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.
Tuesday, June 24, 2014
One of the more fascinating cases around is the case of former Goldman Sachs programmer Sergey Aleynikov. Aleynikov was convicted in the Southern District of New York for stealing secret high-frequency trading computer code from Goldman Sachs and sentenced to eight years in prison. His conviction was reversed by the Second Circuit on the grounds that his actions were not covered by the federal statutes under which he was charged. Aleynikov had already served a year in prison.
Then, Manhattan District Attorney Cyrus Vance, apparently provided the testimonial and tangible evidence used in the prosecution of Aleynikov by the U.S. Attorney, decided to prosecute him in state court under state statutes, a decision I criticized because it violated at least the spirit of double jeopardy protection (see here). Last week, a New York State judge threw out much of the evidence underlying the state prosecution on the ground that Aleynikov's arrest and related searches by federal agents were not supported by probable cause that he committed the underlying federal crimes, even though the agents acted in good faith. See here. New York has rejected on state constitutional grounds the "good faith exception" to unlawful searches applicable in federal courts. Compare People v. Bigelow, 66 N.Y.2d 417 (1985) with United States v. Leon, 468 U.S. 897 (1984). Mr. Vance's choice now is either to concede that the judge's suppression has made his case untriable and make an interlocutory appeal or go forward to trial without that evidence (or, of course, move to dismiss the case).
Ironically, Goldman Sachs, the purported victim of Aleynikov's alleged criminality, is laying out millions of dollars to afford Mr. Aleynikov the energetic and aggressive defense his lawyer, Kevin Marino, is providing. A New Jersey federal judge last October ordered Goldman to advance Mr. Aleynikov's legal fees based on a corporate bylaw that required it to advance legal fees for officers charged in civil and criminal proceedings. Aleynikov v. Goldman Sachs (Civ. No. 12-5994, DNJ, October 22, 2013).
Monday, June 2, 2014
Second Circuit Reverses Convictions Due to Prosecutorial Misconduct and Exclusion of Good-Faith Evidence
The Second Circuit Court of Appeals, which issues complete reversals in only about five percent of the criminal cases it hears, last week in an opinion by Judge Jed S. Rakoff (sitting by designation) reversed the trial conviction of two individuals and a corporation for environmental crimes involving asbestos removal, and ordered a new trial. United States v. Certified Environmental Services, Inc., et al. (see here). The reversal was based on the denial of a fair trial due cumulatively to the exclusion of evidence of good faith to demonstrate the defendants' lack of intent (an issue not discussed here) and prosecutorial misconduct in improper "bolstering" during the opening and closing arguments. The Court denied that part of the defendants' appeal based on Brady v. Maryland.
The decision does not concern any novel legal grounds. Perhaps most significant in the white-collar area is its detailed discussion of the proper and improper use by prosecutors of the cooperation agreements their witnesses commonly enter into with the government. Since many, probably most, white-collar cases involve cooperating government witnesses, prosecutorial introduction of and comments on cooperation agreements frequently occur in white-collar trials. Here, the prosecutor improperly bolstered the witnesses' testimony on numerous occasions, both in the opening and closing arguments, by referring directly and indirectly to the self-serving language that prosecutors routinely place in the cooperation agreements they draft to the effect that the witnesses are obligated to tell the truth. Prosecutors and defense attorneys would do well to review the opinion to determine when and how the government may disclose and use the truth-telling requirement language of cooperation agreements during testimony and in argument.
The opinion also excuses, but does not condone, the improper failure of the government to turn over handwritten notes by a testifying agent which were discovered in the later examination of another agent and belatedly revealed to the defense. The notes should have been revealed earlier, says the Court, not only since they included evidence favorable to the defense, but also pursuant to Fed. R. Crim. Pro. 16(a)(1)(B)(ii), a discovery rule, and 18 U.S.C. 3500, the Jencks Act. However, since the notes were, however belatedly, turned over and the defense had an opportunity to review them, examine the later-testifying agent about their content, and recall the earlier witness if it chose, and since their timely disclosure would not have changed the verdict, in any case there was no Brady violation. The opinion thus demonstrates that late provision of Brady (or Rule 16 or Jencks) by the government during trial will virtually never be grounds for reversal, at least not in the Second Circuit.
Monday, May 5, 2014
This morning in Robers v. United States (2014), the U.S. Supreme Court resolved a circuit split and unanimously affirmed the Seventh Circuit. The Mandatory Victim Restitution Act of 1996 requires offenders to pay their victims "an amount equal to...the value of the property" taken, minus "the value (as of the date the property is returned) of...the property that is returned." The Supreme Court, through Justice Breyer, held that the "property" in question is money, rather than real property. Thus, Appellant's argument that his criminal restitution judgment, payable to the bank he defrauded through his straw purchases, should have been reduced by the value of the two properties securing the two loans on the day that the bank took the properties back, was rejected. The sentencing court had determined its restitution figure by subtracting the amount of money the bank received through sale of the two houses from the original loan amount. The Court approved this approach. The Court did note that the statute has a proximate cause component and that offenders may be able to show in some instances that intervening factors broke the causal chain. But Appellant failed to make this argument at the district court level. Justice Sotomayor, joined by Justice Ginsburg, joined in the Court's opinion, but expounded upon the proximate cause issues in a separate concurrence.
Saturday, May 3, 2014
Yesterday in United States v. Shawn Sayer, the First Circuit ruled that that a portion of the federal cyberstalking statute, 18 U.S.C. Section 2261A (2) (A), is constitutional as applied to defendant Sayer's actions and is not facially overbroad. The Court held that Sayer waived his void for vagueness challenge. The facts were undisputed and the case involved a multi-year effort by Sayer to harass his ex-lover by, among other things, posting their intimate sex tapes on pornographic web sites and inviting male strangers to contact her for sexual activity. The Court also approved the trial court's upward variance/departure.
Thursday, May 1, 2014
Well. It's complicated.
Can your co-conspirator also be your victim? Your darn tootin' he can, under the Hobbs Act, according to the Fourth Circuit.
In 2007, the Sixth Circuit ruled that the victim of a Hobbs Act conspiracy must be a person outside of the alleged conspiracy. The case is United States v. Brock, 501 F.3d 762 (6th Cir. 2007). This decision seems to have common sense on its side. How can your victim be your co-conspirator, unless you are the Symbionese Liberation Army?
Prior to Brock, the Fourth Circuit had taken a more nuanced and sophisticated view in United States v. Spitler, 800 F.2d 1267 (4th Cir. 1985). There the Fourth Circuit noted a difference between "mere acquiescence" by an extortion victim, which would NOT render him a Hobbs Act co-conspirator, and "active solicitation", which would. "Refusing to paint with a broad brush," the Court ruled that Spitler's conduct was closer to "active solicitation" than "mere acquiescence."
On Tuesday, in United States v. Samuel Ocasio, the Fourth Circuit refused to abandon Spitler in favor of Brock. Ocasio involved the notorious Baltimore City Police Department towing scandal, in which city cops steered accident victims to a particular towing service in return for kickbacks. Ocasio, a former Bawlmer cop, claimed that, as a matter of logic, he could not have conspired with the towing service owners who were his alleged victims. The Fourth Circuit disagreed, applied the Spitler test, and found the towing service owners' actions closer to "active solicitation" than "mere acquiescence." According to the Court, the plain and unambiguous text of the Hobbs Act compels the conclusion that one CAN conspire with one's victim.
Hat Tip to Lonzo and Oscar.
Tuesday, April 29, 2014
This post isn't about a white collar case, but America is our beat. Yesterday the Tenth Circuit reversed the bank robbery conviction of Stanley Hill, because FBI Special Agent Charles Jones (qualified as an "expert" trained in "special tactics and ways to identify deception in statements and truth in statements") testified that Hill's answers during a government interrogation were "not worthy of credence and 'did not make sense.'" Jones also testified that Hill "displayed evasive behaviors 'common among the criminal element to keep law enforcement at bay'" during interrogations. When asked about Hill's purported statement that he would rather die than face charges, Jones opined that "[n]ever in my career have I seen that with an innocent person." Finally, in discussing Hill's frequent invocation of God during the interrogation, Jones told the jury "'[m]y training has shown me...when people start bringing faith into validating their statements, that they're deceptive. Those are deceptive statements.'"
The surprise here is not that the Tenth Circuit found plain error and reversed. The surprise is that a DOJ trained prosecutor would ever put on such testimony in the first place. The surprise is that a federally trained public defender CJA Panel Attorney would sit like a potted plant and fail to object to such flagrantly inadmissible testimony. The surprise is that a United States District Court Judge with even a cursory understanding of the Federal Rules of Evidence and due process would allow such testimony to go forward. Of course the Tenth Circuit panel went out of its way to absolve the trial court of any responsibility: "We cast no blame on the district court for the error that occurred in this case." That's the federal judicial protection racket for you. Most traffic court judges would know better than to allow in testimony like this. Here is the opinion in United States v. Stanley Hill.
Update: Hat Tip to Steve Levin of Levin & Curlett LLC for pointing out that the case was tried by a CJA Panel Attorney rather than the Public Defender's Office.
Monday, April 28, 2014
Nancy and Lester Sadler ran pain clinics that sometimes serviced more than 100 patients a day--and that didn't even include the fake ones. They were convicted of several crimes and the Sixth Circuit affirmed all but one of the counts of conviction last week. Nancy Sadler's wire fraud conviction was vacated, however. According to the Court, "the government showed that Nancy lied to pharmaceutical distributors when she ordered pills for the clinic by using a fake name on her drug orders and by falsely telling the distributors that the drugs were being used to serve 'indigent' patients." But this did not "deprive" the distributors of their property, because Nancy paid full price. "[P]aying the going rate for a product does not square with the conventional understanding of 'deprive.'" The government argued that the distributors would not have sent the pills had Nancy told them the truth. The Sixth Circuit dubbed this a "right to accurate information" and noted that the federal mail and wire fraud statutes no longer cover this kind of intangible right in the post-McNally era. Congress' statutory fix of McNally only covers the intangible right of honest services, "which protects citizens from public-official corruption." Of course 18 U.S.C. Section 1346 does more than that, even after Skilling, as it also covers certain private deprivations of honest services. But the conduct at issue in Sadler did not involve Nancy's "honest services" to the pharmaceutical distributors. She provided no services to them--she simply fibbed, but paid full price. Here is the opinion in United States v. Nancy Sadler.
Tuesday, March 25, 2014
The Second Circuit Court of Appeals affirmed Rajat Gupta's convictions for securities fraud and conspiracy to commit securities fraud. (See here). The decision should be a hit for future evidence casebooks as it provides detailed analysis of a host of different evidence rules - Rules 403, 801, 802, 803, and 804.
But what the decision summarily denies is the argument that the "wiretap authorizations were obtained in violation of Title III of the Omnibus Crime Control and Safe Streets Act of 1968, ... and the Fourth Amendment to the Constitution." The Second Circuit notes that since Rajaratnam's challenges were rejected, "Gupta's Title III and constitutional challenges are thus foreclosed." Hopefully a higher Court will examine the use of wiretaps in such white collar cases.
Wednesday, March 5, 2014
In Kaley v. United States (12-464, decided February 25, 2014) (see here), the Supreme Court by a 6-3 vote extended the rulings of United States v. Monsanto, 491 U.S. 600 (1989) and Caplin & Drysdale v. United States, 491 U.S. 617 (1989) by determining that a grand jury finding of probable cause that a federal defendant committed a crime was conclusive in any effort by that defendant to secure funds out of temporarily restrained assets to hire a private attorney of his choice. A defendant seeking release of funds may still be able to challenge the grand jury determination that there was probable cause that the assets seized resulted from or were involved in the purported criminal activity, but not that the activity was criminal.
The opinion, written by Justice Kagan, exalts the inviolability of the grand jury and demonstrates a naive misunderstanding of (or lack of concern about) the reality of its role in the determination of probable cause, ignores the presumption of innocence, and denigrates the importance of independent defense counsel in the criminal justice system. It tilts the playing field of justice in the government's favor by giving the government, in some cases, the option to deprive the defendant of the counsel he has selected or intends to select.
Essentially, the premise of the opinion is that since grand juries historically have the unreviewable power to determine probable cause to indict and require a person to stand trial and thus derivatively to deprive him of pre-trial liberty, they similarly have the power derivatively to deprive him of his right to counsel of choice. Justice Kagan, worrying that a different decision would be incongruous and unsymmetrical, seems more concerned with the effect of the decision on the pillars of architecture of the criminal justice system than the pillars of justice and fairness.
The underlying (but unspoken) foundation of the opinion is essentially fraudulent: the legal fiction that federal grand juries actually make independent, considered determinations of probable cause necessary to indict. Every experienced federal prosecutor, defense attorney, or judge knows otherwise; grand juries, especially federal ones, are virtually invariably merely "rubber stamps" for the prosecution. The government -- not the grand juries -- makes the actual decision who and for what to indict.
Former New York Court of Appeals Chief Judge Sol Wachtler famously said, "A grand jury would indict a ham sandwich" -- referring to a grand jury in a state where prosecutors are constrained because they know that judges are mandated by law upon defense motion to review the grand jury minutes to determine whether the evidence presented was legally sufficient and to dismiss the indictment if not, and where hearsay evidence is not admissible. In contrast, in federal courts, as stated in Kaley (quoting United States v. Williams, 504 U.S. 36, 54 (1992)), "a challenge to the reliability or competence of the evidence supporting a grand jury's finding of probable cause will not be heard" (and an indictment may be, and sometimes is, based wholly on hearsay, often from a single government agent). A federal prosecutor thus has no such constraint as his New York State counterpart; he knows that no matter how flimsy or inadmissible the evidentiary basis for an indictment may be, that basis is unchallengeable. Thus, if a New York State grand jury would indict a ham sandwich, a federal grand jury would indict a slice of bread.
* * *
Chief Justice Roberts, to my knowledge the only current justice who had a significant career representing paying clients and thus may have greater empathy for the private bar than most of his colleagues, wrote a powerful dissent noting the basic lack of fairness allowing the prosecution essentially to disqualify an accused's counsel of choice without even a hearing. He wrote:
[F]ew things could do more to undermine the criminal justice system's integrity than to allow the Government to initiate a prosecution and, then, at its option, disarm its presumptively innocent opponent by depriving him of his counsel of choice -- without even an opportunity to be heard. . . . [I]t is fundamentally at odds with our constitutional tradition and basic notices of fair play. . . .
The issues presented here implicate some of the most fundamental precepts underlying the American criminal justice system. A person accused by the United States of committing a crime is presumed innocent until proven guilty beyond a reasonable doubt. But he faces a foe of powerful might and vast resources, intent on seeing him behind bars. That individual has the right to choose the advocate he believes will most ably defend his liberty at trial. . . .
In my view, the Court's opinion pays insufficient respect to the importance of an independent bar as a check on prosecutorial abuse and government overreaching. Granting the Government the power to take away a defendant's chosen advocate strikes at the heart of that significant role.
* * *
Following Monsanto, which explicitly left open the question as to whether a hearing on the provenance of seized funds was required, the federal courts divided on the issue. Some prosecutors had chosen to allow defendants to pay from restrained funds reasonable and legitimate fees to counsel of choice. Most had done so in order to avoid giving the defendant a preview of their case; others had done so out of respect for the constitutional right to counsel and a robust adversary system -- a right apparently not as much respected by the Court majority -- and a preference for a fair fight where the accused is not hampered by denial of his choice of counsel.
The elimination of the requirement in many courts for what was called "a Monsanto hearing" (a term likely to be soon forgotten) will undoubtedly eliminate, or at the very least severely limit, the opportunity for defendants in federal courts to pay counsel of choice from seized funds. Prosecutors who had chosen to allow defendants to pay counsel from restrained assets in order to avoid discovery of their cases will no longer have that reason to do so. Those who used the avoidance of discovery as a cover out of respect for the constitutional right to counsel of choice or the adversary system will no longer be able to do so. Pre-trial forfeiture claims will now in some cases offer a prosecutor a potential bonus beyond the stated goals of depriving a defendant of wrongfully-gained assets and using them for governmental purposes -- the elimination of a top-notch adversary. Thus, there is now a tactical trial benefit to the prosecutor to institute pre-trial asset restraint. In white-collar cases, where the prosecutor often knows who will probably represent the defendant from pre-indictment discussions, his determination to seek pre-trial restraint may be affected by whether he likes or dislikes the attorney, whether the attorney is dogged and aggressive, or whether the attorney is likely to give the defendant a better chance of success than a replacement.
The Kaley decision will also have a severe harmful effect on the finances of an already financially-distressed private middle-class (other than big-firm) criminal defense bar, which will (as will large firms) be deprived of a considerable number of well-paying clients because of lack of available assets outside of those seized. Defendants -- generally either drug or white-collar defendants, those who had a considerable amount of money prior to pre-trial seizure -- will be deprived of representation by the most experienced and successful criminal defense lawyers. They will be represented by court-appointed public defenders, institutional or private appointed attorneys, or less expensive private attorneys -- often, but not always, experienced, dedicated and able, but generally less so than high-profile, high-paid private attorneys, and almost always with more cases and clients and less time and resources to devote to them than well-compensated private attorneys (and it is unlikely that government funding will be increased to provide public defenders those resources). The ability, energy and knowledge of who represents them will often depend on the luck of the draw from assigned counsel lists, rather than their considered choice. The gulf between counsel of choice and public defenders is greatest in white-collar cases since few public defenders have experience in these cases, or ample resources to defend them.
In his opinion, Chief Justice Roberts alluded to, but failed to state explicitly, the general disparity between the selected best of the private bar and the average (and an assignment-by-rotation system necessarily leads to the mean or average) public defender or assigned attorney. It is unfashionable (and politically incorrect) for judges (and bar leaders) to say or write anything that might be construed to disparage public defenders (and perhaps provide ammunition to ineffective assistance claimants). Rather, they, as did Chief Justice Roberts, often speak of "counsel of choice" when they mean "the private bar." Lawyers -- whether chosen or assigned -- are not fungible. Just as there is a difference in quality between a $300,000 Bentley and a $15,000 Toyota Corolla, there is usually a difference in quality between an attorney who commands large fees because of her reputation and stature and the average assigned attorney. (To be sure, like automobiles, there are lemons and diamonds among both the expensive and the inexpensive.)
As Chief Justice Roberts said, "The possibility that a prosecutor could elect to hamstring his target by preventing him from paying his counsel of choice raises substantial concerns about the fairness of the entire proceeding." Just as a basketball team opposing the Miami Heat might choose, if it could, that LeBron James sit out the game, so too a prosecutor, if he could, might now choose to seek pre-trial restraint to keep a first-rate private lawyer on the bench.
Wednesday, February 26, 2014
Unwarranted Sentencing Disparities Among Defendants With Similar Records Who Have Been Found Guilty Of Similar Conduct
Juan Prado was a mildly corrupt Chicago cop who pled guilty to taking bribes from tow truck operators in order to funnel business their way. At sentencing he argued for a downward variance based on several factors, including the downward variance received by James Wodnicki, an allegedly similarly situated Chicago cop who was sentenced in a related case. The sentencing court ruled, incorrectly, that Seventh Circuit precedent only allowed it to consider nationwide sentencing disparities under 18 U.S.C. Section 3553 (a)(6). It refused to consider any arguments, from either the prosecution or defense, based on Wodnicki's downward variance, and sentenced Prado to a within-Guidelines prison term of 42 months. Last week, in United States v. Prado, the Seventh Circuit reversed, since the sentencing court was unaware that it could consider Wodnicki's sentence in applying 3553 (a)(6), and since the Seventh Circuit thought this may have affected Prado's sentence. The opinion reaffirms two important points, to wit--that sentencing disparities can be considered on both individual and global levels, and that within-Guidelines sentences can be reversed when based on erroneous assumptions. Interestingly, Prado did not raise this specific ground of error until the case reached the appellate court, but the government failed to argue Prado's waiver on appeal. Ergo, the waived waiver doctrine applied.
Tuesday, February 25, 2014
This isn't exactly a white collar case, but America is our beat. Few things are more frustrating to a competent criminal defense attorney than a judge who won't allow her to make an adequate record. This problem seems to be getting worse in the federal system. What a nice surprise then that the Fifth Circuit, through Judge Ed Prado, is not having any of it. In United States v. Salazar, the district court revoked defendant's supervised release, sentenced him to a prison term, and imposed an additional supervised release term with new conditions. The new supervised release conditions were not announced by the trial court until near the end of the sentencing hearing. When defense attorney Angela Saad tried to object, the judge (Alia Moses) cut her off three times. On appeal, Salazar challenged Supervised Release Condition 6. The government argued for plain error review because Saad's objections to the new conditions were global and not specific. Salazar urged that abuse of discretion was the appropriate standard, as the judge had cut off counsel's attempts to object in more detail. The Court sided with Salazar. "Salazar had no reason to object to the conditions prior to sentencing, as they were not announced until that time." Moreover, "[c]ounsel...initially objected broadly to the conditions on account of their overly burdensome nature, but before counsel had an opportunity to finish her sentence, the court overruled her objection three times. Salazar's counsel reasonably believed that the district court would not have welcomed or entertained any further discussion of the issue." The Court ultimately vacated Condition 6, because the trial court had not adequately explained why it was reasonably related to statutory supervised release factors. This is a good case for a criminal appellate attorney to keep in his back pocket. It is altogether fitting that Prado wrote it. He was an outstanding trial judge who was always respectful to attorneys on both sides, and let them try their cases.
Monday, February 24, 2014
In United States v. Rubin, appellant maintained that his conviction for conspiracy to violate the Unlawful Internet Gambling Enforcement Act of 2006 ("UIGEA") was invalid, despite his unconditional guilty plea, because the indictment against him alleged conduct exempt from prosecution under UIGEA, and therefore deprived the district court of subject matter jurisdiction. Defendants who voluntarily plead guilty generally waive all non-jurisdictional defects in prior proceedings. (Conditional guilty pleas require the agreement of the government and the trial court.) Applying the U.S. Supreme Court's unfortunate decision in United States v. Cotton, 535 U.S. 625 (2002), the Second Circuit squarely rejected Rubin's contention. Could Rubin have successfully argued, for the first time on appeal, pursuant to Fed. R.Crim.P. 12 (b)(3)(B), that his unconditional guilty plea was invalid because the indictment simply failed to allege an offense, irrespective of any jurisdictional issues? We do not know. According to the Second Circuit, his attorney failed to raise that point.
Tuesday, January 28, 2014
The degree of causation necessary to impose legal blame is an interesting philosophical, policy and, of course, legal issue. It is an issue that probably arises more often in tort than criminal cases, but is nonetheless important in criminal law in several areas, including sentencing considerations.
In Burrage v. United States, ___ U.S. ___ (12-7515, January 27, 2014), the Supreme Court considered the meaning of the term "result from" in a case where the district court imposed a 20-year mandatory minimum sentence upon a defendant for the sale of one gram of heroin since a buyer's death had "result[ed] from" the use of the heroin as one of several drugs he consumed that contributed to the death.
Burrage was convicted of distribution of narcotics to Banka, who died after imbibing the heroin and several other drugs. Medical experts at trial could not rule out that Banka might have died from using the other drugs even if he had not taken the heroin, but opined that the heroin use was a contributing factor to his death.
The district court declined to accept the defense contention that the statutory term "result from" required a "but-for" standard. Instead, it construed the phrase to mean that the drug sold had only to be a "contributing cause" of the death and so charged the jury. The Eighth Circuit affirmed.
In a unanimous opinion, written by Justice Scalia (who has authored some of the most innovative and pro-defense decisions by the Court in recent years), the Court reversed, ruling that the term "result from" should be construed in its "ordinary meaning" to require a "but-for" standard of causation -- that the harm would not have resulted "but for" the defendant's conduct. It was, therefore, the Court found, not enough for the trier of fact to find that the drug transfer was merely a "contributing factor" to the death. The opinion discussed the Model Penal Code, the Restatement of Torts, baseball, and the rule of lenity, as well as the Court's recent restrictive reading of the term "because of" in discrimination cases, a discussion which triggered a special concurrence by Justice Ginsberg (which she apparently would not have felt the need to write "but for" that discussion).
The government, not untypically, made a doomsday argument that defining "result from" as the Court did would "unduly limit criminal liability" and "cannot be reconciled with sound policy." The Court disagreed, doubting that the opinion would prove to be a "policy disaster."
Although very unlikely to be a "disaster," the opinion may have ramifications beyond drug cases. The issue of what consequences resulted from the defendant's conduct arises frequently in homicide and assault cases, and also occasionally in white-collar cases, for instance in determining the amount of loss or harm for sentencing purposes. At the least, it appears that in federal criminal law the term "result from" now will have a more narrow meaning than previously.
Thursday, January 16, 2014
One of the increasing incursions into constitutional rights in the white-collar area is the expansion of the "required records" exception to the Fifth Amendment privilege against self-incrimination. In general, that doctrine provides that an individual or entity required by law to maintain for regulatory purposes certain records has no Fifth Amendment right to refuse to produce them to the government.
The Second Circuit last month, in affirming a contempt finding against an individual for failing to produce to a grand jury records of foreign bank accounts mandated to be kept by regulations promulgated pursuant to the Bank Secrecy Act, 31 CFR 1012.420 ("BSA"), held, in accord with prior rulings by other circuits, that the "required records" exception to the Fifth Amendment privilege against self-incrimination pertains to the production of such records. In Re Grand Jury Subpoena Dated February 2, 2012, (13-403-CV, Dec. 19, 2013).
The individual contended that he had a Fifth Amendment right to refuse to comply with a grand jury subpoena for foreign bank records. He claimed that the subpoena put him in a Catch-22 position: produce documents that might incriminate him or confirm that he failed to maintain records of his foreign bank accounts, which also might incriminate him. The court essentially said "tough," and affirmed the contempt order.
The court first considered whether the "act of production" doctrine (see United States v. Hubbell, 500 U.S. 27 (2000)) applied to "required records." Under that doctrine, generally a person could on Fifth Amendment grounds resist a subpoena for the production of records unless the government could demonstrate it was a "foregone conclusion" that the person actually possessed such records. Although the contents of the records, as in the case of "required records," might not be privileged, by producing them the individual essentially incriminated herself by its production by admitting, among other things, that she possessed such records. The court held that the Fifth Amendment did not apply to required records, either as to the content of or production of such records, and thus the "act of production" privilege, a form of Fifth Amendment protection, did not apply.
The court then applied the three-prong test of Grosso v. United States, 390 U.S. 62 (1968), to determine whether the required records doctrine applied to the BSA regulation. That test provides, first, that the purpose of the legal requirement must be "essentially regulatory;" second, that the information sought must be of a type "customarily kept;" and third, that the records must have "public aspects" which make them at least analogous to public documents. The court then held that the regulation, although it was designed in part to facilitate criminal prosecutions, was "essentially regulatory" in that it did not target only those suspected of criminal activity since possession of foreign bank accounts by itself was not unlawful. Second, it held that the records were "customarily kept" since holders of bank accounts are likely to be aware of or have records of the details of their accounts. Third, the court held that "records lawfully required to be kept" for purposes of constitutional analysis by definition have "public aspects." Practically, such a finding eliminated this third prong as an independent prerequisite for application of the exception.
In sum, the court essentially ruled that any records ordinarily kept by individuals that are required to be made available to governmental authorities pursuant to a law not primarily designed to detect criminal activity lack Fifth Amendment protection.
Thus, the decision essentially gives federal prosecutors the ability to subpoena any person and demand that she produce any foreign bank records she possesses, even absent any knowledge or suspicion that she has such an account. To be sure, in this case, and virtually all other reported cases involving subpoenas of foreign bank accounts, the government appears to have had a considerable basis to believe the person subpoenaed does have a foreign bank account. The Second Circuit's ruling, however, at least implicitly, does not require that such governmental knowledge be a prerequisite for an enforceable subpoena for foreign accounts. "Fishing expeditions" for foreign bank account information appear to be allowed.
I would not be surprised, therefore, to see a considerable increase in the number of governmental subpoenas for records of foreign bank accounts, and perhaps the addition of a boilerplate request for foreign bank records in other subpoenas for financial records. As they say, there's no harm in asking.
Friday, December 27, 2013
In the current New York Review of Books, Judge Jed Rakoff presents the most thoughtful, balanced analysis I have seen to date regarding DOJ's failure to prosecute high-level executives at elite financial institutions in connection with the recent financial crisis. Appropriately entitled, The Financial Crisis: Why Have No High Level Executives Been Prosecuted?, Judge Rakoff is careful not to point fingers, rush to judgment, or even allege that fraud has definitively been established. And that's a big part of the DOJ's problem. How can you establish fraud if the effort to investigate it has been haphazard and understaffed from the outset? Rakoff is someone worth listening to. An unusually thoughtful federal district judge, he has presided over many significant securities and bank fraud cases, served as chief of the Securities Fraud Unit in the SDNY U.S. Attorney's Office, and worked as a defense attorney. Oh yeah. He also hates the Sentencing Guidelines.
Among the many theories Rakoff posits for the failure to prosecute what, it bears repeating, only may have been fraud, are two that I take issue with. These investigations were apparently parceled out to to various OUSA districts, rather than being concentrated in the SDNY. Judge Rakoff believes that the SDNY would have been the more logical choice, as it has more experience in sophisticated fraud investigations. This may be true as a general proposition. But the most plausible historical fraud model for the mortgage meltdown-fueled financial crisis is the Savings & Loan Scandal of the late 1980s, so successfully prosecuted by DOJ into the mid-1990s. The SDNY had very little of that action.
Judge Rakoff also notes the government's role in creating the conditions that led to the current crisis as a potential prosecution pitfall. But this did not stop the S&L prosecutors from forging ahead in their cases. Back then, virtually every S&L criminal defendant claimed that the government had created that crisis by establishing, and then abandoning, Regulatory Accounting Principles, aka RAP. (One marked difference between the two scandals is that the S&L Scandal was immediately met with public outrage and a sustained Executive Branch commitment to investigate and prosecute where warranted. The sustained Executive Branch commitment has not happened this time around, for whatever reason.)
But these are minor quibbles and Judge Rakoff is spot on in most of his observations.
Judge Rakoff is right to reject the "revolving door" theory of non-prosecution. Any prosecutor worth his salt would love to make a name for himself, and would definitely enhance his private sector marketability, by winning one of these cases. Judge Rakoff also correctly notes that these cases are hard and time-consuming to investigate.
The judge's most salient point has nothing to do with the various theories for DOJ's failure to prosecute. Instead, it is his observation that there is no substitute for holding financial elites responsible for their major criminal misdeeds. The compliance and deferred prosecution agreements favored today are simply a cost of doing business for most big corporations. What's worse, in the current environment, DOJ is giving a walk to elite financial actors and simultaneously prosecuting middle-class pikers with a vengeance that is sickening to behold. The elite financial actors may not have committed criminal fraud, but many of them bear heavy responsibility for the ensuing mess. It is so much easier for DOJ to rack up the stats by picking the low hanging fruit.
The one thing Judge Rakoff cannot do, and does not try to do, is answer the question of whether criminal fraud occurred in the highest sectors of our financial world. The answer to that question can only be supplied, at least as an initial matter, by the AUSA in charge of each investigation. And if no prosecution occurs, you and I are unlikely to ever know the reason why.