On June 20, 2012, President Barack Obama escalated a battle with the GOP-controlled House of Representatives by claiming executive privilege for 1300 executive-branch documents that relate to the White House and the Justice Department’s response to subpoenas about the botched Fast and Furious gun-trafficking operation.
The House Oversight and Government Reform Committee, chaired by Rep. Darrell Issa (R-Calif.) then voted immediately along party lines to approve a contempt of Congress finding against Attorney General Eric Holder Jr. That recommendation is expected to go to the full House next week.
The committee asserts that it needs the documents in its investigation of Fast and Furious and of a possible executive-branch cover-up of that operation. The White House replies that handing over the documents would hamper the ability of government officials to discuss policy matters frankly and without fear that their deliberations would become public.
Confrontations between the President and Congress over documents and over claims of executive privilege are not new. In fact, executive privilege has been claimed by every president since President John F. Kennedy, and the roots of the doctrine go back to actions by President George Washington in 1792.
The privilege to withhold documents from a congressional committee is not found in the Constitution. It is, however, based on the constitutional principle of separation of powers, which provides that the three branches operate independently of each other. Although the Supreme Court rejected the application of executive privilege in 1974 when President Richard Nixon claimed it in relation to a criminal subpoena for Watergate tapes, there is no question that the privilege exists and can be properly claimed under some circumstances.
The problem is that Obama and Holder are claiming the privilege broadly, for all 1300 pages of documents, without specifying why each document or group of documents is privileged.
As Todd Gaziano, a former attorney in the Justice Department’s Office of Legal Counsel, which advises on executive privilege, wrote in the Heritage Foundation’s blog:
Even if properly involved, the Supreme Court has made clear that executive privilege is not absolute. DOJ must provide an explanation why all those documents fit one of the recognized categories of executive privilege. It is questionable whether they all are legitimately subject to executive privilege, for several reasons. First, the Supreme Court in United States v. Nixon (1974) held that executive privilege cannot be invoked at all if the purpose is to shield wrongdoing. . . . Congress needs to get to the bottom of that question to prevent an illegal invocation of executive privilege and further abuses of power. That will require an index of the withheld documents and an explanation of why each of them is covered by executive privilege—and more. Second, even the “deliberative process” species of executive privilege, which is reasonably broad, does not shield the ultimate decisions from congressional inquiry. Congress is entitled to at least some documents and other information that indicate who the ultimate decision maker was for this disastrous program and why these decisions were made.
At the very least, the Administration owes Congress and the American people a better explanation of what it is doing and why.
Yet another shoe has dropped in the long-running investigation and the series of prosecutions arising from allegations of insider trading in the stocks of Goldman Sachs and other companies. In May 2011, Raj Rajaratnam was convicted of insider trading and ultimately sentenced to 11 years in prison. On June 15, 2012, Rajat Gupta, a former director at Goldman Sachs, was convicted in the U.S. District Court for the Southern District of New York on four of six counts of an indictment that charged him with a conspiracy that included feeding inside tips to Rajaratnam in September and October 2008 about developments at Goldman Sachs.
As with the trial of Rajaratnam, the key pieces of evidence against Gupta appear to have been wiretapped conversations. The four charges on which Gupta was convicted all related to trades in support of which the government presented recorded conversations as evidence (though the government played only three recordings in the Gupta trial). The jury acquitted Gupta of two charges arising from other trades for which the government presented no such evidence. The jury clearly was influenced by hearing Rajaratnam on the recordings referring to his source on the Goldman Sachs board – powerful evidence that gave increased persuasive power to the government’s reliance on phone records showing substantial contacts between the two men.
Rajaratnam has appealed his conviction to the U.S. Court of Appeals for the Second Circuit, and one significant issue he has raised is whether the government improperly sought authority to wiretap the conversations that were the cornerstone of his conviction. That ruling will be very significant, both because a decision in Rajaratnam’s favor is likely to result in a reversal of Gupta’s conviction as well, and because the Second Circuit’s ruling may have a major impact on the future ability of prosecutors to continue to use wiretaps against white-collar targets.
While Gupta is likely to receive a prison sentence for his conviction, it seems likely that he will receive a lower sentence that Rajaratnam, who engaged in the trades in question and reaped the benefits of those trades – estimated at trial to have generated $16 million in gains or in avoided losses from Rajaratnam’s fund. While prosecutors may seek a higher sentence based on acquitted conduct, Gupta’s advisory range calculated under the U.S. Sentencing Guidelines may be as much as eight years in prison. There is also a significant question whether Judge Jed Rakoff, who has expressed frustration with what he calls “the guidelines’ fetish with abstract arithmetic,” will sentence Gupta to a shorter term than the one calculated under the Guidelines.
When you hear of FBI agents descending upon a place, you might think of a hostage situation, a drug raid, or the penetration of a terrorist cell. But you probably wouldn’t assume that those armed agents were working with the U.S. Department of Education on a raid on a Florida for-profit college.
FBI agents raided campuses of FastTrain College in May 2012 in order to obtain data (documents and a computer or two) in furtherance of a joint investigation of the FBI and DOE of allegedly deceptive practices. One might wonder why the drama was necessary: Couldn’t the government just subpoena the materials or go in with a little less gusto? Yes, but the drama may have been a part of the plan.
While on campus, the agents questioned students about their Pell grants, used for tuition and expenses. Not surprisingly, all this activity caused a good bit of chaos and stirred up concern among students. One student was quoted as saying he was glad he was on campus at the time of the raid, “because they could’ve took money from me, a lot of money from me, and I’d have been screwed.” Another student relayed concerns over whether FastTrain was going to continue to operate, and what would happen to his credits. The students’ statements demonstrate a real concern over the credibility and viability of the institution – a concern incited by the FBI’s dramatic entry.
The drama also had major impact online, where several reports seem to have already decided the guilt of the college, inaccurately stating that the investigation found “deceptive and otherwise questionable sales and marketing practices.” This inaccurate quote, which was picked up and disseminated by the Huffington Post, goes to show how careless journalism can set the tone of a story. Here’s what appears to have happened:
• One report noted that “[t]here was a major undercover investigation by the General Accounting Office in 2010 of for-profit trade schools, which receive billions in federal loans and grants. The investigation uncovered ‘deceptive and otherwise questionable sales and marketing practices’ according to a government inquiry.”
• A later report peeled off the second sentence, stating, “Our news partner Channel 4 reports the investigation uncovered ‘deceptive and otherwise questionable sales and marketing practices,’ according to a government inquiry.”
• That quote itself was then picked up by Huffington Post contributor David Halperin, who stated “One report says the investigation found ‘deceptive and otherwise questionable sales and marketing practices.’”
These latter two stories missed the point that the identified deceptive practices were a part of the earlier 2010 GAO investigation and had nothing to do with the still-pending investigation of FastTrain. It appears that some writers are more than eager to jump to conclusions about the alleged greed of for-profit educators.
The DOE and the FBI have raided for-profit schools several times over the past several years – including at ITT and Corinthian College campuses. One source says that years into the ITT investigation, it finally concluded with no finding of wrongdoing. (Tell that to the students who fled from the school’s programs after the FBI raid.)
So why do the DOE and FBI keep up these shows of force at for-profit college campuses? Some of us skeptics may posit that they already have figured out for themselves that these institutions are bad, so they are making life difficult for the schools in order to give the industry a bad name in students’ eyes.
The FBI and DOE should follow the normal steps of investigation. Playing out drama and rigging public opinion before facts are gathered seems as incendiary as crying “fire” in a crowded theater or inspiring a bank run.
The Justice Department showed off some fancy dance moves in a recent sidestep it used to respond to an inquiry from Senator Chuck Grassley (R-Iowa). Grassley wanted detail from Justice to support its claims that it has brought thousands of mortgage fraud cases, including numerous convictions against Wall Street execs, following the 2008 housing crisis. Justice provided detail . . . but not detail responsive to Grassley’s request.
The senator had submitted a letter to Justice in March as a follow-on to a Senate Judiciary Committee hearing on the DOJ’s prosecutorial record. At the hearing, Grassley criticized the DOJ for its “terrible” record on prosecuting mortgage fraud, in particular for its failure to go after the higher-ups at Wall Street firms ultimately responsible for the financial crisis. The agency later retorted that it had brought “thousands of mortgage fraud cases over the past three years, and secured numerous convictions against CEOs, CFOs, board members, presidents and other executives of Wall Street firms and banks for financial crimes.” Grassley asked for the details, particularly requesting that the agency indicate which convictions were obtained against executives.
We previously wrote about the Iowa senator’s request and questioned whether he was doing a bit of grandstanding and overstating prosecutorial issues. But Justice’s response gives one pause to question whether the agency has been lax in investigating Wall Street, and trying to gloss over this reality.
What Grassley received from Justice in response to his request (weeks after his deadline) was an extensive list of cases. Glaringly missing were specifics on prosecutions against executives for mortgage fraud. The DOJ noted in its letter that it “does not maintain [such] statistical data” and thus could not generate a list based on business titles. Nonetheless, it then identified several cases against high-level officers and executives across financial crimes, including cases for insider trading and Ponzi schemes.
Anyone considering the DOJ’s response for more than a minute should see the game it was playing. If Justice could provide a list of cases, why could it not pluck data from the list on business titles of the defendants? If it could provide a list of prosecutions of executives across financial crimes, why could it not isolate that list to the immediate question of how many have been prosecuted for mortgage fraud?
Grassley noted that the DOJ’s response “substantiates my suspicion” that it “isn’t going after the big banks, big financial institutions or their executives” and instead is hiding behind numbers. If Justice wants to allay Grassley’s concerns, as well as the general public’s concerns, and prove that it indeed has been proactive in investigating mortgage fraud up and down the ladder – and not just going after smaller fraudsters – it needs to come up with a better response than it has to date.
Justice recently announced yet another working group, the Residential Mortgage-Backed Securities (RMBS) Working Group, to address mortgage fraud. Perhaps this group will be able to better provide some answers. But, as the working group’s predecessors have proved, simply having a bunch of task forces is insufficient, especially in light of some questionable track records.
While the recent economic crisis brought newly invigorated political support for SEC enforcement against financial services companies, a recent case shows that the courts will still prevent the SEC from overreaching in its efforts to punish those it views as wrongdoers. In Matter of the Securities and Exchange Commission v. Richard L. Goble, a May 29, 2012, decision by the United States Court of Appeals for the 11th Circuit reversed an SEC victory in a lawsuit claiming a violation of Rule 10b-5, on the ground that this anti-fraud provision did not reach the conduct that formed the basis for the enforcement action.
The SEC brought a civil enforcement action against Goble and others in 2008 alleging that Goble, the founder and owner of a brokerage firm called North American Clearing, Inc., had orchestrated a scheme to manipulate the amount of money that North American was required to set aside to protect the assets of its customers. North American was a securities and clearing brokerage firm for about 40 small brokerage firms and cleared trades for more than 10,000 customer accounts with a total value of more than $500 million. The case arose after North American’s revenues declined during 2007 and 2008 and a March 2008 audit by the Financial Industry Regulatory Authority (FINRA) revealed irregularities in North American’s calculation of its reserves.
After a bench trial, a U.S. district judge in the Middle District of Florida found that Goble had directed an employee to make a false entry in the company’s books, and thus found Goble liable for securities fraud in violation of Section 10(b) of the Securities and Exchange Act of 1934, 15 U.S.C. § 78j(b) and Rule 10b-5, 17 C.F.R. § 240.10b-5. The Court also found Goble liable for aiding and abetting violations of the Customer Protection Rule, 15 U.S.C. § 78o(c)(3) and 17 C.F.R. § 240.15c3-3, and the books and records requirements of the Exchange Act, 15 U.S.C. § 78q(a) and 17 C.F.R. § 240.17a 3.
The 11th Circuit’s reversal of the finding that Goble had violated Rule 10b–5 was based on the question of materiality – that is, for a defendant to be liable, to what did the misrepresentation in question have to be material? The appellate court found that, while knowledge that Goble and his company had cooked their books might be material to a customer’s choice of whether to use him as a broker-dealer, that was not relevant to his liability under Rule 10b-5. Rather, the Court emphasized that to be a basis for a liability for securities fraud, the misrepresentation had to be material to an investment decision by a customer and therefore (to use the language of the statute and rule) “in connection with” the purchase or sale of securities. The Court declined the SEC’s invitation to expand the scope of potential liability to include Goble’s conduct.
By rejecting the SEC’s overreaching, the Goble case is a reminder of the important role of the courts in checking the excesses of government enforcement against companies and individuals. And, given the availability of a private right of action under Section 10(b) and Rule 10b-5, the Court’s restriction on the scope of liability may serve to protect against some of the excesses of private securities fraud litigation as well.
A recent settlement by global pharmaceutical giant Abbott Laboratories over its promotion of the drug Depakote shows that federal regulators remain prepared to pursue drug manufacturers for promoting unapproved uses of their products. Abbott has agreed to pay federal and state governments a total of $1.6 billion in criminal and civil fines and to plead guilty to a criminal misdemeanor violation of the Food and Drug Act to resolve allegations against it. This makes the case the second-largest in a series of multi-million dollar settlements of enforcement actions by the U.S. Department of Justice and state regulators against drug makers. Abbott will be subject to monitoring and reporting requirements as a condition of its plea.
When the Food and Drug Administration approves a drug as “safe and effective” for sale to the public, it specifies that the approval is for one or more defined medical purposes. It is a common practice among doctors, however, to prescribe drugs for other uses based on their understanding of other effects of use of the drug, and such “off label” prescriptions are not illegal.It is illegal, however, for drug manufacturers to promote off-label use of their products.
In the Abbott case, federal and state regulators and law enforcement agencies alleged that the company had promoted off-label use of Depakote, which the FDA has approved to treat epileptic seizures, migraines and the manic episodes suffered by people with bipolar disorder. As part of its settlement, Abbott has admitted that, beginning in 1998, it trained a portion of its sales force to promote Depakote to nursing home personnel as a way to control agitation and aggression in elderly patients suffering from dementia. Abbott continued to do so through 2006 even after it was forced to discontinue clinical trial testing in 1999 of the use of Depakote to treat patients with dementia because the drug caused increased drowsiness, dehydration and anorexia in the elderly test subjects.
The use of Depakote by nursing homes for the off-label use promoted by Abbott was attractive because, as Abbott’s sales force highlighted, Depakote was not covered by the Omnibus Budget Reconciliation Act of 1987 (OBRA) and its implementing regulations designed to prevent the use of unnecessary medications in nursing homes. Thus, use of the drug for this purpose could help nursing homes avoid the administrative costs and other burdens of complying with that law.
In some ways, the Abbott settlement is simply another reminder that pharmaceutical manufacturers that “misbrand” drugs by promoting off-label use will face scrutiny and enforcement from federal and state governments. On the other hand, the Abbott case is particularly egregious given the allegations that, after tests showed poor effectiveness and possible problems with the off-label use of Depakote, Abbott failed to disclose to its sales force the results of those studies. In highly regulated industries such as pharmaceutical manufacturing, the case is a reminder that companies that fail to adhere closely to legal and regulatory requirements do so at great risk.
It appeared for some time last year as if New Jersey was about to become the first state to legalize and regulate online gaming in the form of poker. But Republican Gov. Chris Christie vetoed state legislation to that effect, citing legal and constitutional concerns.
Now, however, Christie has laid down the gauntlet to the U.S. Department of Justice on a different type of gambling – sports betting. In January, he signed legislation allowing sports betting in New Jersey after it was approved by a 2-to-1 margin in a nonbinding voter referendum in November 2011. And he announced on May 24 that he plans to go ahead and set up a system of wagering at the state’s racetracks and casinos this fall, before the National Football League season ends.
Christie was quoted as saying that he signed the bill in January in order “to boost our casino and horse racing industries, and encourage tourists to come here to Atlantic City.”
“We intend to go forward and allow sports gambling to happen, if someone wants to stop us, they’ll have to take action to stop us,” he said.
The governor was referring to the Professional and Amateur Sports Protection Act (PASPA), a 1992 federal statute that prohibits states from operating a gambling system based on professional or college sports. Only four states –Nevada, Delaware, Oregon and Montana, which already had this type of gaming in effect – were exempted. The NFL, the National Basketball Association, and other pro leagues are strongly opposed to legalized gambling, and the U.S. Department of Justice can be expected to consider taking legal action to stop New Jersey’s plan from going into effect.
In fact, State Sen. Ray Lesniak, a leading proponent of sports wagering in New Jersey, fully expects that the federal government and the NFL will try to prevent the system from going into effect.
Although this state action may face a significant legal challenge, a bill to legalize online poker in New Jersey that is now moving through the state legislature, if passed and signed by the governor, looks as if will be legally safe. Lesniak says he hopes that bill will be ready for the governor’s signature by the end of June. The bill was changed this year to meet the governor’s objections from 2011, and in addition, the U.S. Department of Justice has now expressed the view that the federal Wire Act does not prohibit online poker.
We support New Jersey’s efforts to legalize these types of gaming in the interests of helping its economy and giving residents and visitors a chance to enjoy this pastime and possibly even make some money.
Responding to a requirement in the Dodd-Frank Act that it review, and if appropriate, amend, the federal sentencing guidelines for mortgage fraud, the U.S. Sentencing Commission set forth on April 13, 2012, two new provisions that will affect sentencing for this type of crime.
Mortgage fraud became a significant issue in the recent financial crisis and the housing downturn, so the Commission’s changes are being closely watched in the financial services industry.
First, the Commission’s proposals, which will take effect on November 1, 2012, if not disapproved by Congress, add language to the “credits against loss” rule that affects the amount of loss to be considered for sentencing purposes in mortgage fraud cases. The determination of loss must be reduced by any money returned to the victim before the offense was detected and by the fair market value of any collateral that may not have been disposed of at the time of sentencing.
The problem is that often, if the collateral has not been disposed of by the time of sentencing, its fair market value may be hard to determine, and the absence of a uniform process for determining the value may result in disparities in sentencing.
The Commission decided that the value of the collateral should be determined as of the date on which the guilt of the defendant was established, and it established a rebuttable presumption that the most recent tax assessment value of the collateral constitutes a reasonable estimate of its fair market value. The commission said its intent is to provide a uniform practicable method for determining the fair market value of undisposed collateral while providing sufficient flexibility for courts to address differences among jurisdictions regarding how closely the most recent tax assessment tracks the fair market value.
Second, the Commission amended the application of an existing four-level increase in sentence if the offense involved specific types of financial harms such as jeopardizing the safety and soundness of a financial institution – such as making the institution insolvent, forcing it to reduce its benefits to pensioners or insureds, and the like.
The amendment adds as a new consideration whether one of the listed harms was likely to result from the offense, but did not in fact occur because of federal government intervention, such as a bailout. The Commission took the view that a defendant should not avoid the application of the four-level increase merely because the harm that was otherwise likely to result from the conduct did not occur because of fortuitous federal government intervention.
In some circumstances, this amendment could have the result of significantly increasing an offender’s sentence. We would expect prosecutors to argue that many interventions by the government, short of a fully announced “bailout,” should be taken into account and that sentences should be increased because of the “but-for” aspect of the defendant’s conduct: Had the government not stepped in, the defendant’s actions would have jeopardized a financial institution.
While the prosecution of former Senator Ted Stevens is long over, the fallout from the prosecutorial misconduct in that case continues. Congress is now considering legislation that attempts to ensure that federal prosecutors comply in a meaningful way with their obligations under Brady v. Maryland and its progeny. The legislation has some provisions that could possibly help protect Brady rights, but even if it passes – which appears doubtful – the bill is unfortunately more of a political gesture than an effective tool for protecting the rights of criminal defendants.
Perhaps the most significant provision in the proposed Fairness in Disclosure Act is one that addresses the timing of Brady disclosures. Under current practice, prosecutors often delay the required disclosures of exculpatory information as long as possible. Given that the only time limitation appears to be the ill-defined requirement that information must be provided within a reasonable time for the defense to use it at trial, the law effectively allows the government to disclose Brady information almost any time before trial. Because the legislation requires the disclosure of such information “without delay after arraignment,” it has the potential to lessen the incidence of late disclosure of Brady information by prosecutors. The proposed bill’s requirement that Brady information be provided before the entry of a guilty plea is also commendable.
Other provisions that address the location and possession of the information at issue may also be helpful. The act would make clear that information contained in witness statements must be disclosed, and may not be withheld until it is provided – after a witness testifies at trial – pursuant to the Jencks Act. The bill also requires that prosecutors disclose not only information that they know but also information that they should know – an attempt to prevent prosecutors from insulating themselves from exculpatory information. The proposed law also makes clear the requirement of disclosure not only of the information in possession of the prosecutors and the investigatory agency but also of information in the hands of any other agency that participates in the investigation.
Other provisions, such as those relating to whether inadmissible evidence must be disclosed and the remedies for violation of the act, also have the potential to have a favorable impact on Brady compliance.
The problem is that, in the end, the Fairness in Disclosure Act will be effective only to the extent that it clearly defines what information falls within the scope of prosecutors’ obligations to disclose. And in that respect, the bill largely substitutes one ambiguous standard for another. On the one hand, it discards the approach that turns entirely on “materiality” of the information – a concept that works for appellate courts after the fact but is an impossible standard to enforce against prosecutors before trial. On the other hand, the bill’s requirement that prosecutors disclose information that is favorable to the defense as to guilt or sentencing does not solve the real obstacle to ensuring that defendants’ Brady rights are protected. That’s because it still leaves it in the hands of prosecutors – who may not know what defense the defendant will utilize – to determine whether a piece of information is favorable or not. To many criminal defense lawyers, that is the real problem that causes problems with Brady compliance even with well-intentioned prosecutors.
Despite these flaws, a number of organizations, including the American Bar Association, have expressed support for this bill. Nevertheless, at least one website that carries predictions on the fate of legislation puts the likelihood of passage of the bill at 2 percent. It is surely a good development to have politicians and the public focused on the need for reform to protect criminal defendants’ rights, but the Fairness in Disclosure Act may not ultimately be the solution to this issue.
On May 3, 2012, Ifrah Law filed an amicus curiae brief in the U.S. Supreme Court on behalf of the Justice Fellowship and a group of law professors who practice in the areas of criminal law and sentencing. The brief was filed in the case of Rubashkin v. United States, a highly publicized case in which Sholom Rubashkin, the former operator of a kosher slaughter house, was sentenced to 27 years in prison in 2009 for 86 counts of financial fraud.
Rubashkin’s bid for a new trial after his conviction in federal court in Iowa was denied by the U.S. Court of Appeals for the 8th Circuit in 2011. Earlier this year, he filed a petition to the Supreme Court for certiorari.
The brief filed by Ifrah Law contends that that principles applied by the 8th Circuit in affirming Rubashkin’s sentence “are at odds with the principles applied by at least three other Circuit Courts of Appeal” and “could have a very negative impact on the law and policy of federal sentencing under advisory guidelines.”
Federal appeals courts, the brief contends, have the duty to ensure that all criminal sentences are “procedurally reasonable,” which includes the idea that sentences must not include unwarranted disparities with the sentences imposed for similar defendants who committed similar crimes.
Appeals courts, the brief says, have uniformly held that in order to permit meaningful appellate review on this issue, trial judges need to state on the record their reasons for accepting or rejecting the arguments that were made for or against the sentence that they imposed. “There is no way for the appellate court to determine whether the trial court considered [an] argument if the court does not address it explicitly,” the Ifrah brief said.
In the Rubashkin case, the trial court “failed to make any record that it considered the defendant’s non-frivolous argument regarding the need to avoid unwarranted sentencing disparities,” the brief points out. This failure, the brief says, is at variance with the rule in at least three other federal circuit courts of appeal.
Accordingly, the brief urges the Supreme Court to accept the case and to resolve the circuit conflict.
In addition, Rubashkin is also seeking Supreme Court review on a different issue – that the federal trial judge, Linda Reade, had in effect become part of the prosecution team by actively engaging in the planning of a raid on Rubashkin’s facility by federal agents and helping the agents plan their strategy. The “Sentencing Law and Policy” blog has used the term “prosecutorial and judicial misconduct” to refer to the judge’s alleged activity and the prosecution’s failure to inform the defendants about it.
We hope that the Supreme Court accepts this case and takes a step toward curbing the excessive concentration of power in the hands of federal prosecutors and judges.