White Collar Crime News

Two fraud cases show need for attorneys to assume the worst at the first sign of trouble January 8, 2009

As an attorney, I like to be proactive instead of reactive.  In other words, I prepare for the worst and  I assume that every case will go to trial, so I prepare accordingly.  It seems like other attorneys either don’t know how to evaluate a client’s actions and/or a client’s business.  Maybe they are too lazy or maybe they don’t care.  I really don’t know why but it is something that all of us could do more often. 

This is easier to do is the client has shut down a business or ceased their activity.  I do not have to report crimes that have already happened but the ethics rules kick in when I find crime that is on going.  Of course, what is a crime and what is a civil case can be tough to distinguish in these cases.  Thus, I can’t blame an attorney for not wanting to look for something they would rather not find. 

Assuming there are no ethical issues because any possible criminal activity is over, an attorney must perform an evaluation on a client’s business at the first sign of trouble.  Two new fraud cases today demonstrate my point:

Case one involves Alexander James Trabulse, the former manager of the Fahey hedge fund.  In 2007 he was sued be the Securities and Exchange Commission.  The year before the suite, the fund had about 165 investors who invested a total of $17.6 million in the fund.  The SEC allege that he  misled those investors into believing that their investments were worth $50 million when in fact they were worth $12 million.  Investigators concluded that more than 20 percent of all invested assets included things like rugs, real estate, art and jewelry. 

While the article is rather brief, I would doubt that the SEC just surprised him by filing a suit against him.  I am sure there were other signs that would have led his attorneys to believe that a suit along with criminal charges were not far off.  A final judgment in the civil case was entered against him in April.  However, criminal charges were just filed against him a few days ago.  He is charged with mail fraud.

If his attorneys would have audited his business from the beginning, they would have seen all his problems long before the criminal charges were filed.  This would allow them to prepare a defense for the criminal case, use the civil case to assess the strengths of the Government’s case and be able to have plea negotiations early on or even attempt to avoid criminal charges.  More information on this case is here. 

Since that article doesn’t include a lot of information about the case, I have to make a lot of assumptions about what Trabulse’s attorneys did, known, actions they could have taken, etc.  However, I know more about this next case due to the details in the article.

In 2007, the One World Capital Group was more or less shut down by Commodity Futures Trading Commission after they obtained a court order to freeze their assets and bar them from any further trading activity.  At that point, it is time to go into a total defensive mode, “lawyer up” and prepare for everything.  As a result, nothing is ever a surprise.

On the eve of working out an agreement in the civil case, the Government arrested John Walsh, the founder of the company along with Charles Martin, another employee of the company.  They are both charged with wire fraud.  Martin is alleged to have charged over $1 million at clubs and restaurants”, as well as spending $50,000 at toy stores and $280,000 in jewelry-store purchases.  Both men are alleged to have used hundreds of thousands of dollars to finance a movie that was never released.

Walsh’s civil attorney was at least surprised with the timing of the arrests.  I have to imagine that he knew that there was a good chance that these charges were on the way at some point.  The story is here. 

As both of these cases show, civil cases can turn into criminal charges sooner or later.  Attorneys for clients in any civil case, internal investigation or administrative investigation involving allegations of theft or fraud need to assume that criminal charges are right around the corner.  While you don’t want to call the FBI and ask them if they will be pressing charges, you need to keep your ear to the grounds.  Its my experience that you will know well in advance that the FBI is coming after your client.  After all, there is no emergency that requires them to use stealth and speed to gain an advantage in their case. 

An attorney also needs to try to work out a package deal that includes both the criminal and civil cases.  Or if that is not possible, an attorney can at least advise the client that resources should not be wasted in defending the civil case, but that the civil case can be used to gather evidence and set up the criminal case.  After all, the criminal case is much more important than the civil case.

While I cannot judge the actions of the attorneys with the little information I have here, I know that there are many people that find themselves in civil cases and other investigations where their attorneys give no thought to possible criminal cases.  Early and aggressive work before charges are filed can often help the client avoid being charged let alone convicted.