Court’s Strict Interpretation of Bank Fraud Law May Rein In Prosecutors

A recent interpretation of the federal bank fraud statute by the United States Court of Appeals for the Second Circuit may prove to be a useful check to overreaching by federal prosecutors, who have tended to use that statute in the past as a catch-all law enforcement tool.

In United States v. Nkansah, the Court reviewed the conviction of a defendant for bank fraud and other crimes arising from a scheme in which the defendant and others stole identification information and used that information to file fraudulent tax returns from which they obtained tax refunds. The depositing of the refund checks involved forgery of endorsements and/or the use of false identification.

On appeal, the defendant challenged his bank fraud conviction on the ground that the government had failed to carry its burden of proof that he intended to victimize the banks, as opposed to the U.S. Treasury that issued the refund checks. Defendant argued that no such evidence of intent to defraud a bank was presented, nor did the government prove that the banks themselves actually lost any money.

The court agreed. In its opinion reversing the bank fraud conviction, the appeals court noted that “the bank fraud statute is not an open-ended, catch-all statute encompassing every fraud involving a transaction with a financial institution” but rather “a specific intent crime requiring proof of an intent to victimize a bank by fraud.” For this reason, the court specifically held that “[t]he government had to prove beyond a reasonable doubt that appellant intended to expose the banks to losses,” and noted that, if that intent were proved, there was no need for proof of actual or even possible loss.

The court noted that the evidence upon which the government relied – conversations among the participants about avoiding detection by the banks – was not sufficient to satisfy this required element of proof. The court acknowledged that, in some cases, the fact that a bank may suffer a loss based on the negotiation of a check with a forged endorsement permits an inference of intent. But, in this case, given that the checks at issue were genuine Treasury checks, the actual exposure of a bank to losses is “unclear, remote, or non-existent” because the banks could be deemed to be holders in due course of the checks, with the risk of loss borne entirely by the Treasury. Under such circumstances, the permissible inference urged by the government was far from sufficient to constitute proof beyond a reasonable doubt of the defendant’s intent.

The Second Circuit’s holding in this case is significant because of federal prosecutors’ frequent use of bank fraud charges when banks were part of the transactions included in the allegedly wrongful conduct but were not the intended victims of that conduct. Prosecutors like the bank fraud statute because it carries a hefty maximum statutory sentence of 30 years imprisonment. Bank fraud can also form the predicate (as it did in Nkansah) for other charges such as aggravated identity theft – a crime for which probation is prohibited and for which a defendant must receive a consecutive sentence to the punishment he receives for conviction of any other offense. By holding prosecutors to the strict requirements of the bank fraud statute, the Second Circuit may limit the ability of federal law enforcement to use that statute as leverage in its prosecutions.

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‘Off-Label’ FDA Cases Can Run Afoul of First Amendment, Appeals Court Holds

A recent decision by the U.S. Court of Appeals for the Second Circuit may significantly curtail enforcement efforts relating to the so-called “off-label” use of drugs approved by the Food and Drug Administration for specific uses and/or populations. Finding that the government’s prosecution of promotional statements supporting off-label use of an FDA-approved drug would violate the First Amendment, the court ruled that the Federal Drug and Cosmetic Act (FDCA) must be construed narrowly to avoid unconstitutionally prohibiting such statements.

As we have explained in previous blog posts, when the FDA approves use of a drug, it does so for a specific illness or condition and/or for certain populations. It is not illegal for physicians to prescribe approved drugs for off-label use, and such uses sometimes constitute commonly recommended courses of treatment. Law enforcement efforts (both criminal and civil) have focused on the marketing and promotion of drugs for off-label use by pharmaceutical manufacturers and their representatives.

Civil and criminal enforcement against promotion of off-label use has been extensive in recent years and has resulted in some massive fines for pharmaceutical manufacturers. But in United States v. Caronia, decided December 3, 2012, the government’s enforcement efforts ran smack into the First Amendment’s protection of speech, including commercial speech.

The government prosecuted Alfred Caronia, the representative of a pharmaceutical manufacturer, for conspiracy to introduce a misbranded drug into interstate commerce, a misdemeanor violation of the FDCA, 21 U.S.C. sections 331(a) and 333(a)(1). Under this section of the FDCA, a drug is “misbranded” if, among other things, its labeling fails to bear “adequate directions for use,” 21 U.S.C. section 352(f), and FDA regulations define this term as “directions under which the lay[person] can use a drug safely and for the purposes for which it is intended.” 21 C.F.R. section 201.5.

FDA regulations permit the use of promotional statements as evidence of the intended use for this purpose and, because off-label use is (by definition) neither approved by the FDA nor addressed on the label authorized for the drug by the FDA, the FDA has concluded that “[a]n approved drug that is marketed for an unapproved use . . . is misbranded because the labeling of such drug does not include ‘adequate directions for use.’ ” The prosecution of Caronia was based on his statements to a government cooperator in which he promoted the use of a drug for off-label use by a segment of the population for which the FDA had not approved the drug.

After rejecting the government’s claim on appeal that it had used Caronia’s statements merely as evidence of intent, the appeals court found that the government’s interpretation of the FDCA as criminalizing Caronia’s statements would violate the First Amendment’s protection of free speech. The court began with the expression of principle in the Supreme Court’s decision in Sorrell v. IMS Health, Inc., 131 S.Ct. 2653 (2011) that “[s]peech in aid of pharmaceutical marketing . . . is a form of expression protected by the Free Speech Clause of the First Amendment.”

The court found that the restriction on speech that would result if the FDCA were read as prohibiting Caronia’s statements was content-based because it disfavored the point of view he expressed (supporting off-label use) and was speaker-based because other actors (such as physicians and academics) were free to make similar statements without fear of prosecution. Accordingly, the court found that the restriction on the speech was subject to heightened scrutiny.

The court then found that it was unnecessary to determine what level of heightened scrutiny would apply because the government’s proposed restriction did not satisfy even the least exacting level of heightened review. First, the court found that the restriction on off-label promotional speech did not directly and effectively advance the government’s justifiable interest in drug safety. The court noted that the FDA’s approval process contemplates that there will be off-label use of approved drugs and even includes a safe harbor for manufacturers to make statements about such uses. The court concluded that a prohibition of truthful statements about off-label use paternalistically interfered with the ability of doctors and patients to make well-informed choices about treatment and did not reduce the risk that patients would be exposed to unsafe or ineffective drugs. Second, the court found that a prohibition on such statements – and criminalization of that conduct – was not a narrowly drawn restriction on speech, and noted a number of other approaches that could more narrowly limit such speech in the interest of promoting the FDA’s goals.

The court unequivocally rejected the ability of the government to pursue criminal prosecution of this conduct, writing;

Accordingly, even if speech can be used as evidence of a drug’s intended use, we decline to adopt the government’s construction of the FDCA’s misbranding provisions to prohibit manufacturer promotion alone as it would unconstitutionally restrict free speech. We construe the misbranding provisions of the FDCA as not prohibiting and criminalizing the truthful off-label promotion of FDA-approved prescription drugs. Our conclusion is limited to FDA-approved drugs for which off-label use is not prohibited, and we do not hold, of course, that the FDA cannot regulate the marketing of prescription drugs. We conclude simply that the government cannot prosecute pharmaceutical manufacturers and their representatives under the FDCA for speech promoting the lawful, off-label use of an FDA-approved drug.

The court’s decision clearly leaves the FDA with significant power to regulate and punish pharmaceutical companies in connection with its oversight over the approval and marketing of prescription drugs – for example, in cases in which manufacturers make false statements about off-label use of their products. But, assuming that other courts reach similar conclusions, the ability of the federal government to act against off-label promotion may be significantly diminished.

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D.C. Circuit: Restitution Order Must Involve Victim’s Loss, Not Defendant’s Gain

On November 9, 2012, in a unanimous opinion in United States v. Fair, the U.S. Court of Appeals for the D.C. Circuit found that the district court had abused its discretion in ordering restitution in the amount of $743,000 in a criminal copyright infringement case. The appeals court vacated the lower court’s restitution order, finding that the order was based on “a clear legal and factual error.”

The appeals court emphasized that a restitution order may not be based solely on the ill-gotten gain of the defendant but must be directly related to the victim’s actual loss, which is not always the same thing.

In this case, Gregory Fair had offered customers an appealing but illegal way to acquire up-to-date Adobe software at less than half the retail price. Fair’s company sold outdated Adobe software (Photoshop and PageMaker) on eBay and included numerical codes that the buyers could use to purchase an update of the same software directly from Adobe. This scheme lasted from February 2001 until September 2007, when Fair was shut down by the United States Postal Inspection Service.

In 2009 Fair pleaded guilty to charges in exchange for a reduced sentence. Although Fair admitted to receiving roughly $1.4 million in revenue from the sale of pirated software on eBay, his plea agreement was based on an infringement category of greater than $400,000 but less than $1 million. Based on the Sentencing Guidelines for that category, Fair was sentenced to 41 months in prison followed by three years of supervised release. At sentencing, the prosecution also insisted that the court order the maximum restitution. The district judge ordered restitution of $743,000 to Adobe, based on prosecutors’ calculations of Fair’s ill-gotten gains.

At first blush that makes sense, right? Not so quick; there is a fatal flaw. Under federal law, restitution is not based on what the defendant gained; it’s based on what the victim actually lost. In many cases those are the same, but here it certainly was not.

At sentencing, Fair’s attorney raised this point in several different ways, emphasizing that the prosecution had completely failed to prove any actual harm to Adobe. This was a critical issue in this case, because Fair was actually directing each of his buyers to make a legitimate $200 purchase from Adobe. Fair’s attorney argued, correctly, that the burden was on the prosecution to show actual, provable loss (i.e., that purchasers of Fair’s outdated material, which Adobe no longer offered for sale, would have actually purchased the full-price, up-to-date merchandise from Adobe AND that the aggregate sales that Fair directed to Adobe were less than the sales that he supposedly thwarted).

The trial judge ignored Fair’s arguments, referred to the prosecution’s unsubstantiated calculation as “hard proof,” and fallaciously based the restitution order on his belief that it was “undisputed that Fair’s revenue from the sale of pirated products was at least $767,000.”

In so doing, the trial judge overstated the weight of the prosecution’s evidence and misinterpreted the law regarding restitution. As the appeals court explained, the purpose of the Mandatory Victim Restitution Act (MVRA) is “to compensate victims for the loss caused by the defendant’s criminal conduct.” Thus the trial court’s restitution order must be “limited to the actual, provable loss suffered by the victim” at the hands of the defendant. The appeals ruling made it clear that the prosecution must “articulate specific factual findings underlying its restitution order,” and it “may not substitute the defendant’s ill-gotten gains for the victim’s actual, provable loss.”

Prosecutors and judges must not lose sight of the fact that victims are free to seek full restitution in separate civil lawsuits. In fact, civil restitution suits actually allow for the disgorgement of all of the defendant’s profits, including those in excess of the victim’s loss. The Fair case is a perfect example of federal prosecutors and criminal trial courts losing sight of their role in the justice system. Fortunately, the appeals court stepped up to rein them in. In the words of D.C. Circuit Judge Judith Rogers, “the abuse-of-discretion standard may be generous, but it is not one that will countenance the clear legal and factual error present here.”

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Are Medicaid Claims Becoming the Next Battleground for FCA Cases?

A qui tam case that was recently dismissed on summary judgment may signal the next front in the legal enforcement war arising from off-label use of prescription medications.

In United States ex rel. Watson v. King-Vassel et al., filed in the U.S. District Court for the Eastern District of Wisconsin, the complaint alleged that defendant Dr. Jennifer King-Vassel violated the Federal False Claims Act and Wisconsin False Claims Law by prescribing medications to a minor patient receiving Medicaid assistance for off-label purposes – that is, for purposes other than the specific ones for which the Food and Drug Administration has authorized use. The complaint also alleged that the company that employed Dr. King-Vassel was liable under a theory of respondeat superior.

On October 23, 2012, the court granted summary judgment to the defendants on the ground that there was no specific allegation that Dr. King-Vassel had submitted a Medicaid claim (or made any other false claim) specifically arising from the prescription of the medication in question, and on the ground that Dr. King-Vassel was actually an independent contractor, and not an employee, of the corporate defendant.

The Watson case was clearly resolved in the way it was because of specific deficiencies in the pleadings and proof in that case, and the court’s order dismissing the case was also highly critical of ethically questionable behavior committed by the relator as a means of creating and supporting the qui tam case. Nevertheless, the case raises the specter of a whole new series of legal actions that appear likely to arise from off-label use of FDA-approved medications.

We have written before about the massive fines paid by pharmaceutical companies for promotion of off-label use of medications. The Watson case focuses on a whole other universe of potential deep-pocket defendants: medical professionals and institutions involved in the prescription of the medications in question. Notwithstanding the dismissal of the Watson case, its operative theory – that a Medicaid claim relating to off-label use of a medication may constitute a false claim – may still be viable, though it is largely untested. Going forward, in any case in which a medical professional or institution faces civil or criminal legal action based on such a theory, counsel will have to scrutinize carefully whether the claims on which liability purports to be based truly fall within the scope of the false claims statute.

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New DOJ Guide on FCPA Provides Guidance, Gives Statute a Broad Reading

After much uncertainty and discussion, the U.S. Department of Justice has finally issued official guidance regarding who qualifies as a “foreign official” under the Foreign Corrupt Practices Act (FCPA). This guidance was published on November 14, 2012, in the Resource Guide to the U.S. Foreign Corrupt Practices Act, a broad guide to enforcement and interpretation of the FCPA that the DOJ issued jointly with the Securities and Exchange Commission.

As expected based on the DOJ’s previous interpretations of the term, the Guide provides a broad definition of “foreign official” by stating that the term encompasses “officers or employees of a department, agency, or instrumentality of a foreign government.” This definition imposes few restrictions on whom the Department will consider a “foreign official” and stretches the term far beyond its obvious and limited meaning.

Much of the confusion regarding “foreign official” status arose from government-affiliated entities that fall in the hazy middle ground between government agencies and private entities. Often this uncertainty surrounds services such as telecommunications, banking, and the aerospace industry, in which a government has some degree of ownership in the entity but may not completely own or control it. In those cases, the Guide clarifies that although the DOJ uses a multifactor test to determine whether an entity is a government instrumentality, it is most likely to pursue cases in which a government has a majority ownership stake. However, it acknowledged that there may be rare cases in which a government that owns only a minority stake nevertheless controls the entity through veto power, political appointees, or other means, in which case it will still be considered a government instrumentality.

Even though the very term “official” denotes a certain degree of authority within an organization, the Guide makes clear that the FCPA “covers cor¬rupt payments to low-ranking employees and high-level officials alike” in government departments, agencies, or instrumentalities. Therefore, corrupt payments to anyone within these organizations will bring the case within the FCPA’s bounds, regardless of their status within the organization or their ability to control or influence the instrumentality.

Although the new Guide states that its advice is “non-binding, informal, and summary in nature,” it is the best indication of how the DOJ plans to implement and enforce the FCPA. So while the content of the Guide essentially affirms the stance that the DOJ has assumed in existing cases, it does provide a foundation of guidance for organizations to rely on in their contacts with foreign entities. Unfortunately, this guidance will largely serve to dissuade companies from creating beneficial partnerships for fear that they might accidentally implicate FCPA concerns. As we have discussed previously on this blog, we hope that the courts will weigh in on this issue and find a more reasonable interpretation of what constitutes a “foreign official.”

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Domain Names and the First Amendment: The Latest Word

The intersection of domain names and the First Amendment is not new. Indeed, in the early days of the domain name system, courts considered the issue of whether a domain name registrar could prohibit the registration of domain names on the basis of content – for instance, domain names containing profanities. See Nat’l A-1 Advertising, Inc. v. Network Solutions, Inc., 121 F. Supp. 2d 156 (D.N.H. 2000); Seven Words LLC v. Network Solutions, Inc., 260 F.3d 1089 (9th Cir. 2001). However, the U.S. Court of Appeals for the Fifth Circuit recently was confronted, in Gibson v. Texas Dep’t of Insurance, with a new twist on the First Amendment as it applies to domain names: whether a particular domain name is pure “commercial speech” (entitled to only limited First Amendment protection) or “expressive speech” (entitled to more extensive protection).

The Texas Labor Code prohibits the use together of the words and phrases “Texas,” and “Workers Compensation,” or similar abbreviations. Nonetheless, Gibson, a workers compensation lawyer in Texas, registered the domain name texasworkerscomplaw.com. On the associated website, Gibson discusses matters relating to Texas workers compensation law and, of course, advertises his law practice. The Texas Department of Insurance took offense to Gibson’s domain name, and sent Gibson a cease and desist letter. Gibson, being a lawyer, sued in federal court, alleging that the Texas Labor Code restrictions violated his constitutional rights.

The Fifth Circuit, in an interesting opinion, addressed the commercial speech/pure speech dichotomy inherent in domain names used by commercial enterprises, but artfully dodged the question of whether the domain name was in fact commercial speech. Instead, the court first analyzed whether, if the domain name was in fact commercial speech (which can under some circumstances be restricted), it was the sort of commercial speech that the Texas Department of Insurance could restrict.

The court found, correctly, that commercial speech can be restricted only if it is “inherently likely to deceive.” The state argued that Gibson’s domain name implied a connection with or approval of the state. The Fifth Circuit dispensed with the state’s argument, noting that since there was nothing to suggest that texasworkerscomplaw.com could not be viewed in a non-deceptive fashion (a truism), the state could not restrict the use of the domain name as commercial speech.

There is a second exception allowing a restriction on commercial speech: A state may regulate non-deceptive commercial speech if the restriction “advances a substantial state interest” and is narrowly tailored to serve that interest. On this issue, the Fifth Circuit sent the case back to the federal district court to develop a factual record. It seems unlikely that the Texas Department of Insurance will prevail in the end, as the statute on which its objection is based is vastly overreaching, and would prohibit anyone providing services relating to workers compensation in Texas from registering domain names that accurately describe what they do. For instance, a physician who performs workers compensation examinations could not register texasworkerscompdoc.com (as of this writing, this domain name is available for the taking).

Obviously, such a domain name is not misleading, and there is no legitimate basis upon which the state can restrict it. Domain names are often a form of speech. Just because they are a relatively new format of expression does not change this fact and give the government a basis to attempt to restrict their use.

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China, Other Nations Need to Crack Down on Software Piracy

Reuters recently quoted Tian Lipu, head of China’s State Intellectual Office, complaining about China’s reputation for rampant software piracy. According to Tian, “China is the world’s largest payer for patent rights, for trademark rights, for royalties, and one of the largest for buying real software . . . We pay the most. People rarely talk about this, but it really is a fact.”

Tian’s protestations are akin to the shoplifter who defends his theft of a coat by pointing out that he also bought two shirts from the same store. China, as well as other countries worldwide, needs to stop looking the other way at copyright and trademark piracy, and to crack down on this form of theft.

According to the Business Software Alliance’s (BSA) 2011 Global Software Piracy Study, 42% of PC software worldwide – with a commercial value of more than $63 billion — is pirated. The rate of software piracy in China is an astounding 77%. By comparison, the percentage in the United States is 19%, while it is 26% in the UK, 21% in Japan, and 27% in Canada. In fairness, while the value of pirated software in China eclipses all other countries (excepting, ironically, the United States, where the relatively low piracy rate still results in almost $10 billion worth of pirated software), China is not the only, nor is it the worst, offender. Among the world’s 20 largest economies, Indonesia and Venezuela have higher piracy rates than China (86% and 88%, respectively), and Russia, India, Mexico, Thailand, Malaysia and Argentina all clock in with piracy rates over 50%.

Technical means of quashing or impairing the performance of pirated software (for instance, the Microsoft Genuine Advantage program) can help. But they are not a cure-all, nor can they put a dent in the pervasive levels of piracy. A multifaceted approach is needed to protect software and application developers from this pervasive form of theft. To start, developers must incorporate anti-copying mechanisms into their software and applications and must have strong and enforceable license agreements with users. From there, it is up to the developers to take a firm stand against theft of their product. However, it is equally important that governments, starting with China, bring their intellectual property laws into the 21st century, adapting them to encompass apps and other new and emerging technologies; enforce those laws; and make clear that software and application piracy will not be permitted. Until China and other nations do this, software and app developers will continue to be the constant victims of theft and the forward march of innovation will be stunted.

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DOJ Should Not Withhold Information From Defense in High-Profile Leak Case

Lawyers for Stephen Jin-Woo Kim, a former federal contractor employee accused of unlawfully disclosing sensitive information, recently filed a motion in the U.S. District Court for the District of Columbia criticizing the government’s withholding of information in the case and asking the court to order the government to produce the documents. The government should not be permitted to withhold this type of valuable, discoverable information from the defense in this “leak” case.

Kim was indicted in August 2010 with unlawfully disclosing national defense information to a reporter for a national news organization and making false statements to the FBI. If convicted, Kim faces up to 10 years in prison for unlawful disclosure of national defense information and up to five years in prison for making false statements. Kim was an employee of a federal contractor who was on detail at the State Department at the time of the alleged disclosure of classified information in June 2009.

Prosecutors in the case have said that Kim’s trial is not likely to occur until 2013.

According to the indictment, in June 2009, Kim knowingly and willfully disclosed to a national news reporter “Top Secret-Sensitive Compartmented Information” that concerned the military capabilities of a foreign nation and intelligence that “could be used to the injury of the United States.” The indictment further alleges that, in September 2009, Kim made false statements to the FBI when he denied having any contact with the reporter since a meeting in March 2009. The government alleges that he has had repeated contact with the reporter in the months following the meeting.

The indictment was part of a series of investigations by the federal government into unauthorized information leaks to media outlets during the Obama administration. After the announcement of the indictment, lawyers for Kim criticized the government for criminalizing an occurrence “that happens hundreds of times a day in Washington.”

Discovery in the case began in October 2010 and is continuing. Recently, without prior notice to defense counsel, the government filed a motion seeking the court’s permission to withhold otherwise discoverable classified information from defense counsel. In its motion, the government sought an ex parte review, even though lawyers for Kim all had security clearances and classified discovery had been ongoing for close to two years subject to a protective order. Counsel for Kim noted that over the past 22 months, the Department of Justice has produced over 3,000 pages of classified material to Kim’s legal team.

The government should not be permitted to withhold discoverable information without making a strong showing that there is a need to do so. Here, the government has made no showing and has “not provided defense counsel with any information about the nature or subject” of the information withheld, defense counsel say. Especially given the protective order and the security clearances of Kim’s counsel, it seems inexcusable to allow the government to continue to withhold information without justification.

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Judge Rakoff and the Emperor’s New Clothes

On October 24, 2012, U.S. District Judge Jed Rakoff sentenced Rajat Gupta to 24 months after he was found guilty by a jury of one count of conspiracy and three counts of substantive securities fraud, in connection with providing material non-public information to convicted inside trader Raj Rajratnam. This two-year prison sentence was substantially below the applicable advisory range under the United States Sentencing Guidelines and, in the week since that ruling, much has been said about whether or not this sentence was appropriate.

But the most remarkable part of Judge Rakoff’s sentencing ruling was his unflinching analysis of the way in which the application of the Sentencing Guidelines to white collar fraud cases does not reflect empirical analysis about those offenses or those who commit them – an argument that defense counsel have been making for some time with mixed success.

Judge Rakoff began his analysis with an eloquent and incisive observation about his role as a sentencing judge and the inadequacy of the sentencing guidelines as a comprehensive tool to determine a defendant’s sentence:

Imposing a sentence on a fellow human being is a formidable responsibility. It requires a court to consider, with great care and sensitivity, a large complex of facts and factors. The notion that this complicated analysis, and moral responsibility, can be reduced to the mechanical adding-up of a small set of numbers artificially assigned to a few arbitrarily-selected variables wars with common sense. Whereas apples and oranges may have but a few salient qualities, human beings in their interactions with society are too complicated to be treated like commodities, and the attempt to do so can only lead to bizarre results.

Judge Rakoff noted that the Sentencing Guidelines were “originally designed to moderate unwarranted disparities in federal sentencing” on the theory that the Guidelines “would cause federal judges to impose for any given crime a sentence approximately equal to what empirical data showed was the average sentence previously imposed by federal judges for that crime.” Of course, as the Supreme Court has already observed, the Guidelines deviated from this goal almost from the start.

For example, based on “limited and faulty data,” the Sentencing Commission determined that an ounce of crack cocaine should be treated as the equivalent of 100 ounces of powder cocaine for sentencing purpose, even though the two substances were chemically almost identical and, as later studies showed, very similar in their effects. The result of this empirically unsupportable conclusion was an indefensible racial disparity in narcotics sentencing. Kimbrough v. United States, 552 U.S. 85, 96-98 (2007). Judge Rakoff noted that, even when the Sentencing Commission changed the ratio from 100-to-1 to 18-to-1 in 2010, that ratio was likewise not based on empirical evidence but was merely “plucked from thin air.”

Judge Rakoff went on to observe that the Guidelines applicable to white collar fraud likewise “appear to be more the product of speculation, whim, or abstract number-crunching than of any rigorous methodology,” and that this “maximize[es] the risk of injustice.” Noting the huge increases in the recommended Guidelines for fraud cases, Judge Rakoff noted that the resulting advisory ranges “are no longer tied to the mean of what federal judges had previously imposed for such crimes.” Rather, these sentences “instead reflect an ever more draconian approach to white collar crime, unsupported by any empirical data.”

In short, congressional mandates to get tougher on fraud have resulted in a singular focus on one factor – the amount of loss – that “effectively ignored the statutory requirement that federal sentencing take many factors into account, see 18 U.S.C. § 3553(a), and by contrast, effectively guaranteed that many such sentences would be irrational on their face.” The result, Judge Rakoff observed, was “to create, in the name of promoting uniformity, a sentencing disparity of the most unreasonable kind.”

Regardless of whether or not one agrees with the sentence ordered in the Gupta case, Judge Rakoff’s analysis of the way in which the Sentencing Guidelines fail to promote justice in white collar cases is sure to have significant weight in other cases going forward. As structured, federal sentencing begins with a calculation of the advisory Guidelines range, and then defendants seek a variance from that range under Section 3553(a) – a process that creates a de facto presumption that a defendant will be sentenced within the Guidelines range. A recognition that the Guidelines ranges applicable to fraud crimes are not fair is a good first step towards reforming sentencing in such cases in the interest of true justice.

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Reid-Kyl Bill Would Legalize Online Poker at Federal Level

A draft of the online poker bill that Sen. Harry Reid (D-Nev.) and Sen. Jon Kyl (R-Ariz.) plan to introduce was released this week. The bill, known as the “Internet Gambling Prohibition, Poker Consumer Protection, and Strengthening UIGEA Act of 2012” would legalize online poker at the federal level, a step that became possible last December when the U.S. Department of Justice released an opinion stating that the Wire Act does not apply to online poker.

The bill provides an opt-in structure, in which states have to affirmatively choose to participate in the online poker program. A state would be considered to have opted in if it has passed a law legalizing online poker. Thus far, only Nevada and Delaware have passed such laws. An Indian tribe is considered to have opted in if a designated authority of the tribe submits written notice to the Secretary of Commerce saying so. Money could only be accepted from players located in those states or tribal lands at the time they are playing.

The bill would create an Office of Online Poker Oversight within the Department of Commerce to regulate the industry. The Secretary of Commerce would need to designate, not later than 270 days after the enactment of the bill, at least three state agencies or regulatory bodies of Indian tribes that are considered qualified bodies to regulate online poker. If there are not three bodies qualified, the Secretary will designate all state bodies that fit defined criteria including:

(1) A reputation as a regulatory and enforcement leader in the gaming industry.
(2) A strict regulatory regime.
(3) Regulatory and enforcement personnel with recognized expertise.
(4) Adequate regulatory and enforcement resources.
(5) Demonstrated capabilities relevant to the online poker environment.

In making determinations under those criteria, the Secretary is also to consider the number of years that the agency has directly regulated casino gaming, the size of the gaming market that has been regulated, and the demonstrated ability to evaluate complex gaming technologies, among other things.

No game other than poker would be allowed under the bill, even if it is licensed by the state. A state could still legalize other games under their own laws, but this law would not allow them to operate those games interstate. The bill has a carve-out that allows interstate bets on horse racing to continue to operate legally, as well as an exception to allow lotteries to sell tickets online.

The bill would impose a fee of 16 percent tax on revenues generated from online poker. The money generated from this tax would go to a fund known as the “Online Poker Activity Fee Trust Fund.” Seventy percent of the money in that fund would be given to the states or Indian tribal governments where the player was located at the time he played. The other 30 percent would go to the state that issued the license to the site where the money was generated.

For five years after enactment of the bill, no person may be considered suitable for licensing if the person owned or operated an Internet gambling site that accepted bets after December 31, 2006. Such persons are referred to as “covered persons.” Additionally, no assets that were used to take bets after December 31, 2006, can be used for five years after the bill’s enactment. This provision effectively excludes all companies that were shut down by the federal government on “Black Friday” in 2011.

An individual that is considered a “covered person” may apply for a waiver from the Office of Online Poker Oversight and would need to show by a preponderance of the evidence that the person did not violate, directly or indirectly, any provision of federal or state law in connection with the operation or provision of an Internet gambling facility. A similar waiver process exists for tainted assets. The bill also states that a previous criminal proceeding will not be considered in the waiver process.

The bill would prohibit the operation of public Internet parlors where devices are made available primarily for online poker.

There is no provision in the bill that requires a licensee to own a casino, a proposal that had been considered in some online poker legislation.

Criminal penalties of up to five years in prison can be assessed under the bill to operators that violate certain provisions.

We are glad to see that legislation that would legalize online poker is being considered on Capitol Hill and has reached a draft stage. This draft could change significantly over time, but the bill in its current form may face steep opposition.

Several objections are possible. First, many states have recently explored the idea of legalizing online poker, with the intent of possibly generating significant revenue. The language of this bill would take a significant amount of that potential revenue generated from online poker away from the states.

No state other than Nevada, Harry Reid’s home state, has developed its own regulations to govern online poker, or given the criteria listed in the bill, would be considered qualified to regulate online poker.  The state that issues the license gets 30 percent of the revenues generated from online poker, which would likely all go to Nevada. States may not support such a large percentage of the money generated going directly to Nevada.

In addition, the provision barring all operators who took bets after the enactment of the Unlawful Internet Gambling Enforcement Act of 2006 is too draconian and could be vulnerable to a constitutional challenge. Finally, the 16 percent fee on revenues generated from online poker is very steep and may face opposition from operators.

It also remains unclear what level of support an online poker bill would have in the lame-duck session of Congress. As Senate Majority Leader, Reid has the ability to dictate the legislative agenda to some extent, but it remains to be seen if he will be able to generate the votes needed to pass the bill. Kyl, although he will be retiring after this term, is the Minority Whip in the Senate and could also help rally support from Republicans. If it seems unlikely that a stand-alone online poker bill could generate enough support in Congress, there may still be an alternative. Perhaps the best chance of online poker legislation getting passed is to attach it to another larger bill, which is something that Reid can be influential in helping to achieve. It is a tactic that has been used in this context before, as in 2006, when UIGEA was passed as part of the SAFE Port Act, a bill that regulated port security.

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Ifrah Law is a leading white-collar criminal defense firm that specializes in igaming.