This is the result we've all been waiting for (OK, maybe just me).  Joseph Collins, as you may recall, is a partner in Mayer, Brown and was named in a shareholder suit under Rule 10b-5 for committing securities fraud as the outside counsel for Refco.  He claimed he had no idea that fraud was occurring and that he was kept in the dark.  A district court judge dismissed the lawsuit against him, reminding us all that parties may not be sued as aiders and abetters to securities fraud, but only as primary actors.  And, the court, must have reasoned, no jury could find by a preponderance of the evidence that Mr. Collins was a primary actor in the Refco securities fraud.  Now, in private securities litigation speak, this doesn't mean that a jury couldn't find that Collins knew about the fraud and kept going; in fact, the district judge thought that was almost surely true.  But to find that Collins perpetrated securities fraud against investors after Stoneridge Investors v. Scientific-Atlanta, the investors must have known that the fraudulent statements were coming from Collins in order to have "relied" on him.  So, since the fake documents that were prepared by Collins were put in filings without investors really associating them with the law firm, Collins is in the clear as far as a private civil lawsuit goes.

Well, now a jury has found that beyond a reasonable doubt, Mr. Collins committed securities fraud.  Not just that he was engaged in a conspiracy to commit securities fraud, but also that he committed two counts of securities fraud.

One of these would seem to be wrong to a bystander just walking by, observing.  How could the evidence against someone be enough for a criminal conviction, but not enough for a civil lawsuit?  The short answer is because the elements of criminal fraud don't require much, and the elements of securities fraud, at least for private parties, do.  The prosecutor doesn't have to prove that anyone relied or was damaged by Collins' fraud -- only that he knew of the fraud and kept going.  Because we have made a decision that the frivolous securities lawsuit is inefficient and too costly for defendants to bear, we require private plaintiffs to prove (basically without discovery) that they relied on the particular actor's part of the fraud and that they were economically damaged.  This, obviously can lead, and has in this instance led, to some crazy situations.  What a crazy world if Mr. Collins is sufficiently blameless to avoid civil liability but must spend part of his life in prison for the same act.  Sentencing will come later.  The CEO is in prison for 16 years; the President for 10 years.

If readers are interested in the legal structures and practices that make it possible for this disconnect, feel free to read The Undercivilization of Corporate Law (33 J. Corp. L. 361 (2008)).

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So, before leaving the country, I’ve been pondering my queasiness with 150-year prison sentences. I have no problem with an effective life sentence or even a longer-than-life sentence, but these blockbuster sentences somehow seem just wrong. I tried to figure out just what the problem is, when I realized that the 150-year sentence in the Bernie Madoff case is an artifact of the charges levied against Madoff by the U.S. Attorney. Recall that the government charged, and Madoff pleaded guilty to, 11 counts of criminal behavior with a collective maximum sentence of 150 years. Those charges and that maximum were the basis for the sentence Judge Denny Chin ordered.

But consider this: J. Allen Stanford, another Ponzi schemer, was just charged with 21 counts of criminal behavior with a collective maximum sentence of 250 years.

Now, if the judge in Stanford’s case were to impose the statutory maximum would it make any sense? 150 years for a $60 billion Ponzi scheme that lasted decades and swept up thousands of victims (Madoff); 250 years for a $6 billion Ponzi scheme that lasted just a few years and ensnared far fewer victims (Stanford)?

You can see the problem: the U.S. Attorney can (and frequently does) manipulate the sanction options available to the sentencing judge just by piling on causes of action. The U.S. Attorney’s office in Houston took some time and exercised some care in making the charging decision in Stanford (whom they expected to plead not guilty). Presumably, with a few more weeks and a more combative defendant, the U.S. Attorney’s office in the Southern District of New York could have come up with more charges and therefore sought many more years in their indictment of Bernie Madoff.

One can easily see a sanctions arms race among districts and increasing sentencing disparities of the sort the Sentencing Guidelines were intended to curb.

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I've been reading Public Enemies by Bryan Burroughs, a fascinating exploration of the most notorious bank robbers in the early 1930s (John Dillinger, Pretty Boy Floyd, Machine Gun Kelly, the Barker Gang, Baby Face Nelson and Bonnie and Clyde), who were foiling state and federal lawmakers at every turn with their simultaneous crime sprees.  Interestingly, the book points out that the Depression did not create these bank robbers.  They weren't down and out people who had lost farms or jobs.  They had been criminals in the 20s, also.  But, the technology of the day had brought them getaway cars and machine guns, giving them a new ability to rob banks and disappear into the back roads of the Midwest.  The book also reveals the ineptitude of the newly created FBI and has spawned a movie starring Johnny Depp as John Dillinger.

Thinking about Dillinger et al. has created an interesting backdrop to the Madoff sentencing.  We don't have a lot of bank robbers these days, and very few jail breaks.  The book depicts the relationship between the criminals and law-abiding folk as not that strained.  Dillinger in particular took many hostages to flee crime scenes, but then let them go, often with spending money.  He generally stole money from banks, which weren't very popular during the Depression, but not from individuals.  (He did seem to steal a lot of getaway cars, though.)  Some individuals saw his crimes as being against nameless banks or insurance companies, and not really having much to do with them.  Informants and witnesses were hard to find.  Of course, his crimes created a lot of danger for innocent bystanders and caused the death of several of them, and many law enforcement officers.  He also later teamed up with trigger-happy Baby Face Nelson, who didn't seem to have the marketing talent that Dillinger had.  Obviously, Dillinger's crimes were not bloodless financial crimes to be sure.  (Will Rogers famously criticized the FBI by saying that Dillinger might get lost in a crowd of innocent bystanders and then the FBI would accidentally shoot him.) 

Our public enemy of today is a very hated person, Bernard Madoff.  His financial crimes were bloodless, although we are having a debate in the comments to Jayne's "Extraordinary Evil" post about how life-ruining having one's life savings stolen, particularly late in life, can be.  One of Madoff's victims stated that he felt imprisoned because he lost the freedom that his life savings gave him.  Madoff seems to definitely be more reviled by middle America than Dillinger.  No Robin Hood myth could ever attach to Madoff.  He stole from the rich and the middle class to make himself richer, but Dillinger also kept his bounty.  Dillinger never got rich and definitely never led a life of luxury and leisure, like Madoff.  And Dillinger didn't look people in the eye, friends and confidants, and lie to them to get their money.  Perhaps these are the differences, or perhaps just differences in the times in which we live.

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Still thinking about yesterday's excellent posts by Jayne Barnard on Bernie Madoff's sentencing, I opened my browser to the W$J this morning and immediately made this association ...

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A few more thoughts about the Madoff sentencing this morning.  At 9:56, Bernie Madoff entered the courtroom looking like an old, old man.  He actually seemed to be doddering in.  When the hearing was completed, he gave a brisk nod to his lawyer, Ira Sorkin, then smartly walked -- very business-like -- out of the courtroom.  He actually seemed transformed.  Maybe it is some perverse source of relief to know that you're going away forever and ever instead of just forever.

For the victims, though, there was little euphoria.  Only a few people in the courtroom shouted when the sentence was announced.  Judge Chin had discouraged the allocutors from complaining about the SEC or the SIPC trustee.("This is not the time to criticize the government.")  He also made clear he had no authority to sentence Madoff to a particularly odious prison. 

There was talk, of course, about Madoff's marriage.  One victim said "I have a marriage made in heaven.  You have a marriage made in hell."  No, said Madoff, "I lied to my wife ... and she still stands by me."  You think she is "silent and not sympathetic.  That's not true." "

The most powerful voice in the room was that of Judge Denny Chin in a closely-scripted but emotionally resonant ruling.  He cited the many middle-class victims of Madoff's fraud -- a theme deftly created by the U.S. Attorney's Office.  He recounted the story of a widow who had gone to Madoff's office to thank him for protecting her family's weatlh.  "You're safe," Madoff assured her.   Judge Chin noted the many decisions victims had made -- sometimes for decades -- based on their mistaken belief in Bernie Madoff.   

I was present in the courtroom primarily to observe the victim allocution.  Some of the allocutors could be faulted for being a little star-struck ("when I was being interviewed by Katie Couric.....") but all of them were candid, poetic, and powerful advocates for their position. No one's time was wasted by listening to 45 minutes of victim allocution. 

In the end, Judge Chin rejected Sorkin's suggesion that there was "something absurd" about a 150-year sentence.  Not in this case.  Not for a crime as "extraordinarily evil" as this one.

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I've just come from the ceremonial courtroom in the New York federal courthouse, where I was able to witness the sentencing of Bernard Madoff.  There is much to be said about the past two hours -- the dignity and eloquence of the victims who spoke; the crisp and powerful presentation of Lisa Baroni, the U.S. Attorney who argued for the 150-year sentence; the remarkable and quite plausible allocution of the defendant, Bernard Madoff; and, above all, the unprecedented sentence handed down by Judge Denny Chin.  Judge Chin rejected defense arguments that a 150-year sentence could only be justified by some sense of "mob vengeance."  Rather, he said, "symbolism is important"  It is important for purposes of retribution, deterrence, and also to recognize the suffering of victims.  "The fraud here was staggering."

It is true, Judge Chin said, that Madoff had turned himself in and had turned over all his assets.  Still, "I don't believe Mr. Madoff has done all that he could or told all that he knows."  He also noted that, unlike in other white collar crime cases, he had "not received a single letter from family, friends, or colleagues."  Bernie Madoff was quite alone.

Madoff spoke to the court in what I thought was a believable statement.  Oddly, he spent almost as much time lamenting the damage he had done to "the industry I spent my life trying to improve" as he did expressing contrition to his victims.  "I don't ask for any forgiveness," he said.  "I believed that was something I could work my way out of.  I refused to accept the fact that, for once in my life, I had failed."

He talked about his wife, Ruth, who "cries herself to sleep at night" and said "I am tormented by that."  He acknowledged the "legacy of shame" he will leave his grandchildren.  Then, in the only out-of-kilter moment, Madoff turned to face the courtroom and said "I apologize to my victims.  I'm sorry."  The creepy Madoff smirk deformed his face.

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I can't pretend to have read Dante's Divine Comedy.  I do know that, in it, the author offers a vision of hell -- the Inferno -- that's organized like a parking garage.  Each descending level is reserved for a different class of wrongdoers.  Circle 2, for example, is reserved for the lustful. Circle 3 for the gluttonous.   Circle 7 for the violent.  Circle 8 is for sorcerers, hypocrites, frauds and deceivers, like Bernie Madoff.  Circle 9 is for those for betray their friends.  Oh right, like Bernie Madoff.

Circle 9 is as low as one can go.

Later today, Bernie Madoff will learn of his sentence at a courthouse on Pearl Street in NYC.  Much of the drama has gone out of the event -- the judge has aleady entered a forfeiture order for $170 billion.  None of the Madoff family is expected to be in court.

Still, the sentencing will be a spectacle.  Victim allocution will take up much of the day.

Some victims, like Ruth Madoff's sister Joan (now bankrupt in Florida), have said "pffft" to Bernie and won't be in the courtrom.  Other victims wasted no time in signing up to be heard.  They are a colorful group -- a concert promoter; a politician; a model; a long-time friend of the Madoff family; a middle-aged mom with both a teenager and aging parents now dependent on her; a former Madoff employee who lost his job and his reputation overnight.  It is fair to say some combination of rage, fear, vanity, pain, and a sense of the historical moment drive these people to speak to the court.  For some, the experience will be as defining as the fact and magnitude of their loss.

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So, how long should Bernie Madoff spend in prison?  His lawyer today said no more than 12 years – “just short of an effective life sentence.”  His victims think a longer term is essential.  They want Judge Denny Chin to send him to prison for the rest of his life “with no possibility of parole, no leniency from the court, and no funny business from his defense attorneys to try to get him off.”  “He should stay in jail, under the harshest of circumstances, for the rest of his life.”  He should be treated as the criminal he is – “he is an ‘economic terrorist.’”

These quotes are from some of the victim impact statements filed with the court in anticipation of the sentencing next Monday, June 29.  Judge Chin has promised to read and consider all of these statements.  A handful of Madoff’s victims will also speak at the hearing.  So, apparently, will Bernie Madoff himself.  According to his lawyer, Madoff “will speak to the shame he has felt and to the pain he has caused.”  I’ll be in the courtroom and blog the whole pageant here on The Glom next Monday.

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I am on vacation here in Colonial Williamsburg (where I fittingly can't get any "bars" for my phone, but I have wifi!) so I can't give this post the proper respect (or the properly punny "Jeopardy" title).  But, note that the Supreme Court has said that Scott Yeager, one of the "Enron Broadband" defendants, cannot be retried, ending a half-decade of uncertainty for the defendant.  However, the Supreme Court left the door open for the Fifth Circuit to re-determine whether the facts that the jury believed deserved acquittal where the same facts that the counts to be retried would have to depend on, as well.  This is also probably good news for one of his co-defendants, whose writ of cert was not granted, but not especially good news for his co-defendant that plead guilty a few months ago.  (Glom posts on this saga here and here)  So, I don't have time to recreate the Enron scorecard now, but it's definite that the Task Force had great success getting guilty pleas, but little success getting guilty verdicts, much less guilty verdicts that withstood appeal.  The last piece of this puzzle will be to see how much Jeff Skilling's lengthy sentence, the only "success" of the Task Force, will survive appeal, if his conviction remains at all.  When it's all said and done, the only bigger (and more expensive) organizational failure than Enron may be the Enron Task Force.

I hate to just post and run, because I know that many criminal law experts were watching the case because of its potential importance to wacky double jeopardy jurisprudence.  Hopefully, some of our readers can fill us in!

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We finally have an Enron-related case (besides the too-late Arthur Andersen case) at the Supreme Court!  Woo-hoo, corporate law professors everywhere.  Except that it's on criminal procedure grounds.  Rats.

A few months ago I blogged in passing that one of the "Enron Broadband" defendants had pled guilty, even while his co-defendants were appealing to the Supreme Court of the United States that being retried after being acquitted on some counts and receiving hung verdicts on other counts that seemed to require the other counts violated their rights against double jeopardy.  Well, yesterday, the Court heard oral arguments in that case.  According to the Houston Chronicle, "Supreme Court justices today appeared skeptical of government arguments that prosecutors haven’t had a fair shot at convicting Enron strategist Scott Yeager of money laundering and insider trading."  Hmmm.

For those of you more interested in the legal issues presented by the case, this SCOTUSWiki rounds up all pertinent documents, including a transcript from the hearing.  Also included is this amicus brief by several prominent criminal law professors, including my colleagues Margareth Etienne and Andy Leipold.

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Defendants take responsibility for their crimes in the allocution that accompanies their pleas, but, as Miriam Baer observes, here's what Bernard Madoff said today in his:

Which might go under the headline of blaming the victims.

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This past week, I've been drafting a blog post in my head (yes, it's been that kind of week) about the role that risk played in the 2008 financial crisis.  I kept seeing smart people making analogies to "the Enron debacle," and I just felt that this analogy was not apt.  I assume that references to the Enron debacle are shorthand references to the accounting scandals that plagued the beginning of this century, which involved Enron, WorldCom, Tyco, HealthSouth, RiteAid, and more.  In each of these stories, the financial picture given to the marketplace didn't seem to match up with reality, making some investors be caught off guard when the picture was revealed.  These stories are fraud stories.  At these firms, certain individuals knew that the picture was off, and criminal prosecutions and civil litigation tried to sort out which individuals knew what and when.  These trials seemed to throw too wide of a net and induced some big fish caught in the net to surrender whether than flounder and risk a greater penalty.  (OK, I went too far with that fish-net analogy.  I apologize.) 

Another way to read those 2001 stories is as stories of risk-taking.  Either risk-seeking companies painted too rosy a picture to try to buy time for actuals to catch up with disclosed financials or individuals had too great an appetite for legal risk -- sidling up too close to the edge of an accounting rule or guideline.  But generally, the risk story is eclipsed by the fraud story.  So, is the 2008 financial crisis going to be a risk story or a fraud story?  I think this is important because it is going to drive the regulation that will inevitably follow.  The 2001 scandals were fraud stories, and SOX is basically an anti-fraud statute that re-allocates responsibility for fraud and tries to prevent fraud.  SOX does not address risk-taking directly, although some make the argument that SOX stifles risk-taking.

I would argue that at least given what we know now, the 2008 financial crisis is a risk story.  Different individuals and firms underassessed the risk of certain financial transactions and products.  Homebuyers underassessed their ability to refinance mortgages and the potential appreciation of their homes; mortgage lenders underassessed the potential appreciation of collateral and credit risk; mortgage asset-backed security buyers underassessed the risk of those products; financial firms entering into credit default swaps to hedge the risk of those products underassessed counterparty risk; and so on.  Although the system was meant to reduce overall risk of mortgage lending, the system could not withstand the shock to its system when housing prices fell.  (Think of it as all the nation's insurers selling hurricane insurance, and then several hurricanes hitting at once.  And, unfortunately, those insurers weren't regulated and required to maintain reserves.)  If this is just a risk story, then regulation just needs to backstop the risk for these "perfect storm" "once in a century" types of shocks.  Some risk stories don't even need regulation -- think of the "take or pay" cases from the 1980s between pipelines and producers of natural gas who never envisioned that demand would be less than supply of natural gas.

But of course, risk stories don't sell.  They don't sell to the media, the regulators, the investors or the voting public.  Surely mispricing of risk couldn't cause this collapse, could it?  If we're going to put $700 billion into fixing the system, then the problem has to be as big as the cure.  In other words, the bailout only sells if there is a fraud story.  Our markets are efficient, and efficient markets price risk well, if not perfectly.  If there was mispricing of risk, that must have been because there was fraud in the system.  So, enter the FBI.  The FBI is now investing not only Fannie Mae and Freddie Mac, but also Lehman Brothers and AIG for "misstatements."  According to one unnamed government official "it was 'logical to assume' that those four companies would come under investigation because of the many questions surrounding their recent collapse."  If there is one thing that we may have learned from the "Enron debacle," it's that federal prosecutors tend to find what they are looking for.  Although, Attorney General Mukasey has said there will be no "2008 Financial Crisis" task force, a la  the 2002 Corporate Fraud Task Force.  Stay tuned.

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White collar crime followers will remember that before we started being concerned about DOJ hiring practices, we had begun to be concerned with the DOJ's prosecutorial practices, including pressuring corporate targets to waive attorney-client privilege and refuse to pay attorney fees for employees who were potential defendants.  These tactics were the result of guidelines outlined in an internal memo, first called the Thompson Memo, then the McNulty Memo, after the Deputy AGs who oversaw the drafting of those memos.  Well, the memo had been revised again, under the direction of Deputy AG Mark Filip.  So, why the Filip Memo?

These guidelines have been revised following congressional interest in regulating the DOJ's tactics.  In an effort to head off congressional action, specifically this proposed bill, the new guidelines "[prevent] prosecutors from asking companies under investigation to disclose attorney-client privileged information" and specify that "whether a company is paying legal fees of employees under investigation, or whether a company has entered into a joint defense agreement with employees" will not be relevant to a determination of whether the company is "cooperating" with prosecutors for purposes of the sentencing guidelines.

So, we'll see whether this attempt at self-regulation will halt proposed legislation and of course, what effects the revisions will have in practice.

UPDATE:  Apropos of pressuring companies not to pay attorney fees for employees, Miriam Baer just tells me that the Second Circuit just affirmed Judge Kaplan's slapdown of KPMG.

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Some research I’ve been doing on consumer fraud had me running across a Federal Trade Commission survey on complaints related to consumer fraud in general and identity theft in particular.  The survey reflected data from self-reported consumer complaints (and hence was not a nationwide survey) for January through December 2007.

For 2007, Colorado was the state with the largest number of consumer fraud complaints per capita—displacing Utah, which held the position in 2006.  Thus, Colorado had 233.8 consumer fraud complaints per 100,000 people in its general population, for a total of 11,364 complaints.  The state with the least number of consumer fraud complaints was Mississippi, which had 90.6 complaints per 100,000 people, for a total of 2,644.  The next two states with the lowest number of consumer fraud complaints were North Dakota and South Dakota.   

Apparently, identity theft is by far the most prevalent form of consumer fraud, and has been so for eight years in a row--explaining why so many governmental agencies and other entities have focused on ways to combat it.  Arizona was the state with the largest number of identity theft complaints per capita.  Hence Arizona had 137.1 identity theft complaints per 100,000 people in its population, for a total of 8,688 total victims. Once again, the two states at the bottom of the list in terms of identity fraud were North Dakota and South Dakota.  It is probably no surprise that in terms of total number of complaints, no state beat California, with 61,409 consumer fraud complaints and 43,892 identity fraud complaints.  Unfortunately, my own state of Maryland ranked 6th in terms of consumer fraud complaints and 10th in terms of identity fraud complaints.  Interestingly, at least in terms of consumer fraud complaints, Maryland ranked behind Alaska, which came in at number 5.

One the one hand, the survey does suggest that there may be places to which one can escape if seeking to avoid consumer fraud—like the Dakotas.  And yet, the survey also underscores the fact that fraudsters do not direct their schemes into particular states.  Rather, the predominant manner in which victims are contacted is through the Internet over email, suggesting that any state could find itself in the unenviable position of consumer fraud or identity fraud capital of the nation.

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Yesterday, two former Bear Stearns managers were arrested and face criminal charges related to the collapse of certain investment funds associated with subprime mortgages.  The managers represent the first executives to face criminal charges stemming from the subprime meltdown and current financial crisis.  The Wall Street Journal has a copy of the indictment, which charges both managers with securities fraud, wire fraud, and conspiracy, and one manager with insider trading, that can be viewed here. Both former managers were arrested outside of their respective homes.  The photos and coverage of their “perp walks” struck me as very similar to the highly publicized arrests of corporate executives involved in the accounting and corporate governance scandals post-Enron. In fact, such arrests and perp walks began occurring almost five years ago, and around the same time—during the summer months. So I was struck by the similarities between those arrests and yesterday’s arrests. Moreover, the similarities raise some interesting questions.

First, do the arrests represent the tip of the iceberg? Certainly such was the case five years ago, as the summer months seemed to reflect the beginning of an almost steady flow of corporate arrests. Moreover, the creation of Operation Malicious Mortgage (DOJ and the FBI’s concerted efforts to curb mortgage fraud) suggests that more corporate executive arrests may follow. Indeed, apparent some four hundred individuals have already been charged with fraud in connection with the operation.

Second, will the indictments lead to convictions? To be sure, many of the high-profile indictments surrounding the collapse of Enron and other entities resulted not only in convictions, but the imposition of lengthy prison terms.  According DOJ's most recent report, its Corporate Fraud Task Force—created in July of 2002 to respond to the corporate governance crisis—has been responsible for over 1300 corporate fraud convictions since its inception. And yet there were some notable “losses”—including high profile acquittals, reversals and mistrials.

Third, if there is an increase in indictments of corporate executives over the coming months, will that increase be sustained over the coming years? One 2007 survey by the American Lawyer found that in recent years the number of major corporate fraud indictments has “slowed to a trickle.”  Thus, the survey found that while there were more than 300 major corporate fraud indictments between 2002 and 2005, DOJ only identified fourteen such indictments in 2006 and twelve as of November of 2007.  To be sure, apparently some 400 people have been indicted since March as a result of Operation Malicious Mortgage. Then too, some may applaud the overall decrease in prosecutions and convictions, particularly those who believe that such actions are ineffective in curbing fraud as well as those concerned that such indictments and their resulting convictions were sometimes obtained through problematic practices that eroded important attorney-client rights.  Moreover, there are many reasons for the decline, including the possibility that both the market and corporations adapted to increased prosecutorial scrutiny.

Fourth, will these indictments make a difference?  Of course this may be the most important and yet most difficult question about which we try to respond. After all, five years after new legislation and a seeming increase in white collar crime prosecution, we seem to be back at the same place. Does that confirm that these high profile indictments, convictions, and lengthy prison sentences are not effective deterrents? Or should it cause us to question how much more fraud we may have seen if not for the increased efforts of five years ago?  Unclear.  At the very least however, the similarities between the corporate perp walks of yesterday and those that occurred five years ago suggest that while the transactions and people may change, fraud—and the corporate perp walk?—will persists.

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