Annie Donnelly entered a guilty plea to stealing $2.3 million from her employer, a medical practice, to buy lottery tickets over the past three years. She was buying upwards of $6,000 worth of tickets a day, and a clerk in a story where she made her purchases is quoted as saying, "I don’t think I’ll ever see anyone spend that much money again." No kidding! It’s not clear how much she won, but it’s unlikely there much left if she kept embezzling from the business. If you can steal $2.3 million without being noticed, isn’t that kind of like hitting the lottery? Donnelly faces a prison term of at least four years, and could serve up to twelve years. It’s been said enough times, but the trusted bookkeeper is usually the soft underbelly of so many businesses hit by embezzlement. A Reuters story (here) discusses the guilty plea. (ph)
Category: Fraud
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After asking "Where the heck is Kobi Alexander?" (earlier post here) the answer is:
Sri Lanka— Namibia. Check an updated blog post here. The rest is what was written on August 24: Israeli newspaper Ma’ariv reports (Marketwatch story here) that a private investigator tracked Alexander through an internet telephone call he recently placed to his daughter in Israel. Assuming he has not left the jurisdiction, the United States and Sri Lanka have an extradition treaty so there is a chance that he will be detained and then returned to the United States to face the conspiracy and securities fraud charges filed against him in Brooklyn related to options-timing at the company he founded and served as CEO, Comverse Technologies.One issue in an extradition proceeding against Alexander will be whether the crimes charged are covered by the treaty (here), which provides in Article 2: "An offense shall be an extraditable offense if it is punishable under the laws in both Contracting States by deprivation of liberty for a period of more than one year or by a more severe penalty." The treaty entered into force in 2001, and is fairly flexible on determining whether there is dual criminality, providing in Article 2(3) that it is an extraditable offense
(a) whether or not the laws in the Contracting States place the offense within the same category of offenses or describe the offense by the same terminology; or
(b) whether or not the offense is one for which United States federal law requires the showing of such matters as interstate transportation, or use of the malls or of other facilities affecting interstate or foreign commerce, such matters being merely for the purpose of establishing jurisdiction in a United States federal court.
(ph)
Addendum –
It is very typical for countries to incorporate a dual criminality provision within a treaty. The rationale for the dual criminality rule is "to make certain that extraditable crimes are serious offenses. Having the conduct as criminal in both countries helps to assure that it is a crime that both countries consider sufficiently wrongful." Podgor, Understanding International Criminal Law 99 (2004) In determining whether the crime is the same in both countries, the name of the crime is not determinative. Courts also will defer to the surrendering country in its "reasonable determination that the offense in question is extraditable." United States v. Saccoccia, 58 F.3d 754, 766 (1st Cir. 1995).
(esp)
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Martin Armstrong has spent almost the entire 21st century in jail, having been sent there in January 2000 because he was found in civil contempt for refusing to turn over assets in an SEC securities fraud action. Armstrong was a money manager who founded Princeton Economics International, and he was accused in parallel criminal and civil cases of defrauding Japanese investors of over $700 million. Despite repeated attempts to get out of jail on the ground that the civil contempt was ineffective, U.S. District Judge Richard Owen — backed by the Second Circuit — refused to let Armstrong leave the Metropolitan Correctional Center in New York for over six years, no doubt a record for the longest civil contempt in federal court history. Now, Armstrong has finally entered a guilty plea to a charge of conspiracy to commit securities and wire fraud, and he will be sentenced in January 2007 by U.S. District Judge John Keenan, who presided over the criminal case that was set to go to trial in October. A Bloomberg story (here) discusses the plea agreement.
Even after the guilty plea, it remains an open question whether Armstrong will be let out of jail on the civil contempt, and whether the court will take into consideration his 6+ years in jail. On the latter issue, federal law permits the imposition of a civil contempt that interrupts a criminal sentence, and there is no requirement that the time spent in jail on the civil contempt be counted toward the criminal punishment, although Judge Keenan is free to do so in setting the sentence. The reason why the civil contempt does not count lies in the difference between a civil contempt, which is viewed as coercive, and a criminal sentence, which is punitive.
The person held in civil contempt "holds the keys to the jail cell" according to the old adage, which means the person can "purge" the contempt by complying with the court’s directive. Most cases in this area involve individuals who have received immunity but continue to refuse to testify, and they can get out of the civil contempt simply by testifying. One of the seminal decisions is United States v. Liddy, 510 F.2d 669 (19774), involving Watergate burglar G. Gordon Liddy — how’s that for a blast from the past — who refused to testify before the Watergate grand jury despite an immunity grant. In rejecting his argument that the civil contempt could not interrupt his service of the criminal sentence, the D.C. Circuit stated:
The coercive impact of confinement for civil contempt results from the fact that the contemnor ‘carries the key to the jailhouse door in his pocket,’ that is, he can procure his release at any time by agreeing to comply with the court order whose violation is the basis of his contempt. Had the District Court ordered that Liddy’s contempt confinement be concurrent with his sentence for Watergate crimes, Liddy would have no incentive to comply with the District Court’s order since his doing so would not reduce his total period of confinement. Therefore, the District Court was manifestly justified when it stated: "To give meaning and coercive impact to the Court’s contempt powers in the interest of protecting the Court’s integrity, the Court here finds it necessary to hold in abeyance the execution of Mr. Liddy’s sentence under the indictment pending his confinement for contempt."
Armstrong faces a maximum sentence of five years on the conspiracy charge, and under the federal Sentencing Guidelines if the loss is even 10% of what the government alleges he will be in a sentencing range that will easily take him to the full five years. Whether he gets the benefit of having spent six years in jail already poses an interesting question because he has not, to this point, agreed to cooperate in the SEC enforcement action that triggered the civil contempt. He has, however, shown a resolve that likely would make G. Gordon Liddy proud. (ph)
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Two senior executives of DHB Industries, Inc., a supplier of body armor to the U.S. military, were arrested on insider trading, securities fraud, and conspiracy charges, and the SEC filed a civil suit alleging securities fraud. The former officers are Dawn M. Schlegel, DHB’s CFO, and Sandra L. Hatfield, the chief operating officer, and the charges were filed by the U.S. Attorney’s Office for the Eastern District of New York. The charges involve both accounting fraud and the sale of DHB securities that resulted in a profit of over $8 million. According to the SEC Litigation Release (here), the two defendants:
[R]egularly overstated
the value of DHB’s inventory by fraudulently increasing inventory
quantities, labor costs, overhead costs, and the amount of raw
materials used in DHB’s products. The complaint alleges that together
Hatfield and Schlegel also transferred millions of dollars of expenses
from cost of goods sold to research and development costs to materially
increase the company’s gross profit. The complaint further alleges that
Schlegel falsely inflated DHB’s $60 million charge against earnings
taken in the third quarter of 2005 to mask her and Hatfield’s
fraudulent conduct. Schlegel is alleged to have lied to DHB’s auditors
and provided fake inventory schedules and other documents to conceal
the fraud.The complaint also
alleges that during the period of their fraudulent conduct, Schlegel
and Hatfield collectively profited by over $8.2 million from the
cashless exercise of warrants and sale of over 400,000 DHB shares.
Schlegel and Hatfield sold these shares at the end of 2004 at the
height of DHB’s stock price and before the public knew about the
misrepresentations in DHB’s filings and public statements.Last year, the military ordered the recall of one of the company’s body armor products due to quality issues. Former CEO David Brooks, whose daughter’s $10 million bat mitzvah party featured legendary rockers Steven Tyler and Joe Perry of Aerosmith, left the company on July 10 "pending the outcome of federal, state, and internal investigations" while DHB settled shareholder suits (press release here) Because federal prosecutors did not file any charges against Brooks at the same time as they did against Schlegel and Hatfield, it may be that he is cooperating in the investigation. Brooks made over $190 million from the sale of DHB stock in 2004, so he is a likely target of the grand jury investigation. (ph)
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A major bank fraud case in Florida that lasted three months followed by three weeks of jury deliberations resulted in a split verdict on some of the counts, but a guilty finding against all the defendants. (See Miami Herald here) All were taken into custody immediately (See David Marcus’ Southern District of Florida Blog here). David Marcus raises the question of whether these defendants will be punished more harshly for having exercised their right to a jury trial.
The US Attorney’s Office for the Southern District of Florida issued a Press Release that includes the following:
According to the evidence presented at trial, the defendants conspired to fraudulently inflate, by hundreds of millions of dollars, the value of collateral used to obtain loans through Espirito Santo Bank of Florida. The defendants worked for E.S. Bankest, LLC, a company in the business of “factoring.” Factoring involves the purchase of accounts receivable from client companies at a discount. Espirito Santo Bank was a joint venture partner in E.S. Bankest, LLC, and was responsible for arranging funding for E.S. Bankest, LLC’s factoring operations. The accounts receivable E.S. Bankest, LLC, supposedly purchased were to serve as the collateral for the funding arranged by Espirito Santo Bank and provided by Espirito Santo Bank customers.
According to the evidence, over the nine-year period from June 1994 through August 2003, the defendants’ conspiracy deceived Espirito Santo Bank and investors by falsifying financial statements, creating fictitious invoices and checks, using fictitious companies, and engaging in other machinations to create the appearance that millions of dollars in fictitious accounts receivable were actually real. Through these tactics, defendants deceived Espirito Santo Bank, federal banking regulators, and independent public accounting firms that examined E.S. Bankest, LLC, about the value of the accounts receivable owned, all to support additional loans through the bank. As a result of their schemes, the conspirators fraudulently obtained approximately $170 million in loan proceeds.
(esp) (w/ thanks to David Marcus for the hat tip)
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Embezzlement is sometimes as easy as opening up a can of beer on a hot summer day, at least from the description of some cases. A press release (here) from the U.S. Attorney’s Office for the District of New Jersey sure makes it sound like it was easy for an accounting manager at the Hoboken Housing Authority to steal over $110,000. According to the press release, Eric Hurt admitted that "he embezzled the funds – in 34 checks written to himself – between about August 2001 and February 2004. To conceal the embezzlement, Hurt admitted that he falsely reported to the Housing Authority that the payees on the checks were various vendors doing business with the Housing Authority by entering them that way in the general operating fund check register." Not even a false name or a dummy corporation with a bank account he controlled, just a false entry in the check register. They’re called internal controls for a reason, and once again they seem to be ignored, no doubt because Mr. Hurt was a trustworthy sort of person. (ph)
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Liquidmetal Technologies, Inc., disclosed that it had received a grand jury subpoena for documents related to the company’s accounting. A press release (here) states: "The documents being sought include accounting records, documents relating to the Company’s relationship with Growell Metal of Korea, and documents and records relating to transactions in Company stock by officers and directors. The Company has been advised that the materials sought are pertinent to a grand jury investigation recently initiated in the Middle District of Florida by the U.S. Department of Justice, Criminal Division, Fraud Section concerning alleged accounting improprieties by the Company, among other things." While the press release is vague — naturally — it may be that the overseas transactions involve possible Foreign Corrupt Practices Act violations, particularly when the Fraud Section conducts the investigation. The issues related to transactions in company stock could indicate possible insider trading questions, but again it’s not clear where the government is going. (ph)
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If it turns out that Kobi Alexander is in Israel, the issue may be whether he can be extradited back to the United States. (see post here) According to the Wall Street Jrl here, Robert Morvillo, Alexander’s attorney, is stating that he has no idea of the whereabouts of his client. Morvillo states that his client is an Israeli citizen which may make extradition difficult.
Eddie Antar (Crazy Eddie Inc.’s founder) was extradited from Israel to the United States in January of 1993. He had tried to seek asylum in Israel, but failed after three years. (See Philadelphia Inquirer Jan. 11, 1993, at A1) Alexander, however, may be an Israeli citizen and as such there may be different laws applicable here. Israel, like some European countries (See Baltimore Sun, Oct. 23, 1997, at 2A), has rules that permit the home country of the individual to prosecute the accused as opposed to extraditing them. Thus, Alexander, as an Israeli, may be subject to prosecution in Israel. If this applies, this would not be the first time that Israel prosecuted an individual for a crime in the United States. Samuel Sheinbein left the United States for Israel. He eventually entered a plea in Israel related to a homicide occurring in Maryland and was sentenced and imprisoned in Israel.
Kobi Alexander’s case may present additional issues: does it make a difference whether the crime is also a crime in Israel, and is this alleged conduct a crime in Israel?
(esp)
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As expected, a grand jury indicted former Brocade Communications CEO Gregory Reyes and former human resources VP Stephanie Jensen, supplanting the securities fraud complaint issued on July 20. Reyes is indicted on twelve charges and Jensen on eight, comprised of conspiracy, securities fraud, mail fraud, false entries in the company’s books, and four counts of making false statements to the company’s accountants (Reyes is the only defendant on these). The factual allegations in the indictment (available below) do not vary much from the earlier complaint, and the securities fraud charges under Section 10(b) and Rule 10b-5 simply recite the language of those provisions and allege both a scheme to defraud and causing Brocade to file false Form 10-Ks with the SEC. The mail fraud charge alleges both the traditional money/property form of fraud and also an alleged deprivation of the right of honest services owed to Brocade by both defendants. Once again, the issue of intent will be the key to the fraud charges because neither Reyes nor Jensen profited directly from the backdating of the options grants and they were authorized to issue the options to the new hires, albeit without falsifying records. Each is charged with a narrower books-and-records violation, which may be easier for prosecutors to establish.
One thing I noticed in the indictment is that it is dated "July 20, 2006" on the last page where the foreman signed it as a "True Bill," although it was not filed until August 10. I had wondered why prosecutors used a criminal complaint earlier rather than a grand jury indictment, which would have obviated the need for a hearing on the propriety of the complaint that was held before a magistrate on August 9. A complaint is judged by a different standard than a grand jury indictment, although the threshold for an acceptable complaint is still rather low. I suspect that the prosecutors hoped to have the grand jury return the indictment on Thursday, July 20, but for whatever reason it could not be completed in time. Rather than let the moment pass, they filed the complaint and now, three weeks later — this is obviously a "Thursday" grand jury, and could even be the same one that is hearing the Barry Bonds perjury investigation — the indictment was ready for a vote. A previously scheduled preliminary hearing to review the basis for the securities fraud charge in the complaint is now out the window because a grand jury indictment is based on probable cause, so the case will proceed from here into the discovery phase. Look for the defense to file a motion to dismiss and for a bill of particulars to get the government to identify the victim(s) of the alleged violations and its basis for inferring criminal intent, among other things. (ph)
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Former Comverse Technology CEO Kobi Alexander was charged with conspiracy along with two other senior executives, but has not been located at this point. While a Department of Justice press release (here) notes that two brokerage accounts with $45 million of Alexander’s assets have been frozen, it appears that he transferred over $57 million to accounts in Israel in what the government asserts was a money laundering scheme "in an effort to conceal the funds from U.S. authorities." The FBI has declared Alexander a fugitive, and is conducting a worldwide search.
There is certainly a good possibility that Alexander is in Israel, so it may be difficult to extradite him to the United States. An article in the Israeli newspaper Ha’aretz (here) quotes a local attorney who states that the extradition treaty between the countries dates back to 1963 and the alleged fraud from the options timing may not be a covered offense allowing for Alexander’s return. Should Alexander return to the United States to face the charge, expect to see some fairly onerous conditions if bail is granted, which is probably unlikely. If Alexander shows up in a country that will not extradite him, then we may have a new Marc Rich, who fled to Switzerland in the face of tax evasion charges in the early 1980s. (ph)
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