The options-timing investigations have hit approximately 80 companies, with the first criminal charges filed recently and more may be coming in the next few weeks involving former senior executives at Comverse Technology, including possibly the company’s former in-house counsel (see Law.Com story here). The first response at companies targeted in the various government investigations has been to announce an internal investigation along with a pledge of support. For Affiliated Computer Services, Inc. (ACS), a Dallas-based tech company, a quick announcement that an initial investigation found nothing problematic in its options-granting practices may have backfired. In a May 15 SEC filing (here), ACS stated: "Notwithstanding the above-referenced accounting determination, based on the initial findings of its internal investigation (which is on-going and not complete as of the date of this filing), ACS does not believe that any director or officer of the Company has engaged in the intentional backdating of stock option grants in order to achieve a more advantageous exercise price." In a press release (here) issued on August 7, however, it now states that its earlier assertion "can no longer be relied upon . . . ." Much like Ron Ziegler called prior statements "inoperative" or Emily Litella said "Never mind," ACS would rather just skip over that earlier admission, tempered as it was with the claim that the investigation was "not complete." The company earlier received a grand jury subpoena from the Southern District of New York, and federal prosecutors there will be eager to hear about what has changed in a little less than three months. (ph)
Category: Investigations
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The Stein case (KPMG related) has been a subject of a good number of posts on this blog. (e.g., here and here). Here is one to add to this collection, as Joan Rogers has an extremely thorough and thoughtful article in the ABA/BNA Lawyers’ Manual on Professional Conduct. The ABA and BNA have been kind enough to allow this blog to provide direct access to this article. (Download PDFArtic.pdf)
The article dissects Hon. Lewis Kaplan’s decision and provides extensive commentary on the decision. It also places it in context with happenings on this issue in the ABA and the New York State Bar Association.
The Wall Street Jrl reports here of other happenings on this case.
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According to the Washington Post here, Rep. William Jefferson is entitled to review items seized by the government prior to the government obtaining the documents. Jefferson will be given the opportunity to claim whether materials are within the legislative privilege. Previously, the court held that there was no constitutional violation by the government’s seizure of these documents (see post here). Placing this limit on the government may not materially effect the evidence the government receives, but it certainly lets the government know that there will be limits to the actions that it takes.
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Judge Lewis Kaplan has issued yet another Order in the KPMG defendants case that indicates that government coercion will not be tolerated. In a thoughtful and well-written Order he states:
"Having considered the evidence, the Court is persuaded that the government is responsible for the pressure that KPMG put on its employees. It threatened KPMG with the corporate equivalent of capital punishment. KPMG took the only course open to it. In the words of its chief legal officer, KPMG did everything it could "to be able to say at the right time and with the right audience, we’re in full compliance with the Thompson Memorandum." It exerted substantial pressure on its employees to waive their constitutional rights. (footnote omitted)"
In the conclusion of the 37 page Order the court states:
"In this case, the pressure that was exerted on the Moving Defendants was a product of intentional government action. The government brandished a big stick – it threatened to indict KPMG. And it held out a very large carrot. It offered KPMG the hope of avoiding the fate of Arthur Andersen if KPMG could deliver to the USAO employees who would talk, notwithstanding their constitutional right to remain silent, and strip those employees of economic means of defending themselves. In two instances, that pressure resulted in statements that otherwise would not have been made. In seven, the evidence does not warrant that conclusion. The coerced statements and their fruits must be suppressed.
It is no answer for the government to say that these aspects of the Thompson Memorandum are needed to fight corporate crime. Those responsible should be prosecuted and, if convicted, punished. But the end does not justify the means."
Although the suppression of these two statements may not prove consequential to the government’s case, the court is making it very clear that undue coercion on the part of the government will not be tolerated. The fact that the court did not suppress all statements in this case further indicates the thoughtfulness of the decision.
Opinion –
Download opinion_re_smith_and_watson_statements_doc_650_2.pdf
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The documents seized from Representative William Jefferson’s office in the Rayburn House Office Building in May will remain sealed while he pursues an appeal of U.S. District Judge Thomas Hogan’s decision upholding the search. The D.C. Circuit issued an administrative injunction prohibiting the Department of Justice from beginning its review of the records, in response to a deadline of July 26 set by Attorney General Alberto Gonzales after which investigators would being looking through them. An AP story (here) quotes the order: "The purpose of this administrative injunction is to give the court sufficient opportunity to consider the merits of the motion for a stay pending appeal and should not be construed in any way as a ruling on the merits of that motion." As discussed in an earlier post (here), one issue that will likely arise before the appellate court is whether Jefferson can challenge the search because the district court’s decision may be a collateral order, which means it cannot be appealed until after the conclusion of the criminal case. Once again, it is time to hurry up and wait as the investigation stalls awaiting further judicial action on the legality of the search. (ph)
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Greg Anderson, the former personal trainer for San Francisco Giants slugger Barry Bonds, will be called back to testify before the new grand jury being scheduled to be empaneled on July 27 to take up the perjury investigation where the prior panel left off. The earlier grand jury’s term expired on July 20, at which time Anderson was released from his civil contempt for refusing to testify about possible steroid use by Bonds. With a fresh panel in place, Anderson could be held for up to eighteen months if he refuses to testify again, as he has asserted he plans to do. While he is likely to land back in jail, the issue will be whether the civil contempt has any possibility of driving him to testify. If it appears that he will simply continue to refuse to answer questions, at some point the court will have to let him go, although federal district judges have fairly broad discretion in determining when the coercive effect of the civil contempt has become fruitless. An AP story (here) discusses the next step in Anderson’s merry-go-round life with the grand jury and the local federal lockup. (ph)
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In the usual case in which a grand jury issues a subpoena for documents, the recipient determines what is responsive and, if necessary, asserts any attorney-client privilege and work product protection claim by refusing to turn over the records. At that point, the ball is in the government’s court to either challenge the claimed privilege or protection, or to assert the crime-fraud exception to undermine the claim. A recent decision by the Sixth Circuit in In re Grand Jury Subpoenas 04-124-03 and 04-124-5 (here) essentially follows that model when a third party held the documents and was willing to turn them over to the government despite a privilege claim by the target of the investigation.
The investigation concerns Venture Holdings and possible looting of the company by its former owner, Larry Winget, before it went into bankruptcy. As a result of the bankruptcy, new ownership took control of Venture (called "New Venture" in the opinion), and when a grand jury investigation began regarding questionable transactions at Venture, New Venture received a subpoena for documents that it was more than happy to comply with, including waiving any corporate attorney-client privilege. At this point, Winget stepped in and claimed that records held by New Venture included documents covered by his personal attorney-client privilege. The district court accepted the government’s suggestion that a "taint team" made up of a prosecutor and investigator with no connection to the case — behind the so-called "Chinese Wall" — review the documents and determine which ones were subject to a privilege claim. Under the government’s proposal, if the taint team determined that a document was not privileged, it would go straight to the personnel assigned to the grand jury investigation without a chance for Winget to challenge that decision, at least not until after disclosure of the document.
It was this step in the process that cause the Sixth Circuit to reject the taint team and instead permit the privilege claimant to make the initial determination on the privileged nature of the documents, as if the subpoena were served directly rather than on a cooperative the third party. The court expressed some hesitation about the fairness of the proposed government review, stating:
It is reasonable to presume that the government’s taint team might have a more restrictive view of privilege than appellants’ attorneys. But under the taint team procedure, appellants’ attorneys would have an opportunity to assert privilege only over those documents which the taint team has identified as being clearly or possibly privileged. As such, we do not see any check in the proposed taint team review procedure against the possibility that the government’s team might make some false negative conclusions, finding validly privileged documents to be otherwise; that is to say, we can find no check against Type II errors in the government’s proposed procedure. On the other hand, under the appellants’ proposal, which incidentally seems to follow a fairly conventional privilege review procedure employed by law firms in response to discovery requests, the government would still enjoy the opportunity to challenge any documents that appellants’ attorneys misidentify (via the commission of Type I errors) as privileged. We thus find that, under these circumstances, the possible damage to the appellants’ interest in protecting privilege exceeds the possible damage to the government’s interest in grand jury secrecy and exigency in this case. Therefore, we reverse the district court, and hold that the use of a government taint team is inappropriate in the present circumstances. Instead, we hold that the appellants themselves must be given an opportunity to conduct their own privilege review; of course, we can presently make no ruling with respect to the merits of any claimed privilege that may arise therefrom.
Government taint teams have been used primarily in law office search cases in which documents seized are within the government’s control, and there has been quite a bit of controversy about them because the same incentives identified by the Sixth Circuit are present. While In re Grand Jury Subpoenas is a subpoena case, so the court is merely putting the privilege claimant in the same position he would have been in if the he received the subpoena directly, the court’s rationale regarding taint teams could be applied to challenges to searches involving privileged documents. (ph)
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[Note: The following is a corrected post in light of updated media
reports] The investigation of San Francisco Giants slugger Barry Bonds
will shift to a new grand jury so that prosecutors can continue to
determine whether to indict him on perjury and tax evasion charges.
The grand jury panel that had been hearing evidence against Bonds
related to his 2003 grand jury testimony as part of the investigation
of steroids distribution by Balco (Bay Area Laboratory Cooperative)
expired on July 20 at the end of its 18-month term of service. By
empaneling a new grand jury, prosecutors will not have to race any
deadlines in deciding whether to seek charges. I suspect prosecutors
decided to hold off for now rather than risk running afoul of the adage
"act in haste, repent in leisure." Bonds is unlikely to even consider
a plea offer, and the statute of limitations is not a concern, so it is
better to wait until the case is clear — one way or the other —
than to rush something through a grand jury on its last day and then
have to clear up the mess later. That is especially the case with tax
counts, which require approval from the Tax Division in Washington, D.C.The downside to shifting to a new grand jury is that evidence heard
by the prior panel must be presented again to the new set of grand juros, which includes
reading transcripts to them, a process that can be deadly dull. A new
grand jury allows prosecutors to subpoena Bonds’ former personal
trainer, Greg Anderson, to appear once again. In June, Anderson refused to
testify and the district court ordered him to jail on July 6 for civil
contempt, but he only served the two weeks until the prior grand jury’s term
expired. His time on the outside may be fairly short, however,
depending on when prosecutors subpoena him to testify, which most
likely will trigger another refusal to testify and another trip to
jail.While Bonds has dodged an indictment at this time, and probably
for the next few months, the U.S. Attorney’s Office stated that its investigation has not ended. Pulling out a well-worn aphorism, an AP story (here) quotes Michael Rains, an attorney for Bonds, as saying, ""They don’t even have enough to indict a ham sandwich, much less Barry Bonds." I’m not sure what a ham sandwich could do that would trigger federal charges, but it’s probably not perjury or tax evasion. (ph) -
Katherine Harris achieved a measure of fame in 2000 as Florida’s Secretary of State from her involvement in the vote counting there, and then moved on to the House of Representatives a couple years later. Her campaign for the U.S. Senate has bogged down over various issues, and now the whiff of scandal is hitting. A Tampa Tribune story (here) discusses an investigation of campaign contributions to Harris from Mitchell Wade, who entered a guilty plea related to disguising corporate campaign contributions to former California Representative Randy "Duke" Cunningham. The Cunningham case is just one of a variety of corruption investigations embroiling Representatives from, among others, Ohio and Louisiana, in addition to staff and Bush administration officials. Federal prosecutors are seeking to determine whether Wade sought to have Harris earmark defense funds for his company in exchange for contributions to her campaign, a key issue in the Cunningham case that resulted in the Congressman being sentenced to an eight-year prison term for accepting bribes. Former Harris campaign director Ed Rollins, well known for his work for various Republican candidates, said that he was interviewed by the Department of Justice and that from the questioning Harris appears to be a focus of this phase of the investigation. This is not a good time to have a candidate’s name in headlines linking her to corruption. (ph)
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A Wall Street Journal article (here and Law Blog entry here with access to the article) discusses the response of major law firms to the current spate of SEC and grand jury investigations of companies related to the timing of their options awards. Not surprisingly, the firms have viewed this as a marketing opportunity, informing current and potential clients that the best strategy is, of course, to consult with competent counsel. For example, national law firm Latham & Watkins is touting its "Options Timing Working Group" that comes complete with a page on the firm’s website (here) and offers missives written by Jim Barrall in The Executive Comp Insider that tout, again not surprisingly, the need to obtain legal counsel. The burgeoning investigations have already touched over fifty companies, and that’s just the ones publicly disclosing pending investigations. The number of companies conducting their own internal reviews is much higher than that, and we will see more disclosures of problems in the coming months. With all the lawyers getting involved in these cases, the interesting question will be whether firms are conflicted out of certain representations, either because they were involved in the drafting of the stock option agreements or their conduct of an internal investigation means they cannot defend individual officers or directors in subsequent cases. As Peter Lattman notes in the WSJ article, this is another instances of lawyer full employment — not that there’s anything wrong with that. (ph)
MattBray.net 