Tuesday, April 14, 2015
Earlier this month, the Second Circuit, as expected (at least by me), denied Southern District of New York U.S. Attorney Preet Bharara's request for reargument and reconsideration of its December 2014 ruling in United States v Newman which narrowed, at least in the Second Circuit, the scope of insider trading prosecutions. I would not be surprised if the government seeks certiorari, and, I would not be all that surprised it cert were granted.
In Newman, the defendants, Newman and Chiasson, were two hedge fund portfolio managers who were at the end of a chain of recipients of inside information originally provided by employees of publicly-traded technology funds. The defendants traded on the information and realized profits of $4 million and $68 million respectively. There was, however, scant, if any, evidence that the defendants were aware whether the original tippors had received any personal benefit for their disclosures.
The Second Circuit reversed the trial convictions based on an improper charge to the jury and the insufficiency of the evidence. Specifically, the court ruled that:
1) the trial judge erred in failing to instruct the jury that in order to convict it had to find that the defendants knew that the corporate employee tippors had received a personal benefit for divulging the information; and
2) the government had indeed failed to prove that the tippors had in fact received a personal benefit.
Thus, at least in the Second Circuit, it appears that the casual passing on of inside information without receiving compensation by a friend or relative or golf partner does not violate the security laws. "For purposes of insider trading liability, the insider's disclosure of confidential information, standing alone, is not a breach," said the court. Nor, therefore, does trading on such information incur insider trading liability because the liability of a recipient, if any, must derive from the liability of the tippor. To analogize to non-white collar law, one cannot be convicted of possessing stolen property unless the property had been stolen (and the possessor knew it). Those cases of casual passing on of information, which sometimes ensnared ordinary citizens with big mouths and a bit of greed, are thus apparently off-limits to Second Circuit prosecutors. To be sure, the vast majority of the recent spate of Southern District prosecutions of insider trading cases have involved individuals who have sold and bought information and their knowing accomplices. Although Southern District prosecutors will sometimes now face higher hurdles to prove an ultimate tippee/trader's knowledge, I doubt that the ruling will affect a huge number of prosecutions.
The clearly-written opinion, by Judge Barrington Parker, did leave open, or at least indefinite, the critical question of what constitutes a "personal benefit" to a provider of inside information (an issue that also might impact corruption cases). The court stated that the "personal benefit" had to be something "of consequence." In some instances, the government had argued that a tippee's benefit was an intangible like the good graces of the tippor, and jurors had generally accepted such a claim, likely believing the tippor would expect some personal benefit, present or future, for disclosing confidential information. In Newman, the government similarly argued that the defendants had to have known the tippors had to have received some benefit.
Insider trading is an amorphous crime developed by prosecutors and courts - not Congress - from a general fraud statute (like mail and wire fraud) whose breadth is determined by the aggressiveness and imagination of prosecutors and how much deference courts give their determinations. In this area, the highly competent and intelligent prosecutors of the Southern District have pushed the envelope, perhaps enabled to some extent by noncombative defense lawyers who had their clients cooperate and plead guilty despite what, at least with hindsight, seems to have been a serious question of legal sufficiency. See Dirks v. S.E.C., 463 U.S. 646, 103 S.Ct. 3255 (1983)(test for determining insider liability is whether "insider personally will benefit, directly or indirectly"). As the Newman court refreshingly said, in language that should be heeded by prosecutors, judges, and defense lawyers, "[N]ot every instance of financial unfairness constitutes fraudulent activity under [SEC Rule] 10(b)."
As I said, I would not be shocked (although I would be surprised) if Congress were to enact a law that goes beyond effectively overruling Newman and imposes insider trading liability on any person trading based on what she knew was non-public confidential information whether or not the person who had disclosed the information had received a personal benefit. Such a law, while it would to my regret cover the casual offenders I have discussed, would on balance be a positive one in that it would limit the unequal information accessible to certain traders and provide a more level playing field.
Friday, April 10, 2015
District of Columbia Court of Appeals Makes It Official: Prosecutor's Duty To Disclose Exculpatory Evidence Is Broader Than Brady
Kline was prosecuting Arnell Shelton for the shooting of Christopher Boyd. Shelton had filed an alibi notice and "the reliability of the government's identification witnesses" was the principal issue at the 2002 trial, according to the Report and Recommendation of Hearing Committee Number Nine ("Report and Recommendation").
Kline spoke with Metropolitan Police Department Officer Edward Woodward in preparation for trial. Kline took contemporaneous notes. Woodward was the first officer at the scene of the crime and spoke to victim Boyd at the hospital shortly after the shooting. According to the Report and Recommendation, Kline's notes of his conversation with Woodward were, in pertinent part, as follows: "Boyd told officer at hospital that he did not know who shot him–appeared maybe to not want to cooperate at the time. He was in pain and this officer had arrested him for possession of a machine gun."
At trial Boyd identified Shelton as the shooter. According to Bar Counsel, Kline never disclosed Boyd's hospital statement to the defense despite a specific Brady/Giglio request for impeachment material. The other identification witnesses were weak and/or impeachable. The case ended in a hung jury mistrial and the alleged Brady material (that is, Boyd's hospital statement to Woodward) was not revealed to the defense until literally the eve of the second trial, even though DC-OUSA prosecutors and supervisors had known about it for some time.
The court offered defense counsel a continuance, but she elected to go to trial as her client was then in jail. The second trial ended in Shelton's conviction. You can consult my earlier posts for a more detailed factual and case history background.
Rule 3.8(e) of the DC Rules of Professional Conduct states in pertinent part that: "The prosecutor in a criminal case shall not . . . intentionally fail to disclose to the defense, upon request and at a time when use by the defense is reasonably feasible, any evidence or information that the prosecutor knows or reasonably should know tends to negate the guilt of the accused...except when the prosecutor is relieved of this responsibility by protective order of the tribunal."
The District of Columbia Court of Appeals upheld the position of D.C. Bar Counsel and the Board that Rule 3.8(e) is not synonymous with Brady v. Maryland. The Court declined to import Brady's materiality test into Rule 3.8(e), making it clear that at the pre-trial and trial stages of a case, no prosecutor is fit to make a speculative materiality analysis. The rule is now clear. Any evidence that tends to negate the guilt of the defendant must be disclosed under the D.C. Rules of Professional Responsibility.
The Court overturned the Board's 30-day sanction imposed against Kline, given the confusion engendered by the Commentary to Rule 3.8(e). The Commentary states in part that: "The rule...is not intended either to restrict or to expand the obligations of prosecutors derived from the United States Constitution, federal or District of Columbia statutes, and court rules of procedure." Courts in other jurisdictions, as well as the ABA, have construed the D.C. Rule as including the Brady materiality standard, based on this Commentary. Additionally, at the time of Kline's actions, DC-USAO's training taught that Rule 3.8(e) was synonymous with Brady. The Court held that even if the Commentary was inconsistent with the Rule, the plain language of the Rule, and its legislative history, prevailed.
"However, while clear and convincing evidence has been presented that Kline violated Rule 3.8 when he failed to turn over the Boyd Hospital Statement to the defense prior to trial, we are mindful of the fact that our comment to Rule 3.8 (e) has created a great deal of confusion when it comes to a prosecutor’s disclosure obligations under Rule 3.8. Thus, Kline's understanding of his ethical obligations, while erroneous, does not warrant an ethical sanction."
The Board originally found that the suppressed exculpatory statement was material, even though a subsequent jury in possession of the material convicted the defendant. I don't know if that finding was ever revisited. I mention it because the Court's opinion nowhere discusses this point and seems to assume that the withheld statement was immaterial.
The opinion by Chief Judge Washington is extremely well-crafted and enormously significant.
Hat Tip to Charles Burnham of Burnham & Gorokhov for informing me of this ruling and sending a copy.
Tuesday, March 31, 2015
Practice Notes: First Circuit Cases Yield White Collar Rulings on Materiality and Upward Variance/Departure
Two white collar decisions emerged last week from the First Circuit, both related to the Rwandan genocide.
United States v. Kantengwa reinforces an old truth for white collar practitioners. If you don't win on materiality at trial, you are totally screwed on appeal. According to the First Circuit, the appellant was "a member of a prominent political family allegedly involved in the Rwandan genocide." Katengwa was indicted for perjury under 18 U.S. Code 1621 (1) for false statements she told under oath in an asylum application and subsequent removal proceedings. Katengwa argued, among other things, that the government was precluded from bringing perjury charges against her because an immigration judge had already ruled that her false statements did not "go to the heart" of her asylum claim. Assuming, without deciding, that an administrative finding of fact can preclude later criminal charges, the First Circuit rejected Katengwa's collateral estoppel claim, because "materiality" under 1621 (1) and the "heart of the matter rule" in immigration law involve two distinct standards. "The heart of the matter rule from immigration law prohibits basing an adverse credibility determination on inconsistencies in an applicant's testimony that do not go to the heart of [her] claim." (Internal quotes and citations omitted.) But, "a statement is material in a criminal prosecution for perjury under § 1621(1) if it is 'material to any proper matter of the [decisionmaker's] inquiry.' United States v. Scivola, 766 F.2d 37, 44 (1st Cir. 1985) (emphasis added)." The First Circuit made clear, through a litany of examples, that this test can cover a multitude of subsidiary matters to the decisionmaker's overall inquiry. Translation: In all but the rarest cases, materiality is an argument you make to the jury. It can serve as a nice hook for jury nullification. Don't expect it to lead to victory on appeal.
In United States v. Munyenyezi, Katengwa's sister was indicted on "two counts of procuring citizenship illegally by making false statements to the government. See 18 U.S.C. §§ 1425(a) and (b)." The jury hung in her first trial, but the second trial produced convictions. She raised several issues on appeal, but the one that concerns me here is the sentence of 120 months, the statutory maximum. Munyenyezi's Guidelines Range was 0-6 months, and she attacked the sentence on appeal as substantively unreasonable. The First Circuit called this, "a tough sell," reiterating its abuse of discretion standard of review and precedent that "as long as we see 'a plausible sentencing rationale' that reaches 'a defensible result,' the sentence stands. United States v. Martin, 520 F.3d 87, 96 (1st Cir. 2008)." The trial judge imposed the 120 month sentence under alternative theories. He granted an upward departure under Guidelines Section 5K2.0 for an aggravating circumstance of a kind or degree not adequately taken into accoount by the Guidelines. He also upwardly departed under 18 U.S.C. Section 3553 (a). As every schoolboy knows, and as the First Circuit reminds us, "Section 3553(a) lets a judge vary upward based on factors listed there, like the defendant's background (including her criminal history), the circumstances of the offense, the seriousness of the offense, the need to protect and deter others, the need to promote respect for the law and to provide a just punishment, and the need to eliminate unjustified sentencing disparities." And the First Circuit also reminds us, albeit in a footnote, that "[u]nder certain circumstances a judge can also vary downward using section 3553(a)." You don't say!
Interestingly, the trial judge did not upwardly depart/vary because of Munyenyezi's alleged "participation in genocidal conduct." He sentenced her to the statutory maximum because, "'lying about participation in genocide when specifically asked,' the judge explained, knowing full well 'that such conduct is automatically disqualifying with respect to immigration and citizenship seriously undermines the integrity of this country's immigration standards in the most offensive way' imaginable." The judge later noted that if he had sentenced Munyenyezi for her alleged genocidal conduct, he would not have imposed concurrent sentences.
There are often silver linings in decisional clouds. An appellate court that uphold a 3553 (a) upward variance of ten years can also uphold a 10 year downward variance. The precedent cuts both ways.
Saturday, March 28, 2015
Christine Wright-Darrisaw was found guilty of threatening the President under 18 U.S. Code Section 871(a). Ms. Wright-Darrisaw experienced a negative result in her local Family Court. She called the White House switchboard and, after two and one-half minutes of incoherent barnyard gibbersih, threatened to fornicate and kill President Obama. She was entitled to a four point reduction in her offense level under Guidelines Section 2A6.1(b)(6) if the sentencing court found that "the offense involved a single instance evidencing little or no deliberation." The trial judge refused to grant the reduction, noting that the very act of contacting the White House involved deliberation. According to the Second Circuit, "the explanation provided by the district court suggests that the court may have been too sweeping in its consideration of what constitutes deliberation cognizable under U.S.S.G. § 2A6.1(b)(6)." The "deliberation" to be considered under 2A6.1(b)6) "is deliberation related to the communication of the threat itself. Only if a defendant's course of conduct leading up to and following the time the threat was made is closely tied to the communication of the threat, or if the defendant makes any effort to carry out the threat, may the conduct then provide a basis for inferring deliberation sufficient to reject the four-level reduction." Although the call here was deliberate, the threat may not have been. Since it appears that the district court conflated the two concepts, the Second Circuit remanded for re-analysis of the deliberation issue. Examining holdings in sister circuits, the Second Circuit focused on two critical factors in determining whether deliberation is present: "(1) whether, and under what circumstances, the threat itself has been repeated and (2) whether there is evidence of planning or some effort to carry out the threat." In Wright-Darrisaw's case, it is undisputed that the threat against President Obama was not repeated. (However, there were abundant past threats against neighbors, strangers, President Bush, and other officials.) Thus, the only question on remand is whether "there is sufficient evidence of planning or some effort to carry out the threat." The case is United States v. Wright-Darrisaw.
Wright-Darrisaw's challenge to the sufficiency of the evidence against her was deferred pending the U.S. Supreme Court's decision in United States v. Elonis, 730 F.3d 321 (3d. Cir. 2013), cert. granted, 134 S.Ct. 2819 (2014).
Wednesday, February 25, 2015
Co-blogger Solomon Wisenberg's post on today's Supreme Court decision in Yates v. United States highlights the plurality opinion that focuses on a straight statutory interpretation analysis. But there is an interesting and important note in the dissent that is worth mentioning.
In Part III of the dissent it states, "That brings to the surface the real issue: overcriminalization and excessive punishment in the U.S. Code." - So even though the dissenters are not willing to toss out the statute with the fish, they are recognizing the overcriminalization movement.
Second, the dissenters state - ". . . , I tend to think, for the reasons the plurality gives, that s 1519 is a bad law -- too broad and undifferentiated, with too-high maximum penalties, which give prosecutors too much leverage and sentencers too much discretion. And I'd go further: In those ways s 1519 is unfortunately not an outlier, but an emblem of a deeper pathology in the federal criminal code."
The recognition by these dissenting justices of the growing problem of overcriminalization in the United States is an important step. In many ways this decision is really a 9-0 decision in that the plurality tossed the fish case out because it did not fit in this sea. The dissenters felt their hands were tied to allow the fish case to stay, but they weren't happy with what Congress was doing and sent their message in the sentences above. Will Congress listen, that is the important question here.
The U.S. Supreme Court has rendered its opinion in Yates v. United States. A fish is still a fish, but it is not a tangible object under 18 U.S.C. Section 1519, which was passed as part of the Sarbanes-Oxley Act. Under Section 1519:
Whoever knowingly alters, destroys, mutilates, conceals, covers-up, falsifies, or makes a false entry in any record, document, or tangible object, with the intent to impede, obstruct, or influence the investigation or proper administration of any matter within the jurisdiction of any department or agency of the United States or any case filed under Title 11, or in relation to or contemplation of any such matter or case, shall be fined under this title, imprisoned for not more than 20 years, or both.
Yates was charged under 1519 with destroying, concealing, and covering-up some undersized groupers which he threw overboard after they were segregated and ordered preserved by Officer John Jones of the National Marines Fisheries Service.
The Court ruled 5-4 that Yates' conduct did not run afoul (or a fish) of 1519, because the little fishies were not tangible objects under that particular statute which was clearly aimed, as an examination of its title and overall language shows, at document-related cover-ups. Justice Ginsburg, writing the Opinion of the Court for a four person plurality, held that a tangible object under 1519 is really only a tangible object "used to record or preserve information." She was joined by Chief Justice Roberts and Justices Breyer and Sotomayor. Justice Alito concurred in the judgment alone, but used a textual-contextual approach similar to that employed by the plurality, stating that a tangible object under 1519 had to be "something similar to records or documents." Always careful not to offend the federal prosecutorial apparatus, Alito called it a very close case.
In dissent Justice Kagan, joined by Justices Scalia, Kennedy, and Thomas, used a straight textual approach and pointed to the plain and ordinary meaning of tangible object--an object that is touchable. You can touch a fish. Ergo, a fish is a tangible object. You can destroy, cover-up, or conceal a fish. By doing so with the right amount of intent, you can violate 1519. End of story.
Monday, January 19, 2015
The case is United States v. Dibe. Claudio Dibe pled guilty, without a plea agreement, to wire fraud and received a below Guidelines sentence. He complained on appeal that his sentence would have been lower if the sentencing court had considered his counsel's ineffective assistance in failing to adequately explain the benefits of the government's initial plea offer. The Ninth Circuit held that ineffective assistance of counsel cannot be considered as a mitigating under 18 U.S.C. Section 3553(a). Distinguishing the U.S. Supreme Court's opinion in Pepper v. United States, 131 S.Ct. 1229 (2011), the Ninth Circuit noted that counsel's alleged ineffective assistance "has nothing to do with [Dibe's] own conduct."
Tuesday, January 6, 2015
Thursday, December 11, 2014
Here are two (ahem) differing views on yesterday's Second Circuit insider trading decision in United States v. Newman. The Wall Street Journal editorial writers are understandably happy at the ruling and contemptuous of Preet Bharara, dubbing him an Outside the Law Prosecutor. The Journal exaggerates the extent to which the case was an outlier under Second Circuit precedent and incorrectly states that "the prosecution is unlikely to be able to retry the case." The prosecution cannot retry the case, unless the full Second Circuit reverses the panel or the U.S. Supreme Court takes the case and overturns the Second Circuit.
Over at New Economic Perspectives, Professor Bill Black insists that the Second Circuit Makes Insider Trading the Perfect Crime. Black thinks Wall Street financial firms will enact sophisticated cut-out schemes in the wake of the opinion to give inside traders plausible deniability. He compares the fate of Newman and his co-defendant to that of Eric Garner and calls for a broken windows policing policy for Wall Street. Black's piece is outstanding, but in my view he underestimates the extent to which the Newman court was influenced by Supreme Court precedent and ignores the opinion's signals that the government needed to do a much better job of proving that the defendants knew about the tipper's fiduciary breach. As a matter of fact, in the typical insider trading case it is relatively easy to show such knowledge. That's what expert testimony and willful blindness instructions are for.
Wednesday, December 10, 2014
The Second Circuit's decision in United States v. Newman is out. The jury instructions were erroneous and the evidence insufficient. The convictions of Todd Newman and Anthony Chiasso are reversed and their cases have been remanded with instructions to dismiss the indictment with prejudice. Here is the holding in a nutshell:
We agree that the jury instruction was erroneous because we conclude that, in order to sustain a conviction for insider trading, the Government must prove beyond a reasonable doubt that the tippee knew that an insider disclosed confidential information and that he did so in exchange for a personal benefit. Moreover, we hold that the evidence was insufficient to sustain a guilty verdict against Newman and Chiasson for two reasons. First, the Government’s evidence of any personal benefit received by the alleged insiders was insufficient to establish the tipper liability from which defendants’ purported tippee liability would derive. Second, even assuming that the scant evidence offered on the issue of personal benefit was sufficient, which we conclude it was not, the Government presented no evidence that Newman and Chiasson knew that they were trading on information obtained from insiders in violation of those insiders’ fiduciary duties.
Wednesday, November 19, 2014
Special Prosecutor Mike McCrum has survived an attempt to quash the Rick Perry indictment based on alleged procedural irregularities connected to McCrum's appointment. Courthouse News has the story here. The Order Relating to Authority of Attorney Pro Tem, written by Assigned Judge Bert Richardson, appears to be carefully and thoughtfully crafted. We can expect a similar approach to the more substantive constitutional issues awaiting Judge Richardson's pen.
Monday, October 27, 2014
Imagine being so angry at prosecutorial shenanigans in one of your cases that you decide to write a book. A book that names names and settles scores. A book that details the Brady violations you believe occurred in your client's trial. A book that compares those purported violations to the undeniable Brady errors judicially noticed in the Ted Stevens prosecution. A book that identifies the DOJ officials connected to both your case and the Ted Stevens case and traces the rise, high within the ranks of DOJ and the White House, of the prosecutors you loathe. A book with a forward by none other than Ninth Circuit Chief Judge Alex Kozinski. Imagine this and you have imagined Sidney Powell's Licensed to Lie: Exposing Corruption in the Department of Justice.
This book is a terrific read, particularly for anyone making a living in the world of federal white collar investigations and trials. Both the federal white collar specialist and the intelligent lay reader should find it engrossing. I particularly enjoyed the "you are there" descriptions of defense strategy sessions and courtroom hearings.
Powell played a minor role on the Arthur Andersen appellate team and the lead role in the post-trial defense of Enron Barge defendant, and former Merrill Lynch executive, Jim Brown. She covers most or all of the Enron Task Force sins that have long been the subject of controversy in the white collar defense bar, including the practices of: providing mere summaries, rather than full interview reports, of exculpatory materials to the defense; withholding certain exculpatory information altogether; withholding agent notes of witness interviews; creating composite 302s that fail to reveal changing witness statements over time; designating potential defense witnesses as targets, in effect threatening them with prosecution if they testify; convincing compliant trial judges to approve clearly faulty jury instructions.
Powell reminds us as well that every Enron-related conviction that went up on appeal resulted in a partial or complete reversal. And although she had no involvement in the Ted Stevens case, Powell does an excellent job of summarizing, based on two publicly released investigations, the multiple material Brady/Giglio violations that occurred in that prosecution.
And yet this book, as informative and fun to read as it is, has some problems.
For openers, Powell sees the world in black and white terms. You are with her or against her on this ride, and God help you if get on Sidney's bad side. You tend to get painted in black and white terms. Ergo:
Enron Task Force Chief Andrew Weissman is "a narrow faced man with a beak of a nose."
DOJ Criminal Division Chief Michael Chertoff is "sharp-featured."
DOJ's Rita Glavin has "long black hair, sharp features, an easy smirk, and an affinity for androgynous attire."
Original Enron Task Froce Chief Leslie Caldwell is "a short no-nonsense looking woman with closely cropped hair."
FBI Special Agent Raju Bhatia is "smarmy."
Enron Barge Case prosecutor Kathryn Ruemmler, who later served President Obama as White House Counsel, has "a well known passion for expensive Chrisitan Louboutin red-soled stiletto heels." Those heels show up in more than one description of Ruemmler.
Matthew Friedrich, later Acting Assistant AG in charge of the Criminal Division, has "a boyish face that easily appeared smug."
You get the picture. But if you are lucky enough to be on Sidney's side. Well:
Ike Sorkin is "a handsome man with thick gray hair."
Richard Schaeffer is "a tall handsome impeccably dressed New York lawyer."
And so on.
Fifth Circuit Judges who might rule against Powell are suspected of being politically biased or intellectually corrupt. Thus, in describing the panel she drew for her Fifth Circuit argument that Jim Brown deserved a new trial (based on multiple Brady violations), Powell wonders "if [Judge] Graves...might have some connection with Ruemmler. She, logically, would have been the person to advise the president on Graves' nomination and assist Graves in the confirmation process." Powell also wonders "if Friedrich had been part of the confirmation process with [Judge] Southwick. Friedrich's meteoric rise within the department placed him as chief of staff to Attorney General Gonzalez when Southwick was nominated and confirmed." After the panel ruled unanimously against her, in an opinion authored by Judge Jerry Smith, Powell "struggled to grasp how a court that I had respected so much for so long could issue an opinion as result-driven, tortured, and just plain bad as this one was."
Second, Powell posits a past DOJ Golden Age, when prosecutors were fair and committed to doing justice, and contrasts it unfavorably with our present era of so-called corruption. Here's a news flash for Ms. Powell. There was never a Golden Age of prosecutorial fairness in the DOJ. There have always been good prosecutors and bad prosecutors, and Assistant U.S. Attorneys have long played a prosecutorial game quite legally and openly rigged in favor of the house.
Last, but by no means least, Powell refuses to deal seriously, or to deal very much at all, with Judge Jerry Smith's Fifth Circuit panel opinion denying Jim Brown a new trial. Powell passionately argues throughout the book that the government hid Brady material from Brown's trial defense team in a grave miscarriage of justice. Virtually every argument she makes, in front of every federal tribunal, is meticulously rendered in 400 plus pages. But her discussion of Judge Smith's opinion is curiously brief, covering two pages, and fails to address Smith's main points.
The Enron Barge case concerned an allegedly sham transaction between Enron and Merrill Lynch to purchase Enron barges. The government maintained that the deal was a sham, and not a real purchase, because Enron orally promised/guaranteed to take Merrill out of the transaction, by buying back the barges, or finding a third party buyer, within six months. Although Jim Brown and the other Enron Barge defendants saw their fraud convictions overturned by the Fifth Circuit, Brown had also been convicted of perjury and obstruction of justice for grand jury testimony regarding his understanding of the transaction.
Prosecutors refused to disclose the FBI's raw notes of Andrew Fastow's interviews to Brown's trial team, instead providing summaries. The raw notes, unlike the summaries, quoted Fastow as saying that he "never used the word promise" in conversations about a buy-back with Merrill executives. Judge Smith pointed out, however, that "any potential exculpatory value of the passages from the Fastow notes that were not disclosed to the defense is eliminated when we read them in context rather than looking just to the portions of the sentences that Brown cherry-picks."
Smith pointed to other portions of the raw notes and explained that:
The notes say, to give only a few examples, (1) “It was [Enron’s] obligation to use ‘best efforts’ to find 3rd party takeout + went on to say there would be 3rd party b/c AF is manager of third party,” (emphasis added); (2) “LJM was 3rd party + was already found;” (3) “[Fastow] told [Merrill Lynch] that [Enron] would get [Merrill Lynch] out, would get [illegible] or LJM to buy out;” and (4) “Come June 2000, if [Enron] did not have a buyer then LJM would step in to buy out.”
In other words, Fastow controlled a captive third party, LJM, and could effectively guarantee that if a buyer could not be found, LJM would take Merrilll out of the transaction in six months. Judge Smith noted that:
[T]he sentences that Brown cites from the Fastow notes do not say that the agreement as a whole was a “best efforts” agreement, pace Brown’s testimony; they say only that Enron would use its “best efforts” to find a buyer but that Fastow guaranteed that LJM2, which he controlled, would be that buyer if no one else was found. Indeed, Fastow admitted that, “[i]f call was transcribed—it should have blown the accounting.”
Now I'm perfectly willing to believe, and in fact I assume, that the Enron Barge defendants, including Jim Brown, got a really raw deal and should never have been indicted. And I'm also willing to hear a good argument that Judge Smith got his Brady analysis backasswards. But in a book devoted to exposing Brady error, written by one of the country's foremost appellate lawyers, I expect more than two pages of cursory, conclusory attacks on a key federal appellate decision. Powell fails to fairly present, much less refute, Judge Smith's specific points (incorrectly referring to his careful 19 page opinion as a "meager" nine pages). I call this a material omission.
Wednesday, October 1, 2014
And here it is. DeLay v. State of Texas. To clarify my ealier comments, the majority held that DeLay did not commit or conspire to commit money laundering. He did not launder or conspire to launder criminally derived proceeds, because the facts proved by the State failed to prove a violation of the Texas Election Code. In other words, the State proved no underlying crime.
Sunday, September 28, 2014
Former Wellcare executives, who were convicted, have filed their briefs in the 11th Circuit and a strong amici brief is accompanying them. One of the key issues comes from an 11th Circuit case United States v. Whiteside, where the court held that a false statement charge can't be premised on a statement that is true under an objectively reasonable interpretation of the law. The importance of the falsity of the statement is a key component of a prosecution as without this limitation prosecutorial discretion can be stretched to inordinate lengths.
An equally important issue argued pertains to willful blindness. The Supreme Court's opinion in Global Tech emphasizes the importance of an affirmative act needed for demonstrating willful blindness and how recklessness and negligence will not suffice.
These issues raise important questions for the 11th Circuit to examine. It is therefore no surprise to see some top criminal law professors signing onto the amici brief.
Behrens Brief - Download Behrens_Brief_-_Filed_Copy
Farha's Brief - Download Farha_Brief_2014 09 19-1
Clay's Brief - Download Clay_Brief_-_Filed_Copy
Thursday, September 18, 2014
Appellate Court Reverses Conviction Based on Last-Minute Prosecutorial Provision of Brady Material "Buried" in Mass of Discovery
Two of the many issues relating to prosecutorial disclosure of Brady material are the timing of the disclosure and the identification of the material as exculpatory. Many, perhaps most, prosecutors believe that they have satisfied their ethical and constitutional obligations under Brady by providing the exculpatory material just before trial (or before the witness affected testifies) without any specification that it is Brady material. Courts rarely -- almost never -- reverse a conviction because the Brady material was provided late or without any signal that it is exculpatory material.
In this connection, yesterday an intermediate New York appellate court in Brooklyn upon an appeal of a denial of a post-conviction motion unanimously reversed a kidnapping conviction because of the untimely disclosure of Brady material in a "document dump" on the eve of trial. The prosecutors there had during jury selection delivered the documents "interspersed throughout a voluminous amount of other documentation, without specifically identifying the documents at issue at the time of delivery," thereby, said the court, "burying" them. By doing so, the prosecution "deprived the defendants of a meaningful opportunity to employ that evidence during cross-examination of the prosecution's witness." People v. Wagstaffe, A.D.3d -- (2d Dept., Sept. 17, 2014). See here.
The prosecution's case was based exclusively on the testimony of a witness under the influence of drugs and alcohol at the time of the event who testified that she saw the defendants force the 16-year old victim into a car. The documents, police requests for records for both defendants, would have revealed that the defendants were being investigated one day prior to the initial police interview with the witness, contrary to the testimony of one of the investigating officers that the interview led them to the defendants. Thus, the documents, said the court, would "bear . . . negatively upon the credibility of [the witness] and the investigating detectives," issues of "primary importance in this case."
Too often appellate courts, often while giving lip service to the notion that Brady material should be provided to the defendant in time for him or her to use in a meaningful fashion, accept the view that a few minutes before cross-examination is sufficient, or that the defense lawyer's failure to request an adjournment is fatal to the defense appeal. Too often courts distinguish between Giglio impeachment of witness material and other Brady material and accept that it is acceptable that the former be given as late as just before cross-examination. Too often courts expect defense counsel to find the Brady "needle in a haystack" in a pile of discovery or 3500 material provided shortly before trial.
It is refreshing for an appellate court to accept the practicality that a harried on-trial defense lawyer cannot be expected to appreciate immediately the significance of a single item or a few items of paper provided at the last-minute and/or together with a mass of other less significant documents. It is refreshing for a court not to accept the prosecutorial tactic or custom to provide a "document dump" to conceal a page or a few pages of significant exculpatory material.
Hopefully, this decision will be affirmed on appeal (if taken or allowed) to New York's highest court, the Court of Appeals, and will be a bellwether for other courts, and not ignored or consigned to history as an aberrant decision of an intermediate appellate court.
Sunday, August 31, 2014
The New York Times had an interesting article this week by Steven Davidoff Solomon entitled “Keeping Corporate Lawyers Silent Can Shelter Wrongdoing.” The piece centers on the recent decision out of the Delaware Supreme Court in the case of Wal-Mart Stores, Inc. v. Indiana Electrical Workers Pension Trust Fund IBEW,Del. Supr., No. 614, 2013 (July 23, 2014), and notes that the attorney-client privilege can be used to “shelter potential wrongdoing, perhaps to the detriment of many people, including shareholders.” As discussed at length in the article, the IBEW case permits stockholders to unilaterally breach the attorney-client privilege when there is suspected wrongdoing at a corporation.
The IBEW case is one many have followed in recent years. The controversy began after the New York Times broke the story of potential Foreign Corrupt Practices Act violations by Mar-Mart in April 2012. In response to that initial article, the IBEW, a Wal-Mart stockholder, sent a letter to the company demanding inspection of a number of documents related to the potential FCPA matter, including documents regarding the corporation’s initial internal review of the situation. Wal-Mart declined to provide certain of the documents and, with regard to some of those materials, claimed they were protected by the attorney-client privilege. The issue of whether Wal-Mart could properly withhold these materials from shareholders was litigated at length and finally made its way to the Delaware Supreme Court. In the ruling from last month, the Delaware Supreme Court sided with the IBEW and ordered Wal-Mart to produce the materials. Referring to the Fifth Circuit Court of Appeals case of Garner v. Wolfinbarger (1970), which recognized a fiduciary exception to the attorney-client privilege, the court in IBEW said:
With regard to the other Garner good cause factors, the record reflects that disclosure of the material would not risk the revelation of trade secrets (at least it has not been argued by Wal-Mart); the allegations at issue implicate criminal conduct under the FCPA; and IBEW is a legitimate stockholder as a pension fund. Accordingly, the record supports the Court of Chancery's conclusion that the documentary information sought in the Demand should be produced by Wal-Mart pursuant to the Garner fiduciary exception to the attorney-client privilege.
It is important to note, of course, that the shareholders are meant to keep the information they receive confidential and use it only to decide whether to file a claim against Wal-Mart directors related to the FCPA matter.
In reading the most recent New York Times article, I kept coming back to Upjohn v. United States and the ever present debate regarding the proper role of privilege in the world of internal investigations and potential corporate wrongdoing. In particular, I was drawn to the important language in Upjohn regarding the reasons for applying the privilege: “The privilege recognizes that sound legal advice or advocacy serves public ends and that such advice or advocacy depends upon the lawyers being fully informed by the client.” As the New York Times states in its piece from this week, “the attorney-client privilege for companies is increasingly under attack.” I wonder now what impact the IBEW decision and related issues regarding lawyer whistleblowers, such as in the ongoing Vanguard case, will have on the future of internal investigation strategy and, in particular, the role of internal counsel in such situations.
Friday, July 25, 2014
In re Kellogg Brown & Root – Privilege, Internal Investigations, and International White Collar Crime – Part II of II
In last week’s post, I discussed the recent case of In re Kellogg Brown & Root (“KBR”) from the perspective of privilege issues and internal investigations generally. Today, I would like to focus our consideration of the KBR case on international investigations and privilege issues.
In the KBR matter, a whistleblower alleged that the defense contractor defrauded the government by “inflating costs and accepting kickbacks while administering military contract in wartime Iraq.” During the whistleblower’s case, he sought discovery of materials from an internal investigation of the matter previously conducted by KBR. As discussed last week, the U.S. Court of Appeals for the District of Columbia Circuit concluded that the whistleblower was not entitled to the materials, stating that the “same considerations that led the Court in Upjohn to uphold the corporation’s privilege claims apply here.”
In rendering its opinion, the DC Circuit offered several important clarifications regarding the applicability of the attorney-client privilege to internal investigations. One of those was to note that Upjohn v. US (1981) does not require the involvement of outside counsel for the privilege to apply.
From In re KBR:
First, the District Court stated that in Upjohn the internal investigation began after in-house counsel conferred with outside counsel, whereas here the investigation was conducted in-house without consultation with outside lawyers. But Upjohn does not hold or imply that the involvement of outside counsel is a necessary predicate for the privilege to apply. On the contrary, the general rule, which this Court has adopted, is that a lawyer’s status as in-house counsel “does not dilute the privilege.” In re Sealed Case, 737 F.2d at 99. As the Restatement’s commentary points out, “Inside legal counsel to a corporation or similar organization . . . is fully empowered to engage in privileged communications.” 1 RESTATEMENT § 72, cmt. c, at 551.
While this is accurate with regard to domestic internal investigations, one must be cognizant of the fact that various jurisdictions around the globe interpret the privilege differently. When an internal investigation crosses borders, a failure to examine the breadth and scope of attorney-client privilege protections in the relevant jurisdictions could unexpectedly expose vast quantities of materials to production or seizure.
Take for example, the case of Akzo Nobel Chemicals Ltd. v. European Commission (European Court of Justice 2010). The case involved an antitrust investigation during which a dawn raid was carried out on Akzo’s Manchester, England, offices. During the raid, two emails were seized. The emails were an exchange regarding relevant antitrust issues between a general manager and the company’s in-house counsel. Despite the fact that such communications would almost certainly be privileged under U.S. standards and the ruling in In re KBR, the European Court of Justice rejected Akzo’s position that the emails were protected under the EU rules of privilege. Relying on an earlier ruling, the European Court of Justice reiterated that in EU investigations the attorney-client privilege only applies where (1) the communication is given for purposes of the client’s defense and, (2) the communication is with an independent lawyer, which does not including in-house counsel. See AM&S v. Commission (European Court of Justice 1982). The Akzo court went on to state, “It follows, both from the in-house lawyer’s economic dependence and the close ties with his employer, that he does not enjoy a level of professional independence comparable to that of an external lawyer.”
While such a limited application of the attorney-client privilege will not be present in every jurisdiction encountered during an international internal investigation, it is an important issue to consider both when structuring and conducting such inquiries in a cross-border setting.
For more on the dynamics of international internal investigations, see my recent article entitled International White Collar Crime and the Globalization of Internal Investigations (Fordham Urban Law Journal), available for free download here.
Sunday, July 20, 2014
I enjoy studying upward variance opinions, as they usually contain language and rules that can be used by the defense to support downward variances in other cases. This is true because, whatever specific factors are discussed, federal appeals courts typically speak of what justifies such variances in general terms, not distinguishing between upward and downward excursions. United States v. Ransom, decided earlier this month by the D.C. Circuit in an opinion by Judge David Sentelle, is no exception. Chester Ransom and Bryan Talbott each pled guilty to a fraud scheme and stipulated to a non-binding Guideline range of 46-57 months. The sentencing court calculated Ransom's range at 46-57 months but upwardly varied to a 72 month sentence. The court calculated Talbott's range at 63-78 months but upwardly varied to a 120 month sentence.
The Court initially held that Ransom's upward variance for lack of remorse was not inconsistent with the three point downward adjustment he received for acceptance of responsibility under Section 3E1.1(a) and (b). The Court in essence stated that one can plead guilty early and cooperate with the government without showing any remorse.
Next the Court rejected appellants' argument that the sentencing court improperly relied on factors in varying upward that the Guidelines had already accounted for. Joining some sister circuits the Court held (internal quotes and citations omitted) that:
It is not error for a district court to enter sentencing variances based on factors already taken into account by the Advisory Guidelines, in a case in which the Guidelines do not fully account for those factors or when a district court applies broader [Section] 3553(a) considerations in granting the variance.
As anyone who does federal sentencing work knows, those broader 3553(a) factors are often the key to obtaining a downward variance if the court is otherwise inclined to do so. To take one example, in the Mandatory Guidelines era it was almost impossible to obtain a downward departure based on family circumstances, but they can, and must, at least be "considered" by the sentencing court under the current regime. Believe it or not, not every district judge comprehends this simple rule. Ergo, it is nice to have additional case law on one's side.
Friday, July 18, 2014
In re Kellogg Brown & Root – Privilege, Internal Investigations, and International White Collar Crime – Part I of II
I am honored to join Ellen Podgor, Lawrence Goldman, and Solomon Wisenberg as a blogger on the White Collar Crime Prof Blog. My focus on the blog will be matters related to internal investigations and international white collar crime.
To get us started, let’s take a quick look at a new case that relates to both of these topics – In re: Kellogg Brown & Root, Inc., et al.
As readers of this blog will no doubt recall, the U.S. Supreme Court held in 1981 that attorney-client privilege protections may apply to internal corporation investigations. See Upjohn Co. v. United States, 449 U.S. 383 (1981). The Court stated:
The attorney-client privilege is the oldest of the privileges for confidential communications known to the common law. Its purpose is to encourage full and frank communication between attorneys and their clients, and thereby promote broader public interests in the observance of law and administration of justice. The privilege recognizes that sound legal advice or advocacy serves public ends and that such advice or advocacy depends upon the lawyers being fully informed by the client.
Despite the strong language in the Upjohn case, a U.S. District Court in Washington, DC ruled that a whistleblower at Kellogg Brown & Root (“KBR”), a defense contractor, was entitled to production of documents related to an internal investigation. The lower court concluded that the internal investigation was “undertaken pursuant to regulatory law and corporate policy rather than for the purpose of obtaining legal advice.”
Last month, the U.S. Court of Appeals for the District of Columbia Circuit overruled that lower court decision in the case of In re: Kellogg Brown & Root, Inc., et al. (Decided June 27, 2014). The court concluded that the “same considerations that led the Court in Upjohn to uphold the corporation’s privilege claims apply here.”
In overruling the lower court’s decision, the DC Circuit offered several important clarifications regarding the applicability of the attorney-client privilege to internal investigations. First, the court clarified that Upjohn does not require the involvement of outside counsel for the privilege to apply. Second, the court noted that the privilege may apply even when many of the employee interviews are conducted by non-attorneys, as long as those interviewers are serving as the agents of attorneys. Third, the court explained that even though the employees in the KBR case were not explicitly informed that the purpose of the interviews were to assist the company in obtaining legal advice, Upjohn does not require any “magic words” for the privilege to apply. Further, the court noted that the employees in the KBR case knew that the company’s legal department was conducting an investigation and that the investigation was highly confidential.
Finally, and, perhaps, most importantly, the court rejected the lower court’s argument that the attorney-client privilege did not apply in this investigation because KBR was acting to comply with Department of Defense regulatory requirements, not to obtain legal advice. In ruling on the matter, the appeals court stated, “So long as obtaining or providing legal advice was one of the significant purposes of the internal investigation, the attorney-client privilege applies, even if there were also other purposes for the investigation and even if the investigation was mandated by regulation rather than simply an exercise of company discretion.” This is important language from the court, particularly given the increasing regulatory compliance obligations imposed on corporations and the fact that many internal investigations today are instigated at the behest of the government. See e.g. Computer Associates – discussed here and here.
In my next post, we’ll consider how the In re: KBR case fits into the larger legal framework of international internal investigations. In particular, we’ll examine whether attorney-client privilege extends to internal investigations undertaken solely by internal counsel when the investigation extends outside the United States.
Wednesday, July 16, 2014
As my editor, Ellen Podgor, noted last week (see here), the winning streak in insider trading cases of the U.S. Attorney's Office for the Southern District of New York ended with the jury's acquittal of Rengan Rajaratnam, the younger brother of Raj Rajaratnam, who was convicted of insider trading in 2011 and sentenced to eleven years in prison.
The U.S. Attorney has done an excellent job in prosecuting insider trading, securing convictions by plea or trial of 81 of the 82 defendants whose cases have been concluded in the district court. The office has appropriately targeted primarily professional financial people who seek or provide insider information rather than those incidental offenders who by chance have received or provided insider tips and taken advantage of their knowledge. A few of these trial convictions, however, appear to be in jeopardy. At oral argument in a recent case the Second Circuit Court of Appeals seemed sympathetic to the contention that a trader may not be found guilty unless he knew that the original information came from a person who had received a benefit, and not only had violated a fiduciary duty of secrecy. Judge Naomi Reice Buchwald, who presided over the Rajaratnam case, agreed with that contention and thereupon dismissed two of the three counts.
Whether the prospective Second Circuit ruling, if it comes, will make good public policy is another matter. Insider trading (which fifteen years ago some argued should not be a crime) is, or at least was, endemic to the industry. Presumably, the U. S. Attorney's successful prosecutions have had a positive step in putting the fear of prosecution in traders' minds. Such deterrent to a particularly amoral community seems necessary: a recent study demonstrated that twenty-four percent of the traders interviewed admitted they would engage in insider trading to make $10 million if they were assured they would not be caught (the actual percentage who would, I suspect, is much higher). See here.
The latest Rajaratnam case, indicted on the day before the statute of limitations expired, was apparently not considered a strong case by some prosecutors in the U.S. Attorney's Office. See here and here. Indeed, jurors, who deliberated four hours, described the evidence as "no evidence, period" and asked "Where's the evidence?" That office nonetheless did not take this loss (and generally does not take other losses) well. It was less than gracious in losing, making a backhanded slap at Judge Buchwald, a respected generally moderate senior judge. A statement by the U.S. Attorney Preet Bharara noted, "While we are disappointed with the verdict on the sole count that the jury was to consider, we respect the jury trial system . . . ." (Italics supplied.)
Southern District judges, generally out of deference to and respect for the U.S. Attorney's Office, whether appropriate or undue, rarely dismiss entire prosecutions or even counts brought by that office, even in cases where the generally pro-prosecution Second Circuit subsequently found no crimes. See here. It is refreshing to see a federal judge appropriately do her duty and not hesitate to dismiss legally or factually insufficient prosecutions.
Such judicial actions, when appropriate, are particularly necessary in today's federal system where the bar for indictment is dropping lower and lower. The "trial penalty" of a harsher sentence for those who lose at trial, the considerable benefits given to cooperating defendants from prosecutors and judges, and the diminution of aggressiveness from a white-collar bar composed heavily of big firm former federal prosecutors have all contributed to fewer defense challenges at trial and lessened the prosecutors' fear of losing, a considerable factor in the prosecutorial decision-making process. Acquittals (even of those who are guilty) are necessary for a balanced system of justice.
Lastly, it is nice to see a major victory by a comparatively young (43) defense lawyer, Daniel Gitner of Lankler, Siffert & Wohl, an excellent small firm (and a neighbor), in a profession still dominated by men in their sixties or seventies.