April 2010

Enlightening commentary here from WSJ’s Holman Jenkins Jr., here and here from Macroeconomic Resilience, and here from Erik Gerding in TheConglomerate.org.

     From the Executive Summary of the SEC Inspector General’s Report of Investigation on the Allen Stanford debacle:

     Finally, the OIG investigation revealed that the former head of Enforcement in Fort Worth, who played a significant role in numerous decisions by the Fort Worth office to deny investigations of Stanford, sought to represent Stanford on three separate occasions after he left the SEC, and represented Stanford briefly in 2006 before he was informed by the SEC Ethics Office that it was improper to do so.

     This former head of Enforcement in Fort Worth was responsible for: (1) in 1998, deciding to close a MUI opened regarding Stanford after the 1997 broker-dealer examination; (2) in 2002, deciding to forward the [redacted] complaint letter to the TSSB and deciding not respond to the [redacted] complaint or investigate the issues it raised; (3) in 2002, deciding not to act on the Examination staff’s referral of Stanford for investigation after its investment adviser examination; (4) in 2003, participation in a decision not to investigate Stanford after receiving [Confidential Source]’s complaint letter comparing Stanford’s operations to the [redacted] fraud; (5) in 2003, participating in a decision not to investigate Stanford after receiving the complaint letter from an anonymous insider alleging that Stanford was engaged in a “massive Ponzi scheme;” and (6) in 2005, informing senior Examination staff after a presentation was made on Stanford at a quarterly summit meeting that Stanford was not a matter they planned to investigate.

     Yet, in June 2005, a mere two months after leaving the SEC, this former head of the Enforcement in Fort Worth e-mailed the SEC Ethics Office that he had been “approached about representing [Stanford] . . . in connection with (what appears to be) a preliminary inquiry by the Fort Worth office.” He further stated, “I am not aware of any conflicts and I do not remember any matters pending on Stanford while I was at the commission.”

      After the SEC Ethics Office denied his request in June 2005, in September 2006, Stanford retained this former head of Enforcement in Fort Worth to assist with inquiries Stanford was receiving from regulatory authorities, including the SEC. He met with Stanford Financial Group’s General Counsel in Stanford’s Miami office and billed Stanford for his time. Following the meeting, he billed 6.5 hours to Stanford on October 4, 2006, for, inter alia, “review[ing] documentation received from company about SEC and NASD inquiries.” On October 12, 2006, he billed Stanford 0.7 hours for a “[t]elephone conference with [Stanford Financial Group’s General Counsel] regarding status of SEC and NASD matters.” In late November 2006, he called his former subordinate, the Assistant Director who was working on the Stanford matter in Fort Worth, who asked him during the conversation, “[C]an you work on this?” and who in fact told him, “I’m not sure you’re able to work on this.” Near the time of this call, he belatedly sought permission from the SEC’s Ethics Office to represent Stanford. The SEC Ethics office replied that he could not represent Stanford for the same reasons given a year earlier and he discontinued his representation.

     In February 2009, immediately after the SEC sued Stanford, this same former head of Enforcement in Fort Worth contacted the SEC Ethics Office a third time about representing Stanford in connection with the SEC matter – this time to defend Stanford against the lawsuit filed by the SEC. An SEC Ethics official testified that he could not recall another occasion in which a former SEC employee contacted his office on three separate occasions trying to represent a client in the same matter. After the SEC Ethics Office informed him for a third time that he could not represent Stanford, the former head of Enforcement in Fort Worth became upset with the decision, arguing that the matter pending in 2009 “was new and was different and unrelated to the matter that had occurred before he left.” When asked why he was so insistent on representing Stanford, he replied, “Every lawyer in Texas and beyond is going to get rich over this case. Okay? And I hated being on the sidelines.”

     The OIG investigation found that the former head of Enforcement in Fort Worth’s representation of Stanford appeared to violate state bar rules that prohibit a former government employee from working on matters in which that individual participated as a government employee. Accordingly, we are referring this Report of Investigation to the Commission’s Ethics Counsel for referral to the Office of Bar Counsel for the District of Columbia and the Chief Disciplinary Counsel for the State Bar of Texas, the states in which he is admitted to practice law.

Here is the SEC press release. Also charged is Goldman Sachs VP Fabrice Tourre. Here is the SEC complaint.

Matthew Goldstein of Reuters reports here that SEC Inspector General David Kotz is about to release a report blasting the SEC for its failure to discern, stop, and alert the public about Allen Stanford’s alleged Ponzi Scheme. Kotz’s 2009 report on the SEC’s abysmal failure to discover Bernard Madoff’s Ponzi Scheme, arguably the greatest failure in the history of the SEC, is already a classic.

Lisa Brennan of MainJustice has this outstanding piece on Frederic Bourke Jr.’s appeal of his conviction for conspiracy to violate the Foreign Corrupt Practices Act (”FCPA”). Bourke was also found guilty of making false statements to FBI Special Agents, pursuant to 18 U.S.C. Section 1001. Bourke’s brief was filed at the Second Circuit on April 1, 2010.

According to Brennan, the brief focuses heavily on the trial court’s jury instructions, particularly the intent-related instructions that were part of the conspiracy elements. Bourke complains that the court failed to require proof of the same level of intent (willfully and corruptly) necessary to prove a violation of the underlying FCPA statute. One irony in all of this is that the court’s definition of willfully and corruptly with respect to the substantive FCPA statute, whose elements were set out, is quite good from a criminal defense perspective. The problem is that the court also charged the jury as follows: 

“You should note that the Government need not prove each of the following [seven] elements in order to prove that the defendant engaged in a conspiracy to violate the FCPA. I am instructing you on the elements only because they will aid you in your determination as to whether the Government has sustained its proof with respect to this Count.”

The third element, “Corruptly and Willfully” was then set out and defined. The court rejected a proposed defense instruction which would have required the government to prove that Bourke acted willfully and corruptly, as defined in the instructions, with respect to the charged conspiracy.

Bourke argues that the court’s instruction ran afoul of the well-known criminal law principle that, in order to establish a conspiracy, the government must prove the same level of intent that is required to violate the underlying statute which serves as the object of the conspiracy.

The Second Circuit takes jury instructions in white collar cases, particularly criminal securities fraud cases, very seriously. Stay tuned.

I complained here the other day that not one of the press accounts of the Lehman Repo 105 transactions has discussed the willingness of Lehman’s former executives to blab away to bankruptcy examiner Anton Valukas. Peter J. Henning of White Collar Watch, in the NYTimes’ Deal Book, now tackles the issue here in a thoughtful analysis.

Henning asks and answers as follows:

“So why did the executives speak with Mr. Valukas? One possible explanation is that they could be compelled to appear at a hearing under Federal Rule of Bankruptcy 2004, which allows the bankruptcy court to require an officer for a company to testify about its financial condition and transactions. If subpoenaed for testimony, they would have to assert the Fifth Amendment privilege against self-incrimination to resist responding to questions. Doing that might have jeopardized any payments they may be receiving under Lehman’s directors and officers insurance policy for attorney’s fees, assuming that is still available to them.”

I have yet to come across a D&O Policy that denies coverage when a policyholder invokes the Fifth Amendment. Maybe such policies exist, but I doubt they are the norm. What would be the point of purchasing such a policy?

Henning further notes that:

“An assertion of the Fifth Amendment during the investigation was likely to result in prosecutors giving greater scrutiny to the witness’s role in Lehman’s demise, on the theory that where there’s smoke there’s fire. Lawyers for the executives certainly were aware of the potential downside to refusing to speak to Mr. Valukas, so they decided to take a calculated risk by having their clients speak in the hope that there would not be any criminal prosecution.”

The greater scrutiny theory may be true for a mid-level employee in a run-of-the-mill fraud case, but nobody has to worry about prosecutors giving detailed scrutiny to the Lehman debacle and all of its players. Such scrutiny is happening now or will happen soon, irrespective of who invokes the Fifth Amendment Privilege Against Self-Incrimination.

The main reason that civil defendants avoid taking five is the adverse inference that can be drawn from such an invocation in civil cases. But that risk pales in comparison to the criminal exposure facing the typical target in a criminal securities fraud case.

I still prefer the unmitigated arrogance theory as the best explanation for why former corporate execs with criminal exposure continue to talk to bankruptcy examiners and SEC attorneys.

The criminal defendant formerly known as Sir Allen is currently seeking his fourth set of attorneys. This is usually a bad sign. Securities Docket has the story here. There is apparently a difference of opinion as to trial strategy. Current lead attorney Kent Schaffer is a highly regarded criminal defense lawyer, known for his strategic and tactical sophistication. So, if Stanford is unhappy with somebody as good as Schaffer, something must be terribly amiss.

Zachary Goldfarb reports here in today’s Washington Post that SEC enforcement chief Robert Khuzami is considering requiring more detailed factual statements in SEC settlements. In other words, SEC defendants who settle, pay up, and do not “admit or deny” the SEC’s allegations, will see the allegations spelled out with greater specificity in publicly available court documents. The article speculates that such a change may benefit class action plaintiffs who file piggy-back lawsuits, while decreasing the number of settlements between civil defendants and the SEC. Maybe so. But, assuming that the change in practice occurs, the wiser course for criminal targets facing a simultaneous SEC fraud suit will still be to settle up quickly with the SEC and concentrate their minds on the criminal case.