White Collar Crime Prof Blog

Senate Judiciary Committee Subpoenas Rove E-Mails

Although the controversy over the firing of eight U.S. Attorneys has largely receded from the media's view, the Senate Judiciary Committee is pressing forward by issuing a subpoena to Attorney General Alberto Gonzales requiring the production of e-mails to or from senior Presidential adviser Karl Rove.  The subpoena marks a turn in the investigation for the Senate Committee because this is the first subpoena for documents it has issued, although its House counterpart has subpoenaed records.  The subpoena (here) requires production of the following:

Complete and unredacted versions of any and all emails and attachments to emails to, from, or copied to Karl Rove related to the Committee’s investigation into the preservation of prosecutorial independence and the Department of Justice’s politicization of the hiring and firing and decision-making of United States Attorneys, from any (1) White House account, (2) Republican National Committee Account, or (3) other account, in the  possession, custody or control of the Department of Justice, including any such emails that were obtained by U.S. Attorney Patrick Fitzgerald as part of the investigation into the leak of the identity of a covert CIA officer by officials in the Administration  that led to the conviction of I. Lewis “Scooter” Libby.

The third source is particularly interesting because it seeks e-mails obtained previously by Patrick Fitzgerald in the Valerie Plame leak investigation, which stretched well into 2005.  By subpoenaing the Department of Justice and not the White House, the Committee should avoid any claim of executive privilege to prevent the production, and seeking the Special Counsel's documents means that some internal White House e-mails may be available.  One problem may be if the Department of Justice claims the e-mails gathered by Fitzgerald are grand jury material and therefore protected by the secrecy requirement of Federal Rule of Criminal Procedure 6(e) that prevents disclosure of such information without prior judicial approval.

A bi-partisan group of Judiciary Committee members (Leahy, Specter, Feinstein, Grassley, Schumer, and Sessions) also sent a letter (here) to Gonzales requesting production of the 2006 confidential order delegating in large measure authority to hire and fire political appointees in the Department of Justice to the AG's chief of staff (Kyle Sampson) and White House liaison (Monica Goodling) .  The order had gone unmentioned in Gonzales' earlier testimony before the Committee, and the Senators expressed more than a little bit of exasperation at the failure to turn it over earlier:

The Committee has issued multiple requests for the Department to produce documents in its custody, possession or control related to the Committee’s investigation into the firings of U.S. Attorneys and alleged politicization at the Department, and to provide the Committee with the precise scope of the production.  Despite these requests, the order has not been produced and its existence has not been disclosed.  The order appears to be responsive to the Committee’s requests insofar as it dealt with the appointment and removal of inferior officers who are not subject to Senate confirmation, which would include interim and acting U.S. Attorneys.  Consequently, we ask that you please produce the order and all related documents immediately.

Is the firing of the U.S. Attorneys headed back to the front pages?  An AP report (here) states that the Department of Justice's Inspector General and the Office of Professional Responsibility are investigating whether Goodling used political criteria in hiring Assistant U.S. Attorneys, a career position insulated from such considerations.  It's unclear why someone in the AG's office would even get involved in hiring decisions in the local federal prosecutors offices aside from the appointment of the U.S. Attorney, even if it only occurred in offices headed by interim or acting U.S. Attorneys.  The fact that the AG's White House liaison might have had a say in the hiring of line AUSAs raises substantial questions about the politicization of the U.S. Attorney's Offices.  The Congressional committees show no sign of moving on from the investigation, and the House Judiciary Committee will hear testimony from Gonzales later in May, so it should stay alive at least that long.  The internal DOJ investigation of Goodling may disrupt plans for Congress to grant her immunity if her participation in hiring decisions violated federal law. (ph)

Options Explosion in Dow Jones

The surprise $5 billion bid by Rupert Murdoch's News Corp. for Dow Jones & Co. may not have been quite as surprising to some who bought call options on the publisher of the Wall Street Journal before the announcement.  In a continuing refrain when large offers are made for companies, trading in the options spiked in the days before the information became public, netting some "lucky" traders outsized profits.  In this case, a Bloomberg story (here) notes that the average volume in Dow Jones call options in the month before the bid was a bit more than 300 per day, but on April 25, four trading days before the announcement, the volume was over 3,000 contracts; on April 30, the day before the bid emerged, the volume was over 4,300 contracts.  The article notes that all the 3,464 September 45 call options, which were well out of the money, that traded on April 30 were purchased in the last eleven minutes before the market closed at 4:00 p.m. EDT.  The price on these calls jumped from less than $.50 to a $12 close the next day, which is at least a 2,400% return in one day -- I won't even try to annualize it.  Timing in life is everything, but that's just way too much to not draw a lot of attention from the SEC and the U.S. Attorney's Office. (ph)

Congress Considers a New Public Corruption Statute

HR 1872, "Effective Corruption Prosecutions Act of 2007" is the house bill that mirrors Senate Bill S. 118. It provides that 18 U.S.C. s 666 would be allowed as a RICO predicate. It allows for an 8-year statute of limitations for a host of statutes that are routinely used in corruption cases, as well as outside this sphere.  For example, if passed into law it would allow for an 8-year statute of limitation in a simple bribery case or in a mail fraud case that uses the honest services statute (see here).  The proposed legislation also calls for additional funding to investigate and prosecute corruption.

Clearly the proposal to extend the statute of limitations will be the most controversial aspect of this proposed legislation.  Some anticipated questions: 

• Is it really necessary for investigations (if starting immediately after the commission of the crime) to last for 8 years in these specific type of cases? 
• Many of the statutes included in this proposed legislation involve simple forms of criminal conduct, and is it really necessary to provide investigators more time to proceed with these cases?
• Are these cases really more complicated than tax cases, cases that have a statute of limitations below 8 years?
• Is it necessary to place undue stress on individuals being investigated by giving the government a longer statute of limitations before some resolution is reached on a case?
• Has corruption increased so drastically from the past that warrants this legislation?

(esp) (w/ a hat tip to Stephanie Martz)

Mail Fraud Reversal

Co-blogger Peter Henning noted here the acquittal during oral argument of an individual prosecuted under the mail fraud statute. The accused was convicted for a deprivation of honest services despite a fact scenario that had this individual selecting the low bidder for a state contract. The problem here is not the jury, as they appropriately followed the law.  The problem is the prosecution's use of this law, section 1346 - the "intangible rights doctrine" of the mail fraud statute, and the fact that the law allows for this type of application. The decision now released leads one wondering if there is no crime in this jurisdiction that tax dollars could be spent on this type of prosecution. One also has to wonder whether this case emphasizes the need to reign in section 1346's "honest services" provision to curtail prosecutorial discretion. Judge Easterbrook, authoring the Seventh Circuit opinion in this case, has a superb analogy in his decision. He states:

"Once again that approach has the potential to turn violations of state rules into federal crimes. When the Supreme Court reverses a court of appeals, it is apt to say (as the prosecutor says about Thompson) that public officials have failed to implement the law correctly. Does it follow that judges who are reversed have deprived the United States of their honest services and thus committed mail fraud?"

(esp)

Will Lord Browne Be Prosecuted For Perjury?

The resignation of BP p.l.c. CEO Lord John Browne included his admission that he made a false statement to a British court in order to obtain an injunction preventing the publication of an embarrassing story about a personal relationship.  In a statement (here) acknowledging the relationship, Lord Browne stated, "My initial witness statements, however, contained an untruthful account about how I first met Jeff. This account, prompted by my embarrassment and shock at the revelations, is a matter of deep regret. It was retracted and corrected. I have apologised unreservedly, and do so again today."  He denied allegations that he allowed the person to use company resources, and BP's chairman stated that "[a]t John's explicit request, the Board instigated a review of the evidence. That review concluded that the allegations of misuse of company assets and resources were unfounded or insubstantive."  I'm not sure what "insubstantive" means, although perhaps the point is the amount is insignificant and so should not be a concern to shareholders. The problem for the company is that related-party transactions must be disclosed, and any misuse of corporate resources can be a significant concern for regulators.

The British tabloid that broke the story, The Mail on Sunday, issued a statement (here) assailing Lord Browne: "That Lord Browne should have felt free to lie deliberately and repeatedly raises deeply worrying questions about the system of secret court hearings which is increasingly being used by the rich and powerful to prevent the public knowing the truth about their activities."  The paper said it would make its evidence available to the Attorney-General for possible prosecution for perjury.  The governing statute is the Perjury Act of 1911, which makes it a crime for a witness in a judicial proceeding to "make[] a statement material in that proceeding, which he knows to be false or does not believe to be true . . . ."  That provision is similar to the federal perjury statute in 18 U.S.C. Sec 1621, which makes it a crime to testify about a matter "which he does not believe to be true."  Lord Browne's explanation for making the false statement does not negate the intent for perjury, because a violation is based on knowledge of the falsity of the statement, not that the witness had a good explanation for lying.  That said, Lord Browne is a highly-regarded business person, and the underlying story has at best a tenuous connection to BP's business, so it may be one prosecutors decide to pass on. (ph)

NACDL White Collar Conference - Part IV

Stephanie Martz, White Collar Crime Project Director at the National Association of Criminal Defense Lawyers (NACDL), guest blogs a six part series on the recent White Collar Crime Track at the NACDL Cincinnati Conference:

Session 4: Attorneys’ Fees and Asset Forfeiture

The panelists, Steve Weisbrod of Gilbert, Heintz & Randolph in Washington, DC and David Smith of English & Smith in Alexandria, VA, addressed a hypothetical accounting restatement case with parallel proceedings.

What kinds of assets can/should you accept? Smith said "no" to proceeds of fraud crimes. You should be chary of assets from the CEO who has received most of his assets from the business itself (which was financed as a start-up from his own pocket). One circuit (the 7th) has said that you don’t have to do any investigation at all to determine likely source of the proceeds. DOJ guidelines, which have not been updated since 1985, require an "actual knowledge" test. If there are no restraining orders or indictments in place yet, it would be difficult to show that anyone’s assets were subject to forfeiture. Bottom line, though, is that there are many U.S. Attorneys’ offices that have never sought to forfeit a fee – it varies widely and the politics are interesting.

How do you investigate what funds are subject to forfeiture or not? Sometimes clean property can be substituted for dirty property if the dirty property is not available for forfeiture. If clean and dirty money is co-mingled, it helps to know what percentage is each (in a money laundering case, for example) – and it’s a very messy area of the law.

Weisbrod then discussed the right to indemnification. It comes from 3 sources: employment agreements, corporate by-laws, and statutes in all 50 states. Payment in advance, as opposed to indemnification, is quite difficult to get in many circumstances. Even indemnification is mandatory under state law only when you are "wholly successful" or something close to it. Most indemnification statutes provide mandatory indemnification under limited circumstances and optional indemnification under others. Insurance policies are contracts with usually very specific terms and limits.

Both panelists talked about the case of United States v. Wittig, in which the government alleged that the pre-existing indemnification agreement itself was the product of the fraud. Smith said that this case, while extremely disturbing, is still an outlier (and the result was ultimately vacated when the convictions were overturned). However, one should note that in general, forfeiture has bled significantly outside of the original core of drug cases.

Weisbrod noted that in the last 2 years, a quarter of all of the cases ever decided in which companies or insurance companies have argued against an indemnification agreement, have come down. This certainly evidences a trend towards fighting against paying employees in fraud cases. The "ancillary" proceeding in United States v. Stein, the KPMG case, is a prime example of this.

Weisbrod also cautioned that insurance, if it exists, should be your first source of funds, rather than your last, because notice and what you say in that notice is extremely important.

(sm/posted and links by esp)

White Collar Educators

The Chronicle of Higher Education News Blog reports of a plea to one count of mail fraud by the "former chief of SUNY's (State University of New York's) Entrepreneurship Institute."

(esp) (w/ a hat tip to Dean Darby Dickerson)

Lawyer Convicted

Newsday (AP) reports that an Atlanta lawyer was convicted in a "pump and dump" securities case following a trial in which he represented himself.

(esp)

New Blog - Audit Trail

The White Collar Crime Blog welcomes Audit Trail to the blogshere. 

(esp & ph)

Gonzales Matter Continues

The Attorney General "firings" is not losing press coverage.  The most recent revelation is reported by Murry Waas in the National Journal in an article titled "Secret Order By Gonzales Delegated Extraordinary Powers to Aides."

(esp)(w/a hat tip to Jack King)

Wittig to Face Third Trial

According to the Topeka Capital-Journal here, prosecutors have decided to proceed with a case against former CEO of Westar Energy, David Wittig, and former executive vice-president Douglas Lake. The first trial was a mistrial. The second trial, which resulted in a conviction, was reversed by the appellate court.  Wittig had received a sentence of 18 years, and Lake 15 years when the court decided to reverse the fraud convictions. (see here) The reversal came in a case with an incredible analysis using the "legally compelled mailing doctrine." But now the prosecution wants to try for three. (see also Wall Street Jrl here) Thats a lot of attorney fees.

(esp)

Conrad Black Trial Continues

Conrad Black's trial continued today.  For some updates on the trial of the former head of Hollinger International, check out MacLeans here.  Richard Siklos of the NYTimes reports on a contentious cross-examination that occurred today.  It sounds like a common cross-examination scenario may have played out --  what could the witness actually remember, was her memory faulty, and could she be relied upon for statements made in direct examination. One item to note from the article is that defense counsel was placing paragraphs of interest on a screen in the courtroom.  It is clearly becoming more and more popular in white collar cases to see the use of graphics in the courtroom.  Courtroom technology is clearly an important part of presenting a technical white collar case.

(esp)

NACDL White Collar Crime Conference - Part III

Stephanie Martz, White Collar Crime Project Director at the National Association of Criminal Defense Lawyers (NACDL), guest blogs a six part series on the recent White Collar Crime Track at the NACDL Cincinnati Conference:

Session 3: Sentencing Update – White Collar

Amy Baron-Evans, Sentencing Resource Counsel for the Federal Defenders, did a terrific presentation on both new amendments to the Guidelines and case/litigation developments. She began by noting that after Booker, there is no need to wait until Congress finalizes the proposed Guideline amendments that will be sent to the Hill on May 1 in order to argue them.

One of the most relevant new Guidelines for white collar lawyers is that implementing the Crime Victims Rights Act. Baron-Evans noted that while judges have rejected definitions of "victims" that include plaintiffs in civil class-action suits (derivative suits are harder, though), victims of acquitted or uncharged conduct, and certain types of collateral victims, lawyers should be chary of attempts to push the definition further.

Another helpful new (proposed) Guideline is the policy statement in 1B1.3, "Sentence Reduction." Courts may now consider terminal illness (which greatly expands the old "death rattle" standard); permanent medical conditions that require care by someone else, including age-related deterioration; and situations in which the only family member capable of caring for a minor has died or become incapacitated (in the past, foster care was often considered good enough).

In terms of litigation, Baron-Evans repeated the message that I’ve often heard her impart but that bears constant reminder because it is so important: Always go back to the "shalls" in 3553 – especially, that a sentence "shall" not be greater than necessary to meet the goals of criminal punishment. In that vein, white collar lawyers should be mindful of raising – starting with the pre-sentence report, that all-important document that determines so much – the factors that predict reduced recidivism: age, stable employment, education level, marriage, abstinence from drugs, first-time offender status, poor health, and emotional problems that are treatable. Lastly, remember that no statute requires the government alone to move for substantial assistance departures.

(sm/ posted and link by esp)

Sixth Conviction in P2P Case

A Department of Justice press release reports that "[a] sixth defendant has pleaded guilty in connection with Operation D-Elite, the first criminal enforcement action targeting individuals committing copyright infringement on a peer-to-peer (P2P) network using BitTorrent technology."  The release states that:

"Operation D-Elite targeted leading members of a technologically sophisticated P2P network known as Elite Torrents. At its height, the Elite Torrents network attracted more than 133,000 members and facilitated the illegal distribution of more than 17,800 titles—including movies, software, music and games—which were downloaded over 2 million times."

(esp)

An Appearance of Impropriety

When a judge has a potential conflict, or when there is even an appearance of impropriety, one often finds the judge recusing him or herself from the case.  But this time it isn't a judge, and we also are not seeing a recusal.  Rather, we are seeing a full announcement of an investigation by the same branch that is investigating the investigator.  According to the Washington Post, Special Counsel Scott J. Bloch  has decided to investigate the Inglesias matter as well as other hot items in the news recently. But the question may be whether he should be the one charged with this important investigation.

(esp)

Bush Official Resigns - Call-Girl Scandal

Yahoo News reports of a recent resignation of a Bush official titling the article, Bush Official Resigns Over Escort Links.

(esp)

NACDL White Collar Crime Conference - Part II

Stephanie Martz, White Collar Crime Project Director at the National Association of Criminal Defense Lawyers (NACDL), guest blogs a six part series on the recent White Collar Crime Track at the NACDL Cincinnati Conference:

Panel II was on "Parallel Proceedings." Barry Pollack of Kelly Drye Collier Shannon LLP, also an NACDL board member, moderated.

He started with the issue of the government’s using a parallel proceeding as a stalking horse. Chuck Ross, of Charles A. Ross & Assoc, LLP in NY, addressed this issue – can you smoke out whether there is a prosecutor involved? United States v. Stringer, a case two years ago from Washington state, does give you some guidance as to questions you can pose as defense counsel. You can craft formal requests of the out-front civil regulatory body, such as, do you intend to do (any of the stuff that the court in Stringer ultimately found so offensive). One does, however, need to be careful that you don’t invite scrutiny that you don’t have already. Might be a difference among agencies – the SEC tends to work more hand-in-glove with prosecutors than, say, the FEC.

Critical question: Once you have parallel proceedings in the open, do you move to stay the civil proceeding? Jack Fernandez, of Zuckerman Spaeder in Tampa, FL, said there are two schools of thought. In a civil proceeding, you could get discovery that you wouldn’t otherwise get. But you need to get protection for what you don’t want to disclose, namely, your client’s testimony. It might boil down to whether your client can afford to take the Fifth. In most cases your client really needs to take Five; this militates in favor of a stay. Seek a stay if you have a client who literally can’t afford to take Five (would lose legal fees) or is a high-profile or public figure.

Can you even get a case stayed during the criminal investigatory stage, pre-charging? Fernandez: Seek it especially if it’s private civil litigation, but you probably won’t get it. Ross said he recently did get a stay in such a case (private class action suits brought against client, stayed during criminal investigation – a knowledgeable and conscientious magistrate judge).

Interesting twist on an evergreen topic: What is the impact of the McNulty Memo/pressure to waive on parallel proceedings? Carol Elder Bruce, a partner at Venable in Washington, DC (and former independent counsel in the Bruce Babbitt case – as Pollack noted, one of the few to decide there was not evidence to warrant an indictment), answered this question. She began by noting that for years, lawyers for corporations (including herself) felt compelled to tell corporations to waive if they could – for notes of witness interviews, etc. -- because of the incentives built into DOJ policy. The key to the whole waiver process is that the government gets individual statements that it might not otherwise get. But beyond that, "selective waiver" – the obvious antedote to the parallel proceeding issue – has rarely been accepted by courts because it violates the sword/shield principle behind the privilege. In re Qwest Communications in the 10th cir. is a recent example.

(sm/ links and posting by esp)

Another Memo in the U.S. Attorney "Firings"

Charlie Savage of the Boston Globe reports on a memo written a good number of years back that outlines how to replace U.S. Attorneys without going through the appointment process.

In the meantime, the Boston Globe reports that Gonzales was "heckled" at his Harvard reunion.

(esp)

NACDL White Collar Conference - Part I

Stephanie Martz, White Collar Crime Project Director at the National Association of Criminal Defense Lawyers (NACDL), guest blogs a six part series on the recent White Collar Crime Track at the NACDL Cincinnati Conference:

Part I -

We’re here this morning (Friday, April27, 2007) at NACDL’s spring white collar track in Cincinnati, Ohio. This is a one-day session in which numerous pre-indictment and post-indictment strategies are on the table for discussion. (In addition, Earl Silbert, a panelist in the first session, is being honored at NACDL’s luncheon today. Silbert was the "first" Watergate prosecutor, who prosecuted the five Watergate burglars and Hunt and Liddy, and is currently one of the deans of the white collar bar, practicing at DLA Piper in Washington, DC).

The first panel is called "The Who’s, What’s, When’s, and How’s of Internal Investigations." Moderator Blair Brown of Zuckerman Spaeder LP.

Joseph Heyd, Senior Litigation Counsel for General Electric, talked first – in response to a hypothetical – about who needs lawyers and what kind, in an internal investigation. He said that one of the first things in-house counsel needs to do when notified of an investigation is to interview the individuals who are the risk factors – those who are alleged (by an FBI agent? By the AUSA?) to have been involved in misfeasance. The interview should be conducted by someone competent in the in-house counsel’s office, complete with a corporate Upjohn warning. (The necessity of a Computer Associates warning was also discussed – and rejected by Heyd as a bridge too far.)

Silbert talked about the role of outside counsel. He said most outside counsel would recommend that outside counsel conduct any kind of mildly substantial internal investigation. The reasons: in-house counsel too closely allied with management; employees might speak more freely. Also, never do the interviews alone! And watch your privilege if you don’t go with outside counsel. But Heyd pointed out a problem: if time is of the essence, it can be hard to get outside counsel up to speed.

The panelists also discussed the necessity for the "rhythm method" for document retention – companies need to have a regular cycle of document retention that won’t raise any timing or motive questions about destroying documents. At the same time, some class of documents will obviously be subject to a suspension order from in-house counsel. This will, in turn, create gossip and speculation in the company. Silbert’s tactic is to distribute to some employees written bullet-point instructions about talking, telling the truth, what’s at stake, etc. At the same time, you must be careful about obstruction and be crystal clear about what you say and don’t say to employees about how to behave – that’s why you want something in writing about what your advice has been.

The perennial issue: attorneys’ fees. Do you require an employee to submit to an interview before paying for a lawyer? Heyd said no, it depends on pre-existing written company policy, which might require an employee to cooperate with all such interviews and investigations but is not a pre-condition, otherwise, for fees.

Kent Wicker, of Reed Wicker LLP in Louisville, KY, played the role of representing an individual (in the hypothetical, a former employee who seems a little too willing to make nice with the company). "I suppose there is a case n which I’d let him testify under oath, but I haven’t found it yet." Wicker also emphasized the necessity to convince the company that it’s good to have no daylight between the employee and the company, in other words, that the employee can be helpful to the company and not harmful. "I’m going to be on the phone and in their face."

Part of the hypothetical also involved the company’s own attempt to unearth information about potential witnesses – i.e. "pretexting" a la Hewlitt Packard. Wicker said you have to be extraordinarily careful, if you use a private firm at all, that you know the person well and give him/her extremely specific instructions and supervision.

On the topic of Joint Defense Agreements (JDA’s): There was a case recently in the E.D. Ky. in which one defendant paid fees for others and the evidence was quite thin about whether there was real obstruction; but the defendant was convicted and the case is on appeal.

(sm/ w/ links by esp)

Playing to a Different Tune

Perhaps unknown by many people, the FBI has an art crime team. The U.S. Attorney for the Central District of California is prosecuting a case coming from an investigation of this team.  A recent press release of this office states that:

"A Long Beach man who is currently in custody in France was indicted today on federal charges for allegedly taking two violins that had been stolen from a member of the Los Angeles Philharmonic to Paris, where he attempted to sell them."

Press Release - Download stolen_violins.059.pdf

(esp)

A Few More Documents from DOJ on the U.S. Attorney Firings

The Department of Justice continues to dribble out documents related to the firing of the eight U.S. Attorneys, releasing more e-mails on April 26 and 27, but also withholding over 160 e-mails and memos held by Kyle Sampson, the former chief of staff for Attorney General Alberto Gonzales.  According to the list of withheld documents (here), the e-mails were sent from December 8, 2006, the day after seven of the U.S. Attorneys received the notice of their termination, until March 8, 2007, shortly before Sampson resigned his position.  He is listed as the custodian of these records.  The e-mails relate largely to dealing with inquiries from Senators and the press about the firings, and there are eight documents listed that relate to the firings.

The usual privilege list submitted in civil litigation or in response to a grand jury subpoena gives the reason(s) why the document is withheld, such as the attorney-client privilege or protected work product.  In this case, however, it is not clear what the reason is for withholding the documents from the House Judiciary Committee, which has demanded a wide range of records related to the issue.  To this point the Department of Justice has not asserted a deliberative privilege or the executive privilege, and communications with Congress are unlikely to be subject to any claim for protection.  More documents are sure to emerge, but any list of withheld documents is sure to pique the interest of the House and Senate Judiciary Committees.  An AP story (here) discusses the latest set of documents. (ph)

Former Mets Clubhouse Employee Pleads Guilty to Distributing Steroids

The steroids scandals that have rocked baseball the past few years may take a new turn based on reports that a former clubhouse employee of the New York Mets agreed to plead guilty to distributing steroids and money laundering.  The plea came in the Northern District of California, where the BALCO investigation has continued with the grand jury inquiry into whether San Francisco Giants slugger Barry Bonds committed perjury in 2003 when he testified about his use of performance-enhancing drugs.  According to a report on SI.com (here), Kirk J. Radomski worked at Shea Stadium for the Mets from 1985 to 1995, and after BALCO was shut down he became a source of steroids for major league players.  The article states that he began to cooperate in the investigation after a search of his home, and that his cell phone records include the numbers of current and former players.  This development could mean a substantial expansion of the federal grand jury's steroids investigation.  Whether any of the players involved in the BALCO investigation might also be linked to Radomski remains to be seen. (ph)

Baker Hughes Settles Criminal and Civil FCPA Charges

Oil-field services company Baker Hughes Inc. settled charges that it paid bribes to obtain business from the state-owned oil company in Kazakhstan.  A subsidiary of the company agreed to plead guilty to charges of conspiracy, violation of the FCPA, and aiding and abetting a violation of the books-and-records provisions of the federal securities laws; Baker Hughes also settled an SEC civil enforcement action.  The company had agreed to a cease-and-desist order covering FCPA violations in 2001, so this is a second strike against the company because some of the conduct occurred after entry of that order.  In settling the criminal and civil actions, Baker Hughes agreed to pay an $11 million criminal fine, disgorge profits and interest of $23 million, and pay a civil penalty of $10 million.  The $44 million in payments is the largest in an FCPA case, according to a Department of Justice press release (here).  The SEC Litigation Release (here) describes the payments to agents of Kazakhoil:

Baker Hughes paid approximately $5.2 million to two agents while knowing that some or all of the money was intended to bribe government officials, specifically officials of State-owned companies, in Kazakhstan. The complaint alleges that one agent was hired in September 2000 on the understanding that Kazakhoil, Kazakhstan's national oil company at that time, had demanded that the agent be hired to influence senior level employees of Kazakhoil to approve the award of business to the company. Baker Hughes retained the agent principally at the urging of Fearnley. According to the complaint, Fearnley told his bosses that the "agent for Kazakhoil" told him that unless the agent was retained, Baker Hughes could "say goodbye to this and future business." Baker Hughes engaged the agent and was awarded an oil services contract in the Karachaganak oil field in Kazakhstan that generated more than $219 million in gross revenues from 2001 through 2006. Baker Hughes, the complaint alleges, paid the agent $4.1 million to its bank account in London but received no identifiable services from the agent. The complaint also alleges that in 1998 Baker Hughes retained a second agent in connection with the award of a large chemical contract with KazTransOil, the national oil transportation operator of Kazakhstan. Between 1998 and 1999, Baker Hughes paid over $1 million to the agent's Swiss bank account, despite a company employee knowing by December 1998 that the agent's representative was a high-ranking executive of KazTransOil.

The SEC complaint (here) also alleges FCPA violations from bribe payments in "Nigeria, Angola, Indonesia, Russia, Uzbekistan and Kazakhstan in circumstances that reflected a failure to implement sufficient internal controls to determine whether the payments were for legitimate services, whether the payments would be shared with government officials, or whether these payments would be accurately recorded in Baker Hughes' books and records." 

Baker Hughes also entered into a deferred prosecution agreement with the Department of Justice that requires the company to continue its cooperation with the Department of Justice, appoint a compliance monitor, and stay clear for two years.  Unlike most cases involving such an agreement in which criminal charges are dropped after a certain period, the subsidiary entered a guilty plea and the deferred prosecution agreement only precludes additional charges against Baker Hughes for other conduct, most likely related to the payments in the other countries identified in the SEC complaint.  This case involves more than just an isolated payment, but instead what appears to be part of a culture of foreign bribery, and it will be interesting to see whether Baker Hughes will be able to reform its overseas operations.  The government did acknowledge Baker Hughes' cooperation, which likely saved it from even more severe penalties.  The SEC action also named a former business development manager from the company as a defendant, and he did not settle the case.  (ph)

Possible Insider Trading Before Harman Deal -- Say It Ain't So!

This will come as a shock for those who follow the mergers and acquisitions area.  A Bloomberg story (here) notes that in the days before Harman International Industries announced it had agreed to be bought out by KKR and Goldman Sachs on April 26, trading in call option contracts on the company's shares spiked, to the tune of almost twenty (20) times the average daily volume.  On April 18, the volume of contracts was over 11,000 while the average daily volume over the previous twenty days was a shade under 600.  The volume in the May 105 contracts, which are the shortest term options available, led the way, and when Harman announced the deal, its stock shot up by $19 to $122 per share.  Imagine that -- trading in slightly out of the money call options are suddenly way in the money, leading to an outsized gain.  Look for the SEC insider trading case to be filed at some point, and perhaps even a criminal case, and on the chance any of the call option purchases came through an overseas account the filing will be sooner rather than later.  (ph)

Siemens Corruption Probe Spreads to the U.S.

The widening criminal and civil probe of foreign bribes paid by Siemens A.G., the giant German telecommunications company, claimed the company's CEO, Dr. Klaus Kleinfeld, who announced that he would not seek a new contract.  According to a statement (here) issued by Siemens:

He based his decision on the current discussions about postponing his contract extension once again. “In times like these, the company needs clarity about its leadership. I have therefore decided not to make myself available for an extension of my contract,” said Kleinfeld.

Siemens can show major business successes today, yet at the same time is in the midst of an intensive investigation of corruption. Especially in times of such challenges, employees, customers, and the capital markets expect clear leadership more than ever. “The company must have complete freedom of action,” stressed Kleinfeld.

Siemens has been the subject of a foreign corrupt practices investigation by the Munich prosecutor's office that has included the arrest and interrogation of former senior officers, including its former CFO who prosecutors in Germany identified as a suspect in the overseas bribes paid to obtain contracts.  In a quarterly report filed with the SEC (here), the company further disclosed that the SEC and Department of Justice are pursuing investigations of its payments.  "The U.S. Department of Justice is conducting an investigation of possible criminal violations of U.S. law by Siemens in connection with these matters. During the second quarter of fiscal 2007, Siemens was advised that the U.S. Securities and Exchange Commission’s enforcement division had converted its informal inquiry into these matters into a formal investigation."

The resignation of Dr. Kleinfeld may signal a change in how European companies view criminal investigations and the responsibility of the corporation's leadership for the conduct.  In the United States, it has become almost commonplace for a CEO to resign -- or be forced out -- if there is evidence of a substantial breakdown in the company's legal compliance.  European companies long took a different approach, particularly in the area of overseas bribes, which in some countries were deductible business expenses. 

The investigation of Siemens for violations of the FCPA  by the German prosecutors is a new development because it was only a little more than a decade ago that a number of European nations first adopted statutes similar to the FCPA making foreign bribes a criminal offense for both individuals and corporations.  I suspect the SEC and Department of Justice are strongly encouraging the German prosecutors, and certainly the SEC will share information gathered in its investigation with foreign law enforcement officials.  While some bemoan the concept of corporate criminal liability, it is a new concept in Europe that may be paying dividends in curbing abusive business practices. (ph)

Scrushy Attacks the Constitutionality of the Federal Criminal Jurisdiction Statute

Former HealthSouth CEO Richard Scrushy is trying a new tactic in attacking his conviction on corruption charges related to a payment to former Alabama Governor Don Siegelman.  According to a brief filed by his attorneys, available below, the federal criminal jurisdiction statute, 18 U.S.C. Sec. 3231, is unconstitutional because it was not properly passed by Congress in 1948.  I won't pretend to follow the argument completely, but the gist is that the bill ultimately passed by Congress had not been properly introduced in the House because that body had adjourned sine die the previous year without being reintroduced, and then the Senate passed a different version of the bill that was not enrolled until after another adjournment. 

While I suspect there's something amiss with this argument, it certainly wins points for creativity, but it may not have the effect Scrushy's legal team asserts as a basis for overturning his conviction.  Section 3231 replaced previous statutes that granted the United States District Courts exclusive jurisdiction over federal criminal prosecutions.  It has been a cornerstone of federal constitutional law that there are no common law federal offenses, the venerable proposition was first announced in United States v. Hudson & Goodwin, 7 Cranch 32 (1812) -- how often do you get to write that kind of citation.  Since then, all federal prosecutions must be based on an identified statute and brought only in federal court unless the provision specifically allows for a state prosecution, something that many pre-Civil War laws authorized.  Federal courts have long had jurisdiction over violations of federal statutes, so holding that the 1948 statute is unconstitutional because it was not properly passed would mean the prior statutes would still be valid and could not have been repealed or displaced by Section 3231.  If that is the case, then the federal district court did have jurisdiction to try and convict Scrushy, albeit under a different provision of the federal criminal code.  While certainly interesting, I suspect Scrushy's argument won't get much traction in the district court or the Eleventh Circuit.

Chief U.S. District Judge Mark Fuller finally set a sentencing date for Scrushy and Siegelman of June 26 (see AP story here), almost a year after the convictions.  The judge still hasn't decided issues related to the jury selection process, so there may be more to come on that front, and with almost two months until sentencing, look for a lot more fireworks in this case. (ph)

Download us_v. Scrushy Jurisdiction Brief.pdf

Kobi Alexander Burrows Into Namibia

The extradition process for former Comverse Technology, Inc. CEO Kobi Alexander slowed even more as Namibian prosecutors requested a postponement of the first hearing on his case until June to select a new magistrate.  While the extradition request by U.S. prosecutors to have him face charges related to options backdating and obstruction of justice at the company won't be decided any time soon, Alexander has embarked on a public relations and investment campaign that appears designed to garner support from the Namibian government and people.  According to an article in Israeli daily Ha'aretz (here), he has announced a scholarship fund for Namibian students of $21,000 -- named after himself and his wife.  A press release issued by the Education Ministry praised Alexander's contribution.  The story also notes that billboards supporting Alexander have appeared around Windhoek, the Namibian capitol where Alexander lives and has promised to invest millions in low-cost housing. 

It will be interesting to see whether public sympathy generated by the campaign -- organized by worldwide PR firm TBWA -- will be able to outweigh pressure from the United States government on the Republic of Namibia.  A report from USAID (here) notes that while Namibia has developed a democratic government and free press, it also suffers from one of the highest rates of AIDS.  In 2005, USAID provided over $42 million in assistance through the President’s Emergency Plan for AIDS Relief.  That level of assistance and other aid could make it hard for the Namibian government to reject an extradition request for Alexander.  Don't hold your breath for a resolution of the case any time soon. (ph)