A Miami Beach man was recently accused of threatening President Trump on Twitter. He sent the threat directly to Secret Service, challenging them to stop his Inauguration Day surprise. They did, and Dominic Puopolo, who used the screen name of Lord Jesus Christ, is now in federal custody.
Sending a threat to the President, to an ex-wife, or to a judge is a federal felony, punishable by as much as 20 years in the federal penitentiary. But what constitutes a threat? What if the person sending a letter or email is merely angry and has no intention of carrying out the threat? What if the author is demonstrably suffering from mental problems? And are there times where the pre-trial process greatly exceeds the length and difficulty of the eventual trial of a threats case?
When it comes to threatening communication prosecutions, federal prosecutors are increasingly finding themselves stuck at the intersection of crazy and criminal. It is a juncture where seemingly serious threats might actually be meaningless rambling but where internet rants might actually reflect a true intent to harm or kill the stated victim. And in today’s bitter, divided, and tumultuous political climate, would anyone bet against threatening communications being sent to 1600 Pennsylvania Avenue? If so, please contact me, as I’ll definitely take the other side of that wager.
“The President must die. When I am released I will kill him.” U.S. v. Rendelman, 641 F.3d 36, 40 (4th Cir. 2011).
[If the President refuses to meet with me, he] “will get the worse Christmas present ever, “will suffer for 30 days,” and “will wish for death but death will not come for him.” U.S. v. Dillon, 738 F.3d, 284, 288 (D.C. Cir. 2013).
“Enough elementary schools in a ten-mile radius to initiate the most heinous school shooting ever imagined…And hell hath no fury like a crazy man in a Kindergarten class.” U.S. v. Elonis, 135 S. Ct. 2001, 2006 (2015).
The Easy Case
Certainly, a decent chunk of these prosecutions stem from imprisoned inmates taking the time to send a “I can’t wait to kill you” letter to their prosecutor (usually spelled “persecutor” in these letters) or to the judge who sentenced them to the “outrageous” sentence, often a term of imprisonment that lies perfectly within the sentencing guidelines. Further, these jail bards conveniently tend to include a return address, handwriting suitable for comparison, their name and even their inmate number, to so to avoid confusion. The sole issue in this type of case tends to be simply whether additional consecutive time will make any sort of difference to our “Cape Fear” penitentiary pal.
The Harder Case
Creatively worded threats, however, occasionally generate serious issues as to sufficiency. For example, in U.S. v. Zavrel, 384 F.3d 130 (3rd Cir. 2004), the defendant and her roommate mailed 17 envelopes containing corn starch to juveniles whom she blamed for her son’s juvenile prosecution for, wait for it, terroristic threats. The corn starch resembled anthrax, a deadly chemical that had in fact been mailed to several potential victims in late 2001. The issue decided by the Third Circuit was whether the simple mailing of corn starch established a “communication” for purposes of proving a threatening mailing under 18 U.S.C. Section 876. It was.
The other common issue, which made its way all the way to the Supreme Court, is whether the sender of the threat has to in fact intend to harm the recipient (subjective standard) or whether the sender must simply intend to communicate threatening words which are reasonably understood by the recipient to constitute a threat (objective standard). In Elonis, (2015) Chief Justice Robert’s opinion adopted the latter standard, resolving a Circuit-split that had existed for some time. Still, the issue of whether the recipient reasonably views the letter or email as a threat remains a regular feature of these cases.
The Hardest Case
The hard case is when the defendant says horrible things that are directed toward some public, possibly political figure, but it’s not clear that he or she constitutes a “true threat” to the recipient. And, the defendant already is serving a substantial prison sentence. These are the class of cases that the federal criminal justice system is least likely to deal with in a satisfactory way. There tends to be a perfect storm of factors coming together to complicate the superficially simple case: “important” victims, such as judges, the President, or prosecutors; a defendant with a serious, pre-existing mental health problem, and threatening language that is both graphic and somewhat implausible.
For example, one defendant claimed that he literally would crucify his intended victim, before signing off with “I am the Alpha and the Omega,” and some defendants openly discuss the jurisprudence of threatening communications while enlightening readers to the fact that a person “who placed a mortar launcher in the cornfield across from his wife’s residence would have a clear line of sight through the sun room…” Elonis, at 2005. And the man who threatened President Trump via Twitter casually mentioned that he is Jesus.
The typical court process for such a case is that the judge orders a mental health evaluation for competency, which results in the prisoner being shuttled to one of several federal facilities which include competency and criminal responsibility assessments. Not surprisingly, some of these defendants are kept months before they decide not to take the prescribed medications, often based upon the belief that the prison medical personnel are just part of a grand conspiracy that continues to manifest itself through each of the defendant’s cases. Not a lightly undertaken process, forcible medication of a defendant requires significant, and often lengthy, litigation as well. To the extent that the defendants fire their attorneys out of frustration, a fairly common development, the case slows to a snail’s pace.
And this becomes the most obvious challenge to the criminal justice system in this realm – the defendant, clearly suffering from some mental deficiency, is incarcerated pre-verdict for longer than his applicable sentencing guidelines and in some instances at, or approaching, the statutory maximum for his crime. Yet, he may in fact pose a danger to the recipient of his threat, so dismissing the charge is not a favored result either. In the current climate where the likelihood of these challenging cases is on the rise, the question is whether anyone or any institution will take the lead in balancing ideas of deterrence and punishment with the practical reality that many of these defendants fall outside the mainstream in terms of mental health as well as case resolution. Nobody wants to travel down the wrong road at this intersection, so bet on reaction, not pro-action.
Federal Criminal (Other), Federal Criminal Procedure, Federal Sentencing, White-collar crime
When you grant access to a $ 4 billion fund and give fund participants relative autonomy in how they use those funds, ne’er-do-wells will sniff their way to the honey pot. Keeping them out can be a challenge. So goes the story of the federally administered Schools and Libraries Program, better known as E-Rate.
Established by the Telecommunications Act of 1996, E-Rate is a federal subsidy that helps schools and libraries–particularly those in disadvantaged areas–pay for telecommunications services (e.g., Internet access). The program runs a $3.9 billion fund today.
Schools and libraries that want to take advantage of E-Rate simply need to follow the program’s bid and approval process. Participants oversee the bidding process and choose their service provider. While participants are required to choose the most cost effective provider, there isn’t much of a check on whether they actually do: they need only self-certify that they chose the most cost effective bid.
E-Rate participant autonomy has been a problem as the program regularly faces allegations of fraud and abuse. These concerns prompted a GAO study and senate hearings in the early 2000s. Former Rep. Jim Greenwood (R-PA) told the New York Times, “You couldn’t invent a way to throw money down the drain that would work any better than this.” After the GAO reported its findings (2004), U.S. Rep. Joe Barton (R-TX), Chairman of the Committee on Energy and Commerce, said, “Unscrupulous vendors … fleeced the program while underserved communities and telephone customers pay the price.” Over the past decade, there have been a number of investigations and enforcement actions, resulting in civil as well as criminal penalties, including jail time for a few program profiteers.
Some noteworthy fleecing includes:
- The Atlanta Public School system misspent nearly $73 million in E-rate dollars giving contracts to vendors without requiring they go to the lowest bidder. The former technical director who ran the APS E-rate program, was sentenced to 37 months in federal prison for accepting nearly $300,000 in bribes from vendors.
- Puerto Rico wasted more than $100 million in program funds and its secretary of education was sentenced to three years in prison and fined $4 million.
- In the Chicago Public School system, some $8.5 million in equipment was stockpiled (better yet, the CPS and E-Rate were essentially paying twice for equipment that was never installed!).
- A company in the San Francisco Unified School District was required to pay $20.7 million in fines and restitution.
More recently, schools and libraries in the Chicago and New York City areas have been investigated for violating the competitive bidding process and taking E-Rate funds without actually providing E-Rate services. Those investigations are still underway, with dramatic raids last March.
Adding to the temptation for ne’er-do-wells are the millions of dollars left on the table in E-Rate funds each year. According to EducationDive, some $245 million in funds went unclaimed in 2014. It is almost hard to blame profiteers for seeking out what they perceive as free money, especially when they have so much control over the process.
There may be a lot of good intentions behind E-Rate. But in its current form and function, E-Rate is but one more example of a poorly administered federal funds that attract those able to game the system.
What a difference two words can make. Just ask the Center for Competitive Politics (CCP) or Americans for Prosperity (AFP), two organizations that filed separate lawsuits against the same defendant, California Attorney General Kamala Harris, over the same issue: whether Harris’s office had the right to access the organizations’ donor information. (The cases are Center for Competitive Politics v. Harris and Americans for Prosperity v. Harris.)
The plaintiffs’ arguments in each case were basically the same: the state’s request to access donor information would violate the first and fourteenth amendments of the U.S. Constitution. But there the similarities stopped: the CCP never got to trial, whereas the AFP did—and won! Was the CCP the victim of a miscarriage of justice? Nah. It all came down to two words: “as applied.”
You know the saying “go big or go home?” Well, unfortunately the CCP did both: it tried to get the court to rule that Harris’s probe of donor information would be unconstitutional for all organizations. The AFP took a different approach: it asked the court to call the probe unconstitutional “as applied” to the AFP alone.
The AFP’s narrower approach enabled the court to provide relief without upsetting Harris’s authority and potentially affecting thousands of other organizations. Courts generally hesitate to invalidate a state’s actions when they can provide individual relief to the plaintiff instead. If the CCP had taken this course, it might have had a flying chance. But now it had the added burden of proving how the state’s actions would adversely affect all organizations subject to the same request.
Meanwhile, the AFP coasted without having to prove any such thing. All it had to show was how the state’s request had already affected the organization and could continue to do so. This was no fun task, though. Several individuals testified that they suffered reprisals, assaults, and even death threats due to their association with the AFP—a strongly conservative organization. Clearly, being publicly linked to the AFP could lead to serious fallout. For her part, Harris tried to argue that the state would keep donor information confidential, but the AFP was able to show how this had failed before, citing over one thousand instances of donor information being improperly disclosed on the AG’s own website!
The AFP showed that the risk of scaring, and therefore discouraging, would-be donors was real. The chilling effect on individuals’ freedom of association would be too steep a price to pay for a nominal benefit to the state.
It was a strong case—unlike the defendant’s. Harris claimed that accessing donor information was in the state’s best interest; reviewing the findings would help uncover potential irregularities tied to fraud, waste, or abuse. Maybe it would—but it doesn’t pass the “exacting scrutiny” test, which requires states to protect their interests by the least restrictive means in situations like this. More importantly, Harris could not produce any evidence or testimony to corroborate her argument that access to donor information was important to state law enforcement. Although several state-employed investigators and attorneys took the stand, none could claim that they needed, or even used, donor information to do their work—and if they did need it, they could generally get it elsewhere. This evidentiary failure undercut Harris’s arguments and called into question the state’s overall scheme.
In the end, it was not a tough decision: with so strong a case by the plaintiff, and so weak one by the state, the court sided plainly with the plaintiff. It could have gone a step further and declared the state’s actions broadly unconstitutional, but instead it judged the state’s actions to be improper as applied to the AFP alone. This was a good idea, because Harris will have a harder time challenging the decision on appeal.
So the AFP trial didn’t set a huge precedent for everyone—but that’s kind of the point. If you’re going to file suit, and there’s a path of least resistance, take it. Those sweeping courtroom victories you see in the movies are rare. In real life, justice takes baby steps.
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.
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.
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!
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.
Despite the old saying “the customer is always right,” the law places limits on customer service in the casino industry. Normandie Casino has found this out the hard way. The operator of the casino has agreed to plead guilty to charges that it violated anti-money laundering provisions of the Bank Secrecy Act, according to a Department of Justice press release.
Normandie Casino is one of the few remaining family-owned casinos in the country and one of the original card clubs in California. In the 1980s, the casino expanded its offerings and now features Seven-card Stud, Texas Hold-em, Five-card Draw, Blackjack, Pai Gow Poker, and Super 9, among other games and entertainment.
However, amid all these offerings, it appears the casino failed to consistently observe the banking regulations. Under the Bank Secrecy Act, casinos are required to take measures to prevent criminals from using the casino for money laundering. In particular, casinos must report transactions involving more than $10,000 by any one gambler in a 24-hour period.
Under the agreement with the Department of Justice, Normandie Club, which operates Normandie Casino, has agreed to plead guilty to two felony offenses. In the agreement, Normandie will admit that the casino used independent gambling “promoters” to locate high-rollers. Once the high-rollers were at the casino, high-level employees would help the high-rollers avoid transaction reporting requirements. Normandie would use the name of the promoter on the Currency Transaction Report, rather than the high-roller, and also structure the payments to make them appear to fall under the federal transaction reporting requirements.
Normandie has agreed to pay a $500,000 fine per charge, for a total of $1 million, plus the casino will forfeit the nearly $1.4 million it received in 2013 when failing to file accurate Currency Transaction Reports.
While the casino industry runs on making its customers happy, the casino must also do so within the bounds of the law. Gamblers may seek anonymity, but casinos cannot guarantee this to high-rollers who are making significant transactions.
Beating their chests and breathing fire to rouse the polity, the Department of Justice recently came out with an announcement as earth shattering as the sun rising. The DOJ proclaimed it has adopted new policies to prioritize the prosecution of individuals for white-collar crime.
Deputy Attorney General, Sally Q. Yates, was quoted in the New York Times: “It’s only fair that the people who are responsible for committing those crimes be held accountable. The public needs to have confidence that there is one system of justice and it applies equally regardless of whether that crime occurs on a street corner or in a boardroom.”
What’s the hoped-for public response? Probably something like this: “And the crowd goes wild. Finally, after years of corporate executives sporting Teflon and sliding past investigators, the government is going to put its fist down and make the wrongly rich execs pay for their nefarious acts of fraud, insider trading, embezzling, racketeering, and tax evasion! “
But things look a little different in the actual world of white-collar criminal investigations and defense. In fact, prosecutors from the Southern District of New York and across the country are zealously prosecuting employees accused of white-collar offenses, and their companies are never shy about providing the backup data regulators request.. What’s more, convicted offenders are often subject to penalties far exceeding their crimes, as U.S. District Judge Jed Rakoff noted in the 2012 sentencing of Rajat Gupta.
The fact of the matter is that the DOJ doesn’t need to announce a new policy to go after individuals for white-collar crimes. The reality on the ground is we deal with employees being investigated and indicted all the time.
So why did Washington make the announcement? It sounds more like a PR stunt than anything else. Perhaps the Administration is gearing up for the next election cycle, which includes some obvious key elections. The DOJ wants to have a strong response to public outcries for accountability at the opportune time of impending regime change. In prior election cycles, administrations have taken some sort of hard stance on crime and punishment, whether it is increasing sentencing guidelines or messaging prosecutors about white-collar plea agreements.
From our viewpoint, it’s a little hard to take the DOJ’s new policy announcement at face value. We don’t see any recent motivation (outside PR). However, it’s also true that the wheels of Justice move slowly and this may just be a reflection from public dissatisfaction after the 2008 economic crisis, which saw corporations, but few Wall Street execs, held accountable. Regardless, we see the DOJ’s announcement much ado about nothing.
In an ironic twist, the U.S. Justice Department unsealed a 47-count indictment this morning charging nine present and former officials of the Federation Internationale de Football Association (better known by its acronym, FIFA) and five sports marketing executives with fraud, racketeering, bribery and money laundering. The guilty pleas of four individuals and two entities relating to these same allegations were also unsealed.
The indictment alleges that officials of FIFA, which controls the media and marketing rights to international soccer tournaments worldwide, received bribes totaling more than $150 million in connection with the award of those rights. The defendants also include sports executives alleged to have paid those bribes, and the indictment also charges that intermediaries were used to launder the proceeds of those bribes. The lead charge in the indictment is an alleged violation of the federal Racketeering Influenced and Corrupt Organizations Act (RICO).
At the request of U.S. authorities, Swiss authorities arrested a number of individuals in Zurich this morning where FIFA executives had gathered for the organization’s annual meeting. The indictment was disclosed along with a Swiss investigation into mismanagement and money laundering associated with the award of the 2018 World Cup to Russia and the 2022 World Cup to Qatar. FIFA has stated that the award of those tournaments will not be reconsidered.
The great irony of the indictment is that this is about football – not “American football” but “real” football (what we Americans call “soccer”) – the most popular sport on the planet. From a sports perspective, Americans are still newcomers to the game, though the women’s national team has enjoyed perennial success, the men’s national team has climbed in world rankings, and individual American players are becoming more commonplace on teams in the English Premier League and elsewhere in Europe. It is surely ironic for the U.S. to police a sport that struggles for attention at home.
But on the other hand, it should be no surprise to see a U.S. indictment that seeks to address corruption in FIFA that has been the stuff of rumors for years. The FIFA indictment is another example of how the United States projects not only military power but legal power overseas, using its robust Justice Department and court system to impose on the world the legal standard enshrined in its criminal laws. Given that the case is being prosecuted in the Eastern District of New York – where now-Attorney General Loretta Lynch previously served as the United States Attorney – the case may also signal something about Attorney General Lynch’s approach to such multinational cases.
The Department of Justice presumably justifies this extraterritorial exercise because the defendants include several Americans and because FIFA includes component associations located in the United States; the alleged offenses therefore impact Americans as well as those overseas. To the extent this is true, that seems to be appropriate justification. But another question is how that exercise of power will be perceived outside of the United States. Is the United States helping to solve a problem that has dogged international soccer for years? Or is it meddling in matters that are largely outside of its borders and that should not concern it? As news of this morning’s arrests and the unsealing of the indictment spreads, the world’s reaction may answer those questions.
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.