Crime in the Suites: An Analyis of Current Issues in White Collar Defense
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Dec 20
2013

First Circuit Reverses District Court Order Granting New Trial

Appellate courts do not often reverse a trial judge’s decision to grant a new trial, so we took notice when the First Circuit did so in United States v. Carpenter.  Given the case history, the First Circuit decision should help to answer an important question:  How much leeway do prosecutors have when summarizing evidence in closing arguments?

In 2005, a jury convicted Daniel Carpenter on nineteen counts of wire and mail fraud.  The charges pertained to Carpenter’s operation of Benistar, a company that handled “like kind” exchanges for owners of investment property.  Under federal law, investors may defer capital gains on the sale of investment property if they exchange it for another property of like kind.  In order to qualify, the seller or “exchangor” must complete the exchange within 180 days of the initial sale and must not take possession of sale proceeds in the interim.  To meet the requirements, exchangors usually rely on a qualified intermediary to hold the exchange funds until they are reinvested.  Benistar’s business as a qualified intermediary gave rise to the charges against Carpenter.

The government alleged that Carpenter obtained investors’ exchange funds by fraud.  At trial, the prosecution argued that Carpenter persuaded investors to contract with Benistar by misrepresenting that their funds would be managed conservatively for a modest return of 3 to 6%.  According to prosecutors, Carpenter made the representations knowing full well that the money would be used for high-risk trades.  The jury apparently agreed, returning a guilty verdict on all counts.

Carpenter requested a new trial, which the trial judge granted due to the government’s repeated use of a gambling metaphor in closing arguments.  The court noted that the evidence against Carpenter was sufficient for a conviction, but not overwhelming.  The government may have tipped the scales by arguing that Carpenter had gambled with investors’ money hoping to make millions for himself.  It was possible the jury convicted based on moral disapproval of gambling rather than evidence of fraud.

In a divided opinion, the First Circuit affirmed, largely deferring to the trial court’s assessment.

At the end of the re-trial, the government omitted the gambling metaphor, focusing instead on Benistar’s marketing materials, contracts with investors, and Carpenter’s profit motive.  Again, the jury returned a guilty verdict on all counts having deliberated for roughly two hours.

At Carpenter’s request, the trial judge ordered a third trial, but not for reasons advanced by the defense.  This time, the judge was troubled by the jury’s two-hour deliberation.  He observed that it would be nearly impossible for jurors to walk through the evidence for nineteen different counts in two hours.  They must have taken a shortcut.  Thus, the judge ordered a new trial on grounds that the prosecutor had invited jurors to employ certain presumptions based on mischaracterizations of evidence.  For one, the government implied that Benistar’s marketing materials made express misrepresentations about the safety and security of investor funds.  In reality, the marketing materials supported only an inference to that effect.  The government also invited jurors to presume that qualified intermediaries are prohibited from using exchange funds for high-risk trades, when that is not the case.  Moreover, by emphasizing Carpenter’s profit motive, the government may have encouraged jurors to convict for “greed” rather than fraud.

On appeal, the First Circuit disagreed and reinstated the guilty verdict.  A unanimous panel held that the prosecution’s statements were permissible summations of the government’s theory of the case, not mischaracterizations of record evidence.  The government had argued that Carpenter took in millions based on false pretenses that Benistar would keep the exchange funds safe and secure.  That argument was not improper, as the trial court found, because the prosecution followed it with a discussion of specific evidence supporting that conclusion.  Similarly, the government argued that “like kind” transactions are typically conservative—not so the jury would convict based on some imaginary statutory violation or breach of contract, but to establish that Carpenter knew Benistar’s risky investment strategy differed from investors’ expectations.  And the government’s references to Carpenter’s profit motives were equally permissible.  Those comments went to prove Carpenter’s specific intent for the fraud, which was to make more money.

A comparison of the two appellate decisions suggests that the district court erred because it failed to see the forest for the trees.  By treating each of the government’s questionable statements in isolation, the court found support for a new trial.  But the statements had to be considered in context.  In context, the prosecution’s comments were not mischaracterizations of evidence but main points of the government’s theory, which the prosecution supported from the record.

Given Carpenter’s pro-defense trial judge, it’s unclear why the defense opted for a third jury trial.  In hindsight, Carpenter may have fared better by ditching the jury request in favor of a bench trial.

Dec 18
2013

The Bitcoin Bubble Hasn’t Burst Yet, But The First Signs Of Trouble Are Brewing

By: Karl Smith and Casselle Smith 

The value of Bitcoin, the hottest and most widely traded virtual currency, plunged a little over a week ago, after China’s central bank issued a statement that the government is banning financial institutions from trading in the virtual currency.The price of a single Bitcoinfell from roughly $1200 on December 5th to less than $600, early morning December 8th. Thereafter it recovered somewhat selling for around $700 as of December 16.  At the time of this posting (12/18), the price had fallen once again to $571.

This time last year, Bitcoin were selling for roughly $13 apiece. Economists and financial experts have struggled to explain the meteoric rise price to investors and to a public increasingly interested in the virtual currency.  In many ways, the soaring price for Bitcoin looks like a classic bubble: Speculators pay out of the nose for Bitcoin, hoping to unload them to an “even greater fool” who will come along later with the same plan. At first blush, this type of bubble appears to resemble a pyramid scheme that must inevitably collapse once all potential speculators have bought in.

Bitcoin, however, has important features that differentiate them from other bubble-prone assets.  The fact that the crash coincided with a change in policy from the Chinese government makes it even more likely that the special features of Bitcoin have played an important role in their use.

The design of Bitcoin allows for almost completely secure and anonymous transactions.   Users don’t have to trust that a bank or other financial intermediary will keep their information secret. For the most part, the very nature of a Bitcoin transaction does this. Consequently, the currency has attracted substantial interest from users engaged in illicit transactions.  Some of these are of the kind familiar to American readers. The website Silk Road, for example, specialized in selling narcotics and accepting Bitcoin as payment; it has been shuttered by U.S. law enforcement.

The Chinese government’s ban on Bitcoin arose from a different sort of illicit transaction that is less familiar to Americans because it are designed to get around regulations that the United States does not impose… Here’s the rub: the Chinese government limits its citizens’ ability to invest outside of the country because it wishes to provide a large pool of capital available to Chinese industries.  Since Chinese investors have limited choice, Chinese banks can offer them paltry rates of return that guarantee that the value of their investments will fail to keep up with inflation.  Naturally, Chinese investors wanted a way out, and many of them turned to Bitcoin.

Chinese investors would buy Bitcoin using the local currency, the Yuan. They would then transfer the Bitcoin to a bank or other financial institution outside of China and have that institution sell the Bitcoin and invest the proceeds outside of China. When the investor was ready to cash in, she would simply instruct the financial institution to sell the foreign investments, use the proceeds to buy Bitcoin, and then transfer the Bitcoin back to her.

This loophole allowed Chinese investors to earn higher rates of return without being caught by the authorities. For a time, the Chinese government allowed the loophole to remain open. On Wednesday, however, the Chinese government banned financial institutions and, importantly, online platforms like Biadu.com, from doing any business in Bitcoin.  Baidu is a Chinese search engine that, like Google,forms the backbone of how users connect online. Without Baidu’s help,finding someone to buy or sell Bitcoin in the first place becomes exponentially more difficult.

Fear that the Chinese market for Bitcoin would dry up seemed to lead speculators to dump the currency following the announcement.  It also exposes the fundamental weakness of Bitcoin: while they allow enormous anonymity for users, connecting with a broadbase of other users requires using a platform which almost necessarily does not seek anonymity. If it did, potential users would not know of their existence.

Regulators don’t have to crackdown on users themselves but simply on the websites and platforms that connect them.

There is no readily apparent US or European analogue to the Chinese monetary policy that motivated the country’s crackdown. Hence, China’s stance does not necessarily indicate that an international sea change is afoot with respect to the legal nature of Bitcoin and other emerging virtual currencies. Nonetheless, to the extent that Bitcoin’s surge in value was precipitated by Chinese investors’ thirst for international investment capabilities, the recent crash highlights the currency’s deep vulnerability to changes in financial regulation around the world.

Karl Smith is the Creator and Chief Curator of Modeled Behavior, a leading international finance and economics blog currently hosted on Forbes. He blogs mostly on macroeconomics, rationality, philosophy, and futurism. 

Dec 17
2013

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

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

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

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

Dec 11
2013

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

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

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

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

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

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

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

Nov 15
2013

Peugh Ruling Affirms Sentencing Guidelines at the Time of the Crime are Applicable

In a key sentencing decision handed down this year, the United States Supreme Court held that the Ex Post Facto Clause is violated when a defendant is sentenced under provisions of the Federal Sentencing Guidelines promulgated after he committed the crime and those new provisions result in an increased risk of greater punishment. In addition to clarifying the proper application of different versions of the Sentencing Guidelines, this is a particularly significant decision because the Supreme Court has now held that even post-Booker, an error in calculating merely advisory guidelines ranges still invalidates the sentence.

Marivn Peugh and his cousin Steven Hollewell were charged in 2008 with nine counts of bank fraud in connection with a check kiting scheme from 1999 to 2000 that allegedly caused the bank to suffer over $2 million in losses. Hollewell pleaded guilty to one count of bank fraud and was sentenced to one year and one day imprisonment. Peugh pleaded not guilty and went to trial where he testified that he had not intended to defraud the banks. Peugh was nonetheless convicted by the jury of five counts of bank fraud, although he was acquitted of the remaining counts.

At the time of Peugh’s offense (in 1999 and 2000), the 1998 Guidelines were in effect. Under the 1998 Guidelines, the base offense level applicable to his offense was six, and thirteen levels were added for a loss amount of over $2.5 million, creating a total offense level of nineteen. The government argued for an additional two level enhancement for obstruction of justice, which brought the total offense level to 21. Since Peugh was a first time offender in criminal history category I, he had an advisory sentencing range of 37-46 months under the 1998 Guidelines.

When Peugh was sentenced in 2010, the district court applied the 2009 Guidelines which were then in effect. Under the 2009 Guidelines, the base offense level applicable to Peugh’s conduct was now seven, and the enhancement for a loss value of over $2.5 million added an additional eighteen levels. After adding the two level enhancement for obstruction of justice, Peugh’s total offense level under the 2009 Guidelines was 27 – six levels higher than under the 1998 Guidelines.  With a criminal history category of I, the advisory range for sentencing was 70-87 months – roughly double the range under the earlier version of the Guidelines. The district court sentenced Peugh to 70 months imprisonment, at the low end of the advisory Guidelines and he appealed the decision.

The U.S. Court of Appeals for the Seventh Circuit affirmed the sentence from the district court and quickly dismissed Peugh’s argument that the sentence violated the Ex Post Facto Clause. Relying on its own 2006 decision in United States v. Demaree, the Court held that the advisory nature of the Sentencing Guidelines post-Booker makes moot any argument that the application at sentencing of an increased Guidelines range at sentencing was not in effect at the time of the offense violates the Ex Post Facto Clause. This ruling was no surprise given that the Seventh Circuit has reaffirmed this proposition twice since it issued its 2006 ruling in Demaree.

The Supreme Court granted certiorari to resolve a Circuit split on this issue.  On appeal, the focus of the Court’s analysis was on whether the Guidelines – which, post-Booker, are admittedly advisory – are sufficiently material to judges’ decisions about sentencing to warrant application of the Ex Post Facto Clause. In support of his argument, Peugh relied upon empirical evidence showing the judges are indeed influenced in their sentencing decision making by the Guidelines even if those Guidelines are not binding. On the other hand, the government argued that there was no precedential basis for the application of the Ex Post Facto Clause to a provision of law that is merely advisory.

In its holding the Court emphasized that the intent of the Ex Post Facto Clause was that it “ensures that individuals have fair warning of applicable laws and guards against vindictive legislative action.” Even where these concerns are not implicated, the Court held that the Ex Post Facto Clause also “safeguards a fundamental fairness interest.” The Court noted that, while the Guidelines are advisory, judges are still required, under Gall and by statute to begin their sentencing determination by correctly calculating the applicable Sentencing Guidelines range.  The Court noted that continued vitality of the Guidelines in encouraging uniformity in sentencing by creating procedural hurdles that make the imposition of a sentence outside the guidelines range less likely. In doing so, the majority rejected the argument in Justice Thomas’ dissent that the advisory nature of the Guidelines means that do not “meaningfully constrain” a judges’ discretion.

The ruling in Peugh provides clear guidance to district judges that the version of the Sentencing Guidelines to be applied is the one in place at the time that the defendant committed his or her conduct constituting an offense. Of course, the Court’s ruling does not resolve how that principle will apply in cases involving charges such as conspiracy that may occur over a substantial period of time during which there may be multiple versions of the Guidelines. That issue and others will undoubtedly be the subject of litigation to come.

Nov 05
2013

District Court Holds Anti-Retaliation Provision of Dodd-Frank Act Does Not Apply in Case Virtually Lacking Any U.S. Connections

A recent decision in the United States District Court for the Southern District of New York has reinforced the United States Supreme Court’s jurisprudence on the extraterritorial application of federal statutes.

In Liu v. Siemens A.G., the plaintiff asserted that he was fired as a consequence of his disclosure of business practices by his employer in connection with sales in China and North Korea that he believed to be in violation of the Foreign Corrupt Practices Act, and sought damages from Siemens under the anti-retaliation provision of the Dodd-Frank Act.  But the multinational character of the case – with almost no contacts with the United States – led the Court to grant Siemens’ motion to dismiss on the ground that the anti-retaliation provision of Dodd-Frank has no extraterritorial application.

In Morrison v. National Australia Bank, the United States Supreme Court significantly limited the extraterritorial reach of federal statutes that do not affirmatively provide for such application.  That case involved alleged fraud in the shares of an Australian bank whose shares were not sold on any American exchange, and involved purchases of those shares outside of the United States.  Though the bank had American Depositary Receipts (ADRs) the Supreme Court affirmed dismissal of the securities fraud claims in that case.

The Liu case reaffirmed this principle based on a tailor-made set of facts.  As the Court explained: “This is a case brought by a Taiwanese resident against a German corporation for acts concerning its Chinese subsidiary relating to alleged corruption in China and North Korea.”  The Court noted that the only contact with the United States was that Siemens had ADRs traded on an American exchange, just as was the case in Morrison.

In granting Siemens’ motion to dismiss, the court observed that the anti-retaliation provision of the Dodd-Frank Act is silent as to extraterritoriality – a fact that the court viewed as weighing heavily against a finding of extraterritoriality.  The court also noted that other parts of the Dodd-Frank Act do provide for extraterritoriality – making the silence of the anti-retaliation provision even more meaningful.  The court also observed that the only other court to consider this issue also ruled against extraterritorial application of this portion of the statute.

While the court engaged in a lengthy discussion of whether the disclosures at issue fell within the scope of the statute, it ultimately concluded that there was no need to resolve that issue given that the statute simply did not apply to this conduct lacking almost any connection to the United States.  The court’s decision signals a willingness of the federal judiciary – at least in the context of civil litigation – to limit the extraterritorial reach of federal statutes where Congress has failed affirmatively to provide for such an application of the statute.  On the other hand, the case leaves open the question of whether a court might rule otherwise in a case in which there were greater contacts with the United States.

Oct 09
2013

Court Dismisses Loss Recovery Case, in Big Win For Fantasy Sports Industry

Today, in a closely watched case in Illinois, a federal court dismissed a lawsuit brought under the Illinois Loss Recovery Act (ILRA) against daily fantasy sports site FanDuel, Inc. and daily fantasy sports player Patrick Kaiser, finding that the plaintiff lacked subject matter jurisdiction to bring the suit. This is one of several lawsuits that have been brought in Illinois courts against daily fantasy sports companies and individual winners.

If a person has lost more than $50 gambling, the ILRA, like a number of state loss recovery acts, allows that person who lost money or something of value to sue the winner to recover the money that was lost. The ILRA also provides that if a suit is not brought by the loser within six months, “any person” may bring an action against the winner and is entitled to recover three times the amount of money lost gambling. The plaintiff in this case, Christopher Langone, is that “any person” who brought the suit against Patrick Kaiser and FanDuel.

The complaint alleged that Kaiser won several hundred thousand dollars playing on daily fantasy sports sites including FanDuel.

The court dismissed the complaint because it lacked subject matter jurisdiction due to insufficient allegations in the complaint. The court noted that there was not even a bare assertion that there was a sufficient amount of money lost for a federal court to have the jurisdiction to hear the case. The court also noted that the complaint failed to identify a specific loser who lost a certain amount and failed to bring a claim as required under the ILRA.

A very interesting point in the decision is that the court held that FanDuel was not a “winner” in the context of the Illinois Loss Recovery Act. The plaintiff had alleged that the defendants were winners because they take a commission from the entry fees paid by participants in the games, but the court rejected that argument. The court noted that, “FanDuel does not place any ‘wagers’ with particular participants by which it could lose money based on the happening of a future events (i.e., the performance of certain athletes), but merely provides a forum for the participants to engage each other in fantasy sports games.”

The plaintiff alleged in the complaint that daily fantasy sports games are not a game of skill, but instead “a form of ‘exotic’ sports wagering subject to change.” The court in this case did not address the issue because it did not have to after it found that there was a lack of subject matter jurisdiction.

Although the court did not address all of the issues relevant to the daily fantasy sports industry in the case, this decision is a huge win for the industry. Loss recovery act cases will be harder to bring against daily fantasy sports companies that are not assuming risk in their games. Daily fantasy sports continue to grow rapidly and today’s decision helps to partially remove one roadblock to its growth.

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

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Oct 08
2013

Appeals Court: Forced Rectal Search of Suspect Violates 4th Amendment

In a recent opinion, the US Court of Appeals for the 6th Circuit addressed whether it was constitutionally reasonable for police to use a doctor – in this case, a doctor “who is known to conduct unconsented intrusive procedures when suspects are presented by the police” – to forcibly recover drugs from a man’s rectum. Judge Julia Smith Gibbons’ dissent notwithstanding, the 6th Circuit found that it was not reasonable, opining that the doctor’s behavior “shocks the conscience at least as much as the stomach pumping that the Supreme Court long ago held to violate due process.”

The case, United States v. Felix Booker, came to the appeals court from the Eastern District of Tennessee. It began just before noon on August 12, 2010, when K-9 officer Daniel Steakley pulled Booker over for expired plates. The stop quickly escalated into a drug search. Steakley had arrested Booker earlier the previous year. Although Steakley’s drug-sniffing dog and a physical patdown yielded less than a gram of marijuana, Steakley called for backup and immediately arrested Booker for felony possession of marijuana. Tennessee law designates anything less than 14.175 grams a misdemeanor, worthy of only a citation.

Apparently the arrest was based on the officer’s suspicion that Booker was hiding contraband on his person. According to the officers, Booker fidgeted with the back of his pants during the traffic stop and at the police station following his arrest. They subjected Booker to an even more intrusive patdown in the interrogation room and to a strip search at the detention facility. No contraband was retrieved from either, but the officers weren’t done with Booker. They transported him – naked, shackled, and covered only in a blanket – to a local emergency room. There they presented him Dr. Michael LaPaglia, the attending physician.

LaPaglia told Booker that he needed to examine his rectum and extract any items found there. Booker refused. LaPaglia informed Booker that he had little choice in the matter, injected Booker with muscle relaxants and probed his rectum, manually. When that search failed to produce any contraband, LaPaglia ordered general anesthesia and had Booker intubated for nearly an hour. LaPaglia then paralyzed Booker and successfully extracted what previous probes had failed to retrieve, five ounces of crack cocaine.

This was the third time in three years that officers from the sheriff’s department had sought LaPaglia’s assistance in extracting evidence from a suspect. This time, however, Booker appealed his conviction and the 6th Circuit reversed — on the grounds that LaPaglia in conjunction with the Oak Ridge Sheriff’s department had violated Fourth Amendment protections against illegal search and seizure.

After addressing why the doctor’s conduct was attributable to the police, the Court examined the reasonableness of the search by weighing the following three factors: (1) the extent to which the procedure may threaten the safety or health of the individual, (2) the extent of intrusion upon the individual’s dignitary interests in personal privacy and bodily integrity, and (3) the community’s interest in fairly and accurately determining guilt or innocence. In its analysis, the court highlighted the doctor’s failure to employ the less intrusive means used by U.S. Customs and Border Protection: an x-ray to confirm the presence of contraband, monitored bowel, and only engaging in an involuntary body cavity search after obtaining a court order.

The line between zealous police work and the violation of civil liberties can be fine. In Booker’s case, however, that line was egregiously and recklessly crossed with the help of a doctor, all too willing to set aside his oath: “First, do no harm.”

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Sep 18
2013

Colorado Defense Attorney Charged With Felony – Why?

A recent indictment in a state court in La Plata County, Colorado, has ruffled feathers in the defense bar. The accused was one of our own, criminal defense attorney Brian Schowalter. The charge was based on Schowalter’s refusal to turn over evidence he ostensibly held for a client. The evidence, an original letter, was apparently relevant to a homicide investigation involving the attorney’s client (though it appears that this material was not protected by attorney-client privilege).

This is the kind of scenario that keeps defense lawyers awake at night: might you someday face criminal charges for aggressively protecting the interests of your client? So when Schowalter appeared in court to be formally advised of the felony charge against him, it was not too surprising that 10 criminal defense lawyers sat behind him in an apparent show of solidarity, and to signal to prosecutors that they will not buckle easily to pressure.

While few facts about the matter have been publicized, the central question for many is why would the prosecutor choose such a drastic approach?

The indictment charges Schowalter with unlawfully tampering with physical evidence in a homicide investigation. The prosecutor in the matter argues that he used every means available to obtain the evidence. (It would be nice to know exactly what procedural steps the prosecutor undertook before unleashing the proverbial nuclear bomb.) When the prosecutor subpoenaed the letter, Schowalter asserted his Fifth Amendment rights.

It is not clear from the facts currently available, but it is possible that Schowalter’s actions would support a disciplinary proceeding for potential ethics violations. Colorado Rules of Professional Conduct provide that a lawyer shall not “unlawfully obstruct another party’s access to evidence or unlawfully . . . conceal a document or other material having potential evidentiary value.” So why didn’t the prosecutor report Schowalter’s alleged misconduct to the Colorado bar? That would be a more typical – and arguably more appropriate – response to potential issues of professional misconduct.

Did the prosecutor take such a heavy-handed approach because of Schowalter’s decision to assert his Fifth Amendment rights? It seems a bit unusual for a defense attorney to plead the Fifth in response to a demand for client documents. Schowalter’s response implies an admission that his previous action of withholding the letter could lead to more serious charges, an action that may have invited an already-irritated prosecutor to pursue criminal charges rather than a state bar action.

The lesson from this case may be: if you believe that client documents in your possession are legally protectable, fight vigorously by employing the procedural mechanisms available (e.g., a motion to quash). But don’t invite a bigger battle through obstinacy. Of course, if the defense bar continues to hold its line in the matter, there may be a lesson or two for the prosecutor, starting with a road map to a more appropriate legal action – based on ethics sanctions as opposed to criminal penalties.

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

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Sep 13
2013

FBI Hacking Into Electronic Devices: An Effective But Invasive Tool

Privacy and national security interests are notoriously tricky to balance.  Lean too far one way, and you lose an important tool in preventing and detecting crime; lean too far the other way, and you are depriving Americans of their liberty through persistent government intrusion and observation. This balancing act has been an especially hot topic given recent revelations about the National Security Agency’s surveillance and data-gathering networks. While attention has been focused on the NSA and the mass surveillance disclosures that took place earlier this summer, a particularly startling revelation about the FBI’s actions has flown largely under the radar.

A recent New York Times article revealed that the FBI has been gathering information from suspects by remotely hacking into their electronic devices and covertly tapping into the information that can be found on and through the devices.  The FBI accomplishes this in much the same way that criminal, civilian hackers do: by delivering spyware to the devices through web or email links. When the user clicks on the link, either on a computer or a smartphone, the government can use the spyware either to collect existing files or to activate the device’s recording devices for continuing surveillance.  According to the article, one former U.S. official confirmed that the FBI can remotely activate the microphones in phones running the Android operating system to record conversations.

This sort of government intrusion goes well beyond the NSA’s acknowledged collection of telephone and email metadata.  This spyware is programmed to collect full conversations, real-time photos and videos, and stored files of all types, from devices that people have near them 24 hours a day.  This type of intrusive government intrusion into a device in which an individual has a reasonable expectation of privacy is the type that the Constitution’s Fourth Amendment is meant to address.  And, in theory, it does.  The FBI and other law enforcement agencies are required to obtain a warrant each time that they implement this technology to gather content such as computer files, and must meet a stricter standard for wiretaps when conducting surveillance using the webcam or microphone.

As technology advances, it becomes easier for the government to watch our every move.  Whereas once the government could listen to conversations only on wiretapped telephones or bugged areas, it is now able to keep an open microphone on a device that people keep on them no matter where they are.  We hope that law enforcement and the courts will seek and allow the use of this incredibly invasive and effective technique only rarely where no other surveillance is sufficient and not as a matter of course in standard investigations.

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

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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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