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.