Posted On Monday, October 26, 2015
Last Thursday the anticipated fallout from the United States Supreme Court’s recent refusal to review the Second Circuit’s game-changing Newman decision began, with U.S. Attorney Preet Bharara dropping insider trading charges against former SAC Capital Advisors LP portfolio manager Michael Steinberg and six cooperating witnesses who had already entered pleas of guilty.
The announcement signaled a significant setback for Bharara who, prior to the Newman ruling, had amassed dozens of insider trading convictions – with Steinberg’s SAC Capital firm being among the central government targets. SAC had been one of the country’s largest hedge funds, and while its founder, Steven A. Cohen, was never charged with a crime, the firm pled guilty to insider trading charges in 2013, agreed to pay a fine in excess of $1.8 billion, and closed its doors to outside investors.
Steinberg had originally been sentenced to three and a half years in prison, but his conviction was thrown in doubt after the Second Circuit’s December, 2014 Newman ruling, which held that prosecutors have to prove that an individual charged with insider trading knew both that an insider had turned over confidential information and that the insider had received some sort of benefit as a result. Earlier this month, the U.S. Supreme Court denied the government’s petition for writ of certiorari in Newman, thereby ending the government’s challenge to the Second Circuit’s decision, and pushing Bharara closer to Thursday’s decision.
At his press conference on Thursday, Bharara said that “insisting on maintaining guilty pleas in these cases would not be in the interests of justice.”
Posted On Thursday, October 22, 2015
By:
DOJ made news recently with its announcement that it would be placing special emphasis in the course of investigating and prosecuting business organizations on making individuals accountable. While most observers agree it is too early to assess the full impact of the policy shift articulated in the September 9 Yates Memo, it appears that timely and comprehensive response by company executive management to reports of fraudulent conduct will remain a key consideration for government prosecutors when making charging decisions.
Not long after the Yates Memo was published, Assistant Attorney General, Leslie Caldwell made public remarks where she emphasized that the Yates Memo was actually quite consistent with the way the department had been approaching corporate wrongdoing for some time. She also acknowledged, however, that the policy shift does forcefully focus all federal prosecutors on pursuing individual accountability. In that regard, she added that “prosecuting the corporate entity, and imposing a fine for other impersonal conditions, simply is not enough – in most instances – to fully punish and, more importantly, deter corporate misconduct.” She went on to provide examples of cases resolved in the months leading up to the publication of the Yates Memo that demonstrated how the department addresses matters where companies cooperate.
The examples cited by Assistant Attorney General Caldwell in her remarks affirmed the relatively long-held axiom that when corporations act quickly on the first notice of wrong-doing within their organization, and follow it up with a credible internal investigation and disclosure to the government, the corporation can significantly reduce the likelihood of prosecution. That certainly appears to have been the way it played out in DOJ’s investigation of accounting fraud at commercial sanitation services provider, Swisher Hygiene, where the company entered into a deferred prosecution agreement (DPA), and three individual Swisher employees were charged in the District Court for the Western District of North Carolina.
On Monday, DOJ announced the indictment of Swisher’s former CFO, Michael Kipp and Swisher’s former Director of External Reporting, Joanne Viard, in connection with an alleged security fraud conspiracy carried out in 2011 and a subsequent obstruction of justice scheme in 2012. This announcement came on the heels of the October 7 announcement that Swisher had entered into a DPA with the government in which Swisher accepted responsibility for the conduct of its former employees and agreed to pay a $2 million penalty. On that same day, formal charges were filed against Swisher’s former senior-level accounting employee, John Pierrard, who reportedly had already agreed to plead guilty.
According to the government, Kipp and Viard participated in an accounting fraud scheme to ensure that Swisher’s reported earnings had met or exceeded forecasts and to conceal the existence of the fraud. The government alleged that Kipp and Viard manipulated Swisher’s books and records by moving expenses from the company’s profit and loss statement to its balance sheet, and engaged in what is commonly referred to as “cookie jar accounting” – a practice seen by regulators as disingenuous, whereby companies use good financial results from prior periods to create reserves that smooth out dips in profits in lien years.
The government alleged that when Swisher’s then-controller refused Kipp’s demand that he make a fraudulent entry during the year end close, Kipp responded by firing him. When Swisher’s audit committee learned of the controller’s allegations, it promptly commissioned an independent internal investigation to review the matter, a development that was highlighted in the government’s announcement of the charges against Kipp and Viard. Swisher eventually filed restated financial reports, reflecting, among other things, that Swisher had substantially overstated its earnings and significantly understated its losses during the relevant period.
Although the government made note of Swisher’s undertaking of the investigation and its subsequent public disclosure, it charged that after the allegation of fraud was reported, Kipp and Viard almost immediately began to engage in misleading conduct to conceal the accounting fraud and to obstruct justice by lying to the investigators hired by the audit committee. Both Kipp and Viard are charged with one count each of conspiracy to commit securities fraud, to falsify books, records and accounts of Swisher, and to make misleading statements to Swisher’s auditors and accountants; one count of securities fraud; one count of wire fraud; and one count of obstruction of justice. The government has also charged Kipp with one count of bank fraud.
The implementation of Yates Memo will almost certainly make it more complicated for corporations to respond to allegations of fraudulent conduct and to address the government investigations that result. Nonetheless, the Swisher case provides an instructive “post-Yates Memo” example of how companies can mitigate against catastrophic results by (1) executing a credible internal investigation, (2) demonstrating extensive remediation efforts and (3) improving compliance programs and internal controls.
