White Collar Crime Prof Blog

A Deep State Story: The James Wolfe Indictment

Here is the Indictment returned late last week in U.S. v. James Wolfe. Wolfe worked for 30 years for the United States Senate Select Committee on Intelligence ("SSCI") handling top secret and other classified information provided by the Executive Branch to Congress. According to the Indictment, Wolfe leaked the identity of "Male-1" to at least two reporters on two separate occasions and then lied about it to FBI Special Agents. Male-1 is none other than Carter Page and it is clear that the leaks were intended to damage Donald Trump. Reporter #2, referenced in the Indictment, is New York Times reporter Ali Watkins who was romantically involved with Wolfe for almost four years. Records of Watkins' email and phone contacts (but apparently not their contents) were subpoenaed from third party providers. Andrew McCarthy of NRO Online has commentary here, while Alex Pappas of Fox News examines some of Ms. Watkins' embarrassing historical tweets concerning the identity of leakers and the propriety of sleeping with sources. The press and certain members of Congress are concerned, as well they should be, about DOJ's capture of journalistic records. But keep in mind that the press is not the only institution with a watchdog role. The SSCI performs that function as well, and does so officially, with respect to intelligence-related oversight, and it is ironic (in a bad way) that its Chief of Security, if the charges are accurate, betrayed SSCI's trust. At this point Wolfe has only been charged, under 18 U.S.C. Section 1001 (the Martha Stewart statute) with lying to the FBI.

(wisenberg)

George Papadopoulos Criminal Information and Plea Papers

As most people have figured out by now, the most interesting development related to the charges unsealed today by Bob Mueller & company is the guilty plea entered into by an apparently marginal Trump Campaign operative named George Papadopoulos. Papadopoulos established direct and indirect contact with some Russians early in the campaign and lied about it later to the FBI. Not a good career choice. Now he has entered into a cooperation agreement and pled guilty under 18 U.S.C. Section 1001 (the Martha Stewart statute) to making false statements to government officials. Even without a downward variance his Guidelines Range is 0-6 months, so he won't be doing any time.  According to the U.S. v. George Papadopoulos Statement of the Offense, which is the key document in the case, on April 26, 2016, while Papadopoulos was working on the campaign, one of Papadopoulos's foreign contacts advised him that the Russians had access to "dirt" on Mrs.  Clinton and "thousands of emails."  Interestingly, the Statement of the Offense does not explicitly say that the emails were offered to the Trump Campaign by the Russians or that Papadopoulos shared the information about the emails with Trump Campaign officials. Here also are the  U.S. v. George Papadopoulos Criminal Information, and the U.S. v. George Papadopoulos Plea Agreement.

(wisenberg)

Brady Appeal Focuses on Destruction of Evidence

   New England Patriot quarterback Tom Brady did not get the reception he wanted at the oral argument of the appeal of the National Football League (NFL) of a district court decision overturning his four-game suspension in the so-called Deflategate case.  Brady has been accused of conspiring with Patriot employees to deflate footballs so that they were easier for him to throw in a game in cold weather.  The appellate court spent a considerable amount of time questioning Brady's counsel about Brady's destruction of his cellphone shortly before he was to appear before NFL investigator Ted Wells.

   In my view the evidence concerning whether the footballs were deflated was equivocal and, even if they were deflated, the evidence that Brady was knowingly involved was largely speculative, and in total, absent an inference of wrongdoing from the unjustified destruction of evidence, probably not sufficient to meet even the minimal 51-49 "more probable than not" standard used in the NFL and most other arbitrations.  Evidence of the suspiciously timed destruction of the cellphone, and the lack of a convincing justification for it, however, for me pushes the ball over the 50-yard line and may be the linchpin of an appellate decision upholding the suspension.  As Judge Barrington Parker stated at oral argument, "The cellphone issue raised the stakes.  Took it from air in a football to compromising a procedure that the commissioner convened."  He asked Brady's counsel,"Why couldn't an adjudicator take an inference from destroying a cellphone?," then stated that Brady's explanation - that he regularly destroyed cellphones for privacy reasons - "made no sense whatsoever." 

   Courts are understandably especially sensitive (sometimes too sensitive and too punitive, in my view) to acts like perjury or destruction of evidence which obstruct investigations or prosecutions.  Our justice system relies, at least theoretically, on the basic (although somewhat erroneous) principle that, at least generally, witnesses will not violate the oath to tell the truth.   It is therefore no great surprise that the court focussed on Brady's destruction of evidence and his purportedly lying about it.  Indeed, Judge Parker appeared to accept that even if Brady had not been involved in tampering with the footballs, his destruction of evidence would justify Goodell's decision.  "Let's suppose a mistake was made and the footballs weren't deflated, and then a star player lies in his testimony and destroyed his phone.  An adjudicator might conclude the phone had incriminating evidence.  Why couldn't the commissioner suspend Brady for that conduct alone?" 

   Of course, it would be rather perverse if Brady's suspension were upheld when in fact he had actually not been involved in deflating footballs and  had destroyed his cellphone as an excuse for not producing it and lied about it for reasons unrelated to the deflating issue, such as that the phone contained wholly unrelated embarrassing information or that he possesses an Apple-like principled view of privacy rights.   It calls to mind Martha Stewart, who was convicted and jailed  for lying to federal agents and prosecutors in a proffer session even though the underlying insider trading allegation about which she was questioned, was not prosecuted.  On the other hand, it would not be perverse if in fact the destroyed cellphone did contain incriminating conversations.

   Sometimes a client under investigation asks his lawyer what the client should do with incriminating evidence he possesses.  As much as the lawyer in his heart may want the evidence to disappear, he cannot ethically or legally advise the client to conceal the evidence.  (The specific advice will vary depending on the facts and circumstances.)  The lawyer should frankly explain his ethical and legal obligations.  However, generally the client doesn't give a hoot about them.  The lawyer should  explain that destruction, tampering and concealment of evidence, if discovered by the prosecutor, will undoubtedly eliminate the possibility of non-prosecution, lessen the possibility of a favorable plea deal, strengthen the prosecution's case at trial, and, if there is a conviction, undoubtedly cause a more severe sentence.  Just as lawyers sometimes invoke the Stewart case to caution about the danger of voluntary interviews with prosecutors, so might they invoke the Brady case to caution about the danger of destruction of evidence.

 

 

 

The Brady case highlights the danger of destruction of evidence and lying to investigators.

Cosby Decision May Affect Oral Agreements in Practice of Criminal Law

 

The decision by a Philadelphia suburban trial court that a previous prosecutor's publicly announced promise not to prosecute Bill Cosby was not enforceable has virtually no precedential value anywhere, but it may affect how prosecutors, defense lawyers, defendants and targets act throughout the nation. The rule of law from this case seems to be that a former prosecutor's (and perhaps a current prosecutor's) promise not to be prosecute, at least when not memorialized in a writing, is not binding, even when the target relies on it to his potential detriment.  That promise can be disavowed by a successor prosecutor, and perhaps by the prosecutor himself.

Occasionally, cases arise where defense lawyers contend that prosecutors violated oral promises made to them and/or their clients.  Such situations include those where a prosecutor, it is claimed, promised a lawyer making an attorney proffer that if his client testified to certain facts, he would not be prosecuted or would be given a cooperation agreement and favorable sentencing consideration.  Often these instances result in swearing contests between the adversary lawyers: the prosecutor denies making any such promise and the defense lawyer says he did.  In most instances, in the absence of a writing,  the court sides with the prosecutor.  With respect to plea agreements, some courts have set forth a black-letter rule that promises not in writing or on-the-record are always unenforceable.

The Cosby case is very different.  There the (former) prosecutor in testimony avowed his promise, which was expressed in a contemporaneous press release, although there was no formal writing to defense counsel or a court, and expressly testified he did so in part in order to deprive Cosby of the ability to invoke the Fifth Amendment in a civil case brought by the alleged victim,  he also said that he believed his promise was "binding."   Cosby, according to his civil lawyer, testified at a deposition because of that prosecutorial promise.  (Generally, prudent prosecutors, when they announce a declination to prosecute give themselves an "out" by stating that the decision is based on currently-known information and subject to reconsideration based on new evidence).

To a considerable extent, the criminal justice system relies on oral promises by prosecutors (and sometimes judges) to defense lawyers and defendants, especially in busy state courts.  And, in federal courts, while immunity agreements are almost always in writing, federal prosecutors (and occasionally, but rarely,  federal judges) often make unrecorded or unwritten promises.   Sometimes such prosecutorial promises are made in order to avoid the time-consuming need to go through bureaucratic channels; sometimes they are made by line assistants because they fear their superiors would refuse to  formalize or agree to such a promise;  sometimes they are made to avoid disclosure to  a defendant against whom a benefiting cooperator will testify.  Based on the Pennsylvania judge's decision,  some defense lawyers (and some defendants) will believe that prosecutors' oral promises are not worth the breath used to utter them, and, perhaps, since there appears to be no dispute that such a promise was made here, that written promises are barely worth the paper they are written on. 

Defense lawyers are frequently asked by their clients whether they can trust the prosecutor's word in an oral agreement.  My usual answer is that they can: most prosecutors are reliable and honest.  Defense lawyers are then sometimes  asked a variant question about what will happen if the promising prosecutor leaves the office or dies.  My usual answer is that if there is no disagreement as to whether the promise was made, it will be honored.  The Cosby decision has made me reconsider that response. 

There are certain highly-publicized cases of celebrities of little precedential or legal value that have a considerable effect on the practice of law by both prosecutors and defense lawyers.  The case of Martha Stewart, who was, on highly disputed testimony,   convicted of 18 USC 1001 for lying in a voluntary proffer to prosecutors investigating her purported insider trading (which, assuming it occurred, was most likely not a crime),  is still invoked by prosecutors in cautioning witnesses not to lie to them and by defense lawyers in cautioning witnesses about making a voluntary proffer.  The Cosby case will likely be cited by defense lawyers and their clients concerning the uncertain value of oral agreements with prosecutors.  The skepticism of many defense lawyers about the reliability of agreements with the government and trustworthiness of prosecutors will grow.   I suspect the sarcastic refrain of some defense lawyers, "Trust me, I'm the government," will be said more often. 

I assume that the decision will be appealed, and also that a motion will be made to exclude Cosby's deposition because it was a consequence of the promise.  That latter motion is likely to be denied based on the judge's decision on the issue discussed here, although since the judge failed to set forth any reasoning for his decision, there may be room for distinguishing that issue from the one decided.

Although the judge's ruling has no doubt pleased those clamoring for Cosby's conviction and those desiring a decision on the merits, it may have a considerable negative effect on the perceived integrity and reliability of prosecutorial  non-memorialized promises and the actual practice of criminal law.  And it reveals once again how celebrity cases often make bad law.

Lying Juror Requires New Trial in Massive Tax Fraud Case

Last month, in a thorough 64-page opinion, Southern District of New York Judge William Pauley ordered a new trial for three of four defendants convicted in what he described as "the largest tax fraud prosecution in U.S. history" because a juror, Catherine M. Conrad, had lied her way into being accepted as a juror.  United States v. Daugerdas, et al., 09 Cr. 581.

There appears to be little question Ms. Conrad, a suspended lawyer, connived to make herself in her own word "marketable" so that she could have "an interesting trial experience" as a juror.  In voir dire, she lied about her education, claiming the highest level she had reached was a B.A. when in fact she had a law degree.  She concealed not only her membership in and suspension from the bar but her own criminal convictions -- for shoplifting, DWI, contempt and aggravated harassment -- as well as her husband's extensive criminal history, which included a seven-year prison stay.  She made, according to the court, a "calculated, criminal decision to get on the jury." 

At a post-trial hearing at which she was granted use immunity, Conrad stated that if the truth were known, "defense counsel would be wild to have me on the jury."  In fact, however, Conrad turned out to be extremely biased against the defendants.  In a congratulatory letter she sent to the prosecutors after the trial, she said she was "privileged to observe la creme de la creme -- KUDOS to you and your team."  In that letter, she mentioned that she had fought against but ultimately had "thrown[n] in the towel" on a not guilty verdict on one of the counts concerning defendant David Parse.  At the hearing, she testified that "most attorneys" are "career criminals."  Two of the four convicted defendants were practicing lawyers; Parse was a non-practicing lawyer.

Judge Pauley, clearly upset by the need to retry a case which took three months, strongly urged the government to prosecute Conrad.  Perhaps concerned that the government might feel that prosecuting her would be inconsistent with its opposition to a new trial, he added, "The prospect of preserving a tainted jury verdict should not temper the Government's resolve to call Conrad to account for her egregious conduct."  Any prosecution of Conrad, however, obviously would have Kastigar obstacles because of her immunity.

The judge, following the Supreme Court's decision in McDonough Power v. Greenwood, 464 U.S. 548 (1984), found that in order to obtain a new trial, the moving party must "first demonstrate that a juror failed to answer honestly a material question on voir dire and then further show that a correct response would have provided a valid basis for a challenge for cause" (emphasis added).  Apparently, even in a criminal case, the mere existence of a juror who deliberately lied her way onto the jury may not be sufficient to require a new trial.  See United States v. Martha Stewart, 433 F.3d 273 (2d Cir. 2006).  The McDonough test appears to be "If the juror hypothetically had answered truthfully, would her truthful answers have led to a challenge for cause?"  Thus, unknown facts that might have affected her fitness to serve as a juror which would not in any case have been revealed by accurate responses to voir dire questioning presumably should not be considered.

In a lengthy analysis, mingling those hypothetical answers to questions asked during jury selection with, somewhat questionably, facts learned and impressions formed at the post-verdict hearing -- including Conrad's discovered dishonesty, bias and her animus to lawyers -- the court found that the McDonough criteria had been amply met.  Accordingly, it ordered a new trial for all the convicted defendants -- except Parse, who the court ruled had "waived" his claim for a new trial since his attorneys knew or "with a modicum of diligence would have known" that Conrad's statements in jury selection were false and misleading and failed to disclose that knowledge to the court.

Judge Pauley felt that Parse's lawyers, the firm of Brune and Richard, knew or at least suspected (or alternatively should have known) that Conrad was an imposter certainly by the start of jury deliberations, but made a decision not to reveal their belief or suspicion to the court.  The court was apparently affected by what seems to be a carefully-crafted, literally true but arguably misleading, statement in the lawyers' new trial motion that they were "prompted" by disclosure of Conrad's post-verdict letter to investigate and conduct records searches "in the wake of Conrad's . . . post-verdict letter."  The court found that the motion contained "significant factual misstatements" and that its "clear implication" was to give the false impression that Parse's lawyers had no idea of Conrad's true identity until well after the verdict.  In fact, as demonstrated in a later letter from the firm, in the firm's e-mails during trial, which were ordered by the court to be produced, and in testimony by the lawyers at a hearing, the firm apparently had concerns about and suspicion of Conrad's deception, initially at voir dire and later, after further record search revelations, during the judge's charge to the jury.  A most graphic example was one lawyer's e-mail during the charge, "Jesus, I do think it's her."

The court believed that the attorneys' submission was designed to foreclose any government claim that their pre-verdict knowledge doomed their post-verdict motion on the grounds that they failed to act with "due diligence."  The court found unconvincing the attorneys' claim that notwithstanding the similarities between the juror and the suspended lawyer discovered by electronic research -- name, home town, father's occupation, approximate age -- and the juror's use of previously unmentioned legal terms (such as respondeat superior) in jury notes she authored, the attorneys did not believe until after her letter to the government was disclosed that juror Conrad and suspended lawyer Conrad were the same person.

The court thus found that Parse's attorneys had "actionable intelligence" that Conrad was an imposter and that they had been required, but failed, to undertake "swift action" to bring the matter to the court's attention.  The court apparently felt that the attorneys had attempted to "sandbag" it by remaining silent about the defect and only raising the issue when and if the trial did not conclude favorably, in effect providing them and their client with an "insurance policy against an unfavorable verdict."  By his attorneys' conduct, the court ruled, Parse waived any error.

It may well be that during the trial the attorneys chose not to report their suspicions because they felt that Conrad, who appeared from web research to be potentially anti-government, would be a favorable juror for the defense, and they did not want to lose her.  It may also be that, whatever the objective evidence that the juror and the suspended lawyer were one and the same might look like with hindsight, they actually thought that the juror and the suspended lawyer were different people since, as they claimed, they could not believe that the juror -- a lawyer -- would blatantly lie.  Under either alternative, the court found, they had an obligation to share their knowledge with the court.

Some may argue that an attorney, in her duty of zealous representation of a client, may remain silent if she learns during jury selection that a juror misrepresented herself.  Judge Pauley's contrary view is clear:  "An attorney's duty to inform the court about suggested juror misconduct trumps all other professional obligations, including those owed a client."  I agree.  See New York Rules of Professional Conduct 3.3(b).

Some may also question whether Parse, the client, should suffer from his lawyer's purported misconduct or lack of diligence (of which he had no apparent knowledge).  While generally a client is bound by a lawyer's strategic decision, and cannot cry foul if it backfires, Parse did suffer the same denial of a fair jury as the other defendants.  Nonetheless, the court held that his attorneys' failure to report waived any objection by Parse, but granted new trials to the other three convicted defendants (whose lawyers apparently had no knowledge of Conrad's deception).

There are several ironies in this case:  Parse, about whom, according to Conrad's letter to the prosecutors, the jurors "had qualms," is the only one whose conviction stands.  Further, his attorneys were the ones responsible for investigating and presenting the motions which succeeded in a new trial for the others (who joined the motion), but not for him.  And, lastly, if Conrad had told the truth at voir dire and revealed her suspension from the bar and her and her husband's criminal record, she undoubtedly would have been successfully challenged -- whether by cause or peremptory -- on the motion of the prosecution she so strongly favored, and not be the defense she despised.

 (goldman)

Roger's Reputational Dilemma

As expected, Roger Clemens pled not guilty on Monday to charges of perjury, false statements, and obstruction of Congress. He is represented by two of the ablest white collar criminal defense attorneys in the country—Rusty Hardin of Houston and San Diego’s Mike Attanasio. I know these men and their work. They are stellar lawyers.

The government asked Judge Reggie Walton to make Clemens surrender his passport in order to reduce the risk of flight. Honest. They really did. Give me a break. Walton didn’t buy it.

It is generally assumed that Clemens could have taken five before Congress and was therefore foolish to testify and subject himself to possible perjury charges. I’m not completely convinced of this, since the activity Congress was investigating at the time appears to have been beyond the statute of limitations. How can you incriminate yourself by truthfully admitting to something that you can no longer be prosecuted for?

At any rate, Clemens appeared without a subpoena, so there was no question of him not testifying. His attorneys will be able to argue to the jury that he had everything to lose and nothing to gain by appearing and testifying. Ergo, he must have been telling the truth. This can be a powerful argument in skilled hands, particularly in front of a DC jury, but it is better not to be forced to make it at all-better not to be indicted in the first place.

Roger's dilemma is the dilemma of the client with exposure, even limited exposure, who cannot or will not do the prudent thing and shut the hell up. It is best not to testify under oath, or even talk to the government, if you face potential criminal prosecution. Just ask Martha Stewart. But some high profile clients cannot take the perceived damage to their reputations involved in invoking the privilege. Clemens had the example of Mark McGwire in front of him. McGwire’s reputation was permanently and severely damaged by his refusal, on Fifth Amendment grounds, to answer a Congressional panel’s questions. 

I know, I know; the privilege protects the innocent as well as the guilty. But nobody believes that in television land. Had Clemens publicly invoked the privilege, he would have been scarred for life. And he is not some dime-a-dozen, $40 million bonus CEO. He is one of the immortals.

The reputational dilemma is not confined to high-profile clients or the decision to invoke the Fifth Amendment. As a prosecutor, I saw defendants refuse to take plea offers, including misdemeanors with no jail time, because they could not admit wrongdoing to a spouse or child. It is a reminder that the strategy and tactics of criminal defense work are not always confined to logical analysis. The human, emotional element is ever present.

(slw)

Collateral Consequences of a Criminal Conviction & Martha Stewart

Sometimes the collateral consequences of a conviction make no sense.   Martha Stewart could not possibly hurt anyone or be a harm to the UK, yet the technicality of the conviction initially denied her receiving a visa. See CNN, Martha Stewart Denied UK Visa But Hopes to Visit Soon.

(esp)

Addendum - There is certainly a question as to why Ms. Stewart needed a visa, and what legal provision in the UK looks at criminal convictions in other countries? Any readers know the answer here?

Who Really Deserves to Be Indicted in the Libby Case?

An opinion piece in the Washington Post by Victoria Toensing, a former deputy assistant attorney general in the Reagan administration and now a Washington lawyer, provides a long list of "possible" indictments resulting from the circumstances surrounding the Libby trial.  It includes everyone from the prosecutor J. Patrick Fitzgerald, the CIA, to the DOJ.  It is the kind of article that makes one wonder whether we really do need to reexamine the wide breadth of prosecutorial power given individuals who have the ability to ruin people's lives, put people in jail, and also decide who will walk free.

(esp)

A Christmas Podcast

Instapundit's Glenn Reynolds (U. of Tennessee law prof), and his wife Helen, host "A Martha Stewart Christmas" podcast that features Professor Joan Hemingway's new book, "Martha Stewart's Legal Troubles."   As a contributer to this book ( two chapters), it was a pleasure to join Joan, Helen, and Glenn in discussing the Martha Stewart indictment and the use of government resources to pursue this form of criminal activity. The podcast examines issues of overcriminalization, the Sarbanes-Oxley Act, and the recent draconian sentences being issued in white collar cases.

(esp)   

Martha Stewart Settles the Final Case

The final piece of litigation related to Martha Stewart's ill-fated sale of a little over 3,000 shares of ImClone Systems stock in December 2001 is about to be settled.  The government believed her broker had been tipped by Dr. Samuel Waksal, then CEO of ImClone who is serving a seven-year sentence for insider trading and tax evasion related to his own sales of the company's stock.  Stewart's infamous trade, which avoided the loss of a bit less than $50,000 when ImClone announced an adverse FDA action on its primary drug, resulted in an investigation by the SEC and U.S. Attorney's Office that led to her indictment and conviction on conspiracy, false statement, and perjury charges. She served about ten months in a federal prison for the convictions.  While she was not prosecuted criminally for insider trading, the SEC filed a civil securities fraud action that was settled in August 2006 with disgorgement of the loss avoided, a modest penalty, and a five-year bar on Stewart serving as a director of a public company, most importantly the corporation she controls, Martha Stewart Living Omnimedia, Inc.  According to the company's 10-Q (here), the last case is a putative class action by purchasers of stock during 2002 when Stewart denied she traded on inside information that was allegedly misleading and inflated the company's stock price.  The 10-Q states:

In late October 2006, the parties began negotiating an agreement to settle the Class Action for $30 million, approximately $15 million of which is expected to be paid by the Company, approximately $10 million of which is expected to be paid by the Company’s insurers, and approximately $5 million of which is expected to be paid by Ms. Stewart. The settlement is subject to the negotiation and execution of definitive settlement documents and to Court approval. The Company anticipates that a hearing to consider approval of the settlement will be held in late 2006 or early 2007.

While Stewart will pay $5 million of the total settlement amount, her compensation in 2005 was over $2 million, and her stock holdings in the company are worth well over $600 million.  It is hard to believe this whole affair began almost five years ago, and cost so much in time and money.  At this point, the Blog should retire the category "Martha Stewart." (ph)

Martha Settles With SEC

The SEC has issued a press release here announcing a settlement on the "insider trading charges against Martha Stewart and Peter Bacanovic relating to Stewart's sale of ImClone Systems stock in December 2001."  The press release states:

"Under the settlement, Stewart agrees to an injunction, disgorgement of losses she avoided, and the maximum penalty of three times the losses she avoided, for a total of about $195,000 in monetary relief. Stewart also agrees to a five year bar from serving as a director of a public company and a five year limitation on the scope of her service as an officer or employee of a public company. Bacanovic agrees to an injunction and to pay disgorgement of commissions and a penalty totaling approximately $75,000. In a separate order, the Commission previously barred Bacanovic from associating with a broker, dealer or investment adviser."

And although they have settled, "[t]he defendants consented to the judgments without admitting or denying the allegations in the complaint."  The court has to approve this settlement.

This is a win-win situation.  The SEC gets to announce that they reached a settlement with Martha Stewart and Martha Stewart can move forward putting this entire matter behind her.  The amount, $195,000 is a small price to pay to have this finished. Not having to continue to pay attorney fees in handling this matter alone makes this advantageous to Stewart. (See current report stock report on Imclone here).

(esp)

 

Supreme Court Cites to Martha Stewart case

In a case decided yesterday by the United States Supreme Court, Davis v. Washington, Justice Scalia cited to the Second Circuit decision in the Martha Stewart case for the point, "[t]he solemnity of even an oral declaration of relevant past fact to an investigating officer is well enough established by the severe consequences that can attend a deliberate falsehood."   Which case does this cite fit into - the 911 Crawford case.

(esp) (w/ a hat tip to Kathryn Kase)

Martha Stewart, Part Deux: The SEC Inisder Trading Case

Along with the criminal indictment on false statement, perjury, obstruction, and conspiracy charges filed on June 4, 2003, Martha Stewart and Peter Bacanovic were sued the same day by the SEC for insider trading (complaint here) arising from her sales of ImClone Systems, Inc. stock on December 27, 2001.  The Commission alleged that Stewart sold her shares (and avoided approximately $45,000 in losses) based on information about stock sales by ImClone's CEO, Dr. Sam Waksal, that was passed on to her by Bacanovic, her broker at Merrill Lynch.  The complaint does not allege that Waksal -- who is serving a 7-year prison term after pleading guilty to insider trading and tax charges -- tipped either Stewart or Bacanovic about problems ImClone was having in obtaining FDA approval for its main drug, Erbitux.  Instead, the SEC alleges that Bacanovic violated his fiduciary duty to Merrill Lynch by tipping Stewart about customer information: "As of December 27, 2001, the Waksals' efforts and instructions to sell their ImClone stock were not public and Merrill Lynch policies specifically required employees to keep information about those transactions confidential. Indeed, Merrill Lynch had in place at least four policies that prohibited employees, such as Bacanovic and [his assistant Douglas] Faneuil, from disclosing client transactions to others or effecting trades on information about client securities transactions."  The alleged insider trading is a step removed from the confidential information, and concerns market information rather than corporate information, raising questions of materiality and causation.  Federal prosecutors did not charge Stewart and Bacanovic with securities fraud, most likely because it would have been too difficult to establish guilt beyond a reasonable doubt.  The SEC suit operates under the more relaxed civil standard of preponderance of the evidence, although the case is certainly not an easy one.

The parties agreed to stay the civil case until the criminal case was over, and now that Stewart will not pursue any further appeals from the affirmance of her conviction by the Second Circuit in January 2006, the SEC suit can move forward.  An AP story (here) states that Stewart and Bacanovic must now file an answer to the complaint.  The civil case involves a fairly trivial amount of money for someone of Stewart's wealth, and could probably be settled for not much more than $200,000 with interest and a triple penalty, at the most.  The problem in settling the case most likely is a possible director and officer bar that could be imposed on Stewart if there is a finding that she engaged in a violation of the antifraud provisions of the federal securities laws.  The complaint seeks the following relief: "Order[] that Stewart be barred from acting as a director of, and limiting her activities as an officer of, any issuer that has a class of securities registered pursuant to Section 12 of the Exchange Act, 15 U.S.C. § 781, or that is required to file reports pursuant to Section 15(d) of the Exchange Act, 15 U.S.C. § 78o(d) . . . ."  A D&O bar would prevent Stewart from exercising control of Martha Stewart Omnimedia Inc. as a senior executive, barring a move to take it private so that it would not be subject to the registration and reporting provisions of the Securities Exchange Act of 1934.  If the Commission is insisting on a bar, that may be too high a price to pay, especially in a case that Stewart stands a reasonable chance of winning, although at the cost of another round of negative publicity.  Then again, having appeared on a version of The Apprentice, there may be no such thing as too much bad publicity. (ph)

                                                                                    

UPDATE:  An AP story (here) states that Martha Stewart filed an answer to the SEC complaint asserting that she acted in "good faith," which is a defense to a fraud charge under Section10(b) and Rule 10b-5, the legal basis for the insider trading prohibition.  At this point, discovery will move forward, which means deposition notices are likely to go out to Stewart and Peter Bacanovic, her co-defendant and former broker.  Unlike the criminal case, in which neither testified, as civil defendants the opposing party has the right to compel them to testify.  While either can assert the Fifth Amendment privilege at the deposition, that can be used as evidence to infer that the person had the requisite intent to violate the antifraud provisions.  Settlement is certainly not precluded at this point, and as discovery proceeds the sides may move closer to resolving the issues. (ph)

Stewart and Bacanovic Convictions Upheld

The Second Circuit upheld the convictions of Martha Stewart and Peter Bacanovic on conspiracy, false statement, perjury (Bacanovic only), and obstruction of an agency investigation charges in a published opinion (available on Findlaw here).  The opinion is long -- 74 pages -- and goes into a fair amount of detail about the government's evidence because many of the legal issues relate to the weight of the evidence.  After looking through it, it appears to me that the court deals with a number of discrete issues that are largely unremarkable, and only the first two issues in the opinion appear to be a potential basis for a Supreme Court appeal (assuming either defendant wishes to pursue a further appeal at this point).

The first issue the Second Circuit deals with concerns the application of the Supreme Court's 2004 decision in Crawford v. Washington, 541 U.S. 36 (2004), to a Confrontation Clause claim regarding the admission of statements by Stewart and Bacanovic in their interviews with the SEC and FBI as evidence against the other.  The Court issued Crawford a short time after the jury verdict in the case, so the issue is reviewed only for "plain error," which is a very difficult standard for defendants to meet.  For those whose eyes glaze over at the mere mention of the Confrontation Clause, suffice to say that Crawford does not permit the government to introduce out-of-court statements that are "testimonial," and Stewart and Bacanovic argued that the introduction of their statements violated the Confrontation Clause because they were made to government officials, and hence "testimonial" in nature.  After Crawford, such statements cannot be introduced against another defendant without a chance to cross-examine the declarant (recall that neither Stewart nor Bacanovic testified).  Crawford has caused a great deal of uncertainty about its application by not defining what is a "testimonial" statement, which is one reason why it could be an issue that might draw the Supreme Court's attention.  The Second Circuit dealt with the defense argument in this way:

Here, Defendants do not have the temerity to argue that somehow Crawford precludes the government’s proof of the Defendants’ false portions of their statements because they were provided in a testimonial setting. Crawford expressly confirmed that the categorical exclusion of out-of-court statements that were not subject to contemporaneous cross-examination does not extend to evidence offered for purposes other than to establish the truth of the matter asserted. * * * Defendants object that certain truthful portions of their statements made during the course of the agreed-upon obstruction must be excluded because they are "testimonial." On the facts of this case, where the object of the conspiracy is to obstruct an investigation that is engaged in obtaining those testimonial statements of the conspirators, that objection must fail. * * *

As noted, the admissibility of such totally false statements, made in the course and in furtherance of the conspiracy, suffers no Sixth Amendment bar under Crawford. The truthful portions of statements in furtherance of the conspiracy, albeit spoken in a testimonial setting, are intended to make the false portions believable and the obstruction effective. Thus, the truthful portions are offered, not for the narrow purpose of proving merely the truth of those portions, but for the far more significant purpose of showing each conspirator’s attempt to lend credence to the entire testimonial presentation and thereby obstruct justice. It would be unacceptably ironic to permit the truthfulness of a portion of a testimonial presentation to provide a basis for keeping from a jury a conspirator’s attempt to use that truthful portion to obstruct law enforcement officers in their effort to learn the complete truth. 

In other words, good effort, but it just can't work that way.

The second issue concerns the false testimony of Lawrence Stewart, the Chief Forensic Scientist at the Secret Service laboratory who testified about the ink used in a notation in Bacanovic's broker book about selling Stewart's ImClone shares "@60."  Lawrence Stewart was later prosecuted and acquitted of perjury charges related to his testimony, and Stewart and Bacanovic argued that the government's use of perjured testimony violated their due process rights.  False testimony in the government's case-in-chief is highly suspect, but the jury returned a not guilty verdict on the charge related to the false testimony.  In light of that, the Second Circuit held:

Lawrence’s testimony did not influence the verdict on the counts of conviction. It pertained exclusively to Bacanovic’s "@60" worksheet and was used by the Government to support its position that the $60 stop-loss agreement was an after-the-fact fabrication. The jury acquitted Defendants of all of the counts and specifications relating to the existence of the agreement. Because the Government failed to persuade the jury to convict on the only counts to which Lawrence’s testimony related, that testimony cannot be considered capable of materially affecting the verdict on the counts to which it had no relevance.

The other issues relate to juror misconduct, the failure to give a jury charge for the defendants related to insider trading, evidentiary rulings excluding evidence of the legality of Stewart's sale of ImClone stock, and challenges by Bacanovic to his convictions (e.g., the "two-witness" rule for perjury).  The issues are largely non-controversial, and the court's resolution of them is unlikely to be the basis for a Supreme Court appeal because they involve judgment calls by the district court in areas in which the trial judge has fairly wide discretion. 

While the Stewart case has received an a great deal of media attention, the appellate opinion affirming the convictions shows that the legal issues are rather mundane, and certainly not of great legal importance except perhaps the Crawford and witness perjury questions.  (ph)

                                                                                             

UPDATE: Doug Berman has an interesting post (here) on the Sentencing Law & Policy blog on the pace of appellate review in non-capital cases like this one. (ph)

Martha Stewart says to Government - Take a Hike

Martha Stewart, assuming that she is not busted for yoga again (see post here), will return to the government the jewelry they recently lent her.  This coming Wednesday she is supposed to remove the ankle bracelet that apparently does not match her upcoming outfits.

Martha will now be able to tell the government  - "take a hike."

And what remains to be seen is whether the deterrence generated by this case becomes  -

1. Tell the truth to the government when questioned.

OR

2.Don't talk to the government when they seek information.

(esp)      

Busted for Yoga

CNN reports here that Martha Stewart has agreed to extend her house arrest for an extra three weeks.  The CNN story states that, "[t]he New York Post reported over the weekend that Stewart, ...may have violated the rules of her probation by riding around her suburban New York estate on a Kawasaki Mule four-wheel drive vehicle and dropping in on a nearby yoga class."

Martha must have gotten used to fitness classes while being housed at Camp Cupcake. And after all, prison is a place to reform and educate.  And Martha must have just been following that education that she learned when she was incarcerated.   

We should all feel safer knowing that Martha will be spending an extra three weeks on house arrest.

(esp)

Rapper Compared to Martha Stewart

Yahoo News (AP) reports here that Rapper Lil' Kim received a sentence of 366 days (year and a day) for "lying to a federal grand jury about a 2001 shootout outside a Manhattan radio station."  The district judge sentencing Rapper Lil' Kim was none other than Judge Gerard Lynch, a thoughtful jurist who authored a brilliant piece in the Journal of Criminal Law and Criminology back in 2001 on "Sentencing Eddie." 

It is obvious in this case that he thoughtfully weighed important factors in reaching a decision of what would be the appropriate sentence. One of his considerations in rendering the sentence was a comparison to what Martha Stewart received for her alleged lies to the SEC. Interestingly he said that Rapper Lil' Kim "deserved more time because she had lied about a violent crime, not a white-collar scheme."  (see here) He also provided a second rationale for why this case warranted more time than that given to Martha Stewart. 

The government has continually stressed the need for uniformity in sentencing.  What this case demonstrates is that federal judges are capable of providing that uniformity in a thoughtful way and that restrictive guidelines are not always the answer.

(esp)

What is Work for a White Collar Offender on House Arrest?

CNN reports here that the US Probation Department plans to investigate whether Martha Stewart violated her "house arrest" by attending a Time Magazine dinner in which she was honored.  Several things are noted here:

1. What more can an individual do who is on probation/house arrest then seek approval of places they think they should attend as work related? According to the CNN article, Martha Stewart did that here.

2. Why is someone having the probation department investigate her attendance?  Don't they have better things to do with their time?  Or is someone unhappy that Martha Stewart is getting so much favorable press despite the conviction on the government charges?

3. This is a perfect example of how white collar individuals are different.  What is considered "work-related" to some may not be to others.  In the corporate setting, a person's name may be the trade name that serves as the goodwill for the company.  Does Martha Stewart need to be "seen" and "heard from" to let people know that the company is surviving fine despite the conviction setback? 

4. Would Martha Stewart just be better off staying at home until the house arrest period is over?  Because of the high-profile nature of this case, the fact that some people are unhappy that she continues to get favorable press, maybe she would be better off just staying clear until the time period runs.  It is obvious that people are scrutinizing every move she makes, so maybe this is a good time to lay low. 

(esp)

Addendum: Also see the comments of Doug Berman on his Sentencing Blog here. 

Martha Stewart Loses Round One on Sentence Reduction Issue

We posted here that Martha Stewart's attorneys had filed to reduce her sentence in light of the Booker decision. CNN reports today that the district court will not be reducing Stewart's sentence.  As such she will need to continue the home confinement and continue to wear an ankle bracelet, and we are not talking about the fashionable kind of bracelet but rather a government monitoring device. 

Stewart, like many others who are or were incarcerated, or on home confinement, are having their cases re-examined in light of Booker.  And most, like Martha Stewart, are finding that this new decision is not changing their sentence. This does not preclude these issues being re-examined by the appellate tribunal.  The problem here is that it is unlikely that the appellate court  will rule much in advance of the finishing of her sentence to home confinement.   This case is also another indication that Booker will not have the dramatic effect that some anticipated it would have. The bottom line is that the sentence stays the same.

(esp)

Is Prison Better for Society in the Waksal Case?

Sam Waksal's attorneys are trying to obtain an early release for him so that he can continue cancer research.  (See CNN) Waksal received a sentence of seven years and three months.  So far he has served just under two years.  But the question is - does society need him in prison or is there more of a need for him outside of prison?

Waksal, as you may recall, was CEO of ImClone, a stock that fell sharply after failing to receive initial approval from the FDA. Waksal, unfortunately told some relatives of ImClone's problems resulting in insider trading, a charge to which he plead guilty.  It was Waksal's transactions that served as a catalyst for questioning  Martha Stewart,  that led to her eventual prosecution and conviction.

But should Waksal be in prison or in a place where he can do cancer research?  Perhaps a part of Waksal's problems were his not sticking to the research side of his profession and moving instead into its business side.  But can scientists and physicians really avoid that these days?  Has the health field become a health industry that makes it difficult for the science types to fully understand and operate within?

If Waksal is allowed out to continue research, will people say that white collar offenders are being given a "preference?"  After all, the street crime offender might not have the education or opportunity to secure this same privilege.  But if the street crime individual has cancer, I can't help but wonder if they wouldn't mind having Waksal back in the lab as opposed to in a prison facility.  Where will society benefit more, and should that be a factor in how we handle punishment?

(esp)