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Indicted D.C. businessman C. Gregory Earls is in a pinch. He has four days to find a lawyer. The chief of U.S. Technologies Inc. is facing federal criminal charges that he defrauded investors in his company out of $13.8 million, and pocketed another million or so meant for a separate investment. But the one-time D.C. socialite and political fund-raiser has no money — at least none that he can spend, because a federal judge froze his personal assets in March at the behest of the federal government. For lawyers, Earls’ inability to access the money is turning what would normally be an easy decision to take the case into a question of whether garnering headlines in the high-profile matter is worth the risk of not getting paid. “A defense of that nature requires a lot of resources,” says D.C. lawyer Thomas Green, who is representing Earls on “a limited basis,” but has not yet agreed to full representation in the criminal case. Says white collar crime expert Plato Cacheris of freezing a defendant’s assets: “It certainly chills the right to counsel.” Typically, freezing a defendant’s assets is a tool used by prosecutors in narcotics trafficking, money laundering, or other organized crime probes when federal investigators can show a judge that most, if not all, of the funds were garnered through illegal activity. But ever since late 2001, when the Enron Corp. scandal began to dominate the headlines and evening news broadcasts, the government — usually through the Justice Department or the Securities and Exchange Commission — has been targeting the personal bank accounts of corporate officials in high-end fraud matters. According to SEC officials, the agency moved to freeze assets 63 times in fiscal year 2002, compared with 43 in 2001 and 56 in 2000. From Oct. 1, 2002, to Feb. 28, 2003, the SEC filed 20 asset freeze applications. In the Enron case alone, $35 million in personal assets have been frozen, and DOJ officials say they intend to freeze much more, according to comments made by Leslie Caldwell, head of the Justice Department’s Enron task force, at a May 1 press conference. One former SEC official says the agency has frozen assets in the past usually to make sure people or companies under investigation didn’t move their money offshore. It also puts pressure on the target. “Clearly, they are using it more aggressively in finance fraud cases when they want to protect assets and when they are confident they can get a forfeiture,” says Michael Missal, a partner at D.C.’s Kirkpatrick & Lockhart and a former attorney in the SEC’s Enforcement Division. Part of the trend has to do with the Sarbanes-Oxley Act, which expanded enforcement powers of the SEC. In particular, the 2002 law made it easier for SEC lawyers to seek a 45-day asset freeze on targets if there was evidence that the officials under investigation had received “extraordinary payments” — such as bonuses or other forms of high compensation. If an individual or company is charged with any violation of securities law, then the freeze can be extended indefinitely. Any freeze is subject to judicial approval, but defense lawyers say most judges are agreeing to it. The move not only blocks executives from receiving their salary or other compensation, but is also being made by the government to keep them from hiring lawyers, defense lawyers argue. “What’s really at work here are a lot of strategies designed to separate these individuals from competent defense counsel,” says Green, a D.C. partner at Sidley Austin Brown & Wood. But while the government may be more vigilant in going after the personal bank accounts of company executives, its efforts have met with mixed results. On May 7, a federal judge in Birmingham, Ala., denied an SEC motion seeking to freeze the personal assets of Richard Scrushy, the fired chairman of the HealthSouth Corp. currently under investigation for criminal fraud by the Justice Department. Scrushy, accused of being part of a scheme that inflated his company’s worth by more than $1 billion, asked the court to lift the temporary freeze so he could access nearly $50 million in order to pay for his lawyers, accountants, and other personal expenses. After an 11-day hearing, Judge Inge Johnson ruled that the SEC failed to present sufficient evidence that Scrushy was involved in the alleged fraud. The judge also suspended the SEC’s civil case until the DOJ’s criminal investigation was completed. The tactic is being employed by state prosecutors, too. Earlier this month, the prosecutor in New York’s state fraud case against Tyco International Ltd. executives L. Dennis Kozlowski and Mark Swartz complained to a Manhattan judge that the two were each given $500,000 monthly allowances while awaiting trial. The amount was mentioned in court papers opposing the defendants’ request for pushing back their trial date. Their personal assets — about $600 million — have been frozen since September, and their expenditures are now reviewed by a New York State trial judge. When a defendant’s personal assets are frozen, he must petition the court to release any of it for personal use, such as paying a mortgage or a lawyer. Or he could try and work out an arrangement with the government. One federal prosecutor in the District who asked not to be named says he will sometimes take into consideration a person’s financial needs when building a case to freeze funds. This lawyer adds, however, that freeing up money so the defendant could retain a lawyer would not be considered a necessary expense. “It would not be persuasive to me that they could not buy a lawyer,” says this prosecutor. In the case of Earls, SEC officials moved to freeze Earls’ assets and those of U.S. Technologies in March after learning that Earls had written several personal checks in the range of $15,000 to $20,000 to keep his company afloat. The SEC had filed a civil securities fraud action against Earls in December in the U.S. District Court for the District of Columbia. He was criminally indicted in New York in late March. “We do not know what is left of his personal assets or how much he has spent on personal expenses, including his top-of-the-line legal defense team,” wrote SEC attorney David Kornblau in the agency’s emergency motion to freeze Earls’ assets. “Having stolen millions of dollars of funds from [company] investors, Earls should not be permitted to squander assets that should be preserved for his victims.” Kornblau also told the court that he was discussing with Earls’ defense team the possibility of having a court monitor appointed to manage the company’s finances. Judge James Robertson granted the motion to freeze U.S. Technologies’ corporate assets as well as Earls’ personal assets. A separate bank account was later set up for Earls to deposit any new money he received for personal use. Judge Gladys Kessler, as the judge assigned to decide motions at the time the request for appointment of a court monitor was filed, approved the court monitor request, naming former SEC lawyer Gregory Bruch, a D.C. partner at Foley & Lardner, as the court monitor to manage the corporate assets. On May 1, Earls asked Judge Robertson, who was permanently assigned the case, to agree to a transaction in which Earls would be paid about $250,000 from company assets. Earls, who continues to run U.S. Technologies but has not been paid for nearly a year, argued that the money was both compensation for his work and the return of funds that he lent the company. Earls argued that he needed the money to pay for a lawyer in the criminal case pending in U.S. District Court for the Southern District of New York. According to court papers, Judge Naomi Buchwald gave him until May 15 to find counsel. At a May 7 hearing in D.C. federal court, Bruch, the court monitor, said he agreed to pay Earls $92,500. Kornblau objected to that amount, saying that the SEC was still investigating whether Earls deserved the money. “The test here is what is in the best interests for U.S. Technologies shareholders, not what’s in the best interests of Mr. Earls’ criminal defense,” Kornblau argued. “We can’t see a basis for turning over corporate assets to Mr. Earls in light of the allegations against him.” Judge Robertson, however, agreed with Bruch and ordered the payment, noting that it would “make it possible” for Earls to hire a lawyer in the criminal case. Late last week, however, Green had still not agreed to take the case. While he says he sympathizes with Earls’ situation, the decision to take a case comes down to the bottom line. “I am trying to extend myself here as I would to a lot of people in need of representation,” says Green. “As to the ultimate contours of that representation, I don’t know what they’re going to be.”

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