History > 2006 > USA > Federal Justice (III)

Judge Halts Effort

to Recoup Mistaken Medicare Refunds

September 29, 2006
The New York Times
By ROBERT PEAR

WASHINGTON, Sept. 28 — A federal judge on Thursday ordered the Bush administration to halt its effort to collect $50 million from 230,000 Medicare beneficiaries who had received erroneous refunds of premiums paid for prescription drug coverage. He said many of them might qualify for waivers because repayment would cause hardship.

The judge, Henry H. Kennedy Jr. of Federal District Court here, said Dr. Mark B. McClellan, administrator of the Centers for Medicare and Medicaid Services, must immediately send a notice to every one of the 230,000 beneficiaries, stating that each has a right under federal law to request such waivers.

Federal officials had previously told beneficiaries to return the money by Saturday, Sept. 30. Judge Kennedy said the administration could not enforce that demand unless it first gave beneficiaries an opportunity to seek an exemption.

If a beneficiary requests a waiver, the government cannot try to recoup the money until the secretary of health and human services rules on the request, Judge Kennedy said in issuing a preliminary injunction sought by the plaintiffs. The plaintiffs include the Action Alliance of Senior Citizens, based in Philadelphia, and Gray Panthers, a national organization for older Americans.

Judge Kennedy said that any money already paid to the government “must be immediately returned to the beneficiaries so that they may decide whether to request waiver.”

Peter L. Ashkenaz, a spokesman for the Medicare agency, said government lawyers had not decided whether to appeal the decision. Mr. Ashkenaz said the government would do everything possible to ensure that beneficiaries continued to receive drug coverage “with the least inconvenience possible.”

At a court hearing on Tuesday, Gill Deford, a lawyer at the Center for Medicare Advocacy, said some beneficiaries had almost certainly spent the money sent to them by the government.

Mr. Deford said beneficiaries were entitled to notice of their rights because of the Fifth Amendment to the Constitution, which states that no person shall be “deprived of life, liberty, or property, without due process of law.” The administration’s refusal to provide such notice violates the Constitution, as well as the Medicare law and regulations, he said.

The Medicare law says the government shall not recover an overpayment if the beneficiary was without fault and if it would be “against equity and good conscience” for the government to recover the money.

Dr. McClellan has, in effect, acknowledged that the beneficiaries are without fault, saying the mistake occurred because of “an error in Medicare computer systems.”

At the court hearing, lawyers for Dr. McClellan and Michael O. Leavitt, the secretary of health and human services, argued that Medicare beneficiaries had no right to a waiver and therefore no right to be informed that they could fight the demand for repayment.

The erroneous refunds averaged $215 a person, and none exceeded $800, federal officials said.

Beneficiaries “have been unjustly enriched,” Marcus H. Christ Jr., a lawyer from the Department of Health and Human Services, told the court. “Nothing in the Medicare program allows them to keep that money.”

One plaintiff, Lucy C. Loveall of Franklin, Ky., pays for drug coverage by having premiums withheld from her Social Security checks. She received $161.70 from the government, representing a refund for seven months of premiums. Ms. Loveall, 65, said she could not afford to repay the money because she and her husband had total income of $2,214 a month and total monthly expenses of $3,067.

The poorest Medicare beneficiaries do not have to pay premiums for drug coverage. But Mr. Deford said that many of those who did pay premiums had relatively low incomes. About half of beneficiaries have annual incomes less than twice the poverty level, he said. The poverty level is $9,800 for an individual.

    Judge Halts Effort to Recoup Mistaken Medicare Refunds, NYT, 29.9.2006, http://www.nytimes.com/2006/09/29/washington/29medicare.html

Mortgage Suit Says ‘Trust Us’ Led to Fleecing

September 28, 2006
The New York Times
By JOHN LELAND and TOM ZELLER Jr.

MARTINSVILLE, Va., Sept. 27 — In a tightknit neighborhood, where people’s social lives often revolve around their churches, Beulah Penn and her daughter, Sharon, were well-connected and trusted. Beulah Penn was a lay minister in a local church; her daughter, Sharon Penn, dressed hair.

Using these connections, according to a recent lawsuit, the two women and another relative in Indianapolis perpetrated one of the largest mortgage frauds in American history, victimizing dozens of local residents and, according to sources with knowledge of the accusations, at least $40 million in fraudulent loans — perhaps even twice that amount.

“Looking back, maybe it sounded too good to be true, but everyone knew them, and my friends went to church with them, people I been knowing for 10 years,” said Timothy Jacobs, a 29-year-old worker in a fiber-optics factory who discovered recently that he owed $200,000 on two houses in Indiana. “They said they’d be responsible for everything. Now everyone’s probably going to end up filing for bankruptcy.”

The civil lawsuit, filed in June by one of the nation’s largest mortgage lenders, describes an elaborate confidence game in which Martinsville residents with good credit ratings were enlisted last year to join what they believed was a risk-free investment in Indiana real estate. Instead, they found themselves responsible for hundreds of thousands of dollars in unpaid mortgages.

While no criminal charges have been filed, federal grand jury subpoenas are being prepared in Indiana, and further civil action at the federal level is expected to be filed against the investment group soon.

Repeated calls and e-mail messages to people named as defendants in the lawsuit, both in Martinsville and in Indiana, as well as to some of their lawyers, were not returned.

The F.B.I. called mortgage fraud an “epidemic” last December, noting that losses associated with the crime had jumped to more than $1 billion last year from $429 million in 2004. Although the hot housing market that may have at least partly given rise to the fraud boom is cooling, officials say mortgage fraud losses are on pace to increase again this year.

Martinsville, a small Piedmont city of 14,925, once known for its Nascar track and its thriving textile mills, has lost both population and its economic base since the mills and furniture industries moved overseas in the 1990’s. Small older houses and often empty businesses cluster in the center of town, with larger, more expensive developments — like the ones the Penns moved to — on the fringes.

The median household income is about half the state average. Mr. Jacobs, who was out of work for nine months after a mill closed, said he and his friends saw the real estate venture as a chance to get back on their feet after setbacks. “Now we don’t know what to do,” he said.

Court papers filed by Countrywide Home Loans, the residential mortgage lender, say the Penns invited people to join an “investor’s club” that would buy properties in Indiana and sell them at a profit. Club members were told they faced no risk.

According to court papers and to four participants, the investors were told they would not have to contribute any money but would simply allow their credit ratings to be used in acquiring the properties, which would be owned and managed by the group. Each were promised checks of at least $2,000.

But Mr. Jacobs and others were, by all appearances, the pawns in a quick-flip mortgage scheme, designed to gain control of a property at a low price and sell it quickly at a profit. The game is often rigged at every level — from doctored applications, to bogus property appraisals, to the loan approvals themselves.

Documents reviewed by The New York Times suggest that even independent parties associated with closing the sales on the properties may have played a role in perpetrating the fraud, or demonstrated negligence in overseeing the transactions.

The Countrywide suit asserts, for instance, that the founder of the group, Robert Penn (the son of Beulah Penn and brother of Sharon Penn), acting through a variety of companies, secured purchasing agreements for Indiana properties at market value, then had them appraised at substantially higher rates.

Mr. Penn’s group then bought the homes, according to the lawsuit and documents reviewed by The Times, in the names of the Martinsville residents at the inflated prices — or even higher — but paid only the agreed-to market price to the seller. Mr. Penn’s companies then received the substantial difference, the documents contend.

Often the group closed on several properties in the same buyer’s name on the same day, documents show. Kelvin Thompson, 44, a tire worker, said he discovered he was in trouble when he tried to borrow $1,000 from his credit union to buy presents last Christmas.

That is when Mr. Thompson learned that he owned five houses in Indiana, all in default, with mortgages totaling close to $1 million.

He said he could not have been more surprised. The Penns, he said, did not seem “sophisticated enough” to pull something like this off. “We’re very angry,” he said, “and also embarrassed for being suckered.”

Many of the investors contacted were unwilling to discuss their cases — some out of embarrassment, some out of suspicion of a stranger asking questions about their finances. Some said they had known the mother and daughter for so long that they still did not know what to think.

Mildred, a municipal employee who said she was too embarrassed to be identified by her last name, said she trusted Sharon Penn “because she was my girlfriend.”

She added, “She did my hair for four years.”

Although she was not a member of Mrs. Penn’s church, Mildred said, she knew that Beulah Penn was “a minister, a woman of the cloth,” and so she let down her guard. Even so, she said, when Sharon Penn approached her about joining the investment club, she resisted at first. “But I saw people coming and going, this one got a check, that one got a check,” she said.

She also saw that the Penns were making a lot of money and talking about how “blessed” they were, she said. She agreed to join, she said, on promises that she was part of a no-risk partnership in a development of brand-new houses on which payments were guaranteed by the federal government.

From a leather valise in the back of her car his week, she produced documents showing that two of the three houses she owned were built in 1950 and 1917. The outstanding mortgages on the three homes total more than $500,000. The houses, she said, were worth about $30,000 each.

“I thought I was smarter than that,” she said. “But they were so smooth, and I saw so many people getting checks.”

Repeated calls to Beulah Penn’s home went directly to her voice mailbox, which was full.

William Stern, the mortgage fraud coordinator at the F.B.I. said the agency would not comment on whether it was investigating the Martinsville case. But he said the agency had uncovered similarly ambitious schemes recently.

In August last year, he said, the largest federal sentence for mortgage fraud — 30 years — was handed down to Chalana McFarland of Atlanta, for her role in a major flipping operation that netted $20 million from 1999 to 2002. As a testament to the elaborate nature of the modern mortgage fraud operation, also indicted were two paralegals, six loan originators, one broker, three real estate agents, three appraisers, three straw borrowers, one bank employee, an identity thief, and a property manager.

“This represents an approach to mortgage fraud whereby an entire mortgage fraud ring is targeted and addressed,” Mr. Stern said.

A Martinsville area minister who also lost money in the Penn investments expressed exasperation, but caution. Like others in town, he said he knew Beulah Penn professionally and Sharon Penn as an occasional visitor to his church.

“Nobody has been charged here,” he said, declining to be named because he did not want to embarrass his church. He said he was still holding out hope, “that they just got caught up in this, just like I did.”

    Mortgage Suit Says ‘Trust Us’ Led to Fleecing, NYT, 28.9.2006, http://www.nytimes.com/2006/09/28/us/28martinsville.html?hp&ex=1159502400&en=1f71a480b049e52c&ei=5094&partner=homepage

Fastow Sentenced to 6 Years

September 27, 2006
The New York Times
By KATE MURPHY and ALEXEI BARRIONUEVO

HOUSTON, Sept. 26 — Andrew S. Fastow, the former chief financial officer of Enron, whose schemes to defraud the company made him a symbol of corporate corruption, was sentenced Tuesday to six years in prison for his role in Enron’s collapse in 2001.

As teary-eyed family and friends looked on, Mr. Fastow, 44, was immediately taken into custody after his sentencing in federal court here. After his imprisonment, he will serve two additional years at home under court supervision.

Despite admitting to numerous crimes, Mr. Fastow was given a prison sentence four years less than the 10-year plea deal he struck with the government in January 2004. Legal analysts and Enron prosecutors credited his cooperation in the trial against the former chief executives, Kenneth L. Lay and Jeffrey K. Skilling, as well as his continuing assistance in civil suits against banks brought by shareholders who contend the banks participated in fraudulent deals to conceal Enron’s huge debt.

But Mr. Fastow also benefited from a ruling last year by the United States Supreme Court that made federal sentencing guidelines advisory rather than binding, paving the way for Judge Kenneth M. Hoyt of Federal District Court to reduce the sentence.

Judge Hoyt said he had to “examine the relationship between justice and mercy.” Although Mr. Fastow had “drunk the wine of greed,” the judge said, he had also been the “subject of great persecution,” including anti-Semitic slurs and personal threats.

Mr. Fastow is the highest-level executive to be sentenced so far in the Enron scandal. Two former executives, Timothy Despain and David W. Delainey, were sentenced earlier this month. Mr. Despain received four years of probation and was fined $10,000 on one count of conspiracy to commit securities fraud. Mr. Delainey, a key witness against Mr. Skilling in his criminal trial earlier this year, was sentenced to 30 months in prison on one count of insider trading.

Mr. Skilling’s sentencing is scheduled for Oct. 23. Mr. Lay died of coronary artery disease in July, before he could be sentenced.

Mr. Skilling is expected to receive more than 20 years and could receive life imprisonment, legal analysts say. That would be a far stiffer penalty than those received by other former Enron executives who agreed to cooperate in the government’s investigation.

“The judge clearly took into consideration the extraordinary cooperation and steps toward rehabilitation that Mr. Fastow made during his comprehensive effort to bring to justice the highest-level executives involved in the Enron fraud,” John C. Hueston, a prosecutor in the Enron case, said in an interview Tuesday.

But the reduced sentence was still a surprise. Just two years ago, members of the Justice Department Enron Task Force held up Mr. Fastow’s deal as a sign of the government’s new toughness on corporate crime. Mr. Fastow pleaded guilty to two counts of wire and securities fraud, which carried a maximum penalty of five years each. The deal seemed to indicate that Mr. Fastow would serve 10 years in prison, could not ask to serve less and — if he failed to cooperate — could actually serve more.

Even Mr. Fastow, while testifying against his former bosses in March, professed to believe that he would serve 10 years. “I’ll be sentenced to 10 years as far as I understand,” he said under cross-examination by Daniel Petrocelli, Mr. Skilling’s lead lawyer. “It doesn’t matter — my sentence isn’t affected by whether Mr. Skilling is convicted or not.”

But while the deal seemed explicit, the government did not petition Judge Hoyt for a compulsory 10-year deal, legal experts said. “The government could have made it binding, but they obviously chose not to,” said Joel Androphy, a Houston criminal defense lawyer.

Judge Hoyt handed down Mr. Fastow’s sentence on Tuesday after listening to the testimony of three lawyers involved in Enron shareholder lawsuits. They said access to Mr. Fastow was crucial to implicating several banks that are accused in lawsuits of participating in fraudulent deals to conceal Enron’s huge debt.

In explaining his decision, the judge also cited the incarceration of Mr. Fastow’s wife, Lea, a former Enron manager. As part of her husband’s plea deal, she served a year in jail for signing a fraudulent tax return. During that time, Mr. Fastow was left to care for his two young sons alone. Judge Hoyt acknowledged Mr. Fastow’s devotion to his family and community service and his efforts to redress his crimes at Enron. “The best evidence of remorse is what you do going forward,” Judge Hoyt said.

While thousands of people lost their jobs and savings when the company declared bankruptcy in December 2001, only one disgruntled investor appeared in court to argue against leniency. Brian Durbin said he and his family had been “victims of an elaborate scam” and Mr. Fastow should serve no less than the 10 years specified in his plea agreement. “A deal’s a deal,” Mr. Durbin said, though he remarked that he had prepared his statement before he knew Mr. Fastow was cooperating in the shareholder lawsuits.

Judge Hoyt refused a request by Mr. Fastow’s lawyers and government prosecutors that Mr. Fastow be allowed to surrender voluntarily after Yom Kippur, the Jewish Day of Atonement, which is on Monday. Mr. Fastow was allowed to briefly embrace his wife before federal marshals escorted him from the courtroom in handcuffs.

“We’re very disappointed he was remanded into custody,” said Chris Patti, counsel for the University of California, which is a plaintiff in pending shareholder litigation and who spoke at the hearing. “I’m not sure what this will mean for us.”

Mr. Patti and the other lawyers involved in Enron civil cases had asked the judge to allow Mr. Fastow to remain free until at least Oct. 23, the date they hoped to conclude his deposition.

Mr. Hueston, the Enron prosecutor, testified that the cases against Mr. Skilling and Mr. Lay were weak before Mr. Fastow agreed to help the Enron Task Force.

“He allowed the U.S. government to bring jurors inside the executive suite,” Mr. Hueston said. He said Mr. Fastow debriefed prosecutors “in excess of 1,000 hours to untangle the web” of deceit and proved “credible, contrite and truthful” on the witness stand. Moreover, Mr. Hueston said Mr. Fastow was “truly repentant” and “not the same person introduced to the task force in 2003.”

Acting on a request by Mr. Hueston, Judge Hoyt said he would recommend that Mr. Fastow be imprisoned in a federal penitentiary in Bastrop, Tex., where he can be treated for his dependency on anti-anxiety medication. But the judge said that decision was ultimately up to the Bureau of Prisons.

Mr. Fastow also addressed Judge Hoyt. Choking back tears and causing many in the gallery to weep, he expressed shame and regret for his actions. Turning to face Mr. Durbin, the shareholder, Mr. Fastow abjectly apologized. Speaking of his friends and family, he said, “I’ve failed them and have to work every day of my life to regain their trust.”

Kurt Eichenwald contributed reporting.

    Fastow Sentenced to 6 Years, NYT, 27.9.2006, http://www.nytimes.com/2006/09/27/business/27enron.html

Tobacco Makers Lose Key Ruling on Latest Suits

September 26, 2006
The New York Times
By DAVID CAY JOHNSTON and MELANIE WARNER

In a legal blow to the tobacco industry, a federal judge in Brooklyn ruled yesterday that people who smoked light cigarettes that were often promoted as a safer alternative to regular cigarettes can press their fraud claim as a class-action suit.

Judge Jack B. Weinstein of Federal District Court in Brooklyn found “substantial evidence” that the manufacturers knew that light cigarettes were at least as dangerous as regular cigarettes.

The decision, coming at a time when the tobacco industry felt it was on a legal winning streak, raises the possibility that so-called lights cases will become a major threat to the companies and expose them to potentially significant damages.

The case, first filed in 2004, is against Philip Morris USA, R. J. Reynolds Tobacco, British American Tobacco, Liggett Group, Brown & Williamson and Lorillard Tobacco. It differs from many previous tobacco lawsuits in that it does not claim that smokers suffered personal injury. Instead, the case — called the Schwab case after the lead plaintiff, Barbara Schwab — claims that the industry defrauded consumers beginning as early as 1971, when Philip Morris began selling Marlboro Lights, the first light cigarette.

Because some 45 percent of smokers currently smoke light cigarettes, potentially vast numbers of people nationwide could be involved.

Michael D. Hausfeld, a partner at Cohen, Milstein, Hausfeld & Toll who is representing the plaintiffs, has said that the class could reach tens of millions of people and involve damages of up to $200 billion. The racketeering law being cited would allow any damage award to be tripled.

Investors yesterday drove down the price of tobacco stocks.

But before the case can proceed to a jury trial, the class-action ruling would have to be upheld by the United States Court of Appeals for the Second Circuit. Some litigation experts expressed strong doubt that it would survive such an appeal.

William S. Ohlemeyer, associate general counsel of Altria, whose Philip Morris division makes half the nation’s cigarettes, said “the judge is wrong on the law and wrong on the facts.”

Mr. Ohlemeyer said that the government, not tobacco companies, promoted the idea that lights were a safer alternative cigarette.

He added that Supreme Court decisions and court rules prohibit treating fraud cases as class actions because each individual claim of reliance on false statements must be proved.

Still, yesterday’s ruling is a setback to what tobacco companies have previously described as an “improving legal environment” for the industry.

Tobacco companies in recent months had won a string of victories. In July, the Florida Supreme Court upheld a decision to toss out a $145 billion judgment in a class-action suit. In December, the Illinois Supreme Court threw out a similar $10 billion judgment against Philip Morris.

Then last month, Judge Gladys Kessler of Federal District Court for the District of Columbia issued a scathing decision in the Department of Justice’s landmark racketeering lawsuit. She concluded that the tobacco industry had engaged in a 40-year conspiracy to defraud smokers about the health dangers of tobacco, including deceptions about lights and low-tar cigarettes.

But while Judge Kessler ordered tobacco companies to stop labeling cigarettes as “low tar” or “light” to convey that they were less hazardous than full-flavor cigarettes, she said an earlier ruling prevented her from awarding what could have amounted to $10 billion in damages.

Yesterday’s ruling also throws uncertainty into long-running plans by Altria, the parent company of Philip Morris, to separate its Kraft Foods unit from its domestic and foreign tobacco businesses. After several decisions favorable to tobacco companies within the last year, investors had driven up the price of Altria’s shares in anticipation that it would spin off Kraft in the coming months.

Shares of Altria fell 6.4 percent yesterday to $77.06.

David Adelman, a tobacco analyst at Morgan Stanley, said in a conference call with investors that Judge Weinstein’s ruling would probably delay a restructuring. He said he expects that if tobacco companies are successful in their efforts to get a review of Judge Weinstein’s decision before the trial begins, which could be as early as January, a Kraft spin-off could take place by the end of the first quarter of 2007.

Mr. Adelman said that based on past rulings and what he called the “conservative” nature of the Second Circuit appeals court, he expected such a review to be granted. If it is not, the Schwab case will proceed to a jury trial.

While plaintiffs’ lawyers have been filing such class-action suits against cigarette makers since the early 1990’s, this is the first lights case to be certified as a class action in a federal court. Currently, three other lights cases have received class certification, all in state courts and encompassing fewer numbers of smokers.

Judge Weinstein rejected the defense claim that the case was so “enormous in scope and time and in diverse persons affected” that there was no reasonable and inexpensive way to try the case.

The judge said that a central theme of American justice was that “each right has a remedy” but that it was impractical to try individually the fraud claims of tens of millions of smokers.

The judge took note of past court decisions limiting class-action cases and expressed doubt that litigation has done, or can do, much to reduce the damage done by smoking.

“Nevertheless,” Judge Weinstein ruled, “where a cigarette smoker can demonstrate that he or a group of smokers has been damaged by the cigarette industry, the help of the court in resolving the claim and defenses is mandatory.”

Judge Weinstein also took note of the agreements the tobacco companies reached with the state governments, suggesting the companies could end up paying damages twice.

“The independent political-economic arrangement” the tobacco companies made with the states “to pay them billions of dollars over many years has not compensated smokers for the individual damages they have allegedly suffered,” the judge wrote. He also wrote that widespread “partial acknowledgments” by tobacco companies that cigarettes are dangerous, and their efforts to reduce smoking by children and others “does not negate any liability for past” misconduct.

Judge Weinstein has a history of decisions that favor class actions and proposing novel solutions to settle cases. In an earlier tobacco case, the Second Circuit Court of Appeals overturned his certification of a class.

Professor Geoffrey P. Miller, who teaches class-action litigation at New York University Law School, was among the lawyers who said they expected the Second Circuit Court of Appeals to overturn the class-action certification.

“It is important to remember that it is not a crime per se to lie, nor is it a violation of law to lie,” Professor Miller said. Proving fraud requires showing both that the companies lied and that customers relied on those lies, which means that “technically each individual class member has to show reliance on the fraudulent statements,” he added.

Victor E. Schwartz, general counsel for the American Tort Reform Association, which seeks major limits on class actions, said that “the flaw in Judge Weinstein’s decision is the idea that there is always a remedy for every alleged injury, which simply is not true.”

Trying cases one smoker at a time has resulted in a few victories for smokers, but many more victories for cigarette makers.

Philip J. Hilts, author of the 1996 book “Smoke Screen,” which relied on internal cigarette industry documents to show that the companies knew cigarettes were addictive and dangerous but did not alert consumers, said that cigarette makers have good reason to fear a class-action lawsuit.

“With a class action you get higher legal firepower and you get the principle discussed, not that this person quit smoking a while ago or says he smoked more than he did or whatever detail diverts from the principle,” Mr. Hilts said.

Cigarette smoke contains thousands of chemicals, some of them known carcinogens. Some lights are advertised as having less nicotine, a highly addictive substance.

Light cigarettes are manufactured differently from regular cigarettes. They have microscopic holes that the companies say dilute the smoke. Medical researchers have found that people draw harder and deeper on lights, often filling their lungs with more toxic material than they would get from regular cigarettes, said Dr. Stanton A. Glantz, a cardiologist at the University of California, San Francisco medical school who is a longtime antagonist of the cigarette makers.

Matthew L. Myers, president of the Campaign for Tobacco-Free Kids, an anti-tobacco group, said he thought the latest ruling could embolden plaintiffs’ lawyers to file new lights cases.

Judge Weinstein and Judge Kessler’s legal decisions have also heightened calls for federal regulation of cigarettes. Senator Frank R. Lautenberg, Democrat of New Jersey, introduced legislation on Sept. 7 that would ban the use of the terms “light’’ and “low tar.’’

While Mr. Lautenberg is one of 28 Democratic and Republican sponsors of another bill that would give the Food and Drug Administration authority to regulate tobacco, Dan Katz, chief counsel for Mr. Lautenberg, said that this new bill is needed as a more immediate stop-gap measure.

    Tobacco Makers Lose Key Ruling on Latest Suits, NYT, 26.9.2006, http://www.nytimes.com/2006/09/26/business/26tobacco.html?hp&ex=1159329600&en=db7541a705712a47&ei=5094&partner=homepage

'Light' cigarette lawsuit is certified as a class action

Updated 9/25/2006 1:03 PM ET
AP
USA Today

NEW YORK (AP) — A federal judge on Monday granted class action status to tens of millions of "light cigarette" smokers for a potential $200 billion lawsuit against cigarette makers.

U.S. District Judge Jack Weinstein in Brooklyn made the ruling on a 2004 lawsuit that alleges cigarette makers duped smokers, and responded to consumers' mounting health concerns with a campaign of deception designed to preserve revenue.

LAWSUIT: Read the judge's ruling

Defendants include Altria Group's (MO) Philip Morris USA unit, Reynolds American's (RAI) R.J. Reynolds Tobacco, Loews's (LTR) Lorillard Tobacco unit (tracking stock CG); Vector Group's (VGR) Liggett Group and British American Tobacco's (BTI) British American Tobacco (Investments) Ltd.

The class is anyone who purchased cigarettes that were labeled "light" or "lights" after they were put on the market, beginning in the early 1970s. The judge set a trial date of Jan. 22, 2007.

The judge's decision drove tobacco stock prices as much as 5% lower.

In arguing last week for the class certification, smokers' attorney Michael Hausfeld said the manufacturers used a marketing strategy that promoted light cigarettes as a lower-risk alternative to regular cigarettes, even though their own internal documents showed they knew the risks were about the same.

"They understood that they were selling death," he said. The question, he added, was "how to disguise it. ... They put on 'lights.'"

Hausfeld told the judge that an analysis by plaintiffs' expert witnesses concluded that more than 90% of the smokers in the potential class purchased light cigarettes over the past three decades based on health concerns, as opposed to taste or other factors.

A separate study found that smokers, had they known the truth about the health risks, would have expected discounts of 50% to 80% per pack, part of the basis for a demand for between $120 billion and $200 billion in damages, he said.

Defense attorneys argued that the lawsuit relied on flawed data and should not be certified as a class action. They also said that without surveying each smoker in the suit, it would be impossible to determine their motives for buying light cigarettes.

In his ruling Monday, Weinstein wrote that class action certification was "critical to plaintiffs' case."

"No other method of aggregation of tens of millions of smokers' claims is practicable. The small amount of possible recovery for each smoker could not justify the expensive and time-consuming pretrial and trial procedures required," he wrote.

Analysts had expected downward pressure on tobacco shares if the class was certified, but still saw reason for optimism.

"We would expect the stock to trade down further as a result, but believe this would create a very attractive buying opportunity for investors," analyst Michael Smith of JPMorgan wrote.

It was not immediately clear how the ruling would affect Altria Group's plans to divest its controlling stake in Kraft Foods (KFT), which had seemed to edge nearer after several recent legal rulings seen as favorable to tobacco companies.

But Smith said he expects Altria will announce the spinoff at an Oct. 25 board meeting despite Monday's ruling.

"The board is likely to view the risk from the case as manageable, due to the very high probability of any initial class certification being overturned on immediate appeal to the Second Circuit Court of Appeals, and an overall litigation environment that is far better than in the past," he said.

Contributing: Reuters

    'Light' cigarette lawsuit is certified as a class action, UT, 25.9.2006,http://www.usatoday.com/money/industries/manufacturing/2006-09-25-light-cigs-suit_x.htm

Judge Voids Bush Policy on National Forest Roads

September 21, 2006
The New York Times
By FELICITY BARRINGER

WASHINGTON, Sept. 20 — In the latest round of legal Ping-Pong over the future of 49 million roadless acres of national forests, a federal judge in California on Wednesday reinstated Clinton-era protections against logging and mining on the land and invalidated the Bush administration’s substitute policy.

The judge, Elizabeth D. LaPorte of Federal District Court in San Francisco, said the new policy had been imposed without the required environmental safeguards.

The reversal, however, does not cover nine million acres of the Tongass National Forest in Alaska because a separate set of legal opinions determines their use.

Judge LaPorte ruled in a suit filed by a coalition of environmental groups and states that objected to the decision last year to scuttle what was widely known as the “roadless rule” of 2001.

The administration replaced that rule with a policy of state-by-state management under which governors submit recommendations for the use of national forest lands within their borders.

Judge LaPorte said that the original rule had laid out “the inherent problems in this kind of local decision making,” particularly “the failure to recognize the cumulative national significance of individual local decisions.”

In repealing the 2001 rule, she said, the Forest Service, which is part of the Agriculture Department, had failed to comply with the National Environmental Policy Act, which requires agencies to conduct detailed environmental analyses of alternative approaches.

Judge LaPorte said the Forest Service had failed to consult federal agencies responsible for protecting endangered species. Among other points, her order enjoined the service “from taking any further action contrary to the roadless rule without undertaking environmental analysis.”

Justice Department lawyers had argued that such analyses and endangered-species consultations would be performed as decisions were made on managing individual forests and that giving states the right to petition was more procedural than substantive.

The legislative director of the U.S. Public Interest Research Group, Anna Aurilio, said that the judge’s ruling “sort of took it back to the first principles of environmental protection and said, you can’t just ride roughshod over the environment.”

“They can’t just trample on all the laws,” Ms. Aurilio said of the administration.

Two Agriculture Department officials said they had not decided whether to appeal the decision and would continue to accept and review state petitions.

“As a general matter, we disagree with it, but the court’s order is what it is,” Deputy Under Secretary David P. Tenny said.

Mr. Tenny said working closely with states to gather information was “more effective in managing roadless areas properly than a sweeping approach that deals with all areas at one time.”

“We’ll do our level best to keep working with the states,” he added.

Six states have submitted requests under the changed policy. Five of them — California, New Mexico, North Carolina, South Carolina and Virginia — sought protection for their entire inventories of roadless areas.

Idaho, with the largest inventory of roadless acres outside Alaska, submitted its petition on Wednesday. It sought full protection for 1.7 million of its 9.3 million roadless acres and the option for logging and road construction in what state officials called the remaining “backcountry” areas.

A state environmental official, James L. Caswell, said that such logging would in general be intended to protect forest health and manage fire risks.

Kristen Boyles, the lawyer for Earthjustice who argued in support of the roadless rule, said the governors’ petitions were “never a guarantee that we would get the protections.” The repeal of the rule “was illegal, Ms. Boyles said, because the Forest Service didn’t look at the environmental consequences or the alternatives.”

In June, the Forest Service sold timber leases on two small roadless tracts of the Rogue River-Siskiyou National Forest near the Oregon coast despite the explicit objections of Gov. Theodore R. Kulongoski.

Fire ravaged the area in 2002.

The merits of the roadless policy and its successor have been argued in three federal courts — in Idaho, Wyoming and, now, California — for six years.

The rule was first enjoined by a judge in Idaho, an injunction that the United States Court of Appeals for the Ninth Circuit overturned.

A judge in Wyoming then enjoined the rule nationwide, and the United States Court of Appeals for the 10th Circuit did not rule on that appeal until after the Agriculture Department had rescinded the rule and set up the system of state petitions in May 2005. Thereafter, the 10th Circuit said, any ruling would be moot because the roadless rule was no longer in effect.

    Judge Voids Bush Policy on National Forest Roads, NYT, 21.9.2006, http://www.nytimes.com/2006/09/21/washington/21roads.html

Court says Graham can't serve as judge and senator

Posted 9/20/2006 11:30 PM ET
USA TODAY
By Andrea Stone

A federal court ruled Wednesday that Sen. Lindsey Graham, R-S.C., cannot serve in Congress and as a military judge.

The U.S. Court of Appeals for the Armed Forces said Graham violated the Constitution's Incompatibility Clause by serving as an Air Force Reserve colonel on the Air Force Court of Criminal Appeals. The clause prohibits members of Congress from also holding "an office of the United States," specifically in the executive branch. The framers included the clause to avoid conflicts of interest.

In its decision, the court said a member of Congress "performing independent judicial functions runs afoul of the fundamental constitutional principle of separation of powers."

Eugene Fidell, president of the National Institute of Military Justice, said the decision bars Graham or any other member of Congress from the judicial bench but does not forbid lawmakers from serving in another military capacity. At least three House members are military reservists.

    Court says Graham can't serve as judge and senator, NYT, 20.9.2006, http://www.usatoday.com/news/washington/2006-09-20-graham-ruling_x.htm

Federal Judges Take Steps to Improve Accountability

September 20, 2006
The New York Times
By LINDA GREENHOUSE

WASHINGTON, Sept. 19 — The federal judiciary’s top leadership responded Tuesday to criticism from Congress and elsewhere about asserted lapses in judicial ethics by announcing several steps aimed at enhanced self-policing and greater public accountability.

All federal judges below the Supreme Court level will be required to install “conflict checking” software on their computers to avoid unwittingly participating in cases in which they have a financial interest. Such software has recently become available but is not being used widely by federal judges, said Judge Thomas F. Hogan, who leads the executive committee of the Judicial Conference of the United States, which took the action at its semiannual meeting at the Supreme Court.

The conference, a group of 27 judges led by the chief justice of the United States, sets policy for the federal courts, but its jurisdiction does not extend to the Supreme Court.

The conference also adopted a policy on the attendance by federal judges at educational seminars sponsored by outside groups, the source of considerable controversy in recent years.

Judges will be prohibited from accepting reimbursement for attending a private seminar unless its sponsor has filed a public disclosure statement on the content of the program and all sources of financing. Judges will have 30 days to report their attendance at such seminars, and both the judges’ and the seminars’ reports will be available on judicial Web sites. The policy does not apply to bar association activities.

Federal judges have been criticized for attending expenses-paid seminars on economic and environmental issues sponsored by business-oriented groups that oppose much government regulation. Since 2000, bills have been introduced in Congress to ban judges’ attendance at private seminars.

The conference has opposed the legislation as raising concerns of free speech and the separation of powers. In 2001, Chief Justice William H. Rehnquist denounced it in a speech as “antithetical to our American system.”

Douglas T. Kendall, a leading critic of judges’ attendance at private seminars, called the new policy “a dramatic change for the better.”

Mr. Kendall, executive director of Community Rights Counsel, a public policy group here, has pursued the issue for years, at one point publicizing the names of more than 200 judges who had taken trips sponsored by business interests. In an interview on Tuesday, he said the new policy was a “very positive development that should have a significant effect on this practice.”

Separately on Tuesday, Chief Justice John G. Roberts Jr. endorsed a report proposing improvements in the handling of individual complaints against federal judges under the Judicial Conduct and Disability Act of 1980. The report was the product of a six-member committee, led by Justice Stephen G. Breyer, that Chief Justice Rehnquist set up two years ago.

The 1980 law established a complex and decentralized system for dealing with complaints from members of the public that a judge had “engaged in conduct prejudicial to the effective and expeditious administration of the business of the courts.” Complaints are initially reviewed by each federal circuit’s chief judge, who has considerable discretion in how to proceed.

Justice Breyer’s committee found that while the bulk of routine complaints, about 700 a year, were handled properly, there was an “error rate” of nearly 30 percent in nonroutine cases, those in which complaints against judges had attained some degree of public visibility. That error rate was “far too high,” the report said in recommending various steps for dealing with the problem.

One proposal was to encourage chief judges to refer sensitive cases to another of the 13 federal circuits. Others dealt with better education and training for the chief judges, who serve seven-year terms and thus may encounter only a handful of serious complaints in their tenure.

With Justice Breyer by his side, Chief Justice Roberts briefed reporters on the 183-page report, describing it as a “very important step on the judiciary’s behalf in responding to criticism.”

With some members of Congress calling for an inspector general to police the judiciary, many federal judges have grown increasingly concerned about the judiciary’s public image and what they perceive as threats to the tradition of judicial independence. Earlier this year, Justice Ruth Bader Ginsburg called the independent counsel proposal “a really scary idea.”

A clear if unspoken theme of the presentation on Tuesday was that judges were capable of policing themselves. Referring to Congress, Judge Hogan told reporters, “I would hope they would let us handle our own matters.”

Justice Breyer described his committee’s work as a “direct response” to criticism about lapses in judicial discipline. “The criticism turned out to be constructive,” he said, adding that while the system was not “riddled with problems,” it needed improvement to maintain public confidence.

    Federal Judges Take Steps to Improve Accountability, NYT, 20.9.2006, http://www.nytimes.com/2006/09/20/washington/20judges.html

Ex-Governor of Illinois Gets 6½ Years in Prison

September 7, 2006
The New York Times
By MONICA DAVEY

CHICAGO, Sept. 6 — George Ryan, the former governor of Illinois who was venerated around the world by opponents of capital punishment for halting the death penalty in his state, saw the depths of his downward spiral on Wednesday as a judge sentenced him to six and a half years in federal prison for racketeering and fraud.

Saying it was “the saddest day of my life,” Mr. Ryan, 72, had asked for a lesser sentence, something that would not amount, he said in his booming baritone, “to a death sentence.” His lawyers had recommended a prison term of no more than two and a half years, far below the federal sentencing guidelines.

Mr. Ryan, who during 40 years in public office rose to become one of the area’s most powerful Republicans, for the first time apologized for a scheme in which prosecutors say he put taxpayers’ money toward campaign work, lied to federal agents, and handed out contracts and leases to his friends in exchange for gifts, including island vacations, for himself and his family.

“People of this state expected better,” he said, holding a small file of papers on a lectern before the judge, Rebecca R. Pallmeyer, of United States District Court. “I let them down. For that, I apologize.” Still, Mr. Ryan, who fought the claims against him during a jury trial that lasted more than half a year, also said, “I’m proud of the life I’ve had.”

In pressing the judge to sentence Mr. Ryan to at least six and a half years, Patrick Collins, an assistant United States attorney, pointed to what he called the “mutating virus” that corruption in Illinois politics has become, and said the sentence needed to send a message that carried beyond one man or one office.

“Your sentence has to speak to public officials that public corruption cannot be tolerated,” he said.

The remarkable unraveling of Mr. Ryan and his political career has already left a mark on this state’s rough-edged political terrain. Those who once considered deal-making and favors for buddies as an ordinary, unavoidable ingredient of politics here say they have begun wondering whether an aggressive United States attorney’s office may actually change that.

And within hours of Mr. Ryan’s sentencing, the current candidates for governor were publicly arguing over which one might be more closely linked to corruption claims.

Dan K. Webb, a lawyer for Mr. Ryan, said he was deeply disappointed by the sentence. He had asked the judge to weigh Mr. Ryan’s age, his health issues (Crohn’s disease, diabetes, diverticulitis and high cholesterol), and what Mr. Webb described as acts of courage while in office.

He pointed, in particular, to Mr. Ryan’s finding in 2003, as his term as governor was ending, that the state’s system of capital punishment was broken. Although Mr. Ryan had long been a supporter of the death penalty, he commuted more than 160 of the state’s death sentences to life in prison, winning a Nobel Peace Prize nomination, even as his critics here said he was cynically bracing for his own indictment.

On Wednesday, Mr. Webb asked that Mr. Ryan be allowed to remain free on bond until an appeal of his case can be heard, and the judge has yet to rule on that. For now, Mr. Ryan is to turn himself in on Jan. 4. Mr. Webb asked that Mr. Ryan be allowed to serve his sentence at the federal prison in Oxford, Wis., where some other local politicians have served time (including former United States Representative Dan Rostenkowski, several Chicago aldermen and a Cook County Circuit Court clerk).

Mr. Ryan, a snowy-haired, ruddy-faced former pharmacist from Kankakee, began his political career in the mid-60’s on the Kankakee County Board, then went on to successful runs for the General Assembly, lieutenant governor, secretary of state and, finally, one term as governor.

Entering the courtroom, Mr. Ryan looked more like a politician working a room than a defendant. He politely shook hands with some in the long line of reporters, family members, ordinary spectators and other former politicians, including former Gov. James R. Thompson, seeming not to hear when a spectator called out, “Put the cuffs on, George.”

Mr. Ryan’s friend Lawrence Warner was sentenced Wednesday to more than three years for receiving commissions from leases and contracts from Mr. Ryan’s office.

Elsewhere, in a political campaign season, the echoes were already being felt from the hearing. Many have blamed Mr. Ryan’s woes for Republicans’ recent losses in Illinois, including the loss of the governorship in 2003 to Democrats for the first time in three decades.

Judy Baar Topinka, the Republican nominee for governor who served as treasurer during Mr. Ryan’s administration, told reporters that she did not believe his sentence would affect her much. But she swiftly referred to the continuing federal investigation into hiring by the administration of Gov. Rod R. Blagojevich, a Democrat.

Mr. Blagojevich’s campaign shot back immediately: “Unfortunately, Treasurer Topinka who is pointing a finger today was in a position of responsibility during the Ryan administration and was silent then.”

In announcing her sentence, Judge Pallmeyer seemed to be speaking to more than the politicians in the room with her. The true damage, she said, was the loss of confidence that citizens have in knowing that their government plays by the rules.

“Cynicism is inconsistent with patriotism,” Judge Pallmeyer said. “Government leaders have an obligation to stand as the example. Mr. Ryan failed to meet that standard.”

Shia Kapos contributed reporting from Chicago for this article.

    Ex-Governor of Illinois Gets 6½ Years in Prison, NYT, 7.9.2006, http://www.nytimes.com/2006/09/07/us/07ryan.html?hp&ex=1157688000&en=4f49d22f713f4eaf&ei=5094&partner=homepage