The Department of Justice’s decision to enter into a deferred prosecution agreement with Frank Quattrone may signal that this device will be used in a broader array of white collar cases and not just for corporations. An article in the Wall Street Journal (here) discusses the developing use of these agreements in investigations of corporate crime, and how they have achieved a featured position in the resolution of a variety of cases. A key benefit to a deferred prosecution agreement is that the collateral effects from a criminal case are limited. Blog co-editor Ellen Podgor is quoted in the article, and notes that in many industries, such as health care and military contracting, an indictment can be the death knell for a company because it is cut-off from future business. It will be interesting to see if cases involving individuals will be resolved by deferred prosecution agreements, and what the parameters of those agreements will look like. (ph)
Category: Prosecutions
-
Remember when Lee Iacocca was trying to save Chrysler by initiating the first rebate program with the tag-line, "Buy a car, get a check"? After entering into a deferred prosecution agreement that will result in the dismissal of all charges after one year, former star investment banker Frank Quattrone may be looking at a $120 million payday if he can keep his nose clean. The Wall Street Journal Law Blog (here) discusses a report that Quattrone entered into an agreement with Credit Suisse (former Credit Suisse First Boston, or CSFB) when the left the firm at the time of his indictment that if he were cleared of the charges he would receive $120 million worth of restricted stock and deferred compensation awarded to him while he led its high tech investment banking group. The terms of the deferred prosecution agreement (here) are not particularly onerous, requiring that Quattrone "refrain from violation of any law (federal, state, and local)" and that he "shall associate only with law-abiding persons." With $120 million waiting at the end of the year, Quattrone’s car will be easy to identify in the Bay Area — it will be the only one driving one mile per hour under the speed limit on 101, and it may even be made by Daimler-Chrysler. (ph)
-
Martin Armstrong has spent almost the entire 21st century in jail, having been sent there in January 2000 because he was found in civil contempt for refusing to turn over assets in an SEC securities fraud action. Armstrong was a money manager who founded Princeton Economics International, and he was accused in parallel criminal and civil cases of defrauding Japanese investors of over $700 million. Despite repeated attempts to get out of jail on the ground that the civil contempt was ineffective, U.S. District Judge Richard Owen — backed by the Second Circuit — refused to let Armstrong leave the Metropolitan Correctional Center in New York for over six years, no doubt a record for the longest civil contempt in federal court history. Now, Armstrong has finally entered a guilty plea to a charge of conspiracy to commit securities and wire fraud, and he will be sentenced in January 2007 by U.S. District Judge John Keenan, who presided over the criminal case that was set to go to trial in October. A Bloomberg story (here) discusses the plea agreement.
Even after the guilty plea, it remains an open question whether Armstrong will be let out of jail on the civil contempt, and whether the court will take into consideration his 6+ years in jail. On the latter issue, federal law permits the imposition of a civil contempt that interrupts a criminal sentence, and there is no requirement that the time spent in jail on the civil contempt be counted toward the criminal punishment, although Judge Keenan is free to do so in setting the sentence. The reason why the civil contempt does not count lies in the difference between a civil contempt, which is viewed as coercive, and a criminal sentence, which is punitive.
The person held in civil contempt "holds the keys to the jail cell" according to the old adage, which means the person can "purge" the contempt by complying with the court’s directive. Most cases in this area involve individuals who have received immunity but continue to refuse to testify, and they can get out of the civil contempt simply by testifying. One of the seminal decisions is United States v. Liddy, 510 F.2d 669 (19774), involving Watergate burglar G. Gordon Liddy — how’s that for a blast from the past — who refused to testify before the Watergate grand jury despite an immunity grant. In rejecting his argument that the civil contempt could not interrupt his service of the criminal sentence, the D.C. Circuit stated:
The coercive impact of confinement for civil contempt results from the fact that the contemnor ‘carries the key to the jailhouse door in his pocket,’ that is, he can procure his release at any time by agreeing to comply with the court order whose violation is the basis of his contempt. Had the District Court ordered that Liddy’s contempt confinement be concurrent with his sentence for Watergate crimes, Liddy would have no incentive to comply with the District Court’s order since his doing so would not reduce his total period of confinement. Therefore, the District Court was manifestly justified when it stated: "To give meaning and coercive impact to the Court’s contempt powers in the interest of protecting the Court’s integrity, the Court here finds it necessary to hold in abeyance the execution of Mr. Liddy’s sentence under the indictment pending his confinement for contempt."
Armstrong faces a maximum sentence of five years on the conspiracy charge, and under the federal Sentencing Guidelines if the loss is even 10% of what the government alleges he will be in a sentencing range that will easily take him to the full five years. Whether he gets the benefit of having spent six years in jail already poses an interesting question because he has not, to this point, agreed to cooperate in the SEC enforcement action that triggered the civil contempt. He has, however, shown a resolve that likely would make G. Gordon Liddy proud. (ph)
-
Two senior executives of DHB Industries, Inc., a supplier of body armor to the U.S. military, were arrested on insider trading, securities fraud, and conspiracy charges, and the SEC filed a civil suit alleging securities fraud. The former officers are Dawn M. Schlegel, DHB’s CFO, and Sandra L. Hatfield, the chief operating officer, and the charges were filed by the U.S. Attorney’s Office for the Eastern District of New York. The charges involve both accounting fraud and the sale of DHB securities that resulted in a profit of over $8 million. According to the SEC Litigation Release (here), the two defendants:
[R]egularly overstated
the value of DHB’s inventory by fraudulently increasing inventory
quantities, labor costs, overhead costs, and the amount of raw
materials used in DHB’s products. The complaint alleges that together
Hatfield and Schlegel also transferred millions of dollars of expenses
from cost of goods sold to research and development costs to materially
increase the company’s gross profit. The complaint further alleges that
Schlegel falsely inflated DHB’s $60 million charge against earnings
taken in the third quarter of 2005 to mask her and Hatfield’s
fraudulent conduct. Schlegel is alleged to have lied to DHB’s auditors
and provided fake inventory schedules and other documents to conceal
the fraud.The complaint also
alleges that during the period of their fraudulent conduct, Schlegel
and Hatfield collectively profited by over $8.2 million from the
cashless exercise of warrants and sale of over 400,000 DHB shares.
Schlegel and Hatfield sold these shares at the end of 2004 at the
height of DHB’s stock price and before the public knew about the
misrepresentations in DHB’s filings and public statements.Last year, the military ordered the recall of one of the company’s body armor products due to quality issues. Former CEO David Brooks, whose daughter’s $10 million bat mitzvah party featured legendary rockers Steven Tyler and Joe Perry of Aerosmith, left the company on July 10 "pending the outcome of federal, state, and internal investigations" while DHB settled shareholder suits (press release here) Because federal prosecutors did not file any charges against Brooks at the same time as they did against Schlegel and Hatfield, it may be that he is cooperating in the investigation. Brooks made over $190 million from the sale of DHB stock in 2004, so he is a likely target of the grand jury investigation. (ph)
-
One might find voice samples being requested by the government in street crime cases, especially ones where the accused is thought to have made a threatening telephone call or a statement at the scene of the crime. But in a white collar case?
Yes, AP reports here that a judge has allowed the government to obtain voice samples from three individuals charged in the "theft of trade secrets from The Coca-Cola Co." case. This case originates when Pepsi turned over evidence to Coca-Cola that someone was trying to sell them alleged trade secrets.
In the case of United States v. Dionisio, 410 U.S. 1 (1973), the Supreme Court held that requiring a grand jury witness to produce voice exemplars would not violate constitutional rights under the Fourth and Fifth Amendments.
(esp)
-
According to the Washington Post here, yet another person is pleading guilty after being implicated by testimony given by Jack Abramoff. Roger G. Stillwell, a former Interior Department employee plead guilty after receiving gifts such as sports and concert tickets. The Washington Post’s web page here provides a listing of the guilty pleas entered to date resulting from Jack Abramoff’s guilty plea and cooperation.
The Jack Abramoff plea agreement has been extraordinary for the government. As a polished individual, one with close ties and knowledge to insiders, he has the ability to be used as a threat beyond the typical witness to those who are targets of a government investigation. It is not surprising that we are not seeing indictments followed by trials, and are seeing indictments followed by plea agreements coming from Abramoff’s testimony.
(esp)
-
As expected, a grand jury indicted former Brocade Communications CEO Gregory Reyes and former human resources VP Stephanie Jensen, supplanting the securities fraud complaint issued on July 20. Reyes is indicted on twelve charges and Jensen on eight, comprised of conspiracy, securities fraud, mail fraud, false entries in the company’s books, and four counts of making false statements to the company’s accountants (Reyes is the only defendant on these). The factual allegations in the indictment (available below) do not vary much from the earlier complaint, and the securities fraud charges under Section 10(b) and Rule 10b-5 simply recite the language of those provisions and allege both a scheme to defraud and causing Brocade to file false Form 10-Ks with the SEC. The mail fraud charge alleges both the traditional money/property form of fraud and also an alleged deprivation of the right of honest services owed to Brocade by both defendants. Once again, the issue of intent will be the key to the fraud charges because neither Reyes nor Jensen profited directly from the backdating of the options grants and they were authorized to issue the options to the new hires, albeit without falsifying records. Each is charged with a narrower books-and-records violation, which may be easier for prosecutors to establish.
One thing I noticed in the indictment is that it is dated "July 20, 2006" on the last page where the foreman signed it as a "True Bill," although it was not filed until August 10. I had wondered why prosecutors used a criminal complaint earlier rather than a grand jury indictment, which would have obviated the need for a hearing on the propriety of the complaint that was held before a magistrate on August 9. A complaint is judged by a different standard than a grand jury indictment, although the threshold for an acceptable complaint is still rather low. I suspect that the prosecutors hoped to have the grand jury return the indictment on Thursday, July 20, but for whatever reason it could not be completed in time. Rather than let the moment pass, they filed the complaint and now, three weeks later — this is obviously a "Thursday" grand jury, and could even be the same one that is hearing the Barry Bonds perjury investigation — the indictment was ready for a vote. A previously scheduled preliminary hearing to review the basis for the securities fraud charge in the complaint is now out the window because a grand jury indictment is based on probable cause, so the case will proceed from here into the discovery phase. Look for the defense to file a motion to dismiss and for a bill of particulars to get the government to identify the victim(s) of the alleged violations and its basis for inferring criminal intent, among other things. (ph)
-
Former Comverse Technology CEO Kobi Alexander was charged with conspiracy along with two other senior executives, but has not been located at this point. While a Department of Justice press release (here) notes that two brokerage accounts with $45 million of Alexander’s assets have been frozen, it appears that he transferred over $57 million to accounts in Israel in what the government asserts was a money laundering scheme "in an effort to conceal the funds from U.S. authorities." The FBI has declared Alexander a fugitive, and is conducting a worldwide search.
There is certainly a good possibility that Alexander is in Israel, so it may be difficult to extradite him to the United States. An article in the Israeli newspaper Ha’aretz (here) quotes a local attorney who states that the extradition treaty between the countries dates back to 1963 and the alleged fraud from the options timing may not be a covered offense allowing for Alexander’s return. Should Alexander return to the United States to face the charge, expect to see some fairly onerous conditions if bail is granted, which is probably unlikely. If Alexander shows up in a country that will not extradite him, then we may have a new Marc Rich, who fled to Switzerland in the face of tax evasion charges in the early 1980s. (ph)
-
Federal prosecutors in Chicago and Lord Conrad Black have been involved in a nasty dispute over whether his financial disclosure in connection with the bail application was complete and truthful. The U.S. Attorney’s Office requested that U.S. District Judge Amy St. Eve revoke Black’s $20 million bond and send him to jail pending a trial scheduled for 2007, a long time to stay in the pokey. Judge St. Eve determined that Black had misrepresented his assets, but denied the request to revoke the bond and instead ordered him to put up an additional $1 million in cash. The bond is already secured by property with an estimated value of $30 million, but the additional liquid assets should give the court some comfort that Black will continue to show up for court appearances. A Reuters story (here) notes that Black’s attorney said his client would put up the additional funds — I hope the check clears. (ph)
-
Three former senior executives of Comverse Technology, Inc., CEO Kobi Alexander, CFO David Kreinberg, and chief legal counsel William Sorin, have been charged with conspiracy to commit securities, mail, and wire fraud in a criminal complaint filed in the Eastern District of New York (Brooklyn). The charge relates to backdating options by the former executives, including an alleged "slush fund" options account in the name of a fictitious employee — nicknamed after Phantom of the Opera — to park options that could be doled out to attract employees. According to the complaint (here — courtesy of the Wall Street Journal Law Blog), each of the defendants received backdated options that permitted Alexander to reap additional gains of $6.4 million, and Kreinberg and Sorin over $1 million each.
An interesting aspect of the complaint is the lengthy recitation of efforts by the three executives to slow down the company’s internal investigation and to make false responses to a Wall Street Journal reporter inquiring about the timing of the options grants that triggered the entire investigation. According to the complaint, the defendants tried to dissuade a corporate lawyer from hiring outside counsel to investigate the options-timing issue, and that Sorin’s responses were "half-truths" and vague. What is not clear from the complaint is how these acts relate to the conspiracy, which involved filing false statements with the SEC and defrauding the company’s shareholders. The alleged acts may go to show guilty knowledge, but it is not a separate crime to lie to a reporter — even one from the Journal — nor are false statements in an internal investigation illegal in themselves. It is possible that prosecutors could obstruction of justice to the conspiracy (or as a separate charge) in a subsequent indictment, similar to what was charged in the Computer Associates case that included misleading conduct directed at lawyers doing the internal investigation. Whether such a charge is permissible, even under the broader obstruction statute adopted in the Sarbanes-Oxley Act (18 U.S.C. Sec. 1519), is an open question.
It is clear that Comverse cooperated in the criminal investigation, including waiving its attorney-client privilege, because the complaint recounts in detail conversations between corporate counsel and one or more defendants. Such waivers have been heavily criticized recently, but in this case it was clearly in the company’s interest to waive the privilege, although prosecutors may have demanded it early on. It will be interesting to see if any of the defendants assert that Comverse was pressured into waiving its attorney-client privilege to avoid charges against the company, and seek to have those conversations suppressed.
This is the second criminal case to come out of the various options-timing investigations. Similar to the charge against two former executives of Brocade Communications (see earlier post here), the government chose to proceed with a criminal complaint rather than an indictment, although it is not clear why. Kreinberg and Sorin surrendered, but to this point Alexander has not, and an AP story (here) notes that prosecutors fear he may not be in the country. Unlike the Brocade case, the Comverse defendants received a portion of the backdated stock options, so it may be easier to prove their intent if a securities fraud count is added to the case.
Finally, in an effort to show Alexander’s knowledge of the company’s filings, the complaint quotes him as stating once to an employee, "How many CEOs do you know who read every word of the footnotes?" That probably puts the "honest-but-ignorant CEO" defense out of reach. (ph)
MattBray.net 