SENATE JUDICIARY COMMITTEE March 23, 1998 1:35 p.m. MEMBERS PRESENT Senator Robin Taylor, Chairman Senator Drue Pearce, Vice-Chairman Senator Mike Miller MEMBERS ABSENT Senator Sean Parnell Senator Johnny Ellis COMMITTEE CALENDAR CS FOR HOUSE BILL NO. 50(FIN) "An Act relating to the use of broadcasting to promote certain classics or sweepstakes; and providing for an effective date." - MOVED CSHB 50(FIN) OUT OF COMMITTEE SENATE BILL NO. 201 "An Act relating to prohibiting recovery of damages and prohibiting a remedy to a person in a civil action." - HEARD AND HELD CS FOR SENATE JOINT RESOLUTION NO. 37(JUD) Proposing an amendment to the Constitution of the State of Alaska relating to consent or notification of a parent or legal guardian before an abortion is provided to a minor. - MOVED CSSJR 37(JUD) PREVIOUS SENATE COMMITTEE ACTION SB 201 - See Judiciary minutes dated 10/10/97, 1/28/98, 3/6/98, and 3/9/98. CSHB 50 - See Senate State Affairs minutes dated 5/1/97 and Senate Judiciary minutes dated 5/7/97. SJR 37 - See Judiciary minutes dated 3/20/98. WITNESS REGISTER Mr. Tom Manninen Staff to Representative Mark Hodgins State Capitol Juneau, Ak 99801-1182 POSITION STATEMENT: Presented HB 50 Mr. Willis Kirkpatrick Director, Division of Banking, Securities and Corporations PO Box 110807 Juneau, Ak 99811 POSITION STATEMENT: Commented on SB 201 Mr. Larry Carroll 3510 Mendenhall Loop Rd. Juneau, Ak 99801 POSITION STATEMENT: Commented on SB 201 Mr. Dean Guaneli Department of Law PO Box 110300 Juneau, Ak 99811 POSITION STATEMENT: Commented on SB 201 ACTION NARRATIVE CHAIRMAN ROBIN TAYLOR called the Judiciary Committee meeting to order at 1:35 p.m. and brought up HB 50 as the first order of business. [DUE TO TELECONFERENCE EQUIPMENT FAILURE, THE BEGINNING OF THIS MEETING WAS NOT RECORDED] HB 50 - BROADCASTING OF RAFFLES AND CLASSICS MR. TOM MANNINEN, staff to Representative Mark Hodgins, came forward to present the bill. MR. MANNINEN said the bill removes the prohibition on broadcast media for certain legislatively recognized classics so the sponsors of these events may use broadcast media to increase public awareness of their event. The bill affects only the following classics: Canned salmon classic, Deep freeze classic, Goose classic, Ice classics, King salmon classics, Mercury classics, mushing sweepstakes, Salmon classic. MR. MANNENIN noted that the bill carried a zero fiscal note. SENATOR MILLER made a motion to move HB 50 out of committee with individual recommendations. Without objection, it was so ordered. SJR 37 - CONST AM: MINORS' ABORTIONS CHAIRMAN TAYLOR brought up SJR 37 which had been previously heard in this committee. SENATOR MILLER moved SJR 37 out of committee. Without objection, it was so ordered. CHAIRMAN TAYLOR announced that SB 201 would be the next order of business and called Mr. Willis Kirkpatrick to testify. SB 201 - PROHIBIT RECOVERY BY WRONGDOER MR. WILLIS KIRKPATRICK, Director of the Division of Banking, Securities and Corporations (BSC) came forward and CHAIRMAN TAYLOR asked if he would like to make an opening statement. MR. KIRKPATRICK said he had no opening statement but did say he was somewhat reluctant to talk about the involvement of the Division due to the class action lawsuit currently under litigation against BSC regarding the World Plus Incorporated (WPI) investment scheme, as he had not yet been advised by counsel in this matter. CHAIRMAN TAYLOR acknowledged that the committee was aware of the suit and believed that there had been no suggestion of criminal action nor liability on the part of BSC, and the only possible criminal action would be against those personally involved in perpetuating the scheme itself. CHAIRMAN TAYLOR asked MR. KIRKPATRICK if he was aware of anything beyond that. MR. KIRKPATRICK asked for clarification and CHAIRMAN TAYLOR asked if he was aware of any concerns with possible criminal prosecution of BSC. MR. KIRKPATRICK replied he was not. CHAIRMAN TAYLOR asked MR. KIRKPATRICK if he was aware of any criminal cases pending against anyone at the state level and WILLIS KIRKPATRICK said he was not. CHAIRMAN TAYLOR wondered if MR. KIRKPATRICK had ever imagined he would be in the situation of reviewing the biggest fraud scheme ever perpetrated in Alaska, one in which not a single state charge had been filed. MR. KIRKPATRICK remarked that he does not know the scope of the federal investigation in this case. He said the federal government does have more resources to conduct an investigation but he is not privy to the results of that inquiry. MR. KIRKPATRICK said he can only assume that if there is a cause for action that they would act appropriately. MR. KIRKPATRICK pointed out this was only his assumption and CHAIRMAN TAYLOR would have to ask the federal authorities for their comments. CHAIRMAN TAYLOR asked if MR. KIRKPATRICK had spoken to anyone about the decision to prosecute in these cases. MR. KIRKPATRICK said that as a securities dealer, he was taught to record his actions. He keeps desk notes, telephone logs, call back slips and other such documents in order to create a paper trail to explain his actions in any given case, should that become necessary. He said historically this has been useful for him and in the process of a large transaction he would accumulate quite a bit of information, he indicated he had gathered a lot of information surrounding WPI. MR. KIRKPATRICK said he would hate to imply what his records would indicate, but believed they would show he did everything necessary in this case. CHAIRMAN TAYLOR clarified that it was MR. KIRKPATRICK's habit to keep any records including memos, phone logs and other such documents at the time they occurred for future reference, and he had done so in this instance. MR. KIRKPATRICK agreed he had. CHAIRMAN TAYLOR asked about the date inquiries had first been made regarding WPI. MR. KIRKPATRICK replied that he could not expound on the specifics without reviewing his notes. He said he is not generally directly involved with the more specific tasks of the division such as these inquiries. CHAIRMAN TAYLOR asked when he recalled having concerns with World Plus and WILLIS KIRKPATRICK recalled a phone call had been made to his office by a Fairbanks man who expressed his concern over "a ponzi coming apart." MR. KIRKPATRICK said the matter was referred to a securities examiner. CHAIRMAN TAYLOR asked if that was a federal securities examiner or someone from the state and MR. KIRKPATRICK replied it was a state examiner by the name of Dennis Salveson. CHAIRMAN TAYLOR asked MR. KIRKPATRICK if the examiner reported back to him and MR. KIRKPATRICK indicated he did. CHAIRMAN TAYLOR asked when this occurred and MR. KIRKPATRICK said he would have to consult his notes. CHAIRMAN TAYLOR asked if MR. KIRKPATRICK thought it was before the actual collapse of WPI and MR. KIRKPATRICK suggested it was probably approximately that same time. CHAIRMAN TAYLOR asked about discussions conducted with Ms. Lori Otto and asked MR. KIRKPATRICK if he had been party to those discussions. MR. KIRKPATRICK indicated he had been involved in some discussions, probably about the time that Mr. Ed Watkins retired. CHAIRMAN TAYLOR asked about an e-mail sent to Mr. Watkins and Mr. Salveson that expressed concern over the situation, and seemed to indicate that someone was aware, as early as 1993, that this woman [the owner of WPI] had prior convictions. CHAIRMAN TAYLOR asked MR. KIRKPATRICK if he recalled a meeting with Ms. Otto and LARRY CARROLL, and if he would comment on the substance of that meeting. MR. KIRKPATRICK did recall the meeting and said there was a bit of a personality conflict in play. MR. KIRKPATRICK said as soon as he found that any action might be taken he referred the case to the Department of Law, and asked Ms. Otto to come and discuss the matter with him. CHAIRMAN TAYLOR said according to some notes he had received, when Ms. Otto came to discuss the matter she also listened to a recording made of an interview conducted by Mr. Wilkins with Mr. Goldman [from Fairbanks]. Apparently, Ms. Otto was critical of the interview and criticized the interview technique. Ms. Otto then advised them that due to a lack of documentation, the Department would be unable to prosecute the case. MR. KIRKPATRICK objected, saying he thought that CHAIRMAN TAYLOR had just read into the record part of an investigatory file. CHAIRMAN TAYLOR responded that he had received the notes as part of the record, and they were not confidential. MR. KIRKPATRICK stated that he remembered a meeting with Ms. Otto, LARRY CARROLL and Dennis Salveson and CHAIRMAN TAYLOR asked if Mr. Salveson was the same person who had much earlier been talking to Mr. Watkins about this matter. MR. KIRKPATRICK replied that Mr. Salveson took over Mr. Watkins' position when he retired. CHAIRMAN TAYLOR noted that it appears that MR. KIRKPATRICK had advised Ms. Otto that he would proceed. MR. KIRKPATRICK said he was under the impression that Ms. Otto had some questions as to the responsibility of BSC. He thought she felt they were merely a registration entity, and he attempted to make clear to her what their responsibilities were under the Alaska Securities Act. CHAIRMAN TAYLOR asked if he received any memos with instructions to do otherwise and MR. KIRKPATRICK replied that he had received a memo from Ms. Otto that advised she had talked with the U.S. Attorney and the Justice Department who had apparently said that it may be detrimental for them to investigate if the state was also involved, so they would not proceed. CHAIRMAN TAYLOR asked MR. KIRKPATRICK if he ever had any indication that BSC's actions would jeopardize any other state or federal investigation. MR. KIRKPATRICK replied that Ms. Otto had said that. CHAIRMAN TAYLOR asked whose investigation would be jeopardized and MR. KIRKPATRICK answered she had indicated the federal investigation would be jeopardized, particularly as affected by tainted evidence and questions of immunity. CHAIRMAN TAYLOR asked MR. KIRKPATRICK if he felt there was any truth to this statement and MR. KIRKPATRICK replied that he personally had never had any problems of this sort. CHAIRMAN TAYLOR ascertained that MR. KIRKPATRICK had worked closely on this case MR. KIRKPATRICK affirmed he had. CHAIRMAN TAYLOR said it seemed, at some point in the conversation, that there was a difference of opinion regarding BSC's role and the perception of that role from the Attorney General's office. MR. KIRKPATRICK said he believed a reference was made to a federal authority but could not recall if it was the Justice Department or the U.S. Attorney or even the IRS. CHAIRMAN TAYLOR wondered how we end up two years later with no case; the state playing Pontius Pilate and washing their hands of it, saying the feds will do it. He wondered why the state did not do the same thing as the feds did when they found some of their people involved: that is, recuse them and bring in new investigators. CHAIRMAN TAYLOR wondered how Ms. Otto could conclude "it wasn't our job" to protect investors. MR. KIRKPATRICK again remarked that he believed Ms. Otto did not realize the scope of the Division's authority and viewed them as a registration office without enforcement powers. He suggested CHAIRMAN TAYLOR could ask LARRY CARROLL for his impression of the conversation also. CHAIRMAN TAYLOR said he understood that BSC has independent enforcement authority; he asked if any enforcement action had been taken and MR. KIRKPATRICK said there was action taken against one party to this case and there may be more coming. MR. KIRKPATRICK did not have an answer for CHAIRMAN TAYLOR's question as to why there was no prosecution in the case. CHAIRMAN TAYLOR asked MR. KIRKPATRICK if he was aware of any matters the committee should be aware of that could not be discussed publicly. MR. KIRKPATRICK said he had been careful speaking of things regarding the class action lawsuit, but did not believe he was aware of anything confidential that would be germane to their inquiry. He indicated he had no additional information. CHAIRMAN TAYLOR asked if MR. KIRKPATRICK had discussed whether or not to prosecute the case with Attorney General Bruce Bothelo and MR. KIRKPATRICK replied he had not. CHAIRMAN TAYLOR then inquired if members of the division had discussed it and MR. KIRKPATRICK said that there had been some contact between the two agencies but he did not believe prosecution was the topic. CHAIRMAN TAYLOR asked if there were questions from the other committee members, seeing none, he remarked that he had no further questions at this time, but believed that there are other matters that the committee is not aware of due to the restrictions imposed by the current class action lawsuit. CHAIRMAN TAYLOR said that the evidence that has come before them indicates there is a problem, but does not go very far in pinpointing the guilty parties. CHAIRMAN TAYLOR said if there is a legislative change that would assist future prosecution of this type of case, whether it is a tightening of the language of our current statutes or any other action, the committee would be eager to pursue it. MR. KIRKPATRICK responded by saying the Alaska Securities act is a good, uniform act that works for Alaska and is employed in 16 other states as well. MR. KIRKPATRICK encouraged the committee to remember that BSC is like a cop on the street; they can only refer a crime to the District Attorney, not take action on it themselves. He added that in this type of white collar crime it is sometimes difficult to identify the victims. MR. KIRKPATRICK said the prosecutors must be the ones to delegate the resources and make the decision to prosecute, his office can only intercede sometimes. MR. KIRKPATRICK said he knows several federal authorities have been involved and believes they have substantially looked at all aspects of this case. MR. KIRKPATRICK does not know how the situation could be improved by a change to state law, and restated the idea that white collar crime is difficult to combat. [TAPE RECORDING BEGINS] TAPE 98-22, SIDE A Number 001 CHAIRMAN TAYLOR asked MR. KIRKPATRICK to comment on a legislative structure that would invoke an independent prosecutor on behalf of an agency when the Attorney Generals office refused to prosecute. MR. KIRKPATRICK had no comment. CHAIRMAN TAYLOR asked if MR. KIRKPATRICK had reviewed the auditors' statements and had any comments on them. MR. KIRKPATRICK said he had reviewed the statements and had no comments on them. CHAIRMAN TAYLOR said he wanted to give MR. KIRKPATRICK the opportunity to comment since some of the statements within the audit are quite strong. CHAIRMAN TAYLOR said he has known MR. KIRKPATRICK for years and has a high regard for him. He said it appears in this case that BSC relied on letters and comments received from several investors, some of them state employees. CHAIRMAN TAYLOR commented that sometimes we trust people too much. CHAIRMAN TAYLOR thanked MR. KIRKPATRICK for his testimony and asked LARRY CARROLL if he would come forward. CHAIRMAN TAYLOR asked LARRY CARROLL if it was fair to say he (or others in his department) had spoken with the U.S. Attorney, the Attorney General and others regarding information in this case that can't be discussed publicly due to the class action suit. LARRY CARROLL responded that he had met with those people and there may be portions of the conversation that may be confidential. Other specifics about individual investors were also discussed and may require privacy. CHAIRMAN TAYLOR noted that MR. DEAN GUANELI from the Department of Law had been listening to the testimony during the entire hearing and had not stood and voiced any objection. CHAIRMAN TAYLOR remarked that if MR. GUANELI did have any objections he would like him to stand up and voice them. MR. GUANELI replied that he is not in the position to state any objection to what MR. CARROLL might or might not say, as he has not talked with him. MR. GUANELI said it is difficult to state an objection regarding conversations he was not a party to and which have not been discussed with him. MR. GUANELI stated that CHAIRMAN TAYLOR should not take his silence to indicate that the state has no objection, he is simply not in a position to state an objection one way or another. CHAIRMAN TAYLOR indicated he did not want to jeopardize the state's defense, only to discuss matters of public record. He said he did not know if it was fair to place MR. GUANELI in that position as he does not know what his role is in either defending the class action suit or being involved in decisions about prosecution. MR. GUANELI replied that he couldn't say much more as it was CHAIRMAN TAYLOR's hearing. He said he appreciated CHAIRMAN TAYLOR's concern about the state's liability but that CHAIRMAN TAYLOR should not look to him to be jumping up with objections as he might in a courtroom, as he is not in a position to do so. CHAIRMAN TAYLOR said, according to the noted provided by MR. CARROLL, it appears BSC's investigation into this matter began in 1992 or 1993, though the scheme did not collapse until 1996. CHAIRMAN TAYLOR asked MR. CARROLL if that was correct and MR. CARROLL said that seemed about right. He said BSC was aware Ms. Bonham was selling some notes. He said they took action to close out everything before considering an exempted transaction. CHAIRMAN TAYLOR asked for confirmation that the notes MR. CARROLL had provided were taken at the time the events occurred, not constructed later from memory. LARRY CARROLL said the notes were made within a day of the time the events occurred. CHAIRMAN TAYLOR asked if he recalled a conversation with the Attorney General and an agent of the FBI or another federal agency. MR. CARROLL said he knows the bureau talked to the Attorney General, but he had not been present. CHAIRMAN TAYLOR asked if MR. CARROLL had talked to the Attorney General about this and, if so, approximately when. Mr. CARROLL replied he had spoken to the Attorney General about the same time Ms. Otto visited their office. CHAIRMAN TAYLOR asked how this related to the time frame of the WPI collapse and MR. CARROLL said it came toward the end, after the bankruptcy filings. CHAIRMAN TAYLOR asked LARRY CARROLL about the substance of his conversation with the Attorney General. MR. CARROLL recalled he had expressed concern with the federal investigation due to the problems they had encountered and urged him to allow BSC to continue their investigation. MR. CARROLL said he received assurance from the Attorney General that if the feds were not successful in concluding the case, he would revisit it. CHAIRMAN TAYLOR asked what the actions referred to by MR. KIRKPATRICK were and who had taken them. LARRY CARROLL said he had taken actions including the subpoena of records and transactions, during the same period of time. MR. CARROLL said he also interviewed other individuals who were registered with them after their names appeared in the newspaper as possible investors, and took actions in those cases as well. CHAIRMAN TAYLOR asked if this was the only state action MR. CARROLL knew of and MR. CARROLL replied that was correct, but said he did not have any particular basis to know of any other action. CHAIRMAN TAYLOR asked what impact the letters BSC received from investors who were state employees (including prosecutors, police, and others) had on BSC's investigation. MR. CARROLL said they probably had more impact than letters from convicted criminals or con men, but does not think BSC overemphasized their importance. He remarked that having people endorse a company does lend credibility. MR. CARROLL said this, coupled with other regulatory steps taken by BSC led to the exemption being granted. He commented that, in retrospect, he saw that having refused the exemption wouldn't have mattered, as WPI was way outside the bounds of their exemption as it was. Number 200 CHAIRMAN TAYLOR asked if there was a phrase to describe the letters BSC received and MR. CARROLL explained that the term was "lulling." CHAIRMAN TAYLOR remarked that it appeared obvious from MR. CARROLL's memo that the FBI and the U.S. Attorney's office felt strongly enough about the involvement of some of their employees that they recused them and brought in a new team of investigators. CHAIRMAN TAYLOR asked LARRY CARROLL if he knew of anyone in Alaska who has been recused. LARRY CARROLL replied he did not. CHAIRMAN TAYLOR asked MR. CARROLL if he had a chance to review the recommendations made by the legislative auditors and if he believed there should be a change in the law to provide for a situation like this. MR. CARROLL agreed with WILLIS KIRKPATRICK, saying it is hard to legislate specifics to combat white collar crime. MR. CARROLL pointed out that there is an office of special prosecutions and appeals within the Department of Law that has previously been utilized by BSC on white collar projects. MR. CARROLL said he would think the Department of Law would dictate the course of action for the Attorney General. CHAIRMAN TAYLOR agreed, but indicated that, unfortunately, that was not the case. CHAIRMAN TAYLOR asked MR. CARROLL if he was aware of any further information that might prove helpful to the committee but could not be discussed publicly. MR. CARROLL replied that the only further information he might provide would simply fill in the gaps with names, accounts, and other personal information. He said CHAIRMAN TAYLOR knows the thrust of what happened and he does not believe this additional information would help. MR. CARROLL said there is no "dirty little secret" that is being hidden. CHAIRMAN TAYLOR said he understood that BSC has been cooperative in providing information. He asked again how it could be that no one has been charged by the state. CHAIRMAN TAYLOR indicated he was prepared to take any testimony the Department of Law may wish to offer. He said this could happen at any time convenient to the Department. MR. DEAN GUANELI advised CHAIRMAN TAYLOR that he had testified previously to the reasons there were no state prosecutions. Given the pending audit, he indicated he'd prefer to wait and see what they come up with before the Department makes a final response. CHAIRMAN TAYLOR said there may not be time once the session goes into "close out" mode. He remarked that he would like to discuss it (in an executive session if necessary) and he'd like to see the memos and notes that have been referred to and receive an explanation of how someone can get away with the criminal behavior Ms. Bonham did and elude charges. MR. GUANELI indicated that the letter from Lori Otto had been provided to Mr. Jensen. CHAIRMAN TAYLOR said he had been told this was a confidential document. He said he is unwilling to wait until the end of the session to receive an explanation about this, as he is concerned right now. MR. GUANELI said he did not believe he had told MR. JENSEN the letter was confidential. MR. GUANELI said he had given previous testimony to the committee and would wait until the audit was finalized before making further comments. He said, assuming the audit process is objective, he thinks the department would like to see the results of the audit and then respond, since only then would they be able to ascertain whether or not the pending lawsuit would be jeopardized. CHAIRMAN TAYLOR argued that MR. GUANELI's office holds the answers to his questions and he did not see any reason to wait and see what the auditors determine. MR. GUANELI replied again that he had previously testified to the reasons the department did not proceed and again stated his wish to view the completed audit before making a second response. CHAIRMAN TAYLOR asked why DEAN just wouldn't come sit down and talk to them, saying the auditor may miss information if they do not have the cooperation of the department. CHAIRMAN TAYLOR indicated he would take all the necessary precautions with any confidential information. He expressed concern to MR. GUANELI that the department's action might have been related to the termination and rehire of Ms. Otto or the transfer of Mr. Goldman, which occurred about this same time. MR. GUANELI interjected that CHAIRMAN TAYLOR had just put forth a speculative allegation that he had never heard before; he said it is unfair to have new allegations thrown at him when there is an ongoing audit. MR. GUANELI stated he is unprepared to respond to these suggestions. CHAIRMAN TAYLOR declared that these are questions the victims want answered and they will not wait for the auditors when the answers could be provided by MR. GUANELI. CHAIRMAN TAYLOR indicated he was willing to have an open or closed meeting at the department's convenience. MR. GUANELI repeated that he has given the committee more than a general statement but would schedule a hearing to provide additional information if the committee felt so inclined. MR. GUANELI added that he still felt the results of the ongoing audit should be revealed so he would be better prepared to discuss any rumors or innuendo the committee might be hearing. CHAIRMAN TAYLOR said they would meet whenever he was able, in order for MR. GUANELI to explain what went wrong and what could be done to correct it. He asked if the state needs an independent prosecutor process for when the Attorney General's office fails to prosecute. CHAIRMAN TAYLOR said the apparent significant involvement of employees of the Department of Law casts doubt on why certain decisions were made. MR. GUANELI said CHAIRMAN TAYLOR had indicated in a prior meeting that a preliminary audit would be the next step, so he had not expected to be called to testify before that process was complete. CHAIRMAN TAYLOR said he only asked if MR. GUANELI wanted the opportunity to speak, MR. KIRKPATRICK had appeared to testify today only because he was unable to attend an earlier hearing at which LARRY CARROLL testified. MR. GUANELI asked CHAIRMAN TAYLOR if he anticipated the audit process to be completed before the end of the session and CHAIRMAN TAYLOR did not think it would be done, but said he wanted to get to the bottom of this. MR. GUANELI said the fact that the audit is in progress will change the way things will proceed and said they should just set up an additional hearing. CHAIRMAN TAYLOR indicated the committee would arrange a meeting at MR. GUANELI's convenience. SENATOR PEARCE commented she remembered MR. GUANELI's prior testimony and asked what that date was. MR. GUANELI did not recall, but said it was well before MR. CARROLL's testimony. SENATOR PEARCE said the auditors were asked very specific questions and this may explain why none of MR. GUANELI's testimony was incorporated into their findings. MR. GUANELI said he believed this was a shortcoming of the audit report, he said the cancellation of a scheduled meeting and the lack of communication with his department prior to the release of findings were other shortcomings on the part of the auditors and he hoped they would be addressed in the final audit. SENATOR PEARCE commented that the auditors are always thorough, sometimes tediously so, and she'd like to know what exactly CHAIRMAN TAYLOR asked them. CHAIRMAN TAYLOR and MR. GUANELI agreed they would schedule a meeting soon and CHAIRMAN TAYLOR again indicated he'd like MR. GUANELI to provide the committee with any pertinent documents, including interdepartmental memoranda relating to the decisions that were made. MR. GUANELI again stated that the letter in question can be released to the committee, and added he believed it had already been released in response to a public information inquiry. CHAIRMAN TAYLOR announced, with nothing further to come before the committee, they were adjourned.