The spate of high profile white collar crime trials over the past 18 months (or so) — kicking off with Martha Stewart and Frank Quattrone through the jury deliberations about the fate of Richard Scrushy and leading up to the anticipated blockbuster Enron conspiracy trial of former CEOs Ken Lay and Jeffrey Skilling — is triggering a reassessment of some of the so-called conventional wisdom in criminal prosecutions. An article in Business Week (here) highlights the strategies of prosecutors and defense counsel in white collar crime cases, touching on topics from indictments and plea bargains to pre-trial publicity and the decision whether to have the client testify. The author is even kind enough to mention this blog (I plead guilty to shameless self-promotion). (ph)
Category: Prosecutions
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A judge in Milan, Italy, ordered Parmalat CEO and founder Calisto Tanzi to stand trial beginning Sept. 28 on charges related to the accounting fraud that led to the company’s bankruptcy. In addition, Italian officers of Bank of America, accounting firm Grant Thornton, and Parmalat’s accountant Deloitte & Touche, are among others who will also be tried in the case. The Milan charges are the result of one branch of the investigation of Parmalat’s collapse, which included falsified documents on Bank of America stationary indicating large accounts at off-shore banks that never existed, except of course on the company’s balance sheet that was widely circulated to investors in its bonds. An investigation in Parma, Italy, site of the company’s headquarters, is continuing. On the civil side of the Parmalat case, Morgan Stanley agreed to pay €155 million to settle claims by Parmalat related to underwriting of the company’s bonds (8-K here). An AP story (here) discusses the charges against Tanzi and others. (ph)
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The Milberg Weiss firm, in its various incarnations, is one of the leading plaintiff securities class action and shareholder derivative firms in the country. The firm and William Lerach, once a name partner and now the lead partner at Lerach Coughlin Stoia Geller Rudman & Robbins, may be the unindicted coconspirators in the prosecution of Seymour Lazar for accepting kickbacks in connection with his service as a representative plaintiff in various civil cases (see earlier post here). The indictment refers to "a New York law firm with principal offices in New York and California," which certainly is a description of Milberg Weiss before it broke up in May 2004. Milberg Weiss had represented Lazar as one of the representative plaintiffs in class actions, including Churchill Village LLC v. GE, In re MCA Shareholder Derivative Litigation, In re Xerox Corp. Securities Litigation, and In re Biogen Securities Litigation; the firm also represented the plaintiffs in a class action against Hertz in California in which one Adam Lazar was the named plaintiff (Lazar v. Hertz Corp.). An article in The Recorder (here) states that the government is trying to pressure Lazar, who is accused of using family members in addition to himself as the representative plaintiff, to cooperate against Milberg Weiss and Lerach. In a statement, Milberg Weiss asserted that "[w]e are outraged that these allegations have been made against the firm and reject them as baseless." (See AP story here) This case could get a whole lot more interesting, and have a major impact on the securities bar, if some of the leaders of that bar — who are also large political contributors in the fight against restrictions on class actions — are linked to improper payments. (ph)
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The U.S. Attorney’s Office for the Central District of California announced the indictment of Seymour Lazar, a 78 year-old lawyer in Palm Springs, for allegedly taking approximately $2.4 million in secret kickbacks from lawyers for plaintiffs in class actions in exchange for serving and causing his family members to serve as named plaintiffs in more than fifty class action and shareholder derivative action law suits over the last twenty years. According to a press release (here):
[T]o conceal the illegal kickback scheme from the courts presiding over such lawsuits, the other parties to such lawsuits, and the absent class members and shareholders whose interests Lazar and his family members purported to represent, Lazar made false and misleading statements in under-oath depositions and in documents Lazar signed under penalty of perjury. The indictment further alleges that the illegal kickbacks were secretly paid to Lazar through various intermediary law firms and lawyers selected by Lazar, who used and applied the kickback payments at Lazar’s direction and for his benefit.
Also indicted was Paul Selzer, a lawyer who is accused of being an intermediary for Lazar by funneling payments to him.
A quick check of Westlaw shows that Lazar was one of the named plaintiffs in Churchill Village v. General Electric, 361 F.3d 566 (9th Cir. 2004), a class action by dishwasher owners against manufacturers, In re MCA Shareholder Litigation, 785 A.2d 625 (Del. 2001), a shareholder derivative suit in the Delaware courts alleging a breach of fiduciary duty by the board related to a merger agreement, and Bell Atlantic Corp. v. Bolger, 2 F.3d 1304 (3rd Cir. 1993), another shareholder derivative suit. He was also a plaintiff in In re Concord Holding Securities Litigation, a securities fraud class action for which there is a settlement notice here. It is not clear whether Lazar received any of the alleged payments in connection with these cases, but he is clearly one of the group of "usual suspects" who serves regularly as a named plaintiff in class actions.
Interestingly, one of the issues in the Bell Atlantic case was an alleged conflict of interest for a law firm that represented the defendant corporation and individual defendant-directors and officers. A named or representative plaintiff in class actions and derivative litigation has a fiduciary duty to the other members of the class, or other shareholders in derivative litigation, to ensure that the action is conducted fairly, and there is a strict prohibition on these plaintiffs from accepting anything other than what other class members receive, unless specifically approved by the court. To receive payments from attorneys for the class while serving as representative would be a conflict that automatically eliminates the person from any involvement as the representative plaintiff, and as seen here can result in criminal charges. One of the changes adopted in the Private Securities Litigation Reform Act in 1995 was to alter the method of selecting the representative plaintiff in federal securities fraud actions, requiring that the court choose as the lead plaintiff a party — often now an institutional investor — with a large stake the company. This provision was designed to eliminate some of the more unseemly aspects of the "race to the courthouse" among the plaintiff class action firms who kept a roster of potential representative plaintiffs on file. Lazar is charged with taking the process of serving as a representative plaintiff a step further by accepting payments from the attorneys to serve as the named plaintiff, or obtaining a compliant family member, most likely to allow the lawyers to pursue the class action or derivative suit without any interference (or oversight) while getting a cut of the attorney’s fees. (ph)
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Gene Burd is (or now more likely was) a lawyer who had a personal injury practice in Houston that specialized in cases involving auto accident victims — do you see where this is going? A press release issued by the U.S. Attorney’s Office for the Southern District of Texas (here) provides the following sordid tale of a PI lawyer who matched the caricature of the classic ambulance chaser:
[Burd] pays runners to solicit accident victims and bring the potential clients to his office. He contracts with his clients to make a claim against the other driver’s insurance company on their behalf and he agrees to accept 33 percent of the settlement as his fee. Burd’s office then refers the client to particular chiropractic clinics for therapy. Some clinic patients are referred to Burd’s law office by the clinics.
After the therapy at the clinics is completed, Burd or his office will send a demand to the insurance company. After some negotiation, Burd settles the case and a check is mailed to him from the insurance company. When the case is settled, Burd takes the insurance company’s settlement check and deposits it into his attorney-client trust account. He withdraws the money by writing three checks. One check goes to the chiropractic clinic to pay for the treatment. The second check goes to the client. The third check goes to Burd as his legal fee and is deposited into his operating account.
When the chiropractic clinic receives their check from Burd they often deposit that check into a third party account instead of into their clinic’s operating account. After the check is cashed in a case in which the patient was referred to the clinic by Burd, the clinic owner meets privately with Burd and returns 40-50 percent of the check to Burd in the form of a cash kickback. Burd keeps the cash and does not deposit it into his operating account. This income received by Burd is never reported on his federal income tax return. The income reported by Burd on his income tax return is only that money that he received from the trust account by check and the salary checks received by Burd from his law firm. The cash kickbacks are not reported.
Burd and the chiropractor each entered a guilty plea to making a false statement on their tax returns related to the income from this little scheme, which netted Burd approximately $686,000 in 1996 and 1997, the years at issue for the tax charge. One wonders why a mail or wire fraud charge was not filed in the case. (ph)
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It is common knowledge that many prosecutors and investigators use a strategy of working up the ladder in pursuing criminal conduct. Start with low level figures and work up to the bigger player. Thus, in Scrushy’s trial we saw a parade of managers testifying against the top man in the company. The success for the government in this particular case remains to be seen.
But sometimes a prosecutor will go after the lower level individual. The NYTimes has an article here titled, For Some, Just Following Orders is a Good Defense, that presents some interesting commentary on white collar strategy through an examination of the NY AG’s unsuccessful prosecution of Sihpol.
The bottom line, though, is that each investigation and prosecution can have its own idiosyncrasies and a cookie cutter recipe may not apply to all cases.
(esp)
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Dr. Roger D. Blackwell, a professor of marketing at Ohio State University, was convicted of 14 counts of insider trading, conspiracy, and obstructing an SEC investigation into trading in the securities of Worthington Foods through the use of information he gained while a member of the company’s board of directors. Two other defendants convicted were an employee of his consulting firm, Roger Blackwell Associates, Inc., and her husband. A Blackwell Associates website (here) describes Dr. Blackwell:
Roger Blackwell was named "Outstanding Marketing Educator in America" by Sales and Marketing Executives International and "Marketer of the Year" by the American Marketing Association. He also received the "Alumni Distinguished Teaching Award", the highest award given by The Ohio State University. After 30 years at the university and recently receiving two additional teaching awards, his depth of knowledge and enthusiasm for teaching still make him a favorite among students.
A press release issued by the U.S. Attorney’s Office for the Southern District of Ohio (here) states that the judge ordered Blackwell to post a $1 million cash bond within 24 hours to remain free until sentencing. An SEC civil insider trading suit against Blackwell and others (complaint here) filed in January 2003 alleges that the defendants made $245,000 from trading in Worthington Foods based on a proposed acquisition of the company.
A check of the Ohio State University marketing department website (here) notes that Dr. Blackwell received "the 16th Annual Mortar Board and Sphinx Faculty and Staff Recognition event held Mar. 8, 2005. Students who are senior honorees nominate university personnel who made a difference in their lives on campus. Douglas Hange, stated that Dr. Blackwell’s ‘. . .ability to give real-world examples relating to business and marketing help to make class concepts come to life.’" An insider trading conviction certainly is a real-world example.
Dale Oesterle on the Business Law Prof blog, who is also on the Ohio State University faculty (in the law school, not the business school), has an interesting post (here) on Blackwell’s role on the campus. (ph)
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Alberto Vilar, the co-founder of Amerindo Investment Advisers, was released on bail after spending a month in the Manhattan MCC since his arrest on May 26 at the Newark airport on fraud charges. Vilar is well-known for his philanthropic gifts to support the arts, although a grand jury indictment on June 9 charges him with securities, mail and wire fraud, plus money laundering, related to taking funds from a customer account and using some of the money to make good on various charitable pledges. Bail was set at $10 million, which Vilar was unable to make until June 20, when he put up assets valued at $4 million, including art works at his apartment, to obtain a bond permitting his release. Amerindo continues to suffer withdrawals by its large institutional investors, and its mutual fund, Amerindo Technology Fund, has lost almost 40% of its assets and fund management has been moved to a new firm. Vilar is likely to retain more experienced counsel to prepare his defense now that he has been released from jail. A Wall Street Journal story (here) discusses the case. (ph)
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The issues related to the investigation and prosecution of corporate misconduct are front and center today. The Wall Street Journal has a front-page article (here) about the focus on corporate crime by federal prosecutors, including the expanding use of deferred prosecution agreements that avoid the pitfalls of an Arthur Andersen scenario (a corporate death sentence, in effect) while still imposing a measure of punishment coupled with an enforceable agreement for corporate reform. Of course, the focus on corporate crime isn’t really all that new, if one recalls the S&L crisis of the late 1980s and early 1990s, the overseas bribery scandals of the 1970s that led to the FCPA, and for those who passed their 20th Century U.S. History class, the Progressive Era featured corporate corruption and the dangers of trusts as important legislative and prosecutorial goals. The Supreme Court recognized corporate criminal liability in New York Central in 1909 in a case involving freight rates, so this has been an issue for nearly a century.
On the topic of deferred prosecutions, the Journal has another article (here) about how Christopher Christie, the U.S. Attorney for the District of New Jersey, hammered out the agreement with Bristol-Myers Squibb that gives his office a hand in the continuing operation of the company’s compliance efforts. The article also notes that one of the beneficiaries of the agreement is Christie’s law school alma mater, Seton Hall, which will receive funds to set up a chair in business ethics and corporate governance (see earlier post here). Will Bristol-Myers get a tax deduction for its gift to the law school, and will the chair be named for the company (assuming the "Bristol-Myers Squibb Chair in Business Ethics and Corporate Governance" is not an oxymoron)?
On the investigatory front, the U.S. Attorney’s Office for the Southern District of New York joined in the finite insurance investigation melee with subpoenas to additional insurance companies that wrote the types of policies that are also the focus of the AIG-General Re case. New York Attorney General Eliot Spitzer and the SEC have sent separate subpoenas to a number of insurance companies already. Those receiving federal grand jury subpoenas include St. Paul Travelers (Form 8-K here) and Ace Ltd. (Form 8-K here), a Bermuda reinsurer whose CEO is the last remaining Greenberg (Evan) heading a public company — his father, Maurice, resigned from AIG in the midst of the government’s investigation and his brother, Jeffrey, was forced out of Marsh & McLennan last year by Spitzer’s demand for his removal. It would not be a surprise to see more guilty pleas from former General Re executives (two have already), and perhaps some from the AIG side of the transaction, in the next few weeks. The companies themselves have avoided criminal charges so far (Spitzer’s office filed a civil fraud suit against AIG and Greenberg recently), and it would not be a surprise if AIG entered into a deferred prosecution agreement of its own with the Department of Justice. General Re is a subsidiary of Berkshire Hathaway, and Warren Buffett’s sterling reputation may allow it to avoid having to walk the deferred prosecution plank. (ph)
UPDATE (6/20): I neglected to include KPMG LLP in the tour of corporate crime — the firm is a limited liability partnership, but we’ll ignore the corporate formalities for the moment. The firm has been under investigation by the Department of Justice for its tax shelters that have since been declared abusive that were used by corporate executives and others to avoid large tax liabilities on capital gains. The DoJ is seriously considering filing criminal charges, and on Thursday, June 17, KPMG issued a statement (here) that includes the following admission: "KPMG takes full responsibility for the unlawful conduct by former KPMG partners during that period, and we deeply regret that it occurred." The firm’s statement stresses that it no longer provides tax shelters — not a tough decision to make in the current environment– and has undertaken significant changes in its business practices. That statement is not something you read before a firm has been charged with a crime or enters into a settlement/deferred prosecution agreement, and KPMG is clearly seeking a deferred prosecution agreement to avoid being hung with a criminal charge that could cost it licenses to practice in the various states. The government is obviously concerned with the Andersen effect from an indictment of an accounting firm, and I suspect will not risk reducing the field to the Big 3. Still, the pressure on both sides is enormous, and another example of the importance of criminal liability for business organizations. (ph)
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Charles Stillman, the lead defense lawyer for former Tyco CFO Mark Swartz, said after the guilty verdict for his client that the jurors "are just sadly mistaken." An article in the Wall Street Journal (here) includes statements made by two jurors who said that the testimony of Swartz and former CEO Dennis Kozlowski was not credible, and that Kozlowski came across as a liar. Both jurors focused on Kozlowski’s testimony regarding an art purchase with Tyco funds from an art dealer. Kozlowski testified that it was just a coincidence that he and the dealer were in London at the same time and he happened to bump into her while window-shopping there, and then plunked down the company’s money to buy the paintings. More generally, the jurors had trouble with the testimony of both defendants regarding the loan forgiveness that resulted in multi-million dollar benefits that were not reported on their taxes, something Kozlowski said he "cannot explain."
On the larger question of whether a client in a white collar case should testify, the answer is (as always): it depends. Drawing a conclusion from cases like Kozlowski/Swartz or Bernie Ebbers, in which the defendants testified and were convicted, can be counterbalanced by cases such as Martha Stewart (no testimony, conviction) and Mark Belnick, Tyco’s former general counsel charged with crimes similar to those against Kozlowski and Swartz (testified, acquitted). Lawyers will always be second-guessed about the decision to testify if the client is convicted. When the jurors decide a defendant is being less than truthful, or even a liar, then the question is who is (sadly) mistaken. (ph)
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