March 2009

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OTS Chief On Temporary Leave As Treasury Inspector General Reviews BankUnited Backdating

March 28, 2009 in Accounting Fraud, Regulatory Issues by Solomon Wisenberg | No comments

Today’s Wall Street Journal reports here that Acting Office of Thrift Supervision (”OTS”) Director Scott Polakoff has been placed on leave pending Treasury OIG’s investigation into whether the OTS approved BankUnited Financial Corporation’s backdating of a capital transfer in August 2008.

According to the story by Damien Paletta and David Enrich:

“In August, BankUnited transferred $80 million from the parent company to its thrift subsidiary, which was running low on funds, according to people familiar with the matter. BankUnited officials said at the time that the transfer was effective as of June 30. The move had the effect of burnishing its capital levels for the quarter that ended June 30.”

“At the end of that quarter, BankUnited’s recorded Tier 1 capital — the measure regulators use to judge a bank’s health — was at 7.6%. That fell to 1.34% by Dec. 31. Regulators typically want a bank to have at least 6% in Tier 1 capital.”

Polakoff is a highly-regarded career federal employee. Treasury OIG revealed in December that the OTS had improperly allowed a similar backdated capital infusion by IndyMac Bank.

The whole scenario of OTS-approved backdating highlights a problem often faced by federal prosecutors when they are called to investigate fraud in the wake of financial debacles. These debacles typically occur during periods of lax regulation. Law enforcement agents discover during their investigations that regulators/examiners have tacitly approved, or at least failed to stop, actions that look like classic fraud to the FBI or an Assistant United States Attorney (”AUSA”).

This makes prosecution more difficult–and with reason. It is hard to justify criminally charging someone who did nothing to hide his/her questionable activities from on-the-scene regulators/examiners. But there are also situations where massive multi-year fraud occurred and the perpetrators sought to cover their actions by obtaining regulatory approval, without full disclosure, to an overworked examiner or regulatory official.

It is the task of the ethical federal fraud prosecutor to determine which of these two types of cases he/she has. The thing to be avoided is a rush to prosecute (in the wake of public rage and hysteria) people who took actions that, however negligent, greedy, or misguided, were entirely within the acceptable regulatory ethos of their times.

Stanford Receiver Wants Hunton & Williams Records

March 27, 2009 in Stanford by Solomon Wisenberg | No comments

The Houston Chronicle reports here that Virginia based law firm Hunton & Williams has agreed to turn over some records to Stanford receiver Ralph Janvey, but not all. Specifically, Hunton & Williams declined to turn over records related to its representation of Stanford’s non-U.S. businesses (including Stanford International Bank) and Allen Stanford individually. Janvey wants them all and has asked U.S. Dsitrict Judge David Godbey for an order to that effect.

Stanford CFO Now Cooperating

March 25, 2009 in Stanford by Solomon Wisenberg | No comments

According to his attorney David Finn, Stanford CFO and number two man James M. Davis is now cooperating with both the SEC and DOJ investigations. NPR.org has the report here. The story does not indicate whether Davis’ co-operation is taking the form of personal interviews or some type of attorney proffer. The difference may be significant. Finn is quoted as saying that Davis has not been promised leniency and that there will be a time and place to answer questions relating to allegations of Davis’ involvement in a fraud. This may mean that for now Davis is only answering, directly or indirectly, rather detailed factual questions related to the whereabouts of assets. At any rate, it is always dangerous for those with criminal exposure to talk to the government unprotected, whether the discussions are informal or under oath. Laura Pendergest-Holt found this out the hard way.

Texas Politics And The U.S. Attorney Selection Process: Michael McCrum Has The Right Stuff In WDTX

March 24, 2009 in DOJ Issues, The Right Stuff by Solomon Wisenberg | No comments

The Dallas Morning News ran this astonishing story on Friday about the continuing role that Texas’ two GOP Senators intend to maintain in the selection of Texas’ U.S. District Judges and U.S. Attorneys. Apparently the Texas Democratic Congressional delegation thought that it would have the only say in making recommendations to the White House and DOJ, but a compromise of some sort has been worked out that appears to leave the Senators and their nominating committees in control. If true, this is quite surprising. The historical practice, when the party in the White House does not have a U.S. Senate seat in a particular state, is for DOJ and/or the White House to make the pick, with varying degrees of advice from state party members in the U.S. House or the Governor’s office. Obviously, the opposition party’s Senators must be consulted and the choice should not be offensive to them, since home state Senators have an effective veto over such picks. But the Senatorial role being envisioned now in Texas seems to be something different in nature.

There is no word yet on how this development will affect the appointment of a new U.S. Attorney in my old stomping grounds, the Western District of Texas (”WDTX”). The WDTX is one of the largest, busiest, and most important U.S. Attorney Offices in the country, encompassing more than 600 miles of border between the U.S. and Mexico and prosecuting a high number of major drug, drug gang, and money-laundering cases.

House Democrats representing Congressional Districts within the WDTX purportedly sent three names to the White House several weeks ago: Michael McCrum, Michael Bernard, and David Escamilla. All are men of integrity. I know and like Mike Bernard and have heard good things about David Escamilla, but in terms of competence and experience for this important position nobody matches Michael McCrum. Nobody.

In fact, Mike McCrum may be the most qualified U.S. Attorney candidate I have ever seen in any district in the country.

A former Dallas cop and San Antonio civil litigator, McCrum moved over to the U.S. Attorney’s Office in WDTX in the late nineteen eighties. He rose through the ranks, garnering a well-deserved reputation as a highly skilled trial attorney (with a tireless work ethic) in major drug and money laundering cases. McCrum ultimately became Chief of the Drug Unit, and later Chief of the Major Crimes Unit, for several years, exhibiting outstanding administrative talents. As far as I know, neither of the other candidates for the post has any federal experience to speak of.

Since leaving the U.S. Attorney’s Office in 2000 McCrum has handled a mix of criminal and civil work and is generally regarded as one of South Central Texas’ premier white collar defense attorneys, joining the ranks of the legendary Jack Leon and Gerry Goldstein. But even that doesn’t do Mike justice, because his practice (currently at Thompson & Knight) has become national and international in scope.

Finally, Mike is an American success story. A lifelong Democrat, Mike grew up speaking Spanish and English in a lower income neighborhood on San Antonio’s South Side. He is of Mexican heritage on his mother’s and stepdad’s side. Mike graduated highest in his Dallas Police Academy class and with honors from St. Mary’s Law School, where he was Executive Editor of the Law Review. He has been recognized in Best Lawyers In America every year since 2006 in the area of White Collar Criminal Defense and General Criminal Defense and was a Texas Super Lawyer in 2007 and 2008.

The only thing that troubles me is why Mike, or anybody else for that matter, would want the job in the first place. It is a really tough job and thankless in many ways. One thing for sure–McCrum doesn’t need it. He has done very well in private practice.

Mike is also an excellent motivator and speaker and possesses the kind of interpersonal, people, and diplomatic skills needed in the U.S. Attorney’s post. Perhaps most importantly, Mike is a very decent, serious human being with the all-important judgement, prudence, and gravitas required for the all-powerful U.S. Attorney position.

In short, this one is a no-brainer. Michael McCrum has the goods and he knows the district. It is not every day that a person of McCrum’s caliber puts forth his name for a U.S. Attorney slot. There is quite simply no rational reason for President Obama to choose anybody else.

SDNY And Bankruptcy Trustee In Possible fight Over Dreier Law Firm Assets

March 23, 2009 in Dreier by Solomon Wisenberg | No comments

Law.com has Noeleen Walder’s New York Law Journal piece here about the forfeiture provision of the Marc S. Dreier indictment, which essentially asks for all of Dreier LLP’s assets. According to the lawyer for the bankruptcy trustee, this is a “complete turnaround” and will interfere with the imminent asset sale. OUSA denies any intent to interfere.

Stanford Money Hunt Update

March 23, 2009 in Stanford by Solomon Wisenberg | No comments

The Houston Chronicle ran this story yesterday, summarizing and updating the efforts of court-appointed receiver Ralph Janvey to locate and unfreeze investor funds. The hardest funds to find have been those related to certificates of deposit.

Dewey Takes Manila, Madoff Stays In Jail.

March 20, 2009 in Madoff by Solomon Wisenberg | No comments

Surprise, surprise. The Second Circuit has affirmed Judge Chin on Bernie Madoff’s incarceration. Here is the WSJ alert.

Some Reflections On Madoff’s Guilty Plea

March 20, 2009 in Madoff by Solomon Wisenberg | No comments

There was much speculation in the white collar criminal defense community last week about why Bernard Madoff would plead straight up to the charges against him. This assumes that the choice was Madoff’s to make. In fact, there is no way that the U.S. Attorney’s Office for the Southern District of New York (”SDNY”) would have entered into a plea greement with Madoff, given his current posture.

Madoff maintains that none of his employees aided and abetted his massive Ponzi scheme. This is obviously a lie and SDNY doesn’t believe it for a minute. SDNY’s proffer sessions have already uncovered malfeasance by Madoff employees. So how could prosecutors enter into a plea agreement with someone who is already lying to them? A plea agreement presupposes that the defendant is being truthful with the government, at least at the outset. Even the relatively bare-bones SDNY white collar plea agreements typically give a defendant three points for acceptance of responsibility and provide that the agreement is null and void if the defendant lies. Plus, the parties must agree on a “factual basis” in support of the plea.

Thus, entering into an “agreement” with Madoff while he is lying about a key aspect of his crime is unthinkable. Quite simply it would be unethical for the SDNY to give its imprimatur to Madoff’s version of events by entering into a “bargain” with him. Besides, it’s not smart to bargain with the devil.

The government, on the other hand, could not and would not prevent a defendant from pleading straight up to all of the charges.

Madoff is determined to protect any and all who aided him in his crimes–a remarkable exhibition of his continuing sociopathy. The government will make him, his family, and his friends pay for it.

Madoff’s Outside Auditor Friehling Is Criminally Charged

March 19, 2009 in Madoff by Solomon Wisenberg | No comments

Here, courtesy of the WSJ, is the Criminal Complaint filed on March 17 (and unsealed yesterday) against Bruce David G. Friehling. Friehling is charged with Securities Fraud, Investment Advisor Fraud, and False Filings With The Securities And Exchange Commission. There is no allegation that Friehling knew of Madoff’s fraudulent Ponzi scheme. The crux of the case is that Friehling falsely certified, in various public filings, to having audited BLMIS (Madoff’s company) in accordance with Generally Accepted Accounting Principles (”GAAP”) and Generally Accepted Auditing Standards (”GAAS”). The FBI’s “numerous” interviews with various Madoff employees and its review of Friehling’s workpapers, however, allegedly belie these certifications. Also, according to the Criminal Complaint, Friehling certified to the American Institute of Certified Public Accountants (”AICPA”) between 1994 and 2008 that he had not performed any audits, thereby escaping AICPA’s peer review process. During the same period, however, Friehling certified to the SEC that “he was performing annual audits of BLMIS [Madoff's company] in conformity with GAAS and GAAP.”

Required Reading: Judge Sullivan’s Order To Show Cause In Batarfi v. Bush

March 15, 2009 in Brady Issues, DOJ Issues by Solomon Wisenberg | No comments

Judge Emmitt Sullivan has had it again with the DOJ. Here (Pacer subscription required) is his Friday Order to Show Cause issued in Batarfi, et al. v. Bush, et al., the habeas case of a Guantanamo prisoner detained for seven years without any adjudication. The DOJ has until Tuesday to explain why it violated an Order issued several months ago requiring the turning over of Brady (that is, exculpatory) material to the Petitioner. It turns out that an exculpatory document created in March 2002 was belatedly produced by the government in violation of the Court’s earlier Order. The government has failed to offer any explanation or excuse for its late production.

Judge Sullivan appears even angrier at the government’s violation of the Court’s January 16, 2009 Order requiring the DOJ to file a declaration affirming that: “Department of Justice attorneys have reviewed Petitioner’s statements for exculpatory evidence and have produced or will produce all statements containing exculpatory evidence to Petitioner’s counsel.” (Emphasis added.) The DOJ declaration instead indicates that the DOJ continues to rely on Department of Defense (DOD) attorneys to conduct an initial review of documents for Brady material. To do otherwise, according to the DOJ declaration, would be “not feasable.”

You heard me right. DOJ attorneys were ORDERED to file a declaration affirming that DOJ attorneys had reviewed all of Petitioner’s statements for Brady material. They instead filed a declaration saying in effect: “We didn’t do that, because we didn’t want to. It would be too hard.”

According to Judge Sullivan: “The government’s argument raises the disturbing implication that the attorneys conducting the review in this and other habeas cases (who presumably are not criminal prosecutors from DOJ) do not have the necessary experience with and knowledge of the government’s Brady obligations.”

The government’s response is due by noon Tuesday.

America is our beat.

Professor Rotunda Weighs In

March 15, 2009 in Constitutional Issues by Solomon Wisenberg | No comments

This is a White Collar Blog, but America is our beat. And so, here we bring you a thoughtful op-ed from today’s Chicago Tribune by Constitutional Law expert Ron Rotunda. Rotunda argues that one key element of the American Recovery and Reinvestment Act (aka, the Stimulus Plan) is clearly unconstitutional.

There He Goes Again: Judge Emmett Sullivan Threatens New Group Of DOJ Lawyers With Contempt

March 14, 2009 in DOJ Issues by Solomon Wisenberg | No comments

BLT reports here that Judge Emmett Sullivan is threatening to hold DOJ lawyers in contempt for failing to produce exculpatory information on Guantanamo detainee Saeed Abdullah Batarfi. Judge Sullivan first ordered the documents produced on January 16. His written order questions whether the DOJ lawyers examining the documents possess the requisite knowledge to make Brady determinations. I don’t have the written order yet because DC Pacer appears to be down.

Judge Denny Chin Jails Madoff After Guilty Plea

March 12, 2009 in Madoff by Solomon Wisenberg | No comments

As expected, Bernard Madoff pled guilty today in a Manhattan federal court. The Washington Post story is here. Madoff, purporting to be ashamed of his conduct, pled to the government’s 11-count criminal information, available here, which was filed earlier this week. Madoff pled straight up–without a plea bargain agreement. Judge Chin, quite appropriately, ordered Madoff to prison after the plea. Contrary to the previous public outcry, it would have been inappropriate for Madoff to have been jailed before he entered a guilty plea.

It is clear from a close reading of the criminal information, as well as from press stories relating to certain proffer sessions conducted by the SDNY U.S. Attorney’s Office, that the government doesn’t believe Madoff acted alone. However, the criminal information is ambiguous enough in its wording for Madoff to be able to plead guilty to it without admitting that others criminally aided and abetted him.

Madoff Investigation Proffers Allegedly Reveal Bogus Trading Tickets

March 9, 2009 in Madoff by Solomon Wisenberg | No comments

Today’s Wall Street Journal reports, in a story here by Amir Afrati, that two assistants to longtime Madoff aide Annette Bongiorno were instructed by Bongiorno to generate trading tickets based on their researching of daily share prices for blue chip stocks “from the previous month or several months.” According to the Journal, the trading tickets are “now believed to be bogus.” The information was allegedly revealed by the assistants, Semone Anderson and Winnie Jackson, in proffer sessions with federal prosecutors. Madoff is expected to plead guilty to various offenses in federal court on Thursday.

The Journal article reports that the two former Madoff assistants were interviewed through the vehicle of proffer agreements, which the Journal describes as agreements ”in which prosecutors agree not to use [the assistants'] statements against them as long as they tell the truth, according to people familiar with the matter.”

In fact, the standard SDNY proffer agreement is much broader, and more dangerous, than this description suggests. For example, if the SDNY decides to prosecute one of the former Madoff aides, her proffer statement can be used against her if any portion of her defense, including an attorney’s opening statement or cross-examination question, is inconsistent with her proffer statement. So, assuming that the standard SDNY proffer agreement was used, and assuming further that the Madoff assistants admitted to intentional wrongdoing during the proffer interviews, their right to put on a meaningful defense may be damaged in the event that the SDNY wants to prosecute them, but they do not want to accept a plea offer.

ABA White Collar Conference: Relearning Old Lessons

March 6, 2009 in White Collar World by Solomon Wisenberg | No comments

Two of yesterday’s panels at the ABA Annual White Collar Crime Conference were excellent. The panel on the year’s major cases, all of which resulted in convictions, reminded the audience of some time-tested truths. Most or all of the convicted defendants had talked to somebody–the grand jury, corporate internal investigators, or the SEC–prior to indictment. There was general agreement among the attorneys on the panel that the talking had been a major mistake. The decisions to talk had been made for the most part by previous counsel on the cases at issue.

Ted Wells, who represented Scooter Libby, was, true to form, an outstanding panelist. Wells stressed that Libby faced a choice, when deciding whether to testify before the grand jury, between increasing his criminal exposure and losing his job. This is a choice sometimes faced by politicians and public servants who are witnesses, subjects, and targets. It is a choice also faced by corporate executives who are asked to participate in internal investigations or testify at the SEC. The ultimate question that all of these people should ask themselves, at every stage of the game, is: “What do I prefer–to lose my job or my liberty?”

Wells reminded the audience that even the sharpest clients and attorneys often cannot comprehend the full scope of a criminal investigation. Thus there is no way to be prepared for every question. Libby, before he hired Wells, testified in front of the grand jury, apparently not realizing that Patrick Fitzgerald’s mandate was much broader than the question of who leaked Valerie Plame’s name to Robert D. Novak.

The ethics panel focused on ethical quandaries associated with corporate internal investigations. As usual, Earl Silbert called, correctly, for transparency by audit counsel in dealing with corporate employees who are potential interviewees. Specifically, if audit counsel anticipates that the corporation’s attorney-client privilege will be waived, and that interview results will be turned over to the government, these facts should be made clear to the interview subjects. Professor Ellen Podgor, of the White Collar Crime Prof Blog, and the other panelists also made excellent contributions. Ellen is also posting on the conference.

The securities enforcement session was largely forgettable. Again, no mention whatsoever of the dismissal of all criminal charges in the David Stockman case.

Live!!! From The ABA White Collar Crime Conference

March 5, 2009 in White Collar World by Solomon Wisenberg | No comments

We come to you live from the 23rd Annual ABA White Collar Crime Conference at the Westin St. Francis in San Francisco. The festivities began last night with an afternoon nuts and bolts session for beginners and an evening of dinners and receptions. The level of excitement among participants was stratospheric at the hotel, as everyone eagerly anticipated another scintillating opening speech by conference organizer Raymond Banoun. It was all everyone was talking about. Really.

In past years, Banoun’s speeches were so powerful that droves of conference-goers emptied the room. Ray promised to tone down his speech this year, and, having just sat through it, I can report that he definitely kept his promise. Oddly, however, people still emptied the room.

There is absolutely no truth to the rumour that Ray laces his coffee with LSD 30 minutes before the speech begins. Valium, maybe. LSD, never.

I am now sitting through a panel discussion of last year’s allegedly major trials–at least one of which took place in 2007 and all of which resulted in convictions.

Banoun also writes an annual essay, printed in the conference materials book, highlighting the past year’s white collar world highlights. Somehow he forgot to include the government’s decision to drop all criminal charges in the alleged $900 million David Stockman securities fraud case. I guess it wasn’t important enough.

Connecticut Attorney Pleads Guilty To Federal Bribery And Tax Charges

March 3, 2009 in Public Corruption by Solomon Wisenberg | No comments

Connecticut attorney Sebastian Ciarcia of Avon pled guilty last week to bribing a Dept. of Veteran Affairs employee, Kevin Malarney, to steer contracts to two companies controlled by Ciarcia. Ciracia also pled guilty to aiding and abetting the preparation of a fraudulent tax return filed by the nominal owner of one of the companies. The District of Connecticut press release is here. Douglas P. Morabito and William M. Brown are prosecuting the case.

You Say Cooperation, I Say Obstruction Of Justice–Let’s Call The Whole Thing Off: Preliminary Reflections On The Laura Pendergest-Holt Criminal Complaint, Supporting Affidavit, and Arrest.

March 1, 2009 in Securities Fraud by Solomon Wisenberg | No comments

Here are the criminal complaint and supporting affidavit filed by the government in U.S. v. Pendergest-Holt, courtesy of the Houston Chronicle’s chron.com. And here is Monica Rhor and Devlin Barrett’s AP story, also on chron.com, detailing Pendergest-Holt’s release from jail (on a $300,000.00, 10% cash, bond), facilitated by a loan from Pendergest-Holt’s criminal defense attorney Dan Cogdell.

Certain things stand out right away.

First, there was no good reason for the feds to arrrest and perp-walk Pendergest-Holt late on a Thursday, thereby forcing her to spend a night in jail, instead of allowing her to turn herself in for the arrest. It was chicken-shit. She is innocent until proven guilty. She hasn’t even been indicted by a grand jury. There was no way in hell that she was going to be detained, as evidenced by the Government’s failure to exercise its automatic right to a three-day continuance in order to prepare for a detention hearing. Yes, the prosecutors and FBI agents were within their rights in arresting and perp-walking Pendergest-Holt on Thursday afternoon. But it still stinks.

Second, FBI Special Agent Vanessa Walther’s affidavit is underwhelming. I would wait to see the complete transcript of Pendergest-Holt’s testimony before rushing to judgment. The government will have to prove that Pendergest-Holt intentionally gave false testimony. It is clear, even from the affidavit, that Pendergest-Holt gave at least some truthful, damaging testimony about R. Allen Stanford and James M. Davis. Moreover, Pendergest-Holt is accused, among other things, of failing to testify about all of the testimony preparation sessions she attended. But she was instructed by the SEC, in at least one instance, not to include, in her answer, testimony about any meetings with her attorney. SFG’s attorney, Attorney A, was present in several of these preparation sessions. If Pendergest-Holt did not think she had to mention all of the sessions, because Attorney A was present and representing her interests as well as SFG’s, she may have an excellent defense. So, let’s just wait and see.

Third, Attorney A is in a heap of trouble. The feds allege that Pendergest-Holt lied under oath and obstructed justice. Attorney A sat through the entire deposition and attended virtually every prep session. Need I say more?

Fourth, at least one attorney-commentator has predicted with great certainty that Pendergest-Holt will cooperate against Stanford and Davis. But that will only happen if she pleads to a felony–and it isn’t at all clear that Pendergest-Holt is prepeared to do that. A close reading of the affidavit suggests that Pendergest-Holt may not have known about the alleged fraud until earlier this year. If that is correct, and if the entire case against her hinges on whether she obstructed jutice in Febraury 2009, Pendergest-Holt may well decide to fight.