Every once in a while a line in a company’s discussion of a government investigation catches your eye when it appears to miss the point. Beazer Homes USA is facing a government investigation of its mortgage lending practices, as discussed in a prior post (here). On March 29, the company filed an 8-K(here) about the investigation, after the media stories first reported the FBI’s confirmation of the investigation, that states, "The Company has received a grand jury subpoena from the United States Attorney’s Office in the Western District of North Carolina seeking the production of documents. The subpoena was issued upon application of the Office of Housing and Urban Development, Office of Inspector General and focuses on the Company’s mortgage origination services. The Company has not received a request for information or documents from the FBI or IRS in this regard. (Italics added) Of course, a grand jury subpoena means the FBI is going to get the documents, and it does not have to "request" any information because the subpoena requires Beazer to provide it. Similarly, if there is a criminal tax investigation, then the IRS can’t ask for documents, or even issue a summons, because the case is now in the exclusive jurisdiction of the Department of Justice. Once the grand jury subpoena arrives, rest assured that a federal investigative agency will be looking at the materials provided for any potential criminal violations — they don’t even need to say "Please" any more. (ph)
Category: Investigations
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Attorney General Alberto Gonzales’ former chief of staff, Kyle Sampson, testified before the Senate Judiciary Committee about the firing of eight U.S. Attorneys and dodged any potential perjury trap (see earlier post here) by not recalling too much detail. As recounted in a Washington Post story (here), Sampson responded to a number of questions by saying that he "did not remember" or "did not remember specifically." It would be virtually impossible to charge someone with perjury for not responding to a question by claiming a lack of memory, unless there was clear evidence that the person did recall, which is unlikely. That said, a lack of memory statement does lock the person into that position, because it is unlikely their memory will improve if incriminating evidence emerges later.
Sampson’s lack of memory — an affliction that seems to trouble others in the Administration — did not prevent him from recalling the participation of his former boss in the decision to dismiss the U.S. Attorneys. Sampson stated that AG Gonzales’ statement about his lack of involvement in the decision was not "accurate," which will boost the pressure on the Attorney General. Sampson also denied that the decision to fire the federal prosecutors was made by inexperienced Department of Justice attorneys, stating that "[t]he decision makers in this case were the attorney general and the counsel to the President" — Gonzales and Harriet Miers. Of course, neither of them would rate as experienced prosecutors with much law enforcement background, but they were in the position of authority to make the final decision. Sampson’s testimony may trigger the kind of hair-splitting we haven’t seen since the late 1990s as each side analyzes how much one can be "involved" without really being "involved" — remember hearing that "it depends on what is means"? An AP story (here) discusses Sampson’s testimony. (ph)
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Dell Inc. issued a press release that it will not be able to file its annual financials because of a continuing internal investigation of account problems, and its cryptic press release hints that the issues may involve violations of the federal securities laws. The press release (here) states, "The Audit Committee’s investigation has identified a number of accounting errors, evidence of misconduct, and deficiencies in the financial control environment. The Audit Committee is working with management and the company’s independent auditors to determine whether the accounting errors necessitate any restatements of prior period financial statements, and to assess whether the control deficiencies constitute a material weakness in Dell’s internal control over financial reporting." (Italics added) Notice how the mention of "evidence of misconduct" gets slipped into the middle of the recounted issues, and there is no further discussion of what that misconduct entails, or whether it was intentional. Dell has not discussed the particular accounting issues it faces, but the computer industry has seen problems related to revenue recognition issues, such as timing or the proper treatment of reserves.
The SEC has been investigating Dell, and surely it will be interested in hearing about any improprieties. Perhaps more ominiously, such a statement may well draw the interest of federal prosecutors because of the size of Dell and the deterrent effect a case could have. The company’s disclosure gives only the bare minimum, so look for details to emerge over the next few weeks as Dell pushes to complete its annual audit so that it does not risk possible delisting from NASDAQ for filing tardy reports. (ph)
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A Wall Street Journal editorial (here) asserts that the Senate Judiciary Committee hearing on the removal of eight U.S. Attorneys is really a "perjury trap" designed to set up the aides to Attorney General Alberto Gonzales subpoenaed to testify. The editorial argues that Judiciary Committee Chairman Leahy and other Democrats should not be surprised "if government officials decide they’d rather not step into this obvious perjury trap." In the context of grand jury investigations, the claim of a perjury trap is part of an argument seeking dismissal of charges on the ground that a prosecutor calling a person to testify with the knowledge that the witness may lie, creating the basis for a separate criminal prosecution, is an unacceptable use of the grand jury and violates the witness’s due process rights. Of course, to be a good perjury trap, the witness must not be aware of the pitfall awaiting their false statements, and the prosecutor presumably knows the truth in setting up the witness. I’m not sure one can say that a perjury trap is being set if the Judiciary Committee does not know the truth in advance. That such traps have been set is certainly true — note the impeachment charges against former President Clinton for perjury based on his grand jury testimony — but they can be avoided if the witness tells the truth or asserts the Fifth Amendment. Monica Goodling, senior counsel to AG Gonzales, took the privilege route and avoided the trap, if there was one, although she may be subjected to the unseemly practice of being excoriated by Committee members for her decision. A Congressional committee can’t really set a perjury trap because it does not control the decision whether prosecute the perjury case, which only the Department of Justice can do, although it can offer the bait.
Unlike Goodling, AG Gonzales’ former chief of staff, Kyle Sampson, will testify and probably take the brunt of the questioning regarding inaccurate statements provided to Congress about the reasons for the U.S. Attorney firings. In prepared remarks (here courtesy of the Wall Street Journal), Sampson states that "[t]he distinction between ‘political’ and ‘performance-related’ reasons for removing a United States attorney is, in my view, largely artificial." It depends, of course, on what one means by "political." If "political" means favoring one party over another, then that statement would seem to contradict the idea that a prosecutor must dispense justice even-handedly. If the point is that following the President’s law enforcement initiatives is important, and hence one must show "political" support, then there is a stronger basis for finding the distinction "artificial." The question is whether the decision to terminate the U.S. Attorneys was "political" in the latter sense when the so-called "performance" issues may have been a cover for the decision, particularly the removal of Bud Cummins from the Eastern District of Arkansas.
Senators will also focus on Sampson’s e-mails, including a newly released set (here) in which he helps prepare a letter in response to Senators questioning the appointment of Cummins’ replacement, Tim Griffin. In his e-mail dated February 8, 2007, drafted for the signature of Acting Assistant Attorney General Richard Hertling, Sampson wrote, "I am not aware of Karl Rove playing any role in the Attorney General’s decision to appoint Griffin." That statement later appears in the letter delivered to Senate Majority Leader Harry Reid. Unfortunately, other e-mail traffic indicates White House involvement in the decision, including references to Rove. Needless to say, the Senators will have their long knives out, but whether we learn anything new from the hearing is an open question. According to Sampson, "This is a benign rather than sinister story," but that remains to be seen. (ph)
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As if the meltdown in residential real estate is not enough, homebuilder Beazer Homes USA is facing a federal probe of its lending practices. A BusinessWeek Online report (here) notes that the FBI, HUD, and IRS are conducting an investigation of its mortgage lending to low-income borrowers that comes with federal loan guarantees. Like others in the subprime market, the default rate on Beazer Homes loans has skyrocketed in recent months as real estate values declined and borrowers have been unable to make increased payments for their ARMs. This is not all that different from what happened in the S&L crisis in the early 1990s, when the decline in real estate — which also included commercial properties — led to the revelation of a number of fraudulent practices in the loan process. When real estate values are rising, no one quite notices that corners were cut, like inflated appraisals, falsified income and asset statements, and false entries in loan documents like HUD-1s. When they fall, however, the bodies start to pop to the surface like there’s been a spring thaw. Don’t be surprised to see the investigation spread to other builders and mortgage lenders.
Beazer Homes is facing the investigation without its general counsel or CFO. GC Kenneth Gary was fired in February "for cause, under the terms of his employment agreement, for a pattern of personal conduct which includes violations of company policies." (8-K here) CFO James O’Leary left the company on March 27 to become CEO of another company (8-K here). Losing two top officers can’t be helpful. (ph)
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Monica Goodling, senior counselor to AG Gonzalez, plans to take the 5th Amendment when called to testify by the legislature. (see Wall Street Jrl here, N.Y. Times here). Her attorney’s letter here explains the reasons for this course of conduct.
Now if this had taken place in a corporation that was under investigation, legal counsel for the corporation would be calling the parties in and asking the employees to answer questions. Either internal or external counsel would be investigating to determine if there was wrongdoing involved in the activities. In all likelihood the individual would have no attorney-client privilege in a world where deferred prosecution agreements allow the corporation to act as mini-prosecutors and turn over evidence of the individuals to the government. And if the individual refused to speak with counsel – the result would be – you’re fired. Will that happen here? And perhaps, more importantly, should that happen here?
What it is important to remember here is that we are all entitled to exercise constitutional rights, even those who work at the Department of Justice.
(esp)
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If there was an investigation occurring of possible criminal activity, federal agents would proceed by either subpoenaing the documents from the accused or obtaining a search warrant. DOJ has not been intimidated in their investigations, even going so far as to allow a search of a congressman’s office. (see discussion of search of Rep. William Jefferson office here)
With this backdrop, one has to wonder why the DOJ is being allowed to produce what it wants in emails. Why are the calendars allowed to be redacted so that no one can see the remaining entries, and is anyone checking to see that DOJ officials are really producing all the necessary documents? Perhaps there should be judicial oversight making these decisions, and perhaps that requires a special prosecutor. Is this a mere employment matter? Was there no criminal wrongdoing here? And should we trust them on calling this one correctly?
(esp)
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That "overblown personnel matter" involving the firing of eight U.S. Attorneys heads into another week of tension between Congress and the White House, with Attorney General Alberto Gonzales seemingly carried forward in its wake. The House and Senate Judiciary Committees authorized the issuance of subpoenas to five Presidential aides, including Karl Rove and Harriet Miers, regarding their roles in the decision to fire the federal prosecutors. The subpoenas have not yet launched, and appear to be more bargaining chips to get the White House to let the aides testify in a setting that goes beyond the offer of a private, unsworn, off-the-record briefing — hard to get much publicity out of that. Responding to the threat of subpoenas, the White House indicated that the offer of a briefing is "off the table" if subpoenas are sent. A CNN.Com story (here) discusses the confrontation.
The Department of Justice also announced that it had found more e-mails and documents relevant to the firings, proving that the document production problems that have plagued Wall Street firms like Morgan Stanley are not limited to the private sector. It’s not clear what the latest trove of e-mails will reveal, but that last bunch have shown just how embarrassing "private" e-mails can be to their authors. In the fine tradition of Berkshire Hathaway’s 8-K filings, the documents will likely be release on a Friday or over the weekend.
As the two sides negotiate over the terms of any testimony by Rove et al., AG Gonzales’ former chief of staff, Kyle Sampson, will testify before the Senate Judiciary Committee on March 30, agreeing to make his statements under oath. Sampson is at, or at least very near, the center of the controversy, and resigned after it became clear that DOJ witnesses were not entirely truthful in their testimony about White House involvement in the firings. His e-mails with Miers show her involvement in the issue in early 2005, almost two years before the U.S. Attorneys were sacked. The Committee’s Democrats will focus on e-mails stating that one quality of a good prosecutor is being "loyal" to the President, with Sampson describing some in another e-mail as "loyal Bushies." Sampson’s communications prove yet again that people will write things in e-mails that they would never say in any type of official situation. An AP story (here) discusses Sampson’s agreement to testify. Don’t look for this story to lose much steam any time soon. (ph)
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The U.S. Attorneys firing fracas will take another turn with the Senate Judiciary Committee authorizing the issuance of subpoenas to five current or former senior-level Department of Justice attorneys to testify at a hearing:
- Michael Elston, chief of staff for Deputy Attorney General Paul McNulty.
- Kyle Sampson, recently resigned chief of staff for Attorney General Alberto Gonzales whose e-mail correspondence with the White House is at the center of the controversy.
- Monica Goodling, senior counsel to AG Gonzales and his White House liaison.
- Bill Mercer, the acting Associate Attorney General, the number three position in the Department.
- Michael Battle, who was director of the Executive Office for U.S. Attorneys and delivered the bad news to the seven (or eight) fired U.S. Attorneys.
AG Gonzales indicated earlier that he would allow DOJ attorneys to testify in the investigation, and an AP story (here) quotes a spokesman for Gonzales stating, "We have clearly communicated to the Congress our willingness to make available voluntarily department employees whom the Congress wishes to interview privately and in public hearings . . . We are disappointed that some members of the Judiciary Committee chose to disregard these facts and have sought to pursue unnecessary and seemingly political act of authorizing the issuance of subpoenas."
An interesting question will be whether any of the subpoenaed witnesses will invoke the Fifth Amendment, especially Sampson. Recent statements by AG Gonzales and Deputy AG McNulty that they were not aware of all the facts about contacts with the White House puts Sampson on the spot based of his e-mail correspondence with then-Counsel to the President Harriet Miers about terminating the U.S. Attorneys. Sampson’s lawyer — I assume he’s retained counsel and won’t try to deal with this alone — may have him assert the privilege at this point until it becomes clear whether there will be a criminal inquiry into possible false disclosures to Congress and who might be the targets of an investigation, if there is one.
Next up for the Judiciary Committee is deciding whether to subpoena aides to the President, including Karl Rove and Ms. Miers. The Department of Justice released another e-mail exchange involving Sampson (here) that specifically references Rove’s interest in the termination of some U.S. Attorneys in January 2005. The subpoena issue has been postponed for a week while issues of Presidential privilege got sorted out. (ph)
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The shake-out in the subprime lending market may well take down mortgage lender New Century Financial, which disclosed that its banks have cut off most of its access to credit, the lifeblood of any financial institution. While executives scramble to prevent a complete meltdown, with the company’s shares having lost most of their value and now delisted from the New York Stock Exchange, they also have to deal with grand jury and SEC investigations that will likely target individuals at the company. According to New Century’s 8-K filing on March 13 (here):
On February 28, 2007, the Company received a letter from the United States Attorney’s Office for the Central District of California (the "U.S. Attorney’s Office") indicating that it was conducting a criminal inquiry under the federal securities laws in connection with trading in the Company’s securities, as well as accounting errors regarding the Company’s allowance for repurchase losses. The Company has subsequently received a grand jury subpoena requesting production of certain documents. The Company intends to cooperate with the requests of the U.S. Attorney’s Office.
On March 12, 2007, the Company received a letter from the staff of the Pacific Regional Office of the Securities Exchange Commission stating that the staff was conducting a preliminary investigation involving the Company and requesting production of certain documents. The staff of the SEC had also previously requested a meeting with the Company to discuss the events leading up to the Company’s previous announcement of the need to restate certain of its historical financial statements. The Company intends to cooperate with the requests of the SEC.
If New Century ends up declaring bankruptcy, then the trustee is likely to undertake its own investigation while also providing information to government investigators, which would likely include a waiver of the attorney-client privilege and work product protection. It is not clear what trading is being looked at, but accounting issues are sure to involve senior management among those who will be questioned. (ph)
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