The raids came after German authorities came into possession of a data DVD containing information on wealthy German citizens who transferred large amounts of money to Liechtenstein banks (Liechtenstein often frustrates Western nations due to the lack of transparency in its banking system). German citizens have been using it for years to shelter their wealth and avoid paying large taxes, though unfortunately for them, “everybody’s doing it” isn’t a proper legal defense. German prosecutors promise that charges will be brought against offenders, and say it’s only a matter of time until enough evidence is collected to file suit.

So far the only individual named as a suspect in the case is Klaus Zumwinkel (pictured), the former Chief Executive of Deutsche Post, the German mail company. Although he was a respected businessman in his country, these allegations forced him to resign last Friday.

German Chancellor Angela Merkel pledged to put pressure on Liechtenstein Prime Minister Otmar Hasler (who also doubles as his country’s finance minister) to increase transparency between Liechtenstein banks and the rest of Europe. Though Liechtenstein lies in the heart of the European Continent, it is not a member of the EU and therefore does not have to abide by the financial laws of the bloc.

Well, it seems that his lustful ways have finally caught up to him. Now he’s facing lawsuits across the country from a number of these women, some accusing him of backing out of promises to give them boat loads of money and expensive items, and others accusing him of giving them STDs.

This all helps clarify why Wellpoint mysteriously fired Colby last spring, merely citing that some of his actions violated the company’s code of conduct and were of a “non-business nature” (most likely violating the manager’s responsibility of “Embracing the Wellpoint standards and casting the shadow of an ethical leader.” You can read their code for yourself, here).

Before that, he appeared to be held in high regard by Wellpoint and Wall Street analysts who labeled him as a straight shooter. “He would give you the good news along with the bad news,” stock analyst Thomas Carroll told the Associated Press. “If he said something, you could really hang your hat on it.” Colby was even a key architect in the $16.4 billion merger of Wellpoint and Anthem in 2004. In fact, after he was later passed over for Wellpoint’s CEO position, he was given a new title and pay-grade to convince him to stay with the company. Not too long after that, he was fired.

Now, it’s a little more clear why.

This verdict is something of a let down to those who really wanted to see Black suffer, as his prison sentence is less than a quarter of the over 30 year sentence that prosecution was seeking. However, if Black reports to jail by March 3 as ordered, he will be pushing 70 when he’s released.

So what should Black be doing to prepare for his six year sentence (assuming an appeal doesn’t go through)? David Novak, a former white-collar criminal who now is a consultant to corporate inmates, advises clients to “prepare for prison life by taping off a small area in their living room and restricting themselves to that.”

Three of Black’s co-defendants were given slightly easier punishments. Peter Atkinson, a former Hollinger lawyer, was given two years in prison followed by three years of supervised parole. John Boultbee, Hollinger’s ex CFO, was given just over two years in prison, three years of probation and over $150,000 in fines. Mark Kipnis, Hollinger’s former general counsel, has yet to be sentenced.

The money will be returned to United Health shareholders, who have so far recovered $900 million from former and current executives related to illegal backdating. The deal will have to be approved by a federal and a state judge before it’s completely finalized.

“I am very pleased to have reached a resolution that puts these matters to rest,” McGuire said in an official statement.

But, things aren’t quite over. The California Public Employees’ Retirement System is spearheading a shareholder lawsuit requesting that he lose access to his remaining 24 million shares, estimated to be worth about $800 million. The result of that case is expected sometime this week.

Originally, Stolt-Nielsen was given amnesty from prosecution for spilling the beans on a price fixing scheme between the three tanker companies and fully cooperating in the Department of Justice’s investigation. Later, “based on evidence from one of the others accused,” the DOJ revoked the amnesty and brought charges against the company. Stolt-Nielsen moved for dismissal, and Judge Bruce W. Kauffman from Pennsylvania agreed, saying:

“The [DOJ's antitrust] division has no reasonable basis upon which to void or revoke the agreement because it has not demonstrated any breach by Stolt-Nielsen or the individual defendants…Accordingly, the indictment will be dismissed.”

Mr. Stolt-Nielsen, obviously relieved, said in a statement, “We are pleased that justice has been served.” Now Stolt-Nielsen is not only the first company to have amnesty revoked by the DOJ, but it’s the first to have it reinstated as well.

As for the Department of Justice, they are fairly unhappy about the decision and plan to review their options. Whether or not they appeal this decision, their intent on hunting down and prosecuting cartels has been duly noted.

Carole Argo, 46 of Baltimore, said that Anthony A. Caputo, Safenet’s former CEO, instructed her to backdate options to October 1, 2001, as that was a time when the company’s stock was relatively inexpensive.  Argo complied, additionally backdating her own stocks, along with those of another employee.

This resulted in Safenet filing an inaccurate report with the Securities and Exchange Commission, Argo said.

Argo and Caputo resigned last year because of an internal investigation looking into Safenet’s stock options grant practices. To date no charges have been filed against Caputo.

Commentary: Wow – $20,000. Better dig deep to pay that one after selling $3.4 million in securities. That would hardly cover the administrative costs of this investigation. Hardly a deterrent to others.

Now the FBI is involved, and so are allegations of violations of the Judicial Code of Conduct.

Without getting into the sordid details, recently filed court documents show Colorado’s top federal judge, Judge Edward Nottingham, was too drunk to remember how he spent more than $3,000 at a strip club in two consecutive days. He also reportedly perused some very inappropriate Internet sites at work.

Judge Nottingham, who is is going through a divorce currently after his wife found the credit card charges from the Diamond Cabaret, recently presided over the insider trading trial of ex-Qwest Communications CEO Joseph Nacchio.

When asked in divorce court how he could have spent so much money, Judge Nottingham testified he could not recall, explaining, “I had had a lot to drink … and I don’t remember.”

The FBI has now gotten involved, looking into possible improper use of his federal computer.

Some are pointing out that Judge Nottingham appears to have violated the Judicial Code of Conduct and thereby may have to step aside. According to the code…

“Public confidence in the judiciary is eroded by irresponsible or improper conduct by judges. A judge must avoid all impropriety and appearance of impropriety. A judge must expect to be the subject of constant public scrutiny. A judge must therefore accept restrictions that might be viewed as burdensome by the ordinary citizen and should do so freely and willingly. The prohibition against behaving with impropriety or the appearance of impropriety applies to both the professional and personal conduct of a judge.”

Just a few weeks ago, Nottingham was presiding over the sentencing of Nacchio, in which he pointed out at great length how no one was above the law: “If it is perceived that there is one law for the rich and one law for everyone else, the law ultimately falls into disrespect.”

This is an unfortunate turn of events for the judge, who had been profiled by the Rocky Mountain News just a few months earlier as a “no nonsense” straight shooter.

Commentary: For those inquiring minds that need to know more…. go check out one of our favorite blogs, www.loweringthebar.net, where they try and decipher exactly how the judge could have blown $3,000 in two days and decide that it must have been roughly 20 hours of non-stop lap dances.

The company just reported stellar earnings, befitting its astronomical business name, wherein management bragged a little bit about its community reputation. Ethisphere recently named Sun one of the most ethical companies in the world and showcased Sun CEO Jonathan Schwartz as a leader in ethical business leadership, so I thought it timely to have a look at the boardroom, too….

The company comes across as personable and transparent, from the open-source board involvement, through the executive blogs, to the shields-down takeover defenses. Word on the street is that the corporate culture matches this openness, and that management has the trust of its employees. Speaking as a former Sun admin myself, this attitude is a far cry from the downtrodden worldview of only a few years ago, and it seems like this is the way Sun was always supposed to act but never quite could. Carry on, ladies and gentlemen.

What’s the lesson here? Good ethics is not just about attracting better employees… it also attracts media attention and investors too. Check the piece out for yourself here.

The most recent setback was a very embarrassing federal judge ruling last week that Qualcomm had knowingly failed to turn over thousands of relevant documents in a patent trial against Broadcom. Judge Rudi Brewster said that Qualcomm knowingly concealed the documents and ordered that the company pay all of Broadcom’s legal expenses as result. Lupin had written an apology letter to the judge back in April after Qualcomm’s outside counsel discovered documents the company hadn’t previously produced that revealed facts “inconsistent with certain arguments that we made on Qualcomm’s behalf.”

Commentary: Perhaps most interesting is how the stock price reacted… it went up by nearly 3%. With 1.67 billion Qualcomm shares outstanding, that translates into a $1.72 billion gain for investors. Maybe they should fire more people as it seems to be working! Not sure how sustainable that business model would be though.

Mr. Reyes had been accused of intentionally changing the grant dates for hundreds of stock option awards without disclosing the move to investors. Sentencing is scheduled for Nov. 21st and Reyes could face up to 20 years in prison and millions of dollars in fines.

The conviction is expected to embolden prosecutors to pursue similar cases.

Back in May, Brocade agreed to pay $7 million to settle civil fraud charges in connection with backdating. Reyes’ alleged accomplice and Brocade’s former head of HR, Stephanie Jensen, is still awaiting trial.

Commentary:The conviction was not surprising to us. You can read the original SEC compliant here. A review of the document will show that the SEC had a very strong case and that Mr. Reyes was pretty much a one-man compensation committee. Now the only question left is how much prison time he will get (unlike Take-Two’s CEO, who got off with probation, we are predicting actual prison time in this case). We are sure that prosecutors are reinvigorated.

Mr. Aguirre had been leading the SEC investigation into possible illegal insider trading by large hedge fund Pequot Capital that is run by Arthur J. Samberg.

Aguirre was fired after complaining that his superiors were interfering by improperly narrowing the scope of the investigation and preventing him from interviewing Morgan Stanley’s CEO John Mack (who allegedly could have been the source for some of the “inside information”).

Now, two years later, the congressional report agrees that the SEC bungled the investigation in a major way and that this resulted in a lost opportunity to broadly crack down on hedge fund insider trading. Here is an excerpt of the report:

“The investigation of Pequot Capital Management could have been an ideal opportunity for the S.E.C. to develop expertise and visibility into the operations of a major hedge fund while deterring institutional insider trading and market manipulation through vigorous enforcement…”

Pequot Capital originally came under SEC scrutiny in 2004 after stock exchange officials found up to 25 sets of highly suspicious trades made by the hedge fund prior to major announcements. The SEC closed the Pequot inquiry last fall without taking action against the fund or its management.

Commentary: To us, it has seemed that there has been something fishy in this case since the get-go. That being said, Morgan Stanley CEO John Mack is surely far too smart to be passing along privileged information to a hedge for insider trading purposes. Yet, it’s rare that an experienced and fairly senior government official risk everything like this in “whistleblowing” unless there is real merit to the case. The Congressional investigation report appears to agree.

Records show that Pequot MUST have been improperly trading on inside information and that the SEC lost a tremendous opportunity to prove and prosecute. Unfortunately, nothing will likely come out it at this point in time – which makes our regulatory system (in this case) look about as fair and just as something designed by Putin.

On a lighter note, wondering what the picture is? That’s an illustration of a Pequot village from the mid-1600s (remember: Pequot is an Native American tribe). Know what the Pequot tribe does today? They are the wealthiest tribe in the nation and their holdings include the popular Foxwoods Hotel and Casino in Mystic CT. Perhaps Samberg had ‘gambling’ on his mind when decide what to name his hedge fund. So far his gaming seems to be working.

Six weeks ago, Johnson & Johnson was ordered to pay $5.5 million in damages in a Florida lawsuit over a defective pain-killing patch that resulted in the death of a Florida man. While initially the company looked like it would appeal the judgment, they instead tried to settle it quietly for $2.5 million.

An excerpt from Bloomberg provided details on the J&J suit:

Johnson & Johnson agreed to pay more than $2.5 million to settle claims that its Duragesic pain-killing patch caused the death of a Florida man, three people with direct knowledge of the accord said.

The agreement means Johnson & Johnson, the world’s largest medical-device maker, won’t have to pay $5.5 million in damages awarded by a jury in June to the family of Adam Hendelson, the people said. The jury concluded Hendelson overdosed on opiate fentanyl when his pain patch leaked the substance in 2003…

The jury in federal court in West Palm Beach, Florida, found that officials of the Johnson & Johnson units knew about defects in the patches and failed to properly warn doctors and consumers about their risks…

MacDonald, a partner in the law firm of MacDonald Rothweiler Eisenberg, said Johnson & Johnson ultimately may have to work out a global settlement of the 300 to 400 wrongful-death suits over the Duragesic patches. “They’ve lost the only two cases that have gone to trial so far,” he noted. “That should be an indicator to them of things to come.”

Commentary: J&J lost another case on the pain patch in Houston two weeks ago as well. This case reminds of the widely-read article in the Q2 edition of Ethisphere Magazine about the ethical lapses and mishaps which seem to be plaguing Johnson & Johnson – and which can be read here.

Mr. Brant pleaded guilty in back February. He had been facing up to four years in prison but received a lighter sentence in exchange for his cooperation with prosecutors.

Commentary: That loud whoosh that you heard when this sentence was imposed? It was the collective “phew” of relief being exhaled by hundreds of other executives from the dozens of others companies under scrutiny for improper and illegal stock option backdating. The precedent sent by this “probation” as opposed to actual prison time is encouraging for them. On a separate note…five years probation? Five years of meeting with probation officer with conversations like this:

Probation Officer: “Ryan, are you staying clean?”

Brant: “Yes, Sir.”

Probation Officer: “I don’t want to catch you doing any more of that stock option stuff any more…”

Brant: “No, Sir.”

Probation Officer: “And don’t be hanging around with that bad crowd of executives who falsify documents…and put down that pen – it’s not good for you.”

Mr. Hill, founder of the company, was pushed out by the very same board of directors that he had hand-picked to serve over the years (we reviewed Commerce’s code of conduct in the last issue of Ethisphere Magazine by the way and were quite confused by it).

The reason for the board’s turn? Quite simply, federal bank regulators said they would no longer allow the bank to open up any more branches as long as Mr. Hill remained at the helm.

The bank is already operating under a cease-and-desist order with regulators, which required it to stop entering into contracts with businesses run by its board members, officers, and members of their families. The federal Office of the Comptroller of the Currency is also looking into possible illegal insider dealing at Commerce, with the primary focus on Mr. Hill.

Yesterday’s New York Times wrote an excellent and interesting piece on Mr. Hill, which makes Donald Trump look good (and relatively discrete if at all possible) in comparison. The story divulged information which would make it seem that the word “excess” does not appear in Mr. Hill’s dictionary:

Hill openly awarded tens of millions of dollars in contracts to friends and relatives, including about $50 million to his wife, who decorated and designed many of the nearly 450 branches (and would conduct surprise inspections with her Yorkie, Sir Duffield) and…built a 46,000-square-foot Tuscan-style mansion in Moorestown, NJ where a farmhouse once stood, complete a 4,000-square-foot gym (and overseeing construction via a helicopter in order to give construction crews orders via megaphone).

Click here to read the whole story (free registration may be required).

Commentary: Sir Duffield? This guy is unreal. Anyhow, this also is not Commerce Bank’s first brush with the law. In 2005, two senior executives were convicted of conspiracy for giving loans to the Philadelphia city treasurer in exchange for the city’s financial business. The city treasurer was found guilty of fraud. Municipal underwriting has been a huge profit driver for Commerce over the years.

To help protect its reputation, IBM announced this week that it was establishing a code of conduct to govern its more than 5,000 employees who have a presence (or “avatar”) on “Second Life” and other online universes.

IBM appears to be the first corporation to create rules governing virtual worlds- its guidelines address such things as protection of intellectual property, export controls (!), proper attire, and even sexual harassment and discrimination:

IBM strives to create a workplace that is free from discrimination or harassment and takes steps to remedy any such problems. External virtual worlds, however, are outside of IBM’s control. If you are in a virtual environment in conjunction with your work at IBM and you encounter behavior there that would not be acceptable inside IBM, the recommended approach is to ignore such behavior and to “walk away” or even sign out of the virtual world.

Commentary:Check out the full IBM net-world guidelines here.

Back in the Q2 edition of Ethisphere, we reviewed IBM’s “real world” code of conduct and were impressed – while this online code is not quite as good, they are the first corporation to have established one of its kind, which is impressive in its own right.

See the avatar in the picture up above? That’s the avatar of Sam Palmisano, the CEO of IBM. Other than dressing himself in the IBM blue, it looks like he grew about a foot and hit the gym… sure beats having to work out for real.

The upcoming study was co-authored by professors James Westphal of the University of Michigan and Michael Clement of the University of Texas, Austin, and was based on a survey of several thousand analysts and hundreds of managers between 2000 and 2004.

According to the study, 63% of equity analysts reported receiving favors from CEOs, CFOs, and other senior executives of the companies that they covered. Favors included such things as recommending the analyst for another job and helping them gain access to a private club.

The problem with that? The study found a direct correlation between the amount of favors received by the analyst and his/her likelihood to upgrade or downgrade a stock based upon news and earnings.

Commentary: We are not surprised, are you? Whenever big money is involved, there are going to be conflicts of interest – and they will be difficult to root out. This study brings back memories of Jack Grubman, the Citibank analyst who upgraded his rating on AT&T stock in exchange for Citibank’s CEO (Sandy Weill) helping Grubman’s toddler get into preschool. Don’t believe us or remember that case? See for yourself in this litigation release from the SEC.

ABB said the probe is uncovering payments of concern made in Asia, South America, and Europe (with a particular focus on Italy).

The company disclosed that it was investigating several cases of suspect payments and it was unclear whether they were linked. ABB said it had not made any provisions and it was not sure how much money could be involved.

Commentary: Gee… this must be an isolated incident (with payments of concern found only in ASIA, SOUTH AMERICA, AND EUROPE). We checked their website and they do not have operations in Antarctica, which could account for that continent’s exclusion. Our opinion is that this is pretty lame as ABB has had multiple scandals in recent years (such as a secret executive pay scandal in 2004 and a financial fraud scandal back in 2000). There really is no excuse at this point for not having a robust compliance program in place that could prevent the most basic of illegal business practices: bribery.

Judge Edward Nottingham also ordered the ex-CEO, Joseph Nacchio, to pay a $19 million fine and forfeit $52 million in assets he gained from illegal stock sales.

In administering his sentence the judge summed it all up by saying, “The crimes the defendant has been found guilty of are crimes of overarching greed.”

Commentary: Chalk up another win to the Feds for this sentence. This is definitely a longer sentence than many expected (as the maximum that he could have received, seven years and three months, was only slightly more than he actually got).

The problem for Black was that Radler later decided to cooperate with the government as a witness for the prosecution – in exchange for a relatively lenient 29 month prison sentence.

Lord Black was convicted of three counts of mail fraud and one count of obstruction of justice (as Black has been captured on security videotape removing 13 boxes of documents from his Toronto offices, despite a court ban on taking away potential evidence). However, he was acquitted of the charges of racketeering and misuse of corporate perks, such as taking the company plane on a vacation to Bora Bora and billing the company $40,000 for a birthday party for wife.

The former CEO now faces up to 35 years in prison.

Many people following the trial were not aware that Black had three co-defendants: former Hollinger International vice presidents John Boultbee, Peter Y. Atkinson, and attorney Mark Kipnis, 59. These three each face up to 15 years in prison and fines of up to $750,000 (as they too were all found guilty of the three counts of mail fraud).

Commentary: Well, Mr. Black certainly kept it interesting along the way. During the trial he wrote a biography of Richard Nixon (and compared himself to Mr. Nixon as well – which is not a trial defense strategy we would have recommended). Other less-than-wise commentary during the trial included calling the prosecutors “Nazi’s” and saying that “corporate governance terrorists” were trying to steal his company.

To use a proper Canadian term (after all he was Canadian until giving up his citizenship), Lord Black is pretty much “hosed” when it comes to appealing. Part of the reason for such is that he was not convicted on ALL charges. When a jury convicts on some, but acquits on others, the courts generally view it to have been a reasoned and fair deliberation.

Okay then, here you go…

First of all, CNBC is reporting this morning that Jimmy Cayne, the CEO of Bear Stearns, is being investigated…

Investigated for what? Fraud? Insider trading? Nope.

He is being investigated for inappropriately changing his golf scores in order to allow himself to win the July 4th golf tournament at the Hollywood Country Club in Deal, New Jersey.

The president of the club has formed a three person committee to investigate the incident.

Why the sudden interest in Cayne’s golf? Some think the attention is driven by angry investors who got severely burned during the meltdown in recent weeks of Bear Stearn’s subprime hedge funds.

During the crisis, the NY Times reported that the mess had not gotten in the way of Mr. Cayne’s golf game – the CEO shot a 96, 98 and 97 on June 14th, 15th, and 21th respectively.

Still not convinced?… Well the Wall Street Journal has decided that a private civil suit against the former CEO of Broadcom by a former assistant alleging that the CEO forced him to use drugs (as well do much more that is too lurid to report here) merits being on the front page of the paper two days in a row (seems like Murdoch already owns them). Other papers are now reporting it as well.

WSJ justified it reporting on the civil case because “it had [gotten] the attention of federal prosecutors probing Mr. Nicholas in a separate matter, the backdating of stock options at Broadcom.”

Commentary: Cheating at golf certainly would not set a good example to employees. But could a CEO lose his job over it? Now that would be a first – - However, it’s not entirely implausible in this day and age (and there are other reasons why Cayne might have to go).

At issue was that Mr. Pinera, a Board of Director member of the company, bought the airline’s stock just a few days before a strong earnings report in July of last year. Mr Pinera had advance knowledge of the report – and took advantage of this inside knowledge to profit from his sudden 3 million share purchase.

Two other stockholders in the airline also were fined. Pinera indicated he would not appeal the fine, which he called ‘politically motivated’.

Commentary: Another example of the “globalization” of insider trading.

According to the analysts, the warning they received from the Office Depot Investor Relations Department re-emphasized earlier alerts about the current business environment and soft spending by businesses. They also mentioned that the calls did not provide specific outlooks for sales and profits.

While lawyers say that the disclosure may go against the SEC’s Regulation FD, which is aimed at preventing selective disclosure of material information to analysts, Office Depot insiders insist that nothing material was disclosed. Even so, the hint was enough for most of the company’s analysts to cut their earnings estimates and for options traders to take positions that would pay off if Office Depot’s stock fell.

Commentary: This is nearly unbelievable that a company would do this in today’s environment. It has garnered surprisingly little press. The SEC appears to be sleeping through it too. And Office Depot is claiming that their calls with the analysts were routine? Then how do you explain that the stock dropped over 8% from $34.46 at close of business on June 21st (the day before they first started ‘tipping’ analysts) down to $31.81 on June 28th on stock trading volume that was nearly 4 TIMES AS HIGH AS NORMAL? This wiped more than $700 million off the market capitalization of the company.

Then the company finally announced in a June 29th filing with the SEC that it expected soft earnings. The stock dropped another couple percentage points after the announcement (when the rest of the world got the news), but that was only a fraction of the overall loss that had already occurred in the prior week.

The executives were originally convicted on conspiracy and fraud charges during a December 2006 trial.

In U.S. District Court for the District of New Hampshire, Judge Paul Barbadoro sentenced former Enterasys CFO Robert J. Gagalis to 11 1/2 years in prison. Bruce D. Kay, another former Enterasys finance executive, was sentenced to 9 1/2 years in prison. The prior week, former Enterasys accountant Robert G. Barber was sentenced to just over 8 years in prison.

Gagalis reportedly tried to stand up and read a statement, but broke into tears. His attorney ended up reading it for him, in which he apologized for his actions and especially regretted the “sorrow, pain and anxiety his actions caused to his three children and his wife.”

In levying the sentences, Judge Barbadoro said: “These kinds of crimes endanger our markets. It is vitally important to me that we do everything we can to protect the integrity of our markets.”

The case dates back to May 2004 when the executives were indicted over allegations that they had artificially inflated revenues between March 2000 and December 2001 as Entrasys became an independent spin-off from the computer computer networking company, Cabletron.

The defendants had backdated and falsified documents and concealed terms of business transactions from Enterasys’ auditors, including creating false revenue by secretly investing company funds in other companies and having those companies to use the investment proceeds to buy Enterasys products.

According to DOJ, the loss to public investors due to these shenanigans was $97 million.

Read more about the case and its background here.

Commentary: WOW… We are against fraud just as much as the next guy, but even us were stunned by the length of these sentences. And more fun in “The Barber’s” courtroom is yet to come – with the former CEO of Entrasys and several others still awaiting sentencing.

This settlement comes after a $30 million payout by the company to the SEC to settle allegations that it had overstated revenues from a deal with AOL’s Time Warner, in addition to using accounting maneuvers to make earnings seem more consistent from 2000 to 2003. With the previous settlement, the company had neither admitted nor denied wrongdoing.