Saturday, May 27, 2006

MORE ABRAMOFF TAINT -- This time it reaches into the Democratic primary for Maryland governor:
A longtime aide to Montgomery County Executive Douglas M. Duncan played a key role in the county's leasing of two schools to the Yeshiva of Greater Washington at the same time he was working as a political adviser and fundraiser for Duncan.

Jerry Pasternak, a special assistant to Duncan (D), knew lobbyist Jack Abramoff -- a Yeshiva board member in the late 1990s and early 2000s -- from the Orthodox Jewish community and accepted his offer to help raise money for Duncan in 1998, Duncan's gubernatorial campaign manager, Scott Arceneaux, said yesterday.
SAFAVIAN TRIAL UPDATE -- Prosecutors are starting to make their case. "A jury was presented with scores of damaging e-mails yesterday that showed lobbyist Jack Abramoff angling for inside information from then-General Services Administration chief of staff David H. Safavian -- and Safavian doing what he could to accommodate his longtime friend."

This is a pretty good test case for the government, before it attempts to prosecute some of the bigger fish, e.g. members of Congress. Presumably, the as-yet unindicted targets of the Abramoff probe are carefully watching.
MONSTER PONZI --
Brick Kane, the court-appointed receiver for Lewis' holdings, testified that Lewis took in $311 million between 1985 and 2003.

The judge asked how Lewis could keep up his scheme for nearly two decades.

"As long as you're able to raise money and keep paying the promised annual or monthly payments, you can keep going until you implode," Kane said. "And Mr. Lewis was about to implode when he was arrested."

Lewis told investors he was earning returns of 18 percent to 40 percent by leasing medical equipment, financing purchases of medical insurance, making commercial loans and buying and selling distressed businesses.

But prosecutors alleged that instead Lewis was using money from new investors to pay off the original ones -- something known as a Ponzi scheme.

Kane testified that some early investors did receive money back, leaving the total loss at $156 million.

Defense attorneys, however, have argued that the net loss to investors was much lower.
He got 30 years, and has to pay the $156 million to the victims in restitution.
BITING DOWN HARD -- "Attorney General Alberto R. Gonzales, the F.B.I. director, Robert S. Mueller III, and senior officials and career prosecutors at the Justice Department told associates this week that they were prepared to quit if the White House directed them to relinquish evidence seized in a bitterly disputed search of a House member's office, government officials said Friday."

It looks like the DOJ triumverate just went all in. It seems like a stretch to think this is a bluff, which suggests that there is something more to the Jefferson investigation than a single, $100,000 bribe.

WaPo's story here.

Interesting analysis (sub. req.) by Prof. Turner at UVa law. Based on a reading of the Speech and Debate Clause, as well as Brewster, the question seems to turn on what evidence was specified in the warrant application and what was actually seized. If evidence of a felony is in bounds, and bribery is a felony, then it would seem that evidence of the actual bribe would be constitutionally susceptible to search and seizure.

On the other hand, the bribe was taken in exchange for an official act, right? Well, one has to wonder whether evidence of the official act is constitutionally susceptible to search and seizure under the Speech and Debate Clause as well as Brewster. Read both authorities carefully, I think it is a little ambiguous. The counterargument is that regardless whether the evidence is of an official act, if it is also evidence of a bribe, it falls within Brewster.

The fact that it was a Congressional office does not, by itself, change the analysis from what I can tell.
NEW STATE OF PLAY --

The tactics and strategies used in the successful prosecution of the former Enron chief executives, Jeffrey K. Skilling and Kenneth L. Lay, highlight the transformation that has occurred in recent years in the investigation and prosecution of white-collar crime, a change that has brought many of the techniques applied to drug cases and mob prosecutions into the once-genteel legal world of corporate wrongdoers.

No longer are defendants allowed to surrender themselves quietly, outside the view of the press. Now, as Mr. Skilling and Mr. Lay learned firsthand, there are "perp walks" where the handcuffed defendant is brought in by law enforcement for booking. Cases are not resolved with a fine or a short stay in a "country club" prison; now defendants face decades of real jail time, sentences that can preclude them from being considered for minimum-security prisons.

Witnesses are squeezed, with threats against family members and stints in solitary confinement. Those who fail to cooperate are indicted, or deemed unindicted co-conspirators, a designation that places potential witnesses in a state of indefinite legal limbo. And companies that want to settle a criminal case can often do so only by taking the once unusual step of waiving their right to protect the confidentiality of their communications with their lawyers.

"Our prosecutors will use the tools legally available to us to solve these crimes and bring the perpetrators to justice," said Bryan Sierra, a Justice Department spokesman.

Legal experts yesterday heralded such aggressive approaches as crucial to the government's securing convictions of Mr. Lay and Mr. Skilling. "Prosecutors in white-collar cases are looking at the range of legal tactics that are available to them that they have used for years in other kinds of cases, and they are not just ruling out those tactics because it is a white-collar case," said Christopher Wray, the former head of the Justice Department's criminal division and now head of the government investigations practice at the law firm of King & Spalding.
Some of the tactics, e.g. forcing waivers of privilege and cutting off executive legal expenses, have been heavy-handed and will probably be seen as unwise over the long-term.

Having said that, the new emphasis on white collar investigations and prosecutions will certainly lead to a change in corporate culture. The only question is what that change will be.

I suspect that the effort to push-back against Sarbanes-Oxley is not much more than a summer shower at this point, but if it builds into a real thunderstorm, much of the gain reformers have realized since Enron will likely be lost. On the other hand, if Sarbanes-Oxley can weather the present situation, which is more likely in the wake of the Lay/Skilling verdit, we may be in for a long-term shift.

The wisdom of that shift, I'll leave for another time.
REPLACING SNOW AT TREASURY -- "President Bush is leaning toward having one of his oldest friends take over the Treasury Department after a fruitless effort thus far to woo a star from Wall Street."

Friday, May 26, 2006

IN NEWS OVERSEAS --
Japanese prosecutors accused a former Internet venture star Friday of calling the shots in a complex scam to inflate stock prices and doctor company books in the opening of a trial against the company and its former executives.

Disgraced Internet company Livedoor acknowledged on Friday it was guilty of violating securities regulations. Former Livedoor executive Ryoji Miyauchi, one of the defendants in the trial opening in Tokyo District Court, said on nationally televised news that he was pleading guilty.

Livedoor Co.'s flamboyant former chief executive, Takafumi Horie, 33, who was the darling of the Japanese media before his arrest in January, will be tried separately and a date has not yet been set for his trial. Horie, released on bail in April, has repeatedly said he is innocent.
ENRON ANALYSIS -- A milestone. A verdict on an era. Tycoons should take heart, or should they?. But reforms should continue.
FOLLOWING UP --
A year ago today, public suspicions about dishonest politicians were confirmed as four [Tennessee] state lawmakers were handcuffed and whisked into federal court to answer bribery charges.

By the end of the day, seven people were arrested as part of a federal sting code-named Operation Tennessee Waltz — four state legislators, one ex-senator and two 'bagmen' who have since pleaded guilty to ferrying payoffs to lawmakers.
BOYLE ON HOT SEAT -- Judge Terrence Boyle, President Bush's nominee for a seat on the Fourth Circuit, had been oppose political grounds. "But new revelations of ethics violations committed by Boyle have left his nomination to one of the nation's most powerful courts hanging in doubt, and Senate Republicans backpedaling." In response, his former clerks have launched a defense.
CONFIDENCE INSPIRING -- "Officials of the Veterans Affairs Department told angry lawmakers on Thursday that an agency employee had been taking home sensitive data for three years before some of the material was stolen from his residence, compromising the records of 26.5 million veterans."

And the cost to clean up the mess: at least $200,000,000.
CAPITOL RAID UPDATE -- NYT reports:
President Bush intervened directly Thursday in an increasingly tense constitutional fight between Congress and the Justice Department by ordering that records seized from a Congressional office over the weekend be sealed for 45 days.

"Our government has not faced such a dilemma in more than two centuries," Mr. Bush said in his first statement on the swirl of events surrounding the Federal Bureau of Investigation's search of the office of Representative William J. Jefferson, Democrat of Louisiana, who has been accused of accepting bribes. "Yet after days of discussions, it is clear these differences will require more time to be worked out."
See more from LAT here.

Some wonder where all this concern about the constitutional order has been the last few years.

Meanwhile, Hastert denies being under investigation, but some aren't buying it.

Thursday, May 25, 2006

DOJ STARTING TO CIRCLE -- The timing of stock option grants is getting more and more attention from prosecutors, and Lattman wonders whether DOJ might create a taskforce: "With more than a dozen grand jury subpoenas already issued by the U.S. Attorney’s offices in Brooklyn and Manhattan, those laid back Californians have decided to join the party. Power Integrations announced that on Tuesday it received a subpoena from the Northern District of California related to its stock-option practices. And yesterday, semiconductor equipment manufacturer KLA-Tencor, which has already been subpoenaed by the Eastern District of New York, received another one from the DOJ’s San Francisco office. The companies both said they’re cooperating with the investigations."
ENRON CONVICTIONS -- "Enron former chief executive Jeffrey Skilling and founder Kenneth Lay were both found guilty Thursday of conspiracy and fraud in the granddaddy of all corporate fraud cases."

Prof. Bainbridge thoughts here. Two of his insights:
It's not the crime, it's the cover up. The real crimes at Enron mainly consisted of turncoat government witness Andrew Fastow's shady deals, but Skilling and, especially, Lay are going down for improperly misrepresenting Enron's fortunes."

One of the curious things about this case is the documented evidence that "a number of people were contradicting Enron's own rosy view of itself long before the middle of 2001." At what point does a lie by top management cease to matter if the market doesn't believe it? Presumably the government convinced the jury that people believed the lies Skilling and Lay told, but did the market really do so?


More here. It all boiled down to credibility.
"LIED, CONCEALED AND MISLED" -- The government delivers its opening statement in the Safavian trial:
Prosecutors accused David H. Safavian, the federal government's former top procurement official, of lying repeatedly to investigators as the first trial related to the political corruption scandal of lobbyist Jack Abramoff got underway yesterday.

Safavian is accused of concealing the truth and obstructing federal inquiries about his relationship with Abramoff and also about a golfing trip the two men took in 2002 to Scotland and London. Prosecutors signaled that they plan to rely heavily on hundreds of e-mails between Safavian and Abramoff to show that Abramoff was seeking two government properties over which Safavian had influence while offering Safavian favors, including the overseas trip.
JUDICIAL TRAVEL -- Few are aware that judges are able to accept free trips to seminars and other educational events, but it seems those trips are coming under greater scrutiny:
Two organizations that have provided free trips to hundreds of federal judges received large contributions from tobacco, oil and other corporate interests, according to documents released yesterday.

The Montana-based Foundation for Research on Economics and the Environment (FREE) and George Mason University's Law & Economics Center previously said corporate money does not pay for the judges' seminars or declined to disclose their donors.

But documents released by the Community Rights Counsel, a nonprofit Washington law firm, show that corporations including Exxon Mobil, Philip Morris and R.J. Reynolds Tobacco have contributed tens of thousands of dollars toward these programs. The new information comes as judicial trips are receiving increased scrutiny on Capitol Hill, where bills would either outlaw such trips or create an inspector general for the judicial branch.
OBVIOUSLY -- "Jim Nicholson, the secretary of veterans affairs, expressed outrage Wednesday over being kept in the dark about the theft of computer data on 26.5 million veterans as he himself came under heavy criticism from Capitol Hill."

Following the timeline, according to the story, he was told on May 16, which was 13 days after the underlying identity theft occurred. And the public was informed May 22, almost a week after Secretary Nicholson was told.

So Nicholson's staff waited two weeks to tell him, and he waited one week to tell the public. I think there is probably plenty of outrage to go around, but leadership, competence and accountability... now those seem to be in much shorter supply.
U.S. v. SCOOTER LIBBY -- Government may call Cheney to testify:
A court filing on Wednesday by the special counsel in the C.I.A. leak case suggested that Vice President Dick Cheney would testify as a government witness in the trial of his former chief of staff, I. Lewis Libby Jr.

The legal brief did not say with certainty that Mr. Cheney would be called as a witness. But the latest filing, like earlier court papers, underscored the prosecutor's contention that the vice president's role was critical to understanding Mr. Libby's wrongdoing. But the new filing was the first to indicate that Mr. Cheney himself might be called as a government witness.
On the other hand, apparently Libby already dropped Cheney's name to the grand jury:
Vice President Cheney was personally angered by a former U.S. ambassador's newspaper column attacking a key rationale for the war in Iraq and repeatedly directed I. Lewis "Scooter" Libby, then his chief of staff, to "get all the facts out" related to the critique, according to excerpts from Libby's 2004 grand jury testimony released late yesterday by Special Counsel Patrick J. Fitzgerald.
MARTHA, PART TWO: A CIVIL ACTION --
A year after her release from prison, her carefully executed makeover complete, Martha Stewart must now confront again the insider trading accusations that turned her world upside down.

The three-year-old civil case against her is resuming. Contesting the Securities and Exchange Commission accusations, as opposed to a negotiated settlement, would help give Ms. Stewart the opportunity to not only clear her name but also to win back her title as chairwoman and chief executive of the company she founded, Martha Stewart Living Omnimedia.

If she loses, the burden will not be onerous. She could certainly afford any financial penalty and while she no longer serves on the board, her current role as editorial director gives her considerable influence.

All the same, a trial of the S.E.C. lawsuit could be another embarrassing blow not only to Ms. Stewart's image but to the fortunes of her company.
CORPORATE DEATH PENALTY --
Ever since the accounting firm Arthur Andersen LLP imploded in 2002 under the weight of an obstruction-of-justice indictment and 28,000 people lost their jobs, federal prosecutors have shied away from filing criminal charges against corporate entities.

Instead, the Justice Department has cut deals with cooperative companies such as Computer Associates International Inc., accounting firm KPMG LLP and drugmaker Bristol-Myers Squibb Co., agreeing not to press criminal charges in exchange for sweeping management changes, large financial penalties and help putting individual employees behind bars.

Last week, federal prosecutors in Los Angeles broke with that trend, filing a 20-count criminal indictment against the phenomenally successful class-action law firm Milberg Weiss Bershad & Schulman LLP. The indictment alleges that two of the firm's top partners, David J. Bershad and Steven G. Schulman, who were also indicted, secretly paid more than $11.3 million in kickbacks to individuals to serve as plaintiffs in class-action securities cases and then lied about it under oath.

The firm and the lawyers have denied wrongdoing. "We have been assured by the partners involved that they didn't engage in wrongdoing," said the firm's attorney, William W. Taylor III. "The firm stands firmly behind them." Bershad and Schulman have taken leaves of absence to fight the charges against them.

The Justice Department's decision to move against the firm, which has 125 lawyers and 240 support-staff members, has been highly controversial because most observers think simply being indicted could force a professional-services firm such as Milberg Weiss out of business.
Indeed. Although professional-services firms, especially law firms, recognize the importance of reputation, perhaps that recognition should do more to constrain the conduct of its attorneys and agents, so as to avoid the appearance of impropriety, let alone indictment.
FANNIE MAE SCANDAL DRAWS IN ANOTHER --
Smithsonian Secretary Lawrence M. Small has been barraged with criticism lately from Congress, historians and filmmakers who say his annual salary of $813,000 is too big and a secret contract barring much of the public from the institution's vast, taxpayer-supported archives unfair.

Now Small is being scrutinized in another drama, his role in the accounting fraud scandal at the Federal National Mortgage Association, where he was president, chief operating officer and board member from 1991 to 2000.

A new government report says Small was among a handful of senior Fannie Mae executives who set an improper "tone at the top," encouraging employees to hit profit targets ab
ove all else so that managers would receive the largest annual bonuses possible.
MORE ON THE CAPITOL OFFICE SEARCH -- House leadership wants the files back: "The constitutional clash pitting Congress against the executive branch escalated Wednesday as the Republican and Democratic leaders of the House demanded the immediate return of materials seized by federal agents when they searched the office of a House member who is under investigation in a corruption case."

WaPo thinks the leadership is overreacting: "The uproar over the FBI's search of Rep. William J. Jefferson's congressional office is understandable but overblown. A demand yesterday by House Speaker J. Dennis Hastert (R-Ill.) and Minority Leader Nancy Pelosi (D-Calif.) that the Justice Department return the papers it seized goes way too far. Constitutional provisions designed to protect lawmakers from fear of political retribution, such as the speech-and-debate clause, counsel restraint and caution in circumstances such as these. They do not transform congressional offices into taxpayer-funded sanctuaries."

And some members are sensing danger: "Some lawmakers are warning of a voter backlash against members of Congress "trying to protect their own" if party leaders keep escalating a constitutional dispute over the FBI's raid of a representative's office."

Meanwhile, this all might just be a breach of etiquette, rather than Constitutional prerogative: "The FBI raid on Rep. William Jefferson's congressional office was an aggressive tactic that broke a long-standing political custom. But while it might violate the spirit of the Constitution, it might not violate the letter of the document or subsequent rulings by the Supreme Court, legal analysts say."

For more see Instapundit here. Reynolds also ties in the maybe/maybe not ABCNews Blotter story alleging Hastert is included in the Abramoff probe, which is detailed here.

Wednesday, May 24, 2006

ESPIONAGE POST-MORTEM -- "The FBI missed many opportunities to identify a suspected Chinese spy and her FBI lover, including a tip that she "was in bed with" the bureau's Los Angeles office, a Justice Department internal review said Wednesday."
MISSED IN THE SHUFFLE -- Major corruption trial of little-known figure set to begin today:
"Opening arguments are set to begin at 9:30 am ET in the David Safavian trial, reports ABC News' Jason Ryan. "The government could lay out a pretty blistering case of Safavian's connections with Abramoff and members of Congress. On Friday, ABC News' Dean Norland reported that besides Neil Volz two other former members of Ney's staff have been subpoenaed to testify at the trial."

"Although the prosecution does not plan to call Abramoff to testify," adds Ryan, "we should expect an interesting narrative on how Abramoff influenced many in Washington. The trial bears close watching to yield clues into the ongoing investigation of Rep. Bob Ney and other members of congress."
NOTED -- "Chief Justice John G. Roberts Jr. said Sunday that he was seeking greater consensus on the Supreme Court, adding that more consensus would be likely if controversial issues could be decided on the 'narrowest possible grounds.'" Sounds more like minimalism and less like originalism. One wonders how Chief Justice Roberts's comments were received in originalist legal circles...

Update: Cass sunstein likes what he heard.
ETHICS IN STATE GOVERNMENT -- Maryland as a case study:
Maryland Gov. Robert L. Ehrlich Jr.'s personal lawyer has parlayed his close ties to the governor into a booming Annapolis government relations practice.

And because David Hamilton has emerged as a behind-the-scenes power broker without ever registering as a lobbyist, he's been able to do what no Maryland lobbyist can: help clients get access to the governor and other policymakers, and then ask those same clients to donate to Ehrlich's 2006 reelection campaign.

State ethics experts say it sounds problematic for Hamilton not to register, but Hamilton says it's not: "I know exactly where that line is, and I am very careful not to cross it. I do lawyering, not lobbying."
But isn't there at least an appearance of impropriety? Should that be the standard, or does that set the bar too high?
COMBATTING ONLINE GAME CHEATING -- "Increasingly, game developers and publishers of first-person-shooter and massively multiplayer online games (MMOGs) are turning to third parties to combat cheaters." I had no idea.
V.A. DELAYED REPORT OF I.D. THEFT --
The Veterans Affairs Department learned about the theft of electronic data on 26.5 million veterans shortly after it occurred, on May 3, but waited two weeks before telling law enforcement agencies, officials said Tuesday.

The officials said investigators in the Justice Department and the Federal Bureau of Investigation were furious with the leaders of the veterans agency for initially trying to handle the loss of the data as an internal problem through the agency's inspector general before coming forward.
FOLLOWING UP ON FANNIE MAE FINE -- It would seem the probe is opening a new chapter:
SEC Chairman Christopher Cox and acting OFHEO director James B. Lockhart III said they now will turn their focus to individuals, including Raines and Howard, to determine what role former and current executives played in the accounting fraud and if they should be forced to forfeit millions of dollars in what the regulators called "ill-gotten" compensation. They said the Justice Department is continuing a criminal probe.

"Fraudulent financial reporting cheats investors of their savings," Cox said. "Those whose actions led to the accounting fraud you've heard described today will be vigorously pursued."

Lockhart agreed. "You could argue none of it was deserved," he said in response to a question on how much of $52.8 million in bonuses Raines received during the six years might have been linked to improper accounting manipulation. As the settlement was announced, OFHEO released a 340-page report summarizing what it found in its nearly three-year probe of the company.

"The conduct of Mr. Raines, CFO Timothy Howard, and other members of the inner circle of senior executives at Fannie Mae was inconsistent with the values of responsibility, accountability, and integrity," the report said. "Those individuals engaged in improper earnings management in order to generate unjustified levels of compensation for themselves and other executives."

Raines's lawyer Robert Barnett said in a prepared statement that Raines "has repeatedly stated that he never authorized, encouraged, or was aware of violations" of accounting rules. Even so, Raines "strongly believes that, as the leader of Fannie Mae, he should be accountable for what happened within the organization, regardless of personal involvement or fault."

Howard's lawyer had no comment.
BLOGOSPHERE BLOWBACK -- Against complaints from House leadership following the search of Rep. Jefferson's office as part of bribery probe. More here. Clearly Instapundit (and others) disapprove. I can't say I disagree with their criticism.

Tuesday, May 23, 2006

HOUSE ETHICS COMMITTEE UP AND RUNNING -- But will it do real investigations? WaPo wonders.
TEACHERS UNION OFFICIAL SENTENCED -- "Former Washington Teachers' Union official Gwendolyn M. Hemphill was sentenced yesterday to 11 years in prison for helping embezzle more than $4 million from union coffers and using some of the money to buy lavish personal items."
QUESTIONING RAID CAPITOL HILL OFFICE -- "An unusual FBI raid of a Democratic congressman's office over the weekend prompted complaints yesterday from leaders in both parties, who said the tactic was unduly aggressive and may have breached the constitutional separation of powers between the executive and legislative branches of government."
ANOTHER ACCOUNTING SCANDAL -- After a three year probe, "[m]ortgage giant Fannie Mae will pay about $400 million in penalties under an agreement with two federal agencies to settle charges related to its $10.8 billion accounting scandal, sources said yesterday."
NOT GOOD AT ALL -- "As many as 26.5 million veterans were placed at risk of identity theft after an intruder stole an electronic data file this month containing their names, birth dates and Social Security numbers from the home of a Department of Veterans Affairs employee, Secretary Jim Nicholson said yesterday."

And the editorial:
It's not as though identity theft is a new worry. Last year companies such as Time Warner Inc. and Citigroup Inc. were in the news for losing computer tapes with sensitive personal information. The Bush administration has created something called the President's Identity Theft Task Force. Virtually every discussion of this subject makes a basic point: Although some data theft is inevitable in a digital society, institutions that collect people's names, birthdays and Social Security numbers must at least try to avoid losing them. Don't ship unencrypted computer tapes by UPS and then say you're sorry if the parcel goes astray. Don't let employees take sensitive files home, where they may be lost or stolen.


Mark my words, maybe not in the context of this specific case, but if this sort of stuff continues organizations maintaining personal information will be liable for damages resulting from the loss of that data. That's in addition to any criminal liability the individual "thief" might have.

Sunday, May 21, 2006

FEDS FOCUS ON BACK-DATING EXEC'S OPTIONS --
Nashville-based Caremark Rx Inc., a pharmacy-benefits management company whose fortunes have shot up since Edwin M. "Mac" Crawford took over as chief executive in 1998, was named last week in a widening federal investigation into corporate stock option programs.

On Thursday, the company stated that it had received a grand jury subpoena from the U.S. attorney for the Southern District of New York as well as a letter of informal inquiry from the Securities and Exchange Commission.

In addition to an inquiry about stock options, the SEC requested documents about the company's executive relocation program. Caremark moved its headquarters from Birmingham to Nashville in 2003.

The stock-option inquiry appears to be part of a broader probe into whether companies had backdated stock option grants to their executives to coincide with low stock prices. U.S. securities regulators and prosecutors have sought information from at least 12 companies, including UnitedHealth Group and Vitesse Semiconductor Corp.
The issue here is whether boards are inflating the value of options awarded to executives by manipulating the date when the value is set.
CLOSING IN ON JEFFERSON -- "The F.B.I. raided the Congressional offices of Representative William J. Jefferson, Democrat of Louisiana, on Saturday night as part of a corruption investigation focused on the lawmaker and on a Kentucky businessman who has pleaded guilty to trying to bribe him."
MARKET JUSTICE FOR FRAUD -- "Juventus, once Italy's blue chip soccer club, has been taking a beating on the stock exchange in the wake of accusations that officials influenced referee appointments and carried out other illicit behavior in a wide-ranging soccer scandal."