A $3 billion fraud scheme, more farcical than dangerous and in any case doomed to fail, led to 20-year sentences in federal prison for all four conspirators. The U.S. Court of Appeals for the 2nd Circuit, however, vacated the sentences on procedural grounds, and U.S. District Judge Stefan R. Underhill of the District of Connecticut, sitting by designation, wrote a concurrence that drew back the procedural curtain to shed light on what he saw as a fundamentally flawed corner of the administration of justice. This was the U.S. Sentencing Guidelines’ loss table, which he said was “divorced from its own objectives and from common sense” in this case.
The case, United States v. Juncal, came to the court on appeal from the District Court for the Eastern District of New York. The appellants – James Campbell, John Juncal, and Rodney Sampson – and their codefendant Emerson Corsey had been convicted of conspiracy to commit mail and wire fraud. The four men, posing as officers of a (fictional) Wyoming-based multinational bank and its client in Buryatia, an obscure region of Siberia, attempted to extract a $3 billion loan from a hedge fund to finance an (imaginary) Siberian oil pipeline. In exchange for the loan, they offered to assign to the hedge fund $5 billion in U.S. Treasury notes, which they claimed would generate a $14 billion return in just five short years. When a broker asked for physical evidence of the T-notes, the defendants explained that they had hidden the notes in Austria for safe keeping. The defendants did, however, send the broker copies of T-notes from their AOL account.
The absurd nature of these facts notwithstanding, the defendants’ offense levels were calculated based on an intended loss amount of $3 billion, and each received the statutory maximum sentence for fraud: 20 years in prison. At sentencing and on appeal, counsel for the defendants highlighted the significant flaws in the loss calculation, arguing that the “30-point mega-enhancement vastly overstated both the seriousness of the offense, and the danger of appellants to their community.
At sentencing, their arguments fell on deaf ears. On appeal, they did not. The Second Circuit questioned the lower court’s failure to apply (or even address the merits of) a reduced sentence and remanded the case for resentencing. Because the case was “clouded by the possibility of error,” the appeals court “felt it appropriate to give the District Court an opportunity to clarify its thinking.” The case was remanded on procedural grounds, and the appeals court declined the appellants’ request to consider whether the sentences were substantively unreasonable.
Judge Underhill began his nine-page concurrence by first agreeing that the sentences should be vacated and remanded for procedural error. However, he also noted that “the real problem is that the sentences are shockingly high.” For that reason, he “would reach the question of substantive reasonableness and would reverse on the merits.” In his view, “the loss guideline is fundamentally flawed, and those flaws are magnified where, as here, the entire loss amount consists of intended loss. Even if it were perfect, the loss guideline would prove valueless in this case, because the conduct underlying these convictions is more farcical than dangerous.”
Underhill went on to explain that the current guidelines are the result of three increases in the recommended ranges for fraud crimes, each of which “was directed by Congress, without the benefit of empirical study of actual fraud sentences by the Sentencing Commission.” He also noted the common perception that the loss guidelines are broken, and highlighted their widely inconsistent implementation among the district judges. However, since this case could be decided on procedural errors, the circuit court was able to remand the case without expressing a view on the substantive issues that Underhill highlighted.
In so doing, however, the appeals court may have overlooked an opportunity to fashion a common- law reasonableness standard to protect the administration of justice in future cases.
There are many arguments to support the avoidance of knotty substantive issues when their examination will not affect the final outcome of the case. As Underhill himself pointed out, courts ordinarily examine the procedural issues first before applying an abuse-of-discretion standard to examine the substantive reasonableness of a sentence. However, that practice creates a slippery slope: district court judges are forced to proceed without meaningful guidelines, and abuses of discretion go unnoticed.
At least six federal agencies, including the U.S. Department of Justice (DOJ), the Consumer Protection Financial Bureau (CFPB), and the Federal Trade Commission (FTC), are currently coordinating a broad crackdown of the online payday lending industry. The agencies are trying to shut down companies that offer short-term loans online at very high interest rates.
The online payday lending industry is rapidly growing. Online payday lending volume rose by 10 percent to $18.6 billion in 2012. Online payday loans now account for nearly 40 percent of the payday lending industry.
The Department of Justice has issued civil subpoenas to more than 50 financial companies, including banks and payment processors, that connect borrowers with online lenders. Federal agencies are also pressuring banks to cut ties with online lenders to prevent the lenders from being able to access consumers’ bank accounts. The scope of the investigation shows that the crackdown is focused not just on the individual lenders, but also the infrastructure that supports the lenders.
Multiple state agencies are also involved in investigations of the online payday lending industry. State regulators have brought actions against online payday loan companies under various laws, such as usury laws that limit the amount of loans that can be provided to borrowers or cap the interest rates for the loans.
Earlier this month, New York State’s top financial regulator ordered 35 online payday lenders to stop offering loans that were in violation of the state’s usury laws and urged more than 100 banks to cut off access to the online payday lenders. At least nine states, including California, Colorado, Minnesota, Oregon and Virginia have also all taken action against individual online payday loan companies in the past year.
On August 12, 2013, the New York Attorney General’s Office sued Western Sky Financial, an online lender, and its affiliates alleging that they charged interest rates that were 10 times higher than rates allowed under the state usury law. Western Sky Financial operates on the land of the Cheyenne River Sioux Reservation in South Dakota and has already been the target of actions by regulators in Colorado, Oregon and Minnesota. Indian tribes are a major player in the online payday loan industry, with lenders forming partnerships and operating on tribal lands. Lenders have argued that they are part of a sovereign nation and not subject to federal or state laws.
Last year the FTC sued several companies for their payday loan practices, but some of the defendants sought to have their case dismissed, claiming that their affiliation with an American Indian tribe made them immune from those federal statutes. Last month a federal magistrate judge ruled that the FTC has authority over payday lending companies, regardless of their tribal affiliations, and that all companies are subject to regulation under the Federal Trade Commission Act, the Truth in Lending Act, and the Electronic Fund Transfer Act.
The online payday lending industry is attracting increasing scrutiny from both federal and state regulatory agencies, and more enforcement actions are very likely to come soon. Online payday lenders need to be sure that they are complying with all federal and state laws to avoid being in the government’s crosshairs.
In a decision issued today that could potentially change the way police operate in the Big Apple, U.S. District Judge Shira A. Scheindlin (S.D.N.Y.) ruled that, for years, New York City police officers have been systematically stopping innocent people in the street without any objective reason to suspect that they were engaged in any kind of wrongdoing. The 195-page decision, issued after a lengthy trial, accuses the NYPD of a widespread disregard for the Fourth Amendment – particularly as the “stop-and-frisk” episodes soared in number over the last decade. To address the issue, Judge Scheindlin said she planned to designate an independent private attorney as a monitor for the police department’s compliance with the Constitution.
Judge Scheindlin’s ruling is a brave rebuke to the department’s increasingly aggressive policing policies.During the two-month trial, the court heard testimony regarding some 4.3 million stops between 2004 and mid-2012. The U.S. Supreme Court has long sanctioned stopping and frisking an individual based upon reasonable suspicion that he or she is engaged in wrongdoing. But experts testified in the trial that in about 88 percent of the stops, police found no contraband or other evidence of illegal behavior – an incidence so high that it suggests that there was no credible basis on which to stop many of those individuals in the first place.
Given that the individuals in question were usually young minority men, a policing policy that essentially permitted police to treat as suspicious behavior that was perfectly innocent had the effect of watering down the Constitution’s protection against illegal searches and seizures. In her ruling, Judge Scheindlin rejected the testimony of numerous police officers and commanders who typically defended the legality of stops and said that they were made only when officers reasonably suspected criminal behavior.
Judge Scheindlin’s ruling in the case comes on the heels of what some have characterized as an effort by the administration of NYC Mayor Michael Bloomberg to influence the judge or to create some kind of extrajudicial bias against her ruling in the Second Circuit Court of Appeals (which will doubtless be hearing an appeal of this decision). In June, the mayor’s office offered to a number a press outlets a “study” it had conducted that purported to show that Judge Scheindlin grants motions to suppress evidence for constitutional violations in a much higher percentage of criminal cases than do her colleagues in the Southern District of New York. Today’s decision certainly makes clear that Judge Scheindlin was not influenced by those communications in favor of the city, and it is left to be seen whether press reports on that study will have the unlikely consequence of influencing the appellate court.
Judge Scheindlin’s decision is important because it seeks to address constitutional violations on an institutional level and also because it addresses those violations that befall individuals who are not charged with any crime. In a case in which a person faces criminal charges, he or she usually can challenge the admission of physical evidence or his or her own statements based on a claimed violation of constitutional rights, and a favorable ruling will result in the exclusion of that evidence from any trial on those charges. But for a person whose civil rights are violated by an illegal search that results in no criminal charges, the recourse is less obvious.
While there are circumstances in which an individual could sue individual police officers based on an illegal search, the burdens of litigation and the proof required usually are high enough that few if any people pursue such cases. Indeed, a police department policy that encouraged officers to engage in searches of questionable legality appears to rely on those disincentives to protect the officers and the department from liability and scrutiny. By finding an institution-wide set of violations, and by imposing a requirement that an independent monitor ensure compliance, Judge Scheindlin’s ruling (if upheld on appeal) has the potential to provide a more reliable guarantee of constitutional rights to New Yorkers.
If some will decry the decision as threatening the ability of police to control crime, they have forgotten the historical lessons about the importance of safeguarding the rights of minorities in our country, and the important role that the Constitution plays in protecting the rights of the innocent.
The Obama administration has issued a road map to combat intellectual property theft over the next three years.
The “2013 Intellectual Property Enforcement Coordinator Joint Strategic Plan” follows up on the more narrowly tailored “Administration Strategy on Mitigating the Theft of Trade Secrets” that we wrote about earlier this year, and reviews progress made on intellectual property issues in general since the administration’s first general IP strategic plan was issued in 2010.
While this year’s plan rightfully highlights the administration’s achievements in trade secret protection, it sheds little light on the concrete steps necessary to achieve its future goals in that area.
The strategic plan reveals progress made on the trade secret legislation, investigation, prosecution, and sentencing fronts. The enactment of Public Law 112-236, the “Theft of Trade Secrets Clarification Act of 2012,” closed a loophole by clarifying that the Economic Espionage Act protects trade secrets related to “a product or service used in or intended for use in” interstate or foreign commerce. The FBI unveiled a public education campaign to raise awareness of trade secret theft, and FBI trade secret theft cases are up 39 percent.
The Department of Justice has provided federal prosecutors with special training in computer crimes in order to support law enforcement agencies in the investigation of trade secret theft perpetrated by persons who pose a national security threat. Over the past three years the administration has also bolstered criminal penalties for economic espionage and directed the U.S. Sentencing Commission to consider increasing offense levels for trade secret crimes.
Despite these accomplishments, there is much more to achieve. The plan aims to press for protection of trade secrets overseas and enforcement actions to address their theft or misappropriation, and expresses concern about “forced technology transfer,” that is, efforts by foreign governments to condition market access or the ability to do business on the transfer of trade secrets or proprietary information.
While this document is high on aspirational talk regarding international coordination, it is notably low on concrete proposals for domestic trade secrets legislation. The lack of momentum on this front may be understandable considering that the administration received only 13 comments in response to the “Administration Strategy on Mitigating the Theft of Trade Secrets” that it released in February. However, there is a general consensus in the IP community that the law needs to provide a federal civil cause of action for trade secret theft that provides for broad civil remedies, similar to the Copyright Act or the Patent Act. Until such an act is implemented, trade secrets will not have a level of protection commensurate with their importance.
A lawsuit recently filed by Incredible Investments, LLC, owned by entrepreneur Consuelo Zapata, alleges that the language in a recently enacted Florida law that was intended to shut down Internet cafes and slot machines has actually outlawed all mobile devices that are capable of accessing the Internet. The complaint, which seeks to have the new law declared unconstitutional, alleges that in the process of hastily passing the bill, the legislators crafted language that could include any smartphone or computer in Florida. The complaint, a copy of which is available here, asks the court to throw out the law, which was purportedly passed “in a frenzy fueled by distorted judgment in the wake of a scandal that included the lieutenant governor’s resignation.”
The law in question was signed into law on April 10, 2012, by Florida Governor Rick Scott. Zapata, whose clientele is primarily migrant workers seeking to access the Internet, owns one of the approximately 1,000 internet cafés that was shut down as a result of the law.
The bill was introduced in the aftermath of a state investigation which found that a purported charity earned $290 million from an Internet gambling effort but donated only $5.8 million of those funds to charity. The investigation resulted in 57 arrests on racketeering and money laundering charges. Former Florida Lieutenant Governor Jennifer Carroll, who has ties to the charity but has not been accused of wrongdoing, resigned in the wake of the investigation.
The problem with the law that was noted in the lawsuit is that it amended the definition of a slot machine to include “any machine or device or system or network of devices” that can be used to play games of skill or chance, which can be activated by “money, coin, account number, code, or other object or information.” The lawsuit alleges that with such a broad definition of a slot machine, any smartphone or computer is effectively banned in Florida because it could be used to access the Internet to play an illegal game.
It is unclear what the result of the lawsuit will be. The court may agree with the plaintiff that this law has effectively banned mobile devices and should be struck down. However, courts often attempt to avoid constitutional issues when interpreting laws and could find that another reading of the statute in this case would be more appropriate.
Whichever way the court does decide on the law, this lawsuit shows the dangers of a swift reaction from a legislature after a high profile incident occurs. The unintended consequences of legislation can be quite serious, as is alleged to be the case here, and a thorough examination of the problems and the best way to address them could have avoided the confusion that has resulted from this law.
Florida judges acknowledge that “justice requires the appearance of justice.” And given some of the controversial verdicts coming out of the Sunshine State — Casey Anthony and George Zimmerman come to mind — it seems more important than ever for the Florida judiciary to protect its institutional integrity. That might explain why the Florida Supreme Court doubled the recommended suspension of a state prosecutor who failed to disclose numerous ex parte contacts with a sitting judge.
On June 20, that court upheld a finding that Howard Scheinberg engaged in conduct that was prejudicial to the administration of justice. The disciplinary action against Scheinberg pertained to the prosecution of Omar Loureiro. In 2007, Scheinberg was the lead prosecutor in a capital murder trial against Loureiro. Former Judge Ana Gardiner was the presiding judge. As a result of that trial, Loureiro was found guilty of first-degree murder and sentenced to death.
Months after the trial concluded, evidence surfaced that Scheinberg had been romantically involved with the judge. During the five months between the jury verdict and sentencing hearing, Scheinberg and Gardiner had exchanged more than 900 phone calls and more than 400 text messages. On average, Scheinberg had communicated with the judge almost 10 times a day during that time but had never disclosed the contacts to opposing counsel.
When the Broward State Attorney’s office learned of the misconduct, it promptly agreed to retry Loureiro: only a second trial could dispel public perceptions that Loureiro had been denied due process.
When the Florida State Bar learned of the misconduct, it promptly initiated disciplinary action. After the complaint was filed, a referee was appointed. She conducted a hearing and issued a report with her findings and recommendations. First, the referee found that Scheinberg’s ex parte contacts and his failure to disclose them prejudiced the judicial system in violation of Florida’s ethics rules. Based on her findings of aggravating and mitigating factors, she recommended a one-year suspension from the practice of law.
Scheinberg challenged the referee’s recommendation as to guilt and the one-year suspension, but received no relief. Instead, the Supreme Court agreed that Scheinberg was guilty of misconduct, even though his contacts with the judge were unrelated to Loureiro’s murder trial. The court explained that Scheinberg’s extensive contacts with Judge Gardiner created “an appearance of impropriety.”
When an attorney becomes romantically involved with the judge presiding over his case, “the judge’s authority necessarily suffers,” the court concluded. First, the relationship itself undercuts the judge’s role as a detached neutral party. Moreover, when a judge presides over cases involving her romantic partner, she loses her single most important source of authority — the perception that she is absolutely impartial.
The court then addressed the recommended sanction. Although it found no error with the referee’s findings on aggravating and mitigating factors, the court held that a one-year suspension was not sufficient. Scheinberg’s conduct created an appearance of impropriety based on substantial communications that were never disclosed to the defense. And it all occurred in the context of a capital murder trial!
The resulting harm was obvious: Scheinberg’s conduct led to an investigation and a retrial, both of which consumed public and private resources. In the court’s view, the seriousness of Scheinberg’s violation and resulting prejudice to the administration of justice required a suspension twice as long. On that basis, the court suspended Scheinberg for two years and ordered him to cover the Florida Bar’s costs.
More than two years after “Black Friday” – the day on which federal prosecutors shut down the U.S. operations of Full Tilt Poker and other major online poker providers and seized billions of dollars in assets – it appears that the final chapter in that enforcement action may soon be written.
The Garden City Group, the entity responsible for claims administration for repayment of Full Tilt Poker players, announced on August 1 that it would soon begin that remission process. Remission of funds to Full Tilt Poker’s U.S. players was made possible because of PokerStars’ payments pursuant to its settlement of civil forfeiture claims with the government. And, due at least in part to advocacy by the Poker Players Alliance (PPA), the calculation formula to be used for the process will be based on players’ final balances as of April 15, 2011, and not on the amount that they originally deposited into their Full Tilt Poker accounts.
Following the Black Friday asset seizures, PokerStars reached a settlement with the United States under which it forfeited $547 million to the U.S. government and agreed to repay approximately $184 million to former customers of Full Tilt Poker outside the United States. One of the valuable aspects of this settlement, from the perspective of former Full Tilt Poker players in the United States, was that it created a fund of money for repayment of players that would not otherwise have existed due to Full Tilt Poker’s financial status at the time of the seizure.
The settlement provided that the United States would oversee a remission process pursuant to which it would return funds to Full Tilt Poker players, but the law governing those processes vests the government with enormous discretion in, among other things, the manner in which the government calculates the amount to be distributed to each recipient. In the case of Full Tilt Poker’s U.S. players, the government was considering an approach that would have based the payment to each player on the amount he or she had deposited into a Full Tilt Poker account, regardless of the wins or losses in that account thereafter.
An alternative approach was to base the payment on the balance remaining in the account on April 15, 2011 – the last day on which the player could have accessed his or her account. The PPA and other advocates of this approach point out that this was a truer measure of the “loss” that each player suffered; to the extent that a player’s balance was lower on that date than his or her initial deposit, it was not due to any wrongdoing but rather a result of poker play. A player who received his or her initial deposit that was greater than the balance on that date would receive an unjustified windfall by recouping money lost fairly in playing online poker. Thus, to use deposit amounts as the basis for remission would effectively redistribute funds among players in a way that was unrelated to the purpose of the seizure and remission. This would have been inconsistent with applicable regulations’ definition of the “victim” to receive remission in terms of the loss suffered “as a direct result of the commission of the offense underlying a forfeiture.” (See 28 C.F.R. § 9.2(v)).
Advocates also expressed concerns that a “deposit”-based refund process would be unduly complicated, and would create inequities between foreign Full Tilt Poker players and U.S. PokerStars players, who received refunds based upon account balances.
It remains to be seen whether Full Tilt Poker’s U.S. players will receive the full amount of their account balances or a proportionally smaller amount – a decision that will be based on whether the amount available for remission is equal to or greater than the aggregate amount of claims filed for such refunds. But the decision to base remission on account balances and the indication that the long-delayed process will start soon are both positive signs that Full Tilt Poker’s U.S. players may soon be made whole from their Black Friday losses.
A recent D.C. Circuit Court of Appeals decision narrows the ability of the government to revisit uncharged crimes against a person whose plea has been vacated due to a change in the law.
In 2007, Russell Caso had pleaded guilty to conspiracy to commit honest-services wire fraud, in violation of 18 U.S.C. §§ 371, 1343 and 1346, based on certain conduct during his employment as U.S. Rep. Curt Weldon’s chief of staff. Caso was sentenced to three years’ probation, including a 170-day term of home confinement. In entering its plea agreement with Caso, the government had forgone the right to charge Caso also with a violation of the false statements statute for failing to include certain payments on his annual disclosure statement required by virtue of his status as a federal employee.
Shortly after Caso was sentenced, the U.S. Supreme Court handed down its decision in Skilling v. United States, 130 S. Ct. 2896 (2010) – a decision that substantially limited the permissible reach of Section 1346, the honest-services fraud statute – with the result that Caso was indisputably innocent of the crime for which he was charged and convicted. The government did not dispute this point but nevertheless opposed Caso’s motion to vacate his conviction.
The government argued that Caso had procedurally defaulted his Skilling challenge because he had not directly appealed his conviction on the ground that the conduct to which he pleaded did not constitute an offense, and therefore was barred from raising this issue on a habeas petition. The government also argued that Caso had failed to satisfy the narrow conditions for excusing such a default that the Supreme Court set out in Bousley v. United States, 523 U.S. 614 (1998): (1) “cause” for the default and “actual prejudice” resulting therefrom; or (2) that the defendant is “actually innocent.”
In denying Caso’s petition (which argued only the second of these exceptions), the District Court agreed with the government, and focused on the Bousley Court’s rule that, “[i]n cases where the Government has forgone more serious charges in the course of plea bargaining, petitioner’s showing of actual innocence must also extend to those charges.” (emphasis added) Based on that rule, the District Court held that Caso had to demonstrate his “actual innocence” not only of the crime for which he was charged and convicted (honest-services wire fraud) but also of the separate uncharged offense of making a false statement, a crime that the government argued was at least equally serious as the honest-services fraud charge. Because Caso could not show his actual innocence of the false statement charge in light of the admissions he made as part of his plea agreement, the District Court denied his motion to vacate his conviction and sentence.
The D.C. Circuit reversed this decision based its reading of what constitutes “more serious charges” under Bousley. In doing so, the appeals court rejected the government’s argument that seriousness is to be determined based on the statutory maximum sentence for each crime, and found it far more logical to base the question of seriousness on the way in which each crime is treated in the United States Sentencing Guidelines. Quoting the Supreme Court’s Gall decision, the court noted that Guidelines calculations are still “the starting point and initial benchmark” for every sentencing decision and that “district courts must begin their analysis with the Guidelines and remain cognizant of them throughout the sentencing process.”
The court also noted that the United States Attorneys’ Manual, in directing prosecutors to charge “the most serious offense that is consistent with the nature of the defendant’s conduct,” explains that “[t]he ‘most serious’ offense is generally that which yields the highest range under the sentencing guidelines.”
The court also noted that statutory maxima provide the parties with little useful information in the context of plea negotiations, in part because courts rarely sentence defendants to the statutory maxima. Because the Guidelines treat a violation of the false statements statute less seriously than honest-services fraud, the Court of Appeals held that the forgone false statement charge was not “more serious,” and that Caso need not show his innocence of that charge to support his claimed right to vacating of his conviction for honest services fraud.
The fact that that the D.C. Circuit relied upon the Guidelines as the justification for its ruling is particularly interesting given that recent attacks on the reasonableness of some of the Guidelines (particular the Section 2B1.1 loss tables) have sapped the Guidelines of some of their authority. It is possible that this ruling could change the way in which prosecutors structure their pleas, but circumstances such as this one, in which a defendant is found innocent of convicted charges because of a change in the law, are rare enough that this is not likely. To the extent that courts face similar cases, they will have to address issues left unresolved by the D.C. Circuit, such as whether there must be contemporaneous evidence that prosecutors considered the forgone charge at the time, and whether a crime of “equal seriousness” (and not “more serious”) falls within the Bousley rule.
White-collar crime can involve any number of types of fraud against the government or private parties. One that isn’t usually thought about but can result in serious jail time involves conspiracies to obtain government contracts fraudulently by setting up bogus small and minority-owned businesses in order to qualify for government preferences.
In the past few months in the Eastern District of Virginia, several businesspeople have been sentenced to serve time in prison after pleading guilty to their roles in a scheme that improperly won them more than $31 million in government contracts that were intended for small, minority-owned businesses but were diverted fraudulently to other businesses that didn’t qualify.
In June, businessman Joseph Richards was sentenced to 27 months in federal prison after he pleaded guilty to his role in the scheme. He was the first major participant to be sentenced.
Richards and his co-conspirators were gaming the system and abusing the federal program that provides so-called 8(a) set-asides for minority businesses. As outlined in a statement of facts to which Richards stipulated, he and the co-conspirators set up “Company B,” a shell company owned by a woman named Dawn Hamilton, who is of Portuguese descent and thus eligible for the set-aside. However, Hamilton was only a figurehead owner, and “Company A,” run by Richards and other non-minority individuals, actually did the work on the government contracts. Earlier this month, Hamilton was sentenced to four years in federal prison.
For example, the memorandum states: “From 2009 until at least February 2012, when [Hamilton] began to work more frequently for Company B, Richards knew that [Hamilton] nevertheless reported to [co-conspirator Keith Hedman], who controlled Company B notwithstanding [Hamilton’s] “on-paper” Company B ownership. Richards also knew that [Hedman] kept a stamp of [Hamilton’s] signature in [Hedman’s] desk drawer and that [Hedman] repeatedly used the stamp to forge [Hamilton’s] name and signature on various documents, including checks and other documents submitted to the U.S. government.” Hedman, the ringleader of the scheme, was sentenced to six years in prison.
In order to make their scheme work, Richards and his co-conspirators repeatedly created fraudulent documents, including fraudulent leases and false responses to government inquiries about their 8(a) status.
These guilty pleas and sentences are indications that federal prosecutors are capable of going after government contract fraud in a concerted manner. The investigation that landed these guilty pleas, among others, was conducted by a large inter-agency team, including the offices of inspector general of the National Aeronautics and Space Administration, the Small Business Administration, the General Services Administration, the Department of Health and Human Services, and the Defense Criminal Investigative Service, with assistance from the Defense Contract Audit Agency.
The fact that the companies involved actually performed the work satisfactorily for various government agencies is, of course, no defense. It is a basic type of fraud to make false representations to obtain benefits – in this case government contracts – to which one is not entitled by law.
Of course, it’s pretty clear that for every one of these scams that are investigated by authorities and end in guilty pleas, there must be five or ten that are never found out. If the Small Business Administration and other agencies got wind of more of these conspiracies, they could do more to ensure that truly deserving companies received these set-aside contracts.
A recent decision by U.S. District Judge John Gleeson in the Eastern District of New York may be the harbinger of new limits on the government’s ability to use a prosecutorial tool of which it has become very fond lately – the deferred prosecution agreement. Judge Gleeson’s assertion that a district court has a right to approve or disapprove the use of a DPA in a criminal case has the potential to change entirely the way in which the government uses these agreements.
The government frequently uses DPAs in criminal cases against large companies as a means of leveraging the threat of criminal conviction to get the company to correct practices that the government believes to be illegal.
A DPA is a formal written agreement that customarily provides that criminal proceedings against the company will be held in abeyance for a period of years during which the company agrees to take steps, subject to monitoring, to correct its past misdeeds. The DPA is commonly filed along with a criminal information that commences a criminal case, and the parties then request that the court stay any proceedings in the case for the period defined in the DPA. If the company complies with the terms of the DPA, the government will dismiss the case at the conclusion of that period.
Because the government implements a DPA through the commencement of a criminal proceeding, however, it must contend with the application of the speedy trial statute during the period of deferral. The parties usually request jointly that the time period be excluded from the calculation of the 70-day period within which the trial must otherwise commence pursuant to statute. 18 U.S.C. § 3161(c)(1).
In United States v. HSBC Bank USA, N.A., 12-CR-763 (E.D.N.Y.), the government filed an information on December 11, 2012, charging HSBC Bank USA, N.A. with violations of the Bank Secrecy Act, 31 U.S.C. § 5311 et seq. (including, among other things, willfully failing to maintain an effective anti-money laundering policy) and with willfully facilitating financial transactions on behalf of sanctioned entities in violation of the International Emergency Economic Powers Act, 50 U.S.C. §§ 1702 & 1705 and the Trading with the Enemy Act, 50 U.S.C. App. §§ 3, 5, 16. On that same day, the government also filed a DPA, a Statement of Facts, and a Corporate Compliance Monitor agreement. The government filed these documents as exhibits to a letter requesting that the court hold the case in abeyance for five years in accordance with the terms of the DPA and that the court exclude that time from the speedy trial clock.
In responding to this request, Judge Gleeson surprised the parties by asserting that he had the authority not only to rule on the request to exclude time from the speedy trial clock, but also to accept or reject the DPA itself. In a written opinion issued on July 1, 2013, Judge Gleeson acknowledged that the court’s authority did not stem from Fed. R. Crim. P. 11(c)(1)(A) (dealing with plea agreements to predetermined sentences) or from Section 6B1.2 of the United States Sentencing Guidelines (which addresses policy statements on the acceptance of such pleas). Rather, Judge Gleeson concluded that the court’s general supervisory power over criminal cases – to ensure that the integrity and fairness of those proceedings – vested the court with authority to approve or reject the DPA.
In so concluding, Judge Gleeson noted that the government retains “absolute discretion not to prosecute,” and noted that a non-prosecution agreement “is not the business of the courts.” Judge Gleeson further noted that the government “has near-absolute power under Fed. R. Crim. P. 48(a) to extinguish a case that it has brought.” But once the government and the defendant chose to build into their DPA the filing and maintenance of a criminal prosecution – albeit one expected to be held in abeyance – the government gave up its largely unfettered discretion. “There is nothing wrong with that,” Judge Gleeson observed, “but a pending federal criminal case is not window dressing.”
“Nor is the Court,” Judge Gleeson noted, using Brendan Sullivan’s famous observation from the Iran-Contra hearings, “a potted plant.” If the parties chose to seek the court’s imprimatur on the DPA by involving the court in the process, they also subjected the DPA to the review and approval of the court pursuant to its supervisory authority over its proceedings.
Judge Gleeson’s self-described “novel” application of the court’s supervisory powers in this context is part of a pattern of increased judicial scrutiny of certain tools used in obtaining the cooperation of companies that are the focus of criminal investigations. Judge Gleeson noted the recent history of cases in which efforts to gain corporate cooperation had run afoul of companies’ attorney-client privilege and work product protections or its employees’ Fifth or Sixth Amendment rights, and noted that there are other hypothetical situations in which a company’s obligation to cooperate could be used in an improper manner.
Ultimately, Judge Gleeson approved the DPA in this case but also noted that the court’s approval was subject to continued monitoring of its execution and implementation.
If other judges follow Judge Gleeson’s lead, this may signal a change in the way in which prosecutors use DPAs. Historically, a DPA permitted the government to retain virtually unlimited discretion in its dealings with the party that entered into that agreement. To the extent that courts will now be more alert to potential abuses of cooperation arrangements, DPAs may be fairer to companies but may also become less attractive to prosecutors.
In asserting authority to approve or reject a DPA, Judge Gleeson readily acknowledged the broad discretion of the Executive Branch in exercising prosecutorial discretion. But if DPAs continue to incorporate the filing of criminal informations that are then held in abeyance, the courts may indeed be more than just drop-boxes for those filings – or more than just potted plants.