Let's say you are a mid-level sales executive with an important client that is a public company.  In its effort to make its numbers, your client asks/demands/pressures you to sign a letter going to its auditors that misstates the amount of rebates or other money owed by your company to the public company.  Perhaps the public company even suggests that if you do not, your sales relationship with it will suffer. 

What are the risks to you if you agree to do this?  Beginning in 2003, the SEC began to aggressively sue "facilitators"--third parties alleged to have knowingly assisted in an issuer's fraudulent revenue recognition practices (see this post, for a summary and numerous links).  More recently, however, the stakes have risen even higher as the DOJ has begun prosecuting facilitators, as well. 

We saw indictments in January 2005 of two AOL executives in connection with an alleged scheme to boost PurchasePro's reported sales by forging and back-dating contracts and providing false documents to company auditor Arthur Andersen.  Yesterday, as discussed in this article, the DOJ announced guilty pleas from seven former suppliers of U.S. Foodservice Inc., who

agreed to plead guilty yesterday to conspiracy charges for helping executives at the company meet earnings targets by inflating promotional allowances by $800 million from 2000 to 2003.

The men, who were mostly mid-level sales executives or food brokers at small firms in the Midwest and Northeast, surrendered to federal authorities yesterday morning. They face a maximum of five years in prison and a $250,000 fine when they are sentenced.

                                                                                     ***

Each of the men allegedly submitted false letters to U.S. Foodservice's independent auditors, either misstating how much in rebate payments the food distribution company earned or how much it was owed by the suppliers. Yesterday's guilty pleas mark the first public action in the case since January, when federal prosecutors in New York charged nine other suppliers with wrongdoing.

The seven men have also settled cases brought against them by the SEC, as announced here.

Thursday, August 25, 2005

Ebbers Sentenced to Medium-Security Prison

The Washington Post reports that, against the more lenient recommendation of the sentencing judge and to the apparent surprise of his attorneys, the federal Bureau of Prisons has ordered that Bernie Ebbers serve his 25-year prison term at a medium-security facility in Oakdale, La.   This decision came despite U.S. District Judge Barbara S. Jones' recommendation that Ebbers be sent to a minimum-security prison in Yazoo City, Miss., near his family and friends.

The article states that

"It is virtually unprecedented for a first time, white collar offender like Mr. Ebbers to be required to serve his sentence in a medium security facility," lawyers Reid H. Weingarten and Brian M. Heberlig wrote in court papers filed Monday.

The article also notes that Ebbers must report to prison by an Oct. 12 deadline.

What is the practical difference between serving time in a medium-security prison versus a minimum-security prison?  I really don't know--White Collar Crime Prof Blog, do you take requests?

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Thursday, August 18, 2005

The (Il)logic Behind the Attempted Face-Shield, Part II: The Perp Mask

I have been thinking about one of the comments posted about the first Face-Shield post:

"Some newspapers or tv stations may choose not to run the picture if there's no identifiable person in it. If it does run, people who happen to glance on the page but aren't really interested won't recognize you. So if I'm ever arrested for any felony, the bag goes over my head."

That is a valid point (although the NY Times, for one, didn't seem to follow the no-identifiable-picture=no running the photo theory)--maybe the face-shield ultimately will spare you some exposure.  But I still say that walking out of court with a huge mailing envelope or Manila folder or gym bag or whatever over your head is a safety risk. 

And so I offer up this idea to you entrepreneurs out there:  the Perp Mask.  Defendants exiting court would simply don a Perp Mask of their choosing, covering up their identity but yet still permitting the defendant to see and breathe.  For instance, any of these would do the job, while also letting the defendant make a "statement" of sorts based on the mask chosen:

For example, the Nixon mask makes the subliminal statement, "I am not a crook." 

I give this idea to you for free.  Now go make it happen.

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Tuesday, August 16, 2005

The (Il)logic Behind the Attempted Face-Shield

Ralph D. Casbarro

The NY Times has this article about the four ex-brokers charged yesterday with conspiring with day traders to provide the day traders with access to their so-called "squawk box" intercoms, which broadcast their biggest customers' stock orders.   The article notes that the "traders, in turn, used that information to buy those stocks before the large orders bid up the price, and quickly sold them for hundreds of thousands of dollars in gains."  The article further explains that

The four brokers, according to the S.E.C. complaint, personally profited from the more than $310,000 in commissions generated from the trades. In addition, the S.E.C. complaint said, "Amore and the day traders that he employed at Watley made secret cash payments to [two of the brokers] for providing access to their firms' squawk box."

OK, that's interesting and all, but here's my real question after reading the article:  What is the logic behind the "face-shield" tactic used by so many defendants (including Ralph D. Casbarro above, one of the four ex-brokers)?  The case and allegations against these brokers are prominently featured in the NY Times, WSJ, etc.  Is the hope that people who see the face-shielded photo will think, "Hey, I know a Ralph Casbarro who is a broker in New York--but it's got to be a different Ralph Casbarro than this guy in the paper."  Or is it that the shame/embarrassment level of the situation is supposedly lower with your name at the bottom of the face-shielded picture above?

I would also think there is a real risk of walking straight into a pole or stepping in a hole or something.

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Friday, August 12, 2005

"The Corporate Crime Lottery"

Professor Larry Ribstein poses an interesting question (and simultaneously appears to have turned a clever new phrase--"the corporate crime lottery" (total Google hits = 0))--in this post on his Ideoblog.  In this post, he asks where the "magic bright line is between criminal and non-criminal fraud?"  Looking at the recently announced accounting shenanigans at Krispy Kreme, Prof. Ribstein observes that "this is the sort of thing that just got Scott Sullivan five years at MCI."  But will there even be a criminal case?  When, exactly, is securities fraud a criminal matter?

Technically, all violations of the securities laws are criminal violations as well--insider trading, accounting fraud, Ponzi schemes, etc.   But quite often, such violations are met only with civil actions by the SEC, and not criminal prosecutions.  The SEC's Enforcement Division has broad discretion in whether to refer matters that it is investigating to the US Attorney's office for possible prosecution, as well.  My sense when I was in the SEC's Enforcement Division was that the "magic bright line" was not bright at all, and that referrals to the DOJ were, at least at that time, reserved for conduct that the SEC deemed to be particularly egregious and where the evidence was particularly strong (given the higher burden of proof that must be met in criminal cases).

In any event, Prof. Ribstein makes a good point that corporate executives engaging in financial fraud are also entering a "corporate crime lottery" where lottery losers get a call from the DOJ as well as the SEC.

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Monday, August 1, 2005

Seymour Lazar Indictment, Part III

The San Diego Union-Tribune has this interesting article about the Lazar-Milberg investigation.  It begins with this interesting observation by the author:

A few years ago, San Diego lawyer Bill Lerach proudly displayed a series of remarkable pictures on the wall of his spacious downtown office.

The photos were taken during a trip by Lerach and some of his partners to a Canadian resort. Lerach told visitors he was reeling in a big lake trout when another fish, a predatory Muskie, attacked the lunker at the end of his line.

Muskies are big fish known for their ferocity. They can sometimes devour a hooked trout before it can be reeled in, Lerach explained.

In his case, though, the stubborn Muskie condemned itself by refusing to let go. The photos show the voracious, unrelenting Muskie being reeled in and netted – along with the mangled, half-eaten trout.

Now Lerach's fish story may serve as a parable for his own potential woes.

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