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July 12, 2009

A daunting jury verdict for deal lawyers

Collins Flying a bit under the radar this past weekend was the dreaded "we're sure as hell not coming back on Monday" verdict that the jury returned on Friday afternoon in the Refco, Inc-related criminal case against Mayer Brown partner, Joseph P. Collins.

Collins was Refco's outside corporate counsel for ten years or so before Refco disintegrated into bankruptcy in October, 2005. A New York city federal jury found Collins guilty on five of 14 criminal counts, including two counts of wire fraud, two counts of securities fraud and conspiracy, and a mistrial was declared on the other nine counts. Sentencing is scheduled for November 3rd. A previous post on the indictment is here and a copy of the original indictment against Collins is here and previous posts about the Refco case are here.

The jury verdict against Collins crosses the Rubicon in terms of the federal government's willingness to prosecute an outside deal lawyer for merely advising a client in regard to structuring transactions that are not intrinsically illegal. As is typical of most business prosecutions over the past several years that criminalize questionable business judgment rather than clear white collar criminal acts such as embezzlement, the case against Collins was a jumble of conclusory allegations of fraud without any specific allegations of what Collins did that was criminal.

Heck, it was undisputed at trial that Collins barely worked on the transactions on which the prosecutors based their case against him. Essentially, the prosecution alleged that Collins assisted former Refco CEO and controlling shareholder Phillip Bennett in using Refco's credit to reduce indebtedness to Refco of an affiliate controlled by Bennett. That's not a crime, but the government asserted that Collins committed a crime by aiding Bennett in misleading Refco auditors and investors by not telling them about the use of Refco's credit to reduce the affiliate's debt to Refco.

It didn't help Colling that a couple of other former Refco officers who copped pleas testified for the prosecution, although Bennett was not one of them. And the fact that a couple of partners from Weil Gotshal -- which replaced Mayer Brown as Refco's corporate counsel after Thomas H. Lee Partners bought a majority stake in the firm a few months before Refco's public offering -- also testified against Collins. I'd bet that testimony didn't help relations between the two firms.

What's curious about all of this is that numerous lawyers, accountants and investment bankers scrutinized and presumably profited from Refco over the past several years in connection with various investments in the firm, including its well-publicized public offering that valued the company at $4 billion five months before it disintegrated into bankruptcy. Not only did those professionals fail to uncover the alleged fraud, but none of them other than Collins was targeted as a criminal. See why these matters are better suited for civil cases in which responsibility for wrongdoing can be allocated among all the responsible parties?

Moreover, as this earlier post notes, if Collins knew about a massive fraud at Refco, then why on earth did he allow the company to be bought by Thomas H. Lee Partners and then go public where discovery of the fraud would likely lead to far more draconian consequences than if Refco had remained private?

Collins testified in his own defense and rightfully contended that it was never the job of Collins -- or generally any outside corporate counsel, for that matter -- to monitor the company's transactions, which would be an impossible task for outside counsel. Collins went on to testify that was never informed of the hidden debt and that Refco's top executives lied to him from the beginning.

At any rate, at the end of the trial, the prosecution contended that none of the specifics really meant much. Collins and Mayer Brown made millions off of Refco, which ultimately tanked. Thus, Collins must have done something wrong, right? Even this apparently divided jury agreed with that twisted logic.

Here's hoping that the trial judge will set aside the verdict against Collins, but that's probably wishful thinking in these anti-business times. The problem with this emerging governmental policy of prosecuting transactional lawyers is similar to the policy of criminalizing agency costs against corporate officers. There is a big difference between prosecuting agency costs and prosecuting clear-cut crimes, such as embezzlement. The difference relates primarily to the nature of the evidence involved, the relevance of contracts, and the subtleties of dividing responsibility between corporate actors.

Larry Ribstein has put it this way. Suppose somebody mugs you on the street. There is no question that is a crime. However, what if they ask you first if they can borrow your wallet, you loan it to them, and then they don't give it back in time? What if they ask your employee who's running the store for you whether they can borrow some money, the employee loans it to them and then they don't pay it back? What if the "thief" is another employee who says the manager gave him the money as bonus compensation?

Who is liable in these situations turns on the contracts and the legal relationships among the various parties. Proof depends on who said what to whom. Can we rely on what the witnesses say about this? What if the prosecutor tells the guy who's minding the store that he'll not face a prosecution for conspiracy if he spills the beans on the employee?

In the meantime, the Collins verdict sends an ominous message to transactional lawyers everywhere. Rest assured that American business -- and ultimately all of us -- will endure the additional costs that deal lawyers will charge to endure the risk that the government will prosecute them for a crime that they do not know about.

Posted by Tom at July 12, 2009 8:28 PM |



In white collar prosecutions you complain about the actions of "the government" but you fail to actually point fingers at the individuals responsible for the abuses you complain of. Prosecutors are employees of the DOJ which is an agency of the executive branch and decisions made by executive branch agencies are inherently based on political considerations. The judiciary is charged with ensuring the political decisions made by executive branch employees are consistent with equitable justice and constitutional principles.

We have had various conversations about the Stanford affair and you raise questions in that matter, as you do in Refco and Enron that prosecutors are acting improperly, but decisions of DOJ employees reflect the priorities of the Attorney General and that individual is merely reflecting the policies of the President. If a prosecutor is acting in a manner that troubles you, isn't your recourse to vote for a change in the leadership of the executive branch and to instill new priorities of the President and Attorney General?

Last week, you questioned in the Stanford affair whether dear, sweet Allen was being "railroaded." For that to happen, wouldn't the DOJ be responsible for making specious arguments and the judge hearing the matter be responsible for knowingly violating the rights of the defendant?

In the case against Joseph Collins, the DOJ is unquestionably making political decisions. That is what they do. Are you arguing the judge hearing the case is allowing the rights of the defendant to be violated or are you arguing that the political decisions of the DOJ are misguided?

Posted by: cmilford Author Profile Page at July 13, 2009 10:57 AM

Question: "Are you arguing the judge hearing the case is allowing the rights of the defendant to be violated or are you arguing that the political decisions of the DOJ are misguided?"

Answer: Both.

Charles, your analysis is a bit simplistic. Prosecutors are not political appointees -- only the chief U.S. Attorneys traditionally submit their resignations upon the inauguration of an opposing party's nominee. Most of the DOJ's prosecutors are career government employees who are employed regardless of who leads the Executive Branch. They are bound by not only the Constitution and judicial precedent, but also the Code of Professional Responsibility, the ethics of their profession and long-standing principles of prosecutorial discretion (such as not fanning the flames of public prejudice or bringing cases in which it is clear that reasonable doubt exists).

I don't know what is more appalling. That a large number of federal prosecutions of businesspeople have simply ignored the foregoing responsibilities over the past decade? Or that a large number of federal judges have let prosecutors get away with doing so? Either way, it's a sad state of affairs.

Posted by: Tom K. Author Profile Page at July 13, 2009 11:20 AM

I agree that prosecutors are not political appointees, but prosecutors answer to the Attorney General who is a political appointee, so the actions of the individual prosecutors will reflect the political decisions of the head of the executive branch. Military officers aren't political appointees but military matters such as equipment, size of force, training and deployment are all highly influenced by political considerations.

Today I shook my head in sadness at the direction of this country when I read that the SEC is strongly leaning toward forcing companies to "assess and reveal the effects of climate change on their financial health." In a Sarbanes-Oxley world we are going to require directors to not only "reveal effects of climate change" but to possibly face legal consequences if the corporate directors believe global warming to be a hoax, make statements about the effects of global warming as requires by law, we finally admit global warming is a huge hoax and shareholders learn that the directors didn't believe in global warming but made "disclosures" they reasonably believed not to be true. I can't wait to read your blog when those prosecutions come to be.

Prosecutors have broad discretion to pick and choose the actions they choose to pursue. Unquestionably political considerations drive decisions of federal prosecutors. It is the judiciary that is charged with keeping the executive branch in check. If you want to see change in the discretion employed by federal prosecutors, you will need to take on the clown in the black robes that are allowing political considerations and not judicial considerations to guide the actions of prosecutors. As you well know, that is an expensive hobby for a practicing attorney.

Posted by: cmilford Author Profile Page at July 13, 2009 11:55 AM

cmilford I take Tom's posts to be advocacy that others act as he would. While his personal legal recourse may be to vote for a change in executive leadership, public discussion of these issues is IMO his much more potent form of recourse. And although Tom does point out (as above) certain specific items that are arguably against the current rules, I think his refrain about whether a truly civil society would tolerate this is far more important.

Posted by: Kevin Author Profile Page at July 13, 2009 1:19 PM

I think we agree that lawyers ought not receive a pass when they do knowingly assist their clients in committing fraud... and that a lawyer not get a pass because they cover their eyes and ears in order to not discover the illegal actions of their clients. the question then is: how to proceed in the absence of a smoking gun of lawyer knowledge of client wrongdoing?

Posted by: steve sturm Author Profile Page at July 13, 2009 3:25 PM

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