I didn't see this one coming!  Trustee Irving Picard, who has recaptured less than $2 billion in the past two years to compensate Madoff victims, is expected to announce today that the estate of Jeffry Picower has agreed to a settlement with Picard and federal prosecutors that will add $7 billion or more to the moneys to be distributed to Madoff victims.  Picower was a frequent withdrawer from his fund with Madoff, and money was always there to distribute to him, probably as compensation for luring others to the fund.  He seemed to keep his real money with Goldman, Sachs.  Picower, who had a history of health problems, was found dead in his swimming pool last year.

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Though I'm continuously surprised by how fast time flies, I really can't believe that it's been 2 years since Bernard Madoff was arrested for perpetrating a $60 billion fraud.  I doubt, however, that this anniversary has escaped anyone's notice, marked by a runup in media attention the last two weeks.  First, trustee Irving Picard began filing the last lawsuits against investors, feeder funds and banks before the statute of limitations ran on Saturday.  The Wall Street Journal was preparing this "where are they now" piece on the Madoffs and others to run on Saturday.  Then, Saturday morning's news turned tragic as Mark Madoff, Bernie Madoff's son, committed suicide in the early morning while his wife and four year-old son were returning from Disney World.  His two year-old son was asleep in the apartment.  Mark Madoff has two other children from a previous marriage.

If Medea or Joan Crawford stand as symbols of bad mothering, then Bernie Madoff has to become shorthand for the worst father in the world.  He either (i) built the world's biggest Ponzi scheme in front of his two sons and raised them to have no moral qualms with stealing folks' money or (ii)  built the world's biggest Ponzi scheme and lived a lie in front of them, not caring that at some point before or after his death they would have to deal with the fallout of a collapsed scheme.  I tend to believe the latter, so my heart goes out to Mark Madoff's family.  Yes, even if in the dark, he lived an extremely good life because of his salary from the market-making arm of his father's enterprise and surely from the collateral effects of his father's criminal enterprise.  Just like the innocent investors in BLMIS, who rode the Madoff Ponzi wave for years, even decades, until the music stopped, the Madoff sons also benefitted from the scheme.  And, as some investors who were "net winners" have been sued for clawbacks, so have the Madoff sons.  But the sons have also faced wrath and bitterness and the stigma of their name.

In his final days, Mark Madoff was sued again by Picard in his capacity as a director in Madoff's London investment arm.  This lawsuit also named Mark Madoff's children.

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The statute of limitations under which the Madoff trustee, Irving Picard, must operate will run in a few days.  Accordingly, Picard has sued three big fish in his attempt to gather compensation for the Madoff victims:  UBS, J.P. Morgan and HSBC.  The complaints, parts of which are sealed, allege that these institutions and their co-defendants either sponsored or facilitated feeder funds that invested in Madoff's fund, even though they suspected fraud.  If allegations that the institutions suspected fraud prove true, then the bankruptcy trustee will be able to claw back profits, which could be profits earned by related feeder funds or possibly fees earned by facilitating trades.  Punitives are also claimed.  Together, these suits allege $17.4 billion in damages.

The juicy stuff is under seal -- the evidence Picard has that these institutions suspected fraud.  It is entirely possible that there were suspicions, but finding evidence will be the tricky part.  According to Andrew Kirtzman's book on Madoff, neither Societe Generale or Credit Suisse would invest with Madoff's international arm because of concerns with his description of his methodology.  Interestingly, that book also reports that J.P. Morgan stopped investing with Madoff's feeder funds in 2008 because of suspicions.  If that is accurate, then I really would like to see the sealed complaint!

Stay tuned.

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I've noted that the SDNY prosecutors tend to leave their government jobs for partnerships at New York law firms - something that is not replicated by other government employees.  Why is this?

Orin Kerr argues, quite reasonably, that

these numbers don’t reflect beefed up white collar enforcement as much as the realities of who the SDNY tends to hire. The U.S. Attorney’s Office in the SDNY is very competitive, and it tends to draw a lot of high-powered litigation associates from top New York firms. Those lawyers come to the SDNY and spend a few years to get trial experience. But they know that living on a government salary over the long term would require a pretty big shift in their lifestyles given the very high costs of living in or near Manhattan. So after they hit their minimum year commitment (3 or 4 years, if I recall), they cycle back to major law firms in more senior positions (either senior counsel or partner) and start earning serious coin.

And, indeed, that's the point of many of these shouting-distance-of-Manhattan prosecutor jobs; one gets one's trials, and then one goes to a white collar defense firm, and never sees a trial again.  None of this, by the way suggests that the fact that government service is often followed by private practice means that there's anything corrupt or captured about the work that these government employees do.

I do disagree with Orin about the beefed-up white collar enforcement thing, which I think did happen, and which Orin thinks didn't.  My guess is that big New York law firms barely, if at all, had white collar practices in the 1980s. Now they all do - including transactional firms like Wachtell Lipton that, generally, are as uninterested in litigation as they can possibly be.  One reason for this change might be market failure - hey, who knew that we could get rich representing companies in investigations related to government enforcement activities?  Another might be because the government stepped up its white collar enforcement work between the Eisenhower era and today, and I think that probably is the bulk of the reason why guys who prosecuted Enron like David Anders are partners at firms like Wachtell Lipton today. 

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I've grown interested in the revolving door - when employees leave government service for the private sector and go back again - because I think it is substantially less corrupt than bland versions of public choice and capture theory would have it.  To that end, I've been perusing the fates of lawyers in the US Attorney's Office in the Southern District of New York - the Manhattan bureau that takes down (or lays off) white collar finance industry defendants like Michael Milken or Ivan Boesky - the latest cases have been against KPMG, and, notably, no one involved in the financial crisis. 

It's pretty interesting.  The resumes are outstanding - ten years ago, there were four out of 150 odd of the prosecutors in the office who clerked for the Supreme Court, now about as many are judges, two are U.S. Attorneys, and the large majority of the rest are partners in white shoe firms in New York.  My guess is that a gig in the Southern District is the greatest path to wealth maximization in the federal government that there is - I say this impressionistically, of course, but the fact is that the financial regulators rarely get picked up by investment banks, and the SEC enforcer to partner rate is pretty low.  And I think lobbyist salaries don't match New York law firm salaries, while Pentagon procurement officials have far too difficult a tournament to win to get the payday of a job with Boeing.  Which makes white collar the straightest path to law firm style riches.  (I could be wrong about a number of these suppositions, of course.)

That right there is pretty interesting, since crime never used to pay, either for the defendants or their lawyers.  My suspicion is that the renumeration due to SDNY attorneys is a function of beefed up white collar enforcement, including the explosion of FCPA, and honest services fraud actions.  It would be interesting to track the paydays of former prosecutors over time by the number of cases brought against corporate executives (was it lower in the 60s?  did a Supreme Court opinion broadening fraud rules contribute to the future bottom line of Manhattan prosecutors?  &c.).  Indeed, though I don't believe this could be the case, new kinds of financial enforcement could simply be examples of SDNY lawyers feathering their future nests.  If you have views on this, since I'm noodling around on the issue, I'd love to hear them.

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On Tuesday I moderated a program sponsored by the SEC Historical Society featuring presentations of the top papers from NERA Economic Consulting's Finance, Law and Securities Litigation Conference, which program can be accessed here.  All of the presenters discussed some really engaging and timely issues.  One presenter, Dr. Elaine Buckberg, spoke about SEC settlement trends.  In fact, NERA Economic Consulting has developed a proprietary database of settlements in SEC enforcement actions.  The database has some very interesting information, including a list of the top ten SEC settlements, with AIG leading the pack at $800 million.  (The list does not include Goldman, which likely would rank 3rd.) 

The database also confirms what we have all witnessed, that since SOX, the SEC "has imposed unprecedented penalties in its enforcement actions."  Indeed, one report notes that prior to SOX, the largest penalty imposed in an SEC action against a publicly traded company was $10 milliom; since that time, the SEC has imposed such a fine (or higher) against more than a hundred companies.  Importantly, that same report notes that while the SEC has had authority to impose significant fines since 1990, it used that authority "sparingly," with some of the reluctance stemming from concern about the impact of such fines on "already aggrieved shareholders."  However, corporate governance scandals and SOX changed all of that-- especially SOX's Fair Funds provision, which allows penalties to be funneled back to shareholders if disgorgement is obtained.  And in the case of AIG, the disgorgement represented $700 million of the total penalty.

To be sure, another report reveals that while the number of settlement actions increased for the first quarter of 2010, the settlement amounts were relatively modest--averaging about $4.7 million, as compared to $10.8 million in the 2009 fiscal year.  The report also reveals that "the proportion of company settlements that included a monetary payment was the third lowest in any quarter since the passage of SOX."  Depending on your view of settlements and civil penalties, this may be good or bad news.

However, whether or not you think the SEC's heightened activity in this area is a good or bad thing, this data is very interesting, especially as it relates to potential future trends.  Of course, it is not clear if the more recent numbers reflect a one-time dip or even, as the report wonders, a one-time "clearing out" of relatively minor cases.  Indeed, according to another report by NERA Economic Consulting, securities class actions have surged, with most of that surge stemming from credit-crisis related cases.  Hence, if SEC enforcement actions parallels these trends in class actions, then it could be that the first quarter numbers are just the calm before the storm. 

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A few years ago I wrote an article that compared the powerful tools of the prosecutors of white-collar crimes against the obstacles civil litigants face in trials surrounding the same bad acts.  Two of the tools that I mentioned were a certain overbroad federal statute that criminalized "theft of honest services" and a legal theory under which prosecutors (but not civil litigants) could prove state of mind by proving "conscious avoidance."  As we know, the Supreme Court has pruned away the honest services statute to make it mostly inapplicable to corporate crimes in Skilling v. U.S.  But what about the conscious avoidance theory?

Conscious avoidance, sometimes called "willful ignorance," or "willful blindness," has helped prosecutors get convictions against several high-profile white-collar defendants, including Bernard Ebbers, Ken Lay and Jeff Skilling.  (This theory is often used in federal drug-related cases as well.)  This theory, in the form of a jury instruction, allows jurors to find that defendants commited securities fraud with intent even absent proof of knowledge of the specific illegal acts if "the evidence would permit a rational juror to conclude beyond a reasonable doubt that the defendant was aware of a high probability of the fact in dispute and consciously avoided confirming that fact."  The Second Circuit affirmed Ebbers' conviction on these grounds, but the Fifth Circuit hinted in late 2006 that Skilling's jury instruction on this theory may have been flawed.  In upholding the denial of bail pending appeal, the Fifth Circuit noted, however, that "[o[ur review has disclosed serious frailties in Skilling's conviction of conspiracy, securities fraud, and insider trading, difficulties brought by a decision of this court handed down after the jury's verdict, as well as less formidable questions regarding the giving of a jury instruction on deliberate ignorance."  (I can find no link to this document outside PACER.  This quote appeared in the WSJ on December 12, 2006.)  As we know, the first part of the sentence hinted to the honest services portion of the verdict, and we've not yet addressed the "less formidable questions" on the conscious avoidance jury instruction.

But wait, there's more.  Earlier this month, the Second Circuit, the same circuit that upheld the conscious avoidance theory as used in the Ebbers' conviction, has vacated Mark P. Kaiser's 2006 conviction for securities fraud.  Kaiser was the chief marketing officer for U.S. Foodservice, which seems to have pumped up its financials by manipulating a rebate program with its vendors.  In instructing the jury, the trial judge did not use the above language favored by the Second Circuit, instead stating

In determining whether the defendant acted knowingly, you may consider whether the defendant deliberately closed his eyes to what otherwise would have been obvious. To put it in very concise terms, there are times that a person can consciously avoid looking at facts that are available and that, in the law, is the equivalent of knowledge; in other words, you can't just hide yourself from knowing something, deliberately hide and then escape responsibility for that. And so we have the concept in the law of conscious avoidance.

And if there was conscious avoidance, that is deliberate failure to learn information, then that is the equivalent of actual knowledge, because somebody can't escape criminal responsibility by deliberately shutting his eyes to something which would have told him the facts. 

The Second Circuit (2010 WL 2607140, July 1, 2010) concluded that this less-than-articulate formulation was closer to negligence than "conscious avoidance."  To be accurate, a jury instruction has to communicate to points regarding conscious avoidance:  "(1) that a jury may infer knowledge of the existence of a particular fact if the defendant is aware of a high probability of its existence, (2) unless the defendant actually believes that it does not exist.”  The court refers to these parts of the instruction as the "high probability" and "actual belief" portions.  So, Kaiser's seven-year sentence was vacated (on this and other grounds).

Does this have anything to do with Skilling?  Probably not.  Jeff Skilling's 2007 appellate brief to the Fifth Circuit argued the appropriateness of the instruction given the facts -- Skilling never asserted that he did not know about a fraud, he asserted that there was no fraud.  Though his co-defendant, Lay, asserted ignorance, Skilling testified that he tried to know everything.  At the time of the verdict, commentators were surprised that the instruction was used against Skilling and thought it was give the jury another way to convict by suggesting that Skilling should have known of the frauds.  Skilling's brief led with this argument, but the Fifth Circuit (554 F. 3d 529 (5th Cir. 2009)) held that even if the trial judge shouldn't have given the instruction, that error was harmless because there was evidence of actual knowledge the jury could have been relying on.  The court did not remark on the language of the instruction:

The word “knowingly,” as that term is used throughout these instructions, means that the act was done voluntarily and intentionally, not because of mistake or accident. You may find that a defendant had knowledge of a fact if you find that the defendant deliberately closed his eyes to what would otherwise have been obvious to him. While knowledge on the part of the defendant cannot be established merely by demonstrating that the defendant was negligent, careless, or foolish, knowledge can be inferred if the defendant deliberately blinded himself to the existence of a fact.

I could certainly challenge the reasoning that introducing what is known as a particularly dangerous instruction could influence whether a jury finds evidence of actual knowledge compelling or not.  However, as time as played on, the honest services point on appeal became the one chosen for the writ of certiorari (along with the unsuccessful venue argument).  Will we see this issue in the Skilling litigation again?  Not sure, but it may be the next prosecutorial tool to come under broader attack.

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The WSJ today reports on a firm, ASM Capital, that is making the Bernard Madoff investors an offer that may or may not refuse.  ASM is offering to pay Madoff investors 20% of the value of their claims in exchange for their claims against the Madoff bankruptcy estate.  As an alternative, investors could instead accept 16% of the value of their claims and retain a 33% interest in any future satisfaction of their claim.  ASM, a firm out of Woodbury, NY, specializes in buying claims of bankruptcy creditors at a discount.  This is their business.

I'm a bird in the hand kind of person, so I would be sorely tempted.  Irving Picard, the SIPC trustee and bankruptcy trustee, as estimated disbursement between 15 and 50%.  However, the liquidation is slow-going.  Gathering the funds has taken awhile (about $1.5 billion so far, another $2 billion on the way from estate of recruiter to feeder fund), and litigation may slow things down as well.  As noted here on the blog, the bankruptcy court ruled in March for Picard's calculation of net investment losses, but an appeal by the Madoff investors seems assured.  Ironically, if the Madoff investors win, and their allowed claims then reflect the "phantom" gains Madoff was reporting and not just their invested principal (minus withdrawals), then some investors' recoveries will be diminished on both a percentage and a net basis.

The reporter seemed to want to imply that ASM is scavanging in a way a little too unsavory -- taking advantage of a group of investors who have already been taken advantage of by Bernard Madoff.  However, I tend to see it differently; ASM is providing the investors with an additional choice that they are free to ignore. 

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I mentioned last week that there were more interesting arguments raised in connection with the cert. petition in the Philip Morris case which bear on on my claim that Citizens United will be used to bolster arguments for more protection for commercial speech. As I observed, The Washington Legal Foundation and the National Association of Manufacturers asserted in an amicus brief that Citizens United supported their argument about commercial speech. Here it is:

(1) Because the health consequences of tobacco use is a matter of public concern; and

(2) Because much of the communication on which liability was predicated took place in the form of newspaper articles, op-eds, congressional testimony, press releases, and television appearances and was in response to public criticism the speech in question was speech on "a matter of public concern."

(3) Because it was speech on a matter of public concern it should have been fully protected.

[Notice that the same thing that makes something a matter of public concern is also was makes it a legitimate object of governmental regulatory efforts.  So it can't be enough to say that full protection follows from the observation that something involves a matter of public concern.]

The trial  appellate courts apparently failed to give this speech the protection to which, in the Foundation's view, it was entitled "because the speakers had an economic motive for their communications." (Brief at 6). The brief go on to say, "But economic motive is insufficient to transform fully protected speech into commercial speech. See Citizens United v. Federal Election Comm'n, 130 S.C. 876, 899 (2010) ('First Amendment protection extends to corporations.')."  (Id.)

It seems to me that the connection between the reference to economic motive and the observation about the rights of corporations is a non sequitur unless the Foundation is making the following assumptions: (1) "corporations" in this sentences = for-profit corporations; and (2) all speech by for profit-corporations has an economic motive. I make these same assumptions; so I think they are fairly reasonable and I understand why the authors believe Citizens United supports their cause. I think it does too, even though I disagree that commercial speech ought to be fully protected. However, I've often encountered objections to these same assumptions when I make them (i.e., "But not all corporations are for-profit!"; or "Not everything a for-profit corporation says is commercial speech!"). But as you can see; these arguments aren't original to me. I got them from the proponents of full First Amendment protection for commercial speech.

I've also argued that many of these proponents are essentially arguing for a constitutional right to lie. See Grounding Nike: Exposing Nike's Quest for a Constitutional Right to Lie. Some think this overstates it. But the Washington Legal Foundation's brief seems to corroborate it. In footnote 2 the Foundation argues that although the Court of Appeals did not "explicitly label" the speech in question "commercial" that must have been the standard the Court was applying because it rejected the First Amendment defenses "solely on the grounds that the speech was (in the court's view) fraudulent" and that only commercial speech could be "punish[ed]" (?!) on that ground; fully protected speech "even if false - is entitled to 'breathing space'...."

Res ipsa loquitur.

A dear former colleague used to argue with me that the First Amendment didn't protect fraud and that there was no "right to lie" even under the strict protection offered in N.Y. Times v. Sullivan. There may not be an right in the abstract to lie. But that can be the practical effect of a high evidentiary standard. As any litigator can tell you (and I have been one), there is a difference between an abstract principle and how it plays out "on the ground." I will have more on that later. Suffice it to say that the "breathing space" the Foundation argues for here would cover an awful lot of fraud.

And that brings me to the next point. How do you prove that a corporation has the specific intent necessary for fraud?

The Foundation claims that the judgment below was flawed because the government did not show sufficient evidence of specific intent to prove fraud because the government relied on a collective intent theory. (Id. at 8). It argues that the court should have looked to the state of mind of the individual officer and employees because "a company - as opposed to an individual - can never entirely know what information it possesses." Just so. Sounds awfully close to an argument that the company, qua company, can never commit a fraud because it can never have specific intent.That certainly turned out to be the Achilles heel of the prosecution of the Arthur Andersen accounting firm in the wake of the Enron scandal.

I actually think there may be something to this argument and it is part (not all) of the problem I see with imposing criminal liability on entities like corporations. Without revisiting the whole issue of corporate criminal law though it is sufficient for my purposes here to note that this argument too would increase the difficulty in restraining fraud. I'm not sure that we should be too sanguine about throwing up additional legal obstacles to prosecuting fraud.

In any event, the record, all 1700 or so pages of findings of fact and conclusions of law, offers what seems to me to be ample evidence of specific intent and plenty of false statements (including that by now notorious false testimony before Congress. See some of it in this clip from 1994 here). For a summary of some of Judge Kessler's findings in this case, as well as a summary of tobacco company marketing efforts to children and the addictive properties of nicotine from the Campaign for Tobacco Free Kids see this.

Is it really a matter of constitutional significance that tobacco companies be able to advertise in Rolling Stone or market their products in pink packages or other specific trade dress?

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So, the other shoe dropped today when it was announced that the Department of Justice is investigating Goldman, Sachs.   (Informative Washington Post story here.)  This can only be good news for the SEC.  Now, the SEC can let the DOJ use all of its tricks -- persuading the Goldman board that cooperation is in it's best interest, persuading Goldman employees to cooperate, before the SEC has to move forward.  At the end of the day, should anyone enter into a plea agreement, that person can enter into a settlement with the SEC at the same time.  The SEC doesn't have to find out if they can survive a motion to dimiss in civil court.

O fcourse, we don't kno wmuch about the investigation.  According to the WSJ, the investigation may be about other transactions, not the ABACUS 2007-AC1.  We don't know if the investigation will target Goldman for entity-level liability or trade entity-level liability for information about particular individual defendants.

The WSJ ominously reminds us that in recent memory, no "major financial firm" has survived "criminal charges." Of course, this statement assumes that charges are brought at the entity level.  Many firms survive charges levied against individual officers of the firm, so it's not unthinkable that a financial firm, even Goldman, would survive that.  Also, this statement assumes charges or an indictment, and not just an investigation with some sort of settlement.  The WSJ article mentions deferred prosecutions against firms, particularly accounting firms.  But there have been other sorts of settlements.  The 2003 Global Settlement of ten major Wall Street firms after investigations by the SEC and the NY attorney general would be one example.  No charges were brought, but these firms survived the settlement (although they may not have survived more recent events).

Both the Post story and the WSJ story make the point that criminal cases are harder to win because of the "reasonable doubt" standard.  However, this argument ignores all of the other effective tools that a prosecutor has to leverage its case.  For more on the prosecutorial advantages in white-collar cases versus civil securities fraud cases, see The Undercivilization of Corporate Law.

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    This was a civil RICO case filed by the United States in 1999 against several tobacco companies and two of their non-profit organizations, the Council for Tobacco Research and the Tobacco Institute. The lawsuit accused these entities of engaging in a conspiracy, taking place over a period of approximately 50 years, to mislead the public about a number of issues related to smoking including: the potential health consequences of smoking; the dangers of environmental smoke (second-hand smoke); whether nicotine was an addictive substance; whether the tobacco companies were manipulating nicotine content; whether the tobacco companies were intentionally targeting youth in their advertising and promotional efforts; whether they were intentionally marketing cigarettes as "light" or "low tar" to imply health benefits (or less detriment) the companies knew did not exist because of a phenomenon known as "compensation," and other claims.

The case went to trial in 2004 and lasted for about 9 months. In 2006 D.C. District Court Judge Kessler, issued an opinion with findings of fact and conclusions of law that ran about 1700 pages. The evidence buried in these pages is unequivocally damning.

Several years later, in 2009 the D.C. Circuit Court affirmed most of these findings in the per curiam opinion above. The defendants (and the government) filed petitions for cert. The petitions of the parties are available here. Whether the Supreme Court will agree to hear the case is unknown, but with the government seeking review as well it may do so. And issues of commercial speech and the First Amendment are raised through out the case. Indeed, the amicus brief filed by the Washington Legal Foundation and the National Association of Manufacturers explicitly says this case offers the Court the opportunity to answer the question that it left open in Nike v. Kasky, writing "This Court has recently reaffirmed that the speech of corporate actors may be entitled to full First Amendment Protection" (Page 19 of the brief which you can view here citing yes, Citizens United).

The 5th case down in the Table of Authorities is Citizens United and it is cited twice in the argument. The brief argues the lower court ignored that much of the misleading speech took place in the form of editorials, op-eds, press releases and the like and involved issues of "public concern" and thus was fully protected speech. Mind you these press releases, so-called informational pamphlets (some sent to school children purporting to educate them about the "debate"), came from a group of defendants who the record amply demonstrates did meet together with their public relations and law firms to come up with a strategy to manufacture a debate that really didn't exists since their problem was that there was scientific consensus on the basic facts about the health risks of smoking and that these facts would be very damaging to future business. Their strategy is succinctly captured in the phrase found in some internal documents and widely reported on since, "Doubt is our product." It is important to be clear on what they are asking for; they are asking for constitutional protection for the manufacture of a phony debate, to obfuscate rather than to clarify information about a product for which there is no safe level of use.

This seems an appropriate juncture to raise Justice Jackson's admonition that "the Constitution is not a suicide pact." It seems like the government ought to be able to regulate a potentially lethal product, and that regulation of advertising and marketing is a necessary part of such appropriate regulation in the public interest. Such a regulation has recently been passed in the form of the  Family Smoking Prevention and Tobacco Control Act, Pub. L. 111-31, 123 Stat. 1776 (2009). The Act permits the FDA to regulate tobacco products and includes very strict limitations on permissible forms of advertising and promotion.

    But a group of tobacco companies is attacking this statute in a District Court in Western Kentucky (much forum shopping there?) on the grounds (among others) that it violates the First Amendment. The companies even wanted to claim First Amendment protection for marketing practices like giving out free samples! The district court denied most these claims, but nevertheless found that some of the statute's regulation of color and trade dress did violate the First Amendment. The opinion is here It was issued before Citizens United came down. But taken together with the arguments raised by the Washington Legal Foundation in the Philip Morris RICO case, I think we can expect Citizens United may well be used in the future in this case as well. Only time will tell. I would worry about giving them ideas, but the connection between Citizens United and commercial speech protection claims is clearly already out there amongst firms litigating these issues. 

Later I will post some other aspects of the Philip Morris case which may be of interest to Glom readers, in particular whether a corporations can commit conspiracies or have specific intent.

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    Much of the outcry about Citizens United has focused on its anticipated impact on elections, see here and  here, as well it might since the decision was, after all, one about the proper interpretation of the Bipartisan Campaign Reform Act, aka McCain-Feingold. However, for my money (no pun intended), its most pernicious impact is likely to be not on elections (there was already a lot of corporate money in elections), but rather its influence on the future interpretation of the commercial speech doctrine. The commercial speech doctrine permits the regulation of commercial speech for its truth.

    What has this got to do with political speech you might say? Nothing, unless one considers why for-profit corporations get into campaign finance or lobbying in the first place. They do so for the same reasons they engage in commercial speech; to further the economic interests of the corporation (and/or the shareholders if you prefer). Even though the Supreme Court did not hold in Citizens United that a corporation enjoys the same First Amendment rights as a human being, the rhetoric in the opinion, what I call the "anti-discrimination rhetoric," is likely to be used as if the Court had said just that and in support of an argument that the Court should not "discriminate" against commercial speech and relegate it to the category of an intermediate scrutiny test but rather should apply to it a strict scrutiny test, a New York Times v. Sullivan test. Suffice it to say that this permits regulation in theory, but little in practice.

    There is evidence that Citizens United will be used this way if you look at how at how Bellotti was used. Bellotti was another corporate election law case. It was decided in 1978, only two years after  Virginia Pharmacy, the case in which the commercial speech doctrine was first announced. It has been repeatedly used to argue for expanded protection for commercial speech. Most recently in the Supreme court in 2003 in the  Nike v. Kaksy case. See here, here and here. 

    Theoretically Bellotti was a case that had nothing to do with commercial speech. Nevertheless, it has regularly showed up, as it did in Nike, in arguments in favor of more protection for commercial speech, supposedly for the proposition that speech is not less valuable because a corporation utters it. May be. But consider this, if we (or the Court) gets this argument tangled up with some notion that First Amendment protection is offered on the basis of some anti-discrimination principle we may be in very deep waters indeed, because for a business corporation its political expression is surely tangential to its main organizing purpose. It's core expressive activity is commercial speech. If we are protecting the speaker then it would seem that its core expressive activity ought to be protected. However, going that way would seemingly wreak havoc on any sort of regulation of commerce. How can you regulate commerce if you can't regulate commercial speech? If the Court goes the way of offering strict scrutiny protection to a lot of commercial speech it may make debate about reform of the financial sector moot. Not to mention the idea that corporations need protection against discrimination is a fairly difficult one to swallow. (It makes for some good editorial cartoons though! This month's Vanity Fair has a great one which you can only see if you buy the magazine; but you can find in the table of contents here under the Vanities section. A similar cartoon showed up earlier in the Boston Phoenix and that one you can view here .)

    This is not just a theoretical proposition. There is a case now pending before the Supreme Court which (arguably) involves commercial speech and at least one amicus brief suggests that this is the case in which the Court can resolve the status of commercial speech (in favor of more protection, natch) and answer the question raised but not answered in Nike v. Kasky. Guess which case is included in its list of authorities? Yep. Citizens United. I will save for another post which case this is and where else Citizens United is popping up. But this is one of those First Amendment cases that could have very widespread impacts on all sorts of regulation of business. That may be a happy thing if you think less is more in the regulatory arena for business. May be not so happy if you think the government should have more of a hand in the regulation of the safety of food, drugs or... financial services.

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Our memory of seminal events tend to fade with each new and salient event, so after Bernard Madoff we could only vaguely remember Enron, and after the revelations of the enforcement action against Goldman, Sachs, it's hard to remember who Madoff was.  (See Glom posts on SEC v. Goldman all over, but here, here and here.)  However, a hardly noted piece of the Madoff prosecution may be instructional for what lies ahead in the Goldman action.

Much of the narrative surrounding the Madoff proseuction was that regardless of what Madoff maintains, he simply could not sustain a 20- or 30-year Ponzi scheme without no one else knowing about it.  Bernard L. Madoff Investment Securities LLC relied on several key employees, auditors and feeder funds.  It's headquarters was two floors down from Madoff's trading and market-making operations, which employed his two sons, his brother and many other people.  No one seems to believe that Madoff could have fooled all of the people all of the time.  So, the DOJ has charged a few people with criminal fraud:  Frank DiPascali, who pleaded guilty, Daniel Bonventre, BLMIS director of operations who maintains his innocence, David G. Friehling, who pleaded guilty, and two computer programmers.

In addition, the SEC filed civil complaints against Cohmad Securities Corporation and its principals and Stanley Chais, for acting as feeder funds and recruiters to BLMIS.  The first of these cases, against Cohmad and its recruiter Robert Jaffe, ended in dismissal by Judge Louis Stanton of the Southern District of New York.  Note that Cohmad Securities was founded by Madoff and his friend Sonny Cohn and was housed on the same floor as BLMIS.  Madoff owns 15% of Cohmad, his brother owns 9%, and Ruth Madoff was also a client.  Jaffe recruited investors in Palm Beach for Madoff.  However, the Southern District held that the SEC had not met its pleading burden for most of the fraud claims under Ashcroft v. Iqbal, 129 S.Ct. 1937 (2009).  The court stated the Iqbal holding that

"A complaint must contain sufficient factual matter, accepted as true, to state a claim to relief that is plausible on its face.  A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.  The plausibility standard is not akin to a probability requirement, but it asks for more than a sheer possibility that a defendant has acted unlawfully.  Where a complaint pleads facts that are merely consistent with a defendant's liability, it stops short of the line between possibility and plausibility of entitlement to relief."

Here is the SEC complaint, if you want to try your hand and picking out facts with possible inferences, plausible inferences and probable inferences.  I am not a CivPro expert, but I am told that this case is a rather strict reading of Iqbal.  I leave it to you people to parse the ongoing implications of that case.  Just as an uninitiated observer, I disagree with the Cohmad court's ruling on at least one point.  The complaint shows that Cohmad did not disclose its relationship with Madoff on required filings with the SEC.  For example, Cohmad filings do not include any reference to BLMIS in answers to questions about referring or introducing customers or being affiliated with other advisory businesses.  The court believes that the chain of inferences from lying to regulators about its relationship with an unregistered advisory business to which it funnelled accounts for fees accounting for as much as 90% of its annual revenue is "speculative and flimsy."  As a minor victory, the court did not dismiss the counts for not correctly filing the required broker-dealer forms, but refused to make the leap from lying on the forms to knowing that BLMIS was not a legitimate business.

So, we always thought the SEC had it easier than private plaintiffs because it could bring actions against aiders and abetters and didn't have to deal with pleading requirements of the PSLRA.  I guess Iqbal somehow levels that playing field, although possibly not in the right direction.

The Cohmad case seemed to be the easiest case to bring, and maybe it would have been for the DOJ, who operates under different and sometimes easier rules for securities cases than civil rules.  Judge Stanton did dismiss without prejudice with leave to replead for 30 days, but that deadline passed over a month ago.

So, will the Goldman complaint survive the inevitable Motion to Dismiss?  The judge seems to be Judge Barbara Jones, so perhaps we will have to wait for her interpretation of plausible inference and "speculative and flimsy."

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A Texas Lawyer story today about Allen Stanford, the Southern man's Bernie Madoff, prompted me to consider change of venue issues in white-collar crime cases.  Bear with me a moment.  Remember a few weeks ago convicted Enron President Jeffrey Skilling had his day in the U.S. Supreme Court, arguing both the unconstitutionality of "theft of honest services" and that he was improperly denied a change of venue from the federal court in Houston, Texas.  We have lots of posts on these happenings, including here and here.  I have said before that, after living in Houston during the "fall of Enron," I thought that if there was ever a situation where a case should be moved because the jury pool was tainted, this must be it.  Hatred for all things Enron, particularly its leaders, was very high among a community of those who lost jobs, retirement accounts, contracts, etc.

So here is Stanford, who seems to be fighting with his rotating teams of attorneys over whether they should move for a change of venue.  According to this story, Stanford has changed his attorney of record several times, alienating the likes of Texas legends Dick DeGuerin and Mac Secrest.  His latest substitutions come with outgoing attorney Kent Schaffer alluding to a difference in strategy, and incoming attorney Michael Essmyer specifying that this strategic decision concerned a motion to change venue.  Apparently, Stanford wants one, but Schaffer thought it was a bad idea.  (I also don't think it's a winning argument, but that's another question.)  He reminds us that Lea Fastow got a change of venue -- to Brownsville, Texas -- before pleading guilty to twelve months in prison.  Schaffer remarks:  "Brownsville -- I can't think of a worse community to try a case of a former billionaire."

First, what is he saying about Brownsville?  Brownsville is the southernmost city in Texas, right at the tip, across the border from Matamoros, Mexico.  According to the Census Bureau, Brownsville is the most impoverished city in the country (140k people) with 36% living below the poverty line.  So, Schaffer may have rightly suspected a little anti-billionaire bias. 

Second, Schaffer is really making the point that his client could find a worse venue.  So, in a perfectly fair world, where would Skilling's trial or Stanford's trial go?  White-collar defendants seem to have two worries about juror bias:  (1) those who have a reaction to the harm alleged, i.e., victims or friends of victims and (2) those who have a reaction to who they are -- rich, privileged, possibly white and therefore privileged, etc.  Getting out of the vicinity of the harm may put you somewhere in the vicinity of a different bias.

Now I'm not saying that white-collar criminals have a special problem getting a fair and unbiased jury.  Surely we've all learned from centuries of trials in the U.S. that other groups have faced much worse juror bias obstacles.  I'm just interested to know where is Stanford's dream venue (besides Antigua)?  Would Skilling have risked status bias in Brownsville to get away from the anti-Enron furor?

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The unexpectedly interesting discussions from yesterday's arguments center around the voir dire process in the Lay/Skilling trial.  (Transcript here.)  Skilling's legal team argues that (1) the trial should have been transferred out of Houston because of community and outrage and pre-trial publicity; (2) that voir dire would not have been a valid method to ensure a fair and impartial jury in this situation; and (3) even if voir dire possibly could have ensured a fair and impartial jury, the truncated (five hour) voir dire mandated by Judge Sim Lake in this case did not.  Although most analysis of the argument yesterday articulates the take-away as being that the judges seemed very concerned with the jury selection process but was also very concerned with micromanaging the jury selection process, the time spent on asking questions about the selection process seem to weight the first part of that take-away as more serious than the first. 

For example, in a single question that runs 31 lines long, Justice Breyer reads from the transcript and gives examples of biased jurors, but also says in the middle "At the same time, I am worried about controlling too much a trial judge.  I have expressed those concerns" before returning to the line of questioning.  Immediately prior to saying that, Breyer points to six jurors that he thinks might have been erroneously denied being struck for cause, requiring the defense to use its last five peremptory challenges against them.  "So I am concerned about the 5 hours, about the lack of recusal for cause, about the very, very brief questions that he provided to people who had said on the questionnaire they could be -- they could be biased.  They said we think he's guilty, for example.  And all those are cause for concern."

Fun stuff.

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