Category: White Collar Crime
The Second Circuit (Pooler, Jacobs, Wesley) issued an opinion holding that a criminal forfeiture order in an insider trading case is not limited to the amount of funds acquired through illegal activity but may extend to the appreciation of those funds. In the case United States v. Afriyie, 17-cr-2444 and 17-cr-4045, the Court upheld a conviction for securities fraud and wire fraud, and upheld an almost $2.8 million forfeiture order, but vacated and remanded a restitution order in light of the Supreme Court’s recent decision in Lagos v. United States, 138 S. Ct. 1684 (2018).
In an appeal arising in the aftermath of Raj Rajaratnam’s criminal conviction for insider trading, the Second Circuit (Lynch, Raggi, Droney) issued an opinion upholding an almost $93 million Securities and Exchange Commission (“SEC”) civil penalty that was imposed based on the same conduct that served as the basis for Rajaratnam’s conviction. The case, Securities and Exchange Commission v. Raj Rajaratnam, No. 11-5124-cv, demonstrates that an individual convicted of insider trading may be required to pay a sizable fine under Section 21A of the Securities Exchange Act, despite having already paid a significant criminal penalty. Despite some provocative comments by the district court about the defendant, the Circuit held that the imposition of the maximum possible fine under the statute was supported by law.
In a decision extolling jurors’ use of “common sense” to evaluate insider trading charges, the Second Circuit affirmed the conviction of Robert Schulman in United States v. Klein (Schulman), No. 17-3355. Though the government’s case rested on only one piece of direct evidence—a statement by Schulman to a friend that he’d like to be “king for a day,” the Court (Katzmann, Kearse, Chin) rejected Schulman’s challenge to the sufficiency of evidence that he intended to pass on inside information to his investment advisor for purposes of trading. The standard of review for sufficiency of the evidence on appeal is very deferential to the government, drawing all permissible inferences in favor of guilt. Here, even one “boastful, impudent” remark has resulted in a criminal conviction.
Earlier this week, we discussed the Second Circuit’s summary order in the insider trading appeal by Rajat Gupta. Gupta was convicted in SDNY as part of the string of successful prosecutions brought during the tenure of U.S. Attorney Preet Bharara. The summary order affirmed the denial of Gupta’s 2255 petition, thereby leaving in place his conviction. The Second Circuit, without explanation, has withdrawn the summary order and published the same decision as a per curiam opinion. Other than the correction of minor typos, there appear to be no changes in the Court’s ruling. A link to the published opinion is here.
In a brief summary order issued yesterday, the Second Circuit denied Rajat Gupta’s collateral attack on his insider trading conviction in Gupta v. United States, Nos. 15-2707(L), 15-2712(C). In a decision reminiscent of the recent summary order in Whitman v. United States, the panel (Kearse, Wesley, Droney) passed on the opportunity to develop the law on the “personal benefit” element of insider trading and instead denied Gupta’s habeas petition on the primary ground that he procedurally defaulted by failing to raise the issue on direct appeal.
In United States v. Demott, No. 13-3410 (2d Cir. Oct. 9, 2018) (Leval, Pooler, Wesley), the Second Circuit vacated two convictions under the Controlled Substance Analogue Enforcement Act of 1986 (the "Analogue Act"), 21 U.S.C. § 802(32)(A), 813, due to errors in the district court’s jury instructions relating to the statute’s knowledge element. The Court also found error in the admission of certain hearsay testimony by a case agent about the underlying investigation. The defendants in Demott were convicted of participating in a conspiracy to distribute two different synthetic “designer drugs” substantially similar to the listed controlled substance MDMA. The defendants were thus prosecuted under the Analogue Act, which functions as a catch-all statute to enable prosecutions of crimes involving drugs that are substantially similar to drugs already listed in the schedule set forth in the Controlled Substances Act (“CSA”), 21 U.S.C. § 812. See id. §§ 802(32)(A), 813.
In a short summary order issued on October 25, 2018, the Second Circuit (Newman, Lynch, Droney) affirmed the denial of a habeas petition in the case of Whitman v. United States. This case could have given the Second Circuit an opportunity to address again a complicated area of insider trading law, but the Court instead rejected the appeal based on procedural grounds, holding that procedural default prevented the district court from granting the petition.
In an important decision issued on August 24, the Second Circuit limited the reach of the Foreign Corrupt Practices Act (“FCPA”) by holding that theories of conspiracy or complicity cannot be used to charge non-U.S. citizens who do not work for an American business and whose furtherance of corrupt schemes takes place outside the United States. Judge Pooler wrote the majority decision in United States v. Hoskins, No. 16-1010, and Judge Wesley authored a concurring opinion. This decision is notable because FCPA cases are rarely litigated because the stakes are ordinarily too high for corporations to challenge the government’s theory of liability in court, and individual prosecutions are rare. Hoskins is also particularly interesting because it appears to contradict the DOJ and SEC’s own interpretation of the FCPA, as set out in the FCPA resource guide.
In a per curiam decision issued on July 27, 2018, the Second Circuit affirmed a $10 million fine imposed on Morris Zukerman as part of a sentence for tax evasion in United States v. Zukerman, No. 17-948 (Katzmann, Kearse, Pooler). The Court summarized its reason for affirming the fine, which was well above the $250,000 Guidelines ceiling, by writing that “Zukerman, a very wealthy man who has repeatedly and brazenly committed sophisticated tax fraud—a rarely caught and more rarely punished offense that undercuts the functioning of state and federal governments—ought to pay a fine hefty enough to take any financial benefit out of his crimes and to give pause to others who might be tempted to commit similar crimes.” While tax cases often involve downward variances to a non-incarceratory sentence, this case involved a district judge’s strongly held belief that the high fine was important to the purposes of sentencing and that it merited an upward variance. The Circuit agreed.
What Was Decided Before Has Been Decided Again: The Amended Opinion in Martoma Cuts Back On The Initial Decision, But Still Affirms
On Monday a divided Second Circuit panel (Katzmann, Pooler, Chin) issued an amended decision upholding the conviction of former SAC Capital portfolio manager Mathew Martoma on one count of conspiracy to commit securities fraud and two substantive counts of securities fraud. The amended decision—like the original decision—is a major decision expounding on the common law of insider trading, from the leading Court on questions of federal securities law. The decision—both the majority and the dissent—requires close study not only of its 61 combined pages, but several prior Supreme Court and Second Circuit decisions upon which it is premised. In this regard, the decision reflects the continuing uncertainty that is created by the absence of a statute that specifically addresses insider trading. Both the majority and the dissent make compelling arguments, and the question of what should be permitted and prohibited would be resolved most constructively by the legislative branch.
Court Allows Wife of Criminal Defendant to Amend Challenge to Forfeiture of Allegedly Commingled Assets on Due Process Grounds
In United States v. Daugerdas, the Court (Walker, Lynch, Chin) offered a lifeline to the wife of a defendant convicted of tax fraud, who sought to assert a third-party interest in funds that the Second Circuit had previously determined were forfeitable to the government as proceeds of the defendant’s crimes. The U.S. District Court for the Southern District of New York concluded that petitioner Eleanor Daugerdas failed to state a claim that she was entitled to retain funds that her husband, defendant Paul Daugerdas, had gratuitously transferred to her. She sought to argue that the tainted funds had been commingled with legitimately earned funds prior to their transfer and therefore could not easily be traced back to Paul’s crimes. But the question of whether the seized funds arose from Paul’s criminal activity had been decided in the affirmative by the district court as part of Paul’s sentencing. As a result, the district court held that Eleanor could not relitigate the issue of whether those funds should be characterized not as criminal proceeds but as substitute assets, which would require the government to seek forfeiture of other property belonging to Paul.
Robert du Purton was convicted of mail fraud and conspiracy to commit mail and wire fraud in 2001 for participating in an “elaborate scheme of fraudulent representations” in his rare coin business. According to trial evidence, du Purton lied to customers about the sources of coins, concocted phony auctions to drive up prices, and had his employees impersonate competitors or independent sources, among other things. His conviction was affirmed on direct appeal. Nearly fifteen years later, he brought a petition for writ of error coram nobis, claiming that the government presented false expert testimony at trial. In a per curiam decision, the Second Circuit (Katzman, Leval, Andrew Carter, District Judge) affirmed the denial of the petition.
In United States v. Mark Henry, the Second Circuit (Jacobs, Cabranes, and Wesley, Js.) affirmed that the Arms Export Control Act (“AECA”), 22 U.S.C. § 2751 et seq., does not constitute an unconstitutional delegation of legislative authority to the executive branch, in addition to addressing various issues of trial procedure. The defendant, Mark Henry, appealed his 2014 conviction following a jury trial of violating and attempting to violate the AECA by exporting “ablative materials”—military-grade technology used in rockets and missiles—and microwave amplifiers to customers in Taiwan and China. The AECA prohibits the exportation of ablative materials, microwave amplifiers, and other “defense articles” except pursuant to a license issued by the Directorate of Defense Trade Controls, a division of the U.S. Department of State. The government presented evidence at trial that the defendant was aware of the need for an export license, that he did not have such a license, and that instead of acquiring a license the defendant took steps to conceal his exportation of restricted materials through the use of intermediaries, fictitious companies, and falsified documents, among other things. The court allowed the defendant, who is from China and primarily speaks Mandarin, to testify at trial in English through the help of a standby interpreter, although the court otherwise required a translator to assist the defendant throughout the trial.
In United States v. Litvak, the Second Circuit (Winter, Chin, Korman D.J.) reversed the conviction of Jesse Litvak, a securities trader at investment bank Jefferies & Co., for securities fraud premised on Litvak’s misrepresentations to trading counterparties about Jefferies’ profits on the transaction. The Court held that the district court improperly admitted testimony that Litvak’s counterparty believed that Litvak was acting as his fiduciary agent—even though in fact no such relation existed. The Court explained that the counterparty’s erroneous, subjective belief was irrelevant as to the objective materiality of the misstatement, but likely swayed the jury in convicting. The decision also raises interesting questions about expectations between traders and their customers, and the Government’s role in policing that relationship. For our discussion and commentary on this decision, please see our article on Law 360.
In a case arising out of the CityTime scandal, the Second Circuit issued a thoughtful opinion addressing the operation of restitution and asset forfeiture on victims of white-collar crime. The decision, Federal Insurance Company v. United States of America, Nos. 16-2967-op and 16-3402-cr, emphasizes that though restitution and forfeiture are both means for victims to be made whole, they are not subject to the same analysis. Ultimately, the Court (Parker, Lynch, Carney) affirmed the decision denying restitution, but remanded for additional proceedings on forfeiture. The decision is worth a careful read for those representing victims in white-collar criminal matters, and also serves as a road map for how district court judges might approach these issues in the future.
In United States v. Zukerman, No. 17-948 (2d Cir. Feb. 6, 2018) (ALK, RAK, RSP) (summary order), the appellant, Morris Zuckerman, challenged the substantive and procedural reasonableness of his sentence, which was imposed following his pleading guilty for tax evasion and obstruction of the IRS, see 26 U.S.C. §§ 7201, 7212(a). While Zukerman’s plea agreement contained a stipulated fine range of $25,000 to $250,000, the district court (Torres, J.) imposed a fine of $10 million. Given that tax fraud defendants are typically required to resolve their civil tax liabilities in parallel proceedings, it is unusual for such a large fine to be imposed in this type of case. After acknowledging that fine calculations are typically committed to the discretion of the sentencing judge, the Second Circuit held that Judge Torres’ comments at the sentencing hearing and in the written statement of reasons did not provide the panel with a sufficient basis to determine how she reached the $10 million fine amount. Rather than try to guess what considerations went into this calculation, the Court ordered a so-called “Jacobson remand”—wherein it remands “partial jurisdiction to the district court to supplement the record on a discrete factual or legal issue while retaining jurisdiction over the original appeal”—and directed the district court to “elaborate on its rationale for imposing a fine greater than those typically imposed in tax prosecutions.”
The Second Circuit has denied the government’s request for rehearing en banc in United States v. Allen, et al. (16-cr-98).
Circuit Remands Restitution Order for Further Consideration of Indigent Defendant’s Right to Counsel and Application for Expert Services
In United States v. Torriero, the Second Circuit (Chin, Droney, Restani by designation) vacated by summary order a $765,561 restitution order relating to costs incurred by the EPA in cleaning up a property that the defendant had used as an illegal landfill. Although not the panel’s primary focus, the order also addresses a district court’s role in approving or denying an indigent defendant’s request for expert services—an issue currently being examined as part of a broader review of the defense funding under the Criminal Justice Act (“CJA”) by an ad hoc committee chaired by Judge Kathleen Cardone of the U.S. District Court for the Western District of Texas.
Second Circuit Finds Death Extinguishes Trial Convictions and Related Restitution Order – But Tax Offenses and Bail Forfeiture Survive
In 2010, a federal jury in the Eastern District of New York convicted body-armor tycoon David H. Brooks of multiple counts of conspiracy, insider trading, fraud, and obstruction of justice for his role in a $200 million scheme to enrich himself from company coffers. Brooks was the founder and former chief executive of DHB Industries, the leading supplier of bulletproof vests to police departments and the U.S. military. Brooks later pleaded guilty to associated charges of conspiracy to defraud the IRS and filing false income tax returns that had been severed from the rest of the case. While he appealed the result of his jury trial, he did not appeal the tax fraud convictions (pursuant to the terms of a plea agreement). Brooks died in prison while his appeal was pending, forcing the Second Circuit to revisit an obscure area of law to decide what aspects of his convictions, if anything, survived his death. Ultimately, Brooks’s death in prison led to the abatement of his trial convictions, and with that abatement, the erasure of significant restitution obligations that Brooks otherwise would have owed.
Skelos Vacated: For The Second Time This Year, Conviction Of Leading New York State Legislator Is Undone Due To McDonnell
The Second Circuit (Winter, Raggi, Hellerstein by designation) today vacated by summary order the convictions of former New York State Senate Majority Leader Dean Skelos and his son Adam Skelos. Dean and Adam Skelos were convicted of Hobbs Act conspiracy and substantive offenses, honest services wire fraud conspiracy, and federal program bribery, after a jury trial in which the government presented evidence that the elder Skelos had taken official actions to benefit certain companies in exchange for payments to his son. Much like the conviction of his fellow senior state legislator, Assembly Speaker Sheldon Silver, the conviction was reversed in light of the Supreme Court’s decision in McDonnell v. United States, 136 S. Ct. 2355 (2016), which narrowed the definition of an “official act.” As the Court rejected the defense contention that insufficient evidence supported the convictions, both Skelos and his son will be retried by the U.S. Attorney’s Office for the Southern District of New York. Like the Silver reversal, this ruling reflects the ways in which the McDonnell decision has complicated that office’s investigation and prosecution of public corruption in New York state government.
A divided Second Circuit panel (Katzmann, Pooler (dissenting), Chin) on Wednesday upheld the insider trading conviction of former SAC Capital portfolio manager Mathew Martoma. Confronting its precedent in United States v. Newman, 773 F.3d 438 (2d Cir. 2014), for the first time since the Supreme Court struck down part of the Newman tippee liability standard this past December, see Salman v. United States, 137 S. Ct. 420 (2016), the Court ruled that the “meaningfully close personal relationship” requirement of Newman is no longer good law. See United States v. Martoma, 14-3599 (2d Cir. Aug. 23, 2017).
Divided Second Circuit Panel Upholds Martoma Conviction, Ruling that Newman’s “Meaningfully Close Personal Relationship” Requirement Is No Longer Good Law After Salman
In a highly anticipated decision, a divided Second Circuit panel (Katzmann, Pooler (dissenting), Chin) today upheld the insider trading conviction of former SAC Capital portfolio manager Mathew Martoma, ruling that the “meaningfully close personal relationship” requirement set out by the Court in United States v. Newman, 773 F.3d 438 (2d Cir. 2014), does not survive the Supreme Court’s decision in Salman v. United States, 137 S. Ct. 420 (2016). See United States v. Martoma, 14-3599 (2d Cir. Aug. 23, 2017).
The Chiclets and Runts vending machine at your local car repair shop last decade may have been one piece of a fraudulent enterprise that ensnarled roughly 7,000 victims. As CEO of Vendstar, Defendant Edward (“Ned”) Weaver directed a scheme that enticed victims to make substantial up-front investments in quarter-slot candy dispensers with false promises of significant returns—even hundreds of a dollars a day. Despite assurances that this “home-based vending business” had “little risk,” many customers lost their entire investment.
In United States v. Weaver, 16-3861 (June 21, 2017) (Newman, Cabranes, Lynch), the Court held in a per curiam order that contractual disclaimers signed by victims of Weaver’s fraud did not render the fraudulent statements “immaterial” as a matter of law and negate criminal liability.
On July 19, 2017, in United States v. Allen, et al. (16-cr-98) (Cabranes, Pooler, Lynch), the Second Circuit issued a decision reversing the convictions of defendants Anthony Allen and Anthony Conti for wire fraud and conspiracy to commit wire fraud and bank fraud. This was the first federal criminal appeal in connection with the London Interbank Offered Rated (“LIBOR”) prosecutions, which involved allegations that various individuals and banks manipulated the LIBOR. The LIBOR is a benchmark interest rate intended to reflect the available rates at which banks borrow money from other banks; the LIBOR is incorporated into the terms of financial transactions worldwide. We provided a brief summary of the opinion a few hours after the decision was rendered; here is our more detailed summary.
On July 19, 2017, in United States v. Allen, et al. (16-cr-98) (Cabranes, Pooler, Lynch), the Second Circuit issued a decision reversing the convictions of defendants Anthony Allen and Anthony Conti for wire fraud and conspiracy to commit wire fraud and bank fraud. This was the first federal criminal appeal in connection with the London Interbank Offered Rated (“LIBOR”) prosecutions, which involved allegations that various individuals and banks manipulated the LIBOR.
In a decision that will provide reassurance both to prosecutors and to the institutions with whom they enter into deferred prosecution agreements (“DPAs”), the Second Circuit (Katzmann, Lynch, Pooler (concurring)) held in United States v. HSBC Bank USA, N.A., No. 16-308(L), that the periodic reports submitted by an independent monitor responsible for evaluating compliance with a DPA are not “judicial documents” to which the public enjoys a First Amendment right of access. To reach its holding, the Court was required to address foundational separation-of-powers questions regarding a court’s role in approving and supervising the implementation of a DPA. The decision, written by Chief Judge Katzmann, will discourage courts from second-guessing decisions made by the executive branch in the legitimate exercise of its prosecutorial discretion. Along with the Second Circuit’s decision in SEC v. Citigroup Global Markets, Inc., 752 F.3d 285 (2d Cir. 2014), which held that a district court reviewing a proposed SEC consent decree may only reject it under limited circumstances, last week’s decision makes clear that the Second Circuit envisions that district courts will not play a significant role in assessing the fairness of the government’s settlements with financial and other institutions.
This morning the Second Circuit (Cabranes, Wesley, Sessions, D.J.) released an opinion vacating the conviction of Sheldon Silver and remanding the case to the district court for further proceedings including a retrial. The Second Circuit concluded that the evidence of guilt was sufficient to permit a retrial, but found that the jury instructions did not comport with the Supreme Court’s McDonnell decision and that the error was not harmless. The panel took no joy in rendering its decision, observing that “many would view the facts adduced at Silver’s trial with distaste.” Nor did the panel blame either the district court or the government for today’s reversal, recognizing that the McDonnell decision—which changed the law of the Circuit—was issued after the Silver trial had concluded. Nevertheless, the panel felt itself compelled by McDonnell and the facts of the case to decide the matter as it did.
On July 10, 2017, in United States v. Boyland, No. 15-3118 (Kearse, Walker, Hall), the Second Circuit affirmed the conviction of former New York State Assembly member William F. Boyland, Jr. on twenty-one counts of public corruption offenses, including eleven counts of honest services fraud. Many of these counts involved determining that the benefits Boyland offered in exchange for bribes amounted to “official acts” under 18 U.S.C. § 201, the federal bribery statute prohibiting public officials from “being influenced in the performance of any official act.” Id. § 201(b)(2)(A). The U.S. Supreme Court recently narrowed the definition of this term in McDonnell v. United States, 136 S. Ct. 2355 (2016), which led the government to concede in Boyland’s appeal that the trial court’s jury instructions on the meaning of “official act” were in part erroneous. The Second Circuit, however, determined on plain error review that the error did not affect Boyland’s “substantial rights” and thus affirmed his convictions. This decision may prove problematic for other high-profile former elected officials whose appeals are currently pending before the Second Circuit.
In United States v. Bodouva, 16-3937 (March 22, 2017) (Katzmann, C.J., Pooler and Lynch, J.), the Court held in a per curiam order that a defendant convicted of embezzlement must forfeit the full amount of her illicit gains to the government even after paying restitution to victims. The ostensibly “duplicative” financial penalty entered against the defendant was not only permissible, but in fact required by statute. The district court thus appropriately ruled at sentencing that it lacked discretion to modify the forfeiture amount. With this decision, the Second Circuit joined several other circuits in holding that restitution and forfeiture serve distinct purposes and, absent clear statutory authority to the contrary, may not offset each other.
Court Affirms Conviction In Case Involving $126 Million Loan For Shopping Mall Transaction, Rejecting Argument That Sentence Should Be Lowered Because Of The Financial Crisis
In a summary order on March 8, 2017, the Second Circuit (Katzmann, C.J. and Pooler and Lynch, J.) affirmed the conviction and sentence for wire fraud in United States v. Frenkel. The case attracted some public attention because Frenkel’s co-conspirator, Mark Stern, was a cooperating witness in a number of public corruption cases brought by the U.S. Attorney for the Southern District of New York. The underlying facts involved Frenkel’s fraudulent inducement of Citigroup to lend $126 million to finance the purchase of shopping malls. Although the decision has no precedential value, it presented four interesting issues.
In United States v. Huggins,15-1676, the Second Circuit (Winter, Cabranes, and Restani, sitting by designation) limited the scope of two Guidelines enhancements often applicable to white-collar crimes: (1) U.S.S.G. §2B1.1(b)(16)(A), which provides for a two-level enhancement when the conduct derived more than $1 million from financial institutions; and (2) U.S.S.G. §3B1.3, which permits a two-level increase when a defendant has abused a position of public or private trust. Huggins marks the first time the Court has given thorough consideration to the first enhancement and further clarified how courts should apply the second.
The Supreme Court today decided a major insider trading case, Salman v. United States, 15-628.
Securing a cooperation agreement after proffering to the government can lead to enormous benefits for those who successfully navigate the process. However, the negative consequences of a failed proffer are profound. Assessing the risks of whether to proffer and enter into a proffer agreement is an important part of federal criminal practice. In an important recent decision, in United States v. James J. Rosemond, 15-0940-cr (Nov. 1, 2016) the U.S. Court of Appeals for the Second Circuit elaborated in detail on exactly when certain defense tactics will (and will not) open the door to the introduction of the otherwise-protected proffer statements. The Court held that the district court in Rosemond applied the waiver provision in defendant’s proffer agreement too broadly, thereby incorrectly precluding defense counsel from making sufficiency arguments.
The line that separates lawful tax shelters from unlawful ones is notoriously hazy, particularly at the margins. There is little question, however, that a transaction that serves no meaningful business purpose other than to reduce one’s tax liability will be treated as an illegitimate tax shelter.
In United States v. Noramie Jasmin, 15-2546-cr, a Second Circuit panel (Walker, J., Cabranes, J. and Lohier, J.), affirmed by summary order the bribery conviction of Noramie Jasmin, a former mayor and trustee of the Village of Spring Valley, New York, a town in Rockland County, New York. Jasmin was convicted of participating in a scheme to obtain financial benefits for herself in exchange for exercising her official powers to facilitate the construction of a community center. Jasmin appealed from a conviction of one count of mail fraud in violation of 18 U.S.C. §§ 1341 & 1346, and one count of Hobbs Act extortion in violation of 18 U.S.C. § 1951, and her sentence of four years imprisonment.
On August 15, 2016, the Second Circuit issued a rare opinion on the subject of the sufficiency of evidence to establish venue in United States v. Lange, No. 14-2442-cr (Jacobs, Chin, Droney). In this securities fraud and conspiracy case, the Court found there was sufficient evidence that the defendants committed a crime in the Eastern District of New York (“EDNY”) when they were aware of “cold call” lists including EDNY residents and where emails soliciting investment were sent to a Postal Inspector in Brooklyn. This connection was sufficient even though the participants in the scheme operated out of Washington State and had little contact with EDNY.
In United States v. Tagliaferri, 15-536 (May 4, 2016) (Leval, Pooler, Wesley), the Court issued a per curiam order affirming Defendant’s conviction for violations of the Investment Advisors Act of 1940, 15 U.S.C. § 80b-6 (the “1940 Act”), entered by the United States District Court for the Southern District of New York (Abrams, J.). In the underlying appeal, the Defendant raised several challenges to his conviction by a jury for violations of the 1940 Act, as well as securities fraud, wire fraud, and violations of the Travel Act.
Second Circuit Clarifies Physician Corporation Ownership Standard for Medical No-Fault Insurance Fraud Cases
In United States v. Tatyana Gabinskaya, 15-776-cr, the Court (Sack, J., Lynch, J. and Murtha, D.J., sitting by designation) affirmed the judgment entered by the United States District Court for the Southern District of New York (Oetken, D.J.), against defendant-appellant Tatyana Gabinskaya for conspiracy to commit health care fraud and mail fraud. Gabinskaya, a licensed physician, was convicted of falsely holding herself out as the owner of a medical services professional corporation (“PC”) that provided medical treatment to car accident victims and submitted reimbursement claims to insurance companies. The Government alleged that she did so in order for the true owners to defraud insurance companies by claiming to comply with the requirement under New York law that PCs be owned by licensed physicians. In affirming the judgment below, the Second Circuit clarified that whether an individual is an “owner” of a medical services PC in the context of the New York no-fault insurance law is defined by the economic realities of that individual’s participation in and control over the enterprise, and the possibility of their financial loss or gain, and not merely by whether the individual is the owner on paper. This is not surprising—the law rarely accords true owner status to straw owners—and the Court found little reason to respect the corporate formalities in this context.
How does the Government successfully “toe the line” when it comes to custodial interrogations for suppression purposes? In United States v. Faux, 15-1282-cr, the Court (Jacobs, J., Hall, J., Restani, J., sitting by designation) answered this question after undertaking a fact-intensive inquiry and determining that the weight of the evidence balanced against suppression. Faux underscores that there is no bright-line rule for determining whether an individual is in custody (and therefore entitled to Miranda warnings); rather, the court must engage in a fact-specific analysis that carefully weighs mitigating and aggravating factors.
Second Circuit Demonstrates the Difficulties in Withdrawing a Guilty Plea and Challenging a Below-Guidelines Sentence
In United States v. Rivernider, 13-4865, the Court (Livingston, J., Lynch, J. and Rakoff, D.J., sitting by designation) affirmed the judgment entered by the United States District Court for the District of Connecticut (Chatigny, J.) against two defendants, Robert Rivernider and Robert Ponte. The defendants pled guilty and were sentenced for multiple counts of wire fraud, conspiracy to commit wire fraud, and tax evasion stemming from a Ponzi scheme and real estate scheme the two ran together.
Defining the Terms: What Constitutes a “Federally Insured Financial Institution” Under 18 U.S.C. § 1344 or a “Bank” Under 18 U.S.C. § 1014?
In United States v. Bouchard, 14-4156, the Court (Parker, J., Lynch, J., and Lohier, J.) reversed the conviction of defendant Michael Bouchard after finding that the Government’s evidence only showed that Bouchard had made false statements in order to defraud BNC Mortgage (“BNC”), a mortgage lender that did not fall within the Title 18 definition of a “federally insured financial institution” or “bank” as would be required by statute for a conviction.
Second Circuit Reaffirms The Right of A Corporation To Impose Consequences On Employees Who Do Not Cooperate With Internal Investigations
In Gilman v. Marsh & McLennan Cos., No. 15-0603-cv (Kearse, Winter, Jacobs), the Second Circuit held that a corporation can fire an employee for cause if the employee refuses to participate in an internal investigation of the company’s possible criminal wrongdoing. Masquerading as an employment dispute, the decision could have important consequences for how a corporation and its employees handle internal investigations when there is the potential for criminal prosecution.
Court of Appeals Affirms Conviction of Former Connecticut Governor Based On Expansive Interpretation of Sarbanes-Oxley
In United States v. Rowland, No. 15-985, the Second Circuit (Winter, Chin, Carney) rejected challenges by former governor of Connecticut John Rowland to both his conviction and sentence on seven counts of violating campaign finance laws and falsifying records. In so doing, the panel issued an important decision regarding the interpretation of 18 U.S.C. § 1519, a provision of the Sarbanes-Oxley Act, which prohibits the falsification of documents for the purpose of misleading government investigators. The Rowland decision tacks in a different direction from the Supreme Court’s recent decision in Yates v. United States, 135 S. Ct. 1074 (2015), in which the Court narrowed the reach of this statute by adopting an interpretation rooted in the statute’s purpose. Rowland, by contrast, seems to take a broader approach.
In a nonprecedential summary order in United States v. Mangone, No. 15-4057, the Second Circuit (Hall, Lynch, Chin) vacated the eighteen-month prison sentence of Westchester attorney Anthony Mangone and remanded Mangone’s case to the U.S. District Court for the Southern District of New York (McMahon, J.) for resentencing. Mangone had pleaded guilty to conspiracy, bribery, extortion, and tax evasion relating to a highly publicized real estate and political corruption scandal in Yonkers. The Second Circuit vacated Mangone’s sentence on the ground that the district court committed clear procedural error, having calculated the applicable U.S. Sentencing Guidelines range at 37–46 months’ imprisonment, while the correct range was only 30–37 months. Although the district court imposed a prison term below the lower of those two ranges, the Second Circuit concluded that resentencing was nonetheless required as “an incorrect calculation of the applicable Guidelines range will taint not only a Guidelines sentence … but also a non-Guidelines sentence, which may have been explicitly selected with what was thought to be the applicable Guidelines range as a frame of reference.” The remand for resentencing was not controversial—in fact, the government had agreed that the district court committed reversible error and had consented to a remand.
In United States v. Stavros Ganias, 12-240, the Second Circuit, in a rare en banc ruling jointly written by Judges Livingston and Lynch, sidestepped a complicated Fourth Amendment issue related to the government’s retention of files from a hard drive outside the scope of a warrant, and instead affirmed the defendant’s conviction on the ground that, regardless of whether there was a Fourth Amendment violation, the government reasonably relied in good faith on a later warrant to search those files. The en banc holding reversed the decision of a divided Second Circuit panel that came down nearly a year ago, which reversed the district court’s denial of the motion to suppress and vacated the judgment of conviction. All of the judges on the Court, except for Judge Chin, either joined in the opinion or concurred in the result. The novel and important question raised in this appeal—whether the government can retain electronic files collected pursuant to a search warrant and later search those files for a separate purpose, pursuant to a second search warrant—will need to be addressed in another case or by Congress.
Release of Right to Bring Qui Tam Action Not Enforceable If Government Had No Other Way To Learn About the Violation
In USA ex rel. v. Exelis, Inc. (14-4155), the Second Circuit (Kearse, Pooler, Droney) held that the right to bring a qui tam suit on behalf of the federal government can be contractually released, but that such a release is unenforceable as against public policy where the government did not have knowledge of the allegations of fraud before the release was signed. The decision complicates somewhat the process of negotiating binding releases with employees at companies that are engaged in government contracting work. That said, such releases still have value to employers and will often be enforceable because in many cases the government will have knowledge of the fraud allegations before the release is signed.
In United States v. Bladimir Rigo, 15-1914, the Second Circuit remanded for resentencing by summary order, finding that the District Court plainly erred when it sentenced the defendant based on the criminal activity of coconspirators without first making certain particularized “relevant conduct” findings about that activity. On June 2, 2015, the U.S. District Court for the Southern District of New York (Sweet, J.) sentenced Bladimir Rigo for his involvement in a conspiracy to commit healthcare fraud and unlawfully distribute prescription pills. The District Court applied a $2.9 million loss calculation to its determination of Rigo’s sentence, some portion of which may have been based on the acts of Rigo’s coconspirators. The District Court concluded that because Rigo “pled guilty to participating in a conspiracy, he is equally liable for the acts of his coconspirators, including others who may have written [the records found in Rigo’s home], and the plans and intentions of the conspiracy, whether consummated or not.” United States v. Rigo, 86 F. Supp. 3d 235, 242 (S.D.N.Y. 2015).
In Haber v. United States of America, No. 15-2078, the Court (Calabresi, J., Lynch, J., and Lohier, J.) considered and rejected petitioner James Haber’s challenges to an administrative summons issued by the IRS. Among his other challenges, Haber contended that the summons was improper because a criminal referral to the DOJ was still in effect. The Court rejected this argument and Haber’s suggestion that the Government must use precise language to terminate a criminal referral. Instead, the Court took a common-sense view of the evidence and concluded that the DOJ had indeed terminated its investigation of the IRS’s criminal referral, and so the administrative summons was properly issued. DOJ need not use any particular words to declare the termination of the investigation; it need only be clear from the record that the investigation has ended.
In United States v. Kent, 14-2082, 14-2874, the Court (Livingston, J., Hall, J., and Hellerstein, J. sitting by designation), the Court vacated the sentence imposed by the United States District Court for the Southern District of New York (Forrest, J.) and held that the record was insufficient to impose Guidelines Section 3B1.1(a)’s leadership enhancement. Section 3B1.1 provides for a four-level increase in offense level if the defendant “was an organizer or leader of a criminal activity that involved five or more participants or was otherwise extensive.” In Kent, the Court restated that the “otherwise extensive” prong of this enhancement is not meant to be a qualitative assessment of whether the crime was serious, but rather involves a quantitative question about the number of criminally responsible and unknowing participants in the offense. Because the district court did not conduct the required analysis, the Court of Appeals reversed and remanded the case.
In United States v. Bonventre, 14-4714-cr (April. 20, 2016) (JMW, RR, CFD), the Court affirmed by summary order the convictions of five former employees of Bernard L. Madoff Investment Securities (the “Appellants”) convicted in the Southern District of New York (Swain, J.) for multiple counts of conspiratorial and substantive securities fraud, bank fraud, and records falsification; making false SEC and IRS filings; obstructing enforcement of tax laws; and tax evasion.