Regular readers of this blog know that the federal government’s criminalization of business since Enron has been steadily encroaching on professionals who provide advice to business interests. First, it was Arthur Andersen, then the Merrill Lynch bankers in the Nigerian Barge case, and then KPMG.
Now, Nathan Koppel of the WSJ Law Blog reports that the Department of Justice has thrown down the criminal gauntlet on legal advisors by indicting former Refco, Inc outside counsel, Joseph P. Collins, the former head of Mayer, Brown & Platt’s derivatives section. A copy of the indictment is here and my previous posts on the Refco case are here.
The indictment crosses the Rubicon in terms of the govenment’s willingness to prosecute an outside lawyer for merely advising a client in regard to structuring transactions that are not intrinsically illegal, but it nevertheless raises more questions than it answers. 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 indictment of Collins is a jumble of conclusory allegations of fraud without any specific allegations of Collins’ fraudulent conduct.
Although inartfully drafted, the government’s indictment essentially alleges 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 alleges that Collins committed a crime by aiding Bennett in misleading Refco auditors and investors in not telling them about the use of Refco’s credit to reduce the affiliate’s debt to Refco. In addition, the government alleges that Collins aided Bennett in covering up from investors the dilution of Bennett’s ownership interest in Refco to BAWAG, which is characterized as “a longtime Refco customer.” Again, the government hinges its criminal case against Collins on the alleged non-disclosure of that dilution.
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 a bankruptcy case. Not only did none of these professionals uncover the alleged fraud, but none of them other than Collins has been targeted as a criminal. Moreover, as this earlier post asks, if Bennett and Collins were orchestrating a massive fraud at Refco, then why on earth did they take it public where discovery of the fraud would likely lead to far more draconian consequences than if Refco had remained private?
Oh well, I suppose that question will be sorted out eventually. An ominous sign for both Bennett and Collins is that former Refco Capital Markets vice-president, Santo C. Maggio, pled guilty yesterday in New York to two counts of securities fraud, one count of conspiracy and one count of wire fraud under a cooperation agreement with prosecutors. In the meantime, it looks as if Collins and Bennett are not in lockstep with regard to defending their criminal cases. The initial public comments of Collins’ attorney suggest that Collins will assert that he had been duped by Refco’s fraud. Although that position can’t be pleasing to the Bennett defense, it is certainly understandable from Collins and Mayer Brown’s standpoint. It appears that Mayer Brown is underwriting Collins’ defense and probably will continue to do so as long as Collins is taking the position that any failure of his legal counsel was the result of being duped or, at worst, negligence.
Maintaining that position would appear to be extremely important to Mayer Brown, which has had been having its own business problems over the past year or so (see here, here and here). If a jury finds that Collins was engaged in criminal fraud with regard to Refco, then such a finding would likely constitute grounds for any insurer or reinsurer of Mayer Brown to deny coverage for damage claims arising from Refco-related civil litigation against the firm, as well as any legal fees generated in the defense of such litigation. In that turns out to be the case, Mayer Brown’s resulting business problems may make the ones that the firm has been dealing with over the past year look like a piece of cake in comparison.
As always, Larry Ribstein and Peter Henning have insightful thoughts on various implications of the Collins indictment.