CORPORATE CRIME REPORTER
Skadden’s
Zornow on Prosecutions Deferred
24 Corporate Crime Reporter 28(10), July 9, 2010
Last month, after seven years of being investigated, prosecuted and indicted
– two former Bristol Myers Squibb executives were vindicated.
They accepted deferred prosecution agreements from the Justice Department.
Translation – the Department couldn’t win these cases.
And they couldn’t just drop them.
So, to save face, they did the next best thing.
DPA.
In 2005, Bristol Myers chief financial officer Frederick Schiff, and executive vice president Richard Lane, were indicted and charged with conspiracy and securities fraud.
The government alleged that the two planned and concealed “a channel-stuffing scheme to meet aggressive internal sales and earnings targets and Wall Street consensus earnings estimates.”
Skadden Arps partner and former federal prosecutor David Zornow is Schiff’s lawyer.
“The government was alleging that our client had misled investors by not revealing that the company was making its earnings by incentivizing wholesalers at the end of the quarter to buy more product,” Zornow told Corporate Crime Reporter. “The government termed this practice channel stuffing. The interesting thing about that was that it was never the kind of channel stuffing that I had encountered in my career.”
“The typical channel stuffing case is one where at the end of the quarter, I say to one of my customers – buy product from me so that I can ship it by the end of the quarter and make my numbers.”
“And I will take it back after the end of the quarter and give you a credit.”
“That's a transaction that was traditionally viewed as fraudulent because it had no economic substance.”
“One of the things that was different about this case and in our view made it a case that should have never been a criminal case is that these were real sales for real dollars.”
“This was a common practice in the pharmaceutical industry. There was no wink wink, nod nod understanding that the product was going to come back.”
The case was brought by Christopher Christie – then U.S. Attorney in New Jersey – now that state’s Governor.
In June 2005, on the same day that the Lane and Schiff indictments were announced, Christie entered into a controversial deferred prosecution agreement with Bristol Myers.
The agreement required the company to fund a chair in ethics at Seton Hall Law School – Christie’s alma mater.
Zornow says that the Schiff case should never have been prosecuted.
“You had here a very serious mistake in judgment about bringing this case at a time when prosecutors were feeling too much pressure to bring cases surrounding restatements,” Zornow said. “And they waded into a case here which on its surface may have appeared to have been similar to the WorldComs and Enrons. But when you got below the surface, it was completely different. And they seemed blind to that. And that was unfortunate.”
Zornow said that the government conceded that there was no accounting fraud and no phony revenue in this case.
“All of these securities fraud cases involve situations where at the base you are talking about phony revenue,” Zornow said. “Look at Enron, WorldCom, Symbol Technologies.”
“The problem in this case is that the government never alleged and couldn't allege that there was anything wrong with the accounting.”
“In the face of a media frenzy over whatever the scandal of the day may be – whether it is the accounting fraud scandals, or the option backdating scandals, or the furor over the financial crisis – sometimes prosecutors come under too much perceived pressure to bring criminal cases in situations where people made mistakes in judgment.”
“And so, you look at the Schiff case, and you didn't have the kinds of things you would normally have in a criminal case. You didn't have insider trading. You didn't have evidence of obstruction of justice. You didn't have accounting fraud. You didn't have phony revenues.”
“So, in circumstances like that, the prosecutor has to have the backbone, the courage to say – this isn't a criminal case. There is all this agitation in the world and in the press for criminal cases – but this just isn't a proper criminal case.”
“They have to have the courage not to pursue it. And sometimes they don't have that courage. And that's tragic.”
Zornow said that after a series of favorable court rulings in the Schiff case – including a Third Circuit Court of Appeals ruling – he approached the new U.S. Attorney in Newark – Paul Fishman.
“We persuaded Paul Fishman to take another look at this case, in light of the tortured history, in light of the sweeping victory that we achieved in the Third Circuit, in light of the fact that we felt the case had been eviscerated by the District Court and Appellate Court rulings,” Zornow said. “And Fishman did take a fresh look at it. And the deferred prosecution agreements were the result.”
Zornow said that to Schiff, the prosecution was “a nightmare.”
“Nobody can give him back the years that were taken away from him,” Zornow said. “He was under investigation since 2002. He was under indictment since 2005.”
“That's an awful thing to put someone through – particularly someone who didn't do anything wrong. But he's obviously extremely gratified that this outcome was achieved and these charges are going to be lifted from his shoulders.”
Does Schiff have any recourse against the government?
“No. Actually, as part of the deferred prosecution agreement, he has agreed not to bring any claim against the government,” Zornow said.
Zornow is head of Skadden’s white collar defense unit.
He’s building a powerhouse unit to compete internationally with the world’s major law firms.
In terms of revenue, Skadden is the fifth largest law firm in the world.
The list of recent white collar hires by Skadden is impressive – including former White House counsel Greg Craig, former federal judge Stephen Robinson, and the
king of health care fraud prosecutors – Michael Loucks.
[For a complete transcript of the Interview with David Zornow, see 24 Corporate Crime Reporter 28(10), July 12, 2010, print edition only.]
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