White Collar Crime Prof Blog

Breaking News: DOJ Abandons McDonnell Prosecution Efforts

It's now official. Former Virginia Governor Robert McDonnell and his wife Maureen will not be retried and all charges are to be dropped. The Washington Post has the story here. It is unclear whether Main Justice overruled the EDVA or caused that office to change its mind regarding proceeding to a second trial. More analysis to come.

(wisenberg)

McDonnell Decision Gives Sheldon Silver Breathing Room

The Supreme Court decision in McDonnell v United States, decided June 27, has given several politicians whose corruption convictions are on appeal both a cause for optimism and freedom on bail pending appeal.  Last week SDNY District Judge Valerie Caproni granted former New York Assembly Speaker Silver's request for bail pending appeal on the grounds that there was a "substantial question" whether the court's instruction defining "official act" passed muster in light of the narrow definition of that term announced in the later Supreme Court decision. 

Judge Caproni made it clear that she had little doubt about Silver's guilt of the major accusations against him, stating, "There is no question that Silver took a number of official acts - most obviously passing legislation and approving state grants and tax-exempt financing - as part of a quid pro quo scheme."  These acts would clearly fall within the Supreme Court definition of "official act."  But the judge recognized that there were other acts committed by Silver that were presented to the jury by the government, such as holding a meeting or arranging an internship, that might not fall within the narrow Supreme Court definition of "official acts."   The jury was thus presented with instructions which may have permitted it to find Silver guilty for actions that were not criminal even if bought and paid for.

18 USC 3143(b)(1) allows a convicted defendant to be granted bail pending appeal if, inter alia, there is "a substantial question of law or fact likely to result in (i) reversal [or] (ii) an order for a new trial...."   Finding the existence of a "substantial question,"  despite the literal language of the statute,  does not mean that the judge believes there is a likelihood of reversal, only that if there were   a substantial question which if decided in the defendant's favor would bring such relief.   United States v. Miller, 750 F2d 19 (3d Cir 1985).  Appellate courts deal with a lot of "substantial questions" that have led to bail pending appeal, but rarely reverse trial convictions.

Here, it appears that under the instructions it was given, the jury could have convicted Silver based on acts not within the statute as limited by the Supreme Court..   But that is not the end of the analysis.  The appellate court will also consider, and the decision is likely to turn on, whether the evidence is considered so strong that the jury would have undoubtedly convicted Silver under a proper charge - in other words, whether the erroneous instruction constituted "harmless error."

I hesitate to predict the outcome of the appeal.  Cases of political figures, as demonstrated by McDonnell, are scrutinized by appellate courts more carefully than, for instance, cases of drug dealers.   I believe it is likely, and will appear likely to the appellate court, that Silver would have been convicted upon a proper instruction.  How likely is the issue.  Is it so likely that the court will find the error "harmless?"  What is "harmless error' is in many ways just a visceral judgment by the judges putting themselves in the role of jurors.  Harmless error analysis, thus, arguably deprives an accused of his basic constitutional right to a determination by a properly-instructed jury of peers and I believe should be applied rarely.  

Other factors the appellate court will probably consider include whether the defense proposed an instruction in accord with the standard set forth in McDonnell, and whether the defense specifically objected to the definition given by the trial court as too broad.  Another factor that may conceivably affect the decision, although unlikely to be mentioned, is whether the judges believe the 12-year prison sentence imposed on the 72-year old Silver is excessive.  And, of course, there may be other, unrelated issues raised.  In any case, based on the "official act" issue  issue alone, a reversal will likely not give Silver a dismissal, but only a new trial, presumably with proper jury instructions. 

One lesson that lawyers - both prosecutors and defense lawyers - might learn from this situation is to be aware and up-to-date on cases for which the Supreme Court has granted cert and, if any concern issues that might arise in a pending case, to craft requests to charge in anticipation of the possible result of the Supreme Court case.  Another lesson - for judges and prosecutors more than defense lawyers - is to adjourn a pending case that might be affected by a pending Supreme Court case until after that decision.  A third lesson - for prosecutors - is to analyze all aspects of their prospective case and discard legally or factually questionable ones when there are strong aspects.

A Review of the UK Serious Fraud Office's Second DPA

Earlier this month, the UK Serious Fraud Office announced the approval by Lord Justice Leveson of the country's second deferred prosecution agreement.  Readers may recall that the implementation of a DPA process is relatively new in the UK (see prior post here).  According to the SFO press release in the matter, the company, which remains nameless due to ongoing, related legal proceedings, was subject to an indictment charging "conspiracy to corrupt, contrary to section 1 of the Criminal Law Act 1977, conspiracy to bribe, contrary to section 1 of the same Act, and failure to prevent bribery, contrary to section 7 of the Bribery Act 2010, all in connection with contracts to supply its products to customers in a number of foreign jurisdictions."

Pursuant to the terms of the DPA, the indictment was suspended and the company agreed to pay a total of 6,553,085 British Pounds.  The company also agreed to continue to cooperate with the ongoing SFO investigation and conduct a review of all third party transactions and its existing compliance measures. 

The SFO press release went on to state:

In passing the judgment, Lord Justice Leveson said:

“[This conclusion] provides an example of the value of self-report and co-operation along with the introduction of appropriate compliance mechanisms, all of which can only improve corporate attitudes to bribery and corruption.”

SFO Director David Green CB QC said:

“This case raised the issue about how the interests of justice are served in circumstances where the company accused of criminality has limited financial means with which to fulfill the terms of a DPA but demonstrates exemplary co-operation.

“The decision as to whether to force a company into insolvency must be balanced with the level and nature of co-operation and this case provides a clear example to corporates. The judgment sets out the considerations in detail and endorses the approach we took. As with the first DPA with Standard Bank, the judgment provides clear and helpful guidance.”

The suspended charges relate to the period of June 2004 to June 2012, in which a number of the company’s employees and agents was involved in the systematic offer and/or payment of bribes to secure contracts in foreign jurisdictions. The SFO undertook an independent investigation over a period of two years, concluding that of the 74 contracts examined 28 were found to have been procured as a result of bribes.

The SME’s parent company implemented a global compliance programme in late 2011. In August 2012, this compliance programme resulted in concerns being raised within the SME about the way in which a number of contracts had been secured. The SME took immediate action, retaining a law firm that undertook an independent internal investigation. The law firm delivered a report to the SFO on 31 January 2013, after which the SFO conducted its own investigation.

The SFO would like to thank HM Treasury, HM Revenue & Customs and the Department for Business, Innovation & Skills for their assistance in this investigation.

The final redacted judgement in the matter is available here.  

This week, WilmerHale released a piece entitled "The UK's second DPA: a hopeful judgment."  In the piece, author Lloyd Firth argues that several revelations from the DPA are encouraging as we consider the role the new DPA system will have in the UK.  For those interested in the evolving DPA process in the UK, I recommend you give both the final redacted judgment and the WilmerHale piece a read. 

(LED)

Thoughts on the McDonnell Decision

I received the McDonnell decision with mixed feelings.  Initially, I was happy for my colleague Hank Asbill, one of the nation's top criminal defense attorneys, for a great victory.  Asbill and his co-counsel litigated this case the "old-fashioned way" - they fought it, and fought it, and then fought it.  Their tenacity, dedication and skill make me proud to be a defense lawyer.

Not having read the briefs of the parties, or of the amici, or heard the oral arguments, I am hesitant to criticize the opinion, especially an opinion by a brilliant chief justice for a unanimous court (I suspect due to  a compromise by potential dissenters, possibly to avoid an outright dismissal).  Indeed, the opinion makes a strong case that the decision was required by precedent.  However,  I do question several aspects of the opinion. First, I find questionable Justice Roberts' Talmudic crucial narrowing of the definition of "official act" by virtually eliminating the broad catch-all words "action" and "matter," largely by resort to the Latin word jurisprudence that is often an indication that the interpretation is on shaky ground. 

Second, while I am less troubled than the Court about the federal assumption of power to monitor the conduct of state officials for purportedly violating their offices,  there is something bothersome about federal officials by criminal prosecutions in effect setting ethical standards for state officials.  However,  as a practical matter it appears that with rare exceptions local prosecutors lack the will and/or the resources to prosecute high state officials.  In New York City, for instance, U. S. Attorney Preet Bharara has in recent years prosecuted about ten state legislators on corruption charges, while New York's five district attorneys combined have not prosecuted any. 

Third and most importantly, I am concerned by the decision's enablement of business-as-usual pay-to-play practices.   By narrowing the definition of "official act,  the Court has legalized (at least federally) the practice of paying a government  executive to set up a meeting with a responsible official.  By doing so, the Court has given such "soft" corruption a green light.  Under the opinion, a businessperson does not violate federal bribery law by paying a governor, mayor - or even the President -  tens of thousands of dollars to make a phone call to a purchasing official asking or directing her to meet with the businessperson.   And that call, however innocuous that actual conversation may sound, will have real consequences - otherwise, why would the businessperson pay for it?  Even absent a verbal suggestion that the executive wants the official to do business with the caller, the official cannot but  think that the executive would like that she do business with that person.  I imagine a New Yorker cartoon with a governor sitting at a phone booth with a sign saying, "Phone calls, official meetings. $10,000 each." 

To be sure, the law concerning bribery - not alone among federal statutes - vests too much power in the government.  At argument government counsel conceded (candidly but harmfully) that a campaign contribution or lunch to an official could constitute the quid in a quid pro quo.  That is frightening, but the problem is in  the quid, not in the quo - about which this case is concerned.  (I applaud Chief Justice Roberts statement in response to the standard "Trust me, I'm the government" argument that "We cannot condone a criminal statute on the assumption the government will use it responsibly.")   And, certainly, if this case were to apply to campaign contributions - and not, as in this case  personal  receipt of money and goods-in the words of the amicus brief of former White House counsel -  it would be "a breathtaking expansion of public corruption law."  Indeed, a distinction should be made between personal and campaign contributions.  But this case applied to the quo - what the governor did in exchange for $175,000 worth of goods and money.  And, in my view he took "action" as the governor on a "matter" by "official acts" -  hosting an event at the official mansion, making calls and arranging meetings. 

Governor McDonnell's Conviction Vacated and Remanded- Analysis

It was the last decision issued by the US Supreme Court this term, and an important one for many.  The Supreme Court vacated and remanded former Virginia Governor Robert McDonnell's conviction (see here). It was a unanimous decision - a strong statement with which to end the Court's term.  The key issue was what constitutes an "official act" to meet the bribery statute.  The issue arose, as so many issues do, from the district court's giving of a jury instruction - 

Chief Justice Roberts issued the 28 page decision vacating and remanding the lower court's decision -

• Setting up a meeting, hosting an event, or contacting officials - without more - is not an "official act".
• The Court uses a straightforward statutory definition analysis to define what constitutes an "official act".
• The precedent offered in Sun Diamond supports the Governor's arguments that "hosting an event, meeting with other officials, or speaking with interested parties is not, standing alone, a 'decision or action' within the meaning of section 201(a)(3), even if the event, meeting, or speech is related to a pending question or matter."
• "[S]omething more is required: section 201(a)(3) specifies that the public official must make a decision or take an action on that question or matter or agree to do so."
• "[A]n 'official act' is a decision or action on a 'question, matter, cause, suit, proceeding or controversy."
• The government's "expansive interpretation" of what is an "official act" raises significant constitutional concerns.
• "[W]e cannot construe a criminal statute on the assumption that the Government will "use it responsibly."
• The Court notes three deficiencies in the district court's instructions from this case.
• The Court sends it back to the district court to determine if there is sufficient evidence to meet the Supreme Court's definition of "official act" and if the district court finds that there is - a new trial should be held using this standard.

More commentary to follow on whether this case should be retried.  This case was tried by Hank Asbill (Jones Day).

(esp)

See also Lyle Denniston, Scotus Blog here; David Debold (Scotusblog) here.

Silver's Alleged Extramarital Affairs to be Considered at Sentencing

   Judge Valerie Caproni, the Southern District of New York judge presiding over the case of convicted former New York State Assembly Speaker Sheldon Silver, has unsealed papers submitted by United States Attorney Preet Bharara alleging that the convicted politician had affairs with two women who allegedly received favorable treatment from him in his professional capacity.   The women, whose names were redacted from court papers (but identified, with accompanying photos, by the New York Daily News) were allegedly a prominent lobbyist who dealt regularly with Silver in his official capacity and a former state official whom Silver allegedly helped get a state position.  

   The government, whose efforts to introduce evidence of the relationships at trial were rebuffed by the judge,  argued it should be able to provide such evidence at sentencing, purportedly to demonstrate that these relationships and favors provided by Silver demonstrated a pattern of abuse of power and possibly to rebut any evidence, including Silver's 50-year marriage, of Silver's good character.   The judge seemed to accept the first argument, stating that she viewed this information "as a piece with the crimes for which Mr. Silver stands convicted,"  although "not exactly  the same since no one is suggesting a quid pro quo, but of a piece of a misuse of his public office, and that's why I think it is relevant."

   Generally, a federal judge has a right to consider virtually any information on sentencing, but I am uneasy about the injection of information of extramarital affairs of a defendant into the sentencing decision.   If "no one is suggesting a quid pro quo," as Judge Caproni said, I question its relevance.  Unless there is some basis that Silver did something favorable for these women because of their alleged sexual relationships - which I would call a "quid pro quo - I wonder whether his alleged actions constitute a "misuse of public office." 

  There, of course, is a difference between allowing a party to present evidence or argument at sentencing and factoring that information into the sentencing decision, and, absent specific facts, I am hesitant to say the material should not be considered.  I am troubled, however, by the possibility that a defendant's alleged marital infidelity will become a regular part of a prosecutor's sentencing toolbox.

  I am relatively sure that my first boss, from almost fifty years ago, Frank Hogan, the legendary and exemplary longtime District Attorney of New York County, would not  have proffered such evidence, but Mr. Hogan was a man with a perhaps old-fashioned notion of fair play in a perhaps gentler age in which prosecutors rarely took aggressive (or even any) positions on sentencing (and the press did not publicize  the dalliances of public officials).

 (I note that Mr. Silver, whom I never met or spoke with, or contributed to, appointed me three times (and failed to reappoint me a fourth) to serve on the New York State Commission on Judicial Conduct).

BuzzFeed and the BBC Expose Evidence of Match-Fixing in Tennis

White collar crime in sports has been a topic of much discussion over the last year, including the widespread coverage of corruption allegations against high ranking officials with FIFA (discussed here).  Now it appears that the tennis word is coming under greater scrutiny as a BuzzFeed and BBC article is released discussing what they describe as "widespread match-fixing by players at the upper level of world tennis."  

The article, entitled The Tennis Racket, was released over the weekend and immediately provoked much discussion.  The story details evidence of match-fixing, including the involvement of Russian and Italian gambling syndicates.  According to the authors, tennis's governing body has been repeatedly warned about the activities of a core group of sixteen players, each of whom has ranked in the top 50 and some of whom are winners of singles and doubles at Grand Slam tournaments.  According to the report, none of the sixteen have been sanctioned and more than half will be playing in the Australian Open, which started today.  Included in the article is a fascinating discussion of a 2007 match in which the betting was so suspicious, Betfair (the world's largest internet betting exchange) suspended the market and announced for the first time in its history that all bets on the match were void. 

After the release of this article, it appears all eyes over the next couple of weeks will be on both the matches at the Australian Open and these serious allegations of misconduct.  The question now is whether this story will mark the beginning of a journey for the tennis world similar to the one the soccer world has experienced over the last year.  

(LED) 

Supreme Court Will Review McDonnell Case

The U.S. Supreme Court granted cert limited to Question One on the Petition. See here.  The Hill here.

See Scotusblog for Petition - here

(esp)

Former New York State Speaker Silver is Convicted

Longtime New York State Assembly Speaker Sheldon Silver, a Democrat, was found guilty today by a Southern District of New York federal jury on corruption charges, including honest services theft and extortion under color of law.  As Speaker and majority leader, Silver was one of the "three men in a room" who controlled the New York Legislature (the others being the Governor and Senate majority leader, almost always a Republican, one of whom, Dean Skelos, is now on trial on corruption charges in the same courthouse as Silver was - an apparent show of federal prosecutorial bipartisanship).

Silver had requested and received case referrals to the tort specialty law firm where he was counsel from a doctor to whose university-affiliated clinic he later directed a half-million dollar state grant.  He also requested from two major real estate firms that they send business to a different law firm from which he received large referral fees.  Although the doctor and the real estate firm officers testified that they made the referrals to curry favor and influence Silver, no witness testified that there was an explicit quid pro quo or specific agreement that Silver would perform a specific (or even unspecific) act, although the government maintained that Silver did perform official actions that benefited the doctor and the real estate firms.

The defense argued that there was no quid pro quo, that the referrals were made out of friendship and respect, and that the official acts performed by Silver were legitimate and not performed because of the referrals.

The verdict was no surprise.  Although the defense portrayed the incidents as "politics as usual," the "politics" just stunk.  Silver had clearly received benefits, referrals to law firms from which he received millions of dollars only because those who had provided these benefits thought that Silver as a powerful official would do things - unspoken, unspecific and perhaps then unknown - that would benefit them.  The cases, on which Silver did no actual legal work, were not referred to him because of his reputation as a lawyer.

On the one hand, as one who loathes corruption, I am somewhat gratified that it now appears (subject to judicial reversal of the jury verdict) that a public official may not request   a substantial valuable benefit, direct or indirect, if he or she knows or believes, that the donor is conferring the benefit because the donor believes that the official will exercise his or her official power to the donor's advantage, even in the absence of an agreement that the official do anything in his official capacity. 

On the other hand, I am concerned about what in effect is legislation by prosecution, even if it is good legislation.  However unwholesome Silver's conduct was, he might have been convicted for what had been generally perceived as acceptable conduct in his world that he believed was not criminal.  For better or worse, U.S. Attorney Preet Bharara has essentially changed the rules.  A corruption conviction does not require as a quid pro quo that there be an agreement by a public servant to do a specific act or at least generally to act favorably in the future when circumstances arise, as many prosecutors had believed for years (and some still do).   While the "new" rule is certainly better for society as a deterrent to corruption, I have some concern whether it is just to convict, and likely imprison for a considerable time, someone who acted within what he believed the rules were.

Perhaps this case will embolden prosecutors to go further in charging public officials.  Here, Silver clearly solicited benefits, received benefits, and, at least in the case of the doctor, in return provided a benefit, even if not pursuant to an agreement.  Will cases now be brought where public official receive monetary or equivalent benefits from those intending to influence them even where there is no evidence of solicitation by the officials and/or no evidence that the officials did anything in return for the benefits received?  And what about cases involving campaign contributions made by donors and accepted by a candidates in the expectation that the candidates will act favorably toward their causes, and the candidates (if elected) do so act?  (Or should there be an exemption for cases involving campaign funding?)

(Note - Silver, whom I have never met or spoken with, reappointed me three times as his designee to serve on  the New York State Commission on Judicial Conduct, but did not reappoint me a fourth time.)

U.S. v. Blagojevich: Logrolling Is Not A Federal Crime

John Quincy Adams and Henry Clay can rest quietly in their graves. Their "corrupt bargain" would not be considered a federal crime today. The same goes for Ike and Earl Warren. In  United States v. Blagojevich, decided yesterday by the Seventh Circuit and discussed here by contributing editor Lucian Dervan, the panel vacated five counts of conviction based on partially faulty jury instructions. Under those instructions, the jury could have convicted the former Illinois Governor based on his attempt to obtain a Cabinet seat in the incoming Obama Administration in exchange for appointing Valerie Jarrett to President Obama's soon-to-be-empty Senate seat. This was just logrolling and Judge Easterbrook and his colleagues were having none of it. "It would be more than a little surprising to Members of Congress if the judiciary found in the Hobbs Act, or the mail fraud statute, a rule making everyday politics criminal." The same was true of the Government's efforts to shoehorn the Cabinet seat/Jarrett offer into 18 U.S.C. 666--the notorious mark of the beast. Altogether a sound public policy decision, although the statutory analysis is not as clear cut.

(wisenberg)

7th Circuit Overturns Rod Blagojevich Convictions

The Seventh Circuit has overturned five of 18 counts against former Illinois Governor Rod Blagojevich.  While the government could pursue a third trial on the overturned counts, it is more likely that the former Governor will simply be re-sentenced on the remaining convictions.  It is unclear whether the ruling will result in a different sentence for Blagojevich, who was sentenced to 168 months in prison after his conviction in 2011.  Judge Frank Easterbrook, writing for a unanimous three judge panel, wrote, "It is not possible to call the 168 months unlawfully high for Blagojevich's crimes, but the district judge should consider on remand whether it is the most appropriate sentence."  Blogojevich will not be released awaiting his re-sentencing on the counts.  The Appellate Court stated, "Because we have affirmed the convictions on most counts and concluded that the advisory sentencing range lies above 168 months, Blagojevich is not entitled to be released pending these further proceedings."

(LED)

FIFA Indictment Passes on Jurisdiction, Fails on Obstruction

Yesterday I skimmed through the FIFA indictment referred to by my colleague Lucian Dervan on May 26, 2015 ("FIFA Officials Facing Corruption Charges"), primarily to determine how the government justified jurisdiction over alleged criminal activities that largely, seemingly almost entirely, occurred in other nations, a complaint made by none other than Vladimir Putin.  Upon review, I believe the indictment, apparently drafted with that question in mind, facially makes a reasonably strong case for U.S. jurisdiction, based largely, although not entirely, on money transfers through U.S. financial institutions. 

There remains, however,  the question whether the U.S. Department of Justice should assume the role of prosecutor of the world and prosecute wrongs, however egregious, that were almost wholly committed by foreigners in foreign nations and affected residents of those foreign nations much more than residents of the United States.  Our government's refusal to submit to the jurisdiction of the International Criminal Court  is arguably inconsistent with our demand here that citizens of other nations submit to our courts.

On another subject, what struck me as just wrong was a minor part of the indictment, the obstruction of justice charge against Aaron Davidson, one of the two United States citizens indicted (the other, a dual citizen, is charged with procuring U.S. citizenship fraudulently).  While the obstruction of justice count itself (count 47) is a bare bones parsing of the statute, the lengthy 112-page preamble to the actual recitation of counts (to me in clear violation of Fed. R. Crim. P. 7(c), which says the indictment "must be a plain, concise and definite written statement")(emphasis added) describes Davidson's allegedly criminal conduct as follows: "Davidson alerted co-conspirators to the possibility that they would be recorded making admissions of their crimes."

Such advice is provided as a matter of course - absolutely properly and professionally, in my opinion -  by virtually every white-collar or other criminal lawyer representing a target of a criminal investigation.  Since lawyers are given no special treatment different from others,  if these facts justify a criminal conviction, a lot of white-collar lawyers will be counting the days until the five-year statute of limitations has passed since their last pre-indictment stage client meeting.

The obstruction of justice statute is so vague that it gives the government the opportunity to charge virtually any effort by lawyers or others to advise persons under investigation to exert caution in talking with others.  The applicable statute, the one used against Davidson, prescribes  a 20-year felony for "whoever corruptly...obstructs, influences, or impedes any official proceeding, or attempts to do so..." 18 U.S.C. 1512(c)(2).  That catch-all statute, which follows one proscribing physical destruction of tangible evidence,  to me is unconstitutionally vague, but courts have generally upheld it and left the determination of guilt to juries on the ground the word "corruptly," which itself is subject to many interpretations, narrows and particularizes it sufficiently.  I hope that the presiding judge in this case, the experienced and respected Raymond  Dearie, does not allow that count to get to the jury.

 

FIFA Officials Facing Corruption Charges

According to CNN, the U.S. Department of Justice is preparing to bring corruption charges against up to 14 senior officials at FIFA, the world's soccer governing body.  The reports from CNN come from "law enforcement officials."  According to the New York Times, several FIFA officials have already been arrested in Switzerland in a "extraordinary early-morning operation." 

FIFA has been under investigation for some time, including with regards to the bidding process for the 2018 and 2022 World Cups, which will occur in Russia and Qatar.  FIFA conducted an internal investigation of the selection process for each event.  The investigation was led by Michael Garcia of Kirkland & Ellis.  Garcia submitted his report to FIFA in September 2014.  FIFA then released a "summary" of the report's findings, which summary Garcia alleged was "erroneous."  Garcia resigned as independent chair of the FIFA Ethics Committee's Investigatory Chamber in December 2014.

One issue that will be interesting to watch in this case is the manner by which the U.S. alleges jurisdiction over the senior FIFA officials despite the fact that alleged corruption occurred overseas and FIFA is an association governed by Swiss law.  According to CNN, the U.S. will allege jurisdiction exists because of the breadth of U.S. tax and banking regulations.  Further, the government will reportedly rely in part on the fact that significant revenue is generated by the U.S. television market.  This is certainly a case we will be hearing a lot about in the coming months. 

(LED)

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)

 

 

New York State Assembly Speaker Sheldon Silver Faces Federal Fraud Charges

The New York Times has the story, with a link to the criminal complaint, here. U.S. Attorney Preet Bharara followed his longstanding tradition of holding a press conference in order to make inflammatory, prejudicial, and improper public comments about the case.

(wisenberg)

Campaign Corruption - Internationally

A former Peru president is convicted "of funneling more than $40 million in public funds to tabloid newspapers that smeared his opponents during his 2000 re-election campaign." See  AP, Former Peru President Convicted of Corruption

(esp)

McDonnell Gets Two Years

Jennisfer Steinhauer, NYTimes, Bob McDonnell, Ex-Governor of Virginia, Sentenced to 2 Years for Corruption

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You Can’t Take Back Time Served - McDonnell Should Remain Free Pending Appeal

Many are focused on what sentence former Virginia Gov. Bob McDonnell will receive from the judge today. After all, he was convicted, and now is the time for him to be punished. But there is a second question, and an important one in this particular  case, that also warrants consideration: Whether the former governor should be allowed to remain on bond pending his appeal. It should be an easy answer - he needs to remain free.

McDonnell’s case screams, ‘let’s wait before we put him behind bars.’ That’s because this is really a case about whether prosecutors stretched the law too far.

Creative federal prosecutions are not new and higher courts have been quick to strike prosecutions that exceed the boundaries of the law. Sometimes our courts have to remind prosecutors of John Adams words that  we are “a government of laws, and not of men.”

We recently saw the Supreme Court strike down a prosecution that used the Chemical Weapons Convention Implementation Act to prosecute a woman for an attempted simple assault. And the Supreme Court is currently reviewing the government’s use of the Sarbanes  Oxley Act to prosecute a fisherman for throwing fish overboard that a state official had asked him to bring to shore.

McDonnell prosecutors used a novel approach in bringing this case. They attempted to prosecute conduct that folks may find offensive. But merely  being offensive is not enough for making something a crime. It has to be criminal under existing laws, as opposed  to a new interpretation created by the government in order to bring their case to court.

This case wasn’t the typical bribery case of someone handing a person money and that individual doing a specific official act in return. When an appellate court finally gets its hands on this case, it may all come down to whether McDonnell corruptly performed  or promised to perform an “official act.” But what constitutes an “official act” is not so easy to explain. Will it include any act that happens to be done by a government official? Will it make a difference in a federal prosecution that the government official happens to be elected to a state position? Will it make a difference that state ethics rules exist to oversee what may or may not be considered corrupt conduct?

So now an appellate court will need to decide whether McDonnell’s conduct fits within the language of the statute. And that is a substantial question of law, the test the court looks at in determining whether to grant bond pending appeal. Pending that decision, it seems that he should remain free.

Many convicted defendants before McDonnell have been allowed to stay out on bond pending their appeal. There’s Martha Stewart, who eventually decided to go ahead and serve her sentence; Bernie Ebbers who received a  25 year sentence; John and Timothy Rigas, who received 15 and 20 years, respectively, and actor Wesley Snipes, who was convicted in a tax case. All went to trial and were convicted.  And all were offered the chance to remain free pending their appeal. One even finds former governors and congressman on the list of those who have been given an appellate bond – former Illinois Gov. George Ryan was the recipient of one and so was former representative William Jefferson.

In many instances, the trial judge is the one who grants the bond pending appeal. But in some cases, it has required a higher, appellate court to step in to order the release of the accused pending his or her appeal. That happened to former Alabama Gov. Donald Siegelman, who was initially granted bail.

The bottom line in most white collar cases comes down to whether the accused has a significant issue being raised on appeal that it is better to have resolved prior to the start of the sentence. After all, once the individual is incarcerated, you can’t take back the time they have served.

Creative federal prosecutions have cost prosecutors much time and money, with few rewards. And in some cases it takes appellate courts to step in and act – and until they do, McDonnell should remain free.

(esp)

Transparency International Releases 2014 Corruption Perceptions Index

Transparency International has released their 2014 Corruption Perceptions Index.  The Index contains a wealth of information regarding the perceived levels of public sector corruption in 175 countries and territories.  Topping this year’s list with the highest score, thus indicating very low perceived levels of public sector corruption, is Denmark, which received a score of 92.  Denmark is followed closely by New Zealand, which received a score of 91.  At the bottom of the list are North Korea and Somalia, each with a score of 8.  The United States is ranked 17^th with a score of 74. 

Along with interesting charts, figures, and analysis, the report contains stories of corruption from select locations.  These include stories about corruption related to pharmaceuticals, medical care, food aid, education, and rule of law. 

A very interesting report worth spending some time examining.

(LED)

Future Trends Regarding White Collar Crime and China

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. 

(LED)