Tuesday, August 12, 2014
As I mentioned in my post last week, I moderated a roundtable discussion at this year's ABA annual meeting entitled Navigating the White Collar Crime Landscape in China. While the discussion included many unique and interesting insights into current trends and challenges in the field of white collar crime in China, I thought I might share just a few of the themes we heard from participants.
First, according to our participants, we should expect to see a continued focus on anti-corruption enforcement actions by both the United States and China. Second, it is important to note that China has begun focusing on the prosecution of high-level corporate employees, not just low-level employees and the corporation. Third, we should anticipate that China will continue to expand its anti-corruption mission, including directing more attention towards U.S. entities. In this regarding, it was also predicted that China may soon explore the adoption of an anti-corruption statute with extraterritorial jurisdiction to assist it in undertaking a broader anti-corruption mission similar to the U.S. This might mean we will soon see a Chinese version of the FCPA. Finally, several of our panelists noted that China is increasing its focus on data privacy and state secrets laws, including enforcing such laws against foreigners more vigorously.
Regarding this last theme from the discussion, I'll note that on the morning of our program two corporate investigators in China, one from the UK and the other from the U.S., were found guilty of purchasing private information regarding Chinese citizens. The pair, who are married, were well known in the internal investigation community in China and regularly performed work for large U.S. corporations, including GlaxoSmithKline. According to the charges, the pair violated Chinese law by illegally acquiring personal information on Chinese citizens and then selling that information to their clients. The first defendant, Peter Humphrey, was sentenced to two and a half years in prison. The second defendant, Yu Yingzeng, was sentenced to two years in prison. Those who perform due diligence and internal investigation work in China are keeping a close eye on this and related matters. You can read more about the prosecution in The Wall Street Journal.
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.
Wednesday, July 2, 2014
BNP Paribas Conviction Commendable, But Length of Investigation and Failure to Prosecute Individuals Raise Questions
Both the Department of Justice (DOJ) and the District Attorney of New York County (DANY) deserve commendation for the criminal conviction of France's largest bank, BNP Paribas, and the securing of penalties of approximately $9 billion (including $2.25 billion to New York State's bank regulatory agency, the Department of Financial Services), and, for the first time, a seemingly not insignificant collateral sanction imposed by a regulator (although how significant remains to be seen). BNP for ten years falsified transactions in order to be able to use the American banking system to do business with Sudan, Iran and Cuba, countries deemed rogue states by the U.S. government (but not necessarily by France). See here. While I accept that those crimes were serious crimes, I would much have preferred a prosecution-to-conviction of an American bank whose wrongs made it and its bankers much richer while making millions of other Americans much poorer.
The investigation, according to a story in the New York Times (see here) began in 2006 under the venerable New York County District Attorney Robert Morgenthau, whose expansive view of jurisdiction included the planet of Saturn (one of his bureaus was called "DANY Overseas"), when an Israeli-American DANY financial analyst developed a lead from reviewing the court papers of a civil suit against Iran brought by a grieving lawyer father whose daughter was killed in a terrorist suicide bombing in Gaza in 1995. See here. The investigation was continued by District Attorney Cyrus Vance when he took office in 2009.
No individuals have been indicted (although 13 have been required to leave their jobs), perhaps because the statute of limitations had run during the lengthy investigation. One wonders why such an important investigation took seven to eight years and has resulted (at least so far) in no indictment of individuals. Perhaps it was due to the difficulty to forge cooperation between federal and state law enforcement agencies. New York's federal and state prosecutors have not always played well together.
In any case, the appearance of the District Attorney of New York as a player in the prosecution of big banks is a welcome step. New York is, as Mr. Vance said, "the financial capital of the world," and therefore probably the financial crime capital of the world. Perhaps strong prosecutorial action by a local prosecutor -- in a sense a competitor with DOJ for high-profile cases -- will goad DOJ into stronger actions against financial institutions. Although the U.S. Attorney's Office under Preet Bharara has done a creditable job in fighting insider trading, it -- and DOJ -- had not until six weeks ago (see here) secured a criminal conviction against a major financial institution.
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).
Wednesday, June 18, 2014
With the growing internationalization of business crime, the question of when a foreign national may be extradited to the United States for crimes charged in the United States is arising more frequently. Generally speaking, under the requirement of "dual criminality," a resident of a foreign country charged in the United States will not be extradited if the country he is residing in does not deem his conduct criminal. If, however, that person travels from his "safe haven" home country to another country (even in transit) where such conduct is criminal, he may be extradited.
As reported in a recent Wilmer Hale article, see here, Romano Pisciotti, an Italian citizen charged with an antitrust bid-rigging violation in 2010, this April was extradited from Germany after the connecting flight on his trip from Nigeria to Italy landed there. Germany generally criminalizes bid-rigging; Italy generally does not. Presumably, had Pisciotti not left Italy, he would not have been arrested.
Pisciotti's extradition demonstrates that foreign residents indicted in the United States who are not extraditable from their home country (some nations, like Germany, will not extradite its own citizens other than to another European Union country or the International Criminal Court, for instance) take a considerable risk whenever they travel away from their country of residence.
Thursday, May 29, 2014
Credit Suisse Conviction Does Not Demonstrate Substantial Change In Department Of Justice Enforcement
The Department of Justice (DOJ) and Attorney General Eric Holder were strutting last week over the criminal conviction by plea of guilty of Credit Suisse, a major financial institution. "This case shows that no financial institution, no matter its size or global reach, is above the law," declared the Attorney General. Recent prosecutions of major financial institutions had resulted in lesser results, "deferred prosecutions," a somewhat deceptive term for "delayed dismissals," or a guilty plea by a minor affiliate.
The Credit Suisse guilty plea does not represent a sea change in the attitude of DOJ toward major financial institutions; rather, it appears to be a small ratcheting-up of the baseline penalty for serious criminal financial acts by such institutions. Credit Suisse, despite paying a hefty $2.6 billion fine, will not suffer the severe collateral consequences that ordinary individual defendants do upon a criminal conviction. (See here, NACDL's report "Collateral Damage: America's Failure to Forgive or Forget in the War on Crime -- A Roadmap to Restore Rights and Status After Arrest or Conviction," released today, Thursday, May 29, 2014.) It will still be able to act as an investment advisor, due to waivers agreed to by federal and New York State governmental agencies. Thus, its conviction, according to its chief executive Brady Dougan, will not have "any material impact on our operational or business capabilities." In other words, for Credit Suisse, it will be business as usual.
I hold no sympathy for Credit Suisse. Its crimes, continuous and notorious, have enabled American citizens and citizens of other countries to launder and evade tax payments on billions of dollars. In effect, Credit Suisse (not alone among Swiss banks) (see here) was a criminal enterprise, for many years making huge profits from extraordinary fees for its knowing and willful provision of a presumably safe haven for untaxed income, ill-gotten or otherwise. Mr. Dougan had stated to a Senate hearing in February that the tax evasion scheme was the work of a small group of private bankers that was hidden from senior management. That hard-to-believe claim was challenged in a statement by Schweitzerisher Bankpersonalverband, the organization representing the bank's employees: "It was common knowledge that tax evasion was the strategy, a business model pursued by many banks for a long time." See here.
To be sure, Credit Suisse's crimes did not cause the vast hardship to tens of millions of Americans that the wrongs -- criminal or not -- of other major financial institutions did in the last several years. And, further, its acts -- while subject to the long-arm jurisdiction of American courts -- were apparently legal under Swiss law, and seemingly condoned by the Swiss government.
Some commentators have suggested that there is considerable unfairness in prosecuting corporations for acts of low- or mid-level employees without knowledge of corporate leaders (see here), a position with which I generally agree. The demi-prosecution of Credit Suisse, however, does not appear to fit within that category, despite Mr. Dougan's claim. I see no unfairness in the government's requiring Credit Suisse to plead guilty.
I do, however, wonder about the effectiveness of the insistence on a guilty plea if the collateral consequences are waived. The conviction of a major financial institution with a considerable financial penalty but a waiver of regulatory bars is to me little different from a civil finding of wrongdoing with such a penalty. Other than its current status as a convicted felon, Credit Suisse today is essentially in the same position it was two weeks ago.
Given the legitimate (but probably exaggerated) fear that a felony conviction of a major financial institution without regulatory waivers will have on its existence and thus on the economy and societal well-being, it may well be that guilty pleas (and trial convictions too) of such corporations should be accompanied by limited collateral consequences. Such prosecutions, however, will then serve little more than a symbolic purpose (which I accept as a legitimate purpose). Overall, DOJ's prosecution to conviction of Credit Suisse is a positive step, albeit a small one.
The resolution here suggests again that the criminal process is inadequate to prosecute large financial institutions. Society looks to the criminal law to solve far more problems than the criminal law is capable of solving. Meaningful reform of a flawed financial system will not come from criminal prosecutions of corporations, but, if at all, from strong, substantial regulatory rulemaking and non-criminal legislation.
Tuesday, April 22, 2014
18 U.S.C. § 1519, known as the “anti-shredding provision” of the Sarbanes-Oxley Act of 2002, makes it a crime for anyone who “knowingly alters, destroys, mutilates, conceals, covers up, falsifies, or makes a false entry in any record, document, or tangible object” with the intent to impede or obstruct an investigation (emphasis added). Congress passed this statute in the aftermath of the Enron debacle. But did they ever envision that a prosecutor would use this statute against a commercial fisherman for allegedly having undersized grouper fish that were thrown overboard following the issuing of a civil fishing citation from the Florida Fish and Wildlife Commission?
The government’s extension of this SOX statute is the subject of a Petition for Certiorari (Download Yates Pcert_Filed) before the Supreme Court. A key issue is whether “fish” are tangible objects for the purposes of this statute. And even more bizarre is that the fisherman allegedly started with 72 undersized red grouper and when he came to shore there were purportedly only 69 fish. Could this be a federal prosecution under SOX for 3 missing fish? And is this all happening during a time of sequestration with tight funding?
Perhaps the Supreme Court will agree that in the ocean of crime, this one is a bit fishy. Following the filing of the Petition for Certiorari and a distribution for conference, the Court requested a response from the government. Amici filed a couple of briefs and it was again distributed for conference. It is now set for distribution a third time, April 25, 2014 (see here). It's a wonderful case for the Court to examine principles of statutory interpretation and how far afield the government can go in using a statute written and intended to stop one form of criminal conduct but being used in an unintended manner. This case also provides the Court the chance to step to the plate and express a view on overcriminalization. (see NACDL amicus brief of William Shepherd here - Download NACDLYATESAMICUS). There are many other issues in the "fish case" that may also interest the Court, such as how a civil fishing citation became a criminal case with an indictment issued 985 days after the citation. (see Petitioner's Reply Brief - Download Yates Reply to Brief in Opposition). But the real question is whether the Court will order fish this coming Friday at their conference.
Tuesday, April 8, 2014
I had the privilege of being at an NYU Conference titled, Deterring Corporate Crime: Effective Principles for Corporate Enforcement. Hats off to Professor Jennifer Arlen for bringing together folks with some different perspectives on corporate crime. Individuals presented data, and I heard different positions presented (corporate, government, industry, judicial) on a host of topics. The individual constituent (CEO, CFO, employee) within the corporation was not a key focus, unless it was a discussion of their wrongdoing or prosecution.
From this conversation it was clear that deterring corporate wrongdoing is not easy. Penalties have increased, yet we continute to see corporate criminality. So the question is, how do we encourage corporations not to engage in corporate wrongdoing?
This is my top ten list of what I think exists and what needs to be changed -
1. Most companies try to abide by the law.
2. Complying with the law is not always easy for corporations. In some instances the law and regulations are unclear, making it difficult to discern what is legal. The array of different laws and regulations (e.g., state, federal, and international), as well as their complexity makes corporate compliance problematic.
3. Companies resort to internal investigations to get information of wrongdoing within the company. In some instances companies will threaten individuals with the possible loss of their jobs if they fail to cooperate with a corporate internal investigation. Individuals who provide information to their employers sometimes do not realize that the company may provide that information to the government and the information may then be used against them.
4. If a company is criminally charged, it typically is financially beneficial for the company to fold, work with the government, and provide information to the government of alleged individual wrongdoing within the company.
5. DOJ's incentives to a corporation that causes it to fold and provide evidence to the government against alleged individual wrongdoers may be causing more harm because it pits corporations against its individual constituents.
6. We need a stronger regulatory system. Our system is broken and one just can't blame agencies like the SEC.
7. If we expect agencies like the SEC to work, Congress needs to provide them with more money to engage in real regulatory enforcement.
8. There are many good folks in DOJ, including AG Holder, who look longterm at stopping corporate wrongdoing. But there are also individuals in DOJ who fail to see the ramifications of what may seem like short-term benefits.
9. Corporate crime can be reduced if everyone - the corporation, government, and also the individual constituents would work together.
10. It would be beneficial in reducing corporate crime if there was more transparency. We all need to hear what works - when there are declinations of prosecutions, or when an agency decides not to fine a company. We can learn from the good things companies do (anonymously) and when DOJ declines to proceed against the company.
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 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.
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.
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.
Friday, November 1, 2013
Business Week has the story here. Former BDO Seidman CEO Denis Field, represented by Sharon McCarthy of Kostelanetz & Fink LLP, was acquitted on all seven counts he faced. Paul Daugerdas, former head of now-defunct Jenkens & Gilchrist's Chicago office, was convicted on seven of 16 counts. The original convictions against Daugerdas and Field were thrown out by SDNY Judge William Pauley after a juror's misconduct was brought to light.
Wednesday, October 30, 2013
In United States v. Miller, the Sixth Circuit today reversed three of four counts of conviction in a mortgage fraud prosecution. The court held that appellant Miller did not unlawfully "use" a means of identification within the meaning of 18 U.S.C. Section 1028A, the Aggravated Identity Theft statute, when he falsely stated that two named individuals had given him authority to act on behalf of an LLC. Since Miller did not steal their identity, pass himself off as them, or purport to be acting on their behalf as individuals, he is not guilty of violating the statute. The government had argued for a broader construction, but the Sixth Circuit applied the rule of lenity.
The court also reversed a Section 1014 count, because it was bottomed on Miller's signing of a loan renewal and modification agreement. Since the modification and renewal agreement did not repeat the false statement contained in the original loan papers, Miller could not be guilty under Section 1014. The court indicated that Miller had engaged in fraud and false pretenses during the loan modification process. But this was not enough to support a Section 1014 conviction, which requires a knowingly false statement.
Tuesday, October 29, 2013
USA Today has this story. Here is the interesting part, at least to federal sentencing aficionados. Renzi took the government to trial. Judge David Bury calculated Renzi's U.S. Sentencing Guidelines range at 97-121 months. (The government asked for a 9-12 year sentence.) Judge Bury downwardly varied to 36 months. This is striking, and yet another example of the Guidelines losing their luster in white collar cases. Under the law the Guidelines must be considered, but in an increasing number of cases they are being considered and ignored or discounted.
Tuesday, September 24, 2013
Many years ago I authored an article titled, "Do We Need a 'Beanie Baby' Fraud Statute?" The Article considered how specific a statute needs to be to provide proper due process to a criminal defendant. It focused on the breadth of the mail fraud statute, while also recommending that criminal statutes cannot be created for every unique circumstance - like "Beanie Baby" fraud. It was written at the height of the time when individuals were committing crimes of fraud with "Beanie Babies." In some cases, the company producing this product was the victim of the fraud.
Another side of "Beanie Babies" is mentioned this past week - and it relates to the CEO of Ty Warner, who was the creator of "Beanie Babies." A DOJ Press Release tells that H.Ty Warner was charged with tax evasion for allegedly hiding funds in a secret Swiss offshore account. The press release states, "[t]hrough his attorney, Warner authorized the government to disclose that he is cooperating with the Internal Revenue Service and will plead guilty to the charge." According to the DOJ Press Release, "Warner is the second taxpayer charged in Federal Court in Chicago in connection with an ongoing investigation of U.S. taxpayer clients of Union Bank of Switzerland (UBS) and other overseas banks that hid foreign accounts from the Internal Revenue Service."
Thursday, September 19, 2013
Political prisoner Tom DeLay had his money laundering convictions reversed today, based on insufficency of the evidence, by Texas' Third Court of Appeals sitting in Austin. The 2-1 majority opinion held that there was no underlying violation of the Texas Election Code, and hence no illegal proceeds to be laundered. Thus ends, for now, one of the most abusive and unfair political prosecutions in recent Texas history. The State can appeal to the Texas Court of Criminal Appeals. The majority opinion is here. The opinion reveals that the jury twice asked, in essence, whether DeLay could be guilty of money laundering if the "proceeds" were not originally procured in violation of law. In each instance, the trial court refused, at the State's urging, to answer the jury's question. How pathetic. Hat tip to Dave Westheimer for bringing the decision to my attention.
Wednesday, September 18, 2013
Move over, Emmet Sullivan and Carmac Carney. Add Kurt D. Engelhardt to the Honor Roll roster of federal district judges willing to speak truth to the U.S. Department of Justice. Willing to speak truth and to do something about it. Here is Judge Engelhardt's Danziger Bridge Mistrial Order, issued yesterday in the Eastern District of Louisiana, and dismissing without prejudice all guilty verdicts obtained by the government in United States v. Kenneth Bowen, et al. This was the federal civil rights prosecution of New Orleans police officers allegedly involved in a horrific shooting of civilians in the wake of Hurricane Katrina.
The mistrial was granted primarily due to a secret campaign of prejudicial publicity carried out through social media by members of the U.S. Attorney's Office in New Orleans and a DOJ Civil Rights Division attorney in DC. But Judge Engelhardt's opinion raises several other troubling issues concerning the conduct of the trial, DOJ's post-trial investigation of what happened during the trial, and possible meddling by the Deputy AG's office in that investigation.
I will have more to say about these issues in the coming days. It is clear that Judge Engelhardt does not believe he has received anything like the full story from DOJ. It is clear that appointment of a Special Counsel to investigate the entire affair is in order. And it is clear, if history is any judge, that no such appointment will be forthcoming from this attorney general.
Judge Engelhardt's opinion is lengthy, but one that should be required reading for every criminal defense attorney who practices in federal court and every DOJ prosecutor throughout the land. For now, I leave you with Judge Engelhardt's stirring words, taken from some of the closing paragraphs:
On July 12, 2010, the indictment in this case was announced with much fanfare, a major press conference provided over by U.S. Attorney General Eric Holder, and widespread media attention. On that occasion, a DOJ representative said that the indictments 'are a reminder that the Constitution and the rule of law do not take a holiday--even after a hurricane.' While quite true in every respect, the Court must remind the DOJ that the Code of Federal Regulations, and various Rules of Professional Responsibility, and ethics likewise do not take a holiday--even in a high-stakes criminal prosecution, and even in the anonymity of cyberspace. While fully appreciating the horrific events of September 4, 2005, and those who tragically suffered as a result, the Court simply cannot allow the integrity of the justice system to become a casualty in a mere prosecutorial game of qualsiasi mezzo.
Some may consider the undersigned's view of the cited rules and regulations as atavistic; but courts can ignore this online 'secret' social media misconduct at their own peril. Indeed the time may soon come when, some day, some court may overlook, minimize, accept, or deem such prosecutorial misconduct harmless 'fun.' Today is not that day, and Section N of the United States District Court for the Eastern District of Louisiana is not that court.
Thursday, September 5, 2013
Yesterday the Seventh Circuit, sitting en banc, reversed and remanded (7-2) a Section 1014 (and Section 317) conviction connected to the mortgage meltdown crisis. Judge Posner wrote the majority opinion. Chief Judge Easterbrook (joined by Judge Bauer) dissented. The opinion is United States v. Lacey Phillips and Erin Hall.
Section 1014 prohibits making any false statement or report for the purpose of influencing in any way a federally insured bank. Longstanding case law requires the government to prove that the defendant knew the statement was false at the time it was made. Phillips and Hall were an unmarried couple who applied for a home loan and were rejected. Hall then contacted his friend Bowling, a mortgage broker, who began advising Hall and Phillips and ultimately led them to a different bank, Fremont Investment & Loan, which granted a home loan to Phillips. Hall was not listed as a borrower. This was a stated income loan, also known in the industry as a liar's loan.
Phillips and Hall could not keep up with the payments and lost their home. A prosecution ensued. There were several false statements on the loan application, but Phillips and Hall testified that they only were aware of one of the statements, which was as follows. Under the Borrower's Income line, Phillips put down the couple's combined income.
Phillips and Hall wanted to testify that Bowling told them: 1) Phillips should be the only applicant for the stated-income loan, because her credit history was good while Hall's was bad because of the recent bankruptcy; 2) Hall's income should be added to Phillips' on the line that asked for borrower's gross monthly income; and 3) adding the incomes together was proper in the case of a stated income loan, because the bank was actually asking for the total income from which the loan would be repaid, rather than just the borrower's income.
The government wanted to keep this testimony from the jury and U.S. District Court Barbara Crabb (I kid you not) agreed. The Seventh Circuit, per Posner, reversed, in an unnecessarily complicated opinion, but one that is nevertheless fun and instructive to read.
I see it this way. According to Phillips and Hall, Bowling told them that, to Fremont Investment & Loan, Borrower's Income meant the total income from which the loan would be repaid. They were in essence informed that Borrower's Income was a term of art for Fremont. If Phillips and Hall believed that Borrower's Income meant (to Fremont) Combined Income of the People Repaying the Loan, then Phillips and Hall were not making a statement to Fremont that they knew was false. Their state of mind on this point was directly at issue. Theirs may have been be an implausible story, but the jury was allowed to hear it. Judge Posner's opinion has some important things to say about terms of art and interpretation of seemingly simple terms.
This case reminds me of a home loan I took out while I was an AUSA. The bulk of the down payment was being paid through my Thrift Savings Plan. That is, I was loaning myself money out of my government retirement fund. At the time, all of the standard loan applications required the borrower to state that no part of the down payment was coming from a loan. I asked my real estate agent and the mortgage broker whether that language applied to a Thrift Savings Plan Loan. They assured me that it did not. So, when I wrote down on the application that no part of my down payment came from a loan, I knew that in one sense this might be considered false, but to the bank, and presumably to any bank, it would be considered true, because the bank did not consider a Thrift Savings Plan Loan to be a loan. Had I defaulted and been prosecuted, I would have liked to present this as a defense, and it is hard to believe that any competent judge would have prevented me from doing so. But Judge Crabb did not allow this kind of evidence in, and Judge Easterbrook cheers her on.
Judge Easterbrook points out that the jury, in finding Phillips and Hall guilty, already determined that the couple knew several statements on the loan application were false. This is back-asswards and misses the point. This is not a sufficiency of the evidence case. If the jurors had heard the excluded testimony, they may well have been more likely to believe Phillips' and Halls' testimony that the rest of the false statements were made and submitted by Bowling without their knowledge. According to Posner, there was evidence to the effect that Phillips and Hall were naive, while Bowling (who pled guilty and cooperated) and Fremont (a bank that Posner deems disreputable) were sophisticated.
Of course, it is appalling and embarrassing that any self-respecting U.S. Attorney's Office would prosecute a case like this, but it is all part of DOJ's Piker Mortgage Fraud Initiative. Even more embarrassing was the government's contention on appeal that the excluded statements were hearsay. Posner called this a "surprising mistake for a Justice Department lawyer." I'm not so sure. Maybe it wasn't a mistake.
Monday, September 2, 2013
In United States v. Vilar, the Second Circuit examined a post-Morrison decision with an issue of whether Section 10(b) of the Securities Exchange Act of 1934 applies to extraterritorial criminal conduct. The government had argued that the Supreme Court's decision in Bowman allowed for an extraterritorial application and that civil and criminal conduct should be treated differently and thus Morrison should not apply. The Second Circuit disagreed with the government saying that the Bowman decision was limited to conduct that was "aimed at protecting 'the right of the government to defend itself.'" In contrast, statutes such as 10(b) have as its "purpose [ ] to prohibit 'crimes against private individuals or their property,'" and therefore "the presumption against extraterritoriality applies to criminal statutes, and Section 10(b) is no exception."
The court also noted that "[a] statute either applies extraterritorially or it does not, and once it is determined that a statute does not apply extraterritorially, the only question we must answer in the individual case is whether the relevant conduct occurred in the territory of a foreign sovereign." Despite this legal analysis and ruling, the court found that there was no plain error with respect to territoriality on the counts here and thus no need to reverse on this issue.
Other issues raised by the defendants, such as those relating to a search warrant, jury instructions, and the admission of statements were found not to be in error. The court did, however, remand the sentence.