Federal Criminal Defense Blog : Georgia Federal Criminal Defense Lawyer & Attorney : Gillen Withers & Lake Law Firm : White Collar Crime, RICO, Trial : Atlanta, Savannah, GA

After the failure of its backdating case against Gregory Reyes, former Chief Executive Officer of Brocade Communications Systems, prosecutors with the U.S. Attorney's Office for the Central District of California are taking a new tack in its backdating case against former KB Home CEO Bruce Karatz, according to the National Law Journal. Karatz is alleged to have received millions in undisclosed income as a result of backdating stock options, and made $232 million in his last three years as CEO alone. The prosecution has decided to focus on Karatz's personal gain from the alleged scheme, and circumvent the defense--effective in the Brocade Communications Systems case--that backdating is not criminal where the corporation is aware of it, or where a defendant relies on the advice of attorneys or accountants. Defendants have also successfully argued that backdating is a legal and legitimate practice, and that many companies restate their income as a result of such conduct.

The U.S. Court of Appeals for the Ninth Circuit reversed Reyes' conviction in August based on the government's alleged prosecutorial misconduct in intimidating and influencing witnesses. The government's failure in the Reyes case came along with its defeat in 2008 in a backdating case against Kent Roberts, the former General Counsel of McAfee, Inc., a security software firm, and the dismissal of its case against two former executives of Broadcom Corp.

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Brad Heath points out a disturbing trend in today's USA Today--federal prosecutions of serious corporate, financial and other white-collar crimes have fallen to new lows. In this age of Enron, Madoff and massive failures of financial institutions, this is a serious breach of the public trust. The article contains a chart which shows that, in fiscal year 2009, the Department of Justice opened only 63 new corporate fraud prosecutions. That is barely one case per year per district and represents a 55% decrease since 2003. Securities fraud charges have decreased 17% and bankruptcy fraud cases have decreased 44% over the same period. The article cites Professor Ellen Podgor of Stetson University College of Law and creator of White Collar Crime Prof Blog who attributes the decline was the result of the Bush administration's push of federal prosecutors and the FBI to focus on terrorism and national security.

However, relief appears to be on the way. The article states that lawmakers have put new pressure on DOJ officials, who have launched thousands of new criminal probes into financial crimes. Congress has approved extra money to target financial crime, and Attorney General Eric Holder announced a new task force to target financial fraud last month. As if to herald a change of direction, prosecutors in New York also announced indictments yesterday against Raj Rajaratnam, founder of Galleon, claiming that the case is the largest hedge fund insider trading case ever. The article also states that the FBI currently has more than 2,800 open mortgage fraud cases..

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Although it may be considered small change when compared with the fraud of fellow Floridian Scott Rothstein, according to an FBI press release, Gary Ernest Williams, former Chief Financial Officer for Marian Gardens Tree Farm (MGTF) in Groveland, Florida, was sentenced to eight years imprisonment on Monday in the U.S. District Corut for the Middle District of Florida. Williams was charged with embezzling approximately 10.5 million from MGTF since 2000 through falsified checks, use of a credit card in the company's name and making large cash withdrawals which he told bank officials were to be used to pay “employee bonuses.” Willams spent the money on lavish homes, luxury cars, jewelry, drugs, and vacations by private jet. He also failed to failed to pay federal income taxes in the amount of $3,675,000 on the illegally obtained funds.

Williams entered a guilty plea in July. The District Court ordered Williams to pay more than 14 million in restitution to MGFT and to forfeit homes in North Carolina, Pennsylvania and the Bahamas.

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Each administration puts its own stamp within the Department of Justice on what priorities, or initiatives it will pursue. Not surprisingly, the Obama Department of Justice is pursuing Financial Institution Fraud as one of its top three initiatives behind National Security and combating the Mexican drug cartels. In the 100 day progress report released last week, the report stated the,

• Department of Justice has placed a distinct focus on financial crimes. Indeed, the Attorney General has said that “the Justice Department must wage an aggressive effort against financial fraud and market manipulation.”
• Moreover, the Department has devoted significant attention to preventing, investigating, and prosecuting mortgage fraud. The Federal Bureau of Investigation is currently investigating more than 2,100 mortgage fraud cases, up almost 400 percent from five years ago. The Bureau also has more than doubled the number of agents investigating mortgage scams, has created a National Mortgage Fraud Team at headquarters in Washington, and is working hand-in-hand with our partners at other agencies.

Of course, this only makes sense in the context of failing financial institutions and is reminiscent to me of the DOJ days of the late 80s and early 90s when financial institution fraud related to the savings and loan scandals resulted in significant prosecutions of officers and directors of those failed institutions. We plan a more in depth analysis of this DOJ initiative in coming weeks.

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   Criminal prosecutions involving corporations in many cases involve a corporation being exposed to criminal liability for the criminal acts or omissions of its agents which the corporation may not have known of and which were contrary to its express policies or procedures. The Eleventh and former Fifth Circuits have long held that a corporation may be held criminally liable. Steere Tank Lines, Inc. v. United States, 330 F.2d 719, 721-22 (5th Cir. 1963) (citing New York Cent. & H. R.R. Co. v. United States, 212 U.S. 481 (1909); United States v. Illinois Central R. Co., 303 U.S. 239 (1938); United States v. A & P Trucking Company, 358 U.S. 121 (1958)). A corporation may be held criminally liable for the acts or omissions of its agents which were committed within the scope of their employment and which the agent intended to “produce[ ] some benefit to the corporation or some benefit to himself and the corporation second.” United States v. Gold, 743 F.2d  800, 823 (11th Cir. 1984).

   Now an array of legal and business organizations are trying to get courts to re-examine the standard for imposing liability on corporations for the acts of their agents, according to an article today in the National Law Journal. The test case is an appeal in the Second Circuit Court of Appeals, United States v. Ionia Management, No. 07-5801, which involved a Greek tanker company which was convicted for the acts of its employees on one of its vessels in dumping oil into international waters and falsifying records. The Association of Corporate Counsel, the United States Chamber of Commerce, the National Association of Criminal Defense Lawyers, the National Association of Manufacturers, the New York State Association of Criminal Defense Lawyers and the Washington Legal Foundation have filed an amicus brief in the case, authored, surprisingly, by Andrew Weissmann, an attorney with the Chicago law firm of Jenner & Block, who was formerly the Director of the Department of Justice’s specially-formed Enron Task Force. The groups argue that courts should modify the now century-old standard of corporate criminal liability of New York Cent. and permit a good faith affirmative defense to liability, based on factors such as whether the corporation had reasonable and effective policies in place to prevent the commission of the crime, citing recent decisions involving employer defenses in employment discrimination cases, the Model Penal Code, and similar provisions in state criminal codes.

    Weissmann noted the irony that it is easier to impute liability to a corporation in a criminal case than in some civil cases. As acknowledged by John Hasnas, professor of business and law at Georgetown University, the Department of Justice frequently misuses the standard in order to extract pleas, fines, or deferred-prosecution agreements from corporate defendants, and agreements to cooperate in the prosecution of their officers or employees. In any event, in cases involving rogue agents whose crimes may benefit the corporation but are against its policies, it seems time to give corporations a fighting chance.

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