Alexandra Clough, Palm Beach Post, Ex-WorldCom exec out of prison, back in area (Scott Sullivan)
Reuters, Massachusetts attorney general targets economic crime
(esp) (blogging from Palm Beach)
Category: WorldCom
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In the Nacchio case (see here), the defense was precluded from having an expert witness testify. In the Goyal case (see here), the issue is that the prosecution failed to provide an expert witness to show that there was a GAAP violation. It is interesting to see the importance of expert testimony in white collar cases – cases that tend to be more complicated and require educating the jury on the technicalities of transactions.
The National Association of Criminal Defense Lawyers (NACDL) has filed an amicus brief in the Goyal case arguing that the government was required to "offer expert testimony that a GAAP violation in fact occurred." As stated in the brief, "a jury should not be treated as a team of accountants and asked to interpret and apply GAAP without expert guidance." (note- a similar issue, although not the same circumstances, was discussed in the Rigases and Ebber's case – see here). This is a particularly interesting issue as the need for an expert has been noted in civil accounting cases. The amicus brief notes that "the need is even more pressing in criminal cases, where the burden of proof of each element is higher- beyond a reasonable doubt, rather than merely by a preponderance of the evidence." The brief also examines the mens rea requirement for corporate officers.
NACDL Amicus Brief in U.S. v. Goyal – Download U.S._v._Goyal_Amicus_Brief
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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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Bernard Ebbers sentenced to prison for 25 years, lost yet another possible hope for relief as the Supreme Court denied certiorari on his case today. The listing appears among a long list of cases denied cert. –
06-590
EBBERS, BERNARD J. V. UNITED STATES
The petition for a writ of certiorari is denied. The Chief
Justice took no part in the consideration or decision of this
petition.
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Yesterday Andrew Fastow, who received a sentence of six years despite a plea agreement allowing him to receive ten years, was sent to prison. Also yesterday, Bernie Ebbers, who went to trial and received a 25 year sentence, reported to prison to begin serving his sentence.
Both men were given the luxury of waiting a period of time to begin serving their sentences. In the case of Fastow it was to allow his wife to first serve her sentence and also allow him to remain free to assist the government. In the case of Bernie Ebbers it was because he was permitted to remain free pending his appeal.
The freedom each of these individuals experienced prior to starting to serve their sentence is yet another indication that the public does not fear these individuals. Their sentences were for deterrence and retribution purposes and not for incapacitation.
In contrast, former Mayor Bill Campbell was ordered to serve his sentence immediately. His sentence for a tax offense surprisingly was much shorter than both Ebbers and Fastow. (see here)
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Bernard Ebbers will begin serving a 25 year sentence this week. The Washington Post here notes comments on this upcoming sentence, including a comment by Professor Frank Bowman stating that "[m]y own sense is that any sentence over 20 years for anybody for an economic crime is hard to justify."
So why is it that a man with no prior criminal record was given a sentence of 25 years for a non-violent crime? The bottom line is the federal sentencing guidelines. The effect of these guidelines is to rachet up the sentences for white collar offenses. The sentence is computed to a large extent based upon fraud loss. The character of the offender, the lack of prior criminal history, and rehabilitation are basically thrown out the window when courts look at a mathematical forumula that looks solely at the amount of fraud loss, a number that can rarely ever be computed with precision (see Olis). Anyone who contends that we need to worry about the discretion judges have in this post-Booker world, need only watch Ebbers as he goes off to prison.
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In what will likely be the final chapter in the prosecution of former WorldCom CEO Bernie Ebbers, assuming the Supreme Court does not grant certiorari to review the conviction, U.S. District Judge Barbara Jones ordered him to report to the Bureau of Prisons on September 26 to begin serving his 25-year prison term. The Second Circuit affirmed the conviction and sentence in July, and so the next step will be determining where Ebbers will be incarcerated. Judge Jones recommended that Ebbers be sent to the federal correctional institution (FCI) at Yazoo City, Mississippi, which has both low- and medium-security facilities in the complex. A Jackson Clarion-Ledger article (here) notes that former WorldCom controller David Myers served his term at the same facility. The company’s former CFO, Scott Sullivan, a star witness at the Ebbers trial, is serving his five-year sentence at the FCI in Jesup, Georgia, and according to the Bureau of Prison’s website (here) is scheduled for release in March 2010.
With Ebbers apparently headed to prison, one of the only remaining issues in the case is completing the sale of his assets to satisfy the forfeiture to which he agreed to settle claims by prosecutors, the SEC, and the plaintiffs in the securities fraud class action against the company and its officers. The Clarion-Ledger article notes that the assets "include the Brookhaven Country Club, an 18-hole golf course, clubhouse, swimming pool and tennis courts; the 28,000-acre Angelina Plantation that is a commercial farming operation about 30 miles west of Natchez and located in Louisiana; and majority interest in KLLM Transport Services Inc., one of the largest temperature-controlled, over-the-road truckload carriers in the United States." The Angelina Plantation is scheduled to be auctioned shortly and there is an offer of $31 million. The president of the company overseeing the auction noted that "[w]e have nothing but gratitude for the gracious way that Bernie has dealt with us." (ph)
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The Second Circuit ruling upholding the conviction and sentence of Bernard Ebbers is discussed here. As noted, the court states, "[t]wenty-five years is a long sentence for a white collar crime, longer than the sentences routinely imposed by many states for violent crimes, including murder, or other serious crimes such as serial child molestation." The court decides to place the power with the legislature and uphold the sentence. What does this say:
- In some cases money losses may be more important when it comes to determining a sentence, then loss of life.
- The courts will take a hands off approach when determining reasonableness – the bottom line is that the federal sentencing guidelines still rule.
- There is no fear of white collar sentences being overly lenient in a post-Booker world.
- Being a first offender doesn’t mean much if the loss is high – the sentence basically ends up placing the convicted defendant in prison for the rest of his life.
- If you decide to take the risk of trial and don’t plead guilty and cooperate with the government, you may be spending the rest of your life in prison if the jury convicts you.
The more important questions here are: – Is this what Congress wanted? Have we gone overboard in sentencing white collar offenders? Have we failed to consider the potential future harmfulness in sentencing white collar offenders? Do we really need these extreme sentences to deter others who may be contemplating these crimes? Should being a first offender mean something when it comes to the sentence imposed? And yes – should a white collar offender who commits an economic crime be receiving a greater sentence than someone who commits a murder?
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The Second Circuit Court of Appeals upheld the conviction of Bernard J. Ebbers, the former CEO of WorldCom. Ebbers argued four basic issues on appeal: defense witness immunity, the giving of a conscious avoidance instruction, the failure to require to prove violations of GAAP, and the sentence.
The court rules that "[t]he government is under no obligation to grant use immunity to witnesses the defense designates as potentially helpful to its cause but who invoke the Fifth Amendment if not immunized." Although the court recognizes that prosecutor’s have a "powerful tool," it will take the defendant showing "that the government has used immunity in a discriminatory way" and "that the evidence to be given by an immunized witness ‘will be material, exculpatory and not cumulative and is not obtainable from any other source.’" The court places the burden on the defendant to show that "the non-immunized witness’s testimony would materially alter the total mix of evidence before the jury." The court also held it was not error to deny a missing witness instruction here.
The mens rea required to be proved by the government would not be undermined by the giving of a conscious avoidance instruction or the failure to require to prove violations of GAAP.
Finally the court upheld the 25 year jail sentence Ebbers received. The court upheld the loss calculation, found that there was a basis for the sentencing disparity between Ebbers sentence and CFO Scott Sullivan. The court admits that the sentence is "harsh but not unreasonable."
Although the decision does specify that Ebbers was a Category I with respect to criminal history, the court does not dwell on the fact that Ebbers is a first offender who in a white collar case is receiving a 25 year sentence. The court does state, "[t]wenty-five years is a long sentence for a white collar crime, longer than the sentences routinely imposed by many states for violent crimes, including murder, or other serious crimes such as serial child molestation." Basically it comes down to – this is what Congress wants, this is what Congress gets. The court finds that the sentence for Ebbers was not unreasonable.
Decision can be found via Wall Street Jrl website here.
Check out Analysis of Harlan J. Protass – Second Circuit Sentencing Blog here – where he states -"Is ‘reasonableness’ an objective or subjective standard? Which should it be?"
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Bernie Ebbers has a lot riding on his appeal as he received a sentence of 25 years. (see here) He has been permitted to be free pending his appeal, and in large part this is because of the significant issues raised in this appeal. (see here). A panel of the second circuit, in oral argument, heard Reid Weingarten, Ebber’s attorney, argue that defense witness immunity should have been provided in this case. (see here)
Although the prosecution has ample opportunity to obtain immunity for its witnesses, the defense usually is not provided with this benefit. It is a major disadvantage that the defense has in a criminal case. While prosecutors can offer plea deals and witness immunity and then use the individuals against an accused, the defense has to find witnesses who are not intimidated by fear of future prosecutorial action, like being indicted.
CNN (Reuters) (here) also notes that the issue of "conscious avoidance" of knowledge of the fraud at WorldCom and court instructions regarding the mens rea of the crime were discussed at the oral argument. (See here) Should the jury have been allowed to consider the "ostrich" defense? Finally, as one might imagine, the court asked about the high sentence received by Ebbers. (CNN Reuters here)
It is interesting to see these issues being discussed just as Ken Lay’s and Jeffrey Skilling’s trial begins. Like Ebbers, Lay and Skilling also may have problems presenting some of their witnesses as a result of these individuals being fearful of prosecutorial retribution. And like Ebbers, a key issue for Lay and Skilling will be whether they can be held criminally liable for acts in which they may not have been a major or minor participant. Where is the line between actual knowledge and avoiding knowledge? For Ebbers the question is surely whether avoiding knowledge should be a sufficient standard for someone receiving a 25 year sentence.
(esp)
MattBray.net 