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)

Thursday, September 6, 2012

Second Circuit Releases Magnum OBUS On Insider Trading

In SEC v. Obus (2d Cir. 2012), released yesterday, the Second Circuit provides a primer on insider trading law, with particular attention paid to tipper liability, tippee liability, and scienter. The Court also seeks to reconcile the supposed conflict between Dirks and Hochfelder with respect to the level of scienter that must be proved in tipping situations. Obus is required reading for anyone working in the white collar and securities fraud fields.

(wisenberg)

September 6, 2012 in Fraud, SEC, Securities | Permalink | Comments (1) | TrackBack (0)

Saturday, August 11, 2012

The DOJ: In Action or Inaction?

Here is an interesting piece from the Washington Examiner's Mark Tapscott, commenting on the Government Accountability Institute's new report, Justice Inaction: The Department of Justice's Unprecedented Failure to Prosecute Big Finance. According to Tapscott, the GAI "has concluded that conflicts of interest among President Obama's top Department of Justice appointees may explain why nobody on Wall Street has been prosecuted by the government following the economic meltdown of 2008." Notice those weasel words--may explain. I haven't read the report yet, but I'm not buying GAI's theory. DOJ's stunning failure to prosecute elite financial control fraud is coming from a pay grade much higher than Holder's.

(wisenberg)

August 11, 2012 in Fraud, Prosecutions, Prosecutors | Permalink | Comments (2) | TrackBack (0)

Wednesday, August 8, 2012

DOJ's Fraud Protection Racket

Here is an excellent story by Michael S. Schmidt and Edward Wyatt in today's New York Times about DOJ's pathetic track record in prosecuting and convicting individual high profile fraudsters in connection with the financial crisis. Instead, companies pay whatever it takes by way of civil and (sometimes) criminal penalties in order to move on. For most of these companies it is a cost of doing business and a drop in the bucket. Make no mistake about it, the failure of this Administration's Justice Department to go after individual criminal fraud at the highest levels of the private sector is a decision that has been made at the highest levels of the public sector. The article quotes Acting Associate Attorney General Tony West as follows: “There is a lot of behavior that makes us angry but which is not necessarily illegal. If the evidence is there, we won’t hesitate to bring those cases.” Sorry Mr. West, but the most charitable interpretation of your remarks is that you don't know what the hell you're talking about.

(wisenberg)

August 8, 2012 in Fraud, Prosecutions | Permalink | Comments (1) | TrackBack (0)

Tuesday, July 24, 2012

Serious Financial Allegations Deserve Criminal Investigation

My learned and astute co-editor, Solomon Wisenberg, bridled at the thought of a criminal investigation of the Libor bank scandal (see here), which he believes will be a waste of time, and of the JP Morgan Chase trading loss (see here), which he believes lacks evidence of criminality.  While I do not know enough about these matters to dispute his reasons, I nonetheless strongly believe a criminal investigation is warranted in both instances.

Financial manipulations which cost shareholders and customers of large institutions millions (or billions) of dollars require criminal investigation, and, if identifiable provable criminal wrongdoing is found, criminal prosecution.  It has become clear that those institutions and their employees are incapable or unwilling to police themselves, and, as Mr. Wisenberg points out, the responsible regulatory agencies have often been asleep at the switch or even compliant.

That is not to say that every massive financial loss involves criminality or that weak or questionable criminal prosecutions should be brought to soothe the popular thirst for criminal punishment.  It is not to say that genuine defenses, such as estoppel due to government approval or acquiescence, should not prevent prosecution.  But for the huge financial institutions, even a penalty of almost a half billion dollars, as in the Barclays Bank "deferred prosecution" deal (effectively a "non-prosecution" deal), is merely a cost of doing business passed on to shareholders.  And for many of the traders and manipulators, who always weigh risk but rarely morality, only the risk of a criminal prosecution (which for them involves potential prison sentences) will have any serious deterrent effect.

To be sure, criminal investigations, even without prosecutions, may deter innovation and creativity in financial vehicles and dealings (although I am not so sure that is a bad thing).  Additionally, investigations themselves cause mental distress, potential loss of reputation, and considerable legal fees.  Criminal investigations, therefore, should not be started without careful consideration by law enforcement or prosecutorial agencies.  But massive losses of other people's money should almost always require an examination beyond a regulatory or civil one by our historically inept financial regulatory agencies.

Every death by other than natural causes, every fire of any proportion, and every serious automobile accident is reviewed by authorities for possible criminal prosecution.  Is there any reason an unusual massive financial loss of other people's money should be exempt from scrutiny for possible criminality?  I think not.

(goldman)

July 24, 2012 in Current Affairs, Deferred Prosecution Agreements, Fraud, Investigations | Permalink | Comments (0) | TrackBack (0)

Thursday, July 12, 2012

Lying Juror Requires New Trial in Massive Tax Fraud Case

Last month, in a thorough 64-page opinion, Southern District of New York Judge William Pauley ordered a new trial for three of four defendants convicted in what he described as "the largest tax fraud prosecution in U.S. history" because a juror, Catherine M. Conrad, had lied her way into being accepted as a juror.  United States v. Daugerdas, et al., 09 Cr. 581.

There appears to be little question Ms. Conrad, a suspended lawyer, connived to make herself in her own word "marketable" so that she could have "an interesting trial experience" as a juror.  In voir dire, she lied about her education, claiming the highest level she had reached was a B.A. when in fact she had a law degree.  She concealed not only her membership in and suspension from the bar but her own criminal convictions -- for shoplifting, DWI, contempt and aggravated harassment -- as well as her husband's extensive criminal history, which included a seven-year prison stay.  She made, according to the court, a "calculated, criminal decision to get on the jury." 

At a post-trial hearing at which she was granted use immunity, Conrad stated that if the truth were known, "defense counsel would be wild to have me on the jury."  In fact, however, Conrad turned out to be extremely biased against the defendants.  In a congratulatory letter she sent to the prosecutors after the trial, she said she was "privileged to observe la creme de la creme -- KUDOS to you and your team."  In that letter, she mentioned that she had fought against but ultimately had "thrown[n] in the towel" on a not guilty verdict on one of the counts concerning defendant David Parse.  At the hearing, she testified that "most attorneys" are "career criminals."  Two of the four convicted defendants were practicing lawyers; Parse was a non-practicing lawyer.

Judge Pauley, clearly upset by the need to retry a case which took three months, strongly urged the government to prosecute Conrad.  Perhaps concerned that the government might feel that prosecuting her would be inconsistent with its opposition to a new trial, he added, "The prospect of preserving a tainted jury verdict should not temper the Government's resolve to call Conrad to account for her egregious conduct."  Any prosecution of Conrad, however, obviously would have Kastigar obstacles because of her immunity.

The judge, following the Supreme Court's decision in McDonough Power v. Greenwood, 464 U.S. 548 (1984), found that in order to obtain a new trial, the moving party must "first demonstrate that a juror failed to answer honestly a material question on voir dire and then further show that a correct response would have provided a valid basis for a challenge for cause" (emphasis added).  Apparently, even in a criminal case, the mere existence of a juror who deliberately lied her way onto the jury may not be sufficient to require a new trial.  See United States v. Martha Stewart, 433 F.3d 273 (2d Cir. 2006).  The McDonough test appears to be "If the juror hypothetically had answered truthfully, would her truthful answers have led to a challenge for cause?"  Thus, unknown facts that might have affected her fitness to serve as a juror which would not in any case have been revealed by accurate responses to voir dire questioning presumably should not be considered.

In a lengthy analysis, mingling those hypothetical answers to questions asked during jury selection with, somewhat questionably, facts learned and impressions formed at the post-verdict hearing -- including Conrad's discovered dishonesty, bias and her animus to lawyers -- the court found that the McDonough criteria had been amply met.  Accordingly, it ordered a new trial for all the convicted defendants -- except Parse, who the court ruled had "waived" his claim for a new trial since his attorneys knew or "with a modicum of diligence would have known" that Conrad's statements in jury selection were false and misleading and failed to disclose that knowledge to the court.

Judge Pauley felt that Parse's lawyers, the firm of Brune and Richard, knew or at least suspected (or alternatively should have known) that Conrad was an imposter certainly by the start of jury deliberations, but made a decision not to reveal their belief or suspicion to the court.  The court was apparently affected by what seems to be a carefully-crafted, literally true but arguably misleading, statement in the lawyers' new trial motion that they were "prompted" by disclosure of Conrad's post-verdict letter to investigate and conduct records searches "in the wake of Conrad's . . . post-verdict letter."  The court found that the motion contained "significant factual misstatements" and that its "clear implication" was to give the false impression that Parse's lawyers had no idea of Conrad's true identity until well after the verdict.  In fact, as demonstrated in a later letter from the firm, in the firm's e-mails during trial, which were ordered by the court to be produced, and in testimony by the lawyers at a hearing, the firm apparently had concerns about and suspicion of Conrad's deception, initially at voir dire and later, after further record search revelations, during the judge's charge to the jury.  A most graphic example was one lawyer's e-mail during the charge, "Jesus, I do think it's her."

The court believed that the attorneys' submission was designed to foreclose any government claim that their pre-verdict knowledge doomed their post-verdict motion on the grounds that they failed to act with "due diligence."  The court found unconvincing the attorneys' claim that notwithstanding the similarities between the juror and the suspended lawyer discovered by electronic research -- name, home town, father's occupation, approximate age -- and the juror's use of previously unmentioned legal terms (such as respondeat superior) in jury notes she authored, the attorneys did not believe until after her letter to the government was disclosed that juror Conrad and suspended lawyer Conrad were the same person.

The court thus found that Parse's attorneys had "actionable intelligence" that Conrad was an imposter and that they had been required, but failed, to undertake "swift action" to bring the matter to the court's attention.  The court apparently felt that the attorneys had attempted to "sandbag" it by remaining silent about the defect and only raising the issue when and if the trial did not conclude favorably, in effect providing them and their client with an "insurance policy against an unfavorable verdict."  By his attorneys' conduct, the court ruled, Parse waived any error.

It may well be that during the trial the attorneys chose not to report their suspicions because they felt that Conrad, who appeared from web research to be potentially anti-government, would be a favorable juror for the defense, and they did not want to lose her.  It may also be that, whatever the objective evidence that the juror and the suspended lawyer were one and the same might look like with hindsight, they actually thought that the juror and the suspended lawyer were different people since, as they claimed, they could not believe that the juror -- a lawyer -- would blatantly lie.  Under either alternative, the court found, they had an obligation to share their knowledge with the court.

Some may argue that an attorney, in her duty of zealous representation of a client, may remain silent if she learns during jury selection that a juror misrepresented herself.  Judge Pauley's contrary view is clear:  "An attorney's duty to inform the court about suggested juror misconduct trumps all other professional obligations, including those owed a client."  I agree.  See New York Rules of Professional Conduct 3.3(b).

Some may also question whether Parse, the client, should suffer from his lawyer's purported misconduct or lack of diligence (of which he had no apparent knowledge).  While generally a client is bound by a lawyer's strategic decision, and cannot cry foul if it backfires, Parse did suffer the same denial of a fair jury as the other defendants.  Nonetheless, the court held that his attorneys' failure to report waived any objection by Parse, but granted new trials to the other three convicted defendants (whose lawyers apparently had no knowledge of Conrad's deception).

There are several ironies in this case:  Parse, about whom, according to Conrad's letter to the prosecutors, the jurors "had qualms," is the only one whose conviction stands.  Further, his attorneys were the ones responsible for investigating and presenting the motions which succeeded in a new trial for the others (who joined the motion), but not for him.  And, lastly, if Conrad had told the truth at voir dire and revealed her suspension from the bar and her and her husband's criminal record, she undoubtedly would have been successfully challenged -- whether by cause or peremptory -- on the motion of the prosecution she so strongly favored, and not be the defense she despised.

 (goldman)

July 12, 2012 in Defense Counsel, Fraud, Judicial Opinions, Legal Ethics, Martha Stewart, Perjury, Tax | Permalink | Comments (0) | TrackBack (0)