matter, including documents regarding the corporation’s initial internal review of the situation.  Wal-Mart declined to provide certain of the documents and, with regard to some of those materials, claimed they were protected by the attorney-client privilege.  The issue of whether Wal-Mart could properly withhold these materials from shareholders was litigated at length and finally made its way to the Delaware Supreme Court.  In the ruling from last month, the Delaware Supreme Court sided with the IBEW and ordered Wal-Mart to produce the materials.  Referring to the Fifth Circuit Court of Appeals case of Garner v. Wolfinbarger (1970), which recognized a fiduciary exception to the attorney-client privilege, the court in IBEW said:

With regard to the other Garner good cause factors, the record reflects that disclosure of the material would not risk the revelation of trade secrets (at least it has not been argued by Wal-Mart); the allegations at issue implicate criminal conduct under the FCPA; and IBEW is a legitimate stockholder as a pension fund. Accordingly, the record supports the Court of Chancery's conclusion that the documentary information sought in the Demand should be produced by Wal-Mart pursuant to the Garner fiduciary exception to the attorney-client privilege.

It is important to note, of course, that the shareholders are meant to keep the information they receive confidential and use it only to decide whether to file a claim against Wal-Mart directors related to the FCPA matter. 

In reading the most recent New York Times article, I kept coming back to Upjohn v. United States and the ever present debate regarding the proper role of privilege in the world of internal investigations and potential corporate wrongdoing.  In particular, I was drawn to the important language in Upjohn regarding the reasons for applying the privilege: “The privilege recognizes that sound legal advice or advocacy serves public ends and that such advice or advocacy depends upon the lawyers being fully informed by the client.”  As the New York Times states in its piece from this week, “the attorney-client privilege for companies is increasingly under attack.”  I wonder now what impact the IBEW decision and related issues regarding lawyer whistleblowers, such as in the ongoing Vanguard case, will have on the future of internal investigation strategy and, in particular, the role of internal counsel in such situations.

(LED)

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)

Ninth Circuit Looks at Selective Waiver

In In re: Pacific Pictures the Ninth Circuit looks at "whether a party waives attorney-client privilege forever by voluntarily disclosing privileged documents to the federal government." The court starts with the principle that "voluntarily disclosing privileged documents to third parties will generally destroy the privilege."  The court rejects the petitioners argument that disclosing documents to the government is different from disclosing them to civil litigants and that a selective waiver should apply. The court notes that legislative attempts to change the evidence rules to allow for selective waiver have failed so far.

The court also does not enforce a confidentiality letter between the corporation and the government. The court states:

"The only justification behind enforcing such agreements would be to encourage cooperation with the government.  But Congress has declined to adopt even this limited form of selective waiver."

The court rejected a claim that "adopting such a rule will drastically impair law enforcement attempts to investigate espionage against 'attorneys, financial institutions, medical providers, national security agencies, judges, large corporations, or law firms.'"

Entities provide significant materials to the government as part of deferred and non-prosecution agreements. Not having a privilege needs to be considered by corporate counsel in deciding what to give to the government.

(esp)

Not Guilty of OSHA Violations

It is not often that companies are criminally charged, and usually when it happens, regardless of the merits, we see the company enter a guilty verdict or enter into a deferred prosecution agreement (see here).  But not Xcel Energy, Inc. and Public Service Company of Colorado.  They were charged, they exercised their right to a jury trial, and were found not guilty after close to a month-long trial. 

The Justice Department brought criminal charges against this Fortune 250 public company alleging safety violations - OSHA violations - in the deaths of five contractors at a hydro-electric power plant in Colorado.  

Clearly this is an incredibly sad situation, with many families suffering and one cannot help but have the deepest sympathy for each person who has suffered here. 

But one also has to wonder whether our criminal justice system should be used for prosecutions alleging OSHA violations from industrial accidents.  Would these matters be better left for the administrative and civil process? And would our scarce resources be better spent educating companies on how best to keep workers' safe?

The company was represented by Cliff Stricklin, Chair of Holme Roberts & Owen's White Collar & Securities Litigation Group in Denver, Colorado. Stricklin also is an adjunct professor teaching white collar crime at University of Colorado School of Law.

See also John Ingold, Denver Post, Xcel Energy Found Not Guilty in 2007 Deaths of Five Workers in Colorado

(esp)

People of the State of New York v. Ernst & Young LLP

Here is the civil complaint filed in New York v. Ernst & Young LLP. The pleading is a well drafted speaking complaint detailing Ernst & Young LLP's auditing actions, and alleged failures to act, in connection with Lehman's Repo 105 transactions. New York is seeking the return of $150 million in auditing fees earned by Ernst & Young on the Lehman account. Assuming that the allegations are true, the complaint is a powerful argument in favor of Dodd-Frank's enhanced whistleblower provisions. Most of the alleged activities occurred after Sarbanes-Oxley was enacted into law. 

(wisenberg)

Albuferon Insider Trading Criminal Complaint

Here is the Yves Benhamou Criminal Complaint, out of SDNY, alleging insider trading violations (under Rule 10b-5 and 15 U.S.C. Section 78ff) by a French doctor. Doctor Benhamou purportedly tipped off a hedge fund employee about negative results from the Albuferon clinical trial. The WSJ story, by Jenny Strasburg and Jean Eaglesham, is here. The SEC's civil complaint, via the WSJ, is here

(wisenberg)

Dodd-Frank Rules Could Create Multiple Corporate Headaches

Guest Blogger - Philip Hilder

Critics are complaining that a likely downside to the Dodd-Frank Wall Street Reform and Consumer Protection Act will be a tsunami of complaints from gold digging bounty hunters in the workplace, including many false allegations.

Certainly the U.S. Securities and Exchange Commission and the U.S. Commodity Futures Trading Commission will have a lot more work. Dodd-Frank also means they will have a lot more help in finding fraud and insider trading.

A bigger problem may be that empowered whistleblowers will be encouraged to ignore their corporate ladder, ignore their internal rules and rush to the government with any perceived problem they hope will be the “original information” that can be the foundation of an enforcement action. This race for cash rewards could conflict with internal company compliance and ethics programs, which encourage employees to internally report wrongdoing.

It also could be good for lawyers who get paid to help clean up the mess, but bad for companies that may lose the opportunity to self-correct before a government investigation is launched.

It is foreseeable that such an investigation could trigger shareholder or derivative lawsuits against the company as well.

My client Sherron Watkins, a former Enron vice president, reported accounting problems at that now-dead company by following the internal rules. Under Dodd-Frank, the next person in Watkins’ position will more likely become a true whistleblower, bypassing internal protocol and heading outside the company to grab for the golden ring.

Just as Congress created Sarbanes-Oxley protections in response to Enron, in part because of Watkins' testimony, Congress also created Dodd-Frank in reaction to the Bernie Madoff scandal. Congress created more lucrative bounties and effectively deputized millions of Americans to skip company protocol by telling the government about insider trading, securities fraud, bribery of overseas businesses and governments, and a host of financial crimes that employees may see on the job.

The stakes are higher than when Watkins warned her bosses in 2001. She was rewarded with inquiries about how to fire her. Dodd-Frank would help in that scenario, too. It not only beefs up the payment to those who reveal real crimes, but it also strengthens the protections against retaliation, and doubles the amount someone can recover in a successful retaliation lawsuit.

Before this Act, total awards to whistleblowers were discretionary and only rewarded for certain insider trading tips. Now, successful enforcement exceeding $1 million could bring a whistleblower between a mandatory 10 percent up to 30 percent of what is government recovered.

Now corporations need not worry only about current and former employees but also about folks at subsidiaries and affiliates of publicly traded companies. Even contractors, consultants and sales agents can blow whistles for cash. Those who can’t reap the rewards include someone convicted of a crime related to the information provided to the government, certain auditors and employees of the SEC, CFTC and U.S. Department of Justice.

Prior to Dodd-Frank being passed, the Department of Labor was barely pursuing whistleblower retaliation complaints. It denied awards in about 98 percent of cases and tossed out more than 1,000 claims. Whistleblowers can now skip over the DOL and proceed directly to federal court where they can double their back pay with interest if they prevail in a lawsuit.

Now we’ll see emboldened employees along with companies who need to be more careful with compliance and self-policing. Congress’ empowerment of employees may create a litigation rich environment where a lot more dirty laundry is aired. 

Philip H. Hilder is a former federal prosecutor and founder of Houston-based Hilder & Associates, P.C., who focuses on white-collar criminal defense and whistle blower lawsuits. philip@hilderlaw.com

(php)

Civil Settlement for Players in Countrywide Case

The Securities Exchange Commission is reporting here that Former Countrywide CEO Angelo Mozilo will pay the SEC $22.5 million to settle SEC charges "that he and two other former Countrywide executives misled investors as the subprime mortgage crisis emerged. The settlement also permanently bars Mozilo from ever again serving as an officer or director of a publicly traded company."  The SEC notice also states:

"Former Countrywide chief operating officer David Sambol agreed to a settlement in which he is liable for $5 million in disgorgement and a $520,000 penalty, and a three-year officer and director bar. Former chief financial officer Eric Sieracki agreed to pay a $130,000 penalty and a one-year bar from practicing before the Commission. In settling the SEC’s charges, the former executives neither admit nor deny the allegations against them."

Some may ask - what about a criminal action?

1. Just because a civil case is proceeding with a resolution doesn’t mean that a criminal case might not be forthcoming. When the civil and criminal case are ongoing at the same time we call them parallel proceedings. But it doesn’t always mean that they have to start at the same time. In some instances, the criminal case will proceed after the civil has been ongoing for some time.

2.White collar criminal cases take a long time to investigate - they are document driven cases and as such require expertise that one doesn’t find when investigating a simple burglary or robbery case.

3. Civil cases have a different standard of proof - a much lower standard than criminal cases which require that prosecutors prove the case beyond a reasonable doubt. It is a more difficult burden and prosecutors need to assess whether they have accomplished what is needed with a civil enforcement action or if a criminal prosecution is needed. They also need to assess whether there is any criminal activity to warrant a criminal action.

4. The government needs to also determine if any conduct violates the law - or were the decisions that were made business decisions that may be wrong -- but ones that do not meet a level of criminality.

5.  Hopefully prosecutors will also consider how best to spend our tax dollars.

(esp)

Addendum, Gretchen Morgenson, NYTimes, How Countrywide Covered the Cracks 

NACDL's 6th Annual Defending the White Collar Case Seminar – “An SEC Makeover: Restructured, Refocused, and … Back in the Game?,” Friday, October 1, 2010

Guest Blogger: Chris Hall, Saul Ewing LLP (Philadelphia, PA)

Moderator: Gerald B. Lefcourt

Panelists: Susan Brune, Pamela Rogers Chepiga, Robert Khuzami, Eliot Spitzer and Richard M. Strassberg

What a panel.  Susan Brune kicked off the discussion with thoughts on whether the SEC’s new cooperation policy will work.  In her view, Bob Khuzami, as the SEC enforcement chief, will have to figure out how to make the SEC a bit more like a federal prosecutor’s office.  One of his new big weapons, however, gives her pause.  The SEC’s new cooperation scheme differs from the federal prosecution process, and some of the differences will impact the SEC’s effectiveness.  AUSAs, in her experience, have much more autonomy than SEC staff attorneys.  While they have to get supervisory approval to grant immunity or decline prosecution, the front office rarely reverses a line Assistant’s recommendation.  With the SEC, in contrast, you never know until the staff attorney completes a long, formal, and inscrutable process that ends with the Commission itself weighing in, and often with political factors at play.  And even then you don’t know.  The SEC’s practice of including lengthy recitations of alleged conduct in its Consent Orders—facts to which the defendant does not agree—risks inflaming the judge, inciting Article III activism, and prompting Courts to reject carefully crafted agreements.  This contrasts markedly with a sentencing hearing with a 5K motion by a USAO, where the federal prosecutor stands with your client shoulder to shoulder.

Rich Strassberg took the baton at that point and addressed the pitfalls of representing a client who has exposure to both the SEC and DOJ.  Most clients who work in the securities industry cannot, as a practical matter, assert their 5^th Amendment right and also keep their jobs.  Clients may feel compelled to give testimony and effectively provide both the SEC and DOJ a roadmap for their investigations.  Rich also touched on the public’s clamor for enforcement action in the wake of the Commission’s failure to anticipate the perils from credit default swaps and derivatives.  The SEC’s perceived need to respond to the public’s furor with immediate action presents huge risks to clients.  Wall Street has moved way beyond the stock market.  The SEC needs to take the time to understand new markets, in Rich’s view, and to reflect on how complex industry norms inform the issue of criminal intent.  A rush to respond to perceived enforcement lapses will deprive market participants of the benefit of a fair investigation that reveals the true context in which market participants worked.  In short, the SEC has to work hard not to act too slowly, or too quickly, but to strike the balance just right.

Pam Rogers Chepiga then took the audience on a tour of the Dodd-Frank Act’s whistleblower provisions, the SEC’s prior rewards program--$159,000 paid out over 20 years—and the rulemaking process for the new rewards process on which the Commission will now embark.  She then posed the following big questions for the audience: do securities fraud allegations lend themselves to whistleblower programs due to the heightened intent requirement that applies?  Will the time and energy it takes to filter through leads drain agency resources from more important enforcement programs?  Will the financial incentives undermine well thought out corporate compliance programs?  And finally, how will defense attorneys counsel clients who have a choice between laying low and seeking a financial windfall?

Bob Khuzami attempted to address the concerns raised by the other panelists.  Judicial scrutiny is what it is.  The SEC, in his view, should be prepared to defend its charging decisions.  While he doesn’t relish headlines, and is concerned a bit sometimes that judges don’t fully understand how a case evolved, he calmly accepts the scrutiny as part of the job.

Cooperation and whistleblowers offer fundamental intelligence that brings forward higher quality information sooner.  The entire Commission supports these new initiatives and will not bog down approvals.  They have already agreed on the basic parameters:  wrongdoers won’t continue to work in industry; they also won’t keep the financial benefits they have wrought.  As to interactions with DOJ, he expects better communication at an earlier stage between the two agencies.

Fear not, moreover.  There will be no shortage of process; no rush to judgment under his watch.  Bob also credited the talented and sector-focused divisions within the SEC; they all will weigh in with their expertise on cooperation agreements and whistleblower rewards. 

The whistleblower program will not drain resources; it will serve as corollary to the SEC’s established office of market intelligence.  The program will also not undercut the need to encourage employees to “report up” via their in-house compliance programs.  The SEC will fashion financial incentives in a way that supports this valuable corporate compliance function, though Bob did not explain why (we will have to wait for the rules).

Eliot Spitzer then grabbed the microphone. Wall Street is rife with conflicts of interest, he noted.  The SEC cannot and should not wait for information to come in.  The Commission instead should anticipate.  The recent financial collapse, in his view, reflects an intellectual failure by regulators.  The solution?  Smart people at the SEC should think about problems before the public suffers.  Eliot cited mutual fund fees as a perfect example.  We know that these fees—suggested to amount to billions of dollars each year--hurt the middle class.  We have democratized investing through these funds; now the regulators have to make them transparent and fair.

No shortage of practical insight and forward looking thoughts from this group!

(ch)

Chicken Feed: Goldman's Nuisance Payment

I was thinking last night about the criminal law implications of the Goldman-SEC settlement. The settlement only confirms what has been fairly apparent from the get-go--this was never a strong fraud case. The SEC extorted a nuisance payment from Goldman and simultaneously sent a signal to the markets that it is serious about its new proactive role.

If the SEC thought that it had a winner, it never would have settled on these terms. Goldman essentially pays 14 days in first quarter profits, admits to a mistake, and agrees to strengthen some aspects of its corporate governance. Goldman avoids lengthy, costly, profit-threatening, and Pandora's Box-opening litigation. And no big shots are forced to resign. When you have to caution your employees not to whoop, holler and smirk in the wake of such a settlement, you know you have made a good deal.

Oh yeah. Goldman agrees to cooperate in the SEC's probe of Fabrice Tourre. All this means is that Goldman's people will come in and talk to SEC attorneys. Tourre has already done plenty of talking himself to Congress, in public and under oath. This was foolish, in my view, for somebody in his position. But it is unlikely that any prosecutor will go after Tourre alone. Goldman was a market-maker here, the parties were sophisticated, and Tourre was hardly off the reservation. Some player's misunderstanding of John Paulson's position, even if caused by a Goldman mistake, is not the same thing as an intentional effort to deceive and defraud.

A key early sign that this was not going to be some slam-dunk fraud action was the SEC's press conference statement, on the day it filed suit, effectively clearing Paulson & Co. of wrongdoing. The SEC, unlike private litigants, can sue, under Rule 10b-5, based on aider and abettor liability. According to the public record, Paulson & Co. took part in several key discussions between Goldman and ACA Capital Management during the time period that the Abacus 2007-ACI CDO deal was being structured. If the SEC seriously believed that big-time fraud was afoot in the Abacus 2007-ACI CDO transaction, it is hard to believe that Paulson & Co. would have been treated in this fashion. If I were a government attorney and thought I had the fraud of the century on my hands, I would want to rope in every potential aider and abettor, and would think very carefully before giving a significant player in an allegedly fraudulent transaction a publicly announced clean bill of health. This is not to say that Paulson & Co. engaged in any wrongdoing. It is instead to suggest exactly the opposite. 

So, I do not expect any criminal cases to come out of Abacus 2007-ACI. Of course I have been wrong before. In 1972 I thought McGovern would kick Nixon's ass. But here I will go out on the limb. 

(slw)

Ouch, That Hurts! Judge Koeltl Pulverizes SEC in Rorech Case

GUEST BLOGGER-SOLOMON L. WISENBERG

Attached is SDNY U.S. District Judge John G. Koeltl's Opinion and Order in SEC v. Jon-Paul Rorech and Renato Negrin, issued last Thursday. With the exception of Koeltl's ruling that the VNU credit default swaps at issue are covered under Section 10(b) of the Exchange Act and Rule 10b-5, the holding was a total defeat for the SEC. For those not wanting to read the entire 122-page opinion, here is the SEC v. Rorech-Introduction and Conclusions of Law portion.

The case centered around Negrin's purchase of VNU credit default swaps from Deutsche Bank's high-yield bond salesman Rorech. Negrin was a portfolio manager for Millennium Partners hedge fund. The case was brought under the misappropriation theory of insider trading. The SEC alleged that Rorech misappropriated confidential information from his employer Deutsche Bank and provided it, during two cell phone calls, to Negrin. The allegedly confidential information was that VNU, a Dutch media holding company, was going to restructure a bond offering and that another Deutsche Bank customer had placed a $100 million indication of interest in such an offering. The restructured bond offering would provide "deliverable instruments" for VNU credit default swaps that were being traded at the time.

Judge Koeltl concluded that:

1. The inside information about the restructured bond offering did not yet exist when Rorech allegedly passed it to Negrin.

2. The information that Rorech did possess at the time of the calls was not material. Rorech's knowledge about a potential restructuring of the bond offering was speculative in nature and already widely shared in the marketplace. Rorech's knowledge regarding another customer's indication of interest was not materially different from information already in the market regarding substantial investor demand for deliverable VNU bonds, through a restructured bond offering. 

3. Rorech did not breach any duty of confidentially owed to Deutsche Bank because Deutsche Bank did not consider Rorech's ideas or opinions or, any general information, about a possible VNU bond offer restructuring to be confidential. Rorech was expected by Deutsche Bank to share such information with prospective customers and this was standard practice in the high-yield bond market. The same went for sharing information regarding other customers' indications of interest.

4. Courts cannot infer that inside information was passed from phone calls followed by trading, without something more. Additionally, Negrin's trades were consistent with his past investment practices.

5. There was no evidence of scienter. Rorech and Negrin had no prior personal relationship, there was no quantifiable or direct personal benefit to Rorech from any tip, and there was no deception by Rorech of Deutsche Bank. (This lack of deception is also relevant to the "disclose or refrain from trade" principle of insider trading. Judge Koeltl found that Rorech had in fact disclosed his interactions with Negrin to Deutsche Bank supervisors.) Moreover, Negrin did nothing to hide his dealings with Deutsche Bank.

There is considerably more in the Opinion and Order. The decision is worth reading alone for Judge Koeltl's succinct recapitulation of governing Rule 10b-5 case law, and for his analysis of why the credit default swaps at issue here fall under the purview of Rule 10b-5. Rule 10b-5 often forms the basis of criminal securities fraud charges brought under the Exchange Act (through 15 U.S.C. Section 78ff), and the civil case law, although not identical to the criminal case law, can be highly relevant.

The facts were obviously important here. The SEC didn't have any.

(slw)

SDNY Goes After Bongiorno and Crupi Assets

GUEST BLOGGER-SOLOMON L. WISENBERG

Here is the SDNY's press release regarding the civil forfeiture complaints filed yesterday against property "traceable" to Bernard Madoff's Ponzi scheme "and paid to or on behalf of" former Bernard L. Madoff Investment Securities LLC ("BLMIS") employees, Annette Bongiorno and Joann Crupi. Here is the Bongiorno-related complaint and here is the Crupi-related complaint.

It is clear from the complaints that the government believes Bongiorno and Crupi were knowing participants in Madoff's fraud. They each allegedly "knowingly perpetuated the fraud" by, among other things, overseeing, preparing, or assisting in the preparation of fabricated account statements and other documents.

By proceeding civilly against the properties at this time, the government lowers its burden of proof and puts the longtime, back-office BLMIS employees in the unenviable position of possibly incriminating themselves if they seek to retain their assets through the in rem forfeiture litigation. Hat tip to forfeiture expert David B. Smith of English and Smith for pointing out to me that invocation of the Fifth Amendment in the context of a civil forfeiture proceeding may not automatically result in the drawing of an adverse interest.

(slw)

Is It Civil Or Is It Limited to Criminal - Beyond RICO and FCPA

A interesting issue is presented in the Chronicle of Higher Education, Harvard Law Professor Takes New Tack Against RIAA (citing Jaikumar Vijayan, Computer World, Harvard professor offers new challenge to RIAA antipiracy campaign -Nesson claims Digital Theft Act, on which RIAA lawsuits are based, is unconstitutional) on whether the Digital Theft Act as used in a civil lawsuit is improper because the statute is limited to criminal matters.

Years back the issue would not have arisen as the overlap between criminal and third-party civil statutes did not exist.  With the Racketeer Influenced & Corrupt Organization Act (RICO) in 1970 we have seen statutes that allow for both criminal and civil enforcement, with the civil enforcement being extended beyond a government agency.  The rationale for these civil actions being allowed is that DOJ can't do it alone and allowing third -party civil actions can assist with enforcement. This was appealing with RICO because its initial focus was organized crime.  But RICO was interpreted broadly and went well beyond its roots and with it went the third-party civil actions. DOJ had and continues to have guidelines that restrict application of the statutes by providing oversight on prosecutorial discretion.  There are, however, no guidelines on the civil side.  This caused Congress to place additional limits on the civil side of RICO as seen in 18 U.S.C. 1964(c).

Other criminal statutes have seen attempts to be used in civil matters, such as the Foreign Corrupt Practices Act.  In Lamb v. Phillip Morris, Inc., 915 F.2d 1024 (6th Cir. 1024), the court did not allow the civil action. (See also Lewis v. Spock, 612 F. Supp. 1316 (N.D. Cal. 1985)).  Interestingly, one finds civil RICO actions that use the FCPA.

(esp)

Stringer: What Are Others Saying

In United States v. Stringer, the Ninth Circuit held that "[t]here is nothing improper about the government undertaking simultaneous criminal and civil investigations." The court reversed a district court opinion that had held that "that the government had engaged in deceitful conduct, in violation of defendants' due process rights, by simultaneously pursuing civil and criminal investigations of defendants' alleged falsification of the financial records of their high-tech camera sales company."

Many have commented on this decision. (see, e.g., here and here).  And now there are additional individuals talking about what will ultimately be the effect of this Ninth Circuit reversal.

Jeffrey B. Coopersmith and Patrick T. Jordan, DLA Piper, Stringer May Not Be Dead Yet, Securities Law 360 - Download stringer_article_final.pdf  (This article was first published in Securities Law 360 and blogged with permission).

Dechert Sent out a Notice to It's Clients titled, Ninth Circuit's Decision Raises Critical Issues for Companies and Individuals Confronted with a Government Civil Investigation.

(esp)

Former AOL Exec Cleared in Civil Case

The government first proceeded with a criminal action against a former AOL executive. (see here and here).  After a "not guilty," was returned by the jury, the government tried the civil route. Because the government has the ability to use parallel civil proceedings, they can proceed twice with basically the same evidence and not be precluded by claims of double jeopardy.

Although the government has the right and power to try a second time in a different forum, the results did not change with respect to the former AOL exec.  The jury returned another win for the defense, resulting in a finding against the government's civil fraud charges. (see here)

Attorney Hank Asbill, a partner at Dewey & LeBoeuf LLP, and attorney for the AOL exec, will be speaking as the keynote speaker at the forthcoming White Collar Crime Institute at Stetson U. College of Law's Tampa campus in Florida on May 8, 2008. To attend this function, see here. See here for more details.

(esp)

Collateral Consequences After a Plea

The Wall Street Jrl reports on the SEC suing the former chief at Refco.  This comes on the heals of Phillip Bennett entering a plea with the government (see here). He is set to be sentenced on May 20, 2008 (see here).  This recent suit emphasizes the importance of looking at white collar cases globally - that is beyond the individual criminal charges.  The collateral consequences of a white collar matter can result in civil law suits, loss of licenses, debarment and a host of other ramifications that need to be factored in when handling this type of case. Sometimes, despite efforts to resolve extraneous matters as part of the plea in a criminal case, one can be left with significant exposure because the collateral consequences are just not a part of the criminal matter.

(esp)