Tuesday, April 15, 2014
Last week, as reported in the New York Times (see here), the House of Representatives Oversight and Government Reform Committee voted to hold in contempt Lois Lerner, the Internal Revenue Service official who after making a brief statement declaring her innocence invoked her Fifth Amendment privilege and refused to answer questions from the Committee members. The Committee action will be referred to the entire House of Representatives for its consideration. If the House votes to hold Ms. Lerner in contempt, it would refer the matter to the United States Attorney for the District of Columbia, Ronald C. Machen, Jr., a Democrat who in my view is unlikely to pursue this politically-charged case.
The Committee vote was based on party lines, with the Republican majority voting against Ms. Lerner. A vote of the entire Congress, if it occurs, will most likely similarly be so based. Indeed, Representatives on the Committee took exaggerated and hyperbolic positions. Republican John J. Duncan claimed if Ms. Lerner's position were accepted, "every defendant . . . would testify and plead the Fifth so they couldn't be cross-examined . . . ." Democrat Elijah Cummings said if he were to vote to hold Ms. Lerner in contempt, it would "place him on the same page of the history books as Senator Joseph McCarthy."
As I said before (see here), I believe that Ms. Lerner's general declaration of innocence, before she invoked the Fifth, does not constitute a waiver, but I do not believe the issue is crystal-clear. Lawyers who represent witnesses before legislative committees (or in other matters) should be cautious about taking such positions.
Wednesday, March 12, 2014
The big news on the white-collar crime front in New York last week was the long-expected indictment of persons involved in the defuct law firm of Dewey & LeBoeuf. Charged were its chairman, executive director and chief financial officer, as well as a low-level client relations manager. Seven not-yet-identified others have pleaded guilty. Only two of the eleven criminally charged appear to be lawyers, and the cases against them may be the weakest. See James B. Stewart, "In Dewey's Wreckage, Indictments," New Yorker Blog, March 7, 2014, see here.
The charges essentially are that the defendants cooked the books in order to keep the failing firm alive with institutional financing. More specifically, it is charged, they falsified financial records submitted to banks and investors to demonstrate that the firm had complied with existing loan covenants and were worthy of further investor loans, and made fraudulent accounting entries to support their false representations. The top charge is grand larceny in the first degree, theft in excess of $1 million, a Class B felony with a potential sentence of 25 years, and a minimum sentence of one to three years.
In many ways, as the facts are alleged, this is a not untypical case, where businesspeople -- ordinarily law-abiding -- fall into financial situations where they desperately need to borrow money to keep their businesses going and falsify income, receivables, expenses and the like in order to get it. Such chicanery is far from rare and is often undetected or overlooked, particularly if the borrower improves its financial position and pays off all or a substantial part of the amount owed. And, if detected, such wrongdoing is often made public only in private civil litigation and without criminal prosecution. Generally, the borrowers have an expectation and/or hope, often unreasonable, that they will ultimately be able to pay off the loan and thus arguably lack the intent to permanently deprive (an element of larceny) the lenders.
There are several interesting aspects of the case. It is being brought by a state prosecutor -- the District Attorney of New York County -- rather than the United States Attorney for the Southern District of New York, the predominant prosecutor of white-collar crime in Manhattan. The District Attorney, like most state and local prosecutors forced to deal with every police street arrest, whether for murder or disorderly conduct, and lacking sufficient available personnel and resources to conduct many complicated and lengthy white-collar investigations, generally has a far less significant presence in white-collar prosecution than his federal counterpart.
More unusual, in this case, much of the legwork for the state prosecution apparently was done by the FBI (and not a state or city police agency). Almost always, when the FBI does the investigative work on a white-collar case (or even when the work is done jointly by federal and state investigators), that case is prosecuted by federal authorities. I do not know why this case is an exception. Perhaps the United States Attorney declined the case because he questioned its strength or jurisdictional basis, or, even less likely, felt his resources were better used on other goals. My best guess is that the case was prosecuted by the District Attorney because he jumped on it first, and/or was first provided evidence of alleged wrongdoing by some of the firm's unhappy partners. In any case, if this joint effort between federal investigators and New York State prosecutors is a harbinger of further cooperative efforts, it will be a significant step forward for white-collar prosecution in New York City, the financial (and probably white-collar crime) capital of the country. Far too often, federal authorities let significant matters brought to their attention go by the wayside because of jurisdictional problems or federal lack of interest rather than turn them over to state prosecutors. And, far too often, state prosecutors let significant matters go by the wayside because of their lack of resources and expertise rather than turn them over to federal prosecutors.
The New York County District Attorney, Cyrus R. Vance, Jr., in a press statement, claimed that the victims were not just the lending financial institutions but also the thousands of people who lost their jobs when the firm failed. I strongly disagree. The firm's employees actually were for the most part beneficiaries of the loan proceeds, and therefore if the allegations are true, unknowing beneficiaries of the criminality that enabled that borrowing, which kept the firm alive and staved off bankruptcy for a time. Those who lost their jobs when the firm ultimately failed and went into bankruptcy most likely kept those jobs much longer than they would have had the law firm not been able to secure the funding. Dewey & LeBoeuf failed not because of criminal acts, but, if criminal acts did occur, in spite of them.
The real victims in this case, the only direct victims, are the banks and other financial institutions which loaned the firm unrecovered money. Sometimes, in cases of this kind, the bankers are negligent in their due diligence and occasionally actually compliant with the borrowers in order to achieve short-term profits for their institutions and immediate benefits for themselves in bonuses and salary increases. I have no knowledge that either negligence or complicity happened here.
Tuesday, February 11, 2014
To the surprise of nobody I know, Mathew Martoma, the former SAC Capital portfolio manager, was convicted of insider trading last Thursday by a Southern District of New York jury. The evidence at trial was very strong. It demonstrated that Martoma had befriended two doctors advising two drug companies on the trial of an experimental drug, received confidential information from them about the disappointing result of the drug trial prior to the public announcement, and then had a 20-minute telephone conversation with Steven A. Cohen, the SAC chair, a day or so before Cohen ordered that SAC's positions in these companies be sold off. The purported monetary benefit to SAC, in gains and avoidance of loss, of the trades resulting from the inside information is about $275 million, suggesting that Martoma receive a sentence of over 15 years under the primarily amount-driven Sentencing Guidelines (although I expect the actual sentence will be considerably less).
Cohen is white-collar Public Enemy No. 1 to the Department of Justice, at least in its most productive white-collar office, the U.S. Attorney's Office for the Southern District. That office has already brought monumental parallel criminal and civil cases against SAC, receiving a settlement of $1.8 billion, about a fifth of Cohen's reported personal net worth, but it has apparently not garnered sufficient evidence against Cohen to give it confidence that an indictment will lead to his conviction. It had granted a total "walk" -- a non-prosecution agreement -- to the two doctors whose testimony it felt it needed to convict Martoma, unusually lenient concessions by an office that almost always requires substantial (and often insubstantial) white-collar wrongdoers seeking a cooperation deal to plead to a felony. As an FBI agent told one of the doctor/co-conspirators, the doctors and Martoma were "grains of sand;" the government was after Cohen.
In an article in the New York Times last Friday, James B. Stewart, an excellent writer whose analyses I almost always agree with, asked a question many lawyers, including myself, have asked: why didn't Martoma cooperate with the government and give up Cohen in exchange for leniency? Mr. Stewart's answer was essentially that Martoma was unmarketable to the government because he would have been destroyed on cross-examination by revelation of his years-ago doctoring his Harvard Law School grades to attempt to secure a federal judicial clerkship and covering up that falsification by other document tampering and lying. Mr. Stewart quotes one lawyer as saying Martoma would be made "mincemeat" after defense cross-examination, another as saying he would be "toast," and a third as saying that without solid corroborating evidence, "his testimony would be of little use." See here.
I strongly disagree with Mr. Stewart and his three sources. The prosecution, I believe, would have welcomed Mr. Martoma to the government team in a New York minute -- assuming Martoma would have been able to provide believable testimony that Mr. Cohen was made aware of the inside information in that 20-minute conversation. When one is really hungry -- and the Department of Justice is really hungry for Steven A. Cohen -- one will eat the only food available, even if it's "mincemeat" and "toast." And there is certainly no moral question here; the government gave Sammy "the Bull" Gravano, a multiple murderer, a virtual pass to induce him to testify against John Gotti. Given the seemingly irrefutable direct, circumstantial and background evidence (including, specifically, the phone call, the fact that Cohen ordered the trades and reaped the benefit, and generally, whatever evidence from the civil and criminal cases against SAC is admissible against Cohen), testimony by Martoma to the effect he told Cohen, even indirectly or unspecifically, about the information he received from the doctors would, I believe, have most likely led to Cohen's indictment.
I have no idea why Martoma did not choose to cooperate, if, as I believe, he had the opportunity. "Cooperation," as it is euphemistically called, would require from Martoma a plea of guilty and, very likely in view of the amount of money involved, a not insubstantial prison term (although many years less than he will likely receive after his conviction by trial). Perhaps Martoma, who put on a spirited if unconvincing defense after being caught altering his law school transcript, is just a fighter who does not easily surrender or, some would say, "face reality," even if the result of such surrender would be a comparatively short jail sentence. (In a way, that choice is refreshing, reminding me of the days defense lawyers defended more than pleaded and/or cooperated.) Perhaps Martoma felt cooperation, a condition of which is generally full admission of all prior crimes and bad acts, would reveal other wrongs and lead to financial losses by him and his family beyond those he faces in this case. Perhaps he felt loyalty -- which it has been demonstrated is a somewhat uncommon trait among those charged with insider trading -- to Cohen, who has reportedly paid his legal fees and treated him well financially (and perhaps Martoma hopes will continue to do so), or perhaps to others he would have to implicate.
And perhaps -- perhaps -- the truth is that in his conversation with Cohen, he did not tell Cohen either because of caution while talking on a telephone, a deliberate effort to conceal from Cohen direct inside information, or another reason, and he is honest enough not to fudge the truth to please the eager prosecutors, as some cooperators do. In such a case his truthful testimony would have been unhelpful to prosecutors bent on charging Cohen. That neutral testimony or information, if proffered, which the skeptical prosecutors would find difficult to believe, would at best get him ice in this very cold wintertime. Lastly, however unlikely, perhaps Martoma believed or still believes he is, or conceivably actually is, innocent.
In any case, it is not necessarily too late for Martoma to change his mind and get a benefit from cooperation. The government would, I believe, be willing to alter favorably its sentencing recommendation if Martoma provides information or testimony leading to or supporting the prosecution of Cohen. Indeed, I believe the government would ordinarily jump at a trade of evidence against Cohen for a recommendation of leniency (or less harshness), even if Martoma is now even less attractive as a witness than before he was convicted (although far more attractive than if he had testified as to his innocence). However, the five-year statute of limitations for the July 2008 criminal activity in this matter has apparently run, and an indictment for substantive insider trading against Cohen for these trades is very probably time-barred.
To be sure, federal prosecutors have attempted -- not always successfully (see United States v. Grimm; see here) -- imaginative solutions to statute of limitations problems. And, if the government can prove that Cohen had committed even a minor insider trading conspiratorial act within the past five years (and there are other potential cooperators, like recently-convicted SAC manager Michael Steinberg, out there), the broad conspiracy statutes might well allow Martoma's potential testimony, however dated, to support a far-ranging conspiracy charge (since the statute of limitations for conspiracy is satisfied by a single overt act within the statutory period). In such a case, Martoma may yet get some considerable benefit from cooperating, however belatedly it came about.
Wednesday, July 17, 2013
In a major blow to the government, the U.S. Court of Appeals for the Sixth Circuit has reversed the convictions of each and every defendant in U.S. v. Douglas C. Adams, et al. This was a high-profile RICO public corruption prosecution (premised on an alleged vote-buying scheme) brought by the U.S. Attorney's Office for the Eastern District of Kentucky. The Sixth Circuit vacated and remanded based on the following evidentiary errors: 1) admitting testimony from three cooperators regarding their drug-dealing activities with some of the defendants, which activities occurred 10 years prior to the alleged vote-buying scheme; 2) admitting an Inside Edition video that also discussed drug-dealing activities in the community; 3) admitting evidence of witness intimidation that could not be tied to any of the defendants; 4) the trial court's making of unprompted, substantive changes to the government's tape transcripts; 5) permitting use before the jury of the inaccurate transcripts that resulted from the unprompted changes; 6) admitting un-redacted, and highly prejudicial, versions of state election records which contained statements implicating the defendants in vote-buying schemes. This appears to be a case of government overkill in the presentation of its evidence, as the Sixth Circuit had no problem affirming the sufficiency of the evidence. The unanimous panel opinion was written by Judge Karen Nelson Moore. John Kline, Trevor Wells, and Jason Barclay argued the case for Appellants. With them on the various briefs were: Larry Mackey, Marty Pinales, Candace Crouse, Kent Westberry, Elizabeth Hughes, Jerry Gilbert, Robert Abell, Scott White, and Russ Baldani. Congratulations to all.
Monday, June 24, 2013
In what should be a surprise to no one, the Wall Street Journal editorial page today launched an attack on James Comey, President Obama's nominee to be the next FBI Director. The primary offenses? Comey's objection to the Bush Administration's illegal warrantless wiretapping and Comey's appointment of Patrick Fitzgerald as Special Counsel to investigate the Valerie Plame leak. The editorial is here. More commentary on this in the next few days.
Coming soon: Professor Podgor's analysis of the Second Circuit's opinion afffirming Raj Rajaratnam's conviction for insider trading violations.
Sunday, June 9, 2013
The wonderful John Wesley Hall concisely explains, at Welcome to the Fourth Amendment.com, the decades-long erosion of our Fourth Amednment rights, at the hands of the Supreme Court and a succession of do-nothing Congresses. No surprises here, as Hall laments:
"What is Congress doing? Essentially nothing. Proposing a law with great fanfare is meaningless if it goes nowhere. I wrote my Senators about email privacy, so I figure they don’t care since they never wrote back. So, I haven’t bothered to write to them about Sen. Paul’s bills. Congress is too mired in gamesmanship to do their damned jobs of actually legislating in the public interest."
"Now, what are we going to do about it? Complain, but sit on or wring our hands and do nothing?"
Hat Tip to NACDL's tireless weekend warrior, Ivan J. Dominguez, for sending this out. Similar points were made on Friday by the inimitable Scott Greenfield at Simple Justice in Seize It All And Trust the Government To Sort IT Out:
"Yet all the hand-wringing interest today will fade and we will elect the same men and women to power to continue to re-enact the same laws that allow the government to do such things to its own people, and presidents who believe so strongly in their own exceptionalism that they can be trusted with our personal data even though the other team could never be."
Cheery thoughts for a Sunday afternoon.
Wednesday, June 5, 2013
FBI Special Agent Reginald Reyes' affidavit supporting DOJ's search warrant application for Fox News Reporter James Rosen's Google email account was ordered unsealed in November 2011. But it wasn't actually unsealed by the DC U.S. District Court's staff until late May of 2013. In other words, the affidavit was only unsealed several days after AG Holder testified that, "[w]ith regard to potential prosecution of the press for the disclosure of material, that is not something that I have ever been involved in, heard of, or would think would be a wise policy." Once the affidavit and search warrant application were unsealed, it became clear that Holder's testimony was inacurrate, as he had personally authorized the search warrant application. See here for yesterday's post on this issue.
DC Chief Judge Royce Lamberth is not happy about his staff's failure to unseal the affidavit and related documents. Here is Chief Judge Royce Lamberth's 5-23-2013 Order expressing his unhappiness.
Tuesday, June 4, 2013
“Well, I would say this. With regard to potential prosecution of the press for the disclosure of material, that is not something that I have ever been involved in, heard of, or would think would be a wise policy.” Attorney General Eric Holder testifying under oath before the House Judiciary Committee on May 15, 2013.
"For the reasons set forth below, I believe there is probable cause to conclude that the contents of the wire and electronic communications pertaining to SUBJECT ACCOUNT, are evidence, fruits and instrumentalities of criminal violations of 18 U.S.C. [Section] 793 (Unauthorized Disclosure of National Defense Information), and that there is probable cause to believe that the Reporter has committed or is committing a violation of section 793(d), as an aider and abettor and/or co-conspirator to which the materials relate." FBI Special Agent Reginald B. Reyes' May 28, 2010, Affidavit in Support of Search Warrant Application for Fox News Chief Washington Correspondent James Rosen's Google email account. The warrant was authorized by Attorney General Holder.
Note than in addition to identifying "the Reporter" as a probable aider, abettor and/or criminal co-conspirator, the affidavit explains that the Department of Justice is not bound by the Privacy Protection Act, otherwise prohibiting warrants for First Amendment work product, precisely because "the Reporter" was "suspected of committing the crime [18 U.S.C. Section 793(d)] under investigation."
There is no doubt that AG Holder gave false testimony to House Members under oath. He is an idiot if he did so intentionally, and he isn't an idiot. What should Holder have done to fix this mess? Corrected the record, of course. In the immortal words of Richard Nixon, "that would have been the easy thing to do."
Holder should have said: "Dear Representatives Goodlatte and Sensenbrenner. I screwed up. My testimony to you is now inoperative. I forgot that I authorized this affidavit, which clearly identifies a 'Reporter' as somebody under investigation for a crime. I did not intentionally try to deceive you. My statement was careless and overbroad. Please accept my apologies."
But the Attorney General apparently cannot not bring himself to do anything as straightforward as that. Instead he spends days sending out spinmeisters, most recently, and regrettably, Deputy Assistant AG Peter Kadzik, as reported here by Sari Horwitz in today's Washington Post.
How sad. Can you imagine anything like this happending under Attorney General Griffin Bell? Bell, a genuine protector of our civil liberties, most likely would have nixed the supboena in the first place. But if Bell had authorized it, he never would have shied away from the ensuing controversy or hidden behind his DOJ underlings.
Mr. Holder has received his fair share of undeserved, demagogic criticism from the kooky right. He deserves what he's getting now.
Here is a copy of the Reyes Affidavit.
Friday, May 24, 2013
Most witnesses with potential criminal exposure who are called to testify before Congressional hearings take the stand, with their lawyers behind them, and repeat the incantation "I respectfully decline to answer the question based on my Fifth Amendment privilege against self-incrimination," or some variation. Occasionally, a witness insists on testifying in spite of a danger that his answers might incriminate him or, if in conflict with other witnesses' statements or other evidence, might lead to a perjury or obstruction prosecution. One notable example is Roger Clemens, who chose to testify and, although ultimately acquitted, was indicted and lost millions of dollars in legal fees and endorsements.
Lois Lerner, an embattled Internal Revenue Service official called to testify before a Congressional hearing earlier this week, tried to have her cake and eat it too. She made a brief opening statement declaring her innocence ("I have not done anything wrong. I have not broken any laws. I have not violated any I.R.S. rules and regulations, and I have not provided false information to this or any other Congressional committee."). She then invoked her constitutional right not to testify. Committee Chair Daryl Issa (R-Calif.) and other Congressmen claimed that, by her opening declaration, she had waived her privilege and therefore was required to answer the Committee's questions.
Some lawyers have criticized Ms. Lerner's counsel, William Taylor III, one of the most highly-respected criminal defense lawyers in the nation, for allowing Ms. Lerner to make an opening statement, claiming that at the very least that she placed herself at risk of waiving her constitutional privilege against self-incrimination. See here. Although the area of waiver of privilege is indeed murky, with cases going in different directions, I believe Ms. Lerner did not waive her right to silence by her unspecific denials. As Miranda v. Arizona itself says, "If the individual indicates in any manner, at any time prior to or during questioning, that he wishes to remain silent, the interrogation must cease." 384 U.S. 436, 473-4, fn. 44.
Nonetheless, courts sometimes bend over backwards to "punish" what appears to them as gamesmanship. Many years ago, a New York City Congressman, Mario Biaggi, in response to a "leak" disclosing he had invoked his privilege in the grand jury and refused to answer questions, declared publicly that he had cooperated fully and answered all the jury's questions -- a statement which was far from true -- and that he had instructed his attorneys to seek release of his testimony to prove it. His attorneys moved for disclosure of testimony, no doubt expecting the motion to be denied. (The United States Attorney also so moved.) The district court, however, as later affirmed by the Court of Appeals, held that Biaggi had waived the privilege and ordered the release of his entire transcript. In re Biaggi, 478 F.2d 489 (2d Cir. 1973).
Even though I believe that ultimately it will not be determined (or probably even litigated) that Ms. Lerner waived her privilege against self-incrimination, I wonder whether her brief declaration of innocence -- by itself unlikely to persuade anyone -- was worth the risk, however slight. My guess -- pure guess -- is that the decision to allow her to make her brief opening statement was a compromise made between a careful lawyer and a client, like many I have represented, who adamantly desired to testify. Of course, professional discretion would prevent Mr. Taylor from shifting any blame.
Tuesday, May 14, 2013
Prosecutors who have committed Brady violations, even those which have been later demonstrated to have resulted in wrongful convictions and lengthy terms of imprisonment for persons later proven innocent, are rarely prosecuted. Courts tend to find Brady violations inconsequential, prosecutor's offices generally defend or at the least refuse to acknowledge them, disciplinary committees overlook them, and defense lawyers, out of timidity and self-interest, rarely press for sanctions. One notable exception to this general disregard by institutions and the bar is DOJ's commendable effort, at the moment thwarted by a questionable administrative law decision, to sanction prosecutors in the Senator Ted Stevens trial (see here and here).
The State of Texas, whose criminal justice system is often disparaged by commentators and defense lawyers, recently took a giant step in holding prosecutors sanctionable for egregious Brady violations. A Texas judge, acting as a court of inquiry, under Texas law, after a hearing ordered the arrest of a current Texas state court judge, Ken Anderson, for contempt and withholding evidence from the court and defense attorneys when Anderson was a District Attorney prosecuting Michael Morton, who was recently demonstrated to be actually innocent for the murder of his wife for which he served 25 years of a life sentence. See here.
The inquiry judge, District Judge Louis Sturns, found probable cause to believe that Anderson had concealed two crucial pieces of evidence: a statement by Morton's three-year old son that Morton was not home at the time of the crime and a police report which revealed that an unknown suspicious man had been seen on several occasions stalking the Morton house.
For denying to the trial judge that there was exculpatory evidence and for failing to provide a full copy of a police report demanded by the judge, Anderson was charged with tampering with evidence, tampering with a government document, and contempt. The most serious charge, evidence tampering, carries a maximum prison term of ten years, far short of the 25 years Morton served.
Criminal prosecution of prosecutors for Brady violations has been to my knowledge totally or almost totally nonexistent. Thirty-five years ago I drafted a proposed New York State statute criminalizing intentional and knowing Brady violations. As expected, the proposal went nowhere. The statute, as I wrote it, had such strict scienter requirements that the crime was virtually unprovable. It was written more to stress to prosecutors the seriousness of such misconduct than to lead to actual prosecutions. The Anderson prosecution, if it occurs, may fill that function.
Monday, April 22, 2013
The government decision to delay Miranda warnings, and also the first appearance before a judge and the assignment of counsel, for Dzhokhar Tsarnaev, the surviving alleged Boston Marathon bomber, was a tactical one, no doubt based largely on an evaluation that any admission Tsarnaev makes is unnecessary to a government case (eyewitnesses, an admission, videotapes, possession of explosives, flight, etc.) which appears to be overwhelming.
The broad "public safety emergency exception" which the government asserts is a questionable Department of Justice attempt to expand the narrow exception announced in New York v. Quarles, 467 U.S. 649 (1984). The government's aggressive stance is based in part on a belief that Miranda does not prescribe a procedural requirement for police questioning, but is only a prerequisite for the admissibility at trial of statements made by a defendant. Under such reasoning, government agents are free to violate the dictates of Miranda (and perhaps other constitutional rights) with no harm to their case except a return to the status quo ante.
Aggressive law enforcement tactics against criminal suspects accused of particular heinous crimes, such as terrorism, murder, kidnapping and large-scale drug dealing, gradually work their way into the general law enforcement toolbox. Tactics used against drug dealers and organized crime figures, such as extensive electronic surveillance, undercover agents, forfeiture of assets and disallowance of attorneys' fees, and exceedingly high bail requests, for instance, are no longer uncommon in white collar cases.
I wonder whether the "public safety emergency exception" is so far off. If it is acceptable under this exception to allow the government to disregard Miranda and Federal Rule of Criminal Procedure 5(a)(1)(A) (requiring agents to bring one arrested before a court "without necessary delay") in order ostensibly to prevent future terrorist crimes, will it also become acceptable to detain for 48 hours and question without Miranda warnings, for instance, those who have provided inside information about unknown persons to whom they might have provided such information in order to deter imminent or future insider trading or those who have hacked computers about accomplices or others who might commit imminent or future computer crimes?
Thursday, March 7, 2013
Attorney General Eric Holder yesterday defended the Department of Justice's treatment of Aaron Swartz, the 26 year-old internet activist who committed suicide three months before his scheduled trial in federal court in Boston. Specifically, Holder, in response to questioning by Sen. John Cornyn, a Texas Republican, defended the prosecution by citing the plea offer, stating, "There was never an intention for him to go to jail for longer than a 3-, 4- potentially 5-month range . . . . Those, those offers were rejected."
Holder's response troubles me in at least two regards. First is his implicit belief that a five-month jail sentence for Swartz was lenient. Swartz' alleged crimes were clearly based on a heartfelt belief that the public was entitled to free access to knowledge, specifically to academic journals. He would receive no personal benefit for his actions. Perhaps in these days, where sentences of years in double digits are commonplace, a sentence of five months seems to Holder like a trip to Disneyland, but five months in jail for a fragile young man acting out of humanistic belief and causing only comparatively light physical damage does not seem lenient to me. Apparently, Swartz did not see it as light.
Second is Holder's further implicit assumption that government decency is satisfied by a reasonable plea offer and available only to those who plead guilty. Swartz was indicted originally for crimes theoretically punishable by up to 35 years in prison. Later, a superseding indictment which ratcheted the potential sentence up to 50 years was filed. Had Swartz exercised his constitutional right to go to trial and been convicted, I would have been shocked if the government would have sought a sentence of five months or less. Rather, it undoubtedly would have sought a long sentence, most likely in the sentencing guideline range of approximately seven years.
I do not condemn the government for prosecuting Swartz. Perhaps prosecuting him was cruel, but prosecutions are often cruel to defendants. Despite his noble intentions, Swartz arguably violated the law, and I do not believe a victim should control the decision to prosecute, one way or the other. I do not, however, believe that Swartz' purported crimes deserved the full-blown zealous prosecution they received. A prosecutor in the appropriate case should charge less than the most serious crimes available and not always exercise her power to the "full extent of the law." Prosecutorial decency, or prosecution discretion, should not be confined only to plea offers.
Monday, January 28, 2013
Casey Anthony, who was acquitted of murdering her daughter Caylee Marie in 2011, has filed for bankruptcy in federal bankruptcy court in Florida. She has listed approximate assets of $1,100 and debts of $800,000, including $500,000 due Jose Baez, one of her defense attorneys. See here. I was pleased to see no debt listed for my colleague and friend Cheney Mason, who as Baez' co-counsel, added gravitas, savvy and experience to Ms. Anthony's defense team.
It is not surprising for a criminal defense lawyer not to be paid a large part of the legal fees owed to her. I venture that the average criminal defense lawyer is "beat" for some 10-20% of her fees. And I do not know how much Baez actually did receive in fees, but I am sure nothing like the fees many white-collar lawyers and firms often receive for representation in criminal matters of institutions or individuals, even those who never get close to being indicted. Of course, the Anthony case did provide Baez considerable fame.
Wednesday, January 2, 2013
It is not often that I praise the Department of Justice ("DOJ"), especially for bringing a prosecution. However, I commend the decision to prosecute -- really prosecute, and not just indict and offer a deferred prosecution -- a UBS subsidiary for its role in manipulating the benchmark LIBOR interest rate. See here.
To be sure, UBS was allowed to offer as the defendant in this case a Japanese subsidiary (UBS Securities Japan Co. Ltd.), for which a conviction would bring considerably less collateral damage than it would upon the parent company. Substituting others for prosecution, whether corporations or individuals, of course, is not a common benefit offered to criminal targets. Nonetheless, for DOJ, bringing a prosecution against a major financial institution, even a subsidiary, is a considerable and commendable step.
Generally, I believe that prosecutions should not be brought against large institutions because of a few rogue employees, unless at least one is a director or "a high managerial agent acting within the scope of his employment and in behalf of the corporation." New York Penal Law Section 20.20(2)(b). See also Model Penal Code Section 2.07. UBS, however, is a serial offender with a history (not alone among Swiss and other banks) as an eager accomplice of money launderers and tax evaders throughout the world. Although UBS' belated and commendable efforts to clean up its act and cooperate deserve credit, in this case DOJ apparently felt it did not make up for its past conduct enough to deserve non-prosecution, and appropriately broke its usual pattern of allowing major financial institutions to avoid criminal convictions.
As a practical matter, one may ask what the difference is between an indictment/deferred prosecution (as occurred in the case of the parent, UBS AG of Zurich) and indictment/conviction if both ultimate results carry huge financial penalties and other requirements, such as monitoring. Aside from the collateral consequences -- which can, as in the obvious case of Arthur Andersen, be fatal to a major financial institution (although I agree to an extent with Gabriel Markoff (see here) that such a fear is exaggerated) -- the conviction here has importance as a symbol, and perhaps also a deterrent in both the specific and general aspects.
Although the huge UBS fines will be borne by current UBS shareholders (not necessarily the same stockholders who benefited from the LIBOR bid-rigging), one would hope that UBS makes an effort to recoup the substantial financial gains through bonuses and other compensation geared to profits that those in leadership and supervisory roles made as a result of UBS' now-admitted criminality even if those leaders were uninvolved or unaware of the wrongdoing. I suspect that there will be no such serious effort, or at least little or no success if there is one.
Monday, December 17, 2012
You can debate all day whether the government should allow any financial institution to get too big to fail. You can also debate whether such an institution, if it is too big to fail, should be too big to prosecute, even when it engages in blatantly criminal conduct over a lengthy period of time. However, you cannot seriously debate whether to prosecute senior bank officials of an international mega-bank who knowingly directed the criminal enterprise in question. Corporations only act through agents. Those agents are human beings.
We are not talking about technical matters here. This is not a question of whether each party to a complex transaction understood the fine print which revealed, or obscured, that an investment bank was betting against the deal it was pushing. According to the published reports and press statements, obvious narcotics-related money laundering was repeatedly facilitated by the bank, despite multiple regulatory warnings. The sources of funds connected to outlaw regimes were intentionally and repeatedly hidden. If this stuff happened, people did it. And they were no doubt high-ranking people.
No credible person will contend that the prosecution of corrupt bank officers can ever endanger the financial community. No matter how important the institution or high-ranking the officer, employees are fungible. The global financial impact of prosecuting these officers, no matter how important they think they are, will always be negligible.
Assistant AG Lanny Breuer said at his press conference that individual prosecutions were not being ruled out. (Similar statements were made at the time of the robo-signing settlement press conference, and we all know what an avalanche of individual DOJ prosecutions followed in the wake of that!) But other comments Breuer made, discussing how hard it supposedly is to prosecute the individuals involved, appear to be window-dressing rehearsals for future DOJ declinations.
Reporters should not let this issue slide into oblivion. The DOJ does not typically comment upon pending investigations of individuals. (Of course this does not stop some FBI and IRS agents from telling all of a target's friends that he is being criminally investigated, thereby ruining the target's life.) Here is an occasion where the policy should be ignored, particularly since the DOJ can comment on a pending investigation without revealing the names of the subjects and targets.
The question every self-respecting reporter should be asking AG Holder and Assistant AG Breuer is not whether individual indictments have been ruled in or out. The questions to be asked at every opportunity in the coming weeks and months are:
"What is the status of the investigation?"
"Is there really any investigation?"
"Are you treating this investigation like you treat the investigation of other individuals suspected of facilitating murder and drug crimes?"
Here is an account by Rolling Stone's Matt Taibbi of his appearance on Eliot Spitzer's Viewpoint program discussing the HSBC settlement. Taibbi's account contains a link to the Spitzer interview. Hat tip to Jack Darby of Austin's Krimelabb. com for alerting me to this posting. Taibbi also has an interesting opinion piece about the HSBC settlement on his Rolling Stone TAIBBLOG.
Tuesday, July 24, 2012
My learned and astute co-editor, Solomon Wisenberg, bridled at the thought of a criminal investigation of the Libor bank scandal (see here), which he believes will be a waste of time, and of the JP Morgan Chase trading loss (see here), which he believes lacks evidence of criminality. While I do not know enough about these matters to dispute his reasons, I nonetheless strongly believe a criminal investigation is warranted in both instances.
Financial manipulations which cost shareholders and customers of large institutions millions (or billions) of dollars require criminal investigation, and, if identifiable provable criminal wrongdoing is found, criminal prosecution. It has become clear that those institutions and their employees are incapable or unwilling to police themselves, and, as Mr. Wisenberg points out, the responsible regulatory agencies have often been asleep at the switch or even compliant.
That is not to say that every massive financial loss involves criminality or that weak or questionable criminal prosecutions should be brought to soothe the popular thirst for criminal punishment. It is not to say that genuine defenses, such as estoppel due to government approval or acquiescence, should not prevent prosecution. But for the huge financial institutions, even a penalty of almost a half billion dollars, as in the Barclays Bank "deferred prosecution" deal (effectively a "non-prosecution" deal), is merely a cost of doing business passed on to shareholders. And for many of the traders and manipulators, who always weigh risk but rarely morality, only the risk of a criminal prosecution (which for them involves potential prison sentences) will have any serious deterrent effect.
To be sure, criminal investigations, even without prosecutions, may deter innovation and creativity in financial vehicles and dealings (although I am not so sure that is a bad thing). Additionally, investigations themselves cause mental distress, potential loss of reputation, and considerable legal fees. Criminal investigations, therefore, should not be started without careful consideration by law enforcement or prosecutorial agencies. But massive losses of other people's money should almost always require an examination beyond a regulatory or civil one by our historically inept financial regulatory agencies.
Every death by other than natural causes, every fire of any proportion, and every serious automobile accident is reviewed by authorities for possible criminal prosecution. Is there any reason an unusual massive financial loss of other people's money should be exempt from scrutiny for possible criminality? I think not.
Tuesday, July 17, 2012
Joe Paterno was buried a second time last week -- partly by a report of former judge and FBI Director Louis Freeh and partly by accounts like that of the New York Times, which in a four-column lead story headlined "Abuse Scandal Inquiry Damns Paterno and Penn State," wrote "Mr. Freeh's investigation makes clear that it was Mr. Paterno . . . who persuaded the university president and others not to report Mr. Sandusky to the authorities . . . ." (emphasis added). See here. A reading of the report, however, shows that its conclusions as to Paterno are based on hearsay, innuendo and surmise. While a report such as the Freeh Report certainly need not be based on court-admissible testimony, if indeed the evidence referred to in the report constituted the sole basis for a criminal and/or civil charge against Paterno, the case undoubtedly would be thrown out and would not reach a jury.
The relevant evidence involving Paterno is as follows:
- In May 1998, with respect to an allegation that Sandusky had showered with an eleven year-old on the Penn State campus, Tim Curley, the Penn athletic director, notified his superiors that he had "touched base" with Paterno about the incident and days later sent to them an email "Anything new in this department? Coach [Paterno] is anxious to know where it stands."
- In February 2001, after he observed Sandusky sexually molesting a youth in a Penn State shower room, Mike McQueary, a graduate assistant, reported the incident to Paterno, who told him, "You did what you had to do. It is my job now to figure out what we want to do." The following day, a Sunday, Paterno reported the incident to Curley and Gary Schultz, a Penn State vice-president. Paterno waited a day or so not to "interfere with their weekend."
- Later in the month, Graham Spanier, the Penn State president, Schultz and Curley devised an action plan which included reporting the incident to the state welfare agency. A day or so later, Curley emailed Schultz and Spanier and said that he had changed his mind about the plan "after giving it more thought and talking it over with Joe [Paterno] yesterday," and now felt that they should instead tell Sandusky to seek professional help and not report him to the welfare authorities unless he did not cooperate.
The first item, the 1998 Curley email, merely demonstrates that Paterno showed an interest in what was happening with reference to the 1998 incident, which ultimately was reported to both the welfare department and the local prosecutor and resulted in no findings or charges. Paterno reportedly in 2011, after the incident involving Sandusky's 2001 conduct and the failure to report it to authorities raised public attention, denied that he was aware of the 1998 incident. In fact, Paterno's testimony in the grand jury in which he purportedly denied any such knowledge was in response to an imprecise, general and unfocused question, and his answer was accordingly unclear. Additionally, the reported statement denying any prior knowledge was by his "family" and not by him.
In any case, while a denial, if made directly by Paterno or even an authorized agent, might arguably be admissible in court as evidence of consciousness of guilt, such evidence is weak proof of guilt since even wholly blameless people often make false statements distancing themselves from wrongdoing.
The second item, Paterno's response to McQueary is by itself of little moment and says no more than that Paterno, having been apprised of the incident, would now have to figure out what he and the others will do. Of course, one can read into that facially bland statement a more sinister meaning -- that Paterno intended to tell McQueary to remain silent. Such a meaning, however, is supported only by surmise and suspicion. The report also states that Paterno waited a day before reporting the information to Curley and Schultz so as not to "interfere with their weekends." This one-day delay is not meaningful.
The third item, Curley's change of mind after "talking it over with Joe," might, not unreasonably, albeit with a considerable leap, be construed to indicate that Paterno suggested not reporting the incident to the authorities. However, it might also be that Curley changed his mind on his own after airing his thoughts with Paterno and deciding that the earlier plan was not preferable. It is, of course, also possible that whatever Curley wrote, his mention of discussions with Paterno (without any direct or indirect report of Paterno's own views) was an attempt by Curley to minimize or shift personal responsibility from himself. In any case, any probative value this email has as to Paterno's intent is also based on speculation.
Freeh himself seems to recognize that his conclusions are far from "clear." He mentions that Curley and Schultz contended that they acted "humanely" and sought "the best way to handle vague and troubling allegations," that Paterno had told a reporter he had "backed away and turned it over to . . . people I thought would have a little more expertise," and that Spanier had denied knowledge "Sandusky was engaged in any sexual abuse of children."
He then rejects these explanations and concludes, "Taking into account the available witness statements and evidence, the Special Investigative Counsel finds that is more reasonable to conclude that, in order to avoid the consequences of bad publicity, the most powerful leaders at the University -- Spanier, Schultz, Paterno and Curley -- repeatedly concealed critical facts relating to Sandusky's child abuse from the authorities, the University's Board of Trustees, the Penn State community, and the public at large" (emphasis added). During a press conference specifically focusing on Paterno's culpability, Freeh, seemingly inconsistently with the qualified "available witness statements and evidence" language of the report, appeared to exaggerate, "There's a whole bunch of evidence here." He continued, "And we're saying that the reasonable conclusion from that evidence is that [Paterno] was an integral part of this active decision to conceal" (emphasis added).
I tend to agree that Freeh's conclusion is the "more reasonable" hypothesis, but I do so based more on a visceral feeling and some understanding of Paterno's power and status at the university than an evidentiary basis. The "facts" demonstrating Paterno's "active" role in the cover-up are insubstantial and equivocal. The case against Paterno is, as a Scotch jury might say, "not proven." Perhaps we should require more substantial proof before we topple Paterno's statue -- figuratively and actually.
As I mentioned here last Wednesday:
"By ignoring material financial falsehoods, the regulators and examiners allow frauds to continue and decrease the likelihood of future accountability through the criminal process."
The New York Fed's Friday data dump reveals beyond question that some of its officials, including Timothy Geithner, were aware of intentionally misreported Libors by 2008 at the latest. Today's Wall Street Journal editorial lays out the damning transcripts.
What does this mean? For openers it means that DOJ's announcement of a criminal investigation is a joke. Regulators and government officials at the highest levels knew of the misrepresentation. By not immediately raising bloody hell and putting a stop to it they either sanctioned the conduct, rendering it non-criminal, or themselves became co-conspirators.
Do you really think DOJ is about to investigate Geithner or drag him into somebody else's criminal defense? Get real. These people can't even prosecute robo-signers.
Wednesday, July 11, 2012
The news that Barclays officials told the New York Fed in 2007 about potential problems with Libor highlights key differences between the regulatory mind and the prosecutorial mind. It also shows the difficulty in successfully prosecuting white collar fraud in the wake of regulatory incompetence.
When the typical federal prosecutor learns that a financial institution or corporation has lied, his instinct is to prove and charge a crime against the individuals responsible for the falsehood. Virtually any material lie in the context of publicly traded or federally insured entities constitutes a federal crime.
When a regulator learns that he has been lied to, the response is not necessarily the same. A famous example of this occurred during one of the SEC’s many examinations of Bernie Madoff’s shop. Madoff was caught flat out lying to SEC examiners. Did the scope of the examination expand? No. Were prosecutors immediately informed? No. Madoff was given a slap on the wrist. His massive Ponzi scheme continued for several years, claiming thousands of new victims.
While prosecuting S&L fraud twenty years ago, I was appalled to discover repeated instances in which the very fraud I was investigating had been contemporaneously revealed in some format to federal banking regulators and/or examiners who had often done nothing in response. This put putative defendants in the position of arguing that their frauds really weren’t frauds at all, because they had not deceived anyone. They argued that the regulators knew all about their conduct and failed to act, so: 1) it wasn’t deceptive conduct; and 2) they thought they had a green light going forward. Sometimes our targets and subjects were right. Sometimes they had only disclosed the tip of the iceberg.
By ignoring material financial falsehoods, the regulators and examiners allow frauds to continue and decrease the likelihood of future accountability through the criminal process.
But sophisticated fraudsters often reveal their conduct to regulators through a glass darkly. They are hoping that overworked regulators, with whom they are friendly, will miss, or misunderstand, the half-assed disclosures being made. The trick is to disclose just enough, but not too much. The typical regulator, unlike the typical prosecutor, does not distrust mankind or see a fraudster around every corner. The typical regulator has known the institution and executives he is currently monitoring for years. Often his ass has been kissed during that period in perfectly appropriate ways. He has been respected and deferred to. These intangibles, and his workload, may prevent him from noticing or following up on potential red flags.
We don’t have the full story yet on what the New York Fed knew about Barclay’s Libor problems, but the alacrity of the New York Fed’s acknowledgement that it knew something is striking. Timothy Geithner ran the New York Fed at the time, and we know that he has never met a wrist that couldn’t be slapped or a falsehood that couldn’t be excused.
The question remains—how can we bridge the regulatory/prosecutorial mental divide in order to punish real corporate fraud? Here is one answer—by training regulators and examiners to have zero tolerance for misleading or obstructionist behavior. The discovery of any lie or intentionally misleading conduct by a publicly traded or federally insured institution in any context should result in immediate fast-tracking to appropriate civil and/or criminal enforcement officials and/or federal prosecutorial authorities. This does not mean that prosecution should automatically or even usually ensue. It does mean that individuals who actually know something about fraud can take a critical and timely look at red flag behavior.
Once this process is in place, it may create a business climate in which elite corporate and financial institutions, and their officers, directors, and employees, will know that lying in any form will not be tolerated. The success of such a structure depends on the DOJ green-lighting prosecutors fearless enough to investigate and charge the flesh and blood financial elites who commit fraud. Almost every indication to date (outside of the insider trading context) is that current DOJ leadership is not up to the task.
Thursday, June 28, 2012
Today's New York Times was a virtual treasure trove of white collar crime stories. Among them were the following:
"South Carolina House Panel to Hear Ethics Complaints Against Governor" (see here) - South Carolina Governor Nikki Haley is facing a legislative hearing on whether she acted unethically during her term in the legislature when she was paid $110,000 annually as a fundraiser for a hospital whose legislative goals she advocated. Knowing nothing about South Carolina legislative ethics rules or criminal law, I do not venture to opine whether the Governor did anything improper. However, the broad facts here are strikingly close to a series of cases in New York in which a hospital CEO, a state senator and a state assemblyman all were convicted and went to prison. See here. It seems to me there should be a restriction against a legislator working for an entity, at least in a loosely-defined job such as consultant or fundraiser, and advocating or supporting favorable legislation for that entity.
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"Madoff's Brother Sets Plea Deal in Ponzi Case" (see here) - Peter B. Madoff, the brother of Bernard Madoff and the No. 2 man at Bernard L. Madoff Investment Securities, will reportedly plead guilty tomorrow to falsifying documents, lying to regulators and filing false tax returns. Peter Madoff reportedly served as the nominal compliance officer of his brother's wholly-owned securities firm and apparently exercised little or no oversight of the firm's operations, thereby providing his brother the freedom to steal billions.
Placing an investment firm's proprietor's brother as compliance officer is akin to asking the fox to guard the henhouse. It seems there should be, if there is not, a law, rule or regulation prohibiting a close relative, like a spouse, parent, child or sibling, from being the responsible compliance officer in a substantial investment firm owned entirely (as here) or largely by one's relative.
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"JP Morgan Trading Loss May Reach $9 Billion" (see here) - The amount of JP Morgan's trading losses from its London office could be as much as $9 billion -- four and one-half times as much as the company announced originally. While JP Morgan has in view of its considerable profits downplayed the magnitude of the loss, which its chief executive officer Jamie Dimon estimated in May could possibly be as much as $4 billion, obviously a $9 billion loss takes a much greater bite out of the firm's profitability, and conceivably may even raise some questions as to the firm's viability.
We now know, in the wake of bailouts and government support, that the federal government is both the de facto and de jure insurer of major banking institutions. One might ask whether a government insurer, like a private insurance company, should not be able to set specific rules to curb risky activities which might trigger the insurer's support. To update Congressman Barney Frank, there are now nine billion more reasons for increased governmental regulation.
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Like many other white collar defense lawyers, I am strongly against overcriminalization. On the other hand, I am equally strongly against underregulation. One of the principal reasons I favor greater and clearer rules and regulations is to give potential white-collar offenders reasonable notice of what is criminal and what is not, and not leave that decision, as frequently happens now, to a federal prosecutor's interpretation of the amorphous fraud laws.
A significant portion of the white-collar defendants I have represented in the last forty years, including many of those who were convicted, have actually believed that their actions were not criminal. In some cases, this was simply because they lacked a moral compass. In the financial world, where the primary, and often sole, goal is to take other people's money away from them, many people do not consider whether what they do is morally right or wrong, or are so amoral that they are incapable of making that distinction. Tighter regulation will at least tell them what is prohibited and what is not.