Allen Lengel of the Washington Post has an article titled, "Jefferson Accused of Two More Schemes." The article notes that this will not result in additional charges, but rather additional evidence at the trial.
(esp)
Category: Prosecutions
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Amy Koltz at the American Lawyer has an article titled, A Jury Without Peer, that places you in the jury room during the decision-making process of the trial of AOL employees. It is truly an extraordinary piece, detailing the reactions of lay jurors to a white collar case. It is an excellent read for what works and what does not work in these cases. Most important is that it emphasizes the need for professionalism and that credibility of the case may rest on the how the prosecution handles its deals, its presentation of evidence, and the courtroom presentation. One has to respect the jury in this case.
(esp) (w/ a hat tip to Attorney Hank Asbill)
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An interesting article from the Fulton County Daily Report (available on Law.com here) discusses the persistent problems e-mails present in cases. While the article largely focuses on employment discrimination cases, the point is equally applicable to white collar crime investigations in which e-mails continue to play such a prominent role. One e-mail discussed began, "This is off the record" — except, of course, anything in an e-mail is definitely preserved and forever on the record. According to the writer, "The ‘send’ button — together with its evil cousins, ‘forward’ and ‘reply all’ — are causing a world of trouble for corporations as they connect to evidence in legal proceedings and create a new mess for in-house lawyers to clean up."
Who among us hasn’t regretted hitting the send button on an e-mail, as former New York City Police Commissioner and erstwhile nominee to head the Department of Homeland Security Bernie Kerik has discovered in his indictment (here) on corruption, mail/wire fraud, tax, and false statement charges. How do I segue from e-mail to Kerik? The indictment quotes an e-mail he sent in July 1999, shortly after a meeting Kerik had with City officials in which he defended the bona fides of a company seeking a contract, allegedly in exchange for $255,000 in renovations to his Bronx apartment. Kerik complained about being on "welfare" compared to "John Doe #3" who worked for the company whose virtues he extolled, and then bemoaned the fact that there was still "A b***s*** $170,000., [sic] I had to beg, borrow and [expletive] for the down payment and I’m still [expletive] over the $5,000. [sic] I need for closing." [NB: we’re still a family-friendly blog, so naughty words are edited.] Needless to say, the e-mail may be a bit hard to explain.
The Kerik indictment has tax charges that include a claim he did not properly report the "nanny tax," which is the second time now that this has shown up in a criminal indictment (see earlier post here for the first case with a "nanny tax" charge, also in the SDNY). A handy chart provided by the U.S. Attorney’s Office (here) outlines the basis for the tax counts. The corruption charges are based on the right of honest services fraud, and there are a number of false statement counts related to Kerik’s abortive nomination to be Secretary of DHS, including false statements to White House officials and on federal financial disclosure forms. (ph)
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Embezzlement is bad enough, and when it involves the theft of tax money, the corruption overlay just spreads the harm even further. Two officials in the Washington, D.C. real property tax office were arrested for stealing approximately $16 million through bogus tax refunds that were directed to straw accounts maintained by three other defendants also charged in the case. The charges are mail fraud, bank fraud, money laundering, interstate transportation of stolen property, and conspiracy. According to a press release (here) from the U.S. Attorney’s Office:
The District of Columbia tax code imposes property taxes on real estate in the District and provides a mechanism for property tax refunds when, for example, an individual or company overpays real estate taxes. According to the affidavits filed in support of the arrest and search warrants, from 2004 through the present, Harriette Walters, Diane Gustus, and other D.C. government employees were involved in preparing or approving fraudulent property tax refund requests to generate over 40 separate fraudulent refund checks averaging over $388,000 each. Those fraudulent tax refund checks were deposited primarily into sham corporate accounts controlled by Harriette Walters’s relatives, including Turnbull’s “Chappa Home Services” and “Legna Home Services” accounts, and Richard Walters’s “Helmet Plumbing and Heating” account.
The fraudulently obtained funds then allegedly were distributed through cash, cashier’s checks, and wire transfers to the co-conspirators and family members, who used the funds to purchase homes, vehicles, jewelry, luxury clothing and houseware items, and other real and personal property, among other things. For example, it is alleged that between September 2000 and the present, Harriette Walters spent more than $1.4 million at Neiman Marcus. Additionally, the affidavits allege, some of the money stolen from the District of Columbia has been sent to a money exchange institution in the Dominican Republic that has no bank branches in the United States.
$1.4 million at Needless Markup?! Now that’s a spending spree. According to the Washington Post (here), the search turned up a receipt for a handbag purchased for $26,000, although it has not been located yet.
The Post article notes that the investigation is continuing, and others in the real estate tax office may have had some involvement in the scheme, or at least an inkling of what was going on, because they received lavish gifts from the two officials. Even worse, while the investigation to this point has identified improper tax refund checks from 2004, there’s a chance that the scheme began as far back as 2000, so the loss to the D.C. government may be even worse. That’s an awful lot of money to skim off without anyone noticing for over three years, especially in these days of tight government budgets. (ph)
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The media is quoting unnamed government sources that former New York City Police Commissioner Bernard Kerik is likely to be indicted by a federal grand jury on bribery and tax evasion charges, with an arraignment to occur on Friday, November 9. Kerik was briefly nominated to head the Department of Homeland Security in 2004 before withdrawing from consideration due to "nanny tax" issues. The charges relate to a $240,000 renovation of his Bronx apartment in 1999 — pretty swanky for that part of town, but then nothing is cheap in New York — that was allegedly paid for by contractors seeking his help in obtaining city contracts. An AP story (here) notes that Kerik agreed earlier to extend the statute of limitations on the charge, and that waiver expires on November 15, so the indictment will come shortly if there is to be charges. (ph)
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U.S. District Judge Amy St. Eve denied the request of Lord Conrad Black and his three co-defendants to acquit them of all charges for which they were convicted in July 2007, although she did grant the motion for one charge for one defendant. The Judge issued an opinion (available below) finding sufficient evidence for the three mail fraud convictions related to two transactions in which Hollinger International sold newspapers and the defendants received non-compete payments that were not fully disclosed. In addition, she upheld Lord Black’s conviction for obstruction of justice when he tried to remove documents from his office in Toronto that had been subpoenaed by the SEC and were the subject of an Ontario court order prohibiting him from taking the records. Hollinger’s former general counsel was acquitted on one mail fraud charged, with Judge St. Eve finding the prosecution’s evidence, primarily from former Black lieutenant David Radler, actually showed he had no involvement in the payment or any intent to defraud. The mail fraud counts involve both money/property and right of honest services theories, and the latter will be subject to challenge on appeal. The defendants’ new trial motions were also denied
With the acquittal (and new trial) motions out of the way, the final step will be the sentencing of the four defendants, currently scheduled for November 30. Judge St. Eve asked the parties to submit their views on what version of the Federal Sentencing Guidelines should be applied in the case — the 2000 edition, which was in effect when the mailings occurred, or the current 2007 edition. This is an important issue because of the impact it will have on calculating the Guidelines sentence recommendation. Because the Guidelines are now advisory after Booker, the Seventh Circuit allows a trial judge to use the current version if that results in a reasonable sentence, without concerns about ex post facto issues because the Guidelines are no longer mandatory.
Lord Black submitted a brief (available below) that highlights the differences between the two sets of Guidelines, assuming the loss calculation is based on the total amount of the payments in the counts of conviction. In 2001 and 2003, there were substantial increases in the enhancements for losses from fraud and for convictions of executives of publicly-traded companies. Under Lord Black’s analysis, the difference on those two issues alone is eight levels, which means the sentence could go from 33-41 months under the 2000 version to 78-97 months under the 2007 version. Needless to say, the prosecutors argue for the current edition of the Guidelines (brief available below).
The parties have not yet filed their briefs on the recommended sentence that the Probation Office will submit, so its too early to tell the likely sentences each side will propose, and any grounds for departures. I expect the government to seek at least eight years for Lord Black under the Guidelines, and to argue for an upward departure based on the obstruction of justice and abuse of his position as CEO of Hollinger. Lord Black and the others are likely to seek a downward departure from the Guidelines calculation, and probably will ask for probation or a split sentence, perhaps a double-nickel (five months in prison, five months home confinement).
Another issue Judge St. Eve will have to decide is whether to grant the defendants bail pending appeal. Her opinion makes it clear that she does not see any problems with the convictions, rejecting all of the defense arguments on sufficiency and evidentiary issues. That may signal a denial of bail, but it remains to be seen. (ph)
Download us_v_black_opinion_acquittal_motion_nov_5_2007.pdf
Download us_v_black_sentencing_guidelines_brief_black_nov_5_2007.pdf
Download us_v_black_sentencing_guidelines_brief_us_nov_5_2007.pdf
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The prosecution of former Brocade HR vice president Stephanie Jensen for options backdating seems to be on the South Beach diet. Prosecutors disclosed they planned to drop four charges from the original indictment, after earlier dismissing two others, so that she will only face two counts at trial. Earlier, the company’s CEO, Gregory Reyes, was convicted on ten counts related to his role in the backdating, including securities fraud and conspiracy. Jensen was indicted along with Reyes in August 2006, but U.S. District Court Judge Charles Breyer granted her severance motion, and trial is set to begin with jury selection on November 19.
In its Pretrial Conference Memorandum (available below), the government disclosed that it planned to drop three counts of making a false filing with the SEC and one count of securities fraud. It earlier dismissed two mail fraud counts that included a right of honest services component, no doubt to avoid a defense argument relying on the Fifth Circuit’s decision in U.S. v. Brown rejecting the application of the right of honest services theory when the defendant believes she is assisting the company. The remaining charges are conspiracy and falsification of Brocade’s books and records. The latter charge is the narrowest in the original indictment, requiring no intent to defraud or mislead, only an intent that the corporate books be inaccurate.
In its memorandum, the federal prosecutors outlined their basic theory for Jensen’s liability: "Jensen oversaw and directed the process by which the earlier date was selected, presented to Reyes, and recorded in the company’s corporate records. She also oversaw and directed the process by which other personnel records were falsified. Reyes signed committee minutes falsely stating that the decision to grant options had been made on the earlier date when the price was lower."
Whether the pared down case succeeds remains to be seen. The severance allows Jensen to claim that she acted on Reyes’ orders and that he was responsible for the proper recording of the options grants — an "empty chair" defense. She can also argue that she was unaware that the backdating was not properly recorded in Brocade’s books and records — an ignorance defense. Unlike the CEO of a company, who can be expected to understand the requirements for SEC financial reporting, a lack of knowledge claim from a lower-level executive may have a greater chance of succeeding. The conviction of Reyes for the same conduct certainly is not helpful to the defense, but the cases may play out differently so prior performance is not an indication of future returns, as the mutual fund companies like to warn.
With the government’s case-in-chief set to start on November 26, Reyes’ sentencing originally scheduled for that day will be postponed until after the conclusion of the second case. The Jensen trial may take as long as two weeks, although the government claims it may complete its case-in-chief in three or four days. Remember the rule of thumb whenever a litigator gives an estimate for how long it will take to put on a case: multiply by two. (ph)
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The American Lawyer has a detailed article (here) What’s Behind the Drop in Corporate Fraud Indictments describing what it calls the decline in prosecutions of corporations and senior officers for fraud since the heyday of the President’s Corporate Fraud Task Force. The article and a supporting spreadsheet (here) provides a detailed look at corporate prosecutions since 2002, when the Task Force came into existence shortly before Congress passed the Sarbanes-Oxley Act, the symbol of the government’s response to the collapse of Enron, WorldCom, and Adelphia Communications amidst allegations of accounting fraud. The analysis provides the most comprehensive listing of prosecutions of companies and their executives that I have seen, including information about sentencing and appellate dispositions of cases.
One of the core findings is the drop in corporate fraud prosecutions, particularly since 2004:
Perhaps the most curious of our findings — and one not highlighted by the Department of Justice — is the precipitous decline in the number of major corporate fraud indictments in the two years since the re-election of President Bush. After issuing detailed reports in 2003 and 2004, the task force stopped reporting on its efforts in 2005, just as corporate fraud indictments slowed to a trickle. Our analysis shows 357 indictments in major corporate fraud cases between 2002 and 2005. But only 14 indictments were identified by the Justice Department as significant corporate fraud cases in 2006. There have been only 12 major corporate fraud cases indicted so far in 2007.
There are any number of reasons for the decline, and I doubt there is one single "cause" for the slowdown in these types of cases. One explanation offered by the former U.S. Attorney for the Central District of California takes the "when life gives you lemons make lemonade" approach: the Task Force was so successful that there is no more corporate fraud, at least not on the scale seen a few years earlier. A more plausible explanation is the almost natural ebb-and-flow to cases in a particular area, be it corporate fraud or drug prosecutions. Companies change in response to the marketplace, be it products or prosecutors, and so are acting differently. That doesn’t mean they will stay out of trouble forever.
Perhaps more imporant is the decline in the number of federal prosecutors devoted to corporate crime investigations, which place significant demands on the resources of U.S. Attorney’s offices. With budget resources devoted to the war in Iraq and Afghanistan crimping other departments, and the focus on new prosecutorial initiatives, such as child pornography and terrorism, something has to give and corporate crime is an easy place to cut back when there are no spectacular bankruptcies grabbing the media’s attention. Without the manpower, cases can languish, which is especially difficult in this area because corporate fraud cases are not known for their timeliness. Filing a case about transactions involving technical accounting issues that occurred in a few years earlier just doesn’t leap off the page and demand attention.
When there are fewer resources committed to the area, the pressure to bring cases may actually decrease because it is not as stylish or important to an assessment of an office’s effectiveness. Moreover, the cases remaining from a few years ago are no longer the "low-hanging fruit" and may be just too difficult to prove without a commitment of significant resources. Recent media reports indicate that a criminal investigation of accounting fraud at bankrupt auto parts maker Delphi ended with no criminal charges, a result that might not have occurred a few years ago when there was much more pressure to bring cases.
While the American Lawyer focuses on the decline in corporate fraud prosecutions, that does not mean there is a decrease in cases in other areas that fall within the "big tent" of white collar crime — we are a welcoming niche. Prosecutions under the Foreign Corrupt Practices Act are increasing, not declining, and the globalization trend probably means this will be a growth area. [NB: For those interested in the FCPA, please be sure to check out the FCPA Blog (here), which provides outstanding coverage in this area.] Antitrust prosecutions, especially for international price fixing, have not slowed over the past couple years, and the Antitrust Division’s corporate amnesty policy — first company in the door gets immunity — seems to work in this area. The FBI has announced that public corruptioin is a top priority, and the number of Congressmen and Senators under investigation, indictment, or imprisoned recently is staggering. I doubt anyone is predicting a decline in healthcare fraud investigations, as the recent search at WellCare shows, and the Milberg Weiss prosecution may portend further scrutiny of class action law firms.
Finally, CEOs remain the target of government investigations, and I think that will continue in the future, even if prosecutions of corporations declines. Former Collins & Aikman CEO David Stockman, former ESS Inc. CEO Michael Shanahan, and former Comverse CEO Kobi Alexander are among the corporate chiefs facing charges — maybe not Alexander if he can avoid extradition from Namibia. Regardless of priorities, a case involving the CEO of a public company will be a focus for the Department of Justice, and the resources necessary will be committed to these cases, in all likelihood.
Having seen the aftermath of the collapse of the banking industry up close in the early 1990s, and watching the corporate accounting and backdating cases develop over the past few years, I believe we will see another round of corporate scandals and prosecutions in the next few years. I wish I knew where it would come from, and the continuing collapse of housing prices may give us a hint. (ph)
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BP plc settled three government investigations by agreeing to pay a total of $373 million in fines, restitution, and civil penalties. The company pleaded guilty to a violation of the Clean Air Act, a subsidiary pleaded guilty to a violation of the Clean Water Act, and another subsidiary agreed to a deferred prosecution agreement on a charge of conspiracy to violate the Commodity Exchange Act (CEA). According to a Department of Justice press release (here), the payments include:
$50 million in criminal fines to be paid as part of an agreement to plead guilty in the Southern District of Texas to a one-count felony violation of the Clean Air Act. The agreement resulted from the prosecution of BP by the Department of Justice for a catastrophic explosion that occurred at the BP Texas City refinery on March 23, 2005, that killed 15 contract employees and injured more than 170 others;
$12 million in criminal fines, $4 million in payments to the National Fish and Wildlife Foundation, and $4 million in criminal restitution to the state of Alaska, as part of an agreement to plead guilty by British Petroleum Exploration (Alaska), Inc. (BPXA) to a violation of the Clean Water Act to resolve criminal liability relating to pipeline leaks of crude oil onto the tundra as well as a frozen lake in Alaska;
A criminal penalty of $100 million, a payment of $25 million to the U.S. Postal Inspection Consumer Fraud Fund, and restitution of approximately $53 million, plus a civil penalty of $125 million to the Commodity Futures Trading Commission, as part of an agreement to defer the prosecution of a one-count criminal information filed in the Northern District of Illinois charging BP America Inc. with conspiring to violate the Commodity Exchange Act and to commit mail fraud and wire fraud.
The deferred prosecution agreement calls for the appointment of a monitor for three years to oversee the company’s compliance with its terms and to ensure no future violations of the CEA. In addition to the charges against BP, four former commodities traders at its BP America subsidiary were charged in a twenty-count indictment (here) with conspiracy, violations of the CEA, and wire fraud. According to the press release, the traders conspired
to manipulate and corner the TET propane market in February 2004, in violation of the Commodity Exchange Act, and to sell TET propane at an artificially inflated index price in violation of the federal mail and wire fraud statutes. The indictment further charges the defendants with substantive violations of the Commodity Exchange Act and the wire fraud statute. According to the proposed indictment, from Feb. 5, 2004, through March 15, 2004, the defendants allegedly agreed to manipulate the market for February 2004 TET propane.
(ph)
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The former CEO of military armor supplier DHB Industries, now known as Point Blank Solutions, was arrested on a superseding indictment (available below) that charges him with insider trading involving proceeds of over $185 million from the sale of company stock in 2004. Also named as a defendant is the the former chief operating officer of the company, who was indicted initially back in August 2006. In addition to the insider trading, the indictment charges obstruction of justice, lying to company auditors and to the SEC, tax evasion, and accounting fraud involving undisclosed compensation and overstated inventory. According to a Wall Street Journal story (here), the diversion of company resources for personal benefits included:
more than $350,000 in expenses related to Mr. Brooks horse business; more than $36,000 expenses related to his son’s Bar Mitvah; $11,420 for acupuncture treatments for his family members; $7,900 for a face lift for his wife; $10,000 for his children’s summer camp; $122,000 for the purchase of iPods and digital cameras to give as gifts at his daughter’s Bat Mitzvah; and $101,500 for the purchase of an armored vehicle for Mr. Brooks and his family members’ personal use.
The party for his daughter was broadcast as part of MTV’s "My Sweet Sixteen" series, a favorite in my house. The indictment also alleges that over $1 million of DHB money was used for family vacations, ranging from $100,000 for a trip to St. Johns to $3,200 on meals and merchandise at the Bellagio in Las Vegas. In addition to the criminal charges, the SEC filed a civil enforcement complaint (here) in the U.S. District Court for the Southern District of Florida. (ph)
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