White Collar Crime Prof Blog

Report of Insider Trading at EADS

A preliminary investigation by the French financial regulator Autorité des marchés financiers (AMF) indicates that a number of senior executives at Franco-German aircraft manufacturer European Aeronautic Defense & Space Co. NV (EADS) sold shares before the announcement of problems with the company's largest development project ever, the A380.  The AMF report was discussed in the French newspaper Le Figaro and the trading allegedly occurred between November 2005 and March 2006, before the June 2006 announcement of technical problems with the superjumbo A380 and also the A350 aircraft.  The stock dropped over 25% on that announcement, and it is not clear how far in advance the information was known to 21 managers and executives who sold shares.  The AMF issued a statement (here) that

it submitted an interim memorandum to the prosecuting authorities in Paris in early September, in accordance with law; it obviously has no comment on the Le Figaro report; it insists that it has not completed its investigations and is unlikely to do so before the beginning of 2008; consequently, the AMF Board, which has sole authority to commence regulatory proceedings against persons suspected of infringing its General Regulation, has not given an opinion on the matters reported in the article and, at this stage, has decided solely to inform the criminal court thereof; at this stage of the procedure, which is still a standard inquiry, the persons concerned have not had the opportunity to exercise their right of defence.

Insider trading cases in the European Union are fairly uncommon, at least as compared to the United States.  It will be interesting to see how the investigation develops, especially when it involves a company with the political significance of EADS.  A story on CNN.com (here) discusses the report. (ph)

Leahy Wants Assurances From Mukasey

The imbroglio over the firing of eight U.S. Attorneys in 2006 has largely receded into the background, and there does not appear to be much interest in pursuing the issue on Capitol Hill.  Judiciary Committee Chairman Patrick Leahy sent a letter to Attorney General nominee Judge Michael Mukasey seeking his assurances that the problems arising from the firing of the U.S. Attorneys will not come to the surface again, and that he will not interfere with any contempt citation Congress might issue regarding the refusal of former White House aides Harriet Miers and Josh Bolten to testify about the firings.  The letter (here) states:

The mass firings of the U.S. Attorneys appointed by this President were unprecedented.  I will inquire whether you share my view that the integrity and independence of federal law enforcement should not be compromised by political operatives from the White House.  I will ask for your assurance that the Department of Justice and, in particular, our U.S. Attorneys, will not be employed in upcoming elections to seek to affect the outcome.  The Department of Justice should be working to protect Americans’ right to vote and have their vote count, not seeking to swing close elections into a partisan column by leaking allegations of corruption or bringing last minute legal actions alleging voter fraud. * * *

Under applicable statutes and practices, contempt citations against Administration officials by the House and Senate would be certified to the U.S. Attorney for the District of Columbia to bring before a grand jury for its action.  If the House or Senate certified a contempt citation against current or former White House officials arising from the U.S. Attorney investigation, would you permit the U.S. Attorney to carry out the law and refer the matter to a grand jury as required by 2 U.S.C. § 194? If the White House sought to prevent the U.S. Attorney from bringing contempt charges to a grand jury as required by law, would you take any action to prevent the U.S. Attorney from doing so?

More generally, what would you do as Attorney General if you learned that a White House official had called a U.S. Attorney asking for information about an on-going criminal investigation?  What would you do as Attorney General if you learned that a Member of Congress had called a U.S. Attorney asking for information about an on-going criminal investigation?

The issue raised in the last question might be better addressed to Representatives and Senators rather than putting the onus on the Department of Justice to resist such inquiries.  Whether Judge Mukasey will give anything close to an acceptable response remains to be seen, but it's unlikely he will address hypotheticals beyond asserting that he will "call them like I see them" and act in the best interests of the citizenry.  Senator Leahy takes a somewhat conciliatory tone at the end the letter, bemoaning the White House's alleged failure to cooperate with the Committee that has "left you to answer the unanswered questions and left longstanding disputes unresolved."  (ph)

Jury Selection Begins for Defense Contractor Accused of Bribing Duke Cunningham

Jury selection began for the trial of defense contractor Brent Wilkes, who is accused of giving former California Representative Randy "Duke" Cunningham over $600,000 in bribes and other benefits in exchange for the award of no-bid contracts.  Wilkes had earlier subpoenaed twelve Representatives to testify at trial, which drew a motion to quash from the counsel to the House of Representatives (see earlier post here).  The subpoenas have been withdrawn, but new ones may be issued to former House Speaker Dennis Hastert and four California Congressmen, Duncan Hunter, Jerry Lewis, John Doolittle and Darrell Issa, who allegedly were present on trips with Cunningham.  According to a story in The Hill (here), U.S. District Judge Larry Burns said he would enforce subpoenas to Representatives only if they have information relevant to the defense.  Any new subpoenas will probably trigger another motion to quash from the House counsel, who earlier asserted an absolute privilege under the Speech or Debate Clause that prevents members of Congress from testifying -- it's not clear whether such a broad assertion of the constitutional protection will fly. (ph)

York Settles FCPA Investigation

York International Corp., now a subsidiary of Johnson Controls, settled an investigation of overseas bribes by agreeing to a deferred prosecution agreement (available below) with the Department of Justice and a civil settlement with the SEC.  The case involves a wide range of payments in violation of the Foreign Corrupt Practices Act, as described in the SEC's Litigation Release (here):

The Commission's complaint alleges that York International's Delaware subsidiary paid approximately $522,500 to an intermediary while knowing that most of the money was intended to bribe United Arab Emirate officials; York International's Dubai subsidiary authorized and made approximately $647,110 in kickback payments under the U.N. Oil for Food Program; and that York International's subsidiaries devised elaborate schemes to conceal kickback payments of over $7.5 million made to secure orders on certain commercial and government projects in the Middle East, India, China, Nigeria and Europe.

The company agreed to pay a $10 million criminal fine, a $2 million civil penalty, and disgorge profits and pre-judgment interest of over $10 million, for a total cost of $22 million. 

An interesting part of the deferred prosecution agreement concerns waiving the attorney-client privilege and work product protection, an issue that has become quite contentious.  The agreement provides that the Department of Justice can request documents and information from the company, including those covered by the privilege, and that York can assert the privilege and protection in response and refuse to provide the requested materials on that basis.  However, the agreement goes on to state that "[i]n the event that York withholds access to the information, documents, records, facilities and/or employees of York, the Department may consider this fact in determining whether York has fully cooperated with the Department."  While the company has not agreed to waive the privilege, assertion of it could come at the cost of determining whether (and to what extent) it has been cooperative. (ph)

Download us_v_york_international_deferred_prosecution_agreement_oct_2007.pdf

Former Cendant Chairman's Conviction Affirmed

The conviction of former Cendant chairman Walter A. Forbes on conspiracy and filing false statement with the SEC, which resulted in a 107-month prison term, was affirmed by the Second Circuit.  The court's decision was issued in an unpublished order (here), and the discussion -- if you can call it that -- of the issues is just a little more than one page.  While Forbes raised nine issues on appeal, only three are addressed briefly, and the decision concludes, "We have considered all of the issues raised, including those noted above, and the relevant law, and conclude that all of defendant’s arguments are without merit."  While many appellate decisions are unpublished, cases involving high-level corporate officers usually have published opinions because the issues are often fairly close.  I can't recall a recent conviction after trial of a corporate officer in a position like Forbes' whose appeal has not resulted in a published opinion, and it's surprising that the issues were treated so tersely in a case involving Williams & Connolly as defense counsel. (ph)

Blackwater - What About the Corporation?

Erik Prince, CEO of Blackwater, says it is up to the Justice Department to investigate "and, if warranted, prosecute personnel involved in the deaths of Iraqi civilians." (Washington Post here)

But the question should also be whether Blackwater, the company, could be held criminally liable if DOJ or the FBI finds conduct that demonstrates that the company failed to promote a culture that avoided criminality within its midst.  Can a corporation be prosecuted if its employees commit criminal acts when discharging their employment?  And how many criminal acts by the employees will warrant an investigation of the entity?

Corporate criminality dates back to the New York Central case in 1909, when a company was criminally liable for violations of the Elkins Act.  Federal courts today use the common law theory of respondeat superior (as opposed to the Model Penal Code) which examines whether the agent was acting within the scope of his or her employment in behalf of the corporation. Courts also use a "collective knowledge" approach that allows the bits and pieces of knowledge from the different parts of the corporation to be combined together. 

Now maybe Blackwater has no criminal culpability here and Prince is right that this was a rogue employee. And maybe any acts that were improper were not within the scope of that person's employment. But perhaps the questions here need to also include: 1) whether the company had a corporate compliance program - which maybe it did ( it has an ethics statement here); 2) whether there was oversight to make certain that people would not be working while intoxicated or committing other possible improper acts; and 3) whether the companies actions were in violation of any criminal laws.  Maybe there will be nothing to write home about here - and that's good, as companies that act in good faith should not be held criminally liable for acts committed by rogue employees.  But as long as corporate criminal liability exists, and as long as a good faith defense for corporations is not embodied in the law, there can always be a question to ask regarding whether there was any corporate criminality liability.

(esp)

SEC Settlement in Dynegy Related Matter

Jess Westbrook, Bloomberg News has an article in the Houston Chronicle titled, "Former Dynegy Figure Settles With SEC." According to this article it would appear that Chief Financial Officer Robert Doty agreed to pay $376,650 to settle SEC allegations related to Project Alpha at Dynegy. Jamie Olis initially received over 24 years in prison, a sentence that was then reduced following a Fifth Circuit remand to 6 years in prison for his role in Project Alpha. Olis asserted his constitutional right to a trial by jury. (see here and here) For full details on the settlement with the SEC see here. The Order issued discusses the roles of individuals in Project Alpha at Dynegy, although the civil findings were without "admitting or denying" the Commission's findings.

(esp)

Is the White House Cutting Back on Funds for White Collar Investigations?

Check out this article by Paul Shukovsky and Daniel Lathrop at Seattlepi.com entitled, "FBI Faces Deep Cuts in Programs to Fight Crimes." The article notes that the Bush Administration 2008 budget will seriously affect the FBI's "ability to tackle white-collar fraud."

(esp)

Oscar Wyatt Pleads

Oscar Wyatt and the Oil for Food Program have certainly been a topic in the news (see here). But Wyatt wants to move on and has agreed to a plea that will allow him to do so. According to the media he is agreeing to a guilty plea to one count - conspiracy to commit wire fraud - that will mean he faces a sentence of 18 to 24 months and an 11 million dollar forfeiture. (See Wall St Jrl here, USA Today -AP- here).  Interestingly this plea comes in the middle of his trial (see NYTimes here).

So why might someone plead guilty in the middle of trial?  Here are some possibilities, although this is not to imply that one or any of these apply to this situation -

• Cost -  The cost of going to trial can be enormous to someone accused of a crime. Ending the process certainly helps in reducing the cost.
• Risk -  Going to trial is taking a risk.  These days with the federal sentencing guidelines, the risk can be enormous.  Having a plea provides certainty and usually a much lesser sentence absent a not guilty finding.  Hearing the evidence and how that evidence is playing with a jury, may motivate one to avoid additional risk.
• Moving On - The toll taken psychologically, on someone accused of a crime, is enormous.  Ending the process with a certainty allows for "life after" - which in white collar cases can be important, especially after an extremely long investigation.
• New Discovery - Unfortunately, not all prosecutors turn over discovery well in advance of trial.  Receiving the discovery can provide a very good reason for wanting to plea, as one now sees the evidence the government has available.
• Jencks Material - By statute, the government does not have to turn over witnesses statements until after the witness testifies.  Many prosecutors realize the value of turning over this material well in advance of trial.   After all, if the accused sees the evidence against him or herself, there is more likely to be a quick plea. It certainly saves taxpayer money.

(esp)

White Collar Crime Conference Remarks

The WSJ via an article by Even Perez comments on remarks made by Judge Kaplan at the recent National Association of Criminal Defense Lawyers (NACDL) & Georgetown University's White Collar Crime conference.  It is not surprising to see his concern about the government's power in securing agreements with companies. 

The KPMG related case stands as a headline to those monitoring fairness in the system that government power in this context needs to be re-evaluated.  The bill to curb government requests for waivers of the attorney-client privilege are a step in the right direction (see here).

(esp)

The New Bristol Myers Squibb Agreement

The United State Attorney for Massachusetts reports in a press release that "Bristol-Myers Squibb Company (BMS) and its wholly owned subsidiary, Apothecon, Inc., have agreed to pay in excess of $515 million to resolve a broad array of federal and state civil allegations involving their drug marketing and pricing practices."  Within the press release one finds the following:

"BMS cooperated in aspects of the Government’s investigation. For example, BMS voluntarily disclosed to the United States Attorney's Office in the District of Massachusetts its practices with respect to the remuneration paid to physicians in 2000-2003, and voluntarily provided to the government numerous documents detailing these practices. With respect to Abilify, prior to the government’s investigation, BMS initiated steps to modify its physician “call lists” to reduce the potential for off-label marketing. In addition, BMS made available to the government Frederick Lacey, a retired federal district court judge who had been serving as BMS' compliance monitor pursuant to a deferred prosecution agreement in the District of New Jersey. Judge Lacey and other senior BMS officials presented extensive evidence of the compliance practices under which BMS currently operates. The government took BMS’s self-disclosure, its cooperation, and its current practices into account in agreeing to this civil resolution."

The Agreement does contain a waiver and cooperation provision, but it does not ask for a waiver of attorney-client privileged material. The agreement states:

33. BMS agrees to cooperate fully and truthfully with the United States' investigation of the Covered Conduct, as that pertains to individuals and entities not released in this Agreement.  Upon reasonable notice, BMS shall make reasonable efforts to facilitate access to, and encourage cooperation of it directors, officers, and employees for interviews and testimony, consistent with the rights and privileges of such individuals and shall furnish to the United States, upon reasonable request, all non-privileged documents and records in its possession, custody, or control related to the Covered Conduct.

By the way, this agreement also does not include a chair to law school.

(esp)

Destroying Computer - Misprison of a Felony

Destroying a computer with evidence of pornography can land you a conviction. A press release of the U.S. Attorney for Connecticut reports of a plea "to one count of misprision of a felony" by an attorney who "admitted that he was aware that an individual had committed a child pornography crime, yet he failed to report it to authorities."  The release notes that he "then concealed the crime by destroying a laptop computer containing the child pornography."

The attorney was acting as attorney to a church. According to the press release, the attorney told the individual with the improper items on the computer that "this is serious business,” “this is a federal crime that carries a minimum of five years in jail,” and “you need a lawyer.” The attorney for the church then "destroyed and concealed ... [the] laptop."  This attorney then "failed to report to law enforcement that [the person he advised to secure legal counsel], who was not his client, had possessed child pornography."

At least the charge was not a SOX amendment charge (see here)

Every attorney who represents an entity of any type needs to be aware of this case. It is sad to see a criminal conviction being given to an attorney based upon these facts.  Would a disciplinary violation have been a better resolution?

Information -  Download Information.pdf

Plea Agreement - Download plea_agreement.pdf

(esp)

Prosecutors Subpoena California Congressman and Five Aides in Abramoff-Related Investigation

A federal grand jury investigating Capitol Hill corruption subpoenaed California Representative John Doolittle and five of his aides for a number of documents created over the past eleven years.  The Congressman has been under investigation for over a year, including a search of his Virginia home, related to dealings with former superlobbyist Jack Abramoff, who is serving a six year sentence in federal prison and has been cooperating in the Department of Justice's continuing inquiry into corruption in Congress. Two of Doolittle's aide reportedly testified before the grand jury recently.  According to a story in The Hill (here), Representative Doolittle's lawyer asserts that the subpoenas cover "“virtually every record including legislative records," and the Congressman plans to fight them on the ground that the records are protected by the Speech or Debate Clause. 

Article I, Section 6 of the Constitution provides that "for any Speech or Debate in either House, [members of Congress] shall not be questioned in any other Place."  The two leading Supreme Court cases on the scope of the Speech or Debate Clause are United States v. Brewster, 408 U.S. 501 (1972), and United States v. Helstoski, 442 U.S. 477 (1979). In Brewster, the Court stated, "[A] Member of Congress may be prosecuted under a criminal statute provided that the Government's case does not rely on legislative acts or the motivation for legislative acts. A legislative act has consistently been defined as an act generally done in Congress in relation to the business before it. In sum, the Speech or Debate Clause prohibits inquiry only into those things generally said or done in the House or the Senate in the performance of official duties and into the motivation for those acts." [Italics added]  In Helstoski, the Court explained, "Likewise, a promise to introduce a bill is not a legislative act. As to what restrictions the Clause places on the admission of evidence, our concern is not with the ‘specificity’ of the reference. Instead, our concern is whether there is mention of a legislative act. To effectuate the intent of the Clause, the Court has construed it to protect other ‘legislative acts’ such as utterances in committee hearings and reports. But it is clear from the language of the Clause that protection extends only to an act that has already been performed. A promise to deliver a speech, to vote, or to solicit other votes at some future date is not a legislative act."  The government will have to walk a fine line in seeking materials that do not come within the definition of "legislative act."

The D.C. Circuit's recent decision related to the search for records in the office of Louisiana Representative William Jefferson will likely be a favorable precedent for Representative Doolittle because the court held that the Executive branch cannot view legislative materials protected by the Speech or Debate Clause.  The government is seeking rehearing en banc to clarify the scope of the privilege afforded members of Congress by the Constitution (see earlier post here).  The number of investigations of Capitol Hill corruption, and the link to official acts of Congress, likely means this issue will arise with some regularity in the near future.  If the D.C. Circuit does not grant review by the full court, look for the Department of Justice to seek Supreme Court review of the issue.  (ph)

Five Medical Companies Settle Criminal Kickback Investigation

Five companies that are the dominant suppliers of surgical knee and hip implants agreed to settle a criminal investigation that they paid kickbacks to doctors in the form of consulting fees and lavish travel and entertainment to get them to use their products.  The companies are Zimmer, Inc., Depuy Orthopaedics, Inc., Biomet Inc., Smith & Nephew, Inc., and Stryker Orthopedics, Inc., and together they control 95% of the market for the surgical products.  The U.S. Attorney's Office for the District of New Jersey announced that the first four companies listed agreed to a deferred prosecution agreement, while the fifth, Stryker, entered into a non-prosecution agreement because it was the first one in the door to report the illegal payments to physicians.  According to a press release (here):

The criminal Complaints accuse the four companies of using consulting agreements with orthopedic surgeons as inducements to use a particular company’s artificial hip and knee reconstruction and replacement products. The investigation revealed that this was a common practice by the companies from at least 2002 through 2006. Surgeons who had agreements with the companies were typically paid tens to hundreds of thousands of dollars per year for consulting contracts and were often lavished with trips and other expensive perquisites.

The deferred and non-prosecution agreements each last for 18 months.  Four companies also agreed to five-year Corporate Integrity Agreements with the Department of Health and Human Services, and settled civil claims by paying over $300 million for violating the anti-kickback statute.  Stryker was not involved in the civil settlements.  By receiving a non-prosecution agreement, Stryker gained the benefit of not having a criminal complaint filed against it, and the U.S. Attorney's approach is similar to the Antitrust Division's policy of giving the first reporter of a violation immunity from prosecution.

The deferred prosecution agreements require the companies to pay for corporate monitors to ensure their compliance, a standard feature of such settlements.  The monitors appointed pursuant to the four deferred prosecution agreements are former Attorney General John Ashcroft, former U.S. Attorneys Debra Yang (CD Cal.) and David Kelley (SDNY), and former New Jersey Attorney General David Samson.  Interestingly, all four are law enforcement colleagues of the New Jersey U.S. Attorney, Christopher Christie, showing again the value of connections in receiving such appointments, which can be quite rewarding to the firm's employing the monitors.  The agreements are available on the U.S. Attorney's website (here). (ph)

House Moves to Quash Subpoenas to Twelve Representatives

As discussed in an earlier post (here), Brent Wilkes sent subpoenas to twelve members of the House of Representatives -- one was withdrawn -- for their testimony at his upcoming trial on corruption charges related to bribes paid to former Representative Randy "Duke" Cunningham.   The House general counsel moved to quash the subpoenas on a number of grounds, among them that the Speech or Debate Clause grants members of Congress an absolute privilege from testifying, the subpoenas seek their appearance while the House is in session, the subpoenas do not comply with the House rules, and the defendant failed to tender the appropriate witness fees and mileage allowances -- the last one is really in there.  The filing also notes that an investigator for defense counsel stated that subpoenas will also be issued to four senators, the White House chief of staff, and the Secretary and Deputy Secretary of Defense, although they have not been served.  The filing also contains the attachment for documents sent to two Representatives that seeks, inter alia, "documentation of all political contributions, meals, entertainment or other travel, goods or services offered to you or accepted by you in exchange for the performance of your duty as a member of the legislature or in exchange for any special treatment afforded to you by anyone . . . ."  Somehow, I can't see the subpoena generating many documents responsive to this request.

The government filed a motion (see earlier post here) seeking to preclude Wilkes from offering a necessity or duress defense to the corruption charges.  These subpoenas to Capitol Hill appear to be designed to put on a defense of a "culture of corruption" in Congress, and that Wilkes simply went along with the status quo and is now being made into a scapegoat.  Whether the judge will allow such a defense is questionable, and unless Wilkes can show a plausible reason for subpoenaing so many Congressmen he never dealt with, the subpoenas probably will be quashed. (ph)

Download us_v_wilkes_motion_of_us_house_of_representatives_sept_25_2007.pdf

An End-of-the-Year Insider Trading Clearance at the SEC

With the end of the fiscal year nearly upon us, the SEC seems to be clearing its docket of insider trading cases, announcing three new ones on the second to the last day of FY 2007.  Last year, the Commission was criticized for the decrease in enforcement actions, specifically insider trading cases, and it's unlikely that criticism will be leveled again with the increase in the number of such cases filed.  Note when the trading involved in the three cases occurred:

• A father and son were accused of trading in the shares of Aspen Technology, Inc., Regeneration Technologies, Inc., and Triangle Pharmaceuticals, Inc. in 2001 and 2002 based on information the son obtained while working for Banc of America Securities and passed on to his father.  The father comes with quite a pedigree, having been "a founding member and Director of the Chicago Board of Options Exchange, Director of the American Stock Exchange, a Board member of the Securities Industry Automation Corporation, and a Director of the New York Institute of Finance."  The two defendants settled the matter by agreeing to be jointly and severally liable to disgorge profits of $204,476 plus prejudgment interest of $72,511.48.  The son will pay a one-time civil penalty, while the father agreed to a double penalty.  The SEC Litigation Release is here.
• A former director and member of the audit committee at NBTY, Inc. is accused of tipping a friend about an impending announcement of an earnings shortfall in the third quarter of 2004.  Based on the information, the friend "sold his entire position of NBTY stock, sold the stock short, purchased put contracts, and sold call contracts through the custodial accounts of his three children," realizing $400,000 in gains and losses avoided.  The SEC complaint is here.
• A tippee of a vice president of LendingTree, Inc., traded and tipped others before the announcement of a buyout of the company in May 2003.  The defendant realized profits of $14,078 himself, and his tippees made $74,516.  In settling the matter,the defendant agreed to disgorge his profits and pay a $88,594 penalty, equal to the total profits made through his and his tippees trading.  The SEC Litigation Release is here.

Just like the auto companies, the SEC needs to clear the lot for next year's models. (ph)

Siemens Bribery Probe Keeps Expanding . . . Again

The internal investigation of corrupt payments at Siemens A.G. just can't seem to stop these days.  New York law firm Debevoise & Plimpton reportedly has told the company's managing board that the suspicious payments to obtain overseas contracts involve upwards of 1.6 billion euros, far more than the original disclosure of questionable payments of more than 400 million euros.  More importantly, the investigation shows the payments were not limited to Siemens' telecommunications unit, but also involve the power generation division and other units of the company.  As the extent of its foreign bribery grows, so too does the likelihood that Siemens will face a substantial criminal fine and may have to plead guilty in the U.S. to a Foreign Corrupt Practices Act violation rather than receive a deferred prosecution agreement.  An AP story (here) discusses the latest development at Siemens. (ph)