The options-timing investigations that have ensnared numerous companies call into question the oversight role of the board of directors at the organizations. The Wall Street Journal reports (here) that KB Home, the Los Angeles home building giant, has initiated an internal investigation into some "propitiously timed" stock options granted to CEO Bruce Karatz, who was among the highest paid executives in 2005 with total compensation of over $150 million, most of it from cashing in options. An interesting tidbit in the story is that the former head of the compensation committee on KB Home’s board, James Johnson, is also an independent director at UnitedHealth Group, which is also involved in a number of options-timing investigations. Indeed, UnitedHealth has hired Bill McLucas, former head of the Enforcement Division at the SEC and now at Wilmer Cutler, to lead its internal investigation, and the company has achieved the federal investigatory hat trick, with the IRS, SEC, and Department of Justice conducting investigations of possible options backdating in grants to executives, including its CEO, William McGuire (see proxy statement here). Johnson is the former CEO of Fannie Mae, and serves as a director at Goldman Sachs and Temple-Inland, along with KB Home and UnitedHealth. Directors serving on multiple boards is certainly not unknown, and boards are stocked with former CEOs, giving these groups the feel of an old boys club. While there is certainly no conflict involved in serving on multiple boards, the options-timing investigations will focus on the work of compensation committees in particular, and it cannot be comforting to shareholders to see companies with the same directors facing similar problems involving internal controls and oversight of executive compensation. (ph)
Category: Investigations
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"Scooter" Libby, scheduled for trial in January, is having a problem getting some of the discovery material he wants for this trial. The issue he faces is common in cases of espionage and sometimes terrorism, but this particular problem is rarely seen in the white collar case. The problem, according to the Wall Street Jrl. here, is that some of the documents are sensitive documents that might risk national security if released. Not an unexpected ruling when dealing with a CIA leak.
It is important to note here that the judiciary is making the decision of whether to release the documents. Considerations are whether the accused truly needs this material for his or her defense and the issues of national security that might accrue if the information were released.
(esp)
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Kobi Alexander, former Comverse Technology CEO, has been missing (posts here and here). No doubt problematic as he has been charged with mail fraud, wire fraud, and securities fraud. The story of his background and rise to fame is outlined in a comprehensive story by Julie Creswell in the NY Times. (see NYTimes here).
One interesting note is that the story states that "Robert G. Morvillo, said he last heard from his client more than two weeks ago and he believed that Mr. Alexander and his family were on vacation in Israel."
Robert G. Morvillo, an experienced white collar attorney (see here), also represented Martha Stewart at her trial.
(esp)
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A Department of Justice criminal investigation into an agreement between Bristol-Myers Squibb and generic drug-maker Apotex regarding a $40 million payment to the company to keep a generic version of Plavix, one of Bristol-Myers best selling drugs, from the market has certainly caught the eye of the company’s board of directors. One would think that an FBI search of the Bristol-Myers’ offices, including the CEO’s, would be enough to spur the board into action, but a press release issued by the company (here) on August 17 made it a point to begin by stating that the board has been treating the investigation "with the highest degree of attention and seriousness." The release goes on to note that in addition to hiring former U.S. Attorney Mary Jo White to conduct the internal investigation, the independent directors have hired former U.S District Court judge Kenneth Conboy (now with Latham & Watkins), and that former FBI Director Louis Freeh will monitor "internal and external legal initiatives."
I assume one of those "external legal initiatives" is to keep Bristol-Myers out of hot water with the U.S. Attorney’s Office for the District of New Jersey for violating the terms of the deferred prosecution agreement it entered into in June 2005 regarding accounting fraud arising from a channel stuffing program that inflated revenues and earnings. The agreement (here) primarily addresses securities reporting and internal control issues, but Paragraph 34 contains a general requirement that "BMS will inform the Office of any credible evidence of criminal conduct at BMS occurring after the date of the Agreement . . . ." The definition of "criminal conduct" includes "any crime related to BMS’s business activities committed by one or more BMS executive officers or directors," which certainly appears to cover the current criminal investigation. The effect of a future criminal violation can be rather severe, as provided in Paragraph 36:
Should the Office determine during the term of this Agreement that BMS has committed any criminal conduct as defined in paragraph 34 commenced subsequent to the date of this Agreement, or otherwise in any other respect knowingly and materially breached this Agreement, BMS shall, in the discretion of the Office, thereafter be subject to prosecution for any federal crimes of which the Office has knowledge, including crimes relating to the matters set forth in the Statement of Facts.
That means the original securities fraud case could be restarted, which gets even scarier for the company because Paragraph 37 states that "[i]n the event of a breach of this Agreement that results in a prosecution of BMS, such prosecution may be premised upon any information provided by or on behalf of BMS to the Office at any time, unless otherwise agreed when the information was provided." All those high priced lawyers will have to keep Bristol-Myers from having to face a government onslaught not only from the current investigation but also from last year’s trouble. (ph)
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The grand jury investigations involving Balco (Bay Area Laboratory Co-operative) and possible perjury by Barry Bonds may end up sending witnesses to jail for civil contempt for their refusal to testify in response to subpoenas. Bonds’ former personal trainer, Greg Anderson, went to jail in July for refusing to testify, and was released when the grand jury’s term expired. With a new panel in place for at least 18 months, he now runs the risk of spending a lot of time in jail. In an appearance before the grand jury, Anderson apparently responded to a few questions, but refused to answer a key one: "Did you distribute anabolic steroids to Barry
Bonds?" The San Francisco Giants slugger denied knowingly using them in grand jury testimony in 2003. Prosecutors have asked that Anderson be held in contempt again, and a hearing is scheduled for August 28 to decide whether he should be held on contempt for refusing to answer. If he is ordered to respond to the question and refuses again, he may sit in jail for up to the 17 months remaining in the grand jury’s term, assuming it’s not extend by six months. An AP story (here) discusses the latest twist in the Bonds perjury investigation.How do we know what Bonds said before the grand jury? That brings us to two more potential witnesses who have asserted they will not testify about who leaked Bonds’ testimony to them despite being ordered by a federal judge, who refused to quash subpoenas to San Francisco Chronicle reporters Mark Fainaru-Wada and Lance Williams. Prosecutors are investigating the leak of grand jury material that is supposed to remain confidential. The reporters, whose First Amendment privilege claim has been rejected by courts in a variety of situations, have stated that they will not disclose the confidential source of the grand jury testimony. As discussed in an earlier post (here), the person who leaked the testimony of Bonds and other major league baseball players could face a criminal contempt and other charges for disclosing the transcripts. Within a few weeks, there could be three people in jail for refusing to testify before the grand jury, and no one has even been indicted yet. (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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Two reporters for the San Francisco Chronicle, Mark Fainaru-Wada and Lance Williams, have been ordered to testify before a federal grand jury about the leak of the grand jury testimony of major league baseball players who testified in 2003 about receiving steroids from Balco (Bay Area Laboratory Co-operative). Among those whose testimony reached the reporters is San Francisco Giants slugger Barry Bonds, who stated to the grand jury that he did not knowingly use steroids provided by his personal trainer who also worked at Balco. Bonds is now the target of a separate grand jury investigation into possible perjury, and the Department of Justice has also been investigating the leak for well over a year. Fainaru-Wada and Williams published the book Game of Shadows that asserted Bonds used steroids for a number of years, which apparently triggered baseball’s investigation of steroid use and may have stimulated the perjury investigation.
U.S. District Judge Jeffrey White issued an opinion (In re Grand Jury Subpoenas to Mark Fainaru-Wada and Lance Williams available below) rejecting the reporters’ assertion of a journalist privilege to maintain the confidentiality of sources, and found that the grand jury subpoenas were not "unreasonable or oppressive" under Federal Rule of Criminal Procedure 17(c). The decision to enforce the subpoenas is consistent with the decisions reached in the Special Counsel’s investigation of the leak of Valerie Plame’s identity as a CIA agent in which former New York Times reporter Judith Miller spent almost three months in jail on a civil contempt before I. Lewis Libby released her from the promise of confidentiality. See In re Grand Jury Subpoena, Judith Miller, 438 F.3d 1141 (D.C. Cir. 2006). Among those filing affidavits in support of the two reporters were former baseball commissioner Fay Vincent and well-known journalist and author Carl Bernstein.
The reporters are unlikely to testify before the grand jury and could end up in jail for civil contempt, a fate that has already befallen Bonds’ former personal trainer, Greg Anderson, who refused to testify in the perjury investigation. While Judith Miller’s source released her from the confidentiality agreement, that is probably less likely to occur here because of the substantial legal risks that person (or persons) faces. The leak of grand jury material is punishable as a criminal contempt under Rule 6(e)(7). Moreover, during the government’s investigation, it appears that all parties to the Balco case with access to the leaked grand jury testimony have stated they did not disclose it, so revealing the source of the information could well open that person up to additional charges of perjury, obstruction of justice, and making a false statement (Sec. 1001). The two reporters may be in jail for quite a while if the case is being investigated by the new grand jury empaneled in July in the Bonds perjury investigation because the civil contempt lasts for the panel’s term, which could be until January 2008 (assuming it’s not extended another six months). (ph)
Download order_denying_motion_to_quash_subpoenas_fainaruwada.pdf
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One might find voice samples being requested by the government in street crime cases, especially ones where the accused is thought to have made a threatening telephone call or a statement at the scene of the crime. But in a white collar case?
Yes, AP reports here that a judge has allowed the government to obtain voice samples from three individuals charged in the "theft of trade secrets from The Coca-Cola Co." case. This case originates when Pepsi turned over evidence to Coca-Cola that someone was trying to sell them alleged trade secrets.
In the case of United States v. Dionisio, 410 U.S. 1 (1973), the Supreme Court held that requiring a grand jury witness to produce voice exemplars would not violate constitutional rights under the Fourth and Fifth Amendments.
(esp)
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The second criminal case coming from the options-timing investigations, against three former Comverse Technology executives, should send every executive at the 80 or so companies that have disclosed being caught up in the various criminal and civil investigations looking for their own counsel. The prospect of criminal charges naturally has the effect of putting everyone in the vicinity of an investigation on the defensive even more than they already were. An article in The Recorder (here) discusses how Apple executives are hiring their own lawyers in light of recent disclosures of questionable options grants, including two by its former general counsel, Nancy Heinen. Among those charged in the Comverse case is the company’s former chief legal counsel, which highlights the potential for in-house lawyers to become targets of the investigations and certainly subjects of great interest to the grand jury and the SEC. With all those companies hiring law firms to conduct internal investigations, along with lawyers to advise the audit committee and counsel for the individuals, the suggestion that the end of the Enron-related prosecutions means white collar practices will recede in significance at private firms looks misguided. Ladies and gentlemen, start your billing. (ph)
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