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american lawyer media news service Kenneth I. Schacter, a litigation-area partner in the New York office of Boston-based Bingham McCutchen, is a former assistant U.S. attorney for the Southern District of New York. Donald K. Stern, a partner in the firm’s litigation area in its Boston office, is a former U.S. attorney for the District of Massachusetts. Undercover agents. Consensual recordings. Informants. Court-ordered wiretaps. Search warrants. Handcuffed defendants. Perp walks. Seizure and forfeiture of the fruits of criminal activity. Sounds like your basic organized crime or drug case? Think again. These time-honored, tough law enforcement techniques, developed over the past decades to address more traditional criminal cases, are now being routinely applied to the formerly genteel and slow-moving world of the white-collar criminal investigation. White-collar cases have always been treated somewhat differently by prosecutors and by the courts, for several reasons. The conduct is generally seen as less “serious” (no violence, no drugs); the defendants usually have no prior criminal record; the risk that an indicted defendant will flee is slight or nonexistent; there is often a hazy line between what is a crime and what is a civil violation; and there is even a question whether the conduct might be entirely lawful. As a result, law enforcement tactics in such cases have often been seen as gentler, and the sentences more lenient, than those involving conduct considered a more direct threat to social norms. To some extent, this is still the case. But the gap is narrowing and narrowing quickly. Why is this happening? How are white-collar cases being handled differently now? And what does this mean for clients and their counsel? After Sept. 11, 2001, it was thought that white-collar enforcement, particularly at the federal level, would slow down. The Department of Justice, which had earlier made noises that it was looking to devote additional resources to such areas as guns, drugs, immigration and pornography, had to throw away its playbook. By virtue of the horrific events of that day, terrorism became the number-one priority. Indeed, even existing white-collar investigations were by and large halted, as federal agents and prosecutors focused post-Sept. 11 investigations on efforts to deter further attacks here and abroad. However, the corporate scandals of the last two years have forced the government to make sure that white-collar cases are aggressively investigated and prosecuted, particularly where public companies are involved. This will mean more than just adding some new cases. After all, the federal government has long vigorously prosecuted major fraud. The difference now is in the number, scope and public profile of these cases. Daily news reports trumpeting the latest (alleged) corporate wrongdoing, involving major drops in market capitalization or corporate bankruptcy, appear with alarming regularity. And this comes at a time when (at least until recently) stock prices were substantially lower, so that a rising tide could not mask the problems. Moreover, it seemed to many that the reported fraud may have stemmed from a failure of oversight by directors of public companies, accountants, lawyers and the Securities and Exchange Commission (SEC). Whereas some deference to “civil” institutions and internal corporate compliance mechanisms might have been seen as appropriate in the past, the Department of Justice adopted the opposite view. Criminal prosecution was seen as necessary to change corporate behavior. At the same time, New York Attorney General Eliot Spitzer moved into what he considered to be an open field and ratcheted up state law enforcement of securities firms, going well past what was already an ever increasing enforcement push by state attorneys general and securities regulators. These efforts, federal and state, constituted the most recent push by prosecutors to adopt, in white-collar cases, techniques formerly reserved for other, more “serious” crimes. These hardball tactics threaten to be in the standard tool kit of prosecutors for a long time to come, despite criticism from many quarters. Guidelines heighten pressure The pressure exerted on targets and subjects of these investigations is heightened by the enormous weight of the Federal Sentencing Guidelines, recently revised to lengthen sentences in many white-collar cases, particularly those involving large decreases in market capitalization of publicly traded companies. In cases involving substantial stock price drops-and, consequently, substantial “losses” for purposes of the sentencing guidelines-the guidelines all but mandate substantial prison terms in the absence of meaningful cooperation. The 87-month sentence imposed in June on former ImClone CEO Samuel Waksal by U.S. District Judge William H. Pauley III is indicative of the exposure noncooperating defendants face, even following a guilty plea. Congressionally mandated amendments to the guidelines scheduled to take effect on Nov. 1 will increase that exposure further. In a securities fraud case involving tens or hundreds of millions of dollars in market “losses,” there is enormous pressure and incentive to cooperate as the best chance to avoid a long period of incarceration. The Department of Justice has made it clear that it intends to rely more heavily on cooperating witnesses working proactively. The pressure of the sentencing guidelines practically ensures that, in any given investigation, mid- to senior-level executives will be cooperating, and cooperating early before more senior executives/targets even know an investigation is afoot. This means that fellow corporate officers and employees will engage in discussions with their business colleagues designed to generate incriminating statements. Many of these conversations will be recorded (perhaps even videotaped) for use in later prosecutions. In some instances, those cooperating with the government may be whistleblowers, acting because they object to the conduct of others and believe it illegal. Other whistleblowers may participate in such activities for mixed motives-a desire to uncover wrongdoing, supplemented by the availability of a monetary recovery in a qui tam False Claims Act case. But in most cases, it will be the threat of prosecution and the looming enhanced sentences under the revised sentencing guidelines that will trigger cooperation. Consent tapes have been used in white-collar cases for years but, in recent cases, the use of such recorded conversations among very senior executives appears to be increasing as the pressure on such executives to “flip” on each other mounts. Recent hearings in the Healthsouth case brought against former CEO Richard Scrushy revealed that the company’s chief financial officer, William Owens, had secretly recorded conversations with Scrushy under the government’s aegis. According to media reports, moments after the last of the recordings, government agents swooped down on the company’s headquarters and executed a broad search warrant. Use of wired cooperators is not a brand-new tactic in white-collar cases. But it is quite clear that it will become the favored method of investigation, preferred over the former practice of poring over tens of thousands of documents for years and methodically (and slowly) building a case. Public statements by high-level officials in the Department of Justice, including the attorney general, and the SEC make plain that the push will be to get as close to “real time enforcement” as is possible. Wall St. J., April 4, 2003, at C1, C9. Undercover is here to stay The government has for some time been using undercover agents to investigate white-collar crime. Recent examples include the investigation into brokers accepting bribes to sell Bulletin Board stocks, various FBI-run stings targeting telemarketers and an investigation into a Ponzi scheme operating in 22 states. In the first case, nicknamed Operation Bermuda Short, an FBI agent posed as a securities trader employed by the U.S. representative of a fictitious foreign mutual fund willing to purchase large blocs of thinly traded stocks at inflated prices in exchange for kickbacks. In Operation Disconnect, FBI undercover agents pretended to sell a device that would enable fraudulent telemarketers to dial as many as 12,000 calls per hour. By persuading the telemarketers that they needed to know exactly how they conducted their telemarketing businesses-including specific information about their most successful telemarketing techniques-the undercover agents were able to obtain damaging admissions about the fraudulent nature of their business activities. The investigation resulted in the indictments of more than 50 defendants. Another recent case involved the use of FBI undercover agents posing as investors in connection with a so-called prime bank case, a classic Ponzi scheme. More than 50 arrest warrants were issued in the case, nicknamed “Sweet Tea Masquerade.” This trend will only accelerate. The type of effort and expense used to create phony businesses, or to insert undercover agents into the stream of commerce, will no doubt be encouraged. Such efforts are limited only by the imagination of federal agents and prosecutors. One might expect, for example, phony medical billing offices set up to investigate health care fraud or sham accountants offering to cook the books for potential clients. Similarly, we can expect that wiretaps in white-collar cases will become more common, although certainly still not the norm. Securities fraud itself is not an enumerated wiretappable offense (18 U.S.C. 2516(1)), but its close cousins, wire fraud and mail fraud, are. See 18 U.S.C. 2516(1)(c). Wiretaps have been used in some securities-related fraud cases already. See, e.g., United States v. Wager, 2002 WL 31106351 (S.D.N.Y. 2002) (use of wiretap in connection with investigation of organized crime-related securities manipulation scheme). Certainly, if federal agents can get judicial approval to bug a judge’s chambers, as in Operation Greylord, making the case to place bugs in the corner office of a Fortune 100 company executive can be expected (and may already be in place). Searching and shaming Of course, search warrants of company headquarters seeking documents and computer hard drives are not new. Usually such searches are conducted by a large contingent of agents. The numbers are usually justified by the need to ensure that the search is completed quickly and efficiently, in order to minimize the burden on the ongoing business, as well as to secure the offices during the search. But the real agenda is often to fan out and interview employees, many of whom will be caught unaware of any investigation and may not be represented by counsel. Looking to obtain admissions and statements that incriminate higher-ups will be the order of the day. The search of corporate headquarters often generates considerable media attention. But at least there is a legitimate law enforcement purpose (one assumes) in conducting the search in the first place. The same cannot be said for the “perp walk” to the extent that these are arranged by law enforcement to show handcuffed business executives walking to or from court. This technique, reflecting a desire to demonstrate “toughness” on white-collar crime, appears to be more an ancient “shaming” practice than a legitimate law enforcement tactic. Such perp walks were used in recent cases in the Southern District of New York, such as the Waksal case, the prosecution of John Rigas, the founder and former chairman of Adelphia Communications, and the cases brought against Scott Sullivan and David Myers, former senior executives of WorldCom. See Geeta Anand, Jerry Markon and Chris Adams, “Biotech Bust: ImClone’s Ex-CEO Arrested, Charged With Insider Trading,” Wall St. J., June 13, 2002, 2002 WL-WSJ 3397582; “Those CEO Perp Walks,” Wall St. J., Aug. 20, 2002, 2002 WL-WSJ 3403884; Benjamin Weiser, “Parading of Executives in Custody Fuels New Debate,” N.Y. Times, Nov. 26, 2002, 2002 WL 103089103. However, criticism of the practice-or an astute recognition that the practice could seem heavy-handed and backfire by engendering sympathy-may have led to the recent decision to permit the highest-profile white-collar defendant of all, Martha Stewart, to surrender voluntarily and avoid this humiliating public spectacle. Forfeitures more in favor Another area where the rules are changing is in the increased willingness of the government to seek forfeiture of assets in white-collar cases. The government for some time has sought to forfeit assets when it comes to drug trafficking or money laundering. Increasingly, forfeitures are being sought in white-collar cases, including health care fraud matters. Similarly, forfeiture agreements have now become part and parcel of plea agreements arising out of the spate of corporate misconduct, ranging from the collapse of Enron to the Adelphia scandal. For example, in late 2002, Timothy Belden, the former head of Enron Power Marketing’s western states operations, pleaded guilty to conspiring to manipulate the western energy markets and agreed to forfeit $2.1 million, which represented a portion of the bonus compensation he received that was traceable to the manipulation. Michael Kopper, a former Enron managing director, pleaded guilty in August 2002 to money laundering and wire fraud charges, and agreed to forfeit $12 million as a part of the plea agreement. In October 2002, the Justice Department filed a civil forfeiture action against Ben Glisan Jr., the former treasurer of Enron, seeking to seize a brokerage account containing about $900,000. The government contended that the account contained the proceeds of criminal activity relating to the collapse of Enron. See John R. Emshwiller, “Enron Ex-Treasurer Is Subject Of Justice Department Probe,” Wall St. J., Dec. 30, 2002, 2002 WL-WSJ 103129832. And in the Adelphia case, the government’s indictment of John Rigas and others seeks forfeiture of a staggering $2.53 billion in assets, stemming from alleged accounting fraud and corporate looting. Prepare for the unthinkable In addition to more traditional forfeiture actions, with the advent of Sarbanes-Oxley, the CEO or CFO of an issuer may be required to repay to the issuer bonuses or stock-trading profits realized during the 12 months before the filing of any false securities disclosure document. Faced with such aggressive investigatory techniques, clients and counsel would be well advised to prepare for the previously unthinkable. For public companies in particular, even the hint of an investigation can be a public relations nightmare, and any suggestion of an impropriety in connection with such an investigation can be catastrophic. Advance planning can help a company and its executives respond appropriately when confronted with even an unexpected encounter with law enforcement agents. Compliance plans should be in place that contemplate, in the worst-case scenarios, execution of search warrants and on-premises arrests. Employees at all levels should know who at the company is in charge in such events and what their rights and responsibilities are. Executives of companies involved in even seemingly routine regulatory or civil inquiries should be aware that fellow executives, customers or suppliers could be secretly recording conversations or saving e-mails. Even the innocent can be easily trapped in a compromising conversation or transaction when it is completely unexpected and when the other party has an interest in eliciting certain statements. If not already in place as a result of the corporate scandals of the past few years and the requirements of the Sarbanes-Oxley Act, counsel should revisit the subject of a corporate document retention policy designed to ensure compliance with current retention requirements. The conviction of Arthur Andersen and the recent indictment of Credit Suisse First Boston investment banking star Frank Quattrone were both based on e-mails sent during investigations that seemed to encourage the purging or alteration of documents of potential interest to regulators. And anyone doubting that any seeming coverup is usually viewed more harshly by prosecutors than the conduct being investigated need look no farther than the example of Martha Stewart. The complaints of whistleblowers can raise particularly thorny issues, even if the complaints seem on their face without merit. Under Sarbanes-Oxley, whistleblowers have substantial protections (including a new private right of action), and a misstep by the company can have serious consequences. Company counsel will need to review such complaints thoroughly and, in certain instances, bring in outside counsel experienced in such matters to conduct a further investigation. And, since prosecutors are now likely to insist upon a waiver of the company’s attorney-client privilege as the price of admission for the company getting full credit for cooperating in an investigation, counsel will need to think through carefully how such an internal review is conducted. See Department of Justice Memorandum from Larry D. Thompson, deputy attorney general, “Principles of Federal Prosecution of Business Organizations,” (Jan. 20, 2003), � II(A)(4). The government’s willingness to employ aggressive investigatory and prosecutorial techniques formerly reserved for crimes that at least used to be thought of as more serious reflects the Justice Department’s “get tough” policy in white-collar cases, especially those high-profile ones involving the downfall of publicly traded companies. This is a trend that is unlikely to be reversed, even in the face of criticism of some aggressive practices from the defense bar, at least as long as new headlines of corporate scandals continue to appear.

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