This NY Times article reports on the increasing difficulty of secretly stashing ill-gotten money in Swiss bank accounts. The article notes as follows:

According to a report in March from the Paris-based Financial Action Task Force on Money Laundering, which is supported by 32 countries, only seven jurisdictions – the Cook Islands, Guatemala, Indonesia, Myanmar, Nauru, Nigeria and the Philippines – now qualify as “non-cooperative” in international efforts to block the flow of illicit funds.
Less than four years ago, the list comprised 15 countries, including many in the Caribbean, like the Cayman Islands, that have now been removed. . .
Not surprisingly, Switzerland has no wish to be associated with this list of shame, and its bankers say they have been tightening their controls since 1977.
That does not alter the fact that Switzerland’s bank secrecy laws, dating to 1934, impose far fewer obligations to report customers’ affairs than laws elsewhere.
* * *
But there is a counterimage that resurfaced in the 1990’s, when Swiss banks were discovered to have denied survivors access to funds deposited by Holocaust victims. The Swiss National Bank, moreover, was obliged to acknowledge that it had accepted deposits of Nazi gold during World War II.
More than anything, the disclosures undermined Swiss respectability and persuaded the bankers that their image needed a makeover to protect an industry that employs 110,000 people and accounts for 11 percent of the country’s economic output.
Indeed, as the enforcement of regulations on illicit money has tightened, Swiss banks have become more cooperative with investigators, he said. Since Sept. 11, 2001, for example, Swiss authorities have frozen $26 million in 82 accounts said to be linked to Al Qaeda or the Taliban . . .

In addition to the foregoing, the Swiss banking bar is a remarkably small and close knit group. If clear proof exists that the Swiss banking system is being used to facilitate a criminal purpose, then, in my experience, members of the Swiss banking bar have been quite helpful in facilitating discovery of information relating to the funds and accounts in question.

The Curmudgeonly Clerk evaluates a novel defense theory in a California (where else?) case involving a murder of a transsexual.

The Fifth Circuit recently issued this opinion that examines the investor reliance presumption under the fraud on the market theory in securities litigation. Under that theory, investors are entitled to a presumption that they relied on a misrepresentation so long as the company’s shares were traded on an efficient market. An interesting twist to that theory is that the investors are not entitled to the presumption if they cannot establish that the misrepresentation actually affected the market price of the stock.
In this particular case, the plaintiffs apparently could not prove that the defendants’ positive public statements regarding the company (which turned out to be false) had increased the company’s stock price. Accordingly, the Fifth Circuit reasoned that the plaintiffs were entitled to the presumption of reliance only to the extent that they could tie the earlier false positive statements to the subsequent decline in stock price after the true negative public statements hit the media. The Fifth Circuit observed:

We are satisfied that plaintiffs cannot trigger the presumption of reliance by simply offering evidence of any decrease in price following the release of negative information. Such evidence does not raise an inference that the stock?s price was actually affected by an earlier release of positive information. To raise an inference through a decline in stock price that an earlier false, positive statement actually affected a stock?s price, the plaintiffs must show that the false [positive] statement causing the increase was related to the statement causing the decrease. Without such a showing there is no basis for presuming reliance by the plaintiffs.

This is yet another in a long line of Fifth Circuit decisions that require strong proof of reliance in fraud cases. Hat tip to the Rule 10b-5 Daily for the link to this decision.

This Chronicle story reports on an interesting development in the Enron-related criminal case commonly referred to as the “Nigerian Barge case.” U.S. District Judge Ewing Werlein rejected one of the defendants’ request for a postponement of a July trial setting to allow the defendants additional time to sift through over 2 million pages of documents relating to the case. Consequently, for the first time since the controversial Arthur Andersen trial over two years ago, it now appears that the Enron Task Force is actually going to have to try a case.
The Nigerian Barge case is a particularly interesting one because it involves the government’s attempt to convict former Enron and Merrill Lynch executives of participating in a commercial transaction of the type that is common throughout the business world. The Enron Task Force contends that the entire Nigerian Barge deal in which Enron sold an interest in some barges off the coast of Nigeria to Merrill Lynch was a sham because Merrill Lynch would not have done the deal but for former Enron CFO Andrew Fastow‘s oral assurance that Enron would broker a sale of the barges for Merrill Lynch the following year. Fastow did indeed broker a sale of the barges the following year to one of his infamous “off-balance sheet partnerships” that hid roughly $40 billion of Enron debt.
According to the government’s theory, if Fastow’s oral assurance to Merrill Lynch was binding on Enron, then the sale of the barges was not a true arm’s length sale and, as a result, Enron’s accounting for the transaction as a true sale was fraudulent. Under the government’s theory, the fact that the written agreements entered into between Enron and Merrill Lynch contained a provision that made Fastow’s oral assurrance unenforceable is irrelevant. The contract was false and a part of the sham because Merrill Lynch would not have done the deal but for Fastow’s oral assurances.
Other than Mr. Fastow’s probable testimony of dubious credibility (he is cooperating with the government under a draconian plea bargain in an attempt to minimize his jail time to ten years), the government’s primary evidence of the alleged sham nature of the deal appears to be the “nervousness” that several Merrill executives openly expressed about the deal in emails prior to Merrill consummating the transaction. The government interprets that nervousness as evidence that the Merrill executives knew that the deal was a sham and that they could be caught participating in a fraud with Enron.
However, there is another (and in my mind, more reasonable) interpretation of Merrill’s nervousness regarding the deal — that is, they were really nervous about the deal, not because they thought it was a sham and a fraud, but because they knew that they could not rely on Fastow’s oral assurance that Enron would broker a sale of the barges the following year. Accordingly, their nervousness was that they might be making a bad investment that would result in having to hold the barges for a long, rather than short, term. Stated another way, the Merrill executives were nervous because they knew that this was a real deal in which the deal documents controlled the rights of the parties, and that Fastow’s oral assurances to get them to do the deal could not be enforced if Enron failed to live up to them.
The Chronicle also has this piece today on the Enron grand jury in Houston and its members’ cozy relationship with the Enron Task Force attorneys.

This recent Fourth Circuit opinion concludes that a liability finding under Rule 10b-5 in a private securities case does not necessarily require an award of damages.
In this case, a short seller publicized negative statements about a company in which he held a substantial short interest. Shareholders of the company sued the short seller on the theory that his statements were material misrepresentations that defrauded the market and caused the company’s stock price to decline in value. The jury in the case returned a verdict that held the short seller liable, but awarded a big fat zero in damages. As one would expect, the shareholders on appeal argued that the jury finding of liability required the award of damages in some amount.
Noting that it was a case of first impression, the Fourth Circuit disagreed and noted that courts “often refer to the fact of proximately caused damage and the amount of proximately caused damage as involving separate, although related, inquiries.” Thus, the Court reasoned in affirming the lower court’s judgment of no damages, a jury could find that “(1) the plaintiff proved the defendant’s fraud constituted a substantial cause of plaintiff’s loss and so find the defendant liable but (2) the plaintiff failed to provide a method to discern, by just and reasonable inference, the amount of plaintiff’s loss solely caused by defendant’s fraud, and so refuse to award the plaintiff any damages.”
Hat tip to the 10b-5 Daily for the link to this case.

Long-time federal district Judge Filemon Vela, 68, died Tuesday afternoon in Harlingen after a short battle with cancer. President Carter appointed Judge Vela to the federal bench in 1980. Judge Vela’s family has scheduled a funeral Mass for 9 a.m. Friday at the Special Events Center in Brownsville.

Professor Ribstein at Ideablog is providing consistently insightful observations regarding the troubling trend of prosecutors to take on currently popular but ethically questionable criminal cases against corporate executives. Today, Professor Ribstein explores the agency costs of such prosecutions from the prosecutor’s side, and observes that many of these corporate executive prosecutions are an easy out for the prosecutors:

My point is that catching real criminals is hard work. The reason is that real criminals know that they’re criminals and that they have to work hard at not getting caught. Yet prosecutors are paid to catch crooks, and if they don’t get results they get fired, or at least don’t move onto to the jobs they really want, like governor or senator.
How much easier would be the lives of the Eliot Spitzers of the world if they could go after people who didn’t know they were criminals when they were committing their crimes? Even better — how about if their behavior wasn’t even clearly criminal when it was committed? They wouldn’t cover their tracks, or at least not very well. No more 7 years sitting in cars and talking to Adriana. All you have to do is look at expense accounts, or movies of parties on Sardinia.

Professor Ribstein concludes with these words of wisdom:

Of course we would prefer that prosecutors put the real bad guys away. But it’s nice for them if we let them off the hook when they grab headlines by bagging some slow-moving rich business people.
The best antidote is for the press and the rest of us, instead of lapping up the momentary satisfaction that corporate “thieves” are getting their just deserts, reflect on the damage this is doing to risk-taking, and ask whether this is the best use of prosecutorial resources.

The only comment that I would add to the Professor’s analysis is that federal judges also should play a key role in evening the currently unbalanced playing field in prosecutions of corporate executives.
Federal judges have the power and discretion (at least in areas other than sentencing guideline matters) to rein in questionable prosecutions of corporate executives. For example, federal judges should not allow prosecutors to sledgehammer corporate executives with indictments containing dozens of duplicative counts simply to pressure the executive to cop a plea rather than risk a life prison sentence if he elects to defend himself against the charges.
When principles of prosecutorial discretion are subordinated to the fame of popular prosecutions of corporate executives, the Article III protection from the passions of the moment that our justice system provides to federal judges is one of our society’s most important counterbalances to the state’s awesome prosecutorial power. This protection allows our judges to make unpopular but just decisions. In the current politically-charged climate of white collar prosecutions, true justice requires that our federal judges exercise that power.

This NY Times article reports on federal Northern District of Texas Judge Barefoot Sanders’ decision yesterday that upheld the Internal Revenue Service’s efforts to obtain the names of two KPMG clients who bought a tax shelter that the IRS contends is abusive. The two investors had previously sued KPMG in an attempt to prevent the disclosure. The decision is another setback for KPMG in this messy situation for the firm, which is the subject of previous posts here, here, here, and here.

This Wall Street Journal ($) article addresses the knotty problem of proving mens rea (i.e., intent) in corporate criminal cases. As the Journal article notes, the problem, in short, is this:

It may be obvious that an executive did something wrong, but that doesn’t mean he intended to do anything wrong.
And therein lies the biggest hurdle for prosecutors in corporate-corruption cases. Prosecutors must prove not only that the accused did something bad but also that they meant to do something bad.

The article notes that proving criminal intent becomes particularly difficult when ccorporate executives commit wrongful acts openly and on advice of counsel, accountants and consultants:

Many executives accused of improper accounting argue that they had no criminal intent by insisting that that they relied on advice or approval from lawyers, boards of directors or auditors. “In dealing with arcane areas,” an advice-of-counsel defense can be “a silver bullet,” says George Canellos, a former federal prosecutor. Prosecutors often counter that the defendant didn’t give the lawyer complete information.
In the Tyco trial, a key defense argument was that the defendants operated openly. All of their actions, they stressed, were recorded in company records, known by numerous employees and, in many cases, by outside auditors. Jurors say those arguments echoed powerfully, leading about half to lean toward acquittal initially. “It was something the defense hammered on, with a lot of effectiveness,” says juror Peter McEntegart.

And, as Professor Ribstein notes over at Ideablog:

Things get even murkier in securities fraud cases, where the perpetrator is not only not stealing, but may actually think he’s being loyal to shareholders by, for example, protecting their shares from short-term earnings glitches.
Of course this thinking is misguided and wrong, but should it be criminal? Criminalization discourages beneficial risk-taking. Even worse, applying criminal law to ordinary behavior risks diluting the moral force of the law.

Professor Ribstein makes an insightful point. If we criminalize business risk-taking partly because it is difficult to prove criminal intent in most business cases, then we are eventually going to discourage business risk-taking, which will have detrimental consequences on economic development and job creation.
To make matters worse, demagogues in the political field have seized upon corporate executives as popular political enemies. Thus, they have promoted criminal laws that assess criminal sanctions that are completely out of proportion to the nature of the business crime — just plug the name “Jamie Olis” into this blog’s search engine to read about a prime example of that phenomenom. Moreover, those same politicians have also passed laws that constrict the power of judges to use their discretion and good judgment to modify a criminal sanction to make it appropriate to the crime.
The bottom line is this — railing against capitalist roaders may be good politics, but it is contrary to fundamental American principles of justice.