The Criminal Lawyer

Milberg LLP partners David Bershad and Steven Schulman were sentenced in federal court yesterday afternoon, each receiving 6 months in prison. Along with two other partners, they had been convicted for offenses arising our of the payment of kickbacks to lead plaintiffs in securities and shareholder class actions, which netted the firm more than a quarter of a Billion dollars in attorney fees.

These 6-month sentences were far less than what the other two partners were given earlier this year: William Lerach got 24 months, and Melvyn Weiss got 30.

At Bershad’s sentencing hearing, U.S. District Judge John Walter intitially indicated that he thought Bershad ought to get the same sentence as Lerach, as they had pled to the same conduct. Bershad’s lawyers sought probation, and the prosecution asked for 3 months in prison plus 3 months of community confinement. Apparently swayed by Bershad’s statement of remorse, letters of support, and the fact that Bershad’s plea was the first domino that led to the other pleas, the judge came down to the six-month jail term.

At Schulman’s sentencing hearing, the prosecution asked for a year in prison, as Schulman had taken longer to plea than Bershad, and so had provided less assistance. Schulman’s lawyer argued that the sentence should be no longer than Bershad’s, and that the delay in pleading guilty was due to attempts to work out a plea that would let Schulman keep his law license — notwithstanding the fact that there was no way he could conceivably keep that license given what had happened. Judge Walter wasn’t impressed with those arguments, but ultimately gave him the same 6-month sentence, taking into consideration the letters in support and the fact that Schulman had three young children who would be affected by a longer sentence.

Bershad had pled to conspiracy to obstruct justice, and to making false statements under oath. Schulman had pled to a racketeering charge. In addition to jail terms, each was sentenced to pay a $250,000 fine, on top of forfeitures of $7.75 million and $1.85 million, respectively.

Milberg LLP was formerly known as Milberg Weiss LLC, and as Milberg Weiss Bershad & Schulman LLP. At one time, it accounted for half of all securities class action settlements. The firm engaged in “strike suits,” wherein a corporation whose share price had fallen would be sued in a shareholder class action, with an individual shareholder identified as the class representative. The suits were brought for the purpose of settlement for nuisance value. Individual shareholders did not approach the firm, but rather the firm monitored the stock market and manufactured its own cases. To get individuals to to take the role of lead plaintiff, the firm would share its fees with them. The firm also paid kickbacks to stockbrokers who referred clients. At least one expert witness, specializing in estimating damages, was paid on a contingency-fee basis. Bershad and Schulman were indicted, along with the firm, in 2006 on various counts, including racketeering, mail fraud and bribery.

This morning, the New York State Court of Appeals rejected the appeal of former Tyco executives Dennis Kozlowski and Mark Swartz.

The court held that testimony of an attorney who had investigated the case was not unduly prejudicial, nor was the prosecutor’s comments about that testimony on summation. With respect to subpoenaed Tyco director statements, although the defendants did properly lay the groundwork for the subpoena, and although the statements were not privileged, the judge still acted within his discretion in quashing the subpoena.

The former CEO and CFO were convicted in 2005 of nearly two dozen counts of first degree grand larceny, falsifying business records, conspiracy and securities fraud. The convictions stemmed from the improper use of Tyco funds for their own personal use.

They used a company loan program called KELP (“Key Employee Loan Program”) to buy $12.75 million worth of paintings by famous artists, millions of dollars of jewelry, and an $8.3 million stake in a sports partnership. Another loan program intended for normal relocation costs was used to buy a $7.2 million home on Park Avenue. Millions of dollars of elaborate personal expenses were covered by these “loans.” By the summer of 1999, the two executives owed more than $70 million to Tyco.

To pay that back, they gave themselves huge “loan forgiveness” bonuses, without using Tyco’s procedures for determining the amounts of such bonuses. Despite the great size of these bonuses, the entire debt was not eliminated. They then ordered more than $25 million in cash payments to themselves, plus over $12 million in stock. Tyco’s compensation committee did not receive necessary documentation, and every committee member who testified denied approving the bonuses.

After conviction, Koslowski and Swartz argued that they were entitled to a new trial. A lawyer who had taken part in the civil investigation testified that he’d had conversations with Swartz, who essentially admitted that what was done was improper. The lawyer also testified as to his own recommendations and advice to the Board during his investigation. In summation, the prosecution commented on the lawyer’s testimony, to the effect that the Board only found out about the embezzlement after the lawyers did their investigation. The defendants claimed that the lawyer’s testimony was essentially opinion, telling the jury how to decide the case, and the People’s summation bolstered that effect, creating impermissible prejudice.

The Court of Appeals disagreed, and found that “the testimony and summation complained of merely set forth facts enabling the jury to draw an inference of defendants’ guilt.” The lawyer did not present an opinion on guilt, but merely reported facts from first-hand knowledge. Facts that hurt the defendant are of course prejudicial, but prejudice is not necessarily improper. Prejudicial testimony here would only improper if the witness gave a personal opinion as to guilt.

The government’s comments, likewise, were not impermissible expressions of the prosecutor’s personal belief or opinion as to guilt, but rather “quite properly concentrated, in argument, on proved facts and circumstances and the inferences to be drawn therefrom.”

There was a second claim that a subpoena issued by the defendants had been impermissibly quashed. The court held that the defendants actually had met their burden to identify specific items and show that they were reasonably likely to contradict the People’s evidence. However, the documents sought were still privileged, and thus were not subject to production.

The privilege was not absolute, however. The materials were statements by director-witnesses, which the court held to be trial preparation materials. As such, they were not subject to the attorney-client privilege (as Tyco had argued). Nor were they subject to the absolute work-product privilege (as the government here argued). Instead, disclosure is entirely up to the trial court’s discretion.

The discretionary determination rests, oddly enough, on civil procedure: CPLR 3101(d)(2). That rule required the defendants to show that they could not get the underlying facts another way, without undue hardship. The defendants didn’t do so here, and so the judge properly exercised his discretion.

Clearly, a lot of creative thought went into the litigation and appeal of this case on both sides. There are still five years or so to go in the defendants’ sentence, so one might expect further creativity down the road.

The long-delayed trial of KPMG executives charged with selling fraudulent tax shelters has at last begun, three years after the indictment. Jury selection began yesterday in federal court in Manhattan, and opening arguments are scheduled for today. The trial is expected to continue into early 2009.

Out of 19 original individuals in the indictment, four now remain: Robert Pfaff, John Larson and David Greenberg from KPMG, along with former Sidley partner Raymond Ruble. (Full disclosure: the author is a former Special Associate of Sidley Austin.) Judge Kaplan dismissed indictments against 13 of the individuals last year, finding that the prosecution violated their rights by threatening to indict KPMG itself if it paid their legal fees. The 2d Circuit upheld that decision, which has caused the Justice Department to issue two significant memos ostensibly ending that practice. Two other defendants have pled guilty: David Rivkin in 2006, and David Makov of Presidio Advisory Services, whose plea inculpated Ruble, in 2007.

The defendants are accused of putting together tax shelters designed to create fake capital losses, reducing clients’ taxes by more than two and a half Billion dollars. The scheme is alleged to have been concealed from the IRS by opinion letters from KPMG or a law firm, making false representations about the underlying transactions.

The defense team has been trying to exclude summary charts, based on IRS data, from the government’s case in chief. The defense claims that the underlying IRS data was not made available, and so the charts summarizing that data should not be admitted. The court has not yet ruled on this. The IRS is subject to confidentiality rules that prohibit the disclosure of such data, unless the individual taxpayer is under formal IRS scrutiny. The New York Times reports that “many taxpayers sought to strike deals with the IRS to prevent formal scrutiny by the agency.”

Lehman Bros. is now under investigation by three separate U.S. Attorney offices. Each of the investigations boil down to a question of whether Lehman publicly claimed its finances were fine, while privately admitting that it was in deep kimchee.

This is a typical focus of securities investigations, and the investigations are likely to hinge on statements in internal emails and files, and whether those statements conflict with powerpoints, public statements, conference calls and individual phone calls with outsiders.

The SDNY is focusing on whether Lehman inflated its asset values deceptively. The investigation has zeroed in on what investors were told about the value of its commercial real estate holdings. There have been allegations that investors were told these holdings were worth $32.6 billion, when in fact they were only worth about $21 billion, a difference of 35%.

The SDNY is also investigating whether Lehman acted improperly by moving $8 billion from its London unit to New York right before it filed for bankruptcy.

The EDNY is running a carbon-copy of its Bear Stearns investigation, focusing on whether Lehman executives gave investors and analysts optimistic reports to investors and analysts during conference calls, while privately believing that the firm’s condition was worse. The allegations are that analysts were told that no new capital needed to be raised, after Lehman had determined that it needed to raise between $3 and 5 billion in new capital, as new collateral for its clearing bank following a steep decline in Lehman’s share value. The Wall Street Journal reports that the executives had decided before the call not to raise new capital, but instead to sell assets to generate the cash. [Full disclosure: the author represents an individual in the Bear Stearns matter.]

The District of New Jersey is looking into whether Lehman gave misleading information to the New Jersey pension fund during a $6 billion stock offering earlier this year. New Jersey has lost about 65% of its investment in that offering.