Crime in the Suites: An Analyis of Current Issues in White Collar Defense
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May 18
2015

Cell Tower Location Data Privacy Decision Reversed

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Last July, we reported on United States v. Davis, an Eleventh Circuit decision in favor of privacy rights. In that case, a three-judge panel held that cell phone users have a reasonable expectation of privacy in their cell phone location data. If the government wants to collect the data, it must first obtain a probable-cause warrant, as required by the Fourth Amendment.

The groundbreaking decision seemed a clear victory for privacy rights, but the victory proved to be ephemeral. Last year, the en banc court agreed to revisit the question and, weeks ago, declared that subscribers do not have a reasonable expectation of privacy in their cell tower location data. As a result, the government can collect such data from third-party service providers if it shows reasonable grounds to believe the information is relevant and material to an ongoing criminal investigation.

In February 2010, defendant Quartavius Davis was convicted on multiple counts for robbery and weapons offenses. Davis appealed on grounds that the trial court admitted cell tower location data that the prosecution had obtained from a cell phone service provider in violation of Davis’ constitutional rights. An Eleventh Circuit panel agreed with Davis. Speaking for the court, Judge Sentelle explained that Davis had a reasonable expectation of privacy in the aggregation of data points reflecting his movement in public and private places. The government’s collection of the data was a warrantless “search” in violation of the Fourth Amendment.

To reach that decision, the panel leaned heavily on a 2012 Supreme Court case called United States v. Jones. In Jones, the Court announced that the government must have a probable-cause warrant before it can place a GPS tracking device on a suspect’s car and monitor his travel on public streets. The Court so held based on a trespass (or physical intrusion) theory. Absent probable cause, the government could not commandeer the suspect’s bumper for purposes of tracking his movement, even if each isolated movement was observable in public. Several Justices went further, suggesting that the same result should obtain even without a trespass. They hinted that location data might be protected because individuals have a reasonable expectation of privacy in the sequence of their movements over time. It was this persuasive but nonbinding privacy theory that guided the Eleventh Circuit’s panel decision.

On rehearing, the en banc court rejected the panel’s approach. The court noted that Davis could prevail only if he showed that a Fourth Amendment “search” occurred and that the search was unreasonable. He could show neither. To demonstrate a search, Davis had to establish a subjective expectation and objective expectation of privacy in his cell tower location data. But this case involved the collection of non-content cell tower data from a third-party provider who collected the information for legitimate business purposes: the records were not Davis’ to withhold. According to the court, Davis had no subjective expectation of privacy in the data because cell phone subscribers know (i) that when making a call, they must transmit their signal to a cell tower within range, (ii) that in doing so, they are disclosing to the provider their general location within a cell tower’s range, and (iii) that the provider keeps records of cell-tower usage. But even if Davis could claim a subjective expectation of privacy, he could not show an objective expectation. In the court’s view, Supreme Court precedent made clear that customers do not have a reasonable expectation of privacy in non-content data voluntarily transmitted to third-party providers. Because there was no “search,” there could be no violation of Davis’ constitutional rights.

The en banc court explained further that Jones did nothing to undermine the third-party doctrine. For one, Jones involved a government trespass on private property. But the records in Davis were not obtained by means of a government trespass or even a search, so Jones did not control. Additionally, Jones involved location data that was first collected by the government in furtherance of a criminal investigation. By contrast, Davis involved location data that was first compiled by a service provider in the ordinary course of business. Simply put, “[t]he judicial system does not engage in monitoring or a search when it compels the production of preexisting documents from a witness.”

Ifrah Law is a leading white-collar criminal defense firm that focuses on data privacy.

May 11
2015

Laptops, Border Checks and The Fourth Amendment

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Photo: “LAX-International-checkin” by TimBray at en.wikipedia.

 

Developments in law are sluggish compared to the rapid rate of technological advancement, and courts must constantly apply old legal principles to technologies which were not contemplated at the time the laws were enacted.   Recently, technology has been at the forefront of privacy rights debates, in light of revelations that the government has access to online communications, personal data storage and extensive monitoring via technology. The Fourth Amendment of the United States Constitution establishes a privacy right by prohibiting unreasonable search and seizure, but the extent to which that applies to technology is largely untested. Last week, a federal judge upheld this fundamental right as she ruled that our client’s rights had indeed been violated by an unreasonable search and seizure of a laptop computer conducted by the government.

U.S. District Court Judge Amy Berman Jackson granted a motion which we filed on behalf of our client, South Korean businessman Jae Shik Kim, to suppress evidence seized from his laptop as he departed the country from Los Angeles International Airport in October 2012. The decision severely cripples the government’s case alleging that Kim conspired to sell aircraft technology illegally to Iran, in United States of America vs. Jae Shik Kim, Karham Eng. Corp. (Crim. Action No. 13-0100 in the U.S. District Court for the District of Columbia).

The seizure of Mr. Kim’s laptop presents a unique challenge in an undeveloped area of law.  The government claimed that because Mr. Kim’s laptop was seized at the border, it was free to search the computer without having any suspicion that he was presently engaged in criminal activity, the same way the government is free to search a piece of luggage or a cargo container. Yet anyone who owns a laptop, smartphone, tablet, or any other personal mobile device, knows that the breadth and depth of private information stored within these gadgets are intimately tied to our identities and should be entitled to a heightened level of privacy.

Judge Jackson, who understood this aspect of modern mobile devices, wisely rejected the government’s argument that a computer is simply a ‘container’ and that the government has an ‘unfettered right’ to search. In her memorandum opinion and order, she wrote, “…given the vast storage capacity of even the most basic laptops, and the capacity of computers to retain metadata and even deleted material, one cannot treat an electronic storage device like a handbag simply because you can put things in it and then carry it onto a plane.”

In her decision, Judge Jackson also repeatedly referred to “reasonableness” as the “touchstone for a warrantless search.” She keenly balanced the government’s imperative to protect our borders with individuals’ privacy rights.  Judge Jackson found that the nature of the search — including that the government conducted the search as Kim departed the country (and not as he entered) to gather evidence in a pre-existing investigation, and that it made a copy of the entire contents of Kim’s laptop for an “unlimited duration and an examination of unlimited scope” — amounted to an invasion of privacy and an unreasonable search and seizure.

While the search of Mr. Kim was technically a border search, his laptop was not searched at the airport. Instead, it was transported 150 miles to San Diego and held until government agents were able to find and secure information they deemed valuable to their case. In fact, Mr. Kim was deemed so little of a threat to national security that he was permitted to board his flight.  Judge Jackson noted that if the government’s asserted justification for the search were to stand, it “would mean that the border search doctrine has no borders.”

In this case, unfortunately, the government overstepped the boundaries established by Fourth Amendment of the Constitution, however the checks and balances imposed by the same foundational document proved to correct this error, and rightly so, as our laws continuously strive to adjust to the reality of rapidly evolving technology.

Ifrah Law is a leading white-collar criminal defense firm that focuses on data privacy.

Mar 26
2015

Fifth Circuit Rules Only a Seaman Can Commit Seaman’s Manslaughter

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A recent decision of the U.S. Court of Appeals for the Fifth Circuit Court serves as a good reminder that criminal statutes say only what they say, and that it is up to the legislature to revise statutes to expand their scope if the legislature cares to do so.

The opinion, United States v. Kaluza, arose from the April 20, 2010, blowout of oil, natural gas and mud at the Macondo well, located on the Outer Continental Shelf in the waters of the Gulf of Mexico. The blowout resulted in explosions and fires on the Deepwater Horizon, a drilling rig chartered by the BP petroleum company, that led to the death of eleven men.

Robert Kaluza and Donald Vidrine were “well site leaders” – the highest ranking BP employees working on the rig.  Kaluza and Vidrine were indicted in the Eastern District of Louisiana on 23 counts, including 11 counts of “seaman’s manslaughter” or “ship officer manslaughter” in violation of 18 U.S.C. § 1115. Section 1115 is titled “Misconduct or neglect of ship officers” and provides, in part, that:

Every captain, engineer, pilot, or other person employed on any steamboat or vessel, by whose misconduct, negligence, or inattention to his duties on such vessel the life of any person is destroyed, and every owner, charterer, inspector, or other public officer, through whose fraud, neglect, connivance, misconduct, or violation of law the life any person is destroyed, shall be fined under this title or imprisoned not more than ten years, or both.

On the one hand, unlike the common law definition of manslaughter and the companion statutory definition for general manslaughter found in Section 1112, Section 1115 only requires proof of negligence.  On the other hand, the portion of the statute quoted above specifically states that it applies only to two groups of individuals: (1) every captain, engineer, pilot, or other person employed on any steamboat or vessel; and (2) every owner, charterer, inspector, or other public official. The second of these categories clearly did not apply to the two individual defendants, and the Fifth Circuit upheld the district court’s dismissal of the Section 1115 charges on the ground that neither of the defendants fit in the first.

Because neither of the defendants was a “captain, engineer [or] pilot” of a vessel, the issue was whether the men fell within the scope of “[e]very . . . other person employed on any . . . vessel.” In making this assessment, the Court of Appeals literally walked through this phrase word by word, indicating the dictionary definition for each one. Having done so, the Court rejected the government’s argument that the plain text of the statute was unambiguous, and encompassed every person employed on the Deepwater Horizon. The Court noted that such a conclusion would make the inclusion of “captain,” “engineer,” and “pilot” superfluous; instead, invoking the principle of ejusdem generis, the Court held that these terms limit the scope of the otherwise open-ended “every . . . other person.”

The Court emphasized that the limiting principle of ejusdem generis has particular force with respect to criminal statutes, so that unsuspecting persons are not ensnared by ambiguous statutory language. Finding that the common attribute of these specific positions was that all are involved in positions of authority responsible for the success of a vessel as a means of transportation on water. Because the defendants were responsible for drilling operations, and not the marine transportation functions of the Deepwater Horizon, they did not fall within this category, and therefore could not be held liable for seaman’s manslaughter.

The Kaluza case is a textbook example of how courts can and should carefully interpret ambiguous statutes so that they may be applied only to those persons and acts to which Congress intended them to apply. The case is certain to provide guidance to trial judges in the Fifth Circuit and elsewhere when similar circumstances arise in other cases.

 

Ifrah Law is a leading white-collar criminal defense firm that focuses on a variety of practice areas. View all.

Mar 25
2015

Your Mom and the Courts Agree: Naked Online Pix are Not OK

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Since the 1990s and the rise of the Internet and social media, each one of us has become increasingly aware of the risks and dangers of unwanted posts and how fast a “discreet” image can go viral. The development and evolution of the Internet has brought with it a host of novel legal issues, from the worldwide threat of cyber bullying to disgruntled employee posts, a flippant press of a button can mean tremendous consequences and legal challenges for many involved parties. Combine the viral nature of an image with the fuel of raw emotions over a breakup with a spouse or former lover and it is a recipe for disaster!

In a case that is considered the first of its kind, a website operator was found criminally liable for identity theft and extortion by a California state jury last week. The defendant operator Kevin Bollaert owned the website YouGotPosted.com, which permitted jilted lovers to submit nude pictures of their exes in order to publicly humiliate them. The site would identify the victim by name and also include the victim’s phone number next to the photo. On a sister website set up by the same operator, ChangeMyReputation.com, the victims were asked to pay up to $350 in order to have the photo removed. Between December 2012 and September 2013, less than one year, the site put up over 10,000 posts.

“Revenge porn” sites like this one permit the online posting of nude and sexual photos of people, by its nature mostly women, whose exes post the images to try to humiliate them. Images can also be easily picked up by other websites, so even if a person succeeds in getting images removed from one site, it may be difficult or impossible to remove them completely from the Internet. So, of course this sounds like it would clearly be illegal? Not so. Perhaps surprisingly, most states do not make it a crime to post people’s photos or personal information online without their permission. Many revenge porn sites have popped up in recent years and have brought national attention, as states scramble to enact laws or amendments to existing laws to help the defenseless victims. With the quick rise of revenge porn, states have often used laws already in existence to prosecute those accused of committing revenge porn, such as laws against disseminating pornography or laws protecting privacy. Even so, many current laws regarding invasion of privacy, harassment or disorderly conduct were enacted long before revenge porn was contemplated or became a rising concern. Oftentimes, a loophole makes it difficult to prosecute because the victims don’t own the photographs in which they appear or have voluntarily disseminated the photo without the intention of it going viral. It is for this reason that in the past few years, sixteen states have enacted criminal revenge porn laws, and there is legislation pending in over twenty additional states.

The case against Bollaert was the first conviction following California’s revenge porn bill, signed into law in October 2013 by Governor Jerry Brown. The law amends the state’s disorderly conduct law and makes it a crime to post nude photos of another online without permission and with intent to publicly shame the subject. However, this law as first drafted did not include photos taken as “selfies” but only those taken by another party. To remedy this, the law was subsequently amended, which will take effect in July of this year. Unlike other revenge porn sites, though, YouGotPosted.com permitted users to share personally identifying information about the photo’s subject. Bollaert was therefore prosecuted for identify theft and extortion, not under the revenge porn law. Bollaert faces up to 20 years in state prison when he is sentenced on April 3.

So, is this case unique due to the egregious nature of the facts, or should website operators beware of government’s tightened grip on website content? I think the answer is both. The facts are egregious but far from uncommon and increasingly more frequent. As devious players contemplate use of the Internet in unprecedented ways, state laws are feverishly attempting to catch up to evolving technology. While many object to such laws based on First Amendment free speech rights, it seems that governments are in fact taking stricter control over website content, with new laws and amendments pending in almost half the states in order to close the loopholes currently existing on this issue. Even so, there is a lesson to be learned to prevent humiliation and the time and expense of litigation – for all of those who leave their smart phones next to their beds, think twice before undressing and snapping!

Ifrah Law is a leading white-collar criminal defense firm that focuses on a variety of practice areas. View all.

Mar 17
2015

Bureaucracy Unlimited

Businessman caught in Red Tape

This article first appeared on FEE.org – you can access this version at http://fee.org/freeman/detail/bureaucracy-unlimited

Big Gov and Big Biz. Are they holding hands, shaking hands, or boxing? It depends on the day and the issue. But while Big Biz hardly seems like a sympathetic character, Big Gov always has the upper hand.

Remember Arthur Anderson? Perhaps not. It used to be the biggest accounting firm around. Then the Justice Department went after it with little proof but lots of gusto. The megalith firm fought the law, and the law won (temporarily). The Department of Justice obtained a criminal conviction against the firm that was the equivalent of a death sentence: the company lost its reputation and therefore lost its clients. By the time the Supreme Court overturned the conviction, it was a pyrrhic victory for the defunct firm.

Through Arthur Anderson, companies learned that no matter how big you are, the government is bigger. When the government comes after you, stand down and don’t fight.

Enforcement creep

Do you care that Big Gov picks on Big Biz? While Big Gov is busy starting wars of attrition with Big Biz, it is building out its bureaucratic infrastructure — all while sharpening a strategy that means it can’t lose. And that’s everyone’s concern. Companies regularly acquiesce to government demands and pave the way for what I’ll call enforcement creep — de facto lawmaking whereby government agencies use the threat of costly litigation, the threat of multiple agency investigations, or the threat of Arthur Anderson’s sad fate to gain settlements with defendants, even when the companies haven’t committed any significant wrongs.

These settlements often exceed the scope of existing laws and regulations, more accurately reflecting what the agencies want, not necessarily what the law requires. Agencies thus further their policy initiatives — including those not defined by statute or by implementing regulations — on an ad hoc basis, outside the purview of traditional lawmaking.

Here are two examples of how enforcement creep plays out.

Sallie Mae

In May 2014, the Consumer Financial Protection Bureau announced a $96.6 million settlement against student loan servicer Sallie Mae (now Navient Solutions). The agreement was to settle allegations that the company failed to reduce interest rates on loans to military members as required under the Servicemembers Civil Relief Act (SCRA). In the settlement agreement, Sallie Mae didn’t admit to any wrongdoing (a typical agreement term) but nonetheless agreed to pay fines and restitution. It also agreed to institute new measures to ensure compliance with the SCRA.

Here’s the kicker: the new measures require that Sallie Mae not only comply with current law, but go several steps further. That is, current law puts the burden on service members to seek loan reduction relief, but the consent order shifts the burden to Sallie Mae. It requires that the company presume loan reduction requests based upon service member actions (such as a request from the service member for another form of relief). It also requires the company to undertake other measures proactively to seek service member rate reductions (such as creating an online intake form and training designated customer service representatives to advise on SCRA protections).

It probably seemed to government regulators that the loan servicer, instead of the service member, was in a better position to bear the burden of looking after SCRA rights. And so they shifted that burden through an investigation and settlement with a major loan servicer — as opposed to going through the more public rulemaking process and requesting that Congress revise the law.

Costco

Here’s another example. In September 2014, Costco settled charges with the Environmental Protection Agency. The government authorities alleged the company violated the Clean Air Act by failing to repair refrigerant leaks and failing to keep adequate records of the servicing of its refrigeration equipment. The consent decree, in which Costco admitted no liability, requires that the company cut its leak rate to almost half the legal maximum over the next three years. (The decree requires Costco to achieve corporate-wide average leak rates of 19.1 percent; the regulations, 40 C.F.R. § 82.156 and EPA guidance, provide a legal leak rate maximum for commercial refrigeration equipment of 35 percent.)

The agreement requires the company to retrofit, replace, and install systems in a manner that similarly appears to surpass legal standards. Comparing the EPA guidance with the consent decree, the decree looks like a big leap from current regulatory requirements. The settlement agreement terms sound a lot more like policy objectives, in keeping with the EPA’s GreenChill initiative, than legal standards.

Give us your lunch money

It’s okay to encourage companies voluntarily to adopt more rigorous environmental standards than the law requires, but when a company’s decision not to comply can result in steep sanctions, the decision is no longer voluntary. So when the government looks for excuses to impose extralegal preferences, it starts to sound less like cheerleading and more like bullying. Think of it this way: it is still legal to encrypt your smartphone, but would you feel free to do so if you knew that the police were investigating everyone pursuing that form of privacy?

Where companies don’t do anything wrong, or where the wrongs committed pale in comparison to the punishment exacted, why do they settle with the feds? It has a lot to do with cost-benefit analysis. Rational parties will assess whether it makes financial sense to defend their positions in protracted litigation or to settle and move on. Since legal defense can be very costly, accepting a reasonable penalty that frees time and economic resources may seem like the best option. It’s similar to the pressure on someone charged with a serious crime, even when they are innocent, to plea bargain rather than face the expense of a long legal defense and the real possibility of a wrongful conviction. Plus, these companies don’t want to face significant bad press or a conviction that could effectively shutter operations. So Big Biz stands down; Big Gov expands its legal reach by applying an extralegal strategy of legislation by threat.

Groupsink

The companies entering into settlement agreements will obviously have to adopt the terms of those agreements or be in breach. But they are not the only ones looking carefully at applying settlement terms. Other companies with similar business practices will recognize a world of limited choices: adopt the government’s policy objectives or prepare for your time in the ring. New de facto law is made outside the courts, outside Congress, and entirely outside the public sphere. The extent to which Big Biz could once serve as a check on Big Gov fades into history, as enforcement creep becomes the new reality.

Ifrah Law is a leading white-collar criminal defense firm that focuses on a variety of practice areas. View all.

Mar 09
2015

What Expats Need to Know Now about their Taxes, FATCA and the IRS

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Are you an American abroad living in perpetual fear of the IRS? Do you wake up every morning wondering if today you’ll receive a formidable notice that the taxman cometh? You are not alone. Expats around the world are facing (and fearing) the painful reality that the IRS’s global tax enforcement effort is underway. While you may want to stick your head in the sand, a brief review of where we are and how we got here may encourage you to confront your IRS situation.

It started in 2010 with the passage of the Foreign Account Tax Compliance Act. FATCA was billed as an effective way to tackle offshore tax evasion. The legislation requires foreign financial institutions (FFIs) to report on U.S. taxpayers’ accounts or face hefty withholding penalties on transactions passing through the U.S. Affected institutions include not only banks, but any entities substantially engaged in holding or investing financial assets for others. These institutions are required to comply with the law regardless of conflict with the laws of their home country. That means FFIs have been put in the position of potentially violating local data privacy or bank secrecy laws or getting hit with significant penalties on funds passing through the States.

While the PR for the legislation presented it as an important means to tackle rich and greedy tax cheats, the reality is that FATCA impacts a lot more people than Swiss banking billionaires. The legislation has plenty of repercussions for the seven million plus U.S. citizens living abroad. Suddenly, dual citizens with negligible ties to the U.S. (say, they were born in the States but haven’t lived in the U.S. since infancy) realize they are supposed to be reporting their income and assets to the IRS, regardless of foreign location. Many of the unwitting lawbreakers and quiet law deniers have been waiting out the storm, not seeking resolution with the IRS as they think FATCA is not a fixed reality.

There is good reason why some people have hoped FATCA would be repealed, overturned, or perhaps ignored by other countries: (1) the conflicts between local laws and FATCA reporting requirements, (2) the significant costs to FFIs to implement FATCA compliance programs, (3) the unintended consequences to average expats that makes the legislation politically unpopular. The Alliance for the Defense of Canadian Sovereignty launched a legal challenge to FATCA in the Canadian courts. U.S. super lawyer, James Bopp Jr., has helped Republicans Overseas launch a challenge to the law in U.S. courts. And Senator Rand Paul has reintroduced legislation to effectively repeal the law. One would think Senator Paul’s efforts should get traction since there is a Republican-controlled Congress and the party has made FATCA repeal a part of the Republican National Committee platform. But power assumed is hard to retract.

Meanwhile, implementation of the law has trudged on. After a few delays, the law took effect July 1, 2014, and reporting has begun. More than 100 countries have entered treaties (intergovernmental agreements) with the U.S. to facilitate reporting and to get around local law conflicts. Countries with data privacy laws have agreed to have FFIs report to local tax authorities who in turn will report to the IRS. Even countries known for bank privacy protection and bank secrecy (like Switzerland, Hong Kong, and Austria) have agreed to comply with FATCA, eliminating secrecy for U.S. taxpayers.

Paving the way for large scale reporting, the IRS recently launched its web application, the International Data Exchange Service (IDES), for FFIs and foreign tax authorities. IDES is supposed to allow these FFIs and tax authorities to submit U.S. taxpayer information efficiently and securely by an encrypted pathway.

With treaties in play, reporting underway, and technological platforms built, the chances of FATCA getting repealed, overturned, or ignored are dissolving. This is especially true as more countries take their cues from FATCA and consider their own global tax enforcement efforts. Moving in this direction, the Organization for Economic Cooperation and Development has issued a new standard to facilitate intergovernmental sharing of financial data.

Expats that are behind on their IRS reporting need to face this fact and bite the bullet before they shoot themselves in the foot. It is important to address options, like whether or how to use the IRS’s Online Voluntary Disclosure Program or whether and how to renounce U.S. citizenship (note, you’ll still have to pay up for past deficiencies). But the reality is that FATCA is in force and the IRS is invested in ensuring all U.S. taxpayers comply. You may disagree in principle and you may (and perhaps should) advocate for repeal or revision. But in the meantime, find a way to face Uncle Sam.

 

Ifrah Law is a leading white-collar criminal defense firm that focuses on financial services.

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Feb 27
2015

SCOTUS Rules No Felony for Throwing the Little Ones Overboard

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This week, the United States Supreme Court resolved some fishy matters on which prosecutors sought to base a federal felony conviction.

The case, Yates v. United States, arose from a offshore inspection of a commercial fishing vessel in the Gulf of Mexico. During the inspection, a federal agent found that the ship’s catch contained undersized red grouper, in violation of federal conservation regulations. The agent instructed the ship’s captain, Mr. Yates, to keep the undersized fish segregated from the rest of the catch until the ship returned to port. But after the officer left, Yates instead told a crew member to throw the undersized fish overboard. Yates was subsequently charged with destroying, concealing and covering up undersized fish, in violation of Title 18, United States Code, section 1519. That section provides that a person may be fined or imprisoned for up to 20 years if he “knowingly alters, destroys, mutilates, conceals, covers up, falsifies, or makes a false entry in any record, document, or tangible object with the intent to impede, obstruct, or influence” a federal investigation.

At trial, Yates moved for a judgment of acquittal on this charge, noting that the provision was part of the Sarbanes-Oxley Act of 2002. That law was designed to protect investors and restore trust in financial markets after the collapse of Enron Corporation. Yates argued that the reference to “tangible object” was meant to refer to objects that store information, such as computer hard drives, and did not refer to fish. The Court denied the motion and the jury convicted Yates, and the Eleventh Circuit Court of Appeals affirmed the conviction, finding that fish are objects having physical form, and therefore fall within the dictionary definition of a “tangible object.”

In a majority opinion authored by Justice Ginsburg (and joined by the Chief Justice, Justice Breyer and Justice Sotomayor), the Court relied upon “[f]amiliar interpretive guides” in ruling that the “tangible object” to which section 1519 referred was indeed used to record or preserve information. In so ruling, the Court placed significant emphasis on context – in particular, the other parts of Title 18, Chapter 73. The Court noted Congress placed section 1519 at the end of that chapter immediately after pre-existing specialized provisions expressly aimed at corporate fraud and financial audits. The Court also noted the contemporaneous passage of section 1512(c)(1), which prohibits a person from “alter[ing], destroy[ing], mutilat[ing], or conceal[ing] a record, document or other object . . . with the intent to impair the object’s integrity or availability for use in an official proceeding” – a provision that would be unnecessary if section 1519’s reference to “tangible object” already included all physical objects. The Court also applied the statutory interpretation canons of noscitur a scoiis (“it is known from its associates”) and ejusdem generis(“of the same kind”), noting that beginning the provision with “any record [or] document” directs that the “tangible object” later referenced must be one used to record or preserve information. The Court also noted that the rule of lenity required that it resolve the dispute against finding criminal liability here. Justice Alito filed a concurring opinion relying on a narrower basis, while Justices Kagan, Scalia, Kennedy and Thomas dissented from the Court’s ruling.

The Court’s opinion in Yates makes for good reading for aficionados of classic statutory interpretation, and the Court’s decision to find that the scope of the statute was narrower than suggested by the government is a welcome respite from the seemingly ever-increasing scope of crimes in the U.S. Code. Congress could certainly pass legislation to make clear if it intended to include other tangible objects in the scope of this provision. But for now, tossing back the little ones does not constitute a SOX crime.

Ifrah Law is a leading white-collar criminal defense firm that focuses on a variety of practice areas. View all.

Feb 25
2015

Court Reins In Prosecutorial Overreach in Insider Trading Cases

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In an effort to reinstate powers stripped from them by the Court of Appeals in U.S. v. Newman and Chiasson, prosecutors have sought a rehearing of the landmark Second Circuit decision which severely curtailed the scope of insider trading cases.

The case is one which has already seen a dramatic reversal, so it is perhaps no surprise that prosecutors are hoping for the tide to turn in their favor.  In trial court, the jury heard evidence that financial analysts received insider information from sources at two companies, Dell and NVIDIA, disclosing the companies’ earnings before those numbers were publicly released.  The financial analysts in turn passed that information along to hedge fund traders Todd Newman and Anthony Chiasson, who executed trades in the companies’ stock.

Those transactions earned Newman’s funds approximately $4 million and Chiasson’s funds approximately $68 million. The prosecution charged both defendants with insider trading based on the trades they made with early knowledge of the earnings reports.  The trial judge instructed the jury that the defendants could be found guilty if they had knowledge that the information “was originally disclosed by the insider in violation of a duty of confidentiality.”  On December 12, 2012, the jury returned guilty verdicts for both defendants on all counts.

Newman and Chiasson appealed their convictions, arguing among other things that the prosecution had failed to present evidence that they had engaged in insider trading and that the trial judge improperly instructed the jury as to the level of knowledge required to sustain a conviction.  Newman and Chiasson argued that the government must prove beyond a reasonable doubt not only that the information was originally disclosed by the insider in violation of the duty of confidentiality, but that the insider disclosed the information in exchange for personal benefit.

The Court of Appeals agreed with their arguments, and found that the government had failed to present sufficient evidence that the insider received any personal benefit from sharing the information, or that Newman and Chiasson had knowledge of any such personal benefit an insider received from sharing the tip.

The Second Circuit’s December 10, 2014 opinion clearly lays out the requirements for “tippee liability,” that is, liability for one who received a tip originating from a corporate insider:

(1) The corporate insider was entrusted with a fiduciary duty; (2) the corporate insider breached the fiduciary duty by (a) disclosing confidential information to a tippee (b) in exchange for personal benefit; (3) the tippee knew of the tipper’s breach, that is, he know the information was confidential and divulged for personal benefit; and (4) the tippee still used that information to trade in a security or tip another individual for personal benefit.

Based on this standard, the Court of Appeals concluded that “without establishing that the tippee knows of the personal benefit received by the insider in exchange for the disclosure, the Government cannot meet its burden of showing that the tippee knew of a breach.”

The opinion also issued a stern rebuke of “recent insider trading prosecutions, which are increasingly targeted at remote tippees many levels removed from corporate insiders.”  This admonition could be fairly interpreted as being directed toward Manhattan United States Attorney Preet Bharara, who has been aggressively prosecuting Wall Street insider trading cases and has obtained approximated 85 convictions so far.  Mr. Bharara issued a statement saying that the decision “interprets the securities law in a way that will limit the ability to prosecute people who trade on leaked inside information.”

The court has yet to rule on the prosecution’s January 23, 2015 request for a rehearing of the case.  Until any modification is issued, the Newman ruling remains the controlling law of the Second Circuit and it will affect other cases.  Already, at least a dozen criminal defendants in the Southern District of New York have cited to the case in requesting to overturn their conviction or vacate their guilty pleas.

For instance, soon after the Second Circuit issued its ruling in Newman, a federal judge in Manhattan vacated the guilty pleas of four men charged with insider trading related to IBM:  Daryl Payton, Thomas Conradt, David Weishaus, and Trent Martin. Instead of bringing the case to trial, the prosecutors instead asked Judge Andrew Carter to dismiss the indictment.  However, the prosecutors indicated that if the Newman decision is altered on rehearing or appeal, they might consider bringing the charges again.  Appeals of previously convicted defendants will likely remain on hold pending the court’s decision on the requested Newman rehearing.  Regardless of the outcome on rehearing, the Newman decision is a strong indication that courts are making a concerted effort to rein in prosecutorial overreach.

Ifrah Law is a leading white-collar criminal defense firm that focuses on a variety of practice areas. View all.

Feb 18
2015

The Government’s [Subpoena] Power is Not Infinite

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It’s not every day that a federal court likens an Assistant U.S. Attorney’s argument to that “of a grade schooler seeking to avoid detention.” But, in a recent opinion, Judge Emmet G. Sullivan of the D.C. District Court did just that. In so doing, he reminded us that—despite the government’s (admitted) routine abuse of its subpoena power—the privacy rights of inmates matter, and a standard practice is not tantamount to a legal basis.

The overall case, one involving an alleged conspiracy to commit visa fraud, had taken some rare procedural twists before landing in Judge Sullivan’s courtroom: for example, the government had effectively incarcerated Ms. Truc Huynh (a former co-defendant) to postpone her deportation to Vietnam and ensure her availability to testify at a deposition against a remaining co-defendant. The primary issue addressed in Judge Sullivan’s recent ruling, however, was whether the U.S. Attorney’s Office violated the law when it issued subpoenas to the Central Treatment Facility (a local jail) for Ms. Huynh’s visitation logs, call logs, and recorded telephone calls—without notifying the Court, Ms. Huynh, or the defendant against whom Ms. Huynh was set to testify.

As a general matter, Rule 17 governs the issuance of subpoenas in criminal cases and allows the government to subpoena a witness to testify at a hearing or trial and may require the concurrent production of documents. It does not, however, allow for pretrial fishing expeditions for potentially relevant information. But that is precisely what the government had done in this case by “inviting” the jail to comply with the subpoena by promptly providing the requested documents directly to the Assistant U.S. Attorney handling the case. Within a matter of days, the jail complied with the production of 200 recordings, which were in Ms. Huynh’s native Vietnamese.

After having initially agreed to the defendants’ request for English language transcripts, the government later argued that compliance would be unduly burdensome because (upon review) the calls appeared to be irrelevant to the case. In so doing, the government showed its hand: the Assistant U.S. Attorneys had, essentially, used the Court’s subpoena power to conduct a fishing expedition into Ms. Huynh’s private phone calls without specific reason to believe that the calls would be admissible at trial.

To make matters worse, a similar subpoena had been issued for the remaining defendant’s jailhouse calls. When defense counsels moved to quash the subpoenas, the Assistant U.S. Attorneys failed to offer any legal authority in support of their actions—arguing instead that this was their general practice and they didn’t know of any authority saying they couldn’t. Fortunately for the defendants, Judge Sullivan—known for holding the government to account (see, e.g., his handling of the Ted Steven’s trial and the IRS scandal)—was not inclined to excuse such behavior. At oral argument, the Judge pushed back, “So that’s your authority: There’s nothing that says we can’t do it?” and the Assistant U.S. Attorney responded: “Right … That’s my authority.” The Court was not persuaded.

In his written opinion, Judge Sullivan held that the government had, indeed, overstepped Rule 17 by “inviting” the subpoena recipient to provide pretrial production of the documents requested. The government’s assertion—that an “invitation” for pretrial discovery did not obligate pretrial discovery—was of no moment, neither were its arguments that defendants lacked standing. Judge Sullivan made clear that “[b]ecause subpoenas are issued with the Court’s seal and backed by the threat of court-posed sanctions, the mere fact that an attorney abuses the subpoena power directly implicates the court itself and creates an embarrassment for the institution.”

In the end, Judge Sullivan boldly vindicated the privacy interests of these individual defendants. It remains to be seen, however, if his opinion will stymie the government’s practice of “inviting” pretrial discovery without court approval.  If nothing else, perhaps the Assistant U.S. Attorneys appearing before Judge Sullivan will think twice before doing so.

Ifrah Law is a leading white-collar criminal defense firm that focuses on a variety of practice areas. View all.

Feb 05
2015

Closing the Loop: The Proposal of New Subcontracting Limitations on Small Businesses

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Many small business government contractors may have to rethink the way they do business. The Small Business Administration issued a proposed rule at the end of December to implement provisions of the National Defense Authorization Act of 2013. The NDAA, which was signed into law in January 2013, requires several significant modifications to the rules for small business concerns, including changes to the Limitations on Subcontracting Rule (13 C.F.R. 125.6).

The proposed rule suggests a number of changes that would impact small businesses qualifying under one or more of the size or socioeconomic categories for set-aside contracts. These changes would (1) require companies to change how they determine compliance under §125.6, (2) require them to certify compliance in the bidding process, and (3) impose steep monetary penalties for delinquencies.

The Limitations on Subcontracting rule limits the extent to which prime contractors may subcontract obligations to outside entities, say to large companies that would not themselves qualify for a government set-aside. Under the current rule, a cost-based metric controls what prime contractors on set-aside contracts can subcontract to other entities: the prime must incur a certain percentage of the contract costs. For instance, for services contracts, a prime contractor must “perform at least 50 percent of the cost of the contract incurred for personnel with its own employees.” Section 125.6 currently provides different cost-base ratios based upon the type of contract (e.g., services, supplies, construction) and the type of set-aside (e.g., 8(a), SDVOB, HUBZone).

The proposed rule, if implemented, would alter how limitations are calculated, using an income-based, as opposed to a cost-based, metric. Under the proposed rule, prime contractors on set-aside contracts would be required to keep in-house a certain percentage of income—including passive income—paid by the government. For services and supply contracts, no more than fifty percent of the amount paid under the contract could be passed on to subcontractors; for construction no more than eighty-five percent; and for specialty trade, no more than seventy-five percent. (note that these are the same ratios used under the current cost-based metric, but now apply to the income-based metric). There no longer would be a distinction in ratios based upon type of set-aside, however.

An important exception to the rule would exist for “similarly situated entities.” Maintaining the philosophy behind the set-aside program, the proposed rule would allow prime contractors to contract out to companies who also qualify under their set-aside category without that relationship counting towards the income limit. In other words, the entities would be treated the same for purposes of the Limitations on Subcontracting rule. For instance, an SDVOB could subcontract out a services contract to another SDVOB and that contract relationship would not count towards the fifty percent income limit. However, the subcontractor must qualify under the same set-aside category as the prime in order to take advantage of this exception.

Another exception is that the rule would not apply to contracts valued under $150,000.

Closing a former loophole, the revised §125.6 would count all levels of subcontractor relationship, not just to the first prime-sub relationship. So companies could not get around the subcontract limitation through subcontracting out under the subcontractor.

In order to satisfy the new Limitations on Subcontracting rule, companies would need to address the rule in their contract bids for set-aside contracts. They would be required to certify that they can satisfy the rule. They would further be required to identify any similarly situated entities they planned to subcontract with and to what extent (percentage) they planned to subcontract with them. Any post-award changes would need to be presented to the contracting officer.

Unlike in the past, the proposed rule would institute steep penalties for non-compliance with the Limitations on Subcontracting rule. Companies found violating the rule would be subject to fines “the greater of either $500,000 or the dollar amount spent in excess of the permitted levels for subcontracting.”

The SBA’s proposed changes may seem staggering to small businesses that have carefully defined their business relationships to remain compliant under the current cost-based regime. But the changes could ultimately help to ensure the viability of the SBA’s set-aside programs. When small and disadvantaged prime contractors subcontract the bulk of their work to large businesses, they call into question the purpose of the set-aside structure. Those interested in presenting comments on this proposed change may submit their comments through regulations.gov by February 27, 2015.

Ifrah Law is a leading white-collar criminal defense firm that focuses on government contracting.

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About Ifrah Law

Crime in the Suites is authored by the Ifrah Law Firm, a Washington DC-based law firm specializing in the defense of government investigations and litigation. Our client base spans many regulated industries, particularly e-business, e-commerce, government contracts, gaming and healthcare.

Ifrah Law focuses on federal criminal defense, government contract defense and procurement, healthcare, and financial services litigation and fraud defense. Further, the firm's E-Commerce attorneys and internet marketing attorneys are leaders in internet advertising, data privacy, online fraud and abuse law, iGaming law.

The commentary and cases included in this blog are contributed by founding partner Jeff Ifrah, partners Michelle Cohen, David Deitch, and associates Rachel Hirsch, Jeff Hamlin, Steven Eichorn, Sarah Coffey, Nicole Kardell, and Casselle Smith. These posts are edited by Jeff Ifrah. We look forward to hearing your thoughts and comments!

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