Crime in the Suites: An Analyis of Current Issues in White Collar Defense
Archive for the ‘Federal Criminal (Other)’ Category
May 08
2014

Ifrah Law Report: Johns Hopkins Symposium on Social Costs of Mass Incarceration

On April 28, 2014, Ifrah Law attorneys Jeff Hamlin and Casselle Smith attended a symposium on incarceration presented by The Johns Hopkins University and its Urban Health Institute. The day–long program focused on adverse impacts of mass incarceration and potential strategies for mitigating them and reversing trends toward continued prison growth. Throughout the day, panels comprised of medical professionals, sociologists, legal scholars, and ex–offenders took the stage to address issues bearing on their areas of expertise.

Panelists discussed the effects of over–incarceration on individual liberty, family cohesion, and economic inequality, among other things. Many speakers emphasized the critical importance of upstream intervention. To this point, House Representative Elijah Cummings (D-Md) challenged communities to provide children with opportunities in sports, scouts, band, and other activities that can offer a positive sense of belonging. Others emphasized the value of post-incarceration solutions, including decarceration, education, and re–entry assistance.

Much of the afternoon discussion revolved around underreported effects of incarceration, including the lifelong consequences of a felony record. Too often, criminal defendants serve their time only to face a new set of challenges upon their release. Ex–offenders typically lack meaningful options for lawful employment outside of prison. The structural barriers to prosperity erected in the aftermath of incarceration can be as confounding as the time served—especially for those stationed on the lower rungs of socioeconomic stratification. This lack of opportunity is a catalyst for recidivism and ends up perpetuating the cycle of crime.

In his keynote address, Rep Elijah Cummings lamented that the real sentence is not the incarceration, but the criminal record that follows you until you die. The day after Cummings’ address, the Baltimore City Council passed legislation to address that problem. The “Ban the Box” bill—named for the criminal history checkbox that has become commonplace on job applications—makes it a crime for private businesses (with at least 10 employees) to “require an applicant to disclose or reveal whether he or she has a criminal record” before a conditional job offer has been made. The bill has teeth. Failure to comply is a misdemeanor violation that can result in fines up to $500 and up to ninety days in jail.

According to local reports, Baltimore Mayor Stephanie Rawlings-Blake strongly supports the bill. It will take effect 90 days after she signs it into law. The next test will be effective implementation and enforcement to ensure its success.  We will continue to monitor its evolution and report on major developments.

The Urban Health Institute plans to upload video clips of the panel discussions and speeches. Video clips of panel discussions and speeches can be viewed at the Urban Health Institute’s YouTube channel.

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Apr 30
2014

Another SDNY Judge Finds the U.S. Sentencing Guidelines Wanting

In a sentencing hearing yesterday in the Southern District of New York, yet another judge reached the conclusion that the quasi-mathematical formulaic approach of the United States Sentencing Guidelines fails to account adequately for differences between criminal defendants.  But, in this case, the result was to the detriment of the individual being sentenced in that case.

Judge Jed Rakoff made headlines in October 2012 when he sentenced former Goldman Sachs director Rajat Gupta to a two-year prison sentence despite an advisory Guidelines range of 6-1/2 to 8 years (and an even higher range pressed by prosecutors and the Probation Department).  As we wrote here at that time, in ordering a significant downward variance, Judge Rakoff bemoaned the Guidelines’ attempt to treat human beings and their attendant complexities as “commodities,” and the “bizarre results” that follows that approach.

In yesterday’s sentencing hearing for Anatoly Golubchik, Judge Jesse Furman focused on a different manner in which the Guidelines fail to account for differences from case to case.  Golubchik had entered a guilty plea to a single count of participating in a racketeering conspiracy from in or about 2006 through in or about April 2013.  The government alleged that this racketeering conspiracy engaged in illegal gambling, threats of violence, and laundering of approximately $100 million.

Under Section 2E1.1 of the Guidelines (applicable to racketeering), Golubchik’s base offense level was the greater of 19 or the base offense level applicable to the underlying conduct.  That underlying conduct was the operation of an illegal gambling business, for which Section 2E3.1 provides a base offense level of 12.  Thus, Golubchik’s base offense level was 19, and, despite the laundering of millions of dollars, the Probation Department calculated the advisory Guidelines range as 21 to 27 months.

In its submission prior to sentencing, the government argued that the Court should grant an upward variance from that range based, in part, on the failure of the Guidelines to reflect adequately the extent of Golubchik’s offense.  The Court ultimately ordered the parties to be prepared to address at sentencing whether it should grant an upward departure under Section 5K2.0 on the ground that the offense conduct presented a circumstance of a kind or to a degree not adequately taken into consideration by the Guidelines.  The issue was joined, in large part, simply because the Guidelines applicable to illegal gambling – unlike the Guidelines applicable to many other offenses – do not include an upward enhancement based upon the amount of money involved according to the loss table set forth in Section 2B1.1 of the Guidelines.  (The Guideline applicable to money laundering (Section 2S1.1) directs the application of the offense level for the underlying conduct if that level can be determined; otherwise, it would incorporate an enhancement from the loss table.)

During argument on this issue, Judge Furman pushed Golubchik’s counsel to “concede that two defendants, one convicted of racketeering offenses involving gambling amounting to $2,000 and two, a defendant convicted of racketeering offenses [involving] gambling involving $100 million” are treated the same under the Guidelines.  Transcript of April 29, 2014 Hearing at 56.After hearing the parties’ argument, Judge Furman ordered an upward departure on that basis:

I do believe and find that a departure is warranted under Section 5K2.0, whether the problem is with the gambling guideline, namely 2E3.1, or the money laundering guideline, namely 2S1.1, by de-linking completely the offense conduct from the amount of money involved with the direct money laundering, the guidelines failed to distinguish, in my view, between run-of-the-mill gambling cases and run-of-the-mill racketeering cases involving gambling, and cases like this one involving a massive, sophisticated gambling operation that spans continents and involves upwards of $100 million.

Id. at 61.  In addition to noting the failure of the gambling Guideline to consider the amount of money involved, Judge Furman noted the “anomaly created by the fact that for third-party launders the loss table is used to calculate the guidelines range.”  Id.  Based in large part on this issue, Judge Furman sentenced Golubchik to 60 months in prison – a sentence more than double the top of the advisory Guidelines range.

Our purpose in commenting on this hearing is not to criticize Judge Furman’s ultimate decision in sentencing Golubchik.  Rather, we do so because Judge Furman’s identification of the “anomaly” created by the gambling and money laundering Guideline sections presents yet another manner in which the Guidelines simply fail to deliver on their promise to provide a mathematical formula for determining a sentence consistent with the mandate in Title 18, United States Code section 3553.  Of course, one solution would be simply to tie those Guideline sections to the loss table.  But given the growing – and, in our view, well-deserved – criticism of the application of the loss table in the Guidelines, this would simply make matters even worse.  We instead view the analytical conflict identified by Judge Furman as yet another factor that should ultimately lead to the demise of the Guidelines as a useful tool for federal sentencing.

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Mar 01
2014

$76 Million Distributed in Full Tilt Poker Restitution

We have previously reported on the arrangements being made by the Garden City Group for remittance of money to the former customers of Full Tilt Poker.  Since that time, there has been a lengthy process for the submission of claims to the group for administration.

It appears that players’ waiting has not been all for naught.

The Garden City Group reports that, on February 28, 2014, it issued more than 27,500 payments totaling approximately $76 million to former Full Tilt Poker players who timely confirmed the balance of their Full Tilt Poker accounts.  GCG reports that petitioners will receive ACH transfers of the funds anywhere from the day it was issued until several business days later, depending on the practices of their banks.

These payments are only the first round of anticipated payments.  The deadline for affiliates to submit a petition for remission is this Sunday, March 2.

Feb 21
2014

Banks Shy Away From Processing Marijuana Transactions in Colorado – Will Anyone Step Up?

Last Friday, the Department of Justice (DOJ) and the Department of Treasury, Financial Crimes Enforcement Network (FinCen), both published new guidance in connection with the legalization of recreational marijuana in Colorado. Because marijuana use remains illegal under federal law, the banking industry is prohibited from servicing any marijuana-related bank accounts. This forces the recreational marijuana industry to operate on an all-cash basis, which increases public safety risks (both to retailers and to customers) and is a great inconvenience to the industry (which is required to take extreme measures such as hiring armed guards, installing very high tech security measures, and the businesses are unable to obtain bank loans or credit).

In response, FinCen’s guidance, along with the DOJ memo, was supposed to enable marijuana-related banking and eliminate the public safety concerns, as it clearly stated: “This FinCEN guidance should enhance the availability of financial services for, and the financial transparency of, marijuana-related businesses.” Although the guidance pursued an admirable goal, it fell remarkably short.

The DOJ memo states:

“The provisions of the money laundering statutes, the unlicensed money remitter statute, and the Bank Secrecy Act (BSA) remain in effect with respect to marijuana-related conduct. Financial transactions involving proceeds generated by marijuana-related conduct can form the basis for prosecution under the money laundering statutes (18 U.S.C. §§ 1956 and 1957), the unlicensed money transmitter statute (18 U.S.C. § 1960), and the BSA. … Notably for these purposes, prosecution under these offenses based on transactions involving marijuana proceeds does not require an underlying marijuana-related conviction under federal or state law.”

Simply stated, the DOJ memo confirms that recreational marijuana use remains illegal under federal law and could serve as the basis of prosecution against banks (or individuals), but that the DOJ will probably not enforce the applicable federal statutes against banks for processing marijuana-related accounts, provided that the banks follow certain guidelines that are outlined in the DOJ memo.

These wishy-washy “promises” of non-enforcement are extremely unlikely to sway banks from their decision not to permit marijuana-related accounts. Banks are naturally conservative and also have a huge self-interest to be 100% compliant with federal law because of the highly regulated banking industry; therefore, banks are only likely to permit marijuana-related accounts if it was legal under federal law, or if there were some form of safe harbor for the banks. However, there is clearly no safe harbor with the recent regulations and guidance.

For instance, the DOJ memo explicitly states: “Neither the guidance herein nor any state or local law provides a legal defense to a violation of federal law, including any civil or criminal violation of the CSA, the money laundering and unlicensed money transmitter statutes, or the BSA, including the obligation of financial institutions to conduct customer due diligence.”. The FinCen memo also repeats “that the illegal distribution and sale of marijuana is a serious crime…” Thus, although the guidance issued by DOJ and FinCen on the surface appear to be helpful, they are ultimately toothless.

Further, the ultimate decision (and the inherent risk and liability) remains with the banks, as also noted in the FinCen memo: “In general, the decision to open, close, or refuse any particular account or relationship should be made by each financial institution based on a number of factors specific to that institution.” Therefore, in the absence of any safe harbor and the illegal status of marijuana under federal law, banks will likely pursue the safe option of refusing to process marijuana-related accounts.

This scenario is quite similar to the recent aftermath in New Jersey when it legalized online gaming for intrastate users. Although New Jersey declared online gaming legal under New Jersey state law, banks generally refused and continue to refuse to process online gaming accounts. Banks deemed these accounts too risky because their internal regulations dictate that they would not process payments for accounts related to online gaming for real money when it was still prohibited in other states and would be an unwanted burden on their compliance checks. Similarly, the ultimate conclusion of banks considering marijuana-related accounts is likely to refuse to allow such accounts because they are still illegal under federal law and permitting those accounts presents an unwelcome risk for the banks.

Another significant hurdle that may cause banks to refuse marijuana-related accounts is the significant disclosure requirements applicable to the banking industry that are mandated by federal agencies like the FDIC and Federal Reserve. Banks, particularly banks that are publicly traded entities, have many filings and disclosures that they are required to make on a consistent basis. Therefore, the banks would presumably have to disclose that they are currently violating federal law by processing marijuana-related transactions and permitting marijuana-related accounts (and anticipate continuing to violate the federal laws). Regarding disclosure requirements, it should make no difference whether the DOJ presently anticipates prosecuting those crimes or how much of a priority they are in accordance with the DOJ memo – the fact remains that the bank is violating the federal law and that must be disclosed. Indeed, the DOJ could decide to prosecute these crimes at any time in the future. Furthermore, that disclosure (i.e. that they are currently violating the law) would likely trigger a host of regulatory issues that require banks to comply with all federal laws.

Yet, the banking market for marijuana-related accounts remains lucrative and underserved. The million dollar question is which bank will take the leap of faith to enter the marijuana industry?

One possibility is a Colorado bank that only has Colorado branches may be willing to permit marijuana-related accounts. Obviously, the potential reward is great because of the lucrative and underserved marijuana industry market. More importantly, the risk to Colorado banks is lower because they only operate in Colorado and can legitimately claim they are complying with all laws because Colorado state law permits recreational marijuana use, so they can be more confident that the DOJ will not prosecute them. More importantly, even if the DOJ decides to prosecute them, the state of Colorado will likely defend them and throw their weight behind the local bank, because if Colorado did not, then the whole recreational marijuana law and industry would quickly collapse.

Consequently, the risk-reward equation for a local Colorado bank is tilted more favorably toward permitting marijuana-related accounts because there is less risk to a Colorado-only bank, and the reward would be given more weight because the value of the marijuana accounts would mean much more to a smaller Colorado bank than to a larger national one. In the meantime, one would hope that the federal agencies would issue guidance that provides more clarity and real solutions to this issue, rather than just discouraging banks from this industry by issuing vague guidance.

Feb 12
2014

Wild, Wild West: The Legalization of Marijuana Brings Lots Of Regulatory Concerns

The beginning of 2014 has brought many new laws into effect and we have written on a number of them. But few laws have received more mainstream media exposure than Colorado’s legalization of recreational marijuana. Of more importance to us, the legalization of recreational marijuana has posed some interesting problems for regulators.

The most obvious effect of the law was to allow the recreational use of marijuana, but there has also been a significant side effect: Colorado has seen an explosion of food products with marijuana additives (known as “marijuana edibles”). A big reason for the wide variety of marijuana infused products is because it is relatively simple to manufacture them. The regular food manufacturing process is used and then cannabis oil is added to the recipe, which adds THC (tetrahydrocannabinol) the main psychoactive substance in marijuana, to the food. Marijuana edibles range from candies and sweets (e.g. chai mints, truffles) to sodas to cake (e.g. cookies, brownies), and even peanut butter. These products are especially attractive to people who want to avoid the coughing and inhaling of pot smoke, or, to partake of marijuana in a place where smoking is not permitted.

We are not generally in favor of more regulation, but we do think that there is a need for more robust regulation of marijuana edibles.  These are standard food products with all the associated risks (e.g. going rancid, food poisoning like salmonella).  Also, THC is not particularly stable as a good additive. Yet, despite these characteristics that pose risks associated with food products, marijuana edibles are not being monitored by the experienced federal food regulators (such as the Centers for Disease Control and Prevention and the Food and Drug Administration).  Moreover, Colorado Department of Public Health also cannot provide oversight because part of their funding comes from the federal government.  And while Colorado’s Marijuana Enforcement Division may monitor these products, its original purpose was to regulate the medical marijuana industry and it is therefore ill equipped to regulate the entire recreational marijuana industry from the perspective of experience and resources.  The Marijuana Enforcement Division has taken some significant steps to ensure marijuana edibles’ safety – such as requiring laboratory certification of edibles and implementing a tracking program that would be able to trace any food poisoning outbreaks directly back to the plant – but the absence of experienced food regulators from this process is worrisome.

Like many new laws, the legalization of recreational use of marijuana in Colorado is creating unforeseen challenges for regulators necessary to ensure the health and safety of the public.  We are confident that, even in the continued absence of federal agency involvement, Colorado state authorities will find new and effective ways to meet these challenges.

Jan 27
2014

Healthcare Fraud Recoveries at All-Time High Since 2009

Fiscal year 2013 marked the fourth consecutive year in which the Department of Justice has recovered at least $2 billion from cases involving charges of healthcare fraud.  Make no mistake: these record-setting yields were no accident.  The Obama Administration has prioritized busting healthcare fraudsters since it took office, and for good reason.  A 2009 analysis by the AHIMA Foundation, estimated that only 3 to 10 percent of healthcare fraud was being identified. To help crackdown, Attorney General Eric Holder and Human Services Secretary Kathleen Sebelius formed the Health Care Fraud Prevention and Enforcement Action Team (HEAT) in 2009.The Government also launched www.stopmedicarefraud.org in an effort to curb ongoing fraud. From January 2009 through the end of the 2013 fiscal year, the Justice Department used the False Claims Act to recover an unprecedented $12.1 billion in federal healthcare dollars.

In this past year alone, DOJ successfully recovered $2.6 billion. More than half of that amount related to alleged false claims for drugs and medical devices under federally insurance health programs, including Medicare, Medicaid and TRICARE.

Many of the DOJ settlements involved allegations that pharmaceutical manufacturers engaged in “off-label marketing” –that is, promoting sales of their drug products for uses other than those for which the Food and Drug Administration (FDA) approved them.  A notable “off label” settlement was with Abbott Laboratories, which paid $1.5 billion to resolve allegations that it illegally promoted the drug Depakote to treat agitation and aggression in elderly dementia patients and schizophrenia – neither of which was the use for which the FDA had approved the drug as safe and effective.  Abbott’s settlement included $575 million in federal civil recoveries, $225 million in state civil recoveries and nearly $700 million in criminal fines and forfeitures.  DOJ also reached a settlement in 2013 with biotech giant Amgen, Inc., which paid $762 million (including $598.5 million in False Claims Act recoveries) over allegations that included promotion of Aranesp, approved to treat anemia, in doses and for purposes not approved by the FDA.

DOJ settlements in the past year also addressed allegations of the manufacture and distribution of adulterated drugs.  For example, in May, Ranbaxy USA Inc. paid $505 million, including $237 million in federal civil claims, $118 million in state civil claims and $150 million in criminal fines and forfeitures, due to adulterated drugs from its facilities in India.

Kickbacks were the subject of other DOJ enforcement in 2013.  DOJ obtained a $237 million judgment against Tuomey Healthcare System Inc. after a four week trial. Tuomey was accused of violations\ the Stark Law (which prohibits hospitals from submitting Medicare claims for patientsreferredto the hospital by physicians with a prohibited financial relationship with the hospital) and the False Claims act.  Tuomey’s appeal is pending; if upheld, the judgment will be the largest in the history of the Stark Law.  DOJ’s $26.3 million settlement with Florida dermatologist Steven J. Wasserman M.D., arising from allegations of illegal kickbacks from a pathology lab, was one of the largest with an individual in the history of the False Claims Act.

DOJ Civil Division’s Consumer Protection Branch was likewise active during 2013, obtaining 16 criminal convictions and more than $1.3 billion in criminal fines, forfeitures and disgorgement under the Federal Food, Drug and Cosmetic Act.

These numbers make clear that DOJ continues to view healthcare fraud as a priority.  Providers and others who operate in this highly regulated space ignore this law enforcement focus at their peril in 2014.

Jan 23
2014

Charges Against Former Virginia Governor McDonnell Brought on by Whistleblower

The media coverage of this week’s announcement that federal prosecutors have charged former Virginia Governor Robert F. McDonnell and his wife, Maureen, with illegally accepting gifts from a wealthy Richmond area businessman have largely focused on what the Commonwealth’s first family may have given in return.  To be sure, the question of whether and how these gifts corrupted the state government is an important one, and the effect on a man once considered a potential 2016 Presidential candidate is a significant political story.

But the story of how the allegations against Governor McDonnell first surfaced is also a cautionary tale about the vulnerabilities that can lead prosecutors to the evidence they need to bring down rich and powerful people.  During his tenure at the Virginia gubernatorial mansion, chef Todd Schneider kept records and photographs of a variety of things he viewed as suspicious.  When Schneider was accused of wrongdoing involving his outside catering company’s relationship with the state – allegations that proved to be unfounded – Schneider revealed to prosecutors all of the documents and photographs he had that suggested corruption on the part of the Governor and his family.  The indictments announced this week are the product, at least in part, of that treasure trove of carefully preserved incriminating evidence.

The defense in this case will likely be that gifts were accepted but no favors were granted in exchange, and that may be a winning strategy but there is also a lesson here.  Corporate officers and public officials need to understand that, when they engage in behavior that comes close to crossing the line between proper and improper, their acts need to be explained and not kept private.  They also need to understand that leaders are often judged by and held to a higher standard of conduct.  From the mail room on up, employees expect the most from their leaders.  Anything less than that may look suspicious and can literally turn into a federal case.

This saga is by no means the first in which a lowly employee who is discharged or accused of wrongdoing becomes a whistleblower that leads to headline-grabbing criminal charges against a company or a political figure.  But it is a good reminder that those who cut corners or even commit crimes in organizations are vulnerable to the evidence collected by others in that organization.

Dec 17
2013

Supreme Court Grants Cert to Resolve Circuit Conflict on Intent Required to Prove Federal Bank Fraud

On December 13, 2013, the United States Supreme Court granted a certiorari petition in a case that squarely poses the question of what the government must prove with respect to intent in order to convict a defendant of federal bank fraud.  There is wide agreement among the Courts of Appeal that, in order to secure a conviction under Title 18, United States Code section 1344(1) (making it illegal “to defraud a financial institution”), the government must prove that the defendant intended to defraud the government and to expose it to a risk of loss.  With respect to subdivision 2 of the statute, however (making it illegal to obtain money and the like of a financial institution “by means of false or fraudulent pretenses, representations, or promises”), the Circuits are split six to three – with the First, Second, Third, Fifth, Seventh and Eighth Circuits holding that the same intent requirement applies under either subsection of the statute, and Sixth, Ninth and Tenth Circuits holding that subsection 2 establishes an independent crime that requires only intent to defraud someone (and not necessary a bank) and some nexus between the fraudulent scheme and a financial institution.

In the case in question, Kevin Loughrin v. United States, the defendant was convicted of bank fraud arising from a scheme to make fraudulent returns at a Target store despite the undisputed fact that he did not intend to cause (nor actually caused) any risk of financial loss to the bank.  The Tenth Circuit acknowledged that it took the minority view of split Circuits, but nevertheless upheld the conviction, and Loughrin filed a petition for certiorari to the Supreme Court.  In his petition, Loughrin emphasized that having different standards for each subsection regularly led to opposite results in factually similar cases.

The Court’s decision in this case could be a game-changer for the way in which prosecutors use the federal bank fraud statute.  In many cases – for example, the Black Friday poker cases in the Southern District of New York – bank fraud charges pose the most serious consequences for a criminal defendant but are asserted in cases in which there is no intent to expose the financial institution to loss.  A change in the law will change the way such cases are charged by prosecutors, and alter the dynamics of how such cases are negotiated and tried.  Whatever the Court’s ultimate decision on the  issue, it will bring badly needed clarity to this area of the law.

Dec 11
2013

Taking Advantage of a Video Poker Glitch Can Land you in Jail in Nevada

Last month, federal prosecutors in Nevada filed a motion to dismiss an indictment that shined a bright light on overly broad federal criminal statutes and the abuse of prosecutorial discretion in using them.

John Kane and Andre Nestor were each charged in an indictment in January 2011 with one count of conspiracy to commit wire fraud and one count of computer fraud in violation of the Computer Fraud and Abuse Act (CFAA), the same law that was used to prosecute Internet activist Aaron Swartz and Andrew Auernheimer.

The indictment alleged that Kane and Nestor used an exploit on video poker machines to defraud casinos and win money that they were not entitled to, which “exceeded their authorized access” on the machines in violation of the CFAA. Kane, who reportedly spent an extremely significant amount of time playing video poker, discovered a bug in the software of the video poker machine that allowed for him, and later his co-defendant Nestor, to achieve large payouts on certain slot machines through a series of moves where he switched games and made bets at different levels. There is absolutely nothing illegal about pressing buttons on slot machines to change the amount of money you are betting or to switch games you are playing, but the prosecution alleged that doing this exceeded lawful access. The court agreed with the defendants and ruled in favor of their motion to dismiss the CFAA count in the indictment.

The CFAA was enacted in 1986 to protect computers that there was a compelling federal interest in protecting, such as computers owned by the federal government and certain financial institutions. The CFAA has been amended numerous times since it was enacted to cover a broader range of computer related activities and there has been recent discussion on Capitol Hill of amending it further. The CFAA prohibits accessing a computer without proper authorizationor it is used in a manner that exceeds the scope of authorized access. The law has faced steep criticism for being overly broad and allowing prosecutors wide discretion by allowing them to charge individuals who have violated a website’s terms of service.

In November, after filing nine stipulations to continue the trial date, the government filed a motion to dismiss the remaining conspiracy to commit wire fraud charges against both Kane and Nestor because “the government has evaluated the evidence and circumstances surrounding court one [wire fraud conspiracy] and determined that in the interest of justice it should not go forward with the case under the present circumstances.”

Although the charges were ultimately dismissed,the issue remains that these charges never should have been brought in the first place. Kane and Nestor had to deal with open criminal charges against them for nearly three years. There are proper uses for statutes such as the CFAA, but the people and the courts should demand that the government only use them for their intended purposes. Prosecutions taking broad and unjustified interpretations of these statutes are not justified.

Jul 29
2013

D.C. Circuit Clarifies Key Issue in Wake of High Court’s ‘Honest Services’ Decision

A recent D.C. Circuit Court of Appeals decision narrows the ability of the government to revisit uncharged crimes against a person whose plea has been vacated due to a change in the law.

In 2007, Russell Caso had pleaded guilty to conspiracy to commit honest-services wire fraud, in violation of 18 U.S.C. §§ 371, 1343 and 1346, based on certain conduct during his employment as U.S. Rep. Curt Weldon’s chief of staff. Caso was sentenced to three years’ probation, including a 170-day term of home confinement. In entering its plea agreement with Caso, the government had forgone the right to charge Caso also with a violation of the false statements statute for failing to include certain payments on his annual disclosure statement required by virtue of his status as a federal employee.

Shortly after Caso was sentenced, the U.S. Supreme Court handed down its decision in Skilling v. United States, 130 S. Ct. 2896 (2010) – a decision that substantially limited the permissible reach of Section 1346, the honest-services fraud statute – with the result that Caso was indisputably innocent of the crime for which he was charged and convicted. The government did not dispute this point but nevertheless opposed Caso’s motion to vacate his conviction.

The government argued that Caso had procedurally defaulted his Skilling challenge because he had not directly appealed his conviction on the ground that the conduct to which he pleaded did not constitute an offense, and therefore was barred from raising this issue on a habeas petition. The government also argued that Caso had failed to satisfy the narrow conditions for excusing such a default that the Supreme Court set out in Bousley v. United States, 523 U.S. 614 (1998): (1) “cause” for the default and “actual prejudice” resulting therefrom; or (2) that the defendant is “actually innocent.”

In denying Caso’s petition (which argued only the second of these exceptions), the District Court agreed with the government, and focused on the Bousley Court’s rule that, “[i]n cases where the Government has forgone more serious charges in the course of plea bargaining, petitioner’s showing of actual innocence must also extend to those charges.” (emphasis added) Based on that rule, the District Court held that Caso had to demonstrate his “actual innocence” not only of the crime for which he was charged and convicted (honest-services wire fraud) but also of the separate uncharged offense of making a false statement, a crime that the government argued was at least equally serious as the honest-services fraud charge. Because Caso could not show his actual innocence of the false statement charge in light of the admissions he made as part of his plea agreement, the District Court denied his motion to vacate his conviction and sentence.

The D.C. Circuit reversed this decision based its reading of what constitutes “more serious charges” under Bousley. In doing so, the appeals court rejected the government’s argument that seriousness is to be determined based on the statutory maximum sentence for each crime, and found it far more logical to base the question of seriousness on the way in which each crime is treated in the United States Sentencing Guidelines. Quoting the Supreme Court’s Gall decision, the court noted that Guidelines calculations are still “the starting point and initial benchmark” for every sentencing decision and that “district courts must begin their analysis with the Guidelines and remain cognizant of them throughout the sentencing process.”

The court also noted that the United States Attorneys’ Manual, in directing prosecutors to charge “the most serious offense that is consistent with the nature of the defendant’s conduct,” explains that “[t]he ‘most serious’ offense is generally that which yields the highest range under the sentencing guidelines.”

The court also noted that statutory maxima provide the parties with little useful information in the context of plea negotiations, in part because courts rarely sentence defendants to the statutory maxima. Because the Guidelines treat a violation of the false statements statute less seriously than honest-services fraud, the Court of Appeals held that the forgone false statement charge was not “more serious,” and that Caso need not show his innocence of that charge to support his claimed right to vacating of his conviction for honest services fraud.

The fact that that the D.C. Circuit relied upon the Guidelines as the justification for its ruling is particularly interesting given that recent attacks on the reasonableness of some of the Guidelines (particular the Section 2B1.1 loss tables) have sapped the Guidelines of some of their authority. It is possible that this ruling could change the way in which prosecutors structure their pleas, but circumstances such as this one, in which a defendant is found innocent of convicted charges because of a change in the law, are rare enough that this is not likely. To the extent that courts face similar cases, they will have to address issues left unresolved by the D.C. Circuit, such as whether there must be contemporaneous evidence that prosecutors considered the forgone charge at the time, and whether a crime of “equal seriousness” (and not “more serious”) falls within the Bousley rule.

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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, Casselle Smith, and Griffin Finan. These posts are edited by Jeff Ifrah. We look forward to hearing your thoughts and comments!

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