White Collar Crime Prof Blog

False Accusation of Rolling Stone Article Suggests prior Notification of Targets in White-collar Cases

In November Rolling Stone published a blockbuster article about a student's account of being  gang-raped at a University of Virginia frat house.  Within days others, primarily the Washington Post, sharply questioned the truthfulness of the student's claim.  Rolling Stone then commissioned an independent investigation by Steve Coll, the respected Dean of Columbia Journalism School, to review the magazine's reporting, editing and fact-checking.  That report, written by Coll and two colleagues, came out a few weeks ago.  See here.  Rolling Stone also "withdrew" the article.

The report (Sheila Coronel, Steve Coll, Derek Kravitz, "An Anatomy of a Journalistic Failure") is "intended as a work of journalism about a failure of journalism." It is thorough and comprehensive and, as expected, clear and thoughtful.  Although the purpose of the report was to investigate the conduct of Rolling Stone and not the conduct of the student, it treats the student who made the false accusation and continued it over months of questioning by the reporter much too gently and itself is affected by the implicit bias that it suggests motivated the writer.  For instance, it takes pains to state that the student who made the indisputably false accusation may well have in fact been a victim of some predatory sexual act(s), and does not even speculate that she might have made up the incident out of whole cloth.  It expresses its regret that the the widely-disseminated revelation of the false accusation might cast doubt on other campus sex accusations (accepting the questionable estimates that false charges make up  less than 8% of rape allegations) and fails even to consider the possibility that the false claim here might not be such an aberration , and perhaps will serve a salutary purpose by increasing public (and governmental and institutional) awareness that false accusations are not so infrequent. 

To be sure, campus sexual abuse by male students against women is a serious problem and deserves vigorous, but measured and fair, action by universities and, when appropriate, law enforcement, and aggressive reporting on that subject is important to increase public knowledge.  School officials, and magazine and newspaper writers (and also law enforcement officers)  should be mindful, however, that this is an area where accusations are often inaccurate,  exaggerated, and sometimes downright false, and that there are sometimes unjust findings and convictions, by courts and schools, that wrongly destroy the lives of those accused.  Indeed, in my opinion, rape is the area of criminal law in which there are the most intentionally false (as opposed to mistaken) accusations by civilian complainants.

The report demonstrates convincingly that there were a series of errors in the investigation, review, fact-checking and editing of the story before it appeared.  Among those errors was the failure to give the person accused an opportunity to refute the accusations.  "Journalistic practice - and basic fairness - require that if a reporter intends to publish derogatory information about anyone, he or she should seek that person's side of the story."

I could not help but thinking that the defective  oversight  of the Rolling Stone journalists and their seemingly limited concern for the reputations of the institutions accused were nonetheless far greater and far more likely to uncover false accusations than the minimal or nonexistent review by law enforcement  that typically occurs in a criminal case prior to an arrest (and sometimes even after).  Once law enforcement officers decide to make an arrest, why should the accused not be allowed to present beforehand his "side of the story?"  Obviously, in many cases, such as where there is a need for immediate apprehension by a police officer, no pre-arrest review or notification is possible. Further,  in many other cases, for instance where the identity of the alleged perpetrator is unknown, or where there is a reasonable fear that if not arrested he will flee and not be available to face charges, an immediate unannounced arrest is called for. 

However, in many, probably most, white-collar cases, there is no such need. In those cases, as a general rule a prosecutor should notify a target that he is under investigation and seek his "side of the story."  Nonetheless, many prosecutors proceed the "old-fashioned" way by ordering an arrest first without giving the defendant an opportunity to hire a lawyer and present, should he choose to, his side of the story.

Notifying a prospective defendant that he is likely to be arrested and may choose to present his case beforehand has advantages for prosecutors in many situations. The defendant and his lawyer might provide evidence or legal arguments that will persuade the prosecutor to seek lesser charges or not to go forward at all.  Sometimes a plea agreement might be reached with the defendant which will eliminate the need for a time-consuming grand jury presentation.  And, should the defendant decide to cooperate, he may be able to do so proactively and generally more effectively since an indictment often tips off others to steer clear of him.

There are, arguably, certain benefits to law enforcement in making surprise arrests. There is a  possibility that an upset, unprepared  and  uncounseled defendant will make incriminating statements.  And, a defendant may have on his person or in proximity evidentiary items which will be found by a search.  Those advantages, however,  are less likely to occur in white-collar case, where defendants are less likely to make statements without lawyers or carry contraband or evidence.  Another potential benefit to prosecutors  is that at bail hearings a defendant's attorney may not be able to argue  that the defendant did not flee after becoming aware of the charges.  Such an argument, I have found, does not carry as much weight as it should. In any case, prosecutors are unlikely to provide prior notification of their intent to arrest to any who are conceivable flight risks.

For these reasons, the most successful and sophisticated prosecutors in white collar cases, such as the United States Attorney for the Southern District of New York, generally notify white-collar targets of their investigations and give them or their attorneys an opportunity to dissuade, minimize or deal.  Less sophisticated prosecutors of white-collar crimes, often state prosecutors, are more likely to make summary arrests.  These cases, generally not well vetted since there was no input from the accused or his counsel, more often lead to dismissals, acquittals or cheap pleas.

Not only is pre-arrest notification to a prospective defendant more fair to him in that it gives him  an opportunity to defend, explain, negotiate or prepare psychologically, it will benefit judicial and prosecutorial economy of resources by allowing for some matters to be settled with less or no litigation and court involvement.  And, as discussed above, it helps law enforcement.   It should be the default position in white-collar (and many other) cases, and deviated from only when there are genuine countervailing reasons.

 

Terms Within the DP for Deutsche Bank

The Deferred Prosecution Agreement (DPA) is available online on the DOJ website here. Like so many DPAs, this one has terms that place the sole discretion on certain matters with the DOJ. For example,

"Deutsche Bank agrees that in the event that the Department determines, in its sole discretion, that Deutsche Bank has knowingly violated any provision of this Agreement, an extension or extensions of the term of the Agreement may be imposed by the Department, in its sole discretion, for up to a total additional time period of one year, without prejudice to the Department's right to proceed as provided in Paragraphs 13-16 below."

As with many DPAs, it calls for continued compliance, a monitor, and disclosure of information (not covered by the attorney-client privilege, etc.).  The agreement allows Deutsche Bank to propose three names of monitors to the government - although the government gets to choose.  Bottom line is that if the company complies with the DPA (which is within the sole discretion of the government to decide) the criminal Information gets dismissed.  Another problematic provision within the DPA is that:

"Deutsche Bank expressly agrees that it shall not, through present or future attorneys, officers, directors, employees, agents or any other person authorized to speak for Deutsche Bank or its subsidiaries or affiliates, make any public statement, in litigation or otherwise, contradicting the acceptance of responsibility by Deutsche Bank set forth above or the facts described in the attached Statement of Facts."

Is it really necessary to place so much discretion with the government in the DPA?  Shouldn't a court get to decide if there is a violation of a DPA?  Should First Amendment rights be allowed to be discarded in a DPA? We will probably never know the answer to these questions because companies in a post-Arthur Andersen world can't take a risk of fighting the government. Most just sign the DPA, try their best to comply, and hope they can move on.  For a discussion of terms within DPAs, see my co-authored article here.

(esp)

DP for Deutsche Bank Subsidiary to Pay $2.5 Billion

DOJ Press Release here today -

"DB Group Services (UK) Limited, a wholly owned subsidiary of Deutsche Bank AG (Deutsche Bank), has agreed to plead guilty to wire fraud for its role in manipulating the London Interbank Offered Rate (LIBOR), a leading benchmark interest rate used in financial products and transactions around the world.  In addition, Deutsche Bank entered into a  deferred prosecution agreement to resolve wire fraud and antitrust charges in connection with its role in both manipulating U.S. Dollar LIBOR and engaging in a price-fixing conspiracy to rig Yen LIBOR. Together, Deutsche Bank and its subsidiary will pay $775 million in criminal penalties to the Justice Department."

"The agreement requires the bank to continue cooperating with the Justice Department in its ongoing investigation, to pay a $625 million penalty beyond the fine imposed upon DB Group Services (UK) Limited and to retain a corporate monitor for the three-year term of the agreement."

"Together with approximately $1.744 billion in regulatory penalties and disgorgement—$800 million as a result of a Commodity Futures Trading Commission (CFTC) action, $600 million as a result of a New York Department of Financial Services (DFS) action, and $344 million as a result of a U.K. Financial Conduct Authority (FCA) action—the Justice Department’s criminal penalties bring the total amount of penalties to approximately $2.519 billion."

(esp)

In the News & Around the Blogosphere

Jennifer Steinhauer, NYTimes, Senate Confirms Loretta Lynch as Attorney General After Long Delay

Michael S. Schmidt  & Matt Apuzzo, NYTimes, David Petraeus Is Sentenced to Probation in Leak Investigation

(esp)

Ninth Circuit En Banc Reverses Barry Bond's Conviction

An en banc decision of the Ninth Circuit, United States v. Bonds, reverses the obstruction of justice conviction against then professional baseball player Barry Bonds finding insufficient evidence of materiality under the statute, 18 U.S.C. s 1503. The decision is per curiam, with several concurring opinions, and one dissent.

Hon. Kozinski, joined by Judges O'Scannlain, Graber, Callahan, and Nguyen commence with a single question - "Can a single non-responsive answer by a grand jury witness support a conviction for obstruction of justice under 18 U.S.C. s 1503? In answering this question, they speak about how "[s]tretched to its limits, section 1503 poses a significant hazard for everyone involved in our system of justice, because so much of what the adversary process calls for could be construed as obstruction."  They continue to state that "[b]ecause the statute sweeps so broadly, due process calls for prudential limitations on the government's power to prosecute under it."  The limitation they place is a requirement of materiality.  They find materiality lacking here.

The next concurring opinion also speaks to a requirement of materiality, finding that "a single truthful but evasive or misleading statement can never be material." Hon. Reinhardt's concurring opinion simply says that a single non-responsive answer by a grand jury witness cannot support a 1503 conviction. 

And although Hon. Fletcher disagrees with the rationale, focusing on the word corruptly in the statute finds it insufficient here.

Only Hon. Rawlinson does not want to second guess the jury decision and doesn't want to rely on perjury law as some of the concurrences did. The jury was instructed on materiality and that should be sufficient.

What fascinates me about this case is whether everyone is in the same ballpark. For all the reasons provided by everyone other than the dissent, one should not have an obstruction conviction based on this limited statement. But most imply that materiality is an element of obstruction.  I have argued in a past Article that it should be - here.  And it is wonderful to see so many on this court adhering to that position and taking this point as a given. But the statute may not be as clear and the law as consistent as it should be.  This case is important for taking this important step and demonstrating the absurdity of a conviction that fails to have materiality as a key component.

(esp)

Second Circuit Denies Rehearing of Insider Trading Case Reversal

   Earlier this month, the Second Circuit, as expected (at least by me), denied Southern District of New York U.S. Attorney Preet Bharara's request for reargument and reconsideration of its December 2014 ruling in United States v Newman which narrowed, at least in the Second Circuit, the scope of insider trading prosecutions. I would not be surprised if the government seeks certiorari, and, I would not be all that surprised it cert were granted.

   In Newman, the defendants, Newman and Chiasson, were two hedge fund portfolio managers who were at the end of a chain of recipients of inside information originally provided by employees of publicly-traded technology funds. The defendants traded on the information and realized profits of $4 million and $68 million respectively. There was, however,  scant, if any, evidence that the defendants were aware whether the original tippors had received any personal benefit for their disclosures.

   The Second Circuit reversed the trial convictions based on an improper charge to the jury and the insufficiency of the evidence. Specifically, the court ruled that:

       1)  the trial judge erred in failing to instruct the jury that in order to convict it had to find that the defendants knew that the corporate employee tippors had received a personal benefit for divulging the information; and

       2)  the government had indeed failed to prove that the tippors had in fact received a personal benefit.

   Thus, at least in the Second Circuit, it appears that the casual passing on of inside information without receiving compensation by a friend or relative or golf partner does not violate the security laws. "For purposes of insider trading liability, the insider's disclosure of confidential information, standing alone, is not a breach," said the court.  Nor, therefore,  does trading on such information incur insider trading liability because the liability of a recipient, if any, must derive from the liability of the tippor.  To analogize to non-white collar law, one cannot be convicted of possessing stolen property unless the property had been stolen (and the possessor knew it).  Those cases of casual passing on of information, which sometimes ensnared ordinary citizens with big mouths and a bit of greed, are thus apparently off-limits to Second Circuit prosecutors. To be sure, the vast majority of the recent spate of Southern District prosecutions of insider trading cases have involved individuals who have sold and bought information and their knowing accomplices.  Although Southern District prosecutors will sometimes now face higher hurdles to prove an ultimate tippee/trader's knowledge, I doubt that the ruling will affect a huge number of prosecutions.

   The clearly-written opinion, by Judge Barrington Parker, did leave open, or at least indefinite, the critical question of what constitutes a "personal benefit" to a provider of inside information (an issue that also might impact corruption cases). The court stated that the "personal benefit" had to be something "of consequence."  In some instances, the government had argued that a tippee's benefit was an intangible like the good graces of the tippor, and jurors had  generally accepted such a claim, likely believing the tippor would expect some personal benefit, present or future, for disclosing confidential information. In Newman, the government similarly argued that the defendants had to have known the tippors had to have received some benefit.

   Insider trading is an amorphous crime developed by prosecutors and courts - not Congress - from a general fraud statute (like mail and wire fraud) whose breadth is determined by the aggressiveness and imagination of prosecutors and how much deference courts give their determinations. In this area, the highly competent and  intelligent prosecutors of the Southern District have pushed the envelope, perhaps enabled to some extent by noncombative defense lawyers who had their clients cooperate and plead guilty despite what, at least with hindsight, seems to have been a serious question of legal sufficiency.  See Dirks v. S.E.C., 463 U.S. 646, 103 S.Ct. 3255 (1983)(test for determining insider liability is whether "insider personally will benefit, directly or indirectly").  As the Newman court refreshingly said, in language that should be heeded by prosecutors, judges, and defense lawyers, "[N]ot every instance of financial unfairness constitutes fraudulent activity under [SEC Rule]  10(b)."

  As I said, I would not be shocked (although I would be surprised) if Congress were to enact a law that goes beyond effectively overruling Newman and imposes insider trading liability on any person trading based on what she knew was non-public confidential information whether or not the person who had disclosed the information had received a personal benefit. Such a law, while it would to my regret cover the casual offenders I have discussed, would on balance  be a positive one in that it would limit the unequal information accessible to certain traders and provide a more level playing field.

 (goldman)

 

 

District of Columbia Court of Appeals Makes It Official: Prosecutor's Duty To Disclose Exculpatory Evidence Is Broader Than Brady

The case, handed down yesterday, is In Re Kline. This matter has wound its way through the disciplinary process for years. I posted about it here in 2012 and here in 2013.

Kline was prosecuting Arnell Shelton for the shooting of Christopher Boyd. Shelton had filed an alibi notice and "the reliability of the government's identification witnesses" was the principal issue at the 2002 trial, according to the Report and Recommendation of Hearing Committee Number Nine ("Report and Recommendation").

Kline spoke with Metropolitan Police Department Officer Edward Woodward in preparation for trial. Kline took contemporaneous notes. Woodward was the first officer at the scene of the crime and spoke to victim Boyd at the hospital shortly after the shooting. According to the Report and Recommendation, Kline's notes of his conversation with Woodward were, in pertinent part, as follows: "Boyd told officer at hospital that he did not know who shot him–appeared maybe to not want to cooperate at the time. He was in pain and this officer had arrested him for possession of a machine gun."

At trial Boyd identified Shelton as the shooter. According to Bar Counsel, Kline never disclosed Boyd's hospital statement to the defense despite a specific Brady/Giglio request for impeachment material. The other identification witnesses were weak and/or impeachable.  The case ended in a hung jury mistrial and the alleged Brady material (that is, Boyd's hospital statement to Woodward) was not revealed to the defense until literally the eve of the second trial, even though DC-OUSA prosecutors and supervisors had known about it for some time.

The court offered defense counsel a continuance, but she elected to go to trial as her client was then in jail. The second trial ended in Shelton's conviction. You can consult my earlier posts for a more detailed factual and case history background.

Rule 3.8(e) of the DC Rules of Professional Conduct states in pertinent part that: "The prosecutor in a criminal case shall not . . . intentionally fail to disclose to the defense, upon request and at a time when use by the defense is reasonably feasible, any evidence or information that the prosecutor knows or reasonably should know tends to negate the guilt of the accused...except when the prosecutor is relieved of this responsibility by protective order of the tribunal."

The District of Columbia Court of Appeals upheld the position of D.C. Bar Counsel and the Board that Rule 3.8(e) is not synonymous with Brady v. Maryland. The Court declined to import Brady's materiality test into Rule 3.8(e), making it clear that at the pre-trial and trial stages  of a case, no prosecutor is fit to make a speculative materiality analysis. The rule is now clear. Any evidence that tends to negate the guilt of the defendant must be disclosed under the D.C. Rules of Professional Responsibility.

The Court overturned the Board's 30-day sanction imposed against Kline, given the confusion engendered by the Commentary to Rule 3.8(e). The Commentary states in part that: "The rule...is not intended either to restrict or to expand the obligations of prosecutors derived from the United States Constitution, federal or District of Columbia statutes, and court rules of procedure." Courts in other jurisdictions, as well as the ABA, have construed the D.C. Rule as including the Brady materiality standard, based on this Commentary. Additionally, at the time of Kline's actions, DC-USAO's training taught that Rule 3.8(e) was synonymous with Brady. The Court held that even if the Commentary was inconsistent with the Rule, the plain language of the Rule, and its legislative history, prevailed.

"However, while clear and convincing evidence has been presented that Kline violated Rule 3.8 when he failed to turn over the Boyd Hospital Statement to the defense prior to trial, we are mindful of the fact that our comment to Rule 3.8 (e) has created a great deal of confusion when it comes to a prosecutor’s disclosure obligations under Rule 3.8. Thus, Kline's understanding of his ethical obligations, while erroneous, does not warrant an ethical sanction."

The Board originally found that the suppressed exculpatory statement was material, even though a subsequent jury in possession of the material convicted the defendant. I don't know if that finding was ever revisited. I mention it because the Court's opinion nowhere discusses this point and seems to assume that the withheld statement was immaterial.

The opinion by Chief Judge Washington is extremely well-crafted and enormously significant.

Hat Tip to Charles Burnham of Burnham & Gorokhov for informing me of this ruling  and sending a copy.

(wisenberg)

 

Samuel J. Buffone: 1946-2015

I am deeply saddened to report the death of Samuel J. Buffone, a giant in the D.C. and national white collar bars. Sam was not only one of the greatest appellate craftsmen of all time. He was also a consummate professional, gentleman, scholar and mentor. Sam was most recently a partner at BuckleySandler. Before that he was at Ropes & Gray, as chair of the Government Enforcement Practice Group, and Tigar and Buffone. I first met Sam during the Victoria Savings & Loan sentencings and appeals in the early nineties. He was a quiet man of dignity and grace, and a selfless friend to me when I crossed over to the defense bar and moved to Washington. Sam Buffone will truly be missed by the many friends and colleagues he leaves behind and whose lives he has enriched. Here is a tribute to Sam, posted today on the BuckleySandler website by Andrew Sandler.

(wisenberg)

More on Menendez

Courtesy of NPR.

(wisenberg)

 

Menendez

Here is the Indictment in United States v. Robert Menendez and Salomon Melgen. Here is the Washington Post story.

(wisenberg)