Prosecutors requested a fall 2005 trial date yesterday for Sanjay Kumar, former CEO of Computer Associates International, who is charged with obstruction of justice, conspiracy and lying to law enforcement officers in a multibillion-dollar financial fraud.  The obstruction of justice charge is particularly notable, and perhaps novel, because it relates to statements Kumar made not to any government official but rather to the company's outside counsel (Wachtell Lipton), which was conducting an internal investigation of the matter. 

According to paragraph 53 of the indictment filed against Kumar,

Shortly after being retained in February 2002, the Company’s Law Firm met with the defendant SANJAY KUMAR and other CA executives in order to inquire into their knowledge of the practices that were the subject of the Government Investigations. During these meetings, KUMAR and others did not disclose, falsely denied and otherwise concealed the existence of the 35-day month practice. Moreover, KUMAR and others concocted and presented to the Company’s Law Firm an assortment of false justifications, the purpose of which was to support their false denials of the 35-day month practice. KUMAR and others knew, and in fact intended, that the Company’s Law Firm would present these false justifications to the United States Attorney’s Office, the SEC and the FBI so as to obstruct and impeded the Government Investigations.

Four former executives of the company, including its chief financial officer and general counsel, have reportedly already pleaded guilty to the charge of obstructing justice by lying to the lawyers from Wachtell.

As discussed in this excellent article in Wall Street Lawyer by two lawyers from Latham and Watkins,

One notable aspect of the Computer Associates case is that it essentially “deputized” the company’s counsel. Lying to a federal official is, of course, a federal crime. Martha Stewart, for example, was convicted of obstruction of justice for lying to investigators about her ImClone stock sale. But lying to corporate counsel was not previously considered obstruction of justice.

The Computer Associates case thus represents another example of the recent trend to enlist corporate counsel in the battle against corporate misconduct.

According to this article in the National Post, this new form of obstruction was the subject of discussion recently by defense attorneys John Keker and Theodore Wells, Jr. at PLI's annual securities conference:

"You better understand how broad these obstruction statutes are -- and how risky for both you and your clients," Mr. Keker told the audience of securities lawyers.

He pointed to the case against Computer Associates International, in which the three executives -- including the general counsel -- pleaded guilty to obstruction of justice for lying to their own lawyers at Wachtell Lipton Rosen & Katz, who were conducting an internal investigation.

Government prosecutors said the general counsel hid some information and gave incorrect information to Wachtell, even though he knew the findings were being passed along to the government.

"What's really scary here is some prosecutors are now taking the position that if an employee makes a false statement to the outside lawyer doing the internal investigation, that can constitute obstruction based on the theory that the outside lawyer is doing the investigation with the purpose of giving that information to the government," said Mr. Wells, who, like Mr. Keker, is consistently ranked as one of America's leading white-collar defence lawyers.

"So now we've moved from a situation where you're not supposed to make false statements to government agents, which at least people understand, to a world where if you make a false statement to the lawyer from Skadden Arps or Cravath, that in and of itself may constitute an act of obstruction."

Friday, November 5, 2004

Profiling the Corporate Fraudster, Part III

A while back KPMG concluded that the "profile" of the most typical corporate fraudster was a male director or senior manager between the ages of 36 and 45, who has worked in the finance department of a public company for more than 10 years.

Then E&Y told us that "employees who work excessive hours, refuse to delegate and fail to take up their full holiday entitlement are more likely to commit fraud."

Now USA Today wonders in this provocative article whether "philanderers" are more likely to be involved in financial fraud.

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Thursday, November 4, 2004

Oh, That Barge Deal, Part II

Any would-be facilitator of a public company's fraudulent revenue recognition practices who has not already been deterred by the string of SEC cases discussed in posts such as this should consider the verdict handed down yesterday in the Enron "barge" case. As discussed in detail in this article in the New York Times, a federal jury in Houston found that five defendants, including four former executives of Merrill Lynch, conspired to help Enron report bogus profits. The case "centered on a single transaction involving what the government argued was a bogus sale of an interest in barges by Enron to Merrill." Specifically, according to the article,

The barge transaction took place in late December 1999, when Enron was struggling to meet Wall Street's profit projections. When no buyer emerged, Merrill agreed to invest $7 million in an entity that made the purchase, in exchange for what the government said was a secret oral commitment from Enron to repurchase the barges in six months. Such a deal would guarantee Merrill against loss, meaning that Enron still retained the risk of ownership and could not report the money from the deal as revenue.

The former Merrill executives include the former head of global investment banking at Merrill and the former head of the firm's project and lease finance group. They now face sentences of up to five years in jail on the conspiracy charge.

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Friday, October 22, 2004

Martha Stewart's Appeal

Ms. Stewart's trial-related website, MarthaTalks.com, includes a copy of the 87-page brief her lawyers filed on her behalf with the Second Circuit on October 20, 2004. The brief is very well-written and provides a clear explanation of Ms. Stewart's view of the world. For those without the time or energy to read the whole thing, the four-paragraph "Introduction" pasted below provides a nice summary of her arguments:

INTRODUCTION

Martha Stewart was never charged with insider trading. But a barrage of pretrial leaks and in-court accusations left the indelible impression that she was guilty of that offense. Tarring Stewart with an uncharged, highly inflammatory crime was fundamentally unfair; that unfairness was compounded by rulings that barred Stewart from responding to those charges and prevented the jury from understanding what was—and was not—properly before it. Governmental and juror misconduct further undermined the integrity of the proceedings.

At bottom, Stewart’s trial turned on one question: Why did she sell the last small remnant of her holdings in ImClone Systems, Inc. (“ImClone”) on December 27, 2001? Stewart’s answer: A preexisting agreement with her broker that he would contact her, and she would decide whether to sell, if the price fell to $60 per share or below. If fully accepted, that explanation—corroborated by testimony from a pivotal witness, as well as a critical document—would have negated the Government’s theory of the case and established a firm basis for concluding that, if Stewart made any factual misstatements or material omissions during two interviews with government investigators, she did so because of honest error, faulty memory, or misunderstanding of the specific questions asked.

Two separate constitutional violations, however, seriously undermined the cornerstone of Stewart’s defense. First, in contravention of the Confrontation Clause, the Government used out-of-court testimonial statements by Stewart’s codefendant that were never subject to cross-examination to undermine the one witness who provided independent corroboration of the $60 agreement. Second,
the Government’s efforts to discredit the one corroborating document were led by a high-ranking Secret Service official who even the prosecutors now admit lied on the stand.

In the end, the jury found Stewart guilty of two instances of saying that she did “not recall” having discussed certain matters months previously, and for material false statements or material omissions in response to unrecorded and ambiguous questions about a minor transaction that has not itself been the basis of criminal charges. The process leading to conviction was tainted by: repeated allegations of an uncharged crime that were never rebutted or explained to the jury; the introduction of damaging testimony that was never subject to crossexamination; the use of false testimony condoned by senior Government officials; and, finally, the presence of an outspoken juror who apparently lied to be seated on the panel that judged Stewart a liar. Alone, each of these errors would warrant reversal. Together, they make an overwhelming case for setting aside this verdict.

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Thursday, September 30, 2004

A "Great Day" in the Scrushy Case

I guess it's all relative, but at least Richard Scrushy believes Wednesday, September 29 was a "great day." According to this article in the Birmingham Business Journal, Scrushy learned on Wednesday that 27 of the 85 counts against him had been dropped, although three counts including accusations of perjury and obstruction of justice, were added. As a result, instead of a reported maximum 650-year prison sentence and $36 million in fines, Scrushy now faces a maximum 450 years in prison, and $30 million in fines. So he's got that going for him, which is nice.

The article details a press conference that sounds like it was quite a scene. Scrushy was flanked by his attorneys, including Donald Watkins and Jim Parkman (whatever happened to these other guys?).

The article states that:

Parkman, wearing a dark suit and bright pink tie, peppered his brief speech with sports analogies.

Parkman says he is ready "to go the big dance in January," referring to Scrushy's federal trial that begins Jan. 5. ("The Big Dance" is common vernacular for college basketball and football tournaments.) Parkman, of Dothan, Ala., will serve as head trial counsel.

The press conference remained colorful. Parkman added that the new charges are a "couple pieces of potato" added to a stew that has no beef. Asked to describe his professional career, Parkman told a ring of reporters that he "puts his pants on one leg at a time."

Scrushy himself added that he was "absolutely not guilty."

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Wednesday, September 29, 2004

Martha Stewart Update: West Virginia Bound

The AP reports that the federal Bureau of Prisons had decided to send Martha Stewart to a federal prison in Alderson, W.Va., a minimum-security women's prison that houses about 1,000 inmates. Stewart's request to serve her five-month sentence in Danbury, Conn., close to her home in Westport, was apparently not honored.

According to the article, the Alderson camp (a.k.a. "Camp Cupcake") was chosen largely because of its remote location, which was desirable in that it would not be as easily accessible to the media.

The article notes that:

--Alderson, "nicknamed Camp Cupcake," is known for its open environment. There are no metal fences surrounding the camp.

--Stewart will be expected to work at jobs such as grounds maintenance, sanitation and food services, and will earn between 12 cents and 40 cents an hour at these jobs.

--Free time can be spent playing volleyball, softball or tennis, or doing aerobics.

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Friday, September 10, 2004

Former Symbol Tech. CEO Makes "Most Wanted" List

Tomo Razmilovic, former CEO of Symbol Technologies and one of numerous indicted Symbol executives that allegedly "used every trick in the very long book of fraud" to victimize shareholders and enrich themselves was declared a fugitive back in June 2004 after his lawyer told prosecutors Razmilovic would not return to the U.S. to face formal charges.

According to this article today in the New York Post, Razmilovic is believed to be in Sweden:

After being declared a fugitive, Razmilovic was spotted vacationing on his yacht in the Adriatic Sea before returning to Sweden, where he took up residence in a remote seaside home.

A native of Croatia and a Swedish citizen, Razmilovic has told reporters that he is innocent and won't return to the U.S. because he doesn't believe he will get a fair trial.

Although warrants have been issued for his arrest here and abroad, Swedish authorities won't move on him until the U.S. government makes a formal request.

The government can ask Swedish authorities to extradite him or prosecute him there, but the process will take months to work its way through legal and diplomatic channels.

Sweden's treaty with the U.S. does not mandate that it extradite Swedish nationals.

The article also notes that Razmilovic has been added to the "Most Wanted" list by the U.S. Postal Inspection Service, which posted notice of a $100,000 reward and this "Wanted" picture on its website.

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Tuesday, July 20, 2004

Martha Stewart Hires Prison Consultant

Now here's a growth industry....Sunday's Washington Post has this must-read article about what "every smart white-collar criminal" is doing these days before reporting to prison--hiring a prison consultant. Indeed, Martha Stewart has reportedly hired Herbert J. Hoelter, "one of the best-known consultants in the business" who runs an operation in Baltimore called the National Center on Institutions and Alternatives.

Among the key services and points of advice dispensed by such consultants:

--making formerly powerful clients understand that Bureau of Prisons rules do not allow them to conduct business from prison and that their contact with the outside world will be severely restricted (e.g., no trying to close deals in prison; no access to email)

--advising clients to take care of all dental and medical needs before going to prison (shoe designer Steve Madden reportedly petitioned a judge for a short delay in the start of his sentence so he could get a root canal, fill some cavities and have surgery to fix a deviated septum)

--planning for the fact that prisons do not permit inmates to keep even basic things like their address books. According to one lawyer, "whatever you go in with, they're going to take away from you. I have clients write themselves a letter that will arrive that day or the day after, to write down all the names and addresses of their friends."

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Thursday, July 8, 2004

Former Enron CEO Kenneth Lay Indicted, Pleads Not Guilty

The WSJ reports that former Enron Corp. CEO Kenneth Lay was indicted today and pleaded not guilty to federal charges that he was involved in a scheme to deceive the public, company shareholders and government regulators about the energy company that he founded. In addition, the SEC also filed civil fraud charges against Lay, accusing him of making false and misleading statements and insider trading.

A copy of the indictment is available here and a copy of the SEC's civil complaint is available here. Both actions are pending in the U.S. District Court for the Southern District of Texas, Houston Division.

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Tuesday, June 1, 2004

Superseding Ebbers Indictment

On May 24, 2004, federal prosecutors in New York announced a new, superseding indictment against former WorldCom CEO Bernie Ebbers which added six charges of securities fraud. The superseding indictment does not expand the nature of the government's charges, but rather contends that the accounting scheme described in the original indictment in March 2004 resulted in six additional false filings with the Securities and Exchange Commission. A copy of the new indictment is available here.

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Thursday, March 11, 2004

Details on the Possible Martha Stewart Sentence

David Glovin of Bloomberg reports in this interesting article that Martha Stewart may begin serving a prison sentence of 10 to 16 months as early as July 2004. The article notes that according to former federal prosecutor Mike Simons, it is unlikely that Stewart will remain free for long after her June 17 sentencing (even though she plans to appeal) because this would require the trial judge to certify that there is a substantial issue that may make prison unlikely. "You're asking the judge to certify that she may have made a mistake,'' said Simon, estimating that Stewart would be given a couple of weeks after sentencing to report to prison.

According to the article, Kirby Behre, another former prosecutor, speculated that Stewart may be assigned to a federal prison in Danbury, Connecticut, 27 miles from her home in Westport. He also stated that the judge has only limited discretion to alter the 10 to 16 months called for by federal sentencing guidelines for Stewart's crimes.

Other interesting points from the article:

--Federal prisoners are issued khaki, green or blue uniforms, which consist of a shirt and elastic-waistband pants.

--Stewart will only be able to make outgoing phone calls and talk for as much as 300 minutes a month.

--Women in the federal prison system are housed in dormitory style-facilities or rooms with double or triple bunks. They must work as orderlies, food-service workers or groundskeepers and are paid 12 cents to 40 cents an hour. They can have approved visitors on weekends.

--Stewart will be allowed to keep money in an inmate trust account at a prison commissary, where she can spend as much as $290 a month on items such as detergent, shampoo, personal hygiene items, tennis shoes, shorts, sweat suits, junk food and radio headsets.

--Stewart will have to serve most of her sentence. Parole has been abolished for federal prisoners. Stewart's term could be reduced by 15 percent if she behaves well in prison. With such time off, Stewart could finish her sentence in 8 1/2 months if she receives a minimum sentence of 10 months under the standard guideline range. Half of that sentence could be served in detention at her home.

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Tuesday, March 2, 2004

WSJ: Ebbers Indicted, Sullivan to Plead Guilty in WorldCom Investigation

The WSJ reports in this article that former WorldCom CEO Bernard Ebbers "has been indicted on federal charges stemming from the multibillion-dollar accounting fraud at the telecommunications giant." In addition, the article states that former WorldCom CFO Scott Sullivan will plead guilty to unspecified criminal charges Tuesday in New York. Sullivan currently is scheduled to go to trial next month.

According to the article, Attorney General John Ashcroft is scheduled to hold a news conference at 1 p.m. EST today in New York to announce the charges against Ebbers.

UPDATED: A copy of the Ebbers Indictment is available here.

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Thursday, December 18, 2003

2004 Criminal Prosecution Calendar

Erin McClam of the AP has this article today laying out the numerous criminal trials of corporate executives already set for 2004. The packed calendar reportedly looks something like this:

January 2004: Dennis Kozlowski (cont.) (former Tyco CEO)
January 12, 2004: Martha Stewart (Martha Stewart Living Omnimedia’s CEO)
February 2, 2004: Scott Sullivan (former WorldCom CFO)
February 2, 2004: Richard Scrushy (former HealthSouth CEO)
February 2004: John Rigas (Adelphia Communications Corp. founder)
March 22, 2004: Frank Quattrone retrial (former CSFB banker)
April 20, 2004: Andrew Fastow (former Enron CFO)

Trial watchers may want to enter these in their DayPlanners in pencil rather than pen as at least Scrushy and Fastow already have made motions to postpone their trial dates. Plan accordingly!

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Tuesday, December 16, 2003

Scrushy's Lawyer Says Reports of SOX Challenge "Premature"

A lawyer for former HealthSouth CEO Richard Scrushy told Compliance Week that news reports of a plan to challenge the constitutionality of the Sarbanes-Oxley Act, previously discussed here, are "premature." Compliance Week reports in this article (subscription required) that Scrushy's attorney, Thomas Sjoblom, stated that "Yes, we anticipate filing some sort of motion, but [the reports] are way ahead of the curve. I'm trying to formulate my thinking on what the issues are." Sjoblom says he plans to look closely at the constitutionality of SOX Section 906, the criminal penalty provision of the certification rules. The article reports that at this time, however, any such legal challenge is still at the "research and thinking" stage.

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Friday, December 12, 2003

Scrushy Will Seek to Overturn Certification Requirements of Sarbanes-Oxley

The AP reported on Wednesday that former HealthSouth CEO Richard Scrushy, recently charged in an 85-count indictment by the U.S. Attorney's Office for the Northern District of Alabama for alleged conduct related to accounting fraud at the company, will challenge the constitutionality of the certification requirements of Sarbanes-Oxley, 18 U.S.C. 1350. Counts 48-50 of the Indictment charge that Scrushy certified, or attempted to get others to certify, certain periodic reports filed with the SEC while knowing that the reports "did not fairly present. in all material respects, the financial condition and results of operations of HealthSouth...." Scrushy is believed to be the first person to be prosecuted under Sarbanes-Oxley.

Abbe Lowell, who recently agreed to join Thomas V. Sjoblom, his partner at Chadbourne & Parke LLP, "in this historic endeavor of service to [Scrushy], one which will prove to be of unprecedented magnitude" (for more on the historic endeavor and unprecedented magnitude, see this post from the hardly obscure Corp Law Blog), reportedly told the Court that the parties were in agreement that the trial needed to be moved from the current Feb. 2 trial date, preferably to August 2004, and that he needed time to study the 1 million documents the government was prepared to produce to his client.

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Wednesday, October 29, 2003

Second Circuit: Conscious Avoidance of Knowledge No Bar to Conspiracy Conviction

On October 24, the Second Circuit ruled in U.S. v. Svoboda, 2003 WL 22420055 (2nd Cir.(N.Y.)) that "a defendant's conscious avoidance of knowledge of [a conspiracy's] illegal purpose may substitute for knowledge of the illegal purpose." The case reached the Second Circuit after Michael Robles was convicted of a conspiracy to commit securities and tender offer fraud between approximately November 1994 and December 1997. Robles was long-time friends with Richard Svoboda, who during that period was employed as a "credit policy officer" at Nations Bank. In this role, Svoboda was privy to confidential information about Nations Bank's clients, such as earnings information and merger and acquisition plans. According to the opinion,

Svoboda testified that he obtained confidential information about certain securities and tender offers through his position at Nations Bank; that he passed the information to Robles, who, in turn, used the insider information to make trades; and that he and Robles shared the profits realized from their illicit trading. Svoboda further testified that he and Robles discussed and agreed upon the details of the above-described scheme and that Robles was fully aware that he was trading on the basis of unlawfully obtained insider information. Robles, however, took the stand in his own defense and denied knowledge of the unlawful source of Svoboda's information.

Despite Alan Dershowitz's efforts on behalf of Robles, the Second Circuit held that even in a two-person conspiracy, "knowledge consciously avoided is the legal equivalent of knowledge actually possessed.... The defendant's conscious avoidance of knowledge of the unlawful aims of the conspiracy thus may be invoked as the equivalent of knowledge of those unlawful aims. In the context of a two-person conspiracy, intent to participate may be shown by a finding that the defendant either knew, or consciously avoided knowing, the unlawful aims of the charged scheme and intended to advance those unlawful ends."

Lesson 1: It would behoove you to be a bit on the inquisitive side if, as in this case, you and your buddy have an arrangement where you agree to buy stocks he recommends and (a) you know he has access to confidential financial information; (b) some of the trades you make wind up being the day before a tender offer announcement; and (c) your trades result in returns up to 400%.

Lesson 2: If you plan to rely on novel legal theories to avoid insider trading liability, move out of the inhospitable Second Circuit.

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Wednesday, August 27, 2003

Oklahoma Files Criminal Complaint Against WorldCom and Six Former Execs

As discussed in this earlier post, Oklahoma's AG has filed criminal charges against WorldCom and six of its former executives. A copy of the Felony Information filed with the District Court of Oklahoma County is available here.

According to an article in the Wall Street Journal, Oklahoma AG Drew Edmondson said the executives named in the complaint -- Bernie Ebbers, Scott D. Sullivan, David F. Myers, Buford T. Yates, Betty L. Vinson and Troy M. Normand -- "have one week to turn themselves in to authorities in Oklahoma. If they fail to meet that deadline, Mr. Edmondson said arrest warrants will be issued and his office will seek extradition."

Bloomberg reports that six other states are considering "WorldCom charges," as well.

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Here Comes Oklahoma

Apparently out of nowhere, the Oklahoma State Attorney General plans to file criminal charges against MCI, its former CEO Bernie Ebbers and five other individuals as early as today in connection with the massive accounting fraud, according to this article in the Wall Street Journal. The article states that the charges are expected to be under the Oklahoma Securities Act. This follows the decision thus far of federal authorities not to charge the company criminally. Mr. Ebbers has not been charged criminally to date, either.

The WSJ article reports that federal prosecutors apparently were not advised of the Oklahoma AG's plans, and raises the interesting question of how Oklahoma would prove its case. The article states:

Most evidence gathered in the case has been prepared by federal prosecutors working for the U.S. attorney in Manhattan and regulators in Washington for the SEC.

That evidence, gathered over the last year, wouldn't be available to Oklahoma without those investigators handing it over. It appears the Oklahoma investigators haven't had any contact with witnesses in the federal case and haven't obtained any documents related to it, said people familiar with the federal investigations. The findings of several other independent investigations by outside lawyers, have been published, however.

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Monday, August 25, 2003

Insider Trading Indictment

The SEC announced today that on August 19, 2003, over a year after he settled the SEC's insider trading case against him, Jay Laveson was criminally indicted by the United States Attorney for the District of Vermont on insider trading, mail fraud, and wire fraud charges. The SEC announced that:

According to the indictment, Laveson was employed as a financial analyst by IDX Corporation Inc., Inc., a publicly-traded company based in South Burlington, Vermont. The indictment alleges that Laveson received confidential non-public information concerning potential merger targets for IDX and sensitive financial information about those merger targets and IDX, and he then used that information to trade in the stock of merger target companies, as well as IDX, for his own profit from early 1997 through early 1999. According to the indictment, Laveson made more than $120,000 from his insider trading. The indictment charges Laveson with one count of securities fraud, one count of mail fraud, and fourteen counts of wire fraud in connection with his insider trading activities. If convicted of all criminal charges, Laveson faces up to 310 years imprisonment and a fine of up to $4,250,000.

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