Investigators Fight Dot-com Fraud in Silicon Valley
Sunday, April 22, 2001
By David Streitfeld,
Washington Post Staff Writer
<< I found this story. In light of Enron, it is interesting how some people are more likely to acknowledge one fraud over another. This writer has the decency to admit the obvious. -josh >>
SAN FRANCISCO — In the midst of the dot-com implosion, there's one enterprise in Silicon Valley that is booming: uncovering and prosecuting securities fraud.
As law-enforcement agencies here add more staff, they're pursuing a wide range of wrongdoing in the high-tech industry, from insider trading to cooking corporate books.
The freewheeling nature of the tech world may have made it easy for some to skirt the law, authorities said.
"There's been a casino atmosphere here until recently," said Assistant U.S. Attorney Leslie Caldwell. "I don't think people thought for a second that they could be held criminally responsible for these kind of things."
Among her recent cases: Two accountants at Cisco Systems Inc. are accused of awarding themselves $6.2 million in unauthorized stock. A law firm partner, brought in to advise on a merger, is alleged to have immediately bought shares in his client's company. The managing partner of a small investment firm learned enough about an upcoming merger from a law firm associate to make a $411,696 profit in two days.
Caldwell said her securities fraud team at the U.S. Attorney's Office for the Northern District of California is also finding that "the very top management of some companies are actively engaging in pretty brazen fraud. We're not talking about gray-area accounting issues here."
Caldwell's jurisdiction ranges from San Jose to Oregon. It includes 7 million people and a vast variety of companies. But she said all 10 of her current financial fraud investigations — none of them yet public — involve tech firms.
It's impossible to say whether the rash of new cases has been propelled by the 13-month-old tech downturn or that fraud is much more thoroughly embedded into the tech landscape. A culture built on speed and unimaginable wealth, in which someone can be paying off college loans one year and worth $100 million the next — and, often recently, penniless the next — must have long ago produced the temptation to cut corners.
"Everyone in Silicon Valley wants to be a billionaire by age 25," said Helane Morrison, chief of the Securities and Exchange Commission office here. "If it's not coming fast enough legally, they may try to get it illegally."
Morrison's staff has grown by a third, to 26 lawyers and accountants, since late 1999. Caldwell has seven people specializing in securities fraud now, up from zero two years ago, and she is seeking more. Many cases are done jointly: the SEC handles the civil complaint while the U.S. attorney will pursue criminal charges.
Lawyers are beginning to notice. The U.S. attorney's office is being "very aggressive in trying to make a name for themselves in Silicon Valley," said Nanci Clarence, an attorney with Clarence & Snell, who has a client caught up in one investigation.
Last Monday, a federal grand jury indicted Malcolm Wittenberg, a director and head of the patent department of the Oakland law firm Crosby, Heafey, Roach & May, on two counts of insider trading.
According to the indictment, Wittenberg was contacted in August 1999 by an attorney for one of his clients, Forte Software Inc. The attorney said Forte was confidentially negotiating to be acquired by Sun Microsystems Inc., and asked Wittenberg to help Sun attorneys on some intellectual property matters.
Wittenberg agreed, but, according to the government, also bought 1,000 shares of Forte that day and another 1,000 shares four days later. Three days later, the merger was announced, and Forte's stock rose sharply.
"We're concerned about the allegations, and hopefully Mal will be able to address them and put the matter behind him," said Crosby partner Jim Wilson.
In one respect, Wittenberg already has: He paid the SEC $14,000 in profit and $15,000 in fines and interest, although he neither admitted nor denied guilt. He did not return a call left on his office voice mail. The criminal case against him is proceeding.
The Cisco case involves Geoffrey Osowski, a financial manager, and Wilson Tang, an accounting manager. According to a criminal complaint, Osowski didn't have direct access to the computer that handled option grants, but after a little exploring figured out some weaknesses in it. In collaboration with Tang, he allegedly caused 97,750 shares of Cisco to be deposited in their Merrill Lynch & Co. accounts in late December.
Osowski started spending his money in February, according to court documents, as spendthrift as any 1999 dot-com millionaire. The court papers say he bought a Mercedes-Benz 320 for $52,000, a diamond ring for $44,000 and a $20,000 Rolex watch. At the same time, he and Osowski again looted the company, the government said.
Merrill Lynch tipped off Cisco, which brought in the FBI. No trial date has been set. Osowski's attorney declined to comment. Tang's public defender didn't return a call for comment.
While the most recent cases have focused on individuals, Caldwell said the activities of several firms also are under investigation. During the boom years, tech start-ups flew high and fast, often on nothing more than promises.
"The reason some companies were appearing to do as well as they did was because of securities fraud," Caldwell said. "It was such a go-go atmosphere that there was not as much scrutiny of what these companies were doing."
In what is her office's biggest case to date, two former executives of McKessonHBOC Inc. have been charged with securities fraud, conspiracy, mail fraud and wire fraud. According to the indictment, the executives systematically defrauded HBO & Co., a health-care software firm, before its merger with McKesson Corp., a drug wholesaler.
The executives, Albert J. Bergonzi and Jay P. Gilbertson, are accused, for example, of figuring out how many more sales were necessary to meet the company's quarterly projections, and then simply making them up. When auditors first revealed in 1999 what had happened, McKessonHBOC immediately lost $9 billion in market value. Bergonzi's attorney declined to comment. Gilbertson's attorney didn't return a call for comment.
Eric Von der Porten, a Silicon Valley hedge fund manager who urges more regulation of the new economy, agreed that "corporate executives here probably have not had much fear of enforcement action. The SEC has occasionally talked tough, but it has rarely taken public action against prominent companies or underwriters."
Meanwhile, tech fraud is becoming harder to prove. Things have changed since the late 1980s, when the computer disk-drive manufacturer MiniScribe was reduced to packing bricks in boxes and pretending they were drives that had been ordered by customers. MiniScribe added $4.3 million to its bottom line that way.
It's difficult to cover up that sort of thing forever: Too many people are involved and too much physical evidence is produced. MiniScribe went down in flames in 1990.
With the dot-com companies, however, allegations of fraud are rarely as substantial as bricks. Sometimes it is merely words. "Fraud became an extension of hype, which was everywhere," Von der Porten said. "If you have no reasonable basis to say your start-up can do $7 billion in revenue in five years or generate 30 percent operating margins, at some point this becomes fraud."
Defining that point can be difficult. When did enthusiasm and optimism, however misplaced, shade into deception? Nevertheless, Von der Porten hopes that regulators will nail some prominent companies. "If they do," he said, "it's a lesson that will be remembered the next time around."
The Palo Alto law firm Brobeck, Phleger & Harrison would rather forget its brush with an insider trading case.
On Sept. 17, a two-year associate at Brobeck was working on Sun Microsystems' acquisition of Cobalt Networks Inc. That night, she met a man at a party.
On Sept. 18, the man — a 31-year-old private investor named Joel Mesplou — bought $1.2 million worth of Cobalt stock and options. On Sept. 19, the acquisition was announced, and Mesplou sold his stock for a profit of $411,696.
Mesplou told SEC investigators that he got "lucky." Last month, he pleaded guilty to making a false statement, surrendered his profits and paid nearly $300,000 in civil penalties and $500,000 in criminal forfeiture. He will be sentenced in June. He did not return calls for comment.
The associate, who ultimately resigned, was not charged. Her attorney and Brobeck officials said her disclosure was inadvertent. She did not know Mesplou well. "It was a social relationship, a social encounter," said the attorney, Nanci Clarence. "It was flabbergasting to my client that this happened."
In January, a feature on Brobeck's Silicon Valley operation appeared in American Lawyer magazine. Prominently displayed alongside the story was aphoto of the associate. The caption: "Julie Freese runs her own deals."
The story vividly depicted a hypercharged and freewheeling culture, where younger lawyers had the advantage because they were the same age as the dot-com clients. In the Valley, the story concluded, "people are willing to take chances."
washtech.com
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