The U.S. Supreme Court handed down a number of opinions this week, including rulings on the honest services fraud statute that significantly reign in its broad scope.

In a case involving former Enron chief executive Jeffrey Skilling that could have far-reaching impact, the high court held that the statute, which is most often used in public corruption cases against state officials, covers only bribery and kickback schemes.

The June 24 decision significantly narrows the “honest services” statute, enacted in 1988 in response to the 1987 Supreme Court decision McNally v. U.S., which limited prosecutors’ ability to bring charges under the honest- services theory under the mail fraud statute.

The statue, 18 U. S. C. §1346, simply states, “For the purposes of this chapter, the term ‘scheme or artifice to defraud’ includes a scheme or artifice to deprive another of the intangible right of honest services.”

It has been criticized for its vagueness, which defense attorneys argue has allowed federal prosecutors pursue cases against public and private officials for all manner of questionable conduct.
The three opinions issued this week are the Supreme Court’s first rulings on the honest services fraud statute since McNally. The statute was also at play in rulings handed down this week in the cases of former publishing magnate Conrad Black, convicted of fraud at Hollinger International and former Alaska state legislator Bruce Weyhrauch.

Skilling was found guilty in 2006 of 19 counts, including the honest-services-fraud conspiracy charge, and sentenced to 292 months in prison.

The high court’s majority opinion, authored by Justice Ruth Bader Ginsburg, agreed with the Court of Appeals that Skilling’s fair-trial argument failed, but court disagreed with the Fifth Circuit’s honest-services ruling, and held that §1346 covers only bribery and kickback schemes.

“As we read §1346, Skilling did not commit honest-services fraud,” Ginsburg wrote. “Because the indictment alleged three objects of the conspiracy-honest-services wire fraud, money-or-property wire fraud, and securities fraud-Skilling’s conviction is flawed.”

However, the Supreme Court said that determination doesn’t necessarily require reversal of the conspiracy conviction, and left it to the lower court to decide on remand whether the error was harmless, and whether potential reversal on the conspiracy count touches any of Skilling’s other convictions.

Based on its holding in Skilling that §1346 only criminalizes schemes to defraud that involve bribes or kickbacks, the Supreme Courts also vacated the honest services fraud convictions of Alaska state legislator Bruce Weyhrauchand former Hollinger CEO and media mogul Conrad Black, and remanded both cases to the lower courts for further proceedings.

A new report offers benchmarking data for compliance officers looking to see how their whistleblower hotline stacks up against their industry peers.

According to the 2010 Corporate Governance and Compliance Hotline Benchmarking Report published by The Network and BDO Consulting, personnel management incidents, which include human resources issues and incidents related to wage and hour and management interaction, remain the leading incident category across all industries, comprising nearly half of incident reports, followed by corruption and fraud (13 percent) and employment law violations (12 percent).

The report, which is available for free download here, is based on more than 500,000 actual incident reports from 2005 to 2009.

Reporting of fraud-related incidents (reports on corruption, fraud, misuse of assets or information, conflicts of interest, Foreign Corrupt Practices Act violations, etc.), which climbed steadily during the first quarter of each year from 2006 through 2009 from 10.9 percent to 20.6 percent, leveled of in the first quarter of 2010, at 20.2 percent. According to the report, that may be attributed to the current economic climate or the stabilizing of fraud reporting that may have increased dramatically with the implementation of awareness programs and a focus by companies on their GRC systems and processes.

Overall, the level of incident reports fell in 2009, with incident rates down in four of the five organizational size categories. Only organizations with 20,000 to 50,000 employees experienced an increase. On average over the past five years, organizations with fewer than 5,000 employees experienced the highest number of reported incidents, which the report says may reflect a lack of segregation of duties that is prominent in smaller organizations and provides for fewer checks and balances.

While retail trade; services industries, and the transportation, communication and utilities continue to have the highest overall incident report rates, the data shows that all of those industries experienced a decrease in their incident rate in 2009.

Seventy-one percent of participants did not notify management of an issue before making a hotline report in 2009. That statistic has stayed steady across all five years of data.

For the past five years, the majority of participants remained anonymous while submitting an incident via hotline. However, in 2009, the overall level hit a 50/50 split, and the report notes, in several industries, there was a shift from less than 50 percent of participants remaining anonymous in previous years to more than half choosing to remain anonymous in 2009.

From 2005 - 2008, hotline users that had given prior management notification were more likely to remain anonymous when making a report. In 2009, more participants who didn’t previously report the incident chose to remain anonymous.

Nearly three-quarters of reports warranted an investigation in 2009, with 40 percent of those investigations resulting in corrective action.

The poster continues to be the most popular means of caller awareness (32 percent). However, the report notes that a company’s Intranet and other electronic means are steadily growing in popularity.

A lawsuit brought by the Securities and Exchange Commission seeking to claw back pay from a former chief executive the agency isn’t accusing of wrongdoing appears set to move forward.

An Arizona district court judge denied the motion to dismiss filed by Maynard Jenkins, the former chief executive of auto parts retailer CSK Auto Corp., who made headlines last July as the subject of a first-of-its kind clawback suit brought by the Commission.

As previously reported, the SEC is seeking to recoup more than $4 million in bonuses and profits Jenkins received while the company was committing accounting fraud. CSK filed two restatements related to overstated vendor allowances while Jenkins was CEO. The SEC brought a settled enforcement action against CSK in May 2009 for filing false financial statements, and filed criminal and civil actions against other former CSK employees.

The case made headlines as the first in which the SEC wants to recoup compensation under Section 304 of the Sarbanes-Oxley Act without accusing Jenkins himself of any misconduct.

At issue is whether Section 304 requires a CEO to reimburse an issuer even where the CEO committed no personal wrongdoing.

Section 304 requires that, if an issuer restates because of material non-compliance with securities laws, and if that non-compliance was caused by the company’s misconduct, then the CEO or CFO must reimburse the issuer any bonuses and incentive-based and equity-based compensation received during the twelve-month period following the first improper public issuance or filing.

The SEC’s complaint doesn’t allege that Jenkins was aware of or played any role in perpetuating the fraud. However, as CEO, he certified the inaccurate financial statements and the restatements.

In a June 9 order denying the motion to dismiss, District Judge Murray Snow concluded that the SEC’s complaint properly states a claim under the statute.

“The overarching issue is whether the Complaint alleges facts sufficient to raise a plausible claim under Section 304,” Snow wrote. “Because a motion to dismiss turns not on what facts ultimately may be proven, but rather on what the complaint plausibly alleges, the Court need not reach issues that depend on factual disputes. Accordingly, based on traditional rules of statutory interpretation, the Court concludes that the Complaint has alleged facts sufficient to state a claim under Section 304.”

SEC spokesman John Nester said the agency is “pleased with the Court’s ruling.”

Jenkins’ lawyer, John Spiegel of the law firm Munger, Tolles & Olson, did not immediately respond to a request for comment.

So far, most of the actions brought by the agency under Section 304 have been in the context of executives accused of breaking other securities law while backdating stock options. However, last week, former Diebold CEO Walden O’Dell agreed to repay more than $470,000 in cash bonuses, 30,000 shares of stock, and options for 85,000 shares to settle an SEC enforcement action brought under SOX Section 304, even though O’Dell wasn’t accused of fraud. The SEC is suing three of Diebold’s former senior executives, alleging they used fraudulent accounting practices to inflate earnings. Diebold agreed to pay $25 million to settle fraud charges without admitting or denying the SEC’s allegations.

Corporate compliance, legal and risk professionals got a warning from a top Justice Department official, along with some advice on how to keep the companies they work for out of trouble.

Acting deputy attorney general Gary Grindler made it clear that the agency is taking a no holds barred approach to cracking down on corporate fraud.

Speaking at Compliance Week’s annual conference this week in Washington D.C, Grindler summed up the message simply, telling attendees, “We will be aggressive, but fair, and we will use every tool at our disposal to ferret out and prosecute corporate crime.”

He highlighted three DoJ enforcement priorities: the Financial Fraud Enforcement Task Force, healthcare fraud, and the Department’s new Intellectual Property Enforcement Task Force.

The Financial Fraud Enforcement Task Force, established last November and comprised of representatives from more than 20 federal, state and local agencies, is a coordinated effort to share information to crack down on all types of financial fraud, including bank, mortgage, and lending fraud; securities and commodities fraud; money laundering and False Claims Act violations, to name a few.

With hundreds of billions of federal dollars pouring into government programs like Medicaid and Medicare, the DOJ is also stepping up efforts to prosecute healthcare fraud.

A joint task force, known as HEAT, or the Health Care Fraud Prevention and Enforcement Action Team, devotes new resources and technology to prevent and combat fraud and abuse. Grindler shared some statistics that show they mean business: Since HEAT’s formation roughly year ago, Medicare Fraud Strike Force prosecutors have filed over 60 cases, negotiated more than 50 guilty pleas, and obtained six convictions. During fiscal 2009, he said federal prosecutors filed criminal charges in 481 healthcare fraud cases, obtained 583 convictions and opened 1,014 new criminal healthcare fraud investigations.

He also reminded pharmaceutical companies to expect closer DoJ scrutiny. As drug companies do more business overseas, where much of the healthcare business is government-run, he said opportunities for FCPA violations abound.

Grindler said DoJ will use “every tool at our disposal to investigate and prosecute corrupt practices in the pharmaceutical industry,” and “will not hesitate to charge pharmaceutical companies and their senior executives under the FCPA…to root out foreign bribery.”

Moreover, the recent healthcare reform legislation gives the government broad new tools and powers to combat healthcare fraud. Among other things, the law requires providers and suppliers to establish compliance plans to enroll in Medicare or Medicaid; provides increased oversight, including mandatory licensure checks; authorizes withholding of payments for claims under investigation for fraud allegations; requires the self-reporting and return of overpayments within 60 days, and clarifies that anti-kickback statute violations constitute FCA violations.

Another top priority where DoJ is coordinating enforcement efforts both inside and outside of the agency is in the area of intellectual property crimes, including online piracy of movies and software and sales of counterfeit electronics. A new Intellectual Property Enforcement Task Force, led by Grindler, will monitor enforcement efforts, increase the focus on international enforcement and expand civil enforcement efforts.

As public backlash against corporate America grows amid the financial crisis, Grindler said the role of corporate compliance and legal professionals in making sure companies act as “responsible corporate citizens is essential.” To that end, he offered some tips for helping companies stay out of prosecutors’ cross hairs.

1. Robust, effective compliance programs and internal controls. Grindler stressed that a company’s compliance program “continues to be one of the most important factors” DoJ considers in weighing whether to charge a company.

During a Q&A session, he rebuffed a complaint by some corporate executives who lament that an effective compliance program doesn’t really count for much if a company finds itself in the cross-hairs of a federal prosecutor.

“Having an effective compliance program will be taken under consideration when you talk to the government about a criminal violation,” he said. “We take it seriously and it will have positive impact on negotiations.”

Grindler said recent amendments to the U.S. Federal Sentencing Guidelines, effective in November unless Congress acts to undo them, reinforce the point that having a robust program is critical “not only to preventing misconduct in the first place, but also how your organization will be treated in the event criminal conduct does take place.”

2. Partner with DOJ. DOJ has been reaching out to private sector anti-fraud professionals to share information about fraud schemes and improvements in data analysis. Likewise, he said, if the private sector sees “new fraud schemes or ways in which we can prevent fraud, that is something you should share with us.”

3. Early, voluntary disclosure of misconduct. It’s not only usually in a company’s best interest, but in some cases, failure to make timely voluntary disclosure after the discovery of a criminal violation can be a violation itself, he noted.

4. Take meaningful remedial measures in response to criminal wrongdoing, such as the payment of restitution and disciplining or terminating culpable employees, officers, or directors.

As Congressional lawmakers continue political maneuvering on the sweeping legislation to overhaul U.S. financial services regulation in the aftermath of the financial crisis, the independent panel investigating the causes of the crisis is setting its sights on sub-prime lending, securitization, and government-sponsored enterprises.

Representatives from the Board of Governors of the Federal Reserve System, the Office of the Comptroller of the Currency, Citigroup, Fannie Mae, the Federal Housing Finance Agency and its predecessors, the Federal Housing Finance Board, and the Office of Federal Housing Enterprise Oversight, are among those set to come before the Financial Crisis Inquiry Commission, which has scheduled hearings for April 7- 9 in Washington D.C.

Some of those on the guest list include: Alan Greenspan, former chairman of the Board of Governors of the Federal Reserve; former Citigroup Chairman and Chief Executive Officer Chuck Prince; Robert Rubin, former chairman of the Executive Committee of Citigroup’s Board; Robert Levin, former Fannie Mae executive vice president and chief business officer; Daniel Mudd, former Fannie Mae President; and CEO and Armando Falcon Jr. and James Lockhart, both former directors of the Office of the Federal Housing Enterprise Oversight.

The hearings are the latest of dozens promised by 10-member commission, which was established last year under the Fraud Enforcement and Recovery Act. Commission officials have said they’ll hold hearings on more than 20 areas of inquiry related to the financial crisis. In January, the panel heard testimony from federal and state regulators and enforcement officials, banking executives, and analysts, among others.

In a CNN interview this month, FCIC Chairman and former California State Treasurer Phil Angelides said the panel, which has 50 full-time investigators and researchers at work, has already received about 580,000 documents. The group’s findings are due in a report to the president and Congress by mid-December.

Forging ahead with the revamp of its Enforcement Division, the Securities and Exchange Commission unveiled new tools to incentivize individuals and companies to cooperate with the enforcement staff during investigations, including deferred- and non-prosecution agreements and a so-called Seaboard Memo for individuals.

For the first time, the SEC set out in a new policy statement how it will evaluate whether, how much, and in what manner to credit cooperation by individuals, to serve as an incentive for people to report violations and cooperate fully and promptly in enforcement cases. The guidance is similar to the so-called “Seaboard Report” issued in 2001 detailing the factors the SEC considers when evaluating cooperation by companies, and identifies four general considerations:

• The assistance provided by the cooperating individual;
• The importance of the underlying matter in which the individual cooperated;
• The societal interest in ensuring the individual is held accountable for his or her misconduct; and
• The appropriateness of cooperation credit based upon the risk profile of the cooperating individual.

The moves are part of an overhaul announced last summer that marks the most significant reorganization of the Enforcement Division in more than 30 years.

The Enforcement staff will also have new tools at its disposal, including: formal, written cooperation agreements, in which the staff agrees to recommend to the Commission that a cooperator get credit for cooperating in an investigation or enforcement action, if they provide substantial assistance, such as “full and truthful information and testimony”; Deferred Prosecution Agreements, by which the Commission agrees to forego enforcement action against a cooperator who agrees to cooperate and comply with certain reforms for the duration of the agreement; and rarer Non-prosecution Agreements, under which the Commission agrees not to pursue an enforcement action against a cooperator who agrees to cooperate and comply with express undertakings.

While such tools have long been used by prosecutors in criminal prosecutions and investigations, they were previously unavailable in civil proceedings.

Enforcement Division Director Robert Khuzami, who described the measures as “a potential game-changer for the Division,” noted in remarks at Wednesday’s press conference, that cases aided by cooperator testimony can be made quickly, since cooperators are most often insiders who’ve seen and heard what happened first-hand and charges supported by cooperator testimony can be resolved or litigated from a “position of strength.” Cooperating witnesses can also help investigators break cases involving complex transactions that might otherwise escape detection, or help apprehend “higher-ups” whose culpability can be hard to establish, Khuzami noted.

Russ Ryan, a partner with King & Spalding and a former assistant director in the Enforcement Division, says the move “represents a sea change in enforcement practice with respect to individuals.”

“Previously only companies ever got any tangible rewards for extraordinary cooperation, so individuals rarely had any incentive to come forward with information unless and until asked for it, especially if they knew they had potential liability,” says Ryan. “This could really change the dynamic in many investigations.”

The SEC also streamlined the process for submitting witness immunity requests to the Justice Department for witnesses who help in its investigations and related enforcement actions.

At the same time, Khuzami announced the heads of the five new national specialized units and the head of its newly created Office of Market Intelligence.

The new Office of Market Intelligence, led by Thomas Sporkin, who most recently served as deputy chief in the Office of Internet Enforcement, will be responsible for the collection, analysis, risk-weighing, triage, referral, and monitoring of the tips, complaints, and referrals that the SEC receives each year.

The Asset Management Unit, led by co-chiefs Bruce Karpati, head of the SEC’s Hedge Fund Working Group, and Enforcement Division Assistant Director Robert Kaplan, will focus on investment companies, investment advisers, mutual funds, hedge funds, and private equity funds.

The Market Abuse Unit, headed by Daniel Hawke, director of the SEC’s Philadelphia Regional Office, will focus on large-scale and organized insider-trading and market manipulation schemes, and will utilize some unique technology to aid in the investigations.

The Structured and New Products Unit, led by Kenneth Lench, an Assistant Director in the Enforcement Division, will cover all structured products, including collateralized debt obligations, both cash and synthetic Credit Default Swaps, securitized instruments, and other structured products, and will focus on developing products.

The Foreign Corrupt Practices Act unit, led by Cheryl Scarboro, an associate director in the Enforcement Division, will focus on enforcing the law and regulations that prohibit corporate bribery of foreign officials.

The Municipal Securities and Public Pension Unit, led by Elaine Greenberg, associate regional director of the Philadelphia Regional Office and Co-Chair of the Division’s national Municipal Securities Working Group, will focus on misconduct in the $2.8 trillion municipal securities market and at public pension funds.

Compliance Week will provide readers with full details in an upcoming edition.

The government has created a new task force to coordinate its efforts to fight fraud stemming from the massive financial crisis.

The Financial Fraud Enforcement Task Force, led by the Department of Justice, will include representatives from dozens of federal agencies, regulatory authorities, and inspectors general.

In announcing its creation this week, Attorney General Eric Holder said the group’s mission is “not just to hold accountable those who helped bring about the last financial meltdown, but to prevent another meltdown from happening.”

The task force, which replaces the Corporate Fraud Task Force established in 2002, will build on existing efforts to combat mortgage, securities, and corporate fraud. The group will hold its first meeting sometime in the next month. The Department of Treasury, Department of Housing and Urban Development and the Securities and Exchange Commission will serve on the steering committee.

Treasury Secretary Timothy Geithner said the task force’s creation makes clear that the Obama Administration “is going to act aggressively and proactively in a coordinated effort to combat financial fraud.”

However, former federal prosecutor Andrew Weissmann, now a partner at Jenner & Block, says the creation of such task forces, “while certainly signaling an increase in attention to the particular area, may not in fact result in increased prosecutions or even investigations.”

“Sometimes a task force has only a cosmetic effect,” says Weissmann, who served as director of the Enron Task Force. “If well done, a task force can help to coordinate information and investigations, increase resources, and provide consistency in prosecutorial decision making. Only time will tell which of the paths the new task force will go down.”

Meanwhile, SEC Enforcement Director Robert Khuzami noted that, in fiscal 2009, more than 150 of the SEC’s enforcement cases were filed in coordination with criminal charges filed by the Department of Justice and others, up 30 percent from last year.

“The Task Force should only increase those numbers and provide even greater opportunities for close collaboration and information sharing among law enforcement authorities,” he said.

As previously reported, Khuzami announced a revamp of the SEC’s enforcement unit earlier this year, including the creation of specialized units to focus on areas such as derivatives and securitized products; broad-based insider trading; and market manipulation and fraud among hedge funds and investment advisers, among others.

Some of the other groups participating in the task force include the Department of Homeland Security; the Commodity Futures Trading Commission; the Federal Trade Commission; the Federal Deposit Insurance Corp.; the Board of Governors of the Federal Reserve System; the Federal Bureau of Investigation; the Internal Revenue Service; the Secret Service; and U.S. Immigration and Customs Enforcement.

The independent commission investigating the financial crisis will begin holding hearings by December, according to its chairman.

The Financial Crisis Inquiry Commission, led by former California State Treasurer Phil Angelides, held its first public meeting on Sept. 17.

The 10-member Commission, created by the Fraud Enforcement and Recovery Act, will hold hearings on more than 20 areas of inquiry related to the financial crisis and report to Congress in December of 2010.

In a statement, Angelides said it is “essential that our investigation proceed on the basis of fact and evidence—and not according to the opinion or political leanings of any member of the Commission or the Congress that empowered us.”

Noting that the 9/11 Commission conducted over 1,200 interviews, reviewed over 2.5 million pages of documents, and held 12 days of public hearings, he said, “We should be similarly thorough.”

Angelides said the Commission’s job is to “pursue the evidence wherever it leads” and “… move as quickly as we can in fulfilling our duties.” He also noted that the group will use its subpoena power, if needed.

Meanwhile, commission member Keith Hennessey, senior White House economic adviser to President George W. Bush, called for the panel to move “quickly and aggressively,” and to develop a “mechanism to produce useful information” to the public and policymakers over the course of the next year and a quarter.

“If we hold all of our information until next December, our work will be irrelevant,” Hennessey said in a statement.

The independent commission tasked with investigating the financial crisis is set to hold its first open meeting on Sept. 17 in Washington.

As previously reported, the Financial Crisis Inquiry Commission was created under the Fraud Enforcement and Recovery Act passed in May to examine the domestic and global causes of the current U.S. financial and economic crisis.

According to the Federal Register notice, the meeting will include announcements, statements from Commissioners, and a discussion of the scope of work, work plan, and the Commission’s timeline.

A WilmerHale alert notes that Thomas Greene, of the California Attorney General’s office, has been tapped as the Commission’s Executive Director.

The 10-member Commission, chaired by former California State Treasurer Phil Angelides, is expected to examine and hold hearings on more than 20 areas of inquiry related to the financial crisis, and to examine the causes of major financial institutions that failed or were likely to fail if they hadn’t received exceptional government assistance. Its findings are due in a report to Congress in December of 2010.

The fallout from the Madoff debacle continues, as Senate lawmakers seek input on how to improve the performance of the Securities and Exchange Commission in the aftermath of the agency’s now well-documented failure to fully examine Bernard Madoff and his firm for operating a Ponzi scheme, despite ample tips and complaints over several years.

Leaders of the Senate Banking Committee have slated a hearing for this week, entitled “Oversight of the SEC’s Failure to Identify the Bernard L. Madoff Ponzi Scheme and How to Improve SEC Performance.”

The latest Congressional hearing follows the release of the summary and full text of the long-awaited SEC Inspector General’s report detailing—and the SEC’s statement in response to—the Commission’s bungled handling of the investigation into the massive fraud tied to the Wall Street money manager. Madoff was sentenced back in June to 150 years in prison.

The release of the report also coincided with reports that New York Democratic Senator Charles Schumer plans to introduce legislation allowing the SEC to be self-funded—an idea touted back since at least March by SEC Commissioner Luis Aguilar.

So far, the witness list for the hearing includes SEC IG H. David Kotz, Certified Fraud Examiner and Madoff whistleblower Harry Markopolos, Barry Minkow, the mastermind behind the ZZZZ Best fraud and now co-founder of the Fraud Discovery Institute, and SEC Enforcement Division Director Robert Khuzami.