Saturday, February 2, 2008
Two hoary maxims that Napoleon ignored were never fight a two front war and never invade Russia in the winter. Famed Mississippi tort lawyer Dickie Scruggs is fighting on more than two fronts these days, although under the terms of his bail I don't think he'll be heading to Russia any time soon. His criminal entanglements began with a contempt charge in the Northern District of Alabama, a case we haven't heard much about lately but that continues to percolate. The contempt came out of Scruggs' possession of information taken from State Farm Insurance related to payment of claims from damager caused by Hurricane Katrina. The most recent filing (available below) by the Special Prosecutors attacks Scruggs' motion to strike a request for Rule 17(c) subpoenas. Among the points mentioned in the brief is a claim by Mississippi Attorney General Jim Hood that Scruggs was working as a "confidential informant" on the Hurricane Katrina litigation, and thus should not be found in contempt for his alleged defiance of a federal judge's order.
The second front, much more well known, is the prosecution of Scruggs and two others for their alleged involvement in the attempted bribe of a Mississippi state court judge in litigation over attorney's fees. A recent government filing (available below) states cryptically that "the United States will seek to introduce similar act evidence pursuant to Rule 404(b) . . . ." That Rule prohibits the use of other "crimes, wrongs, or acts" of a defendant except as "proof of motive, opportunity, intent, preparation, plan, knowledge, identity, or absence of mistake or accident." A confederate of Scruggs' has entered a guilty plea to paying a bribe to a judge in a different case, and that certainly may be the evidence the government is referring to, but it could be that there is more prosecutors may want to bring in at trial. Rule 404(b) evidence is often quite powerful because, while it cannot be used directly to establish the defendant's "bad" character, once admitted the jury can do with the evidence what it will.
Recently, a third front has opened up for Scruggs, this time a civil suit filed by State Farm accusing Mississippi Attorney General Jim Hood of conspiring with Scruggs to threaten the insurer with criminal charges if it did not settle Hurricane Katrina litigation brought by -- you guessed it -- Scruggs. State Farm noticed the deposition of Scruggs for February 1, which caused his attorney, John Keker, to send a series of e-mails (available below) stating that his client would assert the Fifth Amendment and not show for the deposition. Any criminal defense lawyer would instruct a client to assert the privilege against self-incrimination before trial, and that's usually the end of the matter. But State Farm has advanced a particularly aggressive argument in a brief (available below) for wanting Scruggs to appear and take the Fifth in response to specific questions: "Even if Mr. Scruggs invokes the Fifth Amendment, his testimony is necessary because that invocation will entitle State Farm to a negative inference against Mr. Scruggs’ principal and co-conspirator, General Hood."
Can that argument really work? While taking the Fifth can be a ground for inferring that the witness' testimony would be incriminating, I have never heard of that inference being drawn against another person. [UPDATE: A sharp-eyed reader pointed out that I'm mistaken in my belief, and that courts have permitted a negative inference to be drawn from one witness' assertion of the Fifth Amendment against another party. Those cases tend to involve corporations or other organizations and the witness is an employee or former employee, but the language in the opinions is clear that it is not limited to only that situation and depends on the circumstances. I happily stand corrected.] While a statement of one conspirator may be used against another, that's only for what was said during the conspiracy -- and in furtherance of it -- not at a subsequent deposition. It's hard to see a court extending the potential inferential value of asserting the self-incrimination privilege from one non-party individual (Scruggs) to another individual (AG Hood) based solely on a claimed conspiracy, especially when Scruggs is facing two pending criminal prosecutions that may be the reason for asserting the Fifth Amendment. I doubt State Farm will be able to make this argument stick, but it's worth a shot. The litigation points up another potential area for a government investigation, the relationship between Scruggs and AG Hood, which could spread quite far and wide in Mississippi. I suspect we have not seen the last set of criminal charges involving Scruggs. (ph)
Wednesday, January 30, 2008
Comverse Technology issued the final report (here) on its internal investigation of options backdating and earnings manipulation, blaming the misconduct squarely on its founder and former CEO, Kobi Alexander, and other senior executives. In 2006, Alexander fled -- or chose to relocate -- to Namibia shortly before his indictment in the Eastern District of New York on conspiracy, securities fraud, and obstruction of justice charges. According to the company's report:
In reviewing the Company's practices relating to option grants from 1991 through 2005, the Special Committee reviewed 39 separate grants of more than 82 million options to approximately 6,200 employees and consultants, as well as 22 grants of approximately 1.2 million options to eight non-employee directors of the Company. It found that between 1991 and 2001, almost 54 million stock options (issued via 29 grants to 5,386 grantees) were backdated to obtain advantageous exercise prices, with the knowledge and participation of the Company's former Chairman and Chief Executive Officer, Jacob "Kobi" Alexander ("Alexander"), the Company's former director and General Counsel, William Sorin ("Sorin") and, at times, the Company's former Executive Vice President and Chief Financial Officer, David Kreinberg ("Kreinberg").
Kreinberg and Sorin earlier entered guilty pleas and settled securities fraud cases filed by the SEC. The accounting improprieties involved "cookie jar" reserves used to smooth out Comverse's earnings so that they appeared to be less volatile than they were, a major no-no in financial reporting.
Alexander has been living in Windhoek, Namibia's capital, for over eighteen months, and an extradition request by the United States has been repeatedly postponed by the Namibian courts at his request; the next one is scheduled to take place in March, although given past practices it too is likely to be delayed. One would think Alexander would not want to pick a fight with his former employer in the United States, even after it filed a lawsuit against him in New York state court to recover for the damages he allegedly caused it through the options backdating and accounting problems. Instead, however, he filed a counter-claim to Comverse's suit, seeking $72 million in severance pay and for options that he claims the company improperly canceled. Given that the Super Bowl is almost upon us, perhaps this is the "best defense is a good offense" approach.
If one were trying to stay away from the United States, would you file a claim in a state court lawsuit that might subject you to the jurisdiction of an American court and require you to appear for a deposition? New York's civil discovery provision, CPLR 3110, provides: "Where the deposition is to be taken within the state. A deposition within the state on notice shall be taken: 1. when the person to be examined is a party or an officer, director, member or employee of a party, within the county in which he resides or has an office for the regular transaction of business in person or where the action is pending . . . ." A party can seek to have a deposition taken outside the state, but it requires a showing of "substantial hardship" in order to avoid appearing in New York.
Is a federal indictment a "substantial hardship" that might be grounds for Alexander to avoid returning to New York? I'm certainly not an expert in New York civil procedure, but the few cases I saw on the topic allowing depositions outside the state generally involved issues related to illness or infirmities, or where the person would appear at a time closer to the trial so initial discovery could be taken through written interrogatories or video deposition. Somehow, I suspect a New York state Supreme Court judge is not going to view a claim that a party wishes to avoid being arrested on federal charges -- even when that person proclaims his innocence -- as meeting the requisite standard to avoid appearing for a deposition, particularly when a counter-claim has been filed. Even if Alexander is deposed in Windhoek, don't be surprised if the federal prosecutors get ahold of the transcript to use in his trial -- if there ever is one, givenn how well his attorneys are delaying the extradition process in Namibia. Comverse doesn't appear to harbor any warm feelings for its former CEO these days, so it will look to make the case against him almost as much as the U.S. Attorney's Office will. A Reuters story (here) discusses Alexander's counterclaim. (ph)