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In-House Lawyer Could By Sue Reisinger Robert Graham, a former senior lawyer at General Re Corp., faces life in prison for doing what his defense attorney calls a "few hours work" on a fraudulent deal. Prosecutors want to sentence Graham to a "substantial" term -- up to 230 years behind bars -- for his role in a sham insurance deal with American International Group Inc. The government also wants Graham, who is 60, to pay millions of dollars in fines and restitution. In February a U.S. district court jury in Hartford convicted Graham -- Gen Re's former assistant general counsel -- and four other executives of multiple counts of securities fraud. At a Sept. 25 sentencing hearing before Judge Christopher Droney, prosecutors argued that Graham should face a stiff penalty because he abused a position of trust and used his special skills and knowledge as a lawyer to further the fraud. The government is also asking for similarly harsh prison terms for three of Graham's co-defendants -- Ronald Ferguson, Gen Re's former CEO; Elizabeth Monrad, the company's ex-CFO; and Christian Milton, the former vice president of reinsurance at AIG. Prosecutors are suggesting a shorter sentence for a fifth defendant -- Christopher Garand, Gen Re's former chief underwriter -- who was convicted on fewer counts. The government arrived at the severe prison terms by using a formula in the federal sentencing guidelines which provides for steeper penalties as the amount of loss and number of victims rises. Prosecutors argue that the defendants deserve heavy sentences because more than 250 AIG investors lost at least $544 million from the fake deal with Gen Re. The defendants have countered with an expert who maintains that there was zero loss and no victims. The issue will be decided by Droney, who has not yet set a sentencing date. He is expected to choose a sentence between what the prosecutors seek, and the 12 years to 17 years recommended for each defendant in a pre-sentencing report. The fake deal was concocted eight years ago. Gen Re paid a $10 million insurance premium to AIG, which secretly returned the money. AIG then booked $500 million in false loss reserves, to impress analysts and to increase its stock price. Prosecutors say Graham's advice helped to "legitimize bogus documents and to conceal the fraud" by structuring it through a holding company. Graham's attorney, Alan Vinegrad, a New York-based partner with Covington & Burling, wouldn't comment for this story. But in a September court filing, Vinegrad argued that his client is the "least culpable" of the defendants, and that prosecutors are overstating the seriousness of his misconduct. Graham didn't initiate the scheme, didn't have control over the amount of loss, and didn't personally benefit from it, according to Vinegrad. Even without jail, the conviction will "wreak havoc with the remainder of Graham's professional and economic life," Vinegrad says in his 71-page reply. Prosecutors have asked for at least $544 million in joint restitution from the five defendants. And Vinegrad added that Graham faces other possible consequences from the fraud. He's under investigation by the Securities and Exchange Commission, which could include significant penalties; he will lose his law license; and he's a defendant in a multimillion-dollar suit by AIG shareholders. The reply argues that Graham's conduct represents "aberrant behavior" that is not typical of his career and is a "dramatic deviation from an exceptional life." It paints a picture of Graham as a lawyer with "an exceptional record of civic, charitable, and public service, employment related contributions, and prior good works" who is being disproportionately punished. White-collar defense attorney Michael Cornacchia, who is not involved in the case, says harsh sentences are due to "post-Enron hysteria," which led to sentencing guidelines based on factors like the amount of loss and number of victims. The proposed sentence for Graham "sounds draconian to me," says Cornacchia, a former Assistant U.S. Attorney and senior litigation counsel in the business and securities fraud section of the U.S. Department of Justice. If you take a life, Cornacchia adds, a life sentence is appropriate. "This is serious conduct, but it's not taking a life. This is stealing money," he says of Graham's conviction. Cornacchia notes that the federal sentencing guidelines are no longer mandatory, and judges will often impose a penalty more proportionate to the crime. Among the longest recent sentences for securities fraud, former Worldcom Inc. CEO Bernie Ebbers began serving a 25-year term in 2006, when he was 65, and former Enron Corp. CEO Jeffrey Skilling started a 24-year sentence in 2006, when he was 52. Franklin Brown, the former general counsel of Rite Aid Corp., is currently the oldest in-house lawyer in jail -- he began serving a 10-year sentence for securities fraud in 2005, when he was 77. Given AIG's recent collapse, Graham's timing is nothing if not lousy. Because of the sham deal, AIG's longtime CEO Hank Greenberg was forced to resign in 2005. Prosecutors said in court that Greenberg initiated the deal, though he was never charged. After AIG agreed to pay $1.6 billion to settle state and federal investigations into the fake deal, the company's stock plummeted. Now, amid the financial crisis, U.S. taxpayers have had to bail out AIG with $122.8 billion in loans while AIG execs are being grilled in congressional hearings Duane Reade's Former Execs Charged With Securities Fraud By Larry Neumeister Duane Reade Inc.'s former chief executive and chief financial officer were indicted Thursday on charges of exaggerating the income of the New York area's largest drug store chain by millions of dollars. Anthony Cuti, of Saddle River, N.J., and William Tennant, of Richmond, Va., were charged in U.S. District Court with securities fraud, making false entries in books and records and making false statements to the Securities and Exchange Commission and auditors. The executives "are alleged to have deceived the investing public by providing false and misleading information about Duane Reade's financial condition while lining their own pockets with millions of dollars in compensation," Acting U.S. Attorney Lev L. Dassin said. If convicted of the most serious charge, Cuti, 63, and Tennant, 61, could face up to 20 years in prison. The charges stem from December 2000 through June 2005, when Cuti was the company's chief executive officer, chairman of the board and president. Tennant was chief financial officer and senior vice president. In papers filed in Manhattan, prosecutors said the men exaggerated the company's performance to meet their own financial projections and securities analysts' expectations. The SEC filed a separate complaint in federal court in Manhattan, saying the men schemed to overstate the chain's pretax income by a total of approximately $17.5 million between 2000 and 2004. The executives entered into fraudulent transactions to boost reported income and enable the company to meet earnings guidance, the commission said. Prosecutors said the men reported inflated income from fraudulent real estate transactions and reduced company expenses through fictitious credits from vendors. Tennant also was the company's real estate administrator, the SEC said. Lawyers for Cuti said in a statement that Duane Reade grew fivefold to become the city's top retail drug chain during the 10 years he headed the company. "We vigorously deny the government's allegations against Mr. Cuti and remain confident of our position on the merits," the statement said. "We look forward to our day in court, where we expect Mr. Cuti to be fully vindicated." The statement said the indictment covers disputed transactions that occurred years ago and did not affect stockholders, bondholders, the company itself or its private equity holder, Oak Hill Capital Partners, which bought the chain in 2004. The disputed transactions did not affect Cuti's compensation or Duane Reade's present or future financial results, the company's statement said. John Kenney, a lawyer for Tennant, said he had not yet seen the court papers and could not comment. Duane Reade said in a statement that it has cooperated fully with various governmental agencies investigating the company over the last 16 months. Itching
to Prosecute?: White-Collar By Noeleen G. Walder With public anger reaching a boiling point over plunging stock prices and Wall Street "greed," white-collar defense attorneys are preparing for an inevitable surge in criminal prosecutions. Stanley S. Arkin, for one, said he expects that the anger, hysteria and economic dislocation fueled by "imprudent credit policies" will "inspire" indictments that would not have been brought in a "calmer and more dispassionate time." There is "an underlying popular sensibility in this country that someone has to pay for all the jobs lost and the savings extinguished," said Mr. Arkin, a partner at Arkin Kaplan Rice. "There's a lynching quality that arises in circumstances of extreme dislocation like this." Other defense attorneys say they are confident that prosecutors will act responsibly in deciding what, if any, criminal charges to bring. "I don't think public clamor for executives' heads to roll is going to cause prosecutors to bring charges that they otherwise wouldn't bring," said Alan Vinegrad, a partner at Covington & Burling and a former Eastern District U.S. attorney. Lawyers expect heightened scrutiny of maneuvers engaged in by financially beleaguered institutions like mortgage behemoths Fannie Mae and Freddie Mac, investment banks Bear Stearns and Lehman Brothers and insurer American International Group. Prosecutors were ratcheting up their activities even before Congress passed a $700 billion bailout bill last week. That bill provides that federal financial regulatory agencies must cooperate with the FBI and other law enforcement agencies "investigating fraud, misrepresentation, and malfeasance with respect to development, advertising, and sale of financial products." According to reports this week by The Wall Street Journal and Bloomberg News Service, U.S. attorneys in the Eastern and Southern districts of New York and New Jersey are investigating whether Lehman was telling investors that its financial condition was sound at the same time its executives knew the balance sheet was crumbling - a situation that ultimately resulted in bankruptcy. Two weeks ago, other reports indicated that the FBI had launched a probe into Fannie Mae and Freddie Mac, AIG and Lehman. FBI Director Robert Mueller previously had told Congress that 24 large financial companies were under investigation. In June, two former Bear Stearns hedge-fund managers were indicted in the Eastern District for allegedly misleading clients about the risk of certain investments. Other investigations are at a preliminary stage, but even if authorities snare a few "big fish," state and local prosecutors are likely to pursue hundreds of retail-level fraud cases against individual brokers, real-estate agents and buyers. Just last week, three people pleaded guilty in the Southern District to a multimillion dollar subprime mortgage scheme, bringing to 11 the number of defendants convicted so far in the case. Benton J. Campbell, the U.S. attorney for the Eastern District, said in an interview that his office has had a local mortgage fraud task force at work since this spring and has been working with the FBI, the U.S. Postal Inspection Service, the Federal Deposit Insurance Corp., the U.S. Securities and Exchange Commission, and the Internal Revenue Service, among other regulatory bodies. "The types of criminal activity are fundamentally very familiar to us," Mr. Campbell said. He would not comment on specific cases, but said investigations center around "classic cases of securities fraud" in which people willfully make material misstatements about the performance of their public company or investments in violation of Rule 10b-5 of the Securities Exchange Act; valuation issues, including misrepresentations to auditors; and insider trading and other forms of self-dealing. Criminal statutes that could come into play at a federal level are securities fraud under Titles 15 and 18, mail fraud, wire fraud, bankruptcy fraud and bank fraud. Mr. Campbell acknowledged that the mood of the country might affect decisions on the resources devoted to such investigations, but he maintained that "public pressure doesn't play a role in charging decisions." He added that his office "spend[s] a great deal [of time] focused on . . . isolating market forces that might be at play from what we think may be criminal activity." 'People Are Angry' However, Charles Stillman, a white-collar criminal defense lawyer at Stillman, Friedman & Shechtman, said he was skeptical about the ability of prosecutors to exercise proper discretion during times of economic upheaval like the Enron and options backdating scandals and the current financial crisis. "People are angry. People are frightened and they need someone to blame, and those are your jurors," Mr. Stillman said. Prosecutors will "start with some basic propositions of securities fraud. They'll throw in mail fraud, wire fraud, and then just take the conduct and blend it into one of those theories," he said. Meanwhile, Mr. Stillman said, Attorney General Andrew M. Cuomo will "haul out the Martin Act." The act gives the attorney general the power to investigate any "fraudulent practice" in connection with the "issuance, exchange, purchase, sale, promotion, negotiation, advertisement, investment advice or distribution within or from [New York] state." "You may see indictments that are warranted . . . and then I think you are going to see indictments that are over the top because of pressure," Mr. Stillman said. "As the climate heats up," executives' mistakes "get escalated into crimes," he said. "Negligence becomes gross negligence, which in turn is ratcheted up to willful blindness. Now you've just hit the bell, because willful blindness gets you to the penitentiary." But other defense attorneys predicted that prosecutors would remain level-headed in the face of public anger. Robert G. Morvillo of Morvillo, Abramowitz, Grand, Iason, Anello & Bohrer, said it was too early to tell whether bad indictments would stem from the economic crisis, but added that he did not think local prosecutors would resort to such tactics. Defenses Against Charges Although the current climate will "push" prosecutors to take a hard look at whether executives committed fraud, this does not mean the government will pursue "weak or frivolous cases," said Salvatore J. Graziano, a partner at securities class action firm Bernstein Litowitz Berger & Grossmann. At the end of the day, he said, it will boil down to whether "executives said certain things . . . [when] they really knew that the facts were different." "You have executives at public corporations making statements and certifying accounting [practices] under Sarbanes-Oxley, so the potential is there for charges," Mr. Graziano said. Quarterly press releases issued to investors also will provide clues as to whether insiders misled the public, he said. Mark C. Zauderer, a partner at Flemming Zulack Williamson Zauderer, agreed that public hostility toward the financial industry could spill over into the government's investigation of executives connected to the mortgage fallout. "If we saw hostility in [the] Enron climate, we are going to see hostility by a magnitude of tenfold" here, Mr. Zauderer said. He speculated that those facing indictments as a result of the current crisis would rely on defenses similar to those used by former Enron executives Kenneth Lay and Jeffrey Skilling. They will claim they "did not have deceptive intent, that they relied on other people to report to them any information that was at odds with public positions they were taking," Mr. Zauderer said. Dickstein Shapiro partner Ira Lee Sorkin said that prosecutors will have a tough time making their cases against executives from institutions who purchased tranches of mortgage-backed securities. Executives will claim they relied on the credit rating agencies, who will in turn maintain that they did the best they could to determine "whether some farmer in Kansas could make the mortgage payments on his home." Moreover, in the case of Lehman, legal observers say it may be difficult to prove that investors were truly misled. Defendants could argue that the company's problems were widely reported, and many sophisticated investors were well aware of them. Mr. Graziano said that as was the case with Enron, prosecutors might target junior-level employees to build their cases against higher-level executives. While each probe will be "fact-specific," he said he "wouldn't be surprised if criminal charges were filed against executives from a number of companies." Mr. Arkin predicted a more dire fate for executives scapegoated for the subprime crisis. "Some people will be vindicated, and I think that there will be a lot of people who are going to get their butts kicked very hard, if not plain hung," Mr. Arkin said.
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A Feast
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