Federal Criminal Defense Blog

New York Defendant Indicted for $50 Million in Fraud from ATM, Armored Car and Other Businesses

Anthony Lake — Fri, 12 Mar 2010 13:24:43 -0500

As reflected in an FBI press release, an indictment was unsealed in the U.S. District Court for the Southern District of New York against Robert Egan, President of Mount Vernon Money Center (MVMC) on Wednesday charging Egan with one count of conspiracy to commit bank fraud and wire fraud and six counts of bank fraud for allegedly defrauding banks and other financial institutions of approximately $50 million.

MVMC operated various cash management businesses, including replenishing cash for over 5,300 automated teller machines (ATMs), payroll services for businesses, and an armored car service, Armored Money Services (AMS). MVMC's clients included banks and financial institutions, businesses and universities. MVMC also had several cash vaults to store and process cash from its businesses.

The government alleges that, from 2005 through 2010, Egan and MVMC's Chief Operating Officer, Barnard McGarry, allegedly collected hundreds of millions of dollars from MVMC clients based on false representations that they would not commingle clients' funds or use the funds for purposes other than those specified in MVMC's agreements with the clients. However, Egan and McGarry are alleged to have engaged in a practice known as "playing the float," in which they misappropriated funds from the substantial cash flow into MVMC to their own uses, to pay prior client obligations or to cover operating expenses of MVMC's businesses. Egan and McGarry are also alleged to have commingled its clients' monies in its accounts and cash vaults, and instructed employees to use whatever monies were available to replenish ATM machines. McGarry is alleged to have transferred clients' monies among MVMC's accounts. In addition, both defendants are alleged to have made false representations in reports to ATM clients regarding the amount of funds MVMC allegedly held in its vaults for the clients. MVMC was entrusted with approximately $70 to $75 million by its clients, but allegedly only kept approximately $20 to $25 million in its accounts and vaults.

Egan was arrested last month. A receiver has been appointed to administer MVMC. The press release stated that the case was brought in coordination with the White House's Financial Fraud Enforcement Task Force. Among the officials who addressed the media in conjunction with the press release was the Special Inspector General of the Troubled Asset Relief Program (SIGTARP) Neil Barofsky.

Bloate v. U.S.: Extensions of Time to File Pretrial Motions Not Automatically Excludable from Speedy Trial "Clock"

Anthony Lake — Wed, 10 Mar 2010 08:49:29 -0500

The United States Supreme Court has sped up the clock in criminal cases with consequences for how attorneys practicing federal criminal law will practice in the future. The Speedy Trial Act of 1974, 18 United States Code Section 3161 et seq., requires that the trial of a criminal defendant begin within 70 days of the date he is charged or makes an initial appearance, whichever is later. The Act, however, contains numerous periods of delay which are not counted when computing the 70 day time frame. Some of the periods of delay are “automatically” excluded from the 70 day time period, and are contained in Section 3161(h)(1). Other periods are only excludable if the district court makes specific findings, pursuant to Section 3161(h)(7), which provides that certain time periods “may” be excludable if the judge finds that “the ends of justice served by taking such action outweigh the best interest of the public and the defendant in a speedy trial,”

One of the “automatic” exclusions is for “(D) delay resulting from any pretrial motion, from the filing of the motion through the conclusion of the hearing on, or other prompt disposition of, such motion…” 18 United States Code Section 3161(h)(1)(D). Courts traditionally read this provision to include additional time granted to defendants to file pretrial motions. Yesterday, however, the Supreme Court issued its opinion, authored by Justice Clarence Thomas, in Bloate v. U.S., No. 08–728, available here, in which the majority held that “delay resulting from pretrial motions is automatically excludable, i.e., excludable without district court findings, only from the time a motion is filed through the hearing or disposition point specified in the subparagraph, and that other periods of pretrial motion-related delay are excludable only when accompanied by district court findings.” (Emphasis in original).

Counsel for Bloate, who was indicted for possession of cocaine, had obtained an approximately one month extension of time to file pretrial motions, and subsequently filed a motion to dismiss the indictment for Speedy Trial Act violations. The district court held that the extension to file pretrial motions was excludable under Section 3161(h)(1)(D) and the Eighth Circuit Court of Appeals affirmed his conviction, however the Supreme Court reversed and remanded. The majority responded to criticisms by dissenting Justices Samuel Alito and Steven Breyer that its holding would force district courts to choose between denying requests for additional time to file pretrial motions and potential dismissal of the indictment, noting that courts may make specific findings that the time is excludable from the Speedy Trial computation under Section 3161(h)(7), and that, even if the indictment is dismissed without prejudice, the government may still re-indict the defendant.

Most criminal cases already move quickly precisely because of the Speedy Trial Act. Conversely, the cases may be complex, preparation of effective pretrial motions may require substantial time and criminal lawyers may be occupied on other cases. Extensions of time to file pretrial motions are a frequently sought remedy. In view of the Court’s holding in Bloate, practitioners now must consider the implications under the Speedy Trial Act in requesting necessary extensions of time. Lawyers will have to consider how any proposed extension should be excludable from the Speedy Trial clock in the interest of justice, and may be forced to agree or stipulate that any extension will be excludable.

SEC Charges Prominent South Florida Cuban-American Couple with $135 Million Ponzi Scheme

Anthony Lake — Mon, 08 Mar 2010 20:42:20 -0500

The Securities and Exchange Commission has charged prominent Miami businessman Gaston E. Cantens and his wife, Teresita Cantens, with allegedly running a $135 million Ponzi scheme targeting elderly Cuban-Americans, according to the Miami New Times.

Specifically, the Cantens allegedly used their development company, Royal West Properties, to sell promissory notes to finance the purchase of properties, representing that the investments were safe and would yield annual returns of 9 to 16 percent. When property owners began to default on their mortgages, however, the Cantens purportedly used monies from new investors to pay returns to previous investors. The Cantens are alleged to have persuaded investors by using their prominent standing in the community and claiming that Jesuit priests and other religious leaders had entrusted their money to them, targeting investors at social and religious gatherings and through national television ads on Spanish language channels. The Cantens were allegedly never authorized to sell the securities by the SEC. They furthermore are alleged to have diverted $20 million of the funds to themselves, their children and their grandchildren, and to finance their other businesses.

Gaston Cantens was an advisory board member for Belen Jesuit Preparatory School. The Cantens are the parents of former Florida State Representative Gaston I. Cantens, who served from 1998 to 2006 as a Republican representing District 114, and is currently is a Vice President at Florida Crystals Corporation.

Government Looks for Success Against Former KB Home Executive Following String of Failures in Stock Option Backdating Cases

Anthony Lake — Mon, 08 Mar 2010 00:33:11 -0500

After the failure of its backdating case against Gregory Reyes, former Chief Executive Officer of Brocade Communications Systems, prosecutors with the U.S. Attorney's Office for the Central District of California are taking a new tack in its backdating case against former KB Home CEO Bruce Karatz, according to the National Law Journal. Karatz is alleged to have received millions in undisclosed income as a result of backdating stock options, and made $232 million in his last three years as CEO alone. The prosecution has decided to focus on Karatz's personal gain from the alleged scheme, and circumvent the defense--effective in the Brocade Communications Systems case--that backdating is not criminal where the corporation is aware of it, or where a defendant relies on the advice of attorneys or accountants. Defendants have also successfully argued that backdating is a legal and legitimate practice, and that many companies restate their income as a result of such conduct.

The U.S. Court of Appeals for the Ninth Circuit reversed Reyes' conviction in August based on the government's alleged prosecutorial misconduct in intimidating and influencing witnesses. The government's failure in the Reyes case came along with its defeat in 2008 in a backdating case against Kent Roberts, the former General Counsel of McAfee, Inc., a security software firm, and the dismissal of its case against two former executives of Broadcom Corp.

British Multinational Defense Contractor BAE Systems Pleads Guilty to Foreign Corrupt Practices Violations and Other Offenses; Ordered to Pay $400 Million Fine

Anthony Lake — Thu, 04 Mar 2010 08:11:02 -0500

On Monday, BAE Systems PLC, a United Kingdom-based, multinational defense contractor, pled guilty in the U.S. District Court in the District of Columbia to charges of allegedly conspiring to defraud the United States by impairing and impeding its lawful functions, allegedly making false statements about its Foreign Corrupt Practices Act (FCPA) compliance program, and allegedly violating the Arms Export Control Act (AECA) and International Traffic in Arms Regulations (ITAR), according to PR Newswire. U.S. District Judge John D. Bates ordered BAE Systems to pay a $400 million criminal fine. The fine is one of the largest ever imposed in a foreign corrupt practices/export control case. BAE Systems also agreed to retain an independent compliance monitor.

BAE Systems, the prime military contractor in the UK, was alleged to have represented to various U.S. government agencies from 2000 to 2002 that it would would create and implement policies and procedures to ensure its compliance with anti-bribery provisions of the FCPA and the Organization for Economic Cooperation and Development (OECD), but failed to implement the policies and procedures. BAE Systems was alleged to have saved approximately $200 million in failing to implement the policies and procedures.

The government also alleged that BAE Systems made payments to shell corporations and third party intermediaries which were not subject to the scrutiny required by the U.S. government. BAE Systems is alleged to have retained "marketing advisors" to secure defense contracts and to have allegedly concealed its relationship with these advisors from the U.S. government and made undisclosed payments to them, encouraging them to set up offshore shell corporations to receive payments. The company is alleged to have created one company in the British Virgin Islands in order to allegedly conceal its marketing advisor relationships, the identities of the advisors and how much they were paid; to help the advisors avoid tax liability, and to obstruct investigating authorities and circumvent laws of countries which prohibit such relationships. BAE Systems is alleged to have made more than £135 million in payments through the shell entity.

BAE Systems was also alleged to have given benefits to an official of the Kingdom of Saudi Arabia in order to influence sales of fighter jets and other armaments to the country without properly reviewing or verifying the benefits pursuant to U.S. law. BAE Systems is alleged to have transferred millions through a bank account in Switzerland controlled by an intermediary in relation to the deal.

Oral Arguments in Skilling Case Focus on Jury Selection Issues, Less Emphasis on Honest Services Fraud

Anthony Lake — Mon, 01 Mar 2010 22:23:53 -0500

According to Lyle Denniston at SCOTUSblog, Ashby Jones at the Wall Street Journal Law Blog, and Professor Ellen S. Podgor of Stetson University College of Law and the White Collar Crime Prof Blog, the U.S. Supreme Court seemed more interested in the jury selection/fair trial issues in yesterday's oral arguments in the case of former Enron CEO Jeffrey Skilling, Skilling v. U.S., Case No. 08-1394 then it did in the constitutionality of 18 U.S.C. 1346, the federal honest services fraud statute. The transcript of the oral argument may be read here. After lengthy questioning regarding the jury selection at Skilling's trial by Justice Stephen G. Breyer and others, Chief Justice John G. Roberts, Jr., raised the question of honest services. Skilling's counsel, Sri Srinivasan, appeared to have adopted the strategy of arguing for a new trial based upon juror bias relating to the Enron scandal rather than a reversal of Skilling's convictions for honest services fraud. Srinivasan argued that the Department of Justice was interpreting the law broadly enough to reach virtually any falsehood told by an employee.

Deputy Solicitor General Michael R. Dreeben argued for the government. Dreeben argued ways in which the Court could interpret the honest services fraud statute in order to avoid holding it unconstitutionally vague. Justice Anthony Kennedy stated to Dreeben that it was Congress' job to rewrite the statute and Justice Antonin Scalia remarked on the excessive scope of the statute.

The Court's decision in the case is expected this spring or summer. The parties' arguments regarding honest services fraud largely mirrored the arguments in the two other challenges to 1346 which the Court had heard this term. Commentators have opined that 1346 may not survive without being sent to Congress for reshaping.

Appeal of Former Enron CEO Jeff Skilling to Test Constitutionality of Federal Honest Services Fraud Statute

Anthony Lake — Sat, 27 Feb 2010 10:59:33 -0500

As noted by Ashby Jones at the Wall Street Journal Law Blog, the U.S. Supreme Court will hear oral arguments in the case of U.S. v. Skilling on Monday at 1 p.m., Eastern Time. The central issue to be argued to the Court is whether the federal honest services fraud statute, 18 United States Code 1346, is "unconstitutionally vague." Mr. Jones rounds up commentary from around the blogosphere on the case.

As noted by Mr. Jones, the honest services fraud statute, Section 846, criminalizes the deprivation of another of the "intangible right to honest services." Congress enacted Section 846 22 years ago following the Supreme Court's decision in McNally v. U.S, which had ended prosecution for honest services as a part of mail or wire fraud. The problem is that Section 846 does not define "honest services." The honest services provision is a favorite of prosecutors, especially in cases where deprivation of money or property, as required in traditional mail or wire fraud cases, may be difficult to establish.

Jeff Skilling is the former Chief Executive Officer of Enron Corporation, which crashed into sudden bankruptcy in 2001. Skilling, former CEO Kenneth Lay and others were charged with conspiracy, wire fraud, making false statements to auditors and insider trading. In May of 2006, Skilling was tried in the U.S. District Court for the Southern District of Texas and the jury found him guilty on 19 counts. The District Court sentenced him to 292 months imprisonment and ordered him to pay $45 million in restitution.

Skilling appealed to the U.S. Court of Appeals for the Fifth Circuit, arguing that the government used an invalid theory of "honest services" fraud to convict him. The indictment alleged that Skilling conspired with others to, among other things, deprive Enron and its shareholders of the right to the honest services owed by its employees. The Fifth Circuit affirmed Skilling's honest services fraud conviction, noting that it had created an exception to the honest services fraud statute in the related Enron case of U.S. v. Brown, 459 F.3d 509 (5th Cir.2006) where an employer creates a goal, aligns employees' interests to achieve the goal and higher-level management sanction improper conduct to reach the goal. However, the Fifth Circuit held that Skilling's conduct had not been sanctioned by the corporation.

Skilling has appealed to the Supreme Court, arguing that lower rulings on the honest services fraud statute have been “a hodgepodge of oft-conflicting holdings, statements, and dicta” that “only the most discriminating lawyer or judge” could understand. Attorney Sri Srinivasan of O’Melveny & Myers will argue on Skilling's behalf before the Court.

Another case calling into question the constitutionality of Section 1346 is the case of newspaper magnate Conrad Black. The Court heard oral arguments in Black's case last December.

Firm's Brand New Website Launched

Anthony Lake — Fri, 26 Feb 2010 10:24:27 -0500

Gillen Withers & Lake LLC has launched a new website at http://twitherslaw.com/. The site lists many of the notable successes which the firm has had in its history. We would like to thank our readers and encourage them to take a look at the new site.

Adult Urinary Incontinence Supplies Fraud? DME Owner Pleads Guilty to Healthcare Fraud and Identity Theft

Anthony Lake — Thu, 25 Feb 2010 19:52:48 -0500

In another sign that nothing is sacred and no area safe from crime, even the adult undergarment industry has now been marred by fraud. Benjamin Essien, 34, owner and operator of Logic World Medical, a Houston-based durable medical equipment (DME) company, pled guilty to conspiracy to commit healthcare fraud, five counts of healthcare fraud and two counts of aggravated identity theft in the U.S. District Court for the Southern District of Texas, according to a press release by the FBI. Essein was charged with a scheme which began in 2004 of using names, addresses and account numbers of Medicaid beneficiaries to file false claims for adult urinary incontinence supplies many of which were never delivered to the beneficiaries, some of which were never purchased from suppliers, and which were not needed or were never prescribed by a physician. Essein continued to bill Medicaid for the supplies--which included adult diapers, underpads, wipes, and pull-up briefs--even after his delivery contractors were informed by the beneficiaries that they did not need or want the supplies. Essien billed Medicaid for the maximum amount allowable for supplies each month per beneficiary including extra large size diaper briefs, which apparently have the highest Medicaid reimbursement rate, regardless of the actual size needed by the beneficiary. it is alleged that Essein received payments from Medicaid for claims totaling approximately $1,101,865.37. he will be sentenced in May.

Forensic Accountant Lewis Freeman Indicted for Alleged Misappropriation of $6 Million in Funds from Fiduciary Accounts

Anthony Lake — Wed, 24 Feb 2010 07:57:29 -0500

As reported in the South Florida Business Journal, Lewis B. Freeman, one of the best-known forensic accountants in South Florida was indicted yesterday in the U.S. District Court for the Southern District of Florida on charges of conspiracy to commit mail fraud. Freeman is alleged to have misappropriated funds from fiduciary accounts from 2000 through 2009 by writing checks to himself and his firm, Lewis B. Freeman & Partners, and depositing the funds into the firm's operating account. Freeman is alleged to have misappropriated some $6 million in funds by writing approximately 162 unauthorized checks and using the proceeds to support a lavish lifestyle.

Freeman put his firm into receivership last fall during the federal criminal investigation. The firm previously did millions of dollars in business. The government alleges that out of the $6 million misappropriated, some $2.6 million of clients' monies were lost. Freeman, oddly, worked routinely as an expert for the court in liquidating the assets of companies. According to Freeman's counsel, he turned himself in and is cooperating with authorities. His counsel have stated that he made "serious mistakes," and will "accept the consequences for his actions.”

Former Head of SK Foods Indicted for Food Fraud and Mislabeling

Anthony Lake — Mon, 22 Feb 2010 00:40:12 -0500

Frederick Scott Salyer, 54, former owner of California-based SK Foods, which grows, processes and distributes tomatoes, was indicted on Friday on charges of racketeering, wire fraud, mail fraud, money laundering and obstruction of justice. Tomatoes from SK Foods are widely used in tomato-based products including sauces, ketchups and juices.

Salyer is alleged to have manipulated the industry through price fixing, bribery and mislabeling. Specifically, he is alleged to have bribed purchasing managers at food companies to guarantee that the companies purchased SK Foods' products over its competitors and for its competitors' pricing information. Salyer is also alleged to have ordered the mislabeling of products As a result, consumers received dated and moldy products, and products mislabeled as organic at higher prices. In some cases, products as much as three years old with a shelf life of one year, or containing mold levels beyond limits set by the Food and Drug Administration, were alleged to have been placed on the market.

Salyer was arrested earlier this month at John F. Kennedy Airport in New York upon arriving on a flight from Switzerland. He had allegedly fled the U.S. last fall to relocate to a country where he could not be extradited after some of his subordinates pled guilty to charges in relation to the investigation, a joint effort by the FBI, IRS, FDA and Department of Justice Anti-trust Divison, nicknamed Operation Rotten Tomatoes. Salyer is alleged to have arranged for the transfer of millions of dollars to overseas accounts, and to have placed a $7 million home in Pebble Beach on the market. Salyer was denied bail.

SK Foods declared bankruptcy last May and has been acquired by another company.

Dozen French Vintners, Wine Traders and Cooperatives Convicted of Passing Off Faux Pinot to Unrefined Americans

Anthony Lake — Fri, 19 Feb 2010 06:47:07 -0500

As observed by Law.com, a French court has convicted a dozen French wine traders, vintners and wine cooperatives of passing off local wines as expensive Pinot Noir for importation to the United States. The leader of the scheme, M. Claude Courset of the Ducasse wine trading company received a suspended six month prison sentence and was fined 45,000 Euros, and Sieur d'Argues, the company which sold Ducasse wines to the U.S. was fined 180,000 Euros. The defendants were charged in a court in Carcassonne, in Southwest France, with "fraud in the quality and composition of the wine"--no doubt a crime the French take very seriously. The vintners and wine cooperatives were from the Aude and Herault, in the Languedoc-Rousillon. They passed Merlot and Syrah grapes off as Pinot Noir.

M. Courset was unrepentent, however, stating that his wines were irreproachable and stating that he had reserved the right to appeal. U.S. wine conglomerate E.&J. Gallo has issued a statement stating that it is no longer selling the wines. It is unclear how many U.S. consumers noticed a difference.

FBI Raids Home of Southern Christian Leadership Counsel Chairman; Meets with SCLC Officials Over Diversion of Funds

Anthony Lake — Thu, 18 Feb 2010 09:36:17 -0500

As reported here and here in the Atlanta Journal-Constitution, the Southern Christian Leadership Conference has had its own leadership under scrutiny by investigators. This week, three SCLC officials met in Atlanta with Federal and local authorities investigating allegations that its National Chairman and its former Treasurer allegedly mishandled hundreds of thousands of dollars. Last week, FBI agents in Dayton, Ohio, raided the home of its Chairman, Reverend Raleigh Trammell, the home of Trammell's daughter, Angela Goodwine, as well as the SCLC's Dayton office. Rev. Trammell and former national Treasurer Spiver Gordon are alleged to have diverted at least $569,000 in SCLC funds to bank accounts which they controlled and made out checks to themselves and their relatives. The SCLC's Atlanta General Counsel, Dexter Wimbush, has voluntarily and temporarily stepped down.

Law enforcement agencies in Georgia, Ohio and Alabama were provided information on possible mismanagement of SCLC funds.

Edward Stein, Architect of $46 Million Hedge Fund Ponzi Scheme, Sentenced to 9 Years

Anthony Lake — Thu, 11 Feb 2010 11:51:37 -0500

Edward T. Stein, a former hedge fund manager, was sentenced to nine years in prison in the U.S. District Court for the Eastern District of New York for a Ponzi scheme which defrauded investors of $46 million, according to BusinessWeek. Stein was arrested last April and pled guilty last June to counts of securities fraud and wire fraud.

Stein was alleged to have operated a Ponzi scheme from 1988 to 2009, targeting friends, acquaintances and vulnerable investors. The government alleged that Stein promised to invest clients' money in annuities but instead converted the monies to his own use. Stein managed Gemini Fund I hedge fund, Prima Capital Management Corp., and DISP LLC, a firm which invested in life insurance policies. Stein, through Gemini, invested in fashion magazine publisher Detour Media Group, Inc., and used money from new investors with Gemini to repay selected clients. In all, some 83 investors were affected by the scheme. Stein used his gains to, among other things, purchase a $1 million apartment in Manhattan.

Stein, who is 60, faced up to 19 years in prison, however U.S. District Judge Jack B. Weinstein found that the circumstances of the scheme placed it outside the "heartland" of fraud cases. Judge Weinstein stated that Stein's age made it unlikely that he would commit any further crimes. Stein's counsel had argued for a reduced sentence based on Stein's assistance to authorities in locating assets.

Several of Stein's victims testified at the hearing. One called Stein “a money-hungry, evil, sly fox who preyed on seniors.” Stein offered an apology for his actions in his address to the court.

British Aviation Firm Pleads Guilty in U.S. Court to Exporting Boeing 747 Aircraft to Iran

Anthony Lake — Wed, 10 Feb 2010 08:39:52 -0500

Balli Aviation Ltd., a subsidiary of United Kingdom-based Balli Group, PLC, pled guilty on Friday in the U.S. District Court for the District of Columbia to charges of illegally exporting Boeing 747 aircraft from the United States to Iran. Balli Aviation had agreed in a plea agreement to pay a $2 million fine and to be placed on corporate probation for five years, as reported on the PM Newswire. The information against the company alleged that, from 2005 through 2008, the company conspired to export three Boeing 747 aircraft to Iran without obtaining the required export licenses from the U.S. Bureau of Industry and Security (BIS), or required permission from the U.S. Office of Foreign Assets Control (OFAC). Balli Aviation was charged with purchasing the aircraft through a subsidiary, Blue Sky Companies, with financing from a private Iranian airline, Mahan Air, and with entering into a lease agreement with Mahan Air.

Balli Aviation and Balli Group announced on Friday that they have also reached a $15 million settlement of a parallel civil action with BIS and OFAC. Balli Aviation and Balli Group also had their export privileges revoked for five years, however this condition was suspended on the condition of the companies' payment of the civil penalty and refraining from committing any further violation of export laws. The companies must also submit to independent audits of their export compliance program for five years with the results being reviewed by BIS and OFAC. Former Chancellor of Britain, Lord Lamont, is a non-executive director for Balli Group.

Businesses considering engaging in trade abroad in countries which may be subject to sanctions or restrictions by the U.S. should examine both BIS' export control rules and requirements and OFAC's information on sanctions programs and also consult with counsel.

Sentencing Considerations for Corporations and Organizations

Anthony Lake — Tue, 09 Feb 2010 11:00:56 -0500

We received an excellent reader question regarding what factors do Federal courts consider in imposing punishment on corporations or organizations in criminal proceedings. Corporations of course, don’t “go to jail.” The Government does collect its $200 however, since the organization sentencing provisions of the United States Sentencing Guidelines are primarily fine-driven. And while there is a massive body of law concerning factors which must be considered in imposing sentence on individuals, caselaw relating to considerations in imposing punishment on corporations is relatively sparse.

However, areas which courts consider in sentencing corporations or organizations, and conversely areas which corporate criminal counsel may emphasize in order to attempt to mitigate the consequences to their corporate clients, may be discerned from the Guidelines themselves. In many cases, such as relating to acceptance of responsibility and role in the offense, these considerations closely parallel those for individual defendant. The questions facing a corporation at sentencing will boil down to how much will the corporation be made to pay in the form of fines and restitution, and what conditions will be imposed on the corporation.

The relevant portion of the Guidelines is Chapter Eight. Imposing a sentence on a corporation or organization in a Federal criminal case involves a complex determination by the sentencing court. In brief, the court must:

1. Determine whether any restitution, remedial orders or community service should be ordered;

2. Determine the amount of the fine, including determining the corporation’s or organization’s “culpability score”;

3. Determine whether any departures or probation is appropriate.

The Introductory Commentary to Chapter Eight states that it is designed “designed so that the sanctions imposed upon organizations and their agents, taken together, will provide just punishment, adequate deterrence, and incentives for organizations to maintain internal mechanisms for preventing, detecting, and reporting criminal conduct.” U.S.S.G., Ch. 8, Pt. A, Introductory Commentary. The sentencing provisions of Chapter Eight are intended to reflect the general principles that:

First, the court must, whenever practicable, order the organization to remedy any harm caused by the offense. The resources expended to remedy the harm should not be viewed as punishment, but rather as a means of making victims whole for the harm caused.

Second, if the organization operated primarily for a criminal purpose or primarily by criminal means, the fine should be set sufficiently high to divest the organization of all its assets.

Third, the fine range for any other organization should be based on the seriousness of the offense and the culpability of the organization. The seriousness of the offense generally will be reflected by the greatest of the pecuniary gain, the pecuniary loss, or the amount in a guideline offense level fine table. Culpability generally will be determined by six factors that the sentencing court must consider. The four factors that increase the ultimate punishment of an organization are: (i) the involvement in or tolerance of criminal activity; (ii) the prior history of the organization; (iii) the violation of an order; and (iv) the obstruction of justice. The two factors that mitigate the ultimate punishment of an organization are: (i) the existence of an effective compliance and ethics program; and (ii) self-reporting, cooperation, or acceptance of responsibility.

Fourth, probation is an appropriate sentence for an organizational defendant when needed to ensure that another sanction will be fully implemented, or to ensure that steps will be taken within the organization to reduce the likelihood of future criminal conduct.

U.S.S.G., Ch. 8, Pt. A, Introductory Commentary. The provisions are designed to offer “incentives” to corporations or other organizations to police and eliminate criminal conduct through compliance and ethics programs. U.S.S.G., Ch. 8, Pt. A, Introductory Commentary.

The Introductory Commentary to Part B of Chapter Eight states:

As a general principle, the court should require that the organization take all appropriate steps to provide compensation to victims and otherwise remedy the harm caused or threatened by the offense. A restitution order or an order of probation requiring restitution can be used to compensate identifiable victims of the offense. A remedial order or an order of probation requiring community service can be used to reduce or eliminate the harm threatened, or to repair the harm caused by the offense, when that harm or threatened harm would otherwise not be remedied.

U.S.S.G., Ch. 8, Pt. B. Guideline Section 8B1.1 requires a court to enter a restitution order for the full amount of a victim’s loss if such an order is authorized. Section 8B1.3 authorizes a court to order community service as a condition of probation “where such community service is reasonably designed to repair the harm caused by the offense.” U.S.S.G. § 8B1.3. The commentary on Section 8B1.3 notes that the community service should be “related to the purposes of sentencing.” U.S.S.G. § 8B1.3, Cmt.

Guidelines Section 8B2.1 describes an “effective compliance and ethics program.” It states that, in order to have an effective compliance and ethics program, a corporation or organization must:

1. Exercise due diligence to prevent and detect criminal conduct and establish standards and procedures to prevent and

detect criminal conduct;

2. “[P]romote an organizational culture that encourages ethical conduct and a commitment to compliance with the law”;

3. Ensure that the corporation’s or organization’s governing authority is knowledgeable about the compliance and ethics program and that specific individuals have day-to-day responsibility for the program; and

4. Take reasonable steps to ensure that the compliance and ethics program is followed, enforced and evaluated.

A critical provision is Guidelines Section 8C2.5, which governs determination of a corporation’s “culpability score.” That section provides for a base score of 5 points with increases or decreases to the level for:

1. Condoning, tolerating or “willful ignorance” of criminal activity by corporate governing authorities or high-level personnel;

2. Any prior history of misconduct;

3. Any violation of orders or obstruction of justice; and/or

4. Self-reporting, cooperation and acceptance of responsibility.

With regard to a decrease in culpability level for cooperation, the Application Notes state that:

[C]ooperation must be both timely and thorough. To be timely, the cooperation must begin essentially at the same time as the organization is officially notified of a criminal investigation. To be thorough, the cooperation should include the disclosure of all pertinent information known by the organization. A prime test of whether the organization has disclosed all pertinent information is whether the information is sufficient for law enforcement personnel to identify the nature and extent of the offense and the individual(s) responsible for the criminal conduct.

U.S.S.G. § 8C2.5, Note 12.

Another vital provision is Guideline Section 8C2.8—the corporate equivalent of Code Section 3553(a) which courts must consider in sentencing individuals. Section 8C2.8 provides:

(a) In determining the amount of the fine within the applicable guideline range, the court should consider:

(1) the need for the sentence to reflect the seriousness of the offense, promote respect for the law, provide just punishment, afford adequate deterrence, and protect the public from further crimes of the organization;

(2) the organization’s role in the offense;

(3) any collateral consequences of conviction, including civil obligations arising from the organization’s conduct;

(4) any nonpecuniary loss caused or threatened by the offense;

(5) whether the offense involved a vulnerable victim;

(6) any prior criminal record of an individual within high-level personnel of the organization or high-level personnel of a unit of the organization who participated in, condoned, or was willfully ignorant of the criminal conduct;

(7) any prior civil or criminal misconduct by the organization other than that counted under §8C2.5(c);

(8) any culpability score under §8C2.5 (Culpability Score) higher than 10 or lower than 0;

(9) partial but incomplete satisfaction of the conditions for one or more of the mitigating or aggravating factors set forth in §8C2.5 (Culpability Score);

(10) any factor listed in 18 U.S.C. § 3572(a); and

(11) whether the organization failed to have, at the time of the instant offense, an effective compliance and ethics program within the meaning of §8B2.1 (Effective Compliance and Ethics Program).

(b) In addition, the court may consider the relative importance of any factor used to determine the range, including the pecuniary loss caused by the offense, the pecuniary gain from the offense, any specific offense characteristic used to determine the offense level, and any aggravating or mitigating factor used to determine the culpability score.

U.S.S.G. § 8C2.8. The Application Notes to Section 8C2.8 further state, in relevant part, “[i]f punitive collateral sanctions have been or will be imposed on the organization, this may provide a basis for a lower fine within the guideline fine range.” U.S.S.G. § 8C2.8, Note 2.

Finally, Part C of Chapter Eight provides for departures from a sentence/fine if a court finds “that there exists an aggravating or mitigating circumstance of a kind, or to a degree, not adequately taken into consideration by the Sentencing Commission in formulating the guidelines that should result in a sentence different from that described.” U.S.S.G., Ch. 8, Pt. C, Introductory Commentary. The relevant potential grounds for upward or downward departures are:

1. Substantial assistance to authorities under Section 8C4.1;

2. Risk of death or bodily injury under Section 8C4.2;

3. Threat to the environment under Section 8C4.4;

4. Threat to a market under Section 8C4.5;

5. Public entity (ground for downward departure) under Section 8C4.7;

6. If members or beneficiaries of the corporation or organization are also victims (ground for downward departure) under Section 8C4.8;

7. Whether the remedial costs exceed the gain from the offense under Section 8C4.9; and

8. Mandatory programs to detect and prevent violations of the law under Section 8C4.10.

From this maze of Guidelines, the following potential points can be derived for corporate criminal counsel to potentially argue in favor of a low or lesser punishment or fine, departure or for mitigation generally:

Any compliance and ethics programs instituted or proposed by the corporation either before or following the alleged conduct;
Any actions the corporation has taken to remedy any harm from the alleged conduct, including:
1. Restitution to any victims;
2. Institution or proposal of a compliance and ethics program;
3. Any other efforts the corporation has made to detect or prevent criminal activity, or to detect or prevent any recurrence of the alleged conduct;
The corporation’s service to the community before or following the alleged conduct;
Whether the corporation reported the alleged conduct to law enforcement;
Whether the corporation cooperated and/or rendered substantial assistance to the Government, and the degree of such cooperation and/or assistance;
Whether the alleged conduct constituted a distinct, isolated instance, as opposed to demonstrating that the corporation had an alleged criminal purpose;
The relative position of the individuals involved in, or having knowledge of, the alleged conduct—i.e. whether governing or high level officers or lower level personnel;
Whether the corporation has any history of similar conducts;
The seriousness of the alleged conduct, including whether it resulted in any physical harm, threat to any market, third party, etc.;
The corporation’s role in the alleged conduct, including whether the corporation or its officers, members or employees were also victims of the alleged conduct;
The lack of likelihood of recurrence of the alleged conduct;
The corporation’s efforts to investigate the alleged conduct and actions against culpable individuals;
Whether the alleged conduct resulted in collateral consequences to the corporation, including costs from investigation, civil lawsuits relating to the alleged conduct, etc.; and
Whether the gains from the alleged conduct were outweighed by the costs incurred by the corporation in responding to and remedying the alleged conduct.

These points may also furnish useful guidelines or tips for corporate officers or members and counsel in attempting to devise appropriate responses in the event of notice of alleged wrongdoing and/or a criminal investigation.

TARP Inspector General Investigations January 2010

Thomas Withers — Mon, 08 Feb 2010 06:15:59 -0500

Well, first of all, even if you like the Colts and Peyton Manning (I do), you still have to be happy for the Saints and the City of New Orleans. What a great American story.

Back to business though, the Troubled Asset Relief Program Inspector General (TARP IG), Neil Barofsky, announced in his January 20, 2010 report that TARP has continued to develop into a sophisticated white-collar investigative agency. Through December 31, 2009, TARP has opened 86 and has 77 ongoing criminal and civil investigations. These investigations include complex issues concerning suspected TARP fraud, accounting fraud, securities fraud, insider trading, bank fraud, mortgage fraud, mortgage servicer misconduct, fraudulent advance-fee schemes, public corruption, false statements, obstruction of justice, money laundering, and tax-related investigations.

The Inspector General (IG) highlighted three current investigations. First, the IG remarked that Omni National Bank (“Omni”) a national bank headquartered in Atlanta with branch offices in Birmingham, Tampa, Chicago, Fayetteville, N.C., Houston, Dallas, and Philadelphia continued to be under scrutiny. Omni failed and was taken over by the Federal Deposit Insurance Corporation (“FDIC”) on March 27, 2009. Prior to its failure, Omni had applied for but had not been approved for TARP funds. TARP has participated in several investigations concerning Omni that have led to criminal charges as part of a mortgage fraud task force that includes TARP, the U.S. Attorney’s Office for the Northern District of Georgia, the Office of the Inspector General of the Federal Deposit Insurance Corporation (“FDIC OIG”), the Office of the Inspector General of the Department of Housing and Urban Development (“HUD OIG”), the Federal Bureau of Investigation (“FBI”), and the U.S. Postal Inspection Service.

TARP, the IG noted continues to play a significant role in the investigations by the Office of the New York Attorney General, the U.S. Attorney’s Offices for the Southern District of New York and Western District of North Carolina, the Securities and Exchange Commission (“SEC”), and the FBI into the circumstances of Bank of America’s merger with Merrill Lynch and its receipt of additional TARP funds.

And, finally, as previously reported, in August 2009, TARP, along with the FBI, FDIC OIG, and HUD OIG, conducted search warrants at the offices of Colonial Bancorp and Taylor, Bean & Whitaker (“TBW”). On December 16, 2009, TBW consented to its debarment from participating as an originator of Federal Housing Administration (“FHA”)-insured mortgages. HUD also terminated TBW as a Government National Mortgage Association (“Ginnie Mae”) issuer of mortgage-backed securities and took control of TBW’s $25 billion Ginnie Mae portfolio. In conjunction with the suspensions, HUD also proposed debarments of two officers of TBW. On August 7, 2009, Colonial reported that it is the target of a criminal probe. The investigation, the IG noted is ongoing.

The federal government’s enormous investment of monies into the TARP program and the establishment of the TARP IG, means a continued focus on financial crimes in the future.

Justice Kennedy Comments On Our Prison Nation

Thomas Withers — Sat, 06 Feb 2010 16:15:50 -0500

As reported by the LA Times, Supreme Court Justice Kennedy, in a speech to the Los Angeles legal community at Pepperdine University, derided the state of our nation’s prison mentality. In what was described as an “otherwise courtly and humorous address,” Justice Kennedy remarked that “California now has 185,000 people in prison at $32,500 a year.” Justice Kennedy noted that U.S. prison sentences are eight times longer than those issued by the European court system.

We have previously commented about the criminalization of virtually everything in our nation. We even have a federal criminal law on the books for the unlawful use of the character of “Smokey Bear” (seriously – look it up – 18 U.S.C. 711) and interstate transportation of dentures (18 U.S.C. 1821 – you can’t make this stuff up)! More importantly, has been the use of honest services mail fraud (18 U.S.C. 1346) by federal prosecutors to fashion together a federal criminal common law, which the Supreme Court, we hope, will soon reign in.

Nevertheless, it is nice to note that the oppressive length of our prison sentences are not lost on our Supreme Court. Injustice is being done in our justice system.

Macon Lawyer Mark Treadwell Nominated for MDGA Federal Judgeship

Thomas Withers — Sat, 06 Feb 2010 15:30:46 -0500

Macon attorney Mark Treadwell has been nominated by President Obama to fill a District Court vacancy in the Middle District of Georgia created by Judge Hugh Lawson’s taking of senior status. The Macon Telegraph reports that Mr. Treadwell was informed yesterday of his nomination.

Mr. Treadwell, a 1981 graduate of Mercer University School of Law, is a partner in the firm of Adams, Jordan & Treadwell, P.C. After graduation Mr. Treadwell worked for a large Atlanta firm before returning to Macon in 1985, where he has resided and practiced law. He is a fellow of the distinguished American College of Trial Lawyers and teaches as an adjunct Professor of Law at Mercer’s School of Law.

Mr. Treadwell’s firm’s website is here and his resume is here.

Blagojevich Re-Indicted to Protect Against Losing Honest Services Counts

Thomas Withers — Fri, 05 Feb 2010 06:09:59 -0500

As previously predicted here, we believe that the Supreme Court will declare the honest services statute unconstitutional. Apparently, the U.S. Attorney’s Office in the Northern District of Illinois thinks likewise.

In an apparent effort to head off any problems caused by the loss of the honest services mail fraud counts, the government has returned a Second Superseding Indictment against former Illinois Governor Rod Blagojevich. In a filing yesterday, the U.S. Attorney’s Office in the Northern District of Illinois explained that because the defendants’ conduct violated multiple criminal statutes, additional violations of the law are charged in the Second Superseding Indictment. The filing is in direct response to Blagojevich’s Motion to Dismiss the honest services mail and wire fraud counts, and is fashioned in such a way that, should the Supreme Court find that the honest services mail and wire fraud statutes are unconstitutional, those charges can easily be dismissed, so as not to effect the trial of the case. The Blagojevich trial is scheduled for June 3.

All criminal practitioners should be filing similar motions to dismiss the honest services counts in any pending indictments.