If you’re anything like us, you may have forgotten that Scooter Libby has a connection to world of high finance. Too many bottles of Chateau Mouton-Rothschild will do that kind of thing to you. Someone called Libby was convicted yesterday for something involving the CIA, the Bush administration, Iraq and Robert Novak. Or something. We get that kind of news from the Daily Show. Everyone was talking about it at dinner last night, which we just took as an opportunity to drink more of the wine.
But this morning, as our hangovers cleared and we said farewell to our dinner companion, we started to remember the name Scooter.
Scooter!
He was the lawyer for Marc Rich. Along with his partner Pincus Green, Rich was convicted of tax-evasion and illegal trading with Iran after a successful career as commodities trader and real estate developer. And the prosecutor on the case was none other than a Wall Street mob-busting, Miken and Boesky convicting, US Attorney named Rudy Giuliani. (Who later turned around and wound up owning his own investment bank, recently sold for gazillions as he prepares to run for president.)
Green and Rich (the very names evoking envy and wealth) both fled to Switzerland prior to their conviction, of course. Rich and Green were later pardoned by President Clinton (while several lesser-known accomplices served out there sentences). From 1985 until the pardon, Scooter represented Rich.
The Cost of Libby [New York Sun]
The story of Clinton’s Marc Rich pardon [Human Events via World Net Daily]
legal
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Eugene Plotkin
Giving Poster Boy For Insider Trading An Entirely More Boring Meaning
By Bess LevinWe’ve been sitting around the office for the better part of the morning trying to figure something out. No, not, “Did Carney’s beard add gravitas to his appearance on CNBC or did it just make the whole operation look like b-roll from Court TV?”—though that question has been plaguing us for some time.
What we’re wrestling with this a.m. is the latest insider trading extravaganza and, you know, how it makes us feel. Because that’s how we analyze things around here: from the heart and without reason.
First off, it’s become readily apparent to us that everyone covering the story got together and said, let’s really drive home the Boesky connection. And not that we’re not always up for connections but the thing is—we’e already lived through the whole Boesky deal. Or at least JC has, and I got myself up to speed a few years later with Michael Douglas’s take on the situation. Illegal tips. Egos. Russians. Blah. Blah. Blah. It’s all the same. History repeats itself and that’s why history is boring.
Whatever happened to past performance not guaranteeing future results? These days it’s just all past performance performing the past again. We read all the hype over this insider trading scandal and feel like we’ve got a cousin in town who is totally excited to see Phantom of the Opera for the seventh time.
When the Plotkin case came along, now that got us excited.
A. There was a ballet dancer involved
B. The groundwork for the scheme was laid out at Spa 88—schvitzing and blintzing and insider trading, oh my!
Now, what it is what is is. And what is is a bunch of middle-aged men getting together at Oyster Bar in freaking Grand Central Station to lay out their plan for world domination to repay someone a measly $25,000. (Also: Oyster Bar in Grand Central Station? What, the Houlihan’s at Penn wasn’t good enough for them?). And here’s the best part of it—a few of the guys involved have already pleaded guilty! Snore. Even Boesky and Milken put up a fight, for a bit.
No courtroom drama, no character witnesses suddenly gone missing the night before they’re supposed to testify, no stern looking prosecutors with grating voices and cute names like Rudy.
At least Shpigelman was man (or boy) enough to entertain us with the argument that he did what he did because of “false promises, deception, intimidation and flattery.” Okay, that’s a little girly. Makes him sound like a girl waking up in the DTD house and regretting that those last four shots of Peach Schnapps made Brian looks kind of like he might be a good boyfriend. But you get our point.
It’d be wishful thinking on all of our parts to assume that any of these newbies will do anything but lie back and take it. Perhaps the one saving grace in the whole profoundly underwhelming deal (that’s right—we found it necessary, nay, irresponsible-not-to, qualify the ‘underwhelming’) is that “the case was so complex that the United States attorney in Manhattan, Michael J. Garcia, yesterday used a large poster board to explain the inner workings.”
A poster board!
(photo credit: Business Week)
The Century’s Big Insider-Trading Bust [Business Week]
Feds Charge 14 in Insider Scheme [thestreet.com]
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Apple
Another Backdating Indictment: McAfee’s Former General Counsel Charged
By John Carney
The former general counsel of McAffee yesterday became the eleventh person charged with criminal offenses related to stock-options backdating. The feds have said they are examining some 140 companies for backdating but its not hard to see why McAffee’s former general counsel ended up high on its lists for criminal indictments.
First, McAffee was an early and somewhat easy target for the feds because the company has had to restated its financial results five times in the past five years. The company faced securities fraud charges in connection with an alleged scheme to overstate revenue from 1998 to 2000. It settled with the authorities by agreeing to pay a $50 million civil penalty, but neither admitted nor denied any wrong-doing. It’s former controller, however, pleaded guilty to one count of securities fraud.
Kent Roberts, the indicted former general counsel, allegedly manipulated his own stock options grant date, as well as that of his chief executive. He then allegedly turned around and fired the controller for manipulating stock options grant dates. Nasty. His indictment has been expected for at least two weeks now.
Roberts seemed to have tripped the self-dealing alert that we’ve seen in other backdating indictments, and engaged in some corporate backstabbing that makes him hardly a sympathetic character. Here are the details on the indictment from the Wall Street Journal:
According to a seven-count indictment returned by a federal grand jury in San Francisco, Mr. Roberts in late 2000 became dismayed that an option grant made to him earlier that year was “underwater” — that is, its exercise price of $29.62 was higher than the stock’s price at the time. An option can only be cashed out for profit if the exercise price is below the open-market price of the stock.
According to the indictment, Mr. Roberts directed the company’s then-controller, Terry W. Davis, to change the grant’s record so it appeared to have been granted April 14, 2000, a day the stock fell to $19.75. That immediately made his grant more valuable, though he never later cashed out any of the options for a profit.
Mr. Roberts got Mr. Davis pushed out of his job, the indictment says. In 2002, Mr. Roberts headed an internal probe of irregularities at McAfee, which was then known as Network Associates Inc. Upon learning that Mr. Davis, who wasn’t identified by name in the indictment, had among other things lowered the exercise price on some other options, Mr. Roberts recommended that he be removed from his finance-department position, the indictment said. It added that Mr. Roberts didn’t tell internal auditors or the SEC that Mr. Davis had manipulated Mr. Roberts’s own grant.
It’s notable that the prosecutors seem to have concluded that the self-dealing trigger was pulled when Robert’s manipulated his own grant even though he never cashed out the backdated options. This is important because the “no gain from backdating” has become a major line of defense for some corporate executives, including Apple chief Steve Jobs. So the question remains: will the feds indict Jobs or will the “Apple Rule” continue to protect him? (More on the “Apple Rule” from the man who coined the term here)
McAfee’s Ex-Counsel Is Charged With Options Fraud [$$] [Wall Street Journal]
McAfee Ex-GC Indictment [pdf file via WSJ Law Blog]
The controversial conviction of NYSE specialist David Finnerty was thrown out by a federal judge this morning. Finnerty was convicted back in October after a surprisingly brief jury deliberation that led some to wonder whether the verdict would stand up on appeal. Now we know it didn’t.
U.S. District Judge Denny Chin in New York today set aside the jury’s guilty verdict. Jurors in Manhattan federal court found that Finnerty, who worked at Fleet Specialist Inc., illegally inserted his firm as a middleman in trades that should have been made directly between two customers.
The ruling is the latest blow to prosecutors in what was the biggest crackdown on illegal trading at the Big Board. Of 15 specialists charged with fraud by the U.S. in April 2005, three, including Finnerty, were convicted at trial, and two pleaded guilty. Two other specialists were acquitted, and prosecutors dismissed charges against seven others. One remains a fugitive.
Chin said prosecutors failed to present enough evidence to show that investors were defrauded. “What did customers expect when presenting an order to specialists?” Chin said in a 37-page ruling. “What did customers `trust’ the specialists to do? None of these questions were answered by the evidence.”
Former NYSE Specialist Finnerty’s Conviction Reversed [Bloomberg]
The criminalization of Enron is really starting to unwind. The Houston Chronicle reported last night that the Justice Department won’t seek to overturn a fifth circuit appeals court decision throwing out most of the 2004 convictions of several Merrill Lynch bankers.
The convictions for fraud and conspiracy of four Merrill executives were thrown out last August when the court ruled that the prosecutors had presented the jury with an improper legal theory. Prosecutors had argued that the conduct of the defendants had deprived Enron of its right to their “honest services.” The appeals court ruled that since the allegations did not involve bribery or theft, and the conduct of the defendants was consistent with Enron’s corporate goals, the defendants could not be convicted on the “honest services” theory.
Since the prosecution of former-Enron CEO Jeff Skilling, who is now serving a 24-year and four month jail sentence, also used the “honest services” theory, there has been some speculation that the court’s decision might be a sign that it could overturn some of his convictions as well. When the fifth circuit court denied Skilling bail in December, it noted that there were “serious frailties” with his conviction on securities fraud and insider trading convictions.
The decision by the government not to appeal the fifth circuit ruling means that Skilling’s appeal before the same court will be able to rely on ruling as controlling law. It may be too early for Skilling to pop the cork on the champagne. But it’s probably not too early to start putting some on ice.
Government won’t challenge appeal court’s decision in Enron-related case [Houston Chronicle]
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Bear Stearns
Update: Bear Steans Verdict Is In! Hand-Holding And Belly-Rubbing Now Mandatory, Says Judge, Jury Still Out On OJ’s Culpability
By Bess LevinOnly hours ago we were complimenting a commenter for bringing to our attention one reason investment banks were pushing for hedge fund regulation: the fear that the prime brokerages will be the fall guys for hedge fund failure. Because hedge funds are not as regulated as broker/dealers, the argument goes, regulators will be tempted to go after the brokerages for failing to police the activities of hedge funds.
And, as if to prove the point, a federal bankruptcy judge just ordered Bear Stearns Cos. to return at least $125.1 million to a failed hedge fund now in bankruptcy.
“This is going to send shock waves through many prime brokers, because they’ve been very careful to limit their responsibility for their customers’ actions,” Michael Missal, a former SEC lawyer and head of the regulatory practice at Kirkpatrick & Lockhart Preston Gates Ellis LLP in Washington, said before today’s hearing.”
Earlier: I can think of nothing more fitting than for the four of you to spend a year removed from society so that you can contemplate the manner in which you have conducted yourselves. I know I will.
Bear Stearns Told to Repay Hedge Fund $125.1 Million [Bloomberg]
Word is starting to spread that Jeff Skilling might not have to serve out the 24 years to which he was sentenced after his trial. Over at the Conglomerate blog, Christine Hurt lifts the following sentence out of the Fifth Circuit’s December 12th order denying Skilling bail: “Our 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.”
Hurt says this could all indicate that Skilling might end up serving a lot less time.
So, why was he denied bail? Well, even if the Fifth Circuit thinks that the counts of conspiracy, securities fraud and insider trading are vulnerable on appeal, there are still five counts of false statements to auditors. The time to be served on convictions standing after an appeal would have to be less than the duration of time between December 12, 2006 and the appeal. So, the Fifth Circuit might be saying that much of the conviction may be reversed, but there could still be six months to a year to serve at the end of the day. Well, that’s a lot different than 24 years. Remember that when the Fifth Circuit sua sponte released the Merrill Lynch bankers William Fuhs, Daniel Bayly and Robert Furst from prison pending appeal the bankers had already served one year and had been sentenced to 37- and 30-month sentences.
She goes on to wonder why more wasn’t made of this at the time the order was issued, joking that she’s going to file the entry under “How Did I Miss This?” Well, as much as we hate to toot our own horn, she wouldn’t have missed it if she was reading DealBreaker, which mentioned the “serious frailties” the very next day.
Re-reading the Fifth Circuit’s Denial of Skilling’s Bail Pending Appeal [The Conglomerate]
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