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During the heyday of Internet start-up companies, California’s Silicon Valley was a veritable corporate wild West, yet it attracted little criminal securities fraud enforcement efforts. Federal prosecutors in New York retained a virtual lock on handling Wall Street-style fraud cases through the 1990s. Then the Enron Corp. and WorldCom Inc. accounting and securities scandals splashed allegations of corporate malfeasance across the nation’s front pages through 2001 and 2002, and the U.S. Department of Justice (DOJ) began to franchise securities fraud cases in federal prosecutions around the nation. By the end of 2002, 30 U.S. attorney’s offices around the country brought 259 criminal cases stemming from Securities and Exchange Commission (SEC) investigations, and the president ordered the creation of a national securities fraud task force to oversee regional cases. Federal prosecutors in San Francisco, Chicago and a few other major cities had gained some expertise in early corporate fraud investigations, but others were playing catch-up. As early as 1997, former federal prosecutor Leo Cunningham in San Jose, Calif., had to beg the SEC office in San Francisco to send some potential criminal cases his way. That produced the federal indictment of the chief executive and financial officers of semiconductor components company California Micro Devices Corp. in nearby Milpitas, Calif., on charges that the two executives artificially inflated sales and engaged in insider trading. Jurors convicted the pair in a six-week trial. This only whetted the SEC’s appetite in San Francisco for more cases. Cunningham, now with Wilson Sonsini Goodrich & Rosati in Palo Alto, Calif., saw his and others’ ad hoc efforts to develop regional expertise in securities fraud pay off when the national scandals broke. American companies, the public quickly learned, had been cooking their books with aplomb. In 2002, a record 330 publicly traded companies restated their past earnings disclosures, according to Dale A. Oesterle, law professor at Ohio State University’s Michael E. Moritz College of Law. Pressure from the states State attorneys general, led by New York’s Eliot Spitzer, began to step up pressure on the SEC and DOJ by pursuing their own state investigations and prosecuting corporate malfeasance in what became a very public competition between state and federal prosecutors. At one point, 10 state attorneys general met and divided up investigation of investment banks and their analysts for false stock touting, finally reaching a $1.4 billion settlement in 2003. And the competition hasn’t stopped. “There is a multistate group looking at Ameriquest right now,” said Tom Dresslar, spokesman for California Attorney General Bill Lockyer. A 30-state investigation of Ameriquest Capital Co. has been examining allegations of hidden fees and overcharges to consumers. “We try to take a more aggressive role and [the Bush administration] claims federal pre-emption [of state action], and then they sit around and don’t do much,” Dresslar said. The Enron case, coupled with the outside pressure by states, Congress and the public, dramatically altered the way that DOJ handled prosecution of corporate fraud. The Justice Department turned to hometown prosecutions near company headquarters using local offices or specialized task forces to bring cases. “The pressure by the state attorneys general was healthy,” Oesterle said. “The SEC was getting too complacent and comfortable,” he said. “There was a view that there needed to be more effort by the Department of Justice in the area where the [illegal] conduct had made the most impact,” said Leslie Caldwell, who headed the Enron prosecution task force and oversaw the indictment of former CEOs Kenneth Lay and Jeffrey Skilling and Chief Financial Officer Andrew Fastow. Before Enron, Caldwell, having put away the likes of Lorenzo “Fat Cat” Nichols and his notorious Brooklyn, N.Y., drug gang, took on fat cats of an entirely different sort in 1998. She used experience gained in handling not only East Coast gangsters but also some securities fraud cases to pursue corporate crooks in Northern California as head of a newly formed securities fraud prosecution unit in San Francisco. The unit was created by then-U.S. Attorney Robert Mueller, who is now head of the FBI. Mueller recruited Caldwell to create and manage the securities fraud team in San Francisco. Her successes in San Francisco were rewarded when she was picked to head the Enron prosecution task force in Houston. Mueller recognized that a U.S. attorney has to focus on the issues in his district, Caldwell said. Northern California was not the drug capital or the organized crime capital of the nation, but “it was the white-collar crime capital of America. With Silicon Valley booming there was a lot of sloppiness,” she said. “It was a wide-open field because there hadn’t been a lot of criminal enforcement, not on a targeted basis,” said Caldwell, who is now with Morgan, Lewis & Bockius’ New York office, specializing in corporate investigations and criminal defense. “It was the Wild West. People had no fear because there was not a lot of enforcement or punishment,” she said. “Historically, the SEC was passive in white-collar enforcement. They would complete a case and then get the U.S. attorney involved. Nothing might happen criminally for several years down the road,” she said. “It didn’t make sense, and Mueller wanted it to change.” Things did change. That also opened up opportunities for federal prosecutors around the country to develop new areas of expertise. In Boston, U.S. Attorney Michael J. Sullivan focused on health care fraud and has been been encouraged by DOJ to prosecute cases, he said. And he did. Sullivan’s office won an $875 million settlement with TAP Pharmaceutical Products Inc. for inflating the price of a cancer drug in what is still the largest pharmaceutical fraud case. Success breeds more success, Sullivan said. As a result of winning cases, people who are aware of fraud refer those matters to his office, he said. Some disappointments But there have also been disappointing failures. Despite the huge fines, in 2004 a Boston jury acquitted eight former TAP sales representatives on charges of bribing doctors and giving incentives to hospitals to use the company’s services. The judge acquitted two others and prosecutors dropped charges against a third due to poor health. U.S. v. MacKenzie, No. 01-CR-10350 (D. Mass.) Although 15 executives of HealthSouth Corp. pleaded guilty in the Birmingham, Ala., prosecution, jurors acquitted former CEO Richard Scrushy in June of allegations he conspired to inflate the firm’s worth by $2.7 billion. U.S. v. Scrushy, No. CR-03-BE-0530-S. (N.D. Ala.). In Detroit, the $42 million fraud case against two Kmart Corp. executives was dropped when the star witness contradicted her own testimony. U.S. v. Montini, No. 03-CR-80228-PDB (E.D. Mich). Justice Department spokesman Bryan Sierra said that the practice of spreading corporate fraud cases to various regions has put cases beyond New York and into San Francisco, Chicago and other offices. “And that is the way it is going to stay for quite a while,” Sierra said. The department feels it is better to have a broader field of expertise, he said. As for defeats such as HealthSouth, he said, “We are not making a blanket change in policy because of any one case.” What it has done, according to Ohio State’s Oesterle, is that it has taught criminal prosecutors to focus their trials and spend time on how the executive used the money for fancy parties or yachts. Second, it may force the use of “sideshow charges”-something like those against Martha Stewart for lying to the government, rather than a harder-to-prove count of insider trading. In July 2002, President Bush created a corporate fraud task force that still oversees many of the corporate fraud cases. Its job is to focus prosecutors on officers, directors and other professionals who may engage in securities or accounting fraud. From the view of plaintiffs’ attorney Reed Kathrein of San Diego-based Lerach Coughlin Stoia Geller Rudman & Robbins, all the activity is welcome. “I hope they stay out there,” he said. “There is nothing wrong with the government strategy. It is wise they’ve taken it on the road. It isn’t just a New York problem anymore.” Caldwell, who now finds herself trying to keep corporate clients out of trouble, said that there are still plum cases out there. “The appetite to do corporate fraud cases is still strong. There is probably an enhanced wariness that this is not so easy,” she said. Corporate fraud rarely produces smoking-gun evidence, she said. But one thing is already beginning to change, Caldwell said. Districts without a prosecution track record will have more defense lawyers willing to go to trial hoping their client will get off because of inexperienced prosecutors, a judge more susceptible to arguments that others wouldn’t buy and an untested jury pool, she said.

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