Tuesday, July 20, 2010

Tourre's Answer

Fabrice Tourre's Answer has been filed in SEC v. Goldman, Sachs & Co. and Fabrice Tourre. Among other things, Tourre contends that neither he nor Goldman "had a duty to disclose any allegedly omitted information" and that the ABACUS 2007-AC1 offering materials "expressly disclosed that no one was purchasing notes in the equity tranche of the transaction."


July 20, 2010 in Civil Enforcement, Current Affairs, SEC, Securities, Statutes | Permalink | Comments (0) | TrackBack (0)

Saturday, July 10, 2010

Quality Control at the Second Circuit II: United States v. Kaiser and Historical Truth

I wrote here last week about the Second Circuit's opinion in United States v. Kaiserwhich overturned a long line of Second Circuit precedent establishing that willfulness in the context of criminal Exchange Act prosecutions requires the government to prove a defendant's awareness of the general unlawfulness of his/her conduct under the securities laws. I pledged to post again and focus a little more on the specifics of the opinion. 

The Kaiser Court states that "[m]ore recently, we seemed to endorse a higher standard for willfulness in insider trading cases." This is misleading on several counts.

First, the higher standard for willfulness in criminal cases brought under the Exchange Act was established 40 years ago in United States v. Peltz, 433 F.2d 48 (2nd Cir. 1970). Since when is an opinion from 40 years ago considered recent? Peltz is older that any of the opinions cited by the Court in support of the lower standard of proof.

Second, not one of the higher standard cases cited by the Court explicitly confines the higher standard of proof to insider trading cases. Indeed, Peltz itself was not an insider trading case.

Third, the Court ignored published and unpublished Second Circuit case law that unequivocally applies the higher standard outside of the insider trading context. See United States v. Becker, 502 F.3d 122 (2nd. Cir. 2007); United States v. Schlisser, 168 Fed. Appx. 483 (2nd Cir. 2006) (unpublished).

The Kaiser Court states that "Unlike securities fraud, insider trading does not necessarily involve deception, and it is easy to imagine an insider trader who receives a tip and is unaware that his conduct was illegal and therefore wrongful." (emphasis added).

First, insider trading is quintessentially a species of securities fraud. Most insider trading cases are brought under Section 10(b) of the Exchange Act and SEC Rule 10b-5. These are securities fraud provisions by definition and Rule 10b-5 is well known as the classic catch-all securities fraud regulation. As the Supreme Court stated in Chiarella v. United States, "Section 10(b) is aptly described as a catch-all provision, but what it catches must be fraud." 445 U.S.222, 234-35 (1980).

Second, the essence of insider trading is fraudulent deception through failure to disclose. What Section 10(b) of the Exchange Act outlaws on its face is a "manipulative or deceptive device or contrivance." The Supreme Court in designating insider trading a "manipulative device" has stated that inside traders "deal in deception." See United States v. O'Hagan, 521 U.S. 642, 653 (1997). In fact, all insider trading prohibited by the criminal law involves deception of some party or parties by the inside trader.

The Kaiser Court also at numerous points conflates, deliberately or negligently, case law discussing Exchange Act Section 32(a)'s willfulness requirement with case law discussing Section 32(a)'s provision that "no person shall be subject to imprisonment under this section for the violation of any rule or regulation if he proves that he had no knowledge of such rule or regulation." As noted in my prior post, the Second Circuit precedent does not hold that the government must establish the defendant's knowledge of the particular rule, regulation, or statute that he/she has allegedly violated in order to prove willfulness under Section 32(a) the Exchange Act. But the government must prove the defendant's knowledge that his/her conduct was illegal in general or "wrongful under the securities laws."

As a general proposition in the Second Circuit, one panel cannot overturn another panel's recent precedent. Here, the Kaiser panel appears to have overturned recent and longstanding precedent of myriad other panels. Maybe the higher willfulness standard under Section 32(a) should go. Clearly, the case law on this issue has not always been clear or entirely consistent. But the bench and bar deserved better here.



July 10, 2010 in Current Affairs, Fraud, Insider Trading, Judicial Opinions, News, Prosecutions, SEC, Securities, Statutes | Permalink | Comments (0) | TrackBack (0)

Thursday, June 24, 2010

NACDL President Comments on Honest Services Trilogy


Here is a press release from the National Association of Criminal Defense Lawyers ("NACDL") containing NACDL President Cynthia Orr's comments on today's U.S. Supreme Court honest services opinions. Orr is “heartened that the Court has unambiguously rejected government arguments that the ‘honest services’ fraud statute can be properly used across as broad a range of conduct as the government has sought to do in recent years.” Nonetheless she is"disappointed that the Court has held that there remains a place in our criminal justice system for a statute on whose meaning few can agree.” (In various friend of the court briefs, NACDL has taken the position, now shared by Justices Scalia, Thomas, and Kennedy, that 18 U.S.C. Section 1346 is unconstitutionally vague.)

Orr expects “to see future litigation surrounding efforts by prosecutors to wedge their cases into the ‘bribe or kickback’ paradigm to which the Court has now limited this statute.” Of this we can be sure.

The NACDL press release also bemoans the portion of the Skilling opinion which "shockingly found that pre-trial publicity and community prejudice did not prevent Mr. Skilling from obtaining a fair trial. In fact, though, there has not been a more poisoned jury pool since the notorious first robbery and murder trial of Wilbert Rideau in Louisiana." 


June 24, 2010 in Current Affairs, Enron, Insider Trading, Judicial Opinions, Media, News, Obstruction, Prosecutions, SEC, Securities, Statutes | Permalink | Comments (1) | TrackBack (0)

More on Honest Services and Skilling


The breakdown is as follows. All nine justices agree that the judgments in the three honest services fraud cases must be vacated and remanded. The majority rules that Section 1346 honest services fraud encompasses only bribery and kickback schemes, and would be unconstitutionally vague if interpreted more broadly. The majority opinion in Skilling (and Black) is written by Justice Ginsburg, who is joined by five other justices. Justice Scalia (joined by Justices Thomas and Kennedy) concurs, but would simply hold Section 1346 unconstitutionally vague under the Due Process Clause and would not seek to salvage it through a narrowing interpretation.

The jury instructions in all of the cases allowed for conviction under the now-discredited broad view of honest services. The lower courts must decide whether the instructional errors were harmless.

Jefffrey Skilling's fair trial arguments were rejected 6-3, with Justice Sotomayor, joined by Justices Stevens and Breyer, dissenting.

Conrad Black and co-defendants properly preserved their objections to the jury charge.

All of this is based on my quick skim. More detailed analysis will come later.

Once more, here are the slip opions in Skilling, Black, and Weyhrauch.


June 24, 2010 in Current Affairs, Enron, Fraud, Judicial Opinions, News, Prosecutions, SEC, Securities, Statutes | Permalink | Comments (0) | TrackBack (0)

Supreme Court Vacates and Remands in Skilling's Honest Services Case!


Here is the slip opinion. According to the Court's syllabus, Section 1346 is not unconstitutionally vague, but only proscribes the "bribe-and-kickback core of the pre-McNally case law." More to come.


June 24, 2010 in Fraud, Judicial Opinions, Prosecutions, Securities, Statutes | Permalink | Comments (0) | TrackBack (0)

Friday, June 18, 2010

Farkas Indictment


Here is the Lee Bentley Farkas Indictment, unsealed this week in the EDVA. Farkas is charged with conspiracy, bank fraud, wire fraud, and securities fraud. I'm surprised they didn't throw in dancing with a mailman or impersonating Smoky the Bear. The government alleged securities fraud under 18 U.S.C. Section 1348, which, surprisingly, has seen very limited use since it was enacted as part of Sarbanes-Oxley. It will be interesting to see if this is part of a new trend. There are three securities fraud counts (Counts 14-16) based upon three separate reports (10-K, 8-K, and 10-Q) filed with the SEC, each one charged as an execution of the securities fraud scheme.


June 18, 2010 in Current Affairs, Fraud, Mortgage Fraud, Prosecutions, SEC, Securities, Statutes | Permalink | Comments (0) | TrackBack (0)

Wednesday, June 16, 2010

Ninth Circuit Affirms Brokers' Duty To Disclose Material Commissions


Last week, in a significant decision construing SEC Rule 10b-5 in the context of criminal prosecutions, the Ninth Circuit held that "if a broker and a client have a trust relationship...then the broker has an obligation to disclose all facts material to that relationship." The case is United States v. Laurienti and can be accessed here. Laurienti involved a pump and dump scheme in which brokers failed to disclose commissions they received equal to 5% of the purchase price of certain "house stocks" sold to clients. The defendant brokers argued that they had no legal duty whatsoever to disclose the 5% commissions to their clients. The Ninth Circuit disagreed, and noted that the 5% commissions were clearly material under the facts developed at trial, since "every former client who testified said that he or she would not have bought the house stocks had he or she known about the bonus commissions." The case was brought under all three subsections of Rule 10b-5. The Court noted in dictum that "[u]nder subsection (b) of Rule 10b-5, even in the absence of a trust relationship, a broker cannot affirmatively tell a misleading half-truth about a material fact to a potential investor." The Court also held that the defendants could have been found guilty of conspiracy in the pump and dump scheme even if the disclosure of bonus commissions had not been required by law, because "a reasonable juror...could have concluded that Defendants intentionally acted contrary to the interests of their clients by pushing house stocks as part of a fraudulent scheme to line Defendants' pockets without regard for the interest of their clients." The undisclosed bonus commissions were "circumstantial evidence of Defendants' agreement to join the conspiracy." The Court relied heavily on the Supreme Court's opinion in Chiarella v. United States, and on Second Circuit precedent, in reaching its decision.


June 16, 2010 in Judicial Opinions, SEC, Securities, Statutes | Permalink | Comments (0) | TrackBack (0)

Friday, October 2, 2009

NACDL's 5th Annual Defending the White Collar Case Seminar - "Capitol Chaos--What's Happening in D.C.?," Friday, October 2, 2009

Guest Blogger:  Ross H. Garber, Shipman & Goodwin (Hartford, CT)

Panelists:  Shara-Tara Regon, Kathleen Sullivan

Legislative Update

Shana Regon, NACDL’s Director of White Collar Crime Policy, provided an update on NACDL’s efforts on Capitol Hill.  She began by talking about NACDL advocacy on attorney-client privilege and attorney work product protection issues, particularly related to DOJ policy on requesting waivers of the privilege and protection from cooperating companies.  She also talked about proposed legislation, HR 1947, that would regulate deferred prosecution agreements (DPAs) and non-prosecution agreements (NPAs).  Among the provisions of HR 1947 are those that would require court approval of DPAs and NPAs and require posting of all DPAs and NPAs on the DOJ website.  Shana also talked about NACDL’s efforts to educate Congress about overcriminalization including ambiguous mens rea standards, mandatory minimums, the federalization of criminal conduct and the adoption of overlapping statutes covering the same conduct.

Supreme Court Update

Kathleen Sullivan of Quinn Emanuel spoke about some recent white collar cases decided by the Supreme Court in the past session: Diaz v. Massachusetts; Yaeger v. United States; and Nijhawan v. Holder.  In Malendez-Diaz, the Supreme Court held in a 5-4 decision that the confrontation clause applies to an affidavit from a crime lab analyst because it is testimonial in nature.  Kathleen emphasized that this decision would apply to any forensic experts.  In Yaeger, the court held that when a jury acquits on some counts and hangs on others, the government may not re-try the defendant on any of the counts.  In Nijhawan the Court interpreted the deportation statute for aggravated felonies with respect to crimes of fraud or deceit involving more than $10,000.  The Court held that the $10,000 requirement is met based on the facts of the case, even if the underlying aggravated felony statute itself does not require a $10,000 loss

Kathleen noted that in this session, the Court is considering several honest services cases.  Among the issues the Court will tackle is whether the mail fraud statute criminalizes mere ethical missteps. Among the honest services cases are United States v. Weyrauch, in which an Alaska legislator was convicted of soliciting legal work from clients when he was in a position to benefit clients and not disclosing the work.  The question posed in this case is whether the government must prove violation of disclosure requirements otherwise required by state law. 

In a case involving Conrad Black, the Supreme Court will evaluate whether there must be an intent to and likelihood of depriving a corporation of a business opportunity for an executive to be found guilty of the honest services provision of the mail fraud statute.  Kathleen said she expects these cases to be decided for the defendants on narrow statutory grounds.


October 2, 2009 in Conferences, Congress, Current Affairs, Fraud, Judicial Opinions, Statutes | Permalink | Comments (0) | TrackBack (0)

Thursday, October 1, 2009

NACDL's 5th Annual Defending the White Collar Case Seminar - "Cyberspace - The Black Hole Where Ethics, Strategy, and Technology Collide," Thursday, October 1, 2009

Guest Blogger:  Cynthia Hujar Orr, President, National Association of Criminal Defense Lawyers

Panel Moderator:  Gerald Goldstein

Panelists: AUSA Joey Blanch, Blair Brown, Marcia Hofmann, Alexander Southwell

Gerald Goldstein grabbed the attention of the NACDL White Collar seminar telling us that each time we hit the send button on the internet a new government exhibit is created.

Blair Brown spoke about the Balco Investigation, Comprehensive Drug Testing, case and its ground breaking opinions.  They answered many previously unanswered questions regarding the operation of the plain view doctrine and appropriate limits and procedures for the execution for computer search warrants. The Baseball Players Association conducted anonymous testing in order to determine whether comprehensive drug testing should be imposed on the sport.  However, a search warrant issued for drug test results for specific athletes and promised to screen and limit the search of the computers to records of specific athletes through off site screening procedures.  The government rejected assistance on site to produce just the records that the government sought.  In fact, the case agent viewed all of the records under the theory that they were in "plain view."  Three separate district judges found the government acted in an outrageous fashion, executing general warrants.  Blair explained the appropriate limits and procedures that the Court held should have been followed instead.

Alexander Southwell explained the government's application of the Computer Fraud Abuse Act to the public's use of social networks in the context of the Laurie Drew case.  Drew had created a fake "my space" account culminating in the suicide of a young woman distressed by the postings from the fake site.  The government pressed charges for formation of a fake account, criminalizing the violation of the terms and conditions of a social network.  Drew was convicted and the court entered a judgment of acquittal from which the government has taken an appeal.  Therefore, the story has not been written on the sweep of the Computer Fraud Abuse Act (CFAA), 18 U.S.C. Section 1030.  He explained the difficulty of the criminal law to keep up with technology and the importance for criminal defense lawyers to push back when the government attempts to apply the criminal law to current social practices.

Marcia Hofmann working for the Electronic Frontier Foundation, a techie ACLU.  She encouraged defense lawyers to reach out to EFF when confronting technical issues in your criminal cases.  She discussed the evolution of the CFAA covering the cases that were the vehicles that expanded its use.  Her discussion opened eyes about conduct that was not traditionally addressed by the criminal law. 

AUSA Joey Blanch discussed child pornography in the age of the internet.  Cases are exploding and proliferating.  Every section of society in every walk of life ends up with people committing these crimes because people think they are anonymous on line.  Blanch told the white collar lawyers that they will have a client with a child pornography case and explained how it could arise. Importantly, she discussed the new child pornography offenses effective in October of 2009.  She also discussed the circuit split on the Mona Lisa defense.  One of the new crimes is the Child Pornography Enterprise offense which creates a 20 year mandatory minimum for participation in child pornography internet groups.  That was just the tip of the iceberg.

Using a hypothetical containing common real life circumstances the group guided the audience through what counsel should do in tough circumstances. 


October 1, 2009 in Computer Crime, Conferences, Legal Ethics, Searches, Statutes, Web/Tech | Permalink | Comments (0) | TrackBack (0)

Thursday, October 18, 2007

Expanding the Identity Theft Statute

Senate Judiciary Committee Chairman Patrick Leahy and Ranking Member Arlen Specter introduced the "Identity Theft Enforcement and Restitution Act of 2007" to expand the power of the federal government to pursue cases of identity theft.  According to a press release (here) issued by Senator Leahy, the new bill would give federal prosecutors greater authority to bring identity theft cases by lowering the jurisdictional requirements for a federal prosecution.  The press release outlines some of the changes the proposed legislation would bring about:

  • Expand the jurisdiction of federal computer fraud statutes to cover small businesses and corporations;
  • Eliminate the prosecutorial requirement that sensitive identity information must have been stolen through an interstate or foreign communication and instead focuses on whether the victim’s computer is used in interstate or foreign commerce, allowing for the prosecutions of cases in which both the identify thief’s computer and the victim’s computer are located in the same state;
  • Make it a felony to employ spyware or keyloggers to damage ten or more computers regardless of the aggregate amount of damage caused, ensuring that the most egregious identity thieves will not escape with a minimal, or no, sentence;
  • Eliminate the requirement that the loss resulting from damage to a victim’s computer must exceed $5,000; under this bill violations resulting in less than $5,000 damage would be criminalized as misdemeanors.

More federal crimes, the preferred solution in Congress. (ph)

October 18, 2007 in Statutes | Permalink | Comments (0) | TrackBack (0)

Wednesday, August 1, 2007

Commit a Crime, Lose a Pension?

The House overwhelmingly passed a Congressional ethics "reform" law, now called The Honest Leadership and Open Government Act of 2007, and the Senate is likely to send it to the President.  One provision of the law, Sec. 401, would strip a member of Congress of his or her pension if convicted of certain specified offenses related to conduct in office.  Among the statutes that can trigger the pension loss are bribery and unlawful gratuities (Sec. 201), foreign lobbying (Sec. 209), obstruction of justice, wire fraud/honest services, perjury, money laundering, and RICO, along with conspiracy to violate any of these laws.  The list is more interesting for what it leaves out, however.  A conviction under the wire fraud statute, Sec. 1343, triggers the pension loss, but not one under the companion mail fraud provision, Sec. 1341.  These two statutes are interpreted identically regarding fraud, and are often charged together based on how the fraud was perpetrated, i.e. whether through wire communications or if the mail and interstate carriers were used.  Similarly, the bill identifies Sec. 1957 of the money laundering statute, which has a $10,000 minimum for the financial transactions, but does not include Sec. 1956, which covers concealment through monetary transactions.  The obstruction provision listed, Sec. 1512, is broad, but left our are Sec. 1505, which covers obstruction of Congressional committee and federal agency investigations, and Sec, 1519, an even broader provision adopted as part of the Sarbanes-Oxley Act.  One perjury statute, Sec. 1621, is on the list but not the other, Sec. 1623.  And not even included is Sec. 1001, the false statements statute, which covers a broader array of conduct than the perjury provisions and is frequently used in federal prosecutions involving government filings and false statements to agents. 

Why the selective inclusion of some federal criminal provisions but not others covering similar conduct?  Maybe I'm getting too cynical in my old age, but one possible explanation is to give future Representatives and Senators a way to protect their pensions and still plead guilty if caught in an investigation.  For example, rather than pleading to a wire fraud/honest services charges, the official could offer to plead to a mail fraud charge covering the same conduct -- except that a mailing or delivery by an interstate carrier would be identified as part of the execution of the scheme.  Same basic offense, and the same sentence, but no loss of pension.  Is this a potential bargaining chip for prosecutors: "Take a Sec. 1001 charge, or we'll charge you with perjury so you'll lose your pension?"  I'm sure there's an innocent explanation for the selective inclusion of some crimes. (ph)

August 1, 2007 in Corruption, Statutes | Permalink | Comments (0) | TrackBack (0)

Thursday, January 18, 2007

Commit a Crime, Lose a Congressional Pension

The continuing investigation of corruption on Capitol Hill has triggered a move to strip any legislators convicted of certain offenses from receiving their pensions.  A bill introduced in the House and Senate, the Congressional Pension Accountability Act, would forfeit any pension earned by a Representative or Senator convicted of violating the federal bribery/gratuity law, 18 U.S.C. Sec. 201, a conspiracy to violate the law, and perjury or subornation of perjury.  Representative Bob Ney, the most recent Congressman to enter a guilty plea, would not fall under this provision (if it were in effect when he was in Congress) because he pleaded guilty to a false statement charge, so it would not affect his $29,000 pension.  Another bill introduced in the House, the Congressional Pension Forfeiture Act, would cover a broader array of criminal statutes, including perjury and

An offense within the purview of section 201 (bribery of public officials and witnesses), 203 (compensation to Members of Congress, officers, and others in matters affecting the Government), 204 (practice in United States Court of Federal Claims or the United States Court of Appeals for the Federal Circuit by Members of Congress), 219 (officers and employees acting as agents of foreign principals), 286 (conspiracy to defraud the Government with respect to claims), 287 (false, fictitious or fraudulent claims), 371 (conspiracy to commit offense or to defraud the United States), 597 (expenditures to influence voting), 599 (promise of appointment by candidate), 602 (solicitation of political contributions), 606 (intimidation to secure political contributions), 607 (place of solicitation), 641 (public money, property or records), 1001 (statements or entries generally), 1341 (frauds and swindles), 1343 (fraud by wire, radio, or television), 1503 (influencing or injuring officer or juror), 1951 (interference with commerce by threats or violence), 1952 (interstate and foreign travel or transportation in aid of racketeering enterprises), or 1962 (prohibited activities) of title 18 or section 7201 (attempt to evade or defeat tax) of the Internal Revenue Code of 1986.

A letter from the National Taxpayers Union (here) sent in November 2006 highlighted the pensions received by former Representatives James Traficant, in prison on a RICO conviction receiving a $40,000 annual pension, and Dan Rostenkowski, who pleaded guilty to mail fraud and still receives a $125,000 annual pension.  Not to worry, however, even the more stringent House bill would only take effect for violations in the 111th Congress and later, which doesn't begin until January 2009.  Any current legislators under investigation are not in danger of losing their pensions. (ph)

January 18, 2007 in Corruption, Statutes | Permalink | Comments (0) | TrackBack (0)

Saturday, December 9, 2006

What Does the Attorney-Client Protection Act of 2006 Do?

Senator Arlen Specter's legislative proposal, The Attorney-Client Protection Act of 2006 (here), would roll back portions of the Thompson Memo on the considerations that go into deciding whether to prosecute a corporation, if Congress enacts it.  The legislation may go beyond just organizations by protecting "any communication" covered by the attorney-client privilege and not just those of a corporation.  Perhaps more importantly, while the title refers to the privilege and includes the work product protection, it also extends to prohibiting consideration of a company's decision to pay the attorney's fees of an employee under investigation, entering into a joint defense agreement with employees, and refusing to terminate a person's employment if the employee does not cooperate in an investigation.  This language has little to do with the privilege directly, and largely tracks the ABA's criticism of the Thompson Memo adopted this past August.  It also reaches beyond just criminal prosecutions by covering civil enforcement actions, which means the SEC, FTC, and OIGs, among others, that pursue civil actions would also be governed by the legislation.

The proposal is certainly interesting, and addresses problems that have developed since the adoption of the Thompson Memo and its predecessor, the Holder Memo.  Nevertheless, the bill will not go anywhere in the current Congress because the session is over and a bill will have to be introduced in the 110th Congress that convenes in January, when Senator Specter will no longer chair the Judiciary Committee.  In analyzing the legislation, some issues that may be worth thinking about include:

  1. What's the procedure?  While the proposal says that in a civil or criminal investigation the government shall not "demand, request, or condition treatment" of an organization on its decision to waive the privilege, pay an employee's attorney's fees, etc., it does not say what will happen if someone alleges a violation of the law.  Who can challenge the government if there is a belief that such a "demand, request or condition" has occurred?  Most likely the corporation can raise the issue because that's whose rights are being protected, but could an individual investigative target, such as an employee, bring a challenge?  If so, and particularly if this is during the pre-indictment phase of an investigation, there may be substantial grand jury secrecy issues if discovery were permitted.  A procedure similar to raising a Rule 6(e)(7) contempt challenge to improper disclosure of grand jury information might be used, but the law says nothing about what a court is supposed to do, so some guidance may be helpful.
  2. What's the standard?  Imagine this scenario, unlikely as it might be: an attorney whose corporate client is under investigation meets with the prosecutor and states that the company will pay all attorney's fees and will not waive any privilege, and that if the company is indicted then that decision will be challenged because the decision must have been affected by the company's posture on these issues.  If an indictment takes place, will there be a hearing on the company's challenge at which it can take discovery of the government's decision-making process?  If so, who bears the burden of production and persuasion, and can a court grant discovery on the issue?  Mini-trials are not welcomed in criminal cases, and there would be issues whether the propriety of the charges could be considered by a court hearing a challenge.  The Supreme Court has been reluctant to permit discovery of the exercise of prosecutorial discretion, and this legislation goes to those charging decisions, so this is another issue that should at least be considered.   
  3. What's the remedy?  Closely tied to the procedural issue is what remedy a court could grant if a violation were found.  No doubt, investigative targets would want the investigation enjoined, or an indictment dismissed.  But where would a court get its authority to do that?  The language of Senator Specter's proposal says nothing about this crucial issue.  The Supreme Court has restricted the supervisory power of the courts to redress prosecutorial misconduct by dismissing indictments, and stopping a criminal investigation may be extreme if an indictment has not issued, especially if it ends up protecting culpable individuals.  The Court in U.S. v. Williams, 504 U.S. 36 (1992), acknowledged that supervisory power could be used to dismiss an indictment for a violation of a clear statutory or constitutional right, so this proposal might grant a court that authority.  That said, is dismissal of an indictment proper if a corporation's employees engaged in wrongdoing and the prosecutors sought a waiver of the privilege?  Congress may want to be a bit more clear on what happens if there is a violation, and whether any remedy would extend to individuals who are not the privilege holder, such as an employee.  Again, the Rule 6(e)(7) contempt model of a contempt proceeding might be a workable approach, so that the underlying investigation or prosecution is unaffected by the prosecutorial misconduct.
  4. Will this legislation encourage corporations to act unscrupulously?  The legislative prohibition may create an unintended incentive for a corporation -- or more particularly its senior executives -- to try to keep lower-level employees from cooperating if there is no downside to doing so.  While one would hope this never happens, imagine a corporation and its senior officers are being investigated for a criminal violation, and the company tells its employees that any of them who cooperate with the government will not have their attorney's fees paid by the company, but if they refuse to cooperate then all their fees will be paid and the company will not waive the privilege or work product protection.  Even worse, it tells them that if called to testify before a grand jury they should assert their Fifth Amendment privilege and refuse to testify.  Could the government take that conduct into consideration in deciding whether to prosecute the company?  The bill's language is categorical that the government cannot "condition a civil or criminal charging decision" on the issue of fee payments, privilege waivers, joint defense agreements, information sharing, and retaining uncooperative employees.  Of course, the conduct by the senior executives might be an obstruction of justice, but the discussions on attorney's fee payments and cooperation may be protected by a joint defense agreement, and the government could not seek a waiver to learn about the discussion.  The legislation could produce a "beware what you wish for" response because it could make prosecutors more reluctant to charge an organization, so the government will charge individual officers more frequently, even in close cases if there's any suspicion of executive stonewalling.  This raises the "criminalization of agency costs" issue that has been discussed by some.
  5. Could there be a constitutional problem? I won't pretend to be an expert on constitutional law, particularly separation of powers questions, but this legislation strikes me as unique in having the Legislative Branch direct the Executive Branch in the exercise of its authority to decide who to prosecute on the basis of investigatory considerations.  While courts have imposed limits on prosecutors regarding charging decisions based on protected categories like race and sex, the legislature's role is to define the crimes and then leave it to the executive to enforce the law.  Here, the legislation tells prosecutors what they may not consider in making a charging decision, even if the conduct might have probative weight (e.g. conditioning payment of attorney's fees on not cooperating) regarding corporate criminality.  Courts have been quite reluctant to second-guess prosecutorial charging decisions absent strong proof of an impermissible motive, and there could be a constitutional issue raised by the legislation.

I've gone on way to long, but these are some of the issues I would like to see explored if the next Congress is going to pursue Senator Specter's proposal.  If the goal of the legislation is to bail corporation's out of criminal prosecutions, then the bill may not be the best idea.  If it is a serious effort to protect the privilege and not simply insulate organizations from civil and criminal liability, then Congress should address not only how best to go about doing that, but also what happens if there is a violation, and how to keep corporate executives from perhaps misusing the protections Congress may afford companies. (ph)

December 9, 2006 in Defense Counsel, Privileges, Statutes | Permalink | Comments (1) | TrackBack (0)

Saturday, November 25, 2006

Preserving Crime Victims' Restitution Act of 2006

Perhaps better described as the "Recoup Ken Lay's Money Because He Had the Temerity to Die on Us Act," the text of S. 4055 (here) provides that restitution can be ordered for any case pending on July 1, 2006, in which the defendant died before sentencing and appeal.  First proposed by the Department of Justice in August 2006, Senators Feinstein and Sessions introduced the bill during the lame duck session after the November mid-term elections, and at this point the bill is unlikely to pass unless it is attached to a more pressing piece of legislation.  A more likely scenario is that it will be reintroduced in the next session beginning in January 2007.  The basic thrust of the legislation is:

    `(a) General Rule- Notwithstanding any other provision of law, the death of a defendant who has been convicted of a Federal criminal offense shall not be the basis for abating or otherwise invalidating a plea of guilty or nolo contendere accepted, a verdict returned, a sentence announced, or a judgment entered prior to the death of that defendant, or for dismissing or otherwise invalidating the indictment, information, or complaint on which such a plea, verdict, sentence, or judgment is based, except as provided in this section.

We shall see how far the proposal goes in the legislative process. (ph)

November 25, 2006 in Enron, Statutes | Permalink | Comments (0) | TrackBack (0)

Friday, November 17, 2006

Feinstein and Sessions Introduce DOJ-Backed Bill to Overturn Abatement Doctrine

California Senator Diane Feinstein and Alabama Senator Jeff Sessions introduced a bill in the Senate to enact the Department of Justice's proposal to overturn the abatement doctrine that led to the dismissal of the indictment and conviction of former Enron CEO Ken Lay after his death in July 2006.  The Department had asked U.S. District Judge Sim Lake to postpone dismissing the case while it sought Congressional action to enact a retroactive reversal of the abatement doctrine (see earlier post here), but the bill was never introduced before Judge Lake finally acted on a motion by Lay's estate on October 18.  The Fifth Circuit affirmed that decision a short time later. 

The effect of the abatement doctrine, as discussed in an earlier post (here), is that the entire case disappears, which means that any asset forfeiture action must proceed as a civil case against the estate and not as an adjunct to the criminal conviction, and there can be no restitution order because the conviction is removed from the record.  A Houston Chronicle story (here) quotes Senator Feinstein reiterating the victims rights rationale first offered by the DOJ for getting rid of the abatement doctrine. Given that a majority of the federal departments do not have a budget yet and the change of party control in Congress will cause much distraction, it is unlikely the bill will go anywhere during the lame duck session.  While it can be reintroduced in the new Congress in January, the Senate Judiciary Committee may have more pressing business, although bi-partisan sponsorship certainly gives the bill a chance. (ph)


UPDATE (Nov. 25): The text of S. 4005, entitled "Preserving Crime Victims' Restitution Act of 2006" is available here. (ph)

November 17, 2006 in Statutes | Permalink | Comments (2) | TrackBack (1)

Monday, October 2, 2006

Making "Pretexting" a Crime

At the House Energy & Commerce Subcommittee hearings on the Hewlett-Packard internal investigation that involved pretexting to obtain private telephone records, some of the Representatives railed at the H-P witnesses, particularly former chairwoman Patricia Dunn and outside counsel Larry Sonsini, that the practice is already a crime.  Yet, it is not entirely clear what federal statute the "pretexting" violated, although as discussed in an earlier post (here) prosecutors could stretch the wire fraud statute to cover the conduct of the private investigators, although defense lawyers would certainly challenge the application of that law to their clients.  Whenever conduct appears to slip through the cracks, the legislature is often quick to fill it in.  California adopted a law (here), signed by Governor Schwarzenegger on Sept. 29, that will make the following a crime:

Any person who purchases, sells, offers to purchase or sell, or conspires to purchase or sell any telephone calling pattern record or list, without the written consent of the subscriber, or any person who procures or obtains through fraud or deceit, or attempts to procure or obtain through fraud or deceit any telephone calling pattern record or list shall be punished by a fine not exceeding two thousand five hundred dollars ($2,500), or by imprisonment in a county jail not exceeding one year, or by both a fine and imprisonment. If the person has previously been convicted of a violation of this section, he or she is punishable by a fine not exceeding ten thousand dollars ($10,000), or by imprisonment in a county jail not exceeding one year, or by both a fine and imprisonment.

The House of Representatives passed a bill, HR 4709 (here), in April 2006, by a 409-0 vote no less, that would add the following to the federal criminal code:

Criminal Violation -- Whoever, in interstate or foreign commerce, knowingly and intentionally obtains, or attempts to obtain, confidential phone records information of a covered entity, by --

(1) making false or fraudulent statements or representations to an employee of a covered entity;

(2) making such false or fraudulent statements or representations to a customer of a covered entity;

(3) providing a document to a covered entity knowing that such document is false or fraudulent; or

(4) accessing customer accounts of a covered entity via the Internet, or by means of conduct that violates section 1030 of this title, without prior authorization from the customer to whom such confidential phone records information relates;

shall be fined under this title, imprisoned for not more than 10 years, or both.

The statute defines a "covered entity" as a telecommunications company or those who provide internet calling service.  The House bill has been held up in the Senate by a jurisdictional fight between the Commerce Committee and Judiciary Committee, which have competing bills.  Always nice to see that sharing toys remains a problem long after people have stopped playing in sandboxes.  An AP story (here) discusses the turf war in the Senate blocking the legislation.  (ph)

October 2, 2006 in Statutes | Permalink | Comments (0) | TrackBack (0)

Tuesday, September 12, 2006

The Senate Talks About the Thompson Memo

The Senate Committee on the Judiciary has scheduled a hearing on "The Thompson Memorandum’s Effect on the Right to Counsel in Corporate Investigations" for today.  The impressive lineup of individual's giving testimony are:


The Honorable Paul J. McNulty
Deputy Attorney General
U.S. Department of Justice
Washington, DC


The Honorable Edwin Meese
Former Attorney General
Ronald Reagan Distinguished Fellow in Public Policy
Chairman, Center for Legal and Judicial Studies
The Heritage Foundation
Washington, DC

Thomas J. Donohue
President and CEO
U.S. Chamber of Commerce
Washington, DC

Karen J. Mathis, Esq.
American Bar Association
Chicago, IL

Andrew Weissmann, Esq.
Jenner & Block LLP
New York, NY

Mark B. Sheppard, Esq.
Sprague & Sprague
Philadelphia, PA

The testimony from these witnesses will be retrievable online here.  More will be posted on this blog tomorrow regarding this testimony.  But to give a preview,  the written testimony of the Hon. Edwin Meese includes the following passage regarding the McCallum Memo, an unsuccessful attempt by the government to appease people by saying that waivers of attorney client privilege need to coordinated within each individual USA's office.  Meese states:

"Nevertheless, it appears that the McCallum Memorandum does not represent a sufficient improvement. The main objectives of the Memorandum included providing greater uniformity, predictability, and transparency to the process that federal prosecutors use when requesting a waiver of a business organization’s attorney-client privilege. But the McCallum Memorandum does nothing to address the inherently coercive nature of the Thompson Memorandum factors that take into account whether a company has waived its privilege."

There are many important issues of the day that need to be addressed by the Senate.  So why is DOJ allowing so much time to be spent on the waiver issue, an issue they could easily resolve by just removing it from the Memo and from practice? Don't they get it -  asking for a waiver of the attorney-client privilege is just plain wrong.


September 12, 2006 in Government Reports, Legal Ethics, News, Prosecutions, Statutes, Think Tank Reports | Permalink | Comments (0) | TrackBack (0)

Wednesday, May 3, 2006

Yet Another Federal Crime

We elect Congress to pass laws, so it is a bit disingenuous to criticize our Senators and Representatives for enacting legislation.  Yet, when it comes to federal criminal laws, will there ever come a time when we say "enough already"?  The House passed H.R. 5253, the Federal Energy Price Protection Act of 2006, on a 389-34 vote (AP story here).  The legislation ostensibly is designed to address one aspect of the spike in gasoline prices.  The Act makes it an unfair or deceptive practice to engage in "price gouging" in the sale of petroleum products such as gasoline, home heating oil, diesel fuel, and the like.  The law gives the Federal Trade Commission the authority to investigate such abuses and to bring civil actions for violations, and permits a civil penalty of $3 million per day.  It also authorizes state Attorney Generals to pursue a civil enforcement action in federal court under the law.  While that is all well and good, the final provision of H.R. 5253 (here) provides:

(1) IN GENERAL- In addition to any other penalty that applies, a violation of subsection (a) is punishable-

(A) in the case of a wholesale sale in violation of subsection (a), by a fine of not more than $150,000,000, imprisonment for not more than 2 years, or both; or

(B) in the case of a retail sale in violation of subsection (a), by a fine of not more than $2,000,000, imprisonment for not more than 2 years, or both.

What is "price gouging" you might ask?  The statute states that the FTC will adopt rules within six months defining that term.  That sure is precise for a criminal provision.  Note that the statute does not contain any mens rea element, and indeed simply adds criminal liability on to the civil liability provisions, with an additional fine and prison term a possibility tacked on to the bill.  Do we really need to make this type of conduct, which likely will be very difficult to prove, a federal offense?  (ph)

May 3, 2006 in Statutes | Permalink | Comments (0) | TrackBack (0)

Wednesday, February 15, 2006

Proposed Mortgage Fraud Crime

Senator Barack Obama of Illinois introduced legislation to combat mortgage fraud that includes an interesting provision that would create a new federal criminal law.  The bill, S. 2280 (available below), is entitled (unfortunately) the "Stop Transactions which Promote Fraud, Risk, and Underdevelopment Act" or "STOP FRAUD Act," and it would provide for a central data base to track mortgage fraud and fund federal and state anti-fraud efforts in the area.  Section 2 of the bill would create Section 1351, "Mortgage Fraud," that would make it a federal crime for a "mortgage professional" to engage in a scheme to defraud or make false/fraudulent statements in connection with a real property loan, with a maximum punishment of 35 year and a $5 million fine.  The statute is narrower than the mail and wire fraud statutes, which are often used to prosecute mortgage fraud cases, because of the limitation to conduct by mortgage professionals.  That term is defined as including appraisers, lawyers, real estate brokers, mortgage underwriters, and "any other provider of professional services engaged in the mortgage process" -- how is that for a circular definition: mortgage professionals are providers of professional services related to mortgages.  Mortgage scams in which straw purchasers engage in sham transactions to inflate the value of property and then take out a large mortgage would not be covered by the statute unless the perpetrators were themselves mortgage professionals.

Even more interesting is proposed Section 1351(c), which permits private parties to bring a private right of action for violations of the provision, regardless of the amount in controversy, citizenship of the parties, or exhaustion of administrative remedies.  Creating such a broad private right of action, with no real guidelines on the scope of the potential suit, is uncommon, and perhaps unprecedented.  Off the top of my head, the only criminal provisions that I am aware of that also include express private rights of action are the False Claims Act and RICO, while the antitrust and securities laws also rely on private actions as a means of enforcement along with federal civil and criminal enforcement.  RICO and qui tam actions have very specific pleading requirements, while the mortgage fraud suit would seem to be, in effect, a federal common law fraud action limited to mortgage professionals.  If enacted, this provision would raise interesting questions about whether the principle of respondeat superior would permit a law suit against the mortgage professional's employer, whether punitive damages are recoverable, and perhaps most importantly, whether a prevailing party could be awarded attorney's fees.  On a different note, is there any way that the use of silly acronyms for laws can be stopped, or at least curtailed? (ph)

Download mortgage_fraud_legislation.pdf

February 15, 2006 in Fraud, Statutes | Permalink | Comments (7) | TrackBack (1)

Tuesday, May 24, 2005

Former Wal-Mart Executive Files Whistleblower Complaint Over Termination

Jared Bowen, a former vice-president at Wal-Mart, has filed a whistleblower complaint with the Department of Labor over his termination by the company in late March, which he claims was in retaliation for disclosing expense-account abuses by former executive and board member Thomas Coughlin.  The company reported to the U.S. Attorney in March that Coughlin had submitted false invoices for up to $500,000, and there is a grand jury investigation of Coughlin.  Just to complicate matters, Coughlin's attorney has hinted that the funds were used to make secret payments to union officials for information about organizing drives involving Wal-Mart employees (see earlier post here).  Bowen asserts that he reported two instances of improper billing by Coughlin, but was terminated because he failed to report a third instance of misconduct involving Coughlin and that there was a "loss of confidence" in him. 

Section 806 of the Sarbanes-Oxley Act created protections for employees of publicly-traded companies who report misconduct involving fraud (18 U.S.C. Sec.1514A here).  The provision provides the following remedies:

(1) IN GENERAL- An employee prevailing in any action under subsection (b)(1) shall be entitled to all relief necessary to make the employee whole.

(2) COMPENSATORY DAMAGES- Relief for any action under paragraph (1) shall include--

(A) reinstatement with the same seniority status that the employee would have had, but for the discrimination;

(B) the amount of back pay, with interest; and

(C) compensation for any special damages sustained as a result of the discrimination, including litigation costs, expert witness fees, and reasonable attorney fees.


May 24, 2005 in Civil Enforcement, Fraud, Investigations, Statutes | Permalink | TrackBack (0)