Sentencing Panel Amends Guidelines for Mortgage Fraud

Responding to a requirement in the Dodd-Frank Act that it review, and if appropriate, amend, the federal sentencing guidelines for mortgage fraud, the U.S. Sentencing Commission set forth on April 13, 2012, two new provisions that will affect sentencing for this type of crime.

Mortgage fraud became a significant issue in the recent financial crisis and the housing downturn, so the Commission’s changes are being closely watched in the financial services industry.

First, the Commission’s proposals, which will take effect on November 1, 2012, if not disapproved by Congress, add language to the “credits against loss” rule that affects the amount of loss to be considered for sentencing purposes in mortgage fraud cases. The determination of loss must be reduced by any money returned to the victim before the offense was detected and by the fair market value of any collateral that may not have been disposed of at the time of sentencing.

The problem is that often, if the collateral has not been disposed of by the time of sentencing, its fair market value may be hard to determine, and the absence of a uniform process for determining the value may result in disparities in sentencing.

The Commission decided that the value of the collateral should be determined as of the date on which the guilt of the defendant was established, and it established a rebuttable presumption that the most recent tax assessment value of the collateral constitutes a reasonable estimate of its fair market value. The commission said its intent is to provide a uniform practicable method for determining the fair market value of undisposed collateral while providing sufficient flexibility for courts to address differences among jurisdictions regarding how closely the most recent tax assessment tracks the fair market value.

Second, the Commission amended the application of an existing four-level increase in sentence if the offense involved specific types of financial harms such as jeopardizing the safety and soundness of a financial institution – such as making the institution insolvent, forcing it to reduce its benefits to pensioners or insureds, and the like.

The amendment adds as a new consideration whether one of the listed harms was likely to result from the offense, but did not in fact occur because of federal government intervention, such as a bailout. The Commission took the view that a defendant should not avoid the application of the four-level increase merely because the harm that was otherwise likely to result from the conduct did not occur because of fortuitous federal government intervention.

In some circumstances, this amendment could have the result of significantly increasing an offender’s sentence. We would expect prosecutors to argue that many interventions by the government, short of a fully announced “bailout,” should be taken into account and that sentences should be increased because of the “but-for” aspect of the defendant’s conduct: Had the government not stepped in, the defendant’s actions would have jeopardized a financial institution.

Brady Rights Require Attention, but This Bill Is Flawed

While the prosecution of former Senator Ted Stevens is long over, the fallout from the prosecutorial misconduct in that case continues. Congress is now considering legislation that attempts to ensure that federal prosecutors comply in a meaningful way with their obligations under Brady v. Maryland and its progeny. The legislation has some provisions that could possibly help protect Brady rights, but even if it passes – which appears doubtful – the bill is unfortunately more of a political gesture than an effective tool for protecting the rights of criminal defendants.

Perhaps the most significant provision in the proposed Fairness in Disclosure Act is one that addresses the timing of Brady disclosures. Under current practice, prosecutors often delay the required disclosures of exculpatory information as long as possible. Given that the only time limitation appears to be the ill-defined requirement that information must be provided within a reasonable time for the defense to use it at trial, the law effectively allows the government to disclose Brady information almost any time before trial. Because the legislation requires the disclosure of such information “without delay after arraignment,” it has the potential to lessen the incidence of late disclosure of Brady information by prosecutors. The proposed bill’s requirement that Brady information be provided before the entry of a guilty plea is also commendable.

Other provisions that address the location and possession of the information at issue may also be helpful. The act would make clear that information contained in witness statements must be disclosed, and may not be withheld until it is provided – after a witness testifies at trial – pursuant to the Jencks Act. The bill also requires that prosecutors disclose not only information that they know but also information that they should know – an attempt to prevent prosecutors from insulating themselves from exculpatory information. The proposed law also makes clear the requirement of disclosure not only of the information in possession of the prosecutors and the investigatory agency but also of information in the hands of any other agency that participates in the investigation.

Other provisions, such as those relating to whether inadmissible evidence must be disclosed and the remedies for violation of the act, also have the potential to have a favorable impact on Brady compliance.

The problem is that, in the end, the Fairness in Disclosure Act will be effective only to the extent that it clearly defines what information falls within the scope of prosecutors’ obligations to disclose. And in that respect, the bill largely substitutes one ambiguous standard for another. On the one hand, it discards the approach that turns entirely on “materiality” of the information – a concept that works for appellate courts after the fact but is an impossible standard to enforce against prosecutors before trial. On the other hand, the bill’s requirement that prosecutors disclose information that is favorable to the defense as to guilt or sentencing does not solve the real obstacle to ensuring that defendants’ Brady rights are protected. That’s because it still leaves it in the hands of prosecutors – who may not know what defense the defendant will utilize – to determine whether a piece of information is favorable or not. To many criminal defense lawyers, that is the real problem that causes problems with Brady compliance even with well-intentioned prosecutors.

Despite these flaws, a number of organizations, including the American Bar Association, have expressed support for this bill. Nevertheless, at least one website that carries predictions on the fate of legislation puts the likelihood of passage of the bill at 2 percent. It is surely a good development to have politicians and the public focused on the need for reform to protect criminal defendants’ rights, but the Fairness in Disclosure Act may not ultimately be the solution to this issue.

Brief Urges Supreme Court to Accept Rubashkin Sentencing Appeal

On May 3, 2012, Ifrah Law filed an amicus curiae brief in the U.S. Supreme Court on behalf of the Justice Fellowship and a group of law professors who practice in the areas of criminal law and sentencing. The brief was filed in the case of Rubashkin v. United States, a highly publicized case in which Sholom Rubashkin, the former operator of a kosher slaughter house, was sentenced to 27 years in prison in 2009 for 86 counts of financial fraud.

Rubashkin’s bid for a new trial after his conviction in federal court in Iowa was denied by the U.S. Court of Appeals for the 8th Circuit in 2011. Earlier this year, he filed a petition to the Supreme Court for certiorari.

The brief filed by Ifrah Law contends that that principles applied by the 8th Circuit in affirming Rubashkin’s sentence “are at odds with the principles applied by at least three other Circuit Courts of Appeal” and “could have a very negative impact on the law and policy of federal sentencing under advisory guidelines.”

Federal appeals courts, the brief contends, have the duty to ensure that all criminal sentences are “procedurally reasonable,” which includes the idea that sentences must not include unwarranted disparities with the sentences imposed for similar defendants who committed similar crimes.

Appeals courts, the brief says, have uniformly held that in order to permit meaningful appellate review on this issue, trial judges need to state on the record their reasons for accepting or rejecting the arguments that were made for or against the sentence that they imposed. “There is no way for the appellate court to determine whether the trial court considered [an] argument if the court does not address it explicitly,” the Ifrah brief said.

In the Rubashkin case, the trial court “failed to make any record that it considered the defendant’s non-frivolous argument regarding the need to avoid unwarranted sentencing disparities,” the brief points out. This failure, the brief says, is at variance with the rule in at least three other federal circuit courts of appeal.

Accordingly, the brief urges the Supreme Court to accept the case and to resolve the circuit conflict.

In addition, Rubashkin is also seeking Supreme Court review on a different issue – that the federal trial judge, Linda Reade, had in effect become part of the prosecution team by actively engaging in the planning of a raid on Rubashkin’s facility by federal agents and helping the agents plan their strategy. The “Sentencing Law and Policy” blog has used the term “prosecutorial and judicial misconduct” to refer to the judge’s alleged activity and the prosecution’s failure to inform the defendants about it.

We hope that the Supreme Court accepts this case and takes a step toward curbing the excessive concentration of power in the hands of federal prosecutors and judges.

U.N. Should Keep Its Hands Off the Internet

In March 2012, a resolution was introduced in the U.S. House of Representatives that would urge the U.S. Permanent Representative to the United Nations to oppose any resolution that would regulate the Internet. It is unfortunate that it turns out to be necessary to forestall Internet regulation at the U.N. level, but that appears to be the case. We support this resolution.

The resolution, House Concurrent Resolution 114, was introduced by Rep. Michael McCaul (R-Tex.) and Rep. Jim Langevin (D-R.I.), co-chairs of the House Cybersecurity Caucus, in response to growing fears that some nations will seek to regulate and censor the Internet. The sponsors cited a September letter from China, Tajikistan, Russia, and Uzbekistan outlining their plan to introduce a United Nations resolution on Internet governance.

Rep. Langevin said in a statement, “The proposals by some nations to gain international approval of policies that could result in Internet censorship would be a significant setback for anyone who believes free expression is a universal right. It must be made clear that efforts to secure the Internet against malicious hacking do not need to interfere with this freedom and the United States will oppose any attempt to blur the line between the two.”

The resolution was referred to the House Committee on Foreign Affairs on March 26, 2012, and no action has occurred on it since then.

Internet freedom has been a hotly debated issue on Capitol Hill in recent months with the Senate’s Protection of Intellectual Property Act (PIPA) and the House’s Stop Online Privacy Act (SOPA) becoming the focus of protests  that eventually helped defeat the bills. 

The Issue of Internet privacy will soon be dealt with at the international level. The World Conference on International Telecommunications (WCIT) is scheduled for December 2012, and countries such as China and Russia are expected to try to expand the authority of the International Telecommunications Union (ITU). The ITU is the United Nations agency that is responsible for worldwide standards in telecommunications, including regulation of the Internet.

The proposals that are expected to be considered could dramatically affect the Internet. Russian Prime Minister Vladimir Putin said last June that his goal is to establish “international control over the Internet” through the ITU. Accordingly, it’s understandable that many Americans fear that other nations could employ a new regulatory scheme to censor the Internet and control access to information. One reason that some of the protesters were so strongly opposed to SOPA and PIPA was the fear that once tools exist for regulating Internet content, they can be prone to abuse.

Internet access improves the quality of life for people across the world and represents a triumph of freedom of expression. Any agreement like the ones expected to be sought at the WCIT could have dramatic chilling effects on the freedom of the Internet. We will keep you up to date on any movement in Congress or in the United Nations regarding Internet freedom.

Worst Part of Wal-Mart Bribery Case Is Failure to Conduct Proper Investigation

Over the weekend, The New York Times broke a major story, publishing a highly detailed 8,000-word article that seems to indicate that Wal-Mart not only engaged in a pattern of bribery of Mexican government officials in the mid-2000s but also that the company intentionally stifled an internal investigation of the alleged bribery and in fact directed most of its furor against the former employee who blew the whistle on Wal-Mart’s conduct.

The story knocked 5 percent off Wal-Mart’s stock price after it broke, and commentators are talking about possible jail terms for company executives and major fines under the Foreign Corrupt Practices Act (FCPA). Democrats on the Hill are already talking about hauling top Wal-Mart executives to hearings to explain the alleged bribery and cover-up.

We certainly don’t condone unethical or illegal practices, and we have always taken the view that the best way for a company to deal with a bribery scandal is to open a no-holds-barred internal investigation. According to the Times, Wal-Mart originally decided to do just that by hiring the law firm of Willkie, Farr & Gallagher to conduct that type of internal probe, but it instead chose to do a much more limited investigation in which its senior management had direct control over the probe.

From a legal, prudential, and public relations standpoint, Wal-Mart should have stayed with its original plan of bringing in Willkie Farr. A report from a law firm of that firm’s stature, acting independently, would have had instant credibility and would have more readily helped Wal-Mart get past this crisis.

One thing that an internal investigation might have found is that many of the payments by Wal-Mart to foreign officials did not violate the FCPA since they merely facilitated government action, such as the granting of a permit, that would have occurred in any case. We simply don’t know about the nature of each alleged payment – but now, with Congress, the media, and the blogosphere on Wal-Mart’s trail, all we will hear for a while will be how guilty Wal-Mart is.

Regardless of the ultimate outcome, this should remind everyone that the rules for doing business abroad are not the same as in the United States. Sometimes, compliance with U.S. law such as the FCPA is not uppermost in the mind of executives in foreign countries, and it should be.

Suspect Extradited From Estonia to Face Massive Internet Fraud Charges

One of the features of crimes committed over the Internet is that they may be committed from anywhere in the world where a defendant has access a computer. A current case in New York shows that extradition likewise can reach around the globe.

On April 19, 2012, Anton Ivanov was extradited from Estonia to face charges of conspiracy to commit wire fraud and computer intrusion, among other offenses, in the U.S. District Court for the Southern District of New York. Ivanov is one of a number of defendants accused of a technologically sophisticated scheme that used malware and other techniques to reroute Internet traffic to websites chosen by the defendants because they were paid for driving traffic to those websites. According to the government, more than four million computers located in over 100 countries were infected with the malware as part of the scheme, which allegedly netted millions of dollars for the defendants.

Victims’ computers allegedly became infected with the malware when they visited certain websites or downloaded certain software to view videos online. The malware enabled the defendants to digitally hijack internet searches by changing the DNS server settings on victims’ computers to reroute their searches to “rogue DNS servers” controlled and operated by the defendants. Victims were re-directed to unwanted websites either when they clicked on internet search links that they thought would take them to other websites (what the government refers to as “click hijacking”) or through advertisements that Ivanov and others allegedly substituted for advertisements that were supposed to appear on particular web pages (what the government calls “advertising replacement fraud”). Arrangements have been made to substitute legitimate servers for the rogue servers as a temporary remediation measure so that victims’ computers will not lose their ability to access websites.

Ivanov has not yet indicated what his defense will be to the charges. He faces a maximum sentence of 85 years in prison in the case, which is pending before U.S. District Judge Lewis A. Kaplan. His next court appearance is set for April 23, 2012. Ivanov’s co-defendants in the case include five other Estonian nationals also arrested in November 2011 who are in custody in Estonia, and one Russian national, who remains at large.

As the Internet continues to expand to include a greater portion of the global economy, the ability to reach enormous numbers of computers will create incentives for technologically savvy wrongdoers to manipulate Internet users for illegal purposes. This case shows that the scale on which Internet conduct operates will mean that affiliate marketers and others who direct traffic on the Internet will be the subject of scrutiny by federal authorities. Even companies that are engaged in legitimate Web-based businesses need to be aware of this possible scrutiny.

An Interview With Jeff Ifrah of Ifrah Law

On April 15, 2012, the White Collar Crime Prof Blog ran an interview with Jeff Ifrah, founding partner of Ifrah Law. Here is the text of the interview, which can also be found here.

Q: Why did you start the blog?

A: We wanted to share our analysis of breaking news in the white collar crime area. The blog is an opportunity to demonstrate to current and prospective clients our understanding and expertise on compelling issues in white collar representation.

Q: What is the purpose of the blog?

A: We want to generate news rather than just commenting on existing stories. We want to be a place where news is first reported rather than only analyzing cases in a public forum. We do this by being the first to identify and discuss an up and coming legal issue. For example, we were among the first to identify a circuit split in the GPS case, and noted that the issue was likely to be heard by the Supreme Court. (It was later granted cert). Similarly, we identified a circuit split between the DC Circuit and the Ninth Circuit regarding legislative privilege. Because we were among the first to discuss this, news outlets called us as experts when the story gained widespread interest.

Q: How long did it take before the media began relying on Crime in the Suites as a new source?

A:　It took about a year and a half of building up credibility. Generally, the stories that the media picks up on are ones that aren’t really out there yet. For example, when there was discussion of creating a whistleblower provision in the FCPA, we took a strong stand on that on why that didn’t make sense, and it was picked up by the Wall Street Journal.

Q: What makes readers come to Crime in the Suites?

A: We have the experience and expertise in high profile cases that allows us to comment knowledgeably about pending cases and decisions. Being litigators with 20 plus years of experience, we have seen how prosecutors and legislators respond to a wide range of situations. When those issues come up again, we can draw on that experience and anticipate how they will handle them.

Q: How widely is the blog read?

A: We have subscribers and followers in 41 countries and we average 2000 hits per week.

Since DOJ Won’t Confess Error, It’s Time for Others to Stay on the Case

A Washington Post article today points out that in many cases over the past several decades, federal prosecutors knew that the evidence against a defendant was flawed because the science upon which the conviction had relied was not reliable – yet the prosecutors failed to notify the defendants or their attorneys of the problems.

The article notes that the forensic evidence – including hair identification evidence, which is now regarded as generally unreliable — led to hundreds of convictions of defendants, nationwide, for crimes they may well not have committed. In these cases, the convicts are entitled at the very least to a DNA test, which would in most cases determine their guilt or innocence. In one case, a man was executed in Texas even after the Justice Department began its review of convictions based on evidence that was not supported on solid scientific grounds.

All told, the Post found that the Department disclosed the results of these reviews to the defendants or their attorneys in fewer than half of the more than 250 cases in which questions had arisen about the forensic evidence.

It is truly unfortunate that it took an investigative reporting effort by a newspaper to uncover these clear failures by prosecutors to do justice, which is the first obligation of any government lawyer.

Looking at this, the Ted Stevens case, and other recent prosecutorial problems, it’s hard to avoid the conclusion that the Justice Department isn’t going to admit its errors or revisit its acknowledged problems unless its feet are put to the fire.
Journalists, bloggers, defense lawyers, whistle-blowers, and others all need to be aware of the department’s tendencies to make only the most perfunctory self-evaluations and to insist that it is right and just, even when it is not.

$25 Billion Mortgage Fraud Settlement Marks Turning Point for Industry

On April 4, the $25 billion national mortgage servicing settlement, which was announced in February, was finalized by a judge in the U.S. District Court for the District of Columbia. The settlement with the nation’s five largest mortgage servicers — Bank of America Corporation, JPMorgan Chase & Co., Wells Fargo & Company, Citigroup Inc., and Ally Financial Inc. (formerly GMAC) — was negotiated by 49 state attorneys general and the federal government. The complaint alleged that the servicers’ misconduct “resulted in the issuance of improper mortgages, premature and unauthorized foreclosures, violation of service members’ and other homeowners’ rights and protections, the use of false and deceptive affidavits and other documents, and the waste and abuse of taxpayer funds.”

The settlement of this major mortgage fraud case requires that servicers provide a minimum of $20 billion in benefits directly to borrowers through a series of national homeowner relief effort options, and pay $5 billion to the states and federal government ($4.25 billion to the states and $750 million to the federal government). Eligible borrowers who lost their homes to foreclosure from January 1, 2008 through December 31, 2011, and suffered servicing abuse may each qualify for an estimated $1,500 cash payment, and eligible homeowners whose homes are currently underwater may qualify for principal reduction.

While these payments will assist homeowners who have already fallen victim to servicers’ mortgage fraud, perhaps the most important development to emerge from this settlement is the creation of new servicing standards that will take effect over the next two to six months.

The standards seek to improve consumer access to help and information by requiring servicers to provide a single point of contact for borrowers seeking information about their loans and adequate staff to handle calls. These servicing standards set procedures and timelines for reviewing loan modification applications and give homeowners the right to appeal denials. Finally, they will stop many past foreclosure abuses by requiring servicers to evaluate homeowners for other loan mitigation options before resorting to foreclosure, forbidding banks from foreclosing while the homeowner is being considered for a loan modification, requiring strict oversight of foreclosure processing, and prohibiting abuses such as robo-signing and improper mortgage documentation.

To ensure that the servicers comply with the terms of the settlement and prevent future mortgage fraud, a monitor has been appointed to work with non-compliant institutions to establish corrective plans, or to recommend penalties or to seek injunctive relief to enforce the settlement. The U.S. Department of Justice and state attorneys general can enforce through the court process compliance with the servicing standards and the banks’ financial obligations. The settlement does not prohibit further relief for individuals, and borrowers and mortgage investors can pursue individual, institutional or class action cases without restriction.

We hope that this $25 billion settlement is enough to get the attention of servicers engaged in unscrupulous practices and to ensure that they change their operations moving forward. We also hope that now that this cloud over the industry is dissipating, it can proceed to provide and service mortgages in a way that is legal and ethical and that will aid in facilitating a housing recovery that is still only on the horizon.

Second Circuit YouTube Ruling Will Have Major Impact for Online-Piracy Debate

What had been touted as a great victory for Google in particular and for “Internet freedom” in general was just dealt a major blow when the U.S. Court of Appeals for the Second Circuit Court of Appeals overturned a lower court decision in Viacom’s lawsuit against Google and Google-owned YouTube.

Viacom, along with the English Premier League and various film studios and television networks, sued YouTube in 2007 alleging copyright infringement based on YouTube’s broadcast of some 79,000 copyrighted videos. The lower court had thrown out the case, granting summary judgment to YouTube and holding that YouTube was not responsible for the infringing activities at issue. The plaintiffs appealed. The Second Circuit brought new life back to the suit — and new life to the complaints some have made against online piracy, which recently hit the headlines with the introduction of the SOPA and PIPA bills in Congress.

At the heart of the lawsuit is the application of a 1998 federal law, the Digital Millennium Copyright Act, and one of its “safe harbor” provisions. The DMCA was enacted to carry out an international copyright treaty and to protect intellectual property online through anti-circumvention rules. Essential to Internet innovation (and to the growth and success of YouTube) are the DMCA’s safe harbor provisions, which limit liability of Internet service providers (ISPs) for copyright infringement by their users.

It’s been generally understood that, provided the ISP has a notice-and-takedown system in place for receiving complaints of infringing behavior and promptly responds  to those complaints by removing the infringing material, the ISP would be good to go. That general understanding gave online services a major boost. A Wired article celebrating the 10-year anniversary of the DMCA attributed the success of blogs, search engines, e-commerce sites and social networking portals to the safe harbor provisions. And the lower court’s earlier decision in the Viacom-YouTube suit appeared to be an affirmation for “Internet freedom.”

But the recent Second Circuit reversal could mean a major change in philosophy and practice. The court effectively held that a notice-and-takedown regime is not enough to shield an ISP from copyright liability for users’ infringing activities. If it appears that an ISP had knowledge or awareness of specific infringements, it may need to take action before a copyright owner provides notice of the infringing behavior. The Second Circuit asked the lower court to determine whether any specific infringements of which YouTube had knowledge or awareness (as evidenced by internal emails at YouTube) correspond to the clips at issue in these actions. It further asked the lower court to determine whether YouTube made a “deliberate effort to avoid guilty knowledge.”

This latter question of whether an ISP could be held liable for “willful blindness” has not been fleshed out before in the context of the DMCA safe harbor provisions. If the lower court ends up determining that YouTube is on the hook for willful blindness, ISPs’ current M.O. of relying on notice-and-takedown procedures will need to change. Some might argue such a move could stifle innovation and curb “Internet freedom.” But adoption of a willful blindness doctrine may end up benefitting service providers and hosting companies: It could strengthen the argument that new legislation à la SOPA or PIPA is unnecessary as the DMCA already provides sufficient protection against copyright infringement, otherwise known as online piracy.