Tennessee Business Litigation Law Blog

Here are three news items of interest on the corporate fraud front. Since well before the Sarbanes-Oxley law was passed in 2002, the effort and energy put into investigating and dealing with corporate fraud has produced great changes for the business and government sectors. Prison time, once a rarity, no longer is; and corporate giants who thought the government was either too incompetent, politically disinterested or lazy to regulate and/or investigate them have found out otherwise. In other words, things just keep changing and evolving in this area.

SEC eases Sarbanes-Oxley financial control rules: The SEC voted yesterday to tentatively adopt a plan giving smaller companies more flexibility in how they apply financial controls under the broad 2002 Sarbanes-Oxley law, which was passed to combat corporate fraud. The proposed changes provide new guidelines about how to evaluate internal financial controls and financial reporting, among others. Overall, the changes will ease financial control rules for smaller companies and were brought about by businesses who complained that the rules were overly burdensome and costly. Here is an AP story with more information.

DOJ revises its corporate fraud guidelines: The Justice Department on Tuesday bowed to pressure from the federal bench, Congress and the business sector and relented in its “take no prisoners” stance on waiving the attorney-client privilege, among others, when deciding whether to indict. This is the third in a series of memos written by senior DOJ officials beginning in 1999, again showing just how rapidly the subject of corporate fraud is changing. This week’s memo is referred to as the “McNulty Memo” in honor of its author, Deputy Attorney General Paul McNulty, and replaces the 2003 Thompson Memo (former DAG Larry Thompson), which replaced the Holder Memo (former DAG Eric Holder). The complaints in the last few years have been about the aggressive practice in the pre-indictment phase of prosecutors asking (or expecting) companies to waive the attorney-client privilege or to cut off the payment of legal fees for employees being investigated or charged. As you can imagine, the pressure to cooperate and possibly avoid indictment is heightened when a federal prosecutor requests that the company turn over the results of an internal investigation or the strategic advice of the company’s lawyers. Now, McNulty has told prosecutors that attorney-client communications should be sought only in “rare circumstances” and, once a legitimate need for it is shown, approval must be sought up the chain from the U.S. Attorney to the Assistant Attorney General of the Criminal Division. In certain instances, McNulty will personally approve requests for obtaining privileged information. Also, for added incentive, on December 8, Senator Arlen Specter, R-Pa., outgoing chairman of the Judiciary Committee, introduced a bill that would strictly limit a prosecutor's ability to request attorney-client privileged information. Read an article at law.com

Skilling reports to prison: Having failed to win the court’s approval to remain free on bond pending his appeal, former Enron chief executive Jeffrey Skilling entered a Minnesota federal prison yesterday. Skilling, 53,  will serve over 24 years for his conviction on fraud in the collapse of the former energy giant. Remember, federal time is “real time” because there is no parole and only a minimal reduction for good behavior if it is earned day for day as determined at the end of the year.

Posted In Business Entities , Business News and Miscellany , Civil Fraud
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I tried one of the first health care fraud qui tam cases in the Federal District Court for the Middle District of Tennessee and the subsequent case to collect the $10 million judgment was recently decided by the Federal Sixth Circuit Court of Appeals. In November 2000, the federal government won the multi-million dollar judgment against a defunct home health care company, Century Health Services, Inc., and two of its former executives on claims under the False Claims Act for misuse of medicare reimbursement funds.

Unable to collect on the judgment from the two executives, the feds went after their wives for benefiting from the ill-gotten gains and sued using the common law theory of unjust enrichment and the Federal Debt Collection Procedures Act (FDCPA). The feds settled with one of the wives and won summary judgment in the Federal District Court against the other. The Court of Appeals overturned the majority of the summary judgment decision and remanded a single issue to the District Court. The feds' unjust enrichment claim was based, in part, on the home health care company's repayment of a loan from the wife. The feds argued that the company's repayment was made with money the government paid it through fraud. It failed because the Court of Appeals found that the government conferred no benefit on her in connection with the transactions and that, basically, repayment of a loan is not unjust enrichment.

The feds claimed the FDCPA applied because the wife's monthly allowances she received from her husband were made with the intent to hinder, delay, and defraud the government because they were made after her husband knew he owed a debt to the feds. However, the argument failed on appeal because it was uncontradicted that the wife used the monthly allowances to pay living expenses such as food, clothing, utilities, etc., and, therefore, did not meet the definition of fraudulent transfer.

The hard truth: Even the big federal government sometimes has trouble collecting on judgments. The opinion, United States v. Goforth, et al., is available here.

Posted In Civil Fraud
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