My client in this second matter is an extremely bright guy who made some mistakes and got involved in a fraud scheme. I could tell shortly after he and others were indicted together that the prosecutor suspected but did not yet realize that my client was actually the brains behind the operation.  We decide to take the chance of going through the “proffer” exercise.  I have written before on this, but it is worth describing once again.

When a federal prosecutor believes that a suspect or Defendant has valuable information that might assist in the prosecution of other people, the prosecutor will sometimes ask the defense lawyer to bring the client in for a “proffer.”  The Government asks for these to see if the accused person has important and useful information, and also to assess whether my client might make a good witness if he or she decides to cooperate against others.

These proffer sessions to me are much like taking a test drive at an auto dealer.  The driver is not obligated to buy, nor is the dealer obligated to sell.  They just want to see whether the vehicle fits that particular person.

The dangerous part of the proffer is that the defense lawyer does not necessarily know everything that the prosecutor and federal agents know, so the lawyer needs to thoroughly and completely prepare his client beforehand.  Furthermore, some people have a hard time admitting when they did something wrong, so quite often the attorney needs to assist his or her client in the way they admit what they did, as much as the actual admission itself.

In the case I am discussing, we spent a lot of time with the client working on the method for admitting what he did.  It seemed to work.  At the end of the proffer session, the prosecutor marveled, saying that he was surprised that my client was so clear and forthright when admitting what he had done.  That clarity and certainty came  back to help the client when he was asked to testify against one of his co-Defendants.  Although the client had already started his sentence, he followed my advice and continued to cooperate truthfully.  Amazingly, within an hour of his testimony, we had a ruling from the Judge letting him out of jail to recognize his assistance.  It was one of those unfortunately rare situations where I walked a client out of custody based on my work for him or her.

There are a couple of lessons from these two cases discussed in these recent posts.  First, avoiding jail in a federal fraud case is difficult.  Second, every case is different, and the attorney needs to pick the correct strategy and tactics that seem best for that client under those circumstances.

Many people contact us because they are fearful that they might go to a federal prison for one of these fraud-type cases.  A case I recently finished included some of the arguments that help such clients avoid a jail sentence in a federal fraud prosecution.

My client was married to one of the other people charged in a large federal fraud prosecution.  Her spouse was a former law enforcement official who convinced his wife and others to get involved in a certain business proposition.  As you likely guessed already, that business proposition was based on false and untrue (meaning fraudulent) statements in loan applications sent to various banks.

The prosecution made a big deal about her husband’s law enforcement status.  The Judge imposed a lengthy jail sentence on the husband.

When we prepared to go to the sentencing hearing for the wife, we rounded up our best arguments.  First, we noted that there were others who had trusted the husband based on his law enforcement status, yet these others had not been charged with crimes.  These other uncharged people also knew that the bank applications contained untrue information, yet the Government let them go without being charged.  So, our first argument was that a spouse should be given at least the same amount of credit when she simply following the lead of her husband into a business venture.  Second, we focused on my client’s family obligations.  Without revealing confidential information in this blog post, it made a big impact when we explained to the Judge what would happen with the family if the wife was incarcerated.  Third, I did my best to maintain good relations with both the Prosecutor and the Probation Officer.  While they are my opponents and I often do not agree with them, maintaining good relations can help in a close case.  Here, it did help, for the Prosecutor did not really put up much of a fight when we asked the Judge to figure out a way to avoid sending my client to a prison.  Furthermore, the Probation Officer was the one who came up with the suggestion as to the method that could allow the Judge to impose a sentence that did not contain any further time in custody.  Fourth, my client decided to trust me and the strategy I had mapped out.

The Fifth and final factor is more difficult to describe, but might be the most important.  I knew this Judge very well from having appeared before him many times.  I have also been on professional programs with this Judge, and had the chance to talk with him about non-lawyer issues. I have a fairly good idea of what arguments work, and those which won’t work.  Knowing the Judge can sometimes be a tremendous help when crafting the best argument in trying to keep a client out of prison.

All of these factors came together in this recent case.  The Judge said he was going to do something he never does, and he gave my client a sentence that kept her at home with her family.  As you can imagine, she is very relieved.

Every case is different.  Nevertheless, when trying to avoid a prison sentence in a federal fraud case, it is so important that the attorney map out a multi-pronged strategy when trying to help the client avoid jail.  This recent case was gratifying not only because my client avoided prison, it also made me feel good that our strategy was the proper course to take.

One of my favorites is a defense that I affectionately call “the wrong courthouse.” Some cases are  bought in federal court, even though there is a very slim or tenuous connection to the federal government.  The Feds usually try to get past this thin connection by using the “Commerce Clause“, found at Article I, section8 clause 3 of the Constitution of the United States.

The Commerce Clause has been stretched by the courts to cover just about anything involved in our far-flung economy.  The theory goes that if an activity “affects” commerce, then just about any aspect of that activity can be “regulated” by the federal government.  Therefore, even though Mr. Jones is growing marijuana for himself and some friends, his activity has an impact on the overall marijuana market throughout the country.  As a result, the federal government can bring a criminal case against the unfortunate Mr. J by showing that his actions affect commerce, thus letting them prosecute him in a federal courthouse.  Using the wrong courthouse defense, there are a few cases where the connection is too tenuous or basically non-existent.  We argue that while the client did something wrong (growing marijuana, for example), they are bringing the case in the wrong courthouse for there is no federal connection.  The wrong courthouse defense cannot get the client completely out of the stew, for the local state authorities could also bring a case against him or her.  Still, it gives us some wiggle room and potentially the way to a better overall resolution.

Another rarely used defense is the “statute of limitations”, or as I usually call it, the “SOL.”  Most folks have heard about the SOL.  It is based on old English common law that was passed down to the people who created our form of government.  Basically, the SOL is a law that says prosecutors only have a certain amount of time in which to bring a criminal case.  The main federal SOL is found at title 18, United States Code, section 3282.  For most federal crimes, the SOL is 5 years.  In the late 1980s’ and thereafter, Congress created a longer “period” for bringing various fraud-type cases, that law is at title 18, United States Code, 3293. These fraud cases can usually be brought if done within 10 years.

The SOL can be raised as a defense in two kinds of ways.  First, the careful lawyer might notice that the indictment does not allege that anything happened within the relevant SOL period (be that 5 or 10 years).  That could lead to a pretrial Motion to Dismiss.  Second, the attorney might realize that while the indictment alleges that something happened inside the applicable SOL period, there are not facts that can be proved to show that the Defendant him or herself did anything during that time frame.  Some attorneys will lay back until the very end of the prosecutor’s case before raising this defense, when it is too late to bring any more witnesses or evidence into the trial.  Again, in an SOL defense, the lawyer is NOT saying that the client is innocent.  Instead, the defense is that the prosecutor waited too long.

These are very specialized defenses, and should only be used in rare situations.  Nevertheless, it is worth remembering that in some situations, just because the client did the things he or she is accused of doing, that does not automatically mean there is no defense.

The basic idea of an “insider trading” case is that someone learns about “material non-public information”, such as the fact that one company might be in the process of buying another company. When companies prepare to engage in such moves, they need to hire bankers, lawyers, accountants, printers and lots of folks who work on the deal. It is illegal for anyone who learns such “material non-public” information to give a “tip” to anyone, and for the recipient of the tip (the “tippee”) to make trades (such as buying the stock of the company that is about to be purchased.)

Attorneys for Zvi Goffer, a former securities trader , and Michael Kimelman, co-founder of a trading firm, recently asked the United States Court of Appeals for the Second Circuit to vacate their clients’ 2011 convictions. Prosecutors claimed that Mr. Goffer (a securities trader), was the ringleader of a scheme which traded on material non-public information prior to public announcement of deals involving computer network equipment makers and drug companies. Mr. Kimelman, the other Defendant, apparently worked with Goffer’s brother. Although the attorney for the securities trader claimed that his client had not breached anyone’s trust, one of the judges noted that the trader apparently paid kickbacks to lawyers at a large law firm in return for information on upcoming corporate acquisitions.

Perhaps the more interesting aspect of this appeal concerns the challenges to the sentences imposed for insider trading. The trial judge imposed a 10-year sentence on Mr. Goffer, and two and one-half years for Mr. Kimmelman. The defense lawyers contrasted the treatment their clients received with the high-profile insider trading case against Rajat Gupta, the former Goldman Sachs director convicted for leaking non-public information to Galleon founder Raj Rajaratnam. Gupta got a shorter two-year prison sentence in October. The scheme involving Gupta and Rajaratnam supposedly netted $50 million, far more than what was involved here, the defense attorneys argued, yet the sentences were almost as severe.

We are very sensitive to sentencing arguments in federal court, for we handle many similar matters. Likewise, we also occassionally represent people caught up in SEC investigations, some of which turn into federal insider trading criminal cases. We had some good luck on appeal for a bank executive caught up in an insider trading case. We convinced the trial judge to impose no jail time, but the prosecutors appealed, similar to the situation described in this post. However, in our case, we convinced the Court of Appeals to reverse itself and affirm the sentence of probation. Because of that and similar cases, we look forward to seeing how the Second Circuit resolves these cases.

Mr. Merrill was involved in a company that sold munitions to the Army. The munitions would then be shipped to Afghanistan. There is a federal statute and regulation saying that companies cannot provide any such munitions if the material was manufactured by a company in Communist China. Merrill and others had “old” munitions that had been made by a Chinese Communist manufacturer years before the prohibition went into effect. When they tested the waters, they discovered that the US government would still not allow the use of this “old” Communist material, so they did what any self-respecting international arms dealer would do: they removed all signs of its origin and shipped the stuff to Afghanistan.

The feds eventually got wise, and sent Mr. Merrill a federal grand jury subpoena, telling him to appear in Miami two days before he was supposed to testify in front of a federal grand jury. Merrill apparently showed up with no lawyer helping him. You guessed it, during those two days a federal prosecutor and several agents “dry cleaned” Mr. Merrill, telling him that they had the goods on him, telling him it would be better if he ‘fessed up, and getting him to basically incriminate himself.

They later indicted Mr. Merrill. His defense team argued that Merrill’s statements should be suppressed because a court cannot admit against a defendant “a statement made during plea discussions with an attorney for the prosecuting authority if the discussions did not result in a guilty plea or they resulted in a later-withdrawn guilty plea.” Fed.R. Evid. 410(a)(4). However, there were no charges pending at the time of the interview. Furthermore, the Court of Appeals found it important that Merrill was free to end the interview or to consult with his attorney, and he declined to do either even though he was advised of his rights. And here’s the important part: the trial court “credited the testimony of Agents Vasquez and Perez who testified that any discussions of leniency were general in nature and that no specific promises were made.” As a result, the Court ruled that even if Merrill thought that he was cutting a deal when he made admissions to the prosecutor and the agents, the Court decided to believe the agents who testified that no such deal was discussed.

It is always important to have a lawyer when a person speaks with a federal prosecutor or agent. It is perhaps more important to have another person accompany the Defendant and the lawyer, so that if there is a dispute the Courts cannot always simply rubber-stamp whatever the agents “remember” from such a meeting. This recent case is further proof of why people should consult experienced federal criminal defense lawyers when they get a grand jury subpoena.

Like many of the federal fraud cases we handle, Singletary involved questions of how much “loss” was involved, along with how much “restitution” could be ordered. Many lawyers forget that these are two very distinct issues. “Loss” is a calculation under the United States Sentencing Guidelines, and this figure is one of the major factors that drives the calculation of the prison sentence in a fraud case. The Guidelines tell a judge to calculate “loss” as the “greater of actual or intended loss”. Additionally, the Guidelines also instruct that loss can be “estimated” when the proof is difficult to establish.

Restitution is quite different than “loss.” Restitution is based on the loss the victim actually suffered. In other words, “loss” can be much higher than restitution when the defendant tried to get money but was unsuccessful.

While “loss” and restitution are distinct concepts, each figure needs to be adequately proven by the prosecutor. Furthermore, when a defendant objects to either calculation, the sentencing judge must support the ultimate “loss” or restitution number with specific factual findings.

In Singletary, the Court of Appeals confronted a case where the prosecutor used a broad-brush approach to restitution, trying to come up with an estimated figure. The sentencing judge basically agreed with the prosecutor’s approach, estimating a loss of $1 million. The Eleventh Circuit reversed because the trial court “failed to carry out the task” of rendering factual findings for each and every specific loss that supported the restitution order.

This case holds lessons for lawyers who handle federal fraud cases. Remember to make the government prove both the “loss” and restitution, and when they do not, appeal the issue. It might help the client in the long run.

The case is United States v. Suzanne Schmitz, and it was published on March 4, 2011. We have gotten a little behind in our blogging here, and over the next couple of weeks we will try to catch up by posting some entries from earlier this year.

In the Schmitz case, the defendant was charged with two varieties of fraud, mail fraud and fraud involving a program that received federal funds. The mail fraud charges were OK, appropriately setting out facts to support what we call the “scheme to defraud.” However, the counts alleging that Ms. Schmitz defrauded a program that got some money from federal funds fared less well. These charges merely alleged that she worked for the program, that she got her salary each year by engaging in fraud, and that such conduct violated the specific law in question.

On the one hand, indictments that set out the language of a law sometimes are good enough. However, the indictment also needs to set out sufficient facts and circumstances so that the defendant knows what he or she must defend against. Here, the part of the indictment involving federal funds fraud failed to allege any such facts.

The prosecutors in the Schmitz case had a fallback position. There is another set of rules that tell judges to look at the indictment “as a whole” and give it a “common-sense construction.” The prosecutors in Schmitz argued that by looking at the mail fraud charges (which, as mentioned above, were pled correctly) a person could understand what was charged in the counts alleging federal funds fraud. The Eleventh Circuit rejected this argument. While one part of an indictment can “inform” the meaning of other portions, this does not mean that one part can be simply read into that other portion of the indictment. The better practice is to have explicit cross-references between the various parts of a complex indictment, so that the defendant knows exactly what he or she must defend against.

We are currently involved in a case with somewhat similar issues. We filed a series of pretrial motions in an attempt to force the prosecutors to tell us exactly what we must defend against. In one way we were successful, in that the government went back and got a new indictment that included some of the material we suggested had been missing from the earlier version. The Schmitz decision is a lesson to those prosecutors who fail to plead fraud cases with the appropriate particularity.

In 2006 and 2007, Mr. Ghertler researched the names of corporate officers, then called the company and identified himself as an officer, usually the general counsel. He claimed that some urgent matter, such as settlement of a lawsuit, required an immediate cash transfer and provided instructions for distribution of the funds. He pleaded guilty to eight counts of wire fraud in 2008, admitting to defrauding the seven companies named in the indictment. He was sentenced to concurrent 185-month sentences.

One of Ghertler’s arguments on appeal was that the District Court should not have applied U.S.S.G. § 3B1.3, a two-level sentencing enhancement for abuse of a position of trust. The District Court recognized that Ghertler did not actually hold a position of trust, but based its decision on Application Note 3, which provides for application of the enhancement where “the defendant provides sufficient indicia to the victim that the defendant legitimately holds a position of private or public trust when, in fact, the defendant does not.”

The Court held that “[a] relationship of trust between the defendant and the victim is the sine qua non of the abuse-of-trust enhancement.” In this case, there was no relationship of trust between Ghertler and the victims to abuse. The Court looked to the history to Application Note 3, pointing out that the Commission adopted the Note to ensure that the enhancement would apply to defendants who entered into relationships of trust with victims based upon misrepresentations. The relationship of trust remains the touchstone of the abuse-of-trust analysis. Without such a relationship, the enhancement cannot be applied.

The opinion in Ghertler is available here.

Section 1304 of the bill passed last night provides additional funding to the tune of $250 million between 2011 and 2016 to the HCFAC program. The HCFAC Account is funded by the Federal Hospital Insurance Trust Fund pursuant to 42 U.S.C. § 1395i(k). It covers the costs of:

(i) prosecuting health care matters (through criminal, civil, and administrative proceedings);

(ii) investigations;

(iii) financial and performance audits of health care programs and operations;

(iv) inspections and other evaluations; and

(v) provider and consumer education regarding compliance.

Now is the time to reevaluate compliance programs and prepare for an increase in health care fraud investigations and prosecutions.

A copy of the bill is available here.

A section-by-section analysis of the bill is available here.

Stock-option backdating is a practice in which an employer grants stock options to an employee, retroactively dated to increase its value. Backdating itself is not illegal, but it must be properly disclosed in financial records and filings with the SEC. This article, published at the beginning of the backdating scandal in 2006, explains the history and controversy of backdating options. The SEC began charging corporations and executives in enforcement actions relating to backdating in significant numbers in 2006, and criminal charges have resulted in a few cases. The SEC has continued to bring enforcement actions against corporations and executives for secret backdating of options.

US v. Reyes was the first, and most high-profile, of the criminal cases. Reyes’ defense was that, although he had signed off on backdated options, he had relied on Brocade’s finance department to properly account for the backdated options in the corporate books and was not responsible for false records. The government put up a witness from the finance department who testified that she and other employees in the department did not know about the backdating. However, higher-up finance department employees had told the FBI that they did know about the backdating, but those witnesses did not testify because they were subject to possible criminal prosecution and had been targets of SEC civil suits. In the prosecutor’s closing argument, he told the jury that “finance did not know anything” in direct contravention of the statements given to the FBI. The Ninth Circuit stressed the special duty of federal prosecutors not to impede the truth and remanded the case for a new trial, which is scheduled for February.

Even more egregious prosecutorial misconduct occurred in the backdating cases against former executives of Broadcom. In May 2008, the SEC charged former CEO Henry Nicholas, former CFO William Ruehle, chairman and chief technology officer Henry Samueli, and general counsel David Dull with a backdating scheme. All but Dull were charged criminally, as well. Samueli agreed to a plea deal and the prosecutions of Ruehle and Nicholas went forward.

Ruehle’s attorneys first accused the prosecutor of misconduct in October 2008, when AUSA Andrew Stolper leaked confidential communications with counsel for the defendants to reporters for the L.A. Times and the Wall Street Journal. Stolper initially denied the allegations, but has since admitted to the conduct, calling it “the stupidest thing I’ve done in my career.” However, a more complete picture of Stolper’s misconduct eventually emerged. Stolper intimidated and improperly influenced each of the necessary witnesses for the defense. We have included portions of the transcript from December 15, 2009, when Judge Carney of the Central District of California dismissed the backdating cases, explaining:

Nancy Tullos was Broadcom’s vice president of human resources. This is what Judge Carney said of Stolper’s conduct regarding Ms. Tullos:

The judge had this to say regarding the intimidation of Mr. Dull:

Judge Carney was particularly concerned with the prosecution’s disgraceful treatment of Mr. Samueli, whose guilty plea he vacated on December 9, 2009:

Judge Carney noted that, in addition to the misconduct, because the witnesses were improperly influenced, their testimony was unreliable and must be stricken, leaving insufficient evidence to convict Mr. Ruehle. For that reason, the judge dismissed the indictment with prejudice and entered a judgment of acquittal for Mr. Ruehle.

Because Nicholas needed the same three witnesses for his defense, he was also denied compulsory process and would not be able to receive a fair trial. For that reason, Judge Carney also dismissed the stock option backdating case against him with prejudice. Nicholas is also charged in a drug distribution case and will likely call the same witnesses in that case. The judge ordered the government to show cause why that case should not also be dismissed. He noted that other evidence of government misconduct will be admissible at that trial, including a threat to force Nicholas’ 13 year old son to testify before the grand jury.

In addition, Judge Carney dismissed the SEC case without prejudice and discouraged the SEC from proceeding with that case any further.

The judge concluded eloquently:

The Ninth Circuit’s opinion in Reyes is available here.

The criminal minutes from December 15, 2009 in Ruehle is available here and the full transcript is available here.

Background

For many years, federal prosecutors successfully argued that the mail fraud and wire fraud laws covered schemes to defraud the people of the “intangible right” to have affairs conducted honestly. Now referred to as “pre-McNally caselaw” this body of law was not uniform; the circuits disagreed on exactly what conduct constituted the illegal conduct at the boundaries of the law. In McNally v. U.S. in 1987, the Supreme Court held:

Rather than construe the statute in a manner that leaves its outer boundaries ambiguous and involves the Federal Government in setting standards of disclosure and good government for local and state officials, we read [the mail fraud statute] as limited in scope to the protection of property rights. If Congress desires to go further, it must speak more clearly than it has.

Congress reacted by passing 18 U.S.C. § 1346, which states: “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.” Everyone agrees that Congress intended to overrule McNally and most seem to agree that the statute covers bribery and kickbacks, but because Congress failed to speak clearly, many issues at the borders of the law remain unresolved.

Since 1987, prosecutors have attempted to extend “honest services fraud” to many situations that would be less-than-obvious to readers of the statute. In Black, Conrad Black was convicted of honest services fraud in a private setting for use of a scheme to increase his own compensation that caused no harm to the corporation. In Skilling, Jeffrey Skilling was convicted in a private setting (Enron) in which the scheme involved no personal gain. In Weyhrauch, an Alaska legislator was convicted for failure to disclose a conflict of interest, even though Alaska law imposes no duty to disclose. When the Supreme Court denied certiorari in Sorich v. U.S. this year, Justice Scalia dissented, saying that it seemed irresponsible “to let the current chaos prevail” in this area of law. The Court will finally take on the responsibility with Black, Weyhrauch, and Skilling.

Oral Arguments in Black and Weyhrauch

At the oral argument in Black last week, the Court seemed eager to determine whether the constitutionality of § 1346 was properly before them in these two cases. Many of the Justices asked about a constitutional argument. Black’s lawyer asserted that he was presenting the constitutional question of vagueness (both notice and prosecutorial discretion) as a predicate for the logical disposition of the question presented. The government’s lawyer asserted that the constitutional question had not been posed in Black, but that Skilling, which had not yet been briefed, may present the issue. Chief Justice Roberts responded by asking, “you agree it would be very unusual if in June we announced the opinion in your case agreeing with you and then the next case announced that the statute is unconstitutional?”

The Court asked the government’s lawyer about the ins and outs of what is covered by honest services fraud, particularly what the lawyer called “undisclosed conflicts of interest by an agent or fiduciary who takes action to further that interest.” Justice Breyer worried that “perhaps there are 150 million workers in the United States. I think possibly 140 of them would flunk [the government’s] test.” The government’s explanation was that materiality and intent to defraud would exclude such employees, but Justice Scalia wasn’t satisfied with the government’s circular reasoning, asking, “I’m still waiting to hear what materiality consists. Is it just – de minimus doesn’t count?” and later remarking that nothing in the government’s brief or argument had “eliminate[d] these de minimus kind of … misrepresentations to the employer.”

The Court spent the next hour on oral arguments in Weyhrauch. Weyhrauch’s counsel argued primarily about the duties enforced by the honest serviced statute. When the government lawyer returned, however, the Justices turned back to the constitutional issues. The Court contemplated the ability of the average citizen to understand the law, with Justice Scalia asking at one point, “What is the citizen supposed to do? He is supposed to go back and read all those pre-McNally cases?” The government lawyer eventually assured the Court that vagueness is a legitimate concern that the government would not shy away from once raised in Skilling.

The Court has not asked the parties to brief the constitutional vagueness issue in Black or Weyhrauch, but the Skilling brief addresses it directly. Because oral arguments in Skilling have been pushed forward since that brief was filed, the Court will likely tackle the constitutional issue before announcing opinions in Black or Weyhrauch.

Skilling Brief

Filed on Friday, Skilling’s brief focuses on two issues: the constitutionality of honest services fraud, particularly where no private gain was intended, and whether the Government may rebut the presumption of jury prejudice. Regarding honest services fraud, Skilling set forth the following arguments.

A. To identify any meaning in § 1346, one must consult two decades of conflicting and confusing cases, so it is unconstitutionally vague.

The brief identifies five basic questions that the pre-McNally cases disagreed upon, making it “hopelessly unclear and conflicting” so as not to provide fair notice of what is criminalized by § 1346. These disagreements included: what source of law identifies the illegal conduct; whether contemplated economic harm to the employer was a necessary element; whether public and private sector standards were identical; whether duties extended beyond “official action,” and whether use of the fiduciary position was a necessary element. The brief quotes a dissenting judge from the Second Circuit as saying, “Ordinary people cannot be expected to undertake such an analysis [of the meaning of pre-McNally cases]; rare is the lawyer who could do it…”

The brief also details numerous conflicting meanings assigned to the statute by the government in the history of its prosecutions. The government has used this statute as a deus ex machina (a disgraceful literary device defined here) to proffer any meaning necessary to prosecute whichever defendant happens to be in its sights. By facilitating arbitrary prosecutions, this statute implicates “the other principle element of the vagueness doctrine.” In oral argument in Black, Justice Breyer brought up this point, joking about a criminal statute reading, “‘It is a crime to do wrong.’ sometimes adding, ‘in the opinion of the Attorney General.'” He then asked, “Now do you see the problem?”

Because of the vagueness issues and the Justices’ questions and remarks during oral argument, we are hopeful that the Court will decide that § 1346 is unconstitutional, now that the issue has been presented directly. The Court may, however, simply limit its application. Skilling argues that doing so would require creation of federal common law, which is not a part of the Court’s duty. Justice Scalia addressed this point numerous times during oral argument, saying, “[Y]ou speak as though it is up to us to write the statute… but that’s not our job.”

B. If the Court decides to uphold the statute, it should limit it to covering bribes and kickbacks, the only category of conduct unambiguously prohibited in pre-McNally caselaw.

Skilling argues that, if the Court upholds the constitutionality of § 1346, it should limit its application to the bribery and kickbacks that were paradigmatic of pre-McNally caselaw, rather than including the “self-dealing” types of cases that have garnered much of the confusion regarding this law. The bribery and kickbacks cases are what an average citizen would likely find when attempting to determine the meaning of the statute and the government has stated that Congress meant to codify the paradigm cases in enacting § 1346. The rule of lenity requires such a limitation. In addition, the pre-McNally self-dealing cases were effectively money or property fraud cases that did not need to be addressed by a new statute, so this is already-covered territory and extending honest services fraud to it would be redundant.

C. If the Court reads self-dealing into the statute, it should require private gain as an element of the offense, and disqualify normal compensation incentives established by the employer as “private gains.”

Finally, Skilling argued that even if self-dealing is covered by the statute, it should only apply in cases in which the defendant gained privately. Every circuit that addressed a private gain requirement in the pre-McNally cases enforced a requirement that the government prove that the defendant personally gained some economic benefit. Even during oral argument in Weyhrauch, the government lawyer stated that the government was after “personal conflicting financial interests.” When the Chief Justice twice repeated the word “financial,” the government lawyer responded each time with “That’s right.” If the majority of the Court follows through with these comments by the Chief Justice, then it appears that private gains will be a necessary element in an honest services fraud prosecution.

Skilling then argued that normal compensation incentives for doing a good job for the employer is not a private benefit for the purpose of § 1346. No pre-McNally cases held that normal compensation incentives qualified as private gains. In addition, since people are presumed to act in their financial self-interest and employers count on that behavior in incentivizing performance, “every salaried employee can be said to work for her own interest while purporting to act in the interests of the employer,” according to Judge Jacobs of the Second Circuit, in his dissent in U.S. v. Rybicki.

We look forward to reading the government’s reply brief, which is due January 25, 2010. We hope the Court will eventually hold that this statute is unconstitutionally vague, but, as Timothy O’Toole pointed out at the White Collar Crime Prof Blog, the Court denied certiorari in another honest services fraud case on December 7th. The case is U.S. v. Kincaid-Chauncey and the Ninth Circuit opinion is available at 556 F.3d 923. Because this case dealt with more straightforward bribery charges against a public official, the denial of cert. leads us to believe the Court may consider leaving the bribery and kickback aspects of the statute intact.

Transcripts from the oral arguments are available here

(Black) and here (Weyhrauch).

Skilling’s brief is available here.

Additional reading is available at the following locations:

ScotusBlog White Collar Crime Prof Blog NPR’s All Things Considered

The honest services fraud statute, 18 U.S.C. § 1346, expands the definition of a scheme or artifice to defraud under the mail and wire fraud statutes to encompass schemes that “deprive another of the intangible right of honest services.” This federal criminal case will address whether the statute requires the government to prove that the defendant’s conduct was intended to achieve “private gain” rather than to advance the employer’s interests, and, if not, whether the statute is unconstitutionally vague. A second issue in the case involves when a presumption of jury prejudice arises.

We have previously discussed two other honest services fraud cases, Black v. United States and Weyhrauch v. United States, that the Court will also hear this term. Our discussion of Black is here and of Weyhrauch is here. The differences between the three cases are: Black: A corporate executive’s use of a fraudulent scheme to increase his own compensation that caused no harm to the corporation. Skilling: A corporate executive’s use of a fraudulent scheme with no personal gain or benefit to the corporation. Weyhrauch: A state legislator’s failure to disclose conflict of interest where state law does not require such disclosure. Although these three cases have not been consolidated, we hope that the Court takes a comprehensive approach and straightens out the myriad issues plaguing interpretation of this law.

In its amicus brief in support of Skilling’s petition for a writ of certiorari, the National Association of Criminal Defense Lawyers (NACDL) encouraged the Court to resolve three principal issues: whether courts have the power to engraft limiting principles on the vague language of § 1346; if courts do not have that power, whether § 1346 is void for vagueness; and if they do, the content of those limiting principles. In addition to addressing these three issues, we hope that the Court takes the opportunity to create some meaningful and clear distinctions between public sector and private sector honest services fraud.

For an interesting analysis of the potential outcomes from these cases, see this post at the SCOTUSblog.

For more detail on the chaos plaguing interpretation of this statute, see this New York Times article. (A favorite tidbit of ours quotes Justice Scalia carrying it to its logical extreme, saying, “it would seemingly cover a salaried employee’s phoning in sick to go to a ballgame.”)

The briefs filed in Skilling are available at the SCOTUSblog.

As reported over at the SCOTUS Blog, Black has requested bail during the time his appeal is pending. He has served 15 months of a 78-month prison sentence and, if bail is denied, will have served about two years before the Justices decide his case. If his conviction is reversed, those are several months he cannot get back. His lawyers also argue that he should be released from prison in the meantime because his co-defendant, John Boultbee, has been released on a $500,000 bond and allowed to return to Canada to await the Supreme Court’s decision.

You can read Black’s application here.

The mail fraud and wire fraud laws are the bread and butter for federal prosecutors bringing white collar cases. Each of these laws requires a scheme to defraud another person out of “money or property.” For many years, federal prosecutors successfully argued that the word “property” included the right to “honest services” from public employees (such as elected officials). In 1988, the Supreme Court ruled that the word “property” does not include “honest services,” but several months later Congress amended these statutes so as to include the concept of “honest services” within the universe of cases that can be prosecuted under the federal mail and wire fraud statutes. Specifically, Section 1346 of the Federal Criminal Code expands the definition of a “scheme or artifice to defraud” under the mail and wire fraud statutes to encompass schemes that “deprive another of the intangible right of honest services.”

Despite the background of this type of fraud, the concept of “honest services” has now been extended by federal prosecutors beyond situations where a public official may have engaged in fraud. Recently, federal prosecutors are bringing more and more cases against people who work for private companies, arguing that the employee breached his or her duty of rendering “honest services” to the employer.

Last Monday the United States Supreme Court granted certiorari in Black v. United States. The Court will decide whether this Section applies in a purely private setting where the defendant’s conduct did not risk any foreseeable harm to the putative victims.

The case involves media mogul Conrad Black, who built an international newspaper empire from a single Canadian newspaper, eventually owning hundreds of community newspapers, as well as several large newspapers, such as the Chicago Sun-Times and London’s Daily Telegraph. In the late 1990s, Black predicted the affect the internet would have on newspapers and suggested that the company sell most of its smaller newspapers. As a part of those deals, purchasers paid Black for covenants not to compete, which the government construed as a scheme to defraud the company’s shareholders, although the money from those deals would have been paid to a different company controlled by Black and his co-defendant, anyway. The trial court’s instructions permitted the jury to convict even if they found that the shareholders didn’t lose any money. Black was convicted. The Seventh Circuit upheld the conviction, even though the law in at least five other circuits would have required reversal.

In 1999, the Eleventh Circuit here in Atlanta decided United States v. DeVegter, requiring the government to prove that economic harm was at least reasonably foreseeable in a private “honest services” case such as this one. Without this rule, Black argued in his petition to the Supreme Court, “[t]he only obstacle to converting every violation of corporate governance or company rules into federal crimes would seem to be the moment-to-moment whims of federal prosecutors.” We hope that the Supreme Court, when it decides this case, agrees with the Eleventh Circuit.

The Court’s docket for this case is available here.

The Seventh Circuit’s opinion below is available here.

Mr. Black’s petition for certiorari is available here.

The government’s brief in opposition is available here.

Mr. Black’s reply brief is available here.

In our post linked above, we mentioned that used car dealerships are “financial institutions” under the federal criminal code’s definition, even though most people would never consider them to qualify as such. FERA expands the definition even further, including even businesses that are not directly regulated or insured by the federal government.

FERA also expands the money laundering statutes by reacting to a significant Supreme Court case that was decided last year. In United States v. Santos, the Court held that the word “proceeds” in the money laundering statutes referred only to profits obtained from illegal activity, rather than all money brought in, or the “gross receipts.” FERA overrules that part of the Court’s decision by defining “proceeds” as “any property derived from or obtained or retained, directly or indirectly, through some form of unlawful activity, including the gross receipts of such activity.”

FERA expands the government’s ability to prosecute fraud in a number of ways in addition to those enumerated above. Financially, it authorizes over $500 million in additional funding for the DOJ, SEC, USAO, FBI, U.S. Postal Inspector, and Secret Service. It also amends fraud statutes to punish significantly more broad behavior, enlarging the mortgage applications statute, major fraud statute, and securities statute, and significantly expanding the civil, but punitive, False Claims Act. FERA will have an important impact on white collar criminal law.

Professor Pogdor gives a more detailed analysis of FERA’s impact on the money laundering provisions over at the White Collar Crime Prof Blog.

The defendant was involved in the Enron mess. He was charged with conspiracy, mail and wire fraud, securities violations, insider trading and for laundering the money related to the insider trading. The jury found him not guilty of everything except the insider trading and money laundering, and on these charges, they were unable to reach a verdict. The prosecutors tried to crank up a new set of charges based on the areas where the jury did not reach a verdict. The defendant pointed to the Double Jeopardy protection which includes what we call “collateral estoppel”. This is the issue the Supreme Court will address in the case.

The collateral estoppel question is both a technical legal issue, along with being a common-sense concept that the average man or woman on the street can figure out (think “Joe the Plumber” gets prosecuted a second time when the first jury found him innocent on basically everything charged). Here’s the technical description. Under the rule of collateral estoppel, when a first jury necessarily decides a certain fact against a party, that same party is prevented (or what as we lawyers say, is “estopped”) from again trying to litigate that same fact at a later trial. However, what happens when a first jury rules for the defendant, but the jury for some reason is unable to reach a verdict on other charges that have the same basic factual underpinnings? Some of the federal courts say that the hung counts prevent the courts from being certain that the facts underlying the acquitted counts were necessarily found in the defendant’s favor. Other federal courts rule in the complete opposite direction: saying that it makes no sense to even consider the charges where the jury was unable to reach a verdict when deciding whether certain facts were necessarily found in the defendant’s favor. These inconsistent rulings were likely the major reason the Supreme Court agreed to take the case involving the Enron defendant.

As I said above, the question in this case is both highly technical, yet also something that non-lawyers can grasp. Most folks would understand that when you go through a trial and the jury finds you not guilty on basically everything, prosecutors should not get a second chance. Let’s hope that the Supreme Court remembers to apply the Constitution that most of us live under, and not the version wanted by some whining prosecutors who will do anything to get their way.

The Department of Justice is the mother ship for all of the various lawyers who work for the federal government. When it comes to prosecuting federal criminal cases, the 94 U.S. Attorneys offices around the country have front-line responsibility. The U.S. Attorney him or herself is a person appointed by the President to head up one of these 94 offices. However, the day-to-day operations usually are handled by prosecutors who have generally made a career of or have spent a long time as an Assistant U.S. Attorney (AUSA). The statistics in this new report show that there can be great variations between the 94 offices when it comes to how AUSA’s handle white collar federal criminal cases.

Some of the statistics in this report are set out in Appendix XIV. This Appendix details how federal prosecutors have handled white collar criminal investigations over the past 5 years. The Appendix goes through each of the 94 U.S. Attorneys offices, and details how many such cases were referred to the prosecutors, provides numbers on how many were actually prosecuted, gives figures on how many were refused for prosecution, and sets out how many are still just hanging around with no decision.

Again, remember that statistics can often mislead. Nevertheless, this report shows that in some U.S. Attorneys’ offices, the majority of white collar cases lead to formal criminal charges. In others, a relatively small percentage ever result in a criminal case. In many districts, the majority of white collar cases languish for many years before anyone makes a decision.

We represent many people who are investigated for federal white collar offenses such as mail or wire fraud, public corruption, money laundering and the like. The toll of such an investigation can weigh heavily on our clients and their families. These statistics show clearly that for some of our clients, they may have to wait many years before the case is either refused for prosecution or simply dies on the vine.

The case out in Denver involved charges of fraud against some bankers. They were convicted, and on appeal both the defendants and the prosecutors argued that the trial judge made mistakes when imposing the sentences.

The main sentencing issue on appeal involved the question of “loss” under the Federal Sentencing Guidelines. I have written at length on the Guidelines in other posts. The “loss” calculation is especially tricky. The defendants in the Denver case, through their very able lawyers, made the rather sensical argument that what they got out of the crime is the same as the “loss.” Unfortunately, a lot of lawyers who do not get into federal court all that often mistakenly believe that this is the law. It is not. The concept of “loss” under the Sentencing Guidelines is far greater than what a person gets. It also covers “intended loss”, along with losses caused by other people who did the same thing.

The court in the Denver case sent it back for a new sentencing hearing. The defendants’ attorneys did a good job for their clients the first time. They will have a rougher road the second time around.