White Collar Crime & Internal Investigations Blog

Supreme Court Hears Challenge to Pretrial Seizure of Assets Needed to Hire White Collar Defense Counsel

Posted in Constitutional Rights, Forfeiture

The Supreme Court heard oral argument recently in a case that has significant potential implications for defendants facing a pre-trial seizure of their assets, which they argue are needed to retain counsel to handle their defense.

In Kaley v. United States, No. 12-464, a married couple was charged with offenses relating to an alleged medical device scheme, and the district court granted a pretrial restraining order precluding the couple from disposing of certain assets, including their home. The couple sought a pretrial hearing to challenge the seizure, arguing that their property rights in their home are an interest that outweighs the government’s interest in a potential forfeiture if the criminal case is successful, and that they needed the money to hire counsel of their of choice. The district court denied the couple the ability to argue at a post-restraint hearing that the lack of probable cause in support of the indictment is a basis to overturn the seizure.

The government argues that the couple is seeking a remedy that goes beyond their mere property rights in the seized assets. Because the grand jury’s probable cause determination is not challengeable until trial, and because the grand jury process is deeply rooted in the traditions of our justice system, the pretrial seizure does not violate the standards of due process. The government also argues that it would be unreasonable to allow a defendant who is released on bond pending trial to challenge the grand jury’s probable cause determination in order to retain property, but to deny other defendants who are detained pending trial not to challenge the grand jury’s determination to protect their freedom.

Defending complex white collar cases can be, and often is, expensive. Many would not feel concern over pretrial seizure of assets if a defendant was using assets that were acquired with the proceeds of an alleged fraud scheme to fund his defense. On the other hand, many feel that pretrial seizure of substitute assets that are not traceable to the alleged scheme, simply to maximize potential recovery by the government only if the case is successful, is overly aggressive. What is clear is that the outcome of this case will be critical to the ability of some defendants to retain counsel of their choice. And, it certainly puts another round of focus on the scope of the government’s asset forfeiture program.

Courts Must Use Sentencing Guidelines in Effect at the Time of the Offense, Not at Time of Sentencing

Posted in Constitutional Rights, Sentencing

The Supreme Court, in Peugh v. United States, ruled that the ex post facto clause requires federal criminal defendants to be sentenced under the Guidelines in effect when the crime occurred, not higher guidelines in place at the time of sentencing. There are a number of guidelines that have become more harsh over time, including those for many fraud offenses.

Peugh was convicted of bank fraud and sentenced to 70 months of imprisonment under sentencing guidelines that had been increased in 2009. But his crimes had occurred in 1999 and 2000, and he should have been sentenced under the 1999 guidelines, which would have dictated a sentencing range of 30-37 months.

Justice Sotomayor wrote the majority opinion, rejecting an argument that the sentencing guidelines are only advisory after the Booker decision, and therefore do not have the effect of increasing sentences after the fact. Instead, she explained that because the district courts are required to use the sentencing guidelines as a starting point in their sentencing analysis, they still create a sufficient risk of an increased sentence that they trigger the ex post facto clause of the Constitution.

Whether this decision will lead to dramatic reductions in sentences for fraud defendants remains to be seen. At resentencing hearings for defendants who challenge their sentences following Peugh, district courts will have to recalculate the applicable guideline range. But, those courts will not be bound by the range, and may elect to justify their original sentences under the statutory factors in 18 U.S.C. §3553.

SEC Settles Anti-Fraud Violations With Municipal Bond Issuer

Posted in Securities Fraud

Earlier this month the SEC, in the first case of its kind against a municipality, ordered the City of Harrisburg, Pennsylvania to cease and desist from violating the anti-fraud provisions of the federal securities laws. While the circumstances surrounding this order are somewhat unique to the City of Harrisburg’s situation, in today’s economic climate, it is not only possible, but likely that such a scenario, or one similar to that of Harrisburg, could recur.

The City of Harrisburg, as is the case for many municipalities throughout the country, has been facing a debt crisis for a number of years leaving it in a very poor financial condition.  During the years 2008 and 2009, when the City’s financial condition first took a turn for the worse, the City failed to comply with its requirements to provide certain ongoing financial information for the benefit of investors holding bonds issued by the City.

As a result of the City’s failure to file, the City created what the SEC has described as an “information vacuum.” According to George S. Canellos, co-director of the SEC’s Division of Enforcement, “municipal investors had to rely on other public statements misrepresenting City finances.”  For a City needing to put on a good front for the public during an otherwise tough time, this “information vacuum” put the City in a bind.

According to the SEC’s order, it found that at a time of increased interest in the City’s finances due to its deteriorating financial condition, investors were more likely to pursue relevant information relating to their investments from other places, such as statements of public officials and the City’s own website.

One such public statement was made when then City posted on its website its 2009 budget which, as adopted, did not include funds for debt guarantee payments, “raising questions as to whether it would fulfill its obligations under those guarantees.”  That budget also misrepresented the City’s credit rating.

To add to matters, in April of 2009, the City’s mayor gave a State of the City address in which he referred to these debt payments as an “additional challenge” and an “issue that can be resolved.”  According to the SEC, these statements were misleading because they omitted to state the amount of the debt that the City would likely have to repay from its general fund and the impact that repayment obligation was already having on Harrisburg’s finances.

The SEC conducted its investigation into the matter and ultimately entered into a settlement agreement in which the City neither admitted nor denied wrongdoing but agreed to cease and desist from any further violations.  In accepting the settlement, the SEC indicated that it took into consideration the City’s cooperation during the investigation and the steps that it has taken to improve its disclosure process.

While this may be the first such case of its kind against a municipality, this case certainly puts all other municipalities on notice that statements made by public officials, whether oral or in writing, can expose the municipality to liability under the anti-fraud provisions of the federal securities laws.  This is particularly so where a municipality may have gaps or lapses in meeting its compliance obligations relating to its municipal bond obligations, causing statements made by public officials, even politically guarded statements such as those made by the City of Harrisburg’s mayor, to be significantly more material to a potential investor.

Additionally, this case stresses the importance of cooperation during the course of an SEC investigation as well as the implementation of a compliance plan that will effectively avoid such disclosure gaps.  After all, had such a plan been in place to apply greater oversight of those required filings, these statements made on the City’s website or by the City’s mayor at his State of the City address would not have received the scrutiny that they did in this case.  Furthermore, such a plan would have demonstrated to the SEC the City’s ongoing efforts to remain compliant with its disclosure obligations and would have effectively mitigated the damages to its reputation caused by this very public SEC settlement.

United States Sentencing Commission Proposes Amendment to Acceptance of Responsibility Guideline

Posted in Constitutional Rights, Sentencing

The United States Sentencing Commission recently released proposed amendments to the Federal Sentencing Guidelines.  Among the proposed changes, including changes relating to [insert list here], is a proposed change to the guidelines regarding acceptance of responsibility.  The Commission, through this proposed amendment, seeks to reconcile to conflicting circuit opinions regarding the interpretation of the existing guideline.

The proposed amendment addresses not the two-level reduction for a defendant who accepts responsibility, generally by virtue of entering a guilty plea, but the additional third level reduction, the likes of which is available to a defendant only at the discretion of the United States Attorney’s Office.

The language of §3E1.1(b) currently reads:

If the defendant qualifies for a decrease under subsection (a), the offense level determined prior to the operation of subsection (a) is level 16 or greater, and upon motion of the government stating that the defendant has assisted authorities in the investigation or prosecution of his own misconduct by timely notifying authorities of his intention to enter a plea of guilty, thereby permitting the government to avoid preparing for trial and permitting the government and the court to allocate their resources efficiently, decrease the offense level by 1 additional level.

A split has occurred in the interpretation of this provision relating to whether or not the Court has the discretion to apply the 1 additional level reduction under this Section.  As the Commission noted, the Seventh Circuit, in United States v. Mount, 675 F.3d 1052 (7th Cir. 2012), held that if the government moves for the additional 1-level reduction, and all other requirements under that Section are met, the Court must apply the enhancement, affording no discretion to the Court.

The Commission has proposed to adopt the Fifth Circuit’s view in United States v. Williamson, 598 F.3d 227, 230 (5th Cir. 2010), that where the Government makes a motion for the additional 1-level reduction, the ultimate decision lies within the Court’s discretion.

Accordingly, the Commission seeks to Amend note 6 of the Commentary to §3E1.1 to add the following:

The government should not withhold such a motion based on interests not identified in §3E1.1, such as whether the defendant agrees to waive his or her right to appeal.

If the government files such a motion, and the court in deciding whether to grant the motion also determines that the defendant has assisted authorities in the investigation or prosecution of his own misconduct by timely notifying authorities of his intention to enter a plea of guilty, thereby permitting the government to avoid preparing for trial and permitting the government and the court to allocate their resources efficiently, the court should grant the motion.

As demonstrated here, the Commission also seeks to add the additional language that the motion is not to be withheld by the Government in an instance where a Defendant does not agree to waive his right to an appeal.  This also seeks to resolve a split among the circuits, by adopting the Fourth and Seventh Circuits’ position in United States v. Divens, 650 F.3d 343 (4th Cir. 2011), and United States v. Davis, __ F.3d __ (7th Cir. April 9, 2013)(finding that the government’s insistence that the Defendant waive his right to an appeal in order to qualify for the additional reduction does not serve the interests of §3E1.1).

If adopted this amendment as a whole will be bittersweet for defense counsel.  While the additional layer of discretion as to whether or not to apply the additional enhancement can only serve to reduce the number of instances where the enhancement will actually be given, the amendment preventing the requirement that a defendant waive his right to appeal in order to receive the enhancement will certainly be valuable to defense counsel when negotiating plea deals.

SEC Enforcement Actions – No Discovery Rule Available to Extend the Statute of Limitations

Posted in Securities Fraud

The Supreme Court ruled yesterday that SEC enforcement actions against investment advisors must be filed within five years from the date of the alleged fraud, not from the date the fraud was discovered by the government.

In Gabelli v. SEC, the SEC sought civil penalties against the chief operating officer and a portfolio manager of an investment advisor to a mutual fund. The SEC alleged that they had allowed an investor to engage in “market timing” in exchange for an investment in a hedge fund run by their employer. The SEC’s view was that this conduct aided and abetted violations of the Investment Advisers Act. The defendants moved to dismiss the case successfully, arguing that the five-year statute of limitations had run before the suit was filed, because the market timing had ended in August 2002, but the suit was not filed until April 2008. The trial court granted the motion to dismiss, but the Second Circuit had reversed that decision.

While it was clear that five years had expired from the time the claim accrued, the SEC had successfully persuaded the Court of Appeals to apply the “discovery rule,” which creates an exception to the statute of limitations for claims that are not deemed to accrue until the claim is discovered, or could have been discovered with reasonable diligence. That discovery rule arose in the 18th century based on the recognition that where a defendant’s conduct may prevent a plaintiff from even knowing that he has been defrauded. That is, it had been deemed to apply and to extend the statute of limitations in cases where a plaintiff had been injured by fraud, but remained in ignorance of the injury without any fault or lack of diligence on its part.

The Supreme Court distinguished the situations where the discovery rule has been applied, as being situations where a plaintiff was only seeking recompense for the actual injury, not penalties for engaging in the action. The discovery rule serves to protect those who do not ordinarily exist to investigate potential fraud; however, the SEC’s mission is to investigate potential violations of the federal securities laws, and it has plenty of resources to do so. The Court reiterated earlier opinions which state that it would be “utterly repugnant” if the government’s actions seeking penalties could be brought “at any distance of time” after the alleged wrongdoing.

The Court noted that there are instances in which the government does benefit from an explicit statutory discovery rule, for example, government suits for money damages founded on contracts or torts, 28 U.S.C. 2415, 241(c), and the False Claims Act, 31 U.S.C. 3731(b)(2). But, in those instances the statutes provide some attempt to identify the government official whose knowledge is relevant to the discovery of the fraud.

Truthfully, the False Claims Act is unclear in revealing who the responsible United States official charged with responsibility to act really is. And, lower courts have struggled with making that determination. But, here, at least, the Supreme Court does a good job of refusing to suspend a statute of limitations for causes not mentioned in the statute itself.

Lessons From U.S. V. Kinnucan

Posted in Securities Fraud, Sentencing

One of the most difficult tasks for a white collar criminal defense attorney is to control his client during what is inevitably a long-term government investigation. Developments in a recent case, U.S. v. Kinnucan, may provide defense counsel with an excellent primer on what their client should not do. On January 15, 2013, the 55-year-old former Broadband Research chief, John Kinnucan, was sentenced to 51 months in prison by U.S. District Judge Deborah Batts for conspiracy and securities fraud and required to forfeit $164,000. This saga of Kinnucan provides concrete evidence supporting all of the things we tell our client to do, or not to do, and the consequences of not following our advice.

Kinnucan was one of more than 40 defendants sentenced in the federal government’s Operation Perfect Hedge insider trading investigation. The investigation by the Southern District of New York is part of President Obama’s Financial Fraud Enforcement Task Force.

Long before he was indicted, Kinnucan received an ambush visit by FBI agents seeking to enlist his cooperation in their ongoing investigation. From this point forward, Kinnucan was a textbook example of everything a defendant should not do. He immediately went public and announced to all of his clients via email that “Today, two fresh-faced eager beavers from the FBI showed up unannounced (obviously) on my doorstep thoroughly convinced that my clients have been trading on copious inside information, . . . . We obviously beg to differ, so have therefore declined the young gentlemen’s gracious offer to wear a wire and therefore ensnare you in their devious web.”

On November 23, 2010, Kinnucan was interviewed by CNBC’s David Faber. During that interview he described his confrontation with the FBI as “a couple of suits” who jumped out of their car and approached him on his front porch while he was enjoying a glass of wine. In addition to his emails and television interviews he also sent emails to lawyers, congressional investigators and journalists that were very critical of the federal authorities investigating him.

Kinnucan admitted to at least 25 antagonistic voicemails left with prosecutors and cooperating witnesses between 2011 and 2012. In one of those he wondered, “Where’s Hitler when we need him?” He basically challenged federal prosecutors to arrest him. They were happy to accommodate, and he was arrested at his Portland, Oregon, home on February 16, 2012.

His behavior came home to roost when he attempted to obtain bond for his nonviolent offenses. White collar criminal defendants typically are released on a recognizance bond, meaning no cash or property is posted. Kinnucan learned that federal judges are not particularly impressed with individuals who threaten and harass prosecutors or witnesses. His bond was set at $5 million, with various conditions that he could not meet. This resulted in him being the guest of the U.S. Marshals on a trip from Portland, Oregon, to the Metropolitan Correctional Center in Brooklyn, where he resided until he was recently sentenced. Anyone with experience in dealing with the Marshals and their methods of transporting prisoners from one location to another is familiar with the fact that those trips are made from local jail to local jail, often in a weeks-long circuitous route, at the convenience of U.S. Marshals. Mr. Kinnucan arrived in the urban correctional center in New York which like all urban correctional centers is claustrophobic and not particularly prisoner friendly.

A number of individuals who were indicted in the large-scale investigation received probation or significantly lesser sentences than Kinnucan. The sentence handed down by Judge Batts for Kinnucan was at the top end of the guidelines. Defense attorneys across the country will tell you that it is rare for a judge in a large urban setting to impose a sentence at the top end of the guidelines.

I intend to paste together all the articles about Kinnucan and make a notebook for my next “type A” corporate executive who is placed under the magnifying glass of a federal prosecutor. When that client suggests that we do a Freedom of Information Act request on all people involved in this investigation, I will advise him to keep his mouth shut, post no comments, make no Tweets, and no comment to the press or anyone else about the investigation. And then I will ask him to carefully consider the strategy of Mr. Kinnucan and the results he achieved.

Sentencing Disparity in Federal Fraud Cases Growing: Longer Sentences, But Not as Long Everywhere

Posted in Sentencing

What are the consequences of committing a federal white collar crime? For years, casual conversation included references to a “slap on the wrist” and short stints in “country club” prisons, where federal inmates reportedly enjoyed leisurely activities, including golf and tennis. Not so. But one thing is clear: the number of Americans who are getting the opportunity to experience the hospitality of the Federal Bureau of Prisons is growing. The number of sentenced federal offenders has more than doubled between FY 1996 and FY 2011. And, the percentage of those offenders who were sentenced to imprisonment grew from 77 percent to 88 percent in the same period. So, with financial crimes a declared high priority for the U.S. Department of Justice, a careful look at sentencing results in fraud cases is in order.

The U.S. Sentencing Commission, in a recent report on the continuing impact of the U.S. Supreme Court’s decision in United States v. Booker, has undertaken substantial analysis of sentencing trends in several categories of federal cases. See http://sentencing.typepad.com/files/part-a—continuing-impact-of-booker-on-federal-sentencing.pdf.

The report reflects that, following the Supreme Court’s decision in Booker, in which the Court held that the sentencing guidelines are not mandatory, federal judges have shown an increasing propensity to vary from the sentencing guideline range. Regional disparities are increasing, and differences between judges within districts are increasing as well. Some judges are weighing the characteristics of the offense and the offender differently than other judges in similar cases. These differences are arguably even more pronounced in fraud cases. The average minimum guideline sentence has increased in the last 15 years, but the average sentence has not increased as dramatically.

Perhaps it is not surprising that the influence of the guidelines has diminished after judges were given more discretion by the Supreme Court. But the degree of variance is not consistent across circuits, and in a system designed to promote national uniformity in sentencing, that is problematic. For example, the Sentencing Commission’s analysis reflects that within the Second Circuit, nongovernment-sponsored below-range sentences in fraud cases occurred more often than within-guideline-range sentences. Yet, this is only true in the Second Circuit, a region recognized for its significant caseload of financial crimes. And, while it is true that average sentences for fraud offenders have increased, primarily due to substantial increases in enhancements for loss amounts in the guidelines, there is a growing divergence between the average guideline minimum and the average sentence imposed in fraud cases in some, but not all, circuits. The Commission’s report reflects that the divergence is markedly more noticeable in the Second Circuit than in the Fourth Circuit. In the First Circuit, the majority of fraud sentences are imposed within the guideline range, but in the Second Circuit that has recently been true in fewer than 40 percent of fraud cases.

At the district level, the Commission’s analysis reflects that government-sponsored below-range sentences are occurring more frequently, but not consistently across districts, nor within certain districts. As a result of these growing disparities, within and across districts, the Commission recommends that Congress enact a more robust appellate review standard, and that appellate courts require a presumption of reasonableness for within-range sentences on appeal and greater justification for sentences substantially outside the guideline range. The Commission also recommends heightened review of sentences based on policy disagreements with the guidelines and a statutory requirement that courts give the guidelines “substantial weight.”

For those who have experienced the swinging pendulum of sentencing policy over the last 30 years, these results and the Commission’s preference for more uniformity will not be surprising. But, for fraud offenders who find themselves facing the prospect of a stint in the “big house,” the trend toward more frequent below-guideline sentences in many districts and circuits will be perceived as a swing in the right direction.

Justice Department Announces One of the Largest FCA Settlements Ever With an Individual

Posted in False Claims Act, Healthcare Fraud, U.S. Attorney's Office

On Monday the U.S. Department of Justice announced that Dr. Steven J. Wasserman, a dermatologist out of Venice, Florida, agreed to pay $26.1 million to resolve allegations that he accepted illegal kickbacks and provided medically unnecessary services that he billed to the Medicare program in violation of the (FCA).

According to the allegations, Dr. Wasserman entered into an illegal kickback arrangement with a pathology laboratory in which he allegedly sent biopsy specimens to the lab for testing and diagnosis. The lab would then provide Dr. Wasserman with a diagnosis on a pathology report, which Dr. Wasserman would then sign to make it appear to Medicare as though he had performed the diagnostic work himself. The federal government also alleged that Dr. Wasserman “performed thousands of unnecessary skin surgeries known as adjacent tissue transfers on Medicare beneficiaries.” These specific surgeries are complicated and often time consuming, and allegedly resulted in substantial billings for Dr. Wasserman.

In the end however, what this means is that the bar continues to be raised with respect to the federal government’s expectations when entering into settlement arrangements for actions brought under the FCA. In fact, Robert O’Neill, the U.S. Attorney for the Middle District of Florida, called this settlement a “watershed achievement,” and asserted that schemes of this magnitude “require extraordinary remedies.”

Certainly the U.S. Attorney’s Office is proud of such an exorbitant settlement agreement. But even more pleased with it is the relator, a former employee of the pathology lab, who originally filed the suit in which the United States ultimately intervened. In this case, their leader will receive a whopping $4,046,000 from the settlement.

In addition to paying the $26 million, Dr. Wasserman is excluded from treating patients and being paid under Medicare, Medicaid and any other federal health care program as well.

Lessons From the Prosecution and Death of Aaron Swartz

Posted in Sentencing

Much has been written recently about the sad case of Aaron Swartz. Described as “a brilliant young software programmer and Internet activist,” Swartz, 26, committed suicide in January. At the time of his death, Swartz was under indictment in the District of Massachusetts for wire fraud, computer fraud, and various other cyber-crime-related offenses. The indictment alleged, in essence, that Swartz, without authority, hacked into a restricted-use online service that provided archiving and research services for academic institutions.

The U.S. Attorney in Boston has acknowledged that there was no evidence that Swartz ever intended to use the information for personal gain. Instead, it appears that Swartz’s actions were driven by a desire to make information available on the internet. Swartz’s supporters and friends have blamed the U.S. Attorney, in large measure, for Swartz’s death. They argue that charges should never have been brought against Swartz, and that the U.S. Attorney’s insistence that Swartz plead guilty to a felony was an example of gross prosecutorial overreach. The U.S. Attorney, on the other hand, has defended her office’s handling of the case, stating that the assigned prosecutors, “took on the difficult task of enforcing a law they had taken an oath to uphold, and did so reasonably.” Whether this was a case of prosecutorial overreach or a reasonable prosecution lies in the eye of the beholder. It is a debate in which there will be no clear winner. However, an important lesson should be taken from this tragic case.

Those of us who work in the criminal justice system, whether as defense attorneys, prosecutors, judges, or pretrial services officers, need to always keep in mind that we deal in high-stakes cases, where the stresses and emotions can be overwhelming. I am personally familiar with several cases involving defendants who committed suicide after charges were brought against them. (Fortunately, none of those cases involved individuals whom I prosecuted or defended.) The cases involved no discernible pattern as to the ages of the defendants (they included young and not so young), their level of education, their prior criminal records (or lack thereof), or the nature of the charges (they included charges as disparate as possession of child pornography and violent extortion).

What is apparent is that these individuals all suffered depression, at least in part, as a result of the circumstances in which they found themselves; a depression so profound that they decided to take their own lives. Perhaps such tragedies, including that of Aaron Swartz, couldn’t have been prevented, but we should at least be sensitive to the issue and take appropriate action when the signs of serious depression are present and perceived.

$10 Million Mortgage Fraud With a Twist Charged Against an Attorney

Posted in Bank Fraud, Mortgage Fraud

An indictment returned on January 24, 2013, in the Northern District of Illinois charges attorney Warren Ballentine with bank, mail and wire fraud. The indictment appears to be connected to several recent indictment/convictions and plea agreements. It names co-schemers Bobbie Brown, who previously received a 20-year sentence for a mail fraud scheme on the south side of Chicago, and Brenda Tibbs and Wanda Rivera-Burton, who have pleaded guilty and are apparently cooperating against Mr. Ballentine.

The indictment is different from the garden variety mortgage fraud/false loan application cases that arose during the mid to late 2000s. It alleges that Ballentine represented buyers who were recruited by Brown and others and “advised buyers” to sign documents that he knew contained material false representations. Indeed, a number of the unnamed, and apparently uncharged, buyers made multiple loan applications in a very short period of time where they falsely indicated that they intended to use the property as their primary residence.

Buyers’ or sellers’ attorneys are not usually involved in the loan application process. This indictment does not allege involvement in the process, although it does allege that defendant advised buyers to sign fraudulent documents knowing that they contained false representations.

Plea agreements of apparently cooperating witnesses indicate that attorney A was paid approximately $350 for each real estate closing and that attorney A counseled nominees (straw people) at closings to execute documents that the attorney knew contained materially false statements and omissions, including that investment schemers were paying the nominee to purchase the property that they had no ability to purchase.

It will be interesting to see how this case develops. Perhaps the lesson to be learned is that a buyer’s attorney should always be well aware of the facts and circumstances surrounding his or her clients, especially if they are making multiple purchases and claiming each is his/her primary residence.