FRAUD

A false representation of a matter of fact—whether by words or by conduct, by false or misleading allegations, or by concealment of what should have been disclosed—that deceives and is intended to deceive another so that the individual will act upon it to her or his legal injury.

Seventh Circuit Upholds Criminal Convictions of Conrad Black

On June 25, 2008, the U.S. Circuit Court of Appeals for the Seventh Circuit unanimously affirmed the convictions of former media giant Conrad Black and three others found guilty in July 2007 of mail and wire fraud (and Black, in addition, of obstruction of justice). U.S. v. Black, Conrad, No. 07-4080 (7th Cir. 2008). The focus of the appeal was on the sufficiency of evidence as well as the use of a certain jury instruction. The 62-year-old British Baron, formally known as Lord Black of Crossharbour, was already serving his six and a half year sentence in a Florida federal prison at the time of the Seventh Circuit's decision.

In its 16-page decision, the appellate court summarized relevant findings at the trial court level, including the jury's 2007 verdict that Black was guilty of mail and wire fraud in violation of 18 USC 1341 and of obstruction of justice under 18 USC 1512(c). The charges stemmed from his (and the other defendants') roles as senior executives (Black was chairman and CEO) of Hollinger International, which, through its subsidiaries, owned a number of domestic and international newspapers. The defendants were found to have engaged in a multimillion-dollar corporate fraud scheme that shorted both the company and its shareholders of several million dollars.

Hollinger was controlled by a Canadian company, now defunct, called Ravelston, which in turn was controlled by Black, who owned 65 percent of its shares. The evidence at trial established that Black was able to control Hollinger through his majority stake in Ravelston.

Hollinger had a subsidiary called APC, which owned several newspapers and was in the process of selling out. When APC had only one remaining newspaper, a small weekly community paper in Mammoth Lake, California, Hollinger's corporate counsel (another defendant) drafted and executed (on behalf of APC) an agreement (covenant not to compete) to pay Black and the other defendants $5.5. million in return for their promise not to compete with APC for three years. The trial established that the money was paid. The trial also established that neither Hollinger's audit committee (required for all transaction approvals) nor Hollinger's board of directors was informed of this transaction.

The defendants had argued that the $5.5 million actually represented management fees owed to Ravelston, but had been characterized as compensation for the non-compete covenant in the hope that Canada might not treat the fees as taxable income . Notwithstanding, evidence at trial showed that Hollinger, a large and sophisticated public corporation, had no documents to indicate either that the $5.5. million was credited to management fees accounts or, for that matter, approved by the corporation at all. The payment checks were also backdated to a time when APC had sold most of its newspapers, a scheme that the jury found to make the ostensible non-compete compensation less suspicious. Additionally, the checks were made out to Black and the other defendants personally. None of the defendants disclosed the money in the 10-K reports required annually by the Securities and Exchange Commission (SEC). The defendants also caused Hollinger to falsely represent to its shareholders that the payments had been made “to satisfy a closing condition.” As to Black, a corporate security camera caught him on video as he hauled 13 boxes of documents from his Toronto office after learning they were being sought as part of an investigation into his financial dealings. There was additional evidence showing that Black had tried to avoid the security cameras. That evidence led to the obstruction of justice charge and conviction.

Black also defended that he did no harm to the company, because the purpose of the “for private gain” criminal element in this case was to achieve a gain at the expense of the Canadian government, not Hollinger. But the Seventh Circuit's opinion noted, “They are making a no harm-no foul argument, and such arguments usually fare badly in criminal cases … [There was] no doubt that the defendants received money … and very little doubt that they deprived Hollinger of their honest services.” The appellate court also rejected Black's argument that the jury was improperly given the “ostrich” jury instruction, which provides that a jury can find a defendant guilty for intentionally avoiding knowing the truth about criminal behavior. Said Justice Posner in the appellate opinion, “If you receive a check in the mail for $1 million that you have no reason to think you are entitled to, you cannot just deposit it and when prosecuted for theft say you didn't know you weren't entitled to the money.”

Ultimately, the Seventh Circuit opinion, in affirming the convictions, held that (1) there was no error in the jury instruction which directed jurors to convict upon proof that defendants had schemed to deprive a corporation or its shareholders “of their intangible right to the honest services of the corporate officers, directors or controlling shareholders …”; (2) the obstruction of justice charge (against Black) did not require proof of materiality; all that was required was a showing that documents were concealed in order to make them unavailable in an official proceeding; (3) the “ostrich instruction” was proper; and (4) the court did give inadequate limiting instructions with respect to the jury's use of the false filings with the SEC (not affecting the ultimate verdict).

Counsel for Black did not indicate whether an appeal to the U.S. SUPREME COURT was forthcoming. Moreover, Black and his parent Canadian company, Hollinger, Inc. had additionally faced lawsuits by the SEC (SEC v. Black, No. 04-7377), and by Sun-Times Media, (Hollinger International v. Hollnger Inc, No. 04-698).

David Chalmers and BAYOIL Companies Sentenced

In March 2008, the U.S. Attorney for the Southern District of New York in Manhattan announced the sentencing of David Chalmers, of Houston, Texas, and two corporations operated by him, BAYOIL INC. (American) and BAYOIL SUPPLY & TRADING LTD. (Bahamian) (collectively, BAYOIL COMPANIES), for their roles in illegal kickbacks to Iraq under its Oil-for-Food Program. U.S. v. Chalmers, No. S1-05-CR-59(DC). Chalmers, 54, was sentenced to two years imprisonment and payment of restitution in an amount over $9 million. The corporations were each sentenced to three years probation and payment of restitution in conjunction with joint and several liability with another defendant, Oscar Wyatt, Jr.

While the sentencing was unremarkable, the crimes were not. They involved a set of defendants who tendered secretive illegal surcharge payments directly to the former Saddam Hussein regime of the former Government of Iraq, in exchange for crude oil, and in circumvention of the United Nations' sanctions and the Oil-for-Food Program.

As background, in August 1990 (about four days after Iraq invaded Kuwait), the United Nations (UN) imposed economic sanctions on the Government of Iraq. Specifically, it prohibited UN member states from trading in any Iraqi commodities or products. UN Security Council Resolution 986 authorized the Government of Iraq to sell a limited quantity of oil, but the proceeds from sales were deposited in an escrow bank account managed by the UN. The money in the account could only be used for humanitarian purposes approved by the UN, including food and medicine for the Iraqi people and reparations to victims of the Hussein regime's 1990 invasion of Kuwait.

On/about 2000, the Hussein regime developed a way to circumvent this sanction and obtain free money directly without UN supervision. It began to condition the right to purchase oil under the Oil-for-Food Program (i.e., to prioritize prospective purchasers) on their willingness to make secret surcharge payments directly to the Hussein regime. Chalmers, working with and through BAYOIL COMPANIES, elected to participate and began paying the illegal kickbacks between 2000 and 2003. This diverted millions of dollars otherwise available for humanitarian purposes intended to benefit the Iraqi people under the Oil-for-Food Program.

With a pending September 2007 trial, in August 2007, Chalmers and the BAYOIL COMPANIES each pleaded guilty to “participating in a conspiracy to commit wire fraud related to the payment of secret illegal surcharge payments to the former Government of Iraq.” Another defendant, Ludmil Dionissiev, an associate of Chalmers, pleaded guilty to facilitating the transportation and sale of Iraqi oil in January 2001. He was charged with facilitating the smuggling of Iraqi oil by sending a message to a Russian political figure that an agent of the BAYOIL COMPANIES had promised to pay an illegal surcharge on the oil on behalf of the Russian political figure. On December 13, 2007, Dionissiev was sentenced to a fine of $5000 and two years probation.

In addition to guilty pleas from Chalmers, Dionissiev, and the BAYOIL COMPANIES, the Oil-for-Food investigation led to several additional convictions. In October 2007, Oscar Wyatt, Jr., the founder of the Coastal Corporation, pleaded guilty (four weeks into his trial) to conspiring to make illegal kickback payments to the Saddam Hussein Regime. In 2006, Tongsun Park, a Korean national was found guilty by jury trial of conspiring to, among other things, serve as an unregistered agent of the Hussein regime in the United States; Samir Vincent, an Iraqi-American businessman, pleaded guilty to the same charge the year before. Vincent, not yet sentenced, had cooperated and testified for the U.S. government. Wyatt and Park both received prison sentences and fines.

Federal charges related to the Oil-for-Food Program were also filed against several other persons and entities, including Ephraim Nadler and Benon V. Sevan. At the time, Sevan was the Executive Director of the UN office that operated the Program. The charges alleged that Sevan received more than $150,000 from Nadler on behalf of the Government of Iraq, as a result of an oil transaction under the Program.

Those funds remitted to the U.S. Attorney's Office in connection with its investigation of abuses in the Oil-for-Food Program have been substantial: more than $11 million from Wyatt; $20 million from Chevron Corporation; and more than $5 million from El Paso Corporation, the latter two being publicly-traded companies that obtained Iraqi oil under the Program through third parties who paid the illegal kickbacks to the former Iraqi government. The monies collected were transferred to the Development Fund of Iraq (established by UN Security Council Resolution 1483 in 2003) as restitution for the benefit of the people of Iraq.

Democratic Fundraiser Norman Hsu Sentenced and Charged Again

Democratic fundraiser Norman Hsu, a Chinese businessman who was convicted of grand theft in the United States more than 15 years ago but fled to Asia before sentencing, was sentenced in January 2008 in a San Mateo, California court for the 1992 no-contest conviction. (He was charged in 1991 but entered his plea in 1992). Immediately thereafter, he was transferred to federal custody in New York to face fraud charges involving political fundraising totaling more than $20 million.

Hsu was a major contributor and fundraiser for Senator Hillary Rodham Clinton (D-NY), and it was widely reported that she would return at least $850,000 in donations because of the fraud charges. According to Lee Cary in his April 2008 article for American Thinker (“Norman Hsu Who?”), the three highest benefactors of Hsu's funds were three New York politicians: Hillary Rodham Clinton, state Attorney General Andrew Cuomo, and then-state Governor Elliot Spitzer, in descending order. “The second highest [Cuomo] might have been the man that a Governor Spitzer would have appointed to complete a President Hillary Clinton's unexpired Senate term [on the assumption of her winning],” Cary opined.

After fleeing to Asia while on bail following his 1992 conviction, Hsu resurfaced in the United States years later as a political fundraiser. When media coverage of Hillary Rodham Clinton's presidential campaign exposed Hsu's fugitive status, he surrendered to San Mateo authorities in August 2007. Free on $2 million bail, he again fled, but was caught a short time later in a Colorado hospital after injuring himself aboard an Amtrak train leaving the area.

Hsu's attorneys had attempted to have the 1992 case dismissed, or at least to allow Hsu to withdraw his no contest plea, arguing that his right to a speedy trial had been violated. The argument was premised on alleged facts that authorities were passive in attempting to locate him, despite his visibility, being photographed with political candidates and attending major fundraising events. The judge rejected that argument and Hsu was sentenced to the three years he faced under his original plea deal for the 1992 conviction. More importantly, the new charges Hsu faced involved more than $20 million dollars federal prosecutors alleged he bilked from political campaign donors.

Little was publicly known about Hsu until numerous old storage files were opened at various courts and from former partners and friends, in light of the more recent fraud charges. The collage of information revealed several failed businesses and bankruptcy filings, lawsuits, a kidnapping, and an unexplained financial recovery from each of his financial failings. He was said to have charmed people into investments in real estate, restaurants, and apparel businesses. According to court documents filed in the federal fraud case, several people lost their life savings.

Norman Yuen Hsu was born in Hong Kong in October 1951, according to his own statements to acquaintances, although a former college friend and business associate, Pedro Woo, stated that Hsu's roots were in Shanghai. In any event, he moved to California and received a Social Security Card in 1969 when he enrolled as a student of computer science at the University of California, Berkeley. According to public records, he married at 22 in 1974, shortly after graduating.

In 1976, Hsu received a California license to sell real estate. After completing a degree program at the University of Pennsylvania's Wharton School in 1981, he dabbled in various retail and restaurant enterprises and maintained a long list of businesses registered under his name. Known for dressing well, he apparently built trust by establishing himself as a successful businessman. He had impeccable educational credentials, was seen in popular political and social circles, and was often quoted in trade magazines.

Hsu and two college friends, including Pedro Woo, started a retail men's wear enterprise, from which Woo suffered a $50,000 loss (the third partner returned to Hong Kong). Woo, who was angry and felt Hsu abused his trust, could not track Hsu down for recourse. In fact, Hsu began to develop a reputation as long as the list of false addresses he left behind, much to the wonderment and chagrin of longtime bona fide occupants of those addresses who had never heard of him and were frustrated by mail from bill collectors.

In retrospect, it appeared that Hsu was building the classic pyramid-type investment scams, particularly one in the 1980s involving latex glove products. When several investors sued, Hsu filed for bankruptcy protection. Hsu vanished again just prior to his sentencing hearing in 1992, only this time, to Asia. According to Hong Kong business records, he began setting up two vague businesses with broadly-worded charters; both went bankrupt in 1997 and 1998. It is believed that shortly thereafter he returned to California, where he again dabbled in real estate and retail clothing businesses. As Hsu's California business contacts appeared to have tapered off, he reemerged in New York, this time in political circles. It remained unclear just how, why, or specifically when that happened.

Hsu became heavily involved in political fundraisers for the Democratic Party and tendered hefty donations, as well as threw lavish parties, for several of them. In 2004, when the Democrats succeeded in Congress, Hsu hosted a large party at a swank New York Club, during which he reportedly grabbed the microphone and ordered anyone not supporting Hillary Clinton to “get out!” Hsu also was a member of the Clinton Global Initiative, for which he paid an annual $15,000 donation membership fee.

Hsu's life began to crash again when media persons following political fundraisers began describing discernible patterns between Hsu's contributions and those of people with no prior history or means of contributing. Federal investigators began probing into whether donors were reimbursed and/or donation money from one individual was spread out among many donors to slide in under the maximums allowable per contributor. Amid these new probes, Hsu, who was to surrender his passport and discuss bail reduction, disappeared again only to be caught in Colorado.