Federal Criminal Defense Blog : Georgia Federal Criminal Defense Lawyer & Attorney : Gillen Withers & Lake Law Firm : White Collar Crime, RICO, Trial : Atlanta, Savannah, GA

After a five-day nation-wide manhunt, Rufus Paul Harris, former CEO of Conversion Solutions Holdings Corporation (CSHC), originally of Adairsville, Georgia, was arrested on Sunday  by the U.S. Marshal's Service in Provo, Utah. According to the Rome News-Tribune, Harris fled Atlanta on May 23 following the eighth day of his jury trial for conspiracy, fraud and falsifying financial statements in the U.S. District Court for the Northern District of Georgia in which Harris was representing himself.  The charges against Harris were based on an alleged "pump-and-dump" scheme in which Harris and others allegedly inflated CSHC's stock prices by false claims and financial statements and defrauded investors out of millions.

Harris was convicted in absentia and will be sentenced on August 18, and will face a potential 25 years' imprisonment. 

Photo: amberlrhea

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Federal officials last week announced that Deutsche Bank and its mortgage division, MortgageIT, allegedly engaged in fraud on a massive scale as a civil complaint was filed against Deutsche Bank. The complaint alleges that the massive German bank allegedly defrauded the government of up to $1.2 billion through alleged reckless lending practices. The Federal Housing Administration has allegedly paid out approximately $386 million in wrongful insurance claims. The government is seeking three times this amount in fines and penalties. Among the government's allegations is a charge that documents which would have informed bank officials about high rates of default were hidden in a closet at MortgageIT. The civil complaint fails to disclose any incriminating documents which could be used to establish an intent to defraud the government.

However, according to an article by Fox Business News, the government is holding back in the Deutsche Bank case from bringing criminal charges in response to the alleged massive fraud. The author points to the case as illustrative of a trend by Federal officials to prosecute alleged wrongdoing by corporations through civil, rather than criminal, means.

The article speculates that Federal officials might have elected civil, rather than criminal, proceedings due to the lower burden of proof , as well as the more time and resource-consuming nature of criminal proceedings. It also acknowledges concerns by prosecutors over potential harm to corporations, investors and the economy and markets in general, illustrated by the demise of accounting giant Arthur Andersen in 2002 as a result of the federal prosecution in the wake of the Enron scandal. The article cites the fact that criminal, as opposed to civil, actions, are often accompanied or followed by de-licensing actions by regulatory bodies.

The article also cites the relatively few criminal prosecutions following the financial collapse of 2007. What criminal proceedings there have been have focused on individuals with various Wall Street firms--rather than the firms themselves. Furthermore, several of these prosecutions have ended in failure, as exemplified by the acquittal of former Bear Stearns hedge fund managers Ralph Cioffi and Matthew Tannin in 2009.

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Randy Jones, a former executive vice president with Community Bank & Trust who worked for the bank for 30 years, pled guilty last week in the U.S. District Court for the Northern District of Georgia for an alleged multi-million dollar fraud scheme, according to an article in the Atlanta Journal-Constitution. Specifically, Jones was alleged to have made loans to a customer, Joseph Penick, Jr., to purchase tracts of land in North Georgia. Penick is alleged to have paid Jones $770,000. Penick has pled guilty to his involvement in the scheme.

Jones was also alleged to have used family members and friends to obtain more than $800,000 in loans from Community Bank & Trust to purchase an interest in six Zaxby's restaurants.

Community Bank & Trust was shut down by regulators in January of 2010. The bank opened in 1900 and had been insured by the Federal Deposit Insurance Corporation since 1934. Before it failed, it had 36 branches across the region and $1.1 billion in assets. An FDIC report in September of 2010 found that Community Bank & Trust failed to follow its own loan policy and had made more than $10 million in bad loans. Georgia has had more failed banks than any other state--52 since 2008. 

Investigators say he used the names of family members without their consent to obtain more than $800,000 in loans from the bank, which he used to buy a stake in six Zaxby's restaurants. And they claim he approved more than $2.8 million in loans to fraudulent borrowers so that a customer who was a real estate developer could pay down interest on loans.

The bank failures have also led to a number of prosecutions and suits against former bank executives, employees and others. Five people with ties to Omni National Bank of Atlanta were convicted on bank fraud and other charges after the bank collapsed during a federal mortgage fraud probe. A lawsuit by the FDIC also alleges that former officers of Alpharetta-based Integrity Bank engaged in gross negligence and breach of fiduciary duty relating to making bad loans. One of the defendants is State Senator Jack Murphy, a former bank official and the new Chairman of the Senate Banking Committee. Sen. Murphy has denied any wrongdoing.

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A Judge in Oshawa, Ontario, a suburb of Toronto, acquitted six former executive of Royal Group Technologies on Friday, according to the Toronto Star. Royal Group is a manufacturer of plastic materials for the housing construction industry. The company is a subsidiary of Georgia Gulf Corporation, an Atlanta-based, manufacturer and marketer of chlorovinyls and aromatics, which purchased Royal Group in 2006 for $1.7 billion.

The executives, including Royal Group's founder, Vic De Zen, president Doug Dunsmuir, former chief financial officers Ron Goegan and Gary Brown, ex vice-president Luciano (Lu) Galasso and accounting director Gordon Brocklehurst, were charged with fraud in 2006 relating to a purchase of a property in Vaughan, Ontario, in 1998 for $20.5 million by a company tied to the defendants, which was then re-sold on the same day to Royal Group for $27.4 million. The defendants were also charged over their receipt of more than $2 million in bonuses for the sale of a subsidiary of Royal Group in 2002. The defendants were charged following an investigation by the Royal Canadian Mounted Police's Market Enforcement Team, designed to combat white collar crime.

The defendants' counsel argued that the defendants satisfied all disclosure requirements, and that the bonuses appeared in Royal Group's annual circular. Mr. Justice Richard Blouin acquitted the defendants immediately after hearing final oral arguments. The trial ran a total of 49 days, beginning last April. Canada's Federal Public Prosecution Service will determine whether or not to appeal the Judge's decision.

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The U.S. Attorney's Office for the Northern District of Ohio announced last week the sentencing of Vriginia resident Sean M. Daly to 41 months imprisonment after Daly pled guilty to one count of securities fraud. The government alleged that, from 2001 through 2007, Daly engaged in a "free-riding" scheme to purchase stocks. "Free-riding" occurs where a purchaser of stocks places an order for stocks but has insufficient funds to cover the purchase price and instead uses the proceeds from the sale of the stock to cover the purchase. Free-riding schemes attempt to profit from short term changes in prices.

Daly ordered millions worth of securities through the accounts, using the names of nonexistent clients or corporations. He would monitor the price of the stocks during a three-day waiting period, and would refuse delivery of any stocks which had decreased in value, falsely claiming that he was waiting on an overseas client to make payment. Daly also issued false press releases and financial analyses to promote certain stocks which he had placed orders for in order to artificially increase their prices.

The scheme involved accounts with seven broker-dealers: KeyBanc Capital Markets, Inc.(f.k.a. McDonald Investments, Inc.), Dain Rauscher, Inc. (n.k.a. RBC Dain Rauscher, Inc.), Ryan Beck & Co., Inc. (n.k.a. Stifel Nicolaus & Co.), Jesup & Lamont Securities Corp., Jeffries & Company, Inc., Raymond James & Associates, Inc., and Robert W. Baird & Co. Daly also used trading accounts in various company names at National Financial Services, Goldman Sachs Execution & Clearing, LP, Charles Schwab, and Lloyds of London Market Services. 

Daly's scheme was discovered after he was unable to pay for 250,000 shares of stock in Decker Outdoor Corporation which he purchased through McDonald Investments, Inc., causing a loss to McDonald of $1,013,272.56 when it was forced to liquidate the stock.

The Court ordered Daly to pay $5.7 million in restitution. 

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Today's National Law Journal has another article relating to electronically stored information in criminal investigations. For large organizations, subpoenas or requests for information by the government in a criminal investigation are always an unwelcome development, frequently as much because of the potential massive expenditures of time, money and resources they entail as because of their criminal nature. They must, however, be taken with the utmost seriousness, with extreme care to safeguard the rights of the corporation and individuals, and to guard against possible criminal exposure from the very act of responding itself.

The author advises corporations, on becoming aware of a criminal investigation, to issue a notice regarding preservation of evidence to every employee in the corporation, or in relevant offices or departments. Ideally, corporations should already have a comprehensive and thorough document and electronic information retention policy in preparation for any possible demands for information in not only criminal, but civil matters as well. Companies are also advised to take affirmative steps to gather and preserve evidence which might be relevant to a criminal probe upon learning of an investigation or inquiry.

The article also points out the fact that preservation of potential evidence is critical given the danger of obstruction of justice charges by the government. In numerous instances, the government has indicted on charges of obstructing an investigation alone, and not for any alleged underlying crime. The author also notes possible use by the government of any improper handling of evidence as evidence of the corporation's or employees' "consciousness of guilt."

The article recommends forensic management of the hard drives of relevant officers and employees.However, corporations must take care to carefully review the material on the hard drives for any privileged material, at the risk of possible waiver of privileges through disclosure to the government. The author stresses that, even after conducting their own review of the information on hard drives, companies should negotiate an agreement with the government as to a protocol which will ensure that the government's forensic review does not include reviewing privileged information before counsel for the corporation has an opportunity to review and identify the information as privileged. The government and the corporation may enter into a confidentiality agreement under Federal Rule of Evidence 502(e) to guard against possible waiver.

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An article in the New York Law Journal today analyzes the difficulty faced by corporations having countless bytes of electronically stored information when they are served with subpoenas in a federal criminal investigation. In addition to a need for caution in disclosing information so as not to waive any privileges, companies can face staggering costs and consumption of resources in attempting to comply with government demands for information. The authors also note the risk that targeted searches for information might be alleged to be insufficient by a prosecutor or regulator after the fact, creating a risk of additional demands for information or, at worst, charges of obstruction of justice. There are currently no Department of Justice guidelines for requesting electronically-stored information.

The article points out the potential for negotiating with the government regarding the scope of the subpoena and the actions to be taken in compliance. The authors recognize that prosecutors may often be reluctant to narrow the scope of a subpoena out of a concern that doing so may reveal information about its investigation. A corporation may also not want to reveal its methods for responding to a subpoena, considering it to be confidential attorney work-product.

The authors note that Federal Criminal Rule 17(c) sets forth some limitations on the government's power to subpoena. A subpoena must be reasonable, including in the scope of the requests and the burden on the party responding to the subpoena. The article indicates that an objection to the overbreadth of a subpoena's requests for information may be used to negotiate a narrower scope to the subpoena or the manner in which the subpoena will be complied with. The authors cite the Supreme Court's decision in Hale v. Henkel, in which the Court held that subpoena requests must be particularized, as a basis to argue that subpoena requests for electronic information are not sufficiently particularized enough to allow the recipient to identify responsive documents throught the use of targeted search terms or other methods.

The authors further note recent decisions by courts which indicates that courts may soon impose such a requirement that the government negotiate with targets of subpoenas over the scope and manner of compliance. They advocate meet and confer sessions between investigators and recipients of subpoenas, or possible meetings overseen by a magistrate judge or a special master approved by the government, similar to civil litigation, as a step before filing a motion to quash. Involvement of a magistrate or special master would also provide the added benefit allowing a subpoena recipient to submit information in camera.

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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.

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According to Lyle Denniston at SCOTUSblog,  Ashby Jones at the Wall Street Journal Law Blog, and Professor Ellen S. Podgor of Stetson University College of Law and the White Collar Crime Prof Blog, the U.S. Supreme Court seemed more interested in the jury selection/fair trial issues in yesterday's oral arguments in the case of former Enron CEO Jeffrey Skilling, Skilling v. U.S., Case No. 08-1394 then it did in the constitutionality of 18 U.S.C. 1346, the federal honest services fraud statute. The transcript of the oral argument may be read here. After lengthy questioning regarding the jury selection at Skilling's trial by Justice Stephen G. Breyer and others, Chief Justice John G. Roberts, Jr., raised the question of honest services. Skilling's counsel, Sri Srinivasan, appeared to have adopted the strategy of arguing for a new trial based upon juror bias relating to the Enron scandal rather than a reversal of Skilling's convictions for honest services fraud. Srinivasan argued that the Department of Justice was interpreting the law broadly enough to reach virtually any falsehood told by an employee.

Deputy Solicitor General Michael R. Dreeben argued for the government. Dreeben argued ways in which the Court could interpret the honest services fraud statute in order to avoid holding it unconstitutionally vague. Justice Anthony Kennedy stated to Dreeben that it was Congress' job to rewrite the statute and Justice Antonin Scalia remarked on the excessive scope of the statute.

The Court's decision in the case is expected this spring or summer. The parties' arguments regarding honest services fraud largely mirrored the arguments in the two other challenges to 1346 which the Court had heard this term. Commentators have opined that 1346 may not survive without being sent to Congress for reshaping.

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            We received an excellent reader question regarding what factors do Federal courts consider in imposing punishment on corporations or organizations in criminal proceedings. Corporations of course, don’t “go to jail.” The Government does collect its $200 however, since the organization sentencing provisions of the United States Sentencing Guidelines are primarily fine-driven. And while there is a massive body of law concerning factors which must be considered in imposing sentence on individuals, caselaw relating to considerations in imposing punishment on corporations is relatively sparse.

However, areas which courts consider in sentencing corporations or organizations, and conversely areas which corporate criminal counsel may emphasize in order to attempt to mitigate the consequences to their corporate clients, may be discerned from the Guidelines themselves. In many cases, such as relating to acceptance of responsibility and role in the offense, these considerations closely parallel those for individual defendant. The questions facing a corporation at sentencing will boil down to how much will the corporation be made to pay in the form of fines and restitution, and what conditions will be imposed on the corporation.

The relevant portion of the Guidelines is Chapter Eight. Imposing a sentence on a corporation or organization in a Federal criminal case involves a complex determination by the sentencing court. In brief, the court must:

1. Determine whether any restitution, remedial orders or community service should be ordered;

2. Determine the amount of the fine, including determining the corporation’s or organization’s “culpability score”;

3. Determine whether any departures or probation is appropriate.

The Introductory Commentary to Chapter Eight states that it is designed “designed so that the sanctions imposed upon organizations and their agents, taken together, will provide just punishment, adequate deterrence, and incentives for organizations to maintain internal mechanisms for preventing, detecting, and reporting criminal conduct.” U.S.S.G., Ch. 8, Pt. A, Introductory Commentary. The sentencing provisions of Chapter Eight are intended to reflect the general principles that:

First, the court must, whenever practicable, order the organization to remedy any harm caused by the offense. The resources expended to remedy the harm should not be viewed as punishment, but rather as a means of making victims whole for the harm caused.

Second, if the organization operated primarily for a criminal purpose or primarily by criminal means, the fine should be set sufficiently high to divest the organization of all its assets.

Third, the fine range for any other organization should be based on the seriousness of the offense and the culpability of the organization. The seriousness of the offense generally will be reflected by the greatest of the pecuniary gain, the pecuniary loss, or the amount in a guideline offense level fine table. Culpability generally will be determined by six factors that the sentencing court must consider. The four factors that increase the ultimate punishment of an organization are: (i) the involvement in or tolerance of criminal activity; (ii) the prior history of the organization; (iii) the violation of an order; and (iv) the obstruction of justice. The two factors that mitigate the ultimate punishment of an organization are: (i) the existence of an effective compliance and ethics program; and (ii) self-reporting, cooperation, or acceptance of responsibility.

Fourth, probation is an appropriate sentence for an organizational defendant when needed to ensure that another sanction will be fully implemented, or to ensure that steps will be taken within the organization to reduce the likelihood of future criminal conduct.

U.S.S.G., Ch. 8, Pt. A, Introductory Commentary. The provisions are designed to offer “incentives” to corporations or other organizations to police and eliminate criminal conduct through compliance and ethics programs. U.S.S.G., Ch. 8, Pt. A, Introductory Commentary.

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Last month, the U.S. Sentencing Commission issued its 2010 Proposed Amendments to the U.S. Sentencing Guidelines, which may be viewed here, which contain much of interest for both corporate and individual defendants.

In regard to corporations or “organizational" defendants, the Commission has proposed several changes to Chapter Eight of the Guidelines. The Proposed Amendments amend Guideline Section §8B2.1, governing compliance and ethics programs for corporations, by adding language in the Application Notes regarding personnel who must be aware of an organization’s document retention policies and conform to such policies and setting forth “reasonable steps that an organization should take after detection of criminal conduct.” The steps are:

First, the organization should respond appropriately to the criminal conduct. In the event the criminal conduct has an identifiable victim or victims the organization should take reasonable steps to provide restitution and otherwise remedy the harm resulting from the criminal conduct. Other appropriate responses may include self-reporting, cooperation with authorities, and other forms of remediation. Second, to prevent further similar criminal conduct, the organization should assess the compliance and ethics program and make modifications necessary to ensure the program is more effective. The organization may take the additional step of retaining an independent monitor to ensure adequate assessment and implementation of the modifications.

Section 8D1.4, governing conditions for probation for corporations or organizations, is also amended to provide, as conditions of probation, that an organization develop and submit a compliance and ethics program and retain an independent monitor. The amendment further provides that organizations must disclose any material adverse changes in its business or financial condition or prosepects, and any new criminal prosecutions, civil litigation, administrative proceedings, investigations or formal inquiries commenced against the organization.

Last September, the Commission had stated that one of its policy priorities would be to study alternatives to incarceration. Accordingly, the Proposed Amendments increase “Zone B” and “Zone C” of the Guidelines’ Sentencing Table by one level. Defendants with Guidelines calculations falling within Zone B are eligible, instead of a sentence of imprisonment, to have imposed “a sentence of probation that includes a condition or combination of conditions that substitute intermittent confinement, community confinement, or home detention for imprisonment…” pursuant to Section §5C1.1(b)(3).

The Commission has sought comments on its Proposed Amendments. It has also sought comments on potential revisions to certain specific offender characteristics as a basis for downward departure in sentence pursuant to the policy statements in Chapter 5 of the Guidelines, including age; mental and emotional condition; physical condition; military, civic, charitable, or public service, employment-related contributions and record of prior good works; and lack of guidance as a youth. The Commission has stated that it has considered eliminating these statements pursuant to the Supreme Court’s decision in Booker, which mandated that sentencing courts consider a defendant’s “history and characteristics” pursuant to Section 3553(a) in fashioning a reasonable sentence. Under the “old” Guidelines system, such factors were either prohibited or discouraged grounds for a downward departure in sentence.

The Proposed Amendments also take into account the Supreme Court’s landmark holding in United States v. Booker, 543 U.S. 220 (2005) that the Guidelines are advisory, rather than mandatory, by amending the instructions on applying the Guidelines in Section 1B1.1 to provide that, after a sentencing court has determined the proper sentencing range under the Guidelines and considered the factors in 18 U.S.C. § 3553(a), “[t]he court shall then determine the sentence (i.e., a sentence within the guideline range, a departure, or a variance), considering the applicable factors in 18 U.S.C. § 3553(a) taken as a whole.”

The Proposed Amendments expand courts’ authority to impose probation as an alternative to incarceration in certain drug cases in a new proposed Guideline Section 5C1.3 provided that the defendant participates in a substance abuse treatment program and meets certain additional criteria. The Amendments furthermore suggest changes to determining a defendant’s criminal history in terms of the recency of prior offenses. Finally, the Proposed Amendments also recommend so-called “hate crimes” enhancements under Section 3A1.1 which provide for an increase of 3 or more levels to a defendant’s offense level where “the defendant intentionally selected any victim or any property as the object of the offense of conviction because of the actual or perceived race, color, religion, national origin, ethnicity, gender, gender identity, disability, or sexual orientation of any person…”
 

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The Securities and Exchange Commission announced this week a new initiative to encourage private individuals and corporations to cooperate in SEC investigations and enforcement. The SEC will revise its Enforcement Division's enforcement manual to add a new section entitled "Fostering Cooperation." The section will allow SEC investigators to use the following "tools":

Cooperation Agreements — Formal written agreements in which the Enforcement Division agrees to recommend to the Commission that a cooperator receive credit for cooperating in investigations or related enforcement actions if the cooperator provides substantial assistance such as full and truthful information and testimony.

Deferred Prosecution Agreements — Formal written agreements in which the Commission agrees to forego an enforcement action against a cooperator if the individual or company agrees, among other things, to cooperate fully and truthfully and to comply with express prohibitions and undertakings during a period of deferred prosecution.

Non-prosecution Agreements — Formal written agreements, entered into under limited and appropriate circumstances, in which the Commission agrees not to pursue an enforcement action against a cooperator if the individual or company agrees, among other things, to cooperate fully and truthfully and comply with express undertakings.

The proposed changes also streamline the process for requesting immunity from the Justice Department for witnesses assisting in SEC investigations and enforcement actions. They futhermore set forth considerations for evaluating cooperation by individuals, including:

The assistance provided by the cooperating individual.
The importance of the underlying matter in which the individual cooperated.
The societal interest in ensuring the individual is held accountable for his or her misconduct.
The appropriateness of cooperation credit based upon the risk profile of the cooperating individual.
As the announcement recognizes, the "tools" are tools which the Department of Justice has long employed to secure cooperation and obtain information. Professor Ellen S. Podgor of Stetson University College of Law and the White Collar Crime Prof Blog has listed concerns regarding the SEC's new cooperation criteria.

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Georgia leads the nation in bank failures this decade, with 32 failed banks since 2002, 25 of those in 2009 alone, according to the Federal Deposit Insurance Corporation (FDIC). Fraud has undoubtedly played a substantial role in the failure of many of these banks, and the FDIC and other agencies are especially vigilant in detecting and prosecuting fraud in the wake of bank failures.

Brent Merriel of Atlanta, Georgia, was indicted last week in the U.S. District Court for the Northern District of Georgia on four counts of aggravated identity theft and two counts of making false statements to the FDIC as announced by the U.S. Attorney's Office for the Northern District of Georgia. Merriel is alleged to have obtained several million worth of loans on properties in his name and the names of family and friends from Omni National Bank (Omni). Omni failed on March 27, 2009, and was taken over by the FDIC. Merriel then asked the FDIC to forgive $2.2 million in loans and to allow him to make a "short sale" of two properties to purchasers. A short sale is a sale of a property for less than the full amount due or owed, which serves to reduce a lender's losses or assist the property owner. However, in Merriel's case, the alleged purchasers were allegedly persons whose identities had been stolen. Merriel is also alleged to have forged sales contracts and loan commitment letters which he submitted to the FDIC.

The release notes that other individuals have been prosecuted relating to Omni, including Mark Anthony McBride, who fraudulently obtained millions in mortgage loans from Omni and other lenders and who pled guilty last April, and Delroy Oliver Davy, who similarly obtained millions in fraudulent loans from Omni and others. It quotes FDIC Office of Inspector General, Southeast Region Special Agent In Charge C. Ed Slagle as stating that FDIC will aggressively investigate and prosecute fraudulent acts uncovered in the FDIC's process of liquidating assets of failed banks in order maximize recoveries. The release also quotes Special Inspector General for the Troubled Asset Relief Program (SIGTARP) Neil Barofski, Department of Housing and Urban Development Inspector General Kenneth M. Donohue and U.S. Postal Inspector in Charge, Atlanta Division Martin D. Phanco on fraud and enforcement.

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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.

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In response to allegations uncomfortably similar to those against former New York celebrity lawyer and arch Ponzi-schemer Marc Dreier, Fort Lauderdale attorney Scott Rothstein, head of Rothstein, Rosenfeldt and Adler, P.A., appeared in response to a criminal information in the U.S. District Court for the Southern District of Florida on Tuesday. The information charges Rothstein with one count of Racketeering Conspiracy, in violation of 18 U.S.C. § 1962(d); one count of Money Laundering Conspiracy, in violation of 18 U.S.C. § 1956(h); one count of Mail and Wire Fraud Conspiracy, in violation of 18 U.S.C. § 1349; and two counts of Wire Fraud, in violation of 18 U.S.C. § 1343, as well as criminal forfeiture, U.S. v. Rothstein, 0:09-cr-60331-JIC.

According to the criminal information, available here, from about 2005 through November 2009, Rothstein, and other “known and unknown” unnamed co-conspirators, allegedly unlawfully obtained approximately $1.2 billion from investors through a Ponzi scheme (outdoing even Dreier’s scheme). The Government alleges that Rothstein used false statements, documents and computer records to induce investors to loan money to alleged borrowers based upon fraudulent and fictitious promissory notes and bridge loans. Rothstein allegedly falsely informed investors that his law firm, Rothstein, Rosenfeldt and Adler, P.A.’s, clients requested short-term financing for undisclosed business deals and that the clients were willing to pay high rates of return for loans negotiated by Rothstein.

Rothstein also allegedly told investors that they could purchase at a discount confidential settlement agreements in sexual harassment and whistleblower cases in amounts ranging from hundreds of thousands of dollars to millions of dollars. Rothstein allegedly falsely represented that the settlement agreements would be repaid to the investors at face value over time. Rothstein allegedly represented to investors that the settlements were highly confidential in order to protect the reputations of the companies and executives involved; that the plaintiffs preferred to settle the claims rather than purse them in a public forum; that Rothstein, Rosenfeldt and Adler, P.A., would disburse the investors’ funds to the plaintiffs; that the firm would make payments to the investors pursuant to the payment schedules in the alleged settlement agreements; that the funds were maintained in designated trust accounts for the investors in accordance with the rules and regulations of the Florida Bar and were verified by independent sources, as well as numerous other alleged false statements regarding the settlement agreements, investment funds and the firm.

To effect the fraud, Rothstein allegedly established numerous trust accounts in Rothstein, Rosenfeldt and Adler, P.A.’s name; falsified statements from financial institutions and manufactured online banking information allegedly showing investors’ monies; created false and fictitious settlement agreements and other documents. Among the alleged false and fictitious documents was a court order in a case, purportedly signed by a Federal District Judge, which falsely alleged that Rothstein, Rosenfeldt and Adler, P.A.’s clients had prevailed in a lawsuit and were owed $23 million, when in fact the firm had settled the case without the clients’ knowledge and had obligated them to pay $500,000 to the defendant.

The information also alleges that Rothstein allegedly falsely told clients that, in order to recover funds, they had to post bonds to be held in Rothstein, Rosenfeldt and Adler, P.A.’s trust account. Over several years, clients wired approximately $57 million to a trust account controlled by Rothstein. Rothstein allegedly created another false Federal court order to conceal the scheme, providing that the funds were to be returned to the clients by a later date.

Rothstein used the funds acquired through the alleged scheme to fund the operations of Rothstein, Rosenfeldt and Adler, P.A., and to expand the firm. The firm grew to employ approximately 70 attorneys. Rothstein is alleged to have laundered the funds from the scheme through corporations, contributions and large bonuses and gifts to employees. The information alleges that Rothstein used the funds to make contributions to Federal, State and local political candidates in a manner designed to conceal the source of the funds and to circumvent Federal and State limits on campaign contributions; for charitable donations; to purchase controlling interests in restaurants in South Florida; and to hire members of local law enforcement to provide security for Rothstein, Rosenfeldt and Adler, P.A., and for Rothstein personally.

The enormous wealth amassed by Rothstein through the alleged scheme is apparent in the Governement’s forfeiture allegations, which seek forfeiture not only of a sum of $1.2 billion, but also of 24 properties in Fort Lauderdale, Lauderdale by the Sea, Boca Raton, Hollywood and Plantation, Florida; New York City and Narragansett, Rhode Island, including Rothstein’s 10% ownership in the Miami Beach mansion of late fashion mogul Gianni Versace, “Casa Casuarina.” Forfeiture is also sought of numerous business interests, bank accounts and jewelry, as well as 24 vessels and vehicles purchased by Rothstein, including a 55 foot yacht.

The Government also lists millions in political and charitable contributions by Rothstein which it seeks forfeiture of, including contributions to the Republican Party of Florida; Florida Governor Charlie Crist; Democratic Chief Financial Officer Alex Sink, who is running for governor; and two hospitals.

As reported in the Miami Herald here, and here, Rothstein started Rothstein, Rosenfeldt and Adler, P.A., in 2002 as an obscure attorney practicing employment law. Over the next six years, his net worth grew from about $160,000 to tens of millions. Rothstein used flashy wealth and connections in the Broward County social and business communities to lure wealthy persons to invest in his schemes. He befriended the rich and famous, including NFL Hall of Famer Dan Marino

George G. Levin, a wealthy Fort Lauderdale resident and hedge fund manager, gave $656 million to Rothstein to invest in settlements purportedly worth $1.1 billion. Levin helped Rothstein market investments in employment and sexual harassment lawsuits to investors, although he is not alleged to have been complicit in Rothstein’s crimes. Another of Rothstein’s clients, car-dealership mogul Ed Morse, claims that Rothstein defrauded him of $57 million, arising from the settlement of a contract dispute with an interior decorator.

Rothstein would allegedly give large bonuses to employees of Rothstein, Rosenfeldt and Adler, P.A. on the condition that they make campaign contributions to political candidates who Rothstein would specify. The Government has stated that the recipients of the political contributions have returned the contributions. The Florida Democratic Party has returned $200,000 and the Florida Republican Party has given back $150,000. After Crist won the Governor’s race in 2006, he appointed Rothstein to a panel which nominates Broward County judicial candidates. The Florida Democratic Party has called for an investigation of Crist. Rothstein also allegedly paid gratuities to local law enforcement officers to avoid scrutiny.

Rothstein’s scheme began to unravel over Halloween weekend, when investors began calling the firm for overdue payments and discovered the fraud. Rothstein fled to Morocco in October, taking $400,000 to $500,000 in cash with him and wiring $16 million to Casablanca. Rothstein reportedly sent e-mails to members of his firm that he was contemplating suicide, but he returned to the U.S. on a private jet in early November. He met with Federal authorities and provided details regarding his Ponzi scheme. FBI and IRS agents raided Rothstein, Rosenfeldt and Adler, P.A.’s law offices, and seized Rothstein’s real and personal property. Rothstein agreed to waive indictment, an indication that he is cooperating with the Government, although Rothstein’s counsel has denied that he has any deal with the Government.

The Government’s information does not name Rothstein’s alleged co-conspirators, however news reports suggest members of Rothstein's inner circle at the law firm, and officers at Toronto Dominion Bank, where the investor trust accounts were held.

Rothstein’s alleged Ponzi scheme has been called the largest in the history of South Florida by Federal officials. The Florida Bar has disbarred Rothstein for stealing from the firm’s trust account. Rothstein, Levin and TD Bank are also being sued by a group of investors for more than $100 million.

Rothstein appeared in court on Tuesday in casual attire with a confident demeanor and pled not guilty to the information. U.S. Magistrate Judge Robin Rosenbaum ordered Rothstein jailed pending trial based on Rothstein’s flight to Morocco. Rothstein is represented by attorney Marc Nurik, oddly of Rothstein, Rosenfeldt and Adler, P.A. He faces up to 100 imprisonment if convicted.

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Last Wednesday, the Government, through Deputy Assistant Attorney General Kenneth A. Blanco, filed a brief Motion to Dismiss Third Superseding Indictment with Prejudice seeking to dismiss its indictment against Miami, Florida, attorney Benedict P. Kuehne, and also Colombian attorney Oscar Saldarriaga Ochoa, in the criminal action of U.S. v. Velez, 1:05-cr-20770-MGC, in the U.S. District Court for the Southern District of Florida. The Government’s motion stated that it was based upon the “totality of the circumstances,” including the Eleventh Circuit Court of Appeals’ affirmance of the District Court’s dismissal of the Government’s charge of conspiracy to launder money against Mr. Kuehne. The Government stated that it believe that dismissal was in the interest of justice. On the same day, U.S. District Judge Marcia Cooke entered an order dismissing the Third Superseding Indictment.

The dismissal marked the end of a long ordeal for Kuehne, who was indicted over two years ago for alleged money laundering conspiracy, money laundering concealment conspiracy, concealment money laundering and wire fraud conspiracy. According to the Government’s indictment, Fabio Ochoa Vasquez was one of the leaders of the Medellin Cartel, one of the largest cocaine trafficking and money laundering organizations in the world. In 2001, Ochoa was extradited from Colombia to the U.S. to face charges of conspiring to smuggle approximately 30 tons of powder cocaine into the U.S. per month between 1997 and 1999. Ochoa hired distinguished attorney Roy Black, of the Miami law firm of Black, Srebnick, Kornspan & Stumpf, P.A., and other attorneys to represent him, and the defense in turn retained Mr. Kuehne, of the Law Offices of Benedict P. Kuehne, P.A., to investigate the funds which Ochoa would use to pay his legal team. Kuehne drafted various opinion letters for the offense. The Government alleged that Kuehne was paid for his investigation and opinions by various wire transfers with monies which were the proceeds of specified unlawful activity—the distribution and sale of illegal drugs, including monies from the Colombian “Black Market Peso Exchange” and drug proceeds supplied by undercover U.S. agents.

Kuehne, through his attorney, Jane Moscowitz of Moscowitz & Moscowitz, P.A., filed a motion to dismiss the indictment in July, which may be viewed here, relying on the fact that one of the federal money laundering statutes, 18 U.S.C. § 1957, contains an express exemption for “any transaction necessary to preserve a person’s right to representation as guaranteed by the sixth amendment to the Constitution.” 18 U.S.C. § 1957(f)(1).The motion began with a quote from Banking Crimes: Fraud Money Laundering and Embezzlement, by John K. Villa: "There is an inestimable difference... between expecting a defendant to be able to find an attorney willing to risk his fee, and expecting him to find an attorney willing to risk his personal liberty." Kuehne argued that Congress enacted the exemption in § 1957(f)(1) out of a concern that the threat of prosecution of criminal defense attorneys for accepting fees would have a “chilling effect” on attorneys’ willingness to accept clients, and therefore impose an unacceptable burden on the exercise of the Sixth Amendment right to counsel. The defense argued that the monies paid fell squarely within § 1957(f)(1)’s exemption and that Count One of the indictment should be dismissed. The District Court agreed and dismissed Count One, and the Eleventh Circuit affirmed in United States v. Velez, No. 09-10199, 2009 WL 3416116 (11th Cir., October 26, 2009).

As reported by the Miami Herald, Kuehne addressed reporters on the steps of the courthouse, stating that he always believed “things would turn out well in the end.” Prior to the allegations against him, he had been a prominent member of the legal community, serving on the Florida Bar board of governors, as a past president of the Dade County Bar Association and as a member of Vice President Al Gore’s legal team in the 2000 Florida presidential election dispute. Kuehne expressed his appreciation to the Department of Justice for the dismissal of the matter. Cynthia Hujar Orr, President of the National Association of Criminal Defense Lawyers, which filed amicus briefs in Kuehne’s case, called the Government’s prosecution of Kuehne “disgraceful.”

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The trial of Bear Stearns hedge fund managers Ralph Cioffi and Matthew Tannin got underway last week. As reported by attorney Jacob Zamansky in Forbes and the New York Daily News, the parties gave opening statements on Thursday. Assistant U.S. Attorney Patrick Sinclair argued that Bear Stearns financial officer Matthew Tannin allegedly told investors on 11 occasions that he was putting more of his own money into Bear Stearns’ troubled High-Grade Structured Credit Strategies Fund and High-Grade Structured Credit Enhanced Leveraged Fund. Tannin allegedly told investors that it would be “silly” to redeem their investments. Sinclair also told the jury that Cioffi failed to disclose to investors that he had transferred $2 million of his own money to another Bear Stearns fund. The prosecution cited alleged incriminating e-mails between Cioffi and Tannin in which the defendants allegedly acknowledged that the subprime mortgage market was “toast” and that they should “close the fund.” Sinclair argued that Cioffi’s and Tannin’s actions were allegedly to save their bonuses and reputations. He spoke to the jury for about 45 minutes.
 

In contrast, Cioffi’s attorney, Dane Butswinkas, delivered a two hour opening statement using charts and exhibits to show the complexity of Bear Stearns’ management structure, hedge funds and the operation of the collateralized debt obligation (CDO) market. Butswinkas argued that the defendants were the victims of market forces beyond their control and that the defendants did their best to predict the future performance of the market and the funds. Tannin’s counsel, Susan Brune, also spent approximately two hours explaining to the jury about hedge funds, CDOs and market risk. Brune attributed the failure of the funds on a “run on the bank” and argued that the funds’ investors were well aware of the risks. Brune characterized the prosecution’s theory as “I lost my money, therefore there has to be a fraud.” The defense argued that the e-mails were taken out of context, and that worrying about markets is not a crime.
 

Nearly 300 investors kept their investments in the hedge funds, which lost $1.4 billion in July of 2007. The two hedge funds had experienced positive growth until the preceding quarter, however an internal Bear Stearns report showed that securitized subprime mortgages were losing value fast.
 

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The trial of former Bear Stearns hedge fund managers Ralph Cioffi and Matthew Tannin begins today in Brooklyn, as reported by Bloomberg. A jury will be selected today. 

Cioffi and Tannin are charged with allegedly causing losses of $1.4 billion to investors by misleading investors regarding the health of two Bear Stearns hedge funds, the Bear Stearns High-Grade Structured Credit Strategies Enhanced Leverage Master Fund Ltd. ("Enhanced Fund"). and the Bear Stearns High- Grade Structured Credit Strategies Master Fund Ltd. ("Master Fund"). Cioffi was a hedge fund manager and Tannin was an attorney who served as chief operating officer. They are charged with alleged conspiracy, securities fraud and wire fraud. Cioffi is also charged with alleged insider trading.

Cioffi's and Tannin's attorneys have argued that the collapse of Bear Stearns was actually the result of the failure of two other Bear Stearns hedge funds a year prior to the failure of the Enhanced Fund and the Master Fund.

U.S. Attorney Benton Campbell, a former member of the Justice Department’s Enron Corp. Task Force, and Assistant U.S. Attorney James McGovern, are leading the prosecution of Cioffi and Tannin. The prosecution alleges that Cioffi and Tannin were promoting the funds to investors while knowing that the health of the funds was in serious risk. The government has listed 38 witnesses and 532 exhibits which it intends to present at trial, however, the centerpiece of the government's evidence is expected to be Cioffi's and Tannin's own words in e-mails.Cioffi allegedly sent one e-mail on March 15, 2007, with the subject-line "Fear," stating that he was fearful of what the markets were going to do. In another e-mail, Tannin allegedly stated that if AAA bonds were downgraded, there would be no way for the funds to make money. Google released additional private e-mails to the government last week. Prosecutors allege that e-mails show Cioffi and Tannin allegedly boasting of how they were luring investors to invest more money in the funds at the same time they knew that the funds were in trouble. Witnesses for the government are expected to include Bear Stearns employees and investors in the hedge funds.

Cioffi is defended by attorney Brendan Sullivan, who won reversal of the charges against Alaska Senator Ted Stevens, as well as Margaret Keeley and Dane Butswinkas, all of Williams & Connolly LLP. Tannin is being represented by Susan Brune and Nina Beattie of Brune & Richard LLP. Commentators have observed that the e-mails by Cioffi and Tannin can be read in "many" ways.

A year following the failure of the funds, Bear Stearns itself failed and was purchased by JP Morgan Chase & Co. The failure of Bear Stearns was accompanied by failures of Lehman Brothers Holdings, Inc., and AIG. Losses from U.S. banks and mortgage companies in the financial collapse total at least $396 billion.

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As reported by Chris Herring over at the Wall Street Journal Law Blog, the trial of former Bear Stearns hedge fund managers Matthew Tannin and Ralph Cioffi is scheduled to commence next Monday. And now the government has obtained Tannin's e-mails from his private Google account. Tannin had closed the Google account on the advice of his counsel. Prosecutors suspected that Tannin was hiding something. Google released the e-mails a few days ago. U.S. District Judge Frederic Block for the U.S. District Court for the Eastern District of New York has ruled that since the e-mails have been released, the government cannot explore whether Tannin was trying to hide anything from investors in his personal e-mails, stating that it would confuse the jury and citing the fact that the government already intends to present 38 witnesses and over 500 exhibits in its case against the defendants.

E-mails between Tannin and Cioffi allegedly expressing concern over the health of the hedge funds have already been released to the public. The newly-produced e-mails are expected to reflect similar alleged concerns by the defendants.

As reported by CNN, Cioffi and Tannin are the only two persons to face criminal charges resulting from the worst financial crisis in U.S. history since the Great Depression. The defendants are alleged to have misled investors in two of Bear Stearns' hedge funds to believe that the condition of the funds was better than it in fact was. The hedge funds collapsed in the Spring of 2008, resulting in over $1 billion in losses to investors.

Legal observers have characterized Cioffi's and Tannin's prosecution as a "test case" and have cited the government's need to make an example to discourage similar conduct in the financial sector. Although Cioffi and Tannin may have offered the government what it believed to be its most clear cut case, commentators have noted it may be difficult to prove that Cioffi and Tannin possessed an alleged intent to defraud investors rather than merely being misguided or stupid, given the fact that very few foresaw the subprime mortgage crisis and the collapse of the market.

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As we check back with Sir Robert Allen Standford, the most noteworthy development is perhaps that the Bellagio, a Las Vegas casino and luxury resort, filed suit against Stanford last week in a Clark County Nevada district court for an alleged $258,480 in unpaid gambling debts.The lawsuit alleges that Stanford signed for 14 markers between January 15 and 22 of this year.

Oddly enough, Stanford is allegedly a self-professed Southern Baptist who reportedly infused the boardroom culture in his companies with religion, surrounded himself with individuals he met through church and used church contacts to find customers. Furthermore, Stanford's adoptive home, Antigua and Barbuda, is one of the leading host nations for the multi-billion dollar international online gambling  industry. Stanford, however, reportedly refused to deal with persons involved in gambling in his business dealings. While Stanford's companies based in Antigua have ceased operations, its online gambling sector has continued to thrive.

The Securities and Exchange Commission, which has frozen Stanford's assets, is investigating the Bellagio markers.

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As is well known, Bear Stearns, one of the largest investment banks in the world, was sold to JP Morgan Chase and effectively ceased to exist in March of 2008, after two Bear Stearns hedge funds invested in collateralized debt obligations—mainly subprime home loans—and once worth approximately $1.6 billion, lost nearly all of their value. The collapse of Bear Stearns was the harbinger for a succession of massive failures of financial institutions, including Lehman Brothers, Merrill Lynch and AIG, triggering the current global recession.

As reported by New York Magazine, Reuters and the Daily Telegraph, two managers of the hedge funds, Ralph Cioffi and Matthew Tannin were charged in June in the Eastern District of New York with several counts of wire and securities fraud for allegedly misleading investors regarding the status of the funds in the Spring of 2007. Cioffi, a hedge fund manager, and Tannin, the Chief Operating Officer of Bear Stearns Asset Management (BSAM), have pled not guilty. The collapse in value of the funds cost investors approximately $1.4 billion. When traders wanted to sell some of the funds’ subprime mortgages, no one wanted to buy them.

The trial of Cioffi and Tannin is set to begin in October. The evidence against Cioffi and Tannin consists largely of e-mails between them and investors describing the funds as “an awesome opportunity,” despite allegedly knowing that the funds had problems. Bear Stearns investors are expected to testify at the trial. Both men have consistently maintained their innocence. They face a potential 20 years in prison if convicted.

Cioffi is also charged with alleged insider trading for withdrawing $2 million of his own money from the funds. The government alleges that he engaged in hundreds of transactions involving the funds without the necessary approval by the fund’s directors and despite being warned about conflicts of interest. All trades between Bear Stearns, a securities firm, and BSAM, an asset management firm, were supposed to be vetted by an independent committee. In the Fall of 2006, Bear Stearns ordered a moratorium on such internal trades by Cioffi. Prosecutors sought to introduce evidence of Cioffi’s alleged insider trading in order to demonstrate how Cioffi allegedly operated.

British bank Barclays, a shareholder of one of the funds, also filed suit against Cioffi and Tannin for alleged fraud, however, the suit has been withdrawn.

The prosecution of Cioffi and Tannin makes conspicuously noticeable the fact that no senior executives from Bear, Lehman Brothers, AIG, etc., have been charged with any wrongdoing in the fallout from the financial crisis.

 

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Pharmaceutical giant Pfizer, inc., will pay $2.3 billion to the Federal government and 49 States to settle allegations that it violated federal regulations in promoting several drugs, as reported by the Atlanta Journal-Constitution. The settlement is the largest in U.S. history to date in a healthcare fraud case. 

Georgia will receive $21.7 million as part of the settlement. A spokesperson for the Georgia Attorney General's office told the media that Georgia's portion of the settlement funds would be earmarked for Georgia's Medicaid program.

The U.S. Department of Justice had accused the New York-based pharmaceutical company and its subsidiaries of conducting marketing campaigns to promote drugs including Geodon, Lyrica, Zyvox, and no longer marketed Bextra, for uses not approved by the U.S. Food and Drug Administration. The government also alleged that Pfizer gave kickbacks such as cash, travel and entertainment to members of the healthcare industry in order to persuade them to prescribe these drugs and others, including Lipitor, Zyrtec and Viagra. The only State which did not join in the suit was South Carolina.

Pharmacia & Upjohn Co., a subsidiary of Pfizer, has pled guilty to a felony charge of violating the Food, Drug and Cosmetic Act, and will pay a fine of $1.3 billion.

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As reported in the Atlanta Journal-Constitution and the Associated Press, closing arguments have started in the terrorism trial of Atlanta area native and former Georgia Tech student Ehsanul Islam Sadequee. Sadequee is representing himself and will present his own closing argument.

Sadequee called only two witnesses in his defense before resting his case, including his older sister, Sharanika Sonali Sadequee. Sadequee told the Court that he did not want to testify in his defense. His sister testified that he was quiet, inquisitive and nonviolent and had traveled to Bangladesh to marry his long-time love. The government contends that the trip was actually a cover for Sadequee's alleged plan to attend a terrorist training camp. Sharanika Sadequee testified that her brother has been prohibited from discussing certain subjects in the trial, including his arrest in Bangladesh, which she called a kidnapping, and an attack on Sadequee by another inmate while he has been in custody. Sadequee's mother prayed in the courtroom throughout the proceedings.

U.S. District Court Judge William S. Duffey, Jr., scolded Sadequee for attempting to introduce his wedding photographs into evidence at the last minute. The Judge denied Sadequee's motion for acquittal and ruled that there was sufficient evidence to take the case to the jury on all four counts. The jury will begin deliberations later today.

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We did not weigh in yesterday, but the biggest federal criminal defense news was clearly the conviction of U.S. Representative William Jefferson of Louisiana in his criminal trial in the U.S. District Court for the Eastern District of Virginia, as reported by the New Orleans Times-Picayune. The jury of eight women and four men returned a verdict of guilty against Jefferson on 11 of 16 counts, including 2 counts of conspiracy to solicit bribes to a public official in violation of the Foreign Corrupt Practices Act (FCPA), 2 counts of soliciting bribes, 3 counts of honest services fraud, 3 counts of money laundering, and one count of racketeer influenced and corrupt organization (RICO) violations. As a testament to Jefferson's defense, the jury did not find Jefferson guilty on three of the honest services charges as well as a charge for obstruction of justice and a count for violation of the FCPA.

Jefferson, who is 62, faced a maximum of 235 years in prison if convicted on all counts. He has been allowed to remain released pending his sentencing on October 30. A forfeiture hearing will be held regarding his assets.

Jefferson was the first African-American congressman from Louisiana since Reconstruction.

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Ehsanul Islam Sadequee, 23, nicknamed "Shifa," which means "Cure," is representing himself in his trial in the U.S. District Court for the Northern District of Georgia on four counts of allegedly conspiring to provide material support to terrorism. As reported by the Atlanta Journal-Constitution and the Associated Press, Sadequee began his 14 minute opening statement with a prayer. He told the jury that he had talked about jihadist "fantasies" but that it was empty talk and that there was no plan to carry out acts of terrorism. Sadequee denied conspiring with known terrorists. He told the jurors that he only discussed jihad in online chat rooms."If everything is a question mark, can there be a plan?" he asked the jurors.

Assistant U.S. Attorney Robert McBurney argued to the jury that Sadequee only needed to orchestrate the crime, not carry out any terrorism. The government claimed that Sadequee began visiting online sites frequented by Islamic militants and leaving messages regarding his intent to join the Taliban shortly after the September 11, 2001, terrorist attacks, when he was only 15.

The government presented testimony by Omer Kamal, an Atlanta accountant, former Georgia tech student and friend of Sadequee's. Kamal testified that he, Sadequee and Syed Haris Ahmed, who was convicted in June, watched training videos by Osama bin Laden and the Taliban, and practiced jihad attack techniques with paintball guns in North Georgia. He stated that he backed out of the group when they started planning to visit the Middle East to link up with terrorist groups. Kamal cooperated with the FBI and agreed to testify against Sadequee after becoming concerned that he was under surveillance. He said that the group discussed attacking targets including the White House, the U.S. Capitol, Guantanamo Bay Prison and Abu Ghraib. Kamal said he had slipped a note under his friends' doors when he decided to leave the group. Sadequee then went with Ahmed to Toronto, Canada, to meet with terrorists there. Sadequee spent over an hour cross-examining Kamal yesterday.

Mr. McBurney argued that Sadequee sent videos of the alleged targets to a terrorist suspect in Britain disguising the videos with titles such as "jimmy's 13th birthday party" and "volleyball contest." He claimed that Sadequee subsequently traveled to Bangladesh in order to get married, but also to link up with terrorist groups. Sadequee was arrested in Bangladesh in 2006. Mr. McBurney said that Sadequee communicated with other terror suspects including Ahmed and Mirsad Bektasevic, a Balkan-born Swede who was convicted in 2007 of planning to blow up a target in Europe to force the pullout of foreign troops from Iraq and Afghanistan.

Ahmed, who is awaiting sentencing, has agreed to testify against Sadequee, and will take the stand today.

Sadequee has worn a gray tunic with a beard and long hair during the proceedings. Sadequee's mother, Shirin, sat in the audience during the proceedings and wept and prayed for her son. If convicted Sadequee faces up to 60 years in prison.

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We closely followed the trial of Syed Haris Ahmed, who was convicted for providing material support to terrorism in early June--all of our posts may be found here. The trial of Ahmed's alleged co-conspirator, Ehsanul Islam Sadequee on terrorism charges began yesterday in the U.S. District Court for the Northern District of Georgia. Sadequee has apparently taken a page from Ahmed, who delivered a highly unusual closing argument in his own case, and has opted to represent himself and will present his own opening statements, according to the Atlanta Journal-Constitution. Sadequee has opted for a jury trial unlike his alleged co-conspirator, who was tried by the same judge, the Honorable William S. Duffey. The parties completed jury selection yesterday.

Attorney Don Samuel is serving as stand-by counsel for Sadequee. Mr. Samuel told the Court that Sadequee did not understand what it meant to represent himself. Judge Duffey replied that he had informed Sadequee regarding what it meant to represent himself numerous times.

Sadequee, who is nicknamed “Shifa,” was born in Virginia in 1986, and is of Bangladeshi descent. He and Ahmed are most infamously accused of videotaping landmarks in Washington, D.C., in April of 2005, for purposes of terrorism, including the United States Capitol and the headquarters building of the World Bank. It is also alleged that Sadequee and Ahmed engaged in paramilitary training in North Georgia; met with a circle of terrorists in Toronto, Canada, in February of 2005; and sent the video of the alleged targets to Younis Tsouli, a terrorist in the United Kingdom.

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As noted at White Collar Criminal Prof Blog and The Justice Fellowship, the U.S. House of Representatives Subcommittee on Crime, Terrorism and Homeland Security held a hearing last week on "Over-criminalization of Conduct and Over-federalization of Criminal Law." Organizations which addressed the Subcommittee on issues of over-criminalization and over-federalization included the American Bar Association, the American Civil Liberties Union, the National Association of Criminal Defense Attorneys, the Heritage Foundation and the Federalist Society.

The hearing considered the lack of distinction between federal criminal and civil offenses, as well as over-federalization of criminal law where federal criminal laws have been enacted to cover offenses already subject to state criminal laws, usually providing for harsher penalties. The Subcommittee noted the existence of approximately 4,500 federal criminal laws, with approximately 50 new criminal laws enacted by Congress each year.

The hearing should be welcome news to most federal criminal defense practitioners. Reform in these areas is badly needed. In some cases, certain prosecutions of alleged federal crimes would be more equitably, and less expensively, handled through the imposition of civil fines and penalties. Furthermore, in many cases, State prosecutorial entities are as capable as Federal entities to prosecute offenders in areas where State and Federal criminal law overlaps. The Blog looks forward to the proposals for reform which result from the hearing.

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As reported by the New Orleans Times-Picayune, Judge T.S. Ellis, III, of the U.S. District Court for the Eastern District of Virginia read instructions to the jury yesterday which lasted over 2 & 1/2 hours, and the jury retired for its deliberations in the case against former U.S. Representative William Jefferson. The jury deliberated for about four hours and will re-convene to continue deliberations this morning.

The jury weighing the evidence in the six week long trial of Jefferson on 16 criminal counts, including racketeering, honest services fraud and violations of the Foreign Corrupt Practices Act, consists of two white males, six white females, two black males and two black females. Jefferson's case is the first time the Foreign Corrupt Practices Act has been applied to a public official. The Court sent three alternate jurors home yesterday, instructing them to remain "pristine" with regard to their exposure to information regarding the case.Jefferson's lead attorney, Robert Trout, told reporters that Jefferson intends to be present at Court each morning when the jury arrives.

Closing arguments were heard earlier in the week, with numerous media outlets and journalists from Louisiana in attendance.

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The trial of former Representative William Jefferson, which has gone on for six weeks in the U.S. District Court for the Eastern District of Virginia, will come to an end today. As reported by Ashby Jones at the Wall Street Journal Law Blog and UPI, both sides gave their closing arguments yesterday. Judge T.S. Ellis will give jury instructions and likely send the case to the jury this morning.

The case is best known for the infamous discovery of $90,000 in cash stuffed in boxes for burgers and pie crusts in the freezer at Jefferson's home by federal agents. Jefferson was indicted in 2007 on 16 counts of bribery, racketeering, and violations of the Foreign Corrupt Practices Act. The government charged Jefferson with using his position to promote business ventures in West Africa in exchange for cash payments for his family.

Assistant U.S. Attorney Rebecca Bellows argued during the govenrment's closing that Jefferson allegedly schemed to give at least $100,000 in cash (the "freezer money") to the Vice President of Nigeria, Atiku Abubakar, as a bribe in exchange for granting rights to a telecommunications company with ties to Jefferson's family. The government also played video and audio tapes of meetings between Jefferson and Virginia businesswoman Lori Mody, who was working for the government as an informant. In one video, Jefferson supposedly informed Mody that the cash would be "doled out" to "make sure the hook is in there," and on another tape Jefferson allegedly referred to the bribe as "a goodwill present."

The defense maintained during trial that Jefferson's conduct was stupid or unethical, but not criminal. Defense attorney Robert Trout told the jury during his closing arguments that the government wanted to make Jefferson's actions a crime when it was really a "gray area." He told the jury that Jefferson only agreed to give the money to Abubaker in order to please Ms. Mody.

Prior to closing arguments, Judge Ellis refused to dismiss an obstruction of justice count against Jefferson. Jefferson faces a lengthy prison sentence if convicted.

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As reported by the Atlanta Journal-Constitution and WSB Radio, Anthony Ray, a DeKalb County resident, solicited money from investors by promising them large returns from real estate investments by his company, Key Funding Group. He would frequent local churches to locate victims, making presentations to the congregations. Ray lulled his victims by giving them back portions of their investment and falsely referring to them as returns. Ray hosted his victims at several locations around the Atlanta area, including his condominium in Buckhead as well as a $680,000 home in Decatur, Georgia, which belonged to one of his victims and in which he ran his office. In all, Ray stole at least $5 million from over 30 investors.

Ray stole $160,000 from his own parents. He started Key Funding Group with his father, Calvin Ray, 70, and took out large loans using his father’s identity and his parents’ home as collateral. His parents subsequently turned him in. Ray’s twin brother, Antonio, told reporters that Ray took everything his parents had, and that their father, decided that they had to prosecute.

Ray previously served five years in prison for stealing his brother's identity.

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Sir Robert Stanford has filed a Motion for Relief from Oppressive Jail Conditions. Stanford is currently being held at the Joe Corley Detention Facility in Conroe, Texas. The Motion alleges that temperatures have reached 100 degrees and that the cell in which Stanford is being housed in a cell with 8 to 10 other men and with no windows or air conditioning. Stanford requests transfer to the Federal Detention Center in downtown Houston. The Motion also asserts, as a ground for transfer, the fact that the government has provided discovery in electronic form and the Joe Corley Facility does not permit the use of electronic devices. Stanford's counsel, Dick DeGuerin, claims that he has tried to work these issues out with the U.S. Marshals Service and the staff of the Joe Corley Detention Facility, but to no avail.

A status conference has been set in Stanford's case for September 10, which the defendants moved to continue from August 17. Meanwhile, Stanford's appeal of the District Court's denial of pretrial release is listed in the U.S. Court of Appeals for the Fifth Circuit, U.S. v. Stanford, Case No. 09-20444.

While in no way meaning to detract from the charges against Stanford and his codenfendants, which are extremely serious in magnitude, this Blog notes that arch-Ponzi schemer Bernard Madoff and celebrity attorney-turned-crook Marc Dreier were both granted pretrial release and were confined to their residences with electronic monitoring devices. Given that the government has frozen all of Stanford's assets effectively starving his defense of funding, and that the defense has alleged deliberate misrepresentations by the prosecution in arguing for pretrial detention, pretrial release appears to be appropriate in Stanford's case. We will await the hopefully speedy resolution of the bail issue by the Fifth Circuit.

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The 44 public officials and other persons arrested in the massive sweep on Thursday by the FBI, the result of efforts by the convicted son of a rabbi, include:

Daniel Van Pelt, State Assemblyman;

Peter Cammarano III, Mayor of Hoboken, New Jersey;

Dennis Elwell, Mayor of Secaucus, New Jersey;

Anthony Suarez, Mayor of Ridgefield, New Jersey;

Leona Beldini, Deputy Mayor of Jersey City;

Mariano Vega, President of the Jersey City Council, Commissioner with the Jersey City Housing Authority and Director of Parks, Engineering and Planning for Hudson County, New Jersey;

L. Harvey Smith, President of the Jersey City Council and former State Assemblyman;

Lou Manzo former State Assemblyman;

Edward Cheatam, Jersey City Housing Authority Commissioner and Hudson County Affirmative Action officer;

Michael Schaffer an employee of the North Hudson Sewerage Authority and former Hoboken Councilman;

John Guarini, city taxi inspector and former 13th District Congressional candidate

Denis Jaslow, former 32nd District State Senate candidate;

Guy Catrillo, Michael J. Manzo and LaVern Webb Washington, former Jersey City City Council candidates;

Richard Greene, former aide to L. Harvey Smith;

Joseph Cardwell, Jack Shaw, political operatives;

Also Moshe Altman, Charles Amon, Joseph Castagna, Schmulik Cohen, Levi Deutsch, Yeshayahu Ehrental, Mordchai Fish, Yolie Gertner, David S. Goldhirsh, Shimon Haber, Eliahu Ben Haim, Itzak Friedlander, Saul Kassin, Maher A. Khalil, Ron Manzo, Edmond Nahum, Abraham Pollack, Levi Izhak Rosenbaum, Lori Serrano, Jack Shaw, Vincent Tabbachino, Jeffrey Williamson, Lavel Schwartz, Binyomin Spira, Naftoly Weber and Arye Weiss.

As reported by various sources here, here and here, the arrests were part of a 10-year, two-track investigation by the FBI, code named “Bid Rig” which uncovered three criminal schemes: bribery of public officials; an international money laundering ring operating between Deal, New Jersey, and Israel; and trafficking in illegal kidneys and Gucci bags. The schemes were uncovered by a confidential informant had been charged with bank fraud in 2006 and agreed to work with the FBI. Five rabbis from New Jersey and New York were among those arrested. Hundreds of federal agents raided the suspects’ homes in New Jersey and New York. There were so many arrestees that they had to be brought to FBI headquarters in Newark, New Jersey, by bus. One religious leader arrived in a Mercedes-Benz. Bail was set as high as $3 million for some of the suspects.

FBI Special Agent Ed Kahrer stated to reporters that New Jersey has one of the worst, if not the worst, public corruption problems in the nation, and that corruption has become “engrained” in New Jersey’s “political cult.” Acting U.S. Attorney Ralph J. Marra, Jr., announced that the conspiracy, which was headed by rabbis cloaked their criminal activity in a “facade of rectitute.”

Investigators stated that they have hundreds of hundreds of hours of video and audio recordings containing evidence of money laundering and bribery.

The Public Corruption and Bribery Cases

A criminal complaint filed against Hoboken Mayor Peter Cammarano, 32, alleges that Cammarano accepted a bribe in exchange for giving priority to an FBI informant posing as a real estate developer wanting to develop property in Hoboken. Hoboken’s waterfront contains prime real estate across from Manhattan. The informant is believed to have been Solomon Dwek, who was arrested in 2007 and charged with bank fraud for bouncing a $25 million check. Dwek is the son of Rabbi Isaac Dwek of the Deal Synagogue in Deal, New Jersey, which was raided by the FBI on Thursday. Dwek told the conspirators that he was in bankruptcy and was interested in hiding his assets.

The informant met Cammarano while he was running for Mayor and told Cammarano that he would give him $10,000. The complaint alleges that Cammarano promised the informant that he would sponsor the plans and treat the informant like a “friend.” Michael Schaffer, a North Hudson Utilities Authority commissioner and former Hoboken Councilman, allegedly acted as a middle man for the bribe.

Cammarano has only been in office for three weeks. He allegedly told the informant that those who oppose him get “ground into powder.” When the discussion turned to a possible runoff election with Cammarano’s challenger Dawn Zimmer, who lost the election by only 161 votes, Cammarano allegedly told the informant “I could be indicted and still get 85 to 95 percent of the vote.” Cammarano’s attorney, Joseph Hayden, has made a statement that Cammarano intends to fight the charges.

Cammarano is charged with allegedly accepting a total of $25,000 in cash bribes. Dennis Elwell, 64, Mayor of Secaucus is charged with allegedly accepting a $10,000 cash bribe and Anthony Suarez, 42, Mayor of Ridgefield, is also charged with allegedly accepting a $10,000 cash payment—for his legal defense fund.

L. Harvey Smith, Jersey City Council President, and several other current and former Jersey City public officials also are accused of allegedly accepting money to help the fake developer gain permits and approvals. Deputy Mayor of Jersey City Leona Beldini is charged with conspiracy to commit extortion for allegedly accepting $20,000 in illegal campaign contributions.

FBI agents raided the home and office of New Jersey Department of Community Affairs Commissioner and former State Senator Joe Doria as part of the investigation. Doria resigned on Thursday afternoon. Officials have not stated whether he will face charges.

The Money Laundering and Black Market Organ and Designer Goods Cases

Five rabbis from Deal and Brooklyn were charged with alleged money laundering and sale of fake designer bags. The rabbis were approached by Dwek and dealt with him, despite the fact that it was well known that he had been charged by the government. Dwek’s dealings with the rabbis eventually uncovered the public corruption case when a Jersey City building inspector accepted a $20,000 bribe. Rabbi Saul Kassin of Deal is charged with allegedly laundering more than $200,000. Mordchai Fish, a rabbi at Congregation Sheves Achim, and his brother, Lavel Schwartz, laundered nearly $600,000 for Dwek, giving him cash and taking a 15% cut.

Agents raided “cash houses” run by associates of the rabbis, including a charity called Bnoth Jerusalem and a beeper store.

Levy Rosenbaum, a Brooklyn resident, was charged in a criminal complaint with allegedly conspiring to broker a sale of a human kidney for transplant for $160,000. The complaint further alleged that Rosenbaum had been selling kidneys from vulnerable persons in Israel for 10 years, which he would purchase for $10,000 and sell in the U.S. for $160,000.

The public corruption scandals will undoubtedly figure into the current U.S. Senate contest between Senator Jon Corzine and former U.S. Attorney Chris Christie, who claims to have obtained 130 convictions of elected and appointed officials on corruption charges.

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On Wednesday, U.S. Attorney General Eric Holder addressed the Organized Crime Drug Enforcement Task Forces and Asset Forfeiture Program's National Leadership Conference. Mr. Holder spoke regarding the Organized Crime Drug Enforcement Task Forces (OCDETF) Program, an inter-agency program established in 1982 to conduct comprehensive, multi-level attacks on major drug trafficking and money laundering organizations. OCDETF combines the resources and expertise of the Drug Enforcement Administration, the Federal Bureau of Investigation, the Bureau of Immigration and Customs Enforcement, the Bureau of Alcohol, Tobacco, Firearms and Explosives, the U.S. Marshals Service, the Internal Revenue Service, and the U.S. Coast Guard in cooperation with the Department of Justice Criminal Division, Tax Division and its U.S. Attorney’s Offices, as well as state and local law enforcement. Its mission is to identify, disrupt, and dismantle drug trafficking and money laundering organizations.

Mr. Holder praised the track record of OCDETF and the Asset Forfeiture Program. He mentioned that, since the inception of the Attorney General's Consolidated Priority Organization Target (CPOT) List in 2002, OCDETF has dismantled or disrupted over 1,2000 CPOT and CPOT-linked organizations.

The Attorney General discussed the innovation of OCDETF in establishing the OCDETF Fusion Center to gather intelligence on drug trafficking and money laundering organizations from human and electronic sources in its "Compass" database. Mr. Holder also stated that the International Organized Crime Intelligence and Operations Center -- or "IOC-2"--has recently entered into a partnership with the OCDETF Fusion Center to add data to the Compass database in order to "broaden our capability to attack organized crime in all its forms."

Mr. Holder also remarked on the success of permanent OCDETF Strike Forces in Boston, New York, Atlanta, Tampa, San Juan, Houston, Phoenix, San Diego, with an additional Strike Force planned for El Paso. He mentioned that OCDETF has begun placing Document and Media Exploitation (DOMEX) Teams in the Atlanta and Houston Strike Forces, which permit agents to rapidly capture and exploit evidence and permit prosecutors to quickly develop trial exhibits.

The Attorney General cited the national security threat of the Mexican drug cartels. Mr. Holder furthermore discussed the success of the Asset Forfeiture Program and noted that, since 1984, more than $13 billion in net federal forfeiture proceeds have been deposited into the Justice Assets Forfeiture Fund and more than $4.5 billion has been equitably shared with more than 8,000 state and local law enforcement agencies nationwide, thereby supplementing their constrained resources without further taxing the public. The Attorney General stated that, in fiscal year 2008 alone, approximately $500 million was paid to more 39,000 victims.

Mr. Holder also praised Operation Honor Student, which involved a task force led by the Rhode Island U.S. Attorney’s Office, the Asset Forfeiture and Money Laundering Section of the Criminal Division, and the Food and Drug Administration’s Office of Criminal Investigations, and resulted in the forfeiture of $2.7 million from the accounts of GeneScience, one of the largest biopharmaceutical companies in China which had been involved in the illegal distribution of Human Growth Hormone into the United States. He noted that the task force employed a new statutory vehicle-- 18 U.S.C. § 981(k) --enacted as part of the Patriot Act and used for the first time, which permitted the Government to seize the funds, physically located in China, from the corresponding accounts of Chinese banks in New York. Task force agents estimate that at the time of the investigation, GeneScience manufactured approximately 90% of the hGH being illegally sold and distributed in the United States.

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New legislation typically means new criminal laws, and the White House's and Congress' recent ‘‘American Clean Energy and Security Act of 2009,’’ H.R. 2454, better known as the "Waxman-Markey Bill" or "Cap and Trade Bill," is certainly no exception. The bill is over 1,000 pages long and, for those with copious amounts of time, may be viewed in its entirety here. H.R. 2454 was introduced on May 15, 2009, and narrowly passed in the House of Representatives on June 26, 2009, by a vote of 219 to 212. The Senate is expected to vote on the bill sometime this Fall.

FCDB seeks to keep readers and practitioners alike abreast of changes in criminal law posed by such new legislation. Somewhat surprisingly, a search of H.R. 2454 reveals just one criminal provision, Section 1041, page 1045, in Part IV of the bill entitled "Carbon Market Assurance," which provides:

§ 1041. Fraud and false statements in connection with regulated allowances
        Whoever in connection with a transaction involving a regulated allowance (as defined in section 401(a) of the Federal Power Act, as added by section 341 of the American Clean Energy and Security Act of 2009), knowingly—
        (1) makes or uses a materially false or misleading statement, writing, representation, scheme,
or device; or
        (2) falsifies, conceals, or covers up by any trick, scheme, or device any material fact, shall be fined not more than $5,000,000 (or $25,000,000 in the case of an organization) or imprisoned not more than 20 years, or both.
        (2) The table of sections at the beginning of chapter 47 of title 18, United States Code, is amended by adding at the end the following new item:
‘‘1041. Fraud and false statements in connection with regulated allowances.’’

A "regulated allowance" is defined in Section 401 of H.R. 2454 as "any emission allowance, compensatory allowance, offset credit, or Federal renewable electricity credit established or issued under the American Clean Energy and Security Act of 2009." The proposed changes would be to 18 U.S.C. § 1041, which currently prohibits fraud in connection with a major disaster or emergency benefits.

The Waxman-Markey/Cap and Trade legislation amends the Federal Power Act to require corporations which emit pollutants such as carbon to hold the allowances, which represent the right to emit a certain amount of pollutant. It also would create “regulated allowance derivatives,” which are financial instruments derived from the allowances. The derivative instruments would be purchased and traded by corporations, financial institutions and funds. The proposed change to 18 U.S.C. § 1041 represents a typical fraud/false statement criminal provision for new legislation, albeit with stiff penalties.

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As we have noted, the prosecution of wealthy, international financier Sir Robert Allen Stanford has been characterized from the outset by vigorous disputes over bond for Stanford. The prosecution has argued that Stanford poses a risk of flight given his international connections and the potential that he possesses resources hidden overseas. The defense, led by attorney Dick DeGuerin, has hit back, arguing that Stanford possesses considerable ties to the U.S. and voluntarily surrendered himself, and further charging that the prosecution has made numerous knowing misrepresentations in arguing against bond for Stanford.

The U.S. magistrate judge had ordered Stanford to be released on $500,000 bond, however the District Court Judge reversed the order and ordered Stanford to remain in custody. Last Friday, Stanford's attorneys appealed the Court's bond determination to the U.S. Court of Appeals for the Fifth Circuit.

The government is certainly pulling out all the stops in putting pressure on Stanford, who is charged in an alleged Ponzi scheme which allegedly lost investors $7 billion. Not only has it managed to deny him bond, but it has frozen his assets and those of his companies. Yesterday, the defense was granted permission by the Court to file a motion regarding attorney's fees ex parte and under seal.

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As reported in the Macon Telegraph, Dwight "Malachi" York, former leader of the United Nuwaubian Nation of Moors who was indicted and convicted on over 100 counts of child molestation in April 2004 and setenced to 135 years, has filed a motion in the U.S. District Court for the Southern District of Georgia to vacate his sentence. York, who has been a minister and a musician, is best know as the founder of "Nuwaubianism," an unorthodox religious sect established in the 1970s. In 1993, York moved the Nuwaubians from upstate New York to a compound in Putnam County, Georgia, near Eatonton. York was arrested for sexually molesting dozens of children in 2002. The charges against York were truly astounding and hideous in their magnitude--author Bill Osinsky, in the fact sheet for his book Ungodly, reveals that state prosecutors literally had to cut back the number of counts listed in the indictment from well over 1,000 to slightly more than 200 because "they feared that a jury simply would not believe the magnitude of York's evil."

York has now filed a motion alleging that Federal Bureau of Investigation agents threatened witnesses to give perjured testimony against him, as well as alleging that the prosecution used unauthenticated tapes of York having sex with minors to taint the jury. The motion attached affidavits from witnesses in York's trial, including one by a witness who alleges that FBI agents took him from his family and transported him to a home in Milledgeville and pointed guns at him until he agreed to give information against York. York is currently incarcerated at the supermax prison in Florence, Colorado.

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An excellent article from Legal Times, “Dead Companies Can Tell Tales,” examines how the attorney-client privilege in a corporate context survives the bankruptcy or receivership of the corporation. The article concludes that prosecutors possess considerable freedom to seek privileged information.

The article references the “Filip Memorandum,” which was a revision by Deputy AG Mark Filip to the “McNulty Memorandum” of 2006, which provides guidance to DOJ prosecutors in investigating and charging corporations (which dates back to 1999, when it was originally authored by then-Deputy AG Eric Holder and was known as the “Holder Memorandum”). The Filip Memorandum was the result of concerns over prosecutors’ extracting attorney-client privilege waivers from corporations and preventing corporations from paying officers’ and employees’ legal fees under threat of indictment. The Filip Memorandum sets forth DOJ policy in determining whether to indict a business entity, and the memorandum’s policies and factors to be considered are set forth in the United States Attorney’s Manual (USAM). In regard to the attorney-client privilege, USAM 9-28.710 asserts that “waiving the attorney-client and work product protections has never been a prerequisite under the Department's prosecution guidelines for a corporation to be viewed as cooperative.” The policy nevertheless states that “Everyone agrees that a corporation may freely waive its own privileges if it chooses to do so; indeed, such waivers occur routinely when corporations are victimized by their employees or others, conduct an internal investigation, and then disclose the details of the investigation to law enforcement officials in an effort to seek prosecution of the offenders.”

Therefore, while it is no longer DOJ policy to request waivers of the attorney-client privilege, a corporation may still voluntarily do so. The risk of such a “voluntary” waiver of the privilege may be increased when a corporation is in bankruptcy, and an independent trustee or receiver, or the successor management, are dealing with a criminal investigation and requests by the government, as well as their own investigation of potential criminal activity by the debtor corporation. The article cites the Supreme Court’s decision in CFTC v. Weintraub, 471 U.S. 343 (1985), in which the Court held that the trustee of a corporation in bankruptcy has the power to waive the corporation's attorney-client privilege with respect to pre-bankruptcy communications, id. at 354.

Consequently, the article advises attorneys representing officers or employees of corporations in bankruptcy to advise their clients of the risk that any privilege of their pre-bankruptcy communications to corporate counsel could be waived by the trustee or receiver and the communications disclosed to the government. There is also some question as to whether a bankrupt corporation implicates the Filip Memorandum or USAM 9-28.710 at all, since they do not mention bankrupt or dissolved corporation. The policies would also be inapplicable where the government intends to prosecute individuals instead of the corporation. Beyond the constraints of the Filip Memorandum, prosecutors are free to seek waivers of the privilege. Furthermore, trustees or receivers possess a duty to maximize recovery for corporate shareholders, and not to former officers or employees, and may be readily persuaded to give such waivers.

The authors note that Weintraub waivers have been used by receivers to waive the attorney-client privilege to order outside counsel for a corporation to produce its pre-litigation file, CFTC v. Standard Forex (E.D.N.Y. 1995), and to waive attorney-client and work product protection over the objection of a former corporation officer facing criminal charges, United States v. Shapiro (S.D.N.Y. 2007). The issue has also arisen in at least one proceeding in this Circuit, In re Pearlman, 381 B.R. 903 (Bkrtcy.M.D.Fla. 2007). The debtor in Pearlman and various corporations controlled by him filed for bankruptcy, and the trustee obtained a discovery order from the bankruptcy court and served subpoenas on several outside attorneys and law firms to produce documents. Id. at 905. Pearlman was also indicted by a grand jury in the Southern District of Florida. Id. at 906. Counsel produced some documents in response to the subpoenas, but asserted that other documents were protected by the attorney-client privilege. Id. at 907. The court held that documents relating to some of the entities were not subject to production unless the privilege was waived by the trustee. Id. The court continued to hold “[t]he privilege passed to, is controlled by, and may be waived by the Trustee to the extent an attorney-client privilege exists with respect to any of the Pearlman Entities.” Id. at 909 (citing Weintraub, at 358). It concluded that the documents and information were subject to turnover provided that the trustee waived the entities’ privilege. Id.

However, in regard to documents and information relating to counsel’s representation of Pearlman, the court stated that:

The issue of whether a bankruptcy trustee controls the attorney-client privilege as to an individual debtor has been addressed by various federal courts. The majority of courts employ a balancing test whereby the specific facts of a case are evaluated and the benefits of granting access to the privilege are balanced against the risk of harm to the debtor. The Court adopts the balancing test.

Id. at 907. It continued to observe that:

The Supreme Court did not address in Weintraub whether a bankruptcy trustee controls the attorney-privilege as to an individual debtor. Weintraub, 471 U.S. at 356, 105 S.Ct. 1986 (“But our holding today has no bearing on the problem of individual bankruptcy, which we have no reason to address in this case.”)

Id. at 910. It concluded that:

The majority of courts employ a balancing test whereby the specific facts of a case are evaluated and balanced, including the risk of harm to the debtor versus the benefit to the estate. Foster v. Hill (In re Foster), 188 F.3d 1259, 1268-69 (10th Cir.1999); In re Courtney, 372 B.R. 519, 521 (Bankr.M.D.Fla.2007); In re Bame, 251 B.R. 367, 377 (Bankr.D.Minn. 2000); In re Bazemore, 216 B.R. 1020, 1024 (Bankr.S.D.Ga.1998). The Court, based upon the weight of the case law and the facts and circumstances of this case, adopts the balancing test.

Id. This balancing test balances the harm to the individual debtor and to the attorney-client privilege with the trustee's need for information in light of the particular circumstances. Foster, at 1268.

Pearlman’s balancing test only appears to apply to former officers or employees who are also debtors in a bankruptcy proceeding. Non-debtor former officers or employees must beware of the risk that Weintraub waivers may be sought by the government and granted by the trustee or receiver, and that privileged information may be disclosed. The authors advise practitioners to gain an understanding of the substance of prior privileged communications which may be disclosed. Second, they caution counsel to be alert to any potential Weintraub waiver sought by the prosecution or trustee so that the defense can attempt to intervene and oppose the waiver, likely arguing that their client’s interest in the privilege outweighs any need of the trustee or the government for the waiver, as indicated by Pearlman. Given that a trustee or receiver is typically held to have a great need for any documents or information in carrying out his or her duties, this will likely be a losing proposition, but one worth trying nevertheless.

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   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.

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