Second Circuit Holds Theft of "Source Code" Not a Crime Under the National Stolen Property Act

Sergey Aleynikov was convicted for stealing and transferring proprietary "source code" in violation of the National Stolen Property Act (NSPA), 18 U.S.C. § 2314, and the Economic Espionage Act (EEA) of 1996, 18 U.S.C. § 1832. Source code is computer instructions in a human-readable text.

Aleynikov was a computer programmer for Goldman Sachs & Co., who developed source code for Goldman's high-frequency trading (HFT) system, which permitted large-volume trading of securities and commodities to be made in a fraction of a second.  In 2009, Aleynikov was hired by Teza Technologies, L.L.C., a Chicago-based company, to work on its HFT system.

Prior to his going-away party at Goldman in June of 2009, Aleynikov encrypted and uploaded more than 500,000 lines of source code from Goldman's HFT system to a server in Germany. Aleynikov flew to Chicago on July 2, 2009, taking large portions of the source code with him. He was arrested by the FBI at the airport on his return.

Aleynikov was charged and convicted and sentenced to 97 months' imprisonment. Aleynikov appealed, and the Second Circuit Court of Appeals reversed his convictions following oral argument on February 17, 2012. Last week, the Court issued its opinion holding that Alyenikov's conduct did not constitute a crime under either the NSPA or the EEA. The Court concluded that the source code did not constitute "goods," "wares," or "merchandise" for the purposes of the NSPA. It stated that the theft of purely intangible property was beyond the scope of the NSPA. The Court also held that Goldman’s HFT system was neither “produced for,” nor “placed in,” interstate or foreign commerce for the purposes of the EEA.

Image source:

7th Circuit Reverses Mail and Wire Fraud Conviction of Contractor for Alleged Bid Rigging

Steven Fenzl was the principal of Urban Services of America, Inc. ("Urban"). Fenzl was charged with alleged mail fraud and wire fraud in the U.S. District Court for the Northern District of Illinois. The charges related to alleged bid-rigging under the Sherman Act on a 2005 contract to refurbish the City of Chicago's garbage carts.
Urban had won bids from the City in the past--however it had been subject to investigation on the allegation that Fenzl's partner and co-defendant, Douglas Ritter, had cashed checks from the City written to other contractors. As a result of the investigation, Fenzl and Ritter were afraid that Urban would not be awarded the contract even if it submitted the lowest bid. So Fenzl and Ritter persuaded three other companies to bid on the contract who would not otherwise have done so, with the understanding that if one of the companies were awarded the bid by the City, it would subcontract the fulfillment to Urban. Urban also submitted a bid, which was the lowest. The City awarded Urban the contract. However, the City was unaware of Urban's communications with the other bidders. All bidders, including Urban, had to certify to the City that they had not entered into any agreements with other bidders relating to the price of the bids. Fenzl was indicted in 2009, and was convicted at trial last year.
Last week, the 7th U.S. Court of Appeals reversed Fenzl's convictions, in an opinion authored by Judge Posner, U.S. v. Fenzl, No. 11-2459 (7th Cir. 2012), available here. The Court held that it was difficult to see what was wrongful about Urban's alleged "scheme,"  since it increased, rather than reduced, competition among the bidders. It noted that the theory behind the government's fraud charges against Fenzl was infirm, since "[n]o evidence was presented that the more bidders there
were, the more likely Urban’s bid was to be accepted and that this would result in a higher price to the City for getting its garbage carts spruced up." Even if there were fewer bidders, Urban still would have likely been awarded the contract as the low bidder.
The Court rejected Fenzl's companion argument, that he could not have committed mail or wire fraud since the City did not lose any money as a result of his conduct. It observed that "there is no requirement that the victim have incurred, or the defendant have intended him to incur, a pecuniary loss. [Cit.] If you steal money from a person, it is theft even if you intended to, and did, replace the money before he noticed it was missing." (Citing U.S. v. Joshua, 648 F.3d 547, 553 (7th Cir. 2011)).
Fenzl was also charged with fraud relating to failure to subcontract to a woman or minority-owned business enterprise. However, the trial court ordered him acquitted of this charge. The Court of Appeals ordered Fenzl to be retried on the charge.


9th Circuit Pushes Back Against DOJ; Names Names In Case of Prosecutorial Misconduct

The U.S. Department of Justice and the Ninth Circuit Court of Appeals have come into conflict over misconduct by an Assistant U.S. Attorney which resulted in a mistrial, and the issue of whether prosecutors who engage in misconduct are entitled to have their names withheld from legal decisions. On the second day of the trial of defendant Aurora Avila-Lopez for possession of cocaine with intent to distribute in the U.S. District Court for the District of Arizona, AUSA Jerry Albert allegedly read testimony from Avila-Lopez's earlier change of plea hearing. The statements read to the jury by Mr. Albert appeared to contradict the defendant's earlier statements on direct examination. However, the prosecution had altered the alleged statements. The defense moved for a mistrial, which was granted.

In January, the 9th Circuit issued an opinion in which it criticized Mr. Albert's actions and called for an investigation and possible discipline against him, according to Courthouse News. The U.S. Department of Justice took umbrage at the Court's "name dropping," and filed a motion to have Albert's name removed from the opinion. The 9th Circuit issued an amended opinion yesterday denying the government's motion. In holding that the prosecutor could not remain anonymous, the Court stated "We have noticed that the U.S. Attorney’s Office in Arizona regularly makes public the names of prosecutors who do good work and win important victories. [Cit.]. If federal prosecutors receive public credit for their good works—as they should—they should not be able to hide behind the shield of anonymity when they make serious mistakes."

Image source:

Who is Dr. Arthur Jordan and Why's the Government Protecting This Guy

Last month FOB (friends of blog) Roy Black and Richard Strafer had another win in the Eleventh Circuit in U.S. v. Ignasiak. (Opinion here). Although the case was reversed on Confrontation Clause grounds, the case is of greater interest to me because the Court ordered the unsealing of records regarding the government’s sole expert witness, Dr. Arthur Jordan of Myrtle Beach, S.C. Dr. Jordan testified in the prosecution of Dr. Ignasiak, a retired physician, in a case alleging violations of the controlled substances act, that Dr. Ignasiak was writing prescriptions without legitimate medical purpose.

Now, Dr. Jordan, apparently, is a frequent flyer as an expert witness for the government having been paid around $30,000 for his expert witness services. But here is where the case takes a bizarre twist. Judge Martin writing for the Eleventh Circuit noted that after the verdict, the government disclosed for the first time that Dr. Jordan “engaged in criminal conduct . . . on nine separate occasions, [and] used a counterfeit badge and his United States Marshal credentials to pose as an on-duty U.S. Marshal in order to carry firearms on commercial airplanes while on personal travel.” Amazingly, this series of federal offenses, which the opinion notes resulted in “multiple violations of 18 U.S.C. §§ 912 and 1001 and 49 U.S.C. § 46505,” resulted in pretrial diversion for the good doctor – the federal equivalent of super secret probation.


The question that arises in my mind – what’s the deal? Why would the government permit Dr. Jordan to get off, literally, scot free for having committed, as the Eleventh Circuit notes, multiple violations of federal law – guns on the plane, no less, in the post 9/11 world? Perhaps to preserve the integrity of earlier prosecutions? Dr. Jordan is scheduled to testify in a case that starts here in Georgia later this month. We’ll let you know how that develops.


I’ve found only one other reported case where Dr. Jordan testified, U.S. v. Alerre, 430 F.3d 681 (4th Cir. 2005). If you know of any other cases where Dr. Jordan has testified for the government, send me a post, or an email, and I’ll see if I can obtain the post trial motions that Mr. Black and Mr. Strafer successfully argued on appeal in order to bring the sanitizing light of the courtroom on Dr. Jordan’s practices.

Georgia Federal Court Judgeships Remain Vacant

A seat on the Court of Appeals for the Eleventh Circuit and two judgeships with the U.S. District Court for the Northern District of Georgia remain vacant, as reported in the Atlanta Journal-Constitution. All of the three positions have been vacant for at least a year, with one of the District Court judgeship having been vacant for 31 months. The vacancies have been declared "judicial emergencies" by the U.S. Courts.

On January 26, 2011, President Obama nominated U.S. Magistrate Judge, Linda Walker, and Natasha Perdew Silas, a Federal public defender in Atlanta, for the District Court judgeships. If confirmed by the Senate, they would become the first African-American women District Court judges in the Northern District. Georgia's Senators, Saxby Chambliss and Johnny Isakson, have given blue slips of approval for Judge Walker, but have not for Ms. Silas. The failure to give Ms. Silas a blue slip effectively blocks the Senate from voting to confirm her. The failure has caused friction between the White House, which views Judge Walker and Silas as a package nomination, and Congressional Republicans.

Image source

The Eleventh Circuit vacancy is the result of the retirement of Justice Stanley Birch, who was appointed by President George H.W. Bush in 1990, in August of 2010. The White House has not nominated any replacement for Justice Birch.

Former CEO of Kansas Utility Westar Energy Receives $36 Million Settlement, Plus $3.1 Million in Legal Fees for Dismissed Criminal Prosecution

Westar Energy, the largest electrical utility in the State of Kansas, announced last week that it will pay former Chief Executive Officer, President and Chairman of the Board, David Wittig $36 million as an arbitration settlement relating to Wittig's compensation contract, as well as $3.1 million in attorney's fees and $2.7 million in stock compensation, according to the Topeka Capital-Journal. Westar's settlement with Wittig follows its settlement in the Spring with its former Vice President of Corporate Strategy, Douglas Lake for $21 million in unpaid compensation and $5.3 million in legal fees. Wittig and Lake claimed Westar violated their employment contracts by terminating them prematurely.

Image source:

The compensation for legal fees was for Wittig's and Lake's defense of a criminal prosecution. In 2003, the men were charged in the U.S. District Court for the District of Kansas with conspiracy, circumventing internal accounting controls and falsifying books and records, honest services fraud, wire fraud, submitting false statements and engaging in monetary transactions derived from an unlawful activity. Their first trial ended in a mistrial in 2004 after the jury could not reach a verdict. They were convicted at their second trial in 2005, but the Eighth Circuit Court of Appeals reversed their convictions last year following the U.S. Supreme Court's decision regarding honest services fraud in U.S. v. Skilling.

Kentucky v. King, or The Police Know Exigent Circumstances When They Hear Them


Police officers set up a controlled buy of crack cocaine at an apartment complex in Kentucky and observed the deal take place. The officers then moved to intercept the suspect before he re-entered his apartment. The officers heard a door shut and detected an alleged strong odor of marijuana outside of two apartment doors, although they did not know which door the suspect had entered. The officers banged on the door of the apartment to the left and announced themselves. The officers then allegedly heard the sound of items being moved in the apartment. The officers announced that they were going to enter the apartment and kicked the door in, where they found Hollis King, his girlfriend and a guest who was smoking marijuana. The officers conducted a protective sweep of the apartment, discovering marijuana and powder cocaine in plain view. In a subsequent search, the officers discovered crack cocaine.

The police later entered the apartment to the right, which was the actual apartment which the suspect had entered.

King was charged with trafficking controlled substances and filed a motion to suppress the evidence obtained from the search of his apartment without a warrant. The Kentucky Circuit Court denied the motion and King entered a guilty plea and was sentenced to 11 years’ imprisonment. King appealed, and the Kentucky Court of Appeals affirmed the Circuit Court’s denial of his motion to suppress, holding that the officers’ warrantless entry into the apartment was justified based upon “exigent circumstances” because the officers believed that evidence would be destroyed. However, the Kentucky Supreme Court reversed, questioning whether the mere sound of people moving inside an apartment was sufficient to support a conclusion that evidence was being destroyed. It then held that the search was not justified by exigent circumstances because it was reasonably foreseeable that the occupants of the apartment would destroy evidence when the police knocked on the door and announced themselves. The Commonwealth of Kentucky then took its turn to appeal, and the U.S. Supreme Court granted certiorari.

In Kentucky v. King, which may be read here, in an opinion authored by Justice Samuel Alito, the majority noted the long-established exception to the Fourth Amendment’s requirement that searches and seizures without a warrant are presumptively unreasonable where “the exigencies of the situation make the needs of law enforcement so compelling that [a] warrantless search is objectively reasonable under the Fourth Amendment.” (citing Mincey v. Arizona, 437 U.S. 385, 394 (1978)). “Exigent circumstances” can arise where there is a need to prevent the “imminent destruction of evidence.”

However, the Court also recognized that an exception to the exception had developed—the police cannot rely on the need to prevent the destruction of evidence where the exigent circumstances were created or manufactured by the police themselves. (Citing United States v. Chambers, 395 F.3d 563, 566 (6th Cir. 2005); United States v. Gould, 364 F.3d 578, 590 (5th Cir. 2004)). The majority held that this exception unreasonably shrinks the exigent circumstances exception to the warrant requirement, since the presence of law enforcement always “create” exigent circumstances where persons are engaged in illegal conduct.

The Court then ruled that where the conduct of the police is reasonable and they do not violate the Fourth Amendment prior to the exigent circumstances arising, a warrantless entry to prevent the destruction of evidence is allowed. The majority noted that “When law enforcement officers who are not armed with a warrant knock on a door, they do no more than any private citizen might do. And whether the person who knocks on the door and requests the opportunity to speak is a police officer or a private citizen, the occupant has no obligation to open the door or to speak.” (Citing Florida v. Royer, 460 U.S. 491, 497-98 (1983)). The Court proceeded to reversed the decision of the Kentucky Supreme Court.

The Court’s actual holding in King, which has been discussed on NPR, is actually understandable—police do not “create” or “manufacture” exigent circumstances where they act reasonably, which understandably includes knocking on a door to in pursuit of a fleeing suspect. However, the concerns over the implications of King are also understandable. The decision suggests that sufficient exigent circumstances exist to search a premises where they knock and announce their presence, although hopefully lower courts will require something more when applying the decision.

The particular facts of the case itself are also troubling. The police in King searched the wrong apartment. In addition, is the mere sound of things being moved in an apartment sufficient to support a conclusion that evidence is allegedly being destroyed and to create exigent circumstances to search, especially where police are not certain who the occupants of the apartment are?


Associate of Former Arizona Representative Rick Renzi Sentenced to 3 Years' Probation for Conspiracy and Embezzlement; Follows Acquittal of Mr. Andrew Beardall on All Charges

Yesterday, Dwayne Lequire, a former accountant at an insurance firm run by former Republican U.S. Representative for Arizona Rick Renzi was sentenced to three years probation in the U.S. District Court for the District of Arizona, according to

Representative Renzi represented Arizona's 1st Congressional District until declining to seek re-election in 2008. He is alleged to have siphoned off approximately $400,000 from his family insurance business based in Sierra Vista, Arizona, to finance his Congressional campaign. He was indicted in a 47 count indictment relating to the insurance conduct and to a land swap which was unsealed in February of 2008. Last year, the trial court suppressed the wiretap evidence gathered against Representative Renzi, holding that Federal Bureau of Investigation agents and federal prosecutors ``conducted an unreasonable wholesale interception of calls they knew to be attorney-client communications.'' Representative Renzi has challenged the indictment in the Ninth Circuit Court of Appeals, and the criminal proceedings are on hold pending the appeal.

Lequire was convicted in July on eight counts of embezzlement. He was alleged to have diverted customers' insurance premiums to Representative Renzi. Lequire did not benefit from the activity, however.

Another associate of Representative Renzi, Andrew Beardall of Rockville, Maryland, was charged with conspiracy and two counts of insurance fraud for allegedly helping Representative Renzi cover up the transfer, however Mr. Beardall was subsequently acquitted on all charges.

(Postscript: It is the Blog's understanding that Mr. Beardall has filed a Hyde Amendment petition following his acquittal and we wish him and his counsel success in their pursuit).

Eleventh Circuit Hears Arguments From NFL and Retired Players in Appeal Over Suit Arising From $11 Million Ponzi Scheme

Today's Fulton County Daily Report contains a story concerning Tuesday's oral arguments before the Eleventh Circuit Court of Appeals in an appeal by retired professional football players against the National Football League and the NFL Players Association. The former players are seeking to reverse a ruling last year dismissing the players' suit against the NFL and the Player's Association regarding a Ponzi scheme by an alleged broker and financial advisor, Kirk S. Wright, with whom the players had invested millions of dollars.

The plaintiffs allege the Player's Association allowed Wright to be placed on a list of approved financial advisors. The plaintiffs allege that a background check would have revealed multiple liens against Wright and his business partner, Nelson "Keith" Bond, and that neither Wright or Bond were licensed financial advisors in any state. Wright was convicted for fraud and money laundering in 2006. He is alleged to have defrauded investors, including professional athletes, entrepreneurs and his very own mother, of approximately $150 million.

The plaintiffs invested a total of $11 million with Wright and Bond and their partnership, IMA. Wright committed suicide in a jail in Union City, Georgia, three days after he was convicted. IMA is in bankruptcy. A staggering 170 lawsuits have been filed seeking restitution as a result of Wright's activities, including by investment firms Lehman Brothers Inc., Oppenheimer & Co. Inc., J.B. Oxford & Co., Banc of America Securities LLD and TD Ameritrade Inc., and law firm Gambrell & Russell.

The plaintiffs include retired players Steve Atwater, Blaine Bishop, Carlos Emmons, Clyde Simmons and Al Smith. Atwater was a free safety for the Denver Broncos and New York Jets from 1989 to 1999; Bishop was a safety for the Houston Oilers, Tennessee Titans and Philadelphia Eagles from 1993 to 2002; Emmons was a linebacker for the Pittsburgh Steelers, the Eagles and the New York Giants from 1996 to 2006;Simmons was a defensive end for the Eagles, the Arizona Cardinals, the Jacksonville Jaguars, the Cincinnati Bengals and the Chicago Bears from 1986 to 2000;  and Smith was a linebacker for the Oilers from 1987 to 1996. "Assassin" Atwater in particular is a two time Superbowl winner with the Broncos, an eight-time Pro Bowl selectee, a two-time First Team All-Pro Selectee who has been considered for the Pro Football Hall of Fame. The players' filed suit against the NFL and the Players' Association in the U.S. District Court for the Northern District of Georgia. However, in March of 2009, District Judge Julie E. Carnes dismissed the plaintiffs' suit.

Image may be subject to copyright

The plaintiffs' attorneys argued to the panel, which included Judge Gerald B. Tjoflat and Judge David M. Ebel, a visiting Senior Judge from the Tenth Circuit Court of Appeals, that the District Court's order deprived the players of any remedy and effectively gave the NFL and the Player's Association immunity. The panel pointed out that the players' collective bargaining agreement appeared to pre-empt the players from filing suit. Counsel for the players' union countered that the plaintiff's failed to inquire with the Players' Association regarding Wright prior to investing millions of dollars with him. The case turns on whether the retired players are still governed by the collective bargaining agreement, which would bar their suit against the NFL and the Players' Association since it provides that players are solely responsible for their own finances.


Chief Justice John Roberts Issues Year-End Report on the Federal Judiciary; Judiciary "Operating Soundly"; New Criminal Cases at Highest Levels Since 1932

As the final hours of 2009 were running out on New Years' Eve, U.S. Supreme Court Chief Justice John Roberts issued the Chief Justice's Year-End Report on the Federal Judiciary, available here, a tradition begun by Chief Justice Warren Burger in 1970 to address the most critical needs of the federal judiciary. The Chief Justice has used the Year-End Report in the past to call for salary increases for federal judges. However, this year, the Report merely states that the federal courts are operating soundly, citing the hardships experienced by the nation in 2009.

The Appendix to the Report surveys the workload of the federal courts in 2009. It notes that the total number of cases filed in the Supreme Court decreased by about 6.1% from 2007 to 2008, however the Court hear more cases argued and issued more signed opinions in 2008 than 2007. Filings in the Federal Circuit Courts of Appeals also declined 6% to 57,740, mostly due to a drop in appeals from the Board of Immigration Appeals.

The Year-End Report notes, however, that criminal case filings in federal district courts rose 8% to 76,655, and the number of defendants climbed 6% to 97,982, surpassing the previous record for the number of defendants, 92,714, set in 2003, and reached its highest level since 1932. Filings relating to immigration, fraud, marijuana trafficking, and sex offenses increased. The number of mmigration cases and defendants reached record levels, as a result of illegal re-entries and visa or entry permit fraud. Most of the increase was in five federal districts near the southwestern border. The Report also observes that, as of September 30, 2009, the number of persons under post-conviction supervision was 124,183, an increase of 3% from the previous year. Supervised release cases and pretrial services cases also rose by several percent.

The Demise of Honest Services

Last week three important matters before the Supreme Court signaled the demise of honest services mail fraud found at 18 U.S.C. § 1346. That law defines honest-services mail and wire fraud as "a scheme or artifice to deprive another of the intangible right of honest services." Honest services mail fraud was adopted by Congress 21 years ago in an effort to combat political corruption, but it has allowed federal prosecutors to indict and convict folks of any manner of conduct, criminal or not.

As Justice Scalia recently remarked in dissenting from a denial of a cert petition some months ago, "Without some coherent limiting principle to define what 'the intangible right of honest services' is, whence it derives, and how it is violated, this expansive phrase invites abuse by headline-grabbing prosecutors in pursuit of local officials, state legislators, and corporate CEOs who engage in any manner of unappealing or ethically questionable conduct.''

Last Tuesday, the Supreme Court heard oral argument on two cases that did not explicitly raise the issue of the constitutionality of the honest services mail fraud. Scotusblog has an excellent critique of the arguments in the Conrad Black and the Bruce Weyrauch cases and the oral argument transcripts can be found here and here.

However, as Scotusblog reports, on Friday, attorneys for Jeff Skilling explicitly raised the issue arguing that 1346 is unconstitutionally vague. The Skilling merits brief is here. See p. 38.

A detailed read of the oral arguments last week portends the inevitable falling of this statute that has been an essential weapon in combating public corruption, but that has also been a source of abuse and over-reaching by “headline-grabbing” prosecutors.

Another Win in the Supremes

Yesterday the Supreme Court gave us another defense win authored by Justice Souter. Pursuant to a wiretap of Mohammed Said’s phone, the government recorded 6 phone calls between Said and petitioner Abuelhawa, who arranged on 2 occasions to buy one gram of cocaine. The government charged each of the phone calls as a felony under 21 U.S.C. 843(b), which makes it a felony to “use any communication facility . . . facilitating” the distribution of drugs.

The two purchases by petitioner Abuelhawa were misdemeanors. The two sales by Said were felonies. Justice Souter, in a fairly awkward fashion, writing for a unanimous court, held that because Congress legislated a more lenient sentence for the purchase of gram quantities of cocaine as misdemeanors, that the government’s reach exceeded its grasp in making those misdemeanor purchases into felonies by the end run of charging the use of a communication device. Thus, using a telephone to make a misdemeanor purchase does not “facilitate” felony drug distribution in violation of § 843.