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Wednesday, September 3, 2014

Wine Fraudster Gets Ten-Year Sentence

Last month Prof. Douglas Berman reported in his indispensable Sentencing Law and Policy blog about a ten-year prison sentence imposed by SDNY judge Richard Berman upon defendant Rudy Kurniawan, who had sold counterfeit wine to the very rich, including billionaire William Koch (one of the less political Koch brothers), and allegedly profited by over $28 million (see here by scrolling down to August 10, "Can wine fraudster reasonably whine that his sentence was not reduced given wealth of victims?"  See also here).  Some of the ersatz wine sold for as much as $30,000 per bottle.

Having a somewhat perverse sense of humor, I found it somewhat amusing that the 1% paid astronomical sums for and presumably sometimes drank the same wine that the other 99% of us drink.  However, neither the judge nor the prosecutor (nor certainly the defendant and his lawyer) viewed the sentencing proceeding as a laughing matter.

To be sure, a $28 million fraud is a serious matter deserving serious punishment.  Additionally, the judge seemed to view the crime in part as a public safety violation, declaring "The public at large needs to know our food and drinks are safe, -- and not some potentially unsafe homemade witch's brew," even though this was hardly a contaminated baby food case.

At the sentencing hearing, Kurniawan's attorney argued, reasonably I believe, that his client should be treated somewhat less severely since the victims were exceedingly wealthy.  That argument provoked the prosecutor to the Captain Renault-like response that it was "quite shocking" for a lawyer to argue for a different standard for theft from the rich than from the poor.

That retort reminded me of Anatole France's immortal line (although not directly on point), "The law, in its majestic equality, forbids rich and poor alike to sleep under bridges, beg in the streets or steal bread."  In my view, a sentencing judge should certainly consider in sentencing the extent of damage to the victim(s).  A fraudster who steals a million dollars from a billionaire, notwithstanding the Sentencing Guidelines' overemphasis on absolute figures, should (all things being equal) not deserve as harsh a sentence as one who steals the same amount if it were the entire life savings of a senior citizen.

Prosecutors, when fraud victims are pensioners and widows, argue, I believe reasonably, that the judge should consider the degree of suffering of the victims.  Indeed, every seasoned white-collar trial lawyer knows that in a multi-victim fraud case the government is likely to call as "representative" witnesses those most sympathetic victims for whom the monetary loss was most damaging.

I assume that the prosecutor will get over his "shock" when he prosecutes a fraud case where a less than affluent victim's life savings are stolen.  I further assume he will not argue that the judge should impose the same sentence she would if the victim were a billionaire for whom the loss figure might be pocket change.

September 3, 2014 in Defense Counsel, Food and Drink, Fraud, News, Prosecutors, Sentencing | Permalink | Comments (0) | TrackBack (0)

Wednesday, August 27, 2014

Article About Former Penn State President Raises Issues Concerning Independent Investigative Reports and Role of Corporate Counsel

The New York Times Magazine several weeks ago published a lengthy, largely sympathetic article about Graham Spanier, the former Penn State president (Sokolove, "The Shadow of the Valley"), see here, who is awaiting trial on charges of perjury and other crimes in connection with the Pennsylvania grand jury investigation of his alleged complicity or nonfeasance concerning the actions of now-convicted (and affirmed on appeal) former assistant football coach Jerry Sandusky.

The article rather gently criticized the Freeh report, commissioned by the university, as I too did (see here), and asserts that it "probably led to [Spanier's] indictment."  Commissioning an independent investigative report -- generally either by a former prosecutor or judge, or a large law firm -- is the de rigueur response of institutions or corporations accused of wrongdoing.  An independent investigative report, especially by a respected authority, has the weight of apparent impartiality and fairness and thus the appearance of accuracy.  However, the investigative report -- frequently done with no input from the accused or presumed wrongdoers (since, fearful of prosecution, they choose not to be interviewed) -- is often based on an incomplete investigation.  Further, since the investigator is expected to reach conclusions and not leave unanswered questions, but unlike a prosecutor may not be required to have those conclusions tested by an adversary in an open forum, such investigations, like the Freeh investigation, are often based on probability, and sometimes even speculation, more than hard evidence.  Lastly, the "independent" report, like the report concerning Gov. Christopher Christie's alleged involvement in Bridgegate, may be less than independent.

*                    *                    *

The article also discusses an interesting pretrial motion in Spanier's case concerning a question that had puzzled me since the Penn State indictments were announced over two years ago -- what was Penn State's counsel doing in the grand jury?  Sub judice for six months is a motion for dismissal of the indictment and other relief related to the role of the Penn State general counsel ("GC") who appeared in the grand jury with Spanier, and also earlier with two other officials who were indicted, Tim Curley, the former athletic director, and Gary Schultz, a vice president.

According to the submitted motions (see herehere and here ), largely supported by transcripts and affidavits, the GC appeared before the grand jury with Spanier (and also separately with Curley and Schultz) and Spanier referred to her as his counsel (as also did Curley and Schultz).  According to what has been stated, neither she, who had previously told the supervising judge -- in the presence of the prosecutor but not Spanier -- that she represented only Penn State, nor the prosecutor corrected Spanier.  Nor did the judge who advised Spanier of his right to confer with counsel advise Spanier that the GC was actually not representing him or had a potential conflict.

Later, after Spanier's grand jury testimony, according to the defense motion, the GC -- represented by Penn State outside counsel -- was called to testify before the grand jury.  Curley and Schultz -- both of whom had by then been charged -- objected in writing to the GC's revealing what they asserted were her privileged attorney-client communications with them.  Spanier apparently was not notified of the GC's grand jury appearance  and therefore submitted no objection.

Prior to the GC's testimony, Penn State's outside counsel asked the court essentially to rule on those objections and determine whether the GC was deemed to have had an attorney-client relationship with the individuals, as they claimed, before Penn State decided whether to waive its privilege (if any) as to the confidentiality of the conversations.  Upon the prosecutor's representation "that he would put the matter of her representation on hold" and not "address . . . conversations she had with Schultz and Curley about [their] testimony," the judge chose not to rule at that time on the issue of representation, which he noted "perhaps" also concerned Spanier, and allowed her to testify, as limited by the prosecutor's carve-out.

Nonetheless, despite the specific carve-out to conversations with Schultz and Curley analogous to those she had with Spanier and the judge's mention that the issue might also apply to Spanier, the prosecutor questioned the GC about her conversations with Spanier in preparation for his testimony.  Her testimony was reportedly harmful to Spanier (see here).  At no time did the GC raise the issue of whether her communications with Spanier were privileged.

Whether the motion will lead to dismissal, suppression of Spanier's testimony or preclusion or limitation of the GC's testimony, or none of the above, will be determined, presumably soon, by the judge.  Whatever the court's ruling(s), I have little hesitation in saying that is not how things should be done by corporate or institutional counsel.   At the least, even if the GC were, as she no doubt believed, representing the university and not the individuals, in my opinion, the GC (and also the prosecutor and the judge) had an obligation to make clear to Spanier (and Schultz and Curley) that the GC was not their counsel.  Additionally, the GC had, in my view, an obligation to make clear to Spanier that the confidentiality of his communications with her could be waived by the university if it (and not he) later chose to do so.  Further, the GC, once she was called to testify before the grand jury, had in my opinion an obligation to notify Spanier that she might be questioned as to her conversations with him in order to give him the opportunity to argue that they were privileged.  And, lastly, the GC had, I believe, an obligation to ask for a judicial ruling when the prosecutor went beyond at least the spirit of the limit set by the judge and sought from her testimony about her communications with Spanier.

August 27, 2014 in Current Affairs, Defense Counsel, Grand Jury, Investigations, Legal Ethics, News, Perjury, Privileges, Prosecutors, Sports | Permalink | Comments (0) | TrackBack (0)

Wednesday, July 16, 2014

Rengan Rajaratnam Acquittal Good for Criminal Justice System

As my editor, Ellen Podgor, noted last week (see here), the winning streak in insider trading cases of the U.S. Attorney's Office for the Southern District of New York ended with the jury's acquittal of Rengan Rajaratnam, the younger brother of Raj Rajaratnam, who was convicted of insider trading in 2011 and sentenced to eleven years in prison.

The U.S. Attorney has done an excellent job in prosecuting insider trading, securing convictions by plea or trial of 81 of the 82 defendants whose cases have been concluded in the district court.  The office has appropriately targeted primarily professional financial people who seek or provide insider information rather than those incidental offenders who by chance have received or provided insider tips and taken advantage of their knowledge.  A few of these trial convictions, however, appear to be in jeopardy.  At oral argument in a recent case the Second Circuit Court of Appeals seemed sympathetic to the contention that a trader may not be found guilty unless he knew that the original information came from a person who had received a benefit, and not only had violated a fiduciary duty of secrecy.  Judge Naomi Reice Buchwald, who presided over the Rajaratnam case, agreed with that contention and thereupon dismissed two of the three counts.

Whether the prospective Second Circuit ruling, if it comes, will make good public policy is another matter.  Insider trading (which fifteen years ago some argued should not be a crime) is, or at least was, endemic to the industry.  Presumably, the U. S. Attorney's successful prosecutions have had a positive step in putting the fear of prosecution in traders' minds.  Such deterrent to a particularly amoral community seems necessary:  a recent study demonstrated that twenty-four percent of the traders interviewed admitted they would engage in insider trading to make $10 million if they were assured they would not be caught (the actual percentage who would, I suspect, is much higher).  See here.

The latest Rajaratnam case, indicted on the day before the statute of limitations expired, was apparently not considered a strong case by some prosecutors in the U.S. Attorney's Office.  See here and here.  Indeed, jurors, who deliberated four hours, described the evidence as "no evidence, period" and asked "Where's the evidence?"  That office nonetheless did not take this loss (and generally does not take other losses) well.  It was less than gracious in losing, making a backhanded slap at Judge Buchwald, a respected generally moderate senior  judge.  A statement by the U.S. Attorney Preet Bharara noted, "While we are disappointed with the verdict on the sole count that the jury was to consider, we respect the jury trial system . . . ."  (Italics supplied.)

Southern District judges, generally out of deference to and respect for the U.S. Attorney's Office, whether appropriate or undue, rarely dismiss entire prosecutions or even counts brought by that office, even in cases where the generally pro-prosecution Second Circuit subsequently found no crimes.  See here.  It is refreshing to see a federal judge appropriately do her duty and not hesitate to dismiss legally or factually insufficient prosecutions.

Such judicial actions, when appropriate, are particularly necessary in today's federal system where the bar for indictment is dropping lower and lower.  The "trial penalty" of a harsher sentence for those who lose at trial, the considerable benefits given to cooperating defendants from prosecutors and judges, and the diminution of aggressiveness from a white-collar bar composed heavily of big firm former federal prosecutors have all contributed to fewer defense challenges at trial and lessened the prosecutors' fear of losing, a considerable factor in the prosecutorial decision-making process.  Acquittals (even of those who are guilty) are necessary for a balanced system of justice.

Lastly, it is nice to see a major victory by a comparatively young (43) defense lawyer, Daniel Gitner of Lankler, Siffert & Wohl, an excellent small firm (and a neighbor), in a profession still dominated by men in their sixties or seventies.

July 16, 2014 in Current Affairs, Defense Counsel, Fraud, Insider Trading, Judicial Opinions, News, Prosecutions, Prosecutors, Securities, Statutes, Verdict | Permalink | Comments (0) | TrackBack (0)

Wednesday, July 2, 2014

BNP Paribas Conviction Commendable, But Length of Investigation and Failure to Prosecute Individuals Raise Questions

Both the Department of Justice (DOJ) and the District Attorney of New York County (DANY) deserve commendation for the criminal conviction of France's largest bank, BNP Paribas, and the securing of penalties of approximately $9 billion (including $2.25 billion to New York State's bank regulatory agency, the Department of Financial Services), and, for the first time, a seemingly not insignificant collateral sanction imposed by a regulator (although how significant remains to be seen).  BNP for ten years falsified transactions in order to be able to use the American banking system to do business with Sudan, Iran and Cuba, countries deemed rogue states by the U.S. government (but not necessarily by France).  See here.  While I accept that those crimes were serious crimes, I would much have preferred a prosecution-to-conviction of an American bank whose wrongs made it and its bankers much richer while making millions of other Americans much poorer.

The investigation, according to a story in the New York Times (see here) began in 2006 under the venerable New York County District Attorney Robert Morgenthau, whose expansive view of jurisdiction included the planet of Saturn (one of his bureaus was called "DANY Overseas"), when an Israeli-American DANY financial analyst developed a lead from reviewing the court papers of a civil suit against Iran brought by a grieving lawyer father whose daughter was killed in a terrorist suicide bombing in Gaza in 1995.  See here.  The investigation was continued by District Attorney Cyrus Vance when he took office in 2009.

No individuals have been indicted (although 13 have been required to leave their jobs), perhaps because the statute of limitations had run during the lengthy investigation.  One wonders why such an important investigation took seven to eight years and has resulted (at least so far) in no indictment of individuals.  Perhaps it was due to the difficulty to forge cooperation between federal and state law enforcement agencies.  New York's federal and state prosecutors have not always played well together.

In any case, the appearance of the District Attorney of New York as a player in the prosecution of big banks is a welcome step.  New York is, as Mr. Vance said, "the financial capital of the world," and therefore probably the financial crime capital of the world.  Perhaps strong prosecutorial action by a local prosecutor -- in a sense a competitor with DOJ for high-profile cases -- will goad DOJ into stronger actions against financial institutions.  Although the U.S. Attorney's Office under Preet Bharara has done a creditable job in fighting insider trading, it -- and DOJ -- had not until six weeks ago (see here) secured a criminal conviction against a major financial institution.

July 2, 2014 in International, News, Prosecutions, Prosecutors | Permalink | Comments (0) | TrackBack (0)

Friday, June 27, 2014

The Importance of the Fourth Amendment

This past Wednesday's Supreme Court decision in Riley v. California stressed the importance of law enforcement needing to obtain a warrant if they sought to search digital information contained on a cell phone that had been seized from the individual.  From this decision we can see that the Fourth Amendment is alive and well in the Supreme Court.

But is that the case in the Manhattan District Attorney's Office? Larry Goldman notes here on the White Collar Crime Prof Blog that the District Attorney's Office recent prosecution in a computer related case had 4th Amendment problems.  And this morning's New York Times article by Vindu Goel and James McKinley, Jr., Facebook Bid to Shield Data From the Law Fails, So Far shows how the Manhattan district attorney's office has been obtaining Facebook information using demands for documents from Facebook without notification to the individuals who posted the information on Facebook, and precluding Facebook from notifying them. Admittedly in this instance the Manhattan DAs Office did obtain a warrant, but Facebook and individuals who had items being obtained from Facebook were precluded from fighting the warrant.  According to this article, Facebook has continued to fight these warrants and hopefully a court will see the importance of having oversight when it comes to overbroad computer related searches.

One of the possible ramifications of what the Manhattan D.A. is doing it that when cases eventually come to court, the overbreadth of these searches will be raised. And hopefully attorneys handling these cases will have been alerted by this posting, the New York Times article, and other media sources who may be reporting on these events.  But it is hard to believe that all the information received by the Manhattan DA will be used for a prosecution, and many of these individuals will never know that their privacy had been compromised. As we move further into a digitial age, the principles of the Fourth Amendment need to be maintained. Judges reviewing these search warrants need to provide clearer oversight when granting a warrant, especially when terrorism is not the focus of the search.

June 27, 2014 in Investigations, Prosecutors, Searches | Permalink | Comments (0) | TrackBack (0)

Tuesday, June 24, 2014

Evidence Suppressed in New York State Prosecution of Aleynikov

One of the more fascinating cases around is the case of former Goldman Sachs programmer Sergey Aleynikov.  Aleynikov was convicted in the Southern District of New York for stealing secret high-frequency trading computer code from Goldman Sachs and sentenced to eight years in prison.  His conviction was reversed by the Second Circuit on the grounds that his actions were not covered by the federal statutes under which he was charged.  Aleynikov had already served a year in prison.

Then, Manhattan District Attorney Cyrus Vance, apparently provided the testimonial and tangible evidence used in the prosecution of Aleynikov by the U.S. Attorney, decided to prosecute him in state court under state statutes, a decision I criticized because it violated at least the spirit of double jeopardy protection (see here).  Last week, a New York State judge threw out much of the evidence underlying the state prosecution on the ground that Aleynikov's arrest and related searches by federal agents were not supported by probable cause that he committed the underlying federal crimes, even though the agents acted in good faith.  See here.  New York has rejected on state constitutional grounds the "good faith exception" to unlawful searches applicable in federal courts.  Compare People v. Bigelow, 66 N.Y.2d 417 (1985) with United States v. Leon, 468 U.S. 897 (1984).  Mr. Vance's choice now is either to concede that the judge's suppression has made his case untriable and make an interlocutory appeal or go forward to trial without that evidence (or, of course, move to dismiss the case).

Ironically, Goldman Sachs, the purported victim of Aleynikov's alleged criminality, is laying out millions of dollars to afford Mr. Aleynikov the energetic and aggressive defense his lawyer, Kevin Marino, is providing.  A New Jersey federal judge last October ordered Goldman to advance Mr. Aleynikov's legal fees based on a corporate bylaw that required it to advance legal fees for officers charged in civil and criminal proceedings.  Aleynikov v. Goldman Sachs (Civ. No. 12-5994, DNJ, October 22, 2013).

June 24, 2014 in Attorney Fees, Current Affairs, Judicial Opinions, News, Prosecutions, Prosecutors, Statutes | Permalink | Comments (0) | TrackBack (0)

Thursday, June 19, 2014

DOJ Narrows Basis for Section 1001 Prosecutions

According to a May 12, 2014 article in the National Law Journal (Tony Mauro, "DOJ's Quiet Concession:  U.S. gives up a widely decried charging theory."), the Department of Justice has quietly narrowed the scope of 18 U.S.C. 1001, the statute that makes lying to an FBI or other government agent a five-year felony.  The statute -- perhaps most notably used to send Martha Stewart to jail when the government couldn't make out an insider trading case against her -- makes it a crime to "knowingly and willfully" make materially false statements in any matter under federal jurisdiction, including lying to an FBI agent.  The government now has conceded that, in order to prove that a defendant accused of a Section 1001 violation acted "willfully," it must show that she knew that her action making or providing a false statement was unlawful.

The change in government attitude was mentioned in low-profile submissions to the Supreme Court containing confessions of error.  The Supreme Court has already returned at least two cases to lower courts for further consideration in light of the concessions.

The most questionable use of the statute, in my opinion, has occurred when agents without prior notice confronted an individual about a purported crime she committed and elicited a knee-jerk exculpatory false denial (although such denials are now to my knowledge infrequently prosecuted).  Prosecutors and agents may now have to forego prosecutions where targets or witnesses lie to them (in the field or their offices) or alternatively give those targets and witnesses a warning that a false response to the government questions is unlawful., which, of course, may discourage them from talking.

(Hat Tip to Monroe Freedman and Steve Lacheen.)

June 19, 2014 in Investigations, Prosecutors, Statutes | Permalink | Comments (0) | TrackBack (0)

Tuesday, June 3, 2014

Tilting Toward a Travesty in Texas: The Wallace Hall Referral

If it was not such a serious abuse of power, it would almost be funny. It certainly has its comic elements. Wallace Hall is a Member of the University of Texas System Board of Regents, appointed to that position in 2011 by Governor Rick Perry. The Board of Regents is the governing body for the entire University of Texas System. Hall started snooping around and uncovered several things that troubled him, including:

1. An allegedly secret forgivable loan program for favored law professors at the University of Texas School of Law.

2. Allegedly incorrect accounting treatment of certain in-kind donations to the University's fund-raising campaign. The University had to restate its fund-raising figures after the Council for the Advancement and Support of Education rejected the school's accounting theory.

3. Admission of students to the University of Texas School of Law who had LSAT scores below the average for entering U.T. Freshlaws. Some of the admitted students were related or connected to powerful state legislators with key roles in funding the university and law school.

That last revelation was apparently too much for the legislature (or "the leg" as we called it in my day) and impeachment hearings were commenced by the House Select Committee on Transparency in State Agency Operations ("Transparency Committee").

As I said, the controversy has had its comic moments. The Transparency Committee voted to recommend impeachment of Hall before deigning to draft any Articles of Impeachment. And Transparency Committee Co-Chair Dan Flynn wrote a public letter stating that: 1) there were insufficient grounds to impeach Hall; 2) Hall should resign anyway; and 3) Hall should be impeached if he did not resign. When Hall refused to resign, Flynn voted to impeach him. (The Texas Tribune has a good story here on Flynn's remarkable letter and the response he received from Representative Eric Johnson. Both letters are attached to the story in PDF format.)

The fight between Hall and the legislature is apparently part of a larger years-long battle between th Board of Regents and UT President Bill Powers. The Regents have Governor Perry and company on their side and Powers has legislative allies on his. I'm not concerned about that. I have reviewed Hall's purportedly impeachable offenses and find the allegations against him unpersuasive, but I would not be writing about these things on a white collar blog if impeachment hearings were the only thing going on. Unfortunately, there's more.

The Transparency Committee's Co-Chairs also referred Hall to the Travis County District Attorney's Public Integrity Unit, which has opened an investigation into possible criminal wrongdoing by Hall. This is the same office that brought dubious charges against former U.S. House Speaker Tom DeLay and has a long history of questionable public corruption prosecutions. The Public Integrity Unit is an odd creature of Texas law, housed in the Travis County DA's Office with statewide jurisdiction to investigate and prosecute state officials. The old Travis County DA was Ronnie Earle. The current Travis County DA is Rosemary Lehmberg, an Earle disciple, who refused to resign from office after pleading guilty to Driving While Intoxicated.

One of the House Transparency Committee members made the mistake of asking the U.T. System to review whether Hall had violated state or federal law. The U.T. System hired outside counsel Philip Hilder, a nationally known and well-regarded white-collar heavyweight, to research the issue and write a report. The Hilder Report found "no credible evidence" that Hall violated the Texas Government Code or "any other state or federal law."

In a normal world Hall would be breathing easier. But with the Public Integrity Unit lurking in the background, anything is possible.

To me Hall looks like a classic whistle-blower, albeit a powerful one. He may not have the purest of motives. I really don't know and certainly don't care. But he has uncovered, or helped to uncover, potentially serious problems in the U.T. System. His reward? A criminal referral by the powerful interests whom he has offended. And that is an outrage.

June 3, 2014 in News, Prosecutors | Permalink | Comments (0) | TrackBack (0)

Monday, June 2, 2014

Second Circuit Reverses Convictions Due to Prosecutorial Misconduct and Exclusion of Good-Faith Evidence

The Second Circuit Court of Appeals, which issues complete reversals in only about five percent of the criminal cases it hears, last week in an opinion by Judge Jed S. Rakoff (sitting by designation) reversed the trial conviction of two individuals and a corporation for environmental crimes involving asbestos removal, and ordered a new trial.  United States v. Certified Environmental Services, Inc., et al. (see here).  The reversal was based on the denial of a fair trial due cumulatively to the exclusion of evidence of good faith to demonstrate the defendants' lack of intent (an issue not discussed here) and prosecutorial misconduct in improper "bolstering" during the opening and closing arguments.  The Court denied that part of the defendants' appeal based on Brady v. Maryland.

The decision does not concern any novel legal grounds.  Perhaps most significant in the white-collar area is its detailed discussion of the proper and improper use by prosecutors of the cooperation agreements their witnesses commonly enter into with the government.  Since many, probably most, white-collar cases involve cooperating government witnesses, prosecutorial introduction of and comments on cooperation agreements frequently occur in white-collar trials.  Here, the prosecutor improperly bolstered the witnesses' testimony on numerous occasions, both in the opening and closing arguments, by referring directly and indirectly to the self-serving language that prosecutors routinely place in the cooperation agreements they draft to the effect that the witnesses are obligated to tell the truth.  Prosecutors and defense attorneys would do well to review the opinion to determine when and how the government may disclose and use the truth-telling requirement language of cooperation agreements during testimony and in argument.

The opinion also excuses, but does not condone, the improper failure of the government to turn over handwritten notes by a testifying agent which were discovered in the later examination of another agent and belatedly revealed to the defense.  The notes should have been revealed earlier, says the Court, not only since they included evidence favorable to the defense, but also pursuant to Fed. R. Crim. Pro. 16(a)(1)(B)(ii), a discovery rule, and 18 U.S.C. 3500, the Jencks Act.  However, since the notes were, however belatedly, turned over and the defense had an opportunity to review them, examine the later-testifying agent about their content, and recall the earlier witness if it chose, and since their timely disclosure would not have changed the verdict, in any case there was no Brady violation.  The opinion thus demonstrates that late provision of Brady (or Rule 16 or Jencks) by the government during trial will virtually never be grounds for reversal, at least not in the Second Circuit.

June 2, 2014 in Environment, Judicial Opinions, Legal Ethics, Prosecutors | Permalink | Comments (0) | TrackBack (0)

Thursday, May 29, 2014

Credit Suisse Conviction Does Not Demonstrate Substantial Change In Department Of Justice Enforcement

The Department of Justice (DOJ) and Attorney General Eric Holder were strutting last week over the criminal conviction by plea of guilty of Credit Suisse, a major financial institution.  "This case shows that no financial institution, no matter its size or global reach, is above the law," declared the Attorney General.  Recent prosecutions of major financial institutions had resulted in lesser results,  "deferred prosecutions," a somewhat deceptive term for "delayed dismissals," or a guilty plea by a minor affiliate.

The Credit Suisse guilty plea does not represent a sea change in the attitude of DOJ toward major financial institutions; rather, it appears to be a small ratcheting-up of the baseline penalty for serious criminal financial acts by such institutions.  Credit Suisse, despite paying a hefty $2.6 billion fine, will not suffer the severe collateral consequences that ordinary individual defendants do upon a criminal conviction.  (See here, NACDL's report "Collateral Damage:  America's Failure to Forgive or Forget in the War on Crime -- A Roadmap to Restore Rights and Status After Arrest or Conviction," released today, Thursday, May 29, 2014.)  It will still be able to act as an investment advisor, due to waivers agreed to by federal and New York State governmental agencies.  Thus, its conviction, according to its chief executive Brady Dougan, will not have "any material impact on our operational or business capabilities."  In other words, for Credit Suisse, it will be business as usual.

I hold no sympathy for Credit Suisse.  Its crimes, continuous and notorious, have enabled American citizens and citizens of other countries to launder and evade tax payments on billions of dollars.  In effect, Credit Suisse (not alone among Swiss banks) (see here) was a criminal enterprise, for many years making huge profits from extraordinary fees for its knowing and willful provision of a presumably safe haven for untaxed income, ill-gotten or otherwise.  Mr. Dougan had stated to a Senate hearing in February that the tax evasion scheme was the work of a small group of private bankers that was hidden from senior management.  That hard-to-believe claim was challenged in a statement by Schweitzerisher Bankpersonalverband, the organization representing the bank's employees:  "It was common knowledge that tax evasion was the strategy, a business model pursued by many banks for a long time."  See here

To be sure, Credit Suisse's crimes did not cause the vast hardship to tens of millions of Americans that the wrongs -- criminal or not -- of other major financial institutions did in the last several years.  And, further, its acts -- while subject to the long-arm jurisdiction of American courts -- were apparently legal under Swiss law, and seemingly condoned by the Swiss government.

Some commentators have suggested that there is considerable unfairness in prosecuting corporations for acts of low- or mid-level employees without knowledge of corporate leaders (see here), a position with which I generally agree.  The demi-prosecution of Credit Suisse, however, does not appear to fit within that category, despite Mr. Dougan's claim.  I see no unfairness in the government's requiring Credit Suisse to plead guilty.

I do, however, wonder about the effectiveness of the insistence on a guilty plea if the collateral consequences are waived.  The conviction of a major financial institution with a considerable financial penalty but a waiver of regulatory bars is to me little different from a civil finding of wrongdoing with such a penalty.  Other than its current status as a convicted felon, Credit Suisse today is essentially in the same position it was two weeks ago.

Given the legitimate (but probably exaggerated) fear that a felony conviction of a major financial institution without regulatory waivers will have on its existence and thus on the economy and societal well-being, it may well be that guilty pleas (and trial convictions too) of such corporations should be accompanied by limited collateral consequences.  Such prosecutions, however, will then serve little more than a symbolic purpose (which I accept as a legitimate purpose).  Overall, DOJ's prosecution to conviction of Credit Suisse is a positive step, albeit a small one.

The resolution here suggests again that the criminal process is inadequate to prosecute large financial institutions.  Society looks to the criminal law to solve far more problems than the criminal law is capable of solving.  Meaningful reform of a flawed financial system will not come from criminal prosecutions of corporations, but, if at all, from strong, substantial regulatory rulemaking and non-criminal legislation.

May 29, 2014 in Current Affairs, Deferred Prosecution Agreements, International, Money Laundering, News, Prosecutions, Prosecutors, Tax | Permalink | Comments (0) | TrackBack (0)

Thursday, May 22, 2014

DOJ Announces Policy Favoring Electronic Recording of Statements

The Department of Justice (DOJ) on May 12, 2014 issued a memorandum creating "a presumption" that the Federal Bureau of Investigation (FBI), Drug Enforcement Agency (DEA), Bureau of Alcohol, Firearms, Tobacco and Explosives (AFT) and United States Marshals Service (USMS) electronically record, if possible videotape, post-arrest statements made by individuals in their custody in a place of detention, essentially FBI and local police offices and detention facilities, where the facility has suitable equipment.  Additionally, agents and prosecutors are encouraged to consider electronic recording in circumstances where the presumption does not apply.  This policy is not intended to create any enforceable rights for arrestees.

This is a significant change and DOJ should be commended.  Historically, the FBI, in particular, has resisted recording conversations and in fact has had a formal policy prohibiting it without special permission from a supervisor.  FBI memoranda stated that recording "may interfere with and undermine . . . successful rapport building techniques" and that "perfectly lawful and acceptable interviewing techniques do not always come across in recorded fashion to lay persons as proper means of obtaining information from defendants."  A transcript of the testimony of an FBI agent in a 2013 trial reads:

                           Q:  Does the FBI have a policy of recording interviews?

                           A:  We do not record interviews.

Civil liberties and defense lawyer groups have been seeking such a policy for well over a decade.  Indeed, I wrote an NACDL president's column on the subject in December 2002.  The cynical have believed that the FBI refusal to record investigations was in order to allow agents to use tough, deceptive and coercive methods to induce confessions and then testify to a sugar-coated sanitized version of the interrogation.  The more cynical have believed it gave FBI agents a license to lie with impunity about what the defendants said or did not say.

I believe recording interrogation is a win-win situation.  Jurors will be able to see and hear the circumstances surrounding the questioning and the specific words and tones used by the agents and the defendant.  Agents will be discouraged from shading testimony as to their methods and the defendant's statements.  Defendants and defense lawyers will be unable to argue effectively that the defendants did not make the statement they actually did or claim that they were beaten or coerced when they were not.

To be sure, the memorandum does not require, as some civil liberties and defense lawyer groups have advocated, that the recording begin at arrest.  Thus, there still remains the possibility that agents will coerce statements on the way to the place of detention and lie about it or falsely state that the defendant confessed, or that defendants who did make admissions upon arrest will deny it before the jury.

Nonetheless, this is an important positive step toward presenting the triers of fact with accurate best-evidence versions of events so that they will reach a more just determination.  It will reduce the number of unjust convictions and perhaps unjust acquittals also.  Every law enforcement agency -- federal, state and local -- should adopt such a policy, absent special reasons.  The federal government should require it as a condition of a state police agency receiving federal support.

(I just received notice that Martin Tankleff, who was released from prison in 2007 after serving 17 years upon a wrongful conviction for killing his parents based on a false confession when he was 17 years old, will graduate from Touro Law School this Sunday.  Had Marty's confession been recorded, Marty would very likely not have been convicted.  Marty has vowed to dedicate himself to becoming an advocate for the wrongfully convicted.  Congratulations, Marty; consider this policy a graduation present from DOJ.)

May 22, 2014 in Current Affairs, Prosecutors | Permalink | Comments (0) | TrackBack (0)

Wednesday, May 21, 2014

New York Legislators Propose Commission on Prosecutorial Misconduct

 Two New York State legislators have proposed the creation of a state commission on prosecutorial misconduct to review and investigate complaints of prosecutorial misconduct and to discipline prosecutors who have been found to have acted improperly.  See here.

The proposed commission would, it is said, be the first in the nation of its kind.  It will be modeled upon New York's Commission on Judicial Conduct,  which investigates allegations of misconduct by judges and, if misconduct is found, may discipline a judge by public admonition, censure or removal from the bench.

Virtually every state (but not the federal government) has a commission on judicial conduct  and these commissions,  it is generally agreed, have had a positive effect in limiting judicial misconduct, removing unfit judges who had committed serious misconduct and increasing public confidence in and awareness of the workings of the court system.  (I note that I am a past chair of New York's Commission.)  There is, I believe, no good reason that there should not be an analogous agency to review instances of alleged prosecutorial misconduct, sanction offending prosecutors, and remove the most serious offenders from their positions.  Indeed, there are stronger reasons for a commission concerning prosecutorial misconduct than for one concerning judicial misconduct.  Much of the most serious prosecutorial misconduct, such as concealing exculpatory material and suborning perjury, occurs in the investigative and preparatory stages of a case and is hidden from the view of judges, defense attorneys, and the public and thus not detectable and reviewable by a court.  Almost all judicial misconduct, on the other hand, occurs on the bench in public view, is recorded and observed by lawyers and the public, and is readily reviewable by appellate courts.

With rare exception, see here, prosecutorial misconduct has gone unpunished by prosecutorial offices, bar disciplinary committees and judicial authorities.  Although grievance committees have authority over the improprieties of prosecutors as much as other lawyers, they have historically shown little interest in sanctioning prosecutorial misconduct.  See, e.g., Gershman, Reflections on Brady v. Maryland, 47 S. Tex. L. Rev. 685 (2006); Yaroshefsky, Wrongful Convictions:  It is Time to Take Prosecution Discipline Seriously, 8 D.C. L. Rev. 275 (2004).  Similarly, judges, even when they reverse a conviction due to egregious prosecutorial misconduct, almost always conceal the prosecutor's identity and rarely refer the prosecutor for professional discipline.  And, prosecutorial offices themselves often defend on appeal and thus ratify even serious misconduct of line prosecutors, and fail to sanction even those prosecutors whose serious misconduct they concede.  See, Rudin, The Supreme Court Assumes Errant Prosecutors Will Be Disciplined By Their Offices or the Bar:  Three Case Studies That Prove That Assumption Wrong, 80 Fordham L. Rev. 537 (2011).

Further, potentially criminal misconduct by judges may be investigated and prosecuted by the District Attorney, an agency wholly independent from the judiciary.  However, except in the extremely rare instances where a special prosecutor is appointed, potentially criminal misconduct by prosecutors generally may only be investigated or prosecuted by the very same prosecutorial office that committed that misconduct, which in almost all instances will be hesitant to prosecute one of its own and embarrass the office.

Additionally, there is a stark imbalance in the adversarial criminal justice system where one adversary -- the prosecutor -- may criminally charge the other adversary -- the defense attorney -- when he  tampered with evidence or suborned perjury, but where the defense attorney who believes the prosecutor committed such criminal acts may only make a shout in the wilderness by a futile complaint to an overprotective disciplinary agency with no criminal prosecution power.  A commission on prosecutorial conduct will not wholly right this imbalance, but will tilt it in the right direction.

May 21, 2014 in Legal Ethics, News, Prosecutors | Permalink | Comments (0) | TrackBack (0)

Tuesday, April 22, 2014

A Fishy SOX Case

18 U.S.C. § 1519, known as the “anti-shredding provision” of the Sarbanes-Oxley Act of 2002, makes it a crime for anyone who “knowingly alters, destroys, mutilates, conceals, covers up, falsifies, or makes a false entry in any record, document, or tangible object” with the intent to impede or obstruct an investigation (emphasis added).  Congress passed this statute in the aftermath of the Enron debacle.  But did they ever envision that a prosecutor would use this statute against a commercial fisherman for allegedly having undersized grouper fish that were thrown overboard following the issuing of a civil fishing citation from the Florida Fish and Wildlife Commission?

The government’s extension of this SOX statute is the subject of a Petition for Certiorari (Download Yates Pcert_Filed) before the Supreme Court. A key issue is whether “fish” are tangible objects for the purposes of this statute. And even more bizarre is that the fisherman allegedly started with 72 undersized red grouper and when he came to shore there were purportedly only 69 fish.  Could this be a federal prosecution under SOX for 3 missing fish? And is this all happening during a time of sequestration with tight funding?

Perhaps the Supreme Court will agree that in the ocean of crime, this one is a bit fishy.  Following the filing of the Petition for Certiorari and a distribution for conference, the Court requested a response from the government. Amici filed a couple of briefs and it was again distributed for conference. It is now set for distribution a third time, April 25, 2014 (see here). It's a wonderful case for the Court to examine principles of statutory interpretation and how far afield the government can go in using a statute written and intended to stop one form of criminal conduct but being used in an unintended manner. This case also provides the Court the chance to step to the plate and express a view on overcriminalization. (see NACDL amicus brief of William Shepherd here - Download NACDLYATESAMICUS).  There are many other issues in the "fish case" that may also interest the Court, such as how a civil fishing citation became a criminal case with an indictment issued 985 days after the citation. (see Petitioner's Reply Brief - Download Yates Reply to Brief in Opposition). But the real question is whether the Court will order fish this coming Friday at their conference.

April 22, 2014 in Enron, Obstruction, Prosecutions, Prosecutors | Permalink | Comments (0) | TrackBack (0)

Tuesday, April 8, 2014

NYU Conference - Deterring Corporate Crime: Effective Principles for Corporate Enforcement

I had the privilege of being at an NYU Conference titled, Deterring Corporate Crime: Effective Principles for Corporate Enforcement.  Hats off to Professor Jennifer Arlen for bringing together folks with some different perspectives on corporate crime. Individuals presented data, and I heard different positions presented (corporate, government, industry, judicial) on a host of topics.  The individual constituent (CEO, CFO, employee) within the corporation was not a key focus, unless it was a discussion of their wrongdoing or prosecution.

From this conversation it was clear that deterring corporate wrongdoing is not easy.  Penalties have increased, yet we continute to see corporate criminality.  So the question is, how do we encourage corporations not to engage in corporate wrongdoing?

This is my top ten list of what I think exists and what needs to be changed -

1. Most companies try to abide by the law.

2.  Complying with the law is not always easy for corporations. In some instances the law and regulations are unclear, making it difficult to discern what is legal.  The array of different laws and regulations (e.g., state, federal, and international), as well as their complexity  makes corporate compliance problematic.

3.  Companies resort to internal investigations to get information of wrongdoing within the company. In some instances companies will threaten individuals with the possible loss of their jobs if they fail to cooperate with a corporate internal investigation. Individuals who provide information to their employers sometimes do not realize that the company may provide that information to the government and the information may then be used against them.

4.  If a company is criminally charged, it typically is financially beneficial for the company to fold, work with the government, and provide information to the government of alleged individual wrongdoing within the company.

5. DOJ's incentives to a corporation that causes it to fold and provide evidence to the government against alleged individual wrongdoers may be causing more harm because it pits corporations against its individual constituents.

6. We need a stronger regulatory system.  Our system is broken and one just can't blame agencies like the SEC.

7. If we expect agencies like the SEC to work, Congress needs to provide them with more money to engage in real regulatory enforcement.

8. There are many good folks in DOJ, including AG Holder, who look longterm at stopping corporate wrongdoing. But there are also individuals in DOJ who fail to see the ramifications of what may seem like short-term benefits.

9. Corporate crime can be reduced if everyone - the corporation, government, and also the individual constituents would work together.

10. It would be beneficial in reducing corporate crime if there was more transparency.  We all need to hear what works - when there are declinations of prosecutions, or when an agency decides not to fine a company. We can learn from the good things companies do (anonymously) and when DOJ declines to proceed against the company.

April 8, 2014 in Conferences, FCPA, Prosecutions, Prosecutors, Qui Tam, SEC, Settlement | Permalink | Comments (0) | TrackBack (0)

Wednesday, March 5, 2014

Kaley Opinion, Based on Legal Fiction, is Harmful to Defendants and Lawyers

In Kaley v. United States (12-464, decided February 25, 2014) (see here), the Supreme Court by a 6-3 vote extended the rulings of United States v. Monsanto, 491 U.S. 600 (1989) and Caplin & Drysdale v. United States, 491 U.S. 617 (1989) by determining that a grand jury finding of probable cause that a federal defendant committed a crime was conclusive in any effort by that defendant to secure funds out of temporarily restrained assets to hire a private attorney of his choice.  A defendant seeking release of funds may still be able to challenge the grand jury determination that there was probable cause that the assets seized resulted from or were involved in the purported criminal activity, but not that the activity was criminal.

The opinion, written by Justice Kagan, exalts the inviolability of the grand jury and demonstrates a naive misunderstanding of (or lack of concern about) the reality of its role in the determination of probable cause, ignores the presumption of innocence, and denigrates the importance of independent defense counsel in the criminal justice system.  It tilts the playing field of justice in the government's favor by giving the government, in some cases, the option to deprive the defendant of the counsel he has selected or intends to select.

Essentially, the premise of the opinion is that since grand juries historically have the unreviewable power to determine probable cause to indict and require a person to stand trial and thus derivatively to deprive him of pre-trial liberty, they similarly have the power derivatively to deprive him of his right to counsel of choice.  Justice Kagan, worrying that a different decision would be incongruous and unsymmetrical, seems more concerned with the effect of the decision on the pillars of architecture of the criminal justice system than the pillars of justice and fairness.

The underlying (but unspoken) foundation of the opinion is essentially fraudulent:  the legal fiction that federal grand juries actually make independent, considered determinations of probable cause necessary to indict.  Every experienced federal prosecutor, defense attorney, or judge knows otherwise; grand juries, especially federal ones, are virtually invariably merely "rubber stamps" for the prosecution.  The government -- not the grand juries -- makes the actual decision who and for what to indict.

Former New York Court of Appeals Chief Judge Sol Wachtler famously said, "A grand jury would indict a ham sandwich" -- referring to a grand jury in a state where prosecutors are constrained because they know that judges are mandated by law upon defense motion to review the grand jury minutes to determine whether the evidence presented was legally sufficient and to dismiss the indictment if not, and where hearsay evidence is not admissible.  In contrast, in federal courts, as stated in Kaley (quoting United States v. Williams, 504 U.S. 36, 54 (1992)), "a challenge to the reliability or competence of the evidence supporting a grand jury's finding of probable cause will not be heard" (and an indictment may be, and sometimes is, based wholly on hearsay, often from a single government agent).  A federal prosecutor thus has no such constraint as his New York State counterpart; he knows that no matter how flimsy or inadmissible the evidentiary basis for an indictment may be, that basis is unchallengeable.  Thus, if a New York State grand jury would indict a ham sandwich, a federal grand jury would indict a slice of bread.

 *               *               *

Chief Justice Roberts, to my knowledge the only current justice who had a significant career representing paying clients and thus may have greater empathy for the private bar than most of  his colleagues, wrote a powerful dissent noting the basic lack of fairness allowing the prosecution essentially to disqualify an accused's counsel of choice without even a hearing.  He wrote:

[F]ew things could do more to undermine the criminal justice system's integrity than to allow the Government to initiate a prosecution and, then, at its option, disarm its presumptively innocent opponent by depriving him of his counsel of choice -- without even an opportunity to be heard. . . .  [I]t is fundamentally at odds with our constitutional tradition and basic notices of fair play. . . .

The issues presented here implicate some of the most fundamental precepts underlying the American criminal justice system.  A person accused by the United States of committing a crime is presumed innocent until proven guilty beyond a reasonable doubt.  But he faces a foe of powerful might and vast resources, intent on seeing him behind bars.  That individual has the right to choose the advocate he believes will most ably defend his liberty at trial. . . .

In my view, the Court's opinion pays insufficient respect to the importance of an independent bar as a check on prosecutorial abuse and government overreaching.  Granting the Government the power to take away a defendant's chosen advocate strikes at the heart of that significant role.

 *               *               *

Following Monsanto, which explicitly left open the question as to whether a hearing on the provenance of seized funds was required, the federal courts divided on the issue.  Some prosecutors had chosen to allow defendants to pay from restrained funds reasonable and legitimate fees to counsel of choice.  Most had done so in order to avoid giving the defendant a preview of their case; others had done so out of respect for the constitutional right to counsel and a robust adversary system -- a right apparently not as much respected by the Court majority -- and a preference for a fair fight where the accused  is not hampered by denial of his choice of counsel.

The elimination of the requirement in many courts for what was called "a Monsanto hearing" (a term likely to be soon forgotten) will undoubtedly eliminate, or at the very least severely limit, the opportunity for defendants in federal courts to pay counsel of choice from seized funds.  Prosecutors who had chosen to allow defendants to pay counsel from restrained assets in order to avoid discovery of their cases will no longer have that reason to do so.  Those who used the avoidance of discovery as a cover out of respect for the constitutional right to counsel of choice or the adversary system will no longer be able to do so.  Pre-trial forfeiture claims will now in some cases offer a prosecutor a potential bonus beyond the stated goals of depriving a defendant of wrongfully-gained assets and using them for governmental purposes -- the elimination of a top-notch adversary.  Thus, there is now a tactical trial benefit to the prosecutor to institute pre-trial asset restraint.  In white-collar cases, where the prosecutor often knows who will probably represent the defendant from pre-indictment discussions, his determination to seek pre-trial restraint may be affected by whether he likes or dislikes the attorney, whether the attorney is dogged and aggressive, or whether the attorney is likely to give the defendant a better chance of success than a replacement.

The Kaley decision will also have a severe harmful effect on the finances of an already financially-distressed private middle-class (other than big-firm) criminal defense bar, which will (as will large firms) be deprived of a considerable number of well-paying clients because of lack of available assets outside of those seized.  Defendants -- generally either drug or white-collar defendants, those who had a considerable amount of money prior to pre-trial seizure -- will be deprived of representation by the most experienced and successful criminal defense lawyers.  They will be represented by court-appointed public defenders, institutional or private appointed attorneys, or less expensive private attorneys -- often, but not always, experienced, dedicated and able, but generally less so than high-profile, high-paid private attorneys, and almost always with more cases and clients and less time and resources to devote to them than well-compensated private attorneys (and it is unlikely that government funding will be increased to provide public defenders those resources).  The ability, energy and knowledge of who represents them will often depend on the luck of the draw from assigned counsel lists, rather than their considered choice.  The gulf between counsel of choice and public defenders is greatest in white-collar cases since few public defenders have experience in these cases, or ample resources to defend them.

In his opinion, Chief Justice Roberts alluded to, but failed to state explicitly, the general disparity between the selected best of the private bar and the average (and an assignment-by-rotation system necessarily leads to the mean or average) public defender or assigned attorney.  It is unfashionable (and politically incorrect) for judges (and bar leaders) to say or write anything that might be construed to disparage public defenders (and perhaps provide ammunition to ineffective assistance claimants).  Rather, they, as did Chief Justice Roberts, often speak of "counsel of choice" when they mean "the private bar."  Lawyers -- whether chosen or assigned -- are not fungible.  Just as there is a difference in quality between a $300,000 Bentley and a $15,000 Toyota Corolla, there is usually a difference in quality between an attorney who commands large fees because of her reputation and stature and the average assigned attorney.  (To be sure, like automobiles, there are lemons and diamonds among both the expensive and the inexpensive.)

As Chief Justice Roberts said, "The possibility that a prosecutor could elect to hamstring his target by preventing him from paying his counsel of choice raises substantial concerns about the fairness of the entire proceeding."  Just as a basketball team opposing the Miami Heat might choose, if it could, that LeBron James sit out the game, so too a prosecutor, if he could, might now choose to seek pre-trial restraint to keep a first-rate private lawyer on the bench.

March 5, 2014 in Attorney Fees, Defense Counsel, Forfeiture, Grand Jury, Judicial Opinions, Prosecutors | Permalink | Comments (0) | TrackBack (0)

Tuesday, February 11, 2014

Why Didn't Martoma Cooperate? And Is It Too Late?

To the surprise of nobody I know, Mathew Martoma, the former SAC Capital portfolio manager, was convicted of insider trading last Thursday by a Southern District of New York jury.  The evidence at trial was very strong.  It demonstrated that Martoma had befriended two doctors advising two drug companies on the trial of an experimental drug, received confidential information from them about the disappointing result of the drug trial prior to the public announcement, and then had a 20-minute telephone conversation with Steven A. Cohen, the SAC chair, a day or so before Cohen ordered that SAC's positions in these companies be sold off.  The purported monetary benefit to SAC, in gains and avoidance of loss, of the trades resulting from the inside information is about $275 million, suggesting that Martoma receive a sentence of over 15 years under the primarily amount-driven Sentencing Guidelines (although I expect the actual sentence will be considerably less).

Cohen is white-collar Public Enemy No. 1 to the Department of Justice, at least in its most productive white-collar office, the U.S. Attorney's Office for the Southern District.  That office has already brought monumental parallel criminal and civil cases against SAC, receiving a settlement of $1.8 billion, about a fifth of Cohen's reported personal net worth, but it has apparently not garnered sufficient evidence against Cohen to give it confidence that an indictment will lead to his conviction.  It had granted a total "walk" -- a non-prosecution agreement -- to the two doctors whose testimony it felt it needed to convict Martoma, unusually lenient concessions by an office that almost always requires substantial (and often insubstantial) white-collar wrongdoers seeking a cooperation deal to plead to a felony.  As an FBI agent told one of the doctor/co-conspirators, the doctors and Martoma were "grains of sand;" the government was after Cohen.

In an article in the New York Times last Friday, James B. Stewart, an excellent writer whose analyses I almost always agree with, asked a question many lawyers, including myself, have asked:  why didn't Martoma cooperate with the government and give up Cohen in exchange for leniency?  Mr. Stewart's answer was essentially that Martoma was unmarketable to the government because he would have been destroyed on cross-examination by revelation of his years-ago doctoring his Harvard Law School grades to attempt to secure a federal judicial clerkship and covering up that falsification by other document tampering and lying.  Mr. Stewart quotes one lawyer as saying Martoma would be made "mincemeat" after defense cross-examination, another as saying he would be "toast," and a third as saying that without solid corroborating evidence, "his testimony would be of little use."  See here

I strongly disagree with Mr. Stewart and his three sources.  The prosecution, I believe, would have welcomed Mr. Martoma to the government team in a New York minute -- assuming Martoma would have been able to provide believable testimony that Mr. Cohen was made aware of the inside information in that 20-minute conversation.  When one is really hungry -- and the Department of Justice is really hungry for Steven A. Cohen -- one will eat the only food available, even if it's "mincemeat" and "toast."  And there is certainly no moral question here; the government gave Sammy "the Bull" Gravano, a multiple murderer, a virtual pass to induce him to testify against John Gotti.  Given the seemingly irrefutable direct, circumstantial and background evidence (including, specifically, the phone call, the fact that Cohen ordered the trades and reaped the benefit, and generally, whatever evidence from the civil and criminal cases against SAC is admissible against Cohen), testimony by Martoma to the effect he told Cohen, even indirectly or unspecifically, about the information he received from the doctors would, I believe, have most likely led to Cohen's indictment.

I have no idea why Martoma did not choose to cooperate, if, as I believe, he had the opportunity.  "Cooperation," as it is euphemistically called, would require from Martoma a plea of guilty and, very likely in view of the amount of money involved, a not insubstantial prison term (although many years less than he will likely receive after his conviction by trial).  Perhaps Martoma, who put on a spirited if unconvincing defense after being caught altering his law school transcript, is just a fighter who does not easily surrender or, some would say, "face reality," even if the result of such surrender would be a comparatively short jail sentence.  (In a way, that choice is refreshing, reminding me of the days defense lawyers defended more than pleaded and/or cooperated.)  Perhaps Martoma felt cooperation, a condition of which is generally full admission of all prior crimes and bad acts, would reveal other wrongs and lead to financial losses by him and his family beyond those he faces in this case.  Perhaps he felt loyalty -- which it has been demonstrated is a somewhat uncommon trait among those charged with insider trading -- to Cohen, who has reportedly paid his legal fees and treated him well financially (and perhaps Martoma hopes will continue to do so), or perhaps to others he would have to implicate.

And perhaps -- perhaps -- the truth is that in his conversation with Cohen, he did not tell Cohen either because of caution while talking on a telephone, a deliberate effort to conceal  from Cohen direct inside information, or another reason, and he is honest enough not to fudge the truth to please the eager prosecutors, as some cooperators do.  In such a case his truthful testimony would have been unhelpful to prosecutors bent on charging Cohen.  That neutral testimony or information, if proffered, which the skeptical prosecutors would find difficult to believe, would at best get him ice in this very cold wintertime.  Lastly, however unlikely, perhaps Martoma believed or still believes he is, or conceivably actually is, innocent.

In any case, it is not necessarily too late for Martoma to change his mind and get a benefit from cooperation.  The government would, I believe, be willing to alter favorably its sentencing recommendation if Martoma provides information or testimony leading to or supporting the prosecution of Cohen.  Indeed, I believe the government would ordinarily jump at a trade of evidence against Cohen for a recommendation of leniency (or less harshness), even if Martoma is now even less attractive as a witness than before he was convicted (although far more attractive than if he had testified as to his innocence).  However, the five-year statute of limitations for the July 2008 criminal activity in this matter has apparently run, and an indictment for substantive insider trading against Cohen for these trades is very probably time-barred.

To be sure, federal prosecutors have attempted -- not always successfully (see United States v. Grimm; see here) -- imaginative solutions to statute of limitations problems.  And, if the government can prove that Cohen had committed even a minor insider trading conspiratorial act within the past five years (and there are other potential cooperators, like recently-convicted SAC manager Michael Steinberg, out there), the broad conspiracy statutes might well allow Martoma's potential testimony, however dated, to support a far-ranging conspiracy charge (since the statute of limitations for conspiracy is satisfied by a single overt act within the statutory period).  In such a case, Martoma may yet get some considerable benefit from cooperating, however belatedly it came about.

February 11, 2014 in Current Affairs, Defense Counsel, Fraud, Insider Trading, News, Prosecutions, Prosecutors, Securities, Sentencing | Permalink | Comments (0) | TrackBack (0)

Thursday, January 16, 2014

Second Circuit Denies Fifth Amendment Protection for Required Foreign Bank Account Records

One of the increasing incursions into constitutional rights in the white-collar area is the expansion of the "required records" exception to the Fifth Amendment privilege against self-incrimination.  In general, that doctrine provides that an individual or entity required by law to maintain for regulatory purposes certain records has no Fifth Amendment right to refuse to produce them to the government.

The Second Circuit last month, in affirming a contempt finding against an individual for failing to produce to a grand jury records of foreign bank accounts mandated to be kept by regulations promulgated pursuant to the Bank Secrecy Act, 31 CFR 1012.420 ("BSA"), held, in accord with prior rulings by other circuits, that the "required records" exception to the Fifth Amendment privilege against self-incrimination pertains to the production of such records.  In Re Grand Jury Subpoena Dated February 2, 2012, (13-403-CV, Dec. 19, 2013).

The individual contended that he had a Fifth Amendment right to refuse to comply with a grand jury subpoena for foreign bank records.  He claimed that the subpoena put him in a Catch-22 position:  produce documents that might incriminate him or confirm that he failed to maintain records of his foreign bank accounts, which also might incriminate him.  The court essentially said "tough," and affirmed the contempt order.

The court first considered whether the "act of production" doctrine (see United States v. Hubbell, 500 U.S. 27 (2000)) applied to "required records."  Under that doctrine, generally a person could on Fifth Amendment grounds resist a subpoena for the production of records unless the government could demonstrate it was a "foregone conclusion" that the person actually possessed such records.  Although the contents of the records, as in the case of "required records," might not be privileged, by producing them the individual essentially incriminated herself by its production by admitting, among other things, that she possessed such records.  The court held that the Fifth Amendment did not apply to required records, either as to the content of or production of such records, and thus the "act of production" privilege, a form of Fifth Amendment protection, did not apply.

The court then applied the three-prong test of Grosso v. United States, 390 U.S. 62 (1968), to determine whether the required records doctrine applied to the BSA regulation.  That test provides, first, that the purpose of the legal requirement must be "essentially regulatory;" second, that the information sought must be of a type "customarily kept;" and third, that the records must have "public aspects" which make them at least analogous to public documents.  The court then held that the regulation, although it was designed in part to facilitate criminal prosecutions, was "essentially regulatory" in that it did not target only those suspected of criminal activity since possession of foreign bank accounts by itself was not unlawful.  Second, it held that the records were "customarily kept" since holders of bank accounts are likely to be aware of or have records of the details of their accounts.  Third, the court held that "records lawfully required to be kept" for purposes of constitutional analysis by definition have "public aspects."  Practically, such a finding eliminated this third prong as an independent prerequisite for application of the exception.

In sum, the court essentially ruled that any records ordinarily kept by individuals that are required to be made available to governmental authorities pursuant to a law not primarily designed to detect criminal activity lack Fifth Amendment protection.

Thus, the decision essentially gives federal prosecutors the ability to subpoena any person and demand that she produce any foreign bank records she possesses, even absent any knowledge or suspicion that she has such an account.  To be sure, in this case, and virtually all other reported cases involving subpoenas of foreign bank accounts, the government appears to have had a considerable basis to believe the person subpoenaed does have a foreign bank account.  The Second Circuit's ruling, however, at least implicitly, does not require that such governmental knowledge be a prerequisite for an enforceable subpoena for foreign accounts.  "Fishing expeditions" for foreign bank account information appear to be allowed.

I would not be surprised, therefore, to see a considerable increase in the number of governmental subpoenas for records of foreign bank accounts, and perhaps the addition of a boilerplate request for foreign bank records in other subpoenas for financial records.  As they say, there's no harm in asking.

January 16, 2014 in Contempt, Grand Jury, Investigations, Judicial Opinions, Obstruction, Privileges, Prosecutors | Permalink | Comments (0) | TrackBack (0)

Monday, January 13, 2014

Our Political DOJ

I have no particular sympathy for Governor Chris Christie in his current political travails. But the notion that he or his aides committed a federal crime is ludicrous, and the New Jersey U.S. Attorney's rash public announcement of a criminal investigation is a shameful example of DOJ's continuing politicization. Oh, I know, everyone commits a federal crime every single day. It's what makes America great. But I'm talking about a real crime, that a real prosecutor would seriously tackle. Contrast Paul Fishman's aggressive stance with DOJ's spectacular non-reaction to the fraud-induced 2008 financial crisis. How pathetic.

January 13, 2014 in Investigations, Prosecutors | Permalink | Comments (2) | TrackBack (0)

Friday, December 27, 2013

Judge Rakoff Wades In

In the current New York Review of Books, Judge Jed Rakoff presents the most thoughtful, balanced analysis I have seen to date regarding DOJ's failure to prosecute high-level executives at elite financial institutions in connection with the recent financial crisis. Appropriately entitled, The Financial Crisis: Why Have No High Level Executives Been Prosecuted?, Judge Rakoff is careful not to point fingers, rush to judgment, or even allege that fraud has definitively been established. And that's a big part of the DOJ's problem. How can you establish fraud if the effort to investigate it has been haphazard and understaffed from the outset? Rakoff is someone worth listening to. An unusually thoughtful federal district judge, he has presided over many significant securities and bank fraud cases, served as chief of the Securities Fraud Unit in the SDNY U.S. Attorney's Office,  and worked as a defense attorney. Oh yeah. He also hates the Sentencing Guidelines.

Among the many theories Rakoff posits for the failure to prosecute what, it bears repeating, only may have been fraud, are two that I take issue with. These investigations were apparently parceled out to to various OUSA districts, rather than being concentrated in the SDNY. Judge Rakoff believes that the SDNY would have been the more logical choice, as it has more experience in sophisticated fraud investigations. This may be true as a general proposition. But the most plausible historical fraud model for the mortgage meltdown-fueled financial crisis is the Savings & Loan Scandal of the late 1980s, so successfully prosecuted by DOJ into the mid-1990s. The SDNY had very little of that action.

Judge Rakoff also notes the government's role in creating the conditions that led to the current crisis as a potential prosecution pitfall. But this did not stop the S&L prosecutors from forging ahead in their cases. Back then, virtually every S&L criminal defendant claimed that the government had created that crisis by establishing, and then abandoning, Regulatory Accounting Principles, aka RAP. (One marked difference between the two scandals is that the S&L Scandal was immediately met with public outrage and a sustained Executive Branch commitment to investigate and prosecute where warranted. The sustained Executive Branch commitment has not happened this time around, for whatever reason.)

But these are minor quibbles and Judge Rakoff is spot on in most of his observations.

Judge Rakoff is right to reject the "revolving door" theory of non-prosecution. Any prosecutor worth his salt would love to make a name for himself, and would definitely enhance his private sector marketability, by winning one of these cases. Judge Rakoff also correctly notes that these cases are hard and time-consuming to investigate.

The judge's most salient point has nothing to do with the various theories for DOJ's failure to prosecute. Instead, it is his observation that there is no substitute for holding financial elites responsible for their major criminal misdeeds. The compliance and deferred prosecution agreements favored today are simply a cost of doing business for most big corporations. What's worse, in the current environment, DOJ is giving a walk to elite financial actors and simultaneously prosecuting middle-class pikers with a vengeance that is sickening to behold. The elite financial actors may not have committed criminal fraud, but many of them bear heavy responsibility for the ensuing mess. It is so much easier for DOJ to rack up the stats by picking the low hanging fruit.

The one thing Judge Rakoff cannot do, and does not try to do, is answer the question of whether criminal fraud occurred in the highest sectors of our financial world. The answer to that question can only be supplied, at least as an initial matter, by the AUSA in charge of each investigation. And if no prosecution occurs, you and I are unlikely to ever know the reason why.

December 27, 2013 in Fraud, Investigations, Judicial Opinions, Mortgage Fraud, Prosecutions, Prosecutors, Securities | Permalink | Comments (0) | TrackBack (0)

Saturday, December 14, 2013

Fourth Circuit Extends Required Records Exception to Foreign Bank Accounts

Yesterday, in U.S. v. Under Seal (4th Cir. 2013), the Fourth Circuit, joining several other federal circuits, extended the Fifth Amendment's Required Records Exception to records of foreign bank accounts required to be maintained pursuant to the Bank Secrecy Act ("BSA"). John and Jane Doe received a subpoena to turn over records of their Swiss bank accounts. They responded that complying with the subpoena compelled them to testify against themselves, as they were required to create and maintain such records pursuant to the BSA. They also argued that the long-standing, judicially-created, Required Records Exception did not apply in this case, because the BSA's record-keeping provisions are essentially criminal, rather than regulatory, in nature. The district court disagreed, the Does took civil contempt, and an appeal ensued. Unsurprisingly, the Fourth Circuit sided with the government, accepting its argument that the BSA's record-keeping provisions are essentially regulatory in nature. You are shocked? There's not exactly a strong constituency, public or judicial, for foreign bank account tax evasion.

December 14, 2013 in Antitrust, International, Investigations, Judicial Opinions, Prosecutions, Prosecutors, Qui Tam, Tax | Permalink | Comments (0) | TrackBack (0)


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