Wal-Mart terminated the retirement benefits of former executive Thomas Coughlin this past March and removed him from the board of directors for what the company described as a series of fraudulent billings and other misappropriations (including the use of giftcards for personal purchases) that totaled up to $500,000. The company has now accused a second executive, Jared Bowen, of helping Coughlin cover-up the fraud through false invoices. Bowen was fired this past March, and he filed a whistleblower complaint with the Department of Labor under the Sarbanes-Oxley Act claiming that he lost his job because he reported Coughlin’s misconduct. In a recent filing in the DOL case, Wal-Mart asserts that Bowen engaged in a "brazen deceit" by assisting Coughlin. Moreover, demonstrating a "take no prisoners" approach, the company also accuses Bowen of submitting falsified college transcripts when he was hired in 1996. A grand jury in Arkansas is investigating Coughlin, and it is likely that Bowen’s involvement in the allegedly falsified invoices and giftcard transactions will be scrutinized. A New York Times story (here) discusses Wal-Mart’s response to Bowen’s claims. (ph)
Category: Grand Jury
-
To say that cases involving the crime-fraud exception are complicated is certainly an understatement, but a recent decision of the First Circuit in In re Grand Jury Investigation* (here) is one of the more Byzantine. The court’s summary of the case, with the usual deletion of identifying information, is as follows:
In the course of a grand jury investigation in [[ ]], a lawyer (Lawyer I) directed his client ("Client A") to commit perjury in testifying before the grand jury, after initially advising him to tell the truth. The same lawyer has also represented another client ("Client B") who might or might not have some connection with the earlier perjury. In [[ ]], Lawyer I told Client A to recant the false testimony. Lawyer I did so after consulting with Lawyer II, who represented [[ ]] other clients (collectively "Group C") variously connected with Client B and with pertinent events.
Learning of the perjury, the government is now investigating the possible involvement of others with that perjury and with other possible crimes. The present grand jury summoned Lawyer I, and the prosecutor sought to question him about the prior perjury of Client A including the involvement of others with that perjury and its subornation. Lawyer I refused to answer a number of these questions, saying that answering them would invade Client B’s attorney-client privilege and the joint-defense privilege enjoyed by the Group C clients.
Got that? It takes a while, but the multiple representation and the joint defense privilege are nothing new in wide-ranging grand jury investigations. What makes the case interesting is an order by the district court prohibiting Lawyer I from communicating with Client B or Group C about the government’s effort to compel Lawyer I to testify before the grand jury. My surmise is that the government sought the order out of a concern that Client B, and perhaps one or more members of Group C, were in on the perjury by Client A concocted with Lawyer I, and would tailor their testimony to the (perjurious) testimony of Client A to present a consistent story. If Lawyer I were to tell others what Client A said in the grand jury, then other witnesses would be able to work around the perjury and the government’s investigation of a possible conspiracy to obstruct justice goes down the tubes.
Client B and Group C challenged the order prohibiting Lawyer I from consulting with his client (Client B) and with the attorney for Group C, with whom he had shared confidential information. The First Circuit upheld the order, holding that while Federal Rule of Criminal Procedure 6(e)(2) only imposes a secrecy duty on the government attorney and grand jurors, not witnesses, a court has the inherent power in special cases to effectively silence a witness:
We now decide that the rule’s phrasing can, and should, accommodate rare exceptions premised on inherent judicial power. Absent restriction, courts have inherent power, subject to the Constitution and federal statutes, to impose secrecy orders incident to matters occurring before them. The general power is regularly expressed in orders limiting access to discovery materials, closing sensitive proceedings, and in other contexts. Sometimes these powers are reflected in or reconfirmed by rules, e.g., Fed. R. Civ. P. 26(c), but orders of this kind predated such rules which ordinarily reflect or refine the underlying authority without displacing it.
There is, of course, a simple way to avoid the problem that arose here: don’t tell your client to commit perjury before the grand jury (or anywhere else for that matter)! At a minimum, I suspect that Lawyer I’s law license is in a bit of jeopardy once the Massachusetts Board of Bar Overseers gets the case, if it hasn’t already begun a disciplinary proceeding. (ph)
* Don’t they all seem to get that name, or something similar? It’s enough to drive you nuts if you ever have to write a brief or article on the subject.
-
As the lazy days of summer are upon us, with our nation’s Capitol abuzz with talk of the Chief Justice joining Justice O’Connor in the resignation parade, it’s sometimes nice to remember a more gentle time, when the White House was leaking information to the New Yorker about Linda Tripp’s failure to include a prior conviction on her security clearance form once it came out that she was cooperating in the Independent Counsel’s investigation. If you want to relive those days, check out this opinion from the D.C. Circuit (yet another In re: Madison Guaranty Savings & Loan here) rejecting the claim of a Department of Defense employee who worked in the same office as Tripp (and Monica Lewinsky, for a short time) seeking reimbursement for attorney’s fees of $6,093.75 related to his grand jury testimony . . . for the good ol’ days. (ph)
-
The federal investigation of San Diego-area Congressman Randy (Duke) Cunningham’s sale of his home in 2003 to Mitchell Wade, a friend, campaign contributor, and founder of MZM Inc., a Washington D.C. defense contractor, now includes a grand jury subpoena to Rep. Cunningham for his documents related to the sale. As discussed in an earlier post (here), Cunningham sold his home to Wade for approximately $1.7 million in November 2003, and a year later Wade sold the home for $700,000 less, even though it is in one of the hottest housing markets in the country. Rep. Cunningham described the transaction recently as showing "poor judgment" but that there was nothing criminal involved. Wade’s company, MZM Inc., is a defense contractor that has seen its revenue grow by 285% over the past two years by providing intelligence services to the Pentagon, much of it related to the war on terrorism and the Iraq conflict. On the company’s website (here) is the following statement: "Our values: Integrity, loyalty, reliability and the highest moral conduct in business."
Cunningham is a member of the Defense Appropriations Subcommittee of the House Appropriations Committee, which approved the contracts for the company. The Defense Department’s Inspector General suspended a five-year, $163 million contract with MZM because the agreement did not meet the competitiveness requirements for government contracts. An AP story (here) notes that another California Congressman, Jerry Lewis, who was chairman of the Defense Appropriations Subcommittee last year, said that all contracts approved by his subcommittee "passed the smell test." That sure is a high standard for contracting with the government. MZM also announced recently that James King, a retired Army general, has taken over for Wade as president of MZM. (ph)
-
For those of us who were less-than-stellar athletes, it was always tough waiting to be picked for the playground game. Maybe General Electric felt the same way — although I doubt it — when the U.S. Attorney’s Office for the Southern District of New York began doling out subpoenas as part of its grand jury investigation into finite insurance agreements. GE joined the team when it announced (press release here) that it had received a subpoena just like some other players (see earlier post here about St. Paul Travelers and Ace Ltd. disclosures last week). The announcement contains an interesting sentence: "The subpoena is general in nature." I’m not sure I’ve ever heard that description before, and I’m not sure what it means except, of course, to imply that GE is not a target or subject of the investigation, which is may not be at this point. One complaint about grand jury (and SEC) subpoenas is that they are overly broad, seeking truckloads of documents. Saying that one is "general in nature" does not shed much light on the situation, but it probably means that the government is seeking a broad range of documents without specifying particular transactions that would indicate possible criminal conduct.
With GE on the team, look for its recently spun-off insurance unit, now known as Genworth Financial, to be among the next players selected to disclose receiving a grand jury subpoena. Like GE (and many other insurance companies), Genworth received an SEC subpoena on the same transactions (see company press release here). (ph)
-
The issues related to the investigation and prosecution of corporate misconduct are front and center today. The Wall Street Journal has a front-page article (here) about the focus on corporate crime by federal prosecutors, including the expanding use of deferred prosecution agreements that avoid the pitfalls of an Arthur Andersen scenario (a corporate death sentence, in effect) while still imposing a measure of punishment coupled with an enforceable agreement for corporate reform. Of course, the focus on corporate crime isn’t really all that new, if one recalls the S&L crisis of the late 1980s and early 1990s, the overseas bribery scandals of the 1970s that led to the FCPA, and for those who passed their 20th Century U.S. History class, the Progressive Era featured corporate corruption and the dangers of trusts as important legislative and prosecutorial goals. The Supreme Court recognized corporate criminal liability in New York Central in 1909 in a case involving freight rates, so this has been an issue for nearly a century.
On the topic of deferred prosecutions, the Journal has another article (here) about how Christopher Christie, the U.S. Attorney for the District of New Jersey, hammered out the agreement with Bristol-Myers Squibb that gives his office a hand in the continuing operation of the company’s compliance efforts. The article also notes that one of the beneficiaries of the agreement is Christie’s law school alma mater, Seton Hall, which will receive funds to set up a chair in business ethics and corporate governance (see earlier post here). Will Bristol-Myers get a tax deduction for its gift to the law school, and will the chair be named for the company (assuming the "Bristol-Myers Squibb Chair in Business Ethics and Corporate Governance" is not an oxymoron)?
On the investigatory front, the U.S. Attorney’s Office for the Southern District of New York joined in the finite insurance investigation melee with subpoenas to additional insurance companies that wrote the types of policies that are also the focus of the AIG-General Re case. New York Attorney General Eliot Spitzer and the SEC have sent separate subpoenas to a number of insurance companies already. Those receiving federal grand jury subpoenas include St. Paul Travelers (Form 8-K here) and Ace Ltd. (Form 8-K here), a Bermuda reinsurer whose CEO is the last remaining Greenberg (Evan) heading a public company — his father, Maurice, resigned from AIG in the midst of the government’s investigation and his brother, Jeffrey, was forced out of Marsh & McLennan last year by Spitzer’s demand for his removal. It would not be a surprise to see more guilty pleas from former General Re executives (two have already), and perhaps some from the AIG side of the transaction, in the next few weeks. The companies themselves have avoided criminal charges so far (Spitzer’s office filed a civil fraud suit against AIG and Greenberg recently), and it would not be a surprise if AIG entered into a deferred prosecution agreement of its own with the Department of Justice. General Re is a subsidiary of Berkshire Hathaway, and Warren Buffett’s sterling reputation may allow it to avoid having to walk the deferred prosecution plank. (ph)
UPDATE (6/20): I neglected to include KPMG LLP in the tour of corporate crime — the firm is a limited liability partnership, but we’ll ignore the corporate formalities for the moment. The firm has been under investigation by the Department of Justice for its tax shelters that have since been declared abusive that were used by corporate executives and others to avoid large tax liabilities on capital gains. The DoJ is seriously considering filing criminal charges, and on Thursday, June 17, KPMG issued a statement (here) that includes the following admission: "KPMG takes full responsibility for the unlawful conduct by former KPMG partners during that period, and we deeply regret that it occurred." The firm’s statement stresses that it no longer provides tax shelters — not a tough decision to make in the current environment– and has undertaken significant changes in its business practices. That statement is not something you read before a firm has been charged with a crime or enters into a settlement/deferred prosecution agreement, and KPMG is clearly seeking a deferred prosecution agreement to avoid being hung with a criminal charge that could cost it licenses to practice in the various states. The government is obviously concerned with the Andersen effect from an indictment of an accounting firm, and I suspect will not risk reducing the field to the Big 3. Still, the pressure on both sides is enormous, and another example of the importance of criminal liability for business organizations. (ph)
-
Quest Diagnostics Inc., which provides health care testing and laboratory services, disclosed that it received a subpoena from the U.S. Attorney’s Office in New Jersey as part of an investigation into possible overbilling. Quest’s Form 8-K (here) may set a record for pithiness in its disclosure, consisting of a single paragraph filled with boilerplate statements: "Quest Diagnostics Incorporated received a subpoena from the U.S.Attorney’s office for the District of New Jersey. The subpoena seeks the production of business and financial records regarding capitation and risk sharing arrangements with government and private payers for the years 1993 through 1999. Quest Diagnostics is cooperating with the government’s investigation." (ph)
-
Tom Noe, a Toledo (OH) rare coin dealer whose investments on behalf of the Ohio Bureau of Workers Compensation have come under scrutiny because approximately $10-12 million worth of collectible coins are missing (see earlier post here), is now the subject of a federal grand jury investigation for possible campaign contribution violations. An AP story (here) discusses the grand jury appearance of a former aide to Noe who testified before the grand jury that he made a $2,000 contribution to the Bush-Cheney campaign in 2004 and Noe reimbursed him, a clear violation of the campaign contribution laws; Noe was the northwest Ohio chair of the presidential campaign last year.
Once the hint of scandal hits a campaign contributor, politicians treat their donations as if they were radioactive, and usually can’t get rid of them fast enough. At a press briefing with White House Press Secretary Scott McClellan on June 2 (transcript here), the following Q-and-A took place:
Q Scott, there was a published report this morning that the President had decided to return $4,000 in campaign contributions he received from Tom Noe, the rare coin dealer in Ohio who is under investigation, but that he did not plan to return some $100,000 in other people’s contributions that Mr. Noe had helped raise. Is that true, and why draw the distinction between them?
MR. McCLELLAN: I think that there are some serious allegations that have been raised against this individual. They have raised concerns with people in Ohio, they have raised concerns with the White House. And the President felt it was the right thing to return those contributions that came directly from him.
Q But why not the additional contributions that Mr. Noe had raised?
MR. McCLELLAN: Well, those are from other individuals, and in the past, I think the campaign, if you’ll go back and look, has returned contributions from individuals that maybe have been convicted of crimes, and so forth. And this one is certainly a unique situation that raises some very serious allegations and we felt it was the right thing to do to return the contributions that he had made to the campaign.
The Republican National Committee plans to donate $2,000 to charity, the amount given by Noe, while a number of Ohio politicians also plan to give up funds (upwards of $60,000 donated by Noe. California Governor Arnold Schwazenegger received $10,000, but does not have any plans to return it or donate the funds to charity. Look for this one to get stickier in the coming weeks. (ph)
-
A Wall Street Journal article (here) reports that N.Y. Attorney General Eliot Spitzer’s office has begun presenting evidence to grand jury about possible criminal violations by former American International Group executives in connection with accounting issues at the insurance company. The targets of the investigation at this point are most likely former CEO Maurice Greenberg and former CFO Howard Smith, although other AIG executives have left the company after asserting the Fifth Amendment and their conduct probably will be part of the grand jury’s investigation. Joseph Umansky, who is head of AIG’s reinsurance division that is a principal focus of the investigation, has testified before the grand jury and received immunity (see earlier post here).
Under New York law, a witness who testifies before a grand jury automatically receives immunity (subject to certain exections), which is quite different from the federal system that requires a witness to testify and assert the Fifth Amendment if there is possible incrimination, but immunity is solely at the discretion of the Department of Justice. Another important difference is that the immunity granted under New York law is transactional immunity, i.e. the state cannot prosecute the person for any crime discussed in the testimony, while the federal government pretty much only grants the more limited "use/fruits" immunity that prohibits the use of the testimony in a subsequent prosecution and (more importantly) any information derived from it to prosecute the witness — unless one happens to be dealing with the Ken Starr Independent Counsel’s office, but that’s another story. New York CPL 190.40 (here) provides:
1. Every witness in a grand jury proceeding must give any evidence legally requested of him regardless of any protest or belief on his part that it may tend to incriminate him.
2. A witness who gives evidence in a grand jury proceeding receives immunity unless:
(a) He has effectively waived such immunity pursuant to section 190.45; or
(b) Such evidence is not responsive to any inquiry and is gratuitously given or volunteered by the witness with knowledge that it is not responsive.
(c) The evidence given by the witness consists only of books, papers, records or other physical evidence of an enterprise, as defined in subdivision one of section 175.00 of the penal law, the production of which is required by a subpoena duces tecum, and the witness does not possess a privilege against self-incrimination with respect to the production of such evidence. Any further evidence given by the witness entitles the witness to immunity except as provided in subparagraph (a)
and (b) of this subdivision.What remains unclear is whether there is any coordination between Spitzer’s office and the U.S. Attorney for the Southern District of New York on the investigation. A "race to the courthouse" could have a negative effect on any prosecution ("act in haste" and all that). (ph)
-
An AP story (here) states that Illinois Governor Rod Blagojevich’s office and campaign fundraising committees have been subpoenaed for records by a state grand jury investigating corruption. The investigation concerns possible job appointments being given in exchange for campaign contributions, and the grand jury seeks a broad array of records on campaign contributions and hiring. In addition to Blagojevich’s office, his chief fundraiser and his father-in-law, a Chicago Alderman, have also been served with subpoenas. After graduating from law school in 1983, Blagojevich worked as an Assistant States Attorney in Cook County before launching his political career. Interestingly, his official biography (here) contains the following statement: "A former golden gloves boxer, Blagojevich is committed to fighting a system that accepts corruption, mediocrity and failure, and pledges to make everyday life better for average working families in Illinois."
Blagojevich succeeded George Ryan in 2002, who left office under a cloud and is currently under indictment on charges (including RICO) related to — don’t be shocked — corruption. Of course, gubernatorial corruption is not limited to Illinois, having forced out John Rowland in Connecticut, who is currently serving a one year sentence in a federal correctional institution, and tinged the administration of former New Jersey governor Jim McGreevey, with corruption charges against one of his chief fundraisers. (ph)
MattBray.net 