Crime in the Suites: An Analyis of Current Issues in White Collar Defense
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May 22
2014

The Taxman Cometh for US Holders of Foreign Bank Accounts

U.S. citizens and residents with unreported assets abroad may be feeling a steady increase of pressure these days. The July 1, 2014 effective date of the Foreign Assets Tax Compliance Act (FATCA) is looming. The number of countries that have agreed to enforce FATCA is growing (almost daily). That means the banks in those countries will be required to report U.S. citizens’ assets to the IRS. It seems inevitable that if you don’t report your income and assets, your bank will. This point has been reinforced through bank-issued letters, from foreign banks to their U.S. clients, notifying those clients of the impending reporting requirements. If you want to stick your head in the sand or hide in a dark corner, we feel your pain, but we highly recommend against denial. The consequences of doing nothing could be severe – from staggering monetary penalties to jail time.

Taxpayers who are behind in reporting foreign assets and paying taxes on foreign-based income have a few options before the gloom and doom of the taxman cometh. Since the passage of FATCA in 2010, the IRS has offered citizens three rounds of its Offshore Voluntary Disclosure Program (OVDP), whereby taxpayers can reconcile their status with the IRS through reporting assets, paying past due taxes, interest and penalties. The penalties can be fairly steep – 27.5% on unreported assets alone – but they are preferable to an enforcement action by the feds. For taxpayers considered low risk, i.e. those that owe less than $1500 a year, the IRS offers a Streamlined OVDP that is penalty-free and involves a less onerous reporting process.

Below we provide some additional detail on who should consider making a date with the IRS, what steps to take, and possible consequences of doing nothing.

Who Is Covered:

U.S. citizens and residents with foreign accounts who have failed to file U.S. tax returns, failed to report income from foreign accounts, failed to file a report on foreign assets (FBAR), or failed to file other forms on foreign-based assets (e.g., Form 3520 on foreign trusts, Form 5471 on controlled foreign corporations, Form 926 on transfers of property to a foreign corporation, or Form 8865 on interest in foreign partnerships), need to address what and how to report to the IRS.

Foreign assets that must be reported include (1) accounts containing $10,000 or more of assets at some point during the tax year in which you have a financial interest or over which you have signature authority (FBAR); (2) your interest in assets worth at least $50,000 on the last day of the tax year or $75,000 at any time during the tax year (Form 8938). The problem for many is that what constitutes a foreign asset is somewhat broad and includes not only foreign accounts, stock, and mutual funds but also foreign partnership interests, debt issued by a foreign person, interests in foreign trusts or estates, and certain derivative instruments with a foreign counterparty.

Options Available:

If you have unreported foreign-based income or assets that pass the threshold amount outlined above, the time is right to consider the disclosure options currently offered by the IRS. The IRS’s website provides guidance on several options available to taxpayers, based upon the level of failed disclosure.

à Delinquent FBAR Filing: Those who reported all taxable income, but were not aware of the need to file an FBAR on foreign assets can file an FBAR with an explanatory statement. There will be no penalty for those who fall under this category.

à Delinquent CFC/Foreign Trust Filing: Those who reported and paid tax on all taxable income associated with a controlled foreign corporation or foreign trust, but failed to file Forms 5471 or 3520, may file these forms with an explanatory statement. (The IRS notes that Form 5471 should be submitted with an amended return.) Provided there were no underreported taxes, the IRS will not impose any penalties.

à Streamlined OVDP: Non-resident taxpayers (i.e. only citizens living abroad) owing less than $1,500 per year in taxes may file delinquent returns and related information returns for the last three years, and delinquent FBARs for the past six years, including tax and interest due.  These taxpayers will also need to file additional information for the IRS to ascertain compliance risk. The IRS will review these submissions to confirm they are low-risk (i.e. that amount owed is less than $1,500 per year). If confirmed, the IRS generally will not impose any penalties beyond interest owed. If the IRS determines you are a higher risk, then you may be subjected to a more intensive review, including additional tax years, and may be required to file according to the standard OVDP (below).

à Standard OVDP: Taxpayers who have failed to report foreign accounts and income, especially those who seek to avoid criminal prosecution, may participate in the OVDP, which is structured like a civil settlement. Those taxpayers will pay an offshore penalty (instead of other penalties at the IRS’s disposal). This program involves several steps: (1) the taxpayer must submit a request to the IRS to be accepted into the program; (2) once accepted, the taxpayer must submit many items, including amended tax returns with schedules outlining unreported income for past eight years, FBARS, and information returns for the previous eight years; (3) the taxpayer must submit full payment of all tax and interest due along with penalties (including a penalty of 27.5 percent of the highest aggregate balance of foreign assets held over the last eight years, and a penalty of up to 40 percent of taxes owed on unreported income from foreign accounts). Note that if you disagree with the penalties, you may opt out of the settlement and request a mitigation of penalties (in limited circumstances, some taxpayers will qualify for a five percent or 12.5 percent penalty). You may also choose to opt out if statutory penalties would be lower under relevant laws (which should be reviewed on a case-by-case basis).  Taxpayers who opt out are still protected from criminal prosecution.

à Quiet Disclosures: A final option, which is neither offered nor suggested by the IRS, but which some taxpayers attempt, is to simply start disclosing foreign assets and follow normal reporting requirements without addressing delinquent reports from prior years. Some taxpayers may choose to file amended returns under normal reporting procedures. These quiet disclosures are generally not recommended, as they do not safeguard the taxpayer from an IRS enforcement action, including criminal prosecution. They may at least trigger an IRS audit, which can come with stiffer penalties than those incorporated in the voluntary disclosure programs.

A Couple of Caveats:

If the IRS has already contacted you requesting information or already initiated an investigation, it is too late to follow any of the programs outlined above. As the name suggests, the programs are strictly “voluntary.” Also, the IRS may choose to close down its voluntary disclosure programs at any point. Many out there are warning taxpayers to file with the IRS right away before it is too late.

Although, a minor point of observation: while it is possible that the IRS will determine that it will get all the information it needs through FACTA bank disclosures, it is also likely that the agency will be happy to let the taxpayers do the work for them: to volunteer information and pay fines without the need to expend resources on investigators and prosecution. However, the more delinquent you are in taxes owed, the more likely the IRS will seek stiffer action and penalties. Therefore, if you are significantly behind on taxes owed, be aware that you are a more likely candidate for criminal prosecution. See, for instance, the growing list of former UBS clients who have faced incarceration and hefty fines for tax avoidance.

Why Make A Disclosure?

Some taxpayers may have a high risk tolerance and choose to take a chance that their foreign accounts will not be reported. Or they may think the IRS will be sufficiently inundated with new information from FATCA-compliant countries that it will take years for the IRS to identify them… and by that time perhaps FATCA will be repealed. While a number of activists and politicians have been working hard to repeal FATCA, the reality is, it is probably here to stay. Because dozens of international agreements have been signed, and once the legislation takes effect, it will be very, very difficult to unweave this work and convince the government to relinquish its new power. Taxpayers should presume FATCA is here to stay and reconcile their finances with Uncle Sam.

As of May 2014, more than 50 countries have agreed to comply with and enforce FATCA. (Some countries are enforcing the American law as a part of information share agreements with the U.S. whereby the U.S. will also report information on those countries’ citizens. Other countries are enforcing the American law to avoid the harsh withholding penalties that non-compliant countries would otherwise face.) This means that the financial institutions in these countries will be required to report income and asset information to the IRS. Finding a place to park your money outside of Uncle Sam’s purview is nearing impossible.

And the consequences of the IRS initiating an audit or enforcement proceeding against you are invariably going to be more severe than the voluntary disclosure programs (otherwise, what would be the incentive to disclose?). For those severely behind in IRS reporting, the protection from criminal prosecution should be one of the biggest carrots of the voluntary disclosure programs, especially as the IRS steps up its initiatives to help offset a perilous budget deficit. In the last five years, federal prosecutors have brought more than 100 criminal cases against taxpayers with unreported income overseas. FATCA enforcement will likely increase this number significantly. Regardless of political, philosophical, or moral objections you may have to accept Uncle Sam’s reach abroad, unless you want to risk your estate and possible jail time, the time is right to make an appointment with counsel to address your situation with the IRS.

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

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May 13
2014

SEC Takes Proactive Approach to Cybersecurity

Last month, the Securities and Exchange Commission’s (“SEC”) Office of Compliance Inspections and Examinations (“OCIE”) formally announced its cybersecurity initiative in a Risk Alert. The initiative followed up on OCIE’s announced prioritization of cybersecurity preparedness as part of its 2014 Examination Priorities. The initiative is also timely because the general public is becoming more conscious of cybersecurity risks and its dangers as they learn of major breaches at Target Corp., Neiman Marcus, Michaels Stores Inc., and other companies. The security of personal information is even more important at financial services companies, which often have a large amount of sensitive personal information about their customers.

The OCIE’s approach is refreshingly proactive: “OCIE’s cybersecurity initiative is designed to assess cybersecurity preparedness in the securities industry and to obtain information about the industry’s recent experiences with certain types of cyber threats.” Further, the areas of cybersecurity assessment are quite broad and they cover “the entity’s cybersecurity governance, identification and assessment of cybersecurity risks, protection of networks and information, risks associated with remote customer access and funds transfer requests, risks associated with vendors and other third parties, detection of unauthorized activity, and experiences with certain cybersecurity threats.”

Importantly, the OCIE examination is detailed and specific about ensuring the adequacy and efficacy of cybersecurity measures. For example, the list of questions regarding identification of cybersecurity risks requires exact dates and times and is prefaced with “please provide the month and year in which the noted action was last taken; the frequency with which such practices are conducted; the group with responsibility for conducting the practice…”.

Further, the OCIE examination questions require naming the person(s) conducting the cybersecurity measures and when those measures were last checked or implemented. For example, the questions on identification of risks/cybersecurity governance include:

  • Who (business group/title) conducts periodic risk assessments to identify cybersecurity threats, vulnerabilities, and potential business consequences, and in what month and year was the most recent assessment completed?
  • Please describe any findings from the most recent risk assessment that were deemed to be potentially moderate or high risk and have not yet been fully remediated.

Similarly, the questions regarding a written cybersecurity incident response policy seeks a copy of the policy, the year it was most recently updated, whether there are tests to assess the policy, who conducts the tests, and when and by whom the last test was conducted. Likewise, the questions on event detection processes seek the month and year of the most recent test.

The examination questions also seek a summary of any actual cybersecurity incidents, the services affected, nature of the breach, the availability of services during the breach, and number of other questions about each cybersecurity incident. Notably, although the examination requires companies to provide a large amount of information, the SEC explicitly issued a disclaimer that the “factors are not exhaustive, nor will they constitute a safe harbor.”

Nonetheless, it is good to see the SEC take a proactive approach to the cybersecurity risks posed to financial institutions. Hopefully, this will flow down to other companies because cybersecurity is a hot-button topic that is very concerning to customers and unlikely to be fully resolved soon. With cooperation between government agencies and the private industry, we can be hopeful that cybersecurity risks can be mitigated. As SEC Chair White has noted, there is a “compelling need for stronger partnerships between the government and private sector” to address cybersecurity threats.

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

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May 09
2014

Zealous Counsel or Unethical Social Media Maven – How Far Can a Lawyer Go?

Social media has opened a Pandora’s box of information about just about everyone today, including jurors, witnesses, opposing counsel, defendants and plaintiffs.  As lawyers we want to leave no stone unturned in pursuing a client’s interest, but just how far can we go without jeopardizing our case?  For instance, can counsel (or someone acting at counsel’s direction, such as a paralegal) review a publicly available Facebook page to learn about the background and likes of a potential witness or party?  (Most likely, yes).  May attorneys “friend” that witness to gain access to the witness’s full Facebook page?  (It depends).  Can an in-house lawyer advise an employee to remove posts from the employee’s Facebook page because the lawyer thinks the post could be damaging in an ongoing lawsuit? (Most likely, not).  Can a lawyer “friend” a potential juror? (No).  All counsel need to be cognizant of evolving trends in ethics rules on social media use and contacts.

The New York State Bar Association recently released extensive “Social Media Ethics Guidelines” to address lawyers’ utilization of social media, particularly as to interactions with clients, prospective clients, witnesses, and jurors.[i] The Guidelines are a non-binding advisory publication based on New York’s Rules of Professional Conduct (and precedent in other states) and issued by the Social Media Committee of the New York State Bar Association’s Commercial and Federal Litigation Section. While the Guidelines provide instruction to New York lawyers, they represent the most comprehensive statements on the ethical constraints on lawyers’ use of social media to gather information in litigation. Consequently, other states will likely use the Guidelines in crafting their own policies.

Several other states have either provided some limited guidance as to social media accounts and parties/witnesses/jurors, or are reviewing these issues.  This article provides a brief summary of recent developments, utilizing the New York Guidelines as a guide and an example of how other states may view similar situations.

Reviewing Public Posts

New York Guideline No. 3.A provides that a lawyer may review the “public portion” of a person’s social media profile or public posts, even if that person is represented by counsel.  Under the Guidelines, such access is permissible for obtaining information about the person, including impeachment material for use in litigation. “Public” means: “information available to anyone viewing a social media network without the need for permission from the person whose account is being viewed.” (Comment to New York Guideline No. 3.A). The Guideline cautions, however, that attorneys should be aware that some social media automatically notify a person when someone views that person’s account. 

Reviewing Restricted Posts – Unrepresented Parties

Going one step further, New York Guideline No. 3.B allows a lawyer to request permission to view the restricted portion of an unrepresented person’s social media account.  The lawyer must use his or her full name and an accurate profile.  Attorneys may not create fake or different profiles to mask their identities.  If the person asks for additional information in response to the request, the lawyer is required to accurately provide that information, or withdraw the request.  Earlier, the New York City Bar Association, in Formal Opinion 2010-2, ruled that an attorney or agent may ethically “friend” an unrepresented party without disclosing the true purposes, but may not use trickery.[ii]

Reviewing Restricted Posts – Represented Parties               

New York Guideline No. 3.C bars lawyers from contacting represented persons to seek to review the restricted portion of a person’s social media profile unless the person (presumably, through counsel) furnished an express authorization.  This includes persons represented individually or through corporate counsel.  Interestingly, the Guideline advises that lawyers should use caution before deciding to view “a potentially private or restricted social media account or profile of a represented person which a lawyer rightfully has a right to view, such as a professional group where both the lawyer and represented person are members or as a result of being a ‘friend’ of a ‘friend’ of such represented person.”[iii]

Instructing Others

Lawyers may not direct others, such as paralegals and office staff, to engage in conduct through social media in which the lawyer may not engage. (New York Guideline No. 3.D).  The comment to the Guideline makes clear that this prohibition includes a lawyer’s investigator, legal assistant, secretary, other agent, or even the lawyer’s client.

Using Information Provided by Clients

In situations where a client provides to his lawyer the contents of a restricted portion of a represented person’s social media profile, that the lawyer may review the information, provided certain criteria are met.  (Guideline No. 4.D). The lawyer may not have caused or assisted the client to: inappropriately obtain confidential information from the represented party; invited the represented person to take action without the advice of his or her lawyer; or otherwise overreach regarding the represented person.  “Overreaching” in this context means situations where the lawyer is “converting a communication initiated or conceived by the client into a vehicle for the lawyer to communicate directly with the nonclient.”  Lawyers should be very careful not to advise a client to “friend” a represented person to obtain private information.

Deletion of Social Media Information

The New York Guidelines also address whether a lawyer can advise a client to remove content on the client’s social media account (whether posted by the client or someone else).  A lawyer may advise a client as to what content may be taken down or removed, as long as there is no violation of law – whether statutory or common law – or of any rule or regulation relating to the preservation of information.  If the party or nonparty is subject to a duty to preserve, he or she may not delete information from a social media profile unless an appropriate record of the data is preserved.

Special Considerations Regarding Jurors         

The New York Guidelines allow lawyers to research and view a prospective or sitting juror’s public social media website, account, profile and posts.  However, Guideline No. 5.B cautions that lawyers should be careful to ensure that no communication with the juror takes place – including automatic notices sent by social media networks.  The Guidelines also preclude attorneys from making misrepresentations or engaging in deceit to be able to view a juror’s social media account, profile, or posts, or directing others to do so.  An earlier opinion of the New York City Bar, Formal Opinion 2012-2, concluded that attorneys may use social media websites for juror research as long as no communication occurs between the lawyer and the juror as a result of the research.  Attorneys may not research jurors if the result of the research is that the juror will receive a communication.  Further, neither the lawyer, nor anyone acting at her direction, may use deception to gain access or to obtain juror information.

In April, the American Bar Association (“ABA”) issued Formal Opinion 466, concluding that lawyers may look at information available to everyone on a potential or actual juror’s social media accounts or website.  In other words, observing postings on a public portion of a social media account does not constitute improper ex parte contact with a juror.[iv]  However, ABA Formal Opinion 466 states that lawyers may not send access requests to jurors.  Such a “communication” would constitute a prohibited ex parte contact.[v]  However, under the ABA’s opinion, a social media network’s automatic notification to an individual that an attorney has reviewed that person’s social media account is not violative of the prohibition on communicating with jurors (thus differing from the New York City Bar opinion 2012-2).  The ABA considers the notification to be made by the social media platform, not the attorney. Both the New York Guidelines and ABA Formal Opinion 466 advise lawyers to review the terms of use of social networks regarding automatic subscriber notifications.  Some social networks allow viewers to anonymize their viewing, for instance, which may be a useful course of action.

New York Principles Followed and Expanded in Other Jurisdictions

Other states take a similar approach to public information, generally permitting a lawyer to review the public information of a party, witness, or juror, and prohibiting a friend request or similar request to access non-public information of a juror.  As to witnesses, some Bar authorities (such as those in New Hampshire) specifically allow lawyers to request access to the non-public social media profiles of witnesses, provided the attorney does not use deception.  Virginia bar rules prevent lawyers from “pretextually ‘friending’ someone online to garner information useful to a client or harmful to the opposition,” as pretexing violates Virginia Rule 8.4(c) prohibition against “dishonesty, fraud, deceit or misrepresentation.”  In New Hampshire, a lawyer must also inform the witness of the lawyer’s involvement in the matter.  In Oregon, the State Bar Ethics Committee ruled that a lawyer may access an unrepresented individual’s publicly available social media information but “friending” a known represented party is impermissible absent express permission from party’s counsel.[vi]  The San Diego Bar opined that an attorney attempting to access the non-public Facebook pages of certain high-ranking employees of the opposing party without disclosing the motivation of the friend request violates California Rule of Professional Conduct 2-100 (prohibiting communication with a represented party unless the attorney has the consent of the other lawyer).  Interestingly, the opinion concluded “high-ranking employees” of a represented corporate adversary are considered “represented parties” for purposes of the rule.[vii]

As a general rule, deceptive practices used to gain access to private social media pages may result in proceedings by bar authorities or other adverse actions.  An Ohio prosecutor was fired after his office found out he had created a fake Facebook profile and “friended” a defendant’s alibi witnesses, seeking to influence them against the defendant.[viii]

On the subject of deleting social media pages, a Virginia court sanctioned a plaintiff and his attorney for deleting a Facebook profile and pages that contained photographs that could have negatively impacted a widowed husband’s claim for damages from the wrongful death of his wife in an automobile accident.[ix]  While counsel denied having instructed his client to delete the postings, testimony supported a claim that the attorney directed his paralegal to tell the Plaintiff to “clean up” his Facebook entries.  The court sanctioned the Plaintiff $180,000, and the Plaintiff’s counsel $542,000. Plaintiff’s counsel later agreed to a five year suspension.  The suspension order stated that the attorney violated ethics rules that govern candor toward the tribunal, fairness to opposing party and counsel, and misconduct.[x]

The New York Guidelines provide a useful reminder to practitioners that social media communications cross state lines and may implicate other states’ ethics rules. Counsel should consider Bar rules in states where counsel is admitted, as well as the jurisdiction of any pending case.  In the case of misconduct in a state where counsel is not admitted, it is certainly possible for that state to make a referral to a state where an attorney is barred.  While social media presents a trove of potentially useful information, all counsel need to be aware of, and abide by the ethical restrictions and to tread carefully, particularly as to non-public information.  Bar rules and opinions in this area continue to develop to keep pace with technology trends.  Counsel should continue to monitor further ABA and state bar rulings, particularly before conducting any research pertaining to non-public social media profiles and pages or seeking to communicate with parties, witnesses or jurors.

_____________________________

[i]              The Guidelines are available at: https://www.nysba.org/Sections/Commercial_Federal_Litigation/ Com_Fed_PDFs/Social_Media_Ethics_Guidelines.html.

 [ii]               See “Obtaining Evidence from Social Networking Websites,” Formal Opinion 2010-2, available at http://www.nycbar.org/pdf/report/uploads/20071997-FormalOpinion2010-2.pdf.

 [iii]              Comment to New York Guideline No. 3.C.

[iv]              Formal Opinion 466 is available at: http://www.americanbar.org/content/dam/aba/administrative/ professional_responsibility/formal_opinion_466_final_04_23_14.authcheckdam.pdf/  (“ABA Formal Opinion 466”).

[v]               ABA Formal Opinion 466 at 4.

 [vi]              Oregon State Bar Ethics Committee Op. 2013-189 (available at https://www.osbar.org/_docs/ethics/2013-189.pdf).               

 [vii]             See San Diego County Bar Association Legal Ethics Opinion 2011-2, available at https://www.sdcba.org/index.cfm?pg=LEC2011-2.

 [viii]             See Ifrah Law’s blog coverage at http://crimeinthesuites.com/prosecutor-fired-for-lying-on-facebook-to-wtinesses-in-murder-case/.     

 [ix]              Lester v. Allied Concrete Co., Case No. CL09-223 (Va. Cir. Ct. Sep. 1, 2011); Lester v. Allied Concrete Co., Case Nos. CL08-150, CL09-223 (Va. Cir. Ct. Oct. 21, 2011).

 [x]               SeeIn the Matter of Matthew B. Murray, available at http://www.vsb.org/docs/Murray-092513.pdf.

 

 

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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.

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

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Apr 18
2014

Are High Frequency Traders Playing Fast and Loose With the Rules?

When high frequency trading (HFT) first crept into the public consciousness, it related to primarily to the question of whether rapid, computer driven trading posed risks to the safety and stability of the trading markets.  Now it appears that HFT may have also been a means for some traders to gain a possible illegal advantage.

High frequency trading involves the use of sophisticated technological tools and computer algorithms to rapidly trade securities.  High frequency traders use powerful computing equipment to execute proprietary trading strategies in which they move in and out of positions in seconds or even fractions of a second.  While high frequency traders often capture just a fraction of a cent in profit on each trade, they make up for low margins with enormous volume of trades.

High frequency trading is viewed by many as particularly risky.  While some participants disagree, the Securities and Exchange Commission and the Commodity Futures Trading Commission issued a report in which their staffs concluded that algorithmic and high frequency trading contributed to the volatility that led to the May 6, 2010 “flash crash.” 

More recently, high frequency trading has come under scrutiny by law enforcement.  A number of agencies are investigating such practices to determine whether high frequency traders are profiting at the expense of ordinary investors.  The Justice Department and the FBI have recently announced investigations, while U.S. securities regulators and the New York Attorney General have said that they have ongoing investigations.

Heightening the recent HFT craze is renowned author Michael Lewis, who recently authored Flash Boys:   A Wall Street Revolt. In the book, Lewis claims that computer-driven stock trading has taken over the market at the expense of ‘the little guy’. According to Lewis, Wall Street is rigged by a combination of insiders – stock exchanges, big Wall Street banks and HFT. Lewis claims that HFT’s advantage is so severe that traders are able to predict which stock a common investor wants to buy before he or she can buy it, and drive the price up before the investor can initiate the purchase.

Not everyone is buying the claims Lewis makes in his book.  There have been many on record stating that HFT actually does not prey on mom and pop investors. Additionally, many individualsbelieve Lewis’ claims are overblown and that HFT does not provide traders with a huge profitable advantage.

Inevitably, the most pressing question about high frequency trading is whether any such businesses are given an unfair – and illegal – advantage in placing trades.  On April 11, three futures traders filed a federal class action lawsuit against CME Group, the owner of the Chicago Mercantile Exchange and the Chicago Board of Trade, claiming that high frequency traders are given an improper advance look at price and market data that permits them to execute trades using the data before other market participants.  While the plaintiffs claim that this practice has existed since 2007, CME denies the merits of the allegations.

Between the investigations and this lawsuit (and the others that will certainly follow), it will eventually be determined whether traders with high speed computers benefited improperly over other market participants.  Regardless of the merits of these accusations, it is unquestionable that high frequency trading, like all technological advances, poses special challenges to existing rules and laws that will require special consideration and possibly require new rules and regulations.

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

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Apr 16
2014

Offshore Accounts? IRS is Watching

If you have unreported income from offshore accounts, now may be the best time to come forward and report those earnings; otherwise, you may be susceptible to criminal prosecution.

The IRS initially began this open-ended Offshore Voluntary Disclosure Program (OVDP) in 2009 and later renewed it in 2011. Due to strong interest from previous years, the IRS rolled the 2012 Offshore Voluntary Disclosure Program back out in January. This program provides a way for taxpayers to come forward voluntarily and report their previously undisclosed foreign accounts and assets. The program is designed to resolve an inordinate amount of cases without the IRS having to take the time to conduct independent, thorough investigations of alleged tax fraudsters.

Despite the name, and unlike its predecessors, the 2012 OVDP has no set deadline for taxpayers to apply. However, citizens should be cognizant of the fact that the IRS can change the terms at any given time. For example, the program’s tax penalty could increase, or worse – the program could completely end without any notice, leaving taxpayers as fair game for IRS crosshairs. Those choosing to not report their offshore assets could be prosecuted under the fraud penalty and foreign information return penalties, in addition to increasing their risk of criminal prosecution.

Additional and possible criminal charges that could stem from undisclosed tax returns include tax evasion, filing a false return and failure to file an income tax return. A person convicted of tax evasion is subject to a prison term of up to five years and a fine of up to $250,000. Taxpayers should understand that the likelihood of undisclosed offshore accounts being found is increasing through information available to the IRS by tax treaties, information from whistleblowers and more revealing information by way of the Foreign Account Tax Compliance Act (FATCA), which we’ve blogged on before.

Citizens are wising up and taking advantage of the program. Since 2013, more than 39,000 citizens have utilized OVDP and disclosed unreported earnings. This has netted over $5.5 billion in recovered tax revenues for the IRS.

A few citizens, such as Ty Warner, have ignored the ODVP. The creator of Beanie Babies saw this enforcement first hand when the IRS came knocking on his door, alleging that he hid a secret offshore bank account. In September 2013, a federal court in Chicago issued tax evasion charges against Warner. The court fined Warner a civil fine of $53 million and he was sentenced to two years of probation. Additionally, Warner paid $14 million in back taxes.

While some citizens will surely be tempted to allow their offshore earnings go unreported, we are here to tell you that decision (and risk) may come at a high price.

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

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Apr 04
2014

My, What Long Arms You Have, Uncle

Here’s a visual: Uncle Sam extending his arms around the world, reaching out for his citizens, wherever they may be. He may resemble a candy-striped Gumby, with disproportionately long rubbery arms spanning the globe. The visual is not an endearing one to many Americans abroad. They do not see Uncle Sam’s reach as an embrace, but rather as a stronghold. And a close-up of the visual will show that not only is Uncle Sam holding his citizens, he is also clutching foreign institutions and sovereigns.

This visual describes how many perceive the U.S. following the enactment of the Foreign Account Tax Compliance Act (FATCA), a law that takes effect July 1, 2014, and is purported to increase accountability of U.S. taxpayers who have foreign financial assets. Unlike most countries, the U.S. taxes its citizens on income regardless of where the income was earned. Either through inattention or willful ignorance, many Americans have not fully complied with all U.S. tax laws and have not reported all foreign assets and income earned abroad. Desperate to shore up a massive budget deficit, in 2010 U.S. Congress decided to go after tax revenues on these foreign assets with the passage of FATCA.

FATCA followed on the heels of a 2009 settlement between the U.S. Justice Department and UBS AG in which the bank agreed to pay a hefty $780 million fine to avoid prosecution for allegedly fostering American tax evasion. A savvy Congress may have seen revenue potential both in ferreting out tax evasion and finding reasons to penalize financial institutions that fail to comply with U.S. law. FATCA and its implementing regulations shrewdly address both.

FATCA has two general reporting requirements: (1) U.S. individual taxpayers must attach Form 8938 to their income tax return, reporting information about foreign financial accounts and offshore assets valued over a specified threshold ($50,000 for a single filer, though a higher threshold applies to those living outside the U.S.) and (2) foreign financial institutions (FFIs) must register with the IRS and report information (mainly account balances) about U.S. accounts (including accounts of foreign entities with substantial U.S. owners). The FFIs may be required to withhold 30% on U.S. sourced payments to foreign payees if those payees do not comply with FATCA.

Here’s another visual: a massive splitting headache. FFIs agreeing to comply with FATCA will need to confirm the identity of all account holders, culling U.S. accounts for reporting purposes. In instances where local law conflicts with FATCA, e.g., when accounts are located in countries with bank secrecy laws, FFIs will need to ensure account holders sign waivers to allow reporting of their information. Many FFIs will need to institute a process to withhold 30% of certain payments from recalcitrant account holders and non-compliant FFIs.  So not only must these banks track their account holders, they may be required to track payments to those account holders and to other FFIs. They must stay abreast of which of their account holders and which FFIs are not compliant with FATCA. Then for the non-compliant, the FFIs will need to track U.S. payments to those and withhold 30% of the U.S.-sourced payments. Good luck.

The compliance and reporting requirements will be onerous. And the tediousness of compliance with the U.S. laws and regulations is only one piece of the legal framework FFIs must navigate. As mentioned above, they also have the overarching concern of compliance with their own country’s banking and privacy laws. A clash of laws may subject FFIs to class actions in their respective countries. While intergovernmental agreements between the U.S. and FATCA-cooperating countries, as well as local legislative efforts, may attempt to remediate problems of conflicting laws, FFIs must tread carefully.

Why would foreign banks, or foreign sovereigns for that matter, choose to subject themselves to the U.S.’s jurisdictional overreach? Why wouldn’t countries, especially those known for their bank secrecy laws, simply refuse to submit this costly program? The answer is simple. FATCA includes a steep penalty for non-participation. As mentioned above, there is a 30% withholding of any U.S.-sourced payments to FFIs that do not adhere to the law. A simple solution to avoid the penalty and the regulatory nightmare is to no longer hold U.S. accounts. And many Americans abroad are now struggling to find banks that will take their cash.  But other FFIs have chosen to work with the U.S. and their local government to ease compliance and implementation.

The financial pressure and regulatory burden to which the U.S. has subjected these foreign banks and sovereigns is the impetus for many intergovernmental agreements (IGAs) between the U.S. and other countries. The carrot for these countries to enter an IGA is that the U.S. will reduce the oversight requirements the law foists upon banks. For instance, an FFI in a country with an IGA may not have to track and withhold payments; they merely need to report on U.S. accounts. This regulatory ease is why many big banks in foreign countries have pressured their local governments to sign an IGA with the U.S. The end result is places known for bank secrecy, like Switzerland and Hong Kong, are buckling. Thanks to FATCA, bank secrecy will be a concept as antiquated as carriage rides.

But FFIs who think they are dodging a bullet by lobbying for an IGA in their country should think again. This merely opens the door to an increasing level of U.S. involvement in their affairs. We can expect the U.S. Justice Department to leverage its increased presence in FFIs to expand its enforcement initiatives.

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

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Mar 31
2014

Employers Seeking to Curb Employee Mobile Phone Use at Work? Don’t Use Illegal Signal Jammer – FCC is “Listening”

Some employers, particularly those in manufacturing, health care, and other situations where mobile phone use could interfere with employee safety, have come up with novel approaches to curbing employees’ uses of mobile phones.  While a policy restricting personal phone calls and texting may be acceptable, installation of a signal jammer to prevent employees from accessing the network is unlawful and can subject the employer to significant penalties.  R&N (“RNM”) Manufacturing, Ltd.  In Houston, Texas learned this lesson the hard way when the Federal Communications Commission  (“FCC”) showed up at its manufacturing facility.

As background, RNM purchased a signal jammer online in February 2013, to prevent employees from placing wireless calls from the factory, by blocking cell phone communications.  With very limited exceptions, the Communications Act and the FCC’s rules bar the importation, use, marketing, manufacturing, and sale of jammers.  Jammers may be available for sale all over the Internet, but they are prohibited.  The reason behind this prohibition is that jammers can interfere with emergency and other communications services, including GPS. Signal jammers typically transmit high-powered radio signals that interfere with authorized communications.  The interference can, among other dangers, place first responders and the public at risk if critical communications cannot be transmitted.

AT&T determined that a signal originating from RNM’s Houston facilities was interfering with AT&T’s signal, and reported the interference to the FCC’s Enforcement Bureau. FCC field agents in Houston conducted an investigation and found strong signals coming from RNM’s Houston facility.  The agents subsequently visited the facility to determine the source of the interference and to notify a corporate officer.  RNM’s CFO confirmed the jammer and promised to discontinue the jammer’s use. A formal enforcement action followed.

After analyzing the facts and the agency’s forfeiture guidelines, the FCC imposed a forfeiture on RNM of $29,250 for the 10-day operation (and the voluntary relinquishment of the illegal device).  While this is not a huge penalty, the FCC noted that it could have imposed a forfeiture in excess of $337,000 had it imposed a straightforward application of the statutory maximum.

There are a few important points to note here. First, employers seeking to curb employee mobile use should rely on policies and enforcement, rather than “self-help” through installation of their own devices.  While jammers are available for purchase online – they are illegal irrespective of what a website might advertise. 

Second, while companies might not expect an FCC official to show up at their door for an investigation, the agency (like many other agencies) has field agents and they do conduct on-site investigations – including without notice.  All organizations should have a designated officer or senior employee who is trained to interface with investigators.  Outside counsel can also be key here to interact with the agents and help guide the company through the audit.

Third, monetary penalties can be steep.  A mere 10 days’ use of the signal jammer cost RNM a nearly $30,000 penalty plus likely legal fees and employee time. Had RNM been using the cell jammer over a longer time period, it could have faced a six-figure fine.

Fourth, even though RNM was not an “FCC-regulated” entity such as a broadcast station, telecom company, etc., it understood the need to be responsive and to take the matter seriously.  Just because a company is not regularly under an agency’s jurisdiction doesn’t mean it is not subject to the agency’s enforcement powers.  Federal agencies such as the FCC and FTC enforce laws with wide-ranging implications and can subject companies in various industries to their jurisdiction.

The FCC’s Notice of Apparent Liability for Forfeiture is available here.

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

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Mar 19
2014

Live Report From iGNA 2014 – Is iGaming The Problem or The Solution?

This afternoon at the iGaming North America 2014 conference an interesting panel, “Visionaries’ Perspective—Is i-Gaming the Problem or the Solution?” explored two vastly divergent viewpoints on online gaming in the United States. The panel was moderated by Steve Lipscomb, the Founder of the World Poker Tour, and featured, Mitch Garber, the CEO Caesars Acquisition Co. and Caesars Interactive Entertainment, and Andy Abboud, Vice President of Government Relations, Las Vegas Sands Corp, which is owned by billionaire Sheldon Adelson.

Abboud made clear the positions of his Las Vegas Sands from the start stating, “We are not fans of online gaming.” Abboud expressed caution because he felt that there is a strong presence of illegal operators in the industry and that was what the company feared, not the legalized regulated gaming that is currently offered in Delaware, New Jersey, and Nevada.

Garber called attention to Abboud’s stance differing from Adelson’s public position, which is that iGaming should not be permitted in any context.  Adelson has made it clear publicly that he intends to spend large sums of money to defeat online gaming, and federal legislation to do so may be forthcoming.

Abboud said that the Las Vegas Sands supports legislation to restore the Wire Act and make it clear that the Wire Act prohibits online gaming as well as sports betting. Abboud emphasized that he believes that the industry is dependent on a Wire Act opinion that was issued by Attorney General Eric Holder, but that interpretation of the Wire Act could be overturned by a new administration or a change in perspective from the current administration. Abboud emphasized that he believes the industry needs to be much more cautious in its approach before moving forward, on the law and in terms of consumer protection.

Garber emphasized that he believes that both the federal government and the individual states are capable of regulating online gaming. Garber stated that the consumer protection controls that are in place online are even stronger than in the land-based casinos. Online casinos have the ability to track the money players deposit, view their hand histories,  age and ID verify all participants.

The lively exchange highlighted the divergent perspectives on online gaming in the United States. The debate will continue to play out in the future, but we believe that online gaming is here to stay and the companies that believe that it will cannibalize the land-based casino industry will be proven wrong in time as more states join the market.

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

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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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