The Owens Tapes have been admitted at the trial of former HealthSouth CEO Richard Scrushy, including Scrushy’s statement regarding the non-existence of certain conversations. The defense had fought vigorously to keep the tapes made from a wire worn by former CFO Bill Owens from being admitted at trial. After foundational testimony from Owens and an FBI technician, and apparently a lengthy lunch-time argument on admissibility, U.S. District Judge Karon Bowdre admitted them into evidence and the jury has begun hearing Scrushy’s unadorned statements. The defense has argued that the tapes actually exonerate Scrushy, and it is unlikely any contain the type of pure admission of guilt that is seen on TV cop shows. With the admission of the tapes, it is much more likely that Scrushy will have to testify to explain what he meant and why he said certain things — like why a conversation should not be acknowledged as having occurred. An AP story here discusses the admission of the tapes, and more will be played for the jury over the next day or two. Expect the cross-examination of Owens to begin by next week, and it may prove to be lengthy, with more than a few lurid details coming out. (ph)
Category: Fraud
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The Sixth Circuit issued a decision on Feb. 8 (U.S. v. Douglas) reversing the dismissal of an indictment of two former United Auto Workers representatives charging them with mail fraud, conspiracy, and Hobbs Act extortion related to union demands made as part of a contract negotiation. Donny Douglas and Jay Campbell were officials of Local 594, and during negotiations for a contract at a Pontiac, Mich., truck factory, allegedly they demanded that the company hire Campbell’s son and the son-in-law of a former Local official as "skilled tradesmen" even though neither met the qualifications for that position (which pays over $100,000 per year). The mail fraud count alleged that the the defendants deprived union members of property, namely the right to compete for the skilled tradesman positions that were improperly given to the relatives, and honest services fraud. The district court dismissed the money/property allegation, relying on the Supreme Court’s decision in Cleveland v. United States, 531 U.S. 12 (2000), that held unissued government licenses were not property. The Sixth Circuit reversed, stating that "We are persuaded by the government’s argument that, were the right to compete to have such little value—indeed, value equivalent to an unissued government license—then the union would not bother to bargain collectively for this hiring system . . . The right to compete guaranteed by the collective bargaining agreement in this case is sufficient to constitute property for purposes of the mail fraud statute." The district court dismissed the honest services claim because the government only alleged an unfair labor practice and the indictment did not identify how the defendants breached their fiduciary duty. The Sixth Circuit rejected that reasoning too, holding that "The indictment has only to allege that defendants devised a scheme to defraud, involving use of the mails for the purpose of executing the scheme. The indictment sufficiently makes these allegations." (ph)
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A press release issued by the U.S. Attorney’s Office for the Southern District of Florida (Miami) discussed a conviction on Feb. 7 of David Ellisor for running a scam on local elementary school students who purchased tickets to a program at the Coconut Grove Convention Center called "Christmas From Around the World." The press release states:
At trial, the government proved that Ellisor targeted students and teachers at Miami-Dade County public and private schools, promising that the event would be a “once in a lifetime opportunity” and that students attending the event would receive raffle tickets to win “thousands of dollars of sponsored gifts.” Over 2,700 victims, from at least twenty (20) Miami-area schools, paid the $10 per person fee requested by Ellisor, and made arrangements to attend the event, supposedly scheduled for December 3-5, 2003. Local business also provided money to Ellisor based upon his promises about the event. When the first group of students arrived at the Convention Center on the morning of December 3, they found the building locked, with no information about the event, and Ellisor nowhere to be found. Ellisor never met the requirements for staging an event at the Convention Center. Ellisor also collected thousands of dollars in fees for the event, which he then took as cash or used for personal expenses, including a hotel suite, a Jaguar and a watch which he estimated at $5,000.
Targeting kids with a fake holiday show is about as low as one can go, and the now-advisory guidelines might not be of much help to Mr. Ellisor. (ph)
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A federal district court jury in Rome, Ga., found former preacher Abraham Kennard guilty of 122 counts of mail fraud, money laundering, and tax evasion for running a ponzi scheme that defrauded primarily poor churches with largely African-American congregations in 41 states. Kennard charged the churches a $3,000 fee to join his company, promising forgivable loans or grants up to $500,000, but much of the money was used to finance Kennard’s personal spending and little ever made its way back to the churches. Shortly after his indictment in January 2004, Kennard fled and was arrested approximately six weeks later in Tupelo, Miss. At trial, he defended himself, asserting that "[t]hey’ve mistaken a dream for a scheme." See post on ReligionNewsBlog. A co-defendant, Scott Cunningham, who is an attorney in Dalton, Ga., is scheduled for trial later this year. A story in the Atlanta Journal-Constitution also discusses the case. (ph)
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The HealthSouth and WorldCom trials continue along their parallel paths as former WorldCom CFO Scott Sullivan took the witness stand on Monday, Feb. 7, to begin what promises to be a long engagement testifying against Bernie Ebbers. On his first day of testimony, Sullivan — the government’s star witness because he is the principle link between Ebbers and the multi-billion dollar accounting fraud — stated that Ebbers had a "hands on grasp of financial information." (AP story here) At the HealthSouth trial, former CFO Bill Owens admitted on Friday, Feb. 4, that he had not filed income taxes for the period from 1995 through 2002, and had not repaid loans totaling $1 million from HealthSouth. Sullivan made his own admissions, stating that he used marijuana and cocaine over a two decades and, perhaps more tellingly, lied to the Department of Defense about his drug use as part of a security clearance check. Being an admitted liar is not helpful to the government’s case that hinges largely on the testimony of Sullivan.
Once the government’s direct examination ends, expect the defense to mount significant attacks on Owens and Sullivan, both of whom entered into plea agreements with the government and will be open to questions regarding their veracity (the always-effective "Which time were you lying?" question). (Birmingham News story here (Owens) and Wall Street Journal story here (Sullivan)). (ph)
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The U.S. Attorney’s Office for the Southern District of Florida (Miami) announced the indictment of three doctors and four corporations on mail/wire fraud, drug labeling, and conspiracy charges related to the sale of unapproved Botox to doctors for use in facial enhancement programs for their patients. According to the press release:
[T]he defendants purchased 3,081 vials, each containing five (5) nanograms of Botulinum Toxin Type A and other ingredients, in a formulation designed to imitate Allergan’s Botox®Cosmetic, the only product made with Botulinum Toxin Type A that is approved by the FDA for use in human beings. The defendants then engaged in a scheme to defraud by marketing and selling to health care providers for use in human patients the fake Botox as a cheap alternative to Allergan’s Botox® Cosmetic, without the administering health care providers advising their human patients that the fake Botox was not Allergan’s Botox® Cosmetic and was not approved by the FDA for use in human beings.
(ph)
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Former HealthSouth CFO Bill Owens has now spent four days on the witness stand describing the construction and operation of the accounting fraud at the company. His testimony on Friday, Feb. 4, supplied a motive for Scrushy’s involvement in the inflation of revenues: selling his shares. Scrushy appeared on CNBC in 2002 touting the HealthSouth as an undervalued company, stating that its shares were worth $20, shortly before he exercised stock options and sold the shares for $74 million. A short time later, the CEO/CFO certification requirements of Sarbanes-Oxley became effective, leading to the alleged false certifications charged against Scrushy.
The defense has not gotten the chance to cross-examine Owens yet, and I would expect that process to take at least as long as his direct testimony, if not longer. An AP story (here) describes the day’s proceedings. (ph)
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The government set the stage for introducing the audiotapes made by Bill Owens, HealthSouth’s former CFO, who wore a wire for two days immediately before the FBI executed a search warrant at the company as part of its accounting fraud investigation. The defense has raised questions regarding the veracity of the tapes and problems regarding the government’s handling of them. At the trial today, prosecutors called an FBI evidence technician, who testified she made an "honest mistake" when she put the incorrect date on the evidence log for the tapes. The defense has sought to exclude the tapes from being introduced at trial, a position U.S. District Judge Karon Bowdre rejected before trial (see earlier post here) but did give the defense the opportunity to raise admissibility questions at trial. The government appears to be laying the foundation for admission of the tapes through Owens. Interestingly, while the defense has sought to exclude them, counsel has also said they are exculpatory of Scrushy and show that it was Owens who was the perpetrator of the fraud. No harm in having a fall-back position, in case the tapes come in. An AP story discussing the testimony at Scrushy’s trial is here.
This type of evidence is uncommon in white collar cases, but not unique — recall the prosecution of senior Rite Aid executives involved a cooperating witness who wore a wire to meetings with other defendants. The recordings in that case were challenged as being made in violation of Pennsylvania Rules of Professional Conduct 4.2 and 8.4 because it was an unauthorized contact with a represented person and involved dishonest conduct by the federal prosecutor, U.S. v. Grass, 239 F.Supp.2d 535 (M.D. Pa. 2003), arguments the district court rejected in refusing to suppress the tapes. (ph)
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The government witness testifying on Jan. 31 in the trial of Richard Scrushy was Harvey Kelly, who worked for PriceWaterhouseCoopers as an accountant in its investigation of the accounting fraud at HealthSouth. Kelly testified that he did not come across any documents (memoranda, e-mails, etc.) specifically linking Scrushy to the overstatements of revenue and income at the company, although he also noted that he was not looking for any when he conducted the internal investigation of the accounting issues. The testimony is consistent with the defense theory that financial officers of the company were responsible for the fraudulent accounting, although it does not undermine the government’s position that Scrushy urged those same officers to do whatever was necessary to make the numbers Wall Street wanted to see. It is likely the government will soon call Bill Owens, a former CFO and senior officer at the company, to testify about Scrushy’s involvement in the misconduct; his testimony is expected to be quite lengthy, with the cross-examination very contentious with regard to the recordings he made prior to the government’s search of HealthSouth’s offices. An AP story (here) discusses Kelly’s testimony.
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Marsh & McLennan Cos. Inc. announced a settlement with New York Attorney General Eliot Spitzer’s office on Jan. 31 regarding the complaint filed in October 2004 regarding alleged price fixing in its insurance brokerage unit. The company agreed to create an $850 settlement fund for customers to seek reimbursement for the increased costs from the company practice of soliciting inflated bids. A press release issued by Marsh Mac states that in addition to the settlement fund, which does not include any fine or civil penalty, it will undertake the following corporate reforms:
- MMC has discontinued the practice of receiving contingent compensation from insurance carriers. The company adopted this new policy effective October 1, 2004.
- The company will provide clients with a comprehensive disclosure of all forms of compensation received from insurers.
- The company will adopt and implement company-wide, written standards of conduct for the placement of insurance.
- The company will provide all quotes and terms as received from insurance companies to enable clients to make informed insurance coverage decisions.
- MMC will establish a Compliance Committee of the MMC Board of Directors and has appointed a chief compliance officer.
After Spitzer filed the complaint against the company, he essentially demand that its top management, including former CEO Jeffrey Greenberg, be removed by the board of directors before settlement negotiations could begin. The board complied, and Marsh Mac’s new CEO, Michael Cherkasky, came from its Kroll unit and was Spitzer’s supervisor in the Attorney General’s office earlier in his career. Although the settlement ends the highest profile litigation involving the company’s insurance brokerage business, it does not end the lawsuits brought by other states, shareholders, and clients. Look for those cases to be settled soon. (ph)
UPDATE: Settlement agreement here.
MattBray.net 