Crime in the Suites: An Analyis of Current Issues in White Collar Defense
Archive for the ‘Federal Criminal Procedure’ Category
Jun 08
2016

This Man Is Dodging Wall St.

Rather than confront accusations of baseless zeal and prosecutorial overreach, New York federal prosecutor Preet Bharara would rather spend his energy dodging accountability.

In 2010, Bharara launched a crusade against Wall Street, prosecuting several hedge funds he suspected of insider trading. Highly publicized raids followed. In the wake of the financial meltdown, Bharara was hailed as a hero. A Time cover story proclaimed, “This Man Is Busting Wall St.”

But many of those prosecutions went nowhere. A federal appellate court rejected the legal theory that the prosecutions were built on, and many cases were simply dropped. The SEC even agreed to return some of the money it had seized from several hedge funds.

This was cold comfort to people like David Ganek, the manager of Level Global—one of several hedge funds shut down by Bharara’s inquisition. Even while the case was pending, Bharara all but acknowledged that he meant to shutter Level Global, without regard for the presumption of innocence.

Sadly, even when defendants are harmed by prosecutorial overreach, broad immunity doctrines make it nearly impossible for the wrongly prosecuted to get justice.

But Ganek’s case involved more than just excessive zeal: the warrant used to raid Level Global depended on a false statement. A former employee of Level Global had told federal agents that Ganek did not know he was using information from corporate insiders, but the warrant application falsely said that Ganek did know. That gave Ganek a rare opportunity: federal agents can be shielded for overreaching, but there is no protection for lying.

Ganek sued officials from both the U.S. Attorney’s Office and the FBI (Ganek v. Leibowitz), claiming that the use of the false statement to prosecute him had violated his constitutional right against unreasonable searches and his due process rights. In March, a federal judge ruled that Ganek’s claim could go forward, rejecting claims of governmental immunity.

In most civil cases, overcoming this initial step is a big deal. It would allow Ganek to conduct discovery—that is, to investigate the facts behind his case by methods that can include obtaining documents from prosecutors and the FBI and depositions of federal officials under oath. This process can be extremely onerous—the cost of document production and the risks of laying bare a defendant’s inner workings to a hostile adversary have forced many defendants into settling dubious lawsuits. In addition to uncovering misrepresentations tied to his own case, Ganek also could investigate the conduct of federal officials more generally and, perhaps, even the supervisory practices of prosecutors and the FBI.

In a typical case, there would be no way to avoid this except by an expensive settlement—likely including a premium for avoiding discovery. But this is no typical case, and Preet Bharara is no typical litigant. Although most of us in Bharara’s position would have to wait until the end of a federal case before filing a single, final appeal, Bharara has relied on a narrow legal doctrine that allows him to appeal the court’s decision immediately, based on his claims of immunity. As a result, the court has delayed discovery and other proceedings indefinitely. Instead of accepting the need for transparency and letting Ganek be made whole for his wrongful prosecution, Bharara’s office will get a second bite at the apple by rearguing the issue of immunity in front of the U.S. Court of Appeals for the Second Circuit.

It is hard to imagine that Bharara will prevail on appeal—immunity does not cover outright lies by federal agents. Yet by belaboring a weak immunity argument, Bharara can postpone having to answer for the actions of his office for months, if not longer, while creating additional costs and burdens for Ganek.

This case goes beyond Ganek’s personal quest for justice. Civil suits like this are important for holding public officials accountable and can provide a window into how they operate. Bharara’s resistance sends a discomforting message: however merciless he may be towards his suspects, he should bear no consequences for his actions.

We’ll see if Ganek can prove him wrong.

Apr 28
2016

Feds Open The Gates and Seize the Domain Names

 

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Does the federal government have the right to seize a domain name without notice? With growing frequency, the feds have seized the domain names of thousands of websites for alleged criminal wrongdoing. The latest example is the seizure earlier this week of 67 website domain names for the alleged illegal sale and distribution of counterfeit and prescription drugs.

There still is little information publicly available on the recent seizure. The Justice Department issued a short new release with a statement from U.S. Attorney Bill Nettles, in which he noted,

It’s important for consumers to understand the significant risks involved in purchasing pharmaceutical drugs from these websites.  The generic versions of these prescription drugs are not approved by the Food and Drug Administration and cannot be distributed in the United States legally.  To be safe and effective, prescription drugs must be taken under the care and supervision of appropriate health care professionals; not purchased off the internet from unknown and unregulated foreign sources.

Whether or not the sites facilitated the alleged criminal behavior remains to be decided by a judicial proceeding (if the case ever gets to that point). Federal agents can obtain a seizure order based merely upon probable cause set forth in an affidavit. That’s a relatively low bar considering the consequences of domain name seizures.

The only recourse for the sites at this point is to file a petition with a federal court to contest the forfeiture. Contesting a forfeiture is an uphill—and oftentimes protracted—battle. In the meantime the businesses operating through those domain names are effectively shut down, if the seized websites were their main channel of business. Once the feds carry out a domain name seizure, the “offending” sites will show a seizure banner notifying any visitors that the domain name has been seized by federal authorities for violations of federal laws. No business can be done on the site and the chances of visitors returning are slim.

So how is it okay for a domain name to be seized based on the allegation of a crime, before proper notice and hearing? The feds are taking advantage of a process known as an in rem proceeding, whereby they can file suit against the offending property itself for its alleged role in facilitating criminal conduct. Typically in rem proceedings are filed against tangible assets like a car involved in a drug deal or a bank account used to funnel illegal funds. But in recent years, in rem proceedings have been used by both state and federal agencies against domain names in order to crack down on alleged criminal behavior carried out through the websites. Examples include (1) the Justice Department’s “In Our Sites” operation in which it seized the domain names of thousands of sites accused of violating U.S. copyright laws and (2) the state of Kentucky’s attempt to seize 141 domain names of online poker sites.

Despite the increasing use of pretrial domain name seizures, the legality is still hotly debated by civil liberties groups, free market advocates, and international organizations. These groups raise constitutional concerns, such as due process and restraint on free speech, as well as jurisdictional concerns, such as federal or state authority to reach domain names owned by foreign individuals or entities. The biggest issue is that an in rem proceeding is inappropriate against domain names because a domain name is not property – it is a contractual right that, as such, should not be subject to seizure. We will discuss these concerns in more detail in a coming post once we learn more about the Justice Department’s recent actions against the 67 pharmaceutical domain names.

Apr 15
2016

Good News: The Feds Can’t Freeze Your Assets to Stop You from Hiring a Lawyer

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Republished with permission from FEE.org, originally published April 12, 2016

There are limits to what the government can take from you. The Supreme Court recently ruled that the Constitution forbids the government from freezing a defendant’s “untainted” assets in advance of prosecution. The ruling is a significant victory for those caught in the government’s crosshairs. It is also a significant victory for a traditional concept of justice, which prefers to err on the side of the accused over government agents.

In its decision in Luis v. U.S., the high court agreed with a criminal defendant who argued that her Sixth Amendment right to counsel was violated when the government froze assets unrelated to allegedly criminal behavior. Without access to those funds, the defendant would be unable to retain the attorney of her choice.

The Court considered the government’s interest in preserving funds to pay restitution and criminal penalties, but concluded that a defendant’s right to counsel is “fundamental,” outweighing any interest the government mightultimately have: “[The government’s] interests are important, but — compared to the right to counsel — they seem to lie somewhat further from the heart of a fair, effective criminal justice system.”

In a 5-3 ruling, the Court based its decision on this balancing test, as well as on traditional understandings of common law, which distinguish between assets directly related to alleged criminal behavior and assets considered “innocent” or untainted. The Court found no legal precedent to authorize “unfettered, pretrial forfeiture of the defendant’s own ‘innocent’ property.” Moreover, the Court highlighted concerns that the government’s position has no obvious stopping point and could erode defendants’ right to counsel considerably.

Encroaching on the Sixth Amendment is but one of the several concerns posed by the government’s growing love of forfeiture — it has become too handy of a tool in prosecutors’ pockets — but it is perhaps the gravest concern, as it threatens an individual’s ability to effectively defend him or herself. It puts defendants at a significant disadvantage: they want to obtain the best representation they can afford in order to defend themselves, but they may not be able to afford any if the government freezes all their assets in the hope of confiscating them after a conviction. They may be left begging friends and family to help fund their defense or relying upon overburdened public defenders to represent them. The government’s tactic is the courtroom equivalent of inviting an opponent to a boxing match and then tying one hand behind his back.

The criminal defense bar has decried government’s overuse of asset forfeiture for years. While the government has argued that pre-trial asset seizure is justified in order to preserve its ability to recover funds and penalties, the process has been used to try to deter behavior by making an example of people. Moreover, pre-trial asset seizure looks a lot like presumed guilt, as opposed to presumed innocence. The occasional constitutionally minded congressional representative has tried to curb forfeiture overuse through legislative initiatives, but these bills keep getting left to die in committees and subcommittees. It is nice to see some effective limits placed on the practice by the Court.

Justice Thomas, in a concurring opinion, took issue with Justice Breyer’s opinion “balancing” the state’s interest against individuals’ constitutional rights. He argued the Sixth Amendment prevents the government from seizing untainted assets, period; there is no need to consider a balancing approach. But at least the plurality of the Court recognized that, when balancing the government’s interests in the outcome of a case against the individual’s right to adequately defend him or herself, you should err on the side of the individual.

If that means the state sometimes loses out on full satisfaction of a monetary judgment, that is preferable to defendants being prevented from mounting an effective defense. More wrongful convictions would result from that policy, and the seizure of a few more dollars from the truly guilty would be no consolation. If there is any question whether historically we have favored individual rights over the state’s interests in criminal prosecutions, look only to the Bill of Rights. Justice demands that if anyone’s hand is to be tied in the courtroom, it should be the hand of the government.

Mar 07
2016

Even Bad Guys Have Rights

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This article first appeared February 29, 2016, on FEE.org – you can access this version here.

Remember Martin Shkreli, the “pharma bro” notorious for raising the price of his company’s life-saving drug by some 5,000 percent? Did you know he was recently arrested for securities fraud (completely unrelated to the drug hike)? It didn’t take long for the Justice Department to go after the universally unpopular rapscallion.

Big government gets a bad rap for being inefficient, but it can cut to the chase rather swiftly when it wants to. In order to stop, or at least dramatically curb, behavior that goes against law or policy — or perhaps just opinion — government enforcement agents know how to employ a show of force and to make an example of someone they deem a wrongdoer. The punishment is public and can be severe.

Setting an Example

A recent show of force can be seen in federal actions against the dietary supplement industry. The industry has exploded in recent years, thanks in large part to the public’s growing love for health and homeopathy. The popularity has, predictably, attracted moneymakers of both the scrupulous and unscrupulous kind.

The government wants to rein in the industry, so to set an example it has come down hard on one company. USPlabs was one of more than 100 makers and marketers of dietary supplements against whom the Justice Department announced it was pursuing civil and criminal cases. But the company had the unfortunate luck to become the government’s example of what it can do to wrongdoers. Not only did the DOJ charge the company; it also indicted several of its executives and froze their assets — from investment accounts to homes to automobiles.

Do the Ends Justify the Meanness?

The government’s heavy hand on USPlabs is the kind of crackdown you expect against organized crime or large drug rings. What were the criminal defendants at USPlabs alleged to have done? Not exactly Sopranos-level stuff: importing ingredients with false certificates of analysis and false labeling, misrepresenting the source and nature of product ingredients, selling products without determining safety, and continuing to sell products after they told agents they would stop.

If the allegations are true, the defendants’ actions were wrong. But public arrests and asset seizure are extreme. How often do people accused of false labeling get perp walked? The DOJ’s tactics look like shock-and-awe theater for the benefit of others.

If there is any doubt whether the government wanted to use its hard-line approach against USPlabs as an example for other companies, look no further than this statement by FDA Deputy Commissioner Howard Sklamberg: “The criminal charges against USPlabs should serve as notice to industry that if products are a threat to public health, the FDA will exercise its full authority under the law to bring justice.”

In other words, makers and marketers of dietary supplements: beware!

So What?

You may think the Justice Department performed a public service by coming down so hard on Shkreli and USPlabs. Why should we care if the government crushes some scalawags and discourages others in the process?

What if the government’s show of force comes at the cost of a defendant’s due process rights? Shkreli has said that the feds targeted him because of the drug price hike, looking for anything to stop him. Now he’s been fired and his company has filed for bankruptcy. That’s a pretty high price to pay for being obnoxious.

While deterrence may be an acceptable basis for punishment, it doesn’t justify punishment that exceeds the crime. Arresting executives and seizing their personal bank accounts, homes, and cars in an instance like this is excessive. More commonly in cases like USPlabs, prosecutors will settle with the company, levy a fine against it, require it to institute controls to avoid further wrongdoing, and perhaps require it to be monitored for a while to ensure controls are being observed.

Going after the individual executives as if they were Mafia kingpins goes beyond the pale. Freezing or seizing assets is something that prosecutors more commonly do when those assets are being used to carry out criminal behavior, or when there is a great risk those assets will be disposed of before judicial proceedings. Chances are slim that the executives in the USPlabs matter were planning on liquidating their family homes or cars.

Yet Another Slippery Slope

For those who think the government is on the right side in its show of force, ask yourselves whether the government isn’t pursuing its initiatives (even reasonable initiatives like reining in fraud) a bit brutishly. Making an example of an alleged wrongdoer even before the wrongdoer’s day in court harkens back to techniques used by conquerors in days of old who put heads on pikes to show the subjugated just who was in charge.

And what if the government decides to crack down on behavior not so clearly reprehensible? Say the government decides to put speeding in check by jailing a few folks going modestly over the limit. How many of us would feel safer?

Even when we dislike the targets of prosecutorial zeal, supporting justice is in our self-interest. When the government sets aside due process and proportionality to set an example of other would-be wrongdoers, they are sacrificing justice for the sake of regulatory expediency.

 

Feb 26
2016

Police Make iPhone Public Enemy No. 1

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FBI Director James Comey took a rare break from the posturing typical of investigators and prosecutors in the current showdown between Apple and the FBI.  While prosecutors argue that Apple’s privacy concerns are a smokescreen to avoid “assist[ing] the effort to fully investigate a deadly terrorist attack,” Comey posted a statement over the weekend in which he took the position that the tension between security and privacy “should not be resolved by corporations that sell stuff for a living.  It also should not be resolved by the FBI, which investigates for a living.  It should be resolved by the American people deciding how we want to govern ourselves in a world we have never seen before.”

Comey’s statement highlights a crucial problem with the development of privacy law: it often is developed in the context of important criminal cases.  This comes at a real cost.  We all know that Syed Farook committed a horrific crime, and any rights he once had against government searches are now forfeit.  But though Apple may have chosen to serve as a limited proxy for its consumers in the San Bernardino case, often the interests of private citizens are wholly absent from the courtroom (or, often, judge’s chambers) when issues of fundamental privacy are debated.

This leads to a serious imbalance: Apple is talking about the diffuse privacy rights of its consumers and the risks of potential incursions by more restrictive, less democratic governments such as China.  On the other hand, Manhattan District Attorney Cyrus Vance can point to 175 Apple devices that he cannot physically access even though those devices may contain evidence helpful to the government.

New York Police Commissioner Bill Bratton and one of his deputies put an even finer point on it in an Op-Ed in The New York Times, citing a specific case of a murder victim in Louisiana (more than one thousand miles outside of Mr. Bratton’s jurisdiction) whose murder is unsolved because officers cannot unlock her iPhone, which is believed to contain her killer’s identity. “How is not solving a murder, or not finding the message that might stop the next terrorist attack, protecting anyone?” asks Bratton.

But in assuming that private citizens have no greater fear than whether the police can investigate and prevent crimes, Bratton begs the question.  In reality, citizens may see law enforcement as a threat of itself.  Learning that the NSA was engaging in comprehensive warrantless surveillance likely has given many law-abiding Americans a greater incentive to protect their data from being accessed by the government.  Indeed, in light of the NYPD’s record over the last few years—including a finding by a federal judge that they were systematically violating the rights of black New Yorkers and a lawsuit over religion-based spying on Muslims—it is not hard to see why citizens might want protection against Bratton’s police force.

But even if the police were the angels they purport to be, opening a door for a white hat can easily allow access to a black one.  Less than a year ago, hackers used a “brute force” approach to exploit a flaw in iCloud’s security, and dozens of celebrities had their private photos shared with the world.  These sex crimes are all but forgotten in the context of the San Bernardino shootings, even though the security weakness the FBI wants installed in Farook’s iPhone is markedly similar to that exploited with respect to iCloud.

Nor do those who wish for privacy need to invoke hackers or criminals.  A private, intimate moment with a spouse or loved one; a half-finished poem, story, or work of art; or even a professional relationship with a doctor or mental health professional cannot exist unless they can remain private.  Once these interactions took place in spoken, unrecorded conversations or on easily discarded paper; now many of our daily activities are carried out on our mobile devices.  Even if one has nothing to hide, many citizens might balk at the prospect of having to preserve their private conversations in a format readily accessible by the police.

But if Mr. Comey has shown unusual insight, Mr. Bratton’s one-sided, myopic question illustrates the importance of Apple’s position and the inability of law enforcement officials to be objective about the interests at stake.  Police and prosecutors are not always your friends or your defenders.  Their goals are—and always will be—investigating and solving crimes and convicting suspected criminals.  The less an officer knows, the harder it will be to investigate a case.  As a result, privacy rights—even when asserted by innocent, law-abiding citizens—make their job more difficult, and many officers see those rights as simply standing in their way.

This is hardly news.  Nearly sixty years ago the Supreme Court observed that officers, “engaged in the often competitive enterprise of ferreting out crime,” are simply not capable of being neutral in criminal investigations.  For precisely that reason, the Fourth Amendment requires them to seek approval from a “neutral and detached magistrate” before a search warrant may issue.

That is why Mr. Comey’s acknowledgement that the FBI is not a disinterested party is so refreshing.  Pro-law-enforcement voices have been clamoring to require Apple to compromise the security it built into the iPhone, invoking their role as public servants to buttress their credibility.  But when it comes to privacy, the police do not—and cannot—represent the public interest.  As Comey acknowledged, they are “investigators,” and privacy rights will always stand as an obstacle to investigation.

Feb 19
2016

FBI Recruits Apple to Help Unlock Your iPhone

Alushta, Russia - October 27, 2015: Woman with headphones holding in the hand iPhone6S Rose Gold. iPhone 6S Rose Gold was created and developed by the Apple inc.

It is a well-known maxim that “bad facts make bad law.”  And as anybody even casually browsing social media this week likely has seen, the incredibly tragic facts surrounding the San Bernadino attacks last December have led to a ruling that jeopardizes the privacy rights of all law-abiding Americans.

First, it is important to clearly understand the ruling.  After the horrific attack in San Bernadino on December 2, 2015, the FBI seized and searched many possessions of shooters Syed Rizwan Farook and Tashfeen Malik in their investigation of the attack.  One item seized was Farook’s Apple iPhone5C.  The iPhone itself was locked and passcode-protected, but the FBI was able to obtain backups from Farook’s iCloud account.  These backups stopped nearly six weeks before the shootings, suggesting that Farook had disabled the automatic feature and that his phone may contain additional information helpful to the investigation.

Under past versions of iOS, the iPhone’s operating system, Apple had been able to pull information off of a locked phone in similar situations.  However, Farook’s iPhone—like all newer models—contains security features that make that impossible.  First, the data on the phone is encrypted with a complex key that is hardwired into the device itself.  This prevents the data from being transferred to another computer (a common step in computer forensics known as “imaging”) in a usable format.  Second, the iPhone itself will not run any software that does not contain a digital “signature” from Apple.  This prevents the FBI from loading its own forensic software onto Farook’s iPhone.  And third, to operate the iPhone requires a numeric passcode; each incorrect passcode will lock out a user for an increasing length of time, and the tenth consecutive incorrect passcode entry will delete all data on the phone irretrievably.  This prevents the FBI from trying to unlock the iPhone without a real risk of losing all of its contents.

As Apple CEO Tim Cook has explained, this system was created deliberately to ensure the security of its users’ personal data against all threats.  Indeed, even Apple itself cannot access its customers’ encrypted data.  This creates a unique problem for the FBI.  It is well-settled that, pursuant to a valid search warrant, a court can order a third party to assist law enforcement agents with a search by providing physical access to equipment, unlocking a door, providing camera footage, or even giving technical assistance with unlocking or accessing software or devices.  And, as the government has acknowledged, Apple has “routinely” provided such assistance when it has had the ability to access the data on an iPhone.

But while courts have required third parties to unlock doors, they have never required them to reverse-engineer a key.  That is what sets this case apart: to assist the government, Apple would have to create something that not only does not exist, but that it deliberately declined to create in the first instance.

On February 16, Assistant U.S. Attorneys in Los Angeles filed an ex parte motion (that is, without providing Apple with notice or a chance to respond) in federal court seeking to require Apple to create a new piece of software that would (1) disable the auto-erase feature triggered by too many failed passcode attempts and (2) eliminate the delays between failed passcode attempts.  In theory, this software is to work only on Farook’s iPhone and no other.  This would allow the FBI to use a computer to simply try all of the possible passcodes in rapid succession in a “brute force” attack on the phone.  That same day, Magistrate Judge Sheri Pym signed what appears to be an unmodified version of the order proposed by the government, ordering Apple to comply or to respond within five business days.

Though Apple has not filed a formal response, CEO Tim Cook already has made waves by publicly stating that Apple will oppose the order.  In a clear and well-written open letter, Cook explains that Apple made the deliberate choice not to build a backdoor into the iPhone because to do so would fatally undermine the encryption measures built in.  He explains that the notion that Apple could create specialized software for Farook’s iPhone only is a myth, and that “[o]nce created, this technique could be used over and over again, on any number of devices.  In the physical world, it would be the equivalent of a master key . . . .”

This has re-ignited the long-standing debate over the proper balance between individual privacy and security (and the debate over whether the two principles truly are opposed to one another).  This is all to the good, but misses a key point: Judge Pym’s order, if it stands, has not only short-circuited this debate, it ignores the resolution that Congress already reached on the issue.

Indeed, a 1994 law known as the Communications Assistance for Law Enforcement Act (“CALEA”) appears to prohibit exactly what the government requested here.  Though CALEA preserved the ability of law enforcement to execute wiretaps after changing technology made that more complicated than physically “tapping” a telephone line, it expressly does not require that information service providers or equipment manufacturers do anything to open their consumers to government searches.  But instead of addressing whether that purpose-built law permits the type of onerous and far-reaching order that was granted here, both the government and the court relied only on the All Writs Act—the two-century-old catch-all statute that judges rely on when ordering parties to unlock doors or turn over security footage.

Though judges frequently must weigh in and issue binding decisions on fiercely contested matters of great importance, they rarely do so with so little explanation, or after such short consideration of the matter.  Indeed, when the government sought an identical order this past October in federal court in Brooklyn, N.Y., Magistrate Judge James Orenstein asked for briefs from Apple, the government, and a group of privacy rights organizations and, four months later, has yet to issue an opinion.  Yet Judge Pym granted a similar order, without any stated justification, the same day that it was sought.

An order that is so far-reaching, so under-explained, and so clearly legally incorrect is deeply concerning.  And yet, but for Apple’s choice to publicize its opposition, this unjustified erosion of our privacy could have happened under the radar and without any way to un-ring the bell.  Fortunately, we appear to have avoided that outcome, and we can hope that Apple’s briefing will give the court the additional legal authority—and the additional time—that it will need to revisit its ruling.

Aug 19
2015

Government Dismisses Its Case After Warrantless Airport Laptop Search

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The government has voluntarily dismissed its case against Jae Shik Kim, the South Korean businessman for whom Ifrah Law obtained a motion to suppress in federal court.  In 2012, Mr. Kim was stopped by federal agents as he tried to board a plane to South Korea from LAX.  The government seized his laptop and copied his hard drive based on suspicion that he had engaged in illegal activity years earlier.  The government indicted Mr. Kim based on evidence it found on the laptop relating to past transactions.

Everyone who has been through a security checkpoint at an airport knows that the government has wide latitude to conduct certain warrantless searches at the border without any suspicion of illegal conduct.  However, the U.S. District Court for the District of Columbia concurred with Ifrah Law’s argument that the government’s latitude is wide, but it is not unbounded.   In order to conduct a non-routine search of electronics at the border–including copying a hard drive for the government to conduct a later search unbounded in time and scope—the government must have reasonable suspicion that the owner is presently engaged or will imminently engage in illegal activity.  An ongoing investigation of suspected past criminal activity is not a sufficient basis on which to perform such a search.  To use a border search for that purpose is an illegal attempt to circumvent the warrant requirements imposed by the Fourth Amendment to obtain evidence in an ongoing investigation, and any evidence obtained in that manner cannot be used to convict the defendant.

The government understood that when the court suppressed the evidence obtained from Mr. Kim’s laptop, it did not have a case on which it could obtain a conviction.  Shortly after the court granted Ifrah Law’s motion to suppress, the government filed an interlocutory appeal of the court’s order.  The government hoped that the Court of Appeals would reverse the order and allow the government to present evidence obtained from the laptop in order to secure a conviction.

This week, the government reversed course.  The government not only dropped its appeal on the suppression issue, but moved to dismiss the indictment entirely, resulting in an event all too rare in the criminal justice system—a dismissal of all charges against the defendant.   The government’s action implicitly acknowledges restrictions on its authority to conduct non-routine searches at the border when there is no suspicion of present criminal activity.  It is a big win not only for our client, but for the ongoing effort to preserve our right to 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.

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.

 

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.

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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, health care, 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 and George Calhoun, counsels Jeff Hamlin and Drew Barnholtz, and associates Rachel Hirsch, Nicole Kardell, Steven Eichorn, David Yellin, and Jessica Feil. These posts are edited by Jeff Ifrah. We look forward to hearing your thoughts and comments!

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