The Wall Street Journal reports (here) that Bristol-Myers Squibb will settle a long-running criminal investigation of its accounting related to channel stuffing by paying $300 million and entering into a deferred prosecution agreement with the Department of Justice. On May 10, the company issued a press release stating that it had increased its litigation reserve by $110 million (see earlier post here), so if this settlement is reached it will probably require additional reserves The settlement of the criminal case comes on top of a settlement with the SEC in August 2004 for accounting violations that included a $100 million civil penalty and a $50 shareholder fund for channel stuffing. That’s a lot of money to pay for helping to make quarterly sales look a bit better. (ph)
Category: Investigations
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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)
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Saks Inc. disclosed today that its audit committee has expanded an internal investigation into accounting problems to look into whether vendors were improperly charged for inventory markdowns, which would have bolstered the company’s revenues and income. On May 10, the company dismissed three executives over accounting problems regarding vendor allowances (see earlier post here), and the new "supplemental" investigation looks at other issues related to how Saks used its contracts with vendors to pad its books. A company press release (here) states:
The Audit Committee’s supplemental internal inquiry will review (i) the timing of the recording of both inventory markdowns and vendor markdown allowances at Saks Fifth Avenue Enterprises ("SFAE"), (ii) whether there have been any overcollections of vendor markdown allowances in any of the merchandising divisions of SFAE that were not the subject of the Audit Committee’s prior internal investigation, and (iii) whether the Company has improperly charged any of its merchandise vendors any fees for failure to comply with the Company’s logistics, transportation, or billing policies (these types of fees often are referred to in the retail industry as "chargebacks"). This supplemental inquiry is being undertaken in connection with the previously disclosed restatement of the Company’s financial statements from fiscal 1999 through the third quarter of fiscal 2004 and the preparation of the Company’s Annual Report on Form 10-K for the fiscal year ended January 29, 2005 (the "2004 Form 10-K").
With respect to the timing of inventory markdowns and vendor markdown allowances, the Company currently believes that some inventory markdowns and some vendor markdown allowances may have been incorrectly recorded at SFAE in one or more fiscal quarters prior to 2005. The Company’s results of operations for the first quarter of fiscal 2005 released on May 17, 2005 reflected an approximately $1.2 million reduction to net income based upon management’s preliminary determination that SFAE had incorrectly accelerated into the first quarter of 2005 the recognition of $2 million of vendor markdown allowances.
The company has disclosed that the SEC and U.S. Attorney for the Southern District of New York are investigating it and individuals involved in the accounting problems, and look for the scope of those inquiries to expand. The bargain bin may start filling up with more discarded executives soon. (ph)
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While companies are usually quick to tout their willingness to cooperate with government investigations, every once in a while a corporation resists producing records. Medco Health Solutions, Inc., the pharmacy benefits management company that was spun out of Merck, has refused to provide documents subpoenaed by the Department of Health and Human Services’ Office of the Inspector General as part of an investigation into possible kickbacks and false claims until the OIG agrees not to share the records with the U.S. Attorney’s Office for the Eastern District of Pennsylvania. That office filed a civil lawsuit against Medco in 2003 alleging fraud in the recommendation of drugs, and Medco is demanding that any records produced not be given to the government attorneys prosecuting the civil action. A Wall Street Journal story (here) quotes a response from a Medco spokeswoman that the company is only seeking confidential treatment of the documents. The OIG has moved to enforce the subpoena, and a hearing is scheduled for Wednesday, June 1, in U.S. District Court in Philadelphia.
While Medco claims that all it is seeking is confidential treatment of its records, it is unusual that the request is directed at another office of the federal government. In most cases involving confidential treatment, a private plaintiff is seeking the records produced to the government, and that brings up issues related to FOIA and the need to maintain confidentiality during a pending investigation. Unlike a grand jury subpoena, under which the documents may be protected by the strict confidentiality requirements of Rule 6(e), a civil investigative subpoena does not restrict the sharing of information with other offices of the federal government that may be interested in the documents. While Medco may fear an end-run by the OIG, if the HHS investigation is legitimate and not a sham for the benefit of the earlier lawsuit — and it appears to be part of a broad investigation of other companies, such as Caremark — then I think the subpoena is likely to be enforced because the OIG has broad investigatory authority. (ph)
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Workers compensation is one of those areas of the law that is better left unexamined. Unfortunately for the Ohio Bureau of Workers Compensation (BWC) and its CEO, James Conrad, the spotlight is now focused on a rather peculiar investment by the Bureau that seems to be missing. According to an AP story (here), the BWC bought approximately $55 million in rare coins through a Toledo dealer as part of an investment strategy to diversify its portfolio. Companies pay hefty premiums into state workers comp pools, and investment gains should lower the cost of insurance. About $10-12 million worth of coins, however, are missing, and the coin dealer, Tom Noe, is being investigated for the disappearance. Conrad resigned from the BWC because of the disappearance, and questions have been raised about the use of Noe because he was a substantial contributor to Governor Taft and other Republican candidates. Collectibles are notoriously hard to value — just ask Ellen about the value of her Beanie Baby stash — and subject to theft, unlike stocks and bonds. While the missing coins are only a small part of the BWC’s $15 billion investment fund, it shows that even a small-scale fraud can blow up once it is tied in with campaign contributions. (ph)
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Jared Bowen, a former vice-president at Wal-Mart, has filed a whistleblower complaint with the Department of Labor over his termination by the company in late March, which he claims was in retaliation for disclosing expense-account abuses by former executive and board member Thomas Coughlin. The company reported to the U.S. Attorney in March that Coughlin had submitted false invoices for up to $500,000, and there is a grand jury investigation of Coughlin. Just to complicate matters, Coughlin’s attorney has hinted that the funds were used to make secret payments to union officials for information about organizing drives involving Wal-Mart employees (see earlier post here). Bowen asserts that he reported two instances of improper billing by Coughlin, but was terminated because he failed to report a third instance of misconduct involving Coughlin and that there was a "loss of confidence" in him.
Section 806 of the Sarbanes-Oxley Act created protections for employees of publicly-traded companies who report misconduct involving fraud (18 U.S.C. Sec.1514A here). The provision provides the following remedies:
(1) IN GENERAL- An employee prevailing in any action under subsection (b)(1) shall be entitled to all relief necessary to make the employee whole.
(2) COMPENSATORY DAMAGES- Relief for any action under paragraph (1) shall include–
(A) reinstatement with the same seniority status that the employee would have had, but for the discrimination;
(B) the amount of back pay, with interest; and
(C) compensation for any special damages sustained as a result of the discrimination, including litigation costs, expert witness fees, and reasonable attorney fees.
(ph)
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Who among us really misses the independent counsel statute? An earlier post (here) discussed a D.C. Circuit case involving a former lower-level administrator at the White House who got caught up in the travel office investigation, a minor sideshow in the Whitewater investigation, and sought attorneys fees under the statute. At least that investigation has ended, but it seems that the IC investigation of former HUD Secretary Henry Cisneros remains alive, and with continuing support from Congress it may keep going, and going . . . According to an AP story (here), a move to terminate funding for the investigation was killed in a closed-door Senate negotiation, which allows Independent Counsel David Barrett to remain on an investigation in which the initial target (Cisneros) entered a guilty plea to a misdemeanor in 1999 (he paid a $10,000 fine) and was pardoned in 2001, arising from lying to the FBI about payments made to a mistress. Barrett estimates that it will take at least another ten months, and possibly longer, to complete the investigation and issue a report. How has it taken so long, you might ask? Well, the Wall Street Journal had reported back in 2000 that Barrett expanded his investigation to cover possible obstruction by the IRS and DOJ of the Cisneros investigation at the instigation of the Clinton White House, but not much has been heard recently (see National Review article here).
Barrett was appointed on May 24, 1995, so this is his tenth birthday, which I suspect is the record for the longest continuous service as an Independent Counsel — he’s been on the job longer than my youngest daughter has been around. While being the Cal Ripken of the IC crowd is something to be proud of, one wonders how much longer the investigation will remain open, especially after the government’s expenditures on it have exceeded $21 million and not much seems to have come out over the past couple years. Nevertheless, Robert Novak had an article earlier this month (here) proclaiming that Barrett’s report contains blockbuster information about IRS efforts to obstruct the Cisneros investigation, something likely to draw a yawn from most. (ph)
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A brief announcement (here) from the U.S. Attorney’s Office for the Western District of Washington states that the office will conduct the investigation of controversial Spokane Mayor Jim West after the Eastern District USAO recused itself from the case. The investigation concerns possible violations of federal anti-corruption laws by West for offering city jobs and appointments to young men he met in on-line chat rooms. An article in the Spokane Spokesman-Review (here) discusses the investigation, including the appointment of one person to the city’s Human Rights Commission who had a relationship with West. (ph)
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Former General Re CEO Ronald Ferguson asserted his Fifth Amendment privilege rather than testify in the SEC and DOJ investigation of AIG-General Re reinsurance transactions, and promptly lost his consulting contract with Berkshire Hathaway. Ferguson was CEO of General Re when Berkshire Hathaway acquired the company in 1998, and left that position in 2001 when the company suffered substantial underwriting losses. A press release issued by Berkshire Hathaway (here) states that Ferguson had been subpoenaed to testify in the investigation. He now joins, among others, former AIG CEO Maurice Greenberg and former AIG CFO Howard Smith as one of the senior executives to have invoked the Fifth Amendment to resist answering questions in the investigation. As discussed in an earlier post (here), New York Attorney General Eliot Spitzer’s office is conducting a grand jury investigation that has already heard from one AIG executive, Joseph Umansky. The pace is quickening as another one rides the Fifth Amendment privilege bus. (ph)
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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)
MattBray.net 