The long prosecution of former Adelphia Communications executives John and Timothy Rigas appears to be coming to an end as the federal judge presiding over their case has given them an August 13 reporting date to begin their prison terms. John was CEO of Adelphia, and his son Timothy was CFO. They were convicted in 2004 on a number of fraud and conspiracy charges related to the accounting at the company, which the Rigas family controlled even though it was publicly traded. The sentencing did not take place until 2005, and the Second Circuit largely rejected their appeal in May 2007, upholding all the counts of conviction except one. John received a fifteen-year prison term and Timothy received twenty years, among the most severe sentences in corporate fraud cases. The two have remained free on bail pending appeal, but with the convictions affirmed and little prospect of a successful appeal to the Supreme Court — none of the issues appear to be particularly noteworthy — the judge determined that the time had come to report to the Bureau of Prisons and begin the sentences. John is now 82-years old and has been ill, so it is unlikely he will serve a significant portion of the sentence. With the case nearly concluded, it brings to a close the prosecution from one of the spectacular corporate bankruptcies in 2001-2002 that garnered so much attention. An AP story (here) discusses the judge’s order. (ph)
Category: Prosecutions
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After a week of closing arguments, U.S. District Judge Amy St. Eve will give the jury their instructions and then send them off to consider the fate of Lord Conrad Black and three other former executives of Hollinger International Inc. on a variety of charges. The instructions (available below) outline the elements of the various charges and possible defenses, including most importantly the issue of intent. The court will give the following instruction on the knowledge element of the fraud offenses, which is a key to the case because it contains the deliberate ignorance or "ostrich instruction" [in italics]:
When the word “knowingly” or the phrase “the Defendant knew” is used in these instructions, it means that the Defendant realized what he was doing and was aware of the nature of his conduct, and did not act through ignorance, mistake or accident. Knowledge may be proved by the Defendant’s conduct, and by all the facts and circumstances surrounding the case.
You may infer knowledge from a combination of suspicion and deliberate indifference to the truth. If you find that a Defendant had a strong suspicion that criminal conduct was occurring, yet intentionally shut his eyes for fear of what he would learn, you may conclude that he acted knowingly, as I have used that word. You may not conclude that a defendant had knowledge if he was merely negligent in not discovering the truth.
The italicized portion is sure to generate a ground for appeal if any of the defendants are found guilty on one or more of the fraud counts.
How long will the jury be out? This case involves a number of disparate charges, and one particularly complex count: RICO. The fraud counts cover both the non-compete payments, along with the related SEC disclosures, and the "perks" counts against Lord Black. Those charges form the basis for the RICO charge, which requires the jury to determine whether there is a pattern of racketeering activity and the operation or control of an enterprise, which will require additional considerations beyond just the underlying fraud allegations. There are also tax counts and, for Lord Black, an obstruction of justice charge. Add in the fact that there are four defendants with different levels of involvement in the underlying decisions, and that’s a recipe for a fairly long deliberation. When you consider that the Fourth of July holiday will come just a week after the jury retires, it would not surprise me to see them remain out over two weeks, with the possibly of very long deliberations. This is a lot like watching paint dry, or perhaps a cricket match — very little action, and no way to predict when there will be a resolution. (ph)
Download us_v_black_final_jury_instructions_june_25_2007.pdf
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DOJ has clearly been a place making the news with individuals in top positions leaving office. (see here) But normally a change of personnel would not affect the level or quality of prosecutions, as so many in the office are career individuals. One has to wonder if this is the case this time, as new statistics on public corruption prosecutions show a marked drop from the prior month for the month of February. According to the TRAC reporting system the number of February 2007 prosecutions was down 21.3% from the prior month. And from the prior year we’re taking a 12.1% decrease. Although the convictions for this month was down only 4.8%, this number will have to increase if the number of people being charged with these crimes decreases. It is hard to believe that people are being less corrupt, especially in government positions. Yet, with the statistics showing this decrease, one can only assume that either people are being less corrupt, or the DOJ is no longer prosecuting this conduct at the same level.
(esp)(w/ disclosure that she received her B.S. from Syracuse U. – the home of the TRAC reporting system)
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The government’s brief (available below) in opposition to the motion to dismiss filed by the former KPMG partners and employees in the large tax shelter prosecution is not so much an opposition as it is an acknowledgment of the reality of crafting a remedy for the constitutional violations found by U.S. District Court Judge Lewis Kaplan. While it may come as a surprise that the government supports the defendant’s argument in favor of dismissal, the brief acknowledges the reality of Judge Kaplan’s finding that the denial of attorney’s fees by KPMG in response to government pressure constituted a violation of the defendants’ Sixth Amendment rights. In his opinion (available here), Judge Kaplan found that the Sixth Amendment violation was "structural," which means that the prejudice to the defendants cannot be remedied short of dismissal.
The government still contests Judge Kaplan’s analysis, but concedes that if it is correct, then the only alternative authorized by the Supreme Court for such a violation would be dismissal if KPMG cannot be compelled to pay the attorney’s fees. The Court’s recent decision in U.S. v. Gonzalez-Lopez, 126 S.Ct. 2557 (2006), requires automatic reversal of a conviction for denial of the right to counsel of choice, a type of "structural" error, and the district court found that the Sixth Amendment violation for the KPMG defendants rested on the same constitutional protection. Prosecutors did not accept the Judge’s invitation to offer other remedies because they could not find any that would redress the violation. Any remedy short of dismissal would not correct the "structural" violation of the defendants’ rights found by Judge Kaplan, and therefore a conviction would have to be reversed. The brief states:
Given the logic and express holdings of the Court’s decision in Stein I, and given (i) the ruling by the Court of Appeals on the ancillary jurisdiction question and (ii) the fact that KPMG steadfastly declines to pay the defendants’ fees, it is difficult to understand how anything short of dismissal of the Indictment would suffice. The Court has held that the defendants’ Fifth and Sixth Amendment rights have been infringed and that those violations have led to “structural error,” and the remedy that the Court hoped would restore the defendants “to the position they would have occupied but for the government’s constitutional violation” has not come to pass. If the Court’s analysis and holdings in Stein I are correct — and we respectfully submit that they are not — on appeal “a per se rule of reversal [would apply] following any trial and conviction, when a structural error is present at trial, even if the record contains overwhelming evidence of guilt.” United States, 106 F.3d 450, 454 (2d Cir. 1997).
While it is clear that the government wants to appeal the case to the Second Circuit — it appears to be champing at the bit to do so — its brief does not misconstrue the cases or seek to mislead the court in order to obtain appellate review. The brief disputes the defense argument that dismissal is appropriate for "outrageous government conduct," and instead limits the argument in favor of dismissal to the Sixth Amendment violation. Moreover, it only recommend dismissal for twelve of the eighteen defendants, noting that the other six do not have a valid claim against KPMG for attorney’s fees so there would not be a violation of their right to counsel triggering dismissal. The logic of Judge Kaplan’s decision on the constitutional issues does not leave much room for any other remedy once the Second Circuit rejected his proposed claim procedure against KPMG (see earlier post here). If granted by Judge Kaplan and upheld by the Second Circuit, the dismissal would impose a significant cost on the government for its transgressions in pursuing the case. (ph)
Download us_v_stein_government_opposition_june_22_2007.pdf
UPDATE: A couple readers sent e-mails asking how the government can appeal a decision to dismiss that it appears to be agreeing to. The government’s brief makes clear that, in its view, the only permissible remedy for the Sixth Amendment violation is dismissal of the indictment by the court, but the government is not conceding that the basis for that remedy is correct. Under 18 U.S.C. Sec. 3731: "In a criminal case an appeal by the United States shall lie to a court of appeals from a decision, judgment, or order of a district court dismissing an indictment or information or granting a new trial after verdict or judgment, as to any one or more counts, or any part thereof, except that no appeal shall lie where the double jeopardy clause of the United States Constitution prohibits further prosecution." If Judge Kaplan orders the indictments dismissed, it will not be with the government’s acquiescence except to the extent prosecutors acknowledge it is the only — or perhaps best — remedy. This is not a case of a voluntary dismissal under Rule 48(a), and the government remains opposed to the remedy even though dismissal would allow it to appeal, which it probably wants very much to do. This is one of those funny little procedural technicalities, because if Judge Kaplan refuses to dismiss the indictment, the defendants cannot appeal that decision under the collateral order doctrine. (ph)
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Check out the Wall Street Jrl here discussing the recent move by prosecutors to request the court dismiss some of the cases against KPMG executives. Would prosecutors really seek dismissal of cases to secure the tactical advantage of having the matter finalized for appeal? And if that is the case, should prosecutors be held to the same standard as defense counsel who are forced in many cases to make tactical decisions that can jeopardize an entire case (e.g. deciding whether the client will testify). Should the dismissals be with prejudice – after all – how much in attorney fees should the defense have to pay (that is if they do have to pay in the final resolution of the attorney fee question)?
(esp)
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BusinessWeek has an interesting article (here) about a developing criminal investigation related to the stock lending practices at some of Wall Street’s leading brokerage firms, including Morgan Stanley. The case involves possible kickbacks and other gratuities to employees who work in the stock loan departments of the firms from middlemen who help obtain shares as part of a shorting strategy in which borrowed shares are sold in the hope that the price will decline when the shares are repurchased at a later date. For those who like to play craps, it’s a bit like betting the "don’t come" line, and the strategy is not one that endears practitioners to other investors, most of whom are "long" on stocks. With the growth of large funds that use shorting to "hedge" their positions — hence the term "hedge fund" — there has been a corresponding increase in the demand for shares. The short interest ratio on the exchanges has hovered near an all-time high, and those shares have to come from some place.
It’s not a great stretch to hear that some may have viewed such a situation as an opportunity to line their own pockets while their employers reaped lucrative fees from the business. Who gets hurt anyway, a bunch of rich hedge fund managers and even wealthier investors? An interesting question is how any such criminal charges will be framed, whether as a type of securities fraud or based on the right of honest services route with mail and wire fraud. The article notes that there are already three defendants who are cooperating, so look for a big media splash in the near future. Prosecutors in the Southern District of New York are probably hoping this investigation turns out better than the recent round of charges against floor brokers for alleged front-running that resulted in a number of acquittals and voluntary dismissals. (ph — thanks to YMH for the "tip")
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There’s an old saying in the NFL that "it’s not holding if you don’t get caught." A variation of that adage came up in the prosecution of former Brocade CEO Gregory Reyes for options backdating when a former human resources employee testified that Reyes once stated, "It’s not illegal if you don’t get caught." While the witness could not recall the circumstances of the comment, she did say that the only conversations she had with Reyes concerned the dating of options grants, leading to the inference — at least the government will argue — that he knew the backdating was illegal. A key component of the defense case is the lack of intent to defraud by Reyes, and that the accounting rules on options were so unclear he did not understand them. According to a blog entry on the CAL LAW Legal Pad (here), U.S. District Judge Charles Breyer rejected a defense argument to prevent the witness from recounting the statement because prosecutors had not previously disclosed it, and asked that the examination be curtailed. Judge Breyer stated, "I’m not going to rein in anything. I’m not the ringleader of a three-ring circus.”
Judge Breyer’s decision highlights an important point about the scope of discovery in a federal criminal case. The prosecutors said they first learned of the witness’ recollection about Reyes’ statement during pre-trial preparation, and there was no written record of the interview because it was only with the prosecutor and not with an FBI agent, who would likely write up notes of the interview in a Form 302 report. The government’s Brady obligation is to turn over exculpatory evidence, and Reyes’ purported statement is certainly not in that category, being rather inculpatory. Under the Jencks Act, now in Rule 26.2, the government must turn over a witness statement, but Rule 26.2(f) defines a "statement" to include only a written statement, a substantially verbatim recital or recording of an oral statement, or a statement in the grand jury. While a defendant might wish to know the inculpatory evidence the government intends to introduce, the disclosure obligation in Rule 16 is not so broad that all relevant evidence must be disclosed before trial. Because the witness’ recollection did not fall within any of the categories triggering one of the clear disclsoure obligations, the government was within its rights not to disclose it to the defense, unless a court were to find that it violated the defendant’s due process right due to unfair surprise. The Legal Pad entry notes that Reyes’ defense counsel asserted that the Ninth Circuit has shown a tendency to reverse convictions in similar situations, to which Judge Breyer replied, "That comes with the territory.”
The witness’ testimony is, of course, highly prejudicial to the defense, but that’s hardly a reason to keep out a statement made by the defendant who contests the allegation that he acted with an intent to defraud. Moreover, the statement could be a basis for the court to give an "ostrich instruction" so that the jury can infer the requisite intent based on Reyes being aware of the problems with options backdating but turning a blind eye to them. As discussed in an earlier post (here) about the instruction in the trial of Lord Conrad Black, the deliberate ignorance instruction can be very helpful to the prosecution by effectively lowering the intent element for the offense.
Another interesting question is whether this testimony will be enough to cause Reyes to testify. Even though the context of the statement is not clear, such an assertion is not the type of thing a defense lawyer wants hanging out there unchallenged because the government will make it a featured part of its closing argument. If Reyes intends to dispute having ever said anything about illegal conduct, or claims that it was just a joke or unrelated to the backdating of options, he would most likely need to testify. This could be one of those uncommon "he said-she said" situations in a white collar crime case in which the defense cannot dispute the statement without calling the defendant to testify. That decision, of course, is fraught with any number of risks, but the witness’ testimony about what she recalls Reyes said increases the pressure on him to take the witness stand. (ph)
UPDATE: Reyes’ lawyers apparently missed the witness’ statement in notes the government turned over prior to trial, and so the defense dropped the claim that the government violated its disclosure obligation or that the testimony constituted unfair surprise. That left the defense to argue that the testimony was inadmissible because it was vague regarding the context and prejudicial, which Judge Breyer rejected. An appellate issue just got a lot less important if Reyes is convicted. A story in The Recorder (here) discusses the testimony. (ph)
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The prosecution of Lord Conrad Black and three other defendants has reached the final argument stage, when pithy phrases are tucked into seemingly endless discussions of the details of the case. Lord Black’s attorney, Edward Genson, completed his closing by going into a second day that reiterated themes set forth in the opening, such as "Being wealthy doesn’t make you a bad man" and "He is a little bit of a stubborn man but an innocent man." Unlike television shows, which make closing arguments appear to be little more than soundbites that take only a few minutes to summarize the case, this one promises to stretch into a second week of listening to the lawyers for the four defendants and the federal prosecutors, according to a Chicago Tribune story (here). Then come the jury instructions, which could well take most a day to deliver to the jurors. Only then might peace and quiet reign as everyone waits for the jury to return its verdict. (ph)
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The backdating cases opened with the trial of Gregory Reyes, the former CEO of Brocade Communications. Justin Scheck reports at the Recorder, on Law.com, on how intent will be key defense argument. This argument is coupled with a claim of reliance on others – the accountants. With intent inferred from the circumstances, this can be a difficult position to maintain. But this case may be unique in that these practices are difficult to understand. Will the jury be confused enough to appreciate that a defendant might rely on others to handle these matters? Will they find that the backdating was not done with a fraudulent intent?
(esp)
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The prosecution finished its initial closing argument and the defense is now before the jury box. After they finish, the government will get to respond as they have the burden of proof. As suspected, a key focus is on the credibility of the government cooperator – David Radler. When the government offers enormous benefits to a cooperator in return for his or her testimony, the testimony becomes suspect. But whether the jury will appreciate the benefits a witness receives for his or her cooperation is an unknown. Equally unknown is the veracity of the individual testifying when they face severe consequences if they fail to provide government cooperation. Now clearly the government demands that the testimony be truthful – but the decision of the truthfulness is left to the individuals in the jury box. See WSJ, Chicago Tribune
(esp)
MattBray.net 