Source: https://www.7thcircuitbar.org/general/custom.asp?page=Copyof_white_col2
Timestamp: 2018-07-19 05:26:51
Document Index: 317427724

Matched Legal Cases: ['§ 3613', '§ 1672', '§ 1320', '§3006', '§ 78', '§ 2511', '§ 3661']

Seventh Circuit Update for White Collar Litigation - 7th Circuit Bar Association
Seventh Circuit Update for White Collar Litigation
If your practice involves civil or criminal white collar matters,
the Bar Association presents these helpful summaries and practice pointers for key Court opinions.
Criminal Law and Procedure Committee
Corey Rubenstein, Chair
Habeas Case Shows Importance of Documenting Plea Discussions
Sawyer v. United States, No. 15-2508 (Oct. 20, 2017)
Defendant’s lawyer and the prosecutor had informal plea discussions prior to trial in which the government offered a 15 year maximum sentence. According to Sawyer’s habeas petition, his lawyer advised him to reject the offer and go to trial. He followed his lawyer’s advice, and he was convicted and then sentenced to 50 years in prison. The district court dismissed the habeas proceedings that followed – in which he claimed his lawyer’s advice was constitutionally deficient – without holding an evidentiary hearing. No hearing was needed, according to the district court, because: (1) Sawyer did not allege that a formal or written plea offer had been made; and (2) he only provided self-serving affidavits from himself and his family members concerning the plea offer and his lawyer’s advice to reject it.
The Court held on appeal that the district court’s decision to dismiss without holding an evidentiary hearing was erroneous. Sawyer made out a sufficient claim of ineffective assistance at least to get a hearing. Defendant is not required to adduce proof beyond his own testimony. (Of course, here, he also had the sworn statements of his family members.) More significantly, the Court rejected the notion that informal discussions about a potential plea agreement fail to trigger a defendant’s right to effective assistance.
This case highlights the importance – for both defense and government counsel – of documenting a defendant’s decision to go to trial in lieu of even nascent plea negotiations. Unsuccessful plea discussions may never get to the point where there is a formal offer or a draft plea agreement. It is in precisely those cases, however, when there is likely to be little if any documentation reflecting that defense counsel communicated the offer to her client or counseled him about the risks and benefits of that offer. Therefore, defense counsel may want to memorialize her own plea discussions with her client, as well as the client’s reasons for deciding to go to trial notwithstanding those discussions. Likewise, to protect against a collateral attack on a later conviction, government counsel may wish to put on the record in the defendant’s presence that the plea offer had been made and rejected. Indeed, when a defendant pleads guilty, he is subject to the court’s colloquy ensuring a knowing and intelligent waiver of his trial rights. When the converse occurs – a defendant decides to go to trial despite having been offered a plea that significantly limits his exposure – counsel for both sides would be prudent to make some record that the decision was made intelligently.
False Claims Act Damages Require Proximate Causation; Court Joins Other Circuits in Reversing Long-Standing “But-For” Test
United States v. Luce, No. 16-4093 (Oct. 23, 2017)
Luce, the owner of a mortgage brokerage company, participated in a federal home loan insurance program administered under the Fair Housing Act. According to the government, when Luce’s company applied to participate in the program, he falsely omitted his criminal history, which the government claims would have made his company ineligible. The government sued Luce civilly for violations of the False Claims Act based on his allegedly fraudulent submissions. Because there was no genuine issue concerning Luce’s criminal background and his failure to disclose it, the district court granted summary judgment to the government, awarding it economic damages equal to the amount of the loan defaults by Luce’s borrowers. In doing so, the district court noted the Seventh Circuit’s rule requiring only that the government show that defendant’s false statements were a “but for” cause of its injuries.
The Seventh Circuit’s but-for standard has been the outlier for many years. All other circuits to address the question have held that the government must prove that FCA damages were proximately caused by the false representations. The Supreme Court recently held that the FCA ordinarily should be viewed through the lens of common law fraud principles, as long as those principles don’t otherwise thwart the Act’s purposes. Universal Health Services, Inc. v. United States ex rel. Escobar, 136 S.Ct. 1989 (2016). Reviewing Escobar and reconsidering the purpose of the FCA and the weight of the rulings in all other circuits, the Seventh Circuit agreed in Luce for the first time that the correct test is proximate causation.
The Seventh Circuit’s previously relaxed standard had made its venue a desired one for the government or whistleblowers to bring their FCA cases. The now-heightened standard may temper whether certain of those cases are brought at all, particularly cases based on false representations that had little to do with the damages being claimed. In Luce, for example, it may be difficult if not impossible for the government to establish on remand that the damages from the loan defaults by Luce’s customers were the proximate consequence of Luce lying about his own criminal history. The government may face similar problems in government contracting cases and in FCA cases involving purported minority-owned businesses.
Tax Fraud Convictions Reversed Due to Judge’s Remarks to Jury
United States v. El-Bey, No. 15-3180 (Oct. 24, 2017)
El-Bey was a tax protestor. Unlike most tax protestors, it wasn’t enough for him simply to refuse to pay taxes; he concocted bogus tax returns seeking refunds of hundreds of thousands of dollars in withholdings that he never paid. He represented himself at trial pro se, and focused much of his challenge to the government’s case on his beliefs that his conduct was not illegal because he considered himself a sovereign citizen. The evidence of his guilt was overwhelming. But Judge Posner (sitting by designation) was not content to let the evidence speak for itself. Increasingly frustrated with the defendant’s questioning of government witnesses about the “voluntary” nature of the tax system, the Judge commented before the jury that “paying taxes is not voluntary” and “if you don’t pay your tax, you go to jail.” Then, when instructing the jury on the elements of the offense, the Judge went off-script in explaining materiality. Deviating from the written instructions, he gave an example that parroted the facts of the case: “If you tell a lie to the IRS which gets them to give you $300,000 to which you’re not entitled, that is a material falsehood.”
The Court reversed defendant’s conviction and remanded for a new trial, holding that the trial court’s comments to the jury, both during defendant’s cross-examinations and in the court’s oral instructions, conveyed a bias toward defendant and that the trial court had an opinion concerning his guilt. Those remarks deprived defendant of a fair trial regardless of the weight of the evidence against him.
No RICO Standing for Third-Party Payers on Claims of Pharma’s Off-Label Promotion of Drug
Sidney Hillman Health Center v. Abbott Laboratories, No. 17-1483 (Oct. 12, 2017)
In 2012, Abbott Labs pleaded guilty to the off-label promotion of a drug named Depakote. That drug had been approved by the FDA to treat seizures, but Abbot promoted it for a number of off-label uses, such as ADHD and dementia. Abbott paid $1.6 billion to the government as part of its guilty plea and to resolve related False Claims Act cases.
This civil RICO case followed. Plaintiffs were private welfare plans (such as union funds) that paid health care benefits for their members, including members who were prescribed Depakote. The plaintiffs asserted that they were directly injured by Abbott’s unlawful promotion of the drug because they paid for their members’ prescriptions. The Court affirmed the district court’s dismissal of those claims. The off-label promotion was not directed at the third-party payers, but at the patients and their doctors. The fact that the plans parted with money as a result of Abbott’s wrongful conduct does not mean that the plans had standing as injured parties. Too many other variables exist in the chain of events from unlawful promotion to ultimate payment (e.g., the physician’s independent decision concerning the best course of treatment) to conclude that a payer has been proximately damaged by that conduct. Instead, the Court observed that public prosecution is the proper remedy for such wrongful conduct.
United States v. Lopez, No. 16-2269 (Aug. 29, 2017)
Court Guts Impeachment of Cooperating Witnesses
United States v. Trent, No. 16-3960 (July 13, 2017)
Prosecutions often turn on the credibility of a witness who is actively working with the government. Middle manager testifying up the food chain. Bookkeeper turned on his client. Corrupt real estate appraiser providing evidence against the leader of a mortgage fraud ring. That witness is not helping the government out of the goodness of his heart; he was a co-schemer who is now in full self-preservation mode, trying to reduce his own criminal exposure. Standard cross-examination is to attack the cooperator’s bias by showing he is currying favor with the government to avoid a lengthy sentence of imprisonment. The longer the potential sentence, the greater the bias – so the thinking went. So ingrained is this defense technique that a defense lawyer’s failure to confront a cooperator with the length of his potential sentence could well have been malpractice. But in Trent, the Court has sharply curtailed that aspect of the right to cross-examine. Trial courts now may prohibit defense counsel from asking the cooperator about or otherwise eliciting the number of years of incarceration to which the cooperator is exposed.
Trent was charged with narcotics distribution. The two government witnesses – his alleged co-conspirators – entered into plea agreements. Because of their cooperation, they would avoid the same 20-year mandatory minimum sentence that defendant was facing. Trent’s lawyer predictably sought to impeach them with that fact. At the government’s request, however, the district court ordered defense counsel to ask no questions that would elicit the length of the cooperators’ potential sentences. The court accepted the government’s argument that allowing such questioning would lead the jury to infer that the defendant also was exposed to such a lengthy prison sentence. Because a jury must not consider the defendant’s potential sentence in determining liability, the trial judge agreed to curtail that cross-examination. Defense counsel was only permitted to elicit that the cooperators were seeking to avoid “substantial” incarceration by helping the government. He was not allowed to ask about the actual length of their potential sentences.
On appeal, the Court rejected the defendant’s Sixth Amendment right-to-confrontation challenge. The Court noted that trial judges have wide latitude to limit cross-examination in general, particularly to avoid unwarranted prejudice. Here, that supposed prejudice was that the jury might infer defendant himself was facing a 20-year sentence. However, the Court did not address why it would be insufficient simply to instruct the jury not to consider the defendant’s punishment, a pattern instruction given in every criminal case. Nor did the Court explain why any speculative prejudice would outweigh the core right of establishing a witness’s bias. The Court assumed that eliciting the witness’s exposure to a “substantial sentence” was as effective as eliciting the fact that the witness was facing 20 years behind bars. Of course, any objective practitioner might take issue with that assumption. Nevertheless, defense counsel should be prepared for motions in limine from the government seeking to prevent the traditional cross-examination technique of questioning a cooperator on the length of his potential sentence.
Retirement Funds Not Protected from Criminal Restitution
United States v. Sayyed, No. 16-2858 (July 6, 2017)
Defendant was convicted of receiving kickbacks from his employer’s vendors in return for steering overpriced contracts to them. As part of his sentence, defendant was ordered to pay nearly one-million dollars in restitution. The government sought to collect the restitution from defendant’s tax-qualified retirement accounts. Those accounts, like IRAs or 401(k) accounts, ordinarily are considered to be protected from creditors in civil proceedings until the owner has an unrestricted right to access the funds without penalty. But this circuit has previously held that those protections don’t apply in criminal cases. See, e.g., United States v. Lee, 659 F.3d 619 (7th Cir. 2011). Cases like Lee rely on 18 U.S.C. § 3613(a), which provides that “a judgment imposing a fine [or criminal restitution] may be enforced against all property or rights to property of the person fined.”
Sayyed offered two reasons why his retirement funds could not be taken: (1) because he was not yet of retirement age, he was unable to take penalty-free distributions; and (2) the Consumer Credit Projection Act (CCPA), which limits garnishment to 25% of disposable “earnings.” The Court easily disposed of both arguments. First, there was no dispute that defendant had a present, unconditional right to access his retirement accounts. Although he may not prefer to do so because of the tax penalties arising from early distributions, the Court stressed that the government’s ability to collect is based on the rights the defendant possesses, not the rights he would prefer to exercise. Second, while the Court agreed that the CCPA generally protects even a criminal defendant from being forced to turn over more than 25% of his earnings (15 U.S.C. § 1672), it held that the a lump-sum distribution from a retirement account is not “earnings” within the meaning of that law. If the retirement program had mandated periodic distributions of specified amounts, then they might be protected as earnings. But the right to a lump-sum distribution from a retirement account doesn’t become “earnings” just because that wealth is traceable to the defendant’s earned income.
Court Warns that Defective Jurisdictional Statements Won't be Tolerated
Baez-Sanchez v. Sessions, No. 16-3784 (July 10, 2017)
In these consolidated appeals, Chief Judge Wood issued an order reprimanding the appellees – including the Department of Justice – for shirking their duties in addressing the Court’s jurisdiction. Although it is the appellant’s obligation to establish jurisdiction through its required statement, Judge Wood noted that the Court’s rules confer an “equally-important” duty on the appellee: “The appellee’s brief shall state explicitly whether or not the jurisdictional summary in the appellant’s brief is complete and correct.” Circ. Rule 28(b) (emphasis supplied by Court). According to the Court, “[t]he appellee cannot simply assume that the appellant has provided a jurisdictional statement that complies with the rules. . . The job of the appellee is to review the appellant’s jurisdictional statement to see if it is both complete and correct. The terms are not synonyms.” (Emphases in original.) The Court struck the appellees’ briefs in these appeals, one because it only said that the appellant’s jurisdictional statement was correct (without saying it was complete) and the other because it only said that the jurisdictional statement was complete (without saying it was correct).
To avoid an embarrassing reprimand like that suffered by the Department of Justice, all counsel should take seriously the Court’s emphasis on an appellee’s duty in addressing the threshold issue of jurisdiction – even if that question is not actually in dispute.
Retirement Funds Not Protected from Criminal RestitutionRetiementRetiRe
Sacred Heart Execs' Anti-Kickback Provisions Affirmed
United States v. Nagelvoort, No. 15-2766 (May 12, 2017)
The Anti-Kickback Statute prohibits paying for referrals of Medicare patients. 42 U.S.C. § 1320a–7b(b)(2)(A). The government’s wide-ranging investigation of Sacred Heart Hospital resulted in numerous prosecutions of hospital executives, ownership, and doctors for AKS violations. In the main case, Clarence Nagelvoort, Sacred Heart’s owner/CEO, and his chief lieutenant Edward Novak were convicted of orchestrating that scheme. At trial, the government focused on Sacred Heart’s payments to doctors under supposed “personal services” contracts, as well as other purportedly legitimate arrangements such as office leases. Some of the government’s best evidence was provided by cooperating doctors – both in testimony and recorded conversations – of conversations with defendants about referring patients as part of their “contracts” with the hospital.
On appeal, defendants tried to convince the Court to reconsider a long-standing, though perhaps controversial, interpretation of the AKS: A payment is unlawful if “any part or purpose” of it was to induce referrals, as opposed to requiring that inducing referrals be a “primary” or “substantial” purpose of the payment. Defendants argued that the “any part or purpose” test made the statute unconstitutionally vague. The Court rejected the vagueness challenge, pointing to its opinion in a 2011 case when it first affirmed that test (United States v. Borrasi, 639 F.3d 774).
The Court’s ruling serves as another warning to health care providers about the perils of entering into financial relationships with one another and of the need to have health care counsel thoroughly vet arrangements where one provider also refers patients to the other.
Blago Loses Second Appeal - Post-Conviction Good Conduct Remains Important
United States v. Blagojevich, No. 16-3254 (April 21, 2017)
Rod Blagojevich’s first appellate victory has proved pyrrhic. In response to his initial salvo two years ago, the Court reversed convictions on five counts that included allegations that the Court said amounted to lawful political log-rolling (Blago offered to appoint President Obama’s pick for the vacant Senate seat in exchange for a cabinet position for himself). 794 F.3d 729 (2015). The Court distinguished those counts from the ones it affirmed, where Blago schemed to obtain personal pecuniary benefits such the promise of future employment in the private sector.
In remanding for resentencing, the Court observed that the original sentence would not have been unreasonably high when just looking at the surviving convictions. Taking that cue, the district court imposed the same punishment on resentencing. In doing so, the sentencing court rejected Blago’s contention that his post-conviction rehabilitation and good conduct in prison, as demonstrated by letters from fellow inmates, warranted a lower sentence on remand.
Affirming, the Court addressed Blago’s contention and concluded that the district court was not compelled to reduce his sentence based on that factor alone. Nevertheless, the Court re-emphasized that when a sentencing is set aside on appeal, the defendant’s post-conviction rehabilitation must be considered and can be a basis for a reduced sentence.
No Shortened Sentence for Fraudster to Earn Money for Restitution
United States v. Gold, , No. 16-3678 (April 27, 2017)
Alan Gold ran an investment fund. But instead of putting his victims’ money in equities as he promised, he gambled it away – to the tune of over a million dollars. He was sentenced to 75 months imprisonment and ordered to pay restitution. His appeal focused on the length of his sentence. Gold’s logic was that he couldn’t earn enough to pay restitution if he were incarcerated for so long. The Court easily rejected that argument, holding that the district court was correct to give “no weight” to it.
Acquittal Not Prerequisite for Fee-Shifting under Hyde Amendment
United States v. Terzakis, No. 16-3340 (April 27, 2017)
The Hyde Amendment – a rarely used but powerful tool – allows a criminal defendant to recoup attorneys fees if he is the “prevailing party” and the prosecution was “vexatious, frivolous, or in bad faith.” 18 U.S.C. §3006A. The issue here was whether a defendant must be acquitted to be a “prevailing party.” The Court held that an acquittal is not essential.
The government indicted Terzakis based on the testimony of a witness who the government knew had a serious cognitive disability. That witness later was also diagnosed with terminal brain cancer. The government reconsidered its prosecution and voluntarily dismissed the indictment, meaning that any re-prosecution would be barred because the statute of limitations had run.
Terzakis moved for fees under the Hyde Amendment. The government’s primary challenge was that Terzakis was not a “prevailing party” because the dismissal was voluntary and did not result from an acquittal or any adverse finding. The Court disagreed. Because the dismissal effectively prevented the government from bringing another prosecution due to the statute of limitations, it “materially altered the legal relationship of the parties” such that defendant won the case. The Court nevertheless affirmed the district court’s refusal to award fees because it found that the government’s initiation of the prosecution was not objectively frivolous.
No Criminal Restitution in Mortgage Fraud Scheme Where Lending Bank Acted Recklessly
United States v. Litos, No. 16-2330 (Feb 10, 2017)
Litos sold residential properties to sham buyers through mortgage financing from Bank of America. His scheme involved secretly providing cash for the down payment to each buyer and directing the buyers to falsify other creditworthiness information on their loan applications to BoA. The bank made almost a million dollars in loans, the proceeds of which were paid to defendant at the closings. Of course, the loans all defaulted. At sentencing, the district court ordered the defendant to pay the full amount of those loans as restitution to BoA.
The Court vacated the restitution order. The multitude and pattern of bogus loan applications contained such obviously false information, according to the Court, that BoA was either reckless or deliberately indifferent to the scheme. For example, numerous “principal residences” were supposedly sold to the same set of buyers, an obvious red flag. The Court held that such a “victim” should not be given the benefit of the Mandatory Victim Restitution Act. The Court remanded and recommended that a criminal fine be imposed in lieu of restitution to ensure that defendant would disgorge the proceeds from his offense, while not benefitting BoA.
Although the case involved the question of restitution, the Court’s logic raises the following unanswered questions about criminal liability itself: If a bank is deliberately indifferent to whether loan applications are false, then how can those statements be material? Indeed, how can a defendant engage in a scheme to defraud a bank if the bank blindly goes along with it?
Locke Lord Cleared of Civil RICO Conspiracy with Clients
Domanus v. Locke Lord LLP, No 15-3647 (Jan 31, 2017)
After the minority shareholders in a commercial real estate project in Krakow, Poland discovered looting by the controlling shareholders, Locke Lord was hired to represent the project’s interests. But when those plaintiffs realized that the controlling shareholders were judgment-proof, they set their sights on a new target: those same lawyers. Plaintiffs accused Locke Lord of conspiring with the controlling shareholders in violation of RICO. They particularly alleged that Locke Lord helped the controlling shareholders conceal their defalcations. Locke Lord allegedly knew of that looting from previously filed lawsuits, as well as from the law firm’s receipt of documents produced in that prior case.
In affirming dismissal of those claims, the Court distinguished between the lawyers’ potential ethical or professional lapses (their supposed conflict of interest in representing adverse parties) and an actual conspiratorial agreement. Without some evidence of an illicit agreement, lawyers do not engage in a RICO conspiracy simply because they are aware of allegations that their client engaged in wrongdoing, or because they were improperly representing adverse parties, even if the lawyers’ actions cause that misconduct to be concealed. Of course, lawyers are not obliged to treat as true allegations that have been made against their client. And “claims that lawyers have conspired with their clients are insufficient in the absence of allegations that the arrangement involves more than standard legal representation.”
Sentencing Commission May Weigh in on Individual Cases
United States v. Gibbs, No. 16-1747 (Jan 6, 2017)
The Sentencing Commission’s mission could shift dramatically. Its mandate has always been a system-level one: reviewing historical sentencing data to establish guideposts for future hypothetical cases. The Commission’s role has never been to participate in particular cases. Writing for the Court, Judge Posner proposes to expand its role to advise on a particular defendant’s potential sentence when the sentencing judge or the parties ask for advice.
In Gibbs, the government requested a sentence two years over the high end of the guideline range based on the defendant’s recidivism, and the judge agreed to impose the above-guidelines sentence. The Court affirmed the sentence. However, it criticized the lack of a “sophisticated analysis” of the sentencing factors and that the choice of the particular sentence appeared to be based on a “hunch.” In leveling that criticism, Judge Posner suggested that the Commission’s expertise could have been a valuable tool. “In a case like the present one the Sentencing Commission might advise the prosecutors, defense counsel, and the judge why it had fixed the guideline range where it did and how disapproving it would be of sentences below or above that range. Judgeswouldn’thavetoasktheCommissionforitsinput,orfollowits
recommendations,buttheymightfinditavaluableresource.”
But as Judge Kanne cautions in his concurrence, involving the Commission in particular cases would be unprecedented, and it would certainly spark litigation over the scope of the Commission’s authority. It’s also unclear how the Commission and its limited staff could review specific cases and issue guidance (perhaps in hundreds of cases each year), what the mechanics for such a review would be even if it had that authority, or whether the Commission would be inclined to wade into that morass.
Federal Preemption of Common Law Claims involving Securities Transactions
Holtz v. J.P. Morgan Chase Bank, N.A., No. 13-2609 (Jan 23, 2017)
One of Chase Bank’s many services is to manage its clients’ investment portfolios, including by placing their money in mutual funds. Plaintiff brought a putative class action alleging that Chase paid its employees undisclosed bonuses if they placed clients’ money in the bank’s own mutual funds. The complaint asserted state law breach of contract and breach of fiduciary duty claims. Plaintiff was careful not to allege fraud in an attempt to avoid preemption by the federal securities laws. Nevertheless, the district court found the claims to be preempted under the Securities Litigation Uniform Standards Act (SLUSA – 15 U.S.C. § 78bb(f)) because the mutual funds were “covered securities” and the allegations were based on a “misrepresentation or omission of a material fact in connection with the purchase or sale of a security.” The Court affirmed notwithstanding that plaintiff made no fraud allegations. Congress desired broad preemption under SLUSA for all claims based on misrepresentations or omissions about covered securities, not just fraud-based claims. Fiduciary breaches and even contract violations, if founded on a failure to disclose information, must proceed under federal law if at all.
Trial Court Must Instruct Jury on Meaning of Regulation underlying a Criminal Charge; Reading the Regulation’s Text is Insufficient
United States v. Bloom, No. 14-1445 (Jan 19, 2017)
Eric Bloom was the CEO of futures commission merchant Sentinel Management Group. His fraud conviction arose from Sentinel’s pledge of customers’ accounts as leverage for trading on Sentinel’s proprietary “house” account. When the market and then Sentinel collapsed in 2007, its customers and other creditors lost $600 million, reportedly the largest bankruptcy of an FCM.
The government’s case relied heavily on CFTC Rule 1.25, a typically jargon-laden regulation. That rule governs aspects of how an FCM like Sentinel must deal with its customers’ funds, such as by using segregated accounts. Bloom’s defense sought to use the rule to its advantage, arguing that notwithstanding the segregated account requirement, the rule specifically permitted Sentinel to engage in leverage using those assets. Bloom asked the trial court to interpret the rule and to instruct the jury that leverage was allowed under it. The court refused to give the requested instruction, but not because it disagreed with Bloom’s interpretation. Instead, the court read the full regulation to the jury, letting the lay jurors determine its meaning.
The Court concluded that the trial judge’s refusal to instruct the jury on the meaning of the regulation was a mistake. Because the judge is the arbiter of the law, and because the question of whether the regulation allowed for leverage was a question of law, the judge shouldn’t have left the jury at sea. Finding that the issue was a minor one, however, the Court held the error to be harmless and it affirmed Bloom’s conviction.
Criminal Prosecution of Employee Barred by Government’s Loss in Civil Case Against Company
United States v. Egan Marine Corp., No. 15-2477 (Dec. 12, 2016)
The government’s ability to have two bites at the enforcement apple – first civilly, then criminally – has taken a hit. The Court held that non-mutual collateral estoppel can be asserted by a criminal defendant against the government based on a prior civil judgment against the government and in favor of the defendant’s employer.
Dennis Egan was the principal of Egan Marine, a barge tug company. Dennis was also the master of the tug when an explosion killed one of its deckhands. The government first brought a civil claim against Egan Marine (but not Dennis). After a bench trial, the court found for the company because the government was unable to prove negligence under a preponderance standard. The government then indicted Dennis for the same death. Because negligence was also an element of the criminal charge (to be proved by the higher reasonable doubt standard), Dennis argued that the issue had necessarily been decided against the government and the charge should be barred.
In reversing his conviction, the Court rejected the government’s reliance on cases finding no preclusion in other circumstances – such as acquittals in criminal cases against other defendants or administrative findings against the government. Non-mutual preclusion in the civil-then-criminal context is different, the Court held. Acquittals in criminal prosecutions can be based on jury nullification and are unreviewable, whereas the government can appeal a civil judgment. Administrative proceedings are not reliable enough to justify the preclusive effect in a related criminal prosecution. But when the government tactically chooses to bring a civil case first, “it is the United States that prefers a situation in which it can win but not lose.” Preclusion under those circumstances is mandatory when the factual issue was necessarily decided against the government in the civil case. Because an employee is “in privity” with his employer, the Court found no issue with the “non-mutuality” of the preclusion.
Whether this decision will chill the government’s efforts to bring civil cases preliminary to criminal prosecutions is not known. For practitioners, however, a prior civil judgment against the government and in favor of a client’s employer will be a powerful tool to avoid a criminal charge.
NCAA Athletes Lose Bid as Paid Employees; Concurrence Keeps Door Open for Revenue Sports
Berger v. NCAA, No. 16-1558 (Dec. 5, 2016)
This Circuit – the home of the NCAA – is the latest to weigh in on whether college athletes should be treated as employees under federal law. In this salvo, female track and field stars from the University of Pennsylvania demanded minimum wage under the Fair Labor Standards Act. The Court rejected the claim, holding that dismissal was correct as a matter of law. Its decision was based less on its independent legal analysis, more by deference to the Department of Labor’s strained (and outdated) view that collegiate athletic programs are “primarily for the benefit of the participants.” The panel opinion refused to parse the particulars of the sports at issue, rejecting the athletes’ argument that the employment question was a fact-intensive one. Yet, Judge Hamilton wrote separately to keep the door open for revenue-producing sports: “I am less confident, however, that our reasoning should extend to students who receive athletic scholarships to participate in so-called revenue sports like Division I men’s basketball and FBS football.”
No-Loss Sentence May Result from Superseding Fraud
United States v. Burns, No. 15-2824 (Dec. 12, 2016)
Burns was an investment advisor who lied to his clients about his professional experience. Relying in part on those false representations, those clients invested over $3 million in supposed promissory notes. It turned out that the entire investment opportunity was a Ponzi scheme created by his employer, although Burns did not know that. The district court sentenced Burns based on the entire $3 million loss. The Court remanded for resentencing, holding that the district court plainly erred in failing to consider whether the Ponzi scheme was a superseding fraud that broke the causal chain in Burns’ own fraud. If it was, the dollar loss attributable to Burns for purposes of the guidelines and restitution would be zero.
The decision is useful for clients who are charged as part of an extensive fraudulent scheme but whose conduct (and knowledge) was limited to a particularly narrow or early aspect. Even if that client’s conduct could otherwise result in a high loss figure under the guidelines, intervening misrepresentations by other participants could be deemed a superseding cause that may drastically reduce the client’s exposure.
Caution to Snooping Spouses: Intercepting Your Significant Others’ Emails is a Federal Wiretap Offense
Epstein v. Epstein, No. 15-2076 (Dec. 14, 2016)
Paula suspected that her husband Barry was unfaithful. So like any good millennial, she used her basic email tech skills to find out for sure. She went into her husband’s account and set it to automatically forward all incoming messages to her own account. Her fears were confirmed and the two entered into divorce proceedings, during which Barry found out about Paula’s surveillance activities. He brought a separate civil claim under the Federal Wiretap Act, 18 U.S.C. § 2511, which also provides for criminal liability. The Court reluctantly reversed dismissal of the claim, stating that Paula’s conduct “technically fall[s] within the language of the Act, though Congress probably didn’t anticipate its use as a tactical weapon in a divorce proceeding.” Judge Posner wrote separately to state that – had the argument been made – he would be inclined to dismiss the claim because Barry’s adultery was itself “criminal” and the Wiretap Act shouldn’t be deemed to prevent even private persons from conducting electronic surveillance to ferret out criminal conduct.
Federal and Illinois DBE Programs Ruled Constitutional – Fraud Exposure Remains for Contractors Struggling to Comply
Midwest Fence Corp. v. U.S. Dept. of Transportation, No. 15-1827 (Nov. 4, 2016)
Government contractors have tried for decades to reconcile the aspirational requirements of minority- and disadvantaged-business-enterprise programs with the reality of the marketplace. In recent years, notable general contracting firms and subcontractors have come under investigation for allegations of fraud in their efforts to satisfy those requirements. Some of those firms, as well as their senior executives, have been indicted. Others have been compelled to pay millions in civil fines under the Federal False Claims Act and its state counterparts. Theories of prosecution have become ever-more aggressive. Charges are not solely based on allegations of “sham” DBE firms or blatant “pass-through” arrangements. Instead, many involve more subtle conduct such as sharing employees with the DBE firm, loaning equipment to it, and directing or supervising the DBE’s work on the job-site. Yet, the resulting fraud charges are equally damning. Because of those tensions and the large stakes, contractors continue to challenge the constitutionality of those programs in numerous jurisdictions. Those challenges have often focused on the practical impossibility of finding sufficient qualified DBE/MBEs to provide the required portion of work.
Midwest Fence, the most recent of those challenges, addresses DBE requirements for highway construction programs administered by the U.S. Department of Transportation, the Illinois DoT, and the Illinois Tollway. Although the Court writes that it is “troubled” with certain aspects of those programs, such as their disproportionate effect on certain specialty trades, it agreed with the district court that they are not constitutionally infirm. The Court relied on the theoretical availability of “waivers” allowing a general contractor to seek relief from the otherwise rigid requirements. The Court discounted evidence that waivers were almost never granted in practice, and it brushed off the concern that general contractors would be loath to ask for them in the first place for fear of losing the bid to another firm that doesn’t ask for that concession. The Court also was not moved by evidence showing that truly qualified DBE firms often did not exist for the particular types of work deemed to be DBE-eligible.
Contractors will continue to be challenged in trying to comply with those programs’ requirements. Firms and their key personnel, down to project managers and forepersons, need to be reminded that despite those challenges, the programs are here to stay for the foreseeable future, and any short-cuts may invite a federal scrutiny.
FCA Theory of “Implied False Certifications” Takes a Hit
United States v. Sanford-Brown, Ltd., No. 14-2506 (Oct. 24, 2016)
Can a mere request for payment be deemed a “false statement” under the Federal False Claims Act, on the theory that the request implicitly certifies compliance with the underlying contract and regulations? The Supreme Court examined this so-called “implied false certifications” theory in Universal Health Services, Inc. v. United States, 136 S.Ct. 1989 (2016), holding that it can be a basis for liability, but only when two conditions are met: “first, the claim does not merely request payment, but also makes specific representations about the goods or services provided; and second, the defendant’s failure to disclose noncompliance with material statutory, regulatory, or contractual requirements makes those representations misleading half-truths.” In Sanford-Brown, the Seventh Circuit had the opportunity to apply that standard for the first time. Affirming summary judgment against the government based on Universal Health, the Court emphasized that the defendant’s mere request for payment did not amount to a “specific representation” that could subject it to liability, even if the defendant knew that its performance had not complied with the underlying regulations and that it was not entitled to payment.
Immediate Payment of Full Criminal Restitution Required Despite Apparent Language to the Contrary
United States v. Wykoff, No. 16-1307 (Oct. 6, 2016)
After pleading guilty to wire-fraud charges, Wykoff was sentenced to imprisonment and to pay restitution of $450,000. One of the terms of supervised release was that any unpaid restitution upon release from prison shall be paid “at a rate of not less than 10% of the defendant’s gross monthly income.” On appeal from a writ of garnishment, defendant argued that the special condition established a payment plan. In rejecting that reading, the Court emphasized that full restitution is required to be paid immediately unless the district court provides otherwise. The condition of paying “not less than 10%” of defendant’s income during supervised release, according to the Court, did not change that rule; it only set a floor for any payments. This case highlights the need for great specificity in a judgment order when defense counsel believes that the Court is amenable to ordering installment payments for restitution instead of a lump sum. The judgment order must be unambiguous, and the provision must be in the restitution order itself; it is not enough to include it as part of the conditions of supervised release.
Obstruction-of-Justice Sentencing Enhancement for Defendant’s Testimony Continues to Exact “Trial Penalty”
United States v. Rash, No. 16-1672 (Oct. 27, 2016)
Rash testified on his own behalf in a felon-in-possession gun case. When he took the stand, he conceded his knowing possession, the only element of the offense that had been in dispute. His defense instead was jury nullification: that the gun was owned by his girlfriend and he was simply returning it to her, which, of course, was no real defense. He argued that the sentencing court’s enhancement for obstruction of justice for falsely testifying about the reason for his possession was erroneous because his testimony amounted to an admission of guilt regardless of the reason. Although recognizing that defendant’s false testimony did not go to an element of the offense, the Court nevertheless affirmed because that testimony invited an acquittal through jury nullification. In doing so, the decision highlights that defendants who testify on their own behalf and are convicted should expect to be penalized for exercising that right, even when the subject of the allegedly false testimony was only marginally related to the charged offense.
Courts Are NOT Limited by Rule 6(e) in Allowing Disclosure of Grand Jury Materials
Carson v. United States, No. 15-2972 (September 15, 2016)
The secrecy of grand jury proceedings, and the materials incident to those proceedings, is governed by Fed.R.Crim.P. 6(e). The Rule lists a handful of exceptions where the district court may permit disclosures of those materials. No catch-all provision exists allowing a court to order disclosures in other circumstances or whenever it deems appropriate. Yet, the Court held that district courts’ authority to order disclosures is not so limited. Carson involved grand jury materials sealed from the 1940s of an investigation about cracking Japanese codes during World War II. The government conceded that no interests favored continued secrecy. But it opposed disclosure because none of the exceptions in Rule 6(e) permitted it. The Court rejected the argument that Rule 6(e) was the beginning and the end of the story. Because district courts have inherent powers as supervisors of the grand jury, it found that those powers are not limited by the Rule and a district court can order disclosure “whenever appropriate.” Although the result in Carson might not be controversial on its facts (the release of 70-year old documents of purely historical interest), creative counsel may use the holding to argue for disclosure of grand jury materials in a variety of circumstances regardless of what the Rule provides.
Victim Cannot Waive Right to Restitution under MVRA
United States v. Kolbusz, No. 15-2962 (September 21, 2016)
Even sophisticated victims like insurance companies need to be protected from themselves when seeking restitution. Or so suggests the Court. Dr. Kolbusz was found guilty of submitting fraudulent claims to health insurance carriers for medically unnecessary procedures. In settling parallel civil litigation, some of the insurers gave explicit waivers of their right to receive criminal restitution under the Mandatory Victim Restitution Act. The sentencing court nevertheless ordered the defendant to pay full restitution to each of those victims. The Court affirmed, holding that the government was not bound by those private agreements. The Court did not explain why the government, whose mandate under the MVRA is to benefit the victims, should not be bound by the victims’ fully-informed decision to resolve the restitution issue on their own.
Whistleblower’s Pleading of Personal Expertise Not Sufficient to Support FCA Claims
Presser v. Acacia Mental Health Clinic, LLC, No. 14-2804 (September 1, 2016)
Rose Presser was a nurse and nurse practitioner who worked for the defendant’s mental health clinic. She brought this claim as a relator under the False Claims Act, alleging that the defendants falsely billed for medically unnecessary procedures – such as mandatory drug screenings and a policy requiring that a patient see four different personnel (each incurring a charge to Medicare or Medicaid) before being prescribed medication. Presser based her conclusion about lack of medical necessity on her “years of experience and training” as a nurse and a nurse practitioner. The Court affirmed the dismissal of those claims under Rule 9(b), finding that plaintiff’s personal view, no matter how well-experienced, would not be enough to sustain a finding of lack of medical necessity. The problem with reliance on a relator’s individual estimation of the situation is that a relator “may not be in a position to see the entire picture or may simply have a subjective disagreement with the other party,” and that the relator’s perspective may be colored by self-interest or bias.
The holding is significant beyond the realm of non-physician relators and even beyond health care fraud cases. The dismissal (and the Court’s affirmance) did not turn on whether the relator was sufficiently experienced or knowledgeable to form an opinion of whether the alleged statements were false. A relator who is a physician with a particularly relevant specialty, for instance, might also be unable to sustain an FCA claim if based solely on that relator’s “personal estimation” of what is proper, no matter how much education or experience she has. Instead, the Court concluded that the relator must allege “medical, technical, or scientific context” that would show why the treatments actually were unnecessary. It likewise follows that qui tam complaints in other types of FCA cases (construction, government contracting, etc.) may be attacked regardless of the relator’s wealth of experience in the industry, if the allegations are otherwise thin.
Agreement to Recommend a “Within-Guidelines” Sentence Allows the Government to Ask for High End of the Range
United States v. Morris, No. 15-2402 (September 9, 2016)
A defendant gets no concession at all when the government agrees to recommend a sentence “within the sentencing guidelines range.” Sometimes, the government will enter into a “no-rec” plea agreement. The Court held that this case was not one of those times. When the government agrees to recommend a sentence within the guidelines range, it is not required to utter the words: “The government requests a sentence within the guidelines range,” or anything like them. Instead, because the high end of the range is still within the range, the government is free to ask for the highest sentence available under the guidelines. Worse, assuming the plea agreement doesn’t explicitly prohibit the government from advocating enhancements that would increase the guidelines range, the government can propose any enhancement it wants even in the face of an agreement to recommend the “guidelines range.”
Chambers v. Mississipi Lives
Wayne Kubsch v. Neal, No. 14-1898 (September 23, 2016) (en banc)
More than three decades ago, the Supreme Court held that a criminal defendant’s due process and confrontation rights trump the hearsay prohibition: “Few rights are more fundamental than that of an accused to present witnesses in his own defense. . . [W]here constitutional rights directly affecting the ascertainment of guilt are implicated, the hearsay rule may not be applied mechanistically to defeat the ends of justice.” Chambers v. Mississipi, 410 U.S. 284 (1973). Although the limits of the hearsay prohibition have been challenged now and again, those challenges almost always fail.
In this death penalty habeas case, Chambers was revived in the context of video-recorded eyewitness interviews. Police had questioned the murder victims’ neighbors (a nine-year old girl and her mother) during a recorded interview. The girl recounted having observed the victims come and go from their house at times inconsistent with the state’s theory of when the murders occurred. But when the case came to trial seven years later, the girl couldn’t recall those details; she couldn’t even recall having provided the interview. The trial court excluded the recorded interview on hearsay grounds.
The Seventh Circuit sitting en banc accepted that the hearsay rule was properly applied to exclude the videotaped interviews. Yet, because the interviews were essential to the defense and bore multiple hallmarks of reliability, it found that their exclusion was constitutionally deficient. Although Kubsch was a capital case (a point that the Court said was important in reaching its decision), Chambers now may have renewed vitality for criminal trials of all types, especially in the era of audio- or video-recorded statements.
Judge’s Erroneous Ex Parte Communications with Jurors Does Not Warrant Reversal
United States v. Turner, No. 15-1175 (September 9, 2016)
Only 45 minutes into deliberations, a juror sent a note asking to be released because of a death in the family. Rather than conferring with that juror by note, the judge went back to the jury room – no counsel, no court reporter – to get more information from the juror. After conferring with counsel and ultimately deciding to excuse the juror, the judge had two further ex parte trips to the jury room. In the last of them, the judge admonished the remaining jurors: “We are not going to be able to do this again.”
The Court had no trouble finding that the trial court’s ex parte communications with the jury violated Rule 43(a) of the Federal Rules of Criminal Procedure, which entitles a defendant to be present at all stages of trial, including any “communications between the judge and the jury, or a single juror.” Yet, the Court held the error to be harmless because the defendant was not able to show that those contacts were likely to have affected the outcome of the case. Given that holding, it is not clear how a defendant ever could meet his burden unless the ex parte communications related directly to the substance of the case (the evidence or the law), as opposed to the process of deliberations.
Adverse Inference Triggered by Letter Immunity in Prior Criminal Matter – Are Proffer Letters Next?
Empress Casino Joliet Corp. v. Balmoral Racing Club, Inc., No. 15-2526 (August 2, 2016)
Whatever the benefits of getting an immunity letter from the government in the course of a criminal investigation, it may come with a significant economic risk if your client is later sued for civil damages: The district court may instruct the jury that it can draw an adverse inference against the client – even though the client testified truthfully in the criminal case, and even if your client fully cooperated in discovery in the civil case. In this Rod Blagojevich-inspired case (see next summary), the government gave letter immunity to horseracing executive John Johnston in exchange for his truthful testimony against Blago regarding an alleged contributions-for-legislation scheme. The immunity letter began with the standard preface that “your attorney has represented that such information may tend to incriminate you.” In the subsequent civil case brought by the state’s casinos against Johnston and his racetracks, the trial judge instructed the jury that it may infer based on the immunity letter that Johnston’s testimony would have been incriminating.
Affirming, the Court found no problem with the instruction, even though Johnston testified in all proceedings, civil and criminal, and the civil jury consequently heard all of the relevant testimony. The Court did not explain why a jury would need to “infer” whether Johnston’s testimony would be incriminating, given that the jury actually heard all of his answers. The Court also did not distinguish the case from the more typical ones involving adverse inferences, such as where a party invokes his Fifth Amendment privilege in the pending case, and thus prevents the opposing party from obtaining his testimony or other discovery. Nevertheless, the Court’s ruling appears to extend substantially the district court’s discretion to instruct on the adverse inference. Anytime a putative civil defendant obtains immunity or invokes his Fifth Amendment privilege in a parallel criminal matter, the adverse inference may come into play. Of equal concern, will obtaining a mere proffer letter containing similar language (“your attorney has represented that such information may tend to incriminate you”) trigger an adverse inference instruction in a separate civil matter?
Blago Horseracing Case Makes It Harder to Sustain Civil RICO Claims: “Continuity” Requirement Not So Easily Satisfied
Empress Casino, Part II (see Part I, above)
One of the many aspects of the Rod Blagojevich corruption investigation was Blago’s alleged agreement to sign a tax bill redirecting revenues from the state’s casinos to the horseracing industry in exchange for the promise of a $100,000 campaign contribution by the racetracks. After this part of the investigation became public, the casinos sued the racetracks for civil RICO violations and state law claims. A jury found in favor of the casinos, awarding almost $26 million in damages, which was trebled under RICO to almost $78 million. While affirming the award of damages under the state law claims, the Court reversed the RICO verdict and the trebling of damages because of insufficient evidence of a pattern of racketeering activity. Although the jury would have been entitled to find numerous individual predicate RICO acts, the Court found lacking any evidence of “continuity” – that is, that the contribution-for-legislation scheme existed over an extended period of time or posed a realistic threat of repetition, as opposed to being a distinct “one-off crime.”
Flipper in Beau Brindley Case Gets a Second Chance at Full Benefit for Cooperation Despite Brindley’s Acquittal
United States v. Harrington, No. 15-3486 (August 19, 2016)
Should credit for cooperation be reduced simply because the defendant on trial winds up being acquitted? Defense lawyer Beau Brindley was charged with suborning perjury in his clients’ criminal cases. The government gained the cooperation of one of his former clients, Richard Harrington, who testified at Brindley’s own trial. Brindley was acquitted. According to the Court’s opinion, there was no evidence in the record that Harrington was untruthful in his testimony or that he was deficient in his cooperation. So the government moved for a 25% reduction in Harrington’s previously-imposed sentence. The district court (a different judge than the one who presided over Brindley’s trial) refused the government’s motion in part, granting only a 14% reduction. On appeal, the Court appeared concerned that the district court might have conditioned full cooperation credit on whether the underlying prosecution proved successful. The Court did not go so far as to call the decision error. It instead remanded for the district court to reconsider the government’s motion and, if it were to stick by its ruling, to clarify its reasons. What seems clear, however, is that the Court will not accept the acquittal of the target of the cooperation as a sufficient reason to deny credit to the cooperator.
Increase in Sentence After Defendant’s Successful Appeal of His Sentence is Strangely OK
United States v. Dorsey, No. 15-3341 (July 21, 2016)
Be careful what you wish for in appealing your client’s sentence. You might just lose by winning. In Dorsey, the defendant successfully appealed the supervised-release conditions of his 276-month sentence, and the case was remanded for resentencing. In the meantime, however, he was convicted of a separate charge for violating his release conditions from a prior case triggered by his instant conviction. On resentencing in this case, the district court took account of that post-sentencing charge to increase defendant’s sentence on the first set of charges. On the ensuing appeal, the Court was unsympathetic to defendant’s unusual position of having won a resentencing only to be punished more severely. The Court cited 18 U.S.C. § 3661, which prohibits placing “any limitation” on the information the sentencing court may consider concerning the defendant’s characteristics, even if that information came to light after the original sentencing.
Sentencing Judge’s Commentary on Social Unrest, Protests against Police, and General Decay of Defendant’s Neighborhood Improperly Blamed Defendant for Society’s Ills
United States v. Robinson, No. 15-2019 (July 22, 2016)
This drug case has an important lesson for sentencings in white collar cases: The sentencing court only may go so far in linking general social or economic problems with the case at hand. In Robinson, the judge decried the decay of defendant’s neighborhood, as well as the overall unrest seen in other cities as a result of urban blight, protests, and even rioting. The Court held that defendant’s sentence must be vacated, because the district judge’s comments improperly tied general societal problems to defendant’s narrow offense. Although the importance of general deterrence in sentencing is a given, the sentencing court’s comments must reflect that the punishment is intended to deter the specific type of conduct at issue, as opposed to being punishment for criminality in general or other problems in society at large. Defense counsel should be sensitive to a judge’s (or prosecutor’s) comments at sentencing concerning things such as the deterioration of the overall economy, the loosening of business ethics among corporate executives, and the culture of greed. Those comments may be enough to garner a new sentencing with a new judge.
Beware the Appellate Waiver . . . Again
United States v. Odeh, No. 15-3389 (August 10, 2016)
Defendants decided to plead guilty to fraud offenses. Their plea agreements with the government contained the standard waiver: They could not appeal their sentences as long as the sentences were within the Guidelines range. You might think that the waiver, like any other contractual term, was contingent on the government living up to its obligations under the plea agreement. You would be wrong. When the government refused to recommend a reduction under the Guidelines for acceptance of responsibility, as it had agreed to do in the written plea agreements, the defendants appealed. The Court dismissed the appeals based on the waiver. It found that the government’s arguable breach of its responsibilities did not save the defendants from their waiver of appellate rights. The Court enforced the narrow language of the waiver, which allowed an appeal only if the sentence exceeded the calculated Guideline range. Although such waivers have become the norm (the government pretends that they are a non-negotiable term of any plea agreement), this case is another warning to counsel who reflexively accept the government’s language.
The Continued Demise of Rule 11(c)(1)(C) Plea Agreements: A Sentencing Court’s Unarticulated Rejection of the Agreement is Effectively Unreviewable
United States v. Viren, No. 15-2078 (July 5, 2016)
The Court affirmed the district court’s apparently unbounded discretion to reject a plea agreement under Rule 11(c)(1)(C), without as much as a whiff of a reason being offered by the district court. The government and the defendant had agreed to a maximum sentence of 360 months incarceration for defendant’s child exploitation offenses, whereas the maximum sentence under the Guidelines would have been life imprisonment. The district court did not articulate a reason for its decision; it simply notified the parties, “I will not accept the 360-month cap.” The defendant withdrew his plea, but then decided blindly to enter a plea of guilty. The district court sentenced him to 600 months. Although the Court recited the standard of review as being for abuse of discretion, it refused to require the district court to provide “any justification” for rejecting the parties’ agreement on the maximum sentence. In fact, the Court suggested that by articulating a reason, a sentencing court would run afoul of Rule 11(c)(1)’s prohibition against participating in plea discussions – because, apparently, commenting on what the sentencing court does or does not find acceptable would give the parties a roadmap to a court-sanctioned plea agreement. But in reaching that conclusion, the Court did not discuss how a district court’s decision could ever practically be reviewed for abuse of discretion. The effect appears to be that as long as the sentencing court identifies what term of the Rule 11(c)(1)(C) agreement it finds objectionable, it may reject the agreement without any articulated basis and that decision will be unreviewable.
The Cart-Before-The-Horse Problem of Challenging Agency Investigatory Subpoenas Based on Lack of Agency Jurisdiction
CFTC v. Monex Deposit Co., No. 15-1467 (June 1, 2016)
How can you challenge the enforceability of an agency subpoena when it appears that the agency may not have jurisdiction over the underlying transactions? The Court’s answer is, you can’t. Monex is in the business of selling contracts for delivery of precious metals. The CFTC ordinarily regulates such contracts, and it served Monex with an investigatory subpoena seeking information concerning whether Monex’s contracts were covered transactions. Monex sought to quash the subpoenas, arguing that its contracts were exempted under the Commodities Exchange Act from CFTC regulation because those contracts were for delivery within 28 days. The Court held that the action was premature. “It is clear to us . . that Monex is using its opposition to the subpoena as a means to get a judicial decision on the merits of its statutory argument, before the CFTC makes a substantive decision. . . A contention that the agency lacks ‘jurisdiction’ does not change this timing rule.” The Court’s ruling, however, appeared to be premised on the existence of at least a colorable argument that the CFTC might have jurisdiction based on the results of its investigation. But the conclusion still may be difficult for targets of administrative investigations to stomach: You are likely to have to suffer the slings and arrows of an agency investigation even if you are convinced that the agency has no jurisdiction over the matter it is investigating, and even if you are later proved correct in an enforcement proceeding.
“Sophisticated Means” in Tax Fraud Cases: Almost Anything Counts, even a False 1099
United States v. Bickart, No. 15-2890 (June 17, 2016)
Although tax frauds typically involve falsification of at least one tax document submitted to the IRS, the Court held that creation of false 1099s (purportedly issued by financial institutions) was a step too far to avoid an enhancement for use of sophisticated means. The Court viewed submission of the false 1099s as not being an “inherent” part of the submission of the false underlying tax returns, even though the 1099s were submitted as part of those returns. The Court acknowledged that such conduct “ranks on the low-end of tax scheme sophistication.” But the lesson is that a client’s creation of any false corroborative document to support a false return is likely to trigger the sentencing enhancement
Silvern: Reversal for a Deviation from Silvern Instruction Requires Precise Objection at Trial – It Is Not Enough to Ask for a Mistrial
United States v. Ridley, No. 15-1309 (June 13, 2016)
After just a few hours of deliberations, the jury announced that it was deadlocked. The defendant asked the court to declare a mistrial. The court refused. But instead of giving the standard Silvern instruction (United States v. Silvern, 484 F.2d 879 (7th Cir. 1973) (en banc)), the district court wrote back to the jury: “The Court requests that the jury continue in their deliberations in an effort to reach a unanimous verdict.” Having asked for a mistrial, defendant did not explicitly object to the language of the note. The jury returned guilty verdicts later that day. Although the language of Silvern is thought to be sacrosanct – indeed, the Silvern court itself warned that a resulting conviction from any deviation from the scripted language “will be reversed and remanded for a new trial” – reversal is only required when defendant specifically objects to the instruction before it is given. Here, because defendant failed to make an explicit objection, the Court affirmed.
Court Disqualifies Judge Der-Yeghiayan from Legacy INS Case; Mandamus is Usual Route for Review of Recusal Motion
United States v. Herrera-Valdez (June 17, 2016)
Defendant, previously removed from the United States, was charged with illegal reentry. The criminal case was assigned to Judge Der-Yeghiayan, who had been listed as District Counsel on INS’s pleadings during the preceding removal matter. Regardless of the Judge’s lack of any direct involvement in those prior proceedings, the Court held that the appearance of bias was sufficient to require recusal. More broadly, the Court reiterated this Circuit’s general rule that appellate review of recusal for apparent bias must ordinarily be taken by a pre-trial petition for mandamus. (Mandamus wasn’t required here, however, because the issue was preserved in a conditional plea agreement.)