White Collar Defense and Compliance

Crawford requires that co-conspirator statements to informants be tossed

Alain Leibman — Wed, 27 Jan 2010 12:37:51 -0500

Since the seismic shift in Confrontation Clause jurisprudence effected by Crawford v. Washington, 541 U.S. 36 (2004), lower courts have struggled to define precisely which "testimonial statements" are now excluded from evidence unless the government can show both that the declarant is unavailable to testify at trial and there was a prior opportunity for cross-examination of the declarant. The Crawford Court did not define the term "testimonial" exhaustively, leading to some confusion in the ranks. The Court's more recent jurisprudence has been unpredictable, such as its decision last year that the Confrontation Clause requires the government to present live testimony in order to admit lab test results in drug and other cases.

In at least one major category of government-developed evidence, it appears that lower court confusion has led to lower court error in applying Supreme Court precedent. Lower courts have since Crawford generally treated as nontestimonial, and thus impervious to Confrontation Clause objection, co-conspirator statements made to and often recorded by government informants. Recently, for example, the Sixth Circuit held in United States v. Johnson, 581 F.3d 320 (6th Cir. 2009) that statements made by Johnson's co-conspirator, O'Reilly, to a government informant were admissible against Johnson. They qualified as an exception to the hearsay rule under FRE 804(b)(3) as statements against penal interest, where O'Reilly was presumed unavailable to testify because he was likely to assert his Fifth Amendment privilege. As for the Confrontation Clause, the court of appeals held that O'Reilly's statements were nontestimonial because they were not made in response to police interrogation. Id. at 325-26.

The Sixth Circuit cited other, post-Crawford decisions which have likewise held that co-conspirator statements to informants are nontestimonial under the Sixth Amendment. For example, the Third Circuit in United States v. Hendricks, 395 F.3d 173 (3d Cir. 2005), held that statements of co-conspirators made to a CI were admissible under the Confrontation Clause. What underlies the holdings in these cases is the essential proposition that answering the questions of and responding to a government informant is different for Sixth Amendment purposes than making the same type of statements to a known government representative, as in a formal interview with an agent or police officer. The problem with this proposition is that the Supreme Court's Sixth Amendment jurisprudence shows it to be unfounded.

In Massiah v. United States, 377 U.S. 201 (1964), the Court long ago held that it was a violation of the Sixth Amendment to admit at trial the statements of the defendant made to a government informant after he had been arrested and his right to counsel had attached. To the argument that there was a meaningful difference under the Sixth Amendment between post-charge interrogation by the police and interrogation by an informant working for the police, the Court said unequivocally:

It is true that in the Spano [v. New York] case [excluding a post-indictment confession] the defendant was interrogated in a police station, while here the damaging testimony was elicited from the defendant without his knowledge while he was free on bail. But [the Sixth Amendment rule] must apply to indirect and surreptitious interrogations as well as those conducted in the jailhouse.

Under Massiah, then, the distinction drawn in cases like Johnson and Hendricks based on whether the interrogator is or is not wearing a uniform and carrying a badge is a meaningless one. If the person to whom statements are made is either a law enforcement agent or one doing the bidding of law enforcement, then those statements should be deemed "testimonial" under the Sixth Amendment and they should not be admitted unless the declarant is unavailable at trial and was subject to cross-examination about the statement at an earlier time. The second element of that test will never been met in the informant situation and those statements should be thrown out.

Eleventh Circuit Limits Reach of Section 666 By Narrowly Construing "Agent of the State" Element

Alain Leibman — Tue, 26 Jan 2010 10:51:34 -0500

We noted here recently the first signs of an effort among courts of appeal to temper the reach of 18 U.S.C. § 666, long a favorite tool of prosecutors seeking to federalize misdeeds by local and state officials. Now the Eleventh Circuit has joined in, acting to limit the scope of the statute by strictly holding the government to its allegation that a defendant was an "agent of the state" and finding that a state's payment of the defendant's salary and benefits failed to qualify him as its agent, and throwing out his conviction on that theory.

The defendant in United States v. Langston, 2009 WL 2907047 (11th Cir., Dec. 22, 2009), was the executive director of a state school which provided training to Alabama's firefighters and EMT's, called fittingly enough the Fire College. The school was run by the Fire Commission, an agency of the state. Although the Fire Commission employed Langston and paid his salary, the salary was fixed according to a state employee salary schedule and was paid with funds from the state treasury, and Langston's received state employee benefits. In a display of greed so striking that the Court of Appeals characterized the case as "an affront to every decent law-abiding citizen in the State of Alabama," Langston treated the Fire College as his own piggy bank, doling out monies to friends and family, and creating bogus jobs.

A jury convicted Langston of all counts, but the Eleventh Circuit vacated the conviction on each count which charged a Section 666 violation predicated on Langston solely being an agent of Alabama. All of the above indicia of Langston's apparent connections to the state failed to prove his agency; the monies he unlawfully dispensed were, in the court's broad analysis, property of the Fire College, not the state. The Court's ipse dixit reasoning is nicely captured in the spare simplicity of its holding: "Simply because it [the misused Fire College monies] passed through the state treasury to the state [Board of] Education Trust Fund [which funds the Fire College] does not make it state funds sufficient to demonstrate that Langston was an agent of the state." Consistent with this reasoning, other counts of conviction under Section 666 were affirmed because in them Langston was properly identified as an agent of a specific state agency, not of Alabama in general.

Although the absence of close reasoning in the opinion may hinder the ease with which Langston translates to other fact-patterns involving state and local officials, the result does represent one more expression at the appeals court level of the strict interpretation to be afforded Section 666.

Fifth Circuit Pulls Back the Reach of 18 U.S.C. § 666 As It Relates to Bribery of Local Judges

Alain Leibman — Mon, 18 Jan 2010 10:14:55 -0500

Long a favorite weapon of federal prosecutors, Section 666 of Title 18 makes it a crime for an agent of a state or local organization or agency to corruptly demand, offer, or accept anything of value of $5,000 or more in connection with any business or transaction of the organization or agency, where the organization or agency receives annual benefits in excess of $10,000 under a federal program. The statute has extended the reach of federal authorities to the lowest levels of municipal government, given the ubiquitousness of federal funding programs.

However, the Fifth Circuit has recently emphasized the limits of that reach. United States v. Whitfield, 2009 WL 4723467 (5th Cir., Dec. 11, 2009). In Whitfield, two Mississippi state judges had been convicted of § 666 violations for accepting bribes from a local attorney with cases pending in their courts. The government focused its proof on the receipt by the Mississippi administrative office of the courts of more than $10,000 in federal funding. Although the statutory element was contested below, the court of appeals further assumed that the two judges, Whitfield and Teel, were agents of that administrative office, since they hired chambers staff paid by that office. But the Fifth Circuit vacated the convictions on the ground that there was no proof that either judge had engaged in "business or transactions" of the administrative office when they ruled in their respective cases. In Mississippi the administrative office of the courts is by statute authorized only to assist in the "nonjudicial" activities of the court system. The appeals court held that their roles as judges presiding over the cases constituted the judicial activity of the Mississippi courts, and were unconnected to the business of the administrative office.

In other states, such as New Jersey, the administrative office of the courts seems more deeply engaged in the actual running of the court system, including the assignment and transfer of judges among courts; this circumstance could cause bribe-driven judicial rulings in such states to fall more comfortably within the reach of § 666, even under Whitfield. Nonetheless, the case helpfully refocuses attention on the statutory requirement that the activity in question must be proven to relate directly to the business of the federally-funded agency. With the Supreme Court possibly poised this term to pull back the extensive reach of the "honest services" mail and wire fraud statute, 18 U.S.C. § 1346, these developments may signal a judicial shift in favor of efforts to halt the relentless creep of federal criminal jurisdiction over purely local matters

Another Revisit to Madoff and His Charity Stakeholders - Hadassah and Yeshiva University: Now A Perplexing Tale of Three Forms 990 - Part I - Installment 22

Alain Leibman — Fri, 15 Jan 2010 13:37:19 -0500

This is the twenty-second in a series of installments on this blog that are discussing 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 21 of this series focused on the concerns of charities that were investors with Madoff and similar schemes. All potential stakeholders should consult professional advisors to have their positions evaluated.

Installment 14 of this series compared and contrasted recent Forms 990 filed with the Internal Revenue Service (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 of transparency, 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 again advised that the spouse of the author of this blog contributor has been a Life Member of Hadassah for many years.

Because of the decision by Hadassah to change its fiscal year from a year ending May 31 to the calendar year, Hadassah was required to file a Form 990 with the IRS for the seven-month period ended December 31, 2008 (the “December Hadassah Form 990”). The filing by Hadassah of the December Hadassah Form 990 within approximately seven months after having filed its Form 990 for the fiscal year ended May 31, 2008 (the “May Hadassah Form 990” and, collectively with the December Hadassah Form 990, the “Hadassah 2008 Forms 990”) within such a short period has enabled an unusual insight into Hadassah’s public financial disclosure decisions.

These Forms 990 filings come at a time in history when Hadassah has been endeavoring to repair its post-Madoff image. In a widely-reprinted January 2010 Associated Press article by David B. Caruso, Hadassah President Nancy Falchuk was quoted as saying that the group has sought to streamline and refocus itself and that she has worked hard to rebuild the nonprofit's reputation.

Nonetheless, it would appear that positive image-building for Hadassah did not extend to best practices in transparency in the May Hadassah Form 990 regarding its dealings with Madoff. The May Hadassah Form 990 contained no disclosure relative to Madoff investments and distributions for Hadassah.

As stated in Installment 14 of this series, Hadassah did not measure up to the level of transparency regarding Madoff provided by Yeshiva in its Form 990 filing with the IRS for the fiscal year ended June 30, 2008 (the “Yeshiva Form 990”). While Hadassah did not mention its Madoff financial complexities at all in the May Hadassah Form 990, the Yeshiva Form 990 clearly laid out the dollar amounts involved with Madoff. Curiously the contrasting methods of presentation were in Forms 990 whose professional Preparer was the Park Avenue, New York, office of KPMG LLP, and the same professional at KPMG signed all of such Forms 990.

There is an even more perplexing point about the Hadassah 2008 Forms 990 when they are compared to Hadassah’s consolidated financial statements for the fiscal years ended May 31, 2008 and December 31, 2008, with the auditors’ report of KPMG LLP (collectively, the “2008 Financial Statements”). Hadassah is to be commended for voluntarily making the 2008 Financial Statements available to the public on request.

Both of the 2008 Financial Statements contains a note as to the Hadassah/Madoff involvement. The note in the Hadassah December 31, 2008 financial statements about Madoff is substantially the same as the note in the December 2008 Hadassah Form 990. However, the May Hadassah Form 990 was silent as to Madoff, and that Form 990 actually related to the fiscal year in which Hadassah took the substantial write-down in Madoff “assets”. In contrast to the May Hadassah Form 990, the following statement is part of Note (15) Subsequent Events to the Hadassah May 31, 2008 audited financial statements (“Note 15”):

Subsequent to year-end, Hadassah learned that it has been a victim of the fraudulent scheme perpetrated by Bernard L. Madoff Securities LLC (Madoff) which resulted in write-off of an investment amounting to $88,725,362 as of May 31, 2008. Investor statements received from Madoff reported total investments at fair value of $88,725,362 and $80,684,460 at May 31, 2008 and 2007, respectively, and investment return of $8,040,902 and $11,405,448 for the years ended May 31, 2008 and 2007, respectively. . . .

It is puzzling that Hadassah and its Form 990 Preparer would determine not to include in the May Hadassah Form 990 the language of Note 15 when they deemed it material enough to explain the substantial write off in the corresponding 2008 Financial Statements. It is especially perplexing that the contemporary Yeshiva Form 990 for which KPMG LLP was also the Preparer did have a comprehensive note explaining its write-down of investments with Madoff. Again, I believe that Yeshiva has been more successful than Hadassah in using the Yeshiva Form 990 to build new credibility and repair a damaged reputation than Hadassah has done with the Hadassah 2008 Forms 990.

[To be continued in Installment 23]

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

DOJ Issues New Guidance Requiring Fuller and Earlier Disclosures by Prosecutors

Alain Leibman — Tue, 05 Jan 2010 13:37:14 -0500

On January 4, 2010, Deputy Attorney General David W. Ogden issued a series of three memoranda, published on the website of the Department of Justice, which represented the culmination of a several-months long study of discovery practices among the United States Attorney's Offices and retraining of new discovery coordinators from each Office. The study was undertaken following a number of embarrassing episodes in which courts sanctioned Department lawyers for misconduct such as covering up exculpatory and impeachment material. The most spectacular flame-out was undoubtedly the failed prosecution of former Alaska Senator Ted Stevens, which ended in April 2009 with the court's dismissal of the indictment against him. More recently, another judge incensed over prosecutorial mishandling of evidence dismissed an indictment against several Blackwater employees charged in an Iraq shooting incident.

In the most significant and substantive of the memoranda, one entitled "Guidance for Prosecutors Regarding Criminal Discovery," the Department has enshrined in practical, specific guidelines principles which were formerly only expressed in the most general terms in the United States Attorney's Manual. To ensure that every federal prosecutor adheres to a disclosure approach which exceeds the bare constitutional requirements of Brady and Giglio and the literal requirements of FRCP 16 and 26.2 and 18 U.S.C. § 3500, the new Guidance memorializes a number of particular obligations, including:

 the obligation of every prosecutor to cast a broad net in searching for potential exculpatory and impeachment material. This includes reviews of the entire files of federal agents involved in a matter, including internal emails never before routinely made available to prosecutors. For testifying confidential witnesses or informants, the material to be reviewed now includes agent assessments of the witness(es) and records of payments of expenses. In 16 years as a federal prosecutor, the author can never recall having seen an internal FBI "airtel" or other internal communications regarding evidence gathering, or records of meals bought for witnesses; those are now among the materials which must be reviewed for potential discovery.

 as to agent-witnesses, prosecutors are now directed to have "candid conversations" about potential impeachment information concerning those agents, which they are expected to divulge to the prosecutor.

 as to non-agent witnesses, the Guidance spells out a formidable list of potential areas of impeachment information to be gathered and disclosed, including "benefits provided to witnesses," a category of conceivably enormous breadth.

 "substantive" case-related communications between prosecutors and agents are now to be preserved for review, and include emails, notes, and memoranda. For someone used to issuing regular "to-do" lists to agents, the need to review and potentially disclose such elaborately itemized lists would have proven embarrassing on many occasions; as of January 4th, such review and potential disclosure is the new normal.

 while trial preparation sessions with witnesses are exempt. all other witness interviews should now be memorialized by the attending agent. This is a significant change from the practice in the District of New Jersey, where it has been routine for prosecutors themselves, and not agents, to be the only note-takers for in-office interviews, thereby depriving the putative defendant of any Jencks statements, since attorneys' notes could be argued to be attorney work product and not subject to discovery.

 the Guidance emphasizes the importance of memorializing any variances in witnesses' statements, potentially expanding the scope of Giglio disclosures in this area, which have traditionally been meager or non-existent

 while the Guidance does not require the prosecutor himself or herself to conduct these expansive reviews -- expressing only a preference for prosecutor review but permitting delegation to agents, paralegals, or others -- it is made clear that the prosecutor will ultimately be held accountable for the non-delegable decision to disclose or not

 finally, while banishing the use of the term "open file" discovery because of its potential to mislead, the Guidance is plain in encouraging broad and early discovery

Of course, experience teaches that the implementation of DOJ policies, not their high-minded pronouncement, is where the rubber meets the proverbial road. But there is no doubt that the Department has now given the clearest direction to its lawyers and, at the same time, created a welcomed opportunity for defense counsel to press for greater and more timely discovery than has ever before been the case.

Critical defense exhibits excluded for failure to comply with Rule 16(b) reciprocal discovery obligations

Alain Leibman — Fri, 01 Jan 2010 14:48:18 -0500

Federal Rule of Criminal Procedure 16(b) imposes discovery requirements on the defense which are triggered when the government complies with its own, initial disclosure obligations. Some defense counsel treat the reciprocal obligation as more or less voluntary, betting that they will be spared the district court’s wrath and will avoid the sanction of evidence preclusion due to the defendant’s transcendent Sixth Amendment rights. In at least one recent case that bet proved to be a resounding loser.

In United States v. Hardy, 586 F.3d 1040 (6th Cir. 2009), the defendant had been charged with embezzling $250,000 from her employer, a box manufacturer, by transferring funds under her control to another company. Hardy’s defense was that the transfers amounted to a repayment of loans she had earlier caused to be made to the box company, and sought to introduce at trial check stubs in her possession documenting the alleged, earlier loan. Defense counsel had not supplied the government with copies of those defense exhibits prior to trial, and explained the omission by saying that he had not intended to use them and was only obliged to do so when a duces tecum subpoena served on the box company failed to yield original documentary evidence of the loans. The government objected, and the trial court precluded use of the defense check stubs because of a failure to comply with FRCP 16(b).

The Sixth Circuit affirmed the resulting conviction. Under FRCP 16(b), the defense was required to produce in discovery papers and documents in the possession of the defense which are intended for use in the defense’s case-in-chief. Under FRCP 16(c), the obligation is a continuing one. The appeals court viewed the non-disclosure as willful, making exclusion a proper remedy. To the defense counsel’s strained argument that the requirements of FRCP 16(b) apply only to admissible records and the admissibility of the defense’s copies could only be determined when the subpoena seeking original versions proved unavailing, the Sixth Circuit had an emphatic response: the disclosure obligation exists when (a) the defense possesses the document and (b) intends to offer it, regardless of the outcome of any anticipated dispute over admissibility. The Sixth Amendment’s guaranteed right to present exculpatory evidence was not absolute, and could be overcome by the countervailing interests represented here by FRCP 16(b).

The Hardy case is a useful reminder that, while a risk-benefit analysis may justify delaying disclosure until as late in the pre-trial process as possible, that analysis may tilt unalterably against defense counsel if disclosure is not finally made at some point prior to the actual start of the trial.

SEC to formally invite and specifically reward cooperation for the first time

Alain Leibman — Wed, 23 Dec 2009 18:01:06 -0500

All United States Attorney's Offices have routinized the practice of cooperation and standardized their form of cooperation agreement which, following Section 5K1.1 of the Sentencing Guidelines and 18 U.S.C. § 3553(e), specifies to a degree both the benefits of cooperation and the consequences for violation of the agreement. In contrast, the Enforcement Division of the SEC has traditionally not had in place a formal practice of cooperation, with its promised benefits, much less achieved a standard form of such agreement. The former prosecutor now heading up the SEC's Enforcement Division plans to change that.

Before the AICPA National Conference on December 8, 2009, Director Robert Khuzami discussed the SEC's new “cooperation initiative.” Khuzami explained that the agency will now seek to encourage cooperation in SEC investigations through a variety of methods, including cooperation agreements, which for the first time will provide for the prospect of reduced sanctions based on the timeliness of the decision of a subject to cooperate and the value of the information he or she provides.

Current criminal practices followed around the nation typically reward not only the first witness in the door with a cooperation agreement, but often confer the same benefit on a number of others subsequently passing through the same portal. As a result of the proliferation of cooperation arrangements in any given investigation or prosecution, the Sentencing Commission reports, between September 2008 and October 2009 nearly 26% of all sentences were imposed below the Guidelines range as a result of government-sponsored departures. In contrast, Khuzami's statements indicate that his agency will offer the benefits of cooperation far more parsimoniously. News reports from the AICPA conference quoted him as warning defense attorneys that "only one client can be first" in coming to the SEC with information.

Perhaps Khuzami intended only to create a rush to the SEC's door, much as federal prosecutors often attempt artificially to precipitate haste by claiming to limit the availability of cooperation deals. And perhaps the SEC will in practice relax the first-in-time requirement, much as prosecutors have relented in the interests of pragmatism. But if the Enforcement Director is taken at his word, then practitioners have cause to consider the need for speed in their clients' decision-making in civil securities fraud investigations.

Year-end Advice on Obtaining 2008 Forms 990 by Charity Stakeholders - Installment 21

Alain Leibman — Wed, 23 Dec 2009 14:06:53 -0500

This is the twenty-first 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 20 of this series focused on the concerns of charities that were investors with Madoff and similar schemes. All potential stakeholders should consult professional advisors to have their positions evaluated.

Installment 19 of this series pointed out that Monday, November 16, 2009 was a critical day for Section 501(c)(3) public charities and private foundations (collectively, “501(c) Entities”) with a calendar fiscal year. It was the final day on which such 501(c) Entities could file their Forms 990 and 990-PF (collectively, “Forms 990”) with the Internal Revenue Service (the “IRS”) for calendar year 2008 on a timely basis to avoid possible IRS penalties.

There were reports that there was such a high volume of Forms 990 filed electronically with the IRS that day that some charities experienced substantial delays in their filing efforts.

Installment 19 also pointed out that over the course of the next several months it will be interesting and informative to visit www.guidestar.org to review and analyze the 2008 Forms 990 filings as they are posted. Many calendar year Forms 990 have not yet been posted on www.guidestar.org, presumably because of the crush of last minute November filings,

Nonetheless, for those who want or need to get the Forms 990 information immediately, including potential donors who want to make decisions about 2009 charitable gifts, there are other alternatives. Generally the IRS says that the Forms 990 copies should be made available by the 501(c)(3) Entity for public inspection and copying on the same day if the request is made by appearing in person at the principal offices of the charity. The charity has up to thirty (30) days to respond to written requests made by regular mail, e-mail, facsimile or private delivery. The charity is allowed to charge for actual postage and modest copying fees.

A request for Forms 990 made at the principal headquarters of 501(c)(3) Entities should get a prompt response within 24 hours. Many charities are highly sensitive to their obligations to make Forms 990 available and may even respond within a day to a telephone, facsimile or e-mail request.

Other 501(c)(3) Entities may be unaware of their Forms 990 public inspection responsibilities or may even be evasive or unwilling to provide the Forms 990. Potential donors should have a healthy skepticism about such behavior and can advise the IRS, if necessary. 501(c)(3) Entities can be subject to IRS penalties and potential adverse publicity for failure to respond promptly.

Best wishes to all for a happy and healthy holiday season.

[To be continued in Installment 22]

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

Jury verdict can be impeached by fellow-juror testimony about racially offensive comments made during deliberations

Alain Leibman — Mon, 21 Dec 2009 17:06:31 -0500

Common wisdom is that a jury's verdict cannot later be impeached through the testimony of deliberating jurors regarding misconduct which occurred inside the jury room. Federal Rule of Evidence 606(b) explicitly provides that fellow-juror testimony is inadmissible to impeach a verdict, except to show clerical error on the verdict sheet or the influence of outside or extraneous information. Typical of the latter scenarios is one juror sharing a newspaper story about the case or introducing into deliberations her or his personal research into the scene of a crime or the background of a defendant. Irregularities in the internal deliberations of a jury are generally not proper grounds for subsequent inquiry, for fear of impinging on the free-ranging nature and mysterious ways of the jury process. For example, racial comments among jurors have been found by most courts to be barred from subsequent inquiry under the terms of Rule 606(b).

Yet, a small number of cases have carved out a common law corollary to Rule 606(b), permitting juror testimony to explore whether, despite the strictures of the Rule, due process and Sixth Amendment violations have occurred within the jury. Cases such as Shillcutt v. Gagnon, 827 F.2d 1155 (7th Cir. 1987) have sanctioned inquiry in instances where an "extremely rare abuse," such as pervasive racial prejudice, animated the deliberations. Other courts have been less willing to part the jury curtain. United States v. Benally, 546 F.3d 1230 (10th Cir. 2008) (district court abused discretion in admitting evidence of racial comments in the jury room; it is "not necessarily in the interest of overall justice" to cure expressions of racial prejudice among jury members).

The First Circuit has thrown its lot in with those courts of appeal which have concluded that racial animus toward a defendant is sufficiently destructive of that person's constitutional rights to permit, if not compel, post-verdict inquiry. United States v. Villar, 586 F.3d 76 (1st Cir. 2009). Villar is Hispanic, and after his bank robbery conviction a juror emailed the defense attorney to complain of several fellow jurors who were unwavering in favor of conviction on the expressed ground that "they" cause all the trouble in the community. The First Circuit agreed that Rule 606(b) did not support inquiry on this basis, but held that this was one of the "rare and grave" cases where claims of racial or ethic bias implicated Villar's constitutional safeguards. The district court, as a result, had discretion to examine the validity of the verdict as against the biased statements of jurors.

Ninth Circuit rejects use of Dura Pharmaceuticals' civil loss-calculation method to fix "loss" for criminal sentencing

Alain Leibman — Mon, 21 Dec 2009 16:06:31 -0500

Nearly five years, the Supreme Court held in Dura Pharmaceuticals. Inc. v. Broudo, 544 U.S. 336 (2005) that a civil securities fraud plaintiff was required to show both that an alleged fraud was disclosed to the market and that the disclosure caused a loss to shareholders, that is, that the share price fell after the truth about a defendant's fraud became known. No longer could civil plaintiffs allege the requisite loss on the theory that they had purchased stock at a price artificially inflated by undisclosed losses, because someone who purchased overvalued stock could quickly sell that stock and sustain no out of pocket loss. Two courts of appeals have applied Dura's loss-causation theory to limit the "loss" and resulting Guidelines range for criminal securities fraud defendants. United States v. Olis, 429 F.3d 540 (5th Cir. 2005); United States v. Rutkoske, 506 F.3d 170 (2d Cir. 2007).

But in a recent case, the Ninth Circuit rejected the approaches of the Fifth and Second Circuits and held that Dura's loss formulation methodology does not apply to sentencing in criminal cases. United States v. Berger, 2008 WL 4141478 (9th Cir., Nov. 30, 2009). The defendant was the CEO, President, and Chairman of the Board of Craig Electronics, where he had actively concealed the company's true, negative financial condition from lenders. When an outside auditor forced a restatement of earnings, Craig's share price fell but, still, the fraud committed by Berger was not disclosed to the market until the company's stock was finally delisted. Under Dura. there was no loss that the government could show was suffered by the market at the moment following disclosure of the fraud; instead, the government pursued a stock overvaluation theory to establish millions in losses for sentencing purposes.

But the Ninth Circuit reasoned that Dura was limited to the civil context, where a given plaintiff was required to show that he or she sustained an actual, economic loss. In contrast, in the criminal setting, the Guidelines expressly endorse the calculation of loss by taking a snapshot of the then-overstated and misrepresented value of an item, such as a worthless check represented to have value, and assessing the loss as the difference between actual and overstated values (see U.S.S.G. § 2F1.1, cmt. 7(a)). So, a criminal court may assess "loss" by measuring the amount of loss caused to the market as a whole, which could appropriately be done by measuring the overvaluation of Craig's stock at a given point in time before disclosure of the misdeeds.

Although agreeing that the court below correctly eschewed reliance on Dura, the Ninth Circuit did reject the unusual approach taken by the district court in measuring loss to Craig's shareholders by looking to the typical change in stock value of other companies where frauds had been disclosed. This was rejected as an inapt methodology because Craig's irregularities were never disclosed before trading was ended. On remand, the trial court was obliged to try again to gauge the difference between Craig's share-price as inflated and what it would have been absent the misrepresentation, with no guidance from the Ninth Circuit as to how precisely to accomplish the task.

The appeals court did note in footnote 7 that Dura might well control Berger's restitution analysis, since the MVRA focuses on actual harm sustained by any victims, as opposed to broader losses caused by the defendant. In short, the Berger decision is bad news for defendants seeking through application of Dura to cabin their loss numbers for Guidelines purposes, although Dura may still be helpful in reining in the restitution figure.

The Madoff Loss Game: Will Some Charity and Other Stakeholders Become Even Bigger Losers as a Result of One District Judge's Analysis - Installment 20

Alain Leibman — Mon, 21 Dec 2009 12:12:45 -0500

This is the twentieth 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 19 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 December 15, 2009, United States District Court Judge Paul S. Diamond for the Eastern District of Pennsylvania raised serious questions in the case of the Securities and Exchange Commission (“SEC”) et. al. v. Forte, regarding limitations on recoveries from those who received distributions in Ponzi schemes like that of Madoff. Specifically, Judge Diamond questioned the position of the SEC and the Commodity Futures Trading Commission (“CFTC”) that “clawback” from early investors in Ponzi schemes was limited to the illusory “profits” but not the principal that such investors had recovered. In analyzing the impact of the Pennsylvania Uniform Fraudulent Transfer Act (“PUFTA”) in a lengthy Memorandum Opinion, Judge Diamond observed,

The SEC and CFTC have apparently adopted a nationwide policy that there can be no recovery of principal from winning Ponzi scheme investors even when the investors should have seen “red flags” alerting them to the true nature of their “investments.” . . . Accordingly, it could well be more equitable and legally supportable for the SEC and the CFTC to support . . . as PUFTA provides, [to file] suit to recover the entire fraudulent transfer from all . . . net winners - both the profits and the principal.

The position of Judge Diamond may be starkly contrasted to statements made on October 27, 2009, by Irving Picard, the trustee in the Madoff liquidation proceeding. During the course of the questioning by reporters, the “clawback” issue was raised and the following response was given by Mr. Picard, as previously reported in Installment 18 of this series:

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. . . . 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 simply assumed that he would be limiting recovery efforts from “winners” to their excess distributions but not to the principal that these winners would have recovered in full. He did not address at all in his response whether he will pursue the widely-publicized “profits” from investing with Madoff that have been reported for some charities like Hadassah, as discussed in Installment 14 of this blog series. If Judge Diamond’s position were to be followed in the Madoff proceeding, the result could be to expose such charities to millions of dollars more in potential “clawback.”

Mr. Picard interestingly went even further in his statements regarding pursuit of “winners” than the SEC and CFTC. He has indicated that he will pick and choose among the winners, depending on currently unstated individual qualitative and quantitative standards that may have no firm legal basis.

It is clear that the Madoff case will continue to create controversy and new law as it unfolds.

[To be continued in Installment 21]

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

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

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

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

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

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

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

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

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

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

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)