Monday, October 27, 2008

McCain Op-Ed Discusses DOJ and Enforcement Priorities

Senator John McCain wrote an opinion article at the request of the National Law Journal regarding legal issues facing the next president. Below is a portion of the article discussing the Department of Justice, the ongoing mortgage fraud investigations, and organized crime.

Much responsibility for the effective administration of justice is entrusted to the dedicated men and women who toil day in and day out at the Department of Justice. My first objective would be to ensure that the department is, and remains, above the political fray. The department must function with integrity and effectiveness above all else.

I would also bolster law enforcement programs that will aid our struggling economy and address the ongoing threat of terrorism and other public safety concerns.

Unfortunately, we have all recently observed what happens when banks, major financial institutions and other engines of commerce become subject to market manipulators. Those who make a mockery of rules designed to keep our markets transparent and efficient must be brought to justice.

It will be my aim to boost our financial system and keep our economy strong. Effective enforcement of our nation's securities and banking laws will help accomplish these goals.

In particular, the FBI's mortgage fraud task force is an important tool for keeping our markets clean. No matter who they are or where they hide, we must hold accountable those who would disregard the law, placing innocent citizens and investors in peril.

Preventing terrorist attacks would be a top priority of the McCain administration. As a number of observers have noted, our nation is safer than it was on Sept. 11, 2001, but not yet safe. Upon taking office, I would ensure we win the wars we are fighting in Iraq and Afghanistan. I will also review our counterterror operations to ensure their effectiveness.

As we use aggressively all lawful means to combat threats, we must also ensure that our counterterror programs enjoy bipartisan support and widespread public acceptance. The terrorists win if we fight them using tactics that undermine our strategic goals. As long as I am president, I will ensure that the world never again sees America as a country that tortures. We must always act within the bounds of the law. I will help forge a bipartisan consensus as to where those boundaries are.

Terrorists are not the only threat to public safety. Lax enforcement policies, judges who legislate from the bench and lack of support for law enforcement personnel all continue to force our innocent citizens behind the barred windows of their homes and allow criminals to roam free.

And now drugs are bringing waves of crime and organized gang activity to rural areas thought to be nearly immune from such problems. The federal government must both support state and local law enforcement and effectively enforce federal laws designed to root out violent crime, organized gangs and other interstate criminal activity.

Thursday, October 16, 2008

KPMG Case Heads to Trial

Another case we have followed closely is that of the government's prosecution of former KPMG executives and an ex-partner at Sidley Austin. The case, which was once billed as the biggest tax-fraud case in U.S. history, began with 19 defendants, but only four remain. Both the New York Times and the Wall Street Journal Law Blog have articles on the case this week.

From the NYT.

Jury selection began on Tuesday in a closely watched tax shelter case once billed as the largest ever, but government prosecutors face a difficult road after a string of defeats in a proceeding that has been scaled back.

The four defendants, including three executives who once worked for the accounting firm KPMG, are set to stand trial on fraud and conspiracy charges. They are accused of creating, selling and sometimes using abusive tax shelters that reduced clients’ tax bills by at least $2.5 billion from the late 1990s to recent years.

Opening arguments in the trial, before Judge Lewis A. Kaplan of Federal District Court in Manhattan, are scheduled to begin Wednesday.

The government wants to present a dozen wealthy taxpayers as witnesses for the prosecution, including Doug Lowry, a former tax executive at CKE Restaurants, which owns the Hardee’s chain, according to court filings, as well as at least two current or former employees of Deutsche Bank, which is under a separate criminal investigation into its work with
tax shelters.

The KPMG case is a shadow of its former self. In 2005, 19 defendants — 17 from KPMG — were indicted on multiple charges of conspiracy, tax evasion and fraud in connection with making and selling questionable shelters to wealthy investors. In 2006, Judge Kaplan threw out charges against 13 of the 19 defendants, saying that prosecutors had violated their constitutional rights by pressing KPMG to stop paying their legal fees. Two of the remaining defendants pleaded guilty.

The dismissal of charges followed an outcry from independent lawyers and prosecutors about the government’s tactics in the case. In August, the Justice Department formally softened the guidelines used in the proceeding, saying it would no longer press companies to share legal secrets with prosecutors or not pay the legal fees of employees accused of crimes.

The three remaining defendants who once worked at KPMG are Robert Pfaff, John Larson and David Greenberg. A fourth defendant, Raymond J. Ruble, was a tax lawyer at the law firm formerly known as Sidley Austin Brown & Wood, now Sidney Austin. The trial is expected to last up to four months...

The trial this week centers on tax shelters deemed abusive by the I.R.S. In recent weeks, defendants have intensified their effort to exclude a core piece of the government’s case: charts that are said to show billions of dollars in tax evasion by some 600 wealthy individuals who bought the shelters.

From the WSJ Law Blog.

The judge, Lewis Kaplan (pictured), found that prosecutors, during their investigation of the firm, violated those defendants’ rights by pressuring KPMG not to pay their legal fees in order to avoid a possible indictment of the firm itself. Earlier this year, the 2nd Circuit agreed, and the Justice Department has twice said it would soften its approach in pursuing corporate crime investigations.

New Twist In Broadcom Co-Founder's Plea Bargaining Matter

We've been following the events surrounding the plead agreement reached between the federal government and Broadcom Corp. co-founder Henry Samueli for quite a while now. (see here and here). Last month, the U.S. District Court Judge handling the case rejected the plea deal, which included five years of probation, a $250,000 fine, and $12 million in restitution to the U.S. Treasury. According to the District Court Judge, the proposed deal would "erode the public's trust in the fundamental fairness of our justice system" and would give the perception that "justice is for sale." The matter is on appeal to the 9th Circuit Court of Appeals. has an update of events this week.

On Tuesday, Samueli and prosecutors declined to reject the plea deal, although both agreed to lift the binding provisions to allow the judge to consider a statutory maximum sentence of up to five years.

Thom Mrozek, a spokesman for the U.S. Attorney's Office for the Central District of California, clarified that Samueli opted to lift the binding sentencing provisions and prosecutors chose not to object to those changes. But he said prosecutors intend to seek the plea agreement's original probationary sentence when Samueli gets sentenced next year.

A Little Hollywood Drama in the Plea Bargaining World

Michael Edison, a con man who stole $2 million from the widow of Atherton Phleger, a founding partner of Brobeck, Phleger & Harrison, pleaded guilty to all charges this week in return for an agreement that the government will not seek prison time for his wife, an alleged accomplice in trying to obstruct justice by deceiving Edison's attorney. The full story of how Edison perpetrated his con is a story that involves a Hollywood star, private jets and yachts, and fake documents from Switzerland. For his part, Edison agreed to serve 63 months in prison and pay $2.5 million in restitution. has an article regarding the events.

Michael Edison admitted targeting Jean Phleger, widow of Brobeck, Phleger & Harrison founder Atherton Phleger, in a financial swindle. Originally introduced to Phleger by her son-in-law, the actor Don Johnson, Edison agreed to refinance Phleger's house, pay down her old mortgage, and use $2 million in leftover cash to pay Phleger's bills.

But Edison instead used the money for a private jet, a boat docked in Malta, cars, and goods at Kmart, Foot Locker and other stores, according to court filings.

Describing his occupation in court Tuesday as "an entrepreneur, really, or a turn-around executive," Edison also admitted cheating another set of business partners out of $182,000.

Prosecutors indicted Edison last year for mail fraud. He landed in Santa Rita Jail in Dublin, unable to make bail.

Edison then set out to deceive prosecutors, sending a letter to his wife -- who was living in Switzerland -- with instructions to dummy up documents to make it seem that Phleger loaned Edison the money. Deborah Edison sent the false papers to Edison's attorney, Michael Thorman of Bonjour Thorman Baray & Billingsley, and let Thorman present them to Assistant U.S. Attorney Jeffrey Finnigan.

But jail officials had already intercepted Edison's instructions to his wife. Their maneuvers led to charges against her for obstruction of justice, Thorman getting bounced from the case, and additional counts tacked on to Edison's indictment.

Wednesday, October 15, 2008

Former Chief Executive of Enron Broadband Services Pleads Guilty

According to the Associated Press, the former chief executive of Enron Broadband Services, Joseph Hirko, pleaded guilty on Tuesday to one count of wire fraud. The agreement requires Hirko to serve up to 16 months in prison and pay up to $8.7 million in restitution to the government for victims of the Enron collapse. He will also cooperate with prosecutors in other pending broadband prosecutions. Sentencing will occur on March 3, 2009.

As noted in the AP article, Hirko entered into the plea agreement because he did not want to risk the consequences of losing at trial. As has been discussed here previously (see this post regarding my recent article of plea bargaining in financial crimes cases after Enron), many individuals prosecuted for financial crimes following Enron agreed to enter plea bargains due, at least in part, to the existence of significant "sentencing differentials" between the sentence offered by the government in negotiations and the potential sentence resulting from losing at trial. It appears that Hirko, who pleaded guilty to only one count of wire fraud but faced wire fraud, securities fraud and insider trading charges if he proceeded to trial, also falls into this category.

A portion of the AP story is below.

[Hirko] admitted to allowing press releases to be distributed in 2000 that said a groundbreaking operating system had been embedded in Enron's broadband network that would allow users to pay only for bandwidth they used instead of a flat monthly fee.

The operating system was still under development and the bandwidth-on-demand feature never materialized. Hirko admitted that he knew broadband operating system, or BOS, hadn't been embedded and couldn't provide bandwidth on demand.

Per Ramfjord, one of Hirko's lawyers, said in Tuesday's online edition of the Houston Chronicle that the plea allowed him to "reduce the risk of going to trial and puts him in a position to be able to return to an active life as soon as possible."

A trial of Hirko and four other EBS executives ended in September 2005 with jurors unable to reach verdicts on most charges. Hirko was acquitted in the 2005 trial on 14 of the 27 charges against him, two of them for insider trading and 12 for money laundering. He was charged in a new indictment with wire fraud, securities fraud and insider trading.

Hirko had been set to go to trial in December alongside Rex Shelby, a former top software executive.

"Today's plea closes another chapter in the Enron scandal," Acting Assistant Attorney General Matthew Friedrich said in a news release.

Enron, once the nation's seventh-largest company, entered bankruptcy proceedings in December 2001 after years of accounting tricks could no longer hide billions in debt or make failing ventures appear profitable.

The collapse wiped out thousands of jobs, more than $60 billion in market value and more than $2 billion in pension plans.

SEC Follows DOJ Regarding Requests for Waiver of Privilege

The National Law Journal is reporting that the SEC has released its "Red Book" publicly for the first time. The Red Book is similar to the Department of Justice's U.S. Attorney's Manual and provides guidance to the staff of the SEC Enforcement Division in the investigation of potential violations of the securities laws.

The manual addresses the privilege waiver issue as well as a number of areas that should aid practitioners, including the evaluation of possible investigations, issuing Wells letters, communicating with senior SEC officials, responding to document subpoenas, "witness assurance" letters and contacting current and former employees.

In the privilege section, the manual contains the following statement in bold face type: "The staff should not ask a party to waive the attorney-client or work product privileges and is directed not to do so."

It adds that all decisions about potential waivers are to be reviewed by the assistant supervising the matter and may involve more senior members of management.

"The Enforcement Division's central concern is whether the party has disclosed all relevant facts within the party's knowledge that are responsive to the staff's information requests, and not whether a party has elected to assert or waive a privilege," the manual states.

If a party seeks cooperation credit for timely disclosure of relevant facts, the manual adds, that party must disclose all such facts within the party's knowledge. "On request, and to the extent possible, the staff should continue to work with parties to explore alternative means of obtaining factual information when it appears that disclosure of responsive documents or other evidence may otherwise result in waiver of applicable privileges."

Stephanie Martz, director of the white-collar crime project of the National Association of Criminal Defense Lawyers (NACDL), said the manual language appears to be a "hybrid" of recent approaches by the Department of Justice. "I think on the positive side, it seems to recognize there is a problem," she said. "There is a line where staff is specifically instructed not to ask for waivers, but on the other hand, that's followed by the statement that says supervisors can approve it."

Although the manual claims the relevant inquiry is going to be whether relevant facts have been disclosed, Martz added, "It will be interesting to see how this works if you do have facts and its work product, and the government wants them."

Sunday, October 12, 2008

ABA Task Force's Draft Recommendations Regarding Upjohn Warnings

A Task Force of the ABA has been working on recommendations regarding a set of best practices for company counsel to follow when providing Upjohn Warnings to company employees during internal investigations. Below is the executive summary from the Task Force's latest draft.

This Report and Recommended Best Practices are the product of a Task Force established in early-2008 by the White Collar Crime Committee of the American Bar Association’s Criminal Justice Section. They are intended to address an increasingly-common question associated with the attorney-client privilege: What best practices should corporate counsel follow when interacting with corporate employees while conducting internal investigations on behalf of the corporate entity? In particular, what advice or warnings – commonly referred to as Upjohn warnings, or corporate Miranda warnings – should corporate counsel (attorneys for any legal entity that is distinct from its members) provide to corporate Constituents (employees, officers and directors) and how should counsel give those warnings?

Upjohn warnings are named after Upjohn v. United States, 449 U.S. 383 (1981), the case in which the Supreme Court made clear that the corporate attorney-client privilege applied to a much wider group of Constituents than the corporation’s “control group.” Once Upjohn confirmed that communications between corporate counsel and lower-level employees were potentially privileged, issues arose as to who held the privilege and who could waive the privilege.

Whether the corporation, the Constituent, or the corporation and the Constituent is the holder of the privilege has taken on special significance with the promulgation of federal corporate prosecution guidelines that have incentivized corporations under investigation to waive the privilege in order to gain cooperation credit. In the typical case, a corporation that receives allegations of wrongdoing will retain counsel to conduct an internal investigation to assess the allegations and provide legal advice. Corporate counsel will, in turn, interview the relevant corporate Constituents who possess knowledge about the allegations. Those interviews – involving only corporate counsel and the Constituent – are usually subject to a legitimate claim of attorney-client privilege.

But if the corporation later comes under investigation, especially federal investigation, it may seek to obtain cooperation credit – to mitigate criminal or civil regulatory exposure – by waiving the privilege and producing to the government the statements made by Constituents to corporate counsel during the internal investigation. Upjohn warnings have therefore emerged as the mechanism for making clear to Constituents that the corporation, and the corporation alone, is the holder of the privilege. In the absence of such warnings, Constituents may be able to assert that they, too, hold the privilege: that, as privilege holders, they elect not to waive the privilege, and that the corporation may not produce their statements to government investigators. By providing unambiguous warnings, corporate counsel may be able to limit later disputes over the extent and nature of the attorney-client relationship, and Constituents are better able to assess their own risks.

The draft also includes a recommended Upjohn warning.

I am a lawyer from Corporation A. I represent only Corporation A, and I do not represent you. I am conducting this interview to gather facts in order to provide legal advice for Corporation A. I am conducting this interview as part of an investigation to determine the facts and circumstances of X in order to advise Corporation A how best to proceed.

Your communications with me are protected by the attorney-client privilege. In order for the communication to be subject to the privilege, it must be kept in confidence. In other words, you may not disclose the substance of this interview to any third party, including other employees or anyone outside of the company.

But the attorney-client privilege belongs solely to Corporation A, not you. That means that Corporation A alone may elect to waive the attorney-client privilege and reveal our discussion to third parties. Corporation A alone may decide to waive the privilege and disclose this discussion to such third parties as federal or state agencies, at its sole discretion, and without notifying you.

Do you have any questions?

Are you willing to proceed?

Tuesday, October 7, 2008

DAG on the New Corporate Charging Guidelines

Last week, the Deputy Attorney General, Mark Filip, discussed the new DOJ corporate charging guidelines at the Third Annual National Institute on Securities Fraud Conference sponsored by the ABA Criminal Justice Section.

During the speech, the DAG outlined the major provisions of the corporate charging guidelines dealing with waiver of the attorney-client privilege and employee legal rights. During the question and answer portion of the event, Mr. Filip said that he did not believe that federal legislation was needed to protect the attorney-client privilege and employee rights now that the Department has refined its policies. He also said that the Department continues to support separate legislation (introduced in previous Congresses but not currently pending) that would allow companies to voluntarily produce privileged materials to the government without waiving the privilege as to third parties (the so-called "selective" or "limited" waiver proposals).

The audio of the speech is available on the ABA Criminal Justice Section's website here.

Guilty Pleas from the Subprime Mortgage Fallout Begin is reporting that three people have pleaded guilty to a multi-million dollar subprime mortgage scheme in the Southern District of New York.

Galina Zhigun and her son, Garri Zhigun, operators of the Brooklyn-based mortgage brokerage AGA Capital NY Inc., and Maryann Furman, an AGA employee and the wife of Garri Zhigun, entered guilty pleas to fraud charges before Southern District of New York Magistrate Judge Gabriel Gorenstein.

Accused of using false documents and straw buyers to obtain loans fraudulently, the three were among 26 people indicted in the subprime scheme. Friday's pleas bring to 11 the number of those who have pleaded guilty in the case. The remaining 15 defendants are scheduled to go to trial in two waves, the first on Nov. 17 and the second on Jan. 19.

When he is sentenced on Jan. 5, Garri Zhigun is expected to receive up to nine years in prison. He has agreed to forfeit a total of $2.5 million. His co-defendants are expected to receive between up to four years and three months in prison and each forfeit $1 million.

All three also face a minimum of $1 million in fines.

Wednesday, October 1, 2008

From Special Attorney to Special Counsel: The History of "Special" Lawyers

Slate had an interesting article today that discusses the difference between special counsels, special attorneys, and special prosecutors. The piece stems from discussion of Connecticut federal prosecutor Nora Dannehy's appointment as a "special attorney," though many in the media are mistakenly using the title "special prosecutor." Here is an excerpt from the article discussing the history of the various titles.

The term "special prosecutor" first came into use in the United States during the Teapot Dome scandals of 1920s, when Calvin Coolidge appointed outside lawyers to look into the corrupt land-leasing practices of federal officials. Special prosecutors were given more official status in the aftermath of Watergate, when Richard Nixon finagled the firing of the one assigned to investigate him. The Ethics in Government Act of 1978 called for the position of "special prosecutor" to be separate from the executive and legislative branches and to be appointed by a three-member panel of judges from the U.S. Court of Appeals. The act also gave special prosecutors the power to issue subpoenas, start grand jury proceedings, hire a staff, use the resources of the Department of Justice and FBI, and get a security clearance if needed. (Later, the name "special prosecutor" would be officially changed to "independent counsel.")

The Supreme Court upheld the law governing special prosecutors in 1988, but Congress let it expire in 1999 in the wake of Kenneth Starr and the Clinton investigation. In its place, the Department of Justice created regulations allowing for the selection of a "special counsel" on those occasions when there's a conflict of interest within the department. (Patrick Fitzgerald, who led the Northern Illinois U.S. attorney's office, was appointed under those regulations to investigate the Valerie Plame affair.) Unlike the independent counsels that came before, a special counsel serves at the pleasure of the attorney general's office, so he doesn't enjoy the same strict separation from the executive branch.

As for prosecutor Nora Dannehy, she will be a "special attorney."
A "special prosecutor" is an outside lawyer brought in to investigate a government official accused of wrongdoing. He or she isn't directly accountable to the people or agency under investigation, avoiding the potential conflict of interest that a regular prosecutor would have. But Dannehy comes from within the Department of Justice and will report directly to the attorney general and his deputy: Technically, she's a "special attorney," rather than a special prosecutor. That means she was appointed under a section of the U.S. code that allows the government to assign department lawyers to cases outside their home district. Dannehy lives in Connecticut but will be acting under the power of the U.S. attorney for the District of Columbia.