Wednesday, October 7, 2015
The Yates Memo is all the rage. DOJ is saber-rattling at various CLE events and bloggers are holding forth on what it actually means. But wanting isn't getting. The question remaining is how to make sure that the company coughs up, or an investigation reveals, wrongdoing that occurred at the highest levels.
Here are two modest reform proposals I offer free of charge to the DOJ and FBI, based on my own experience defending individuals and. far less often, companies under investigation.
1. Modify Standard DOJ Proffer Letters. Mid-level corporate employees often possess very damaging information about those higher up the food chain. But these same mid-level employees can themselves be the subjects or targets of DOJ. At some point the employees are given the opportunity to proffer in front of the lead prosecutor. But the standard DOJ Proffer Agreement is riddled with loopholes. Assume that the proffer session does not result in a plea or immunity agreement and the employee is indicted. The primary loophole allows the government to use the proffered statement against the client at trial if the statement is in any way inconsistent with the defense presented. That's not much protection, which is why most seasoned white collar attorneys will not let a client with exposure proffer in front of DOJ. Thus, DOJ loses valuable information. DOJ should offer true non-Kastigar immunity for the information revealed in its proffer sessions. Nothing is lost by doing this, but much can be gained.
2. Demand Independent Internal Investigations. The first question every prosecutor should ask the corporation's outside attorney who is conducting an internal investigation or tendering an internal investigation report to DOJ is, "What is your reporting chain?" If outside counsel is not reporting to the Audit Committee or some other independent entity within the corporation there is absolutely no assurance that culpable upper management will be identified. Management can edit the final report and its conclusions to protect top executives and throw lower level employees to the DOJ wolves. Meanwhile, employees are less likely to truthfully cooperate with the internal investigation if they think the boss is reviewing interview reports every night after drinks. I am astounded at how often internal investigations are reported right up the chain of command at small and large publicly traded companies. DOJ prosecutors can make it clear that the procedural independence of the internal investigation will affect how the company is treated.
Monday, September 28, 2015
Just over a year ago, Stewart Parnell, the former CEO of Peanut Corporation of America (PCA), was convicted by a jury in the Middle District of Georgia of charges related to a deadly nationwide salmonella outbreak. The matter came to the government’s attention in late 2008 when people began falling ill across the country. The illnesses were eventually linked back to PCA’s peanut processing plant in Georgia. As investigators continued to examine the salmonella outbreak, they discovered that the case involved potential criminal misconduct by Parnell and others who allegedly knew about the contamination, attempted to cover it up, and continued to ship contaminated and potentially contaminated product. In one now infamous email from 2007, after being informed that batch test results were not back from the lab, Parnell wrote, “Just ship it.” The outbreak killed nine people and injured thousands more. Eventually, Parnell and others were charged in a 76-count indictment that alleged mail and wire fraud, introducing adulterated and misbranded food into interstate commerce, conspiracy, and obstruction of justice. A jury found Parnell guilty of 67 of the 68 charges against him on September 19, 2014.
On Monday of last week, U.S. District Court Judge W. Louis Sands sentenced Parnell to 28 years in federal prison. One interesting aspect of the sentencing is that because authorities charged this case as a “white collar” matter involving fraud, rather than a homicide case, the most significant factor driving the guideline sentencing range was not the deaths of nine people, but the loss of over $100 million by the various food companies that were forced to recall their products because of Parnell’s actions.
According to last week’s DOJ press release:
Judge Sands took into account the fraud loss of PCA’s corporate victims when imposing today’s sentence. The court found that Stewart Parnell and Mary Wilkerson should be held accountable for more than $100 million but less than $200 million in losses, and Michael Parnell should be held accountable for more than $20 million but less than $50 million in losses. The court also found the government established evidence that Stewart Parnell and Mary Wilkerson should be accountable for harming more than 250 victims, and Michael Parnell should be accountable under federal sentencing guidelines for harming more than 50 victims. The court additionally found that the Parnells should have known that their actions presented a reckless risk of death or serious bodily injury.
Looking at the applicable 2009 Federal Sentencing Guidelines (the Guidelines in place at the time of the offense conduct), one finds the following point allocations:
- Base Offense – 7 points
- Loss of more than $100 million – 26 points
- 250 or more victims – 6 points
- Risk of death – 2 points
- TOTAL: 41 points
While there were likely other applicable sentencing points, such as obstruction of justice and role in the offense, the above point allocations alone result in 41 total points. This translates into a guideline sentencing range of 324-405 months (27.00 – 33.75 years) for a defendant with no criminal history. Steward received 336 months (28 years).
To highlight the importance of the loss amount in the Guideline’s calculation, note that if this case had involved nine deaths, but no financial loss to food companies, the sentencing range under section 2B1.1 of the Federal Sentencing Guidelines would have dropped to 18-24 months in the above calculation. Obviously, this would have been a grossly unreasonable sentence given the devastating harm caused by Parnell.
I don’t know why this case was charged as a fraud and not a homicide. Perhaps it was to send a clearer message about national food safety by bringing federal charges, including charges directly related to the introduction of adulterated and misbranded food into interstate commerce. One additional item to note, however, as we think about the way this case proceeded, is that federal white collar sentences in high loss cases can often dwarf sentences for other crimes, including homicide. Consider that involuntary manslaughter in Georgia carries a maximum sentence of ten years in prison. Georgia also has automatic parole eligibility for most inmates. By comparison, Parnell received 28 years in prison using federal fraud statutes and their applicable sentencing guidelines. Further, there is no parole in the federal system.
Federal fraud offenses are often attractive to prosecutors because they are broad enough to apply in all manner of situations and carry potentially significant sentences. It should be no surprise, therefore, that we continue to see these statutes used in many cases that do not fit neatly into our traditional definitions of “white collar crime.” For a further discussion of the way “white collar offenses” are used in a vast array of cases, many of which do not involve traditional white collar criminal activity, see “White Collar Crime”: Still Hazy After All These Years, 50 Georgia Law Review Issue 3 (Lead Article) (forthcoming).
Monday, September 14, 2015
I have just released a new article discussing the sentencing of Jordan Belfort, better known as the "Wolf of Wall Street." I use this case as a mechanism for considering how white collar sentencing has evolved from the 1980s until today. In particular, the article examines the growth in uncertainty and inconsistency in sentences received by major white collar offenders over this period of time and considers some of the reasons for this trend. The article also examines the impact of recent amendments adopted by the U.S. Sentencing Commission on white collar sentences.
Lucian E. Dervan, Sentencing the Wolf of Wall Street: From Leniency to Uncertainty, 61 Wayne Law Review -- (2015).
This Symposium Article, based on a presentation given by Professor Dervan at the 2014 Wayne Law Review Symposium entitled "Sentencing White Collar Defendants: How Much is Enough," examines the Jordan Belfort (“Wolf of Wall Street”) prosecution as a vehicle for analyzing sentencing in major white-collar criminal cases from the 1980s until today. In Part II, the Article examines the Belfort case and his relatively lenient prison sentence for engaging in a major fraud. This section goes on to examine additional cases from the 1980s, 1990s, and 2000s to consider the results of reforms aimed at “getting tough” on white-collar offenders. In concluding this initial examination, the Article discusses three observed trends. First, today, as might be expected, it appears there are much longer sentences for major white-collar offenders as compared to the 1980s and 1990s. Second, today, there also appears to be greater uncertainty and inconsistency regarding the sentences received by major white-collar offenders when compared with sentences from the 1980s and 1990s. Third, there appear to have been much smaller sentencing increases for less significant and more common white-collar offenders over this same period of time. In Part III, the Article examines some of the possible reasons for these observed trends, including amendments to the Federal Sentencing Guidelines, increased statutory maximums, and judicial discretion. In concluding, the Article offers some observations regarding what the perceived uncertainty and inconsistency in sentencing major white-collar offenders today might indicate about white-collar sentencing more broadly. In considering this issue, the Article also briefly examines recent amendments adopted by the U.S. Sentencing Commission and proposed reforms to white-collar sentencing offered by the American Bar Association.
Tuesday, July 14, 2015
Ellen Podgor and I have just released a new article discussing the complexities of defining the term “white collar crime.” The ability to define and identify white collar offenses is vital, as it allows one to track, among other things, the number of these cases prosecuted each year, the frequency with which particular types of charges are brought in these matters, and the sentences imposed on those convicted. This new article begins with a brief historical overview of the term “white collar crime.” The piece then empirically examines several specific crimes to demonstrate that statutory approaches to defining and tracking white collar offenses are often ineffective and inaccurate. The article then concludes by recommending that the U.S. Sentencing Commission adopt a new multivariate definitional approach that recognizes the hybrid nature of many white collar offenses. The final version of the article will appear next year in Volume 50 of the Georgia Law Review.
Ellen S. Podgor and Lucian E. Dervan, “White Collar Crime”: Still Hazy After All These Years, 50 Georgia Law Review -- (forthcoming 2016).
With a seventy-five year history of sociological and later legal roots, the term “white collar crime” remains an ambiguous concept that academics, policy makers, law enforcement personnel and defense counsel are unable to adequately define. Yet the use of the term “white collar crime” skews statistical reporting and sentencing for this conduct. This Article provides a historical overview of its linear progression and then a methodology for a new architecture in examining this conduct. It separates statutes into clear-cut white collar offenses and hybrid statutory offenses, and then applies this approach with an empirical study that dissects cases prosecuted under hybrid white collar statutes of perjury, false statements, obstruction of justice, and RICO. The empirical analysis suggests the need for an individualized multivariate approach to categorizing white collar crime to guard against broad federal statutes providing either under-inclusive or over-inclusive examination of this form of criminality.
Tuesday, April 14, 2015
Earlier this month, the Second Circuit, as expected (at least by me), denied Southern District of New York U.S. Attorney Preet Bharara's request for reargument and reconsideration of its December 2014 ruling in United States v Newman which narrowed, at least in the Second Circuit, the scope of insider trading prosecutions. I would not be surprised if the government seeks certiorari, and, I would not be all that surprised it cert were granted.
In Newman, the defendants, Newman and Chiasson, were two hedge fund portfolio managers who were at the end of a chain of recipients of inside information originally provided by employees of publicly-traded technology funds. The defendants traded on the information and realized profits of $4 million and $68 million respectively. There was, however, scant, if any, evidence that the defendants were aware whether the original tippors had received any personal benefit for their disclosures.
The Second Circuit reversed the trial convictions based on an improper charge to the jury and the insufficiency of the evidence. Specifically, the court ruled that:
1) the trial judge erred in failing to instruct the jury that in order to convict it had to find that the defendants knew that the corporate employee tippors had received a personal benefit for divulging the information; and
2) the government had indeed failed to prove that the tippors had in fact received a personal benefit.
Thus, at least in the Second Circuit, it appears that the casual passing on of inside information without receiving compensation by a friend or relative or golf partner does not violate the security laws. "For purposes of insider trading liability, the insider's disclosure of confidential information, standing alone, is not a breach," said the court. Nor, therefore, does trading on such information incur insider trading liability because the liability of a recipient, if any, must derive from the liability of the tippor. To analogize to non-white collar law, one cannot be convicted of possessing stolen property unless the property had been stolen (and the possessor knew it). Those cases of casual passing on of information, which sometimes ensnared ordinary citizens with big mouths and a bit of greed, are thus apparently off-limits to Second Circuit prosecutors. To be sure, the vast majority of the recent spate of Southern District prosecutions of insider trading cases have involved individuals who have sold and bought information and their knowing accomplices. Although Southern District prosecutors will sometimes now face higher hurdles to prove an ultimate tippee/trader's knowledge, I doubt that the ruling will affect a huge number of prosecutions.
The clearly-written opinion, by Judge Barrington Parker, did leave open, or at least indefinite, the critical question of what constitutes a "personal benefit" to a provider of inside information (an issue that also might impact corruption cases). The court stated that the "personal benefit" had to be something "of consequence." In some instances, the government had argued that a tippee's benefit was an intangible like the good graces of the tippor, and jurors had generally accepted such a claim, likely believing the tippor would expect some personal benefit, present or future, for disclosing confidential information. In Newman, the government similarly argued that the defendants had to have known the tippors had to have received some benefit.
Insider trading is an amorphous crime developed by prosecutors and courts - not Congress - from a general fraud statute (like mail and wire fraud) whose breadth is determined by the aggressiveness and imagination of prosecutors and how much deference courts give their determinations. In this area, the highly competent and intelligent prosecutors of the Southern District have pushed the envelope, perhaps enabled to some extent by noncombative defense lawyers who had their clients cooperate and plead guilty despite what, at least with hindsight, seems to have been a serious question of legal sufficiency. See Dirks v. S.E.C., 463 U.S. 646, 103 S.Ct. 3255 (1983)(test for determining insider liability is whether "insider personally will benefit, directly or indirectly"). As the Newman court refreshingly said, in language that should be heeded by prosecutors, judges, and defense lawyers, "[N]ot every instance of financial unfairness constitutes fraudulent activity under [SEC Rule] 10(b)."
As I said, I would not be shocked (although I would be surprised) if Congress were to enact a law that goes beyond effectively overruling Newman and imposes insider trading liability on any person trading based on what she knew was non-public confidential information whether or not the person who had disclosed the information had received a personal benefit. Such a law, while it would to my regret cover the casual offenders I have discussed, would on balance be a positive one in that it would limit the unequal information accessible to certain traders and provide a more level playing field.
Wednesday, January 28, 2015
There has been much talk recently regarding Section 2B1.1 of the Federal Sentencing Guidelines, commonly referred to as the Fraud Guidelines. Earlier this year, I noted in a post that the American Bar Association had issued a report calling on the Sentencing Commission to revise Section 2B1.1. Specifically, this report contained a number of suggestions regarding loss calculations and the impact of the current loss table. Earlier this month, Ellen Podgor posted regarding the release of the Proposed Amendments to the Sentencing Guidelines (Preliminary), which included proposed amendments to Section 2B1.1.
As readers begin to digest the proposed amendments from the Sentencing Commission and the Commission’s determination that they “have not seen a basis for finding the guideline to be broken for most forms of fraud…,” I wanted to provide a link to some additional information. The first is a video presentation by Commission staff regarding a detailed examination of economic crime data. The presentation was given at a January 9, 2015 public meeting and offers some extremely interesting analysis of data collected regarding sentencing under Section 2B1.1. The second is a copy of the PowerPoint presentation from the January 9, 2015 presentation. In particular, I direct readers to Figure 1, showing the growth in below range sentences since 2003, and Figure 5, showing the number of cases within range decreasing sharply as the loss figure in the case grows. For those who enjoy statistics, there is a wealth of information for consideration in these materials.
Thursday, January 22, 2015
The New York Times has the story, with a link to the criminal complaint, here. U.S. Attorney Preet Bharara followed his longstanding tradition of holding a press conference in order to make inflammatory, prejudicial, and improper public comments about the case.
Wednesday, January 21, 2015
For more than a year now, the Australian Securities and Investments Commission has been investigating a number of large Australian banks regarding allegations of collusion in the setting of the Bank Bill Swap Rate (BBSR). The BBSR is an interest rate benchmark that is used when banks lend to one another. This rate also impacts business and home loan rates. As details regarding the investigation begin to trickle out, one Australian commentator in the Sydney Morning Herald has said that this “could well prove to be the largest corporate scandal of 2015.” According to the commentator’s article, one bank, ANZ, has suspended seven BBSR traders, including the suspension of the head of the bank’s balance sheet trading earlier this month (see here). The article further states that ANZ has launched an internal investigation into the matter. While the article notes that other Australian banks may have also launched internal investigations, the banks have made no public statements regarding any such inquiries.
As readers of this blog will recall, in 2012 an investigation began into allegations that several large banks had been manipulating the London Interbank Offered Rate (Libor). The scandal received significant international attention. Eventually, the US, UK, and EU fined the banks involved more than $6 billion. Further, several traders were prosecuted for their roles in the manipulation. For more on the Libor Scandal, see the Council on Foreign Relations Backgrounder available here.
Based on recent reports from Australia, it sounds like the Australian BBSR investigation might be the next big international white collar case to watch in 2015.
Wednesday, January 14, 2015
Thursday, December 11, 2014
Here are two (ahem) differing views on yesterday's Second Circuit insider trading decision in United States v. Newman. The Wall Street Journal editorial writers are understandably happy at the ruling and contemptuous of Preet Bharara, dubbing him an Outside the Law Prosecutor. The Journal exaggerates the extent to which the case was an outlier under Second Circuit precedent and incorrectly states that "the prosecution is unlikely to be able to retry the case." The prosecution cannot retry the case, unless the full Second Circuit reverses the panel or the U.S. Supreme Court takes the case and overturns the Second Circuit.
Over at New Economic Perspectives, Professor Bill Black insists that the Second Circuit Makes Insider Trading the Perfect Crime. Black thinks Wall Street financial firms will enact sophisticated cut-out schemes in the wake of the opinion to give inside traders plausible deniability. He compares the fate of Newman and his co-defendant to that of Eric Garner and calls for a broken windows policing policy for Wall Street. Black's piece is outstanding, but in my view he underestimates the extent to which the Newman court was influenced by Supreme Court precedent and ignores the opinion's signals that the government needed to do a much better job of proving that the defendants knew about the tipper's fiduciary breach. As a matter of fact, in the typical insider trading case it is relatively easy to show such knowledge. That's what expert testimony and willful blindness instructions are for.
Monday, November 17, 2014
The American Bar Association Criminal Justice Section Task Force on the Reform of Federal Sentencing for Economic Crimes has released its final report. The report contains significant proposed amendments to the existing federal sentencing guidelines for economic offenses. As to the general structure, the proposed guidelines fit on a single page and contain only three sections for specific offense characteristics, compared with the nineteen sections currently contained in USSG section 2B1.1. The three sections in the proposal are “loss,” “culpability,” and “victim impact.”
The loss section contains only six levels of loss, from more than $20,000 to more than $50,000,000. As currently drafted, a loss of more than $50,000,000 would result in a 14 point increase in the defendant’s offense level. This is a significant amendment from USSG section 2B1.1, which contain 16 levels of loss, the most significant of which increases a defendant’s base offense level by 30 points. It is important to note, however, that the Task Force makes clear in its commentary that it is most focused on the proposed structure of the economic crimes guidelines. The report states, “First, we feel more strongly about the structure of the proposal than we do the specific offense levels we have assigned. We assigned offense levels in the draft because we think it is helpful in understanding the structure, but the levels have been placed in brackets to indicate their tentative nature.”
The remaining two specific offense characteristics – Culpability and Victim Impact – are presented in a manner that allows for consideration of various factors before determining where a defendant falls on a range from low to high. For example, culpability is either “Lowest Culpability,” “Low Culpability,” “Moderate Culpability,” “High Culpability,” or “Highest Culpability.” According to the commentary, a defendant’s culpability level will depend on an “array of factors,” including the correlation between loss and gain. In many ways, this portion of the proposal looks similar to the recently adopted Sentencing Council for England and Wales “Fraud, Bribery and Money Laundering Offences – Definitive Guidelines.” As described in my previous post, these guidelines for England and Wales utilized a “High Culpability,” “Medium Culpability,” and “Low Culpability” model.
Finally, the proposal contains an interesting offense cap for non-serious first time offenders. The proposed guidelines state, “If the defendant has zero criminal history points under Chapter 4 and the offense was not ‘otherwise serious’ within the meaning of 28 U.S.C. section 994(j), the offense level shall be no greater than 10 and a sentence other than imprisonment is generally appropriate.” According to the commentary, in making such a decision, the court should consider (1) the offense as a whole, and (2) the defendant’s individual contribution to the offense.
As the U.S. Sentencing Commission has stated, addressing federal sentences for economic crimes is one of the Commission’s policy priorities for the 2014-2015 guidelines amendment cycle. It will be interesting to watch the Commission’s response to the ABA CJS Task Force proposal.
Friday, October 3, 2014
In May, the Sentencing Council for England and Wales issued their "Fraud, Bribery and Money Laundering Offences - Definitive Guidelines." The Guidelines apply to "all individual offenders aged 18 and older and to organisations who are sentenced on or after 1 October 2014, regardless of the date of the offence."
Bret Campbell, Adam Lurie, Joseph Monreno, and Karen Woody of Cadwalader, Wickersham & Taft have a nice piece examining the new Guidelines in the Westlaw Journal of White-Collar Crime entitled UK Issues Sentencing Guideline for Individuals Convicted of White-Collar Offenses (28 No. 11, Westlaw Journal White-Collar Crime 1 (July 25, 2014)).
In reviewing the new Guidelines, it is fascinating to see the difference in approach when compared to the U.S. Sentencing Guidelines. To take just one example, the fraud guidelines for England and Wales focus on "culpability" and "harm." For culpability, the guidelines consider a number of factors indicating whether the person had "High Culpability," "Medium Culpability," or "Low Culpability." The factors include entries such as the role in group activities, the sophistication of the offense, and the motivation behind the actions. In examining harm, there are just five categories of loss, the highest of which is £500,000 or more. Finally, when determining the sentence, there are a limited number of categories and the highest range is 5-8 years in custody.
For anyone who works with the U.S. guidelines, the guidelines for England and Wales are a fascinating read for comparison, and I highly recommend you give them a look.
Wednesday, September 3, 2014
Last month Prof. Douglas Berman reported in his indispensable Sentencing Law and Policy blog about a ten-year prison sentence imposed by SDNY judge Richard Berman upon defendant Rudy Kurniawan, who had sold counterfeit wine to the very rich, including billionaire William Koch (one of the less political Koch brothers), and allegedly profited by over $28 million (see here by scrolling down to August 10, "Can wine fraudster reasonably whine that his sentence was not reduced given wealth of victims?" See also here). Some of the ersatz wine sold for as much as $30,000 per bottle.
Having a somewhat perverse sense of humor, I found it somewhat amusing that the 1% paid astronomical sums for and presumably sometimes drank the same wine that the other 99% of us drink. However, neither the judge nor the prosecutor (nor certainly the defendant and his lawyer) viewed the sentencing proceeding as a laughing matter.
To be sure, a $28 million fraud is a serious matter deserving serious punishment. Additionally, the judge seemed to view the crime in part as a public safety violation, declaring "The public at large needs to know our food and drinks are safe, -- and not some potentially unsafe homemade witch's brew," even though this was hardly a contaminated baby food case.
At the sentencing hearing, Kurniawan's attorney argued, reasonably I believe, that his client should be treated somewhat less severely since the victims were exceedingly wealthy. That argument provoked the prosecutor to the Captain Renault-like response that it was "quite shocking" for a lawyer to argue for a different standard for theft from the rich than from the poor.
That retort reminded me of Anatole France's immortal line (although not directly on point), "The law, in its majestic equality, forbids rich and poor alike to sleep under bridges, beg in the streets or steal bread." In my view, a sentencing judge should certainly consider in sentencing the extent of damage to the victim(s). A fraudster who steals a million dollars from a billionaire, notwithstanding the Sentencing Guidelines' overemphasis on absolute figures, should (all things being equal) not deserve as harsh a sentence as one who steals the same amount if it were the entire life savings of a senior citizen.
Prosecutors, when fraud victims are pensioners and widows, argue, I believe reasonably, that the judge should consider the degree of suffering of the victims. Indeed, every seasoned white-collar trial lawyer knows that in a multi-victim fraud case the government is likely to call as "representative" witnesses those most sympathetic victims for whom the monetary loss was most damaging.
I assume that the prosecutor will get over his "shock" when he prosecutes a fraud case where a less than affluent victim's life savings are stolen. I further assume he will not argue that the judge should impose the same sentence she would if the victim were a billionaire for whom the loss figure might be pocket change.
Sunday, July 20, 2014
I enjoy studying upward variance opinions, as they usually contain language and rules that can be used by the defense to support downward variances in other cases. This is true because, whatever specific factors are discussed, federal appeals courts typically speak of what justifies such variances in general terms, not distinguishing between upward and downward excursions. United States v. Ransom, decided earlier this month by the D.C. Circuit in an opinion by Judge David Sentelle, is no exception. Chester Ransom and Bryan Talbott each pled guilty to a fraud scheme and stipulated to a non-binding Guideline range of 46-57 months. The sentencing court calculated Ransom's range at 46-57 months but upwardly varied to a 72 month sentence. The court calculated Talbott's range at 63-78 months but upwardly varied to a 120 month sentence.
The Court initially held that Ransom's upward variance for lack of remorse was not inconsistent with the three point downward adjustment he received for acceptance of responsibility under Section 3E1.1(a) and (b). The Court in essence stated that one can plead guilty early and cooperate with the government without showing any remorse.
Next the Court rejected appellants' argument that the sentencing court improperly relied on factors in varying upward that the Guidelines had already accounted for. Joining some sister circuits the Court held (internal quotes and citations omitted) that:
It is not error for a district court to enter sentencing variances based on factors already taken into account by the Advisory Guidelines, in a case in which the Guidelines do not fully account for those factors or when a district court applies broader [Section] 3553(a) considerations in granting the variance.
As anyone who does federal sentencing work knows, those broader 3553(a) factors are often the key to obtaining a downward variance if the court is otherwise inclined to do so. To take one example, in the Mandatory Guidelines era it was almost impossible to obtain a downward departure based on family circumstances, but they can, and must, at least be "considered" by the sentencing court under the current regime. Believe it or not, not every district judge comprehends this simple rule. Ergo, it is nice to have additional case law on one's side.
Wednesday, July 16, 2014
As my editor, Ellen Podgor, noted last week (see here), the winning streak in insider trading cases of the U.S. Attorney's Office for the Southern District of New York ended with the jury's acquittal of Rengan Rajaratnam, the younger brother of Raj Rajaratnam, who was convicted of insider trading in 2011 and sentenced to eleven years in prison.
The U.S. Attorney has done an excellent job in prosecuting insider trading, securing convictions by plea or trial of 81 of the 82 defendants whose cases have been concluded in the district court. The office has appropriately targeted primarily professional financial people who seek or provide insider information rather than those incidental offenders who by chance have received or provided insider tips and taken advantage of their knowledge. A few of these trial convictions, however, appear to be in jeopardy. At oral argument in a recent case the Second Circuit Court of Appeals seemed sympathetic to the contention that a trader may not be found guilty unless he knew that the original information came from a person who had received a benefit, and not only had violated a fiduciary duty of secrecy. Judge Naomi Reice Buchwald, who presided over the Rajaratnam case, agreed with that contention and thereupon dismissed two of the three counts.
Whether the prospective Second Circuit ruling, if it comes, will make good public policy is another matter. Insider trading (which fifteen years ago some argued should not be a crime) is, or at least was, endemic to the industry. Presumably, the U. S. Attorney's successful prosecutions have had a positive step in putting the fear of prosecution in traders' minds. Such deterrent to a particularly amoral community seems necessary: a recent study demonstrated that twenty-four percent of the traders interviewed admitted they would engage in insider trading to make $10 million if they were assured they would not be caught (the actual percentage who would, I suspect, is much higher). See here.
The latest Rajaratnam case, indicted on the day before the statute of limitations expired, was apparently not considered a strong case by some prosecutors in the U.S. Attorney's Office. See here and here. Indeed, jurors, who deliberated four hours, described the evidence as "no evidence, period" and asked "Where's the evidence?" That office nonetheless did not take this loss (and generally does not take other losses) well. It was less than gracious in losing, making a backhanded slap at Judge Buchwald, a respected generally moderate senior judge. A statement by the U.S. Attorney Preet Bharara noted, "While we are disappointed with the verdict on the sole count that the jury was to consider, we respect the jury trial system . . . ." (Italics supplied.)
Southern District judges, generally out of deference to and respect for the U.S. Attorney's Office, whether appropriate or undue, rarely dismiss entire prosecutions or even counts brought by that office, even in cases where the generally pro-prosecution Second Circuit subsequently found no crimes. See here. It is refreshing to see a federal judge appropriately do her duty and not hesitate to dismiss legally or factually insufficient prosecutions.
Such judicial actions, when appropriate, are particularly necessary in today's federal system where the bar for indictment is dropping lower and lower. The "trial penalty" of a harsher sentence for those who lose at trial, the considerable benefits given to cooperating defendants from prosecutors and judges, and the diminution of aggressiveness from a white-collar bar composed heavily of big firm former federal prosecutors have all contributed to fewer defense challenges at trial and lessened the prosecutors' fear of losing, a considerable factor in the prosecutorial decision-making process. Acquittals (even of those who are guilty) are necessary for a balanced system of justice.
Lastly, it is nice to see a major victory by a comparatively young (43) defense lawyer, Daniel Gitner of Lankler, Siffert & Wohl, an excellent small firm (and a neighbor), in a profession still dominated by men in their sixties or seventies.
Tuesday, May 20, 2014
The sentencing of three former Wellcare individuals demonstrates the importance of having the guidelines as advisory, and the importance of an independent judicary that can recognize that sentences should be about individuals and not about arithmetic. (see here) Hats off to Hon. James S. Moody for being a judge that went beyond the math in sentencing the individuals and for his recognition that the stigma and collateral consequences of a conviction for a white collar offender are huge. With little chance of recidivism, strict guideline sentences were unwarranted here. (see here)
The court gave Todd Farha three years (significantly below the number asked for by the government). Paul Behrens received a sentence of 24 months; William Kale a year and a day, and Peter Clay 60 months of Probation. The attorneys representing these individuals were:
Todd Farha: Barry Boss, Stephen Miller, Rebecca Brodey, Seth Waxman, Peter Neiman, Alan Schoenfeld, Robert Stauffer, Laura Vaughan
Paul Behrens: John Lauro; Jeffrey Lamken; Michael Matthews, Michael Califano
William Kale: Stan Reed, Patrick Donahue, Lauri Cleary, Larry Nathans
Peter Clay: Bill Jung, Larry Robbins, Donald Burke.
Thursday, May 15, 2014
An amici brief was filed by a group of law professors and practitioners in support of three defendants in United States v. Farha. It's unusual to see amici coming in at the trial level, but this esteemed group offers some important reasons for allowing this brief.
They note "that this case highlights a serious problem facing federal sentencing judges today - namely, that the federal sentencing guidelines as currently written place too much emphasis on economic 'loss' and too little emphasis on other factors that traditionally have been important factors in determining a fair and just sentence that takes full account of the factors set forth in 18 U.S.C. s 3553(a)." In addition to discussing the distortion caused by the loss guidelines, the authors of this brief also note how other judges have recognized that focusing on loss under the guidelines presents problems. As aptly noted by Hon. Jed Rakoff, the guidelines "tend to place great weight on putatively measurable quantities, such as .....the amount of financial loss in fraud cases, without however, explaining why it is appropriate to accord such huge weight to such factors." (United States v. Adelson).
Hopefully the court will note the growing number of judges that reject strict adherence to a sentence that is ascertained solely by examining numbers and will remember that we sentence people, not numbers.
See Amici- Download AmiciBrief
Monday, May 5, 2014
This morning in Robers v. United States (2014), the U.S. Supreme Court resolved a circuit split and unanimously affirmed the Seventh Circuit. The Mandatory Victim Restitution Act of 1996 requires offenders to pay their victims "an amount equal to...the value of the property" taken, minus "the value (as of the date the property is returned) of...the property that is returned." The Supreme Court, through Justice Breyer, held that the "property" in question is money, rather than real property. Thus, Appellant's argument that his criminal restitution judgment, payable to the bank he defrauded through his straw purchases, should have been reduced by the value of the two properties securing the two loans on the day that the bank took the properties back, was rejected. The sentencing court had determined its restitution figure by subtracting the amount of money the bank received through sale of the two houses from the original loan amount. The Court approved this approach. The Court did note that the statute has a proximate cause component and that offenders may be able to show in some instances that intervening factors broke the causal chain. But Appellant failed to make this argument at the district court level. Justice Sotomayor, joined by Justice Ginsburg, joined in the Court's opinion, but expounded upon the proximate cause issues in a separate concurrence.
Monday, April 28, 2014
Nancy and Lester Sadler ran pain clinics that sometimes serviced more than 100 patients a day--and that didn't even include the fake ones. They were convicted of several crimes and the Sixth Circuit affirmed all but one of the counts of conviction last week. Nancy Sadler's wire fraud conviction was vacated, however. According to the Court, "the government showed that Nancy lied to pharmaceutical distributors when she ordered pills for the clinic by using a fake name on her drug orders and by falsely telling the distributors that the drugs were being used to serve 'indigent' patients." But this did not "deprive" the distributors of their property, because Nancy paid full price. "[P]aying the going rate for a product does not square with the conventional understanding of 'deprive.'" The government argued that the distributors would not have sent the pills had Nancy told them the truth. The Sixth Circuit dubbed this a "right to accurate information" and noted that the federal mail and wire fraud statutes no longer cover this kind of intangible right in the post-McNally era. Congress' statutory fix of McNally only covers the intangible right of honest services, "which protects citizens from public-official corruption." Of course 18 U.S.C. Section 1346 does more than that, even after Skilling, as it also covers certain private deprivations of honest services. But the conduct at issue in Sadler did not involve Nancy's "honest services" to the pharmaceutical distributors. She provided no services to them--she simply fibbed, but paid full price. Here is the opinion in United States v. Nancy Sadler.
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.