Sunday, January 26, 2014

Explaining U.S. v. Bob & Maureen McDonnell

Last week, the United States filed a 14 count indictment against former Virginia Governor Bob McDonnell and his wife Maureen for violating a number of federal laws based on the McDonnells' dealings with a company called Star Scientific and its CEO, Johnny Williams. The allegations would not be out of place in a straight-to-DVD movie, with bald-faced pleas by the McDonnells for money and luxury items and Williams' leveraging of his generosity into meetings with senior level governmental officials to get Anatabloc, a product manufactured by his company, studied by state researchers and touted by the Governor and his wife. [1]

Those rising to the Governor's defense like MSNBC's Joe Scarborough, have pointed out that under Virginia's state law elected officials are not precluded from receiving gifts and that somehow this should make the federal government stand down. [2] This baffling assertion, particularly by someone like Scarborough (who is himself an attorney), does not just fly in the face of the way the law operates, but gives short shrift to the entirety of the Department of Justice's case. The headlines all included the big ticket items - an engraved Rolex watch, a shopping spree for Mrs. McDonnell in New York City, the Governor's use of Mr. Williams's Ferrari and thousands spent on greens fees, apparel and food at a swanky country club. This impressive haul, which included $120,000 in "loans" and $15,000 in catering expenses for a McDonnell daughter's wedding, in addition to the designer dresses, free vacations and all the rest, form much of the core of the government's case. 

Counts One through Four - alleging both a conspiracy and action that defrauded the citizens of Virginia of the "honest services" asserts a quid pro quo between Governor McDonnell, his wife and Mr. Williams where in exchange for money and gifts, the Governor used his office to attempt to advance Mr. Williams's business interests. The "quid" is evident - indeed, the forfeiture request submitted by the U.S. Attorney's Office speaks for itself in terms of the largesse accumulated by the McDonnells; however, the "quo" is where the McDonnells will likely make their stand. The early outline of their defense is two-fold: (1) that one of the jobs of the Governor is to promote business and economic development and thus, arranging meetings and the like for companies with government officials is not suspicious and (2) that the goods the McDonnells received were merely gifts from a friend, not an incentive to violate federal law. 

The government lays out a persuasive case. Exchanges between the Governor or his wife and Mr. Williams occur closely with actions taken by the Governor or his office to arrange meetings or ensuring Mr. Williams's company's presence in front of government officials. [3] But even if the government failed to prove its case solely on the basis of these contemporaneous events, other claims made in the indictment bolster that case. For example, Mrs. McDonnell purchased, sold, re-purchased and then divested herself of thousands of shares of Star Scientific stock, all timed in a way to avoid certain reporting requirements. This is supported by communication with her broker [5] and the pattern of purchase, sale and divestiture all occurring near the end of the calendar year when these disclosure forms needed to be submitted. The McDonnells' personal financial interest in Star Scientific's success would explain their attempts to tout the company's product. Indeed, Mrs. McDonnell spoke at an event hosted by Star and the Governor told members of his cabinet about his use of Anatabloc. This was in addition to the meetings arranged for the company and the attempts to get state-run universities to conduct trials on the pill to gauge its efficacy. That Star could then publicize the support of the McDonnells and potentially secure beneficial research studies would all accrue to the company's stock price. Indeed, the Governor referenced the stock price favorably in two text messages to Mr. Williams in 2012. [6]

Counts Five through Eleven allege both a conspiracy and obtaining property under color of official right, an argument that will similarly hinge on whether what Mr. Williams gave the McDonnells would be considered gifts or property the Governor and his wife were not otherwise entitled to but received improperly because of his public office. [7] But the charging statute for these counts differs slightly, at least in my reading, because the government need only show that the Governor and his wife "obtain[ed] property from another … under color of official right." Indeed, because the McDonnells can't challenge their acceptance of the tens of thousands of dollars in "loans" (since repaid) or gifts, these counts, as well as Counts One through Four will have very little fact-based evidence and rely almost exclusively on competing interpretations of the federal statutes in question - as to Counts One through Four, whether a quid pro quo existed with regard to the exchange of goods and money for official acts versus Counts Five through Eleven, which are arguably read as to whether what was given to the McDonnells was obtained based on the Governor's position ("color of official right") or merely "gifts" given him and his wife from a friend. 

But even if the Governor and his wife were acquitted on Counts One through Eleven, they would both still be facing at least thirty years in prison on Counts Twelve and Thirteen and Mrs. McDonnell would be looking at another twenty under Count Fourteen. These allegations will be much harder for the McDonnells to disprove. Counts Twelve and Thirteen relate to filings the McDonnell made in October 2012 with financial institutions related to loans they wanted to refinance, including on their two rental properties. On those forms, the McDonnells omitted "liabilities," specifically, $120,000 in loans provided to the couple by Mr. Williams. [8] That the loans were omitted cannot be contested because the Governor sent one of the two institutions an "updated" version of the loan application three days after his wife was interviewed by federal agents about those loans. In other words, four months after submitting the forms, suddenly, in February 2013, just after his wife was interviewed by law enforcement agents, the Governor remembered that $120,000 in loans had been made to the couple and confirmed that they also owned $3,143 of stock in Star Scientific. [9] 

Lastly, the former First Lady's attempt at concealment of her receipt of dresses for various events such as her daughter's wedding and the couple's 35th wedding anniversary, form the basis of the Fourteenth, and final count of the indictment. Specifically, the government alleges Mrs. McDonnell engaged in obstruction of the investigation into her and her husband's activity by attempting to return gowns purchased for her by Mr. Williams to him. [10] The government points to a handwritten note by Mrs. McDonnell delivered to Mr. Williams (along with the merchandise) after she was interviewed by federal law enforcement. Mrs. McDonnell's letter indicates that she is returning the dresses for Mr. Williams's daughter's use or to be auctioned off for charity, yet the events referenced in the letter occurred in 2011, while the return of the gifts did not occur until 2013. As the government notes, Mrs. McDonnell initiated a request that Mr. Williams take her shopping in April 2011 and Mr. Williams not only accompanied her on the trip and paid for the gowns, but was then seated next to the Governor at an event that night. [11] No mention of returning the gowns occurred until after Mrs. McDonnell was interviewed by federal agents, at which point, the government asserts, Mrs. McDonnell wrote the note, attempting to return the gowns and conceal the fact they had been purchased for her permanent use. [12] On this one charge alone, Mrs. McDonnell risks twenty years in prison. 

And if any of these activities in isolation might be explained away, the totality of the evidence provided in the indictment strongly suggests the Governor and his wife knew exactly what they were doing. Mrs. McDonnell was advised against accepting gifts from Mr. Williams as early as 2009 but less than 2 years later, went on that lavish New York City shopping trip. Clear direction was given from the Governor and the First Lady about getting Star Scientific employees in front of senior government officials, even going so far as having Star Scientific pay money to two state-run universities in an effort to jump start their interest in doing research on Anatabloc. According to a contemporaneous letter written by the McDonnells' broker, Mrs. McDonnell sought to skirt disclosure rules by dumping stock before the end of the year, and then turned around and repurchased it three weeks into the next calendar yar. Lastly, the flurry of activity the McDonnells' engaged in the days after Mrs. McDonnell's interview with law enforcement all suggest that both the Governor and his wife well knew the jeopardy their actions had placed them in. 

So, while some in the media try to explain away this conduct or put some odd, legalistic spin on it, my guess is that both McDonnells will be seeking plea agreements to avoid decades in federal prison. 


1. U.S. v. McDonnell & McDonnell, filed in U.S. District Court for the Eastern District of Virginia, Case 3:14-cr-0012-JRS (hereinafter "Indictment"). See, e.g., paras. 15-19, 23-29, 35-40, 50, 80-86, 108-123.
3. Indictment, paras. 83, 86.
4. Indictment, paras., 61, 66, 67, 71, 96-97
5. See, e.g., indictment, paras. 62-65, 83-84, 87-89, 111.
6. Indictment, paras. 92 and 93.
7. Under 18 U.S.C. 1951(a) "extortion" (a predicate element to a violation of the statute) includes "obtaining of property from another … under color of official right." 
8. Indictment, paras. 118-121. 
9. Indictment, para. 105. It is also worth noting that the one of the loans, a $50,000 check, had to be re-cut by Mr. Williams's assistant because the "memo" line included Mrs. McDonnell's name. Indictment, para. 86. 
10. Indictment, paras. 107, 122-123. 
11. Indictment, paras. 23-24. 
12. Indictment, paras. 107, 122-123. Mrs. McDonnell also requested an accounting for work done by employees of Mr. Williams months earlier. See, indictment, para. 106. 

Saturday, January 25, 2014

Paying Jamie Dimon

A few days ago, it was reported that JP Morgan Chase's Board of Directors gave CEO Jamie Dimon $20 million in salary and restricted stock in compensation for his work in 2013, a 74% raise what he was paid in 2012. Reporters questioned the wisdom of such an award, after all, JPM paid roughly $20 billion in fines to the federal government, homeowners and others in 2013 for actions related to the housing meltdown, the Madoff scandal and other instances of malfeasance. [1] And JPM is not alone. Other financial institutions have also paid multi-billion and multi-million dollar settlements for everything from robo signing title documents to currency manipulation. 

While these settlement figures are eye catching, their value to the banks is incalculable. As in business, in the law you want certainty - writing a large check, even an 11-figure one, may seem punitive, but getting a release from any future threat of litigation more than pays for itself. Consider that even with the $20 billion JPM paid out in 2013, it still cleared more than $17 billion in profit and since it faces no threat of future litigation related to the matters it settled, that profit margin will only increase going forward. Moreover, because the Federal Reserve is essentially lending money to banks for free (zero percent interest) JPM and its ilk have the additional certainty that if they do need to borrow money, capital will flow free of charge while nothing precludes them from charging their normal rates of interest, further solidifying their balance sheets. 

Of course, it didn't have to be this way. When the major banks were teetering on the edge of insolvency, instead of handing over what was initially going to be up to $700 billion with no strings attached, the federal government could have demanded accountability - the firing or resignation of senior management, temporary nationalization, mandatory write downs of underwater mortgages, and changes to the bankruptcy law that would have shielded homes from foreclosure, among other actions. [2] Further, the federal government should have launched aggressive criminal investigations to ferret out wrong doing. The paper discovery alone would have been well worth the time and effort to understand how these actions were allowed to occur. Finally, the Glass-Steagall Act, a law that had, until it was repealed in 1999, helped us avoid precisely the type of systemic financial meltdown that occurred in 2008 should have been reinstated. 

Instead, consolidation in the wake of the Great Recession has simply put even more power and control in the hands of a few massive banks. Already deemed "too big to fail," JPM, Wells Fargo, Bank of America, CitiBank, Goldman Sachs and Morgan Stanley now control two-thirds of all assets in our financial system. [3] Having recovered from their near death experience, this group has lobbied aggressively to water down any effort to limit their reach and their stock prices have rebounded nicely. 

Of course, we've seen this movie before. Back in the 1998, the major tobacco companies entered into a more than $200 billion global settlement with 46 states (the other four states settled separately) to shut down lawsuits against the companies. Since then, to take one example, Altria, the maker of Marlboro cigarettes, has seen its stock price rise 215% and in return for paying its share of that global settlement, saw their litigation risk disappear forever. Similarly, ExxonMobil and BP have paid billions in the wake of massive environmental catastrophes with absolutely no impact to their balance sheets. So, do not mock Jamie Dimon - to the Board of Directors and shareholders of that company, he's worth every penny paid to him. 


2. Iceland is an interesting case study. There, managers were fired and the banks were briefly nationalized. The economy has come back nicely with no sign of the resurrection of Chairman Mao or Uncle Joe.

Sunday, January 12, 2014

D&R Canal II

After a week-plus of brutally cold weather and lots of rain, Mother Nature (sort of) cooperated today. Overcast skies and highs in the 40s, but plenty of good photos were taken along the D&R Canal. Check 'em out:

Saturday, January 11, 2014

Obama, Diversity & Another Media Epic Fail

Remember this picture?

For about a week in late 2012, this picture, the article it appeared in [1] and the subsequent political shit storm it stirred was all the talk on cable TV, major newspapers and political parts of the Web. In short, this photo, and the attendant reporting, claimed the President had a “diversity” problem - that the nation’s first African-American President was essentially surrounding himself with a cadre of (almost exclusively) white men. The story followed a familiar arc, cries of hypocrisy rained down from the right, teeth knashing from the left, and after a few days, click thrus and myriad panel discussions, the media moved on to the next faux scandal.

But a funny thing happened after the media’s attention waned and the President’s second term began. The whole story turned out to be bullshit. Total, unadulterated, bullshit.   The President appointed the first women to head the Office of Management and Budget (Sylvia Burwell) and the Federal Reserve (Janet Yellen). These offices oversee the entire federal budget and our nation’s monetary policy, respectively. As National Security Advisor, the President selected another woman (Susan Rice), who works with, among others, yet another woman, our U.N. Ambassador (Samantha Power). When the full Cabinet meets, women represent the Environmental Protection Agency (Gina McCarthy), Department of Health and Human Services (Kathleen Sebelius), Department of Commerce (Penny Pritzker), Department of Interior (Sally Jewell) and the Small Business Administration (Jeanne Hulit).

Perhaps even more importantly, the President has continued to outpace all of his predecessors when it comes to appointing women to the federal bench. In 2013 alone, of the President’s 31 nominees to gain Senate approval to the various federal district courts, 16 were women. Of his 10 circuit court of appeals nominees to gain approval, four were women, including two to the highly influential D.C. Circuit Court of Appeals. These lifetime appointees will issue rulings for years, if not decades into the future and may, in some ways, have an even more profound legacy than any of the President’s Cabinet appointees.

Non-white men are also readily found within the President’s inner circle. African-American men lead the Department of Justice (Eric Holder), the Department of Homeland Security (Jeh Johnson), and the Department of Transportation (Anthony Foxx), and a Hispanic-American leads the Department of Labor (Tom Perez). The President also appointed a former Republican Senator as Secretary of Defense (Chuck Hagel) and George W. Bush’s former Deputy Attorney General[2] as head of the FBI (James Comey).

Explaining this level of diversity is not as pithy and easy to digest as a photograph, but it has the benefit of being true. Something the media seems far less interested in than it once was.


[2]  Another former Bush Justice Department official, Sri Srinavasan, himself an Indian-American, was nominated to serve on the D.C. Circuit Court of Appeals. He was confirmed by the Senate in May 2013.