Corporate Governance

The Stockman Dismissal: What Really Happened?

By J. Robert Brown

The decision of the government to drop the case came as a surprise. We can only speculate on the reasons for the decision but we present some of our thoughts on the matter.

The criminal case against David Stockman had been ongoing for almost two years (the indictment was filed in March 2007).  The case at its core was a fraud suit alleging that the defendants had inflated operating income by improperly recognizing certain supplier rebates.  According to the complaint, C&A improperly accounted for rebate payments from suppliers.  Some of the rebates allegedly came with secret promises of repayment while others were alleged to have been booked prematurely.

The government, therefore, confronted what looked like a relatively complicated accounting case, not the best thing to put before a jury.  Moreover, the case was extraordinary in its volume, encompassing more than 15 million documents.  Logistics and case management would be a chore.  At the same time, defense counsel was putting on a vigorous defense despite exhaustion of the D&O insurance policy. 

Finally, a decision needed to be made quickly.  The trial was looming, with the date set in May.  While there was a possibility some of the defendants would seek a continuance, Paul Barnaba had a motion to sever pending (filed by his counsel Solomon Wisenberg) and, consistent with his position throughout, was seeking a trial date as quickly as possible.  Even if a continuance had been granted, the trial judge would have been hesitant to delay Barnaba's trial beyond May.  One way or another there was likely to be a trial in May.

In addition, decision may have been influenced by a series of high profile losses for the US Attorneys Office in the Southern District in securities/while collar cases, including a recent acquittal of a stock trader who worked for a NYSE specialist and a mixed verdit in the KPMG case (after most defendants had been dismissed).  Add in that the Stockman trial was eating up resources just as the Southern District was gearing up to handle the Madoff case, another matter likely to involve considerable attorney/investigator time.

All of this was taking place just as the new administration was coming into office, with a pending decision on the new US Attorney for the Southern District.  The existing US Attorney, Michael Garcia, stepped down in December, replaced by Acting USA, Lev Dassin.  This is, as a result, a good time to get rid of problematic cases, both to clear the docket of the new US Attorney and to avoid the potential for another embarrassing loss.

For documents filed in this case including many of the status hearings before the trial judge, go to the DU Corporate Governance web site.

Full post as published by The Race to the Bottom on January 12, 2009 (boomark / email).