The Criminal Lawyer

The DOJ got an indictment this week against a Hitachi executive, in the government’s ongoing prosecution of alleged price-fixing in the LCD monitor industry.

We first blogged on this back on November 13th, when Sharp, LG Display and Chunghwa all pled guilty to price fixing, agreeing to pay $585 million in fines. Since then, Chungwha executives also pled guilty during February.

After the Chungwha executive pleas, Hitachi itself agreed in March to plead guilty and pay $31 million in fines.

Breaking from the pattern, however, rather than a Hitachi executive subsequently pleading guilty, the feds went ahead and indicted him.

According to a DOJ press release, Tuesday’s indictment charges a Japanese national, Sakae Someya, who was an executive at Hitachi Displays Ltd. Mr. Someya is accused of taking part in a larger global conspiracy to fix the prices of LCD panels sold to Dell.

Mr. Someya is accused of agreeing to charge set prices for the screens, sharing sales information to ensure everyone was complying with the agreed prices, and trying to keep the arrangement secret. These are Sherman Act charges, with a max of 10 years in prison plus a max fine of the greater of $1 million, double the gain, or double the loss to victims.

We wonder how much of the allegedly criminal conduct is simply normal business practice in Japanese culture. After all, the keiretsu distribution system used by Japanese industry looks very much like price fixing to Western eyes.

It certainly looks to us as though the DOJ’s Antitrust Division is busting through decades of resistance to offshore enforcement of U.S. antitrust rules. Whether it is proper to impose U.S. laws on a very foreign culture… that’s another question entirely. What do you think?

We try not to report here on matters that everyone else in the world is already talking about. That’s why we’ve said nowt on Bernie Madoff and other headline-grabbing stories. For the same reason, we decided yesterday not to mention the DOJ’s request to dismiss the charges in its prosecution of former Alaska Sen. Ted Stevens — everyone else was already reporting it. And we’ve already discussed the DOJ’s misconduct at length here and here.

But we wanted to point out a big point that the media seem to be missing. Most reports see this as a vindication of former Sen. Stevens, and a sign that prosecutorial misconduct will not be tolerated by the DOJ. In fact, however, the DOJ’s action means anything but that.

Stevens was convicted last October after a jury trial in D.C., during which the government withheld important Brady material — the judge said the prosecutors did so intentionally, and an FBI agent later confirmed that it was intentional. In addition, the prosecutors had a witness who, when they found out his testimony could clear Stevens of any guilt, they sent home to Alaska to conceal him from the defense. There were also inappropriate dealings between FBI agents and the government’s star witness, including an apparent sexual relationship.

The prosecutors continued to screw up, failing to turn over documents to the defense as ordered by the judge after all this came out. Understandably, the prosecutors were held in contempt, and taken off the case.

The case had gone from a trumpeted victory for the DOJ, to a squalid embarrassment.

So now, yesterday, the DOJ filed a motion to have all the charges against Sen. Stevens dismissed. They’re holding it out as a heroic act, that they’re doing the just and proper thing, that AG Holder is sending a message to prosecutors at the DOJ that further misconduct will not be tolerated.

We call shenanigans.

This dismissal of the charges is nothing more than an attempt to sweep the whole nefarious affair under the rug. The case goes away, so the problem goes away. There will be no further need for the scrupulous investigation of what went wrong at Justice. There will be no need to hold costly and embarrassing internal reviews. There will be no need for further media scrutiny.

The DOJ should not be permitted to escape whipping, by its own unilateral decision to drop a case. That’s not good enough.

This prosecution of this case was bizarre from the get-go. It was rushed to indictment hastily, mere days before the primaries in an important election (in violation of DOJ rules prohibiting indictments that could affect the outcome of an election, by the way). The prosecutors intentionally withheld evidence that seems to show the Senator didn’t commit the crime he was accused of. They violated court orders. They tried to hide a key witness from the defense. And ironically, these were prosecutors in the Public Integrity unit, of all things.

Now they want to make it all go away. Here’s hoping that Congress, the courts and the media see through this little ploy, and keep on investigating just what the heck is going on in the DOJ these days.

What with white-collar crime being such big news these days, it was only a matter of time: The Hollywood Reporter reports that the USA Network is about to pick up a new series, “White Collar.”

Now that USA’s popular detective series “Monk” is ending, the cable network is looking for a new original series to lead in to crime comedy “Psych.” “White Collar” is described by the network as being “about the unlikely partnership of a con artist and an FBI agent who have been playing cat and mouse for years.”

It sounds to us like a takeoff on “Catch Me If You Can,” the 2002 dramedy based on real-life con man Frank Abagnale, Jr. Though entertaining, the movie wasn’t the most socially relevant story when it came out. But now that everyone’s saturated with Madoff (a topic we’ve studiously avoided, since everyone else is already talking about it), and as it looks like prosecutors are going to be announcing even more con and scam cases in the coming months, the timing certainly seems right now.

The pilot was green-lighted back in October. It stars Matthew Bomer (pictured, left) as the con artist, and Tim DeKay (right) as the FBI agent. Bronwen Hughes (“The Kids in the Hall,” “The L Word,” “Forces of Nature”) directed.

We’ve written about an upcoming wave of white-collar prosecutions, especially against Wall Street types. But wait, there’s more: the feds are now about to start prosecuting doctors.

The Department of Justice and the Inspector General of the Department of Health and Human Services are about to start prosecuting physicians who receive inappropriate incentives from manufacturers and sellers of pharmaceuticals and medical devices. Doctors who have accepted such incentives face criminal prosecution, as well as civil fines and being barred from participation in Medicare and Medicaid programs. Doctors who have received significant incentives from medical marketers might want to seriously consider consulting a good white-collar defense attorney.

Of course, incentives are a commonplace in medical marketing. And of course the purpose is to somehow influence which drug a doctor intends to prescribe, or what equipment a doctor uses. A wide range of incentives are offered, not just the free pens, prescription pads and trinkets routinely handed out. Expensive equipment can be provided for free or at a deep discount, in return for minimal obligations such as a product recommendation or letting one’s office be used (albeit rarely) as a training facility. In extreme cases, sellers actually pick up the tab for travel to seminars or other expenses, pay “advances on royalties” for helping develop products, or simply pay cash kickbacks.

In the past, it has usually been the manufacturers who got prosecuted for making kickbacks or bribes, often paying millions in fines and undertaking the supervision of monitors. What’s new now is the federal focus on the doctors themselves, on the receiving end.

Many doctors may not think they’re doing anything wrong by accepting incentives from sales folk. After all, it’s the norm. And so what if a doctor got a free trip to the conference, if he continues to make his prescription decisions independently and based on the actual needs of the individual patient?

The government sees this as criminal partly because such payments are opaque. A patient might not be so trusting of a prescription for FancyPharm if he knew his doctor was getting comped by that company. A patient might not have the same confidence in her eye surgeon if she knew that he didn’t actually select and purchase his laser equipment himself, but instead got it for nothing.

Another reason is the perception that medicines and procedures would be improperly prescribed, because the incentives had an undue influence on the doctor’s decisions. Unnecessary expense and harm could result.

The main tool that prosecutors have here is the federal Anti-Kickback Statute (formally known as “the Medicate and Medicaid Patient Protection Act of 1987,” 42 U.S.C § 1320a-7b). It basically provides up to 5 years imprisonment and $25,000 in fines.

The feds are most likely to go after those who allowed marketers to pay for their consulting fees, travel to seminars or other expenses, or who accepted advances or payments, or who accepted large rebates or extreme discounts without proportionate consideration, or otherwise received remuneration that could have influenced their decision making.

Lewis Morris, chief counsel for the Inspector General, told the New York Times last week that “what we need to do is make examples of a couple of doctors, so that their colleagues see that this isn’t worth it.”

When law enforcement says they are going to make examples of people, one might think that this means they will carefully pick and choose their cases, cherry-picking only the most obviously criminal acts with the strongest evidence. However, in real life, that’s not always the case.

Especially in cases like these, where the evidence tends to be more circumstantial (absent clearly incriminating admissions, recordings or emails), and where the conduct is very often in the gray area of culpability, prosecutors may not have many rock-crusher cases in the first place. And they certainly won’t have enough cases at first to do much cherry-picking in any event.

No, they have announced their desire to make examples of people, and we predict they will go after whatever crosses their desk.

Cases are going to come from marketers who got caught trying to bribe someone else, who are then flipped to inform (and wear a wire) against the other doctors they deal with. Those are the easiest cases for law enforcement to initiate. Other cases may come from third-party complaints or referrals, but those are rare in secret one-on-one deals such as those being investigated here.

If any doctors out there think they might have had dealings with a marketer that could get them in trouble, it might be wise to get counsel from a good white-collar defense attorney sooner rather than later.

Judge Posner issued a scathing decision yesterday for the 7th Circuit, reversing a jury’s fraud conviction and directing an acquittal. Why? Because the only fraudulent misrepresentations were those of the prosecutor.

The decision is great, and we plan to use some of it in our own future arguments. Sadly, it is just the latest in a string of recent cases where federal prosecutors — uncharacteristically — have far overstepped the bounds. We hope it’s not becoming a trend.

In U.S. v. Farinella, the government accused Farinella of fraudulently misleading consumers by slapping a new label over the “best when purchased by” date. The Justice Department alleged that this altered the dates on which “the dressing would expire.”

But the Justice Department was itself misleading when it said so. The dressing had a very long shelf life indeed — in fact, it has no expiration date. There is no time after which one shouldn’t eat it. The “best when purchased by” date was merely a marketing ploy. “For all we know,” Posner wrote, “the date is determined less by a judgment about taste than about concern with turnover.” Nevertheless, the government consistently referred to the date as the “expiration date,” routinely misleading the jury and the court.

Posner made an outstanding observation during his discussion of the government’s expert testimony. They had called an FDA employee, whose testimony strongly implied that changing food labels requires FDA approval. But though that may be the expert’s understanding, it wasn’t actually a requirement.

For it “to be a lawful predicate of a criminal conviction,” Posner wrote, it would “have to be found in some statute or regulation, or at least in some written interpretive guideline or opinion, and not just in the oral testimony of an agency employee.”

He then gave us white-collar defense attorneys a wonderfully quotable ruling: “It is a denial of due process of law to convict a person of a crime because he violated some bureaucrat’s secret understanding of the law. The idea of secret laws is repugnant. People cannot comply with laws the existence of which is concealed.”

There was no evidence of misbranding, and so the defendant had to be acquitted. However, even if there had been evidence, the Circuit would have reversed and ordered a new trial, because the Justice Department’s misconduct was beyond the pale.

As already pointed out, the prosecution repeatedly misrepresented the facts, referring to the “best when purchased by” date as the “expiration date.” In her closing argument alone, the prosecutor substituted that phrase 14 times.

The prosecutor further misled the jury when she told them that the “best when purchased by” date “allows a manufacturer to trace the product if there is a consumer complaint, if there is illness, if there is a need to recall the product.” That’s not remotely true, and there was no public safety issue with what the defendant did.

She made several more arguments hinging on implied threats to public safety: “If what he did was business as usual in the food industry, I suggest we stop going to the store right now and start growing our own food. . . . In spite of all this talk about the quality of the dressing, I don’t see them opening an of these bottles and taking a whiff. . . . [The defendant was indifferent to] safety. . . . The harm caused by the fraud was to public confidence in the safety of the food supply.” She called the still perfectly fine bottles “truckfulls of nasty, expired salad dressing.” She said that after the “expiration date” the dressing was no longer “fresh,” so the defendant “had to convert the expired dressing into new, fresh product.”

During rebuttal arguments, the prosecutor said “Ladies and gentlemen, don’t let the defendant and his high-paid lawyer buy his way out of this.” Then she went on to say “Black and white is our system of justice, ladies and gentlemen. You have to earn justice; you can’t buy it.” The implication that the defendant might be trying to bribe his way to an acquittal should have resulted in a warning of mistrial, but only resulted in sustained objections.

The Justice Department repeated its misrepresentations in its brief, using the phrase “expiration date” and hinting at public safety concerns. But the trial prosecutor’s misconduct alone was sufficient for the Circuit to order a new trial, and the only reason they didn’t do so was because there was no evidence in the first place, resulting in a directed acquittal.

“That does not detract from the gravity of the prosecutor’s misconduct and the need for an appropriate sanction,” Posner was quick to point out, however. “The government’s appellate lawyer told us that the prosecutor’s superior would give her a talking-to. We are not impressed by the suggestion.”

Posner finished his opinion with a nice kicker: “Since we are directing an acquittal on all counts, the sentencing issues are academic and we do not address them, beyond expressing our surprise that the government would complain about the leniency of the sentence for a crime it had failed to prove.”

Ouch.

A couple of weeks ago, we were at a luncheon with some white-collar defense attorneys, listening to a presentation by the acting U.S. Attorney, Lev Dassin. Mr. Dassin let us know that, although he couldn’t spill any particulars, there are a number of ongoing investigations at the Southern District of New York right now, which he expected to provide a lot of work for us later this year.

He also confirmed our impression that there is a lot of political pressure right now, causing prosecutors and law enforcement to focus more assets on white-collar crime. Many see the current economic downturn as the result of Wall Street skullduggery, so law enforcement is being tasked with doing something about it.

Our biggest fear is that people who did nothing illegal may get caught up in the frenzy to blame people for the recession. A federal criminal investigation is a serious matter, and even people who did nothing wrong can wind up in prison because of how they behaved during the investigation.

Still, a lot of white-collar crime is now coming to light these days, because of the hurting economy. Ponzi schemes and other fraudulent investments are being caught out left and right, as investors start trying to pay bills by cashing out their accounts, only to discover that their money isn’t there.

Furthermore, PricewaterhouseCoopers today published a white paper, “Boom Time for White Collar Crime,” predicting that the economy will cause greater numbers of people to commit white-collar crimes, such as embezzlement and fraud.

PwC partner Andrew Gordon told GAAP web that “sales targets seem ever more out of reach, bonuses are under threat, and people’s reputations and livelihoods are at stake. Together, these can be powerful motives for individuals to cross the line.”

The white paper predicts an increase in specific types of fraud: data theft by criminal organizations, “rogue traders” in corporate finance departments, and fraudulent mis-reporting of business numbers to make companies appear better to investors. The paper also sees more Ponzi schemes and fraudulent investment schemes collapsing as investors try to cash out.

So criminals caused a bad economy which is causing more criminals? That sounds a little simplistic.

Of course, the economy didn’t go south because a few Wall Streeters went around defrauding investors. The economy tanked for a lot of reasons, but mostly because lenders stopped believing they’d get paid back. Institutions with the most leverage — financial institutions particularly — got their margins called and couldn’t get new credit, a deadly combination. No amount of government stimulus would change that, without a condition that capital infusions to lenders must turn into loans. The government didn’t make such conditions, so lenders just hoarded their cash to sit out the storm. The credit market, already dying, was pretty much killed. The U.S. Congress and the new Administration have since then acted fairly consistently to prevent lenders from regaining sufficient confidence to start lubricating the economy again. In modern economics, perception is everything — if you are perceived to have liquidity, even if you are at risk, you will have liquidity (see JPMorgan Chase this time last year), but if you are perceived to be at risk even though you aren’t, your liquidity dries up (see Bear Stearns this time last year). Once lenders start perceiving that they will get their money back, things will start picking up. This crisis of confidence was caused, not by white-collar criminals, but by Clinton-era directives to make mortgages to people who can’t pay them, by borrowers and lending agents who cashed in on the resulting laxness, and by an ever growing house of cards that was destined to collapse.

So the economy didn’t go south because of criminals. Similarly, a worse economy doesn’t necessarily translate into more crimes being committed. People who would steal in bad times would have stolen in good times, too. White-collar types aren’t exactly Jean Valjean, stealing a crust of bread so their families don’t starve. No, white-collar crime requires a combination of opportunity and character traits, neither of which correlate with economic pressures.

What is true, however, is that more white-collar prosecutions are going to happen because an under-informed public and its politicians are screaming for blood. Unfortunately, we do not believe that all prosecutors out there understand the complexities and realities of the financial world well enough to accurately sift the guilty from the merely unlucky. Some innocent people are going to get caught in this ever-widening net.

A “Martha Stewart moment” is that unhappy moment during a white-collar investigation when one’s client misleads the investigators. A client who may have escaped prosecution entirely has now practically ensured that she will be prosecuted. If his client must speak with investigators, a good attorney tries to prepare her well, to prevent any Martha Stewart moments from happening.

During the recent SEC investigation of a possible $8 billion fraud at Stanford International Bank, they interviewed Stanford Financial Group’s chief investment executive, Laura Pendergest-Holt (pictured). She was accompanied to the interview by Proskauer Rose partner Thomas Sjoblom, a very good and experienced attorney.

Last Thursday, the investigation went criminal, as Pendergest-Holt was charged with a federal crime. She’s alleged to have had a Martha Stewart moment, lying to the SEC about her knowledge of Stanford’s investments, and about not meeting with other Stanford people to prepare for her meeting with the SEC.

How could that happen, when she had such a good lawyer?

The answer appears to be (first pointed out by Zach Lowe) that Sjoblom wasn’t actually her lawyer. He represented Stanford, not its executive.

This is something that comes up all the time in the white collar world. When a corporation is under investigation, it hires lawyers to protect its interests. The interests of its executives and employees are not always the same — in fact they are rarely the same — and so to avoid potential conflicts of interest they usually get separate counsel.

If the same law firm represented a corporation and its CIO, somewhere down the line the CIO might decide that it’s in her interest to testify against the company. That would cause a conflict of interest, so the company will usually insist that she get her own lawyer.

If the corporation’s attorneys speak with the CIO, they must make it very clear that they only represent the company, and do not represent the individual. In this case, Sjoblom made it very clear at least twice during the SEC meetings that he was Stanford’s lawyer and not Pendergest-Holt’s. It is not yet known whether he made this clear to Pendergest-Holt (he did not return Lowe’s calls seeking comment, but commenting is probably improper anyway), though it is hard to imagine that he did not do so.

Sjoblom had a bit of a dilemma in that situation, regardless. As Stanford’s lawyer, he probably needed to get information from Pendergest-Holt. And he probably needed to cooperate fully with the investigators. He would have had to make it perfectly clear to her that, as he did not represent her, anything she said to him would not be privileged. (Well, Stanford could assert a privilege perhaps, but Pendergest-Holt could not.)

If Pendergest-Holt reasonably believed that Sjoblom represented her, and then Sjoblom shared her information with Stanford or the SEC, then Sjoblom could well be liable in a civil suit. Again, there is no reason to believe that such is actually the case, and this is only mentioned to stress the challenges presented to the corporation’s attorney in a situation like this.

How does the company’s lawyer get information out of its CIO, then? If the lawyer tells the CIO he doesn’t represent her, and nothing she says is going to be confidential, and in fact he’s obligated to share her information, then she’s not going to want to talk. The solution is simple and cold: the lawyer must inform the CIO that if she doesn’t talk she will be fired.

Given all the warnings that must have been given, alerting her that Sjoblom did not represent her, it is strange to see that she didn’t get her own counsel. Nevertheless, Pendergest-Holt somehow appeared before the SEC without being represented by her own lawyer. She didn’t have someone watching out for her own interests, and now she’s been arrested and charged with a federal crime as a result.

She has lawyers now, of course. She is represented by the firm of Parsons Behle & Latimer in the civil SEC matter, and by Houston’s Dan Cogdell in the criminal matter. Still, we have to wonder why she waited until it was too late before she got her own counsel.

Memo to executives and employees: Get your own lawyers!

18 U.S.C. § 1346 expands the definition of mail & wire fraud to include “a scheme or artifice to deprive another of the intangible right of honest services.” That’s short and sweet, but what does it mean?

The courts have been left to define the crime for themselves. Unfortunately, they differ wildly in what the theft of honest services means. The Fifth Circuit says it’s only a crime if the deprivation of services was also a crime under state law. The Seventh Circuit says the crime is when someone abuses their position for private gain. The Third Circuit says gain is irrelevant.

In general, they agree that employees and public officials have a duty to act only in the best interest of their employers and constituents. But there are lots of ways to act otherwise, and the courts seem to agree that not all of them ought to be criminalized. There is a spectrum of behavior, ranging from the socially acceptable to the abhorrent. Where the line ought to be drawn is undefined and uncertain.

So the Supreme Court finally had a chance to clear it all up, define what “honest services” means, and give straightforward guidance to the courts and to all the employees and officeholders out there. Sorich v. United States, No. 08-410 came to the Supremes on a cert petition, asking them to define the crime and settle the issue at last. That’s what the Supreme Court likes to do, after all — if the circuits can’t agree, it the Court’s job to define the correct approach.

Instead, the Supremes punted, and denied cert.

Scalia wrote an intense dissent, pointing out that this is precisely the kind of issue that the Court ought to resolve, that the split among the circuits is causing confusion in the law, and that real injustice is resulting. “It seems to me,” he wrote, “quite irresponsible to let the current chaos prevail.” We can’t help but agree.

“If the honest services theory… is taken seriously and carried to its logical conclusion,” Scalia pointed out that all kinds of actions would be criminal. Not all ought to be. “A state legislator’s decision to vote for a bill because he expects it will curry favor with a small minority essential to his reelection,” a perfectly normal and expected aspect of electoral politics, would be a federal crime. “A mayor’s attempt to use the prestige of his office to obtain a restaurant table without a reservation,” a perhaps obnoxious act, but one hardly worthy of punishment, would also be included. “Indeed, it would seemingly cover a salaried employee’s phoning in sick to go to a ball game.”

“What principle it is that separates the criminal breaches, conflicts and misstatements from the obnoxious but lawful ones, remains entirely unspecified.” Failing to define what the crime actually means invites unjust prosecutions by “headline-grabbing prosecutors.” Furthermore, nobody knows if their actions would be considered criminal or not, and “it is simply not fair to prosecute someone for a crime” that won’t be defined until the judge’s ruling that sends him to jail. “How can the public be expected to know what the statute means when the judges and prosecutors themselves do not know, or must make it up as they go along?”

Scalia closed with an excellent dictum, quoting from another useful dissent — that of Hugo Black in Green v. United States, 365 U.S. 301, 309 (1961) — “Bad men, like good men, are entitled to be tried and sentenced in accordance with law.” It is truly unfortunate that the Supreme Court has passed on an excellent opportunity to ensure just that.

We took an unexpected trip out of state until yesterday, and so haven’t had a chance to catch up on the latest in the ongoing saga involving allegations of prosecutorial misconduct in the Sen. Ted Stevens case. When last we left off, District Judge Emmet Sullivan had ordered a status hearing for last Friday, the 13th.

In Friday’s status hearing, Judge Sullivan held four DOJ lawyers in contempt, for failing to turn over 33 documents to the defense. These documents pertained to December’s whistleblower claims of FBI agent Chad Joy, which had raised concerns of prosecutorial misconduct.

The judge had ordered these documents turned over on January 21. At first, the prosecutors said the documents were protected by the work-product doctrine. But then, even though they later determined that the doctrine did not apply, they still didn’t hand them over to the defense. At the hearing, the DOJ couldn’t give a good reason for the non-production, and so the judge held the lawyers in contempt.

The contempt order was imposed against William Welch II, the chief of the Public Integrity Section of the DOJ which had prosecuted Sen. Stevens. Also held in contempt were Brenda Morris, the section’s deputy chief and the lead prosecutor at trial; Patricia Stemler, chief of the Appellate Section of the Criminal Division; and Kevin Driscoll, a trial attorney with the Public Integrity Section. The order against Driscoll was revoked the following day, however, as he had only recently joined the prosecution team, and had not been a party to the relevant pleadings. Judge Sullivan stated that he would not impose sanctions until the case was over.

On Monday, Welch announced that the trial team of Brenda Morris, Nicholas March and Edward Sullivan were off the case, and would have no further role in the litigation of the charges of prosecutorial misconduct. This only makes sense, as they are necessarily witnesses to their own conduct, and will probably need to testify themselves. What is surprising is that the DOJ waited so long to take this simple action.

Welch added that the government will now turn over internal DOJ documents related to agent Joy’s allegations of misconduct, including memos and emails of the trial prosecutors. Again, what is surprising is not that this material is being disclosed, but that it took so long to do so. This notwithstanding Welch’s statement that the DOJ “understands that the interests of the parties and the public will be advanced by a prompt airing of these claims, and that additional delay relating to the whistleblower-status issue does not advance that cause.”

First, a recap: Last July, former Alaska Senator Ted Stevens was indicted on seven counts of failing to report gifts he’d received, including renovations to his house in excess of what he’d paid for, but mostly goods and services from oil tycoon Bill Allen. Sen. Stevens pled not guilty, and with an election coming up he demanded a speedy trial to clear his name. The trial began on September 25.

Soon after the trial began in Washington, D.C, the prosecutors came under fire for sending one of their witnesses home to Alaska without letting the judge or the defense know. The witness, Rocky Williams, then contacted the defense team and told them that he’d spent a lot less time working on Stevens’ home than the renovation company’s records indicated. That severely weakened the prosecution’s argument that the company had spent its own money doing the renovations.

Then it came out that the government had withheld Brady material. FBI records containing prior statements of a witness had been handed over to the defense, but the prosecutors — Brenda Morris, Nicholas Marsh and Joseph Bottini (pictured) — had redacted parts of the statements that were potentially exculpatory. This wasn’t affirmatively exculpatory material, but it was impeachment material, and should have been turned over.

A memo from Bill Allen was discovered during trial, in which Allen stated that Sen. Stevens probably would have paid for the goods and services, had he been asked to. The prosecution claimed that their failure to disclose it beforehand was an inadvertent oversight.

The judge was reportedly angered by all this, stating with respect to the Brady material that “it strikes me that this was probably intentional. I find it unbelievable that this was just an error.” Nevertheless, the judge did not declare a mistrial, and on October 27 the jury convicted Stevens on all seven counts.

Then in late December, FBI agent Chad Joy went public with the accusation that the prosecutors really had intentionally withheld exculpatory evidence, and had intentionally sent Rocky Williams back to Alaska to conceal him from the defense.

Now, as the New York Times reports, Joy has come forward with additional allegations of prosecutorial misconduct.

In his latest whistleblower filing, Joy claims that another FBI agent conspired with the prosecutors “to improperly conceal evidence from the court and the defense,” as the Times puts it.

“I have witnessed or learned of serious violations of policy, rules and procedures, as well as possible criminal violations,” Joy stated in his affidavit.

With respect to Rocky Williams, Joy stated that the witness was sent back to Alaska not because of ill health (the reason given by the prosecution), but because after preparing him for testimony, the prosecutors decided that his testimony would help the defense case. Joy stated that Nicholas Marsh came up with the idea, after Williams fared poorly in a mock cross-examination.

Joy stated that the prosecution team also tried to hide the Bill Allen memo that stated that Sen. Stevens would have paid for the items if he’d been asked to. Rather than an accident, as prosecutors claimed at trial, Joy now alleges that it was intentionally withheld.

In addition, Joy claims that fellow FBI agent Mary Beth Kepner had an inappropriate relationship with the star witness, Bill Allen. She almost always wore pants, he said, but on the day that Bill Allen testified, Joy says she wore a skirt, which she described as “a present” to Allen. Joy also states that Kepner went alone to Allen’s hotel room. Although Joy’s redacted affidavit doesn’t say it specifically, the defense team now claims that Kepner and Allen appear to have had a sexual relationship.

Joy also claims that FBI agents received gifts from Allen, including help getting a job for a relative.

The judge, Emmet Sullivan, has ordered a hearing to be held in two days, this Friday the 13th, on whether a new trial is warranted. If the judge determines that Sen. Stevens did not receive a fair trial, he could very well scrap the conviction and order a do-over. It would be anyone’s guess, at that point, as to whether the prosecutors would actually try the case again.

Watch this space for future developments.

Gang crime is on the rise, the FBI reports. The politicians and prosecutors, however, are focusing on white-collar crime these days. Here’s a look at why this is happening.

Gang crime seems to have increased, ironically, as a result of improved anti-gang law enforcement in the big cities.

According to the 2009 National Gang Threat Assessment, street gangs have started expanding more rapidly from urban centers into suburban and rural areas. This has spurred new membership, as fresh populations are opened to gang recruitment. By the end of last year, about a million people were estimated to belong to gangs within the U.S.

One might think that the burbs lack the same social pressures that drive gang membership. Gangs are products of the inner cities, after all, where kids lack fathers to lead them, involved communities to belong to, competent schools to teach them, and opportunities for money and glory. We expect gangs to arise in the inner cities of single moms, apathetic neighbors, dysfunctional schools, government welfare and hopelessness. Suburbia’s not like that, right?

Well, according to the NGTA, drugs drove the expansion. During the 1980s, the suburbs began to become a profitable new market for drug dealers who had previously focused on the urban market. During the 1990s, the huge profits from suburban drug sales caused the street gangs to physically expand their territory, often resulting in violence as urban gangs clashed with local toughs and with each other in the race to occupy the burbs.

Meanwhile, law enforcement started cracking down on gang and drug crime in the cities. It was getting dangerous to operate in NYC, LA and Chicago. Suburban cops, however, just weren’t as much of a concern. The burbs were also seen as safe places to hide from unsuspecting law enforcement, unused to dealing with a gang element.

The combination of weaker opposition from law enforcement, and higher profits from suburban drug users paying “white boy prices,” was a clarion call for gang expansion. It was an irony that improved law enforcement actually resulted in the spread of gang-related crime.

There were other reasons for the spread of gangs into suburban and rural communities, not detailed by the NGTA report. From the author’s own interviews with drug traffickers in the New York area, gangs sometimes followed inner-city populations that had moved out there first. People on government assistance began moving out to places such as Lancaster, Pennsylvania and various towns Upstate along the Hudson River, because a person on welfare could have a nicer quality of life there. Many of them brought with them the quality of life that they were trying to avoid, unfortunately. And those who were drug users brought their demand with them. And so the dealers followed, the gangs followed, and the forces that spurred gang recruitment never went away.

—

Despite the spread of violent crime and drug trafficking, however, the FBI is focusing more on white collar crime. White collar crimes certainly are on the rise lately, especially fraud cases.

“We may not be doing as many drug enterprise operations,” Special Agent in Charge Richard Lambert recently said, “so we can focus more on mortgage fraud and corporate fraud problems.”

In just the past month or so, 3000 new FBI positions have been created to combat white collar crime. On top of those new hires, the Senate Banking Committee is preparing a $110 million fund that would hire 500 new FBI agents, 50 new AUSAs, and 100 new SEC agents.

Bill co-sponsor Chuck Schumer (D-NY) stated in the accompanying press release that “our white collar crime divisions are under-staffed, under-funded, and overwhelmed. When a wave of violent crime sweeps through a city, the immediate response is to beef up the police forces, putting more cops on the beat, extending overtime, and making sure the city returns to safety. Our reaction to the financial crisis and the massive and complex financial fraud investigations that loom should be no different.”

Why the rise in white collar cases? It’s not just the economy, stupid.

Sure, people may be tempted to commit crimes in an economic downturn. But this usually applies to people who are on the bottom rungs of the economy. Wall Street types and CEOs don’t start robbing banks just because their net worth slipped a bit.

Instead, white collar crime goes on all the time. What’s changing now is not the number of crimes being committed, as the number of cases being prosecuted. There’s a difference. As Anne van Heerden, head of forensics at KPMG Switzerland told Swissinfo, “I do not believe that the number of cases is growing, but rather the detection rate is increasing.”

Sophisticated financial crimes have always been sexy for law enforcement. What prosecutor didn’t want to convict the next Ivan Boesky, Andy Fastow or Michael Milken? The problem is, they’re hard to catch. The crimes take place on paper, in back rooms, and on golf courses. Not places frequented by cops or detectives. Evidence is often hard to find, and even harder to comprehend if found.

But the new economic downturn — which many see as the direct result of white collar crime — has led to new political pressure to “do something about it.” (At a function last week, we joked with a prominent judge that our white-collar defense practice was recession-proof, to which the judge responded “yes, but your clients caused the recession.”) Elected officials feel that pressure to “do something,” and they start rewarding successful prosecutions, and funding more of them.

So the word has come down from above that white-collar prosecutions are what the chiefs want. And that’s what they’re getting.

Expect to see more.

Yesterday, we observed that there have been a lot of Ponzi schemes coming down lately, and asked what gives? Today, the Wall Street Journal made the same observation, and asked the same question.

Here are some points from the article:

* In 2007, the SEC had brought civil actions from 15 alleged Ponzi schemes. In 2008, they brought 23 such cases. So far this month, they’ve already brought 9. And that doesn’t include all the state-level fraud cases that have come down.

* On the criminal side, there have already been 6 multimillion-dollar fraud cases brought this month.

* Experts say these schemes are being discovered now because of the economic downturn. Investors try to cash out their investments, only to learn that the money’s gone. There’s also less money out there being invested, so the source of cash for these schemes dries up, and the house of cards comes crashing down.

The New York Times also had some similar observations:

* “What is causing them to surface now appears to be a combination of a deteriorating economy and heightened skepticism about outsize returns after the revelations about [Bernie Madoff]. That can scare off new clients and cause longtime investors to demand their money back, which brings the charade tumbling down.”

* The Commodities Futures Trading Association has also experienced a doubling of reported Ponzi schemes in the last year.

* On Thursday last week, Senators Chuck Schumer and Richard Shelby introduced a bill to hire 500 new FBI agents, 50 new AUSAs, and 100 new SEC officials to crack down on these crimes.

Nick Cosmo, the 37-year-old head of Agape World Inc. and Agape Merchant Advance, was arraigned today on charges that he ran a Ponzi scheme that cheated investors out of $370 million since 2006.

The feds allege that about 1,500 investors were promised annual returns of as much as 80%. These huge profits were to come from short-term loans to businesses. Instead of coming from actual profits, however, the complaint states that returns paid to investors actually came from the outlays of subsequent investors.

Investor money went mostly to pay other investors, in a rob-Peter-to-pay-Paul setup similar to the Bernie Madoff and seemingly countless other Ponzi schemes hitting the news these days. About $55 million went to pay brokers who brought in the investors. A bunch of cash was allegedly spent on expensive luxuries for Cosmo himself, as well as to pay the restitution ordered in a previous mail fraud conviction. Only about $10 million actually went to the loans that were supposed to be the core investment. The firm also transferred $100 million since 2003 into Cosmo’s futures-trading accounts, of which $80 million was lost. As of last Thursday, said prosecutors, Cosmo’s firms had less than $750,000 in the bank.

Agape World was listed as #73 in Entrepreneur Magazine’s Hot 100 fastest-growing businesses in America. (See its listing, screenshotted above.)

This is just one more in a series of prosecutions that have been coming down lately. Prosecutors are clearly ramping up their focus on financial crimes in the wake of the Bear Stearns meltdown — it’s definitely the sexy crime of the moment, where the press is throwing a lot of ink, where reputations stand to be made. Of course, crime is only found where it’s looked for, and right now this is a hot (and relatively easy) crime to prosecute. So it makes sense that this is where prosecutors are focusing lots of assets.

But apart from that, what does it mean about the rest of us? Almost all of these Ponzi schemes promised investors stupid-high returns. Wasn’t it obvious to the investors what was going on? Were they just blinded by the go-go stock market, while it was hot? Were they desperate for a winning number after the market soured? Lots of the alleged victims out there were sophisticated investors — one would think they at least would have known the meaning of “too good to be true.” We’d like to hear what you think is going on.

We guess people’s common sense just gets blinded by the prospect of easy gains. And it happens often enough, to enough people who ought to know better, that this crime continues to proliferate nearly a hundred years after it became part of the common lingo.

Oh well, more work for us defense attorneys.

White-collar prosecutors and defense attorneys have been keenly awaiting today’s decision in U.S. v. Ionia Management. At oral arguments last November, the court permitted amicus filer Andrew Weissmann (former head of the Enron Task Force) to make a case for limiting the criminal liability of corporations. The fact that he was given oral argument time meant that the court was at least considering the argument, hence the interest in today’s decision.

Weissman’s argument was that, although the doctrine of respondeat superior holds a corporation criminally liable for the acts of an employee, the corporation should not be liable if the employee acted contrary to the corporation’s policies.

In today’s decision, the court flatly rejected this argument. “We refuse to adopt the suggestion that the prosecution, in order to establish vicarious liability, should have to prove as a separate element in its case-in-chief that the corporation lacked effective policies and procedures to deter and detect criminal actions by its employees.”

The court went on to re-state that a corporation cannot be immunized from liability just by having a compliance program, no matter how extensive it may be. The existence of a compliance program would only be relevant to whether an employee was acting within the scope of his authority. But if employees are acting within the scope of their authority, and they break the law, then the corporation is going to be liable.

The court’s decision was a disappointment to many defense attorneys, who believe that the standard for criminal prosecution of corporations is too low. The ability to charge a corporation with a crime is a deadly weapon, as demonstrated by the downfall of Arthur Andersen in 2002. The ease of bringing such charges gives prosecutors a lot of leverage to demand full cooperation from the company when its employees are under investigation. The government can often stiff-arm corporations into making huge concessions, including stiff fines, to avoid prosecution.

But the decision was not exactly a surprise. During oral arguments, Judge Guido Calabresi questioned whether judges even could limit the existing scope of respondeat superior. It was an interesting academic issue, but Congress or perhaps the Supreme Court would have to deal with it.

It wouldn’t be very surprising to see this issue brought before the Supreme Court. Weissmann has been working on changing this bit of law since he left the government. At the heart of the problem, he says, is a misinterpretation of the Supreme Court case New York Central v. U.S., 212 U.S. 481 (1909). That case has been interpreted in such a way that criminal liability is easier to prove than civil liability under respondeat superior. That’s the opposite of how it usually works, of course.

Our prediction is that the Supreme Court won’t make the change, and it will be up to Congress to tighten up the doctrine. If at all. For the time being, nothing is changed.

District Court Judge Percy Anderson sentenced Jeanetta Standefor to more than 12 years in prison on Tuesday, for running an $18 million Ponzi scheme that preyed on middle-class black investors.

Standefor, who is also black, solicited investments from 650 people around Pasadena who thought the money would go to buying properties about to go into foreclosure. To maintain the illusion of profits, Standefor transferred $14 million of the invested money to early investors. She also spent about a million per year on herself, according to AUSA Stephanie Yonekura-McCaffery. The operation was run through her company Accelerated Funding Group — a name that is practically probable cause in itself.

At the sentencing hearing in the Central District of California, victims told Judge Anderson how they had trusted Standefor with their savings, often their life savings, after she first befriended them. Investors were told that they could make 50% profits in the first month.

Standefor’s attorney, federal defender Charles Brown, argued for leniency. “She is not a serial killer,” he said. “She is not a drug dealer. This is not a person who needs to be thrown in jail and locked up to learn her lesson.” He added that she was a foster child “who worked her entire life to prove her worth. . . [but] she took shortcuts, and started taking from Peter to pay Paul, and that’s how we got here.”

Judge Anderson disagreed with the defense attorney’s characterization, telling Standefor that even if this was just a white-collar crime, she was just as guilty “as if you’d taken a gun out and held it to the victims’ heads.”

Judge Anderson then ruled on sentence. Shortly before he imposed the sentence, however, Brown made one last attempt for leniency. Urging the judge to reconsider, Brown pointed out that the sentence was not consistent with those for similar cases around the country. Brown argued that it seemed to him that blacks get harsher sentences, even when they are convicted of white-collar crimes.

“Not with me, they don’t,” interrupted the judge, who is also black. “This isn’t about being black.”

Standefor was then sentenced to 151 months in prison and almost $9 million in restitution.