White Collar Defense and Compliance

November 16, 2009 - A Critical Date for Madoff Charity Stakeholders with Calendar Fiscal Years - Installment 19

ALeibman@foxrothschild.com (Alain Leibman) — Tue, 17 Nov 2009 09:10:16 -0500

This is the nineteenth in a series of installments on this blog that are discussing some issues arising in the aftermath of the long global Ponzi scheme of Bernard L. Madoff (“Madoff”). Installments 3 through 8, Installment 10 and Installments 14 through 18 of this series focused on the specific concerns of charities that were victims of Madoff and similar schemes. All potential stakeholders should consult professional advisors to have their positions evaluated.

Monday, November 16, 2009 is a critical day for Section 501(c)(3) public charities and private foundations with a calendar fiscal year that invested with Madoff. As a matter of fact, it is a critical day for all Section 501(c)(3) charitable organizations with a calendar fiscal year. It is the final day on which such public charities and private foundations can file their Forms 990 and 990-PF, respectively, with the Internal Revenue Service (the “IRS”) for calendar year 2008 on a timely basis after using both of the two potentially available extension periods. A fling after that date is delinquent and can lead to penalties by the IRS.

While this blog series has strongly advocated filings with the IRS by charitable organizations for 2008 as early as possible, many have delayed their filings until the deadline. A number of factors may have led to this approach, including the following:

1. The new Form 990 for 2008 added probing questions on governance, executive compensation, charitable mission, policies, etc., which required many of the charities to institute or update protocols and procedures.

2. The accounting and auditing firms that assist charities in preparing Forms 990 and 990-PF were under great pressure to deal with the complexities of the new Forms and the financial challenges facing many charities.

3. During 2008 many charities suffered substantial losses in endowment fund values and declines in fundraising that led some of them to delay potentially embarrassing disclosures to the public as long as possible.

4. A number of those charities that invested with Madoff and similar alleged Ponzi schemes had hoped that the IRS would give greater guidance on the uncertainties in treatment of losses and distributions in their filings for 2008 and prior years.

5. Charities that have invested with Madoff or suffered large losses during 2008 may have wanted to see how other Forms 990 and 990-PF filers that filed earlier in the year with the IRS treated the subjects in their financial statements and textual materials.

6. Even charities that did not suffer losses in 2008 may have wanted to see how other Forms 990 and 990-PF filers that filed earlier treated subjects such as description of mission, conflicts of interest and whistleblower policies, executive compensation and other potentially sensitive new areas of disclosure.

Over the course of the next several months it will be interesting and informative to visit Guidestar to review and analyze the 2008 Form 990 and 990-PF filings as they are posted. This blog series will continue to monitor and report on such developments.

[To be continued in Installment 20]

(With appreciation to Michael J. Kline, Esq., for contributing this entry and for his on-going analysis of the concerns of Madoff stakeholders)

Cooperation is the only post-sentencing game in town

ALeibman@foxrothschild.com (Alain Leibman) — Tue, 03 Nov 2009 12:58:20 -0500

The Seventh Circuit recently held that, on a government motion under Rule 35(b) to reduce a sentence for new cooperation, the district court may not use the occasion to reopen sentencing to assess whether a reduction is justified under the 18 U.S.C. § 3553(a) factors. Cooperation is the only basis for a post-sentencing reduction within the Rule. United States v. Shelby, 2009 WL 3335548 (7th Cir., Oct. 19, 2009).

Rarely, one might imagine, would sentencing judges so regret the severity of their initial sentence that they would relish a subsequent opportunity to broadly reexamine and reduce that sentence. However, one such instance occurred in the Northern District of Illinois when the trial court sentenced Gregory Shelby in 1996 to serve 285 months under then-mandatory Sentencing Guidelines for drug and firearms offenses. When the government moved 12 years later under Rule 35(b)(2) to reduce Shelby's sentence to 255 months on the strength of his post-sentencing cooperation, the same sentencing judge leapt at the opportunity to instead reduce the sentence to 180 months, basing his departure not only on Shelby's cooperation but on the § 3553(a) factors. The Seventh Circuit reversed.

Judge Posner wrote for the majority that Rule 35(b) -- which in subsection (2) concerns cooperation motions made more than one year after sentencing and limits the kinds of cooperation which qualify -- is not intended to create a kind of judicially-administered parole system which considers the defendant as a whole, and was created solely to assist law enforcement by encouraging cooperation. While a sentencing judge may look to § 3553(a) in determining the extent of a cooperation departure, and may exceed the government's recommended extent of departure in doing so, the judge may not consider those factors in determining the basis for a post-sentencing departure.

No notice to subscriber required when officers seize stored email from ISP

ALeibman@foxrothschild.com (Alain Leibman) — Fri, 30 Oct 2009 17:07:32 -0500

The usual protocol when agents execute a search warrant at an office or home is to leave a copy of the warrant with the person in control of the premises, often but not necessarily the owner. Rule 41(f)(1)(C) requires it. But what kind of notice is required when agents execute a search warrant to seized stored emails from a subject's internet service provider (ISP), such as Google or Hotmail or Verizon? Answer: none. to the subscriber.

A District of Oregon judge recently considered this question in a case involving a warrant served under the terms of the Stored Communications Act, 18 U.S.C. § 2703(a), which requires a search warrant -- as opposed to a mere subpoena -- if law enforcement officers wish to obtain e-mails stored for 180 days or less. In re Application of United States for Search Warrant, 2009 WL 3416240 (D. Ore., June 23, 2009). The magistrate judge presented with the government's application for a warrant granted the warrant but rejected the Government' s arguments that supplying the warrant to the ISP was sufficient notice under the SCA and that Rule 41's notice procedure was not applicable; the Government was initially ordered to provide notice of the seizure to the individual subscriber.

On an appeal by the Government, the district judge reversed. While the opinion contains a useful summary of search procedures under the involved provisions of the SCA and the interplay of the SCA with Rule 41, the rationale of decision was rather straightforward. The third party electronic context is no different than other third party contexts, such as when agents seize a package in the control of Federal Express. In the latter instance, a copy of the search warrant is permissibly left only with Fed Ex and there is no need to inform the sender or recipient of the package of its seizure. ISP's are analogous to Fed Ex, and notice to the individual subscriber to the ISP is unnecessary.

The Madoff Loss Game: Will Some Charity Stakeholders Become Even Bigger Losers? - Installment 18

ALeibman@foxrothschild.com (Alain Leibman) — Fri, 30 Oct 2009 09:05:47 -0500

This is the eighteenth in a series of installments on this blog that are discussing some issues arising in the aftermath of the long global Ponzi scheme of Bernard L. Madoff (“Madoff”). Installments 3 through 8, Installment 10 and Installments 14 through 17 of this series focused on the specific concerns of charities that were victims of Madoff and similar schemes. All potential stakeholders should consult professional advisors to have their positions evaluated.

On October 27, 2009, Irving Picard, the trustee in the Madoff liquidation proceeding under the Securities Investor Protection Act (the “Madoff Proceeding”), together with Securities Investor Protection Corporation (“SIPC”) President Stephen Harbeck, held a telephone briefing with reporters on progress to date of the Madoff Proceeding. During the course of his prepared remarks, Mr. Picard did not discuss efforts in the Madoff Proceeding to “clawback,” that is, recover assets from Madoff investors who received more in cash distributions than they invested with him.

During the course of the questioning by reporters, the “clawback” issue was raised and the following response was given by Mr. Picard:

At the moment, as I indicated of the accounts that were active at the end of last December, there were 2,568 accounts that received more than was deposited. . . . That’s an area that we are looking at. We’re not going to be suing people who don’t have money. We’re not going to be able to collect. We’re not going to sue people where we become familiar with the fact that they have hardships, medical problems, losing their homes and other things like that. No final decisions have been made; it’s a matter that again, over a period of the next six to eight or nine months, we’re going to be taking a very close look and, quite frankly, those will be looked at virtually on an individual basis before we make some final decisions. . . . if we determine that that’s a matter that we’re going to pursue, then we will pursue them for what we believe is the appropriate amount that we should be seeking from them.

It is noteworthy that Mr. Picard did not address in his response the widely-publicized “profits” from investing with Madoff that have been reported for charities like Hadassah, as discussed in Installment 14 of this series.

Mr. Picard’s response may be compared to the report by Diana B. Henriques on May 28, 2009 in The New York Times that “[t]here is the widespread fear among some — unfounded, Mr. Picard says — that he will sue struggling charities or people of limited means for money they withdrew in the past but no longer have.”

Has Picard now evidenced by his silence a subtle shift from his earlier position with respect to not pursuing ‘struggling charities” that made profits from investing with Madoff? The October 29,2009 issue of The Chronicle of Philanthropy has disclosed that Hadassah suffered a decline of almost 50% in donations during 2008 to just over $85 million as compared to the 2007 level. Does that loss in revenues qualify Hadassah to be exonerated from clawback as a “struggling charity” under Mr. Picard’s earlier position? A significant portion of the decline in Hadassah donations may be due to the economy generally. However, ironically, some of the decline may be attributable to the adverse publicity for Hadassah from having invested with Madoff. Moreover, a number of its major donors may have incurred heavy losses with Madoff and could not maintain their contributions to Hadassah.

As the Madoff Proceeding continues to unfold, these issues should become clearer.

[To be continued in Installment 19]

(With appreciation to Michael J. Kline, Esq., for contributing this entry and for his on-going analysis of the concerns of Madoff stakeholders)

The Madoff Profit Game: Will the Mets End up Losers Off the Field While Charity Stakeholders Become Winners? - Installment 17

ALeibman@foxrothschild.com (Alain Leibman) — Mon, 26 Oct 2009 09:12:11 -0500

This is the seventeenth in a series of installments on this blog that are discussing some of the issues arising in the aftermath of the long global Ponzi scheme of Bernard L. Madoff (“Madoff”). Installments 3 through 8, Installment 10 and Installments 14 through 16 of this series focused on the specific concerns of charities that were victims of Madoff and similar schemes. All potential stakeholders should consult professional advisors to have their positions evaluated.

On October 21, 2009, an article in The New York Times by Ken Belson and Richard Sandomir disclosed that a Madoff bankruptcy proceeding report had contradicted earlier information about large losses with Madoff purportedly suffered by the New York Mets and their owners, the Wilpon family. The article states that the report shows that

Mets LP, one of the team’s financial arms, withdrew $570.5 million from two accounts it held with Madoff’s company, $47.8 million more than it put in. The accounts were part of a list of more than 30 in which more money was withdrawn than was deposited with Bernard L. Madoff Investment Securities. As a result, Mets LP and the others were deemed “net winners” ineligible for compensation and potentially liable to being sued by Irving H. Picard, the court-appointed liquidator who is trying to recover money lost in Madoff’s $65 billion Ponzi scheme. A spokesman for Picard declined to comment.

Thus the Mets and the Wilpon family may become the subject of “clawback” by Mr. Picard and end up losers, especially if they have paid now-unrecoverable federal and state income taxes on the illusory Madoff “gains.” This situation can be contrasted to the position stated by Picard with respect to seeking recovery from charities. As reported in Installment 16 of this blog series http://whitecollarcrime.foxrothschild.com/, Diana B. Henriques wrote on May 28, 2009 in The New York Times that “[t]here is the widespread fear among some — unfounded, Mr. [Irving] Picard [the trustee in the Madoff bankruptcy proceeding] says — that he will sue struggling charities or people of limited means for money they withdrew in the past but no longer have.”

Installment 14 of this blog series discussed reports of large profits by Hadassah from its investments with Madoff. Will Picard choose to pursue the Mets and the Wilpon family while passing on Hadassah? All charities, especially those providing social services like Hadassah, are “struggling” with materially reduced contributions because of the economy, increased demands by individuals who are unemployed and suffering financially, losses in endowment funds from the substantial market declines and increased regulatory activity.

While the position earlier stated by Picard as to charities may be humanitarian and emotionally appealing, there is little basis in the law for the disparity in treatment between charities and for-profit entities. This inequality of approach will more likely than not lead to protracted litigation and uncertainty in the Madoff matter.

[To be continued in Installment 18]

(With appreciation to Michael J. Kline, Esq., for contributing this entry and for his on-going analysis of the concerns of Madoff stakeholders)

Lawyers' botched internal investigation does not prevent prosecutors from using CFO's own statements against him

ALeibman@foxrothschild.com (Alain Leibman) — Tue, 20 Oct 2009 14:31:45 -0500

The Ninth Circuit recently issued a much-awaited opinion on the application of the attorney-client privilege in the area of a corporate internal investigation conducted amidst an options backdating scandal. The anticipation was enhanced because the district court had controversially concluded that the outside counsel who conducted the investigation had likely committed multiple ethics violations and spectacularly suppressed a number of incriminating statements made by the company's CFO to those attorneys. However, in an anticlimax, the court of appeals, finding that the lower court had made both factual and legal errors, reversed, allowing use of the statements, and failed to address the issue of ethical violations at all.

William Ruehle, the CFO of Broadcom Corp., was at the center of the company's practice of backdating stock options for select employees, a practice which the court of appeals noted was not intrinsically fraudulent unless misreported in the corporate books. When a storm swirled in 2006 over the practices, Broadcom engaged outside counsel, Irell & Manella, to conduct an investigation. As part of that investigation, Irell attorneys interviewed Ruehle; in a finding of fact critical to the outcome, it was found that Ruehle understood that his statements would be disclosed to third parties, at least to the company's outside auditors. There was a factual dispute, however, over whether the Irell attorneys had properly given Ruehle an Upjohn warning at the outset of the interview; that admonition, always good practice on the part of outside counsel, is intended to inform the interviewee that the attorneys questioning him are not his personal attorneys but attorneys solely for the corporation and that the individual is free to consult with his own counsel before proceeding.

Eventually, Ruehle's statements were disclosed to civil authorities and to the U.S. Attorney's Office in Los Angeles, which obtained Ruehle's indictment. Thereafter, the district court held a three-day evidentiary hearing, concluding that the Irell attorneys had not conducted themselves ethically and that Ruehle, who was surprised to learn that his statements were later provided to criminal authorities, held a reasonable belief that his statements were made to lawyers he believed represented him, and holding that the statements were privileged because he intended them to be confidential. His statements were suppressed.

The Ninth Circuit reversed. United States v. Ruehle, 2009 U.S. App. LEXIS 21450 (9th Cir., Sept. 30, 2009). First, the district court had applied the incorrect legal standard, substituting the more liberal California state formulation of the privilege, with its presumption of confidentiality, in place of the more severe federal common law test, which places the burden of proof on the party claiming privilege. Second, the district court had erred in finding that Ruehle's statements were made in confidence, one element of the federal test, since he admitted knowing they would be disclosed to third parties; his later shock and surprise that those third parties included the FBI was immaterial.

The court of appeals noted, but chose not to decide, more interesting questions, such as the proper test to apply when there is colorably a dual representation of both corporation and corporate officer (addressed in In re Bevill, Bresler & Schulman Asset. Mgt. Corp., 805 F.2d 120 (3d Cir. 1986)) or the standard to be used in determining, whether in a dual representation context, the corporation can waive the privilege against the will of the corporate officer (see In re Grand Jury Subpoena (Newparent), 274 F.3d 563 (1st Cir. 2001)). The court also skirted the issue of the Irell attorneys' ethics, since it was not presented in the appeal, but noted parenthetically that evidence obtained even in violation of attorney ethics rules was admissible, as long as neither the constitution nor federal law was violated.

The Ninth Circuit created no new precedent and arguably avoided addressing the most noteworthy issues raised by the short-lived district court opinion. Nevertheless, the case stands as a stark reminder of the problems created when outside counsel fail in the course of conducting an internal investigation to clearly inform individual officers that company counsel are not also their counsel and to document that advice of rights in the event of later litigation or prosecution.

[Fox Rothschild's White Collar Compliance and Criminal Defense group has extensive experience in conducting thorough internal investigations for corporate and institutional clients in numerous industries]

Another Revisit to Madoff and His Charity Stakeholders - Charities and Others that Made Money with Madoff - Installment 16

ALeibman@foxrothschild.com (Alain Leibman) — Tue, 29 Sep 2009 09:54:56 -0500

This is the sixteenth in a series of installments on this blog that are discussing some of the issues arising in the aftermath of the long global Ponzi scheme of Bernard L. Madoff (“Madoff”). Installments 3 through 8 and Installments 10, 14 and 15 of this series focused on the specific concerns of charities that were victims of Madoff and similar schemes. All potential stakeholders should consult professional advisors promptly to have their positions evaluated.

On September 22, 2009, the Associated Press reported that federal prosecutors had disclosed in New York that approximately 50% of the Madoff stakeholders had withdrawn more money than they invested with him and about 50% had invested more money than they had withdrawn. There have been many reports that among those stakeholders which received more in distributions from Madoff than they invested were charities. Installment 14 of this blog series reported on allegations that Hadassah received $40 million more in distributions from Madoff than they had invested with him.

Diana B. Henriques wrote an article on May 28, 2009 in The New York Times entitled “It’s Thankless, but He Decides Madoff Claims,” in which Ms. Henriques reported that “[t]here is the widespread fear among some — unfounded, Mr. [Irving] Picard [the trustee in the Madoff bankruptcy proceeding] says — that he will sue struggling charities or people of limited means for money they withdrew in the past but no longer have.”

The May statement by Mr. Picard now presents him with a fascinating quantitative and qualitative dilemma and conundrum. All charities, especially those providing social services like Hadassah, are “struggling” with materially reduced contributions because of the economy, increased demands by individuals who are unemployed and suffering financially, losses in endowment funds from the substantial market declines and increased regulatory activity.

While some smaller charities have already gone out of business from the Madoff fiasco, others large organizations like Hadassah still have meaningful endowment funds, even if depleted. The criteria that Mr. Picard will use to separate “struggling” charities and “people of limited means” from whom he will seek funds and those from whom he will not raises fundamental questions of fairness, size relative value that will likely lead to much more controversy.

[To be continued in Installment 17]

(With appreciation to Michael J. Kline, Esq., for contributing this entry and for his on-going analysis of the concerns of Madoff stakeholders)

Unanimity not required on overt act element of Section 371

ALeibman@foxrothschild.com (Alain Leibman) — Fri, 18 Sep 2009 16:21:01 -0500

Lawyers know reflexively that, in order to convict, a criminal jury must be unanimous in agreeing that the government has proven all essential elements beyond a reasonable doubt. They also know that the crime of conspiracy under Section 371 of Title 18 includes among its elements the requirement of proof of the commission of an overt act, as set forth in the statute. So, it is also true that jury must unanimously agree on which overt act the defendant committed, whether or not set forth in the indictment, right? Not so much.

Judge Posner, writing recently for the Seventh Circuit, held that unanimity is not required as to the identify of the particular overt act. Proof of an overt act is a "statutory afterthought," wrote Posner in United States v. Griggs, 569 F.3d 341 (7th Cir. 2009), since common law conspiracy did not require proof of an overt act. See also 21 U.S.C. § 846 (drug conspiracy; no overt act required). It is "inconsequential" that jurors failed to agree on the identity of the overt act, since the act itself need not be criminal, as long as, presumably, they are unanimous that some step was taken by some conspiracy member to achieve the conspiratorial object.

Thus, the Seventh Circuit joined the only other circuit court of appeals to have considered the question in holding that, no matter how intuitive-seeming the proposition, unanimity as to the specific act is not required. Accord United States v. Sutherland, 656 F.2d 1181 (5th Cir. 1981).

Another Revisit to Madoff and His Charity Stakeholders - Lautenberg Private Foundation Suit vs. Peter Madoff - Installment 15

ALeibman@foxrothschild.com (Alain Leibman) — Tue, 15 Sep 2009 15:45:03 -0500

This is the fifteenth in a series of installments on this blog that are discussing some of the issues arising in the aftermath of the long global Ponzi scheme of Bernard L. Madoff (“Bernard”). Installments 3 through 8 and Installments 10 and 14 of this series focused on the specific concerns of charities that were victims of Madoff and similar schemes. All potential stakeholders should consult professional advisors promptly to have their positions evaluated.

A Cliffview Pilot report on September 15, 2009 by Jerry DeMarco reported that U.S. District Judge Stanley Chesler in Newark declined to dismiss a lawsuit brought by two children of, and the private charitable foundation (the “Foundation”) formed by, Senator Frank Lautenberg, who was its President. The claims in the lawsuit include allegations that Peter Madoff violated the Securities Exchange Act of 1934 by failing to disclose to investors that the company of his brother Bernard was engaged in a fraud. The plaintiffs are claiming losses aggregating almost $9 million.

Concerns about the profound financial and other impacts on charities, both public and private, from investments with Bernard were published soon after the Bernard scandal became public in December 2008. See, for example, “Charities Now Seek Bankruptcy Protection,” by Stephanie Strom in The New York Times on February 20, 2009.

The progress of the lawsuit brought by the Foundation raises several interesting points, some of which were discussed in previous Installments of this blog series.

First, it does appear that actions brought against other members of the Madoff family than Bernard may bear some fruit, separate and apart from the much-publicized Bernard bankruptcy proceedings in New York. Query whether the preliminary success of the Foundation will spur other stakeholders to sue members of the Madoff family, thereby exposing them to the potential for very large claims that could precipitate bankruptcy filings for them as well.

Second, as was discussed in an earlier Installment, private foundations such as the Foundation and their managers have potential liability for excise taxes that may be levied by the Internal Revenue Service (“IRS”) for improvident investing. Query whether success in the lawsuit would generate a compelling argument for the Foundation and its managers for avoidance of the excise taxes because of the alleged securities fraud. Alternatively, if the lawsuit is lost by the Foundation, does it increase the potential for success by the IRS in possibly imposing excise taxes on the Foundation and its managers?

Third, a check of the charity information website Guidestar indicates that the Form 990-PF of the Foundation for the 2007 calendar year was filed with the IRS on August 15, 2008. The Form 990-PF for the Foundation for 2008 has not yet been posted on Guidestar. The nature and extent of disclosures that will be made regarding the Foundation in its 2008 Form 990-PF should be illuminating about the litigation, financial status and contingencies respecting the Foundation.

[To be continued in Installment 16]

(With appreciation to Michael J. Kline, Esq., for contributing this entry and for his on-going analysis of the concerns of Madoff stakeholders)

Need for rehabilitation may not be used to impose longer sentence

ALeibman@foxrothschild.com (Alain Leibman) — Fri, 11 Sep 2009 17:18:12 -0500

Adding its voice to a split among the circuits, the D.C. Circuit recently joined the Third Circuit in holding that, as the result of an interplay between two sentencing statutes, the perceived need to rehabilitate a defendant is not a permissible basis upon which to impose a longer sentence.

Under 18 U.S.C. § 3553(a), courts are directed to consider a range of factors in imposing sentence. Among them is the need to provide a defendant with educational or vocational training or other correctional treatment. However, 18 U.S.C. § 3582 provides that in determining whether to impose imprisonment or, if imprisonment is imposed, the length of sentence, the sentencing court must recognize that imprisonment is not an appropriate means of promoting rehabilitation. Several courts of appeal have held that the statutes taken together do not prohibit consideration of a rehabilitation need in selecting the length of a sentence, but only prohibit its consideration in deciding whether or not to incarcerate at all. United States v. Duran, 37 F.3d 557 (9th Cir. 1994); United States v. Hawk Wing, 433 F.3d 622 (8th Cir. 2006); United States v. Giddings, 37 F.3d 1091 (5th Cir. 1994); United States v. Jackson, 70 F.3d 874 (6th Cir. 1995).

Recently, in In re Sealed Case, 573 F.3d 844 (D.C. Cir. 2009), the D.C. Circuit departed from the preceding courts to sensibly read the plain language of Section 3582 as barring any consideration of the need for rehabilitation in either imposing prison in the first instance or in deciding on the length of incarceration. Accord United States v. Manzella, 475 F.3d 152 (3d Cir. 2007); United States v. Yehuda, 238 Fed. Appx. 712 (2nd Cir. 2007).

The defendant in In re Sealed Case had distributed a small quantity of heroin, so his Criminal History category of VI yielded a range of only 24-30 months. But he also qualified as a career offender under § 4B1.1, resulting in an enhanced range of 151-188 months. The trial court selected a sentence of 132 months, indicating that it had imposed a longer period that it might have otherwise because the defendant would benefit from BOP programs and training. Based on its reading of Section 3582, the appeals court vacated the sentence and remanded.

Search of computer without explicit authorization in search warrant violates Fourth Amendment

ALeibman@foxrothschild.com (Alain Leibman) — Fri, 11 Sep 2009 10:14:18 -0500

When law enforcement officers execute a search warrant in a suspect drug case and the warrant does not explicitly provide for the search of computers in the residence, the officers run afoul of the Fourth Amendment if they search a bedroom computer without securing it and seeking a new warrant, according to the Ninth Circuit.

In United States v. Payton, 2009 U.S. App. LEXIS 15969 (9th Cir., July 21, 2009), .local police obtained a warrant to search for drugs, as well as sales ledgers and financial records of the person controlling the subject residence. No drugs were found, but a police officer happened on a bedroom computer, and with a few mouse clicks discovered and viewed child pornography. The appeals court, reversing the trial court, held that the search of the computer was improper.

Although recognizing that the search of a computer generally is more intrusive than searches of other containers, the Payton court emphasized that there is not special categorical protection against computer searches in the Fourth Amendment. However, in this case the warrant did not specify computers as things to be searched; while ledgers and financial records are capable of being stored in a computer, the lack of specificity in the warrant combined with the lack of circumstantial indicia that ledgers and financial records were on this computer (i.e., there was an absence of such documents in proximity to the computer), to render the search unreasonable.

The better practice, and one the court expressly intended to encourage, would have been for the officers to secure the computer and seek a second warrant specifically oriented toward its search. Such a practice would better accord with "the special considerations of reasonableness involved in the search of computers."

Fingerprint Analysis Again Passes Daubert Muster

ALeibman@foxrothschild.com (Alain Leibman) — Fri, 11 Sep 2009 09:48:43 -0500

The Tenth Circuit recently joined the Third Circuit in upholding against a Daubert and FRE 702 challenge the admissibility of fingerprint identification. In United States v. Baines, 2009 U.S. App. LEXIS 15945 (10th Cir., July 20, 2009), the appeals court affirmed a trial court's decision to admit fingerprint identification testimony which implicated Baines in the possession of certain weapons.

FRE 702 requires, inter alia, that expert testimony result from the application of reliable principles and methods, and the Supreme Court in Daubert set forth a series of criteria against which to measure those methods and principles, including testing; peer review and publication; potential error rates; standards of operation; and general acceptance in the relevant community. Daubert v. Merrell Dow Pharm., 509 U.S. 579, 594-94 (1993). It was clear from the record below, which included pretrial testimony from an FBI fingerprint specialist, that the government could not establish several of the Daubert criteria -- the process of reviewing known against latent prints is not measured by the FBI for error rates, because no such statistics are kept; no objective standards for comparison exist, and the FBI admittedly applies subjective criteria; and there is little or no peer review.

Nevertheless, the Baines court upheld the testimony's admissibility. The Daubert criteria, the Tenth Circuit, emphasized, are flexible and fingerprint analysis is not really the kind of scientific testimony at which Daubert was aimed, and is more akin to technical expertise. Applying a relaxed version of the Daubert criteria, the Baines court agreed with the Third Circuit opinion in United States v. Mitchell, 365 F.3d 215 (3d Cir. 2004)

Another Revisit to Madoff and His Charity Stakeholders - Hadassah and Yeshiva University: A Tale of Two Forms 990 - Installment 14

ALeibman@foxrothschild.com (Alain Leibman) — Tue, 25 Aug 2009 14:23:33 -0500

This is the fourteenth in a series of installments on this blog that are discussing some of the issues arising in the aftermath of the long global Ponzi scheme of Bernard L. Madoff. Installments 3 through 8 and Installment 10 of this series focused on the specific concerns of charities that were victims of Madoff and similar schemes. It generally advocated that every charity should respond pro-actively in the wake of the Madoff scandal and the current adverse economic climate. Such action should include a filing of its Form 990 with the Internal Revenue Service (the “IRS”) as promptly as practicable with appropriate disclosures, whether or not it was a Madoff stakeholder itself. All potential stakeholders should consult professional advisors promptly to have their positions evaluated.

This Installment 14 is designed to compare and contrast the most recent Forms 990 filed with the IRS for fiscal 2008 by two of the most significant and respected charities that invested with Madoff: Hadassah, The Women’s Zionist Organization of America, Inc. (“Hadassah”) and Yeshiva University (“Yeshiva”). While the missions of Hadassah and Yeshiva (collectively, the “Charities”) are different, they provide a basis for comparison, and share as part of their missions the advancement of education and Jewish awareness in the United States and Israel. For disclosure purposes, readers are advised that the spouse of the author of this blog post has been a Life Member of Hadassah for many years.

Concerns about profound financial and other impacts on these Charities from their investments with Madoff were published soon after the Madoff scandal became public in December 2008. For example, an article by Stewart Ain entitled “Hadassah Reveals $130 Million Windfall from Madoff,” was published in The Jewish Week on January 14, 2009 (the “Ain Article”). A more recent article on Hadassah and its involvement with Madoff that contains some is “Woman Tells of Affair with Madoff in New Book,” by Diana B. Henriques and Stephanie Strom, published in The New York Times on August 13, 2009 (the “Henriques/Strom Article”). An article about the impact of Madoff on Yeshiva entitled “Betrayed by Madoff, Yeshiva U. Adds a Lesson,” by Javier C. Hernandez was published in The New York Times on December, 23, 2008 (the “Hernandez Article”).

Several weeks ago, the charity information website GuideStar posted the Hadassah Form 990 for the fiscal year ended May 31, 2008 (the “2007 Hadassah Form 990”). This past weekend the Website posted the Yeshiva Form 990 for the fiscal year ended June 30, 2008 (the “2007 Yeshiva Form 990” and collectively with the 2007 Hadassah Form 990, the “2007 Forms 990”).

This blog series has already covered the newly-designed Form 990 for 2008 (the “2008 Form 990”) that requires 501(c)(3) entities to provide greatly expanded disclosure through answering questions that require “yes” or ‘no” responses about governance and business operations of charities. Questions that are answered “no” require explanation in the 2008 Form 990.

One of the questions for each of the Charities that would have required a response in the 2008 Form 990 (but not the 2007 Forms 990 recently filed with the IRS by the Charities) is whether the respective Board of Trustees and Audit Committee reviewed the 2007 Form 990 prior to its filing with the IRS. Because both Hadassah and Yeshiva have fiscal years other than the calendar year, they were able to use the old Form 990 for 2007.

Some circumstances differ, and some are similar, for the Charities. As will be shown in the table below, it is my view that the 2007 Yeshiva Form 990 has significantly greater disclosure and transparency relative to Madoff than the 2007 Hadassah Form 990. Either of the divergent approaches to disclosure chosen by each of the Charities in its 2007 Forms 990 may be compliant and supportable and were reviewed by the same “Big Four” accounting firm. However, this blog series has strongly recommended that early and complete transparency is advisable to maximize the value of utilizing the Form 990 in rebuilding public confidence in a charity that was affected by Madoff. Earlier disclosure will also get the “bad news” out into the open faster and allow the charity to move on. I believe that Yeshiva has been more successful than Hadassah in using its 2007 Form 990 for this purpose.

The following table will highlight a comparison of some of the relevant factors drawn from the respective 2007 Forms 990 of the Charities that led to the views of the author.

A COMPARISON OF HADASSAH AND YESHIVA 2007 FORMS 990

(Information in the Hadassah and Yeshiva columns is from their respective 2007 Form 990 unless otherwise noted; readers may access the 2007 Forms 990 by visiting GuideStar and completing a free online registration. Other noted sources in the table have the Internet links designated in the foregoing article.)

CATEGORY	HADASSAH	YESHIVA
Fiscal Year End	May 31, 2008	June 30, 2008
Date of 2007 Form 990	April 3, 2009	May 14, 2009
Final Due Date for 2007 Form 990 Filing with IRS, Including All Allowed Extensions	April 15, 2009	May 15, 2009
Office where financial books are kept	500 West 185^th Street New York, NY 10033	50 West 58^th Street New York, NY 10019
Paid Preparer of 2007 Form 990	KPMG LLP 345 Park Avenue New York, NY 10154-0102	KPMG LLP 345 Park Avenue New York, NY 10154-0102
Potential Conflicts of Interest Involving Madoff	The Henriques/Strom article reported the recent allegation by former CFO of Hadassah, Sheryl Weinstein, that she had an affair with Madoff while she was CFO at a time that Hadassah was investing with him	Madoff was a Trustee and Treasurer of Yeshiva while Yeshiva was investing indirectly with Madoff; J. Ezra Merkin, a principal of a putative feeder fund for Madoff, was a Trustee while Yeshiva was investing through him with Madoff
Resolution of Potential Conflicts of Interest Involving Madoff	The Henriques/Strom article reported that Sheryl Weinstein left Hadassah in 1997, 12 years ago	Madoff and Merkin each resigned in all capacities from Yeshiva in December 2008
Extent of Disclosure of Assets Exposed for Loss as a Result of Madoff–related Investments	No disclosure of extent of potential asset loss from Madoff-related investments in 2007 Form 990; The Ain Article and the Henriques/Strom Article reported that, while Hadassah had a loss of assets from Madoff-related investments of $90 million, it had withdrawn $130 million over the two decades of investment with Madoff	Disclosure that Yeshiva wrote off, as of June 30, 2008, $95,290,000 of carrying value of Madoff-related investments
Disclosure of Exposure Potential for Recovery of Assets by Bankruptcy Trustee for Madoff	None apparent in 2007 Form 990; The Ain Article and the Henriques/Strom Article reported that Hadassah took out more than $130 million from Madoff accounts over the years with the potential for seeking of recovery by trustee	2007 Form 990 indicated inability of Yeshiva management to determine whether distributions from Merkin-related investments that were turned over to Madoff are recoverable by the trustee for Madoff
Miscellaneous Disclosures in 2007 Form 990	Effective as of January 2009, Hadassah changed its fiscal year to a calendar year, thereby making it necessary for Hadassah to file a 2008 Form 990 with the IRS for its short seven-month year ended December 31, 2008, no later than November 15, 2009, including all permitted extensions	Lengthy descriptive paragraph in note to financial statements about Madoff, Merkin and Madoff-related investments

[To be continued in Installment 15]

(With appreciation to Michael J. Kline, Esq., for contributing this entry and for his on-going analysis of the concerns of Madoff stakeholders)

Stakeholders in the Madoff Scandal and Their Need to Act Promptly and Proactively -Victims of a Ponzi Scheme Operated as a Charitable Gift Annuity Program by a Purported Charity - Installment 13

ALeibman@foxrothschild.com (Alain Leibman) — Tue, 28 Jul 2009 08:25:24 -0500

This is the thirteenth in a series of installments on this blog that is discussing issues that face the manifold stakeholders who have been materially affected by the long and worldwide Ponzi scheme scandal of Bernard L. Madoff. All potential stakeholders should consult professional advisors promptly to have their positions evaluated.

Installments 3 through 8 and Installment 10 of this series focused on the specific concerns of charities that were victims of Madoff and similar schemes. This installment is a little different in that it does not relate directly to the Madoff morass but rather addresses a recent court decision on a Ponzi/Madoff scheme operated as a charitable gift annuity (“CGA”) program by a purported charity. The victims and stakeholders in this case were not bona fide charities that were duped but rather well-meaning donors who were misled into purchasing bogus CGAs. It is being included to underscore the endless varieties of investment vehicles that are in reality Ponzi/Madoff schemes.

A CGA is a contract under which a charity, in return for a transfer of cash, marketable securities or other assets by a donor, contracts to pay a fixed amount of money to one or two individuals, usually 60 years of age or older, for their lifetime(s). A person who receives payments is called an “annuitant”. The payments are fixed and unchanged for the term of the contract. The CGA payments are not “income”, because a portion of the payments are considered to be a partial tax-free return of the donor's gift, which are spread over the life expectancy of the annuitant(s).
The contributed property (the gift), given irrevocably, becomes a part of the charity's assets, and the payments are a general obligation of the charity. The CGA is backed by the charity's entire assets, not just by the property contributed. In these uncertain and risky economic times, a number of charities, including some that have invested with Madoff, have declared bankruptcy, which would cause severe economic loss to annuitants.

A CGA should be deemed by the donor to be primarily a gift to the charity, not an investment. The total return on a CGA is significantly less than that which could be earned through an annuity issued by a commercial insurance company. The gift annuity rates recommended by the American Council on Gift Annuities (“ACGA”), which are widely used by bona fide charities, have been computed to produce an average gift to the organization at the expiration of the annuity agreement of approximately 50% of the amount originally donated under the contract.

On June 24, 2009, the United States Court of Appeals for the Ninth Circuit decided the case of Warfield v. Alaniz, wherein the Court held that “CGAs” sold in this case (“Sham CGAs”) were investment contracts illegally sold under federal securities laws. Outside contractors such as financial planners and insurance agents had sold Sham CGAs aggregating $55 million on a commission basis for an organization that was a putative charity but in reality was using funds raised from the Sham CGAs solely to pay contractual returns to earlier annuitants and make payments to the promoters and contractors. Selling materials used by the sellers trumpeted high rates of returns, tax benefits, and superiority to commercial annuities, not a charitable intent for the Sham CGAs.

This type of Ponzi/Madoff scheme unfortunately seeks to prey on senior citizens who have a charitable motivation while seeking to maintain a secure return for their lifetimes. Those who would purchase CGAs should visit the Web site of the ACGA at the link above for explanations on CGAs and how to be aware of risk and dangers in purchasing CGAs.

In addition, points raised in earlier installments of this blog series should be followed by those interested in purchasing a CGA, including the following:

1. Go to websites for Guidestar or Charity Navigator to obtain the most recent Forms 990 filed by the charity with the Internal Revenue Service and read about the charity’s mission, analyze its financial statements, see how much it pays for administrative and fundraising expenses and learn about its governance structure.

2. Contact the charitable registration agency or attorney general of the state in which you live to ascertain whether the charity that is selling the CGA is in good standing in the state.

3. If your state is one that requires registration and annual filings for CGA programs, contact the state office that oversees this process.

4. Buy a CGA directly from the charity that you wish to benefit through an officer, employee, trustee or director of the charity (each a “Charity Representative”). Never purchase a CGA through a third party, whether or not on commission.

5. To the extent possible, meet in person with the Charity Representative - find out how long the CGA program of the charity has been in existence and the number of annuitants that exist.

6. Ask the Charity Representative for the current disclosure statement for the CGA program under the Federal Philanthropy Protection Act of 1995. If the Charity Representative does not have such a statement or does not know what you are talking about, you may be well advised to consider another charity.

7. Take into account your total assets, income and obligations to carefully limit the amount of money you commit to a CGA, as you should for all charitable contributions and investments.

8. Seek advice from a lawyer, accountant, financial planner or other adviser that you trust to advise you on the purchase of the CGA.

9. If the CGA program returns sound too good to be true, they should be suspect.

10. If after doing all of the above, you do not understand how a legitimate CGA works or you have pause on making what should primarily be a charitable donation, your purchase of a CGA may be inadvisable.

[To be continued in Installment 14]

(With appreciation to Michael J. Kline, Esq., for contributing this entry and for his on-going analysis of the concerns of Madoff stakeholders)

In assessing Rule 35(b) reduction in sentence, court to consider all Section 3553(a) factors, not just cooperation

ALeibman@foxrothschild.com (Alain Leibman) — Mon, 06 Jul 2009 12:01:27 -0500

Once the government opens the door post-sentencing to a reduction of sentence under Rule 35(b), defense counsel is free to argue, and a court should consider, all of the 18 U.S.C. § 3553(a) factors which must be weighed at the initial sentencing, the Sixth Circuit has held in a case of first impression.

While the post-sentencing cooperation of the defendant is a precondition to the government's filing a motion, it is not a limiting condition in terms of the factors which drive the resulting reduction. United States v. Grant, 567 F.3d 776 (6th Cir. 2009). In a 2-1 decision, the court of appeals held in Grant that current Rule 35(b) requires only that cooperation be the condition precedent to any reduction; it no longer requires, as did a previous iteration of the Rule, that any reduction "reflect" that cooperation. Indeed, the majority wrote, cooperation may still be the predominant consideration in determining the extent of any reduction. But the consideration of a defendant's cooperation does not limit the district court's assessment of the full array of Section 3553(a) factors which must be considered in imposition of any sentence.

The dissenting judge maintained that, since the Section 3553(a) factors will already have been considered at the original sentencing, the majority's ruling invites a "redo" of sentencing, an invitation unlikely to be welcomed by trial judges who already sentence an average of 117 defendants each year.

Stakeholders in the Madoff Scandal and Their Need to Act Promptly and Proactively - Indirect Stakeholders - Installment 12

ALeibman@foxrothschild.com (Alain Leibman) — Thu, 02 Jul 2009 18:05:18 -0500

This is the twelfth in a series of installments on this blog that is discussing issues that face the manifold stakeholders who have been materially affected by the long and worldwide Ponzi scheme scandal of Bernard L. Madoff. All potential stakeholders should consult professional advisors promptly to have their positions evaluated.

Installments 3 through 8 and Installment 10 of this series focused on the specific concerns of charities that were victims of Madoff and similar schemes. Installments 9 and 11 addressed concerns of an Indirect Individual Investor (“III”) who has been embroiled in the Madoff scandal, but not as a result of a direct investment with him.

This Installment is intended to recognize the noteworthy unrelated events of this week in the Madoff scandal. On Monday, June 30, Federal District Judge Denny Chin in Manhattan sentenced Madoff to 150 years in federal prison for his crimes that were characterized by the Judge as “extraordinarily evil.” The Judge cited three symbolic reasons for the maximum sentence that he imposed on the 71-year-old Madoff. They were retribution, deterrence and justice for the victims. I would add a fourth need arising from the Madoff matter itself: the warning to any potential co-conspirators to come forward and cooperate in order to avoid a harsh sentence if later convicted. Such cooperation could raise the level of assets that can be made available to provide restitution to stakeholders.

There may be finality to the criminal case involving Madoff himself, except for his possible appeals to reduce the length of the sentence, which may be moot in any event in light of his age. However, while this result may give some closure and perhaps even “psychic income” for stakeholders who were victimized by Madoff, it provides no economic benefit to assuage their losses, other than perhaps encouraging collaborators to cooperate. More important for their situation is that on Thursday, July 2, the deadline came for filing claims by victims for recovery under the Securities Investor Protection Corporation (“SIPC”), the federal insurance agency for the securities brokerage industry.

On June 29, 2009, Eric Konigsberg wrote an article in The New York Times entitled “Investors Compete for a Piece of the Madoff Pie,” in which Mr. Konigsberg chronicled the staking out of claims for a portion of the limited funds available for victims with highly diverse and complex factual patterns as to how and how much money they lost with Madoff. Those who are IIIs, for example, have been told by Irving H. Picard, the trustee for Madoff’s assets, that they cannot make a separate SIPC claim. Mr. Konigsberg describes these stakeholders as believing that “they are being treated as members of a lower caste, in that many of them went through feeder funds because they lacked the requisite $1 million or $2 million minimum to go straight to Mr. Madoff.” The article reports that Mr. Picard encouraged such IIIs to file claims in any event for later court cases and that 8,800 claims were already filed of an estimated tens of thousands.

The criminal case against Madoff is finished; other criminal or regulatory actions may be brought against putative collaborators with Madoff in the future. However, those who are economic stakeholders must maintain close contact with the economic developments in the matter as they occur. Because the ultimate “pie” will be far less than the aggregate of slices that are being sought, victims should seek professional interpretations and advice as the inevitably complicated processes and determinations unfold.

[To be continued in Installment 13]

(With appreciation to Michael J. Kline, Esq., for contributing this entry and for his on-going analysis of the concerns of Madoff stakeholders)

Admission by government of absence-of-record certificates now unconstitutional

ALeibman@foxrothschild.com (Alain Leibman) — Tue, 30 Jun 2009 12:21:26 -0500

The Supreme Court last week applied a newly-invigorated Confrontation Clause to deny the admission at trial of drug lab test certificates in an opinion which may unintentionally prove very useful to attorneys defending criminal tax cases.

In Melendez-Diaz v. Massachusetts, 2009 U.S. LEXIS 4734 (June, 25, 2009), the Court unremarkably extended the reach of Crawford v. Washington, 541 U.S. 36 (2004) to the test reports of crime laboratories, holding that the admission in a Massachusetts trial of a laboratory report showing that a seized substance was cocaine violated the defendant's Confrontation Clause rights; the State was obliged instead to produce witnesses in court to establish the drug's chain of custody and the testing conclusion. The dissent argued less forcefully that the majority's conclusion was unwarranted or surprising after Crawford, and more effectively that a practical consequence of the decision would be to strain the resources of crime labs everywhere.

But one legal argument posited by the four Justices in dissent was that the lab certificate of results was akin to a business records certificate offered under FRE 803(6), which, even after Crawford, may be admitted in the absence of a live witness. Justice Scalia, writing for the five-Justice majority, dismissed this comparison. First, the business of a crime lab is to produce evidence for use at trial and so it does not share the routineness and regularity of a true business, leaving the former's products -- drug test reports -- outside the scope of Rule 803(6). Second, true business records are neutrally created for the purpose of administering an entity, rendering them non-testimonial when offered in a criminal trial and thus outside the Confrontation Clause, while police lab reports are prepared specifically for use at such a trial and to inculpate a defendant, so are testimonial and subject to the Confrontation Clause. Id. at *31-33.

To further make its point, the majority contrasted non-testimonial clerks' certificates as to records located in a business or government office with "those cases in which the prosecution sought to admit into evidence a clerk's certificate attesting to the fact that the clerk had searched for a particular relevant record and failed to find it … the clerk's statement would serve as substantive evidence against the defendant whose guilt depended on the non-existence of the record for which the clerk searched. Although the clerk's certificate would qualify as an official record [in the sense of FRE 803(6) and 803(8)] the clerk was nonetheless subject to confrontation." Id. at *31.

In myriad criminal cases the government is required as an essential element to prove the absence of an official record in order to establish guilt, but perhaps this is most often true in tax prosecutions. Whether seeking to prove a misdemeanor failure to file returns, 26 U.S.C. § 7203, or a felony Spies tax evasion where an act in furtherance is the failure to file returns, 26 U.S.C. § 7201, the prosecutor typically relies on a certificate from the IRS records center that no return is on file for the given year(s). Defense attorneys can now use Melendez-Diaz to argue that any and all IRS personnel involved in the search for the missing filing must be called as live witnesses in court, since the IRS certificate of non-filing cannot be admitted without violating the defendant-taxpayer's constitutional right of confrontation.

Stakeholders in the Madoff Scandal and Their Need to Act Promptly and Proactively - Indirect Stakeholders - Installment 11

ALeibman@foxrothschild.com (Alain Leibman) — Tue, 23 Jun 2009 11:06:33 -0500

This is the eleventh in a series of installments on this blog that is discussing some of the issues that face the manifold stakeholders who have been materially affected by the long and worldwide Ponzi scheme scandal of Bernard L. Madoff. All potential stakeholders should consult professional advisors promptly to have their positions evaluated.

Installments 3 through 8 and Installment 10 of this series focused on the specific concerns of charities that were victims of Madoff and similar schemes. This Installment is continuing the discussion from Installment 9 on the concerns of an Indirect Individual Investor (“III”) who has been embroiled in the Madoff scandal, but not as a result of a direct investment with him.

Such IIIs may have invested with a fund, investment manager or other vehicle, such as a hedge fund that was a “feeder” for Madoff, or even a partnership of family and friends that was formed to aggregate funds sufficient to invest with him. Each of these types of entities will be defined in this series as a Direct Entity Investor (“DEI”), even though some DEIs may have invested their money with a feeder fund for Madoff that in turn invested directly or indirectly with him.

Those that are IIIs and were “fortunate” enough to have secured distributions from the DEI through indirect redemptions from Madoff in the past may believe that they were either lucky or brilliant to have withdrawn money before his arrest on December 11, 2009. However, such IIIs must be concerned about the extent to which the Madoff bankruptcy trustee or federal or state regulators may be intensifying efforts to recover money or seek criminal prosecutions from those who withdrew money from their Madoff investments. While the initial efforts by the trustee can be expected to be focused upon DEIs that received large distributions and were close to Madoff in making direct investments with him, the focus can be expected to go further down the line to IIIs as well.

The word most commonly used for such monetary recovery efforts in the Madoff morass is “clawback.” Distributions from a DEI to an III are potential targets for the bankruptcy trustee because they may be materially disproportionate to the withdrawals of the average investor (“Clawback Targets”). The word clawback actually covers a number of scenarios and theories for recovery by the bankruptcy trustee under the Federal Bankruptcy Code and various state laws that may have varying degrees of likely exposure for the III.

The basis of clawback is that all of the investors who were engaged in a single, unitary, integrated, failed Ponzi enterprise should have a relatively level playing field and that those that received disproportionate distributions should disgorge their excess receipts.

To a certain degree, the energy that will be undertaken by the bankruptcy trustee for Madoff to pursue an III will depend on (i) the absolute amount in dollars of the distribution to such III, especially in relation to the actual hard dollars invested (net of the nonexistent “returns” reported to the III by Madoff), (ii) how recently the redemption(s) took place and/or (iii) the individual factual circumstances that exist relative to the redemptions by the III. The “clawback” process may become highly complex and may be affected by state law, which may differ from state to state. Competent professional advice for IIIs is a necessity in this area.

[To be continued in Installment 12]

(With appreciation to Michael J. Kline, Esq., for contributing this entry and for his on-going analysis of the concerns of Madoff stakeholders)

Impeachment of convicted witness may be limited to fact of conviction alone

ALeibman@foxrothschild.com (Alain Leibman) — Tue, 16 Jun 2009 18:17:48 -0500

The rules of evidence to which most frequent resort is made in impeaching witnesses with evidence of misconduct are FRE 608(b) and FRE 609. Rule 608(b) provides that specific instances of the witness's conduct to show untruthfulness, other than conviction of a crime under 609, may not be proved extrinsically; that is, the questioner must generally take the witness's answer. Rule 609 admits extrinsic evidence of a criminal conviction under certain circumstances.

But what of cross-examining a witness about the details of the conduct underlying his criminal conviction? The Ninth Circuit has recently held that, where misconduct led to a conviction, Rule 609 is the exclusive vehicle for the use of that conviction and the examiner is limited to admission of the conviction itself and may not inquire into the underlying details. United States v. Osazuwa, 564 F.3d 1169 (9th Cir. 2009). Osazuwa was originally convicted of bank fraud and his first, remarkably skilled attorney managed to win a sentence of one day in jail followed by supervised release, plus restitution. However, Osazuwa could not stand his good fortune, and violated his supervised release by not paying his restitution, resulting in a 90 day sentence. Exhibiting consistency, if not good sense, Osazuwa was days away from completing his new sentence when he allegedly assaulted a prison guard, resulting in the instant prosecution.

The key witnesses at trial were Osazuwa and the guard, a classic credibility contest. On direct examination, Osazuwa's attorney brought out the prior conviction. But In cross-examining Osazuwa, the prosecutor was allowed to probe the details of the bank fraud, asking the witness-defendant several times about how he lied in connection with misusing another's credit card. The court of appeals reversed the resulting assault conviction, holding that the trial court had abused its discretion in allowing this impeachment.

The Ninth Circuit joined several other circuits in reading Rule 608(b) to exempt from its coverage entirely conduct that was the basis for a conviction, leaving convictions solely to the province of Rule 609. United States v. Lightfoot, 483 F.3d 876 (8th Cir.), cert. den., 128 S. Ct. 682 (2007); United States v. Parker, 133 F.3d 322 (5th Cir.), cert. den., 523 U.S. 1142 (1998); Mason v. Texaco, Inc., 948 F.2d 1546 (10th Cir. 1991), cert. den., 504 U.S. 910 (1992).

The bank fraud conviction could be proven extrinsically under Rule 609(a)(2) as a crime of dishonesty, to be sure, but the scope of inquiry into prior convictions is limited. Collateral details may not be the subject of inquiry to a witness, unless the witness "opens the door" by minimizing his misconduct or otherwise testifying falsely. Since Osazuwa admitted the conviction on direct, the entire cross-examination into its details was improper and warranted reversal.

For Third Circuit practitioners, the contrary case of Elcock v. Kmart Corp., 233 F.3d 734 (3d Cir. 2000) should be noted. There, plaintiff's expert witness had a prior conviction under 18 U.S.C. § 641 for embezzling government funds, but the trial judge would not allow further impeachment with the underlying offense details. While upholding the trial judge's decision to limit impeachment as an appropriate exercise of discretion, the court of appeals, in an opinion by Chief Judge Becker, expressed its disagreement with the limitation imposed. All parties agreed that the embezzlement conviction itself was properly admitted under Rule 609(a)(2), but the court of appeals did not view that Rule as the exclusive avenue for use of evidence of conviction, looking to Rule 608(b) to define the discretionary scope of the related, detailed impeachment. The court observed that the amount of money stolen by the expert and the "exact way" in which it was done was "certainly relevant to prove the extent of [his] dishonesty." Id. at 753. "A jury could rationally conclude that one who embezzles a million dollars from the Government over a long period of time has a worse character for veracity than a person who steals five dollars once." Ibid. The Osazuwa court did not cite Elcock, which remains good law in the Third Circuit.

Supreme Court makes it easier to bring RICO charges both criminally and civilly

ALeibman@foxrothschild.com (Alain Leibman) — Tue, 16 Jun 2009 17:13:08 -0500

The Supreme Court last week in Boyle v. United States, No. 07-1309 (June 8, 2009) declined to limit association in fact enterprises under RICO to those having the characteristics of "business-like" entities. In so doing, the Court made it easier for the government to charge RICO against looser confederations of criminal groups, like drug and bank robbery gangs, which lack the formality of traditional organized crime families, and expanded the reach of civil RICO, as well.

The Boyle case involved a group of multi-state bank robbers who lacked a defined leader or individual, fixed roles, but who came together periodically over a period of years to plan and carry out heists. Convicted of substantive RICO, 18 U.S.C. § 1962(c), and RICO conspiracy , 18 U.S.C. § 1962(d), the defendants appealed the trial judge's refusal to charge the jury that it was required to find that their association in fact had an ongoing organization, a core membership, and a hierarchical structure distinct from the predicate bank robbery acts. The Second Circuit affirmed the judgments of conviction, and the Supreme Court affirmed.

The Court's 7-2 decision, in an opinion by Justice Alito, rejected the claim of the dissenters that a RICO enterprise was limited to "business-like entities" because the text of the statute imposed no such requirement. The only structural requirement was that an association in fact have a purpose, a relationship among the members, and some longevity. Justice Alito wrote that RICO does not require further that there be internally consistent or fixed roles or any formality to the association. "The group need not have a name, regular meetings, dues, established rules and regulations, disciplinary procedures, or induction or initiation ceremonies." The majority's mocking tone could be said to be describing a condominium association, rather than a typical criminal gang, emphasizing the absence of any need for such proof on the government's part.

The practical result of the decision in the criminal arena may be limited, given the increased use of money laundering charges to supply the forfeiture remedy and extended sentences once available to the government only through RICO. Nevertheless, the decision lowers the barriers to plaintiffs seeking to use RICO civilly to enhance their leverage against defendants and force settlements.