economics

January 20, 2010

Punishing Lawyers in Corporate Frauds

Filed under: Uncategorized — ktetaichinh @ 12:02 am
Tags: , , ,

Peter J. Henning, a professor at Wayne State Law School, specializes in issues related to white-collar crime and follows them for DealBook’s White Collar Watch.

Joseph P. Collins, a former partner at the international law firm Mayer Brown, received a seven-year prison sentence for his role as the lead attorney for the failed futures trading firm Refco Inc., whose collapse as a result of accounting fraud cost investors and lenders more than $2 billion. Mr. Collins was convicted of conspiracy, wire fraud and securities fraud in July 2009 for his role in the stunning demise of Refco only weeks after the firm’s initial public offering.

The company hid debts owed by its chief executive, Phillip R. Bennett, from a buyout firm in an leverage buyout in 2004 and then in the public offering in 2005. In addition to Mr. Collins’s conviction, Mr. Bennett received a 16-year sentence, and Refco’s former president, Tone N. Grant, was sentenced to 10 years for their role in the accounting fraud.

Mr. Collins was Refco’s long-time outside counsel and the firm was his largest client, generating $35 million in billings for Mayer Brown. It is rare that an outside lawyer is prosecuted for legal representation of a client, and the case can be understood as part of a growing trend in which federal prosecutors and regulatory agencies, including the Securities and Exchange Commission, focus on those who enable corporate fraud along with the officers and directors who orchestrate it. The punishment of Mr. Collins is substantial, and The New York Times’s chief financial correspondent, Floyd Norris, asked on his blog last week, “What are the longest sentences given to partners (or former partners) of major law firms, for crimes committed on behalf of clients?”

Although uncommon, Mr. Collins is not the first outside lawyer to be prosecuted for work on behalf of a client, although his sentence is among the most severe. Other lawyers are included on the list of those who have been convicted for conduct related to their legal practice:

  • Terry Christensen, a well known entertainment lawyer, received a three-year prison sentence for his role in the wiretapping of the ex-wife of his client, the billionaire Kirk Kerkorian,the during a child-support case. Mr. Christensen worked with private investigator Anthony Pellicano, the so-called “private eye to the stars” who was convicted in other cases.
  • Raymond Ruble, a tax lawyer at Sidley Austin, received a 6½-year prison term for his role in the sale of tax shelters by KPMG that resulted in more than $100 million in avoided taxes.
  • Melvyn I. Weiss and William S. Lerach, name partners at the plaintiffs class-action firm Milberg Weiss (which later split into two firms), received sentences of 30 months and 24 months, respectively, for their role in paying kickbacks to lead plaintiffs and expert witnesses in the firm’s cases. Two other name partners from the firm, Steven G. Schulman and David J. Bershad, received six-month prison terms.
  • John G. Gellene, a leading bankruptcy lawyer at Milbank Tweed, received a 15-month prison term for filing false documents in a corporate bankruptcy proceeding in 1994 that did not disclose a conflict of interest he had through prior work on behalf of a major creditor of the company. An excellent book by Professor Milton C. Regan Jr., “Eat What You Kill: The Fall of a Wall Street Lawyer,” looks at how Mr. Gellene came to find himself in a criminal prosecution.

I have not included Marc Dreier on the list because he did not act on behalf of clients in enriching himself, although certainly his standing in the legal community contributed to the fraud he perpetrated.

In-house counsel have also been the subject of criminal prosecutions, most recently in the options backdating cases. For example, the former general counsel of Comverse Technology, William Sorin, received a year-and-a-day sentence for his role in the issuance of backdated options by the company.

Not every case involving the prosecution of lawyers is successful, however, as juries have acquitted inside lawyers from McAfee, Tyco International and McKesson.

What is striking about the sentence that Mr. Collins, the former Mayer Brown lawyer, received is its length. This is largely a product of a change in the Federal Sentencing Guidelines adopted in late 2001 that substantially increased the likely sentence in fraud cases. The United States Sentencing Commission amended the fraud-loss table used to calculate the sentences so that a loss of more than $400 million pushed the potential punishment to more than 20 years and could even result in a term of life in prison when other factors, such as the number of victims, were considered.

The timing of that change could not have been more propitious for prosecutors because shortly afterward financial meltdowns at companies like Enron, WorldCom and Adelphia Communications hit. While at one time prison sentences for white-collar offenders were uncommon, and anything over two years almost unheard of, the sentencing guidelines made substantial prison terms much more likely when a large corporation collapsed. Thus, defendants like WorldCom’s chief executive, Bernard Ebbers, got 25 years; Adelphia’s chief executive, John Rigas, 15 years; and Enron’s chief executive, Jeffrey K. Skilling, more than 24 years, although that term will be reduced and he could even be back in court for a new trial if the Supreme Court reverses his conviction.

More recently, Mr. Dreier received a 20-year sentence for his fraud that cost victims at least $400 million. A Florida lawyer, Scott Rothstein, has been accused of a similar scheme that may exceed $1 billion in losses, and he is likely to receive at least as much prison time if he pleads guilty as expected on Jan. 27.

Given the sizable losses in the Refco case, Mr. Collins may be fortunate to have received only seven years, as the potential punishment under the sentencing guidelines called for a maximum of 85 years in prison. The Federal District Court rejected his request not to be sent to prison at all, an unlikely result given the amount of the loss. Mr. Collins is seeking a new trial based on recently revealed e-mails, and he is certain to appeal the conviction. Whether the district court permits him to remain free pending the appeal remains to be seen.

The substantial sentence is sure to be noticed in major law firms throughout the country, but whether it has any deterrent effect is another issue.

– Peter J. Henning

Leave a Comment »

No comments yet.

RSS feed for comments on this post. TrackBack URI

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

Blog at WordPress.com.

%d bloggers like this: