White Collar Crime Prof Blog

How Do You Lose a Search Warrant?

Compared to a grand jury subpoena, obtaining a search warrant involves quite a bit of hassle for the prosecutor.  While the subpoena is just mailed out, a warrant requires a detailed affidavit, preparation of the warrant that meets the Fourth Amendment specificity requirements for the place to be searched and items to be seized, and then approval by a "neutral and detached magistrate."  Warrants are still uncommon in white collar crime cases, and the decision to try to get one is usually of some significance in an investigation.  Once the warrant is issued, the next phase can be even more daunting, requiring the organization of the volume of records obtained by the agents.  It is not unknown for agents to cart away hundreds of boxes of documents from a search because the descriptions are usually so broad, such as "all documents related to the sale of X since 2003."  That's why an article in Corporate Counsel (available on Law.Com here) is so strange because it states that the prosecutors in a corporate investigation thought a search warrant had been executed but it does not appear that the search ever occurred.

The case involves the investigation of Chiquita for protection payments to a Columbian right-wing paramilitary group that was designated as a terrorist organization.  An earlier article in Corporate Counsel about the case (available on Law.Com here), which Chiquita settled, stated that a warrant was executed at the company's headquarters in 2004.  That statement was based on informationi provided by two prosecutors on the case, but counsel for the company denied that a search ever occurred.  No one can seem to locate the records related to the warrant, and the Department of Justice has refused to comment on the matter. 

What is so odd about this is that executing a warrant involves steps that create a paper trail.  Federal Rule of Criminal Procedure 41(f) requires that "[a]n officer present during the execution of the warrant must prepare and verify an inventory of any property seized," and then the "officer executing the warrant must promptly return it — together with a copy of the inventory — to the magistrate judge designated on the warrant."  Not to mention the documents that are seized in a search, which have to go somewhere.  How is it that the prosecutors could think a warrant was issued when it appears no search ever took place?  Did they ever ask to see the records seized, or to review the inventory to make sure the agents seized all the records covered by the warrant? 

It's a little hard to believe something like this could have fallen through the cracks, and the article notes that the mystery remains about what happened to the Chiquita warrant -- no one at the Justice Department is talking much about it.  Maybe this one joins the Loch Nest monster and the flying saucers over Roswell as another great mystery: the Case of the Disappearing Search Warrant. (ph)

The Slow Moving Freight Train That Is U.S. v. Stein

If you've ever sat at a railroad crossing waiting for a freight train to pass, it is such agony as an endless stream of cars rolls by.  I suspect the participants in the KPMG tax shelter prosecution may be feeling the same way as the case moves at a languid pace.  U.S. District Judge Lewis Kaplan issued an order on November 29 (available below) scheduling the trial for the remaining defendants in the case, with voir dire to begin on September 25, 2008, and the opening arguments on October 2.  The original indictment came down in October 2005. 

The case has been through a number of proceedings, including the dismissal of thirteen defendants after the district court determined that prosecutors violated their Fifth and Sixth  Amendment rights related to pressuring KPMG to cut off payment of their attorney's fees.  That issue is now before the Second Circuit, which has granted an extension to the defendants to file their brief until January 11, 2008, with the government reply due on January 25.  At that point the case will be ready for oral argument, and it's anyone's guess how quickly the court of appeals can rule on the case. 

There is a possibility that the Second Circuit will issue its decision by September 2008, and it if reverses Judge Kaplan's order and reinstates the indictment, then the current trial may be postponed yet again to figure out whether to try all the defendants together.  I think that regardless of who wins in the Second Circuit, there's at least a decent chance of the case going to the Supreme Court because the issues involving the right to counsel are coming up with greater regularity in corporate crime investigations.  Will there be a trial by 2009?  2010?  Perhaps even 2011?  Keep counting those freight cars.  (ph)

Download us_v_stein_order_setting_trial_nov_29_2007.pdf

Former Brocade HR Manager Found Guilty

The second defendant from Brocade Communications was found guilty by a jury in San Francisco on charges related to options backdating at the company.  Stephanie Jensen, the former human resources manager for the company, was convicted on one count of conspiracy and one count of filing false records with the SEC.  Jensen was charged with former Brocade CEO Gregory Reyes in 2006, and initially there were eight charges against her.  After the district court granted a severance motion, the government dismissed six counts, presenting a simpler case that focused on her work with Reyes to backdate options grants to a number of new hires at Brocade and the resulting false statements to the SEC because the backdated options were not properly accounted for in the financial statements.  According to an AP story (here), Jensen's primary defense was her lack of knowledge about the accounting for stock options.

Similar to the Reyes conviction, the government's case did not include evidence that Jensen benefited personally from the backdating, which is often a key component in such prosecutions.  The government relied in large part on the testimony of co-workers who raised questions about the backdating practices and Jensen's reassurances about who would be held responsible.

For a white collar crime case, this one was over almost before it began, with the trial lasting just a bit over one week.  The district court postponed the sentencing of Reyes until after Jensen's trial, so that should take place in the near future. (ph)

The Defense of Dickie Scruggs

The week since the indictment of Mississippi tort lawyer Dickie Scruggs and four other defendants for allegedly trying to bribe a state court judge to rule in their favor in a dispute over $26.5 million in attorney's fees has had enough twists and turns to qualify for the first few chapters of a John Grisham potboiler.  Speaking of whom, the well-known novelist is a friend of Scruggs, and in an interview with the Wall Street Journal (here) described the indictment as "a boneheaded bribery scam that is not in the least bit sophisticated."  Those writers sure know how to turn a phrase, don't they?  Grisham's comment does contain a kernel of Scruggs' likely defense to the charge: "If I was going to bribe a judge, I'd do a whole lot better job of it than this."

One twist in the case was the fact that a key codefendant, Tim Balducci, the payer of the bribe, was not arraigned with the other four defendants in the case, leading to speculation that he was a cooperating witness.  Then, on December 4, Balducci appeared and entered a not guilty plea to the indictment.  If he had been cooperating in the case, the U.S. Attorney's Office likely would have had him plead to a separate criminal information and not be charged in the main indictment.  At least that's the usual way of proceeding, so it does not appear at this point that Balducci is cooperating, although he could down the road.

The indictment (available below) quotes extensively from various conversations among the defendants, which in addition to Scruggs and Balducci include Scruggs' son, another attorney at the Scruggs law firm, and Balducci's non-lawyer partner, Steven Patterson, a former Mississippi State Auditor [NB: How is it that Patterson and Balducci are partners in a firm that includes a law practice when Patterson is not a lawyer?  Mississippi Rule of Professional Conduct 5.4(b) provides "[a] lawyer shall not form a partnership with a nonlawyer if any of the activities of the partnership consist of the practice of law."  Just wondering]  The speculation about Balducci's cooperation was based on the indictment's quoting of conversations between the defendants.  It is possible that Balducci gave a proffer to the government in the hope of striking a deal, but that never occurred and any proffer agreement should prohibit the government from using his statements directly against him.  Another possibility is that the government had a wiretap on the telephone in Balducci's firm.  A number of the conversations appear to be telephone calls to or from Balducci and Patterson and others in the conspiracy, and that may be the source of the information.

If there are recorded telephone conversations on top of videotapes of the meetings between Balducci and the state judge, something that has already been disclosed, then the defense will have to begin by attacking any ambiguity in those conversations.  That would be one component of what I suspect will be a two-prong legal strategy: first, throw Balducci under the bus as someone who lied to Scruggs and the others to carry out his own (delusional) bribery scheme, and then argue that someone as smart as Scruggs would never concoct a "boneheaded bribery scam" with the scheming Balducci. 

The first step is to portray -- or demonize -- Balducci as a misguided sycophant who wanted to curry favor with Scruggs in order to jump on his gravy train.  Then, assert that Balducci lied to Scruggs and the others in order to win a favorable ruling in the attorney's fee dispute -- a variant on the Richard Scrushy Defense in the HealthSouth prosecution.  This is a delicate maneuver, of course, because it requires Scruggs and the others to come across as gullible enough to fall for the entreaties of Balducci.

The second phase is to castigate the bribery scheme described by the government as a product of Balducci's imagination.  The fact that there was any documentation for the payments shows that Scruggs and the others thought Balducci was on the up-and-up because who in their right mind creates a paper trail for a bribe?  This is the flip-side of the gullibility argument, that if this really was a bribery scheme then Scruggs would have done a better job of hiding it.  That argument is dangerous, however, because it risks having the jury conclude that Scruggs was really using Balducci as a cut-out to hide the scheme, and the "boneheaded" paperwork was part of a grand plan to hang him out to dry if necessary. 

This type of argument essentially says to the government (and the jury) that "if you could find it, I couldn't have been doing anything wrong because I would have hidden it better."  Pointing out how much smarter you are than the investigators could be problematic, and recall that one of the seven deadly sins is "superbia," i.e., pride but also sometimes translated as hubris.  Offering intelligence as a defense to charge may backfire.

Balducci is certainly the linchpin of the case, and the defendants and their supporters have already begun to attack him.  We haven't heard anything yet from Balducci, and his lawyer would be smart to keep him quiet for now.  As it turns out, his lawyer for the moment is none other than Tim Balducci, who has to avoid validating the adage that a lawyer who represents himself has a fool for a client.  Staying quiet for now is his best defense, because his conversations with the state judge certainly put him in a bad light. (ph)

Download us_v_scruggs_indictment_nov_28_2007.pdf

                                                                                 

UPDATE: The AP reports (here) that Balducci pleaded not guilty at a hearing at 1:30, then at 4:00 the same day pleaded guilty to one count of conspiracy and has been cooperating in the investigation of Scruggs et al. (plea agreement available below).  Indeed, Balducci's cooperation has already qualified as substantial under Section 5K1.1 of the Sentencing Guidelines and the government will move for a reduced sentence so long as he continues to assist the prosecutors. 

The procedure here is rather strange.  Balducci was not arrested, so the prompt appearance requirement of Federal Rule of Criminal Procedure 5 does not apply, and Rule 10, which governs arraignments, does not have any time requirements.  Why have a defendant plead not guilty, only to turn around and plead guilty?  It could be as simple as the U.S. Attorney's Office not having the paperwork ready, but it is yet another twist in the Scruggs prosecution.  The post above was written based only on Balducci pleading not guilty.  With him cooperating, the defense strategy of demonizing him remains the key. (ph)

Download us_v_balducci_plea_agreement_dec_4_2007.pdf

The Oracle of Omaha On the Witness Stand

The prosecution of four former senior officers of General Reinsurance, including its former CEO, and a former officer from American International Group (AIG) is set to begin shortly in Connecticut.  General Re is a subsidiary of Berkshire Hathaway, and the case involves a transaction between the company and AIG that the government alleges was designed to help AIG prop up its reported loss reserves, thus creating false financial statements because the transaction was not a bona fide reinsurance agreement.  AIG subsequently restated its financials for the transaction, and the government claims that the General Re defendants knew that the contract was to help AIG falsify its records.  Doesn't that sound like something to keep jurors on the edge of their seats?  The superseding indictment (available below) has sixteen counts, charging conspiracy, securities fraud, false statements to the SEC, and mail fraud.

The government's list of possible witnesses (available below) includes the CEO of Berkshire Hathaway, famed investor Warren Buffett, nicknamed the "Oracle of Omaha" for his legendary ability to buy assets on the cheap.  If there is any such thing as an investment rock star, the 77-year old Buffett certainly qualifies.  Buffett was interviewed in the government's investigation, and media reports indicated that he asserted the General Re defendants, which include the company's former general counsel and CFO in addition to its CEO, did not tell him the real purpose of the AIG transaction.  Buffett no doubt brings a little star power to a case that has all the potential to be a major snoozer given the complexity -- or perhaps impenetrability -- of reinsurance.

If Buffett testifies for the government, how will the defense lawyers handle someone referred to as an "oracle"?  The defense counsel in the case come from some of the leading firms with well-known white collar defense groups -- Steptoe & Johnson (including Reid Weingarten, who defended Bernie Ebbers), Covington & Burling (including Alan Vinegrad, former U.S. Attorney in Brooklyn), Cadwalader & Wickersham (including Jim Robinson, former head of the Criminal Division at DOJ), Proskauer Rose, and litigation boutique Hafetz & Necheles.  How these different lawyers handle Buffet will the interesting to watch, should he testify.

The government lists thirty witnesses it may call, not including possible rebuttal witnesses, while the defense has sixty-five potential witnesses.  Those lists of witnesses are usually inflated so that neither side can be accused of calling a witness who the other side didn't know about.  Even these inflated numbers indicate that the case is unlikely to be a quick one.  (ph)

Download us_v_ferguson_superseding_indictment_oct_2006.pdf

Download us_v_ferguson_government_witness_list_dec_3_2007.pdf

Limiting the Scope of Sun Diamond

The Second Circuit issued an opinion in the case of U.S. v. Ganim, a case with multiple convictions including RICO, honest services mail fraud, bribery under section 666, conspiracy, and tax. In affirming the conviction, the court held that "the government was not required to prove a direct link between a benefit Ganim received and a specific act he performed, so long as the government proved that Ganim received benefits in exchange for his agreement to perform specific official acts or to do so as the opportunities arose."  Ganim, the former mayor of Bridgeport, Conn. was sentenced to 108 months imprisonment.

The most fascinating aspect of the opinion pertains to whether proof "of a government official's promise to perform a future, but unspecified, official act is sufficient to demonstrate the requisite quid pro quo for a conviction."  The defendant attempted to use the case of U.S. v. Sun-Diamond to argue "that a specific act be identified and directly linked to a benefit at the time the benefit is received."  Thus, the defense was claiming that the Sun Diamond case, a gratuities case, should be extended to bribery under section 666.  The Second Circuit, however, rejected this argument after examining the difference between the two statutes and the policy rationale in Sun Diamond for distinguishing between legal and illegal gratuities.  The court states that the limiting principle found in Sun Diamond is not needed in the context of this bribery statute. The next question will likely be whether the Supreme Court thinks that an extension of Sun Diamond to bribery under 666 merits review.

(esp)

Backdating Plea

A press release of the Center District of California reports that "[a] former vice president of human resources at Broadcom Corporation has agreed to plead guilty to obstruction of justice in connection with a government investigation of options backdating at the Irvine-based technology company." The plea agreement was to a one count Information that "alleges that the [defendant] instructed a subordinate to delete an electronic mail that was evidence of option backdating by Broadcom senior executives and board members."  The agreement includes cooperation. 

One finds the typical language in the agreement that relates to a possible 5K1.1 motion by the government. The agreement states:

"d) At this time the USAO makes no agreement or representation as to whether any cooperation that defendant has provided or intends to provide constitutes substantial assistance. The decision whether defendant has provided substantial assistance rests solely within the discretion of the USAO.

e) The USAO's determination of whether defendant has provided substantial assistance will not depend in any way on whether the government prevails at any trial or court hearing in which defendant testifies.

Should the prosecution be allowed to determine whether there has been sufficient substantial assistance.  Even though one finds that it will not rest on someone being found guilty, it does place undue pressure on the cooperating witness to please the government.  One has to wonder whether the credibility of the evidence is compromised by the government influence over the witness's future.  Wouldn't it be better placed in the hands of the judiciary?

Press Release -

Download broadcom_tullos.151.pdf

Plea Agreement -

Download broadcom_tullos_plea_agreement.pdf

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New Article - "Deterrence and the Corporate Death Penalty"

Professors Assaf Hamdani (Hebrew University) and Alon Klement (Interdisciplinary Center Herzliyah - Radzyner School of Law) have a piece on SSRN titled, "Deterrence and the Corporate Death Penalty."  They argue that "the corporate death penalty may undermine deterrence."  The abstract and article for download can be found here.

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Name the Top Cities For Corporate Crime Prosecutions

Check out here the findings of Russell Mokhiber, of the Corporate Crime Reporter, on the cities with the most corporate crime prosecutions.

(esp)

Olis - Was There A Brady Violation?

The latest in the Jamie Olis case is a Brief on why Jamie Olis should receive bail. It includes arguments on the likelihood of success on appeal.  There is a motion for discovery that raises issues of whether Olis was properly given exculpatory material by the Government. Attorney Cassman has an affidavit that provides support.  A key issue will be whether the U.S. Attorney's Office had contact with Dynegy and failed to disclose this to the accused.  The affidavit states that "testimony at the recent Yates v. Dynegy civil trial demonstrates that the USAO had frequent contact with other Dynegy employees — including attorneys in Dynegy’s general counsel’s office — during the prosecution of Olis."

In recent years we have seen issues of the government using civil matters collaterally with criminal matters.  In most cases this benefits the government.  But, this case may be the warning sign to the government about having tangential civil matters, especially when these matters may provide evidence that needs to be disclosed to the defense.  Certainly the government cannot claim that the civil and criminal divisions are separate and therefore the items are not subject to discovery.  If the government intends to continue to use doctrines like "collective knowledge" against defendants then they too must be subject to its rules.  What was the collective knowledge of the government here, and was the discovery properly provided to defense counsel prior to trial?

Download 327OlisMotionforDiscovery.pdf

Download 327-2ProposedOrder.pdf

Download 328CassmanDeclreMotionforDiscovery.pdf

Download 326OlisReplyreBail.pdf

(esp)

Challenging the SEC Over the Denial of Attorney's Fees

One of the defendants in the SEC's civil lawsuit (amended complaint here) against a number of former Nortel Networks defendants for alleged accounting fraud has filed a motion to dismiss based on the claim that the Commission sought to improperly pressured the company to deny her the payment of attorney's fees.  The argument is reminiscent of the KPMG case, which is cited in the brief, in which the indictment of thirteen defendants was dismissed because of pressure from prosecutors on the accounting firm to deny attorney's fees to a number of former partners and employees later charged for their work on tax shelters.  A Globe & Mail article (here) discusses the filing, and notes the connection with the KPMG case.  Whether the two are the same is questionable because there are differences between the cases that may be crucial.

The motion by Mary Anne Poland (available below), a former assistant controller at Nortel, makes two interconnected arguments.  First, Nortel Networks cut off payment of her attorney's fees when the SEC indicated that it was looking at her as a possible defendant in an enforcement action.  Unlike the company's former CEO and CFO, also defendants in the suit, she does not have the deep pockets necessary to fight an SEC securities fraud case, which usually involves significant discovery and a long trial if it gets that far.  The motion states that Nortel's counsel, who was the former head of the Enforcement Division at the SEC, counseled the company to terminate the payment so that it could appear cooperative with the SEC in the case.  Nortel eventually settled the accounting case by paying a $35 million civil penalty. 

Poland's motion points to the company's cooperation as evidence of the Commission's involvement in the decision to terminate the attorney's fees.  The SEC's Litigation Release (here) announcing the settlement with Nortel states that "the Commission acknowledges Nortel's substantial remedial efforts and cooperation."  In addition, the motion notes that the SEC announced in another case -- involving telecom equipment manufacturer Lucent -- the Commission highlighted the company's cooperation that involved terminating attorney's fee payments for employees.  The argument is that the Commission, at least indirectly, caused Nortel to terminate Poland's attorney's fees.  Hence, the specter of the KPMG case, in which such governmental pressure led the firm to cut off the attorney's fees that eventually triggered the dismissal of the indictment. 

The problem for Poland is that the SEC's policy was not as explicit as the Thompson Memo that the defendants pointed to in the KPMG case as the basis for terminating the attorney's fees.  The motion leads off with the district court decision in United States v. Stein that found the violation of the defendant's rights based on the governmental pressure to deny attorney's fees.   While the SEC's policy certainly emphasizes a company's cooperation, it is not nearly as explicit at the Thompson Memo was on the attorney's fee issue -- a point changed in the current iteration of the Department of Justice's policy on charging corporation, the McNulty Memo.  It is not clear whether there is any direct evidence of pressure by the Commission staff on Nortel to cut off attorney's fees, and pointing to the company's lawyer as the source of that decision may be a crucial distinction from the KPMG case.  Moreover, unlike Stein, a criminal case, there is no Sixth Amendment right to counsel in a civil case, so that ground is unavailable to dismiss the complaint.

The second related claim is that while Poland did not have counsel, the SEC sought and obtained two tolling agreements that allowed the investigation to continue beyond the five year limitations period.  The motion argues that the denial of attorney's fees was related to these requests because the Commission took advantage of Poland's position of acting without legal advice.  She claims that the SEC staff pressured her to agree to the tolling, once even saying that an FBI agent might join the interview.  Because there is no Sixth Amendment claim, the argument is that the government violated Poland's due process rights.  That was one basis for the Stein decision, but the due process concerns in criminal cases are different from those in a civil case.  Poland could have refused to sign the tolling agreement, or could have hired counsel with her own resources to advise on that issue.  Moreover, she is now represented again by lawyers.  Unlike a criminal case, the SEC cannot seek a prison term, so the decision to sign the tolling agreement may be viewed by the courts as less significant under the Due Process Clause.

The motion relies largely on the overtones of the governmental policy that was castigated in the KPMG case and has led to significant criticism of the Department of Justice on Capitol Hill.  The connection, however, between Nortel's decision to cut off the attorney's fees and any particular pressure from the SEC is less clear in this case.  The fact that a company decides to terminate the payment of fees, even if it is based on the hope that it will curry favor with the SEC, does not necessarily mean the Commission acted improperly.  Whether the dismissal motion gains any traction remains to be seen, but the damage from the government's actions in the KPMG case show how widely felt its effects will be for other cases and agencies. (ph -- thanks to YH for passing along the information)

Download sec_v_dunn_motion_to_dismiss_poland_nov_2007.pdf

Long Sentences for First Offenders

A press release of the U.S. Attorneys Office in Massachusetts tells of 20 and 35 year sentences being issued to first offenders who committed white collar offenses. The press release states that the individuals were "operators of a pyramid scheme which took in approximately $27 million from roughly 500 victims, most from the Cambodian-American community."  "U.S. Attorney Sullivan stated that “[t]he victims are hard working people who were led to believe that they were making safe and responsible investments. Sadly a number of these victims are now facing the loss of their homes and financial ruin.”  The two were convicted of conspiracy, mail fraud, and yes - what seems to be common in white collar cases today - money laundering. This is yet another example of long sentences being issued in a white collar case. (See also here for a discussion of the McFarland case).  More importantly, we again see the long sentence in a case where the defendants risked a trial as opposed to taking a plea agreement, and a case where the dollar figure seriously influenced the sentence.

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NatWest - What Really Happened

Tom Kirkendall over at Houston ClearThinkers has an extensive and thoughtful blog item on what really happened in the NatWest 3 Plea.(see here)

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Rejection of Privilege Claim for the Executive

The ABA Jrl reports on the Senate Judiciary Committee rejecting claims of executive privilege on the investigation of the U.S. Attorney firings. (see also NY Times here)

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Bad Movies - Good Movies

Paul Caron, King of the LawProf Blogsphere tagged me here.  It seems that a dean and some professors are playing tag and if tagged you have to name your "bad movie". (See Dean Jim Chen here, Professor Nancy Rapoport here, Professor Ann Bartow here) It's all part of the "truly bad movie meme" Well that's all well and good, but I do need to add some comments here before I drop the name.

• First I have to point out that my initial reaction was - gee this looks like it might be the start of a pyramid scheme - did they come to the correct blog on this one, a white collar crime blog?  But, I think that can be ruled out.  The money isn't there.
• My second thought - Why always the bad - I hate negativity - couldn't they do the "good" movies.  That would be easy as Being There would be my choice. It's a true classic.
• My final thought (with the help of dinner colleagues from Stetson - Janice McClendon and Candace Zierdt)  - my choice -  Paper Chase.

The Paper Chase is "bad" because it has stigmatized us as a profession. We have the viewing public seeing the law prof as someone without the "caring" we so need in our profession.  To some extent this movie exposed  the Kingsfield professor, but to another extent it reinforced a Socratic methodology that is cold and unfeeling. For that it rates my choice as the "bad movie."

My tag goes to Paul Butler at Blackprof.

Deferred Prosecution Agreement in Roger Williams Medical Center Case Ends

Corporate deferred prosecution agreements allow the government and a company to reach an agreement where the company can continue its business, institute increased reform within the entity, and avoid a criminal conviction.  The agreements have been controversial, in large part because of some of the terms within these agreements (see here).  The increased use of corporate deferred prosecution agreements started several years ago.  And some companies that reached an agreement are starting to see the end of their corporate probation without conviction.  Roger Williams Medical Center is such an example, as the U.S. Attorney in Rhode Island has agreed to terminate this agreement, although several measures will remain in effect. (see here and here).

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Former R.I. House Majority Leader Pleads

The press release of  United States Attorney for the District of Rhode Island reports that a "[f]ormer Rhode Island House Majority Leader Gerard M. Martineau pleaded guilty [Thursday] to public corruption charges, admitting that he arranged personal business dealings with a pharmacy company and a health insurer, and then steered the outcome of legislation in which those companies were interested.  The companies paid Martineau nearly $900,000 for paper and plastic bags to be used in pharmacy retailing."

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Has Rudy Heard About the FCPA?

Presidential candidate Rudy Giuliani, a former U.S. Attorney, seems to be getting caught up in what in the private sector would be considered an accounting scandal, including perhaps the misuse of resources for personal purposes.  According to news reports, while Mayor of New York, he began a relationship with his now wife that was kept secret at the time, no doubt due to his being married to another woman.  In accounting for the costs of his police detail, which apparently included personal trips to the Hamptons for meetings and even the assignment of a security detail to his then undisclosed girlfriend, the Mayor's office put the security costs into the budgets of smaller City agencies, such as the Loft Board, rather than attributing them to the Mayor's budget.  There's no claim that money was somehow embezzled or siphoned off, but the accounting is a bit shady.  As discussed in a New York Daily News article (here), the initial reaction from Giuliani's campaign was that this was how these costs had been accounted for under prior Mayors, a claim that was rather quickly rejected by budget officials in the Dinkins and Koch administrations. 

Giuliani's comment on the imbroglio is that "[i]t was a perfectly appropriate set of expenses."  That may be true, but how costs are accounted for is important, and following appropriate internal controls so that expenses are properly reported is key for any business or government.  The Foreign Corrupt Practices Act, which is enforced by the Executive Branch that Giuliani hopes to lead, requires companies to adhere to the following standards:

(A) make and keep books, records, and accounts, which, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the issuer; and

(B) devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances that--

(i) transactions are executed in accordance with management's general or specific authorization;

(ii) transactions are recorded as necessary (I) to permit preparation of financial statements in conformity with generally accepted accounting principles or any other criteria applicable to such statements, and (II) to maintain accountability for assets;

Just saying the costs were appropriate misses the point that the bookkeeping can't be fudged and hardly instills confidence in the candidate's focus on the need for accountability in all governmental offices.  Perhaps Giuliani should brush up on the requirements for companies subject to the FCPA's record-keeping rules. (ph)

Stolt-Nielsen Indictment Dismissed

International shipping company Stolt-Nielsen and two of its former officers finally got a measure of vindication when the U.S. District Court dismissed the indictment for antitrust violations (opinion available below).  The company was originally accepted into the Antitrust Division's Corporate Leniency Program, which rewards the first one in the door who reports on antitrust violations by giving immunity from prosecution for the corporation and individual officers.  In 2003, however, the Department of Justice asserted that the company had not met the requirements for the immunity by continuing in the bid-rigging conspiracy, and stated it intended to proceed with an indictment.  Stolt-Nielsen filed for an injunction to prevent the grand jury from indicting it, which a district court judge granted but the Third Circuit reversed on separation of powers grounds (Stolt-Nielsen S.A. v. United States, 442 F.3d 177 (3d Cir. 2006) (available here).  The Department of Justice indicted the company shortly thereafter, and the defendants filed a motion to dismiss, arguing that they had not violated the agreement with the government and therefore were immune from prosecution.

U.S. District Judge Bruce Kauffman of the Eastern District of Philadelphia agreed with the defendants, concluding that there was no proof that they had continued to participate in the antitrust conspiracy with two other international shipping companies.  In the opinion, the Judge discredited the testimony of executives from the other companies that were part of the cartel who maintained that Stolt-Nielsen continued with the bid-rigging scheme.  In assessing the credibility of the witnesses, Judge Kauffman found particularly telling the fact that the witnesses had a motive to retaliate against a competitor who rolled over on them.  The Judge stated:

The [Antitrust] Division has failed to produce any credible evidence that Stolt-Nielsen’s participation in the customer allocation conspiracy continued past March 2002.  Nor has the Division proposed a conceivable personal motive for the misconduct it alleges, as there is no indication that either Cooperman or Wingfield stood to profit in any way from continued anticompetitive activity.  Indeed, it would defy logic for executives such as [individual defendants] Wingfield and Cooperman to risk their careers to continue a criminal conspiracy that had been exposed publicly and repudiated by their company’s revised Antitrust Compliance Policy.  With the exception of Jansen, who the Division ultimately attempted to treat as a hostile witness, the only testimony adduced in favor of the Division’s version of the events of March-November 2002 was the testimony of a Jo Tankers employee and a number of Odfjell employees whose accounts were fraught with contradiction and uncorroborated by documentary evidence.  Each Odfjell and Jo Tankers witness testified in return for individual or corporate cooperation agreements that promised immunity or a reduced sentence in exchange for testimony against Defendants.  Each witness thus had a strong motive to seek leniency from the Division and to retaliate against a competitor that had implicated him in a criminal conspiracy. [Italics added]

Ouch!  The Department of Justice was aggressive in pursuing the appeal of the earlier order barring the grand jury from indicting because it involved an issue of great significance far beyond the case.  Whether it will appeal this decision in the face of a stinging rebuke by the Judge who found the government's key trial witnesses to be quite a bit less than credible -- he doesn't call them liars, but comes awfully close -- remains to be seen, but I suspect the Antitrust Division does not want to play with fire.

This case is the first, and so far only, time the Antitrust Division has tried to yank a corporate immunity agreement.  The Criminal Division and the U.S. Attorneys Offices generally do not grant immunity to companies that cooperate in an investigation, preferring to use deferred and non-prosecution agreements to resolve corporate crime investigations.  Those agreements routinely include provisions allowing the government to pull the deal if there is additional misconduct, usually not limited to the particular violation involved in the case.  It's an interesting question whether the government will ever reopen a prosecution for a purported violation of a deferred or non-prosecution agreement.  Bristol-Myers Squibb came close to such a situation in 2006, but prosecutors chose not to claim a breach of the original deferred prosecution agreement, settling instead for the ouster of the company's CEO and general counsel.  Pulling the agreement is the "nuclear option" in a case, and it appears to be something the Antitrust Division may have leaped at with Stolt-Nielsen without thinking through its options.  (ph)

Download us_v_stoltnielsen_opinion_dismissing_indictment_nov_29_2007.pdf

Beware of a Higher Sentence for Vick

Two of Michael Vick's co-defendants in the federal dog-fighting case received sentences at the high end of the Sentencing Guidelines range, which may portend a longer prison term for Vick at his sentencing in December.  The applicable range for the co-defendants was 12-18 months and 18-24 months, based on their prior criminal histories, and they received sentences of 18 and 21 months.  U.S. District Judge Henry Hudson gave the higher sentences because "[y]ou may have thought this was sporting, but it was very callous and cruel."  Vick may be in a lower sentencing range under the Guidelines, but could well receive a sentence higher than my earlier prediction (see Vick's Thanksgiving post) of a year-and-a-day and instead be looking at 15 to 18 months.  Vick surrendered himself earlier in November to begin the prison sentence, and a sentence of even 15 months would keep him in prison or a half-way house through all of the 2008 NFL season. An AP article (here) discusses the sentencing of Vick's co-defendants. (ph)

Dickie Scruggs Is in a Heap of Trouble, But Did the Government Charge the Right Crimes?

Mississippi plaintiffs tort lawyer Dickie Scruggs, his son, another lawyer in his firm, and a lawyer and staffer from a different firm have been charged in a six-count indictment (available below) with trying to bribe a Mississippi state court judge to rule in their favor in a dispute over claims to $26.5 million in attorney's fees.  Scruggs was charged earlier with contempt in federal court in Alabama related to his conduct in litigation involving State Farm over insurance coverage from Hurricane Katrina (also available below).  The current indictment includes conspiracy, Sec. 666 bribery, and wire fraud/honest services counts (Sec. 1346), and these charges could result in a substantial prison term.  The federal prosecutors allege that Scruggs and the others tried to pay the judge in the attorney's fee dispute $50,000 in bribes to rule in his favor.  Rather than take the money, the judge went to the FBI and agreed to work undercover.

The centerpiece of the government's case is a tape recording of a meeting between the judge and the lawyer from another firm in which they discuss the payment and the fact that Scruggs could be counted on to keep quiet about it because of all the "bodies buried" over the past six years.  The recorded conversation includes the following quoted in the indictment:

“We, uh, like I say, it ain’t but three people in the world that know anything about this . . . and two of them are sitting here and the other one . . . the other one, uh, being Scruggs . . . he and I, um, how shall I say, for over the last five or six years there, there are bodies buried that, that you know, that he and I know where . . . where are, and, and, my, my trust in his, mine in him and his in mine, in me, I am sure are the same.”

That sure is eloquent, isn't it?  The conspiracy charge is the key here, because the tape recording is hearsay as to Scruggs and the other defendants not present, except that statements by one conspirator in furtherance of the conspiracy -- which this certainly is -- are admissible against all other members under FRE 801(d)(2)(e).

The Sec. 666 charge makes it a crime to offer anything of value to a state or local official with the intent to influence or reward the official "in connection with any business, transaction, or series of transactions" of the government agency.  This is not the typical Sec. 666 case, in which the official usually is an administrator or elected official steering a contract or other government benefit to the offeror of the bribe.  Here, the state judge allegedly was being asked to rule in favor of Scruggs to the detriment of the opposing parties in the attorney's fee suit, so the government was unharmed, and indeed Scruggs and the others had no intention to cause the government any loss.  Does this fall outside of Sec. 666 if the government is not the intended victim?  The statute could be read that narrowly, but the courts, led by the Supreme Court, have construed Sec. 666 fairly broadly, so the charge will probably survive a challenge.  The fact that the judge might have ruled in their favor in the suit is irrelevant to the bribe because the propriety of the decision is not an issue.

The wire fraud charge based on the right of honest services theory may be a bit more difficult to defend as charged in the indictment.  These two counts allege that Scruggs and the others sought to deprive the citizenry of Mississippi of the honest services of the state judge as part of a wire fraud scheme.  The judge is supposed to perform is job "free from deceit, bias, self-dealing and concealment" according to the indictment.  Honest services fraud is a rather malleable concept, to say the least, and the statue has been used in a variety of public corruption cases.  The problem is that Scruggs and the defendants did not owe the state a fiduciary duty, and the real victim of the crime was the opposing party in the attorney's fee lawsuit, and only indirectly the state if the judge had taken the bribe.  Absent the judge's participation, and he clearly was not going to accept the bribe, was there a scheme to defraud Mississippi of honest services, or is this case better cast as a scheme to defraud the litigants of an honest judge by depriving them of whatever value the lawsuit had?  The better victim might well have been the opposing party because the defendants were trying to take money, or at least the opportunity for a fair claim to the attorney's fee, and not the more ephemeral right of the citizenry to an honest judge.  That said, prosecutors love to charge honest services fraud with public servants, even when they are not corrupt themselves, and I suspect any defense challenge based on failure to charge an offense will likely fail.

The federal anti-corruption laws are a bit of a mishmash, with the key to cases being things like "honest services fraud" or showing under Sec. 666 that a state or local agency received $10,000 in a twelve-month period from the federal government.  As I've argued before (see my article Federalism and the Federal Prosecution of State and Local Government, 92 Kent. L.J. 75 (2003))), federal prosecutors have a crucial role to play in policing corruption at the state and local level.  While there are efforts in Congress to expand Sec. 666 and make it a bit easier to pursue these types of bribery, skimming, and embezzlement cases through other modest changes (see S. 1946 here), it may be even more helpful to prosecutors to have coherent laws that don't rise and fall on how a court construes the scope of a phrase like "honest services fraud."  But then, asking for coherence out of Congress may be just a bit too much.  (ph)

Download us_v_scruggs_indictment_nov_28_2007.pdf

Download us_v_scruggs_contempt_charge_aug_2007.pdf

Sentencing for White Collar Crimes Article

The sentencing of white collar defendants, especially high-profile corporate executives convicted of a variety of fraud-related offenses, has been in the news a great deal these days.  From the 20+ year sentences handed out to Bernie Ebbers and Jeffrey Skilling to the upcoming sentencing of Lord Conrad Black in which the government has asked for upwards of 30 years, the severity of these punishments has called into question the rationale and efficacy of sentencing in white collar crime cases.  Blog co-editor Professor Ellen Podgor has a new article that will appear in the Journal of Criminal Law & Criminology entitled "The Challenge of White Collar Sentencing."  The abstract states:

Sentencing white collar offenders is difficult in that the economic crimes committed clearly injured individuals, but the offenders do not present a physical threat to society. This Article questions the necessity of giving draconian sentences, in some cases in excess of twenty - five years, to non - violent first offenders who commit white collar crimes. The attempts by the U.S. Sentencing Commission to achieve a neutral sentencing methodology, one that is class - blind, fails to respect the real differences presented by these offenders. As the term white - collar crime has sociological roots, it is advocated here that sociology needs to be a component in the sentencing of white collar offenders.

The article is available on SSRN here. (ph)