Fraud trials have come a long ways in Chicago since the days of Al Capone as federal prosecutors in the Windy City announced the indictment on Thursday of newspaper entrepreneur Conrad Black and three of his former associates in connection with an alleged fraud scheme that took place while Mr. Black controlled the giant newspaper company, Hollinger International Inc. Charged along with Mr. Black were Jack Boultbee and Peter Atkinson, who were both former vice presidents of Hollinger, Mark Kipnis, the company’s former corporate counsel, and Ravelston Corp., a Canadian company that Mr. Black used to gain control of Hollinger. Mr. Kipnis was charged with fraud in August along with former Hollinger chief operating officer David Radler, who has already copped a plea under which he will serve 2.5 years in the pokey in return for cooperating with prosecutors. The Justice Department’s unusually long press release on the indictment is here.
The indictment contends that the fruits of the fraud were a couple of Park Avenue apartments, a corporate jet, a trip to the South Pacific and over $50 million in allegedly unauthorized payments to executives. Mr. Black and the others are accused of diverting more than $32 million from Hollinger through a byzantine series of transactions that the indictment frankly does not describe well. The indictment also alleges that Mr. Black was involved in the fraudulent diversion of an additional $51.8 million in 2000 from Hollinger’s sale of assets to CanWestGlobal Communications Corp.

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Following on the revelations of late last week, the Securities and Exchange Commission commenced a civil action yesterday to freeze the assets of former Patterson-UTI Energy, Inc. chief financial officer, Jonathan Dwane “Jody” Nelson, who the SEC accuses of masterminding the embezzlement of $70 million from the Snyder, Texas-based contract drilling company (a copy of the complaint is here. In addition to the freeze order, the SEC obtained the appointment of a temporary receiver over Mr. Nelson’s assets. The SEC’s press release on the lawsuit provides more information regarding the alleged scheme than has been made public to date:

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The NatWest Three are the three former National Westminster Bank PLC bankers based in London — David Bermingham, Giles Darby and Gary Mulgrew — who are charged in Houston with bilking their former employer of $7.3 million in one of the schemes allegedly engineered by former Enron CFO Andrew Fastow and his right hand man, Michael Kopper (previous posts are here).
However, NatWest never sought to recover the funds from the three men, never pursued criminal charges against them in England, and neither the Crown Prosecution Service, the Financial Services Authority nor the Serious Fraud Office in the UK found sufficient evidence to prosecute. If a trial had taken place in the UK, then the three men could not be extradited to the US because of the principle of double jeopardy. But since no British trial has taken place, the British Home Secretary has granted the US extradition request under the Extradition Act of 2003, which was passed to facilitate extradition of suspected terrorists to the US. Under that legislation, the Home Secretary can extradite British citizens without the US authorities having to make a prima facie case — they need only set forth a statement of the facts that they hope to prove. To make matters even murkier, the Extradition Act is a one-way street — to extradite an American citizen from the US, the British still need to provide evidence that the American citizen has committed an extraditable offense.

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Two California doctors who were charged with criminal fraud in performing unnecessary heart surgeries at a hospital formerly owned by Tenet Healthcare Corp. have agreed to an unusual settlement that resolves the criminal charges and includes a settlement of related civil litigation that provides $32.5 million in payments to patients and federal insurance programs. The investigation included a highly publicized raid of the hospital, which Tenet eventually sold under the threat of losing access to the Medicare program.
As a part of the unusual deal, the doctors who were charged agreed to pay $1.4 million each and consented never to perform any cardiology procedures or surgeries on any patient covered by various government insurance programs, including Medicare. Nevertheless, neither of the docs admitted liability and one of them commented that the reason he settled was that he could not “continue to fight a system that is not interested in the truth.”

Thomas H. Lee Partners, Ltd is the private equity firm that bought a big stake in Refco, Inc. last year and held a 38% equity stake in the company after Refco went public in August of this year. With Refco’s recent descent into bankruptcy, that equity stake is now worthless.
Notwithstanding that rather disappointing investment, Thomas H. Lee Partners is a defendant along with former Refco CEO Phillip Bennett and several other Refco executives and consulting firms in several civil lawsuits by investors seeking substantial damages that have been filed since the revelations about Mr. Bennett’s short-term lending arrangement between Refco and one of his personal investment companies. More lawsuits over its involvement with Refco and Mr. Bennett are almost a certainly for Thomas H. Lee Partners.
So, having made this stupendously bad investment and getting sued out the gazoo to boot, what should Thomas H Lee Partners do to defend itself? Well, how about go on the offensive?

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Couldn’t help but notice that American International Group Inc. announced yesterday that its third-quarter net income fell 36% to $1.72 billion (65 cents a share) as a result of recent large catastrophe losses. This comes on the heels of the announcement from last week that AIG would restate its results dating to 2002 to correct errors in the way it accounted for certain types of derivatives contracts, which restatement came only six months after AIG had completed an earlier restatement for the same periods. Just to make matters as murky as possible, AIG also also announced yesterday that it had revised its results for 2000 and 2001.
Inasmuch as yesterday’s earnings announcements were in line with forecasts and came after the close of trading, they did not have much of an impact on trading. AIG’s shares increased 26 cents to $67.50 in regular trading yesterday and, in after-hours trading, the shares dropped 30 cents to $67.20. The stock hit a 52-week low of $49.91 this past spring during the period in which the company restated five years of results and cut shareholder’s equity by $2.26 billion as New York AG Eliot Spitzer sparred with former AIG CEO, Maurice “Hank” Greenberg. For the first nine months of this year, AIG’s profits were $10.02 billion ($3.82 a share), which is up from its restated (twice) profit of $8.3 billion ($3.14 a share) for the first nine months of 2004.

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On a lively Thursday in New York, Phillip R. Bennett, the former CEO of the big commodities broker Refco Inc., was indicted on multiple counts of securities fraud, wire fraud and of making false regulatory filings with the SEC at the same time as creditors in Refco’s pending chapter 11 case fought over the price to be paid for the company’s key regulated futures business. Previous posts about Mr. Bennett and the Refco saga are here and a copy of the indictment is here.
Refco filed a chapter 11 case on Oct. 17 a week after the company announced that a $430 million debt owed to the company by a firm controlled by Mr. Bennett had been concealed and then repaid by Mr. Bennett. Refco’s board placed Mr. Bennett on indefinite leave Oct. 10 and he was arrested on federal securities fraud charges shortly thereafter.

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As the regulators and financial media wait on pins and needles for the next Enronesque experience in business, much attention has recently been focused on the generally unregulated — at least until now — world of hedge funds.
David Skeel recently published this Legal Affairs article (and this follow up discussion with Business Law Prof blogger Dale Oesterle) in which he argues for more regulation of hedge funds because the pressure that hedge funds face to take unreasonable risks and to show over-the-top returns undermines the integrity of the markets, which will hurt the little guy investor. Meanwhile, in anticipation of the new SEC regulations due to take effect in February that require hedge funds managing more than $25 million to register with the SEC, submit to periodic audits and provide detailed information about their trading, the Wall Street Journal reports today that many funds will not be registering with the Securities and Exchange Commission due to loopholes provided by the agency. The entire thrust of the article is “what are these guys hiding?”
Into this fray enters the indomitable Larry Ribstein with this timely post in which he proposes that everyone back off and think about whether the proposed regulations are really a solution to the supposed problem for which they are intended:

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The Chronicle’s Mary Flood reports in this article that the Enron Task Force has obtained three “streamlined” indictments against the five former Enron Broadband executives who were the subject of the previous failed Task Force prosecution over the same subject matter.

As is the Task Force’s policy, they leaked a copy of the superceding indictments to the media before they were filed on the electronic docket of the case, so a copy of the indictment is not yet available. I will post a copy of each indictment when they become available.

As Ms. Flood’s article notes, the five former executives will not be tried together this time around. Kevin Howard, former EBS CFO, and Michael Krautz, former EBS senior accounting director, will be tried together in a trial currently scheduled for May, 2006 on four counts that they conspired to commit wire fraud and falsify books and records relating to the Task Force’s allegation that they created a phony sale of video-on-demand profits in order to inflate EBS earnings.

Next, former EBS executive Scott Yeager will be tried later that summer on a total of 13 counts of insider trading and money laundering.

Finally, former co-CEO of EBS, Joe Hirko, and Rex Shelby, former senior vice president of engineering and operations, will be tried in September, 2006 on conspiracy to commit wire and securities fraud, as well as multiple counts of securities fraud, wire fraud and insider trading.

Of course, all of these trials will be anticlimactic compared with the trial of the Task Force’s legacy case against former Enron executives Ken Lay, Jeff Skilling, and Richard Causey, which will crank up in mid-January, 2006.

Remember Royal Dutch/Shell’s Enronesque experience relating to overstatement of reserves from last year?
Well, the British equivalent of the SEC — the Financial Services Authority, or FSA — announced yesterday that it had concluded its investigation of former senior Shell executives Philip Watts and Walter van de Vijver and found no wrongdoing relating to the executives’ involvement in the company’s overstatement of energy reserves last year. The SEC and the Justice Department are still conducting investigations of the two former executives.
Funny how the FSA’s announcement of yesterday did not get quite as much play in the media as the ouster of the two executives from Shell last year as the company’s overstatement came to light.