Los Angeles Mayor James Hahn faces a primary election on Tuesday, March 8, amidst significant publicity about federal and county corruption investigations involving possible bribery and kickbacks. Federal prosecutors have issued subpoenas for office e-mail and have called witnesses to testify before the grand jury. An executive at a public relations firm with ties to Hahn was indicted in January for allegedly overbilling the city’s Department of Water & Power $250,000 (press release here), and several city officials have resigned, although those resignations have not been linked specifically to the corruption investigations. With the election so close, it will be interesting to see if Hahn, who denies any knowledge or involvement in the alleged corruption, can survive the publicity. An AP story here discusses the investigations. (ph)
Category: Investigations
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Alcoa Inc. disclosed in its annual report (available here) filed on Friday, Feb. 18, that the SEC has begun an informal investigation of the company’s accounting for "certain trade payables financing." The company paid some vendors through intermediaries, and the issue is whether the company classified properly its payments and any discounts received. Alcoa’s annual report states:
On January 28, 2005, in the context of an informal investigation being conducted by the staff of the Securities and Exchange Commission (SEC) relating to certain trade payables financing, the company received a request for the voluntary provision of documents and related information concerning the classification and disclosure of certain trade accounts payable transactions for periods beginning after December 31, 2002 that involve, directly or indirectly, an intermediary. The SEC staff has advised the company that the inquiry should not be construed as an indication by the SEC or its staff that any violations of law have occurred, or as an adverse reflection upon any person or security. Alcoa is fully cooperating with this inquiry.
Jurist has additional information on the investigation. (ph)
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The U.S. Attorney’s Office for the Eastern District of Virginia issued a white paper on Feb. 18, "Combating Procurement Fraud: An Initiative to Increase Prevention and Prosecution of Fraud in the Federal Procurement Process." The district is home to the Pentagon and, more importantly, thousands of government defense consulting firms in Crystal City, Rosslyn, and Alexandria; the revolving door spins rather quickly in D.C. The recent scandal involving Boeing (see previous post here) that led to the sentencing of the company’s former CFO and a senior Air Force procurement officer has led to a large-scale initiative by the U.S. Attorney’s Office, which is already well-known for the Ill-Wind investigation of the 1980s. The white paper discusses the reasons for the formation of a new Procurement Fraud Working Group:
In addition to increasing DoD contracts, these contractors are expanding operations to acquire and service contracts from the State Department, DHS, and other federal agencies. For example, the President and Chief Operating Officer of one of DHS’s top ten contractors recently announced the company’s intent to grow 15 per cent each year. With increased procurement, including a rise in the outsourcing of particular services, there is also the potential for an increase in procurement fraud, which includes product substitution, defective pricing or other irregularities in the pricing and formation of contracts, misuse of classified or other sensitive information, labor mischarging, accounting fraud, fraud involving foreign military sales and ethical and conflict of interest violations. This puts the United States Attorney’s Office, as chief law enforcement agency for this district, in a unique position to act.
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Former Boeing CFO Michael Sears was sentenced to four months in prison and fined $250,000. (See Jurist ) The case involved "improper job talks" with another individual who was "a former senior Air Force procurement official, while she still had sway over contracts involving the company." GOVEX.com reports:
"Druyun admitted in federal court last month to favoring Boeing in at least four contract negotiations, including the tanker deal. She said she felt indebted to the company for giving her daughter, her son-in-law and herself jobs. Druyun was sentenced to nine months in prison."
The Wall Street Journal also reports on this case. Taxpayers for Common Sense has a press release on this case that states:
The sentencing of Michael Sears sends a clear message that fleeing the federal government doesn’t pay. The four month jail sentence will act as a wake-up a wake-up call and strong deterrent for any contractor who thinking they can get away with ripping off taxpayers.
Defense procurement was a top white collar crime priority in the 90s. This case emphasizes that it still remains a concern.
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As reported here, AIG received subpoenas on 2-9-05 from the Office of the Attorney General of New York (Spitzer) and the SEC. (see Newsday for further information here) And as so often is the case following the issuance of subpoenas, plea agreements follower shortly thereafter. In a press release by Attorney General Spitzer, it is reported that today "a senior executive at Marsh and two AIG employees have pleaded guilty to criminal charges in connection with an ongoing investigation of fraud and bid rigging in the insurance industry."
In this press release, Attorney General Spitzer states:
"All three defendants admitted to participating in a scheme that allowed Marsh, the nation’s largest insurance broker, to protect incumbent insurance carriers when their business was up for renewal.
. . . . . As part of his plea today, the managing director of Marsh’s excess casualty unit described an official protocol whereby Marsh clients were given a significantly understated figure when they asked about the amount of revenue Marsh derived from Placement Service Agreements.
Two of the defendants in today’s cases pleaded guilty to the crime of Scheme to Defraud in the First, a class E felony, which carries a maximum sentence of 1 1/3 to 4 years in state prison. The third defendant pleaded guilty to the crime of Scheme to Defraud in the Second Degree, a class A misdemeanor, which carries a maximum sentence of 1 year in jail. All three defendants pleaded guilty before Justice James Yates of New York County Supreme Court.
The defendants in today’s cases are expected to testify in future cases, as are the six other insurance industry employees who entered criminal pleas. Previously, two executives at AIG, two from Zurich American, one from Marsh and one from ACE pled guilty to criminal charges."
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This was probably not the valentine’s gift that those associated with American International Group Inc. (AIG) were hoping to receive – a notice informing them of subpoenas from the Office of the Attorney General of New York (Spitzer) and the SEC. AIG issued a news release on 2-14 stating:
"Subsequent to the earnings conference call on Wednesday, February 9, AIG received subpoenas from the Office of the Attorney General for the State of New York and the Securities and Exchange Commission relating to investigations of non-traditional insurance products and certain assumed reinsurance transactions and AIG’s accounting for such transactions. AIG will cooperate in responding to the subpoenas."
AIG has been in the news recently. (see post). What may be interesting with respect to the timing here, is that the subpoenas are arriving immediately after an internal investigation. See Wall St. Jrl for more.
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The government set the stage for introducing the audiotapes made by Bill Owens, HealthSouth’s former CFO, who wore a wire for two days immediately before the FBI executed a search warrant at the company as part of its accounting fraud investigation. The defense has raised questions regarding the veracity of the tapes and problems regarding the government’s handling of them. At the trial today, prosecutors called an FBI evidence technician, who testified she made an "honest mistake" when she put the incorrect date on the evidence log for the tapes. The defense has sought to exclude the tapes from being introduced at trial, a position U.S. District Judge Karon Bowdre rejected before trial (see earlier post here) but did give the defense the opportunity to raise admissibility questions at trial. The government appears to be laying the foundation for admission of the tapes through Owens. Interestingly, while the defense has sought to exclude them, counsel has also said they are exculpatory of Scrushy and show that it was Owens who was the perpetrator of the fraud. No harm in having a fall-back position, in case the tapes come in. An AP story discussing the testimony at Scrushy’s trial is here.
This type of evidence is uncommon in white collar cases, but not unique — recall the prosecution of senior Rite Aid executives involved a cooperating witness who wore a wire to meetings with other defendants. The recordings in that case were challenged as being made in violation of Pennsylvania Rules of Professional Conduct 4.2 and 8.4 because it was an unauthorized contact with a represented person and involved dishonest conduct by the federal prosecutor, U.S. v. Grass, 239 F.Supp.2d 535 (M.D. Pa. 2003), arguments the district court rejected in refusing to suppress the tapes. (ph)
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Back in early December 2004, the baseball world was rocked by the revelation on successive days (by the San Francisco Chronicle) of the grand jury testimony of Jason Giambi and Barry Bonds (see posts here and here). That testimony is related to the government’s prosecution of four defendants involved in the creation of "designer" steroids at BALCO (the Bay Area Laboratory Co-operative). BALCO founder Victor Conte appeared on the television news program 20/20 after his indictment to discuss the steroid use by major athletes, including (among others) track star Marion Jones, essentially admitting to many of the charges in the government’s case.
An issue regarding the grand jury transcripts concerns the source of the leak to the Chronicle in violation of protective orders and the grand jury secrecy rule in Federal Rule of Criminal Procedure 6(e), which may be punishable by contempt. Last week, the FBI conducted a search of Conte’s Bay Area home for evidence related to the leak of the grand jury transcripts, including a search of his computer. An earlier post on the CrimProf Blog on Jan. 10 (here) discussed possible sources of the leak of the transcripts — given the level of detail in the Chronicle stories, it is almost certain that the reporters received copies of the grand jury transcripts and not just oral (or written) summaries. Given Conte’s penchant for publicity regarding the use (and misuse) of steroids, even when it hurts his criminal case, the government appears to be focusing on him as a source of the transcripts. Whether the mystery of who leaked the transcripts will ever be solved is still up in the air. A story in the San Francisco Chronicle (here) discusses the search of Conte’s home and related developments in the BALCO prosecution. (ph)
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Travelzoo Inc., an internet company that promotes travel bargains for other company’s on its website, filed a Form 8-K (here) with the SEC disclosing that the Commission has requested information from the company regarding trades by CEO Ralph Bartel, who owns 80% of the company’s outstanding shares. The stock has been the subject of significant short selling, and the shares dropped over 20% on Travelzoo’s disclosure of the informal inquiry by the SEC. The Form 8-K states:
Travelzoo Inc. has provided information to the Securities and Exchange Commission in connection with an inquiry into trading in its shares. The inquiry follows a period of extreme volatility in the company’s stock price on the NASDAQ Stock Market during 2004, which has also been a cause of concern to the company.
In response to this inquiry, Travelzoo Inc. has provided information concerning any transactions in the company’s shares by its officers, directors and employees, including Ralph Bartel, the company’s CEO. The results of the company’s review showed that, during the period in question, when the price of the company’s shares increased dramatically, neither Mr. Bartel nor any other directors or senior officers of the company purchased any shares, except for one exercise of a stock option. The inquiry also asked for additional information from Mr. Bartel. Mr. Bartel has confirmed that, since his last sale of 50,000 shares in May 2004, at $19.96 per share, he has neither purchased nor sold any of his shares, except for a previously reported sale of 30,000 shares in November 2004, which Mr. Bartel was required to sell under a stock warrant issued in 2003, which allowed the holder to purchase those shares from Mr. Bartel at $3.90 per share.
The company has provided all information which has been requested to date in this inquiry. The company has no reason to believe that the inquiry relates in any way to the financial reporting or operations of the company.
The impetus for the SEC’s inquiry may well be the short sellers who are betting on a decline in Travelzoo’s stock price. The last sentence is small comfort to the public shareholders when the SEC probes market manipulation.(ph)
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The latest in the government’s scrutiny into healthcare appears to be occurring at Medquist. According to a Washington Post story, "MedQuist Gets Subpoena in Massachusetts," "[t]he U.S. Attorney’s Office for Massachusetts has subpoenaed records from medical information services company MedQuist Inc. seeking documents related to its dealings with both governmental and non-governmental customers." The article notes that "MedQuist also said it continues to cooperate with the Securities and Exchange Commission’s ongoing investigation in the matter."
Agency Investigations add a component to white collar cases that one does not find in a typical street crime investigation. What was originally an agency investigation by the SEC, now is a subpoena request by DOJ. One has to wonder if the SEC has referred this matter to the DOJ for investigation or whether this is an independent investigation?
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MattBray.net 