On May 28, 2013, federal prosecutors unsealed an indictment charging seven men with allegedly operating an organization known as “Liberty Reserve,” which prosecutors allege was established for the sole purpose of creating an illegal digital currency that could be used to launder money. This is a case that anyone involved in businesses that rely in any way on bitcoins will definitely want to watch.
Prosecutors say that Liberty Reserve was used to aid in identity theft, computer hacking, and other illegal activities. The indictment alleged that Liberty Reserve was responsible for laundering more than $6 billion over the last seven years through 55 million transactions. The company allegedly has about one million users across the globe, including 200,000 in the United States.
The indictment comes just a few months after the Financial Crimes Enforcement Network (FinCEN), a branch of the United States Department of the Treasury, issued new guidelines stating that virtual currency exchanges should follow traditional money laundering rules. Virtual currencies, such as the well-known bitcoin, account for only a small percentage of global financial transactions, but their popularity is growing rapidly.
Like bitcoin, Liberty Reserve operated as a virtual currency exchange; however, there are some key differences between bitcoin exchanges and Liberty Reserve. Bitcoin transactions operate in a more transparent way than transactions on Liberty Reserve did. Bitcoin transactions are stored in a public ledger called a “block chain” to keep people from writing the equivalent of a bad check with bitcoins. It is that same public block chain that makes it possible to trace transactions years after they have occurred.
Earlier this month, federal authorities cracked down on Mt. Gox, the world’s largest bitcoin exchange. The basis of the crackdown on Mt. Gox was a failure to properly register as a money transmitter. There were no allegations by law enforcement that bitcoin currency itself violated state or federal law. Indeed, the Treasury Department regulations reflect that such currency is lawful, but subject to regulation.
This month’s actions by federal authorities against Mt. Gox and Liberty Reserve clearly show that law enforcement is monitoring virtual currency exchanges. Although there is no immediate reason to believe that a properly registered bitcoin exchange violates state or federal law, those companies operating virtual currency or bitcoin exchanges should be aware that law enforcement is following this trend and capable of quickly reacting to perceived violations of the law.
On May 31, the House Committee on Judiciary Over-Criminalization Task Force will begin a six-month investigation to determine whether the U.S. Code over-criminalizes relatively minor conduct. The bipartisan task force, composed of five Republicans and five Democrats, will conduct hearings and review thousands of federal criminal statutes for purposes of recommending consensus-based improvements to federal criminal law.
Legislators of all political stripes recognize the need for reform. Experts estimate that the U.S. Code contains 4,500 federal crimes and up to 300,000 regulations that provide for the imposition of criminal penalties. One-third of all federal criminal statutes were added to the U.S. Code within the last 30 years. This recent explosion in federal criminal law has added significant costs for prosecution, resolution, and incarceration. Sometimes Congress enacts new laws that overlap with existing state law, thus transferring enforcement costs from the states to the federal government.
Over-criminalization also burdens individuals. Indeed, the labyrinth of federal criminal statutes and regulations seriously undermines a basic tenet of criminal law — that people should have fair notice of what is against the law. Stories abound to show that the presumption can be as unrealistic as the real-world consequences are devastating:
• In 2003, Texas senior citizen George Norris was indicted in Miami for importing mislabeled orchids in violation of an international treaty as implemented by the Endangered Species Act. After pleading guilty to the charges, Norris was sentenced to 17 months in prison — part of which he served in solitary confinement — and two years of supervised release. He was also ordered to pay an assessment of $700. Although he had no prior record, the orchid-gardener-turned-felon cannot vote, own a gun, or keep alcohol in his home.
• In 2007, Lawrence Lewis was charged with discharging pollutants in violation of the Clean Water Act. Formerly the chief engineer at a military retirement home near D.C., Lewis made the ill-advised but well-intentioned decision to divert backed-up sewage into an outside storm drain to prevent flooding in an area where the military home’s most vulnerable residents lived. Lewis mistakenly believed that the storm drain emptied into a waste-treatment facility; instead, the drain emptied into a creek that feeds the Potomac River. Lewis decided the risks associated with fighting the charge were too great, so he pleaded guilty. He was sentenced to probation and ordered to pay a $2,500 fine.
• In 2011, 11-year old Skylar Capo rescued a baby woodpecker near Fredericksburg, Va. Two weeks later, an employee of the U.S. Fish and Wildlife Service traveled to the girl’s home to cite her for violation of the Migratory Bird Treaty Act, a misdemeanor punishable by up to six months in jail, a fine, or both. The federal agent confirmed that Skylar had already released the bird and canceled the citation. But the automated system processed the citation anyway, so Skylar received a notice requiring her to pay a $535 fine and threatening possible jail time. Although the Fish and Wildlife Service apologized for the error, the case illustrates the potential for abuse that exists due to over-criminalization.
No doubt, the task force will investigate ways to minimize such absurd results. It remains to be seen whether the investigation will produce meaningful change. On one hand, there is reason for hope: efforts to address over-criminalization have broad support among Republicans, Democrats, and a diverse coalition of groups including the Heritage Foundation, Cato Institute, the National Association of Criminal Defense Lawyers, the American Civil Liberties Union, and the American Bar Association.
On the other hand, history suggests that change will not come easy. The House Subcommittee on Crime, Terrorism, and Homeland Security conducted a hearing on over-criminalization almost four years ago, but congressional efforts to address the problem never gained traction. For example, current Task Force member Jim Sensenbrenner (R-Wis.) is a sponsor of the Criminal Code Modernization and Simplification Act, which would reduce the federal criminal code by one-third and otherwise consolidate and streamline federal criminal law.
Sensenbrenner introduced versions of the bill in 2006, 2007, 2009, and 2011, but none was enacted. He reportedly intends to reintroduce the bill this year. If the task force and its supporters are able to raise awareness of how over-criminalization burdens society and individual liberties, legislators on both sides of the aisle may find the political capital they need to get something done.
The U.S. Supreme Court’s decision in the landmark 1966 case of Miranda v. Arizona underlined the importance of the Fifth and Sixth Amendments and drew a line that law enforcement must not cross – all in the interest of protecting individuals’ constitutional rights. Unfortunately, however, the high court was not as clear regarding the level of protection required under the Fourth Amendment in its 2012 decision in United States v. Jones.
In Jones, the Court held that a Fourth Amendment “search” occurs, and a warrant is required, when a GPS tracking device is attached by law enforcement to a person’s vehicle and then used to track its movements. Remaining unclear from the opinion, however, was whether and when such searches could be ever be exempt from the warrant requirement. Further unclear was whether the ruling would apply to other technologies, such as smartphones and OnStar systems.
Because of these ambiguities, and magnified by developments in location technologies, Fourth Amendment and privacy rights are giving way to aggressive law enforcement – and courts are divided on the propriety of these tactics. The Obama Administration recently argued before the U.S. Court of Appeals for the 3rd Circuit that the Supreme Court has given the government broad exemptions to search warrant requirements (such as the “reasonable suspicion” and the “probable cause” exceptions) and that device tracking can fall under these exemptions.
Far more troubling, however, is a recent opinion by a federal magistrate in New York in which U.S. Magistrate Judge Gary Brown effectively eviscerated Fourth Amendment protections for device tracking. Brown ruled that a search warrant is not necessary for authorities to obtain real-time location information for a suspect’s cell phone. Brown held that “phone users who fail to turn off their cell phones do not exhibit an expectation of privacy.” The magistrate’s opinion would mean that we are all effectively giving our consent to search by virtue of using a ubiquitous (and near-essential) technology.
Brown’s opinion contrasts starkly with Justice Sonia Sotomayor’s concurring opinion in Jones, in which she noted:
People disclose the phone numbers that they dial or text to their cellular providers, the URLs that they visit and the e-mail addresses with which they correspond to their Internet service providers, and the books, groceries and medications they purchase to online retailers . . . I would not assume that all information voluntarily disclosed to some member of the public for a limited purpose is, for that reason alone, disentitled to Fourth Amendment protection.
The contrasting statements among the courts have reinforced the need for Congress to step in and circumscribe law enforcement tracking tactics. Currently before the House are both H.R. 983, the Online Communications and Geolocation Protection Act and H.R. 1312, the Geolocation Privacy and Surveillance Act. Both bills are aimed at providing a legal framework for when and how location tracking devices can be used, and when and how data location records may be obtained. Both bills were introduced during the last Congress and reintroduced during this term. With bipartisan support, hopefully they will get traction. In the meantime, you may want to keep your cell phone powered off.
A Houston couple is giving an estimated $4 billion in the next few years to try to solve some of the nation’s social problems by the application of careful thought and statistical analysis – and the criminal justice system is one of their targets.
John and Laura Arnold have that much to give away because John, still only 39 years old, made a vast fortune as a hedge-fund trader.
As a current Wall Street Journal article entitled “The New Science of Giving” explains, the Arnolds’ approach is quite different from the plan that most mega-donors select. Rather than pick existing institutions like cancer centers, women’s shelters, or anti-hunger programs to give money to, the Arnolds want to fund new, alternative approaches to solving problems. Chief among those new approaches is the use of data analysis and science.
Among their targets is the nation’s criminal justice system, where the Arnolds want to understand not the broad constitutional principles but their application in the states on a daily basis and to try to figure out how the system can be improved. They have hired Anne Milgram, a former New Jersey attorney general, to spearhead this effort.
One aspect of the system that the Arnolds are interested in right now is how judges make their decisions to keep nonviolent pretrial defendants behind bars. There just isn’t enough science behind those decisions, the Arnolds believe, and they are spending millions of dollars to create a risk-assessment tool that judges can use to choose whether to lock people up pending trial or to return them to their families. The assessment tool benefited from data from 1.5 million cases – the sort of “big data” that has hardly ever been used in the criminal justice system to date.
We are quite interested in how this project works out and whether a data-driven approach turns out to help prosecutors and defendants. If some quantifiable benefit can be shown, it won’t be just nonviolent crime that will be affected. We’d then expect to see some application of these principles in white-collar crime sentencing and even in civil cases. It’s not clear where the dollars will come from, beyond the Arnolds’ massive infusion of cash, but there’s a significant chance that real change in the justice system may occur in the next decade or so.
The U.S. Court of Appeals for the 11th Circuit recently ruled on an issue lying at the intersection of fraud conspiracies and the U.S. Sentencing Guidelines: the government’s separate burden of proof against each co-defendant when multiple plea bargains are entered. Specifically, the 11th Circuit was addressing whether the government presented sufficient evidence to show, in a credit card fraud case, that the defendant’s criminal activity affected at least 250 victims. Finding that the government had come dramatically short of meeting its evidentiary burden, the appeals court opened its opinion with a flare of witty admonition: “Sometimes a number is just a number, but when the number at issue triggers an enhancement under the Sentencing Guidelines, that number matters.”
The facts of this case are as interesting as the court’s tone. The defendant was Gary Washington, who pleaded guilty to four offenses related to his role in a credit card fraud conspiracy that affected more than 6,000 individual cardholders. At first blush, it stands to reason that his sentence was calculated using a level-6 enhancement, which is reserved for crimes affecting 250 or more victims. However, there was a critical issue that the government and the district court failed to appreciate: Washington didn’t enter the conspiracy until four months after its inception, so the full victim count couldn’t be summarily applied to him.
Remarkably, before the sentencing hearing, Washington conceded that “in all probability there were more than 250 victims.” However, his sticking point was that he wanted the government to submit “hard evidence” supporting a level-6 enhancement in place of its “verbal assurances.” The government essentially ignored his requests and proceeded to the hearing without submitting additional evidence. Washington objected again at the sentencing hearing, but the district court overruled his objection and applied the level-6 enhancement, noting that the figure had been applied to the other defendants’ sentences.
On appeal, the 11th Circuit found the government’s representations insufficient and stated that “evidence presented at the trial or sentencing hearing of another may not – without more – be used to fashion a defendant’s sentence if the defendant objects.” The appeals court pointed out that it was especially inappropriate to use the other co-defendants’ sentences as a guide, because Washington joined the conspiracy well after it began. Following this reasoning, the appeals court set aside Washington’s sentence and remanded the case to the lower court for resentencing. The 11th Circuit declined the government’s request to present additional evidence on remand, because nothing had prevented it from presenting sufficient evidence at the original sentencing hearing.
This case is another example of federal prosecutors and trial courts losing sight of our system’s fundamental canon: a defendant is innocent until proven guilty. In some instances, the procedural safeguards that protect this system may seem inefficient and unnecessary. However, the alternative would beckon trial courts down the slippery slope of replacing actual evidence with assumptions. Fortunately, the appeals courts are present as a way of reining them in.
Former Enron executive Jeffrey Skilling reportedly has negotiated a deal with federal prosecutors that is likely to result in a significant reduction of the prison sentence he will serve for his role in the collapse of Enron. Under the new agreement, Skilling faces between 14 and 17.5 years in prison — a 27 to 42 percent reduction relative to his previous sentence of 24 years. Apparently, Skilling’s aggressive defense wore prosecutors down in such a way that they are now willing to give up almost half of Skilling’s prison sentence to resolve the case once and for all.
In May 2006, Skilling was convicted on one count of conspiracy, 12 counts of securities fraud, five counts of making false statements to auditors, and one count of insider trading. As a result, he was sentenced to roughly 24 years in prison and ordered to pay $45 million in restitution.
Skilling appealed the convictions and sentence with some success. First, the U.S. Court of Appeals for the 5th Circuit vacated his sentence on the grounds that the U.S. Sentencing Guidelines had been misapplied. Then, the U.S. Supreme Court held that the trial record did not support his conviction for conspiracy to commit “honest services” wire fraud. On remand, the 5th Circuit found the “honest services” error to be harmless and upheld the conviction so all that remained was for Skilling to be resentenced.
Skilling’s attorneys were preparing to request a second trial based on newly discovered evidence, but the prosecutors evidently decided that the fight was not worth it. According to prosecutors, the government has invested extraordinary resources in bringing Skilling to justice, and a second round would impose even greater costs, delay resolution, and delay restitution payments to Skilling’s victims.
The parties’ agreement will facilitate closure by stipulating that a sentence in the range of 14 to 17.5 years is reasonable. Both parties have agreed not to contest a sentence within that range and have reserved their right to contest a sentence outside that range.
U.S. District Judge Sim Lake, the sentencing judge, is likely to agree with the parties, as a sentence outside the agreed-upon range would burden the parties with costs they would rather avoid.
Skilling is scheduled to be resentenced in the Southern District of Texas on June 21.
The U.S. Court of Appeals for the 3rd Circuit is currently considering a sentencing issue of great significance in cases in which a number of individuals work together to bring about a financial fraud. The question posed is the extent to which a defendant can and/or should be punished based on the profits made through the fraud when the defendant did not receive as much money from the fraud as his co-conspirators.
In Kluger v. United States, the appeals court must determine whether former attorney Matthew Kluger’s sentence was unduly harsh. Kluger was one of three men who pleaded guilty to insider trading last year in federal district court in Newark, New Jersey. In his plea, Kluger, who is 51, admitted that he stole data on about 30 transactions during 17 years at law firms that included Skadden, Arps, Slate, Meagher & Flom and Wilson Sonsini Goodrich & Rosati. The companies involved include Sun Microsystems, 3Com Corp., and Acxiom Corp. Kluger gave that information to his co-defendant, Kenneth Robinson, who in turn gave them to trader Garrett Bauer, who traded on the information and then sold at a great profit when the deals went public. Following the scheme, Bauer then distributed the money to his partners. Over the last four years of this arrangement, according to prosecutors, Bauer made about $32 million in illicit profits, while Robinson made more than $875,000. Kluger claims to have made more than $500,000.
The sentences that were meted out to Kluger and Bauer did not track this huge disparity in the benefit that each received from their illegal activities. Bauer was sentenced to nine years imprisonment. Kluger received a sentence of 12 years – the longest prison sentence ever given for insider trading, eclipsing the 11-year sentence received by Galleon Group co-founder Raj Rajaratnam. In sentencing Kluger, Judge Katherine Hayden said that she wanted to send a strong message about the “radiating effect of the loss of confidence in the market” caused by insider trading. Judge Hayden also emphasized Kluger’s abuse of trust given his position as a lawyer. Robinson, who cooperated with authorities and secretly recorded the other men for the FBI, received a sentence of only 27 months.
The notion that a defendant may be sentenced based on the aggregated gains of his co-conspirators is nothing new. Section 1B.1.3(1)(a)(1)(B) of the U.S. Sentencing Guidelines expressly provides that, “in the case of a jointly undertaken criminal activity,” relevant conduct (which sets the amount to be used to calculate upward adjustments in the loss table of Section 2B1.1) includes “all reasonably foreseeable acts and omissions of others in furtherance of the jointly undertaken criminal activity . . .” But the acceptance of this approach may be strained by cases of insider trading and other white-collar crimes that increasingly involve astronomical amounts of money, and therefore expose all participants to draconian criminal sentences.
In appealing Kluger’s sentence, his attorneys stressed that the district court appeared not to have considered the disparity in the amount of money that Kluger actually received as a result of the insider trading compared with at least one of his co-conspirators. This argument echoes some of the reasoning of Judge Jed Rakoff in his sentencing of Rajat Gupta, who likewise received far less benefit from insider trading than his co-conspirator, Rajaratnam. The issue raises an interesting question: Should a defendant’s sentence be commensurate only with his or her own personal gain? Or is the measure of the proper severity of a sentence the total gain obtained by all of the participants – an approach that appears to be more in step with the concept of “relevant conduct” that plays an important role in calculating advisory ranges under the Sentencing Guidelines?
The Third Circuit’s determination on this issue may signal the direction that the courts take on this issue, or may be just the first ruling in what becomes a split among the circuits. The resolution of this issue will be particularly important in cases in which Section 2B1.1 (the loss value table) plays a critical role in determining Guidelines sentences.
April 30 was an historic day for online poker players in the United States. Just a bit more than two years after the indictment and civil cases that were termed “Black Friday” shut down the industry, Ultimate Poker became the first live real-money online poker site in the United States after Black Friday.
Nevada became the first state to legalize online poker in June 2011, and the regulations governing online gaming were issued in December 2011. Nevada gaming authorities granted Ultimate Poker a license in October and last week signed off last week on Ultimate Poker’s technology, which allowed them to launch.
Ultimate Gaming, a majority-owned subsidiary of Station Casinos, LLC, is operating UltimatePoker.com. Station Casinos owns sixteen casinos in Las Vegas. Ultimate Poker is the exclusive online gaming partner of the Ultimate Fighting Championship.
Right now, Ultimate Poker is only available to people who are over the age of 21 and are located in Nevada, though you do not have to be a Nevada resident to participate. Players can register and deposit money into their accounts from anywhere in the world, but can only play when they are physically in Nevada. Players can also make deposits and withdrawals at any of Station Casinos’ locations in Las Vegas.
To verify location, Ultimate Poker will triangulate a customers’ cell phone signal, though some cell phone carriers are not participating in the plan yet. Some players reported difficulty when they tried to play on Ultimate Poker on the first day, including issues with the geo-location services and players being unaware that their cell phone carrier was not participating.
Nevada recently passed a bill that would authorize the state to enter into interstate gaming compacts with other states, a reality that became possible after the U.S. Department of Justice released an opinion in December 2011 stating that the Wire Act applied only to sports betting. Liquidity could become an issue for a state with a relatively small population such as Nevada, so interstate compacts could become vital to the long term success of the state’s online gaming industry.
Online gaming is legal in both New Jersey and Delaware, though those states have yet to go live. Nearly a dozen other states have at least considered some form of online gaming legislation in the past year.
We are very happy to see online poker back online again. Some hurdles remain for companies to assure that their products operate smoothly and efficiently, but it is a good day for the industry and players that real money poker is back online.
Justice may or may not be blind; but she can buckle under pressure. It may take years, millions of dollars and armies of attorneys, but if you have the resources to test her mettle, you too may tip the balance in your favor.
Almost seven years after his conviction on fraud and other charges, former Enron executive Jeffrey Skilling may finally be succeeding in his effort to cut down his prison sentence that was originally set at more than 24 years. His investment in his battle is nothing short of impressive. He apparently spent some $70 million on his defense in the underlying trial that ended in 2006 … and that doesn’t include the subsequent seven years of activity, which involves more than 1300 docket entries as of March 2013.
Skilling’s persistence may be paying off. The Department of Justice recently issued a notice on a proposed sentencing agreement with Skilling. (The notice provided that victims have until April 17, 2013, to express their views on the prospective agreement. No further timetables have been officially set.)
It may seem surprising that the Justice Department would consider entering a sentencing agreement with someone who has already been convicted and sentenced and is serving time. But this is a product of Skilling’s aggressive efforts since his conviction, which have resulted in several appearances before the U.S. Court of Appeals for the Fifth Circuit and in one successful trip to the U.S. Supreme Court.
In 2009, the Fifth Circuit vacated Skilling’s sentence – which is where the recently announced sentencing agreement comes into play. In 2010, the Supreme Court ruled that one of the legal theories behind Skilling’s conviction (the honest-services fraud theory) was unconstitutionally vague and remanded the case to the Fifth Circuit to decide whether any of the charges should be invalidated.
After more yo-yoing between courts (the Fifth Circuit upheld the conviction in 2011, the Supreme Court declined to hear a second subsequent appeal in 2012, and Skilling renewed his request for a new trial based on new evidence after the failed Supreme Court appeal), the Justice Department may be raising a white flag of sorts and opting to settle upon a sentence that is mutually acceptable to Skilling and prosecutors. The DOJ may be unwilling to spend more public resources on a man who won’t go away until he gets his way.
It is hard to say what the sentencing agreement will provide. We previously opined that in resentencing, the judge could sentence Skilling to somewhere between 15 and 30 years under the sentencing guidelines. Obviously a more stringent sentence than the previous 24-year sentence is not going to be the result of the prospective agreement between Skilling and the DOJ. Regardless of the terms, the agreement will need to be approved by the sentencing judge. And he will invariably have to balance, along with the scales of justice, the public outcry if the sentence is too light and the costs of continuing to do battle with Skilling.
Earlier this year, the Department of Justice announced an initiative to step up its enforcement of trade secret theft. In a February 20 press conference, Attorney General Eric Holder announced that the Obama administration aimed to make it a top priority to prosecute intellectual property crimes. At the press conference, the DOJ unveiled a report titled, “Administration Strategy on Mitigating the Theft of U.S. Trade Secrets,” which focuses largely on how to prevent and remedy trade secret theft by foreign governments and foreign corporations.
Only two days later, however, a development in one of the DOJ’s highest-profile trade secrets cases demonstrated the difficulties of prosecuting foreign defendants. On February 22, a federal judge in the Eastern District of Virginia determined that, despite eight attempts, the DOJ had not properly served Kolon Industries Inc, a South Korean company accused of stealing trade secrets from duPont, a U.S. company. The DOJ’s criminal case follows a civil trial that returned a $919.9 million judgment against Kolon for stealing 149 trade secrets related to Kevlar, a synthetic fiber used in body armor. Kolon used those trade secrets to create its own competing fabric, Heracron.
The difficulties the DOJ encountered in bringing the overseas perpetrators to justice is especially relevant because the report indicates that most secret theft is committed by foreign nationals, especially in China. According to the report, “Chinese actors are the world’s most active and persistent perpetrators of economic espionage. US private sector firms and cybersecurity specialists have reported an onslaught of computer network intrusions that have originated in China, but the [intelligence community] cannot confirm who was responsible.” The vast majority of cases highlighted in the report involve Chinese nationals or Chinese firms.
The difficulties in bringing foreign nationals to justice only emphasize the need for corporations to take stronger precautions to prevent their trade secrets from being stolen in the first place. The “Administration Strategy” document recognized this need and proposed that companies work cooperatively to develop best practices for trade secret protection in areas such as research and development compartmentalization, information security policies, physical security policies, and human resources policies.
The “Administration Strategy” document notes that companies suffering from trade secret theft may be hesitant to come forward for fear of how it could affect the company and its stakeholders. However, the document encourages them to do so, both in order to bring the perpetrator to justice and to allow the government to collect information that could help to identify patterns in trade theft and prevent similar events in the future.
The DOJ has demonstrated its commitment to trade secret enforcement by continuing to pursue the Kolon case despite the February setback. The DOJ filed a superseding indictment on March 19 and must now serve Kolon in accordance with the judge’s February 22 order. Given the fanfare with which the DOJ announced its trade secret agenda, there is no doubt that the government will continue to doggedly pursue this and other trade secret cases.
We support the DOJ’s effort to protect corporate trade secrets so that companies can benefit from the innovation that they work so hard to develop. As always, we also remain on the lookout for indications of overzealous prosecution in instances where it does not appear that confidential proprietary information has been stolen.