Securities Regulation and Litigation Lawyer & Attorney : OverRegd Blog : Lindquist & Vennum Law Firm, Minneapolis and Denver

John B. Torkelsen, an expert witness heavily utilized by the Plaintiffs' securities bar over the past several years to "testify on such issues as damages allegedly suffered by plaintiffs' classes and the appropriate value of settlements reached in several class action cases around the country," entered into a plea agreement before the Eastern District of Pennsylvania Federal Court, in which he plead guilty to perjury, admitting that "he lied to numerous federal judges across the county who were presiding over securities class actions."

Boiled down, Torkelsen had told various courts that he was an independent expert, yet certain law firms that hired him did so on a contingent fee basis and then concealed the payment arrangement from the courts. According to a Department of Justice litigation release, in furtherance of the scheme, the firms would then "submit to courts requests for reimbursement of fees already paid to Torkelsen when, in fact, the fees had not been paid and would not be paid unless the court awarded fees to the law firms; cause Torkelsen to submit declarations in which he falsely stated under oath that he had been retained on a non-contingent basis when, in fact, he had been retained on a contingent basis; cause Torkelsen to write-off fees he had incurred in class actions in which the law firms did not obtain a successful result; and cause Torkelsen to submit inflated fee requests in other class actions, billing for work that Torkelsen did not actually perform, in order to allow Torkelsen to make up for fees he did not recover in unsuccessful class actions."

Dishonesty has no place in the courtroom. At the end of the day, plaintiffs and defendants alike, as well as their counsel, are well-served by removal of such elements.

A detailed discussion of this case can be found on the Department of Justice's website at www.usdoj.gov/usao/cac/pressroom/pr2008/020.html

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Check out this month's edition of the ABA Journal for an in-depth analysis of the Federal Government's ongoing investigation of plaintiffs securities class action law firm powerhouse Milberg Weiss Bershad & Schulman. Author Martha Neil poses the question "Should Law Firms Ever Be Indicted" and aptly notes that the makings of the Government's case against the law firm contains "all the elements of a John Grisham potboiler."

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For the most comprehensive and interesting detail to date on the federal government’s criminal investigation of Milberg Weiss, check out  this article by Fortune’s Peter Elkind -

The fall of America's meanest law firm

(thanks to my former partner Bill Michael for sending this our way).

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O death, where is thy sting? O grave, where is thy victory?

--1 Corinthians 55

Death be not proud, though some have called thee
Mighty and dreadful, for, thou are not so.

--John Donne

As expected, the federal judge who presided over the criminal trial voided the fraud and conspiracy convictions of former Enron CEO Ken Lay. Lay died of heart failure soon after his convictions. The court followed long established precedent requiring that criminal convictions be voided where the defendant died without the opportunity to appeal the guilty verdict.

The immediate practical consequence of the ruling is to delay government attempts to collect assets from Lay's estate.

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On July 28, the U.S. Court of Appeals for the Second Circuit affirmed a twenty-five year sentence for former WorldCom CEO Bernard Ebbers. To no avail, Ebbers complained that his sentence, which most foresee as a life sentence for Ebbers, age 65, was too severe when compared to sentences meted out to other WorldCom officials who cooperated with the government's prosecution. The outcome came as another significant sentencing victory for the Justice Department in securities fraud cases, as earlier during July the U.S. Court of Appeals for the Eleventh Circuit reversed a seven-day prison sentence for former Health South CFO Hugh Martin, and a sentence to probation for former Southern Pride Contractors Inc. Comptroller Michael Crisp. In both cases, the Court found such light sentences to be unreasonable, citing applicable United States Sentencing Guidelines for securities fraud cases. In the Martin case, the Eleventh Circuit noted that Martin paid a $2.4 million money judgment forfeiture at sentencing. The Court of Appeals reasoned that a probationary sentence under these circumstances would send a message that wealthy corporate executives can buy their way out of prison.

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DOJ prosecutors in corporate fraud and white-collar defense cases should think twice before pursing tactics designed to discourage corporations from paying their employees' attorneys' fees to avoid criminal indictment of the entity. This stems from a recent federal court ruling involving KPMG, one of the world's largest accounting firms. http://www.nysd.uscourts.gov/rulings/05CR888_6272006_0835TS.pdf In that case, KPMG sought to avoid indictment by cooperating with prosecutors through, in part, firing employees suspected of wrongdoing (even before found guilty) and cutting off their legal fees. The judge found that KPMG cut off legal fees as a result of the prosecutors' coercive use of "Thompson guidelines". Specifically, the court found that the government, through use of the guidelines, discouraged KPMG from advancing defense costs to employees in an effort to avoid a corporate indictment, and that by doing so the government violated the employees' constitutional right to a fair trial and legal counsel.

The Thompson Guidelines (named after US Deputy Attorney General Larry Thompson), came into being following the corporate scandals of Enron, Tyco, Global Crossing and other companies. KPMG, like most corporations, had a longstanding policy of advancing and paying legal fees to employees caught up in inquiries. The Thompson memorandum changed that practice, however, given its view that advancing or paying legal fees may be one and the same as protecting culpable personnel, thus being a factor weighing in favor of indictment of the entity.

The strongly worded opinion critical of prosecutorial tactics uses language such as, "KPMG refused to pay because the government held the proverbial gun to its head", and "The government . .. has let its zeal get in the way of its judgment". Since the opinion hales from Judge Lewis Kaplan, who sits in a federal court home to many high-profile corporate fraud cases, the DOJ is likely to take heed of the opinion and more carefully scrutinize how it implements the guidelines.

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For those of you following the Zomax trial, below are links to several articles discussing key developments in the case. Lindquist & Vennum attorneys Bill Michael and (blogger) Nicole Siemens represent former Zomax CEO James Anderson.

Some Zomax Charges Tossed

Zomax CEO testifies in trial over stock sales

Prosecution rests in Zomax trial

Charges dropped against ex-Zomax exec

Over the last two weeks, the Zomax jury trial in St. Paul, MN drew national media coverage as one of the more recent cases involving high-profile allegations of insider trading at a public company. As of Monday, the government had voluntarily dismissed all charges against Neil Dolinsky, the Court had acquitted former Zomax executive Michelle Bedard-Anderson of all 29 counts of insider stock trading, conspiracy and other financial crimes alleged by the federal government, and 18 of the 29 counts against James Anderson were dismissed as well. Anderson, however, still faced 11 counts of money laundering and insider trading charges. Closing arguments before the jury were Tuesday, after which the jury began deliberations.

Jury weighs Zomax case

The jury has spoken.

Zomax ex-CEO convicted

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Milberg, Weiss, Bershad, & Schulman, a New York securities litigation heavyweight, along with two of its name partners, were indicted last month by a federal grand jury on several criminal charges, including racketeering, conspiracy and money laundering. The firm is accused of making $11.3 million in illegal secret payments to three people who served as plaintiffs in more than 150 lawsuits.

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For a look at the Denver, CO media perspective on the Lay and Skilling guilty verdicts, quoting Lindquist & Vennum attorney Steve Peters, whose observations in this blog about the Enron trial have proven prophetic, check out this Denver Post editorial.

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Recall OverReg'd post of May 4, 2006 entitled Federal Honest Services Prosecutions? Steve Peters noted that Enron trial prosecutors, whose cross examinations of former Enron execs Kenneth Lay and Jeffrey Skilling focused heavily on the men's personal investments that placed them in conflict with those of the company and its shareholders would be used against the men during the Government's closing argument. Steve specifically predicted Lay's testimony that "no one should be a slave to the rules" would be quoted back by the Government.

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The current trial of former Enron executives Kenneth Lay and Jeffrey Skilling illustrates how the Justice Department has increased its reliance on conflict of interest violations in white collar prosecutions generally and securities fraud prosecutions in particular. In a case alleging massive securities fraud and byzantine accounting improprieties, the Justice Department "dummied down" its cross examination and focused instead, for example, on small investments that both defendants made in a relatively minor Enron vendor. Those investments admittedly violated the Enron Corporate Code of Conduct, and on cross examination left Mr. Lay in the position of arguing that "no one should be a slave to the rules." Expect to hear that testimony quoted back by the government during closing argument as the public debate over Enron's collapse concludes.

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