Tagged: fraud

How the Feds Enforce the FCPA

  The other day, we drew a contrast between the Manhattan DA’s new public integrity unit and the way the feds go after FCPA violations, and some folks asked just what exactly the feds do in these cases.  That’s a good question.  Especially now, as the FCPA has become a...

Stop the Music – 3rd Circuit Slams DOJ’s “Musical Chairs” in Securities Fraud Prosecution

SEC Rule 10b-5 is one of the main securities fraud laws. It says you can’t mislead people in connection with the purchase or sale of a security. You can’t make an untrue statement of a material fact. And you can’t fail to state a fact, when without that fact the statements you just made would be misleading.

That seems simple enough. But federal prosecutors in New Jersey seem to be having a hard time figuring out what that means.

In June 2005, the feds in New Jersey indicted Frederick Schiff, the CFO of Bristol-Myers Squibb, for failing to disclose material facts to investors. Allegedly, Bristol-Myers (a drug company) was paying wholesalers to order more drugs than they really needed, so Bristol-Myers could report higher sales numbers and inflate its stock value. Schiff allegedly didn’t tell investors about it during conference calls and in SEC filings. (See the indictment here and the DOJ’s press release here.) That indictment got thrown out for a grand jury leak, so they got a second one in May 2006, and finally a third one in April 2007 that dropped allegations of accounting violations.

With respect to the omissions, the government kept changing its tune. First, they said the company had a duty to correct misleading statements of others, based on a “general fiduciary duty.” The district court helpfully pointed out that there is no such duty in the law. So then the feds said there was a statutory duty under SEC regs S-K, which might actually have worked, but then they changed their mind and put on the record that they weren’t pursuing that theory. There was a “theory of duty based on falsity of reported sales and earnings,” which the District Court said wouldn’t fly. Then they tried to say the stuff left out of filings is a material omission that is misleading if you include the earlier analyst calls in the context (calling it “all of a piece”). The district court ruled that, no, there is no affirmative duty under either the “falsity” or the “all of a piece” theory. “It defies logic,” the court ruled, “to charge as a crime that an utterance in an analyst call must have other words written in a later SEC filing in order to make the utterance in the prior phone call ‘not misleading.’” Thanks for playing. The feds appealed.

In a unanimous decision today (opinion here), the Third Circuit slammed the DOJ for constantly changing its theory of the case, for playing “musical chairs” with its theory of how Schiff’s conduct counted as an unlawful omission under Rule 10b-5.

More importantly, the Circuit said the DOJ’s ultimate theory of liability here — that Schiff had a “general fiduciary” duty as a “high corporate executive” to disclose the inventory issue — was simply overbroad. “This argument reaches too far.”

This is a big setback for the feds, who now are left with a much narrower …

Food Fraud Prosecutors Caught Selling Snake Oil

Judge Posner issued a scathing decision yesterday for the 7th Circuit, reversing a jury’s fraud conviction and directing an acquittal. Why? Because the only fraudulent misrepresentations were those of the prosecutor. The decision is great, and we plan to use some of it in our own future arguments. Sadly, it...

We’re Not Alone

  Yesterday, we observed that there have been a lot of Ponzi schemes coming down lately, and asked what gives? Today, the Wall Street Journal made the same observation, and asked the same question. Here are some points from the article: * In 2007, the SEC had brought civil actions...

Can Skilling Get a New Trial?

On Tuesday, the Fifth Circuit ruled on Jeff Skilling’s appeal from his conviction in the Enron case, upholding the conviction, but sending the case back for re-sentencing. Skilling may be able to raise a Brady issue on remand, as well, so the case doesn’t seem to be over. The opinion...

Wave of White-Collar Investigations is Coming

“The nation’s top white-collar criminal defense practices are receiving a steady flow of inquiries from clients embroiled in the ongoing credit crisis,” reports the National Law Journal. This is consistent with reports we have heard within the white-collar defense community. With the economy continuing to take hits from the financial...