Southern Union Co. v. United States -- Must a Jury, and not the Judge, Find the Facts Necessary to Impose a Criminal Fine?

The U.S. Supreme Court's decision in Apprendi v. New Jersey, 530 U.S. 466 (2000), held that the Fifth and Sixth Amendments of the U.S. Constitution require that any fact which increases punishment beyond the maximum prescribed by statute must be determined by a jury, rather than a judge. The Court's holding in Apprendi led to its holding that the United States Sentencing Guidelines were advisory, rather than mandatory, five years later, in United States v. Booker, 543 U.S. 220 (2005).

Now the Court is considering whether the rule of Apprendi extends to the imposition of criminal fines. As explained in detail on Cornell University Law School's Legal Information Institute Supreme Court Bulletin, yesterday, the Court heard arguments in the case of Southern Union Co. v. United States, Case No. 11-94. Southern Union had had a spill of hazardous waste in 2004. The company was charged and convicted of storing hazardous waste without a permit. The trial court imposed a $38 million fine on Southern Union based on its finding that the violation had continued for 762 days.

Southern Union appealed, arguing that the rule of Apprendi required that the jury, not the judge, determine the period of the violation. It has contended that if determination of criminal fines are left to the courts, the courts could impose the fines as punishment.

Southern Union also argues that giving courts discretion in the imposition of criminal fines treats criminal defendants subject to imprisonment differently than criminal defendants subject to fines. Imprisonment of a defendant is determined by evidence beyond a reasonable doubt, while a fine may be imposed using a preponderance of the evidence standard. This structure disproportionately affects corporations, which cannot be imprisoned and are therefore subject to a lower standard of proof in criminal cases.

The government has responded that Apprendi concerns only deprivations of life and liberty interests,and does not extend to the imposition of criminal fines. It maintains that deprivation of property has always been subject to different protections than deprivations of liberty. The government has maintained that applying Apprendi to criminal fines will impair the efficiency of the judicial system.

The Chamber of Commerce and the National Association of Criminal Defense Lawyers have also submitted arguments in the case. A transcript of yesterday's oral arguments before the Court are available here.

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).

Senate Permanent Subcomittee on Investigations Grills Goldman Sachs Execs

Goldman Sachs alleged securities fraud and role in the financial collapse has dominated the news this week, as reported by ABC News, NBC news and Bloomberg. It is difficult to evaluate the evidence against or supporting Goldman at this stage, but Goldman's fortunes were not helped by an inquisitorial and highly publicized hearing by the Senate Permanent Subcommittee on Investigations. The Subcommittee scheduled the hearing less than two weeks after the U.S. Securities and Exchange Commission filed a complaint against Goldman alleging that the firm committed securities fraud.

Goldman officers and employees testified that Goldman was managing its risk on individual transactions, and not betting against the future of the housing market. Six Goldman officers and employees, including its Chief Executive, Lloyd Blankfein, were summoned to testify. Senators asked the witnesses to look through binders of evidence containing internal e-mails and communications.

Goldman defended that the Subcommittee had reached its conclusions before the hearing. The firm also released documents showing that any gains it made from short sales of mortgage backed securities in 2007 were entirely erased by its losses when higher quality mortgages failed in 2008. Goldman's representatives pointed out that the firm had no special advance knowledge that the market would collapse.

The Senators asked Mr. Blankfein if it was morally correct to sell securities to clients while betting against the securities at the same time. Mr. Blankfein promised Goldman would "tighten up" the practices subject to criticism. Michigan Democratic Senator Carl Levin scolded Mr. Blankfein for Goldman selling securities, allegedly described by Goldman's own employees as "crap," and betting against them. Mr. Blankfein told the Committee that it was not Goldman's responsibility to tell its clients how to trade or invest. Blankfein had testified in January before the Financial Crisis Inquiry Commission led by former California Treasurer Phil Angelides.


In an e-mail from November 18, 2007, Blankfein allegedly stated to a colleague that Goldman was making more money from short bets on mortgages than it had lost on its investments in home loans. However, Blankfein also states in the same e-mail that Goldman did not dodge the mortgage crisis, and noted that the crisis was not over. Another document discussed during the hearing was an e-mail between Goldman's Chief Financial Officer, David Viniar, and its President and Chief Operating Officer, Gary Cohn, regarding a profit and loss statement from July 2007 and short sales of stock by Goldman.

Goldman's mortgage chief Dan Sparks admitted in his testimony that Goldman made poor decisions in hindsight.


The Senators frequently interrupted witnesses. Their questioning was also not confined to the allegations of the SEC's complaint. Senator Levin seized on an e-mail between the head of Goldman's mortgage desk, Thomas Montag, and Sparks, in which Montag called a set of mortgage linked investments "one shitty deal." Republican Senator Tom Coburn criticized Goldman for making Goldman bond trader Fabrice Tourre a "whipping boy" and releasing his personal e-mails. In response to Goldman's contention that the Committee had cherry picked its evidence, Senator Levin retorted that the evidence was the "whole bowl of cherries," and reflected the history of what happened.

Tourre also tesfied and asserted his innocence, claiming that he did not mislead any parties in dealings relating to a collateralized debt obligation which he helped to develop. He told the panel that he would defend himself in court against the "false" allegations.

Protestors attending the hearing wore striped prison uniforms and held signs stating "shame" and "Goldman banksters," recalling a term coined by Ferdinand Pecora, an Assistant District Attorney appointed by the Senate to head the Pecora Commission which investigated the causes of the 1929 stock market crash.

Goldman received $10 billion in stimulus money from the federal government following the financial collapse. It repaid the monies with interest eight months later.

It will be interesting to see if the SEC or the Subcommittee--coincidentally the same panel led by Wisconsin Republican Senator Joseph McCarthy in the 1950s--has any more damning evidence up its sleeve. In the meantime, in happier news for Goldman, shares in the company have risen from a low of $152 per share on April 26, to $160 in current trading.

Government Looks for Success Against Former KB Home Executive Following String of Failures in Stock Option Backdating Cases

After the failure of its backdating case against Gregory Reyes, former Chief Executive Officer of Brocade Communications Systems, prosecutors with the U.S. Attorney's Office for the Central District of California are taking a new tack in its backdating case against former KB Home CEO Bruce Karatz, according to the National Law Journal. Karatz is alleged to have received millions in undisclosed income as a result of backdating stock options, and made $232 million in his last three years as CEO alone. The prosecution has decided to focus on Karatz's personal gain from the alleged scheme, and circumvent the defense--effective in the Brocade Communications Systems case--that backdating is not criminal where the corporation is aware of it, or where a defendant relies on the advice of attorneys or accountants. Defendants have also successfully argued that backdating is a legal and legitimate practice, and that many companies restate their income as a result of such conduct.

The U.S. Court of Appeals for the Ninth Circuit reversed Reyes' conviction in August based on the government's alleged prosecutorial misconduct in intimidating and influencing witnesses. The government's failure in the Reyes case came along with its defeat in 2008 in a backdating case against Kent Roberts, the former General Counsel of McAfee, Inc., a security software firm, and the dismissal of its case against two former executives of Broadcom Corp.

Federal Prosecutions of Corporate, Financial and White-Collar Crimes Fall to Six-Year Low; Congress Increases Funding & DOJ Increases Criminal Probes

Brad Heath points out a disturbing trend in today's USA Today--federal prosecutions of serious corporate, financial and other white-collar crimes have fallen to new lows. In this age of Enron, Madoff and massive failures of financial institutions, this is a serious breach of the public trust. The article contains a chart which shows that, in fiscal year 2009, the Department of Justice opened only 63 new corporate fraud prosecutions. That is barely one case per year per district and represents a 55% decrease since 2003. Securities fraud charges have decreased 17% and bankruptcy fraud cases have decreased 44% over the same period. The article cites Professor Ellen Podgor of Stetson University College of Law and creator of White Collar Crime Prof Blog who attributes the decline was the result of the Bush administration's push of federal prosecutors and the FBI to focus on terrorism and national security.

However, relief appears to be on the way. The article states that lawmakers have put new pressure on DOJ officials, who have launched thousands of new criminal probes into financial crimes. Congress has approved extra money to target financial crime, and Attorney General Eric Holder announced a new task force to target financial fraud last month. As if to herald a change of direction, prosecutors in New York also announced indictments yesterday against Raj Rajaratnam, founder of Galleon, claiming that the case is the largest hedge fund insider trading case ever. The article also states that the FBI currently has more than 2,800 open mortgage fraud cases..

Florida Executive Sentenced in $10.5 Million Embezzlement Scheme

Although it may be considered small change when compared with the fraud of fellow Floridian Scott Rothstein, according to an FBI press release, Gary Ernest Williams, former Chief Financial Officer for Marian Gardens Tree Farm (MGTF) in Groveland, Florida, was sentenced to eight years imprisonment on Monday in the U.S. District Corut for the Middle District of Florida. Williams was charged with embezzling approximately 10.5 million from MGTF since 2000 through falsified checks, use of a credit card in the company's name and making large cash withdrawals which he told bank officials were to be used to pay “employee bonuses.” Willams spent the money on lavish homes, luxury cars, jewelry, drugs, and vacations by private jet. He also failed to failed to pay federal income taxes in the amount of $3,675,000 on the illegally obtained funds.

Williams entered a guilty plea in July. The District Court ordered Williams to pay more than 14 million in restitution to MGFT and to forfeit homes in North Carolina, Pennsylvania and the Bahamas.

Financial Institution Fraud - a DOJ Initiative

Each administration puts its own stamp within the Department of Justice on what priorities, or initiatives it will pursue. Not surprisingly, the Obama Department of Justice is pursuing Financial Institution Fraud as one of its top three initiatives behind National Security and combating the Mexican drug cartels. In the 100 day progress report released last week, the report stated the,

  • Department of Justice has placed a distinct focus on financial crimes. Indeed, the Attorney General has said that “the Justice Department must wage an aggressive effort against financial fraud and market manipulation.”
  • Moreover, the Department has devoted significant attention to preventing, investigating, and prosecuting mortgage fraud. The Federal Bureau of Investigation is currently investigating more than 2,100 mortgage fraud cases, up almost 400 percent from five years ago. The Bureau also has more than doubled the number of agents investigating mortgage scams, has created a National Mortgage Fraud Team at headquarters in Washington, and is working hand-in-hand with our partners at other agencies.

Of course, this only makes sense in the context of failing financial institutions and is reminiscent to me of the DOJ days of the late 80s and early 90s when financial institution fraud related to the savings and loan scandals resulted in significant prosecutions of officers and directors of those failed institutions. We plan a more in depth analysis of this DOJ initiative in coming weeks.

Time for a "Good Faith" Defense to Corporate Liability for Criminal Acts or Omissions of Agents

   Criminal prosecutions involving corporations in many cases involve a corporation being exposed to criminal liability for the criminal acts or omissions of its agents which the corporation may not have known of and which were contrary to its express policies or procedures. The Eleventh and former Fifth Circuits have long held that a corporation may be held criminally liable. Steere Tank Lines, Inc. v. United States, 330 F.2d 719, 721-22 (5th Cir. 1963) (citing New York Cent. & H. R.R. Co. v. United States, 212 U.S. 481 (1909); United States v. Illinois Central R. Co., 303 U.S. 239 (1938); United States v. A & P Trucking Company, 358 U.S. 121 (1958)). A corporation may be held criminally liable for the acts or omissions of its agents which were committed within the scope of their employment and which the agent intended to “produce[ ] some benefit to the corporation or some benefit to himself and the corporation second.” United States v. Gold, 743 F.2d  800, 823 (11th Cir. 1984).

   Now an array of legal and business organizations are trying to get courts to re-examine the standard for imposing liability on corporations for the acts of their agents, according to an article today in the National Law Journal. The test case is an appeal in the Second Circuit Court of Appeals, United States v. Ionia Management, No. 07-5801, which involved a Greek tanker company which was convicted for the acts of its employees on one of its vessels in dumping oil into international waters and falsifying records. The Association of Corporate Counsel, the United States Chamber of Commerce, the National Association of Criminal Defense Lawyers, the National Association of Manufacturers, the New York State Association of Criminal Defense Lawyers and the Washington Legal Foundation have filed an amicus brief in the case, authored, surprisingly, by Andrew Weissmann, an attorney with the Chicago law firm of Jenner & Block, who was formerly the Director of the Department of Justice’s specially-formed Enron Task Force. The groups argue that courts should modify the now century-old standard of corporate criminal liability of New York Cent. and permit a good faith affirmative defense to liability, based on factors such as whether the corporation had reasonable and effective policies in place to prevent the commission of the crime, citing recent decisions involving employer defenses in employment discrimination cases, the Model Penal Code, and similar provisions in state criminal codes.

    Weissmann noted the irony that it is easier to impute liability to a corporation in a criminal case than in some civil cases. As acknowledged by John Hasnas, professor of business and law at Georgetown University, the Department of Justice frequently misuses the standard in order to extract pleas, fines, or deferred-prosecution agreements from corporate defendants, and agreements to cooperate in the prosecution of their officers or employees. In any event, in cases involving rogue agents whose crimes may benefit the corporation but are against its policies, it seems time to give corporations a fighting chance.