Back in April I wrote about the New York State Attorney General's investigation into the collapse of the auction rate securities market. Last week the Wall Street Journal reported that the New York AG filed a law suit against UBS, the global financial services conglomerate, alleging a significant consumer and securities fraud. The law suit claims that UBS brokers used fraudulent sales tactics to convince retail customers to purchase the securities despite knowledge that the market itself was near failure. Auction rate securities are a type of debt or bond instrument issued typically by groups such as municipalities or student loan providers in which the interest rate is reset at an auction held periodically by Wall Street firms. The auction process gives what otherwise would be long term "buy and hold" investments the tradable features of shorter term securities.
The law suit further alleges that UBS executives who feared a market breakdown dumped their own auction rate securities for a handsome profit and left their retail clients holding the bag to the tune of $37 billion dollars of withering investments. Karina Byrne, a UBS spokeswoman, said, "UBS does not believe that there was illegal conduct by any employee." After an internal investigation into personal sales of auction-rate securities she stated, "we have found cases of poor judgment by certain individuals and are evaluating appropriate disciplinary measures for these individuals." Citigroup, Wachovia, Merrill Lynch, and Credit Suisse all face similar probes.
Once again, regulators and prosecutors investigate a collapse of a financial market and lay blame at Wall Street's door despite powerful market forces at work beyond anyone's prediction or control. Many of the auction rate securities at issue were backed by sub-prime mortgage debt. The sub-prime market itself disintegrated in a swift and completely unforeseeable manner. This is not an example of greed and high pressure sales tactics but rather the collateral consequences of widespread financial turmoil. Moreover, despite the fact that UBS is attempting to assist clients who hold the beleaguered securities, it is sued for its trouble. I predict that once again we will see individuals at these companies scapegoated for ecomonic problems over which they had no control. CR
The guidelines and principles under which the Department of Justice investigates and prosecutes corporations, their officers and employees may finally change for the better. This week a contentious Senate hearing was held in which members of the Judiciary Committee grilled Attorney General Michael Mukasey on why he had not re-evaluated the controversial aspects of DOJ’s approach to criminal probes of companies. Those notorious issues include company waiver of the attorney-client privilege.
Immediately following the hearing, on the heels of hints by Mukasey that the tenets of prosecution would change, Deputy Attorney General Mark Filip sent ranking committee members, Senators Patrick Leahy and Arlen Spector, a letter regarding proposed transformations. The letter states that DOJ will no longer evaluate a company’s cooperation based upon its willingness to waive the attorney client privilege, its decision to advance legal fees to employees, its entry into joint defense agreements or whether it disciplines allegedly culpable employees. Whether or not a company is viewed as “cooperative” in a criminal investigation can mean the difference between the life support of a deferred prosecution or the corporate death penalty of indictment. However, over eighteen months ago Senator Spector sponsored legislation, the Attorney Client Privilege Protection Act of 2007, to accomplish these exact policy amendments. In addition, three weeks ago, thirty three former United States Attorneys urged Senator Leahy to hold a vote on the Spector legislation.
It’s about time. DOJ’s heavy handed approach which penalized companies for not waiving privilege, paying officer and employee legal fees and signing joint defense agreements has seriously undermined the integrity of the criminal justice process in white collar cases. The revisions promised by Deputy AG Filip, if drafted clearly and forcefully, should stop the blatant erosion of bedrock constitutional standards. The collateral consequences of the Bush Administration’s get-tough-on-corporate-crime policies have been extreme. Corporate officers and employees should be able to consult with company attorneys, exercise indemnification provisions for the payment of their own counsel and participate in joint defense arrangements without the fear of utter ruin. Big brother should not have such a powerful stick as to be able to force privileged secrets to be revealed and prevent people from having funds to hire lawyers. While DOJ’s belated change demonstrates a desire to beat the Senate to the punch, I hope the altered course will be clear and true. CR
Sam Israel III, the fugitive hedge fund manager who tried to fake his own suicide, surrendered to the police in Massachusetts today. Mr. Israel disappeared just before he was to begin serving the extraordinarily severe 20 year sentence imposed upon him by United States District Judge Colleen McMahon after his plea of guilty to securities fraud charges. On June 9, just before he was to report to federal prison, his SUV was found abandoned on a bridge in Westchester County with the words “suicide is painless” scratched into the dust on the windshield. Authorities were reported to have ruled suicide out and have been hunting for him ever since. Israel’s longtime girlfriend Debra Ryan was charged with aiding and abetting his flight.
Israel’s lawyers have their work cut out for them. In my judgment he will be charged with bail jumping under the federal failure to appear statute. Sentencing guidelines which judges must consult to impose any sentence call for an additional three to four years in jail. It is highly likely this potential hit will be imposed consecutively to his twenty year sentence. Moreover, internal regulations maintained by the Federal Bureau of Prisons will call for increased security for Mr. Israel because he tried to flee. This will directly affect the quality of his life while serving his sentence. The best chance he has is to claim some kind of deep documentable psychological problem which caused his flight. His lawyers, Larry Bader and Barry Bohrer at Morvillo Abramowitz are tremendously talented. If anyone can avoid the further fricassee of poor Mr. Israel, they can. CR
