Friday, October 3, 2014

New Sentencing Guidelines in England and Wales for Fraud, Bribery and Money Laundering Offences

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. 

(LED)

October 3, 2014 in Fraud, International, Sentencing | Permalink | Comments (0) | TrackBack (0)

Wednesday, September 3, 2014

Wine Fraudster Gets Ten-Year Sentence

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.

(goldman)

September 3, 2014 in Defense Counsel, Food and Drink, Fraud, News, Prosecutors, Sentencing | Permalink | Comments (0) | TrackBack (0)

Sunday, July 20, 2014

Practice Notes: Sauce For The Goose

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.

(wisenberg)

 

July 20, 2014 in Fraud, Judicial Opinions, Sentencing | Permalink | Comments (0) | TrackBack (0)

Wednesday, July 16, 2014

Rengan Rajaratnam Acquittal Good for Criminal Justice System

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.

 (goldman)

July 16, 2014 in Current Affairs, Defense Counsel, Fraud, Insider Trading, Judicial Opinions, News, Prosecutions, Prosecutors, Securities, Statutes, Verdict | Permalink | Comments (0) | TrackBack (0)

Tuesday, May 20, 2014

Former Wellcare Individuals Sentenced

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.

(esp)

May 20, 2014 in Defense Counsel, Fraud, Sentencing | Permalink | Comments (0) | TrackBack (0)

Thursday, May 15, 2014

White Collar Sentencing is Not All About Loss

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 

(esp)

May 15, 2014 in Defense Counsel, Fraud, Sentencing | Permalink | Comments (0) | TrackBack (0)

Monday, May 5, 2014

Supremes Rule Unanimously: Property=Money Under MVRA

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.

(wisenberg)

May 5, 2014 in Fraud, Judicial Opinions | Permalink | Comments (0) | TrackBack (0)

Monday, April 28, 2014

Wire Fraud: Lying Isn't Always Enough

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.

(wisenberg)

April 28, 2014 in Fraud, Judicial Opinions | Permalink | Comments (0) | TrackBack (0)

Wednesday, March 12, 2014

Dewey & LeBoeuf Indictment is Announced

 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.

(goldman)

 

March 12, 2014 in Current Affairs, Fraud, News | Permalink | Comments (0) | TrackBack (0)

Tuesday, February 11, 2014

Why Didn't Martoma Cooperate? And Is It Too Late?

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.

 (goldman)

February 11, 2014 in Current Affairs, Defense Counsel, Fraud, Insider Trading, News, Prosecutions, Prosecutors, Securities, Sentencing | Permalink | Comments (0) | TrackBack (0)

Tuesday, January 7, 2014

Is Conditional Compensation "Money or Property" for Mail Fraud?

This interesting question is raised in a recent filing of a Petition for Cert in the U.S. Supreme Court - Stinn v. United States.  The case emanates from the Second Circuit and presents a jurisdictional split on whether employee compensation should be allowed as "money or property."   Petitioner raises the following two questions:

1. Whether there are any limits on the extent to which employee compensation satisfies the “money or property” element of the Title 18 fraud statutes and, if so, what factual determinations by the jury are necessary to implement those limits.

2. Whether the property-loss requirement of the Title 18 fraud statutes is satisfied with proof that shareholders were denied their “intangible right to information or control.”

One also has to wonder about the government's prosecution of cases related to employer-employee relations.  Shouldn't these matters be civil actions? And with limited resources, wouldn't resources be better spent on identity theft and other serious crimes.

(esp)

January 7, 2014 in Fraud, Prosecutions | Permalink | Comments (0) | TrackBack (0)

Friday, December 27, 2013

Judge Rakoff Wades In

In the current New York Review of Books, Judge Jed Rakoff presents the most thoughtful, balanced analysis I have seen to date regarding DOJ's failure to prosecute high-level executives at elite financial institutions in connection with the recent financial crisis. Appropriately entitled, The Financial Crisis: Why Have No High Level Executives Been Prosecuted?, Judge Rakoff is careful not to point fingers, rush to judgment, or even allege that fraud has definitively been established. And that's a big part of the DOJ's problem. How can you establish fraud if the effort to investigate it has been haphazard and understaffed from the outset? Rakoff is someone worth listening to. An unusually thoughtful federal district judge, he has presided over many significant securities and bank fraud cases, served as chief of the Securities Fraud Unit in the SDNY U.S. Attorney's Office,  and worked as a defense attorney. Oh yeah. He also hates the Sentencing Guidelines. 

Among the many theories Rakoff posits for the failure to prosecute what, it bears repeating, only may have been fraud, are two that I take issue with. These investigations were apparently parceled out to to various OUSA districts, rather than being concentrated in the SDNY. Judge Rakoff believes that the SDNY would have been the more logical choice, as it has more experience in sophisticated fraud investigations. This may be true as a general proposition. But the most plausible historical fraud model for the mortgage meltdown-fueled financial crisis is the Savings & Loan Scandal of the late 1980s, so successfully prosecuted by DOJ into the mid-1990s. The SDNY had very little of that action.

Judge Rakoff also notes the government's role in creating the conditions that led to the current crisis as a potential prosecution pitfall. But this did not stop the S&L prosecutors from forging ahead in their cases. Back then, virtually every S&L criminal defendant claimed that the government had created that crisis by establishing, and then abandoning, Regulatory Accounting Principles, aka RAP. (One marked difference between the two scandals is that the S&L Scandal was immediately met with public outrage and a sustained Executive Branch commitment to investigate and prosecute where warranted. The sustained Executive Branch commitment has not happened this time around, for whatever reason.)

But these are minor quibbles and Judge Rakoff is spot on in most of his observations.

Judge Rakoff is right to reject the "revolving door" theory of non-prosecution. Any prosecutor worth his salt would love to make a name for himself, and would definitely enhance his private sector marketability, by winning one of these cases. Judge Rakoff also correctly notes that these cases are hard and time-consuming to investigate.

The judge's most salient point has nothing to do with the various theories for DOJ's failure to prosecute. Instead, it is his observation that there is no substitute for holding financial elites responsible for their major criminal misdeeds. The compliance and deferred prosecution agreements favored today are simply a cost of doing business for most big corporations. What's worse, in the current environment, DOJ is giving a walk to elite financial actors and simultaneously prosecuting middle-class pikers with a vengeance that is sickening to behold. The elite financial actors may not have committed criminal fraud, but many of them bear heavy responsibility for the ensuing mess. It is so much easier for DOJ to rack up the stats by picking the low hanging fruit.

The one thing Judge Rakoff cannot do, and does not try to do, is answer the question of whether criminal fraud occurred in the highest sectors of our financial world. The answer to that question can only be supplied, at least as an initial matter, by the AUSA in charge of each investigation. And if no prosecution occurs, you and I are unlikely to ever know the reason why.

(wisenberg)

December 27, 2013 in Fraud, Investigations, Judicial Opinions, Mortgage Fraud, Prosecutions, Prosecutors, Securities | Permalink | Comments (0) | TrackBack (0)

Wednesday, October 30, 2013

Sixth Circuit Reverses Convictions Under 18 USC Sections 1014 and 1028A

In United States v. Miller, the Sixth Circuit today reversed three of four counts of conviction in a mortgage fraud prosecution. The court held that appellant Miller did not unlawfully "use" a means of identification within the meaning of 18 U.S.C. Section 1028A, the Aggravated Identity Theft statute, when he falsely stated that two named individuals had given him authority to act on behalf of an LLC. Since Miller did not steal their identity, pass himself off as them, or purport to be acting on their behalf as individuals, he is not guilty of violating the statute. The government had argued for a broader construction, but the Sixth Circuit applied the rule of lenity.

The court also reversed a Section 1014 count, because it was bottomed on Miller's signing of a loan renewal and modification agreement. Since the modification and renewal agreement did not repeat the false statement contained in the original loan papers, Miller could not be guilty under Section 1014. The court indicated that Miller had engaged in fraud and false pretenses during the loan modification process. But this was not enough to support a Section 1014 conviction, which requires a knowingly false statement.

(wisenberg)

October 30, 2013 in Fraud, Judicial Opinions, Money Laundering, Prosecutions | Permalink | Comments (0) | TrackBack (0)

Wednesday, October 23, 2013

Jury Finds Against BOA, Based on Countrywide Unit's Pre-Acquisition Sales to Fannie and Freddie

This just in from the WSJ (subscription required). The WSJ headline is misleading, as the unit in question was located within Countrywide Financial Corporation, and the actions at the heart of the case occurred prior to Countrywide's acquisition by BOA. The Forbes story is here.
(wisenberg)

October 23, 2013 in Fraud, Mortgage Fraud | Permalink | Comments (0) | TrackBack (0)

Tuesday, October 22, 2013

Ninth Circuit Pops Stargell on Wire Fraud Affecting Financial Institution

Last week in United States v. Willena Stargell, the Ninth Circuit declared, in effect, "we are family with our sister circuits" in interpreting the federal wire fraud statute. Stargell, a tax preparer, was charged and convicted under 18 U.S.C. Section 1343 with wire fraud "affect[ing] a financial institution." Based on her filing of false tax returns, Stargell obtained Refund Anticipation Loans ("RALs") from financial institutions. Even though three of the four loans involved in Stargell's convictions did not result in a loss to any bank, the Ninth Circuit held that the statute was violated because, "[t]he increased risk of loss presented by fraudulent terms is sufficient to 'affect' a financial institution." The Ninth Circuit joined "our sister circuits in defining such term to include new or increased risk of loss to financial institutions." In fact, the only circuits the Ninth joined were the Seventh and Tenth. "The banks were affected  because the risk of loss on the RALs was increased by the fraudulent nature of the related returns." The opinion takes a sledgehammer to the rule of lenity.

(wisenberg)

October 22, 2013 in Fraud, Judicial Opinions | Permalink | Comments (0) | TrackBack (0)

Tuesday, September 24, 2013

Beanie Babies - A New Issue?

Many years ago I authored an article titled, "Do We Need a 'Beanie Baby' Fraud Statute?"  The Article considered how specific a statute needs to be to provide proper due process to a criminal defendant.  It focused on the breadth of the mail fraud statute, while also recommending that criminal statutes cannot be created for every unique circumstance - like "Beanie Baby" fraud.  It was written at the height of the time when individuals were committing crimes of fraud with "Beanie Babies."  In some cases, the company producing this product was the victim of the fraud.

Another side of "Beanie Babies" is mentioned this past week - and it relates to the CEO of  Ty Warner, who was the creator of "Beanie Babies."  A DOJ Press Release tells that H.Ty Warner was charged with tax evasion for allegedly hiding funds in a secret Swiss offshore account. The press release states, "[t]hrough his attorney, Warner authorized the government to disclose that he is cooperating with the Internal Revenue Service and will plead guilty to the charge." According to the DOJ Press Release, "Warner is the second taxpayer charged in Federal Court in Chicago in connection with an ongoing investigation of U.S. taxpayer clients of Union Bank of Switzerland (UBS) and other overseas banks that hid foreign accounts from the Internal Revenue Service."

(esp)

September 24, 2013 in Fraud, Prosecutions, Tax | Permalink | Comments (0) | TrackBack (0)

Thursday, September 5, 2013

18 U.S.C. Section 1014: Dick and Frank (Posner and Easterbrook to you) Duke it Out.

Yesterday the Seventh Circuit, sitting en banc, reversed and remanded (7-2) a Section 1014 (and Section 317) conviction connected to the mortgage meltdown crisis. Judge Posner wrote the majority opinion. Chief Judge Easterbrook (joined by Judge Bauer) dissented. The opinion is United States v. Lacey Phillips and Erin Hall.

Section 1014 prohibits making any false statement or report for the purpose of influencing in any way a federally insured bank. Longstanding case law requires the government to prove that the defendant knew the statement was false at the time it was made. Phillips and Hall were an unmarried couple who applied for a home loan and were rejected. Hall then contacted his friend Bowling, a mortgage broker, who began advising Hall and Phillips and ultimately led them to a different bank, Fremont Investment & Loan, which granted a home loan to Phillips. Hall was not listed as a borrower. This was a stated income loan, also known in the industry as a liar's loan.

Phillips and Hall could not keep up with the payments and lost their home. A prosecution ensued. There were several false statements on the loan application, but Phillips and Hall testified that they only were aware of one of the statements, which was as follows. Under the Borrower's Income line, Phillips put down the couple's combined income.

Phillips and Hall wanted to testify that Bowling told them: 1) Phillips should be the only applicant for the stated-income loan, because her credit history was good while Hall's was bad because of the recent bankruptcy; 2) Hall's income should be added to Phillips' on the line that asked for borrower's gross monthly income; and 3) adding the incomes together was proper in the case of a stated income loan, because the bank was actually asking for the total income from which the loan would be repaid, rather than just the borrower's income.

The government wanted to keep this testimony from the jury and U.S. District Court Barbara Crabb (I kid you not) agreed. The Seventh Circuit, per Posner, reversed, in an unnecessarily complicated opinion, but one that is nevertheless fun and instructive to read.

I see it this way. According to Phillips and Hall, Bowling told them that, to Fremont Investment & Loan, Borrower's Income meant the total income from which the loan would be repaid. They were in essence informed that Borrower's Income was a term of art for Fremont. If Phillips and Hall believed that Borrower's Income meant (to Fremont) Combined Income of the People Repaying the Loan, then Phillips and Hall were not making a statement to Fremont that they knew was false. Their state of mind on this point was directly at issue. Theirs may have been be an implausible story, but the jury was allowed to hear it. Judge Posner's opinion has some important things to say about terms of art and interpretation of seemingly simple terms.

 This case reminds me of a home loan I took out while I was an AUSA. The bulk of the down payment was being paid through my Thrift Savings Plan. That is, I was loaning myself money out of my government retirement fund. At the time, all of the standard loan applications required the borrower to state that no part of the down payment was coming from a loan. I asked my real estate agent and the mortgage broker whether that language applied to a Thrift Savings Plan Loan. They assured me that it did not. So, when I wrote down on the application that no part of my down payment came from a loan, I knew that in one sense this might be considered false, but to the bank, and presumably to any bank, it would be considered true, because the bank did not consider a Thrift Savings Plan Loan to be a loan. Had I defaulted and been prosecuted, I would have liked to present this as a defense, and it is hard to believe that any competent judge would have prevented me from doing so. But Judge Crabb did not allow this kind of evidence in, and Judge Easterbrook cheers her on.

Judge Easterbrook points out that the jury, in finding Phillips and Hall guilty, already determined that the couple knew several statements on the loan application were false. This is back-asswards and misses the point. This is not a sufficiency of the evidence case. If the jurors had heard the excluded testimony, they may well have been more likely to believe Phillips' and Halls' testimony that the rest of the false statements were made and submitted by Bowling without their knowledge. According to Posner, there was evidence to the effect that Phillips and Hall were naive, while Bowling (who pled guilty and cooperated) and Fremont (a bank that Posner deems disreputable) were sophisticated.

Of course, it is appalling and embarrassing that any self-respecting U.S. Attorney's Office would prosecute a case like this, but it is all part of DOJ's Piker Mortgage Fraud Initiative. Even more embarrassing was the government's contention on appeal that the excluded statements were hearsay. Posner called this a "surprising mistake for a Justice Department lawyer." I'm not so sure. Maybe it wasn't a mistake.

(wisenberg)

September 5, 2013 in Fraud, Judicial Opinions, Mortgage Fraud, Prosecutions, Prosecutors | Permalink | Comments (0) | TrackBack (0)

Wednesday, September 4, 2013

Quality Control in the First Circuit: A Question of Materiality

In United States v. Russell, the First Circuit pays lip service to the materiality requirement in 18 U.S.C. Section 1035 (a) (2), prohibiting false statements in connection with the payment of health care benefits, but in reality reads this element out of the statute. After losing his job, appellant applied for and received health care benefits under a state-subsidized health care program in Maine. He was charged with making false statements/omissions to Dirigo Health Care Agency in order to obtain these benefits, by omitting the extra cash income he earned through work he performed at a friend's business. Appellant argued, to the jury and on appeal, that the government failed to prove the materiality of his statements/omissions, since he would have qualified for the subsidy even if he had accurately reported his income. In rejecting appellant's argument, the First Circuit correctly stated the standard materiality definition. But in describing the evidence presented by the government as to materiality, the Court stated the following:

"At trial, the jury heard testimony from Dirigo's director that there was a limit on the income an applicant could earn in 2008 and 2009 to be eligible for an 80% health care subsidy like the one Russell was awarded. The jury learned that Dirigo does not employ investigators to verify statements made by applicants on subsidy applications and that the agency therefore has to rely on applicants' statements in determining eligibility. The agency requires the applicant to sign a certification to help it ensure that all the representations made by the applicant are true. Russell was awarded a $7,500 subsidy in 2008, and a $4,100 subsidy in October 2009, based on his representation in his application that he was neither employed nor receiving income. He signed the accompanying certifications attesting to the truthfulness of his statements in those applications."

None of this establishes that the amount of unreported income omitted by Russell could have affected the subsidy he received. The trial judge, though rejecting appellant's Rule 29 argument, assessed zero amount of loss and refused to order restitution, because appellant's unreported cash earnings could not be determined and there was no evidence that he earned enough to be disqualified from the subsidy program. As the trial judge put it, "if he had told the truth, the result would have been the same." 

The First Circuit analyzed the issue this way:

"Whether Russell's statements were material was ultimately a question for the jury. But the record clearly supports a finding that Russell received income in the amount he reported, plus some additional sums that he did not disclose. Had he forthrightly stated on his application that he had unspecified amounts of undocumented cash income above the precise amounts he reported, it is reasonable to believe that Dirigo might well have determined that he failed to meet his burden of proving eligibility. As we said, the government need only prove that the false statement had a 'natural tendency to influence, or [is] capable of influencing, the decision.' Neder, 527 U.S. at 16 (quoting Gaudin, 515 U.S. at 509) (alteration in original). Given the evidence presented at trial, we believe that a rational fact finder could conclude that they were material."

The Court's analysis seems to shift the burden of proof. The evidence, at least as specifically described in the Court's own opinion, fails to show what the unreported income was and whether it could have affected the subsidy amount. This is the government's burden to prove, not Russell's. If the unreported income did not reach a certain threshold, it simply was not capable of influencing the decision to grant Russell a subsidy. Russell is under no legal burden to prove the precise amount of unreported income he earned. If the evidence was there, the First Circuit should have clearly set it out in its opinion. The materiality element is easy enough to prove as it is. There is no reason to read it out of the statute entirely.

(wisenberg)

September 4, 2013 in Fraud, Judicial Opinions | Permalink

Saturday, July 27, 2013

Five Years Later, Almost No Charges

by: Solomon L. Wisenberg

Yet another story from NPR, with the obligatory quotes from Bill Black and Neil Barofsky, about DOJ's abject failure to properly investigate and prosecute high-ranking corporate insiders for fraud-related activity in connection with the financial crisis. This is the major criminal justice story, and scandal, of the Obama-Holder Administration. From the standpoint of elite corporate fraudsters, the Republicans could not have fashioned a better Dream Team at DOJ. The glaring exception here appears to be Preet Bharera. But it's  easier to go after insider trading than control fraud.

(wisenberg)

July 27, 2013 in Fraud, Prosecutions, Prosecutors | Permalink | Comments (0) | TrackBack (0)

Wednesday, July 17, 2013

Sixth Circuit Reverses RICO Vote-Buying Convictions Due To Multiple Evidentiary Errors

by: Solomon L. Wisenberg

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.

(wisenberg)

July 17, 2013 in Corruption, Current Affairs, Fraud, Judicial Opinions, RICO | Permalink | Comments (0) | TrackBack (0)