Thursday, June 21, 2007

"It's Not Illegal If You Don’t Get Caught"

There's an old saying in the NFL that "it's not holding if you don't get caught."  A variation of that adage came up in the prosecution of former Brocade CEO Gregory Reyes for options backdating when a former human resources employee testified that Reyes once stated, "It's not illegal if you don’t get caught."  While the witness could not recall the circumstances of the comment, she did say that the only conversations she had with Reyes concerned the dating of options grants, leading to the inference -- at least the government will argue -- that he knew the backdating was illegal.  A key component of the defense case is the lack of intent to defraud by Reyes, and that the accounting rules on options were so unclear he did not understand them.  According to a blog entry on the CAL LAW Legal Pad (here), U.S. District Judge Charles Breyer rejected a defense argument to prevent the witness from recounting the statement because prosecutors had not previously disclosed it, and asked that the examination be curtailed.  Judge Breyer stated, "I’m not going to rein in anything. I’m not the ringleader of a three-ring circus.” 

Judge Breyer's decision highlights an important point about the scope of discovery in a federal criminal case.  The prosecutors said they first learned of the witness' recollection about Reyes' statement during pre-trial preparation, and there was no written record of the interview because it was only with the prosecutor and not with an FBI agent, who would likely write up notes of the interview in a Form 302 report.  The government's Brady obligation is to turn over exculpatory evidence, and Reyes' purported statement is certainly not in that category, being rather inculpatory.  Under the Jencks Act, now in Rule 26.2, the government must turn over a witness statement, but Rule 26.2(f) defines a "statement" to include only a written statement, a substantially verbatim recital or recording of an oral statement, or a statement in the grand jury.  While a defendant might wish to know the inculpatory evidence the government intends to introduce, the disclosure obligation in Rule 16 is not so broad that all relevant evidence must be disclosed before trial. Because the witness' recollection did not fall within any of the categories triggering one of the clear disclsoure obligations, the government was within its rights not to disclose it to the defense, unless a court were to find that it violated the defendant's due process right due to unfair surprise.  The Legal Pad entry notes that Reyes' defense counsel asserted that the Ninth Circuit has shown a tendency to reverse convictions in similar situations, to which Judge Breyer replied, "That comes with the territory.”

The witness' testimony is, of course, highly prejudicial to the defense, but that's hardly a reason to keep out a statement made by the defendant who contests the allegation that he acted with an intent to defraud.  Moreover, the statement could be a basis for the court to give an "ostrich instruction" so that the jury can infer the requisite intent based on Reyes being aware of the problems with options backdating but turning a blind eye to them.  As discussed in an earlier post (here) about the instruction in the trial of Lord Conrad Black, the deliberate ignorance instruction can be very helpful to the prosecution by effectively lowering the intent element for the offense. 

Another interesting question is whether this testimony will be enough to cause Reyes to testify.  Even though the context of the statement is not clear, such an assertion is not the type of thing a defense lawyer wants hanging out there unchallenged because the government will make it a featured part of its closing argument.  If Reyes intends to dispute having ever said anything about illegal conduct, or claims that it was just a joke or unrelated to the backdating of options, he would most likely need to testify.  This could be one of those uncommon "he said-she said" situations in a white collar crime case in which the defense cannot dispute the statement without calling the defendant to testify.  That decision, of course, is fraught with any number of risks, but the witness' testimony about what she recalls Reyes said increases the pressure on him to take the witness stand.  (ph)

                                                         

UPDATE:  Reyes' lawyers apparently missed the witness' statement in notes the government turned over prior to trial, and so the defense dropped the claim that the government violated its disclosure obligation or that the testimony constituted unfair surprise.  That left the defense to argue that the testimony was inadmissible because it was vague regarding the context and prejudicial, which Judge Breyer rejected.  An appellate issue just got a lot less important if Reyes is convicted.  A story in The Recorder (here) discusses the testimony. (ph)

http://lawprofessors.typepad.com/whitecollarcrime_blog/2007/06/its-not-illegal.html

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