A post on Nov. 12 (here) discussed the indictment of Linda Schrenko, the first woman elected School Superintendent in Georgia and a one-time rising star in the state Republican party who was charged with defrauding over $600,000 in education funds from the federal government that she used for her failed campaign for the nomination for governor and to pay for, among other things, her cosmetic surgery. On Monday, Jan. 10, Merle Temple, Jr., Schrenko’s top deputy and a co-defendant in the case, agreed to plead guilty and cooperate in the government’s prosecution. An article in the Atlanta Journal-Constitution states that Temple has agreed to pay a fine of $199,500, and will be sentenced on April 7. (ph)
Category: Prosecutions
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As discussed on the Sentencing Law & Policy Blog, a New York Times article (Jan. 10) reviews the plea deal former Connecticut Governor John Rowland agreed to right before Christmas (see post here) that included an admission to receiving unlawful gifts totaling approximately $107,000. According to the article:
[P]rosecutors wanted Mr. Rowland to admit to taking gifts worth at least $70,000, to bolster their case that the 15- to 21-month recommended sentence he faced as a public official under the guidelines was warranted. As long as that figure was reached, the lawyers said, prosecutors were willing to give Mr. Rowland leeway on which gifts to acknowledge as improper. At the same time, Mr. Dow sought to keep the figure below $120,000; even a tad more would have added three months to the recommended prison time.
In the end, the $107,000 compromise paved the way for the recommendation that Mr. Rowland receive a 15- to 21-month sentence, which Judge Dorsey can accept or increase or decrease.
The article also notes that Rowland drew Judge Peter Dorsey, who "has been challenged by prosecutors in the past for leniency." The plea agreement acknowledges that Rowland can seek to have his Sentencing Guidelines score reduced for his "minor role" in the offense and for extraordinary factors, including "unique financial circumstances and professional and individual community contributions." The agreement also permits Rowland to argue for a downward departure if the minor role provision is not applied. Interestingly, the plea agreement does not contain a 5K1.1 cooperation down departure provision. If Booker/Fanfan ends up declaring the Guidelines unconstitutional, Rowland’s sentence could be much less than the 15-21 month Guidelines range. (ph)
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A post on Jan. 5 (The "Honest-but-Ignorant CEO" Defense) discussed former Enron CEO Ken Lay’s defense against federal charges, including the use of a website www.kenlayinfo.com to get his message across. An article in the Houston Chronicle (Jan. 8) indicates that Lay is paying to have his website be a sponsored link on Google, AOL, and Yahoo whenever certain search terms are used. According to the article:
Put the search words "Enron scandal" or "Ken Lay," or even this Enron reporter’s name, "Mary Flood," into any of the above search engines and one of the first things you will see is www.kenlayinfo.com. If you hit on Lay’s Web site from there, then Lay pays between roughly 5 cents and 12 cents.
"I want people to understand Ken Lay’s position. I said that if we were going to do a Web site at all, do it so people can find it," said Lay’s Houston lawyer Mike Ramsey.
Give it a try. (ph)
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In the Jan. 5 post "The ‘Honest-but-Ignorant’ CEO Defense" that discusses the likely defense that will be offered by Ken Lay (Enron) and Richard Scrushy (HealthSouth), I neglected to include Bernie Ebbers to the list of former CEOs who will argue that they relied on subordinates to handle accounting issues. Ebbers, the former CEO of WorldCom (now MCI after the largest bankruptcy in history), is scheduled to go on trial in the Southern District of New York on Jan. 19, when jury selection starts, for securities fraud related to the company’s improper capitalization of expenses (now doesn’t that get the juices flowing). An article in the Wall Street Journal (Jan. 6) about the settlement of a civil securities fraud action by 10 former WorldCom outside directors also discusses the pending Ebbers trial. According to the article, "Mr. Ebbers, 63 years old, is expected to argue that he was never an accounting expert, and that he relied in good faith on those who were, including former Chief Financial Officer Scott Sullivan, who has pleaded guilty to fraud."
One aspect of the Ebbers trial that will be interesting is that, according to earlier reports, Ebbers completely avoided using e-mail to communicate with others in the company, which denies the government a source of information that has been a boon to its corporate fraud and obstruction of justice cases the past few years (e.g. Arthur Andersen, Frank Quattrone). Ebbers apparently refused to review written materials and only communicated orally with subordinates, not even using voice-mail. The usual paper trail in a fraud case may be missing here, and the trial could come down to whether the jury believes Sullivan or Ebbers. Ignorance without a paper trail may be bliss. (ph)
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There has been a major fight between McKesson Corp. and counsel for shareholder plaintiffs suing the company for securities fraud and various state law fiduciary duty violations over the contents of the company’s internal investigation report. The plaintiffs won the right to review the report in a California Court of Appeals decision, McKesson HBOC v. Superior Court, 115 Cal.App.4th 1229 (2003), which held that the company lost the right to claim the attorney-client privilege and work product protection because it turned over the report to federal prosecutors to avoid an indictment of the company.
The latest round in the fight will take place in the U.S. District Court in San Francisco, where former McKesson CFO Richard Hawkins is about to go on trial before Judge Martin Jenkins for securities fraud related to improper accounting that was the subject of the internal investigation. An article on Law.com (Jan. 5) reports that McKesson has requested that the trial be closed to the public–i.e. the shareholder plaintiffs counsel–for any discussion of the internal investigation report. The article states:
Hawkins’ former employer, which is not a party to the criminal case, wants to close Jenkins’ courtroom if witnesses discuss a controversial internal investigation. McKesson hired Skadden, Arps, Slate, Meagher & Flom to conduct the inquiry after allegations of corporate wrongdoing surfaced in 1999.
The Ninth Circuit has not yet ruled on the privilege waiver claim. Hawkins’ attorneys have received a copy of the report, and any exculpatory or impeachment information contained in it will certainly be used by his defense counsel. It will be interesting to see if the judge takes this rather unique (even radical?) approach to protecting the privilege of a non-party as balanced against the public trial right. The motion is scheduled to be argued on Thursday, Jan. 6. (ph)
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A front-page article in the Wall Street Journal (Jan. 5) gives a nice overview of the government’s prosecution of Ken Lay, the twice-former CEO of Enron. According to the article, and any number of statements by Lay, his defense at trial will be that he was ignorant of the wrongdoing occurring at Enron, and that any misstatements he made were the result of being deceived by subordinates and not done intentionally. As the article notes:
Yet despite Mr. Lay’s alleged misstatements, and the plentiful evidence that fraud pervaded Enron, it may not be easy for prosecutors to convict him. Some of the statements prosecutors have focused on are suspect on their face, such as when Mr. Lay in October 2001 apparently misstated the reason for a billion-dollar hit to Enron’s balance sheet. But others — such as giving a rosy assessment in the month before a quarterly earnings report and calling Enron stock a bargain — are much like the utterances routinely made by hundreds of corporate executives.
Lay has a website (www.kenlayinfo.com) that advances his position as an honest, upstanding member of the community, and it includes an attack on the government for its investigation of his wife, Linda, related to sales of Enron’s stock by a family charitable foundation for which she is the president. The "honest-but-ignorant" defense is similar to what Richard Scrushy has advanced to defend against fraud charges involving HealthSouth when he was CEO. Scrushy asserts he was mislead by, among others, all five CFOs that the company has had since it was formed (see Jan. 4 post "Will Scrushy Testify?").
The "pure heart/empty head" defense (or, "I’m an idiot") does not deny the misconduct, but instead seeks to avoid liability by showing that the government’s proof of intent is not sufficient to convict. The defense (or one of its many variants) is quite common in white collar crime cases. Whether it is successful or not is another question. A. Alfred Taubman offered the defense against price-fixing charges when he was Chairman of Sothebys, and after conviction served approximately 10 months in a federal correctional institution. In another case, United States v. Gellene, 182 F.3d 578 (7th Cir. 1999), the defendant (an experienced bankruptcy lawyer) testified that his apparently false statements during a bankruptcy proceeding were not made with the requisite intent and "[h]e called these conclusions ‘bad judgment’ and ‘stupid, but not criminal.’" It is often difficult for successful professionals to argue that they got to such high positions based on ignorance, but certainly not impossible even though it requires confessing to one’s own failings. (ph)
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The securities fraud, mail/wire fraud, and conspiracy trial of former Cendant CEO Walter Forbes and former vice-chairman Kirk Shelton ended in a split verdict on Jan. 4: Shelton guilty on all 12 counts, and a hung jury on the charges against Forbes. According to a New York Times story (Jan. 5),the jury deliberated for 33 days after hearing testimony for seven months. The case involved complex accounting issues related to inflated revenues, proper accounting of expenses, etc. Even with the length of the trial, 33 days to deliberate seems like a very long time, and it was not doubt excruciating for all involved. No word yet from the U.S. Attorney’s Office in New Jersey whether it will seek to retry Forbes, but given his high position in the company, the company’s settlement of shareholder lawsuits for $2.85 billion–the largest payment ever from a fraud case–and the possibility that Shelton might cooperate with the government in a retrial, it is more likely that there will be a second trial absent a plea bargain. (ph)
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New York Attorney General Eliot Spitzer’s office announced on Jan. 4 that it had secured the indictment of former Federated Department Stores CEO James Zimmerman for perjury during a deposition conducted by the AG’s office into possible antitrust violations in the distribution of tableware in New York City stores. According to a press release issued by Spitzer’s office:
Zimmerman intentionally offered false testimony in a sworn statement on April 9, 2004. Specifically, Zimmerman was asked whether he had called Sir Anthony O’Reilly, the Chairman of the Board of Waterford, Wedgewood, PLC, to dissuade him from selling Waterford products through Bed Bath & Beyond or to otherwise encourage him to pull out of the negotiations to do so.
Zimmerman repeatedly told the assistant attorney general taking the deposition that he had never discussed Bed Bath & Beyond in any way with anyone at Waterford, including O’Reilly. According to the indictment, Zimmerman knew that these denials were untrue.
(ph)
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One of our earliest posts (Nov. 2 here) discussed the beginning of the securities fraud and market manipulation trial of Anthony Elgindy and former FBI Agent Jeffrey Royer. Among other things, Royer is accused of feeding confidential information to Elgindy about companies being investigated by the FBI and SEC, which Elgindy used to short the stock of the companies and, allegedly, to extort money from others under the threat of publicizing the investigations, which would negatively affect their shares. An article in the New York Times (Jan. 4) discusses Royer’s cross-examination, in which he defended his disclosure of the information to Elgindy as a means of cultivating a source who could provide information about corporate fraud. The article states:
"I was interested in getting information back," said Mr. Royer, who was soft-spoken at first but grew more feisty as prosecutors continued with their cross-examination. He said he had no idea that Mr. Elgindy would use the information to sell stocks short, which involves borrowing shares in the hope that their price will fall.
Mr. Royer said that he thought that Mr. Elgindy’s network of contacts in the investment world could provide the F.B.I. with useful information, and that he showed Mr. Elgindy some confidential e-mail messages and other documents related to companies under investigation as a way of winning trust.
"By sharing information, I would allow law enforcement and regulatory authorities to shut down companies that scammed the general public. That is what I planned to do."
Other government witnesses, including FBI agents, have testified that Royer gained access to password-protected files and disclosed the information to Elgindy, and that Royer said he planned to work for Elgindy when he resigned from the FBI in 2001. It will be interesting to see if Royer’s explanation for his actions convinces the jury because he largely admits to disclosing secret information to Elgindy. It does not appear that Elgindy will testify. (ph)
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Will Richard Scrushy testify during his upcoming criminal fraud trial? That question is likely to be among the most important ones Scrushy’s defense team will have to help him decide as he prepares for trial. Particularly in high profile criminal cases, the defendant’s failure to testify can come back to haunt him or her when the defense is one of innocence and not just the lack of intent. A recent article by FindLaw Columnist Julie Hilden (available on CNN.com–Dec. 28) questions the decision by Scott Peterson not to testify at his murder trial. The same author argued in a different article (here) that Martha Stewart and her attorney (Robert Morvillo) made the right decision in not having her testify. The answer, of course, is that each trial (and defendant) is different, so the judgment in one case cannot be generalized. That said, jurors are frequently heard to comment on the defendant’s failure to testify as having been harmful to the defense case, especially when the defense is one of innocence.
According to a story in the Birmingham News (Jan. 2), Scrushy stated in an interview, "I am innocent . . . I am innocent and ready for the trial." Scrushy advanced the same position last year during the civil trial regarding the SEC’s request for a freeze of his assets, but he did not testify at that time on the advice of his attorney. At the criminal trial, however, the pressure will be much greater for him to testify, especially when so many former HealthSouth officers–including all five former CFOs–have entered guilty pleas and could be called to testify against Scrushy. It will be interesting to see whether the defense announces its intentions regarding whether Scrushy will testify when the opening statements are made, currently scheduled to begin on Jan. 18. (ph)
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