In this criminal action, defendants are the former chief executive officer (CEO) and chief financial officer (CFO) of a publicly-held diversified manufacturing company. After a nearly six-month trial, a jury convicted defendants of 12 counts of first degree grand larceny, eight counts of first degree falsifying business records, one count of fourth degree conspiracy and one Martin Act count of securities fraud. The principal charges concerned defendants’ theft of four multimillion-dollar “bonuses” between 1999 and 2001.
A Bronx County Criminal attorney said that defendants’ convictions arose primarily out of their abuse of two loan programs: the Key Employee Loan Program (KELP) and the relocation loan program. KELP allowed defendants and other executives to borrow funds to pay taxes due upon the vesting of restricted stock. The relocation loan program covered certain moving expenses incurred when the company transferred an employee to a new geographic area. Defendants did not, however, utilize these programs for permissible purposes. Instead, they incurred debts under them that were used to finance opulent lifestyles.
Under the Plan, defendants were entitled to a base salary regardless of the company’s performance, but had the potential to earn “performance awards,” or bonuses, by exceeding certain performance goals or “hurdles.” These awards took the form of cash payments and the vesting of restricted stock.
Performance goals were established by company’s four-member Compensation Committee, under authority delegated to it by the corporation’s board of directors. The Incentive Compensation Plan specifically provided that prior to any payments the Committee would certify that the performance goals had been satisfied. Such certification generally took place at the close of company’s fiscal year, which ended, when audited financial results were available. The Committee would review information packages prepared by employees working under the direction of defendants. In addition, defendant would appear before the Committee to explain whether that year’s performance goals had been satisfied. Following its review, the Committee acting as a whole would determine whether any bonuses were due defendants and record its awards in the official minutes.
These procedures were not employed with respect to the four so-called “mega-larceny” bonus counts, under which the jury convicted defendants of stealing $77 million and $44.5 million, respectively. Two of these bonuses took the form of reductions of debts that defendants owed the company. During the relevant time periods, defendants’ loan balances were considerable. Those amounts did not decrease over time. Indeed, in August 2000, when defendants facilitated a second round of “loan-forgiveness” bonuses, including a “tax gross-up,” that were valued at $32.97 million and $16.6 million for defendants, their respective loan obligations stood at $25 million and $8.3 million.
The remaining bonus counts concerned payments made in November 2000 and August 2001. In the first, defendants ordered cash payments for themselves, totaling $17.2 million. In connection with the November 2000 bonus, defendants also received $8.2 million and $4.1 million worth of stock. The August 2001 bonus took the form of a vesting of restricted stock. After the bonus transaction was processed, defendants sold that stock for $8.2 million and $4.1 million.
Common to all four of these bonuses was the absence of documentation in the information packets provided to the Compensation Committee or that Committee’s minutes authorizing the bonuses that defendants received. In addition, every member of the Compensation Committee who was available to testify at trial denied approving these purported bonuses.
Defendants asserted, however, that the bonuses had been properly authorized. As to the first three bonuses, their claim rested primarily upon CEO’s communications with the late former chair of the Compensation Committee. The CEO testified that he had explained the justification and mechanics of these bonuses to Hampton. According to the CEO, the Chair’s response was that he was “fine with” the bonuses and that he would “handle” the authorization of the payments by “dealing with the issues” raised by the Compensation Committee and by requesting additional materials from CEO and his subordinates, if necessary.
Defendants proffered no documentation from Chair’s or CEO’s reflecting these assurances. CFO did assert that he made certain presentations to the Compensation Committee and the board, but also offered no evidence to support that claim.
The Chair died prior to defendants’ receipt of the August 2001 bonus. CEO claims that this bonus was approved by the then-chair of the Compensation Committee. After CEO told him that the bonus had been approved, CFO ordered that it be processed. Under the heading “FY 2001 Projected Incentive Plan Projected Payments,” the Compensation Committee’s October 2001 minutes contain a resolution stating that the restricted stock bonus “vested on June 20, 2001.” But defendants had already sold this stock to a subsidiary of the company in August 2001, long before the Compensation Committee passed this retroactive vesting resolution. There is no documentation or third-party testimony demonstrating that the Committee was aware at the time of passage that such sales had occurred.
Later, the company retained the a law firm to conduct an internal investigation into CEO’s payment of a $20 million investment banking fee to a member of the company’s board. The retention letter memorializing this engagement states that it encompassed “any litigation arising from or relating to” a review and analysis of transactions between the company and “certain of its directors and officers.” Such litigation, including a federal multi-district litigation in a federal court in New Hampshire, did in fact eventually commence.
At least a dozen attorneys assisted in the investigation, which was headed by the firm’s founding partner. Although initially confined to the circumstances surrounding the payment, the investigation expanded in June 2002, when CEO resigned as such after being indicted for his failure to pay sales taxes owed on artwork that he purchased. Thereafter, the attorneys began looking into whether company’s directors and officers had engaged in improper transactions with company funds. In connection with this assignment, they interviewed company’s employees and directors. These interviews occurred following CEO’s departure from company.
As an initial matter, the trial court did not abuse its discretion in permitting the People to elicit firm’s background, a general overview of internal investigations and the scope of the Tyco investigation. Defendants assert that testimony regarding Firm’s credentials—including his having lectured on the topic of internal investigations—and his statement that law firms conducting internal investigations often work both with forensic accountants specially trained to ferret out “wrongdoing” and with law enforcement authorities, impermissibly cast a “patina of officialdom” over Firm’s work on behalf of company. This background testimony was not unduly prejudicial. Indeed, such testimony is generally admissible, especially where, as here, it provides helpful context for the jury about complex subject matter, such as an internal investigation. In addition, such evidence was also admissible to allow the jury to evaluate defendants’ contention that firm’s representation of company in ancillary civil litigation gave him a motive to slant his testimony in favor of the People
The purpose of lawyer’s testimony in that criminal case was twofold. First, the People sought to use lawyer’s account of his conversation with Swartz to undercut defendants’ claim that they had taken the August 1999 bonuses in good faith. Second, in response to CFO’s eliciting testimony tending to show that the board continued to employ him as CFO after it was aware of the August 1999 bonuses, lawyer’s testimony as to his conversations with company’s board and senior management were used to establish how the company reacted once it became aware of evidence suggesting that CFO may have violated company compensation procedures.
The second issue addressed is whether Supreme Court abused its discretion in quashing defendants’ subpoena. Our standard for enforcing a third-party subpoena duces tecum was set forth nearly 30 years ago. Under it, defendants must proffer a good faith factual predicate sufficient for a court to draw an inference that specifically identified materials are reasonably likely to contain information that has the potential to be both relevant and exculpatory. Here, the People’s case centers on the charge that defendants’ bonuses were not approved by the Compensation Committee or the board of directors. Defendants maintain that the bonuses were properly approved through the efforts of either the late former officer. Among other things, their subpoena seeks specifically identified statements made by the director-witnesses regarding key issues in this case, including, most notably, compensation events. Although defendants have certainly not made a robust, the court disagree with the People’s contention that defendants were simply fishing for “general credibility” evidence. Indeed, the trial court implicitly recognized as much by confining its written opinion on the subpoena application to questions concerning the applicability of the work product and trial preparation privileges.
The proper purpose of a subpoena duces tecum, of course, is to compel the production of specific documents that are relevant and material to facts at issue in a pending judicial proceeding. The relevant and material facts in a criminal trial are those bearing upon “the unreliability of either the criminal charge or of a witness upon whose testimony it depends”. Here, defendants seek to challenge the director-witnesses’ testimony that they did not approve the four charged bonuses, evidence that bears directly on the question whether defendants took those bonuses under a good faith claim of right.
In meeting the burden for production, defendants need not—and indeed could not—show that director-witness statements are “actually” relevant and exculpatory. They point to specific facts demonstrating a reasonable likelihood that such material may be disclosed and that they are not engaged in a fishing expedition. In applying this standard, we must give due regard to the accused’s right to a fair trial.
Here, defendants were not engaged in “general discovery” regarding the director-witness statements. Instead, they identified the specific director-witness interview notes and memorandum that they sought by referring Supreme Court to company’s privilege log. Defendants pointed to undisputed facts, arguing that after the directors were made aware of at least some of defendants’ questionable activities through the investigation, they continued to permit Swartz to exercise substantial authority as the CFO of company until 2002—the day before he was indicted—and voted to pay him $50 million in severance just one day after the last of the relevant director interviews.
The court concludes that defendants met their burden: they identified specific director-witness statements and proffered facts that permitted an inference that those statements were reasonably likely to contain material that could contradict the statements of key witnesses for the People. In this case, however, there is a claim that the relevant documents are privileged and thus not subject to production. Additional analysis is therefore required.
Finally, defendants challenge the constitutionality of the fines that were imposed upon them. They contend that these fines contravened their right to a jury trial, as guaranteed by the Sixth Amendment to the U.S. Constitution.
Penal Law § 80.00(1) provides that “[a] sentence to pay a fine for a felony shall be a sentence to pay an amount, fixed by the court, not exceeding the higher of “a. five thousand dollars; or “b. double the amount of the defendant’s gain from the commission of the crime.”
When a fine is imposed on the basis of “gain,” “the court shall make a finding” as to that amount. This finding may be based upon facts brought out at trial, a plea allocution, sentencing, or a fact finding hearing conducted pursuant to CPL 400.30. Here, Supreme Court did not hold a CPL 400.30 hearing and instead appears to have based defendants’ fines upon facts brought out at trial or conceded in “sentencing letters” that defendants filed with the court.
The court have considered defendants’ remaining arguments and conclude that they are either unpreserved or without merit. Accordingly, the order of the Appellate Division should be affirmed.
Money can buy anything, but not your dignity. A person liable for an offense should be answerable to the acts committed. Here in Stephen Bilkis and Associates, our Bronx County Criminal lawyers defend our clients in court wholeheartedly, making it a point that justice has been served. Contact us now and hear our advice.