Monthly Archives: May 2014

Credit Suisse Pays $2.6B for Its Part in Aiding Citizens Evade Taxes. But Did the U.S. Justice Department Go Far Enough?

Business law students study the corporate entity and learn from the beginning that since corporations are legal persons they can be charged with crimes.  Corporations cannot be imprisoned, because they have no physical body, but they certainly can face monetary penalties. Such was the recent fate of Credit Suisse.

Credit Suisse pled guilty to one count of “intentionally and knowingly” helping many U.S. clients prepare “false” tax returns.  For decades, Credit Suisse bankers fabricated “sham entities” to help hide the identities of U.S. clients who did not claim the Swiss accounts on their tax returns. They also failed to maintain records related to those accounts, destroyed documents sought by the U.S. government, and helped U.S. clients draw money from those accounts in ways that would not raise a red flag to the IRS. Out of the $2.6 billion, $1.8 went to the Treasury Department, $100 million to the Federal Reserve, and $715 million to the New York State Department of Financial Service.

The monetary penalty is the only punishment levied on the bank, as government officials feared anything further, such as ceasing operations, would have had a detrimental effect on the global economy. Moreover, top bank officials who were involved in the scheme will keep their jobs, even though there were calls for them to resign by their own statesmen.

Reportedly, the Department of Justice is looking to bringing charges against France-based BNP Paribas for similar offenses. But without some officer or director accountability, there will be no deterrence.

SEC Charges Insider Trading Ahead of Merger

The Securities and Exchange Commission charged three software company founders with insider trading and forced them to disgorge $5.8 million in illegal profits, penalties and interest.  Insider trading occurs when people in high levels of management trade company securities based on non-public information.

Lawson Software’s co-chairman, Herbert Richard Lawson, tipped his brother and a family friend (both retired from the company in 2001) about the probable sale of the company to Infor Global Solutions, a privately held software provider.  While negotiations were occurring, the media learned of a possible merger.  Lawson Software’s stock price began to climb based on analyst reports of a possible bidding war with more than one company considering acquiring Lawson Software.  The reports were predicated on an article indicating that Lawson Software conducted a “market check” through its financial advisor to see if there were any other companies interested in a merger.

But Infor Global was the only company interested in buying, as the market check produced “little-to-no interest.”  Lawson Software notified the public that Info Global offered to pay $11.25 per share, however, the media was still reporting incorrectly that other companies were interested in acquiring the company and that the merger would likely be for $15-16 per share.  Those companies listed in the media reports were actually the same companies that declined purchasing Lawson Software in the market check investigation.

The SEC charged defendants both knew the reports were false and Infor Global would not increase its offer any more than $11.25.  But in face of that knowledge, Lawson, his brother and his friend sold shares of the company for approximately $1 over Infor Global’s price, pocketing millions.  Defendants agreed to disgorge the profits and “to the entry of final judgments enjoining them from future violations of Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5.”

An associate director in the SEC’s Division of Enforcement stated, “Richard Lawson conveyed material information that was contrary to what was being publicly reported, and his brother and friend made a windfall when they subsequently sold their company shares at inflated prices.”  He further stated, “When news surfaces about the possibility of a merger and details of the media reports are incorrect, it is illegal for insiders who know the true facts to trade and profit.”

More Trouble for GM Over Faulty Ignition Switch – Can a Settled Case Be Relitigated?

One of the causes of action a plaintiff can bring in a product’s liability lawsuit is a defective design claim. General Motors is facing multiple lawsuits over faulty ignition switches installed in the following vehicles: Chevy Cobalt (2005-2010) and HHR (2006-2011); Pontiac G5 (2007-2010) and Solstice (2006-2010); Saturn Ion (2003-2007) and Sky (2007-2010). More than 2.6 million have been recalled.

A Georgia couple who settled a lawsuit with GM for their daughter’s death is suing again on the grounds that GM’s lead design engineer lied when he testified he had no knowledge of any design “changes” to the switches. Their daughter was killed when her 2005 Cobalt slipped into accessory mode, cutting off the engine and causing her to collide with another vehicle. Her family settled based on this information.

But in recent disclosures to the National Highway Traffic Safety Administration and Congress that testimony appears to be false. The company apparently knew about the problem for years. Now, the family has filed another lawsuit claiming they would not have settled if they had known that evidence was concealed. GM denies the accusation.Settlements are contractual, and therefore, considered final once the parties agree to the terms.  Like all contracts, there are certain situations where a settlement agreement would be deemed void.  In this case, plaintiffs would have to convince a judge that they were somehow misled or defrauded by what GM did or said in order for the settlement to be void and the case to proceed.

Arrest Warrants vs. Search Warrants

Criminal law is certainly an important part of the study of business law, and Fourth Amendment questions always seem to come up in class.  Students are very interested in learning about when the police can search a person’s car, office or home, or when and where can they arrest someone. Generally, police need a warrant either to search a person’s property or to arrest, unless it falls within a constitutional exception.

Most students do not know that there is a difference between an arrest warrant and a search warrant.  An arrest warrant is an order by the court directing a sheriff, constable or police officer to find and arrest a person who is wanted for a crime.  In contrast, a search warrant permits a law enforcement officer to search a person’s place of residence or other location for evidence of a crime.  An arrest warrant, however, does not permit the police to search a home or building for a person where the police reasonably believes the person named in the arrest warrant may be found without the consent of the owner.  The question then becomes whether there are any other times police may enter certain areas of a third-party home and search for a person even though they are only acting pursuant to an arrest warrant.

In the New Jersey Appellate Division decision, State v. Craft, 425 N.J. Super. 546 (App. Div. 2012), Judge Graves held that exigent circumstances permitted the police to enter a bedroom of a third-party home to arrest defendant for a shooting even though they were operating solely under the authority of an arrest warrant.  The facts are as follows.

The Newark Police Department’s Fugitive Apprehension Team is responsible to dispatch officers to certain addresses where fugitives may be found based on certain intelligence.  James Craft was wanted for a shooting.  Officers arrived at the location noted in the arrest warrant.  It was a three-family dwelling located on South 13th Street.  The police believed that defendant was residing there with family on the second-floor.

The front door to the residence was open, and the police proceeded to the second floor.  The officers were in plain clothes, but at least one of them was wearing a badge around his neck. Defendant’s mother opened the door and permitted the police to enter.  The officers told defendant’s mother that they had a warrant to arrest her son. Defendant’s mother told the police that her son was not there, but offered to call him on her cell phone.  Upon dialing the number, the police heard a phone ringing behind a bedroom door. The officers believed it was defendant’s cell phone ringing and that he would most likely be in the bedroom.

When they opened the bedroom door, they found defendant attempting to escape.  The police testified they saw defendant drop a handgun as he climbed through the window.  They also discovered five vials of cocaine in plain view on the top of a dresser.  Defendant was arrested and charged.  The trial court suppressed the evidence finding that the “coincidence of a phone ringing” was insufficient evidence to justify entry into the bedroom without a search warrant and that the police did not have an “objectively reasonable belief” that “defendant both resided at and would be found at” his mother’s apartment.

On appeal, the court reversed, holding that “there was no constitutional violation by the police, and it was error to suppress the items that were seized. The arrest warrant provided probable cause for defendant’s arrest; the officers entered the apartment with [defendant’s mother’s consent]; and [the police] had reason to believe defendant was present in an adjoining room when a cell phone began ringing after [defendant’s mother] called her son.  In addition, the officers knew the arrest warrant was for ‘a shooting’ and, therefore, defendant was potentially dangerous.  Under these circumstances, there was a compelling need for immediate action to apprehend defendant, and it was impracticable for the officers to obtain a search warrant.  Thus, their entry into the bedroom was objectively reasonable, and the items seized were in plain view.”

Here, the exigency to protect persons inside the home from being shot by a potentially armed individual excused the police from failing to consider the possible “coincidence” of the phone ring. According to one of the officers, upon hearing the phone ring at the time defendant’s mother dialed, he reasoned since people generally stay close to their cell phones, he would find defendant next to his.  As a result, the search into the bedroom was reasonable.