Mary Flood and Tom Fowler of the Houston Chronicle report here on the latest developments.
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Well, not exactly. Former Cendant Corp. CEO Walter Forbes is doing 12 years in Allenwood for accounting fraud. His sentence included a $3.275 billion restitution order. The federal government moved, post-sentencing, to liquidate Forbes’ assets in order to satisfy the restitution order. The feds wanted Forbes’ $5 million house, claiming that it was purchased with ill-gotten gains. Now Forbes’ wife Caren has filed for divorce seeking equitable division of the couple’s property. But the mansion is currently held in Caren’s name only, having been sold to her by Walter for a mere $10. Our government is not amused. Nora Dannehy, Acting U.S. Attorney for the District of Connecticut, has taken the highly unusual step of moving to intervene in the Bridgeport Superior Court divorce action. According to Dannehy’s motion: “This court should not allow the Forbes family to undermine the government’s work to enforce the restitution order under the guise of a simple, uncontested, family court matter.” The Connecticut Post story by Daniel Tepfer is here.
The SEC has filed a securities fraud complaint against Danny Pang and Private Equity Management Group in the Central District of California. Henry Blodget has the story here in businessinsider.com. This is another case containing allegations of a classic Ponzi scheme.
Susan Carey of the Wall Street Journal has an excellent background story here on the Tom Petters federal fraud prosecution, being handled out of Minnesota. As in so many of the recent Wall Street scandles, there are claims that Petters’ alleged fraud contained “elements” of a classic Ponzi scheme. There are also stories of investment advisors who were sharp enough to steer their clients away from Petters after doing rather rudimentary research. The heart of the charged fraud centers around purportedly phony purchases and sales of surplus audio/video products by Petters’ company–phony in the sense that no actual equipment existed. Several persons and entities have already pled guilty.
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.
The Houston Chronicle reports here that former Enron CEO Jeff Skilling has asked the full Fifth Circuit to review the panel decision, authored by Ed Prado, affirming his convictions. The main thrust of the motion apparently pertains to the honest services fraud question, with Skilling claiming that the panel strayed from recent Fifth circuit precedent.
Judge Ed Prado’s 104 page opinion affirms the guilty verdicts in toto. The case is remanded for re-sentencing, however, in light of an improper enhancement for substantially jeopardizing a financial institution. Jerry Smith and District Judge Alia Ludlum (sitting by designation) rounded out the panel.
Former GSA Chief of Staff David Safavian was convicted on Friday for obstruction of justice and lying to federal officials concerning his dealings with disgraced former lobbyist Jack Abramoff. Safavian didn’t testify or call any witnesses. His original convictions were thrown out by the U.S. Court of Appeals for the D.C. Circuit. U.S. District Judge Paul Friedman presided at the trial and Lawrence Robbins was lead defense attorney. Justin Schur represented DOJ. Jesse Holland’s AP story is here. . . . For five years the FBI improperly instructed its agents in Iraq to over-report hours, resulting in at least $6 million dollars in improper overtime and Sunday payments, according to the DOJ Inspector General’s report. Ben Corey’s Washington Times story is here. The FBI has admitted wrongoing and says it has stopped these deceptive practices. Spencer Hsu’s Washington Post piece reports that six straight counter-terrorism chiefs condoned the false reporting. Apparently not one of these officials consulted with the FBI’s General Counsel’s Office. Agents were told, among other things, to report time spent at cocktail parties and doing laundry as overtime. One FBI employee took the position that, “When you’re in that environment, anything you do to survive is work for the FBI.” No doubt this is true in some sense. But I don’t see DOJ applying that principle to its various criminal investigations of contractor fraud in Iraq. Apparently there are special rules in Iraq for special people. . . . Meanwhile, Washington Post Personal Finance Columnist Jane Bryant Quinn here discusses two obvious red-flags that should have been apparent to Bernard Madoff’s victims: 1) His fund was audited by an obscure, allegedly rinky-dink, accounting firm with no website; and 2) The funds were held in Madoff’s own advisory firm rather than with “a large, independent financial institution that reports cash flows and trading activity to you directly.”
Rob Cox of breakingviews.com has an excellent column placing the Madoff Ponzi Scheme Fraud within the context of boom and bust economic cycles. Big frauds (or “bezzles”) like Madoff’s remain hiddden in speculative boom years and typically come to light during downturns. The dowturns are in part caused by the excesses and scams of the boom years. The bezzle theory was developed by economist John Kenneth Galbraith. According to Cox, Galbraith taught that the first frauds uncovered are seldom the largest. Thanks to Dave Westheimer for shooting this article to me.
In Hartford on Friday, US District Judge Christopher Droney ruled that investor losses were between $544 million and $597 million in the case of four former executives of Berkshire Hathaway’s General Re and one former executive from AIG who were convicted in February (earlier) on charges related to fraudulent reinsurance accounting transactions. While it’s less than the $1.4 billion figure put forth by prosecutors, it’s still enough to indicate the probability of substantial prison sentences. Droney also ruled that the fraud had more than 250 victims, which also increases the potential sentences under the guidelines. The original sentencing date of May 15, 2008 was postponed; a new date has not been scheduled (Reuters).
A San Franciscoo federal jury has acquitted former McAfee General Counsel Kent Roberts of fraud charges related to the pricing of his stock options. The jury deadlocked on the third charge of falsifying accounting books. The trial judge, in a highly unusual move, recommended against re-trying the case. The AP story is here.
Following the Second Circuit’s August 28 ruling in US v. Stein (earlier), four defendants remain: former Sidley Austin LLP law partner R. J. Ruble and former KPMG LLC partners David Greenberg, John Larson and Robert Pfaff. On September 10 US District Judge Lewis Kaplan denied (.pdf) their motion to dismiss the indictment on grounds of denial of due process (h/t White Collar Prof Blog).
The Houston Chronicle reports that convicted former Dynegy executive Jamie Olis on Monday filed suit in Delaware Chancery Court seeking more than $600,000 in defense costs. Is it coincidental that the filing comes less than two weeks after the Second Circuit affirmed Judge Kaplan’s rulings in US v. Stein?
In Manhattan on Thursday, US District Judge Naomi Reice Buchwald sentenced former Refco Inc. President Tone N. Grant to 10 years in prison for his role in the October 2005 collapse of the company which caused investor and partner losses estimated at $2.4 billion. A jury convicted Grant in April on one count each of conspiracy, securities fraud, wire fraud, bank fraud and money laundering. Grant’s attorneys plan to appeal his conviction (Bloomberg, Reuters). Our previous Refco entries are here.
The Chronicle’s Mary Flood reported Friday that US District Judge Sim Lake has denied Jamie Olis’ recusal motion (earlier here and here ), which was requested because Lake and the late USA Mike Shelby went to the same schools, served in the military and worked at the same law firm (all at different times) and that Lake swore in Shelby. In denying the motion, Lake ruled that the request was filed too late and wrote, “Olis does not point to any evidence showing that any of the court’s prior rulings in this case are based on an extrajudicial source or that they exhibit the degree of favoritism or antagonism required to warrant recusal.”
Former Refco Chairman and CEO Phillip Bennett, who was sentenced to 16 years in prison on July 3, will appeal his sentence — not his conviction — to the the US Court of Appeals for the Second Circuit. Bennett pleaded guilty in February to conspiracy, wire fraud, bank fraud, money laundering and making false SEC filings in connection with the October 2005 collapse of the company which caused investor and partner losses estimated at $2.4 billion (Reuters).
US District Judge Naomi Reice Buchwald has sentenced former Refco Chairman and CEO Phillip Bennett to 16 years in prison. Bennett pleaded guilty in February to conspiracy, wire fraud, bank fraud, money laundering and making false SEC filings in connection with Refco’s 2005 collapse which cost investors an estimated $2.4 billion. Bennett will begin serving his sentence on September 4 and will be under house arrest until then (Reuters via Yahoo News).
Sentencing for former Refco Chairman and CEO Phillip Bennett is now rescheduled (again) for July 3 before US District Judge Naomi Reice Buchwald in Manhttan. Bennett pleaded guilty in February to conspiracy, wire fraud, bank fraud, money laundering and making false SEC filings (earlier). Prosecutors are seeking a sentence in the same range as the 25 year sentence of former WorldCom CEO Bernie Ebbers. Bennett’s attorneys are asking for a non-guidelines sentence in the range of the 10 year sentence former Drexel Burnham Lambert junk bond ace Michael Milken received, noting Bennett’s cooperation with shareholders in their civil suit (New York Law Journal).
In Manhattan on Tuesday, US District Judge Leonard Sand set a trial date of April 6, 2009 in the case of Joseph Collins, former longtime attorney for Refco Inc. Collins was indicted in December 2007 on 11 counts including conspiracy, securities fraud, wire fraud, bank fraud and making false statements to the SEC. The charges arose in connection with the October 2005 collapse of the company which caused investor and partner losses estimated at $2.4 billion. Collins, a partner at Mayer Brown LLP in Chicago, is accused of creating fraudulent documents to help hide Refco’s losses from investors, auditors and and Thomas H. Lee Partners, which had purchased a majority interest in Refco (Reuters).
Former Refco Chairman and CEO Phillip Bennett and CFO Robert Trosten pleaded guilty in February, and former President Tome Grant was convicted by a jury in April. Bennett’s sentencing, originally scheduled for May 20, has been moved to June 19; the New York Law Journal recently reported that Bennett has been cooperating with shareholders in their civil suit; these are the same investors he has admitted defrauding, and he is a defendant in that suit. US District Judge Naomi Reice Buchwald, who will sentence Bennett, has been informed of his cooperation; he faces a possible maximum of 315 years in prison.
Since US District Judge Sim Lake refused to answer last week’s private letter from attorney Lloyd Kelley asking him to recuse himself and gave the letter to the USAO instead (earlier), attorneys for convicted former Dynegy executive Jamie Olis on Tuesday filed a recusal motion in US District Court in Houston.
The Houston Chronicle/AP story notes that Olis is scheduled for release in August 2009. Due to the repeated and obstinate delays by the both the USAO and Lake, we would be surprised if the appeals process is completed by then.
Attorneys for convicted former Dynegy executive Jamie Olis on Friday filed a Response to the government’s answer to his §2255 Motion To Vacate. From the Introduction:
The government’s Answer starts with the cynical assertion that Olis should suffer a procedural default because the United States Attorney’s Office (“USAO”) successfully deceived Olis and his attorneys by concealing its interference with Olis’s lawful access to defense funding. From there, the Answer devolves downward. Contrary to the government’s contentions, the record establishes that (1) the USAO violated Olis’ fundamental rights by interfering with his access to defense funding; (2) the government constructively and impermissibly amended the indictment; (3) the government presented false testimony from Jeffrey Heil, a key government witness; (4) the petit jury included an admittedly biased and unrehabilitated juror; (5) the jury instructions erroneously defined the elements of wire fraud and mail fraud; and (6) Olis received ineffective assistance of counsel.
The response also asks for reconsideration of his motion for discovery in connection with the §2255 motion; US District Judge Sim Lake denied the motion for discovery in March. Also pending is last week’s request by Olis’ attorney Lloyd Kelley that Lake recuse himself.
Convicted former Dynegy executive Jamie Olis’ §2255 Motion to Vacate is pending before US District Judge Sim Lake (earlier). The Houston Chronicle’s Legal Trade blog reports that Olis’ attorney Lloyd Kelley has written Lake a seven-page private letter asking him to recuse himself:
Kelley’s basic argument seems to be that Lake was too close to the late Mike Shelby, who was the local U.S. Attorney when Olis was prosecuted. Shelby suffered greatly with cancer and eventually took his own life. Kelley notes that Lake and Shelby went to the same schools, served in the military and worked at the same law firm (all at different times) and that Lake swore in Shelby. Kelley argues that Shelby’s demise must cloud Lake’s judgment on the Olis case.
Kelley had requested that Lake respond by Friday (Olis’ reply to the government’s response to his motion is due Monday), but Lake on Thursday filed an order giving the letter to the US Attorney’s office and asking for a response within 20 days.
A jury in US District Court in Manhattan on Thursday convicted former Refco Inc. President Tone N. Grant of conspiracy, securities fraud, wire fraud, bank fraud and money laundering in connection with the October 2005 collapse of the company which caused investor and partner losses estimated at $2.4 billion. Refco, at one time the largest futures broker on the Chicago Mercantile Exchange, collapsed just two months after its IPO. Prosecutors alleged that Grant, former CFO Robert Trosten and former Chairman and CEO Phillip Bennett engaged in a years-long scheme to hide extensive trading losses from auditors, banks, investors and Thomas H. Lee Partners, which had purchased a majority interest in Refco in August 2004; the losses were transferred from the company’s books to a company controlled by Bennett, Grant and another partner. Trosten and Bennett pleaded guilty in February; Santo Maggio, former CEO of Refco’s offshore unit, pleaded guilty in December (earlier here and here). All three men agreed to cooperate with prosecutors; both Trosten and Maggio testified against Grant. Sentencing for Grant is scheduled for August 7; he faces a maximum of 85 years in prison. He was allowed to remain free on bond (Bloomberg, Dow Jones Newswires).
KPMG either initiated or tolerated accounting fraud at New Century Financial Corp., according to a 581 page report by Michael Missal, the bankruptcy court’s independent examiner appointed at the request of the Department of Justice to investigate New Century’s 2007 plunge into bankruptcy. The report also blames New Century’s management, and details significant departures from generally accepted accounting practice. New Century was once the nation’s second largest subprime lender. Reuters has an excellent piece here by Amanda Beck. The Washington Post’s Carrie Johnson has a story as well. KPMG, the financial industry’s poster child for abandoning your employees in the face of a federal investigation, vigorously denies the report’s conclusions.
The Journal story is here. The conviction was overturned because of the trial court’s limitations on the testimony of the defense’s expert and its limitations on the defense’s use of classsified data.
The sad ordeal of former Dynegy executive Jamie Olis is no longer news, but we learn via White Collar Crime Prof Blog that US District Judge Sim Lake on Tuesday denied three pending motions by or on behalf of Olis: Olis’ motion for release on bond pending appeal, Olis’ motion for discovery in connection with his §2255 motion to set aside the conviction, and Professor Robert Weisberg’s motion for leave to file an amicus brief in support of Olis’ motion to set aside the conviction. However, Lake did order the government to respond to Olis’ §2255 motion on or before April 4, 2008, and he set a May 5 deadline for Olis’ reply. Olis Motions Ruling
DOJ Fraud Section Principal Deputy Chief Paul Pelletier took a page from Karen and Richard Carpenter after yesterday’s guilty verdicts against former Gen Re and AIG executives, telling reporters, in effect, “We’ve Only Just Begun.” The trial was notable in a number of respects: spotty and superficial news coverage, the inclusion of the high-ranking Pelletier on the trial team, and the naming of the current and former AIG CEOs as unindicted co-conspirators. “The investigation continues,” Pelletier said. “We’ve got a lot of work to do to work up the ladder.” This is the kind of tough, classic, old-fashioned prosecutor-speak we haven’t heard in a long time, sending a clear message to the just-convicted defendants and to AIG itself. Not surprisingly, it comes out of the Fraud Section, the most aggressive, mad-dog white-collar unit within all of DOJ. Today’s WSJ($$) has an excellent story on the trial, the verdict and the larger implications.
A federal trial jury in Hartford on Monday convicted five former insurance executives on all counts including conspiracy, securities fraud, mail fraud and making false statements to the SEC. The defendants were four former executives of Berkshire Hathaway’s General Re and one former executive from American International Group (AIG): former Gen Re CEO Ronald Ferguson, former CFO Elizabeth Monrad, former senior VP and assistant general counsel Robert Graham, former senior VP head of US reinsurance operations Christopher Garand, and AIG’s former VP of reinsurance Christian Milton. The five had been charged in connection with two reinsurance transactions in 2000 and 2001; Gen Re appeared to assume $500 million in reinsurance risk, which allowed AIG to increase its loss reserves by $500 million. The government contended that the transactions were fraudulent because Gen Re did not actually assume the risk; the transactions misled investors about AIG’s financial condition, which artificially boosted its stock price. Sentencing has been scheduled for May 15, 2008 before US District Judge Christopher Droney. Bloomberg here, Reuters here.
In a hearing on Wednesday before US District Judge Naomi Reice Buchwald in
Manhattan, former Refco inc. CFO Robert Trosten pleaded guilty to charges of conspiracy, securities fraud, bank fraud, wire fraud and money laundering in connection with the October 2005 collapse of the company which caused investor and partner losses estimated at $2.4 billion. Trosten’s guilty plea follows the February 15, 2008 guilty plea of former Refco CEO Phillip Bennett (earlier); both had been scheduled for trial on March 17, 2008 along with the company’s former president Tone Grant. Trosten’s plea agreement calls for cooperation with prosecutors as well as asset forfeiture; he will apparently testify against Grant and against former outside counsel Joseph Collins, who has been charged with fraud and conspiracy in a separate but related case. Judge Buchwald scheduled Trosten’s sentencing for February 20, 2009. Bloomberg here, Reuters here.
Former Refco Inc. Chairman and CEO Phillip Bennett pled guilty on Friday, before US District Judge Naomi Reice Buchwald in Manhattan, to all 20 counts on which he had been indicted, including conspiracy, wire fraud, bank fraud, money laundering and making false SEC filings. The charges carry a possible maximum of 315 years in prison. Refco, at one time the largest futures broker on the Chicago Mercantile Exchange, collapsed into bankruptcy in October 2005, just two months after its IPO. Auditors discovered $430 million in losses from the mid 1990s onward; Bennett allegedly concealed the losses from his auditors, investors and Thomas H. Lee Partners, which had purchased a majority interest in Refco in August 2004; the losses were assumed by a company Bennett controlled, in an elaborate transfer scheme. Investors purportedly lost $2.4 billion in the collapse.
Bennett’s guilty plea follows the guilty plea by Santo Maggio, the former CEO of Refco’s offshore unit; Maggio pled guilty to fraud and conspiracy on December 19, 2007 and agreed to cooperate with prosecutors. Judge Buchwald set Bennett’s sentencing for May 20,2008. Bennett had been scheduled to go to trial on March 17, 2008 along with company’s former president Tone Grant and former CFO Robert Trosten; both have pleaded not guilty and maintain their innocence. Bloomberg here, AP here.
Dow Jones’ marketwatch.com looks here at the SEC’s and DOJ’s widening inquiries into possible wrongdoing at Merrill Lynch–in connection with the sub-prime mess. Yours truly is quoted in the piece, and quoted out of context. Reporter Riley McDermid called me on Friday and asked how likely it was that Merrill Lynch would be indicted. I responded that this was a very unlikely scenario in light of the debacle created by the government’s indictment of Arthur Anderson & Co. (If you recall, the government’s indictment of Anderson effectively shut the company down, throwing thousands of totally innocent people out of work. Anderson’s subsequent conviction was later overturned by the U.S. Supreme Court.) I also told McDermid that Merrill Lynch would gladly cooperate with the government, if necessary by throwing former top officers to the wolves, in order to avoid indictment. In McDermid’s article, co-authored by Greg Morcroft, I am quoted as suggesting that Merrill Lynch’s employees won’t be indicted. That is a different question altogether. If the DOJ thinks it has found fraud in connection with Merrill Lynch’s marketing or accounting for sub-prime mortgages, it is in fact quite likely that employees will be indicted, although they will probably be former employees by the time charges are filed.
All defendants have rested in the Gen Re fraud trial in Connecticut. No defendants took the stand and no side called Warren Buffett to testify. The entire defense case took two days to put on. Douglas McLeod of businessinsurance.com has the story here.
U.S. District Judge Christopher Droney denied Defendant Christopher Garand’s motion for mistrial Friday in the Gen Re fraud trial, currently taking place in Connecticut. The motion was based on the prejudicial nature of a taped conversation played to the jury. In the conversation, between former Cologne Re Dublin CEO John Houldsworth and then-Gen Re Senior VP Garand, Houldsworth asks Garand “How much cooking goes on there [at AIG]?” Garand answers, “Quite a bit. They’re fairly aggressive. They’ll do whatever they need to do to make their numbers look right.” Garand’s attorney, Jonathan Rich, complained that the reference to AIG book-cooking constituted “exceptionally inflammatory language.” Droney disagreed. Of course, anything that hurts your client is, ipso facto, prejudicial. The testimony here, however, seems to go to the heart of the government’s primary allegation–that the former Gen Re executives on trial helped AIG cook the books on two reinsurance transactions. Evidence must be relevant to be admissible, and the prejudicial nature of the evidence must outweigh its probative value before a judge can exclude it. Here it appears that Judge Droney not only denied a mistrial, but also refused to strike the tape evidence in the first place. The trial is expected to last two more weeks. The AP story, carried in the Houston Chronicle’s chron.com, is here.
Former Brocade Communications Systems CEO Gregory Reyes was sentenced on Wednesday to 21 months in prison and fined $15 million by US District Judge Charles Breyer in San Francisco. Reyes was convicted in August 2007 after an 8-week jury trial on ten counts including conspiracy, securities fraud, lying to accountants and falsifying books and records in connection with the backdating of options grants to Brocade employees. Reyes will be allowed to remain free on appeal; the San Francisco Chronicle has the story here.
The federal criminal trial of former Gen Re and AIG executives on accounting-related fraud charges, has seen spotty media coverage. Today’s post by David Voreacos and Jane Mills at Bloomberg.com is a welcome exception to the general run of stories on this case. It details the cross-examination of former Gen Re Vice-President Richard Napier, a key government witness, and intelligibly places that cross-examination within the broader context of the government’s allegations.
Former Homestore Inc. CEO Stuart Wolff’s fraud conviction was overturned on Monday by the Ninth US Circuit Court of Appeals in San Francisco. A three-judge panel of the court agreed with Wolff’s contention that US District Judge Percy Anderson should have recused himself because his ownership of AOL stock gave him a “financial interest in the subject matter in controversy;” AOL was a party to the alleged offenses.
Wolff was convicted on 18 felony counts involving an alleged scheme to inflate the company’s revenue by $67 million in a series of sham three-way transactions. He was sentenced in October 2006 to 15 years in prison, fines and restitution. The appellate court returned the case to US District Court for ressignment to a different judge and possible retrial. The San Francisco Chronicle has the story here. Homestore has since changed its name to Move Inc.