Friday, 21 March 2014

Supreme Court extends whistle-blower protections under anti-fraud law

WASHINGTON -- The Supreme Court on Tuesday expanded protections for whistle blowers covered by an anti-fraud law passed following the collapse of energy giant Enron, ruling outside accountants, auditors and lawyers cannot be fired or punished for exposing fraud.

The 6-3 decision will have an effect in the mutual fund and financial services industries, the court said, because they rely heavily on outside contractors and advisers.

The case before the court arose when two employees of a firm that did research for the Fidelity family of mutual funds revealed the funds were overstating expenses. They alleged that in some instances, Fidelity was operating “veiled index funds” while collecting a fee as though they were actively managed.

The two employees say they were reprimanded and ultimately dismissed for having exposed this fraud. When they sued their employer under the Sarbannes-Oxley Act, they lost when an appeals court ruled the law’s protection for whistle blowers covered only employees of public firms, not outside advisers and accountants.

In their appeal to the high court, they said this would reimpose “the very code of silence” that allowed massive frauds such as Enron to occur.

Justice Ruth Bader Ginsburg, speaking for the court, said Congress meant to broadly protect whistle blowers who could expose wrongdoing. It made no sense, she said, to think “a Congress, prompted by the Enron debacle, would exclude from whistle-blower protection countless professionals equipped to bring fraud on investors to a halt.”

Chief Justice John Roberts and Justices Antonin Scalia, Clarence Thomas, Stephen G. Breyer and Elena Kagan agreed.
A dissent was filed by Justice Sonia Sotomayor who said the law covered only “employees” of public companies, not outside advisers. Justices Anthony Kennedy and Samuel Alito agreed with her.

The whistle-blower provisions in the law protect those who reveal frauds from retaliation, and they also allow them to receive a share of money that is recovered if a fraud is exposed.

Thursday, 20 March 2014

Supreme Court Divided on Limiting Securities Fraud Suits

The Supreme Court appeared divided into three camps on whether to overrule or alter a long-standing legal precedent that provides the foundation for many class-action lawsuits alleging securities fraud.

The court heard an hour-long oral argument in a case involving Halliburton Co. and whether to overturn a 1988 Supreme Court decision which held that investors in securities-fraud lawsuits don’t have to prove they relied upon any misleading statements by a company.

By the end of an hour-long argument session, it appeared some justices were looking for a middle-ground to resolve the case.

The court, in Basic v. Levinson, said it was enough that investors rely on the integrity of stock prices, which are a reflection of publicly available company information. That legal doctrine, known as fraud-on-the-market, has provided a basis for allowing investors to pool their claims into one large class-action lawsuit. Read the full WSJ story here.

If the court abandons its earlier precedent it could make it difficult for investors to bring class-actions alleging they were misled.

The court’s four liberal justices, including Justice Elena Kagan, voiced resistance Wednesday to overturning the 1988 decision.

Justice Kagan said Congress has been active in passing securities-law reforms and has had “every opportunity” to overrule or alter the court’s Basic decision, but hasn’t done so. She and other liberal justices suggested there was no strong justification for the court to overrule its prior precedent, which the court generally is reluctant to do.

Conservatives justices expressed concern about the court’s 1988 ruling, but appeared divided on how to proceed.

Justices Antonin Scalia and Samuel Alito voiced skepticism of the premises behind the court’s earlier decision, suggesting it had made it too easy for investors to have their lawsuits certified to proceed as class-actions. Justice Scalia said once investor cases are allowed to go forward as class-actions, company defendants feel pressure to settle even weak cases.

But Justice Anthony Kennedy, a moderate conservative justice, repeatedly asked questions that sought a compromise in deciding the case. He asked whether companies defending against securities-fraud allegations ought to have a chance, before a class-action is certified, to argue that any alleged company misrepresentations didn’t have an impact on the company’s stock price. The court could embrace that approach without abandoning its earlier case, he suggested.

Other justices later voiced interest in Justice Kennedy’s line of questioning. By the end of the session, it didn’t appear that a majority of the court was prepared to fully abandon the 1988 precedent.

The case is being closely watched in investing circles and by the business community. The underlying dispute focuses on a decade-old lawsuit covering investors who bought HalliburtonHAL +1.02% shares between 1999 and 2001. The plaintiffs allege that Halliburton misled the public about its asbestos liabilities, about revenue on construction contracts, and about the benefits of its 1998 merger with Dresser Industries. Halliburton argued that any misrepresentations alleged by the plaintiffs had no actual impact on the company’s share price.

Halliburton asked the court to overturn the 1988 precedent, but as a fallback position, has also advocated for changes to the legal process that are similar to the ones raised by Justice Kennedy.

A ruling is expected by the end of June.

Wednesday, 19 March 2014

The Avanti Law Group: Legal Fraud of the Century

There are plenty of candidates for that title, but after Tuesday the prize belongs to attorney Steven Donziger. Federal judge Lewis Kaplan ruled that the environmental activist had engaged in a massive racketeering scheme and declared that a $9.5 billion judgment against Chevron CVX -0.89% in an Ecuadorian court cannot be enforced in the United States.

As our readers know, in 1993 Mr. Donziger sued Texaco (now merged with Chevron) for what he said was the company's failure to clean up oil pits it drilled in Lago Agrio in the 1970s with state oil company PetroEcuador. Chevron had signed proof that it had cleaned its portion of the pits and had been absolved of any liability, but Mr. Donziger sniffed the potential windfall of a media-ready environmental "disaster" and sued the company for $113 billion. He enlisted all manner of celebrity helpers, including actress Daryl Hannah.

He won in Ecuador, but only thanks to what Judge Kaplan found were "dishonest and corrupt" measures including bribery, coercion and engaging an American consulting firm to ghostwrite an independent expert's reports. In a 485-page opinion, the judge called the case "extraordinary," calling the actions of Mr. Donziger and his legal team "offensive to the laws of any nation that aspires to the rule of law, including Ecuador." The corrupt extortion was intended to "instill fear of a catastrophic outcome in order to increase the amount Chevron would pay to avoid the worst," Judge Kaplan wrote.

Chevron refused to give in, and now the case may serve as an example of how companies can fight back if they have the nerve and the cash. Mr. Donziger says he'll appeal, but on the factual record he stands discredited. Another worthy casualty may be financially strapped Washington law firm Patton Boggs, which got involved on behalf of Burford Capital's BUR.LN -0.44% effort to provide litigation financing to the plaintiffs. Tuesday's opinion means the firm won't collect any plunder, which couldn't happen to a nicer crowd.

Mr. Donziger is a pioneer of the foreign environmental tort, trying to exploit Third World juries to bleed U.S. companies regardless of the merits. We're glad to see his dishonesty face American justice. `

Tuesday, 18 March 2014

The Avanti Law Group: Haste Clouds Long-Term Effort on Mortgage Fraud

A report issued by the Justice Department’s inspector general, Michael E. Horowitz, underscores the danger of extolling short-term results when it comes to prosecuting white-collar crimes. The report highlights how generating headlines seemed to take precedence over accurate figures in the government’s fight against mortgage fraud.

In October 2012, less than a month before the presidential election, Attorney General Eric H. Holder Jr. called a news conference to trumpet the Justice Department’s success in combating foreclosure fraud through a program called the Distressed Homeowner Initiative. “The success of the Distressed Homeowner Initiative, and the developments we announce today, underscore our determination to pursue these and other financial fraud criminals around the country,” Mr. Holder said in a statement.

The claims of great success came during a time of persistent criticism that the Justice Department was not taking stronger action to pursue fraud in the run-up to the financial crisis. The numbers offered by Mr. Holder for the first year of the initiative were impressive: charges filed against 530 defendants, including 172 executives, from frauds that resulted in losses of more than $1 billion.

After questions from the news media about those claims, almost a year later the Justice Department revised those figures significantly downward. The total number of defendants charged was 107, with no reference to any executives, and the loss from criminal activity was $95 million. In response to Mr. Horowitz’s report, a Justice Department spokeswoman pointed out: “In the time period in question, the number of mortgage fraud indictments nearly doubled, and the number of convictions rose by more than 100 percent.”

An interesting question is whether accurate reporting of the results, like a 100 percent increase in convictions, would have generated the kind of headlines the government seemed to want. Bringing that many more cases for a complex white-collar crime is a good result, but claiming to pursue several corporate executives gave the original numbers much more punch in light of accusations that the Justice Department was being soft on Wall Street.

The inspector general’s report puts much of the blame for the inflated figures on how the F.B.I. gathered the information for Mr. Holder. Mr. Horowitz noted that “we found significant breakdowns in the process used to develop the results of the Distressed Homeowners Initiative.” That occurred at least in part because the F.B.I. had “too little time and resources available to allow for vetting of the data.”

The report does not give a reason for taking such a slapdash approach, but I think it is clear that there was pressure to announce the success of the initiative to demonstrate how the Justice Department was responding to public outcry over the lack of tangible evidence that prosecutors were taking a hard line. And so we have an example of “act in haste, repent at leisure.”

Intensifying the pressure to report robust results was additional money provided by Congress for positions to be used to combat mortgage fraud after the financial crisis. Both the Justice Department and the F.B.I. received millions of dollars for new employees, and that means showing the money was put to good use. But Mr. Horowitz’s report states that mortgage fraud was not a high priority for the F.B.I., in part because it was declining as lenders toughened their standards. In these days of tight budgets, however, no agency turns down an appropriation.

The government is fond of calling a new initiative an operation, which implies a sense of urgency and resolve. In 2010, before the Distressed Homeowner Initiative, the Justice Department started Operation Stolen Dreams to take on a broad array of mortgage frauds. Less than three months after it started, Mr. Holder announced that prosecutors had brought cases involving “1,215 criminal defendants nationwide, including 485 arrests, who are allegedly responsible for more than $2.3 billion in losses.”

Those are impressive numbers for a white-collar crime, especially in such a short period, but their validity may be open to question. Mr. Horowitz’s report points out that his office did not audit these figures, and in light of the other findings, he recommends that the Justice Department “revisit the results.”

Catching those engaged in mortgage fraud is not like operating a sobriety checkpoint or drug dragnet that quickly yields arrests. Trumpeting initiatives for pursuing complex white-collar crimes whose success will be reported in months rather than years runs the risk of offering results that don’t grab the public’s attention — or worse, makes them look like failures.

As an initial matter, just figuring out what the numbers are can be difficult. Mortgage fraud is not a separate crime but a subset of federal offenses like bank fraud, mail fraud and wire fraud. So prosecutions involving mortgages may not show up easily in government records.

A greater problem in announcing a crackdown is that these types of cases often don’t come to light until months, or even years, after the transactions, and the fraud can take many different forms. During the period when real estate values soared, there were schemes to inflate property values so that lenders were making loans for far more than houses were worth. Once the housing bubble burst around 2007, mortgage frauds morphed into schemes to defraud homeowners trying to avoid foreclosure.

Putting together a mortgage fraud case requires amassing a large volume of documents to track ownership, housing values and the transfer of money. Even figuring out where a fraud involving inflated housing values took place usually requires a bank or real estate company to report suspicious activity, which could come long after the scheme ended when the loan finally defaults.

For scams involving homeowners who face foreclosure, just identifying whether a crime took place is difficult. Those in danger of losing their homes may grasp at straws in seeking help, with companies taking advantage of them by doing just enough to make it appear they tried to help. Victims may not recognize a fraud or have the time and energy to pursue a complaint in the face of losing their homes.

This type of scheme often involves modest sums taken from those who can least afford it. The Justice Department tends not to pursue small cases, leaving them to local law enforcement, so any number of violations could easily fall through the cracks.

Mortgage fraud, like most white-collar crimes, requires painstaking investigation over a long period, so there will never be a flood of cases. And even when the government commits resources to investigations, there will be some that do not pan out.

But that does not make headlines when the government paints itself into a corner by pursuing initiatives that imply a promise of quick results.