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Basic Legal Concepts BY G. MICHAEL LAWRENCE AND JOSEPH T. WELLS
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CPA was hired to be an expert witness in a civil fraud case. On cross-examination the opposing attorney asked the expert a seemingly simple question: “Would you please define ‘fraud’ for the jury?” The CPA replied, “Do you want to know the legal definition or my definition?” The attorney countered, “You mean there is a difference?” 
CPA’s Handbook of Fraud and Commercial Crime Prevention (# 56504JA).
WASHINGTON: The FBI, under pressure to look at possible criminal activity in the financial markets, is expanding its corporate fraud inquiries in the wake of the tumult on Wall Street, according to FBI officials.
The officials said Tuesday that the total number of major corporate fraud investigations at the FBI was 26, an increase from the 24 open cases cited a week ago by Robert Mueller 3rd, the FBI director. That number stood at 21 as recently as July, but the Federal Bureau of Investigation has not identified most of the targets.
The Associated Press reported that the FBI had opened preliminary investigations into possible fraud involving the four giant companies at the center of the recent turmoil: Fannie Mae and Freddie Mac, Lehman Brothers and American International Group.
A government official, speaking on the condition of anonymity because he was not authorized to discuss the issue publicly, said Tuesday that it was "logical to assume" that those four companies would come under investigation because of the many questions surrounding their recent collapse.
Officials at the U.S. Justice Department declined to comment publicly on which companies were under investigation by the FBI. "As part of our investigative responsibility, the FBI conducts corporate fraud investigations," said Brian Roehrkasse, a spokesman for the department. "The number of cases fluctuates over time. However, we do not discuss which companies may or may not be the subject of an investigation."
Mueller told members of the Senate Judiciary Committee last week that the major investigations were aimed at companies that "may have engaged in misstatements in the course of what transpired during this financial crisis."
"The FBI will pursue these cases as far up the corporate chain as is necessary to ensure that those responsible receive the justice they deserve," he said.
The bureau and the Justice Department have come under pressure from some critics who assert that investigators need to take a broader and more comprehensive approach to the financial inquiries. But Attorney General Michael Mukasey has rejected calls for the Justice Department to create the type of national task force that it did in 2002 to respond to the collapse of Enron.
Mukasey said in June that the mortgage crisis was a different "type of phenomena" that was akin to "white-collar street crime."
In addition to the major corporate cases, the bureau said it had about 1,400 open investigations into smaller companies and individuals suspected of mortgage fraud.
In a major case in June, federal prosecutors brought charges of conspiracy and securities fraud against two portfolio managers at Bear Stearns, which nearly collapsed in March. When that prosecution was announced, Deputy Attorney General Mark Filip acknowledged that the mortgage crisis "includes a wide variety of criminal acts that have proved devastating to American families."
Still, several senators at the Judiciary Committee's hearing said last week that they wanted the FBI to take aggressive steps to investigate possible criminal wrongdoing in connection with the crisis. Senator Patrick Leahy, a Vermont Democrat and chairman of the committee, told Mueller that "obviously everybody's concerned where the U.S. government's on the hook" for bailout costs.
What's Behind the Drop in Corporate Fraud Indictments?
Daphne EviatarThe American Lawyer
November 01, 2007
In his summer of discontent, there were few days of undiluted glory for Attorney General Alberto Gonzales, and July 17 was no exception. Just six weeks before he resigned, Gonzales stood before hundreds of federal prosecutors and investigators in the U.S. Department of Justice's Great Hall to celebrate the fifth anniversary of the department's Corporate Fraud Task Force and declare victory over white-collar corruption.
But the white-collar crime news that day was not dominated by Gonzales' recitation of notches on his prosecutorial belt. Instead, the headlines focused on a federal judge in New York who dismissed indictments against 13 former KPMG executives, a very pointed rebuke to the Justice Department for some of the more aggressive tactics used by federal prosecutors over the past five years.
Along with raining on the AG's victory parade, that confluence of events also served as a neat summary of the Justice Department's corporate fraud record: a long litany of achievements punctuated by disappointment and controversy.
Created by President George W. Bush's executive order in July 2002, the task force was the president's signature response to the flood of revelations of criminal wrongdoing in America's boardrooms. Enron Corp. had collapsed the previous fall. Its accounting firm, Arthur Andersen LLP, was charged in March 2002 with obstruction of justice. Later that spring, Adelphia Communications Corp. announced it would restate earnings by a billion dollars to account for hundreds of millions of dollars looted by senior executives. By the time allegations of a $3 billion fraud by WorldCom Inc. executives surfaced in June 2002, the leading stock indexes seemed locked in a death spiral, with investors panicked about which public company holding their retirement funds might topple next.
The new task force, by marshalling the firepower of nine different federal law enforcement agencies, was designed to restore investor confidence -- and to deliver a strong dose of deterrence to executive suites.
Today, the Department of Justice and the White House say the task force did just that. At the five-year anniversary event, Gonzales announced that the task force had won an unprecedented 1,236 corporate fraud convictions, including the convictions of 214 chief executive officers and presidents, 53 chief financial officers, 23 corporate lawyers and 129 vice presidents.
"Our victories have been about more than just compiling statistics or making an example out of one or two bad actors," Gonzales said. "They have been about preserving the integrity of our corporate boardrooms and our financial markets ... about changing a culture [and] about redefining the way companies do business."
But how much did the Corporate Fraud Task Force truly accomplish? Last spring The American Lawyer began investigating the Justice Department's record on corporate fraud prosecution. It was a massive undertaking made all the more so because the Justice Department does not formally account for its corporate fraud cases. (Indeed, according to Joan Meyer, senior counsel to the deputy attorney general, it cannot provide a complete list of the cases that were the basis of the victories Gonzales cited at the July 17 anniversary celebration.) So we relied on our own research, gathering data on 124 investigations (resulting in 440 indicted defendants) identified by the Justice Department as major Corporate Fraud Task Force prosecutions. Our analysis included cases cited on the task force Web site and in two published task force reports, as well as corporate fraud prosecutions mentioned in speeches or public comments by Justice Department officials.
The Justice Department refused to provide much of the information we requested. In addition to declining to provide a complete list of corporate fraud cases since 2002, the Department would not disclose such basic information as Justice resources allocated to corporate fraud or pre-2002 conviction rates in white-collar cases.
Nevertheless, from publicly available case records and performance statistics, as well as interviews with dozens of current and former prosecutors, task force members, and white-collar criminal defense lawyers, we were able to derive a detailed portrait of the Justice Department's corporate fraud prosecutions over the last five years. We found a highly publicized, top-down strategy that encouraged local prosecutors to charge both corporations and individual defendants with fraud. The effort resulted in hundreds of convictions -- 337 in the cases we tracked -- with the vast majority, 76 percent, coming through plea deals. Corporate criminals paid dearly for their crimes, with more than 50 -- including former WorldCom CEO Bernard Ebbers; Adelphia CEO John Rigas; and Computer Associates International Inc. CEO Sanjay Kumar -- sentenced to spend upwards of five years in prison.
But the Corporate Fraud Task Force suffered important failures as well.
Among the cases highlighted on the task force Web site, we found several high-profile acquittals, hung juries and appellate reversals -- and some of those prosecution failures were due specifically to questionable tactics by the Justice Department. In all, 27 of the defendants whose cases we examined, including executives from Adelphia, America Online Inc., PurchasePro.com Inc. and Qwest Communications International Inc., were acquitted at trial. Another 28 cases were dismissed. There were 22 mistrials. And nine convictions were overturned on appeal, including those of such high-profile defendants as Credit Suisse First Boston Corp. banker Frank Quattrone and the Enron "Nigerian Barge" defendants from Merrill Lynch & Co. Inc.
Moreover, say many former prosecutors and defense lawyers, credit for the Justice Department's successes in corporate fraud prosecution is due to the local U.S. Attorney's Offices that handled the cases -- not to the Corporate Fraud Task Force in Washington, D.C., that urged them on, often without providing much tangible assistance. And while many of the lawyers we interviewed say that the task force's directives did result in more corporations cooperating with the government, defense lawyers and even some federal judges came to believe that that cooperation was won at a high cost: the erosion of such basic defendant's rights as the attorney-client privilege and the right to counsel.
Perhaps the most curious of our findings -- and one not highlighted by the Department of Justice -- is the precipitous decline in the number of major corporate fraud indictments in the two years since the re-election of President Bush. After issuing detailed reports in 2003 and 2004, the task force stopped reporting on its efforts in 2005, just as corporate fraud indictments slowed to a trickle. Our analysis shows 357 indictments in major corporate fraud cases between 2002 and 2005. But only 14 indictments were identified by the Justice Department as significant corporate fraud cases in 2006. There have been only 12 major corporate fraud cases indicted so far in 2007.
That decline raises a critical question: Has the problem of corporate fraud really been solved, as Gonzales suggested at his celebration in July? Or has the Justice Department simply stopped trying as hard to prosecute it?
The Corporate Fraud Task Force was the administration's attempt to forestall a crisis. "The task force was formed in the middle of the market free fall," recalls Debra Wong Yang, now a partner at Gibson, Dunn & Crutcher but then the U.S. Attorney in Los Angeles and a member of the original task force.
"There was concern that foreign countries would start calling in notes.There was a real concern there would be an economic free fall. At the same time, you had a number of companies where things were coming to light that looked like egregious conduct." Congress had responded by quickly cobbling together the Sarbanes-Oxley Act, which passed the House in April and the Senate Banking Committee in June. The administration was right on Congress' heels; on July 9, 2002, President Bush issued the executive order creating the new task force.
That September, the president gathered hundreds of federal prosecutors, agency directors and regional U.S. Attorneys for a special daylong conference. "Over the past year, high-profile acts of deception in corporate America have shaken people's trust in corporations, the markets and the economy," the president told his audience at the Washington Hilton. "The American people need to know we're acting, we're moving, and we're moving fast."
The conference was carefully orchestrated to convey that impression. The president and then-attorney general John Ashcroft, in announcing their initiative, declared that they would root out corporate crime through more aggressive federal investigations, faster prosecutions, and the threat of all-out destruction for companies that resisted cleaning up their act.
Chaired initially by then-deputy attorney general Larry Thompson, the task force included senior Department of Justice officials, seven U.S. Attorneys from major districts around the country, and the heads of eight different federal agencies, from the Securities and Exchange Commission to the U.S. Department of Labor. The idea was to improve coordination among federal officials, speed up investigations and prosecutions, motivate U.S. Attorneys nationwide to bring complex corporate fraud cases, and convince corporations to cooperate in the investigations. Although the focus was largely on criminal prosecution, the SEC received an infusion of funds in 2003 to step up civil investigations of corporate fraud as well.
Statistics suggest that initially, the task force did just what the administration had intended. By the end of its second year, according to the task force's 2004 report, the Justice Department had obtained more than 500 corporate fraud guilty pleas or trial convictions. And new corporate fraud charges had been filed against more than 900 defendants, including 60 corporate CEOs and presidents.
The increased volume of corporate fraud prosecutions was largely the result of the task force's prodding of U.S. Attorney's Offices around the country.
White-collar prosecution had traditionally been dominated by the U.S. Attorney's Office in Manhattan, but by 2003, cases were underway in Birmingham (HealthSouth Corp.); Harrisburg, Pa., (Rite Aid Corp); Houston (Arthur Andersen LLP) and Alexandria, Va. (AOL/Purchase Pro). And prosecutors from outside New York were increasingly likely to work in collaboration with the SEC. "The SEC has a long history of working with the Southern District of New York on these [fraud] cases," says James David Fielder, who spent 10 years as an SEC enforcement attorney until this past July, when he became a partner at Haynes and Boone's Washington, D.C., office. "But generally speaking, other U.S. Attorney's Offices weren't interested in doing them. I don't know if it was because of the task force, or if it was the whole paradigm shift, but from that point on, U.S. Attorney's Offices were much more interested in referrals from the SEC."
Cases were also being filed quickly after fraud allegations surfaced. In perhaps the biggest change in prosecutorial policy, the Corporate Fraud Task Force emphasized "real-time enforcement" -- bringing indictments quickly. "The idea was to segment investigations and not let the perfect become the enemy of the good," explains William Mateja, a former senior Justice Department official and coordinator of the corporate fraud task force, first under deputy attorney general Thompson and later under his successor, James Comey Jr. "We really worked with prosecutors to not get into the mind set that you have to wrap your arms around everything. The rule of thumb was, if this is a case you're going to pursue, we need to look toward bringing charges within six months." As Christopher Wray, former assistant attorney general of the criminal division, now a litigation partner at King & Spalding, puts it: "Better to convict them quickly than to take years and convict them four times over."
Wray cites the example of the case against Adelphia, in which the Justice Department began looking into accounting fraud in April 2002, just days after allegations first surfaced -- and arrested key players in July. "Within four months you had the CEO and four other top executives arrested," he says. Indeed, 77-year-old John Rigas was led away in handcuffs before dozens of news cameras in July 2002, only two weeks after the task force was created. He and his son were found guilty at trial two years later and sentenced to 15 years and 20 years, respectively. (Another son and senior Adelphia official was acquitted of all charges.) Similarly, in the HealthSouth case in Alabama, the government took only seven months before it charged 16 people, including CEO Richard Scrushy, who was accused of masterminding the fraud. (Scrushy was acquitted on all counts in 2005, though he was subsequently indicted four months later on new charges related to a different scheme. In June 2006 he was convicted of bribery, mail fraud and obstruction of justice.)
But while the task force was pressing these new policies from Washington, the cases themselves were being prosecuted by local Assistant U.S. Attorneys, often without significant help from the Justice Department, aside from the daylong conference in September 2002 and some additional training sessions for prosecutors the following year. Many prosecutors say that while Justice officials turned up for press conferences at which corporate fraud indictments were announced, they typically provided little assistance in the actual prosecutions. "If you look at their reports," says F. Joseph Warin, head of litigation at the Washington, D.C., office of Gibson Dunn, "it's essentially work that was being done by various U.S. Attorney's Offices across the United States."
And those offices were frequently hard-pressed to come up with the manpower and money to investigate and prosecute complex fraud cases. "We found the [Justice] Department was challenged by a lack of resources, both technical and in terms of personnel," says John Hueston, a co-lead prosecutor in the investigation and trial of former Enron chairman Kenneth Lay and CEO Jeffrey Skilling. Although he says the Justice Department did what it could to help, "we often felt that the defense was outgunning us on both levels." The Assistant U.S. Attorneys on his team, for instance, didn't have the resources to create a searchable electronic database of Enron documents until shortly before trial, Hueston says, leaving them anxious that they wouldn't be able to convince the jury that Enron's top officers were guilty.
"The types of corporate fraud cases the department decided to take on were of a size and scope unprecedented for almost all U.S. Attorney's Offices," says Hueston, now a partner at Irell & Manella. "Most offices really labored to find the right resources."
The task force, meanwhile, had no prosecutorial staff or budget of its own.
The Justice Department's criminal fraud section actually lost two of its 54 attorneys between 2002 and 2007. And while the SEC has added more than 1,000 accountants, lawyers and economists to its staff since late 2002, budget cuts at the Justice Department forced many U.S. Attorney's Offices to impose a hiring freeze. The number of federal prosecutors peaked in 2003, when the Justice Department added about 200 Assistant U.S. Attorneys to its then total of 473, but has declined steadily since then. By 2006, according to Syracuse University's Transactional Records Access Clearinghouse (TRAC), there were 529 lawyers in U.S. Attorney's Offices, just 56 more than in 2002. And as the government shuffled limited resources, the U.S. Attorney's Office in Manhattan -- which, as the chief prosecutors of corporate fraud, had previously received additional money -- actually lost about $5 million in personnel and other assistance from the SEC, according to two former prosecutors in the office. (The Justice Department and the U.S. Attorney's Office would not confirm.) Meyer acknowledges that U.S. Attorney's Offices were not given additional staff to prosecute corporate fraud cases, but emphasizes that corporate fraud prosecution "has always been an extremely important part of what it means to be a federal prosecutor. The U.S. Attorney's Offices have to prioritize and pick the best cases."
The prosecution of corporate fraud cases by Assistant U.S. Attorneys new to the field presented some drawbacks when cases went to trial. The Justice Department touts its recent closely watched victories -- including the convictions of Hollinger International Inc. CEO Conrad Black in Chicago and Brocade Communications Systems Inc. CEO Gregory Reyes in San Francisco -- but other high-profile prosecutions backfired, leading to an embarrassing string of defeats for the Justice Department. These include the acquittals of senior executives at AOL in Virginia, of Capital Consultants in Oregon, and of Duke Energy Corp. in Texas.
U.S. Attorneys Offices outside New York also lost important appeals. In January of this year, the 10th U.S. Circuit Court of Appeals reversed the convictions of two former Westar Energy Inc. executives in Kansas, writing that the government's theory of the case "hung by a thin legal thread." In June 2005, the U.S. Supreme Court reversed the conviction of Enron's accounting firm, Arthur Andersen, after concluding that the trial judge's jury instruction was insufficient to establish obstruction. And the Enron "Nigerian Barge" cases, in which Merrill Lynch executives were convicted of orchestrating a deal that helped Enron illegally inflate earnings, were also largely overturned on appeal.
The Justice Department's Meyer declines to comment on the outcomes of specific cases, or to provide overall acquittal, conviction or reversal rates. "Acquittals are always disappointing," she says. "I believe that prosecutors around the country that are bringing these cases are generally some of the most experienced prosecutors. They've received training in our corporate fraud program, and they handle these cases very carefully. The number of acquittals is an extremely small percentage of cases we bring, and reversals in appellate court can be for a variety of different reasons. I don't agree with notions that some reversals in an appellate court are based on the experience of prosecutors."
Still, former prosecutors say that the pressure to win corporate fraud prosecutions grew more intense as the losses began stacking up. The trial of Enron CEO Jeffrey Skilling, for example, came on the heels of the acquittal of Richard Scrushy. "[Justice] told us, 'The future of white-collar prosecutions may rise and fall on how you perform in this trial,'" says former prosecutor Hueston.
"There was this level of intensity," adds defense lawyer Carey Dunne, a litigation partner at Davis, Polk & Wardwell who represented Credit Suisse First Boston Corp. in connection with the obstruction of justice trial of former trader Frank Quattrone, and ImClone Systems Inc. in the insider trading investigations of Martha Stewart and Samuel Waksal. "There was a sense many of us had ... in dealing with local prosecutors [that] they were accountable to more than their usual local supervisors."
The most controversial of the Justice Department's corporate fraud prosecution tactics were outlined in the Thompson Memo, a document issued to federal prosecutors in January 2003 by then-deputy attorney general Thompson. (The memo updated policies previously issued by one of Thompson's predecessors, Clinton administration deputy attorney general Eric Holder Jr.) Thompson listed nine factors that prosecutors should take into account when considering the indictment of a company, including the corporation's "timely and voluntary disclosure of wrongdoing and its willingness to cooperate in the investigation of its agents, including, if necessary, the waiver of corporate attorney-client and work-product protections."
The Thompson Memo effectively urged prosecutors to convince companies to lay themselves bare, disclosing reports of internal investigations, waiving privilege and jettisoning employees -- whose legal fees, it was suggested, should not be paid by cooperating corporations.
Such prosecution tactics provoked an angry outcry from defense lawyers. In 2005, at the urging of the National Association of Criminal Defense Lawyers, the U.S. Chamber of Commerce and others, the American Bar Association passed a resolution opposing the government's routine pressure on corporations to waive their rights. "The defense bar and other organizations felt that the department went too far," says Robert Kent, former chief of the complex fraud section of the U.S. Attorney's Office in Chicago, now a partner at Baker & McKenzie.
Several federal judges agreed. In 2005, in the prosecution of Richard Scrushy, the court excluded Scrushy's SEC deposition because the SEC had failed to inform Scrushy of the parallel criminal investigation against him.
In 2006, an Oregon district court in U.S. v. Stringer dismissed indictments against three former executives of FLIR Systems Inc., finding that the SEC and Justice had "engaged in deceit and trickery" by using the SEC's civil investigative authority to gather evidence for the criminal case while concealing its existence from the defendants. And in the most dramatic example of judicial push-back, Lewis Kaplan, a federal district court judge in Manhattan, ruled in 2006 that prosecutors in the KPMG LLP tax shelter case had violated the constitutional rights of former KPMG officials when they pressured the company to condition its payment of attorney fees on cooperation with the government.
Last December the Justice Department finally responded. In a revised memorandum, Thompson's successor, then-deputy attorney general Paul McNulty, clarified that prosecutors should only seek privileged information when there was a "legitimate need" for it; and they should not penalize companies for paying their employees' legal fees. "We determined we could put some additional safeguards into our corporate charging policy and we did that with the McNulty Memo," says Meyer. "Now every waiver has to be approved by a senior Justice Department official."
Still, the revision came too late for the Justice Department to avoid Judge Kaplan's harsh rebuke. On July 17 -- the same day that Gonzales and President Bush were celebrating the five-year anniversary of the Corporate Fraud Task Force in the Great Hall in Washington -- Kaplan dismissed the indictments of 13 former KPMG executives. "[Prosecutors'] deliberate interference with the defendants' rights was outrageous and shocking in the constitutional sense because it was fundamentally at odds with two of our most basic constitutional values -- the right to counsel and the right to fair criminal proceedings," Kaplan wrote.
Beginning in 2005, only three years after the Corporate Fraud Task Force was established, the Department of Justice significantly scaled back its prosecution of corporate crimes. According to an analysis of Justice Department statistics by TRAC, the 2007 year-to-date number of white-collar filings is 64 percent lower than the 2006 number -- and 77 percent lower than in 2004. In part, the drop is a matter of priorities. The Justice Department has established several new task forces -- including the Hurricane Katrina Fraud Task Force, the Obscenity Prosecution Task Force and the National Procurement Fraud Task Force. And in part, it's a result of a decline in investigatory resources: According to a 2005 Federal Bureau of Investigation inspector general report, after September 11, 2001, the FBI "reduced its investigative efforts related to traditional crimes by more than 2,400 agents" in order to focus its work on terrorism.
The Justice Department did launch several stock options backdating investigations in 2006, but such cases were not the result of corporate fraud task force enterprise. They were prompted, as even the department acknowledges, by the 2005 backdating study conducted by University of Iowa associate professor Erik Lie and subsequent investigations by The Wall Street Journal. "We read about [Comverse Technology Inc.'s options backdating] in the Journal, and realized this was an issue we should be focused on," says Michael Asaro, the former Eastern District of New York Assistant U.S. Attorney who handled the prosecution of three former Comverse executives. (Two pled guilty; one is fighting extradition from Namibia.) The task force was essentially uninvolved in the July 2007 stock options backdating trial of former Brocade Communications Systems CEO Gregory Reyes in San Francisco, according to Timothy Paul Crudo, the Assistant U.S. Attorney who prosecuted Reyes. The former CEO was convicted on 10 counts of conspiracy and fraud.
The department insists that the recent decline in prosecutions is actually a sign of the remarkable success of the Corporate Fraud Task Force. "You're getting a lot more focus on compliance, and on ethics internally in corporate structures," says Justice's Meyer. "We do believe that the success of the Corporate Fraud Task Force, in conjunction with the Sarbanes-Oxley Act, is making it more likely that fraud is being detected by corporations themselves."
Former task force member Yang, who left the Los Angeles U.S. Attorney's Office last year, agrees. "We picked off the low-hanging fruit," she says.
"We got all the big bad players, or most of them. The mandate has always been not to strangle corporate America, but to put investor confidence back into the market, which I think we have." Adds former Chicago prosecutor Kent: "The companies that were really engaged in the misconduct in a serious way have been identified, and prosecutions and enforcement actions have occurred."
Ultimately, the task force was (and is) neither a prosecuting body nor a provider of resources to support the prosecutions of complex corporate fraud cases around the country. Rather, it was "a working group of U.S. Attorneys and people from regulatory agencies who sat in a conference room, announced policy initiatives, and kept track of results," says Steven Peikin, a partner at Sullivan & Cromwell and former chief of the Securities and Commodities Fraud Task Force of the Manhattan U.S. Attorney's Office. The Corporate Fraud Task Force was just one star in a larger constellation of government efforts to calm investors in an escalating financial crisis.
But as its role diminishes and prosecutors cast their sights elsewhere, new corporate criminal schemes -- whether related to risky hedge funds, options backdating, subprime loans or something else -- are bound to crop up. As Robert Kent notes wryly: "The history of fraud prosecutions is that there's going to be another area [of trouble]."
And likely another new task force to combat it.
Related article:
Three Cents on the Dollar
Convicted white-collar criminals owe billions in restitution. Getting them to pay it is another story.
Related charts:
CORPORATE FRAUD DATABASE
Adaptec, Inc.- Countrymark Cooperative, Inc.
Craig Consumer Electronics Inc.- HealthSouth Corporation
HealthSouth Corporation - McKesson, Inc.
Med-Hut Co., Inc.- Smith Technologies (Basic Research Corporation)
Smith Technologies (Basic Research Corporation) - YBM Magnex International Inc.
Updated 5/31/2006 3:25 PM ET
Milberg Weiss is the first business to be prosecuted by the federal government since Arthur Andersen, the former accounting firm and Enron auditor that died even though its obstruction-of-justice conviction was overturned last year by the Supreme Court.
In the KPMG case, 16 former executives believe their constitutional rights to legal counsel and fair trial were violated when prosecutors forced KPMG to stop paying their legal fees as part of the firm's agreement with the government to escape prosecution, according to court filings.
As the Justice Department intensified its crackdown on corporate crime in the post-Enron era, a growing number of defense lawyers and business groups have accused it of prosecutorial overkill.
Prosecutors, encouraged by the so-called Holder and Thompson memorandums in 1999 and 2003, respectively, that set Justice Department criteria for going after "business organizations," are compelling more businesses to cooperate with investigations and sign "deferred-prosecution agreements" and "no prosecution" deals — or risk being indicted.
In both cases, prosecutors require companies to agree to reforms, cooperation and often payment of fines or restitution. The difference is that in a deferred-prosecution agreement, prosecutors charge the company with a crime but agree to drop the charges if the company fulfills promises included in the agreement.
"It's an ultimatum from prosecutors: either cooperate or die," says Larry Ribstein, a law professor at the University of Illinois.
Since the Justice Department's corporate fraud task force was formed four years ago, prosecutors have signed "a couple dozen" deferred-prosecution agreements with business entities, says department spokesman Bryan Sierra.
That's twice as many as in the 10 years before the corporate fraud task force was created, says Andrew Weissmann, who prosecuted Arthur Andersen as a member of the Enron Task Force. He is now a defense attorney at Jenner & Block.
Weissmann, who also prosecuted drug gangs and Mafia defendants in New York, says the Justice Department is addicted to using deferred-prosecution deals "like crack cocaine."
"As the department gets more experienced at deferred-prosecution agreements and realize they have more leverage," Weissmann predicts, "you're going to see more and more draconian agreements."
Prosecutors believe that businesses and executives engaging in financial crimes must be taught a harsh lesson. Since the Enron scandal arose in late 2001, the Justice Department has won 1,000 convictions of white-collar criminals, including 167 CEOs and presidents.
But defense and corporate attorneys accuse the Justice Department of going too far — and even engaging in prosecutorial misconduct — when prosecutors pressure businesses to waive attorney-client privilege, which protects the confidentiality of communications with their lawyers, and to hand over investigative documents to the government. Granting such waivers also can weaken the companies' legal position in related civil lawsuits.
The Justice Department's use of deferred-prosecution deals has led an array of business and legal groups — among them the U.S. Chamber of Commerce, American Bar Association, the American Civil Liberties Union, the Securities Industry Association, and the National Association of Criminal Defense Lawyers — to lobby Congress and speak out on the issue.
Several of those groups also have filed legal briefs in the KPMG case, calling it unconstitutional for the Justice Department to force companies to cooperate with the government's investigations by not paying executives' legal fees.
"While prosecuting wrongdoing is a critically important objective, we think everybody deserves the right to have the benefit of counsel," said David Chavern, chief of staff at the Chamber of Commerce.
The KPMG case became a legal flashpoint on the issue after prosecutors charged 16 former KPMG executives with setting up fraudulent tax shelters and creating $11 billion in bogus tax losses.
In a deferred-prosecution agreement with the Justice Department, KPMG agreed last year to pay $460 million in penalties and admit to wrongdoing.
But the defendants' attorneys, in court filings and hearings in federal court in New York, accuse prosecutors of forcing KPMG to stop paying the legal fees of its former executives as a condition of the deferred-prosecution agreement. Prosecutors deny that.
In a May 10 hearing, U.S. District Judge Lewis Kaplan questioned the Justice Department's action in the deferred-prosecution deal.
According to a transcript, the judge scolded prosecutors and said: "Isn't it just perfectly obvious ... that it is the position of the United States Department of Justice that a company facing possible prosecution hurts its case for a favorable outcome" by paying the legal fees of its former employees?
Meanwhile, last month's indictment of Milberg Weiss and two senior partners on fraud charges could cripple the law firm, which ruled the securities class-action field for three decades until last year. Milberg Weiss likely will lose some clients and the ability to serve as lead counsel in big securities-fraud cases, legal watchers say.
On the firm's website (www.milbergweissjustice.com), Milberg Weiss co-founder Melvyn Weiss calls the indictment "completely unnecessary and unjust." Milberg Weiss' 365 attorneys and other employees "will inevitably suffer serious personal and professional harm," he writes.
Weiss and other attorneys say that Milberg Weiss rejected prosecutors' demands that the law firm waive its attorney-client privilege and testify against its own partners.
The prosecution of one law firm, though, won't have the same widespread economic impact as Arthur Andersen's collapse, when tens of thousands of people lost jobs and the number of Big Five accounting firms fell to four.
The vacuum created by the possible death of Milberg Weiss would be filled by dozens of other law firms, says Stanford University law professor Joseph Grundfest.
Even if a company doesn't go under or face an indictment, the threat of prosecution can hobble a business, according to defense lawyers such as Roma Theus, an attorney who is not involved in the Milberg Weiss case.
A potential trial drains money and resources. Morale among employees suffers, and many look for new jobs. The business must deal with the stigma of criminal charges and face the full legal firepower of the government.
That's why nearly all businesses facing potential charges yield to prosecutors.
"If they don't," Theus says, "the consequences can be devastating."
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| Find this article at: http://www.usatoday.com/money/companies/regulation/2006-05-30-justice-usat_x.htm June 20, 20082008 Report - Corporate Fraud Task ForceThe 2008 Report to the President of the Corporate Fraud Task Force is now available (see here). And reading the many prosecutions with guilty pleas and convictions after trial, one would certainly think that this task force has been an incredible success. After all the Report says that the DOJ "has obtained nearly 1,300 corporate fraud convictions." It states that "[t]hese figures include convictions of more than 200 chief executive officers and corporate presidents, more than 120 corporate vice presidents, and more than 50 chief financial officers." The Report even goes so far as to supply successes with civil enforcement. But there is something noticeably missing from this report. How about the not guilty verdicts? Shouldn't a report of this nature present a fair assessment of what really happened with this Corporate Fraud Task Force? Back when they issued their 5 year report I wrote (here) -
The closest the latest Report comes to presenting a true picture of what happened, is on page 1.11 when discussing KPMG they say that "the Government is currently appealing an adverse ruling in connection with the remaining 13 individuals." This Report should be sent back for a rewrite. Lets see a Report that presents a true picture of what has been accomplished by the Task Force. That picture may show that the government has been successful in many cases. But it will allow the President to see exactly what has or has not been accomplished by this Task Force. Ruling Won't Deter Prosecution of Fraud By Carrie Johnson The Supreme Court's resounding decision in favor of disgraced accounting firm Arthur Andersen LLP is a harsh rebuke for federal prosecutors but will not force a retreat in the Justice Department's three-year-old effort to prosecute corporate fraud, legal experts said yesterday. Andersen's March 2002 indictment marked the first big federal prosecution of business abuses as multibillion-dollar frauds at Enron Corp., Rite Aid Corp. and WorldCom Inc. were exploding into public view. The accounting firm's conviction a few months later helped end the company's accounting practice, created momentum for other corporate prosecutions and helped silence critics who claimed that the Bush administration was too cozy with corporations to hold them accountable for fraud and misconduct. Justice Department officials yesterday expressed disappointment with the high court's decision overturning Andersen's conviction for obstructing justice. They said they had not yet decided whether to retry Andersen, a once-respected Chicago accounting firm with 28,000 employees across the nation. "We remain convinced that even the most powerful corporations have the responsibility of adhering to the rule of law," acting Assistant Attorney General John C. Richter said in a prepared statement. Defense lawyers and former prosecutors said the unanimous Supreme Court ruling will not substantially deter the government from prosecuting businesses and high-profile executives. One major reason is that the witness-tampering law under which former Enron auditor Andersen was indicted has been supplanted by a new obstruction-of-justice statute in the 2002 Sarbanes-Oxley Act, corporate accountability legislation Congress passed after investor outcry. In addition, the President's Corporate Fraud Task Force has won important victories since Andersen went out of business, including several for obstructing justice. Prosecutors have convicted former WorldCom chief Bernard J. Ebbers, former Adelphia Communications Corp. chief John J. Rigas and domestic entrepreneur Martha Stewart, among others. However, defense lawyers for investment banker Frank P. Quattrone yesterday asked an appeals court for more time to appeal his conviction to the U.S. Court of Appeals for the 2nd Circuit, citing the Andersen decision. In May 2004, Quattrone was convicted of two counts of obstructing justice and one count of witness tampering, with that charge under the same law as the one in the Andersen case.. "What [the ruling] ought to do is make the government more reflective before they pull the trigger in certain circumstances," said E. Lawrence Barcella Jr., a longtime Washington defense lawyer and former federal prosecutor." Andersen has fewer than 200 workers, whose principal employment is helping the firm defend against civil lawsuits, which makes the Supreme Court decision something of an empty victory. Even so, spokesman Patrick Dorton issued a statement yesterday saying the court recognized "the fundamental injustice" of imposing what amounted to a corporate death penalty on the accounting firm. The indictment drew criticism from business groups, which argued that it would irreparably damage Andersen and reduce competition in the audit industry, by reducing the field from five big players to four. Rusty Hardin, the Houston lawyer who served as Andersen's lead lawyer in the 2002 trial, said, "The next time these things come up, let's tread a little bit more lightly before we look for scalps." The government already may have taken some of that criticism to heart. Since Andersen's demise, prosecutors increasingly have employed deferred prosecution agreements with companies accused of wrongdoing. Under the terms of those deals, companies will face increased financial penalties and other sanctions if they violate the terms of their corporate probation. That avoids the business-destroying approach prosecutors took with Andersen. "Andersen was not without fault for what it did," said Arthur W. Bowman, an industry analyst and author of the Bowman's Accounting Report newsletter. "But Andersen became the scapegoat for a lot of things. Not only were accountants doing shoddy work and getting too close to clients, but so were investment bankers and lawyers." The Sarbanes-Oxley Act imposed new requirements on auditors, corporate board members and top executives, in an effort to get them to take more responsibility for financial statements. It also created an oversight board putting discipline for accounting firms in the hands of an independent body for the first time in 70 years. In recent months, the U.S. Chamber of Commerce and other groups have argued that auditors are overreacting and performing too much work in an effort to insulate themselves from regulatory action. Meanwhile, yesterday's government defeat provides ammunition to defense lawyers who continue to fight the Justice Department's Enron Task Force. Michael Ramsey, a lawyer for former Enron chief executive Kenneth L. Lay, who is to face trial in January, said the decision is a "vindication" of his arguments that prosecutors have overreached and damaged their credibility. Daniel M. Petrocelli, lead defense counsel for former Enron executive Jeffrey K. Skilling, who awaits trial alongside Lay, said, "The Supreme Court's message is loud and clear: You cannot criminalize innocent conduct." Andrew Weissmann, director of the Enron task force, declined to comment yesterday. But the Justice Department's Richter said in his statement that prosecutors moved swiftly against Andersen because they believed the firm was shredding documents to impede securities regulators. Corporate Fraud Lawsuits Restricted By Robert Barnes and Carrie Johnson The Supreme Court yesterday strictly limited the ability of investors who lost money through corporate fraud to sue other businesses that may have helped facilitate the crime, a decision that could doom stockholder efforts to recover billions of dollars lost in Enron and other high-profile cases. In a victory for business interests in a case they had identified as their most important of the year, the court ruled 5 to 3 to protect corporate partners such as vendors, consultants and others from liability if stockholders cannot show they relied on deception from such "secondary actors'' in making their investment decisions. "That was a complete victory for the defendants," said Georgetown University law professor Donald C. Langevoort. "The judicial system has become more conservative and more sensitive to economic rights and business interests. This is one of many cases that has restricted the scope of investor recovery." The case decided yesterday, Stoneridge Investment Partners v. Scientific-Atlanta, involves a scheme by a cable company and two of its vendors that allowed the company to disguise a revenue shortfall and present investors a healthier financial picture. Investors sued the company, Charter Communications, and then went after the two vendors, Scientific-Atlanta and Motorola. Justice Anthony M. Kennedy, writing for the majority, said stockholders had no knowledge of the actions of the two vendors and thus cannot show those companies' actions influenced investors "except in an indirect chain that we find too remote for liability.'' Kennedy drew from the court's 1994 decision that private suits are not allowed against companies "aiding and abetting" corporate fraud by others. He wrote that Congress the following year determined that "this class of defendants should be pursued by the SEC and not by private litigants,'' referring to the Securities and Exchange Commission. The case attracted national attention for its similarity to a case filed by investors who want to sue banks and others that allegedly allowed the energy trader Enron to disguise its financial problems before a collapse that produced heavy losses. It carries implications for other investor-motivated suits over alleged corporate fraud, including attempts by shareholders to recover billions of dollars in widening losses in mortgage industry investments. The decision continued a winning streak for business interests in securities cases that extends back to the court's 2004 case and marked the reemergence this term of the court's ideological split. Kennedy was joined by the four more conservative members of the court, Chief Justice John G. Roberts Jr., Antonin Scalia, Clarence Thomas and Samuel A. Alito Jr. Embracing an argument advanced by the U.S. Chamber of Commerce, the five said expanding the availability of stockholder suits "may raise the cost of being a publicly traded company under our law and shift securities offerings away from domestic capital markets.'' Justice John Paul Stevens said the majority has a "mistaken hostility'' toward such private actions, allowed by the court long ago under federal securities law. Stevens wrote such suits play an important role in insuring "investor faith in the safety and integrity of our markets.'' He said Congress has acted "with the understanding that federal courts respected the principle that every wrong would have a remedy.'' His dissent was joined by Justices David H. Souter and Ruth Bader Ginsburg. Justice Stephen G. Breyer, who owns stock in Cisco, which now owns Scientific-Atlanta, did not take part in the decision. Roberts had also recused himself from the case, but rejoined it, apparently after taking action to eliminate a financial conflict. Plaintiffs' lawyers say sometimes the only way for investors to recover money lost because of a company's fraudulent actions is to go after those who helped perpetrate the fraud. They are often the only ones left with money after a scheme collapses. Sean Coffey, a lawyer who frequently files fraud cases on behalf of shareholders, said the decision "significantly diluted accountability for wrong-doers at the same time that investor confidence in the integrity of our capital markets is suffering yet another body blow, this time from the subprime debacle." The ruling intensifies pressure on regulators and prosecutors to step up their attack on corporate fraud rather than relying on investor lawsuits to shoulder some of the burden. Duke University law professor James D. Cox, who follows the government's antifraud initiatives, noted that neither agency sued Scientific-Atlanta or Motorola in connection with the Charter scheme. "The SEC is a nonplayer in these cases," he said. The SEC had supported weighing in on behalf of plaintiffs in the Stoneridge case, but it was overruled by President Bush and Treasury Secretary Henry M. Paulson Jr., who feared it would hamper business with expensive and frivolous lawsuits. Corporate lobbyists embraced the ruling. "This decision ensures that overzealous litigation does not derail the U.S. economy," said Ira Hammerman, general counsel at the Securities Industry and Financial Markets Association. "The wrong ruling would have unleashed a tsunami of damaging side effects, infecting the entire U.S. economy and harming investors." Dan Newman, a spokesman for the attorneys who represent Enron plaintiffs, said they were analyzing the ruling. The court will consider whether to review the Enron case at its private conference this week. "We're looking at a variety of options because clearly the innocent victims of the Enron debacle don't deserve to be left holding the bag for the fraud orchestrated by powerful banks," Newman said. Some legal experts said the ruling, while unfavorable to many plaintiffs, could have been written in a way that was even more damaging. Former SEC commissioner Harvey J. Goldschmid, who joined in a brief supporting the plaintiffs, said that investors may find hope in a distinction that Kennedy appeared to draw between third parties in the securities and financial services industry and those who handle "ordinary business operations." The opinion, Goldschmid said, may leave room for shareholder lawsuits against underwriters, accountants, lawyers and bankers while forestalling such cases against vendors selling goods. |
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