Wednesday, March 12, 2014
The big news on the white-collar crime front in New York last week was the long-expected indictment of persons involved in the defuct law firm of Dewey & LeBoeuf. Charged were its chairman, executive director and chief financial officer, as well as a low-level client relations manager. Seven not-yet-identified others have pleaded guilty. Only two of the eleven criminally charged appear to be lawyers, and the cases against them may be the weakest. See James B. Stewart, "In Dewey's Wreckage, Indictments," New Yorker Blog, March 7, 2014, see here.
The charges essentially are that the defendants cooked the books in order to keep the failing firm alive with institutional financing. More specifically, it is charged, they falsified financial records submitted to banks and investors to demonstrate that the firm had complied with existing loan covenants and were worthy of further investor loans, and made fraudulent accounting entries to support their false representations. The top charge is grand larceny in the first degree, theft in excess of $1 million, a Class B felony with a potential sentence of 25 years, and a minimum sentence of one to three years.
In many ways, as the facts are alleged, this is a not untypical case, where businesspeople -- ordinarily law-abiding -- fall into financial situations where they desperately need to borrow money to keep their businesses going and falsify income, receivables, expenses and the like in order to get it. Such chicanery is far from rare and is often undetected or overlooked, particularly if the borrower improves its financial position and pays off all or a substantial part of the amount owed. And, if detected, such wrongdoing is often made public only in private civil litigation and without criminal prosecution. Generally, the borrowers have an expectation and/or hope, often unreasonable, that they will ultimately be able to pay off the loan and thus arguably lack the intent to permanently deprive (an element of larceny) the lenders.
There are several interesting aspects of the case. It is being brought by a state prosecutor -- the District Attorney of New York County -- rather than the United States Attorney for the Southern District of New York, the predominant prosecutor of white-collar crime in Manhattan. The District Attorney, like most state and local prosecutors forced to deal with every police street arrest, whether for murder or disorderly conduct, and lacking sufficient available personnel and resources to conduct many complicated and lengthy white-collar investigations, generally has a far less significant presence in white-collar prosecution than his federal counterpart.
More unusual, in this case, much of the legwork for the state prosecution apparently was done by the FBI (and not a state or city police agency). Almost always, when the FBI does the investigative work on a white-collar case (or even when the work is done jointly by federal and state investigators), that case is prosecuted by federal authorities. I do not know why this case is an exception. Perhaps the United States Attorney declined the case because he questioned its strength or jurisdictional basis, or, even less likely, felt his resources were better used on other goals. My best guess is that the case was prosecuted by the District Attorney because he jumped on it first, and/or was first provided evidence of alleged wrongdoing by some of the firm's unhappy partners. In any case, if this joint effort between federal investigators and New York State prosecutors is a harbinger of further cooperative efforts, it will be a significant step forward for white-collar prosecution in New York City, the financial (and probably white-collar crime) capital of the country. Far too often, federal authorities let significant matters brought to their attention go by the wayside because of jurisdictional problems or federal lack of interest rather than turn them over to state prosecutors. And, far too often, state prosecutors let significant matters go by the wayside because of their lack of resources and expertise rather than turn them over to federal prosecutors.
The New York County District Attorney, Cyrus R. Vance, Jr., in a press statement, claimed that the victims were not just the lending financial institutions but also the thousands of people who lost their jobs when the firm failed. I strongly disagree. The firm's employees actually were for the most part beneficiaries of the loan proceeds, and therefore if the allegations are true, unknowing beneficiaries of the criminality that enabled that borrowing, which kept the firm alive and staved off bankruptcy for a time. Those who lost their jobs when the firm ultimately failed and went into bankruptcy most likely kept those jobs much longer than they would have had the law firm not been able to secure the funding. Dewey & LeBoeuf failed not because of criminal acts, but, if criminal acts did occur, in spite of them.
The real victims in this case, the only direct victims, are the banks and other financial institutions which loaned the firm unrecovered money. Sometimes, in cases of this kind, the bankers are negligent in their due diligence and occasionally actually compliant with the borrowers in order to achieve short-term profits for their institutions and immediate benefits for themselves in bonuses and salary increases. I have no knowledge that either negligence or complicity happened here.
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, February 11, 2014
To the surprise of nobody I know, Mathew Martoma, the former SAC Capital portfolio manager, was convicted of insider trading last Thursday by a Southern District of New York jury. The evidence at trial was very strong. It demonstrated that Martoma had befriended two doctors advising two drug companies on the trial of an experimental drug, received confidential information from them about the disappointing result of the drug trial prior to the public announcement, and then had a 20-minute telephone conversation with Steven A. Cohen, the SAC chair, a day or so before Cohen ordered that SAC's positions in these companies be sold off. The purported monetary benefit to SAC, in gains and avoidance of loss, of the trades resulting from the inside information is about $275 million, suggesting that Martoma receive a sentence of over 15 years under the primarily amount-driven Sentencing Guidelines (although I expect the actual sentence will be considerably less).
Cohen is white-collar Public Enemy No. 1 to the Department of Justice, at least in its most productive white-collar office, the U.S. Attorney's Office for the Southern District. That office has already brought monumental parallel criminal and civil cases against SAC, receiving a settlement of $1.8 billion, about a fifth of Cohen's reported personal net worth, but it has apparently not garnered sufficient evidence against Cohen to give it confidence that an indictment will lead to his conviction. It had granted a total "walk" -- a non-prosecution agreement -- to the two doctors whose testimony it felt it needed to convict Martoma, unusually lenient concessions by an office that almost always requires substantial (and often insubstantial) white-collar wrongdoers seeking a cooperation deal to plead to a felony. As an FBI agent told one of the doctor/co-conspirators, the doctors and Martoma were "grains of sand;" the government was after Cohen.
In an article in the New York Times last Friday, James B. Stewart, an excellent writer whose analyses I almost always agree with, asked a question many lawyers, including myself, have asked: why didn't Martoma cooperate with the government and give up Cohen in exchange for leniency? Mr. Stewart's answer was essentially that Martoma was unmarketable to the government because he would have been destroyed on cross-examination by revelation of his years-ago doctoring his Harvard Law School grades to attempt to secure a federal judicial clerkship and covering up that falsification by other document tampering and lying. Mr. Stewart quotes one lawyer as saying Martoma would be made "mincemeat" after defense cross-examination, another as saying he would be "toast," and a third as saying that without solid corroborating evidence, "his testimony would be of little use." See here.
I strongly disagree with Mr. Stewart and his three sources. The prosecution, I believe, would have welcomed Mr. Martoma to the government team in a New York minute -- assuming Martoma would have been able to provide believable testimony that Mr. Cohen was made aware of the inside information in that 20-minute conversation. When one is really hungry -- and the Department of Justice is really hungry for Steven A. Cohen -- one will eat the only food available, even if it's "mincemeat" and "toast." And there is certainly no moral question here; the government gave Sammy "the Bull" Gravano, a multiple murderer, a virtual pass to induce him to testify against John Gotti. Given the seemingly irrefutable direct, circumstantial and background evidence (including, specifically, the phone call, the fact that Cohen ordered the trades and reaped the benefit, and generally, whatever evidence from the civil and criminal cases against SAC is admissible against Cohen), testimony by Martoma to the effect he told Cohen, even indirectly or unspecifically, about the information he received from the doctors would, I believe, have most likely led to Cohen's indictment.
I have no idea why Martoma did not choose to cooperate, if, as I believe, he had the opportunity. "Cooperation," as it is euphemistically called, would require from Martoma a plea of guilty and, very likely in view of the amount of money involved, a not insubstantial prison term (although many years less than he will likely receive after his conviction by trial). Perhaps Martoma, who put on a spirited if unconvincing defense after being caught altering his law school transcript, is just a fighter who does not easily surrender or, some would say, "face reality," even if the result of such surrender would be a comparatively short jail sentence. (In a way, that choice is refreshing, reminding me of the days defense lawyers defended more than pleaded and/or cooperated.) Perhaps Martoma felt cooperation, a condition of which is generally full admission of all prior crimes and bad acts, would reveal other wrongs and lead to financial losses by him and his family beyond those he faces in this case. Perhaps he felt loyalty -- which it has been demonstrated is a somewhat uncommon trait among those charged with insider trading -- to Cohen, who has reportedly paid his legal fees and treated him well financially (and perhaps Martoma hopes will continue to do so), or perhaps to others he would have to implicate.
And perhaps -- perhaps -- the truth is that in his conversation with Cohen, he did not tell Cohen either because of caution while talking on a telephone, a deliberate effort to conceal from Cohen direct inside information, or another reason, and he is honest enough not to fudge the truth to please the eager prosecutors, as some cooperators do. In such a case his truthful testimony would have been unhelpful to prosecutors bent on charging Cohen. That neutral testimony or information, if proffered, which the skeptical prosecutors would find difficult to believe, would at best get him ice in this very cold wintertime. Lastly, however unlikely, perhaps Martoma believed or still believes he is, or conceivably actually is, innocent.
In any case, it is not necessarily too late for Martoma to change his mind and get a benefit from cooperation. The government would, I believe, be willing to alter favorably its sentencing recommendation if Martoma provides information or testimony leading to or supporting the prosecution of Cohen. Indeed, I believe the government would ordinarily jump at a trade of evidence against Cohen for a recommendation of leniency (or less harshness), even if Martoma is now even less attractive as a witness than before he was convicted (although far more attractive than if he had testified as to his innocence). However, the five-year statute of limitations for the July 2008 criminal activity in this matter has apparently run, and an indictment for substantive insider trading against Cohen for these trades is very probably time-barred.
To be sure, federal prosecutors have attempted -- not always successfully (see United States v. Grimm; see here) -- imaginative solutions to statute of limitations problems. And, if the government can prove that Cohen had committed even a minor insider trading conspiratorial act within the past five years (and there are other potential cooperators, like recently-convicted SAC manager Michael Steinberg, out there), the broad conspiracy statutes might well allow Martoma's potential testimony, however dated, to support a far-ranging conspiracy charge (since the statute of limitations for conspiracy is satisfied by a single overt act within the statutory period). In such a case, Martoma may yet get some considerable benefit from cooperating, however belatedly it came about.
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.
Wednesday, January 22, 2014
The statistics section of the website of the federal Bureau of Prisons (http://www.bop.gov/about/statistics/) has some interesting statistics.
Some of the more interesting are:
1. The median (50% of the population) age of federal prisoners is between 36-40 years.
2. The median sentence is between 5 and 10 years; 13% of the sentences are 20 years or more; 2% are less than one year.
3. 25% of the prisoners are not United States citizens; 18% are citizens of Mexico.
4. 35% are classified as Hispanics.
5. 7% are female.
6. 37% are black.
7. 50% are imprisoned for drug offenses, 11% for immigration offenses, 6-10% for white-collar crimes.
8. 17% are housed at a minimum security level, 40% at a low security level.
(Hat tip to Mark Allenbaugh.)
Monday, January 20, 2014
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.
Monday, January 13, 2014
I have no particular sympathy for Governor Chris Christie in his current political travails. But the notion that he or his aides committed a federal crime is ludicrous, and the New Jersey U.S. Attorney's rash public announcement of a criminal investigation is a shameful example of DOJ's continuing politicization. Oh, I know, everyone commits a federal crime every single day. It's what makes America great. But I'm talking about a real crime, that a real prosecutor would seriously tackle. Contrast Paul Fishman's aggressive stance with DOJ's spectacular non-reaction to the fraud-induced 2008 financial crisis. How pathetic.
Tuesday, January 7, 2014
This interesting question is raised in a recent filing of a Petition for Cert in the U.S. Supreme Court - Stinn v. United States. The case emanates from the Second Circuit and presents a jurisdictional split on whether employee compensation should be allowed as "money or property." Petitioner raises the following two questions:
1. Whether there are any limits on the extent to which employee compensation satisfies the “money or property” element of the Title 18 fraud statutes and, if so, what factual determinations by the jury are necessary to implement those limits.
2. Whether the property-loss requirement of the Title 18 fraud statutes is satisfied with proof that shareholders were denied their “intangible right to information or control.”
One also has to wonder about the government's prosecution of cases related to employer-employee relations. Shouldn't these matters be civil actions? And with limited resources, wouldn't resources be better spent on identity theft and other serious crimes.
Thursday, January 2, 2014
Corporate Crime Reporter, Brandon Garrett Talks Corporate Crime
Scott Cohn, USA Today, CEO in cuffs? 2014 Wall Street crime predictions
Ed BAllard, Marketwatch WSJ, U.K. corruption probe begins at Rolls-Royce
Benjamin Weiser, Judge Orders Release of Dying Lawyer Convicted of Aiding Terrorism
Alan Farnham, ABC News, Dennis Kozlowski's Life After Prison
Walt Pavlo, Forbes, The Top White-Collar Cases of 2013
Tuesday, December 31, 2013
Each year this blog has honored individuals and organizations for their work in the white collar crime arena by bestowing "The Collar" on those who deserve praise, scorn, acknowledgment, blessing, curse, or whatever else might be appropriate. I welcome comments from readers who would like to suggest additional categories or winners (or losers?).
With the appropriate fanfare, and without further ado, The Collars for 2013:
The Collar for Sweeping Things Under the Rug - To the Ninth Circuit's En Banc majority in U.S. v. Olsen which swept another Brady violation under the rug of immateriality
The Collar for Least Bang for the Buck - To Rajat Gupta for spending over 30 million on a conviction and jail sentence
The Collar for the Best Game of Hide and Seek – To the DOJ for having to be sued for its lack of transparency in Non-Prosecution Agreements
The Collar for the Most Missed Math Questions - To those trying to interpret sentencing guideline 2B1.1
The Collar for Kicking the Constitution the Most Times – To prosecutors who ask for greater penalties for defendants, like Kevin Ring, who exercise their Sixth Amendment right to a jury trial
The Collar for the Most Likely to be Indicted - Your choices are: Governor, Senator, Mayor, recreational pot smoker (unless you're in Colorado), penny-ante mortgage broker
The Collar for the Worst Continuing Political Prosecution – To the Travis County District Attorney's Office which brought the indictment against Tom Delay that was reversed, and then promptly filed a petition for discretionary review with the Texas Court of Criminal Appeals
The Collar for the Next Pending Legal Dilemma – To jurists deciding whether extraterrestrial is included within extraterritoriality
The Collar for an Arrow Least Likely to Hit a Bullseye – To allegations that the IRS Engaged in Targeting of organizations entitled to tax exempt status
The Collar for Stonewalling - To the IRS for its Congressional Investigation Evasion
The Collar for Destroying Another Country's Growth Industry – To the DOJ for its U.S.- Swiss Tax Evasion Cases
The Collar for the Most Likely to Strip the Government of Power – To judges who start scrutinizing corporate pleas
The Collar for Who Missed the Most Law School Exam Questions on Discovery Even When the Answer Was Provided in Advance – To DOJ Attorneys
The Collar for the Most Willful Blindness – To Prosecutors and jurists who misinterpret the Supreme Court’s decision in Global-Tech
The Collar for the Best Houdini Imitation - To Steven A. Cohen for escaping a personal indictment
The Collar For Breaking the Rubber Band When It Was Stretched to Far - To DOJ for its Hobbs Act prosecution in Sekhar v. United States
The Collar for Recognizing that the Criminal Justice System is Broken – To AG Holder in his comments on the 50th Anniversary of Gideon
The Collar for Best Newspeak (aka Baron Munchausen Collar) - To DOJ and DEA for using the term "parallel investigation" as a substitute for "pervasive government lies"
The Collar for Disappearing Ink - To DOJ for its failure to post anything critical of the Ted Stevens prosecution team on its own website
The Collar for the Best Child– to Don Siegelman’s daughter who continues to fight to Free Don
The Collar for the Best Parent - retired years ago and renamed the Bill Olis Best Parent Award - unawarded this year since no one comes even close to Bill Olis, may he rest in peace.
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.
Wednesday, December 18, 2013
What a marvelous dissent by Chief Judge Alex Kozinski, joined by judges Pregerson, Reinhardt, Thomas, and Watford, in United States v. Olsen. He dissented from the Ninth Circuit's refusal to rehear en banc the panel decision which excused an appalling example of Brady/Giglio error as immaterial. As Judge Kozinski so eloquently put it: "There is an epidemic of Brady violations abroad in the land. Only judges can put a stop to it."
Monday, December 16, 2013
Saturday, December 14, 2013
Yesterday, in U.S. v. Under Seal (4th Cir. 2013), the Fourth Circuit, joining several other federal circuits, extended the Fifth Amendment's Required Records Exception to records of foreign bank accounts required to be maintained pursuant to the Bank Secrecy Act ("BSA"). John and Jane Doe received a subpoena to turn over records of their Swiss bank accounts. They responded that complying with the subpoena compelled them to testify against themselves, as they were required to create and maintain such records pursuant to the BSA. They also argued that the long-standing, judicially-created, Required Records Exception did not apply in this case, because the BSA's record-keeping provisions are essentially criminal, rather than regulatory, in nature. The district court disagreed, the Does took civil contempt, and an appeal ensued. Unsurprisingly, the Fourth Circuit sided with the government, accepting its argument that the BSA's record-keeping provisions are essentially regulatory in nature. You are shocked? There's not exactly a strong constituency, public or judicial, for foreign bank account tax evasion.
Thursday, December 12, 2013
Second Circuit Reverses Convictions, Rejecting Government’s Expansive “Continuing Conspiracy” Theory
The Second Circuit recently reversed the convictions of three defendants convicted in a municipal bond bid-rigging scheme, rejecting the government’s attempt to rely on an attenuated theory of continuing conspiracy. The three defendants were immediately released from prison and the indictment was dismissed. The opinion sets a much-needed limit on the government’s unfettered use of the continuing conspiracy theory to avoid the statute of limitations.
Background: The World of Municipal Bond Taxes
The case involves the somewhat esoteric world of municipal bond taxes. Municipalities issue bonds. Because the bond funds are usually used for long-term projects, municipalities often do not spend the bond funds immediately.
To earn additional revenue from the funds, the municipal bond issuer may invest in “guaranteed investment contracts” (“GICs”) provided by financial institutions, such as GE (called a “provider”). GICs pay predetermined interest payments to the municipality, providing an additional source of income. Municipalities must rebate to the Treasury any interest earned over bond interest rate.
The tax code has certain provisions to prevent arbitrage in GICs. Important here, municipalities must determine the “fair market value” of the GIC. This is difficult because, as the Second Circuit noted, “GICs are not regularly traded.”
To ease the burden on municipalities, IRS regulations provide for a safe harbor to the “fair market value” calculation if the municipality holds a competitive bidding process among GIC providers. Third-party brokers solicit blind bids from several providers. The bidders do not know who else is bidding or the rates of interest being offered by their competitors.
The Defendants’ Role
Three defendants worked for a unit of GE that provided GICs. One left in 2001 to work with a company called Financial Security Assurance, Inc. Between 1999 and 2004, “the Defendants (on behalf of their employers GE and FSA) agreed to pay kickbacks to three brokers . . . and the brokers obliged by rigging the bidding process in several ways.” For example, the broker would disclose the amount of other bids or keep other bidders off the bid list.
The kickbacks helped GE and FSA win bids to provide GICs to municipalities at a lower interest rate. This, in turn, potentially affected whether any interest payments would be rebated to Treasury. According to the Second Circuit, “each deal defrauded the municipality, the Treasury, or both.”
On July 27, 2010, a grand jury returned an indictment. A superseding indictment was then returned for one count of wire fraud and six counts of conspiracy.
The defendants moved to dismiss on statute of limitations grounds. The district court granted the motion as to the substantive wire fraud count but refused to dismiss the conspiracy counts. It reasoned that as long as unindicted co-conspirators GE and FSA made interest payments on the GICs, the conspiracy was continuing.
The defendants were convicted after a three week-trial and three days of deliberations.
The Second Circuit’s Reversal
The Second Circuit reversed, in an opinion authored by Judge Jacobs. United States v. Grimm, No. 12-4310. Judge Kearse dissented.
The applicable statute of limitations for general conspiracy is five years and for conspiracy to commit tax fraud is six years. The court noted that although the indictment listed 55 overt acts, the only ones within either limitations period “were the periodic interest payments made by providers to issuers pursuant to the GICs.”
The court explained that only acts within the scope of the conspiracy could be properly considered in the statute of limitations analysis. The indictment alleged two purposes—the defendants sought to (1) “deprive issuers of money by causing them to award investment agreements at artificially determined or suppressed rates . . . “ and (2) to impede the government’s collection of tax revenue.
The court relied heavily on United States v. Salmonese, 352 F.3d 608 (2d Cir. 2003). That case held that a co-conspirator’s receipt of profits from a financial instrument that was part of the fraud was an overt act in furtherance of the conspiracy because it was part of the co-conspirators’ “anticipated economic benefits.” But Salmonese also explained that the conspiracy ends if the “payoff merely consists of a lengthy, indefinite series of ordinary, typically noncriminal, unilateral actions . . . and there is no evidence that any concerted activity posing the special societal dangers of conspiracy is still taking place.”
The Second Circuit explained that Salmonese’s list of factors was not exclusive. It provided a more general enunciation of the rule:
[G]enerally, overt acts have ended when the conspiracy has completed its influence on an otherwise legitimate course of common dealing that remains ongoing for a prolonged time, without measures of concealment, adjustment or any other corrupt intervention by any conspirator.
Here, the court concluded, the GIC payments satisfied this rule and therefore were not within the scope of the conspiracy. The payments were indefinite (because they were “prolonged beyond the near future); they were ordinary (part of a commercial obligation); and they were made unilaterally (by the provider).
The court held that the interest payments were the “result of a completed conspiracy” and not “in furtherance of one that is ongoing.” It noted that there was no indication that making the payments prolonged the conspiracy in any way. Because the payments were not overt acts in furtherance of the conspiracy, the government could not rely on them to satisfy the statute of limitations.
Because white collar indictments frequently arise out of complex, long-term financial instruments (and are often the result of lengthy government investigations), the Grimm opinion is of note. The opinion announces a general rule that may be application to other financial fraud cases. And, of course, it is a refreshing change to see a court limit the government’s use of the continuing conspiracy theory. Every minor ripple effect of a conspiracy should not be used to excuse the government’s failure to bring a case within the already lengthy limitations period.
Tuesday, December 3, 2013
Check out Mike Scarcella's BLT Blog item, Justice Dept. Sued Over Access to Non-Prosecution Agreement. It is hard to believe that someone would have to file a lawsuit to obtain information about a non-prosecution agreement of a corporation. One can understand the need to protect individuals from the sting of criminality when an agreement is reached to defer a prosecution or when an individual is being spared a prosecution as an alternative method to rehabilitate that individual. But corporations are not afforded the same rights as individuals. The government is quick to note that corporations do not have the same rights as individuals when they are trying to obtain corporate documents.