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Pietragallo's White Collar Criminal Defense Group

In today's environment, the government has never more aggressively regulated, investigated, pursued and prosecuted white collar crime. If you or your company becomes embroiled in any type of federal or state government investigation, you need experienced trial lawyers who have gone toe-to-toe with prosecutors and government agents.

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    Tuesday
    Sep252012

    TYCO Enters Into NPA and Subsidiary Pleads Guilty - $26 million Paid in FCPA Settlement

    On September 24, 2012, DOJ announced the resolution of its prosecution of a subsidiary of TYCO International Ltd. (TYCO) under the Foreign Corrupt Practices Act (FCPA).  In accordance with the agreement, TYCO Valves & Controls Middle East, Inc. (TVC ME) entered a plea of guilty in the U.S. District Court for the Eastern District of Virginia to a one count criminal information charging conspiracy to violate the anti-bribery provisions of the FCPA in its sale and marketing of valves and other industrial equipment throughout the Middle East.  According to the criminal information, TVC ME paid bribes to officials employed by Saudi Aramco, an oil and gas company controlled and managed by the government of the Kingdom of Saudi Arabia, in order to obtain contracts with Saudi Aramco.  At the conclusion of the plea proceeding, the Court sentenced TVC ME to pay a $2.1 million fine.  The fine was part of a $13.68 million penalty paid by TYCO for falsifying books and records in connection with payments by its subsidiaries to government officials.  TYCO paid the fine as part of a non-prosecution agreement (NPA) that it entered into with DOJ.

    As part of TVC ME’s plea agreement and TYCO’s NPA, the companies agreed to cooperate with DOJ and report periodically concerning the company’s compliance efforts, and to continue to implement an enhanced compliance program and internal controls designed to prevent and detect FCPA violations.  DOJ’s decision to allow a subsidiary to enter a plea of guilty and the parent company (TYCO) to enter into an NPA was apparently based on DOJ’s recognition of TYCO’s timely, voluntary and complete disclosure, which included a global internal investigation concerning bribery and related misconduct, as well as follow on remediation of the noted problems.  DOJ cited TYCO’s remediation efforts, which included the implementation of an enhanced compliance program, the termination of employees responsible for the improper payments and falsification of books and records, the severing of contracts with responsible third-party agents and closing of subsidiaries due to compliance failures.

    TYCO also consented in parallel civil proceedings to a judgment in favor of the SEC, requiring the company to pay an additional $10,564,992 in disgorgement and $2,566,517 in pre-judgment interest.  The total of the fine to TVC ME, the agreed payment by TYCO under the NPA, and the SEC consent judgment is more than $26 million.  No individuals were prosecuted in the matter.

    Monday
    Sep242012

    WSJ Article Shines Light on Guilty Pleas

    The Wall Street Journal recently featured the story of Kenneth Kassab, an individual who, almost as an afterthought, withdrew his plea of guilty to federal explosives charges, and ended up being acquitted by a jury.  Gary Fields and John Emshwiller, Federal Guilty Pleas Soar as Bargains Trump Trial, Wall Street Journal, September 24, 2012, A1.  The article zeroed in on the real-world peril of overwhelming sentencing consequences that individuals charged with federal crimes face, highlighting the fact that even those who may believe in their innocence, plead guilty as a way of choosing the lesser of two evils.

    Mr. Kassab was a handy man at a local hotel in Sault Ste. Marie in Michigan’s Upper Peninsula.  In the course of his duties, he was asked by the hotel owner, John Lechner, to move several dozen 50 pound bags that he believed were fertilizer.  The problem was that Mr. Lechner was under investigation for making statements about becoming a mercenary if the government ever failed.  The bags actually contained ammonium nitrate fuel (ANFO) , the same compound used in the bombing of the Alfred P. Murrah Building in Oklahoma City in 1995.

    Mr. Kassab had maintained his innocence, believing he had done nothing wrong.  Nonetheless, after discussing the potential sentence that he was facing, the complicating factors that included a prior criminal history, as well as the fact that he would be tried alongside Lechner, he decided to enter a plea of guilty.  It was only after the Court held a bond revocation hearing for violation of the conditions of his pretrial release, that he, without prior planning or warning to his counsel, declined the magistrate judge’s request that he reaffirm his prior guilty plea.  After a jury trial, the defense of which had to be prepared hastily (the trial was four days away when he changed his plea), he was acquitted of all charges following 2 hours of deliberation.

    The case highlights growing concern that 25 years of federal legislation aimed at getting tough on crime, and the accompanying evolution of the United States Sentencing Guidelines, has resulted in a charging regime that leaves most defendants with little choice but to plead guilty even in circumstances where they maintain their innocence.  Often prosecutors also use the threat of additional charges in a superseding indictment to obtain guilty pleas.  A companion article in the same issue of The Journal reported on a recent academic study, which results indicated that when faced with dire consequences, 55% of innocent people would be inclined to enter into an agreement to plead guilty.  John Emshwiller and Gary Fields, Study Shows Innocent Plead Guilty at a High Rate, Wall Street Journal, September 24, 2012, A20.  It reported other studies have resulted in rates of guilty pleas by innocent people in the range of 10% - 50%.

    Both of these articles point to a growing problem and concern regarding our current system of justice.  There is no practical way that the government could try all of the cases that it charges.  At the same time, however, defense lawyers are faced with difficult tasks of mitigating the potential exposure to their individual clients while holding the government to its evidence.

    Thursday
    Sep202012

    Third Circuit Denies Defendant Interest on Award of Excess Restitution

    The U.S. Court of Appeals for the Third Circuit recently affirmed the denial of a criminal defendant’s claim for interest on an excess payment of restitution under the Civil Asset Forfeiture Reform Act (CAFRA), 28 U.S.C. §2465.  U.S. v. Craig, No. 11-1697, slip op. (3rd Cir., September 17, 2012).

    Ryan James Craig was convicted on charges of wire fraud and failure to appear at trial in the U.S. District Court for the Middle District of Pennsylvania.  His sentence included an order to pay $12,411 in restitution and a $300.00 special assessment, which the government sought to satisfy from funds ($16,342) seized in the case.

    While Craig acknowledged that the previously seized funds could be used for that purpose, he filed a motion for the return of the remaining $3,631.  He ultimately prevailed on the request when an earlier appeal the Third Circuit reversed the district’s order that the remaining fund be applied to an unsatisfied restitution order in the District of Rhode Island.  When the matter was then returned to the Middle District, Craig filed a motion requesting that he receive interest on the amount to be returned.

    On appeal of the district court’s denial of his motion, Craig argued that the United States should be liable for interest under CAFRA because he prevailed in his challenge to the government’s attempt to divert the funds to satisfy the Rhode Island restitution order.  The Third Circuit rejected Craig’s argument reasoning that Craig had obtained neither a judgment on the merits, nor any relief specific to the forfeiture action.

    The court noted that in order to prevail on his claim, Craig must have established that he substantially prevailed in a civil proceeding to forfeit property.  28 U.S.C. §2465(b)(1).  It found that the criminal restitution order issued by the district court at the government’s request did not qualify as a civil proceeding to forfeit property, reasoning that Craig’s argument could not be reconciled with the fact that an order of restitution is a component of a criminal sentence, citing U.S. v. Perez, 514 F.3d 296, 299 (3rd Cir. 2007).

    The court also rejected Craig’s argument that equity requires the government to disgorge the interest, finding no authority to support that argument.  It noted that neither fairness considerations nor rules applicable to private disputes can alone provide grounds for abrogating sovereign immunity, citing Larson v. United States, 274 F.3d 643, 647 (1st Cir. 2001).

    While finding that there appeared to be a split among the circuits regarding this issue, the panel found itself in the majority of its sister circuits, including the First, Tenth, Eighth and Second Circuits.  At the same time, it recognized that the Sixth, Ninth and Eleventh Circuits have approved of contrary approaches, finding that in such circumstances, the government must disgorge its earnings along with the property at the time the property is returned.  See, e.g. United States v. 1461 W 42nd St., 251 F.3d 1329, 1338 (11th Cir. 2001).  The court concluded, however, that the minority view articulated by those circuits was at odds with the exhortation by the United States Supreme Court in Library of Congress v. Shaw, 478 U.S. 310 (1986), that “courts lack the power to award interest against the United States on the basis of what they think is or is not sound policy.”  Id. 478 U.S. at 321.

    Friday
    Sep142012

    Former Stanford Financial Group CIO Sentenced for Obstruction of Justice

    On September 13, 2012, Laura Pendergest-Holt, the former Chief Investment Officer of Houston-based Stanford Financial Group, was sentenced in U.S. District Court for the Southern District of Texas to 36 months in prison for her role in obstructing the SEC’s investigation of the Stanford International Bank (SIB), the Antiguan off-shore bank owned by convicted financier Robert Allen Stanford.  U.S. v. Pendergest-Holt, No. H-09-342 (S.D. Tx.)  Earlier this year, Mr. Stanford was sentenced to 110 years in prison after his conviction on charges of financial fraud relating to his orchestration of a $7 billion ponzi scheme.

    The obstruction of justice charge was based on testimony that Pendergest-Holt provided to the SEC in its inquiry regarding SIB’s investment portfolio.  Pendergest-Holt acknowledged that her eventual appearance and sworn testimony before the SEC was a stall tactic designed to frustrate the SEC’s efforts to obtain important information about SIB’s investment portfolio.

    Thursday
    Sep062012

    New York Times Reports Largest FCPA Settlements have been with Foreign Firms

    ​The New York Times reports that the more than $3 billion in settlements that the Department of Justice has achieved with companies under the Foreign Corrupt Practices Act (FCPA) since the passage of the act in 1977 have been primarily with foreign companies.  The best-known case is that of Siemens, the German global engineering company that paid $800 million to the U.S. and another $800 million to Germany to settle charges that 8 former executives paid $100 million in bribes to Argentine officials to secure a $1 billion contract for Siemens.

    Of the top ten settlements, only one company, KBR, the former Kellogg, Brown and Root, a subsidiary of Halliburton, is an American company.  However, The Times also reports that of the 78 companies now under investigation for suspected violations of the FCPA, most are American, including Alcoa, Goldman Sachs, Pfizer and Wal-Mart.

    For more information, please see:​
    http://www.nytimes.com/2012/09/04/business/global/bribery-settlements-under-us-law-are-mostly-with-foreign-countries.html?emc=eta1

    Thursday
    Sep062012

    Fourth Circuit Refuses To Apply Computer Fraud And Abuse Act To Employee's Theft Of Trade Secrets

    Recently, in WEC Carolina Energy Solutions LLC, v. Willie Miller, et al., the U.S. Court of Appeals for the Fourth Circuit held that an employee's misappropriation of his employer's trade secrets is not a violation of the federal Computer Fraud and Abuse Act ("CFAA").  By adopting a narrow interpretation of the CFAA, the Court contributed to a deepening split among the federal appellate courts regarding the proper construction of the Act. 

    The CFAA was passed by Congress in 1986 to address computer crime.  Today, it remains principally a criminal statute designed to combat computer hacking, although it does allow injured private parties to sue for compensatory damages and injunctive relief. 

    The WEC case involved a civil action brought by WEC against its former employee and Project Director, Mike Miller.  When Miller worked at WEC, he was authorized to access confidential and trade secret documents stored on the company's computer servers, including WEC's price terms and technical capabilities.  According to WEC's corporate policies, however, Miller was prohibited from downloading that confidential information to his personal computer or otherwise using the information without authorization.

    WEC alleged that, before resigning from WEC, Miller downloaded confidential documents to a personal computer.  WEC further claimed that Miller later used that confidential information when making a presentation to a potential WEC customer on behalf of a competitor.  After that customer awarded two projects to the competitor, WEC filed suit against Miller, asserting violations of several state statutes as well as the CFAA. 

    After the trial court dismissed WEC's CFAA claim, WEC appealed to the Fourth Circuit, which affirmed.  The Fourth Circuit first noted that while the CFAA permits a private party to bring a claim for violations of the Act, it is "primarily a criminal statute designed to combat hacking."  The Court further observed that because the CFAA has both civil and criminal application, its interpretation of the statutory language would apply uniformly in both contexts.  Therefore, the Court stated that it would apply the "rule of lenity" applicable to criminal statutes and strictly construe the CFAA's provisions. 

    The issue before the Fourth Circuit in WEC was the scope of the terms "without authorization" and "exceeds authorized access."  The Court had to determine "whether these terms extend to violations of policies regarding the use of a computer or information on a computer to which a defendant otherwise has access."  The Court opted for a narrow reading of these terms, and limited their application "to situations where an individual accesses a computer or information on a computer without permission."  The Fourth Circuit reasoned that its construction 1) was consistent with the Act's primary objective, which is to combat hacking - and not to rein in rogue employees - and 2) was appropriate under the rule of lenity as applied to the construction of criminal statutes.  Accordingly, the Court held that the CFAA does not "provide a remedy for misappropriation of trade secrets or violation of a use policy where authorization has not been rescinded," and dismissed WEC's suit. 

    ​In adopting a narrow interpretation of the CFAA, the Fourth Circuit followed in the footsteps of the Ninth Circuit Court of Appeals, but broke from the broader interpretation embraced by the Fifth, Seventh, and Eleventh Circuits, which have held that the CFAA covers employee violations of corporate computer use restrictions.  The WEC decision deepens the Circuit split, and increases the need for a clear answer from the Supreme Court concerning the breadth of conduct subject to criminal prosecution under the CFAA.

    Wednesday
    Sep052012

    Jury Convicts Three Former UBS Executives for Municipal Bond Big Rigging

    ​On August 31, 2012, a jury convicted three former financial services executives for wire fraud and conspiracy to commit wire fraud in relation to bidding for contracts for the investment of municipal bond proceeds and other municipal finance contracts. According to the Department of Justice, Peter Ghavami, Gary Heinz and Michael Welty participated in separate fraud conspiracies and schemes with various financial institutions and with a broker, at various time periods from as early as March 2001 until at least November of 2006.

    The financial institutions offered a type of contract to state, county and local governments and agencies, and not-for-profit entities, throughout the United States, known as “investment agreements.” Public entities typically hire a broker to assist them in investing their money and to conduct a competitive bidding process to determine a winning provider. According to DOJ, the public entities were seeking to invest money from a variety of sources, primarily the proceeds of municipal bonds that they had issued to raise money for, among other things, public projects.

    The jury found that Ghavami, Heinz and Welty, with their provider and broker co-conspirators, corrupted the bidding process in order to increase the number and profitability of the agreements awarded to UBS. At other times, while acting as brokers, Ghavami, Heinz and Welty and their co-conspirators, arranged for UBS to receive kick-backs in exchange for manipulating the bidding process and steering investment agreements to certain providers. The result was to deprive the municipalities of competitive interest rates for the investment of tax-exempt bond proceeds that were to be used by municipalities to refinance outstanding debt and for various public works projects.

    The government presented evidence at trial that these actions cost municipalities around the country and the U.S. Treasury millions of dollars. Among the issuers and not-for-profit entities whose agreements or contracts were subject to the defendants’ schemes were the Commonwealth of Massachusetts, the New Mexico Educational Assistance Foundation, the Tobacco Settlement Financing Corporation of Rhode Island and the RWJ Healthcare Corp. at Hamilton.

    The DOJ announced that a total of 20 individuals have been charged as a result of the Department’s ongoing municipal bonds investigation. Of those 20, a total of 19 individuals have been convicted or pleaded guilty, and one awaits trial. In addition, one company has pleaded guilty.

    Tuesday
    Sep042012

    Second Circuit Reverses District Court's Dismissal of SEC Claim Against Former Terex Corporation CFO

    On August 8, 2012, a panel of the U.S. Court of Appeals for the Second Circuit reversed the District Court’s dismissal of an SEC claim against former Terex CFO, Joseph Apuzzo, wherein the SEC had alleged that Mr. Apuzzo aided and abetted securities law violations to his role in a fraudulent accounting scheme.

    Apuzzo’s employer, Terex Corporation, manufactures equipment for use in the construction, infrastructure and service to mining industries. United Rentals, Inc. is one of the largest equipment rental companies in the world. Michael J. Nolan was United Rentals’ Chief Financial Officer from 1997 until December of 2002. According to the SEC, United Rentals and Nolan, with Apuzzo’s assistance, carried out two fraudulent “sale – lease back”transactions. These transactions were designed to allow United Rentals to recognize revenue prematurely and to inflate the profit generated from United Rentals’ sales. Here’s how it worked:

    • URI would sell used equipment to General Electric Credit Corporation, and leased the equipment back for a short period.
    • In order to obtain General Electric Credit’s participation, United Rentals convinced Terex to agree with General Electric Credit to resell the equipment for General Electric Credit at the end of the lease periods.
    • Terex and United Rentals also agreed that Terex would provide a “residual value guaranty” (“RVG”) to General Electric Credit, which provided that after resale, General Electric Credit would receive no less than 96% of the purchase price that General Electric Credit had paid to United Rentals for the used equipment.
    • However, to secure Terex’s participation, United Rentals secretly agreed to indemnify Terex for any losses incurred from the RVG that it had provided to General Electric Credit
    • URI also agreed to make substantial purchases of new equipment from Terex to improve Terex year-end sales.

    URI sought to immediately recognize the revenue generated by the sale of equipment to General Electric Credit. However, under Generally Accepted Accounting Principles (GAAP) it could only do so if it met certain criteria, including (1) that the “risks and rewards of ownership” had been fully transferred to General Electric Credit and (2) that the sale price was “fixed and determinable,” or, in other words, that there were no unsettled commitments related to the sale. The problem was that United Rentals had secretly agreed to indemnify Terex for any losses that Terex would incur, and that in doing so, it had not fully transferred the risks and rewards of ownership and there were unsettled commitments associated with the sale. Therefore, recording it as revenue was not permitted under GAAP, and Apuzzo knew that if the full extent of three party transactions was transparent, United Rentals would not be able to claim the increased revenue. Apuzzo, therefore, executed various agreements that disguised United Rentals’continuing risks and financial obligations, and he also approved inflated invoices from Terex that were designed to conceal United Rentals Indemnification Payments to Terex.

    The SEC asserted that in order for a defendant (Apuzzo) to be liable as an aider and abettor in a civil enforcement action, the SEC must prove, “(1) the existence of a securities law violation by the primary (as opposed to the aiding and abetting) party; (2) ‘knowledge’ of this violation on the part of the aider and abettor; and (3) ‘substantial assistance’ by the aider and abettor in achievement of the primary violation,” citing SEC v. Debella, 587 F.3d 553, 566 (2nd Cir. 2009) (quoting Bloor v. Carro, Spanbock, Londin, Rodman & Fass, 754 F.2d 57, 62 (2nd Cir. 1985)).

    Although the District Court found that the complaint filed by the SEC plausibly alleged that Apuzzo had actual knowledge of the primary violation, it concluded that the complaint did not adequately allege“substantial assistance,” and dismissed the SEC’s complaint. Specifically, the District Court held that the “substantial assistance” component required that the aider and abettor proximally cause the harm on which the primary violation was predicated, and that the Complaint did not plausibly allege such proximate causation. The Second Circuit, however, reversed holding that to satisfy the “substantial assistance” component of aiding and abetting, the SEC must show that the defendant “in some sort associate[d] himself with the venture, and that he participate[d] in it as in something that he wish[ed] to bring about [and] that he [sought] by his action to make it succeed,” citing United States v. Peoni, 100 F.2d 401, 402 (2nd Cir. 1938). The Court rejected Apuzzo’s argument that substantial assistance should be defined as proximate cause, noting that such an argument ignored the difference between an SEC enforcement action and a private suit for damages.

    The Court further indicated that “proximate cause” is the language of private tort actions, but that in an enforcement action, civil or criminal, there is no requirement that the government prove injury, because the purpose of such actions is deterrence, not compensation. The Court went on to affirmatively clarify that, in enforcement actions brought under 15 U.S.C. §78(t)(e), the SEC is not required to plead or prove that an aider and abettor proximally caused the primary securities law violation.

    Applying this test, the Second Circuit found that the complaint by the SEC plausibly alleged that Apuzzo provided substantial assistance to the primary violator in carrying out the fraud and, therefore, the judgment of the district court was reversed. The Court explained that Apuzzo associated himself with the venture, participated in it as something that he wished to bring about, and sought by his action to make it succeed. It noted specifically that Apuzzo agreed to participate in the transactions; negotiated the details of those transactions, through which he extracted certain agreements from United Rentals in exchange for Terex’s participation; approved and signed separate agreements with General Electric Credit and United Rentals, which he knew were designed to hide United Rentals’ continuing risks and financial obligations relating to the sale-lease back transactions in furtherance of the fraud; and approved or knew about the issuance of Terex’s inflated invoices, which he knew were designed to further the fraud.

    Tuesday
    Sep042012

    SEC Makes First Whistleblower Award Since Passage of Dodd-Frank 

    On August 21, 2012, the Securities and Exchange Commission (SEC) announced that an individual who had provided documents and other significant information in the investigation of a multi-million dollar securities fraud scheme had been awarded nearly $50,000. This is the first pay-out from a new SEC program designed to reward people who provide evidence of securities fraud. The award represents 30% of the dollar amount collected in an SEC enforcement action against the perpetrators of the scheme. This (30%) is the maximum percentage pay-out allowed by the Whistleblower Law.

    The Whistleblower’s assistance led to a court ordering more than $1 million in sanctions, of which approximately $150,000 has been collected thus far. It is still possible that additional sanctions will be issued. Any such increase, will increase payments to the Whistleblower.

    Robert Khuzami, director of the SEC’s Division of Enforcement, stated, “this Whistleblower provided the exact kind of information and cooperation we were hoping the Whistleblower program would attract.” He indicated further that, “had this Whistleblower not helped to uncover the full dimensions of the scheme, it is very likely that many more investors would have been victimized.”

    The SEC did not approve a claim from a second individual seeking an award in this matter, because of the information provided that did not lead to or significantly contribute to the SEC’s enforcement action, as required for an award.

    The SEC indicates that the quality of tips that has been receiving is on the increase. It indicates that it has received about 8 tips per day since establishment of the program in August of 2011.

    Monday
    Sep032012

    Michigan Man Becomes 9th Individual to Plead Guilty in $13.8 Million Healthcare Fraud Scheme 

    On August 28, 2012, the DOJ announced that Jawad Ahmad, a Detroit area resident entered a plea of guilty for his role in managing a $13.8 million psychotherapy fraud scheme. He is scheduled to be sentenced on November 28, 2012, and faces a maximum potential penalty of 10 years in prison and a $250,000 fine.

    According to the government, the fraud scheme began in July of 2008 when Ahmad and two other co-conspirators acquired control over a home health care company known as Physicians’ Choice Home Healthcare LLC (Physicians’ Choice). Ahmad managed the operations of Physicians’ Choice from January 2009 to March of 2010, and in doing so managed numerous aspects of fraud at Physicians’ Choice, including the delivery of payment of kickbacks to beneficiary recruiters. The beneficiary recruiters would obtain Medicare beneficiaries’ information needed to bill Medicare for home health services that, in fact, were never rendered.

    Ahmad also provided information to employees of Physicians’Choice to check the billing eligibility of the Medicare beneficiaries before Physicians’ Choice began billing them. Physicians’ Choice co-opted the Medicare beneficiaries by providing kickbacks in exchange for pre-signed forms and visit sheets that were later falsified to indicate that they received home health services that they never received. Ahmad would deliver the pre-signed beneficiary paper work to various medical professionals to create and/or sign fictitious patient files to document purported home health services that were never rendered.

    From May of 2010 through September of 2011, Ahmad also managed Phoenix Visiting Physicians, PLLC. DOJ claimed that his co-conspirator, Dr. Dwight Smith, signed home health care referrals for beneficiaries he had not seen or treated. In addition, Phoenix employed individuals who held themselves out to be “doctors,” but who were not licensed in the State of Michigan to perform any medical services. The unlicensed “doctors” met and purported to examine non-home bound Medicare beneficiaries for home health care services.

    Ahmad also acknowledged that his co-conspirators acquired beneficial ownership and control of three other home health care companies, each of which billed Medicare and operated in a manner the same as or similar to Physicians’ Choice. Medicare also paid these companies more than $5 million for fraudulent health care claims submitted based on Dr. Smith’s fraudulent referrals.

    It is estimated that the four home health care companies at the center of the indictment received approximately $13.8 million from Medicare in the course of the conspiracy.