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)

Tuesday, July 2, 2013

Global-Tech? Can't Get No Respect!

by: Solomon L. Wisenberg

Yesterday, in United States v. Goffer, an insider trading/securities fraud criminal appeal, the Second Circuit again refused to alter a standard conscious avoidance jury instruction to comport more fully with the Supreme Court's opinion in Global-Tech Appliances, Inc. v. SEB S.A., 131 S.Ct. 2060, 2068-72 (2011). According to Judge Wesley, Global-Tech was not "designed to alter the substantive law. Global-Tech simply describes existing case law." The instruction given by the trial court "properly imposed the two requirements imposed by the Global-Tech decision." Moreover, Appellant Kimelman's request "that the district court insert the word 'reckless' into a list of mental states that were insufficient" was unnecessary, because "Global-Tech makes clear that instructions (such as those in this case) that require a defendant to take 'deliberate actions to avoid confirming a high probability of wrongdoing' are inherently inconsistent 'with a reckless defendant...who merely knows of a substantial and unjustified risk of such wrongdoing."

I don't know. Sounds a little circular to me. According to Global-Tech, willful blindness has "an appropriately limited scope that surpasses recklessness and negligence." Why not just say it squarely in a jury instruction? The problem here is that district courts are generally afraid to alter standard jury instructions in light of emerging case law. And appellate courts are generally reluctant to vacate major securities fraud convictions unless the jury instructions are blatantly improper. The Goffer opinion can be found here.

(wisenberg)

July 2, 2013 in Fraud, Insider Trading, Judicial Opinions, Prosecutions, SEC, Securities | Permalink | Comments (0) | TrackBack (0)

Thursday, June 27, 2013

First Circuit Holds That 18 U.S.C. Section 666 Doesn't Criminalize Gratuities

by: Solomon L. Wisenberg

The mark of the beast is fading a little, at least in the First Circuit. Amidst the hubbub of the Supreme Court's Wednesday rulings, the First Circuit quietly decided that 18 U.S.C. Section 666 can't be read to prohibit gratuities. This sets up a circuit split. The opinion in United States v. Fernandez & Maldanado is here.

Congratulations to Martin Weinberg, David Chesnoff, Kimberly Homan and Jose Pagan, who were on the brief for Appellant Bravo Fernandez. Congratulations to Abbe Lowell and Christopher Man, who were on the brief for Appellant Martinez Maldonado.

(wisenberg)

June 27, 2013 in Corruption, Fraud, Judicial Opinions, Prosecutions | Permalink | Comments (0) | TrackBack (0)

Monday, June 17, 2013

A Great Moment In The History Of The FBI

by: Solomon L. Wisenberg

This makes me so damn proud to be an American. What a righteous Department of Justice we have! Always going after the malefactors of great wealth. And God Bless the Fan Belt Inspectors too. No crime is too small for the Bureau to root out.

Kudos to John Cook of Gawker.com for posting this item and to Anthony Colleluori for bringing it to my attention.

(wisenberg)

June 17, 2013 in Corruption, Fraud | Permalink | Comments (0) | TrackBack (0)

Wednesday, December 26, 2012

Wiretaps

Monday, November 5, 2012

Voter Fraud

The right to vote is one of the most important rights that we as U.S. citizens have in our democracy. The civil rights division of DOJ has set up a voting rights violations reporting website to provide general information for protecting this right. On their website here it states that "[I]f you believe that you have been denied the right to vote based on your race, color, or language minority status or that otherwise your voting rights under federal law have been violated, you may contact the Civil Rights Division of the United States Department of Justice:" and the telephone, internet, or mail numbers are provided on this webpage.

It was particularly good to see that the Justice Department intended to monitor polls in 23 States on Election Day (see here).  Their press release states that, "[t]he Justice Department announced today that its Civil Rights Division plans to deploy more than 780 federal observers and department personnel to 51 jurisdictions in 23 states for the Nov. 6, 2012, general election."

Assuring that voter fraud does not occur is crucial to having a fair election.

(esp)

November 5, 2012 in Fraud | Permalink | Comments (0) | TrackBack (0)

Wednesday, October 24, 2012

Rajat Gupta's Sentencing: Practice Notes

by: Solomon L. Wisenberg

The sentencing is today at 2:00 PM Southern District of New York Time. (And is there really any other time in the Universe?)

As I noted on Monday, Gupta's Guidelines Range, according to the Government and the Probation Office, is 97-121 months.That's a Level 30. Gupta's attorneys put Gupta's Guidelines Range at 41-51 months. That's a Level 22. The different calculations are based on different views of the gain and/or loss realized and/or caused by Gupta. Gupta's attorneys are seeking a downward variance and asking for probation, with rigorous community service in Rwanda. Serving a sentence in Rwanda is not as strange as it may sound on first hearing. After all, criminal defendants in Louisiana regularly do time in Angola.

But seriously, lawyers and germs, there is a practice pointer in here somewhere. Practitioners naturally strive to obtain the lowest possible Guidelines Range as a jumping off point for the downward variance. It is psychologically easier for a judge to impose a probationary sentence when the Guidelines Range is low to begin with. It is legally easier as well, because the greater the variance from the Guidelines, the greater the judicially articulated justification must be.

But too many lawyers push the envelope in their Guidelines arguments, thereby risking appellate reversal on procedural grounds. This is a particular danger when the judge is already favorably disposed toward the defendant and looking for ways to help him. Failure to correctly calculate the Guidelines is a clear procedural error. (Some of the federal circuits try to get around Booker, Gall, and Kimbrough by setting up rigorous procedural tests. The Fourth Circuit is the most notorious outlier in this regard.) Lawyers must be on guard against the possibly pyrrhic and costly victory of an incorrectly calculated Guideline range, followed by probation. One solution is to have the court rule on alternative theories. "This is the Guidelines Range. These are my reasons for downward variance. Even if the Guidelines Range was really at X, as the Government argues, I would still depart to Y for the same and/or these additional reasons." If the judge already likes your client, getting him or her to do this is often an easy task.

Of course, Judge Rakoff needs no instructions in this regard. One of our ablest and sharpest jurists, and a leading Guidelines critic, he will attempt to correctly calculate the Guidelines Range in an intellectually honest manner and will downwardly (or upwardly) vary as he damn well sees fit, with ample articulation.

(wisenberg)

October 24, 2012 in Fraud, Insider Trading, Prosecutions, SEC, Securities, Sentencing | Permalink | Comments (1) | TrackBack (0)

Monday, October 22, 2012

Rajat Gupta Sentencing Materials

by: Solomon L. Wisenberg

Rajat Gupta is scheduled to be sentenced by Judge Jed Rakoff on Wednesday. The  Rajat Gupta Sentencing Memo filed last week by his attorneys is an outstanding work of its kind, and the Government's Sentencing Memo in U.S. v. Gupta is also quite good.

Gupta's Guidelines Range, according to the Government and the Probation Office, is 97-121 months. Gupta's attorneys, led by Gary Naftalis, put Gupta's Guidelines Range at 41-51 months. The different calculations appear to be based entirely on different views of the gain and/or loss realized and/or caused by Gupta. Key issues are whether Judge Rakoff should include the acquitted conduct in the loss calculations (which he is allowed but not required to do)  and whether the gain should be confined to Gupta and his co-conspirators, as opposed to other investors. Gupta's attorneys are arguing for probation, with a condition of rigorous community service in New York or Rwanda.

My guess is that, however he gets there, Judge Rakoff will impose a prison sentence of 3 to 6 years. The judge is a well-known critic of the Guidelines and Gupta has apparently led a life of extraordinary kindness and good works. On the other hand, Gupta is an enormously wealthy member of the financial elite to whom much has been given. He stands convicted of insider trading, which everybody on Wall Street knows is illegal. This was not a case in which ambiguous admitted conduct did or did not violate the outer edges of the insider trading laws. This was a case in which Gupta either tipped clearly confidential, proprietary inside information or he didn't. The jury has ruled that he did, at least with respect to four of the six charged counts. Judge Rakoff must and will accept that verdict. I believe that Judge Rakoff will see it as his judicial duty to send, through Gupta's sentence, a message of general deterrence.

(wisenberg)

October 22, 2012 in Fraud, Prosecutions, Prosecutors, Securities, Sentencing | Permalink | Comments (0) | TrackBack (0)

Wednesday, September 19, 2012

Prosecutors As Collection Agents: A Disingenuous Artifice?

by: Solomon L. Wisenberg

This front page story from Sunday's New York Times details the sleazy nationwide scam cooked up by debt collection agencies and local prosecutors to pry funds from American citizens through misleading, threatening letters. People who write bad checks are sent threatening letters signed by local district attorneys. In reality the district attorneys are just renting out their letterhead to the debt collectors. The typical letter warns the recipient that he has been "accused" of a crime, but can avoid "the possibility of future action" by the District Attorney's Office if he pays off the bounced check and attends a financial accountability class. The class can cost as much as $180.00 and a small portion of that fee is kicked back from the debt collectors to the District Attorney. In almost all instances, no prosecutor has ever looked at a case file, much less examined whether the individual had criminal intent. The letters may be literally truthful, in the Clintonian sense, but they are undoubtedly misleading. They are a scheme. They are sent through the mail. Perhaps AG Holder can launch an investigation to determine whether this conduct constitutes federal mail fraud. It seems right up his alley, since most debt collection agencies are, relatively speaking, small-scale operations. In many jurisdictions it is a crime to threaten criminal action in order to gain advantage in a civil matter. But I guess it's okay if you team up with the local prosecutor. More than ever our state and federal prosecutorial authorities seem to be acting as collection agencies for big businesses. Kind of sad considering we are still mired in recession.

(wisenberg)

September 19, 2012 in Fraud, Prosecutions, Prosecutors | Permalink | Comments (0) | TrackBack (0)