Business Week (AP) reports here on the indictment of a "former licensing agent for World Wrestling Entertainment, Inc." The charges allege kickbacks on licensing of merchandise.
Category: Fraud
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The jury in the lesser-known Enron Broadband retrial reached a split verdict, convicting one defendant and acquitting the other on conspiracy, false accounting entry, and wire fraud charges. The first trial, which involved five executives of the Enron unit that was supposed to be the company’s foothold in the then-burgeoning dot-com world, ended in the acquittal of defendants on some counts and a hung jury on others. Prosecutors from the Enron Task Force then split the case into three parts, and the first retrial involved Kevin Howard, the unit’s finance chief who was convicted on all five counts, and Michael Krautz, its accounting officer who was acquitted (indictment here). The charges revolved around the "Project Braveheart" transaction — they had such cute names for their accounting legerdemain at Enron — that the government alleged was designed to pump up the Broadband unit’s earnings through the "sale" of its future earnings. The Braveheart transaction was part of a broader effort in 2000 and 2001 to help Enron meet its earnings targets and mask problems at the company, an issue that was key to the convictions of former CEOs Ken Lay and Jeffrey Skilling just a week earlier. While the first Broadband trial took three months, the government went with a slimmed-down version the second time that only took a month to present, largely avoiding the mind-numbing details and technical jargon that nearly left the first jury comatose.
Interestingly, the two Enron trials took place in adjoining courtrooms in Houston, and the juries in the two cases deliberated next to each other. U.S. District Judge Vanessa Gilmore rejected a defense request to poll the jury about whether they were aware of the verdict in the Lay/Skilling trial, although it is hard to believe that they did not notice the frenzy that verdict triggered on May 25. That will likely be one of the appellate issues raised by Howard.
Howard’s likely sentence is hard to predict because, just like the sentencing of Lay and Skilling, a key issue will be loss, but here the calculation is much more complicated. The Enron Broadband unit was a small slice of a much larger company, and the effect of the transactions at issue on the company and its investors will be hard to estimate. The case is similar to the Enron Nigerian Barge trial, which involved a single transaction designed to help Enron’s year-end earnings, and the prosecution of Jamie Olis for an earnings-related tax deal at Dynegy, an Enron competitor. Olis awaits resentencing after initially receiving a 24-year prison term, while the Nigerian Barge defendants received sentences from over two years to fours years. The violations outlined in the indictment all occurred before November 1, 2001, when the Federal Sentencing Guidelines provisions for economic crimes were increased, so Howard may receive a small benefit from a lower Guidelines sentencing calculation, if Judge Gilmore relies on them in fashioning the sentence. Sentencing is set for September 11, 2006, the same day as Lay and Skilling if the schedule holds.
There are two more indictments yet to be tried involving Broadband executives, and the Houston Chronicle has an excellent summary of the defendants and charges (here) . An AP story (here) discusses the verdict in the first retrial. (ph — thanks to Tom Kirkendall for pointing out the correct U.S. Distict Judge who presided at the trial)
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Nine former employees and contractors entered guilty pleas to conspiracy to commit mail fraud for reporting inflated circulation numbers to the Audit Bureau of Circulations (ABC) that were then used to set advertising rates for two newspapers. The newspapers involved are Newsday, which is primarily in Long Island, and Hoy, a Spanish-language paper distributed throughout the U.S. A press release issued by the U.S. Attorney’s Office for the Eastern District of New York (here) describes the role of ABC as conducting "annual audits of circulation numbers that publishers certify bi-annually and functions as an industry watchdog to insure the integrity of data that publishers provide to advertisers. Membership in ABC earns publishers credibility with advertisers, who rely on ABC-audited paid circulation data to decide whether to place advertisements in a publication and to negotiate advertising rates. In general, advertisers pay higher advertising rates to publishers whose paid circulation numbers exceed those of its competitors." The press release described the scheme: "From approximately 2000 and continuing through 2004, Newsday circulation executives and managers repeatedly manipulated paid circulation numbers to make it appear as if more newspapers were being sold than was in fact the case, then forwarded the inflated data to ABC for dissemination to publishers . . . The fraudulent conduct at Hoy involved many of the same techniques and several of the same participants as at Newsday."
The SEC filed an administrative Cease-and-Desist Order (here) against the Tribune Company, the owner of Newsday and Hoy, prohibiting future violations of the financial reporting provisions of the federal securities laws because its quarterly and annual filings included the inflated circulation figures. There was no sanction imposed as part of the administrative proceeding. (ph)
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The indictment of plaintiff class action law firm Milberg Weiss on conspiracy and mail fraud charges did not mean that the firm would necessarily go out of business, but the pressure from the indictment is starting to show. An article in The Recorder (available on Law.Com here) notes that since the grand jury indicted the firm and two of its name partners on May 18, a member of the executive committee and two members of the management committee have announced plans to move to other firms. One partner, the head of the corporate practice group, is leaving but has not announced plans regarding where he will practice next. In a potentially more ominous sign, the health care group at Milberg Weiss, including two partners, six associates, and a staff lawyer will be moving in whole to another firm. Coupled with the loss of partners have been moves to have the firm removed as lead counsel in various class actions, and the indictment will make it very difficult for Milberg Weiss to obtain new appointments as class counsel from judges leery of appointing a firm that may be convicted of fraud in relation to its representation in other class actions. If other practice groups and their leaders decamp from Milberg Weiss, the financial pressure on the remaining partners to fund the firm’s ongoing litigation — which can be an expensive proposition — and the continuing expenses defending the indictment may be too great for it to survive. Unlike Arthur Andersen, which could not survive a conviction, Milberg Weiss may be undermined by the fall-out from the indictment. (ph)
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Kirk Wright has been accused of causing loses — or looting — of over $100 million in hedge funds he managed, and to this point the government has only been able to recover approximately $150,000, not counting the $28,000 in cash on him when he was found. Wright was arrested at the Ritz-Carlton in Miami on a warrant issued after the filing of a single-count criminal information alleging securities fraud in the Northern District of Georgia, and will be returned to Atlanta to face what will likely be a multi-count indictment. A U.S. Magistrate set bond at $1 million, and according to a South Florida Sun-Sentinel story (here), prosecutors plan to appeal the bond decision on the ground that Wright is a flight risk. He will remain in jail until the initial appeal to a district judge is decided. While the Bail Reform Act does not permit a court to set a bond so high that it effectively keeps a defendant in jail, courts are permitted to require a defendant to deposit property with the court or post a surety bond (18 U.S.C. Sec. 3142(c)) to be released, or else remain in jail. In 2005, mutual fund manager Alberto Vilar spent over a month in jail when he was unable to post property to meet a multi-million bond.
Whether Wright will be able to put up $1 million that is untainted by the alleged fraud is another question, but U.S. Magistrate Judge Stephen Brown told Wright that "[i]f you’re going to hide and you’re going to flee, the Ritz-Carlton in South Beach is not the place you want to go." I can think of a lot worse places than a Ritz-Carlton to hide out, although perhaps a location outside the United States might have been just a bit more effective, if one were to flee. (ph)
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If you have received the e-mails or telephone messages telling you that you’ve won a sweepstakes, or at least the highly valuable second prize, your heart probably jumps at least for a moment at the thought of riches. For most of us, that’s also about how long it takes to figure out that it’s a scam, but the lure of free money sure was tempting to over 2,000 victims, as a recently completed Immigration and Customs Enforcement (ICE) investigation shows. Defendants were arrested in a coordinated operation in the U.S. and Costa Rica for running a fraud that an ICE press release (here) described:
During their pitch to victims, the fraudsters in Costa Rica typically claimed to be a "U.S. Customs" official or a representative of another federal agency. They would then tell the victims that they had won 2nd prize in a foreign sweepstakes and that, to collect the prize money, the victims needed to send via Western Union anywhere from $1,000 to several thousand dollars to an "insurance entity" in Costa Rica as a "refundable insurance fee." Victims sent wire transfers to Costa Rica to claim the prizes, but never received any money.
Once the victim had wired the money to Costa Rica, the fraudsters would often call the victims back and inform them that they had actually won 1st prize and that they needed to wire thousands of additional dollars in fees in order to ensure the safe delivery of the prize money. The defendants and their co-conspirators continued to call victims with this pitch as long as the victims continued to wire money to Costa Rica. None of the victims ever received any prize money.
It is believed that more than 2,000 U.S. victims were defrauded out of at least $20 million through this international sweepstakes fraud.
Paying money to get your winnings sounds a bit counterintuitive, but then in hindsight that’s true of most frauds. If you’re going to gamble, you might as well try investing in stock market, at least that is (marginally) more honest. (ph)
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Clients are supposed to be able to trust their lawyers, so when an attorney is accused of stealing from the funds paid out to injured clients it is particularly troubling. Louis Robles, who at one time headed one of the largest class action and mass tort firms in the country, has been indicted in the Southern District of Florida on 41 counts of mail fraud for misappropriating $13.5 million from clients who received settlements in asbestos litigation. Robles was disbarred in 2003 by the Florida Supreme Court, and in his personal bankruptcy a report asserted that Robles overcharged his clients by $30 million for expenses (see Daily Business Review article here). A press release issued by the U.S. Attorney’s Office (here) states:
According to the Indictment, Robles used client trust account money for his personal benefit, including financing his movie production and waste management companies, leasing apartments in New York and Los Angeles, making mortgage payments of up to $101,000 per month on four different properties, including a 9,000 square-foot waterfront mansion in Key Biscayne, and paying his ex-wife’s alimony, as well as payments to other clients.
According to the Indictment, Robles, acting contrary to his fiduciary duty and duty of loyalty as an attorney, misappropriated trust monies belonging to his asbestos clients and used this money for his own personal and business purposes. Specifically, in April 1994, Louis Robles stopped the automatic disbursement to his clients of settlement funds he had received on their behalf, and directed that no disbursements be made without his prior authorization. At around the same time, Robles began requesting bulk withdrawals of funds from client trust accounts without his clients’ knowledge or consent. According to court records, over time, the gap between settlements moneys received versus settlements paid grew until by September 30, 2002, the gap exceeded $13,522,000.
According to the Indictment, Robles further defrauded his clients by making materially false statements regarding his receipt of settlement funds from asbestos corporate defendants. Between April 1994 and February 19, 2003, Robles caused mailings to be sent to his asbestos clients falsely stating that the payment of their claims would be delayed due to the bankruptcies of certain asbestos corporate defendants. In fact, Robles had already received settlement checks for many of his asbestos clients from several of those same asbestos corporate defendants before their bankruptcies.
Robles had a court-appointed lawyer for his initial appearance, and the first issue will likely be sorting out his finances to determine whether he can afford counsel. A court order has frozen his bank and brokerage accounts, and the government is seeking forfeiture of $13.5 million. Robles sold his Key Biscayne house last year for over $12 million. (ph)
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Los Angeles lawyer Richard Purtich entered into a plea bargain with federal prosecutors and will cooperate in the prosecution of Milberg Weiss and two of its name partners for allegedly making secret payments to representative plaintiffs in class action cases in which the law firm served as counsel to the class. The indictment identifies three representatives plaintiffs — Howard Vogel, Seymour Lazar, and Steven Cooperman — as the recipients of the payments, and Purtich admits that he served as the conduit for payments to Cooperman. According to an article in The Recorder (here), Purtich stated that he passed along $3.5 million to Cooperman from 1993 to 1996, and that the funds were not referral fees, a key aspect of Milberg Weiss’s defense to the charges (see earlier post here).
Interestingly, the crime Purtich admitted committing was a tax charge and not fraud. Cooperman pled guilty to a 1999 insurance fraud a few years ago, and during that investigation Purtich testified before a grand jury. The Recorder article claims that Purtich may have had some exposure to a perjury charge arising from that testimony, which may be contradicted by what Cooperman admitted in his plea. While the tax charge may not trigger disbarment for Purtich, his grand jury testimony will certainly be fodder for the defense cross-examination at trial. To this point, the government’s key witnesses in the case appear to be Vogel, Cooperman, and Purtich, along with some Milberg Weiss partners who are supposed to have received immunity. Whether the government will have any "untainted" witnesses, i.e. people without deals, remains to be seen. Look for words like "liar" and "scam artist" to be thrown around the courtroom should the case get to trial. (ph)
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The U.S. Attorney’s Office for the Southern District of Ohio announced the indictment of seven former senior executives at National Century Financial Enterprises (NCFE), at one time among the largest financing companies for health care providers. When NCFE fell into bankruptcy in November 2002, it had securitized approximately $3 billion in health care receivables that it purchased and then repackaged for sale to investors on the secondary market. Among the defendants are the former CEO, CFO, and COO (that’s a lot of chiefs) of the company, along with the head of its securitization office. The 60-count indictment (here) charges conspiracy, securities fraud, mail/wire fraud, money laundering, and money laundering conspiracy, along with forfeiture counts seeking $1.9 billion from the defendants. Three other mid-level NCFE executives entered guilty pleas in 2003 and 2004. According to the press release (here) issued by the USAO:
The Dublin, Ohio based company bought medical accounts receivable from health care providers around the country, then financed the purchases by selling securities in the form of notes to large institutional investors outside Ohio. In their promotional materials, NCFE billed themselves as the “nation’s leading supplier of working capital to the medical industry.” The company collapsed in November 2002.
According to the indictment, National Century operated as a financial service holding company. Through its subsidiary corporations, such as NPF VI and NPF XII, the company bought accounts receivable from hospitals, nursing homes and other health care providers and medical concerns. The subsidiaries would issue health care receivables securitization program notes. National Century employees would sell these securities in private placements, promoting them as conservative and safe investments.
According to the indictment, NCFE executives diverted the money into other companies they owned, used some of the money for operating expenses for NCFE, and provided unsecured advances and loans to clients, third parties and others.
The indictment alleges that the defendants conspired to conceal cash shortages from investors and trustees by using carefully timed transfers of funds back and forth between companies. In one such instance, on January 2, 2002, the defendants ordered $148 million moved into one of their subsidiaries so the investments would appear sound. The next day, they moved the $148 million back to create the same appearance for another subsidiary.
Since the bankruptcy, approximately $1.1 billion has been recovered, leaving investors and others with approximately $1.9 billion in losses. If any of the defendants are convicted and the loss is determined to be anywhere close to that amount, then that person will be looking at a substantial term of imprisonment, in the range of the 25-year sentence given to former WorldCom CEO Bernie Ebbers. (ph)
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The grand jury subpoenas to companies with suspiciously-timed stock option grants to their senior executives seem to be coming fast and furious, and from two different districts separated only by the East River. The U.S. Attorney’s Office for the Eastern District of New York launched the first subpoena, to Comverse Technology, and then went quiet while the Southern District of New York unleashed a set of subpoenas on May 17 to companies such as Vitesse Semiconduct and UnitedHealth. Now comes word that additional companies have received grand jury subpoenas from one or the other district: KLA-Tencor (apparently SDNY); Brooks Automation (EDNY); F5 Networks (EDNY); Juniper Networks (EDNY) (see Wall Street Journal story here). Are the two districts competing over the investigation of companies that have options-timing issues, or is it a matter of dividing a potentially very large field so that one office is not overwhelmed by the truckloads of documents that should be arriving shortly from each corporation that has promised full cooperation? (ph)
MattBray.net 