News & Developments

May 24, 2012

South Carolina Businessman Charged With Illegally Exporting to Iran

On Saturday, May 19, 2012, South Carolina businessman Markos Baghdasarian was arrested at Hartsfield International Airport in Atlanta as he prepared to board a flight to the United Arab Emirates (UAE). Baghdasarian, the manager of Delfin Group USA LLC, is charged with unlawfully exporting goods from the United States to Iran without the required U.S. Department of Treasury licenses, in violation of the International Emergency Powers Act (50 U.S.C. § 1705) and the Iranian Transactions Regulations (31 C.F.R. part 560), and with making a false statement to the government relating to the transactions.

Russian-owned Delfin USA, based in North Charleston, South Carolina, is a supplier of automotive, marine, and aviation lubricants. According to an affidavit filed in support of the complaint, an Iranian businessman (Individual A) agreed to serve as Delfin’s sales agent in Iran. The Iranian businessman was associated with a business in the UAE that shipped Delfin products to Iranian customers. Another Delfin agent, Individual B, operated a different business in the UAE that also shipped Delfin products to Iran.

The affidavit quotes several emails involving some combination of Baghdasarian, Individual A, Individual B, and others that allegedly refer to ways to arrange sales or shipments from the United States to the UAE and then to Iran. In describing one of the violations, the government claims that a barrel of Delfin lubricant was intentionally mislabeled to misidentify the origin of the product, and that the emergency phone number listed on the label was in fact a toll-free number for Victoria’s Secret.

The criminal complaint also includes a false-statement charge (18 U.S.C. § 1001) relating to the government’s May 4, 2012, interview of Baghdasarian in the presence of his counsel. According to the affidavit, during that interview, Baghdasarian admitted that he knew that neither Individual B nor his company was the final end user of the Delfin products, but falsely denied knowing before the government executed a search warrant on Delfin in early 2012 that Individual A was located in Iran.

The case is United States v. Baghdasarian, No. 2:12-mj-00083-CRI (D.S.C.).

— Michael T. Dawkins, Baker, Donelson, Bearman, Caldwell & Berkowitz, PC, Jackson, MS

May 16, 2012

First Criminal Charges Filed in 2010 BP Oil Spill

Signifying the first criminal charges resulting from the April 2010 BP oil spill, the government has issued an indictment against former BP engineer Kurt Mix, charging Mix with two counts of obstruction of justice for allegedly destroying evidence requested by federal authorities who are investigating the spill. Mix is alleged to have deleted more than 200 text messages containing significant information regarding the spill, including information collected in real time, during BP’s failed efforts to stop the oil flow, and information regarding the amount of oil that the spill was releasing into the ocean. Mix faces a maximum of 20 years in prison and a fine of up to $250,000 on each count. United States v. Mix, No. 12cr171 (E.D. La.).

— Joseph Martini and Christine Jean-Louis, Wiggin and Dana LLP, New Haven, CT

May 16, 2012

Attempted NY Subway Bomber Convicted

Following a four-week trial, a federal jury in New York convicted Queens borough resident Adis Medunjanin of conspiring to coordinate a number of suicide bombings in the New York City subway system that were set to take place in September 2009. Evidence at trial revealed that the conspiracy began in 2008, when Medunjanin obtained terrorist training in Pakistan and returned to the United States to carry through on plans to attack well-known targets in New York. In early 2010, when Medunjanin learned that law enforcement was investigating his activities, he attempted to turn his car into a weapon by crashing it into another car on the Whitestone Expressway. Before crashing his car, Medunjanin called 911, identified himself, and shouted an al-Qaeda slogan, “We love death more than you love your life.” Medunjanin will be sentenced on September 7, 2012, and faces a mandatory sentence of life in prison. To date, six other defendants in addition to Medunjanin have been convicted of charges relating to the New York City bombing plot. United States v. Mendunjanin, No. 10cr19 (E.D.N.Y.).

— Joseph Martini and Christine Jean-Louis, Wiggin and Dana LLP, New Haven, CT

May 16, 2012

Connecticut Passes Racial-Profiling Law for Traffic Stops

On Monday, May 7, 2012, in reaction to the January arrests of a police sergeant and three officers for profiling and harassing Latino motorists, the state legislature of Connecticut passed S.B. 364 (“An Act Concerning Traffic Stop Information”), which mandates that local and state law enforcement adopt written policies prohibiting the stopping, detention, or search of any person solely motivated by considerations of race, color, ethnicity, age, gender, or sexual orientation. Connecticut Governor Dannel Malloy is expected to sign the bill soon. Under the law, police officers who stop a motorist as of January 1, 2013, will be required to complete a standardized form that contains biographical details about the driver (including race, age, gender, color, sexual orientation, and ethnicity), the circumstances of the case, and the name and badge number of the officer. The bill also creates a right for motorists who feel they have been profiled to file a complaint with the local police department, which must be submitted to a state agency.

— Joseph Martini and Christine Jean-Louis, Wiggin and Dana LLP, New Haven, CT

April 23, 2012

"Stand Your Ground" Law: Charges Filed in Trayvon Martin Shooting

On April 11, 2012, State Attorney Angela Corey, the special prosecutor in the investigation surrounding the controversial death of Florida teen Trayvon Martin in February 2012, charged George Zimmerman with second-degree murder for Martin’s death. Florida police initially did not charge Zimmerman, a Florida neighborhood-watch volunteer, citing Florida’s “stand your ground” law, which allows the use of deadly force by anyone who feels a reasonable threat of death or serious injury. Zimmerman has claimed that the shooting was in self-defense.

— Danielle Pelot, Ronaldo Rauseo-Ricupero, and Troy Lieberman, Nixon Peabody LLP, Boston, MA

April 23, 2012

President Obama Signs STOCK Act

On April 4, 2012, President Obama signed the Stop Trading on Congressional Knowledge (STOCK) Act (S. 2038), which bans insider trading for members of Congress, their staffs, and officials in the executive and judicial branches of the federal government. “The STOCK Act makes it clear that if members of Congress use nonpublic information to gain an unfair advantage in the market, then they’re breaking the law,” Obama said at the bill’s signing.

The Senate passed a version of the STOCK Act on February 2. The House voted on February 9, 2012, to pass the act, but removed from the bill an amendment included by Sen. Chuck Grassley (R-Iowa). The Grassley amendment, which would have required political-intelligence firms and consultants to register under the Lobbying Disclosure Act, prompted warnings from Wall Street that such a provision could significantly impact how private-equity funds, hedge funds, and other investors gain information from the government to guide their clients’ investment decisions. The House-passed version of the bill, which did not contain the amendment, merely requires a government study of political-intelligence companies that sell such information to investors. The Senate overwhelmingly passed the House version of the bill, 96–3.

The STOCK Act also requires lawmakers to publicly disclose their trades of stocks, bonds, and other securities within 45 days of the transaction. The information will be posted on government websites and in searchable databases in an attempt to make it easier to detect illegal insider trading. Under the act, members of Congress and certain other senior government employees also must disclose the terms of their personal mortgages.

— Danielle Pelot, Ronaldo Rauseo-Ricupero, and Troy Lieberman, Nixon Peabody LLP, Boston, MA

April 23, 2012

Death Penalty Trials for Five at Guantanamo Bay

On April 4, 2012, the Pentagon announced that five senior members of al Qaeda accused of planning the September 11 terrorist attacks will face a death-penalty trial at the Naval Station Guantanamo Bay. Khalid Sheik Mohammed, the alleged mastermind of the attacks, will be tried alongside four co-defendants: Ali Abdul Aziz Ali of Pakistan, who is Mohammed’s nephew; Ramzi Binalshibh and Walid bin Attash, both of Yemen; and Mustafa al-Hawsawi of Saudi Arabia. They will be arraigned next month and will be represented by military and civilian defense attorneys.

All five men were held in secret CIA custody overseas before they were transferred to Guantanamo Bay in September 2006. Their treatment, including waterboarding, is likely to be an issue at trial, despite the fact that prosecutors cannot use as evidence any statement that resulted from torture or from cruel, inhuman, or degrading treatment.

The five men were first charged in a military commission in 2008, but the case was suspended when the Obama administration took office. In a notable move for the Obama administration, military charges were resworn last summer and approved by retired Vice Admiral Bruce MacDonald, the head of the military commissions. The charges include murder in violation of the law of war, attacking civilians, hijacking aircraft, and terrorism.

— Danielle Pelot, Ronaldo Rauseo-Ricupero, and Troy Lieberman, Nixon Peabody LLP, Boston, MA

April 23, 2012

Biomet Resolves FCPA Investigation with $22 Million Penalty

Medical device maker Biomet, Inc. has agreed to pay a $17.28 million criminal penalty as part of a deferred prosecution agreement (DPA) with the Department of Justice to settle conspiracy and Foreign Corrupt Practices Act charges. United States v. Biomet, Inc., D.D.C. 12-CR-080-RBW (March 26, 2012). Additionally, Biomet reached a settlement agreement with the U.S. Securities and Exchange Commission to pay $5.4 million in disgorgement of profits in a related matter.

According to a five-count criminal information filed in the U.S. District Court for the District of Columbia, between 2000 and 2008, Biomet and its subsidiaries and employees made numerous improper payments to public-health-care providers in South America and China for the purpose of securing hospital contracts. Biomet also falsely recorded the payments to conceal their true nature. According to the DPA, Biomet’s direct and indirect corrupt payments totaled more than $1.5 million. The DOJ acknowledged Biomet’s cooperation with the investigation and, as part of the agreement, required Biomet to implement rigorous internal controls and retain a compliance monitor for 18 months.

— Danielle Pelot, Ronaldo Rauseo-Ricupero, and Troy Lieberman, Nixon Peabody LLP, Boston, MA

March 9, 2012

Former Federal Prosecutor Disbarred for “Egregious” Conduct

Rejecting a lesser punishment of suspension, the District of Columbia Court of Appeals recently ordered the disbarment of a former Assistant U.S. Attorney for misconduct that the court characterized as “decidedly egregious,” including wrongfully distributing thousands of dollars’ worth of witness vouchers in felony prosecutions to witnesses ineligible to receive the vouchers, failing to disclose the voucher payments to the court or opposing counsel, and intentionally misrepresenting to the court that the proper disclosures had been made.

The court’s full opinion is available here.

February 14, 2012

Jury Acquits FCPA Africa Sting Defendants; Mistrial for the Rest

The end of January in the D.C. District Court saw the end of a troubled Foreign Corrupt Practices Act (FCPA) prosecution of five defendants alleged to have conspired to bribe a Gabonese official to obtain business. The case began when 22 people were arrested in July 2010 at the “Shot Show” trade expo and charged with conspiring to bribe the official, as well as with other related offenses. As it turned out, there was no Gabonese official, just a number of FBI agents running a sting operation by posing as representatives of such an official.

While a few of the people ensnared in the sting operation pled guilty, four had previously gone to trial in summer 2011, after which the jury deadlocked and Judge Leon declared a mistrial. The judge also granted a Rule 29 motion acquitting one of the defendants, and dismissed FCPA and money-laundering charges against several others.

The second trial arising from the sting began in December 2011 with six defendants. It did not go well for the government. In December, Judge Leon again granted a Rule 29 motion acquitting all defendants on the conspiracy counts, thereby reducing the number of remaining defendants to five. On January 30, 2012, the jury acquitted two of the remaining defendants. The following day, Judge Leon declared a mistrial as to the remaining three.

Following the conclusion of the case, the jury foreman wrote a guest blog post on the jury’s deliberations, which sheds light on the reasons for the jury’s decision as to the two defendants. As the jury foreman noted, the jurors ultimately were not persuaded that the two acquitted defendants fully understood or agreed to the terms of the supposed deal. Several jurors were also favorably persuaded by character evidence concerning one of the acquitted defendants.  

In addition to the jury’s reasons for acquitting the two defendants, the post also provides valuable insight into the dynamics of the jury’s deliberations. It is a worthwhile read.

— Jason M. Silverman and Peter Stockburger, McKenna Long & Aldridge

February 14, 2012

Judge Acquits O'Shea in Mexico FCPA Case

The Department of Justices’s rough patch was not limited to the Shot Show sting trial described above. On January 16, 2011, the judge overseeing the trial of former general manager and vice president of a unit of ABB Ltd, John O’Shea, granted a Rule 29 motion for judgment of acquittal on all substantive FCPA counts. O’Shea’s case arose out of his former employer’s alleged bribery of Mexican officials to secure contracts. O’Shea was alleged to have authorized an agent, Fernando Basurto, to make millions of dollars in improper payments to two officials of Mexico's state-owned electric utility, CFE, to secure lucrative contracts for his employer. The government also alleged that O’Shea arranged kickbacks to himself from the revenue of the contracts. Basurto pled guilty in 2009.

At trial, Basurto was the government’s key witness. He testified that his company received money from ABB Ltd., which then laundered the money and provided it to CFE officials to obtain contracts for ABB Ltd. Basurto had turned over financial records to the government, which the government alleged established a link between O’Shea and ABB Ltd.’s payments. At the close of the government’s case, O’Shea successfully moved for a judgment of acquittal on the basis that the evidence was insufficient to sustain a conviction.

In granting the motion, the trial judge decried the lack of “foundation” or “specifics” in Basurto’s testimony, and opined that Basurto "knew almost nothing." What Basurto did know, the judge noted, was based on gossip. The judge also criticized the poor quality of the government's documentary evidence, opining that it showed only that the accounts involved in the alleged scheme were “undetermined rather than suspect.” Although the judge accepted that the government had established that kickbacks were paid, he found that it had not proven bribery of a public official. On that basis, the judge granted the Rule 29 motion.

— Jason M. Silverman and Peter Stockburger, McKenna Long & Aldridge

February 14, 2012

President Obama Announces New Mortgage Investigation Unit

During the State of the Union address on January 24, 2012, President Obama announced the formation of a new unit of the existing Financial Fraud Enforcement Task Force. Called the Residential Mortgage-Backed Securities Working Group, the new unit will focus on the lending and mortgage securitization practices that led to the real-estate bubble and 2008 crash. The president tapped New York State Attorney General Eric Schneiderman to head the new unit.

Schneiderman has already been aggressively pursuing banks for their role in the mortgage crisis in his capacity as New York attorney general. The Obama administration, too, has devoted significant attention to prosecuting financial and mortgage fraud on the federal level. The new unit, however, will have a narrower focus: the conduct of banks and other financial institutions in originating subprime mortgages and then packaging them into toxic “mortgage-backed securities,” viewed as the root cause of the 2008 financial crisis.  It will also meld federal and state powers to investigate and seek redress for possible wrongdoing: In addition to Schneiderman, who is serving in his capacity as New York attorney general, the new unit includes senior SEC and DOJ criminal division personnel among its leadership.

While the extent of the new unit’s enforcement activities of course remains to be seen, it has already issued civil subpoenas to 11 financial companies. As noted by the New York Times in a recent report on the new unit, it will likely feel significant pressure to address public sentiment that the institutions and individuals truly responsible for the 2008 financial crisis have not yet been held accountable.

— Jason M. Silverman and Peter Stockburger, McKenna Long & Aldridge

January 23, 2012

Supreme Court Rules GPS Tracking Requires Warrant

In an important decision confronting the constitutional implications of surveillance technology, the Supreme Court has ruled in United States v. Jones that using a global positioning system (GPS) device to track a criminal suspect constitutes a search for purposes of the Fourth Amendment, and that, accordingly, police must obtain a warrant before using such technology. 

We invite you to view the Court’s opinion.

— Stacey Gottlieb, Maurice Suh, and Grayson Yeargin, Cochairs, Criminal Litigation Committee

January 20, 2012

Magyar Telekom and Deutsche Telekom Settle FCPA Allegations

On December 29, 2011, Magyar Telekom, a Hungarian telecommunications company, and Deutsche Telekom, a German telecommunications company and majority owner of Magyar Telekom, agreed to pay nearly $64 million in combined criminal penalties to resolve the Department of Justice’s (DOJ) investigation into Magyar Telekom and its subsidiary’s activities in Macedonia and Montenegro.

According to the criminal information filed by the Department of Justice, Magyar Telekom’s misconduct related to its efforts to thwart legal changes to the telecommunications market in Macedonia that it believed would be detrimental to its business. Magyar Telekom executives, assisted by intermediaries, attempted to influence Macedonian government officials to prevent the adoption of the new telecommunications laws and regulations. Magyar Telekom ultimately entered into a secret agreement with high-ranking Macedonian government officials in which the officials agreed to provide Magyar Telekom with certain “regulatory benefits” and agreed to “delay the entrance of a third mobile license into the Macedonian telecommunications market.”

Magyar Telekom executives, through “sham consultancy contracts” made through a Greek intermediary, caused approximately $6 million in payments to be made with the knowledge that such payments would likely be provided to Macedonian government officials to secure the benefits of the secret agreement.

In addition to the large monetary fine, in its deferred prosecution agreement, Magyar Telekom agreed to “the implementation of an enhanced compliance program.”

— Stephanie Ellis and Michael Scheininger of McKenna Long & Aldridge, Washington, D.C.

January 20, 2012

Eight Former Siemens Executives Indicted

On December 12, 2011, the U.S. Department of Justice (DOJ) charged eight former executives and agents of Siemens AG of Germany and its subsidiaries with making $100 million in improper payments to government officials in Argentina to secure a $1 billion government contract to make national identity cards. The individuals attempted to conceal the bribes through various means, including using offshore shell companies and transporting large quantities of cash across international borders. The defendants were charged with conspiracy to violate the Foreign Corrupt Practices Act (FCP”), conspiracy to commit wire fraud, substantive wire fraud, and conspiracy to commit money laundering. The SEC filed a parallel action that charged seven individuals.

All eight individuals charged by the DOJ are foreign nationals from Argentina, Switzerland, and Germany. None of the defendants has yet been arrested or extradited. The most senior executive charged, Uriel Sharef, was a former Siemens managing board member. His indictment is the first FCPA action against a board member of a Fortune Global 50 company.

In 2008, Siemens AG settled a related FCPA case with the DOJ for $800 million, as well as a corruption case brought by German authorities for another $800 million. The Siemens AG case is the largest FCPA case ever filed.

— Stephanie Ellis and Michael Scheininger of McKenna Long & Aldridge, Washington, D.C.

January 20, 2012

DOJ Enters into NPA with Wells Fargo/Wachovia

On December 8, 2011, the Antitrust Division of the Department of Justice (DOJ) announced that it had entered into a non-prosecution agreement (NPA) with Wachovia Bank N.A., now known as Wells Fargo Bank N.A., regarding the criminal conduct of the company’s former employees in entering into agreements to “manipulate the bidding process and rig bids on municipal investment and related contracts.”

In the NPA, Wells Fargo admitted that, from 1998 through 2004, certain former Wachovia employees of the bank’s municipal-derivatives desk entered into agreements to rig bids on municipal investment and related contracts and otherwise unlawfully manipulate the bidding process in violation of section 1 of the Sherman Act and sections of Title 18 of the U.S. Code. The contracts manipulated by these employees were those that “were used to invest the proceeds of, or manage risks associated with, bond issuances by municipalities and other public entities.”

Wachovia agreed to pay $148 million in restitution, penalties and disgorgement in the NPA. In its press release, the DOJ stated: “Today’s resolution achieves restitution for the victims harmed by Wachovia’s anticompetitive conduct and ensures that Wachovia disgorges its ill-gotten gains and pays penalties for its illegal conduct.” The DOJ’s investigation of anticompetitive conduct in the municipal-derivatives industry has resulted in criminal charges against 18 former executives of a number of financial-service companies and one corporation. Of these 18 executives, 9 have pleaded guilty to date.

— Stephanie Ellis and Michael Scheininger of McKenna Long & Aldridge, Washington, D.C.

January 4, 2011

GE Funding Capital Market Services, Inc. to Pay $70 Million

On December 23, 2011, pursuant to a non-prosecution agreement, GE Funding Capital Market Services, Inc. agreed to pay $70 million in restitution, penalties, and disgorgement to the Department of Justice (DOJ), Securities and Exchange Commission (SEC), and other federal and state agencies in connection with the company’s role in anticompetitive activity in the municipal-bonds market. The SEC alleged that, from 1999 to 2004, GE Funding fraudulently manipulated bids and made improper, undisclosed payments to certain bidding agents in the form of swap fees that were inflated or unearned. These payments were made in exchange for bidding agents’ assistance in controlling and manipulating the competitive bidding process. As a result of the company’s admission of conduct, cooperation with agencies, and remedial efforts to address the anticompetitive conduct, the DOJ agreed not to bring criminal charges against GE Funding, provided that the company satisfies its obligations under the agreement.

The settlement is a part of the federal agencies’ ongoing investigation into the municipal-bonds industry. Other financial institutions that have reached agreements with the DOJ, SEC, and other federal and state agencies in 2011 include Wachovia Bank N.A., J.P. Morgan Securities LLC, and UBS Financial Services, Inc.

— Joseph H. Zwicker, James W. Evans, Diana T. Huang, and Sophie F. Wang, Choate, Hall & Stewart LLP, Boston, MA

January 4, 2011

SEC Files Fraud Charges Against Mortgage Executives

On December 16, 2011, the Securities and Exchange Commission (SEC) filed civil fraud actions against the CEOs and four other top executives of Fannie Mae and Freddie Mac, alleging that the executives misled investors about the entities’ exposure to subprime mortgages. The SEC alleges that the defendants publicly stated that the company had little exposure to subprime loans, despite internal communications warning against making such statements. Similarly, the SEC’s complaint against Fannie Mae defendants, including CEO Daniel H. Mudd, alleges that the company under-reported the company’s exposure to subprime mortgages. The defendants stated in press releases that they intend to challenge the allegations.

The SEC’s suit follows a three-year investigation into the financial and mortgage crises. The agency has previously been criticized for its perceived failure to pursue charges against mortgage-industry executives for their involvement in the crisis. Notably, on the same day it filed the suits against the executives, the SEC announced that it had entered into non-prosecution agreements with the entities themselves.

— Joseph H. Zwicker, James W. Evans, Diana T. Huang, and Sophie F. Wang, Choate, Hall & Stewart LLP, Boston, MA

January 4, 2011

Blagojevich Sentenced to 14 Years

On December 7, 2011, Former Illinois governor Rod Blagojevich was sentenced to 14 years in prison following his conviction on 18 public-corruption counts including wire fraud, attempted extortion, conspiracy to commit extortion, soliciting bribes, and conspiracy to solicit and accept bribes. The government alleged that Blagojevich engaged in a pattern of corruption, including attempting to personally gain from his role in selecting the replacement  for President Barack Obama’s former seat in the U.S. Senate. Jurors deadlocked in the first trial.

Blagojevich insisted on his innocence in trial testimony and in extensive media appearances. At sentencing, however, the former governor expressed remorse and apologized to his family and the residents of Illinois. Judge James B. Zagel said that he considered Blagojevich’s acceptance of responsibility in determining the appropriate sentence, which was shorter than the 15–20 sentence that the government sought.

— Joseph H. Zwicker, James W. Evans, Diana T. Huang, and Sophie F. Wang, Choate, Hall & Stewart LLP, Boston, MA

November 22, 2011

J&J Subsidiary Pleads Guilty to Misbranding Heart Drug

Scios, Inc., a subsidiary of Johnson & Johnson, pleaded guilty to a misdemeanor violation of the Food, Drug, and Cosmetic Act for introducing into interstate commerce its heart-failure drug, Natrecor, for a use that was not approved by the Food and Drug Administration (FDA). The district court ordered Scios to pay an $85 million criminal fine in accordance with Scios’s plea agreement.

In addition to this criminal matter, the United States has sued Scios and Johnson & Johnson under the False Claims Act in an ongoing related civil case in the Northern District of California (U.S. ex rel. Storm v. Scios Inc. and Johnson & Johnson, No. C 05-3004 CRB). The government alleges that Scios’s promotion of Natrecor for uses not approved by the FDA caused false claims to be submitted to Medicare and other federal healthcare programs.

— Wick Sollers and Eric Christensen, King & Spalding, Washington, D.C.

November 22, 2011

Detroit-Area Clinic Owner Sentenced in Medicare Fraud Scheme

Martin Tasis was convicted at trial of one count of conspiracy to commit healthcare fraud, one count of conspiracy to pay healthcare kickbacks, three counts of healthcare fraud, one count of conspiracy to commit money laundering, and one count of money laundering. He was sentenced to 10 years in prison for his leading role in a $9.1 million Detroit-area Medicare fraud scheme. He was also sentenced to three years of supervised release and ordered to pay $6 million in restitution, jointly and severally with his co-conspirators.

Martin Tasis and his brother Joaquin owned a Detroit-area clinic called Dearborn Medical Rehabilitation Center (DMRC). The Tasis brothers recruited Medicare beneficiaries through the payment of cash kickbacks. DMRC billed Medicare for approximately $9.1 million in claims that were never provided and/or not medically necessary. Medicare paid approximately $6 million of those claims. The Tasis brothers recruited family friend Leoncio Alayon to help them launder the proceeds through a shell company in Florida. Joaquin Tasis and Alayon were also convicted in this matter.

— Wick Sollers and Eric Christensen, King & Spalding, Washington, D.C.

November 22, 2011

Owner of Houston Healthcare Company Sentenced to 33 Months

Bassey Monday Idiong, owner and operator of B.I. Medical Supply, LLC, a Houston durable-medical-equipment company, was sentenced to 33 months in prison for his role in a Medicare fraud scheme after pleading guilty to one count of conspiracy to commit healthcare fraud and five counts of healthcare fraud. He was also sentenced to two years of supervised release and ordered to pay $527,023 in restitution.

Idiong paid patient recruiters kickbacks for the names of Medicare beneficiaries. B.I. Medical billed Medicare for orthotics and braces (called an “arthritis kit”) at approximately $4,000 per kit, submitting approximately $846,000 in fraudulent claims in total. B.I. Medical then supplied different, less expensive products to patients. B.I. Medical also billed Medicare for an arthritis kit that included two knee braces for a beneficiary who only had one leg.

— Wick Sollers and Eric Christensen, King & Spalding, Washington, D.C.

November 22, 2011

FDA Chemist Pleads Guilty to Using Insider Information

Cheng Yi Liang, a Food and Drug Administration (FDA) chemist, pleaded guilty to one count of securities fraud and one count of making false statements, related to an insider-trading scheme running nearly five years.

Liang worked in the FDA’s Office of New Drug Quality Assessment. In that position, Liang had access to the FDA’s password-protected, internal drug-application-tracking system, which contained material, non-public information regarding pharmaceutical companies that had submitted experimental drugs for review. Liang used this information to trade in the securities of pharmaceutical companies, using accounts belonging to his relatives and acquaintances. Liang’s trades resulted in total profits and avoided losses of more than $3.7 million. During his time at the FDA, Liang filed confidential financial-disclosure forms in which he failed to disclose the use of these accounts or the income that they generated.

Liang’s sentencing is scheduled for January 9, 2012. Liang could face up to 20 years in prison and a fine of several million dollars. As part of his plea agreement, Liang agreed to forfeit $3,776,152, including a home and condominium in Maryland, along with funds held in 10 bank or investment accounts. The Securities and Exchange Commission is currently pursuing civil charges against Liang and several accounts he controlled.

— Wick Sollers and Eric Christensen, King & Spalding, Washington, D.C.

November 22, 2011

SEC Files Insider Trading Charges Against Rajat Gupta

The Securities and Exchange Commission (SEC) has charged former McKinsey & Co. global head Rajat K. Gupta with insider trading for providing tips to convicted Galleon Group founder Raj Rajaratnam while serving on the boards of Goldman Sachs and Proctor & Gamble (P&G). The SEC also filed new insider trading charges against Rajaratnam.

Gupta allegedly provided insider information to Rajaratnam regarding the quarterly earnings of Goldman Sachs and P&G, Goldman’s then future public equity offering, and an upcoming $5 billion investment in Goldman Sachs by Berkshire Hathaway. Rajaratnam allegedly used this information to generate profits or avoid losses of more than $23 million.

The SEC’s complaint charges Gupta and Rajaratnam with violating section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and section 17(a) of the Securities Act of 1933. The complaint seeks a final judgment permanently enjoining the defendants from future violations of these provisions, ordering them to disgorge on a joint-and-several basis their illicit gains, prejudgment interest, and financial penalties. The complaint also seeks permanently to prohibit Gupta from acting as an officer or director of any publicly registered company and from associating with any broker, dealer, or investment adviser.

The SEC has now charged 29 defendants in its actions related to its broad-reaching Galleon investigation. The defendants have worked for more than 15 companies, and the alleged insider trading has generated more than $90 million in total profits.

— Wick Sollers and Eric Christensen, King & Spalding, Washington, D.C.

November 22, 2011

Raj Rajaratnam Sentenced to 11 Years for Insider Trading

Former Galleon Group founder Raj Rajaratnam has been sentenced to 11 years’ imprisonment for insider trading, the longest sentence ever given for such offense. (Notably, this nevertheless fell short of the 19–24 years that the government sought.)

Rajaratnam was arrested in October 2009 on allegations that he made more than $50 million in ill-gotten profits by acting on insider tips. He was convicted in May 2011 on 14 counts of conspiracy and securities fraud following a two-month trial. Rajaratnam was also ordered to pay a $10 million fine.

— Wick Sollers and Eric Christensen, King & Spalding, Washington, D.C.

November 14, 2011

Citigroup to Pay $285 Million to Settle SEC Charges

On October 19, 2011, the Securities and Exchange Commission (SEC) charged Citigroup’s principal U.S. broker-dealer subsidiary with misleading investors about a $1 billion collateralized debt obligation (CDO) tied to the U.S. housing market. The CDO defaulted within months, resulting in a loss to investors while Citigroup made $160 million in fees and trading profits. Citigroup agreed to settle the SEC’s charges by paying $285 million, which will be returned to investors.

The SEC alleges that Citigroup Global Markets structured the CDO, exerting significant influence over the selection of included assets. Citigroup then took a proprietary short position against these assets. Investors were not told of Citigroup’s influence over asset selection or the short position. The SEC has also charged Brian Stoker, the Citigroup employee most responsible for structuring the transaction.

The SEC brought separate charges against Credit Suisse’s asset management unit, which served as the collateral manager for the transaction, as well as Samir H. Bhatt, Credit Suisse’s portfolio manager most responsible for the transaction. The SEC alleged that Credit Suisse violated its fiduciary duty when it failed to disclose that it allowed Citigroup to influence the portfolio selection.

The approximately 15 investors in the transaction lost nearly their entire investments while Citigroup received fees of approximately $34 million for structuring and marketing the transaction, and it realized net profits of at least $126 million from the short position.

The SEC alleged Citigroup and Stoker each violated sections 17(a)(2) and (3) of the Securities Act of 1933. Citigroup has elected to settle the charges without admitting or denying the allegations. Subject to court approval, Citigroup will pay $160 million in disgorgement plus $30 million in prejudgment interest, and a $95 million penalty. The $285 million will be returned to investors via a Fair Fund distribution. Citigroup will also be required to improve the process by which it reviews and approves offerings of certain mortgage-related securities. Litigation against Stoker continues.

The SEC alleged that Credit Suisse violated section 206(2) of the Investment Advisers Act of 1940 and section 17(a)(2) of the Securities Act. Bhatt is alleged to have violated section 17(a)(2) of the Securities Act and caused the violations of section 206(2) of the Advisers Act by Credit Suisse.

Without admitting or denying the allegations, Credit Suisse and Bhatt each consented to the issuance of an order directing it to cease and desist from committing or causing any violations, or future violations, of section 206(2) of the Advisers Act and section 17(a)(2) of the Securities Act. Credit Suisse will disgorge the $1 million in fees it received from the transaction, $250,000 in prejudgment interest, and a penalty fee of $1.25 million. Bhatt was also suspended from any association with any investment adviser for six months.

— Wick Sollers and Eric Christensen, King & Spalding, Washington, D.C.

November 14, 2011

Executives in Haitian Telco Bribery Scheme Sentenced to 15 Years

On October 25, 2011, the former president of Terra Telecommunications Corp., Joel Esquenazi, was sentenced to 15 years in prison for his role in a scheme to pay bribes to Haitian government officials at Telecommunications D’Haiti S.A.M. (Haiti Teleco), a state-owned telecommunications company, the longest sentence ever imposed in a case involving the Foreign Corrupt Practices Act (FCPA). The former executive vice president of Terra, Carlos Rodriguez, was also sentenced to 84 months in prison for his role in the scheme. In August 2011, Esquenazi and Rodriguez were convicted at trial of one count of conspiracy to violate the FCPA and wire-fraud statutes, seven counts of substantive FCPA violations, one count of money laundering conspiracy, and 12 substantive counts of money laundering. The men were also ordered to forfeit $3.09 million.

Haiti Teleco was the sole provider of land-line telephone service in Haiti. Terra had a series of contracts with Teleco that allowed its customers to make calls to Haiti. Esquenazi and Rodriguez used shell companies and false records of “consulting services” to conceal over $890,000 in bribe payments to foreign government officials for over three years. Terra hoped to obtain various business advantages, including the issuance of preferred telecommunications rates, reductions in the number of minutes for which payment was owed, and the continuance of Terra’s telecommunications connection with Haiti.

Four other individuals were previously convicted and sentenced for their roles in this scheme, including Antonio Perez, former controller at Terra; Juan Diaz, president of J.D. Locator Services; Jean Fourcand, president and director of Fourcand Enterprises, Inc.; and Robert Antoine, former director of international affairs for Haiti Teleco.

In a superseding indictment, Washington Vasconez Cruz, Amadeus Richers, Cinergy Telecommunications Inc., Patrick Joseph, Jean Rene Duperval, and Marguerite Grandison are charged in a related scheme, but no trial date is set, and the government’s investigation is ongoing.

— Wick Sollers and Eric Christensen, King & Spalding, Washington, D.C.

November 14, 2011

Sentencing Commission Issues Report on Mandatory Minimums

On October 31, 2011, the U.S. Sentencing Commission submitted to Congress a report assessing the impact of statutory mandatory minimum penalties on federal sentencing. Judge Patti B. Saris, chair of the commission, said, “the Commission unanimously believes that certain mandatory minimum penalties apply too broadly, are excessively severe, and are applied inconsistently across the country. The commission continues to believe that a strong and effective guideline system best serves the purposes of sentencing established by the Sentencing Reform Act of 1984.”

The commission recommended that Congress reassess certain statutory recidivist provisions with respect to drug offenses and asked it to consider possibly tailoring the “safety valve” relief mechanism to other low-level, non-violent offenders. The commission further recommended Congress examine and reevaluate the “stacking” of mandatory minimum penalties for certain firearm offenses, especially where there is no physical harm or threat of physical harm. The commission also recommended that Congress request prison overcrowding impact analyses from the commission as early as possible when considering enacting or amending federal criminal penalties.

The commission reviewed a pool of over 73,000 cases from fiscal year 2010 and data sets from other fiscal years. Among its key findings, the commission noted that more than 27 percent of offenders included in the pool were convicted of an offense carrying a mandatory minimum sentence. Of those, more than 75 percent were convicted of a drug trafficking offense. Of all offenders convicted of an offense carrying a mandatory minimum penalty, 46.7 percent did not receive such a penalty because they assisted the government, qualified for “safety valve” relief, or both, often resulting in a significant reduction in sentence. Additionally, the commission noted that as of September 30, 2010, just over 39 percent of offenders in the custody of the Federal Bureau of Prisons were subject to mandatory minimum penalties at sentencing. While this represented an increase in the number of offenders, the percentage has remained steady for 20 years.

— Wick Sollers and Eric Christensen, King & Spalding, Washington, D.C.

October 25, 2011

NYC Dept. of Housing Preservation and Development Official Indicted

On October 6, 2011, following a multi-agency investigation involving the Department of Justice, Department of the Interior, Internal Revenue Service, Department of Housing and Urban Development, and the Department of Labor, the U.S. Attorney’s Office for the Eastern District of New York arrested and charged an assistant commissioner for the New York City Department of Housing Preservation and Development (HPD) and six real-estate developers in connection with allegations of corruption dating back to 2002. The indictment alleges that the assistant commissioner, Wendell Walters, accepted more than $600,000 in bribes from contractors and real-estate developers in exchange for awarding lucrative city contracts for the development and construction of affordable housing throughout New York City. Walters and the developers, two of whom are attorneys, allegedly devised schemes to solicit and conceal the kickbacks, and at times resorted to violent threats to collect the money. HPD is the largest municipal developer of affordable housing in the United States.

— Jerome Roth and Kyle Mach, Munger, Tolles & Olson, San Francicsco, CA

September 14, 2011

Ex-Galleon Trader Sentenced to 66 Months for Insider Trading

Former Galleon Group LLC hedge fund trader Craig Drimal pled guilty in April 2011 to six counts of conspiracy and securities fraud resulting from a scheme whereby Galleon traded insider information that Drimal had obtained from lawyers working on transactions involving 3Com, Corp. and Axcan Pharma, Inc. On August 31, 2011, Judge Richard Sullivan of the U.S. District Court for the Southern District of New York sentenced Drimal to a 66-month term of imprisonment. Drimal made personal profits of nearly $6.5 million from trades in 3Com and Axcan based on the inside information, and he also provided material nonpublic information to Galleon trader Michael Cardillo, whom prosecutors allege earned $731,505 as a result of the scheme. According to prosecutors, when Securities and Exchange Commission personnel originally interviewed Drimal in July 2008, he lied to them about why he bought Axcan stock.

— Jim Wyrsch, Chris Mirakian, and Jon Bailey of Wyrsch, Hobbs & Mirakian, P.C., Kansas City, MO

September 14, 2011

Baseball Great Roger Clemens to Be Retried after Mistrial

A federal judge has ruled that Roger Clemens will face a new trial on charges that he lied to Congress about using performance-enhancing drugs, after determining that a second trial would not violate Clemens’s constitutional rights. Two days into the first trial, Judge Reggie Walton of the U.S. District Court for the District of Columbia declared a mistrial after prosecutors showed jurors evidence that he had already ruled to be inadmissible. Although Judge Walton chastised prosecutors for their apparent blatant disregard of his ruling, he ultimately determined that he could not bar prosecutors from moving forward with a second trial. Clemens’s attorney argued that the prosecutors’ error was in fact a tactic used to get a new trial, because the first trial was going so badly for the government. Federal prosecutor Steven Durham took the blame for the prosecution’s showing of the inadmissible evidence and acknowledged his wrongdoing, pleading with the judge not to hold the government responsible for his error. While Judge Walton condemned the prosecution and its actions, he held that precedential case law ultimately required that he grant another trial.

— Jim Wyrsch, Chris Mirakian, and Jon Bailey of Wyrsch, Hobbs & Mirakian, P.C., Kansas City, MO

September 14, 2011

Barry Bonds's Conviction Upheld

On August 26, a federal district court judge in San Francisco upheld the conviction of former baseball star Barry Bonds for obstruction of justice relating to his role in the BALCO scandal. The court will sentence Bonds on December 16, 2011. He faces a maximum sentence of 10 years in prison, though the Sentencing Guidelines recommend a sentence between one and two years.

Following the ruling, prosecutors dismissed without prejudice the remaining counts against Bonds—three charges of making false statements on which the jury had deadlocked during the trial.

— Jim Wyrsch, Chris Mirakian, and Jon Bailey of Wyrsch, Hobbs & Mirakian, P.C., Kansas City, MO

September 14, 2011

Validity of Police Lineups Questioned

Following a recent decision by the New Jersey Supreme Court to overhaul the state’s rules regarding treatment of evidence obtained from police lineups (see New Jersey v. Henderson, --- A.3d ----, 2011 WL 3715028 (N.J. 2011)), the New York Times published an article questioning whether police lineups and eyewitness identifications are reliable. The article queries whether current law enforcement procedures pertaining to suspect identification throughout the nation properly safeguard a defendant against the threat of an inaccurate identification.

In its decision in Henderson, the New Jersey Supreme Court cited decades of research demonstrating that traditional eyewitness identification procedures are flawed and can send innocent people to prison. In reaching its decision, the court relied on a detailed, 88-page report by a special master that outlined deficiencies in witness identifications and provided empirical statistical analysis emphasizing these deficiencies. This report may lend support to defense attorneys in making future arguments regarding the admissibility of police lineup identifications.

— Jim Wyrsch, Chris Mirakian, and Jon Bailey of Wyrsch, Hobbs & Mirakian, P.C., Kansas City, MO

July 22, 2011

Sentencing Commission Votes in Favor of Retroactivity

On June 30, 2011, the U.S. Sentencing Commission voted unanimously to give retroactive effect to the proposed amendment to the federal sentencing guidelines implementing the Fair Sentencing Act of 2010. The act reduced the 100-to-1 disparity between sentencing for offenders convicted of crack-cocaine offenses and those convicted of powder-cocaine offenses. The commission’s decision regarding retroactivity follows a public-comment period and a full-day hearing, at which 20 experts and advocates testified. The commission received over 43,500 written public comments on the proposed amendment, the majority of which favored retroactivity. The amendment, including retroactivity, will take effect November 1, 2011, unless Congress intervenes.

The commission estimates that its decision will make nearly 12,000 offenders eligible to seek a sentence reduction. The average sentence reduction likely will be approximately 37 months, although average sentences after reduction will remain around 10 years. The Bureau of Prisons estimates that retroactivity could result in more than $200 million in savings for the Bureau within the first five years after the amendment takes effect.

— Travis McDonough and Eileen Rumfelt, Miller & Martin PLLC

July 22, 2011

New Profile of Typical Corporate Fraudster Released

On June 14, 2011, KPMG released a global survey regarding the current state of corporate fraud. Based on nearly 350 fraud investigations it conducted, KPMG’s report defines the “typical corporate fraudster” as a 36- to 45-year-old male. The typical fraudster commits fraud against his own company after having been employed for five or more years and after having achieved a senior-management position. He is most often employed in finance. Personal greed is the primary motivator for the fraudster’s actions, with pressure to meet profit and budget targets cited as the second most common reason. Notably, according to the report, board-level perpetrators are on the rise, up to 18 percent from 11 percent in 2007.

The report highlights a disturbing trend, which its authors postulate is a direct result of the economic downturn. Nearly 75 percent of perpetrators were able to commit corporate fraud because of weaknesses in their organization’s internal compliance programs. This number is significantly higher than the 49 percent tallied in a similar survey conducted in 2007. The authors of the report reason that employee layoffs and overall corporate focus on “emergency” issues have resulted in inadequate oversight of compliance programs. They note the rise in the number of “red flags” that go ignored, which they find to have increased from 76 percent in 2007 to 94 percent in 2011. The average time from fraud inception to detection is nearly three and a half years. Also indicative of the lack of corporate focus is the fact that external exposure of the fraud (by, for example, anonymous or customer complaints) has grown, while exposure by internal whistleblowers has declined. According to the report, the average total losses in the United States were $1.2 million per fraud, a figure exceeded only in Asia and the Middle East.

— Travis McDonough and Eileen Rumfelt, Miller & Martin PLLC

July 22, 2011

AG Recommends Full Investigation of Deaths of Two Overseas Detainees

On June 30, 2011, Attorney General Eric Holder announced that a more than three-year probe related to the interrogation of post-September 11 detainees abroad would result in a full criminal investigation of the deaths in custody of two detainees. Other than these two announced criminal investigations, the preliminary investigation appears to have reached its end.

The probe began in January 2, 2008, when then-Attorney General Michael Mukasey appointed Assistant U.S. Attorney John Durham to conduct a criminal investigation into the destruction of certain interrogation videotapes by the Central Intelligence Agency (CIA). In August 2009, after reviewing reports submitted by the Office of Professional Responsibility and the 2004 CIA Inspector General Report, Attorney General Holder expanded Mr. Durham’s mandate to include a review of the interrogation tactics used on more than 100 detainees held at overseas locations. At the time, Attorney General Holder emphasized that he would not prosecute anyone acting in good faith and within the scope of the Office of Legal Counsel’s legal guidance. In November 2010, the Department of Justice announced that it would not bring charges related to the destruction of videotapes, Mr. Durham’s original mandate.

The June 30 announcement represents the conclusion of Mr. Durham’s investigation. As Attorney General Holder stated in making the announcement,

The men and women in our intelligence community perform an incredibly important service to our nation, and they often do so under dangerous and difficult circumstances. They deserve our respect and gratitude for the work they do. However, I concluded based on the information available to me then, and continue to believe now, that the Department needed to thoroughly examine the detainee treatment issue. I am confident that Durham’s thorough review has satisfied that need.

— Travis McDonough and Eileen Rumfelt, Miller & Martin PLLC

June 20, 2011

UCB Settles Off-Label Promotion Allegations to Tune of $34 Million

In a victory for the Department of Justice in its crusade against the illegal marketing of pharmaceuticals, the U.S. subsidiary of Belgian drug company UCB SA has agreed to pay $34 million to settle civil and criminal claims that it marketed an epilepsy drug for uses other than those expressly approved by the Food and Drug Administration (FDA). According to the government, which intervened in two qui tam actions brought against UCB under the False Claims Act, UCB promoted its epilepsy drug Keppra as a preventative for migraine headaches, despite having no research or FDA backing supporting such use. In addition to the $34 million payment, which includes a criminal fine of more than $7 million, and a separate civil settlement of nearly $26 million that relates to the filing of false claims with Medicare and Medicaid ($2.8 million of which will be paid to the relators in the qui tam suits), UCB also agreed to plead guilty to a misdemeanor offense. Further, UCB has committed to adhere to certain corporate practices pursuant to a corporate integrity agreement with the Office of Inspector General of the U.S. Department of Health and Human Services. The duration of that agreement is five years.

June 20, 2011

Indictments Mount in Petro Oil Scheme Investigation

A federal grand jury in Missouri recently indicted eight individuals for their alleged roles in a securities-fraud scheme involving Petro America Corp., a Kansas City-based oil company. The new defendants join four previous defendants, bringing the total number of indictments in the case to 12. All dozen of the defendants are charged in a 20-count superseding indictment that includes charges of criminal conspiracy, money laundering, and securities and wire fraud. The defendants are alleged to have caused more than $7.2 million in losses dating back to 2008. Among other things, the defendants are accused of falsely inflating Petro America’s assets; promoting the company to investors using false information, and in spite of cease-and-desist orders from Missouri and Kansas; and structuring transactions to avoid the state-issued orders. The government alleges that the defendants specifically targeted churchgoers, supplying church ministers with shares of Petro so that the ministers could sell the shares secretly while paying kickbacks to the defendants.

June 20, 2011

Former Mass. House Speaker Convicted of Public-Corruption Offenses

On June 15, 2011, following a six-week trial, former Massachusetts House Speaker Salvatore DiMasi was found guilty of conspiracy, extortion, and mail and wire-fraud offenses relating to his conduct as speaker, a position he held from 2004 until 2009. DiMasi was alleged to have accepted kickbacks in exchange for steering state software contracts. The case against DiMasi tested the application of honest-services fraud as limited by the U.S. Supreme Court almost exactly one year ago, in the landmark decision Skilling v. United States. The jurors focused on the honest-services-fraud issue during their deliberations, at one point asking the judge to repeat his instructions on those counts. DiMasi’s legal team already has indicated that it will appeal the jury’s unanimous verdict on the grounds that the government did not prove an intended bribe, as required under Skilling. 

Notably, DiMasi is the third consecutive Massachusetts House speaker to be convicted of a felony. He faces up to five years in prison on the conspiracy charge, and up to twenty years each on the six other counts of which he was convicted.

May 18, 2011

BAE Agrees to Largest-Ever Settlement with State Department

On May 16, 2011, British contracting company BAE Systems PLC agreed to pay $79 million to the U.S. Department of State to settle allegations that it committed more than 2,500 violations of U.S. export laws over a years-long period beginning in 2003. BAE has pledged to pay the fine over three years, and may be eligible for a reduction of up to $10 million based on its implementation of enhanced export-control compliance measures.

The government alleged that BAE violated the Arms Export Control Act and the International Traffic in Arms Regulations in its business dealings in the Czech Republic, Hungary, Saudi Arabia, and other countries. The government alleged that BAE engaged in the unauthorized brokerage of defense articles by, among other things, employing agents who were not properly registered as brokers, failing to maintain adequate records, and failing to report payments of fees and commissions. According to the State Department, the case and the settlement do not implicate BAE’s U.S. subsidiary, BAE Systems Inc.

In February 2010, BAE pled guilty to criminal charges relating to the same conduct. In connection with that plea, BAE paid more than $400 million to the Department of Justice, and more than $47 million to the Serious Fraud Office of the U.K. government.

May 18, 2011

Galleon Group Founder Found Guilty on 14 Insider-Trading Counts

On May 11, 2011, following a widely watched trial and extensive deliberation, a jury in the Southern District of New York found billion-dollar hedge-fund founder Raj Rajarartnam guilty of all 14 insider-trading and conspiracy charges against him. Rajaratnam, alleged to have made more than $50 million in profits on trades based on insider information, faces up to 25 years in prison. The insider-trading case against Rajaratnam was the largest in the Department of Justice’s history, and the verdict against Rajaratnam is the capstone of the government’s investigation of the hedge fund, Galleon Group, which has netted more than 20 guilty pleas and more than two dozen arrests.

During its deliberation, the jury appeared to focus on the government’s wiretap evidence against Rajaratnam, which notably included calls with traders and executives who had already separately pled guilty to related charges, some of whom testified against Rajaratnam at trial. During the trial, the government presented more than 60 taped conversations to the jury. This effort represented the government’s most extensive collection and use of wiretaps in an insider-trading case to date, and could signify a sea change in the prosecution of future insider-trading cases. From a defense perspective, the verdict also could deflate the “mosaic” defense, which Rajaratnam’s lawyers employed in arguing that Rajaratnam made trades based on a conglomerate of many pieces of publicly available information, not on singular insider tips. The mosaic theory, which has not been the subject of much review by appellate courts, is expected to be one piece of Rajaratnam’s appeal.

May 18, 2011

Federal Judge Again Tosses Case Against Former GlaxoSmithKline Lawyer

On May 10, 2011, in a ruling emphasizing the sanctity of the attorney-client privilege, U.S. District Judge Roger Titus of the District of Maryland dismissed the government’s case against former GlaxoSmithKline (GSK) in-house lawyer Lauren Stevens. The government had charged Stevens with six counts of making false statements, obstructing justice, and falsifying and concealing documents, in connection with GSK’s response to an inquiry by the U.S. Food and Drug Administration regarding the marketing of the drug Wellbutrin. Notably, the case was the government’s second effort to prosecute Stevens; the court previously dismissed the original indictment in March 2011, after concluding that the government had misinformed the grand jury about the relevance of Stevens’s possible advice-of-counsel defense.

In dismissing the charges against Stevens for a second time, Judge Titus noted that the government never should have brought the case, and criticized a decision by a magistrate judge in the District of Massachusetts that permitted the government to use documents protected by the attorney-client privilege because they purportedly met the “crime fraud” exception to the privilege. Judge Titus, first noting that the government never should have had access to the documents, rejected the applicability of the exception, noting that Stevens had engaged in a good faith and proper effort to advise her client. Acknowledging that lawyers “should not get a free pass,” Judge Titus cautioned that misapplication of the crime-fraud exception would chill lawyers’ zealous representation of their clients, and noted that “[a]nything that interferes with that is something that the court system should not countenance.”

April 15, 2011

Barry Bonds Convicted in Connection with BALCO Investigation

Following a trial on perjury and obstruction-of-justice charges relating to his conduct during the government’s investigation of steroid use and the Bay Area Laboratory Cooperative (BALCO), a jury found Major League Baseball player Barry Bonds guilty of one count obstruction of justice on April 13, 2011. The court declared a mistrial on the remaining three perjury counts, as the jurors were unable to reach a verdict on those counts. The charges stemmed from Bonds’s 2003 grand-jury testimony in the BALCO investigation, during which he denied using steroids and stated that his trainer, also a target of the government’s investigation, never injected him with a needle. Though it was Bonds’s conduct during the investigation, not the alleged underlying use of steroids, that was at issue in this trial, prosecutors claimed that their criminal investigation had uncovered tests demonstrating the use of anabolic steroids and other performance-enhancing substances by Bonds and other athletes.

The government will decide whether to retry Bonds on the perjury counts, and the court will set a sentencing date for the obstruction count at a hearing scheduled for May 20, 2011. United States v. Bonds, No. 07-00732, April 13, 2011 (N.D. Cal.).

— Danielle Pelot and Ronaldo Rauseo-Ricupero, Nixon Peabody LLP, Boston, MA

April 15, 2011

Court Dismisses Privacy Act Suit Involving Unidentified DOJ Source

A federal judge recently granted the Department of Justice’s motion for summary judgment in dismissing a long-pending case against the department brought by former federal terrorism prosecutor Richard Convertino. Convertino had alleged that an anonymous source from the Department of Justice leaked harmful information to a Detroit Free Press reporter regarding Convertino’s referral to the department’s Office of Professional Responsibility, which related to Convertino’s alleged misconduct during the prosecution of suspected terrorists following the September 11, 2001, attacks. Convertino claimed that the source violated the Privacy Act, “knew the leak would destroy his [Convertino’s] reputation,” and “was fueled by a desire to get back at him [Convertino] for criticizing the Department and for testifying before a congressional committee.” The court found that Convertino had failed to satisfy the Privacy Act’s intentionality and willfulness requirements, in large part because Convertino could not identify the source and thus could not prove that the source was acting within the scope of his or her employment at the time of the leak. Convertino v. United States Department of Justice, No. 04-cv-236, March 24, 2011 (D.D.C.).

— Danielle Pelot and Ronaldo Rauseo-Ricupero, Nixon Peabody LLP, Boston, MA

April 15, 2011

Former Federal Judge Sentenced for Entanglement with FBI Informant

Former U.S. District Judge Jack Camp Jr. was sentenced to 30 days in prison for giving an exotic dancer money to buy illicit drugs. In October 2010, Camp pled guilty to providing the dancer, an FBI informant, with money and his government-issued laptop in furtherance of her effort to buy illegal drugs. The government also charged Camp with federal firearm violations, relating to two weapons he had stowed in his car. In conjunction with the plea, Camp agreed to resign from the bench and to forfeit his law license. United States v. Camp, No. 10-mj-01415, March 14, 2011 (N.D. Ga.).

— Danielle Pelot and Ronaldo Rauseo-Ricupero, Nixon Peabody LLP, Boston, MA

April 15, 2011

Former Bush Administration Lawyer Sentenced to Jail on Misdemeanor Charge

On March 30, 2011, nearly a year after his guilty plea to the misdemeanor charge of contempt of Congress, Scott Bloch, the controversial former head of the U.S. Office of Special Counsel, was sentenced to one month in prison, one year of supervised release, and 200 hours of community service. In April 2010, Bloch pled guilty to contempt of Congress for withholding information from the House Committee on Oversight and Government Reform, which was investigating his decision to have information on several government computers erased. Bloch’s lawyers have asserted that, in pleading guilty to contempt of Congress, Bloch understood and had reason to understand that he could receive a probation-only sentence. Magistrate Judge Deborah Robinson ruled, however, that the charge was not probation-eligible. The court has stayed Bloch’s sentence of imprisonment pending appeal. United States v. Bloch, No. 10-mj-00215, March 30, 2011 (D.D.C.).

— Danielle Pelot and Ronaldo Rauseo-Ricupero, Nixon Peabody LLP, Boston, MA

April 15, 2011

Indictment Against Former GSK Counsel Dismissed Without Prejudice

Following the prosecutors’ erroneous instruction to the grand jury regarding the advice of counsel defense, the court dismissed without prejudice the indictment against Lauren Stevens, a former associate general counsel of GlaxoSmithKline (GSK). Stevens was indicted for alleged violations of 18 U.S.C. § 1512 (obstruction), § 1519 (falsification and concealment of documents), and § 1001 (false statements) for her involvement in GSK’s responses to a Food and Drug Administration inquiry regarding alleged off-label marketing of the GSK drug Wellbutrin SR. During grand-jury proceedings, a juror asked prosecutors, “Does it matter that maybe she was—that Lauren Stevens was getting direction from somebody else about how to handle this? Does it matter or is it not relevant?” The Court found that prosecutors’ responses to the juror’s question clearly indicated that the advice-of-counsel defense was not relevant at the charging stage. In moving to preclude Stevens from asserting good-faith reliance on advice of counsel as a defense, the government argued that 18 U.S.C. §1519 is a general-intent crime, and that the advice-of-counsel defense applies only to specific-intent crimes. Judge Titus of the District Court for the District of Maryland disagreed, ruling that good-faith reliance on the advice of counsel negates the wrongful intent required to commit the crimes with which the government had charged Stevens. Because the prosecutors had indicated otherwise to the grand jurors, the Court dismissed the indictment without prejudice. The Court’s order, however, permits prosecutors to seek a new indictment from a properly instructed grand jury. On assumption that the government will secure a new indictment, the Court has already set a new trial date of April 26, 2011. United States v. Stevens, No. 10-cr-0694, March 23, 2011 (D. Md.).

— Danielle Pelot and Ronaldo Rauseo-Ricupero, Nixon Peabody LLP, Boston, MA

March 29, 2011

Prosecution of GlaxoSmithKline Lawyer up in the Air

On March 23, 2011, U.S. District Court Judge Roger Titus dismissed without prejudice the indictment against Laura Stevens, former associate general counsel of GlaxoSmithKline. Stevens is accused of attempting to obstruct an FDA investigation into Glaxo’s alleged off-label marketing of its drug Wellbutrin SR, but Judge Titus found that prosecutors misinformed grand jurors about Stevens’s primary defense—the advice-of-counsel defense.

Stevens headed the legal team charged with responding to the FDA’s inquiries, which included two other in-house counsel and three outside counsel. According to the now-dismissed indictment, Stevens withheld and concealed documents and information about Glaxo’s promotional activities and falsified and altered documents to impede the investigation. No one else was charged in the case.

In his memorandum order, Judge Titus first denied the government’s motion to preclude Stevens from asserting the advice-of-counsel defense, concluding that good-faith reliance on the advice of counsel negates the criminal intent required for the charges against Stevens. Then, Judge Titus found that the prosecutors had given erroneous and prejudicial legal advice to the grand jury about the advice-of-counsel defense. Specifically, in response to a juror’s question, “Does it matter that maybe she was—that Lauren Stevens was getting direction from somebody else about how to handle this?” prosecutors told the grand jurors that the advice-of-counsel defense was not relevant to their probable-cause determination. This information was incorrect, according to Judge Titus, because good-faith reliance on the advice of counsel is not an affirmative defense, but instead negates the essential element of mens rea.

Judge Titus’s order dismissing the indictment without prejudice allows the government to seek a new indictment from a properly instructed grand jury. It has been reported that prosecutors have not yet decided whether to seek a new indictment, appeal Judge Titus’s order, or drop the charges against Stevens.

March 29, 2011

New Information about Federal Abuse-of-Power Probe in Arizona

Since January 2010, a federal grand jury has been investigating allegations that Sheriff Joe Arpaio of Maricopa County, Arizona, the self-proclaimed “toughest sheriff in America,” and other officials in that county committed criminal violations by abusing their power in a variety of ways. Few details about the scope of the grand jury inquiry have made their way into the public domain, but new information suggests that one reason for the length of the investigation is its breadth. Local news sources are reporting that the Arizona Attorney General’s Office has now handed over four investigations to federal officials because those investigations overlap with the ongoing grand-jury probe. The four transferred investigations reportedly involve campaign-finance issues, questions about improper criminal charges against a county official, spending of jail funds, and a land deal for a sheriff’s substation. Information obtained by media sources through Arizona’s liberal public-records laws also shows that high-ranking officials in the sheriff’s office may have attempted to cover up and obstruct investigations into their alleged wrongdoing.

March 9, 2011

SEC Exercises Expanded Forum-Selection Powers under Dodd-Frank

As the New York Times and other news outlets recently reported, the Securities and Exchange Commission (SEC) has taken advantage of a provision of the Dodd-Frank legislation that permits it to bring cases in front of administrative-law judges, in its case against Rajat Gupta, a former head of McKinsey, whom the SEC alleges to have tipped insider information to former Galleon Group cofounder Raj Rajaratnam. Under the expanded administrative powers bestowed upon the SEC by Dodd-Frank, the SEC is no longer obligated to bring such civil charges in federal court, and can also seek monetary penalties (as opposed to mere disgorgement of illicit profits). As articles have noted, this raises concerns about the lesser evidentiary standard in administrative proceedings, and also may signal the commission’s plans to use administrative proceedings for future cases.

For more information, please see the following articles in the New York Times and Business Week.

March 7, 2011

Mine-Disaster Official Charged with Obstructing Federal Investigation

Federal prosecutors in the Southern District of West Virginia have charged a security official working for a subsidiary of Massey Energy Co., the owner of the site of a fatal mine explosion in April 2010, with lying to federal investigators and ordering the destruction of security-related documents in an effort to conceal illegal practices at the mine.

The charges against the security chief, Hughie Stover, are connected to a joint investigation by the FBI and the Mine Safety and Health Administration (MSHA) regarding whether security officials gave advance notification of MSHA inspections to mine personnel, in violation of the Federal Mine Safety and Health Act. The two-count indictment against Stover charges that he made false statements to an FBI special agent and a special investigator from MSHA regarding the mine’s policies concerning advance notice, and that he directed a person to dispose of thousands of pages of company documents relevant to the investigation by placing the documents in a trash compactor. Stover is alleged to have committed these acts in January 2011.

Stover’s arraignment is scheduled for March 15, 2011.

March 7, 2011

Casino Company Investigated Regarding Potential FCPA Violations

Worldwide casino operator Las Vegas Sands Corp. recently disclosed in an annual SEC filing that it is currently under investigation by the Securities and Exchange Commission (SEC) and the Department of Justice (DOJ) for potential violations of the Foreign Corrupt Practices Act (FCPA). In the Form 10-K, filed March 1, Sands stated that it believes that the investigations and the corresponding subpoena Sands received from the SEC in early February were prompted by allegations in a wrongful-termination suit filed last fall by the ex-CEO of Sands’ China operation, Steve Jacobs. In that suit, Jacobs alleges that Sands sought leverage with which to improperly influence high-ranking Chinese officials, and affiliated with groups tied to Chinese organized crime. Sands has denied Jacobs’s allegations and has pledged to cooperate with the government’s investigations.

In its filing, Sands further revealed that it has already paid a $1.6 million penalty to the State Administration of Foreign Exchange in China, following an investigation by that agency regarding payments made to counterparties and other vendors in China by Sands’ wholly foreign-owned enterprises. That penalty, which relates to Sands’ operations in China and Macau, may concern the same conduct that is at issue in the SEC and DOJ investigations.

February 3, 2011

Government Obtains Additional Guilty Pleas in Galleon Group Cases

Over the course of two weeks in January, several individuals associated with the ongoing Galleon Group insider-trading case pled guilty to fraud and conspiracy charges in advance of the upcoming trial of Galleon founder Raj Rajaratnam. To date, more than 20 individuals have faced charges in connection with the government’s wide-reaching investigation of the former hedge fund. Additionally, the Securities and Exchange Commission has filed civil suits against Galleon and many of the defendants for similar conduct.

On January 14, 2011, Arthur Cutillo, a former associate at Ropes & Gray LLP, pled guilty to one count of conspiracy and one count of securities fraud. The maximum term of imprisonment on the two counts is 25 years. Cutillo’s plea agreement, however, stipulates a sentence of 30–37 months based on a calculated Guidelines offense level of 19.

On January 19, 2011, Danielle Chiesi, a former hedge-fund consultant who was accused of trading on and providing inside information to Rajaratnam, pled guilty to three counts of conspiracy to commit securities fraud. Chiesi faces up to 15 years in prison, but under her plea agreement prosecutors will recommend a sentence of 37–46 months.

On January 26, 2011, two former Galleon traders, Adam Smith and Michael Cardillo, pled guilty to one count each of conspiracy and securities fraud. Both defendants face a sentence of up to 25 years, and their plea agreements do not contain a sentencing recommendation.

Rajaratnam’s trial is currently scheduled to begin on February 28, 2011.

— Jason M. Silverman, McKenna Long & Aldridge, Washington, D.C.

February 3, 2011

Sentencing in FCPA Case Involving State-Owned Haitian Telecommunications Company

On January 21, 2011, the former controller of a Florida-based telecommunications firm was sentenced to 24 months in prison for his involvement in a conspiracy to bribe representatives of Haiti’s state-owned national telecommunications company, Telecommunications d’Haiti (Haiti Teleco). The sentencing is the latest in a series of cases arising from bribery of representatives of Haiti Teleco in an effort to obtain favorable business treatment.

Antonio Perez had pled guilty in May 2009 to conspiracy to violate the Foreign Corrupt Practices Act and money-laundering laws. Perez admitted personal involvement over the course of three months (from November 2001 through January 2002) in assisting with the processing of bribes to an employee of Haiti Teleco. He also admitted having personally assisted in making two bribe payments totaling $36,375, which amount he was ordered to forfeit.

— Jason M. Silverman, McKenna Long & Aldridge, Washington, D.C.

February 3, 2011

United Kingdom Delays Implementation of Bribery Law

On January 31, 2011, the United Kingdom’s justice secretary, Ken Clarke, confirmed that implementation of the United Kingdom’s recently adopted Bribery Act would be delayed. The law was passed on April 8, 2010, and had been scheduled to take effect in April 2011. The delay comes amidst criticism from the business community that the law lacks sufficient clarity, which critics contend will harm British competitiveness abroad.

The Organisation for Economic Co-Operation and Development (OECD), which promotes and coordinates international anti-corruption efforts, criticized the delay and threatened to place the U.K. on an OECD export blacklist if implementation is delayed further.

— Jason M. Silverman, McKenna Long & Aldridge, Washington, D.C.

January 18, 2011

SEC Enters First Non-Prosecution Agreement under New Cooperation Regime

On December 20, 2010, the Securities and Exchange Commission (SEC) announced that it has entered into a non-prosecution agreement with Carter’s, Inc., an Atlanta-based clothing marketer. This is the first non-prosecution agreement the SEC has entered since promulgating its new cooperation initiative in January 2010. Before the initiative, the Division of Enforcement did not authorize the use of non-prosecution agreements. The Carter’s agreement, which is unremarkable but for its place in history, was executed in connection with the SEC’s investigation of financial fraud by Joseph Elles, executive vice president of Carter’s. The SEC alleges that Elles’s misconduct caused an understatement of Carter’s expenses and an overstatement of its net income. Under the terms of the agreement, Carter’s will not be charged with violations of the securities laws in connection with Elles’s alleged misconduct.

In announcing the agreement, the SEC noted that it reflects the isolated nature of the unlawful conduct, as well as prompt and complete self-reporting by Carter’s, its exemplary and extensive cooperation in the investigation (including undertaking a thorough and comprehensive internal investigation), and its extensive and substantial remedial actions. Carter’s also agreed to cooperate fully and truthfully in any further SEC investigation, including the enforcement action against Elles.

— Michael Scheininger and Brad Samuels, McKenna Long & Aldridge, Washington, D.C.

January 18, 2011

Record-Setting Madoff Settlement in the S.D.N.Y.

On December 17, 2010, the trustee for Bernard L. Madoff Investment Securities (BLMIS) and the U.S. Attorney’s Office in Manhattan announced a $7.2 billion settlement with the estate of Jeffry Picower, an investor in BLMIS who held an account in his own name and who controlled a number of other accounts held by various entities. On January 13, 2011, the U.S. Bankruptcy Court for the Southern District of New York approved the settlement over the objections of certain investors who argued that their claims had not been recognized by the trustee. Under the terms of the settlement, which was signed by Picower’s widow, the Picower estate will return $5 billion to the trustee to resolve all claims against it. Combined with the $2.2 billion Picower already forfeited to the U.S. government, the $7.2 billion payment represents 100 percent of the proceeds Picower withdrew during his 33 relationship with BLMIS. The settlement represents the largest civil forfeiture payment in U.S. history, and brings the total amount recovered from the Madoff fraud to date to approximately $10 billion.

— Michael Scheininger and Brad Samuels, McKenna Long & Aldridge, Washington, D.C.

January 18, 2011

Government Announces Results of "Operation Broken Trust"

On December 6, 2010, the FBI Financial Fraud Enforcement Task Force announced the conclusion of “Operation Broken Trust,” which was hailed by the FBI as the largest investment-fraud sweep ever conducted in the United States. Operation Broken Trust included both criminal and civil enforcement actions that occurred from August 16 through December 1, 2010. The operation focused on scams directly targeting individual investors, rather than long-term complex corporate-fraud matters. In total, the operation netted enforcement actions against 343 criminal defendants and 189 civil defendants, for fraud schemes involving more than 120,000 victims throughout the country. The operation’s criminal cases involved more than $8.3 billion in estimated losses, and the civil cases involved estimated losses of more than $2.1 billion.

— Michael Scheininger and Brad Samuels, McKenna Long & Aldridge, Washington, D.C.

December 8, 2010

Singapore Airlines to Pay $48 Million Fine; Government's Broad Price-Fixing Investigation Continues

The cargo unit of Singapore Airlines Ltd. has agreed to plead guilty and to pay a $48 million criminal fine for its role in a conspiracy to fix prices in the air-transportation industry. The Department of Justice (DOJ) alleged that Singapore Airlines Cargo engaged in a conspiracy to fix prices from 2002 until at least February 2006.

Prosecutors said the Singapore Airlines unit and other air-cargo shippers held meetings and conversations in which they agreed on shipping rates, in violation of federal antitrust law. Singapore Airlines is the twentieth airline charged in connection with the government’s investigation into price fixing in the air transportation industry, which so far has generated $1.7 billion in criminal fines. In addition to the airlines themselves, individual executives remain under investigation by the government, with charges currently pending against more than a dozen executives of various airlines.

On December 6, upon a motion to intervene brought by the DOJ, a magistrate judge in the Eastern District of New York issued a discovery stay in multi-district class-action litigation relating to the same price-fixing conduct, after concluding that the government’s criminal investigation could be adversely affected by certain discovery in the civil litigation. Under the order, such discovery will be stayed until March 2011.

— Michael Duffy, Bradley Arant Boult Cummings LLP, Birmingham, AL

December 8, 2010

Former Comverse CEO Agrees to $53 Million Settlement of Options-Backdating Charges

Comverse Technology, Inc. cofounder Jacob “Kobi” Alexander has agreed to pay $53.6 million to settle Securities and Exchange Commission (SEC) charges relating to the backdating of stock options.

In 2006, the SEC charged Alexander and two other former Comverse executives with engaging in a fraudulent scheme to grant undisclosed, “in-the-money” options to themselves and to others by backdating stock-option grants to coincide with historically low closing prices of Comverse common stock.

Alexander previously fled to Namibia, which does not have an extradition treaty with the U.S., to avoid criminal prosecution for the stock-option backdating. The civil settlement with the SEC does not affect Alexander’s fugitive status.

The proposed settlement marks one of the largest disgorgement and penalty amounts imposed against an individual in a stock-options-backdating case.

— Michael Duffy, Bradley Arant Boult Cummings LLP, Birmingham, AL

December 8, 2010

DOJ Recovers $3 Billion in False Claims Act Lawsuits in 2010 Fiscal Year

The Department of Justice (DOJ) announced this month that it recovered $3 billion in cases involving fraud against the government, including $2.5 billion in healthcare-fraud recoveries.

The recoveries were primarily the result of False Claims Act (FCA) lawsuits. Whistleblowers who brought claims under this act were awarded $385 million during the 2010 fiscal year. These statistics are said to underscore the significant focus of regulators in investigating and prosecuting healthcare-fraud allegations, and are likely to further encourage whistleblowers to bring claims under the FCA.

— Michael Duffy, Bradley Arant Boult Cummings LLP, Birmingham, AL

November 16, 2010

California Company and Executives Indicted for Alleged Participation in Mexican Utility Bribery Scheme

On October 21, 2010, Lindsey Manufacturing Co. and two of its executives, Keith E. Lindsey and Steve K. Lee, were indicted for their alleged roles in a conspiracy to pay bribes to Mexican government officials at the Comision Federal de Electricidad (CFE), a state-owned utility company. The company and its executives were charged with conspiracy to violate the Foreign Corrupt Practices Act (FCPA) and other FCPA violations in an eight-count superseding indictment. The superseding indictment alleges that Lindsey and Lee wired money to middlemen, knowing that the payments were based on fraudulent invoices, and knowing that the money would be used to pay bribes to Mexican officials in exchange for CFE awarding contracts to Lindsey Manufacturing Co.

— Wick Sollers and Eric Christensen, King & Spalding, Washington D.C.

November 16, 2010

GlaxoSmithKline to Plead Guilty, Pay $750 Million to Resolve Liability for Manufacturing Deficiencies

On October 26, 2010, SB Pharmco Puerto Rico Inc., a subsidiary of GlaxoSmithKline, PLC (GSK), agreed to plead guilty to charges relating to the manufacture and distribution of certain adulterated drugs made at GSK’s now-closed manufacturing facility in Cidra, Puerto Rico. Among the allegations were charges that SB Pharmco’s manufacturing operations failed to ensure that some finished products were free of contamination; that the manufacturing process employed caused two-layer tablets to split, such that the tablets did not have any therapeutic effect; and that other tablets did not always contain the FDA-approved mix of active ingredients.

SB Pharmco agreed to plead guilty to a criminal felony for releasing adulterated drugs into interstate commerce, in violation of the Food, Drug, and Cosmetic Act. Under the plea agreement, the company will pay a criminal fine of $150 million, which includes forfeiting assets of $10 million. Under the civil settlement, GSK has agreed to pay an additional $600 million to the federal government and the states to resolve claims that it caused false claims for certain quantities of adulterated drugs to be submitted to government health-care programs.

— Wick Sollers and Eric Christensen, King & Spalding, Washington D.C.

November 16, 2010

Rocky Mountain Instrument to Pay $1 Million to Resolve False Claims Act Allegations

On October 29, 2010, Rocky Mountain Instrument Co. (RMI) announced that it has reached a settlement to resolve claims that it violated the False Claims Act. Specifically, RMI is alleged to have submitted claims for payment to various Defense Department prime contractors. The contractors, in turn, allegedly claimed reimbursement from the government for equipment manufactured overseas using sensitive technical data that was exported by RMI in violation of the Arms Export Control Act and International Traffic in Arms Regulations. RMI has agreed to pay the United States $1 million as part of its bankruptcy reorganization.

— Wick Sollers and Eric Christensen, King & Spalding, Washington D.C.

November 16, 2010

Two Florida-Based Fund Managers Charged with Facilitating Ponzi Scheme

On October 14, 2010, the Securities and Exchange Commission (SEC) charged two Florida-based hedge-fund managers, Bruce F. Prevost and David W. Harrold, and their firms, Palm Beach Capital Management LP and Palm Beach Capital Management LLC, with fraudulently funneling more than a billion dollars of investor money into a Ponzi scheme operated by Minnesota businessman Thomas Petters.

The SEC alleged that Prevost and Harrold falsely assured investors that their money would be safeguarded by a phony process of asset protection that facilitated Petters’s scheme. Petters’s “purchase order inventory financing” business involved no actual inventory. Instead, money only ever came directly from Petters, who sold promissory notes to feeder funds like those run by Prevost and Harrold. The SEC further alleges that Prevost, Harrold, and their firms received new notes in exchange for mature notes, instead of receiving cash payments.

The complaint, filed in the U.S. District Court for the District of Minnesota, alleges that Prevost, Harrold, and their two firms invested more than $1 billion in hedge-fund assets with Petters while accepting $58 million in fees. The SEC’s complaint charges Prevost, Harrold, and their firms with violations of section 17(a) of the Securities Act of 1933, section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and sections 206(1), 206(2) and 206(4) of the Investment Advisers Act of 1940 and Rule 206-4(8) thereunder. The SEC is seeking a court order of permanent injunction against Prevost, Harrold, and their firms, as well as an order of disgorgement, including prejudgment interest and financial penalties.

— Wick Sollers and Eric Christensen, King & Spalding, Washington D.C.

November 16, 2010

Former Countrywide CEO to Pay $22.5 Million Penalty

On October 15, 2010, the SEC announced that it had reached a settlement with former Countrywide Financial CEO Angelo Mozilo, and that the settlement had been approved by the District Court for the Central District of California.

Under the terms of the settlement, Mozilo will pay a $22.5 million penalty to settle SEC charges that he and two other former executives misled investors by assuring them that Countrywide was primarily a prime-quality mortgage lender, even though executives knew that Countrywide was writing increasingly risky loans. The SEC also alleged that Mozilo engaged in insider trading of Countrywide securities.

Mozilo’s penalty is the largest ever paid by a senior executive of a public company. Mozilo also agreed to $45 million in disgorgement of ill-gotten gains to settle the disclosure violation and insider-trading charges. The settlement permanently bars Mozilo from ever again serving as an officer or director of a publicly traded company.

In related actions, former Countrywide COO David Sambol agreed to pay $5 million in disgorgement, a $520,000 penalty, and a three-year officer and director bar. Former CFO Eric Sieracki agreed to pay a $130,000 penalty and to submit to a one-year bar from practicing before the commission.

— Wick Sollers and Eric Christensen, King & Spalding, Washington D.C.

Warrantless GPS Tracking Violates Fourth Amendment, D.C. Circuit Rules

The D.C. Circuit recently reversed the conviction of a defendant on whose automobile the government had installed a tracking device without a warrant to do so. United States v. Maynard, ___ F.3d ___, No. 08-3034 (D.C. Cir. Aug. 6, 2010). The defendant, Antoine Jones, was a suspected cocaine dealer. The police had at one time sought and obtained a warrant to install a global positioning device (GPS) on Jones’s car, but the warrant expired before they installed the device. The lower court admitted evidence obtained from the GPS during trial, and Jones was convicted of conspiracy to distribute and possess cocaine following an initial mistrial on the count.

On appeal, the government conceded that the police did not have a valid warrant, but argued that no warrant had been necessary. The government relied on the Supreme Court’s holding in United States v. Knotts, 460 U.S. 276 (1983), in arguing that the surveillance did not violate the Fourth Amendment because Jones had no reasonable expectation of privacy while traveling in an automobile on public roads. The D.C. Circuit distinguished Knotts, however, by noting that the surveillance in that case was discrete— i.e., limited to one trip between Minnesota and Wisconsin. The police department’s surveillance of Jones, by contrast, was continuous, lasting around the clock for nearly a month. The court held that Knotts did not control, and that the police department’s activity constituted a search because it violated Jones’s reasonable expectation of privacy. A reasonable person, the court held, does not expect that every movement he or she makes in his car over the course of a month will be tracked and recorded; rather, he or she reasonably expects these movements to be “disconnected and anonymous.” In reaching this holding, the court discussed but dismissed decisions in the Seventh and Ninth Circuits, which have held that prolonged GPS tracking is not a search.

The Supreme Court Strikes Down Chicago's Handgun Ban

With its decision in McDonald v. City of Chicago, No. 08-1521, March 2, 2010, the Supreme Court has struck down [PDF] Chicago’s laws banning private citizens from owning handguns, holding that the Second Amendment right to bear arms for the purpose of self-defense, recognized two years ago in District of Columbia v. Heller, is incorporated into the Fourteenth Amendment. A four-member plurality of the Court concluded, in an opinion by Justice Alito, that the due process clause of the Fourteenth Amendment incorporates the right. Justice Thomas opined that the privileges-and-immunities clause incorporates the Second Amendment right to bear arms.

Berghuis v. Thompkins: Miranda Warnings Revisited

In a 5–4 decision [PDF] in Berghuis v. Thompkins, No. 08-1470, June 1, 2010, authored by Justice Kennedy, the Supreme Court held that a suspect who wants to invoke his or her Fifth Amendment right to remain silent must do so unambiguously and that merely remaining silent is insufficient to invoke the right. Instead, to invoke the right, the suspect must make a “simple, unambiguous statement” that “he want[s] to remain silent or that he [does] not want to talk with the police.” Conversely, a suspect waives the right if he or she was given and understands the Miranda warnings and later makes a voluntary statement, regardless of how much time passes between the warnings and the statement. Because the defendant in this case did not unambiguously invoke the right to remain silent and then waived the right by speaking voluntarily after remaining largely silent during almost three hours of questioning, admission of his statement into evidence did not violate the Fifth Amendment. Justice Sotomayor wrote the dissent. She concluded that the government had not met its “heavy burden” of establishing waiver of the right to remain silent, pointing to the Court’s precedents, which suggest that silence in response to questioning is insufficient alone to find waiver, particularly when a statement is made only after a lengthy interrogation. She also disagreed with the Court’s holding that “a suspect must clearly invoke his right to silence by speaking.” This rule, she said, “invites police to question a suspect at length—notwithstanding his persistent refusal to answer questions—in the hope of eventually obtaining a single inculpatory response which will suffice to prove waiver of rights.” 

Supreme Court Rules in Honest Services Cases

With today’s opinions in Skilling v. United States, Black v. United States, and Weyhrauch v. United States, the U.S. Supreme Court has waded into the murky waters of the honest-services statute, 18 U.S.C. § 1346. Using Skilling as its primary vehicle, and issuing three opinions in Skilling alone, the Court surveyed the honest-services landscape from the pre-McNally era through the present, ultimately holding that section 1346 criminalizes only schemes to defraud that involve bribes or kickbacks. In limiting the construction of section 1346, the Court expressly rejected the government’s argument that the statute applies to nondisclosure cases (i.e., undisclosed self-dealing by public officials or private employees)—a holding that will surely have implications for prior convictions predicated on that theory of honest services.

Though it recognized merit in Skilling’s argument that section 1346 is unconstitutionally vague, the majority of the Court declined to find the statute void for vagueness, in favor of limiting it to what it called “the bribe-and-kickback core” of pre-McNally case law. Justice Scalia disagreed with the majority’s decision to limit the statute instead of invalidating it, calling this limitation “a dish the Court has cooked up all on its own.”

Notably, though the Court held that Skilling did not violate section 1346, it did not vacate his conspiracy conviction, instead remanding it for a determination of whether the error necessitates reversal.

In Black, the Court held that, in light of Skilling, the instruction regarding honest-services fraud given to the jury in Black was erroneous. The Court remanded the case for a determination of whether that error was harmless.

Finally, in a one-paragraph per curiam opinion, the Court also remanded Weyhrauch forconsideration in light of Skilling. 

We invite you to view the Court’s opinions at the following links:

Skilling
Black
Weyhrauch

Prosecutorial Misconduct Leads to Dismissal of Broadcom Criminal Charges

A recent ruling in United States v. Ruehle from District Court Judge Cormac Carney strongly condemned gross prosecutorial misconduct and acquitted Broadcom’s founder and an ex-CFO of criminal charges. The ABA’s Litigation News summarized this ruling and presented analysis regarding its likely impact, including commentary from our cochair Stacey Gottlieb and the chair of our Ethics and Professionalism Subcommittee, Professor Bennett Gershman.

DOJ Issues New Guidance on Criminal Discovery Practices

Early this year, Department of Justice Deputy Attorney General David Ogden issued three memoranda containing new guidance from the DOJ concerning criminal-discovery practices. DAG Ogden indicated that prosecutors should look to these memoranda “to help assure that they meet discovery obligations in future cases.”

The full text of these memoranda can be found at:
Issuance of Guidance and Summary of Actions Taken in Response to the Report of the Department of Justice Criminal Discovery and Case Management Working Group 

Requirement for Office Discovery Policies in Criminal Matters 

Guidance for Prosecutors Regarding Criminal Discovery 

U.S. v. Stein: Victory for Corporate Defendants

The Justice Department has declined to petition the U.S. Supreme Court to review the Second Circuit’s ruling in U.S. v. Stein. This lets stand the appellate court’s decision that the Justice Department had violated the defendants’ Sixth Amendment rights by pressuring their employer, KPMG, under the so-called Thompson Memorandum to restrict corporate advancement of defense attorneys’ fees.

Stein involved the prosecution of a number of KPMG executives and was once billed by the Justice Department as the largest tax fraud prosecution in history. The U.S. District Court for the Southern District of New York originally dismissed the indictments of 13 former KPMG executives, finding in a case of first impression that prosecutors had engaged in egregious violations of the defendants’ constitutional right to counsel. Specifically, under the threat of imminent indictment, KPMG had agreed to cooperate with the government in exchange for leniency. As part of that promise, the company undertook a number of actions at the behest of prosecutors, including refusing to pay the legal costs of its partners and employees unless they agreed to waive their rights against self-incrimination and submit to voluntary interviews with the government. The district court found that, by pressuring KPMG to withhold advancement of attorney fees, the Justice Department had unlawfully interfered with the defendants’ legitimate right to counsel.

The Second Circuit affirmed the district court’s decision, holding: “In a nutshell, the Sixth Amendment protects against unjustified governmental interference with the right to defend oneself using whatever assets one has or might reasonably and lawfully obtain.” The court of appeals also noted pointedly that “if it is in the government’s interest that every defendant receive the best possible representation, it cannot also be in the government’s interest to leave defendants naked to their enemies.” The deadline for the Justice Department to file a petition for writ of certiorari to the Supreme Court passed in late November with no action taken.

A much more limited version of the case is still underway before Judge Kaplan. At this time, only three former KPMG executives, who were not adversely affected by the government’s misconduct, and one ex-partner at Sidley Austin, are facing charges based on the allegedly fraudulent tax shelters. In the meantime, the Justice Department has replaced the Thompson Memorandum with new guidance, known as the Filip Memorandum, expressly noting that a company’s decision whether to indemnify or advance attorney fees to its officers or employees shall generally not be a relevant factor in deciding whether to credit a company for its cooperation.

DOJ Revises Policies for Prosecuting Business Organizations

On August 28, 2008, Deputy Attorney General Mark Filip announced the U.S. Department of Justice's revised policy for investigating and charging corporation, which are known as “Principles of Federal Prosecution of Business Organizations.” Unlike previous articulations of the Department’s policy (i.e.., the Thompson and McNulty Memorandums), the new principles are incorporated into the U.S. Attorneys’ Manual.

The revisions come after many organizations (including the ABA) have sharply criticized the government for pressuring corporations (under the Justice Department’s predecessor policies) to waive the attorney-client privilege and work product doctrine to gain credit for “cooperation.” The Justice Department undertook these revisions as Congress scrutinized this practice. Indeed, the United States House of Representatives passed legislation in 2007 to protect these bedrock privileges, and a similar bill remains under consideration by the Judiciary Committee of the United States Senate.

Among the significant changes effected by the Department’s new policy is that it is the disclosure of relevant facts—not the waiver of privileges—that is appropriate for consideration in determining a corporation’s cooperation. Under the revised charging principles, federal prosecutors may not request privileged information except in two specific circumstances (invocation of advice of counsel defense or communications in furtherance of crime or fraud). Federal prosecutors also may not consider a corporation’s advancement of attorneys’ fees to its employees or whether the corporation has entered into a joint defense agreement in evaluating "cooperation." Consideration of whether employees are disciplined or terminated is permitted only for the purpose of evaluating the corporation’s remedial measures or its compliance program.

SEC Issues Enforcement Manual

On October 6, 2008, the United States Securities and Exchange Commission ("SEC") issued its first "Enforcement Manual," providing insights into the SEC’s enforcement policies and processes. Of particular interest is the section on Privileges (Section 4, pp. 92-108), and specifically, Section 4.3 (p. 98) on Waiver of Privilege. The SEC Enforcement Manual sets forth the policy view that cooperation need not include voluntary waiver of privileged information as long as all relevant information is disclosed. It further states that the staff is directed not to ask a party to waive privileged information, but does not indicate precisely where the authority is to make the determination whether or not to seek a waiver. "The staff must respect legitimate assertions of the attorney-client privilege and attorney work product protection, unless a party voluntarily chooses to waive privilege.

As a matter of public policy, the SEC wants to encourage individuals, corporate officers and employees to consult counsel about potential violations of the securities laws. A key objective in staff’s investigations is to obtain relevant information, and parties are, in fact required to provide relevant information in response to SEC subpoenas. Both entities and individuals, however, may provide significant cooperation in investigations by voluntarily disclosing relevant information. That voluntary disclosure of information need not include a waiver of privilege to be an effective form of cooperation, as long as all relevant facts are disclosed." Id. "The staff should not ask a party to waive the attorney-client or work product privileged and is directed not to do so. All decisions regarding a potential waiver of privilege are to be reviewed with the Assistant supervising the matter and that review may involve more senior members of management as deemed necessary." Id. at p. 99.

Federal Rule of Criminal Procedure 32(h): R.I.P.

Near the end of its last term, the Supreme Court issued a little-noticed opinion on sentencing issues. Irizarry v. United States addresses whether a district judge need follow Federal Rule of Criminal Procedure 32(h) – a rule promulgated before the Court declared in United States v. Booker that the Federal Sentencing Guidelines were advisory.

Justice Revising Principles of Prosecution of Business Organizations

On July 9, 2008, as the U.S. Senate Judiciary Committee was conducting an oversight hearing on the Justice Department, Attorney General Mukasey announced that the Department of Justice is in the process of revising the Department’s Principles of Federal Prosecution of Business Organizations, also known as the "McNulty Memorandum." By letter of the same date, July 9, 2008, Deputy Attorney General Mark Filip wrote to Hon. Patrick Leahy (Chair) and Hon. Arlen Specter (Ranking Minority Member) of the Senate Judiciary Committee announcing certain changes that the Department of Justice intends to make to the Principles governing federal prosecution of corporations. The changes include:

• Cooperation will not require waiver of attorney-client privileged or work product information.
• Advancement of attorneys’ fees to employees will not be taken into account in evaluating cooperation.
• Entering into a joint defense agreement will not be considered in evaluating cooperation.
• Federal Prosecutors will not consider whether the corporation has sanctioned employees in evaluating cooperation.

The Filip letter came after the Department of Justice requested an opportunity to address the Senate Judiciary Committee’s concerns about the McNulty Memorandum and before the Committee marked up the Attorney Client Privilege Protection Act of 2008, of which Senator Specter was the primary sponsor. The Department’s comments were due on July 7th. When Senator Specter asked the Attorney General about this issue at the hearing on July 9th, the Attorney General announced that revisions were being considered. The letter from Deputy Attorney General Filip was sent that day.

The following day, July 10, 2008, Senator Specter sent a letter in response. In this letter, Senator Specter makes clear that his recommendation to Chairman Leahy is that the Committee not delay consideration of the legislation. Senator Specter also asks Mr. Filip for a more explicit statement on the "Filip memorandum" and requests that the Committee be informed of specific cases pending under the McNulty memorandum.

Supreme Court Offers New Guidance on Money Laundering Statute

On June 2, 2008, the Supreme Court decided Cuellar v. United States, narrowing the reach of the federal money laundering statute, 18 U.S.C. § 1956. At issue was the meaning of the statute’s prohibition against transporting money from the United States to another country "knowing that the [funds] involved in the transportation . . . represent the proceeds of some form of unlawful activity and knowing that such transportation . . . is designed in whole or in part . . . to conceal or disguise the nature, the location, the source, the ownership, or the control of the proceeds of specified unlawful activity." Petitioner was convicted under this provision of the money laundering statute after being stopped in Texas driving toward the Mexican border; police discovered $81,000 in cash in his car’s secret floorboard compartment. The Fifth Circuit, sitting en banc, affirmed the petitioner’s conviction, holding that his actions in concealing the cash fell within the statute’s ambit.

Procurement and Grant Fraud: White Paper

JULY 9, 2007—The National Procurement Fraud Task Force Legislation Committee released a “white paper” including several legislative proposals seeking to improve the Government’s detection, prevention and prosecution of procurement and grant fraud. The Department of Justice established the task force in 2006 as a partnership among Federal agencies responsible for investigating and prosecuting criminal violations concerning contracting and grant activities.

The task released the “white paper” to detail three areas of reform it believes are necessary to remedy vulnerabilities: ”1) improved ethics and internal controls among contractors and grantees; 2) improvements in the government’s ability to prevent and detect procurement and grant fraud; and 3) upgraded prosecution and adjudication resources.”

United States of America v. Jeffrey Stein, et al.

U.S District Judge Lewis A. Kaplan dismissed charges against 13 former KPMG employees in what the government had described as the largest criminal tax case in U.S. history. Judge Kaplan found that he had no choice but to dismiss after finding last year that the government violated the former executives’ constitutional rights by pressuring KPMG to cut off the defendants’ legal fees.

Panetti v. Quarterman

On June 28, 2007, the United States Supreme Court blocked the execution of Texas death-row inmate Scott Panetti because lower courts failed to consider whether his mental illness prevented him from understanding the reason for his execution. The Court reached this conclusion despite the fact that evidence concerning Panetti’s schizophrenia did not arise until his execution date was set.

Rita v. United States

In United States v. Booker, the Supreme Court declared the United States Sentencing Guidelines to be advisory, rather than binding, and concluded that appellate courts must review sentences for “reasonableness.” Resolving a disagreement between the Circuit Courts, the Court recently held in Rita v. United States that appellate courts may find sentences imposed within the Guidelines to be presumptively “reasonable.”