Archive for the ‘White Collar’ Category

Stop the Music – 3rd Circuit Slams DOJ’s “Musical Chairs” in Securities Fraud Prosecution

Wednesday, April 7th, 2010

musical chairs

SEC Rule 10b-5 is one of the main securities fraud laws. It says you can’t mislead people in connection with the purchase or sale of a security. You can’t make an untrue statement of a material fact. And you can’t fail to state a fact, when without that fact the statements you just made would be misleading.

That seems simple enough. But federal prosecutors in New Jersey seem to be having a hard time figuring out what that means.

In June 2005, the feds in New Jersey indicted Frederick Schiff, the CFO of Bristol-Myers Squibb, for failing to disclose material facts to investors. Allegedly, Bristol-Myers (a drug company) was paying wholesalers to order more drugs than they really needed, so Bristol-Myers could report higher sales numbers and inflate its stock value. Schiff allegedly didn’t tell investors about it during conference calls and in SEC filings. (See the indictment here and the DOJ’s press release here.) That indictment got thrown out for a grand jury leak, so they got a second one in May 2006, and finally a third one in April 2007 that dropped allegations of accounting violations.

With respect to the omissions, the government kept changing its tune. First, they said the company had a duty to correct misleading statements of others, based on a “general fiduciary duty.” The district court helpfully pointed out that there is no such duty in the law. So then the feds said there was a statutory duty under SEC regs S-K, which might actually have worked, but then they changed their mind and put on the record that they weren’t pursuing that theory. There was a “theory of duty based on falsity of reported sales and earnings,” which the District Court said wouldn’t fly. Then they tried to say the stuff left out of filings is a material omission that is misleading if you include the earlier analyst calls in the context (calling it “all of a piece”). The district court ruled that, no, there is no affirmative duty under either the “falsity” or the “all of a piece” theory. “It defies logic,” the court ruled, “to charge as a crime that an utterance in an analyst call must have other words written in a later SEC filing in order to make the utterance in the prior phone call ‘not misleading.’” Thanks for playing. The feds appealed.

In a unanimous decision today (opinion here), the Third Circuit slammed the DOJ for constantly changing its theory of the case, for playing “musical chairs” with its theory of how Schiff’s conduct counted as an unlawful omission under Rule 10b-5.

More importantly, the Circuit said the DOJ’s ultimate theory of liability here — that Schiff had a “general fiduciary” duty as a “high corporate executive” to disclose the inventory issue — was simply overbroad. “This argument reaches too far.”

This is a big setback for the feds, who now are left with a much narrower (more…)

Criminalizing the Contractual: Have We Finally Seen the End of “Honest Services” Fraud?

Monday, March 1st, 2010

enron annual report 2000

Try this on for size:

For the purposes of this chapter, the term “scheme or artifice to defraud” includes:

(1) a scheme or artifice by a government official whereby the government official’s position is used for the private gain of any person or entity; or

(2) a scheme or artifice by an officer of a corporation, partnership, nonprofit organization or labor union, whereby the officer’s position is used for the private gain of any person or entity and not for the benefit of the officer’s shareholders or members.

If Congress had half a brain, this is what 18 U.S.C. § 1346 would look like. The whole point of the section is to prevent official corruption. A politician or bureaucrat who steers a contract to a buddy, or a corporate CEO who enriches himself instead of his shareholders, or a union boss who mismanages the pension fund — basically anyone who breaches a trust to act on behalf of those he represents.

But instead, Congress wrote this nonsense:

For the purposes of this chapter, the term “scheme or artifice to defraud” includes a scheme or artifice to deprive another of the intangible right of honest services.

For one thing, anyone can commit this crime, not just people who owe a duty to a constituency. Moreover, instead of a straightforward definition, this is hopelessly vague. Nobody knows what “the intangible right of honest services” means. Does it include an employee who’s playing solitaire instead of reviewing a file? Does it include a politician making promises he can’t keep?

Nobody knows.

And that’s just how federal prosecutors like it. Actual corruption charges, like bribery and extortion, are notoriously difficult to prove. But a mail/wire fraud charge, based on deprivation of “honest services” — that could mean anything, and so anything they can prove could count. Actions that don’t fit any particular category get to be called “fraud.”

Unethical behavior is now criminal. Contractual breaches, especially in the employment arena, also seem to count.

The courts have had a hard time applying this statute, differing widely on what counts and on how to instruct juries. Earlier this term, the Justices on the Supreme Court sounded like they have real problems with the statute. They seem even to wonder whether it’s void for vagueness. Criminal laws have to be specific enough to put you on notice that certain conduct could land you in jail, and a law where nobody even knows what it means certainly could be unconstitutionally vague. The Court hasn’t decided those open cases yet, presumably because they were waiting for one more to be argued.

And that gets us to today’s Supreme Court arguments in the case of Enron’s former CEO, Jeff Skilling.

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Enron was the nation’s 7th-largest company in 2001, when it suddenly came to light that its net worth was zilch. Bright people who had no clue what they were doing had created a bizarre house of cards that came tumbling down in an instant. The city of Houston, Enron’s headquarters, was devastated for years to come. Some people had clearly done wrong — CFO Andy Fastow and friends had profited hugely from schemes that broke the rules. It was less clear, however, whether CEO Jeff Skilling had acted improperly, or whether he even knew of any shenanigans. It was hard to say that he or the directors misrepresented anything to investors, as the company’s activities were pretty well documented. (For an excellent account of what happened and didn’t happen, see Kurt Eichenwald’s definitive “Conspiracy of Fools.” Malcolm Gladwell did an excellent piece in the New Yorker, as well, called “The Talent Myth,” about the culture there, and another one called “Open Secrets,” about the paradox of too much disclosure.)

Jeff Skilling was convicted in 2006 by a federal (more…)

Shameless Self-Promotion

Tuesday, December 22nd, 2009

smug tie

We’re on vacation starting tomorrow, and that means we’ve been extra-busy trying to get as much work done as possible beforehand. So we’re not taking the time to post anything particularly thoughtful today. Maybe while we’re on vacation, but not today.

Still, we were pleased to see we were quoted in Crain’s this morning. Essentially, we were asked to comment on a recent USA Today article claiming that white-collar prosecutions plummeted even as the economic crisis worsened. First of all, USA Today’s stats exaggerate things. As the actual statistics (shown below) show, the drop wasn’t that big. And it’s easily explained by the shift in the FBI’s focus after 9/11. And once the political pendulum started to swing back to financial crimes in 2007, more investigations got started, and we’re now beginning to see plenty more white-collar cases.

white collar stats 2009

We weren’t quoted as accurately as we’d have liked, and they said we used to be a federal prosecutor when we were really a state prosecutor, but they did spell our name and firm correctly, so we’re not complaining.

Anyway, it occurred to us that we’ve been getting some good press lately. And that gave us a great idea for a post. Instead of writing anything of substance, we’d just post some links to the various articles, and call it a day. So here’s some shameless self-promotion:

How Dirty Are Hedge Funds? (Forbes, Oct. 20)

Galleon SEC, FBI Informant Roomy Khan Worked at Intel (Bloomberg, Oct. 22)

Galleon Wiretap Defense Not ‘Hopeless,’ Experts Say (Bloomberg, Oct. 28)

Bear Stearns Defense Holds Lessons For Execs (Forbes, Nov. 17)

After Lull, Financial-Crime Prosecutions Seen Set to Rise (Crain’s, Dec. 22)

And for those who need some useful CLE credits, here are the lectures we gave this year (CLE credit good for most states):
Hope for Hopeless Cases I: Defending an Internet Pornography Case

Hope for Hopeless Cases II: Defending Wiretaps and Tape Recordings

Hope for Hopeless Cases III: Better Loss Calculations for Lower Sentences in Financial Crimes

Hope for Hopeless Cases IV: Your Client Confessed! Now What?

Enjoy!

Something to Tide You Over

Tuesday, November 17th, 2009

writer-boxed-flipped

We apologize to our loyal readers for the unusual delay between posts. We’ve been on trial, and you know how that goes. Trial is all-consuming. And then there’s all the work that piles up in the meantime. And the wife and kids need a token appearance from us once in a while. So the blog just isn’t happening while we’re on trial.

And that’s how it should be, of course.

So yeah, we’ve been on trial since November 2. We keep predicting that it will end soon, but it never does. With any luck, we’ll have closing arguments tomorrow. But we said the same thing yesterday, and on Friday, and on Thursday… And we’re going to have to take Thursday off if the jury’s still not back with a verdict then, because we’re giving our next “Hope for Hopeless Cases” lecture for West Legal Ed Center that day. So yeah, this case could easily last through Friday.

To tide you over until we finally get a chance to blog again, here’s a link to our latest article in Forbes magazine.

Link

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Excerpt:
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Expert View
BEAR STEARNS DEFENSE HOLDS LESSONS FOR EXECS

Going on offense is the best defense in white-collar cases.

It didn’t take long after the housing boom turned bust and trillions of dollars of wealth had gone poof that the public was out for blood. The government needed to “do something” about the mess.

An obvious point of focus were the securities firms Bear Stearns (now a part of JPMorgan Chase) and Lehman Brothers (now a part of Barclays) which blew up in quick succession. From there, it does not take a huge leap of logic to understand how federal prosecutors set their sights on Ralph Cioffi and Matt Tannin, two former managers of Bear hedge funds who were plucked out of obscurity, paraded through a perp walk and unceremoniously read their rights as criminal defendants.

As their Nov. 10 acquittals attest, they didn’t actually commit any crimes. But that didn’t spare them from two years of hell during which they were investigated, indicted, vilified, prosecuted and put on trial. If they’d lost, that would have all been a picnic compared with the 20 years of prison time they would have faced.

If the case teaches us anything, it’s that such ordeals can befall executives–innocent and otherwise. If enough things go wrong on their watch, it’s not all that rare for bosses to find gung-ho prosecutors eager to indict them before all the facts are in.

That leads to the question: What can you do to protect yourself if you fall under the eye of a suspicious prosecutor? Here, the Bear Stearns case is instructive.

Lesson One
You’re on your own. If you ever find yourself on the receiving end of an indictment related to your professional activities, don’t count on your…

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Feds Could Lose Galleon Case

Saturday, October 24th, 2009

sunken galleon

Colleagues joke that we ought to be peeved that neither Raj Rajaratnam nor any of his codefendants even called us. After all, we’re one of the few white-collar defense attorneys who also know how to defend wiretap cases. But because we’re not on the case, we’re now free to comment on it. (And we have been doing so, getting quoted this week by Forbes and Bloomberg, among others.)

And we think the feds could easily lose this case, if the defense attorneys do their job well.

You’d think that this would be a slam dunk. First of all, it was a case investigated by the fine folks at the SDNY, who are without exception bright, hard-working and of sound judgment. They tend to make sure they’ve built a rock-crusher case before they bother filing charges and issuing press releases. Unlike some other prosecutor’s offices we could name, the Southern District is definitely not amateur hour. When one defends a case they’ve built, one where they’ve ensured that all the potential holes are plugged, the bulk of the defense attorney’s role is simply fighting for a better plea offer.

Secondly, this was a freaking wiretap case. The defendants are on tape, we are told, using their own phones, committing the crimes in their own voices. How much more of a slam dunk could this be?

Well, from where we sit, it’s anything but a slam dunk. In fact, from the defense point of view, we actually think this case is winnable.

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What are we talking about? Two things.

First, this may be the biggest insider trading case in history, but so far as insider trading cases go, this one ain’t the strongest.

Second, this may be the first time a securities fraud was investigated using wiretaps (and now that Spades have been broken, you can bet your sweet bippy that wires are going to start happening a lot more in these kinds of cases), but there are ways that a good defense attorney can fight that kind of evidence and win. Believe it or not, but it’s the truth.

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First, let’s talk about the alleged insider trading.

Insider trading is a relatively new crime, only added to 18 U.S.C. during the new millennium. (We’re not so sure it should be a crime in the first place — it prevents those with relevant market information from acting on that information; it is an artificial yoke on market forces that affect not only share prices but also the flow of such information, causing inefficiencies and black markets in info; it prohibits those who worked to create a gain in share prices from realizing their fullest profits from their work; it prohibits the best and truest information from being a basis for share price; it encourages and protects the holding back of information that by rights should have been public in the first place. If we had our way, not only would insider trading not be a crime, it would be a requirement. But apart from Adam Smith and the Japanese, we’re not sure too many folks agree with us on this one.)

The crime of Insider Trading is committed when, first, there is some secret, non-public information. Next, there has to be someone (like an executive or director) who has a fiduciary duty not to disclose that information, a duty owed to the owner of the information (like the shareholders). Next, the secret info has to be shared in violation of that fiduciary duty. Finally, the person who uses that information had to know that it had been shared in violation of that fiduciary duty.

That’s a lot of steps. That’s a lot of room for reasonable doubt.

Look at this Galleon case. You’ve got some insiders, who allegedly spilled the beans to an informant, who then passed on that information to the Galleon crew. How the heck does one prove — prove — that Rajaratnam knew in his own mind that this second-hand information he got came from a breach of a third party’s fiduciary duty? He didn’t deal with the insiders, he dealt with someone else who had spoken with the insiders. Even if the informant said point blank that this was inside info, that doesn’t mean Rajaratnam knew it to be so. It’s like a big game of “telephone.” It’s hearsay by the time the info gets to him.

And once the secret info has been shared, is it even secret any more? The cat’s out of the bag. Maybe the insiders and the informant should be charged, but when the informant passed that no-longer-secret info on to Galleon, how is that insider trading any more? (Oh, and what hay we could make with the fact that the insiders themselves don’t seem to have been charged in the first place. That is verrrrrry suspicious.)

From what we’ve seen in the papers released by the DOJ, the evidence does not necessarily show actual subjective knowledge on the part of Rajaratnam that the information had really been shared in violation of a specific fiduciary duty owed by particular people to particular others. “Knowledge” is not the same as “probably” or “it must be so.” That’s the mental state of “recklessness,” not “knowledge.” The feds cannot prove this case by a kind of res ipsa loquitur argument.

The case just isn’t that straightforward on the merits. In addition to the arguments I just mentioned, and about half a dozen others off the top of my head right now, a good defense attorney is going to raise all kinds of doubt with the convoluted nature of the alleged schemes. How can one prove knowledge about the original state of the fiduciary breach when the information is supposed to have followed such a tortuous path, even going backwards in one instance, before being acted on?

And what was Rajaratnam’s job? What was the hedge fund’s job? Their job was to gather information. Every stock trader’s job is to gather information. You keep your ear to the ground, listen to the rumors, find out what the scuttlebutt is. And it seems like everyone and their mother has a tip. A rumor. A sure thing.

None of that is insider trading. That’s just Wall Street. The trick to being a successful trader is figuring out which “sure thing” is likely to be right. The decision may be based on a lot of number crunching, or on a gut instinct, but it’s always a judgment call. The successful trader’s judgment calls are just a little better than others’ are, that’s all. And Galleon was one of the successful ones.

The press has raised eyebrows at Rajaratnam’s “relentless pursuit of data,” as the WSJ puts it. Well, duh, that’s his freaking job. If he wasn’t relentlessly pursuing data, he wouldn’t be in the business. If the prosecution tries to make that look incriminating, like he was seeking or desperate for illegal info, a good defense attorney will defuse it with a simple dose of reality.

And the prosecution needs to convince all 12; the defense only needs one to be unsure. The defense would like to convince all 12, but they don’t need to. There is plenty of room for argument on the merits alone.

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And while we’re talking about the merits of the case, this may be an opportunity for defense counsel to go to the prosecutors and convince them not to seek an indictment. It’s tough, when the prosecutors have made statements to the press and put their own integrity on the line. But a prosecutor of real integrity will always put that aside and do the right thing.

The trick is getting them to see that their present position is wrong. Stupid defense attorneys just whine and beg and plead, but that only works on stupid prosecutors. A halfway-decent prosecutor has made up his mind based on the evidence he’s got. That may only be a thin sliver of reality, and it may well be completely out of the proper context, but it is what he understands reality to be.

The only way you’re going to change a prosecutor’s mind is by either giving them new information that they didn’t already have, or by giving them a new way of looking at the evidence before them.

That is advocacy. And in a case like this, it may behoove defense counsel to advocate fiercely for a rethinking of the charges. Strategically, it may not be the best choice, because of all the press this case has garnered, meaning that the prosecution might just as well be presumed to be inflexible. But we did precisely this in the Bear Stearns subprime hedge fund case, and the manager we represented did not get prosecuted. And that case had just as much, if not more, publicity at the time. It’s an option, here, at the very least.

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But what about the wiretaps? How do you get around that? Isn’t that pretty much the defendants convicting themselves out of their own mouths?

No way.

Wiretap evidence is anything but a sure thing. We know. We did wires for years in the Rackets Bureau of the Manhattan DA’s office, and now we defend them. We’ve taught a nationwide CLE on how to successfully defend them for West LegalEdCenter. Wiretaps are not a sure thing.

They can be defeated with technicalities. Eavesdropping is probably the greatest invasion of privacy that the government can inflict, and so we make law enforcement jump through all kinds of hoops before they are allowed to get an eavesdropping warrant. There are so many i’s to dot and t’s to cross, that the feds hardly use wiretaps in the first place. You’d think otherwise, but it’s so. Plus, they have to go through so many steps in the chain of command to get permission to apply for a warrant, that by the time they could have done so the need or probable cause has evaporated. State prosecutors do way more wires than the feds do.

Because the feds rarely do them, they’re not necessarily as on the ball as certain state-level offices might be. And except for those few high-caliber state offices, the locals can be even more error prone.

That’s big, because little errors in wiretaps have big consequences. Usually, they mean the government loses the case. A little oversight leads to the suppression of all the evidence derived from that point forward in the case, and a multimillion-dollar investigation just went down the toilet. No bullshit.

What kinds of technicalities are there? Tons. Some are just stupid. One particularly stupid requirement is the “sealing” requirement. The idea is that we don’t want to risk having the tapes or CD-ROMs of the intercepted conversations tampered with. We don’t want Nixonesque 17-minute gaps in the evidence. We want the assurance that the evidence never had a chance to be fucked with, and is as pristine now as when it first came in. And so the law requires that the tapes or CDs be sealed immediately, which usually means having them wrapped in evidence tape and having a judge sign and date the tape with a Sharpie.

But “immediately” doesn’t mean “immediately.” Instead of sealing the tapes right after they were recorded, the law says they have to be signed within 24 hours after the expiration of the warrant. Warrants are typically good for 30 days. So the whole month’s worth of tapes or CDs have to be assembled and sealed no later than 24 hours to the minute after the expiration of the wire. And that can be a tough deadline to meet. Especially when, say, it’s 5:04 on a Friday afternoon and all the judges are on their way out of town for the weekend. Or when, out of the hundred or so tapes for that month, one of them by accident didn’t make it into the group to be sealed, which can easily happen. Or when the judge took forever reading that 160-page renewal application, and the deadline passed when he’d only signed half the tapes.

This 24-hour rule is not a “good faith” or “close enough” rule. 24 hours and one minute means the evidence on those tapes cannot be used, and any evidence that resulted from what was heard on those tapes must be suppressed. The case is over. It’s technicalities like these that make prosecutors sweat and cross their fingers and hope the defense attorney won’t be paying attention.

Another technicality, believe it or not, is who signed the warrant application in the first place. The law is very particular about who is allowed to sign the application. Only certain enumerated DOJ officials, or the elected head of the DA’s office, are allowed to do it. We once had to work pretty hard when a very good defense attorney named Marty Adelman noticed that we’d had a substitute sign on behalf of Mr. Morgenthau when the boss was out of town. We had to prove that he really was legitimately unavailable, not merely at a function or indisposed, and that the substitute was the legitimate second-in-line. We’d done it right, of course, but others don’t. At one point, about a gazillion wiretaps had to be thrown out because the U.S. Attorneys in D.C. were having them signed by someone not on the authorized list.

The big thing, of course, when trying to controvert an eavesdropping warrant, is not the technicalities but the probable cause.

There has to have been probable cause to believe that a particular crime, listed in the wiretap statute, was being committed. That evidence of that crime would be found by listening in on a particular phone. That a particular named person would be using that phone, whose conversations would be evidence of the crime. And traditional investigative methods like surveillance, undercovers, informants, subpoenas, etc. wouldn’t get the job done.

That’s a lot to prove. The warrant applications have a heavy burden to meet. A good defense attorney is going to look for chinks in the armor, weaknesses in the alleged probable cause, and is going to fight hard to get the warrants and all their fruits thrown out.

And doing that work, and making the prosecution work hard to defend itself, and letting them know that they’re going to be working this hard for the rest of the case, can convince them to rethink their plea position at the very least.

When looking at probable cause, a decent attorney is going to notice whether the warrant application sections laying out the arguments are just boilerplate, cut-and-pasted from earlier applications, or whether they actually are tailored to the investigation as it then stood. Boilerplate, if it doesn’t really apply here, is a fraud on the court! That warrant and everything thereafter just got thrown out.

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Well, what if the defense litigated the eavesdropping, but it’s all still coming in? They’ve got a trial on their hands. What do they do now? They can’t fight the tapes in front of a jury can they? How can you possibly cross-examine taped evidence?

It ain’t easy, but a smart lawyer can do it.

First of all, you have to realize how wires get started. They don’t come out of the blue. Probable cause does not land in some cop’s lap.

There’s an easy way, and a hard way, to start a wire. The hard way is to have all this suspicion, based on historical intel about your players, surveillance of their movements, and scuttlebutt from the community. Then you track down their phone numbers, and subpoena tons of call records to see who they’re calling and when. Then you look for patterns, and see what you can dig up about the people they call. And you try to put together a res ipsa argument that this criminal activity must be going on over that phone. That ain’t the easy way.

The easy way, like with any investigation, is to flip an informant. Someone screws up, and now needs to work off a likely sentence. The only way they can do that is by getting someone else in trouble. So they agree to wear a body wire, or introduce an undercover, or (usually) consent to the recording of their own phone calls with the target.

Bang. Right there, we’ve got all kinds of arguments for reasonable doubt. Arguments to piss the jury off at the government and want to acquit our client.

Because what is the informant trying to do? He’s trying to get our client in trouble. He’s trying to elicit an incriminating statement over the phone that’s going to let the government tap that number. That doesn’t just happen.

No, that call is going to be scripted. Or rehearsed. Or both. That call is going to have a purpose, and Mr. Informant is going to do whatever he can do to manipulate that conversation so he gets the incriminating words he wants. Or at least words that sound incriminating.

You see where this is going, don’t you? You may never use the word “entrapment” itself, but by golly you’re going to plant that concept in the jury’s mind. That informant was out to save his own skin. That informant did not tell our client the truth. That informant lied about what that conversation was about. Those lies were scripted and rehearsed with the agents beforehand. This whole case is built on lies. And the conversation didn’t go according to plan. Our client was not about to incriminate himself. So that informant manipulated him, changed the subject, hounded him, cajoled him to say things he otherwise never would have said. Throw some in-check indignation, and you can have one pissed-off jury.

And you fight the recordings themselves. “But look at the transcripts, they’re cut and dried,” you say? Poppycock. Those transcripts are nothing but interpretation. Any defense lawyer who sits back and relies on the government’s own interpretation of what is on those tapes needs to find another line of work.

Because everything on those recordings is open to interpretation. Nobody in the real world speaks in clear prose, with footnotes explaining their jargon and inside references. Nobody talks like that.

People throw ideas around. They talk things through. They change their mind. Taken out of context, a statement on Day 1 can sound really incriminating. But in context with a statement on Day 2, it’s perfectly innocent.

People talk in code. Not just spies and crooks, but everyday folks. Nobody spells it all out, that would infuriate the listener. Stuff that the other person also knows goes unsaid. People use jargon that outsiders can easily misinterpret. Phrases like “you’re going to put me in jail” could really be a schtick between friends for “my boss isn’t going to like this,” rather than the literal meaning. But taken out of context, perfectly innocent words can sound damning. Any one of us could face prosecution if our own conversations were selectively lifted out of context.

So it is critical that the defense listen to all of the intercepts, not just those highlighted as the prosecution’s greatest hits. The defense needs to get the whole context, and be able to explain ostensibly incriminating conversations as being perfectly innocent. The client should help as much as possible.

Other room for interpretation is what the freaking words were in the first place. We had plenty of occasions where we listened to a tape and heard one phrase, our detectives heard at least two different phrases, and our trusted paralegals heard it yet another way. Nobody enunciates every consonant. Speech is casual. It’s rushed. It’s muddled. It’s amazing that our brains can separate out as much as we do. But in doing so, we often see patterns where they don’t exist, and hear words and meanings that were never said. It’s like optical illusions for the ear, and they happen all the time. Have an inaudibility hearing if you have to, and get the statement tossed altogether if need be.

So any fool who relies on the government’s transcripts deserves to be called a fool. Make your own dang transcript, and make sure you can sell it to the jury. You want to be the voice they trust.

There are tons of other ways to tear the intercepts apart. These are just a starter. But this post is already getting far too long and we’re getting sleepy.

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The point is that the Galleon case is built on wiretaps, and the “greatest hits” released by the DOJ in its press releases seem eminently attackable. The rest of their recordings are probably even more open to attack. And the merits look pretty darned shaky to begin with. They have to prove actual knowledge, that doesn’t seem to be all that obvious. The ties to the people with the actual fiduciary duty are second-hand at best, and the tie is a lousy rat out to save their own skin. And the insiders are suspiciously not even being prosecuted themselves?

Based on the little that has been released, this case seems to be a prime candidate for reasonable doubt. It just doesn’t look like a slam dunk. The defense has a pretty good shot at winning.

We’ll keep watching, and wish the best of luck

Yet More Prosecutorial Misconduct by the Feds

Tuesday, August 18th, 2009

peroration

We’ve asked it before, but what the heck is going on with some of these federal prosecutors nowadays? There was the whole Ted Stevens fiasco over the winter, when the feds actively withheld exculpatory evidence and witnesses in their rush to convict the former Senator. Then the 7th Circuit directed an acquittal after the feds blatantly misrepresented the facts in a food labeling case. The W.R. Grace case was screwed by federal prosecutors who withheld exculpatory evidence and gave the judge reason to say he has “no faith in anything the Government says” any more.

And now we get yet another case of the feds blatantly misrepresenting the facts. This time, the 9th Circuit reversed and ordered a new trial, though it’s doubtful that there will be another one.

The case is U.S. v. Reyes, decided this morning. This was one of those options backdating cases that were all over the news for a while back in ’06 and ’07. (“Backdating” is when a company retroactively picks an effective date for stock options, so as to maximize the potential value of those options. It’s a crime when the extra value isn’t accounted for as an expense, because then the books give investors a false image of the company’s finances.)

Gregory Reyes was the CEO of Brocade Communication Systems. In August 2006, Reyes was charged with securities fraud and related crimes for backdating options without properly accounting for them. At trial, his defense was that he had no intent to deceive. He just signed off on the options in good-faith reliance on his company’s Finance Department.

High-ranking Finance Department employees had given statements to the FBI, describing how they knew all about the backdating scheme. But they didn’t testify at trial. Instead, the prosecution called a Finance Department employee who said she didn’t know about the backdating.

The prosecutor was well aware of the fact that others in the department knew all about it. But during closing arguments, he told the jury that the Finance Department employees “don’t have any idea” that backdating was going on.

After several days of jury deliberations, Reyes was convicted. He was sentenced to 21 months in prison with $15 million in fines. That was stayed pending appeal.

This morning, in an opinion byJudge Schroeder, the 9th Circuit held that this was prosecutorial misconduct, and reversed the conviction, ordering a new trial. Reyes argued that he didn’t know the Financial Department wasn’t accounting properly for the backdating, and the feds argued that the Financial Department didn’t know about the backdating. So that was a key question for the jury to decide. And the feds had lied to the jury.

And this wasn’t just a simple little throwaway line, either. The prosecutor did not even limit his argument to the testimony of the witness he’d cherry-picked to give the false impression that nobody in the Finance Department knew about it (which might actually have been permissible). No, the prosecutor:

asserted as fact a proposition that he knew was contradicted by evidence not presented to the jury. In direct contravention of the statements given to the FBI by Finance Department executives that they did know about the backdating, the prosecutor asserted to the jury in closing that the entire Finance Department did not know about the backdating, and further that the government’s theory of the case was that “finance did not know anything.”

“Our theory is that those people didn’t know anything. . . . [The cherry-picked witness] says finance didn’t know. Did you need everybody in the Finance Department to come and tell you that they didn’t know?”

The government even displayed for the jury a diagram explaining the prosecutor’s position that the Finance Department did not know of the backdating. The prosecutor asked the jury to assume other employees of the Finance Department would testify that they did not know about Reyes’ backdating procedure, when the prosecutor knew they did.

Federal prosecutors have “a special duty not to impede the truth.” As the 9th Circuit pointed out today, there is good reason to hold prosecutors to a higher standard: Their words carry the weight and imprimatur of the government itself, which can be very persuasive to a jury.

The 9th Circuit didn’t go so far as to direct an acquittal or dismiss the indictment, because the defense had also played it pretty aggressively. Instead, they ordered a new trial. It is anyone’s guess whether the feds will be up to the task of trying the case all over again, years after the fact. But we’ll go out on a limb and predict that this case will never see a jury again.

For crying out loud, feds! And for shame.

Hoist on Their Own Petard — How Forensic Accountants Catch Small-Time Scammers

Tuesday, August 11th, 2009

 

No law today. Let’s have a police procedural for a change. We’re in the mood for some white-collar stuff, so here goes.

Forget about the Madoff case. Most financial crimes are nowhere near as headline-worthy, nor do they involve such massive amounts of other people’s money. But smaller scams are just as likely to get prosecuted, and they’re just as much a felony as the big ones. And though the news may not report it, people get caught and convicted all the time.

And like Al Capone, the smaller scammers aren’t caught by the gun-toting detectives so much as by the green visor-wearing accountants.

It’s usually a case of self-incrimination. Defendants usually create the very evidence that puts them behind bars, in their financial books and records. Of course, most of them aren’t doing it on purpose. They’re not creating blatant records that flatly proclaim “here there be crimes.” Most take pains to avoid creating records of improper doings, and to conceal or camouflage the rest. But it is often those very attempts to hide their activities that wind up calling attention to them.

-=-=-=-

Every law enforcement agent knows that, to catch the “bad guys,” you need to follow the money. Who wound up with the cash or the assets? How did the money get from person A to person B, and so on to Mr. X?

One easy way to start is to look at public documents. Lots of records get publicly filed, for anybody to look at, and they can be good leads. Does Mr. X own a house? Pull the deed from the county clerk’s office. There’s going to be information that leads to the mortgage itself, and then Mr. X’s bank records are just a subpoena away. Probate records lead to the estate, which leads to more bank records and real estate records. Does someone have a rap sheet already? Maybe they had to post bond in an earlier case. That’s going to show the source of the lien, and lead to more assets. Dun & Bradstreet and similar records can tell whether someone has a lien against Mr. X — such people are often more than willing to give more information to law enforcement. Heck, even newspapers can be a source of leads to get an investigation started.

Paper begets paper. Or computer data. It is nigh impossible to have dealings of any significance without some record being kept somewhere, in some form.

When following leads, the investigator ought to have an idea of what he’s looking at. What kind of business is this company in? Where are they located? What do they spend money on? The investigator can’t tell whether something is unusual unless he knows what the usual looks like.

Maybe this is a kickback scheme. If I am demanding kickbacks from you, or bribes, or extortion payments so I allow you to keep doing business with me, then maybe I don’t want that money coming directly to me. And maybe you don’t want it coming directly from you. So perhaps I set up a “consulting” company to receive payments from you. Or maybe you set up a “customer” company to make payments to me. Or perhaps we do both. Maybe we have lots of shell companies, or only one. If the investigator figures it out, though, our cautions might turn around to condemn us.

Maybe you pay me with a no-show job. If so, you’d better be careful about who is holding back my payroll checks or delivering them to me. And is my pay typical of my job? A steady, constant paycheck is more typical of an office worker than a blue-collar worker, after all. These are possible tipoffs to an investigator. And paper begets paper.

-=-=-=-

So how else do they get the paper, apart from going to public records?

Subpoenas are the main stock-in-trade of the white-collar investigation team. Smart teams won’t subpoena the world, of course, because that just makes for far more work than necessary, while increasing the odds of tipping off Mr. X to the existence of the investigation. Instead, they’ll just limit their subpoenas to what they really need. Narrow requests also make more subpoenas necessary down the road, which keeps open a line of communication.

A shotgun subpoena followed by a narrower one just tips off defense attorneys like us. We see something like that, we have a chat with the client, and figure out what the investigators are probably looking for. We get all that extra time to prepare our defense.

When in doubt, utility bills are a common lead-generator, to figure out how someone is paying for their phone, cable, electricity, etc.

One thing they’ll probably want to see are old tax returns, especially for a business. Tax returns can be a mine of useful information, such as who formed the business, who the officers are, how much they get paid, who their accountant is (always a good person to interrog… ah, interview). And if the tax returns don’t match reality, well that’s another charge for the grand jury to hear, isn’t it?

The company’s accountant often did the tax returns for the owners and officers, too. Investigators can request the accountant’s retained copies of those returns, and find out all kinds of information about assets, mortgages, sources of income, etc.

Canceled checks are a high-want item. They’re one way of seeing who’s paying money to whom.

Bright investigators don’t settle for photocopies, but insist on originals. Critical information could have been whited out before copying. Photocopies are often illegible, and may not include the all-important information on the back of checks showing who deposited it and to what account.

In general, subpoenas are going to be issued to non-targets. There’s little point in asking the suspect to provide the evidence that will hang him. All it does is raise him up. And a savvy defense attorney is going to bring that client in to present the documents to the grand jury — because here in New York, for example, it is far too easy for the prosecutor to slip up and confer total transactional immunity on the client right there in the grand jury. (That’s a topic for a whole nother post.)

No, suspects aren’t usually the ones who get subpoenaed. They get searched.

-=-=-=-

Search warrants are a unique chance for the investigators to get all that stuff they never would have gotten from a subpoena. The “second set of books,” rather than the official set they keep for the IRS and other outside eyes. The secret records. (Although these can sometimes be viewed by an undercover posing as a legitimate potential buyer of the business.)

That’s what the investigators are hoping for: a “smoking gun” document of some kind. Original documents with all the info that got whited out in the subpoena response. Records of illicit payments made, cash skimmed, investors gypped. Evidence that customers were told one thing, but reality was something else entirely. It may be buried somewhere in all those boxes of docs and all those hard drives, but they can’t wait to find it.

These records may be as simple as a notebook or a wad of scratch paper. They could be as detailed as anything. Maybe there’s evidence of a cash payroll — which leads to questions of where that cash came from (the bank? really?) on top of issues of tax and benefits evasion. Maybe there’s a little black book recording paid bribes, or extortion payments received.

Search warrants are often a fine way to gain evidence of embezzlement. Maybe those personal expenses were paid for with the business’s money, or with investors’ deposits. A good search warrant team will have agents who know what they’re looking for, others speaking to the subject. Others will be busy talking to witnesses, family members, employees and others at the location, letting them think the cops know exactly what’s going on, so they’d better come clean.

In a suspect’s home, the search team might see pictures of that really nice boat, or expensive collections, or the like. Investigators love to see things like that, especially when the checkbook doesn’t show those expenses. A lifestyle and possessions beyond one’s official means is going to make them poke around for illegitimate sources of cash.

Obviously, the execution of a search warrant means the investigation ain’t a secret any more. So these usually come at the end of an investigation.

-=-=-=-=-

So how about some examples. Let’s say I have ABC company. Law enforcement subpoenaed or seized a bunch of payroll checks. Every week, my company is cutting a few dozen checks to employees. They all look totally legit, until one of the forensic accountants notices that Joe Blow tends to deposit four or five checks at a time, all on the same day. That means he’s probably not getting them each week like a normal employee, but is receiving a bunch of them once a month. That is typical of a no-show job. Joe Blow and I are now just that much closer to getting caught. Thanks, Joe.

Meanwhile, my manufacturing company DEF sends out invoices every month or so to Jack Nimble, charging tens or hundreds of thousands of dollars for all kinds of different products being delivered. Payment is due on receipt, send the check to my headquarters at 1405 Blank Lane, Suite 120. Unfortunately, the forensic accountant noticed that each month’s invoice number is one more than the previous month’s. Do I only have one customer, for all these things I’m selling? And Suite 120 turns out to be a mail drop box number. Suspicious. They’re going to watch that box and I.D. who uses it, and maybe figure out who’s paying for it. And due on receipt? Someone’s standing on the loading dock with a check for a couple hundred grand? No way. And anyway, how come there are no bills of lading, shipping records, or anything else indicating this really happened? This looks like Jack Nimble is paying me some kickbacks through a shell company.

Original checks are a treasure trove. I’m cutting tons of them to small suppliers, nothing more than $9500 or so. Oddly enough, however, they all tend to get cashed at the same check-cashing joint. They’re not deposited to anyone’s accounts. Looks like I’m laundering some money. Investigators are going to check up on these companies to see if they’re legit, maybe subpoena invoices, bills of lading and purchase order forms to see what’s going on.

MySpace Judge Agrees with Us

Friday, July 3rd, 2009

 

Remember the Lori Drew case? She’s the mom who was convicted last Thanksgiving for creating a fake MySpace persona, which she then used to harass a teenaged girl until the girl committed suicide.

After she was convicted, we argued that her conviction stretched the meaning of the statute too far. Here’s what we wrote:

The underlying statute, the Computer Fraud and Abuse Act, is a federal law intended to prevent hacking. Drew created a fictitious MySpace account, which was used to harass the girl. In doing so, Drew violated MySpace’s terms of service, though she apparently never read them. By violating the terms of service, Drew got unauthorized access to MySpace’s servers, and the prosecution went out on a limb to argue that this technically violated the CFAA.

But does it really?

Plenty of pundits are now doubting that the verdict will survive an appeal. Congress clearly intended the law to criminalize hacking into someone else’s computer. That’s different from creating a fictitious screen name — a very common and socially acceptable occurrence.

Terms of service are conditions imposed by websites which govern permissible use, and which almost always prescribe penalties that may be imposed for violations. These penalties normally range from warnings and temporary disabling of access, to permanent denial of access. The relationship is essentially contractual.

But if the prosecution’s theory is upheld on appeal, then breaching such conditions would have criminal consequences.

Criminalizing this kind of behavior isn’t exactly far-fetched. Crime is essentially that behavior which society considers so threatening that the guilty must be punished with a restriction on liberty or a loss of property. The existence of a civil remedy does not preclude something from being criminal — a thief is civilly liable to return what he stole, but still faces jail regardless. And there may be something to an argument for criminalizing the false personas on social networking sites frequented by minors, to protect society from predators.

But that’s clearly not what Congress was trying to do here. Furthermore, the prosecution’s stretched interpretation is just too overbroad. Rather than being narrowly tailored to focus on those who violate the TOS of a child-used site for the purpose of committing a nefarious or dangerous crime, the prosecution’s theory simply criminalizes all violations of any site’s TOS agreement. A court of appeals is likely to find that an improper application of the law.

Lori Drew was scheduled to be sentenced today. (Well, technically yesterday. Thursday. We’re still working, so it’s still Thursday to us.)

But she wasn’t sentenced. Instead, Judge Wu threw out her conviction. According to CNN, he refused to uphold the jury’s verdict because the guilty verdict would set a bad precedent that anyone who violates a site’s TOS could also be found guilty of a misdemeanor. Criminalizing all violations of a site’s TOS agreement is not what the law is designed to do. Because it technically allows such improper application of the law, it is probably unconstitutional for vagueness.

This was just an oral decision. Wu is expected to issue his written decision soon.

Great minds think alike!

Are White Collar Sentences Too Harsh Now?

Tuesday, June 30th, 2009

dilbert-wcc.pngPrison Farm

When we started law school back in ’93, we felt that white-collar criminals just weren’t punished that harshly in this country. The Dilbert strip above, from about the same time, shows that we were not alone in thinking this. It seems that this was a common perception going at least as far back as our early childhood — click on the audio button above to listen to an early ’70s National Lampoon skit called “Prison Farm.”

Like many, we felt that there was some serious injustice going on here. Socioeconomic elites were getting off lightly, even though they may have victimized far more people, far more seriously, than street-level crooks who were doing hard time. A mugger takes one person’s money, and gets a long sentence in a high-security prison. Meanwhile, a Wall Street scammer wipes out thousands of families’ savings, erases their years of labor and planning, and gets a slap on the wrist. It seemed absurd, like something from Alice in Wonderland.

And we weren’t wrong. As late as the early ’90s, we had guys like Mike Milken serving less than two years, even after the sentencing judge (Kimba Wood) had said such things as “You were willing to commit only crimes that were unlikely to be detected…. When a man of your power in the financial world… repeatedly conspires to violate, and violates, securities and tax business in order to achieve more power and wealth for himself… a significant prison term is required.”

The lesser sentences were of course due in no small part to the difficulty of spotting white-collar crime in the first place, and then proving it to a jury. Also, the law itself classified these crimes at the less-serious end of the spectrum. So you had to expect significant plea bargaining in difficult-to-prove cases, and the plea sentences were being discounted from relatively short terms in the first place.

Another important factor was the socioeconomic status of the white-collar defendants. These were not street thugs, they weren’t skeevy bottom-feeders. They were college-educated, productive members of the community, involved in charities and otherwise living “normal” lives. Their crimes weren’t violent, they were almost administrative. Victims weren’t in your face, with visceral injuries and tangible losses; they were anonymous and diffuse, with paper losses of mere money. These middle- and upper-class defendants weren’t people who belonged in prison — their loss of status, their shame, did more to rehabilitate and deter than any time behind bars. Judges felt this, and acted accordingly.

But by the time we graduated law school, this had all started to change. By then, the federal Sentencing Guidelines had gone into effect. The Guidelines had three major effects on federal cases. First, they increased the penalties for white-collar crimes, especially where the dollar amounts were high and there were many victims. Second, judges lost most of their discretion to sentence lightly based on the defendant’s socioeconomic status, and were not all that willing to put such reasoning on the record. Third, the Guidelines took away much of the plea-bargaining leeway, only permitting two or three levels of departure for taking a plea.

The biggest change happened when the tech bubble burst in 2000. In the late ’90s, Americans became investors like never before, with even cops and construction workers becoming day traders at home. Tons of our money went into IRAs, brokerage accounts and 401(k)s. And then the bubble burst, the markets dipped, and the average Joe saw his investments tank. As always happens, this revealed financial frauds that had escaped unnoticed in the up market. The middle class was outraged, and began to demand severe penalties for the fraudsters.

Prosecutors and judges got the message, and the exposed fraudsters got slammed. WorldCom’s Bernie Ebbers got 25 years. Enron’s Jeff Skilling got 24 years and 4 months (Andy Fastow, reported to be the primary Enron fraudster, cooperated and got six years). Adelphia’s John Rigas got 15 years. In state court, Tyco’s Dennis Kozlowski got 8-1/3 to 25 years.

This pattern repeated itself in the recent economic downturn. After several boom years, a credit crunch and market dip exposed many white-collar offenses (most of which we are told are still in the pre-indictment phase). Voters had lost a lot, and their voices were heard.

So now we get yesterday’s 150-year sentence of Bernie Madoff. As we’ve explained before, we’ve avoided writing about the Madoff case, because everyone else is already talking about it, and we don’t feel like we have anything new to add.

But this 150-year sentence… we’re going to go against the grain here and wonder out loud if perhaps it’s too harsh.

* * * * *

Whoa. How can we say that, when we just got done saying how unjust it seemed when white-collar types were getting off lightly? Isn’t this exactly what we wanted?

No, it isn’t. We wanted the punishment to fit the crime, and to fit the policies underlying criminal punishment. This sentence doesn’t do that.

For one thing, Madoff took a plea to avoid trial. And yet he still got the worst sentence that he could have gotten had a jury convicted him. What was the point of taking a plea? This sends a strong message to white-collar defendants now: you might as well just go to trial, because you’re going to get the same sentence if you lose — and juries being what they are, you might just win. The system could see a lot fewer pleas — pleas it relies on to keep working.

For another thing, Madoff got a bunch of consecutive sentences. Normally, even after trial, they’d mostly run concurrently. He’d have gotten about 30 years — still a life sentence for a 71-year-old guy. Judge Chin said he did so for “symbolic” reasons, to make the victims feel better. But is that a valid purpose of sentencing?

Of course it isn’t. The purpose of sentencing is not to make victims feel better, or give them closure, or anything like that. The criminal justice system does not serve the function of making victims whole. That’s the job of the civil courts. A criminal court can order restitution as a condition of sentencing, but that’s about it. The purpose of sentencing is not reparation, but punishment. Punishment is supposed to deter future crimes, retaliate against the offender, rehabilitate the offender so he doesn’t do it again, or remove a threat to society.

But maybe Judge Chin is on to something here. Perception is important. Few of the purposes of punishment work unless there is some perception. Deterrence doesn’t work, unless people get the impression that crimes are probably going to be punished, and that they will probably be punished harshly enough to make them not worth your while. (This raises an interesting thought experiment — would the criminal justice system work just as well if we could give the public the impression that crimes are punished, without actually incurring the expense and hassle of, you know, punishing them? Discuss.)

Another problem we have with this sentence is that his scam wasn’t directed at Joe Retail out there. It was a secretive investment fund that did not disclose what it was doing, as it would have had to if it had been sold to the average person. It could be secretive because it was sold to sophisticated investors. These sophisticated investors saw an unusually high and steady rate of return, and instead of investigating to see what was going on, simply told Madoff to cut them in.

Sophisticated investors have a duty to check these things out. Are we blaming the victims here? Yeah, a little. They had the size or experience to know that something that sounds too good to be true probably isn’t. And yet they shoved their money into the fund anyway. And for those who shoved all of their money into the fund, ignoring basic investment principles of diversification, they were victimizing themselves just as much as if they’d invested in Pets.com. And for those who invested beyond their discretionary income, but actually sent Madoff the money they needed to live on, that’s the epitome of dumb. These weren’t blue-collar workers, these were investors with enough dough to get in the game, and enough savvy to have known better. The law just doesn’t need to afford them the same protections as ordinary folks.

So the law doesn’t need to impose punishments harsher than those imposed on victimizers of ordinary folks.

What is needed is parity. Yes, white-collar sentences should reflect the seriousness of the harm done, just as sentences for violent crimes and street crimes need to be proportionate to the offense. A white-collar offense that causes as much harm as a back-alley mugging probably deserves a similar punishment, all else being equal. Maybe a little less, actually, as there is more likelihood of deterrence or rehabilitation. White-collar crimes are usually calculated, they aren’t crimes of the moment, and offenders usually have the smarts to take punishment into account. And white-collar offenders aren’t as likely to re-offend once they’ve gone through the system. So sure, maybe they don’t need quite as much punishment. But it ought to be about the same.

Giving 150 years here, though, is not at all proportionate. Murderers don’t get that much. Kidnappers don’t get that much. And taking someone’s life or liberty is just not the same as taking someone’s property. White-collar victims only lose money. It’s only money. It’s a big deal, but it should not be punished more severely than crimes that are obviously more severe.

The pendulum has swung too far.

Defense to Win All Remaining Supreme Court Cases

Wednesday, June 17th, 2009

supreme-court-fountain.png

With only two more decision dates remaining in this Supreme Court term, we’ve got our eyes on four criminal cases yet to be decided. Either next Monday (June 22) or the following Monday (June 29), we should expect to hear from the Supremes.

We’re going to make a prediction right now that all four cases will be decided in favor of the defense. Furthermore, we predict large majorities or unanimous decisions in each case. (Go ahead and laugh, we’ll wait for you.)

The four cases are:

Safford USD v. Redding, No. 08-479. We talked about this one before (see here). A public school had an absurd zero-tolerance policy (surprise, surprise), this time prohibiting prescription Advil. A girl got caught with some. She blamed someone else (surprise, surprise). School authorities confronted the other girl, Redding, who denied being involved. They searched her backpack, and found nothing. They searched her clothes, and found nothing.

Now at this point, a reasonable person might have figured out that the girl who was caught with the actual pills was trying to pull a fast one here. But these were not reasonable people — they were public school officials. So they had Redding — a 13-year-old girl — expose her breasts and vagina. They found no pills. Then they shook out her underwear, and found nothing. Then both the school nurse and another school official physically searched the girl’s body. They found nothing.

Now at this point, a reasonable person would have surely figured out that there was nothing to see here. But these bright bulbs instead stuck the girl in the principal’s office alone for a few hours, didn’t contact her folks, and didn’t bother searching anyone else.

The girl sued, claiming (surprise, surprise) that her Fourth Amendment rights had been violated.

The Supreme Court has now been asked to decide whether public school officials are permitted by the Fourth Amendment to perform a warrantless strip search of a student whom they merely suspect of possessing forbidden contraband.

The school wants the Court to say yes, schools can perform strip searches any time they have reason to suspect that a student has forbidden contraband. They want a rule that doesn’t let judges second-guess the judgment of school officials.

Our prediction is that the Court isn’t going to grant such a bright-line rule. For the reasons we set out in our previous post, we predict that the Court will require a case-by-case analysis. It will be fact-specific, whether the officials have evidence that is sufficiently credible to justify an articulable suspicion that contraband will be found during a strip search. And it will require a balancing, to ensure that the invasiveness of the search is proportionate to the danger of the contraband sought. A strip-search to find an explosive is one thing; but examining a young girl’s private parts to find Advil is another thing entirely.

* * * * *

The next case we’re looking for is Yeager v. United States, No. 08-67.

The issue in Yeager is collateral estoppel after a hung jury. Specifically, a jury acquitted on some counts, and hung on other counts, all sharing a common element. Perhaps the only explanation for the acquittals is that the jury decided that common element in the defendant’s favor. So is the government prevented from re-trying the hung counts, by collateral estoppel?

Yeager was an executive with Enron’s telecom unit, charged with 176 white-collar crimes. After a three-month-long trial, the jury acquitted him on the counts of conspiracy, securities fraud and wire fraud. But the jury hung on the counts of insider trading and money laundering.

The Fifth Circuit said that one explanation for the acquittals is that the jury found that Yeager had no inside information. That was also an element of the insider trading count. But the Circuit said it was impossible to determine “with any certainty what the jury” actually must have decided. So that meant there could be no collateral estoppel precluding a new trial.

At oral argument, Justice Souter honed in on the real issue here, which is a conflict between two underlying principles of our current jurisprudence. On the one hand, once a jury has determined a fact, the government doesn’t get a second chance to prove it. On the other hand, the government is permitted a full opportunity to convict, so it is allowed to re-try counts where a jury hung. Chief Justice Roberts and Justices Kennedy and Breyer explored the conflicting principles in greater depth. Although the government’s attorney was more deft at handling the philosophical argument, and Yeager’s attorney seemed to be stuck in a surface argument, it seemed by the end that the Court was siding with Yeager.

What seems to have killed the government’s position here was its assertion that acquittals should not affect retrials if they are not “rational” — meaning they are inconsistent with the jury’s remaining outcomes — and that a hung count is an outcome that can be used to determine whether the actual verdicts were rational. That not only conflicts with precedent that permits inconsistent verdicts, but also defies common sense by treating the absence of a decision as an affirmative determination.

This one’s a tossup, but we’re going to predict a ruling in favor of Yeager here.

* * * * *

The third case to watch for is District Attorney’s Office v. Osborne, No. 08-6.

Osborne was convicted 14 years ago for kidnapping and sexual assault. The victim was brutally assaulted and raped in a remote area in Alaska. Osborne was alleged to have used a blue condom. A blue condom was found at the scene, containing semen. Osborne now wants to get discovery of the semen, and have DNA testing done at his own expense, in the hopes that it will demonstrate his innocence. The State of Alaska refused.

Osborne brought a 42 U.S.C. §1983 civil rights suit, arguing that Alaska’s refusal violated his Due Process rights. The district court dismissed the suit, saying he should have brought a Habeas claim instead.

The Ninth Circuit issued two decisions. The first was that a §1983 suit is fine here, because the outcome would not necessarily undermine the state-court conviction. The DNA evidence could potentially prove his guilt, or be inconclusive. It would only require Habeas if the evidence would have to demonstrate innocence. And he could still bring a Habeas later if the §1983 action fails.

In its second decision, the Ninth Circuit forced the Supreme Court’s hand. The Supremes have long taken pains to avoid deciding whether a convict can overturn his conviction based only on a claim of innocence, rather than on pointing out defects in the way the trial was conducted. But the Ninth assumed that this is permissible.

Then, based on that assumption, the Ninth said that in circumstances like that — in fact, only in circumstances like that — where a convict could later use the evidence in a freestanding innocence claim, then Brady gives a post-conviction right to access potentially favorable evidence.

The Supreme Court is now deciding both issues: whether the §1983 suit is appropriate for accessing DNA evidence post-conviction, and whether Due Process requires such access if it could establish innocence.

At oral argument, Justice Souter barely let the Alaska A.G. get a word out before launching a lengthy debate over whether Osborne merely sought evidence that might or might not allow him to establish a claim later, or whether he sought evidence that he affirmatively believes will be the basis of a claim of innocence. By the end, both Scalia and Ginsburg had gotten involved, and the Chief Justice was wondering whether the State even had the evidence any more. Breyer got everyone back on track, pointing out that §1983 was appropriate when you didn’t know what the evidence was yet, and Habeas is appropriate when you do know. And here, nobody knows what the DNA evidence is, yet. So how come the State doesn’t have a constitutional obligation to give him the DNA?

The AG gave a terrible response, saying that Osborne simply followed the wrong procedure. Half the bench jumped in to interrupt him, dumbfounded at the assertion, given that Alaska doesn’t have a statutory procedure in the first place. The one statute out there (as Scalia pointed out) first requires an assertion that the evidence establishes innocence, which is the one thing nobody can say yet, because it hasn’t been tested yet. Souter and Scalia tag-teamed the AG on that mercilessly. At one point, Scalia had the audience laughing at the AG. For the rest of the oral argument, the Justices would refer to the fact that they “must have missed” this procedure being mentioned in any of the briefs.

By the end of the AG’s time, nobody had even gotten to the juicy issues yet. Breyer tried to give the AG a chance to talk about it, but the AG just went back to his procedural claim that had used up his time already. This only frustrated the Justices.

The U.S., as amicus to Alaska, started off better, getting to the heart of the issue — the issue the Supreme Court has so long avoided — arguing that prisoners do not have the right to challenge their conviction based on a freestanding claim of actual innocence. But Souter suggested that the right may be found, “not in procedural, but in substantive Due Process,” and asked a hypothetical about letting counsel speak to another prisoner who claims to have exonerating evidence. The Deputy S.G. floundered, and got laughed at as well. They never even got to the constitutional issue (as Souter repeatedly pointed out), and got mired in whether the government even has an interest here in the first place. And then time was up.

Osborne’s lawyer did much better. He deflected the Court’s concerns that at trial the defense had chosen not to test the DNA, and thus must have believed it would show guilt, by pointing out that both sides chose not to test it, because the tests available would have destroyed all of the evidence, precluding later testing.

The Justices across the board expressed concern that they were being asked to create a new constitutional right here. Shouldn’t a prisoner have to make a claim, under penalty of perjury, that he is actually innocent first? Shouldn’t there be a requirement of due diligence, so that claims aren’t made years and years after they could have been brought? Osborne’s attorney admitted that those are fine ideas, and wouldn’t be an obstacle here.

Then Scalia tipped his hand a little. Osborne’s lawyer observed that this is the first case where a prosecutor conceded that DNA would be “absolutely slam-dunk dispositive of innocence,” but doesn’t let the prisoner access it. Scalia thought out loud, “you know, it is very strange. Why did they do that, I wonder?” “Well, it’s very…” Scalia interrupted, “there was a lot of other evidence in the case, wasn’t there?” “Well, that’s…” Scalia cut in, “I don’t know what they thought they were doing.”

Scalia, for one, is not likely to side with the DA’s office here.

Souter came back to his conclusion that this is a substantive Due Process issue, which would require that the prisoner first claim that he is actually innocent. This conflicted with the sworn testimony before the Parole Board admitting guilt. But Breyer pointed out that prisoners often wisely admit guilt before such Boards, because they’re not getting out otherwise. (As defense lawyers like to say, forget guilt or innocence, “out is out.”) So relying on Parole Board admissions would be an arbitrary basis for withholding DNA evidence. So “suppose we said that the rule is non-arbitrary, with illustrations. Send it back to the states. And of course, when they apply their own statutes, by and large they’re not being arbitrary.” Osborne’s counsel agreed, “I think that’s a very sound approach to this.” Breyer responded, “well, it does help you win.”

I don’t think Breyer or Souter are siding with Alaska here, either.

The Chief Justice wondered if the right would be depend on the accuracy of the testing available. No, said Osborne’s lawyer, it has nothing to do with it — the right would just prohibit the state from arbitrarily preventing access to evidence. So long as there’s a reasonable probability that the test will demonstrate evidence, then that should be enough.

On rebuttal, the AAG got maybe three words in edgewise.

So just going from the oral argument, we’re going to predict a loss for Alaska.

Now whether that means a whole new constitutional right or not, well we’re not so sure. This only affects a handful of defendants whose convictions came before the Federal Innocence Protection Act in the mid-1990s.

The trick, though, will be whether the Court can continue to avoid the elephant in the room, the issue of whether one can assert a freestanding claim of innocence. The Ninth Circuit made it a prerequisite, and both the liberal and conservative Justices seemed to put a lot of weight on whether the prisoner first asserted innocence.

We predict that the Court is going to go all the way here. And as long as we’re going out on a limb, we’ll also predict a unanimous decision.

* * * * *

The final criminal case yet to be decided is also the oldest: Melendez-Diaz v. Massachusetts, No. 07-591.

The issue is straightforward: Is a lab report, by itself, a form of testimony for Confrontation Clause purposes, per Crawford v. Washington, 541 U.S. 36 (2004)?

Crawford says you can’t introduce earlier statements of a government witness, if they hadn’t been subject to cross-examination.

Well, a police lab report wasn’t subject to cross-examination when it was created. But they are often admitted into evidence without live testimony from the chemist or forensic expert who made the report — they’re self-authenticating. If lab reports are testimonial, then Crawford would preclude this practice. If they are not testimonial, but merely a record, then they could continue to be admitted without live testimony.

The Massachusetts Supreme Judicial Court looked at this conundrum a couple times, and decided that drug analysis reports were simply records of “primary fact, with no judgment or discretion,” by the chemist who prepared them. So they weren’t testimonial, and there was no Confrontation Clause problem.

Melendez-Diaz was the defendant in the second such case, which affirmed the first one.

It’s a sure bet that Scalia is going to side with the defendant here. He has long been a champion of the Confrontation Clause, and his contributions at oral argument were true to form.

The Massachusetts AG was frankly an embarrassment, making inaccurate assertions (and being corrected by the Court), resting heavily on the lame argument that nobody’s made this particular claim before, and claiming that requiring chemists to testify would be an “undue burden,” even though it’s no such burden to California or New York or any other state where it’s routinely done at trial. Kennedy even coached the AG with arguments that she ought to have been making, and scolded her when she still didn’t make them.

Justices Kennedy, Scalia and Stevens had little patience for the amicus Assistant S.G., whose argument was that machine-generated reports aren’t testimonial. There’s a difference between an automated record and a computerized document created for the purpose of proving an element of a crime at trial. And they’re different from computerized documents reflecting the observations and conclusions of a human being.

Based on how the oral argument went, we’re going to predict yet another win for the defendant.

Antitrust Division Indicts Japanese National in Yet Another LCD Monitor Case

Thursday, April 2nd, 2009

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The DOJ got an indictment this week against a Hitachi executive, in the government’s ongoing prosecution of alleged price-fixing in the LCD monitor industry.

We first blogged on this back on November 13th, when Sharp, LG Display and Chunghwa all pled guilty to price fixing, agreeing to pay $585 million in fines. Since then, Chungwha executives also pled guilty during February.

After the Chungwha executive pleas, Hitachi itself agreed in March to plead guilty and pay $31 million in fines.

Breaking from the pattern, however, rather than a Hitachi executive subsequently pleading guilty, the feds went ahead and indicted him.

According to a DOJ press release, Tuesday’s indictment charges a Japanese national, Sakae Someya, who was an executive at Hitachi Displays Ltd. Mr. Someya is accused of taking part in a larger global conspiracy to fix the prices of LCD panels sold to Dell.

Mr. Someya is accused of agreeing to charge set prices for the screens, sharing sales information to ensure everyone was complying with the agreed prices, and trying to keep the arrangement secret. These are Sherman Act charges, with a max of 10 years in prison plus a max fine of the greater of $1 million, double the gain, or double the loss to victims.

We wonder how much of the allegedly criminal conduct is simply normal business practice in Japanese culture. After all, the keiretsu distribution system used by Japanese industry looks very much like price fixing to Western eyes.

It certainly looks to us as though the DOJ’s Antitrust Division is busting through decades of resistance to offshore enforcement of U.S. antitrust rules. Whether it is proper to impose U.S. laws on a very foreign culture… that’s another question entirely. What do you think?

DOJ Tries To Sweep Its Ted Stevens Fiasco Under the Rug

Thursday, April 2nd, 2009

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We try not to report here on matters that everyone else in the world is already talking about. That’s why we’ve said nowt on Bernie Madoff and other headline-grabbing stories. For the same reason, we decided yesterday not to mention the DOJ’s request to dismiss the charges in its prosecution of former Alaska Sen. Ted Stevens — everyone else was already reporting it. And we’ve already discussed the DOJ’s misconduct at length here and here.

But we wanted to point out a big point that the media seem to be missing. Most reports see this as a vindication of former Sen. Stevens, and a sign that prosecutorial misconduct will not be tolerated by the DOJ. In fact, however, the DOJ’s action means anything but that.

Stevens was convicted last October after a jury trial in D.C., during which the government withheld important Brady material — the judge said the prosecutors did so intentionally, and an FBI agent later confirmed that it was intentional. In addition, the prosecutors had a witness who, when they found out his testimony could clear Stevens of any guilt, they sent home to Alaska to conceal him from the defense. There were also inappropriate dealings between FBI agents and the government’s star witness, including an apparent sexual relationship.

The prosecutors continued to screw up, failing to turn over documents to the defense as ordered by the judge after all this came out. Understandably, the prosecutors were held in contempt, and taken off the case.

The case had gone from a trumpeted victory for the DOJ, to a squalid embarrassment.

So now, yesterday, the DOJ filed a motion to have all the charges against Sen. Stevens dismissed. They’re holding it out as a heroic act, that they’re doing the just and proper thing, that AG Holder is sending a message to prosecutors at the DOJ that further misconduct will not be tolerated.

We call shenanigans.

This dismissal of the charges is nothing more than an attempt to sweep the whole nefarious affair under the rug. The case goes away, so the problem goes away. There will be no further need for the scrupulous investigation of what went wrong at Justice. There will be no need to hold costly and embarrassing internal reviews. There will be no need for further media scrutiny.

The DOJ should not be permitted to escape whipping, by its own unilateral decision to drop a case. That’s not good enough.

This prosecution of this case was bizarre from the get-go. It was rushed to indictment hastily, mere days before the primaries in an important election (in violation of DOJ rules prohibiting indictments that could affect the outcome of an election, by the way). The prosecutors intentionally withheld evidence that seems to show the Senator didn’t commit the crime he was accused of. They violated court orders. They tried to hide a key witness from the defense. And ironically, these were prosecutors in the Public Integrity unit, of all things.

Now they want to make it all go away. Here’s hoping that Congress, the courts and the media see through this little ploy, and keep on investigating just what the heck is going on in the DOJ these days.

White Collar Crime Going Prime Time

Wednesday, March 25th, 2009

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What with white-collar crime being such big news these days, it was only a matter of time: The Hollywood Reporter reports that the USA Network is about to pick up a new series, “White Collar.”

Now that USA’s popular detective series “Monk” is ending, the cable network is looking for a new original series to lead in to crime comedy “Psych.” “White Collar” is described by the network as being “about the unlikely partnership of a con artist and an FBI agent who have been playing cat and mouse for years.”

It sounds to us like a takeoff on “Catch Me If You Can,” the 2002 dramedy based on real-life con man Frank Abagnale, Jr. Though entertaining, the movie wasn’t the most socially relevant story when it came out. But now that everyone’s saturated with Madoff (a topic we’ve studiously avoided, since everyone else is already talking about it), and as it looks like prosecutors are going to be announcing even more con and scam cases in the coming months, the timing certainly seems right now.

The pilot was green-lighted back in October. It stars Matthew Bomer (pictured, left) as the con artist, and Tim DeKay (right) as the FBI agent. Bronwen Hughes (“The Kids in the Hall,” “The L Word,” “Forces of Nature”) directed.

Doctors: Got “Incentives?” Better Get a Lawyer.

Friday, March 20th, 2009

 

We’ve written about an upcoming wave of white-collar prosecutions, especially against Wall Street types. But wait, there’s more: the feds are now about to start prosecuting doctors.

The Department of Justice and the Inspector General of the Department of Health and Human Services are about to start prosecuting physicians who receive inappropriate incentives from manufacturers and sellers of pharmaceuticals and medical devices. Doctors who have accepted such incentives face criminal prosecution, as well as civil fines and being barred from participation in Medicare and Medicaid programs. Doctors who have received significant incentives from medical marketers might want to seriously consider consulting a good white-collar defense attorney.

Of course, incentives are a commonplace in medical marketing. And of course the purpose is to somehow influence which drug a doctor intends to prescribe, or what equipment a doctor uses. A wide range of incentives are offered, not just the free pens, prescription pads and trinkets routinely handed out. Expensive equipment can be provided for free or at a deep discount, in return for minimal obligations such as a product recommendation or letting one’s office be used (albeit rarely) as a training facility. In extreme cases, sellers actually pick up the tab for travel to seminars or other expenses, pay “advances on royalties” for helping develop products, or simply pay cash kickbacks.

In the past, it has usually been the manufacturers who got prosecuted for making kickbacks or bribes, often paying millions in fines and undertaking the supervision of monitors. What’s new now is the federal focus on the doctors themselves, on the receiving end.

Many doctors may not think they’re doing anything wrong by accepting incentives from sales folk. After all, it’s the norm. And so what if a doctor got a free trip to the conference, if he continues to make his prescription decisions independently and based on the actual needs of the individual patient?

The government sees this as criminal partly because such payments are opaque. A patient might not be so trusting of a prescription for FancyPharm if he knew his doctor was getting comped by that company. A patient might not have the same confidence in her eye surgeon if she knew that he didn’t actually select and purchase his laser equipment himself, but instead got it for nothing.

Another reason is the perception that medicines and procedures would be improperly prescribed, because the incentives had an undue influence on the doctor’s decisions. Unnecessary expense and harm could result.

The main tool that prosecutors have here is the federal Anti-Kickback Statute (formally known as “the Medicate and Medicaid Patient Protection Act of 1987,” 42 U.S.C § 1320a-7b). It basically provides up to 5 years imprisonment and $25,000 in fines.

The feds are most likely to go after those who allowed marketers to pay for their consulting fees, travel to seminars or other expenses, or who accepted advances or payments, or who accepted large rebates or extreme discounts without proportionate consideration, or otherwise received remuneration that could have influenced their decision making.

Lewis Morris, chief counsel for the Inspector General, told the New York Times last week that “what we need to do is make examples of a couple of doctors, so that their colleagues see that this isn’t worth it.”

When law enforcement says they are going to make examples of people, one might think that this means they will carefully pick and choose their cases, cherry-picking only the most obviously criminal acts with the strongest evidence. However, in real life, that’s not always the case.

Especially in cases like these, where the evidence tends to be more circumstantial (absent clearly incriminating admissions, recordings or emails), and where the conduct is very often in the gray area of culpability, prosecutors may not have many rock-crusher cases in the first place. And they certainly won’t have enough cases at first to do much cherry-picking in any event.

No, they have announced their desire to make examples of people, and we predict they will go after whatever crosses their desk.

Cases are going to come from marketers who got caught trying to bribe someone else, who are then flipped to inform (and wear a wire) against the other doctors they deal with. Those are the easiest cases for law enforcement to initiate. Other cases may come from third-party complaints or referrals, but those are rare in secret one-on-one deals such as those being investigated here.

If any doctors out there think they might have had dealings with a marketer that could get them in trouble, it might be wise to get counsel from a good white-collar defense attorney sooner rather than later.

Food Fraud Prosecutors Caught Selling Snake Oil

Friday, March 13th, 2009

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Judge Posner issued a scathing decision yesterday for the 7th Circuit, reversing a jury’s fraud conviction and directing an acquittal. Why? Because the only fraudulent misrepresentations were those of the prosecutor.

The decision is great, and we plan to use some of it in our own future arguments. Sadly, it is just the latest in a string of recent cases where federal prosecutors — uncharacteristically — have far overstepped the bounds. We hope it’s not becoming a trend.

In U.S. v. Farinella, the government accused Farinella of fraudulently misleading consumers by slapping a new label over the “best when purchased by” date. The Justice Department alleged that this altered the dates on which “the dressing would expire.”

But the Justice Department was itself misleading when it said so. The dressing had a very long shelf life indeed — in fact, it has no expiration date. There is no time after which one shouldn’t eat it. The “best when purchased by” date was merely a marketing ploy. “For all we know,” Posner wrote, “the date is determined less by a judgment about taste than about concern with turnover.” Nevertheless, the government consistently referred to the date as the “expiration date,” routinely misleading the jury and the court.

Posner made an outstanding observation during his discussion of the government’s expert testimony. They had called an FDA employee, whose testimony strongly implied that changing food labels requires FDA approval. But though that may be the expert’s understanding, it wasn’t actually a requirement.

For it “to be a lawful predicate of a criminal conviction,” Posner wrote, it would “have to be found in some statute or regulation, or at least in some written interpretive guideline or opinion, and not just in the oral testimony of an agency employee.”

He then gave us white-collar defense attorneys a wonderfully quotable ruling: “It is a denial of due process of law to convict a person of a crime because he violated some bureaucrat’s secret understanding of the law. The idea of secret laws is repugnant. People cannot comply with laws the existence of which is concealed.”

There was no evidence of misbranding, and so the defendant had to be acquitted. However, even if there had been evidence, the Circuit would have reversed and ordered a new trial, because the Justice Department’s misconduct was beyond the pale.

As already pointed out, the prosecution repeatedly misrepresented the facts, referring to the “best when purchased by” date as the “expiration date.” In her closing argument alone, the prosecutor substituted that phrase 14 times.

The prosecutor further misled the jury when she told them that the “best when purchased by” date “allows a manufacturer to trace the product if there is a consumer complaint, if there is illness, if there is a need to recall the product.” That’s not remotely true, and there was no public safety issue with what the defendant did.

She made several more arguments hinging on implied threats to public safety: “If what he did was business as usual in the food industry, I suggest we stop going to the store right now and start growing our own food. . . . In spite of all this talk about the quality of the dressing, I don’t see them opening an of these bottles and taking a whiff. . . . [The defendant was indifferent to] safety. . . . The harm caused by the fraud was to public confidence in the safety of the food supply.” She called the still perfectly fine bottles “truckfulls of nasty, expired salad dressing.” She said that after the “expiration date” the dressing was no longer “fresh,” so the defendant “had to convert the expired dressing into new, fresh product.”

During rebuttal arguments, the prosecutor said “Ladies and gentlemen, don’t let the defendant and his high-paid lawyer buy his way out of this.” Then she went on to say “Black and white is our system of justice, ladies and gentlemen. You have to earn justice; you can’t buy it.” The implication that the defendant might be trying to bribe his way to an acquittal should have resulted in a warning of mistrial, but only resulted in sustained objections.

The Justice Department repeated its misrepresentations in its brief, using the phrase “expiration date” and hinting at public safety concerns. But the trial prosecutor’s misconduct alone was sufficient for the Circuit to order a new trial, and the only reason they didn’t do so was because there was no evidence in the first place, resulting in a directed acquittal.

“That does not detract from the gravity of the prosecutor’s misconduct and the need for an appropriate sanction,” Posner was quick to point out, however. “The government’s appellate lawyer told us that the prosecutor’s superior would give her a talking-to. We are not impressed by the suggestion.”

Posner finished his opinion with a nice kicker: “Since we are directing an acquittal on all counts, the sentencing issues are academic and we do not address them, beyond expressing our surprise that the government would complain about the leniency of the sentence for a crime it had failed to prove.”

Ouch.