Thursday, December 12, 2013
Second Circuit Reverses Convictions, Rejecting Government’s Expansive “Continuing Conspiracy” Theory
The Second Circuit recently reversed the convictions of three defendants convicted in a municipal bond bid-rigging scheme, rejecting the government’s attempt to rely on an attenuated theory of continuing conspiracy. The three defendants were immediately released from prison and the indictment was dismissed. The opinion sets a much-needed limit on the government’s unfettered use of the continuing conspiracy theory to avoid the statute of limitations.
Background: The World of Municipal Bond Taxes
The case involves the somewhat esoteric world of municipal bond taxes. Municipalities issue bonds. Because the bond funds are usually used for long-term projects, municipalities often do not spend the bond funds immediately.
To earn additional revenue from the funds, the municipal bond issuer may invest in “guaranteed investment contracts” (“GICs”) provided by financial institutions, such as GE (called a “provider”). GICs pay predetermined interest payments to the municipality, providing an additional source of income. Municipalities must rebate to the Treasury any interest earned over bond interest rate.
The tax code has certain provisions to prevent arbitrage in GICs. Important here, municipalities must determine the “fair market value” of the GIC. This is difficult because, as the Second Circuit noted, “GICs are not regularly traded.”
To ease the burden on municipalities, IRS regulations provide for a safe harbor to the “fair market value” calculation if the municipality holds a competitive bidding process among GIC providers. Third-party brokers solicit blind bids from several providers. The bidders do not know who else is bidding or the rates of interest being offered by their competitors.
The Defendants’ Role
Three defendants worked for a unit of GE that provided GICs. One left in 2001 to work with a company called Financial Security Assurance, Inc. Between 1999 and 2004, “the Defendants (on behalf of their employers GE and FSA) agreed to pay kickbacks to three brokers . . . and the brokers obliged by rigging the bidding process in several ways.” For example, the broker would disclose the amount of other bids or keep other bidders off the bid list.
The kickbacks helped GE and FSA win bids to provide GICs to municipalities at a lower interest rate. This, in turn, potentially affected whether any interest payments would be rebated to Treasury. According to the Second Circuit, “each deal defrauded the municipality, the Treasury, or both.”
On July 27, 2010, a grand jury returned an indictment. A superseding indictment was then returned for one count of wire fraud and six counts of conspiracy.
The defendants moved to dismiss on statute of limitations grounds. The district court granted the motion as to the substantive wire fraud count but refused to dismiss the conspiracy counts. It reasoned that as long as unindicted co-conspirators GE and FSA made interest payments on the GICs, the conspiracy was continuing.
The defendants were convicted after a three week-trial and three days of deliberations.
The Second Circuit’s Reversal
The Second Circuit reversed, in an opinion authored by Judge Jacobs. United States v. Grimm, No. 12-4310. Judge Kearse dissented.
The applicable statute of limitations for general conspiracy is five years and for conspiracy to commit tax fraud is six years. The court noted that although the indictment listed 55 overt acts, the only ones within either limitations period “were the periodic interest payments made by providers to issuers pursuant to the GICs.”
The court explained that only acts within the scope of the conspiracy could be properly considered in the statute of limitations analysis. The indictment alleged two purposes—the defendants sought to (1) “deprive issuers of money by causing them to award investment agreements at artificially determined or suppressed rates . . . “ and (2) to impede the government’s collection of tax revenue.
The court relied heavily on United States v. Salmonese, 352 F.3d 608 (2d Cir. 2003). That case held that a co-conspirator’s receipt of profits from a financial instrument that was part of the fraud was an overt act in furtherance of the conspiracy because it was part of the co-conspirators’ “anticipated economic benefits.” But Salmonese also explained that the conspiracy ends if the “payoff merely consists of a lengthy, indefinite series of ordinary, typically noncriminal, unilateral actions . . . and there is no evidence that any concerted activity posing the special societal dangers of conspiracy is still taking place.”
The Second Circuit explained that Salmonese’s list of factors was not exclusive. It provided a more general enunciation of the rule:
[G]enerally, overt acts have ended when the conspiracy has completed its influence on an otherwise legitimate course of common dealing that remains ongoing for a prolonged time, without measures of concealment, adjustment or any other corrupt intervention by any conspirator.
Here, the court concluded, the GIC payments satisfied this rule and therefore were not within the scope of the conspiracy. The payments were indefinite (because they were “prolonged beyond the near future); they were ordinary (part of a commercial obligation); and they were made unilaterally (by the provider).
The court held that the interest payments were the “result of a completed conspiracy” and not “in furtherance of one that is ongoing.” It noted that there was no indication that making the payments prolonged the conspiracy in any way. Because the payments were not overt acts in furtherance of the conspiracy, the government could not rely on them to satisfy the statute of limitations.
Because white collar indictments frequently arise out of complex, long-term financial instruments (and are often the result of lengthy government investigations), the Grimm opinion is of note. The opinion announces a general rule that may be application to other financial fraud cases. And, of course, it is a refreshing change to see a court limit the government’s use of the continuing conspiracy theory. Every minor ripple effect of a conspiracy should not be used to excuse the government’s failure to bring a case within the already lengthy limitations period.
Tuesday, December 3, 2013
Check out Mike Scarcella's BLT Blog item, Justice Dept. Sued Over Access to Non-Prosecution Agreement. It is hard to believe that someone would have to file a lawsuit to obtain information about a non-prosecution agreement of a corporation. One can understand the need to protect individuals from the sting of criminality when an agreement is reached to defer a prosecution or when an individual is being spared a prosecution as an alternative method to rehabilitate that individual. But corporations are not afforded the same rights as individuals. The government is quick to note that corporations do not have the same rights as individuals when they are trying to obtain corporate documents.
Monday, December 2, 2013
Sara Randazzo, AM Law Daily, Former Dewey Leader Hires Criminal Defense Lawyer
Charles Huckabee, The Chronicle of Higher Education, Prosecutors List Statements by Graham Spanier That They Say Are Lies
Suzi Ring, Bloomberg, FX to Libor Probes Leave U.K. Traders Looking for Lawyers
Monday, November 25, 2013
NACDL White Collar Criminal Defense College at Stetson - March 19 - 22, 2014
The NACDL White Collar Criminal Defense College at Stetson is a “boot-camp” program for practitioners wishing to gain key advocacy skills and learn substantive white collar law. The program will cover client retention, investigation in a white collar case, handling searches and grand jury subpoenas, and dealing with parallel proceedings. Participants will have the experience of negotiating a plea, making proffers, and examining which experts to hire and how to protect the client in this process. Interactive sessions with top white collar practitioners will allow the participants to learn trial skills such as opening statements, cross-examination, jury instructions, closing arguments, and sentencing – all in the context of a white collar matter.
Stetson University College of Law
1401 61st St. S.
Gulfport, FL 33707
Loews Don CeSar Hotel
3400 Gulf Boulevard
St. Pete Beach, FL 33706
For more information, see here.
Friday, November 22, 2013
Catherine Martin Christopher has a new article titled, "Whack-a-Mole: Why Prosecuting Digital Currency Exchanges Won't Stop Online Laundering." The SSRN abstract states:
Law enforcement efforts to combat money laundering are increasingly misplaced. As money laundering and other underlying crimes shift into cyberspace, U.S. law enforcement focuses on prosecuting financial institutions’ regulatory violations to prevent crime, rather than going after criminals themselves. This article will describe current U.S. anti-money laundering laws, with particular criticism of how attenuated prosecution has become from crime. The article will then describe the use of Bitcoin as a money-laundering vehicle, and analyze the difficulties for law enforcement officials who attempt to choke off Bitcoin transactions in lieu of prosecuting underlying criminal activity. The article concludes with recommendations that law enforcement should look to digital currency exchangers not as criminals, but instead as partners in the effort to eradicate money laundering and — more importantly — the crimes underlying the laundering.
Thursday, November 21, 2013
Monday, November 18, 2013
How many federal appellate opinions begin like this?
"An attorney's reputation is her most valuable possession. It forms the basis for her peers' view of her and plays an important role-often a determinative one-in how she advances in her career. This case began with a government attorney's unauthorized filing of a motion for sanctions against Debra K. Migdal, an attorney who has served as an Assistant Federal Public Defender for nearly 25 years. It quickly took on a life of its own, resulting in two district-court orders strongly, publicly, and, we conclude, erroneously reprimanding Migdal. Because the record does not support any basis for these orders, we VACATE the sections of the first order pertaining to sanctions, REVERSE the second order in its entirety, and DISMISS the sanctions proceeding against Migdal."
And how many of them end like this?
"This opinion closes the book on a regrettable chapter in Debra Migdal's career, clears her of all claims that her conduct in this matter was sanctionable, and removes any taint of public censure on her reputation."
As anyone who practices criminal law in the federal court system knows, different districts, and sometimes different judges within a district, have different rules, formal and/or informal, for the issuance of subpoenas demanding early document production pursuant to Fed. R. Crim. Proc. 17(c). Some districts allow prosecutors and defense attorneys to issue the subpoenas, and examine documents, on their own. Other districts require a motion and court order. (Of course, the playing field is uneven, because the prosecution typically has the evidence it needs well before trial through the use of grand jury subpoenas.)
In 2011 Debra Migdal was an Assistant Federal Public Defender in the Northern District of Ohio handling a case in front of U.S. District Judge John R. Adams. At the time, neither the Northern District of Ohio nor Adams had any formal policy regarding the issuance of Rule 17(c) subpoenas. Migdal issued two Rule 17(c) subpoenas on her own, one of which was sent to the custodian of records at the U.S. Border Control, calling for the early production of materials in Judge Adam's court, but on a day she designated that was prior to a scheduled court date. Two previous district court opinions in the Northern District, neither of which were written by Judge Adams, had come to opposite conclusions about the propriety of issuing such subpoenas absent the court's permission. Migdal was unaware of the opinion holding that a court order is necessary.
Migdal used Administrative Office of the U.S. Courts Form AO 89, which commands both the appearance and testimony of the witness and, if necessary, the production of documents. In other words, unless the issuer crosses out the part of the authorized pre-printed form calling on the witness to testify, he/she is always commanded to appear and testify, even though in many cases the issuing party is only interested in obtaining documents. By way of contrast, on the federal civil side, there are two authorized subpoena forms, one calling for documents only and one calling for witness testimony.
AUSA Gregory Sasse told the Border Patrol Agent to ignore the subpoena. Sasse then moved to quash the subpoena and asked the court to impose whatever sanctions it deemed appropriate. Sasse wasn't authorized to move for sanctions and his superiors later withdrew this request. But Judge Adams was clearly not happy with Migdal. He held two hearings and publicly sanctioned Migdal under 28 U.S.C. Section 1927 and his inherent authority.
Section 1927 reads as follows:
"Any attorney or other person admitted to conduct cases in any court of the United States or any Territory thereof who so multiplies the proceedings in any case unreasonably and vexatiously may be required by the court to satisfy personally the excess costs, expenses, and attorneys’ fees reasonably incurred because of such conduct."
The Sixth Circuit, noting that nothing whatsoever in the statute's language authorizes the imposition of non-monetary sanctions, ruled that Judge Adams abused his discretion in sanctioning Migdal under 1927.
The Sixth Circuit then rejected the three rationales Judge Adams relied on for sanctioning Migdal pursuant to his inherent authority. (Any sanctions against Migdal required a showing of bad faith on her part.)
1. Adams had ruled that a criminal defendant is entitled to materials under Rule 17(c) "only after requesting-and not getting-the necessary items from the government via Rule 16 discovery." Incredibly, he believed he had the inherent authority to sanction Migdal for failing to follow this protocol. But as the Sixth Circuit pointed out, no such protocol exists under Rules 16 and 17.
2. Adams had ruled that Migdal violated her duty of candor to to the court by commanding production at a hearing that had not been scheduled or requested. (He referred to it as a "fabricated" hearing.) Migdal acknowledged that the subpoenas were defective in this regard, apologized to the court, and argued that she had not acted in bad faith. The Sixth Circuit agreed, emphasizing that: a) AO Form 89 lacks clarity; b) Migdal called for production in Judge Adams' courtroom, so she was obviously not trying to hide anything from the court; c) the longstanding practice in Migdal's office and in many Federal Public Defender Offices, was to issue Rule 17(c) subpoenas without prior court approval; and d) Migdal relied on a prior Northern District of Ohio opinion specifically authorizing issuance of Rule 17(c) subpoenas without prior court approval. Judge Adams noted that he preferred the contrary judicial opinion. "But Judge Adams' inclination to side with one judge's view over that of another obscures the point that Migdal did not act in bad faith when she hewed to at least one judge's reading of the controlling rule."
3. Adams had ruled that Migdal "utterly disregarded Rule 17(c)'s implicit requirement that the court must approve and order early-production subpoenas." (internal quotations omitted). The Sixth Circuit carefully pointed out that reasonable people could disagree on this point, as evidenced by the conflicting district court opinions. That Migdal chose to take a view of Rule 17(c) at odds with Judge Adams' position, at a time when there was no clear controlling authority, could hardly amount to bad faith.
Throughout Judge Jane Stranch's opinion, for a unanimous Sixth Circuit panel, there runs a tone of incredulity at Judge Adams' actions in "branding a blemish on Migdal's reputation." It should never have happened. It should never happen again.
Here is the Sixth Circuit Migdal Vindication Opinion.
Thursday, November 14, 2013
Todd Haugh (Illinois Institute of Technology - Chicago-Kent College of Law) has a new forthcoming article in the Fordham Law Review - here. The SSRN Abstract states -
“So why did Mr. Gupta do it?” That question was at the heart of Judge Jed Rakoff’s recent sentencing of Rajat Gupta, a former Wall Street titan and the most high-profile insider trading defendant of the past 30 years. The answer, which the court actively sought by inquiring into Gupta’s psychological motivations, resulted in a two-year sentence, eight years less than the government requested. What was it that Judge Rakoff found in Gupta that warranted such a modest sentence? While it was ultimately unclear to the court exactly what motivated Gupta to commit such a “terrible breach of trust,” it is exceedingly clear that Judge Rakoff’s search for those motivations impacted the sentence imposed.
This search by judges sentencing white collar defendants — the search to understand the “why” motivating defendants’ actions — is what this article explores. When judges inquire into defendants’ motivations, they necessarily delve into the psychological justifications defendants employ to free themselves from the social norms they previously followed, thereby allowing themselves to engage in criminality. These “techniques of neutralization” are precursors to white collar crime, and they impact courts’ sentencing decisions. Yet the role of neutralizations in sentencing has been largely unexamined. This article rectifies that absence by drawing on established criminological theory and applying it to three recent high-profile white collar cases. Ultimately, this article concludes that judges’ search for the “why” of white collar crime,
which occurs primarily through the exploration of offender neutralizations, is legally and normatively justified. While there are potential drawbacks to judges conducting these inquiries, they are outweighed by the benefits of increased individualized sentencing and opportunities to disrupt the mechanisms that make white collar crime possible.
Wednesday, November 13, 2013
Sean Radcliffe & T. Markus Funk, Investigating Alleged Board Member Misconduct, ACC Docket
Brandon L. Garrett & David Zaring, Dealbook, For a Better Way to Prosecute Corporations, Look Overseas
Zoe Tillman, BLT Blog, D.C. Circuit Weighs Ex-Congressional Aide's Corruption Fight
Monday, November 11, 2013
Sunday, November 10, 2013
Gretchen Morgenson has another one of her outstanding articles, Earnings, But Without The Bad Stuff, in today's NY Times. The piece explores some unintended effects of the SEC's Regulation G, which "allows companies to use non-traditional metrics in financial reports, but only if they present generally accepted accounting measures [GAAP] alongside so that investors can compare the two." According to Morgenson, and Jack Cieselski of Charm City's R.G. Associates, more companies are using Regulation G to put forward "[m]anagement's recommended measures." This in turn spurs other companies to do the same in order to stay competitive. My gut response is: "So what?" As long as the company is disclosing fully accurate figures according to GAAP, what do I care if they want to present alternative numbers alongside? After all, companies are still prohibited from presenting false or misleading non-GAAP figures, and the SEC has gone after companies who do this.
Tuesday, November 5, 2013
The defendant was charged with two counts of allegedly mailing threatening communications (18 U.S.C. § 876) and two counts of intentionally conveying false and misleading information (18 U.S.C. § 1038(a)(1)). The defendant challenged the "government's introduction of testimony by a handwriting expert pursuant to Federal Rules of Evidence 702 and 403." In this case it was a report and expert testimony of a US Postal Service handwriting analyst. The district court found that under the Daubert and Kumho standards "that the science or art underlying handwriting analysis falls well short of a reliability threshold when applied to hand printing analysis." This case was handled by Stephen J. Meyer (Madison, Wisconsin).
Monday, November 4, 2013
See Peter Lattman & Ben Protess, NYTimes, SAC Capital Agrees to Plead Guilty to Insider Trading
TRAC (Transactional Records Access Clearinghouse) is reporting a decline for 2013 of white collar prosecutions. (see here). Their statistics, which I assume to be accurate, demonstrate a decline of 45% from 10 years ago and 6.8 % from last year. TRAC does a superb job of providing current statistics as provided to them from the DOJ.
But one has to question these statistics for several reasons. Most importantly is the fact that a solid definition of white collar crime is lacking. Will it include RICO? How about RICO with mail fraud counts? How about RICO with robbery counts? And the typical "short-cut" offenses used by the government, like obstruction of justice, perjury, and false statements. These could be economic crimes underlying the conduct, or they could easily be street crimes. The problem is the statistics do not offer that insight.
So before we start saying that the administration is prosecuting less white collar offenses, we need to determine how they are compiling the statistics and what is and is not being included as a white collar offense.
(esp) (w/ disclosure that she is a B.S. graduate of Syracuse U.- home of the Trac Reports).
Sunday, November 3, 2013
Friday, November 1, 2013
The three-lawyer Coral Gables criminal law firm of Hirschhorn & Bieber has joined the Orlando-centered multi-city law firm of Gray Robinson. See here. Their move from a small criminal law practice to a much larger firm reflects a trend of many of "the best and the brightest" of the criminal defense bar leaving small firm practices to join large firms, a trend about which I have mixed feelings. See here.
On the one hand, superb lawyers like Joel Hirschhorn and Brian Bieber, with significant criminal trial experience and demonstrated willingness to stand up to the government when appropriate, add expertise, energy and a degree of combativeness to the often too compliant white collar criminal defense bar.
On the other hand, the loss of two excellent lawyers from the ranks of the general criminal defense bar with its willingness and ability to represent the most unpopular and most in need of able, experienced and vigorous counsel saddens me. Although Brian Bieber vowed that his group will retain its "boutique" identity, I fear that there will be pressures from others in their new firm not to handle certain cases for image and economic reasons. I hope, and I would not be surprised, that these two dedicated lawyers resist.
I wish them luck.
Business Week has the story here. Former BDO Seidman CEO Denis Field, represented by Sharon McCarthy of Kostelanetz & Fink LLP, was acquitted on all seven counts he faced. Paul Daugerdas, former head of now-defunct Jenkens & Gilchrist's Chicago office, was convicted on seven of 16 counts. The original convictions against Daugerdas and Field were thrown out by SDNY Judge William Pauley after a juror's misconduct was brought to light.
Thursday, October 31, 2013
The opinion is in United States v. Kyle. Although not a white collar prosecution, the ruling applies to all federal criminal cases in the Ninth Circuit. The Ninth Circuit noted that when a district court goes beyond giving the reasons for its rejection of a plea agreement and starts discussing hypothetical agreements that it might accept, "it crosses over the line establsihed by Rule 11."
Wednesday, October 30, 2013
In United States v. Miller, the Sixth Circuit today reversed three of four counts of conviction in a mortgage fraud prosecution. The court held that appellant Miller did not unlawfully "use" a means of identification within the meaning of 18 U.S.C. Section 1028A, the Aggravated Identity Theft statute, when he falsely stated that two named individuals had given him authority to act on behalf of an LLC. Since Miller did not steal their identity, pass himself off as them, or purport to be acting on their behalf as individuals, he is not guilty of violating the statute. The government had argued for a broader construction, but the Sixth Circuit applied the rule of lenity.
The court also reversed a Section 1014 count, because it was bottomed on Miller's signing of a loan renewal and modification agreement. Since the modification and renewal agreement did not repeat the false statement contained in the original loan papers, Miller could not be guilty under Section 1014. The court indicated that Miller had engaged in fraud and false pretenses during the loan modification process. But this was not enough to support a Section 1014 conviction, which requires a knowingly false statement.