Most people who are accused of a crime in federal court are unable to pay for a lawyer and have one appointed for them.

Which makes sense - a decent lawyer for a federal criminal case is expensive, the need to find a lawyer is urgent, and most people don't have substantial liquid assets to hire one quickly.

Most people, then, are represented by either a federal public defender or an appointed attorney.

The advantage is that they don't have to pay. The disadvantage is that they don't get to choose the lawyer they hire. Maybe the lawyer they get is someone they don't get along with. Maybe the client thinks an appointed lawyer won't work as hard. Maybe, for some lawyers, there's just a different dynamic when the client is paying for the lawyer's services.

In any event, sometimes, when a client has an appointed lawyer, things go poorly with the relationship with that lawyer.

The Second Circuit's opinion in United States v. Barton is an interesting example of what can happen when that relationship breaks bad.

John Barton was accused of doing some illegal things involving meth and a gun. He had an initial appearance - a first hearing in a case shortly after a person is arrested.

At the initial appearance, the judge asked Mr. Barton if he'd like an appointed lawyer or to hire his own lawyer. An assistant federal public defender, Elizabeth Switzer, was with him at the hearing. Normally, if a person wants an appointed lawyer, the person has to complete a financial affidavit so the judge can see if the person really can't afford a lawyer.

Mr. Barton did not fill out a financial affidavit. He told the judge that he wanted to hire a lawyer. The judge gave Mr. Barton several days to find a lawyer.

Hiring a lawyer proved challenging for Mr. Barton. He came back to court three more times, each time with Ms. Switzer, and each time he was unable to hire a lawyer. The court continued to give him time to hire someone.

Finally, Mr. Barton decided to take matters into his own hands. He filed a motion without a lawyer seeking to dismiss the charges against him. As the Second Circuit described the motion:

He argued, among other things, that he was not properly named in the complaint, which was made out against "JOHN BARTON" and not "John Anthony Barton"; that he was legally allowed to possess both marijuana and methamphetamine to treat narcolepsy caused by a head injury he suffered in connection with a car accident; and that New York State is a sovereign territory into which the laws of the United States do not extend.

These are innovative legal theories, to be sure.

Two more hearings were held on whether Mr. Barton would hire a lawyer. Each time, Ms. Switzer appeared with him.

Finally, the judge, concerned about Mr. Barton's head injury and how sometimes he didn't make complete sense when talking during the hearings, decided that Mr. Barton should be evaluated to see if he is competent to stand trial.

The judge asked Ms. Switzer - who had not been appointed - to "remain in the case not as appointed counsel, but to assist Mr. Barton" until the possibly not competent man hired a lawyer. Because federal public defenders, apparently, are really best viewed as social workers.

Ms. Switzer left the federal public defender's office for greener pastures. At Mr. Barton's next hearing, Robert Smith, in the federal defender's office, showed up instead.

Mr. Barton refused to answer any questions from the court about whether he would hire a lawyer. He did mention the issues raised in his motion to dismiss the charges. When the judge said she would give him two more weeks to find a lawyer then appoint Mr. Smith, Mr. Barton's response was "I object."

A few weeks later, at another hearing, Mr. Barton again mainly objected and talked about his motion to dismiss. The court appointed Mr. Smith, since Mr. Barton hadn't found any other lawyer. The next day, the court issued an order finding Mr. Barton competent.

At an arraignment a few weeks later, Mr. Smith entered a plea of not guilty for Mr. Barton. Mr. Barton objected.

Not surprisingly, Mr. Smith soon after that moved to withdraw as counsel for Mr. Barton. Apparently Mr. Barton refused to see Mr. Smith - Mr. Smith thought this was, perhaps, not the best attorney client relationship.

More hearings were held. Mr. Barton did not hire an attorney. He did not complete a financial affidavit. He did, however, press forward about the issues in his motion to dismiss.

Finally, the motion to withdraw was denied. The district court reasoned that Mr. Barton never said he wanted to represent himself, and that "representation by counsel . . . should be the standard, not the exception."

Mr. Smith took an interlocutory appeal, saying that to be forced to represent a client who wouldn't talk to him is inconsistent with his obligations as a lawyer.

The Second Circuit let Mr. Smith out of the case. Since there was no financial affidavit - and Mr. Barton said he was able to hire a lawyer - the district court didn't have the authority to appoint him in the first place. An appointment without a statutory basis is not really much of an appointment at all.

As the Second Circuit summed it up,

We can think of no justification for requiring these unwilling individuals to continue their unauthorized relationship. Accordingly, the district court abused its discretion when it denied Smith's motion to withdraw.

Going forward, here's where the Second Circuit sees things:

Of course, Barton is free to change his mind. Should he succeed in hiring an attorney following remand, that attorney may file an appearance. Alternatively, if Barton asks for appointed counsel, and if he qualifies financially, the district court must appoint counsel. What the district court may not do, however, is foist an unwilling attorney upon an unwilling defendant, who has actively refused the appointment of counsel and declined to demonstrate his financial eligibility under the CJA.

The court, unfortunately, did not rule on whether being forced to represent a client who refuses to talk to you violates your responsibilities as a lawyer.

Last week was an active week in the federal appeals courts.

Perhaps most interesting - especially to those who are concerned about the state of our federal public defenders - is the Second Circuit's opinion in United States v. Barton. There, a federal defender tried to get out of a case but the judge wouldn't let him out.

On those facts, it turns out that was reversible error.

As the federal defender budget crisis gets worse, this kind of opinion may be comforting?

As you may have heard, there's been a lot of coverage of the federal defender budget situation in the press in the last week. The federal defender for the Southern District of Ohio laid himself off rather than do the same to his people. NPR had a big story on the federal defender system which is worth a listen.

What's frustrating about a lot of this coverage is that it blames the whole problem on the sequester. While the sequester is, of course, not helping, the Administrative Office of the U.S. Courts announced the budget restructuring on February 14th, before the sequester hit (and, even, before it was clear the sequester was going to hit).

The sequester is bad. And I'm all for getting the word out on that. But it seems that the FPD problem is also the result of something going on that isn't terribly indigent-defense friendly in the AO.

And, with that, to the victories,

1. United States v. Baird, First Circuit: Appellant was convicted of possession of a stolen firearm. At trial, the court refused to give a jury instruction that would have allowed him to assert the defense of "innocent possession" of the stolen weapon. Because appellant was entitled to that instruction, his conviction was vacated and the case remanded for a new trial.

2. United States v. Barton, Second Circuit: An assistant federal public defender made a motion to withdraw from representing a defendant in a criminal case. The court abused its discretion by forcing the attorney to continue the representation because the defendant, after being informed of his right to counsel, refused to recognize the public defender as his attorney, said he didn't want an appointed attorney, and didn't attempt to establish his financial eligibility for appointed counsel.

3. United States v. Benoit, Tenth Circuit: Appellant was convicted of receipt and possession of child pornography. Because these convictions arose out of the same depictions, the convictions violated the double jeopardy clause, requiring remand to vacate one of the convictions and sentences. Additionally, because the court did not explain whether the specific losses suffered by the victim were proximately caused by appellant's action, remand for redetermination of the portion of damages attributable to appellant was required.

4. United States v. Doyle, Sixth Circuit: Appellant pled guilty to failing to register as a sex offender and was sentenced to three years and one month in prison, followed by ten years' supervised release, which was subject to four special conditions. Because the court procedurally erred in failing to explain the reasons for imposing the special conditions, and because the record doesn't otherwise explain the basis for them, the special conditions were vacated and the case remanded for resentencing.

5. United States v. Fisher, Fourth Circuit.pdf: Appellant pled guilty to possession of a firearm by a felon. The officer responsible for the investigation that led to the appellant's arrest and guilty plea later pled guilty to defrauding the justice system. In particular, the officer admitted lying in the affidavit underpinning the warrant for appellant's home and car, where evidence forming the basis of the charge to which appellant pled guilty was found. The officer's affirmative misrepresentation, which informed appellants' decision to plead guilty, rendered appellant's plea involuntary and violated his due process rights. As a result, the district court erred in denying appellant's motion to vacate his plea.

6. United States v. LKAV, Juvenile Male, Ninth Circuit: Tribal authorities of the Tohono O'odham nation charged a juvenile with murder in 2009. In 2011, the United States filed its own charge against the juvenile and moved to commit him to an adult medical facility for psychiatric evaluation. Because the district court erred in committing the juvenile under 18 U.S.C. § 4241(d), rather than § 5037(e), reversal was required.

7. United States v. Logan, Eighth Circuit: Appellant pled guilty to conspiracy to distribute 50 grams or more of crack cocaine and was sentenced to 156 months in prison, which was later reduced to 120 months based on substantial assistance she provided after sentencing. Later, appellant filed a motion to reduce her sentence based on an amendment to the advisory guidelines that lowered the base offense levels for certain crack offenses. The district court erred in finding appellant wasn't eligible for a sentence reduction under her plea agreement. She was. Consequently, the case was reversed and remanded for further proceedings.

Alfred Caronia was a sales rep for a pharmaceutical company. And, despite what you might think by reading some of the literature, being a pharmaceutical sales rep is not a crime. It's even more emphatically not a crime after the Second Circuit's opinion in United States v. Caronia.

Part of Mr. Caronia's job was to encourage folks to buy Xyrem.

According to the Second Circuit,

Xyrem's active ingredient is gamma-hydroxybutryate ("GHB"). GHB has been federally classified as the "date rape drug" for its use in the commission of sexual assaults.

Despite Xyrem's dark side, it was approved by the FDA for two uses for folks with narcolepsy.

Mr. Caronia's company thought that perhaps doctors should be prescribing it for an even greater assortment of problems.

Mr. Caronia's job, in part, was to find doctors who would talk to other doctors about the benefits of Xyrem's FDA-approved uses. The doctors did not provide this service for free.

One of the doctors who worked with Mr. Caronia was Dr. Peter Gleason.

And, by way of background - it's ok for a doctor to prescribe a drug for a use that isn't on the label. The FDA doesn't want to get between a doctor's relationship with her patient, even on off-label uses of prescription drugs.

At the same time, it's a crime to "misbrand" a regulated drug. A drug is misbranded if:

its label is false or misleading; the label fails to display required information prominently; its container is misleading; or it is dangerous to health when used in the dosage, manner, frequency, or duration prescribed, recommended, or suggested on the label.

The Wire

The federal government started investigating Dr. Gleason for promoting an off-label use of Xyrem.

The feds wired up a cooperator. The cooperator was another doctor, who called Mr. Caronia and asked about an off-label use of Xyrem.

Mr. Caronia, as only a man paid on commission can, talked up the benefits of the drug for many kinds of maladies - insomnia, Fibromyalgia, restless leg, Parkinsons, chronic fatigue, chronic pain, and MS.

He also said it will make you lose weight without dieting or exercise. [that was a joke]

These statements - and other related ones - got Mr. Caronia indicted for conspiracy to commit misbranding.

Indicted For Aggressive Sales

Mr. Caronia said that he was being indicted for commercial speech. There's a line of cases from the Supreme Court that say that even commercial speech is protected by the First Amendment.

The district court agreed. As the Second Circuit said,

The court observed that "the criminal information . . . allege[d] Caronia's promotion of off-label uses of an FDA-approved drug," and concluded that Caronia stood charged with a crime the actus reus of which was First Amendment speech.

But, the district court concluded that the prohibition on commercial speech is reasonably tailored to the objectives of the Food Drug and Cosmetic Act. So it's ok to charge people criminally for this First Amendment activity.

Mr. Caronia went to trial and was convicted.

The Second Circuit

One big question running through the appeal is whether Mr. Caronia was charged with a crime based on his speech - as the district court determined - or whether he was charged with misbranding and his speech was used as evidence of his other acts that were criminal.

The Second Circuit went through the trial testimony and found that the government's theory here was that Mr. Caronia violated the law by his speech.

So, the government is prosecuting Mr. Caronia's speech. Is that ok?

That's really two questions - first, is Mr. Caronia's conduct covered by the statute and, second, if his conduct is covered by the statute, does it violate the First Amendment.

The Second Circuit let that second question answer the first:

under the principle of constitutional avoidance, . . . we construe the FDCA as not criminalizing the simple promotion of a drug's off-label use because such a construction would raise First Amendment concerns. Because we conclude from the record in this case that the government prosecuted Caronia for mere off-label promotion and the district court instructed the jury that it could convict on that theory, we vacate the judgment of conviction.

So, according to the Second Circuit, promoting the off-label use of a drug is not a crime under the statute. If it were, the courts would have to think about whether such a statute is constitutional.

Five partners at Ernst & Young - Robert Coplan, Martin Nissenbaum, Richard Shapiro, and Brian Vaughn, and Charles Bolton - were charged with a number of tax crimes in federal court in New York, specifically tax evasion, conspiracy to defraud the United States, and lying to the IRS. The Second Circuit said that the government didn't prove that two of the men were guilty and send the case back.

Ernst & Young had developed a number of tax shelters. Tax shelters - to be clear - are not themselves necessarily legal or illegal. As the jury was instructed, "it depends on the facts."

There were five tax shelters at issue. The Second Circuit, in United States v. Coplan, described the tax shelter that was the basis of the tax evasion count this way:

The Add-On shelter was a tax strategy marketed as a means to defer indefinitely income tax liability on capital gains, including the capital gains generated in the second year of [another tax shelter involved in the case, which converted ordinary income to capital gains, which are generally taxed at a lower rate for folks who are using tax shelters .] Add-On involved the purchase of offsetting digital option pairs, followed by a series of transactions designed to generate a tax loss. The offsetting options were structured so that there was a "one-pip" gap between their strike prices, so that, in a theoretical "home run" scenario, a taxpayer could make a multimillion dollar profit. [H]owever, there was no reasonable possibility of earning a profit from Add-On apart from the "home run" scenario, since the Add-On fee structure required payments to [Ernst & Young] and the entity acting as general partner that exceeded the potential payoff.

Four of the men - Mr. Coplan, Mr. Nissenbaum, Mr. Shapiro, and Mr. Vaughn - were charged with, and went to trial on, three charges - conspiracy to defraud the United States, tax evasion, and obstructing the IRS. Mr. Vaughn and Mr. Coplan were also charged with making false statements to the IRS. Mr. Bolton pled guilty.

The government's theory, basically, was this:

At trial, the Government sought to demonstrate that the defendants conspired to conceal the true nature of the five tax shelters by creating a variety of "cover stories" regarding the purported business purpose of the shelters, when in fact the shelters were motivated solely by a desire to avoid taxes. In essence, the Government sought to demonstrate that the defendants hid the truth from the IRS by withholding information and making affirmative misstatements.

After the trial, the jury returned a guilty verdict on all counts.

Bolton, who had entered a plea, was sentenced to 15 months in prison. The folks who went to trial were sentenced to between 20 months to three years.

The Second Circuit reversed the conspiracy charges against Shapiro and Nissenbaum because there was insufficient evidence to support them.

That's a tough standard, to win a sufficiency challenge you've got to show that at least one juror could have reasonably found the person charged guilty. Worse, in a conspiracy case with multiple objects of the conspiracy - as in this case - to win you've got to show that the person wasn't engaged in any object of the conspiracy. Yet that's what the Second Circuit found happened.

The opinion is 95 pages and summarizes a decent bit of the evidence from a multi-week trial. In essence, there wasn't enough evidence that Mr. Shapiro was familiar enough with the details of the tax shelter that the government alleged caused tax evasion.

Here's the important bit from the opinion that will matter to folks not involved in this case (though, by all means, if you have a tax evasion case involving what happened at a company, read the entire opinion). Basically, the government's case was too thin as to Shapiro (internal citations omitted):

Having reviewed the record and the arguments of counsel, we conclude that the evidence against Shapiro is insufficient to support his conviction on Count One. In reaching this conclusion, we are mindful that the absence of direct evidence is not dispositive, since "the government is entitled to prove its case solely through circumstantial evidence." Nevertheless, "[i]f the evidence viewed in the light most favorable to the prosecution gives equal or nearly equal circumstantial support to a theory of guilt and a theory of innocence, then a reasonable jury must necessarily entertain a reasonable doubt." In this case, an essential element of the conspiracy charged in Count One required proof beyond a reasonable doubt that Shapiro joined the alleged conspiracy with the "specific intent" to violate the law. The evidence with respect to Shapiro's intent, viewed in the light most favorable to the Government, remains, at best, in equipoise. Because "[i]t would not satisfy the [Constitution] to have a jury determine that the defendant is probably guilty," we conclude that Shapiro's conviction on Count One must be reversed.

It's nice to see a rejection of the idea that someone is "probably" guilty in a Second Circuit opinion.

The court of appeals reached a similar conclusion for Mr. Nissenbaum.

Because the conspiracy conviction fell, the Second Circuit held that the substantive charges of tax evasion also had to be vacated for Mr. Shapiro and Mr. Nissenbaum. Mr. Nissenbaum's conviction for making a false statement to the IRS was also vacated for insufficient evidence.

The district court also imposed a fine on Mr. Bolton in excess of the statutory maximum. That was reversed so it could be reduced to the statutory maximum.

It's an odd week for wins in the federal appellate courts.

The Second Circuit ruled that the First Amendment protects (some kinds of) promotional activity for off-label use of drugs. Any time the First Amendment is intersecting with criminal law it makes for good reading - expect fuller coverage later this week.

The Eighth Circuit sent a Fair Sentencing Act case back for resentencing, and there was a bizarre grenade case from the Eighth Circuit as well. Good Times.

Also, the Supreme Court is going to hear a challenge to the Defense Against Marriage Act and California's Prop 8. It's not terribly relevant to what we do on this blog, but everyone else is talking about it, and I'd hate to not be one of the cool kids.

To the Victories:

1. United States v. Caronia, Second Circuit: Appellant was convicted of conspiracy to introduce a misbranded drug into interstate commerce because he promoted an FDA-approved drug for "off-label use." Because this conviction violated appellant's First Amendment right to free speech, it was vacated.

2. United States v. Orozco, Eighth Circuit: Appellant was convicted of possessing cocaine and crack cocaine. The court imposed the ten-year mandatory minimum sentence for the crack conviction. After the acts giving rise to the convictions, but before appellant's sentencing, the Fair Sentencing Act went into effect, which amended the crack sentencing provisions. The case was remanded to the district court to address the applicability of the Act and the possibility of resentencing.

3. United States v. Mann, Eighth Circuit: Appellant was convicted of eight offenses arising out of his use of a grenade that cause severe and permanent personal injury. Because Appellant's conviction for possessing a machine gun (count 6) was a lesser-included offense of possessing an unregistered machinegun (count five), these convictions were remanded with instructions to vacate one of the convictions. Additionally, the district court erroneously imposed two sentencing enhancements: (1) an enhancement for directing the assault of a federal inmate under Guideline § 3C1.1 for obstruction of justice; and (2) a firearms enhancement for possession of grenades containing an altered serial number under Guideline § 2K2.1(b)(4). The case was remanded for resentencing on counts 1, 2, 3, and 5 or 6.

I strongly suspect that many of our nation's circuit court judges worked over the Thanksgiving break, because they're back with nine wins for folks accused of crimes in our nation's federal appellate courts.

It's a potpourri of cases - multiplicity in the sale of Bald Eagle Parts, an innocent spouse issue in a restitution award, the reduction of a fine in an Ernst & Young tax shelter fraud case, and a few Fourth Amendment cases.

Heck, there's even a case on a Rule 41 motion. When's the last time you saw a federal appeals court issue a published opinion on a motion for the return of property?

My great hope for this section of the blog is that it will increase the ease with which folks can monitor cases to send 28(j) letters in federal criminal appeals. This week's list of cases has a lot to offer the criminal appellate advocate. Let's get those 28(j) letters rolling!

To the victories:

1. United States v. Munguia, Ninth Circuit: Appellant was convicted of drug conspiracy and possession. The key issue at trial was whether she knew or had reason to know that the drugs she purchased were being used to manufacture methamphetamine. Given this focus, she requested a jury instruction explaining that "reasonable cause to believe" must be evaluated from her perspective, based on her knowledge and sophistication. Because the district court erred in refusing her request and because the error was not harmless, appellant's conviction was reversed.

2. United States v. Berry, Fifth Circuit: Appellant pled guilty to possessing more than five grams of crack and was sentenced to five years in prison followed by three years of supervised release. Although the acts giving rise to this conviction occurred before the effective date of the Fair Sentencing Act, his sentencing occurred after. For the purposes of appellant's case, the Act was significant because it modified the terms of imprisonment and supervised release applicable to simple crack possession. Because appellant's prison and supervised release terms exceeded the maximum terms under the Act, his sentence was vacated and the case remanded for resentencing.

3. United States v. Wahchumwah, Ninth Circuit: Appellant was convicted of offenses relating to the sale of Golden Eagle parts. Counts 2 and 3 were related to the sale of eagle tails and counts 4 and 5 were related to the sale of eagle plumes. Because counts 2 and 3 and 4 and 5, respectively, prohibited the same offenses, and because Congress did not intend to allow multiple punishments for a single tail or plume sale, the case was remanded for the district court to vacate count 2 or 3 and 4 or 5.

4. United States v. Cervantes, Ninth Circuit: Police officers performed a warrantless search of appellant's car that led to the discovery of cocaine. The search was not justified under (1) the automobile exception, which allows officers to search a car and the containers within it where they have probable cause to believe contraband or evidence is contained, or (2) the community caretaking exception, which permits officers to impound cars that jeopardize public safety and the efficient movement of traffic. Because the warrantless search was not justified by an exception to the warrant requirement, the district court erred in denying appellant's motion to suppress the cocaine. Accordingly, the Ninth Circuit reversed the lower court's denial of the motion and remanded the case.

5. United States v. I.E.V., Ninth Circuit: Appellant was a passenger in his brother's car when they entered a United States Border Patrol checkpoint. At the checkpoint, a police dog alerted that the car contained drugs or concealed people. After a search of the car revealed no contraband, an officer frisked appellant and, without his permission, lifted appellant's shirt and found a brick of marijuana. Because the officer was not justified in frisking appellant, and because the frisk exceeded its constitutional scope, the district court erred in denying appellant's motion to suppress the marijuana. Consequently, the court's decision was reversed and the case remanded with instructions to grant the motion to suppress.

6. United States v. Coplan, et. al, Second Circuit: Five appellants were convicted of fraud-related crimes arising out of their development and defense of tax shelters that were sold or implemented by Ernst & Young. The convictions of appellants Shapiro and Nissenbaum were reversed on counts 1-3 because of the insufficiency of the evidence of appellants' intent. Nissenbaum's conviction on count 4 - obstruction of the IRS - was also reversed because the record reflected that a reasonable jury would have had a reasonable doubt as to whether he corruptly obstructed or impeded the IRS. Finally, the portion of appellant Bolton's sentence imposing a $3 million fine was vacated because it exceeded the statutory maximum. On remand, the fine was to be reduced to the $250,000 statutory maximum.

7. United States v. Duran, Eleventh Circuit: After appellant was convicted of conspiring to defraud Medicare, the government secured a substantial restitution judgment. The government obtained a writ of execution against an apartment that, according to property records, was owned jointly by appellant and his former wife. The former wife argued that because she was the sole owner of the apartment before her former husband's prosecution, the government could not look to the apartment for restitution. The district court refused to adjudicate the wife's motion. This was error. Consequently, the order denying the former wife's motion was vacated and the case remanded.

8. United States v. Delgado, Seventh Circuit: Appellant's convictions for being a felon in possession of a firearm and possession of an unregistered firearm were the result of police officers' warrantless search of his apartment. Because the search was not a valid protective sweep and was not justified by the exigent circumstances exception to the warrant requirement, the district court erred in denying appellant's motion to suppress the firearms. For these reasons, appellant's convictions were vacated and the case remanded to the district court with instructions to grant the suppression motion.

9. United States v. Bailey, Eighth Circuit: As a result of appellant's arrest on prostitution-related charges, his property was seized and eventually transferred to a U.S. Attorney's Office. After his conviction was upheld on appeal, he filed a motion for the return of his property under Federal Rule of Criminal Procedure 41. At a hearing, the district court determined that the government no longer possessed the property and denied appellant's motion to convert the action into a civil claim for damages. Under these circumstances, the court was required to give appellant an opportunity to assert such a civil claim. Accordingly, the court's ruling was reversed and the case remanded.

If you're ever involved in a bank fraud case, you should probably read the Second Circuit's opinion reversing Mr. Felix Nkansah's bank fraud conviction. If the government wants to convict someone for bank fraud, the Second Circuit says they've got to show that the person was trying to defraud a bank (as opposed to trying to defraud someone or something else).

The Company You Keep

Felix Nkansah fell in with some bad company.

He worked with a number of other people to steal identity information for people, like names, dates of birth, and social security numbers. Specifically, he stole this information from hospitals, childcare databases, and foster care.

The group then filed false tax returns with the names and social security numbers they had stolen. Cleverly, they didn't file tax returns that showed taxes were owed. Instead, they filed returns that triggered tax refunds.

The fraudulent returns had refunds that totaled more than two million dollars. The group actually received a little more than half a million dollars.

When the refund checks came to a group member, the member would forge a signature on the check and deposit it in a bank account that the group controlled.

Mr. Nkansah was charged with conspiracy to file false claims with the IRS, filing false claims with the IRS, bank fraud, aggravated identity theft in connection with the bank fraud, and identity theft.

He was convicted of all of them at trial.

The Second Circuit

On appeal, though, the Second Circuit reversed his conviction for bank fraud. This was tax fraud, sure. But bank fraud? Nope.

Let's start at the start - with 18 U.S.C. § 1344, the bank fraud statute:

Whoever knowingly executes, or attempts to execute, a scheme or artifice-- (1) to defraud a financial institution; or (2) to obtain any of the moneys, funds, credits, assets, securities, or other property owned by, or under the custody or control of, a financial institution, by means of false or fraudulent pretenses, representations, or promises; [is guilty of bank fraud]

Mr. Nkansah argued on appeal that there was a lot of evidence that he intended to defraud the federal Treasury, but there wasn't any evidence that he intended to defraud a bank.

While defrauding the Treasury is really bad, he was convicted of bank fraud. And there wasn't evidence that he committed that crime.

In fact, Mr. Nkansah argued that there was no reason to think that the banks lost money through this whole transaction. As the Second Circuit summarized it:

In essence, he argues that the banks were no more victims of his deceptions than a bank in which someone opens an account under a false identity to conceal funds from a spouse or business partner.

The Second Circuit agreed with the law undergirding the prosecution:

Appellant is correct that the bank fraud statute is not an open-ended, catch-all statute encompassing every fraud involving a transaction with a financial institution. Rather, it is a specific intent crime requiring proof of an intent to victimize a bank by fraud. See United States v. Rubin, 37 F.3d 49, 54 (2d Cir. 1994). "[A] federally insured or chartered bank must be the actual or intended victim of the scheme."

Summarizing all of this,

The government had to prove beyond a reasonable doubt that appellant intended to expose the banks to losses.

The Evidence Of What Was In Mr. Nkansah's Mind

The government had two kinds of evidence to try to show that Mr. Nkansah intended to defraud the banks. First, they relied on statements made to other folks in the group.

Mr. Nkansah had talked to others about which banks would be least likely to discover the scheme. The Second Circuit rejected these arguments -

While these concerns surely support an inference of an intent to avoid detection, on this record they have no probative value as to an intent to injure the banks.

Second, the government tried to show that because the bank was actually going to suffer a loss - or the bank said it was going to suffer a loss - that was enough to show that Mr. Nkansah thought the bank would suffer a loss.

The Second Circuit has allowed such an inference where a person forged a check and went to the bank to cash it (though, interestingly, the court of appeals said such an inference isn't required). But this isn't such a case - here Mr. Nkansah had a legitimate check (which was issued under false pretenses). That exposes the issuer of the check to a loss, but not, on these facts, the bank.

Because there was no evidence to support the conclusion that Mr. Nkansah intended to defraud the banks - as opposed to the Treasury - his conviction for bank fraud was reversed.

As was his conviction for aggravated identity theft based on the bank fraud.

If Mitt Romney is right that 47% of Americans think of themselves as victims, then the Second Circuit's opinion in United States v. Lacy may be deeply unpopular.

Like Mitt Romney, Kirk Lacey and Omar Henry had a vision for the future.

Unlike Mitt Romney, their vision involved short sales, straw buyers, and a little light mortgage fraud.

Like Mitt Romney, Mr. Lacey and Mr. Henry were not able to see their vision realized.

MTC Real Estate, Inc.

Mr. Lacey and Mr. Henry worked at MTC Real Estate.

MTC would buy houses in a short sale, then find a straw buyer who had no intention of making mortgage payments. That person would buy the house at a price higher than the one MTC bought it for. MTC would make the difference, the straw buyer would default, and the bank that loaned the money was left holding the bag.

To find enough straw buyers, MTC advertised on the radio. Straw buyers were promised $50,000 for buying a house. Some of the straw buyers were even paid what they were promised.

It was a simple and deeply illegal business.

Sentencing

Mr. Lacey and Mr. Henry - along with eight others - were charged with conspiracy to commit bank and wire fraud for this real estate plan.

Mr. Lacey and Mr. Henry - unlike the eight others - went to trial. They lost.

The government, at sentencing, asked for a two-level upward enhancement of their guidelines under U.S.S.G. § 2B1.1(b)(2)(A)(ii), which says:

If the offense. . . (ii) was committed through mass-marketing, increase by 2 levels;

Mr. Lacey and Mr. Henry argued that this enhancement shouldn't apply - the radio ads were directed at straw buyers who were not victims. The banks were the victims here, not the straw buyers. In fact, the straw buyers even made $50,000 each. Much of the time.

As the Second Circuit put it,

The district court agreed with the government, noting that "the MTC marketing campaign was critical to the success of the fraud" because the marketing was "how MTC found people with distressed properties that could be exploited." The district court therefore held that although the mass-marketing was not directed at the victims of the fraud (that is, the banks that made the mortgage loans), the mass-marketing was still "relevant conduct" to the offense and so the enhancement should apply.

Mr. Henry was sentenced to a year and a day - allowing him to receive good time credit from the Bureau of Prisons. Mr. Lacey was sentenced to 46 months.

The Second Circuit and Fraud Victims

The Second Circuit reversed finding, basically, that

After a careful reading of the Guidelines and other relevant authority, we hold that the mass-marketing enhancement is properly applied only when the targets of the mass-marketing are also in some way victims of the scheme. Because it is not clear on the current record whether the straw buyers who were the targets of the mass-marketing in this case were in some sense victims, we will remand to the district court for further factfinding.

The court of appeals looked at the language of the mass-marketing enhancement and noted that the offense has to be "committed through mass-marketing."

As at least one other Circuit has recognized, an offense is "committed through mass-marketing" when mass-marketing is used to recruit or deceive victims of the offense, not when mass- marketing targeted at audiences other than victims is used in connection with the fraud in some other, more tangential manner. See United States v. Miller, 588 F3d. 560, 568 (8th Cir. 2009).

So, to the Second Circuit's way of looking at this,

It is not enough that a scheme may be advanced by the use of mass marketing techniques; a scheme is committed through mass-marketing only when the mass marketing is directed toward individuals who will be harmed by the scheme.

Indeed, the language surrounding the enhancement for mass-marketing helped the Second Circuit reach this reading:

All the other subsections of § 2B1.1(b)(2) base enhancements on the number of victims. Indeed, the mass-marketing enhancement is posed as an alternative to the smallest number of victims in an escalating series of adjustments based on rising numbers of victims. The pattern thus strongly suggests that the enhancement scheme is designed to measure the scope of the wrong by the number of victims, and that the use of mass-marketing is relevant even when the number of actual victims is small, because fraudulent mass-marketing creates a large number of potential victims.

So the district court's reasoning was off, and the case has to be remanded.

Possible Defeat from the Jaws of Victory

But, of course, nothing is as simple in the land of federal criminal appeals.

The court went on to say that

If a mortgage fraud scheme predictably results in pecuniary harm to unwitting, deceived straw buyers, the straw buyers have sustained "actual loss" and are therefore "victims" within the meaning of the Guidelines. They are therefore properly considered under the mass-marketing enhancement.

Not content to let a district court judge figure out how to find that the enhancement applies, the Second Circuit went on to explain exactly what the district court would have to look for on remand:

Returning to the facts of the instant case, it is not clear on the present record whether at least some of the consumers who were the targets of mass marketing were in some sense victimized, notwithstanding that the main thrust of the fraud was directed at banks. To the extent that any straw buyer was in on the scheme or received the promised $50,000 payment, such a buyer could not be seen as a victim. But some straw buyers testified that their credit scores were ruined. Others testified that they intended in good faith to purchase the property and pay the mortgage

More happily, the court of appeals described at some length why radio ads may not be mass-marketing under the guidelines definition at all.

A fun time will doubtless be had in the district court on remand as it follows the Second Circuit's instructions to

consider two questions: first, whether the defendants engaged in "mass-marketing" within the meaning of the relevant Guideline, as interpreted by the commentary; and second, if the defendants did engage in "mass-marketing," whether the consumers who were the target of that mass-marketing were also in some sense victims of the overall criminal scheme, i.e., whether they were injured by the scheme.

Also, the court asked the Sentencing Commission to make this stuff clearer.

Also, why does the Second Circuit hyphenate "mass-marketing" but not "factfinding"?

It's a good week for reversals in fraud cases.

The Second Circuit sent two fraud cases back for resentencing, and vacated a conviction in its entirety! And they're cool issues -- for example, for the "mass marketing" enhancement under the fraud guidelines to apply, the government has to show not just that mass marketing happened, but that mass marketing happened to victims. A number of convictions were also vacated in a criminal tax prosecution, and the Second Circuit found a violation of the defendant's public trial right.

The D.C. Circuit entered the fraud remand fray, sending a criminal copyright case back because of errors in the restitution order.

Exciting stuff.

For those who are obsessive about extraterritorial criminal law (a growing number of folks, these days), the Eleventh Circuit vacated a few convictions for people convicted of violating U.S. drug trafficking laws for things they did in Panamanian waters.

To the victories!

1. United States v. Bellaizac-Hurtado, Eleventh Circuit: As a result of observations by the United States Coast Guard in the territorial waters of Panama, four people were convicted in the United States of engaging in a drug trafficking conspiracy. Panama consented to prosecution in the United States. Because drug trafficking is not "an offense against the Law of Nations" under the Maritime Drug Law Enforcement Act, Congress exceeded its power under the Act's Offenses Clause when it proscribed the conduct in the territorial waters of Panama. Consequently, the Act is unconstitutional as applied to these four individuals and, as a result, the convictions were vacated.

2. United States v. Marquez, First Circuit: In crack cocaine distribution case, appellant was sentenced to 121 months in prison based on the district court's finding that he had acquired for distribution 304 grams of crack in two 152-gram allotments. Although it was not error to attribute the first 152-gram allotment to appellant, the court committed clear error in attributing the other 152-gram acquisition to appellant because there was no evidence to support the finding that the additional quantity was actually 152 grams. This secondary finding had a "dramatic leveraging effect," as it triggered a 120-month mandatory minimum. Consequently, appellant's sentence was vacated and the case remanded for resentencing.

3. United States v. Lacy, Henry, Second Circuit: In mortgage fraud case, the district court erred in applying a two-level enhancement to appellants' sentences for an offense "committed through mass-marketing" under Guideline § 2B1.1(b)(2)(A)(ii) without making sufficient findings to show that the targets of the mass-marketing scheme were also in some way victims of the scheme. Consequently, remand for additional findings was required. The court also failed to credit any of the value of the collateral in formulating its restitution orders, warranting remand for recalculation of the restitution amount.

4. United States v. Gyanbaah, et al., Second Circuit: Appellant was convicted of five offenses arising out of his participation in a fraudulent tax return scheme. Because there was insufficient evidence to convict him of bank fraud and aggravated identity theft related to the bank fraud, his convictions on these counts were vacated and the case remanded for resentencing.

5. United States v. Gupta, Second Circuit: In immigration fraud cause, appellant's sixth amendment right to a public trial was violated when the district court intentionally excluded the public from the courtroom during the entirety of jury selection without first considering the following factors: (1) the party seeking to close the proceeding must advance an overriding interest that is likely to be prejudiced; (2) the closure must be no broader than necessary to protect that interest; (3) the trial court must consider reasonable alternatives to closing the proceeding; and (4) the trial court must make findings adequate to support the closure. Consequently, appellant's conviction was vacated.

6. United States v. Fair, DC Circuit: In copyright infringement and mail fraud case, the district court erred in entering a restitution order against appellant because the government failed to meet its burden under the Mandatory Victim Restitution Act to present evidence from which the court could determine the victim's actual loss. Consequently, the restitution order was vacated.

7. United States v. Woodard, Tenth Circuit: Appellant's conviction for possession of more than 100 kilograms of marijuana with intent to distribute was reversed because there was a reasonable probability that the jury would have reached a different result had appellant been allowed to cross-examine a witness about a prior judicial determination that the witness was not credible.

Autumn is here. With it comes a crisp feeling in the air, leaves turning, the start of the Supreme Court term on the First Monday in October (for a preview of sorts, please see my guide to bluffing your way through knowledge of the upcoming term), and a slowdown in the pace of published opinions coming from our nation's federal appellate courts.

Why the slowdown? My suspicion is that as old law clerks leave the service of their appellate judges at the end of August to be replaced by new clerks -- much as old leaves fall from trees to make way, eventually, for new buds -- the work of the old clerks issues in late August and the work of the new clerks has yet to be rendered in a state fit for publication.

Though perhaps I'm mistaken.

All I know is that I saw the same slowdown last year, and we're seeing it again.

But with this relaxed pace comes exciting news. Here at The Federal Criminal Appeals Blog, we are happy to announce that each and every published opinion where a criminal defendant wins in a federal circuit court will be published, here, in the weekly "Short Wins" column the week after it comes out.

Our great hope is that this will be a bounty of 28(j) letters for the federal criminal appellate bar.

So, if you are a federal criminal appeals lawyer -- representing people who are appealing a federal conviction or sentence -- you can come here, each Monday, to see where and how your brothers and sisters in the bar are winning across the country. And, if another win is like a case you have, you can write a letter to your court explaining this supplemental authority.

Then you, too, can have your client's case written up here!

(though, if we miss a case, please email me to let me know)

1. United States v. Spears, Seventh Circuit: Appellant was convicted of five crimes arising out of his operation of an illicit business that produced and sold counterfeit documents. Because the evidence was insufficient to sustain appellant's conviction for unlawful possession of five or more false identification documents, this conviction was reversed, the sentence vacated, and the case remanded for resentencing.

2. United States v. White, Second Circuit: In possession of a weapon by a convicted felon case, the district court erred in excluding two crucial pieces of evidence: (1) the Government's decision to initially charge four women traveling with appellant with possession of the gun allegedly found on appellant's person; and (2) evidence of a prior judicial finding that discredited the testimony of a Government witness. It was error to exclude the first evidence without inquiring into its relevance and probative value. It was error to exclude the second because evidence that might lead a jury to conclude that the witness was willing to lie in a similar case to secure a criminal conviction is both relevant and probative - particularly where, as here, appellant's defense centered on proving that the same witness and other officers lied about finding a weapon on appellant's person. Because these errors were not harmless, the judgment of conviction was vacated and the case remanded for a new trial.

Joseph P. Collins was charged with securities fraud, mail fraud, wire fraud, making false statements to the Securities and Exchange Commission, and conspiracy. He went to trial and, we can imagine, spent weeks - possibly months - working with his lawyers to diligently defend himself and his rights. His trial took twenty-two days of testimony - more than four weeks in a federal courtroom.

Finally, it was messed up by two maladjusted jurors and a judge who wanted to handle things alone.

We are all bit players in each other's lives. Everyone understands that. In Mr. Collins' case, however, it's not unlike a world where Rosencrantz and Gildenstern decide that they'd rather kill Hamlet than travel with him.

The jurors started deliberating on Mr. Collins' fate on July 1, 2009. That same day, completely unrelated to this case, the Coast Guard published new regulations for fireworks safety in Massachusetts, and a new income-based payment option for student loans became available.

On the fifth day of deliberations, the jurors were having trouble. They sent a note to the court describing that they were having a hard time reaching a verdict. The court, after consulting with the attorneys for the government and Mr. Collins, sent a note back, saying that they should keep at it.

Later that day, a Court Security Officer reported hearing a kerfuffle from inside the jury room. The CSO entered the jury deliberation room. There, one juror accused another juror of physically threatening him.

The trial judge was alerted. He brought the jury back into the courtroom and told them "to show respect for one another." He then sent them home for the day.

The next morning, shortly before 10 a.m., two notes came out from the jurors. The first was from juror number 4. It read,

I am writing to express my concern regarding the conduct of juror number 9 . . . . Although I appreciate your efforts to control the frequent insults I've endured, the threat of bodily harm brings this abuse to a whole new level. Specifically, in a loud and belligerent man[ne]r juror [9] threatened to "cut off your (my) finger." She made that statement twice. In the same tirade she stated, "I will have my husband take care of you." These threats were made yesterday afternoon July 8, 2009. Rest assured I will not allow such threats and intimidation [to] alter my vote when it comes to determ[in]ing a verdict in this case. I am concerned, how[ev]er, [that] hearing these threats may affect other jurors. Regardless, I believe this is not the proper way to deliberate and the Court should be made aware of this conduct.

The second note was from the foreperson.

In regards to the earlier note . . . from Juror 4 . . . , it is my personal opinion that the altercation yesterday could be traced to both parties involved. There ha[ve] also been conversations on numerous occassions [sic] regarding respectfulness on the part of Juror 4.

Imagine sitting in a courtroom, nervously waiting to hear if you'll be convicted of several serious fraud offenses, when you learn that two of the people deciding your fate are spending their time blaming each other for not being more respectful. Awesome.

Later that afternoon, the foreperson sent another note saying,

There's been some concern amongst some of the juror's [sic] regarding odd behavior on the part of Juror #4 . . . . During deliberations on 7/2, [Juror 4] changed his vote on a charge, bringing a unanimous decision. However, [Juror 4] then attempted to make his vote contingent upon the room agreeing blindly on a charge to be voted on later. He wanted to barter. In my opinion, this is at the heart of yesterday's altercation between juror's [sic] 4 and [9]. To compound this issue, juror 4 has made it clear he would prefer to be a hung jury than do further evidence research.

The court decided that it needed to have a private conversation with Juror 4. It told the parties so. The defense lawyer said that he was not agreeing that the court should speak privately with Juror 4.

Juror 4 and the court had a conversation which is remarkable only that it shows the extent to which a federal district court judge is willing to delve into a terribly dull he said/she said conversation to avoid retrying a multi-week fraud trial. The court encouraged Juror 4 to keep an open mind, and reminded him that it was really important to try to reach a verdict.

The next day the jury sent out a note that they had a partial verdict. Mr. Collins was convicted of two counts of securities fraud, two counts of wire fraud, and conspiracy.

In United States v. Collins, the Second Circuit sent the case back for a new trial.

The court of appeals held that a person has a right to be present at each part of their trial. That includes when you talk to jurors.

The appellate court found that the district court's remarks to Juror 4 were a supplemental instruction. And,

When a supplemental instruction is given ex parte, without first consulting counsel, it violates a defendant's right to be present.

Moreover, the Second Circuit noted that,

Where, as here, the ex parte communication involves a supplemental instruction to a single juror in a minority position, the potential for prejudice is particularly acute.

And so, Mr. Collins goes back for a new trial. Surely, after his first, he'll have lots of trust in the process of trial by jury.

Related Post: Going to Prison For What A Jury Doesn't Think You Did

The federal sentencing guidelines love numbers.

Numbers, according to the guidelines, are how you know how bad something is. If the amount of loss from a fraud is higher, the fraud is worse. If there are more drugs, the drug distribution is worse. If there are more victims, or guns, or illicit images, or years of illegal peonage, the crime is always, under the guidelines, worse.

The guidelines like numbers for the same reason that lawyers like rankings - they force a crisp objectivity. Columbia is ranked higher than the University of Chicago - if you're choosing between the two, the decision just got easier.

People crave definite information in difficult decisions, whether they're law students deciding where to go to school or federal judges deciding how to punish a crime.

This focus on numbers may not capture all that we want about how bad a crime is. Maybe a woman who steals $7,000 to pay for insulin for her aging father is less bad than the man who steals $5,000 to buy mint condition Paul Anka LPs.

Maybe she's less bad in more than one way.

As troubling as whether numbers get it right, is how hard it is to get the numbers themselves right.

The Second Circuit,* in United States v. Archer, clarified how these numbers of bad things should be counted when the numbers translate into additional time in prison.

Mr. Archer's Troubles

Mr. Archer was an immigration attorney. He helped people fill out I-687 legalization applications. As it happened, several of the legalization applications he completed for people contained numerous material falsehoods.

The details of how I-687 legalization applications work is complex. I'm going to ignore them. If you're really into these, please read the opinion.

The bottom line is that Mr. Archer completed 171 I-687 applications. At sentencing, there was evidence that four of them contained false statements. If more than 100 contain material false statements, Mr. Archer's guidelines level increases. It's in U.S.S.G. § 2L2.1(b)(2)(C).

The government said that he should get the enhancement for having more than 100 false documents, because all four of the ones the government looked at were false. The sentencing court bit on that argument - the enhancement for more that 100 false documents was imposed.

"Ghost Dope" and Statistics

The Second Circuit was not so keen to use that analysis. As the court of appeals noted, it had previously held that

To sustain quantity-based enhancements for relevant conduct, the court must base its findings on "specific evidence" that the offense involved the requisite quantity of items. This evidence can, however, be circumstantial. United States v. Shonubi ("Shonubi II"), 103 F.3d 1085, 1090 (2d Cir. 1997). This requirement has two parts: (a) there must be evidence regarding the quantity of illicit or fraudulent goods and (b) it has to be specific to the defendant.

Shonubi was a heroin case.

(Quantity-based guidelines enhancements are the great equalizer of the federal sentencing guidelines - the same rule about how to count them applies to a guy who swallowed balloons of heroin to come through JFK as applies to Jeff Skilling or Conrad Black.)

In Shonubi, the person accused of the crime made eight trips to the United States from Nigeria to transport heroin. On the last trip, he was found with 427 grams of heroin. The district court multiplied 427 times eight and sentenced him as though he was caught with that quantity of heroin. In the Bureau of Prisons, I understand that this quantity is referred to as the "Ghost Dope."

The Second Circuit vacated the ghost dope sentence. On remand, the district court had an elaborate hearing, where it heard evidence about how heroin traffickers from Nigeria normally operate. It then imposed the same sentence as before appeal.

The Second Circuit, again, reversed. The court of appeals instructed that a sentencing court has to have some specific evidence relating to the actual person who is being sent to prison, not just folks who are like him or her.

It's an enlightened approach to ghost dope.

Statistics And Mr. Archer

The Second Circuit has noted that in the second Shonubi opinion

In so vacating, our court was careful to point out that "specific" evidence need not be "direct" and, when correctly considered, circumstantial evidence could be sufficient. Id. For example, the court approved of statistical extrapolation to arrive at an estimate of drug quantity when the sample was randomly selected from a known population. Id. at 1092 (approving of the method of testing four randomly selected heroin balloons to estimate the quantity of heroin contained in 103 balloons found inside the defendant's body).

So, if you have a sample that is random and comes from a known population, you can use it to extrapolate for guidelines purposes.

In Mr. Archer's case, the government argued that it had done exactly that. It looked at four of the 171 applications, and found that they all contained false statements. Since, as a matter of statistics, there's only a 10% chance that there would be fewer than 100 false documents from a sample of four (it's worked out in footnote 6 on page 19 of the opinion), that's good enough for government work.

The problem with this analysis, the court of appeals noted, is that these four applications were not randomly selected - rather, the government seems to have picked the very worst applications.

The Government's Other Argument

The government had an alternative argument,

The government notes that 100 percent of the applications involved aliens who claimed to have entered the country illegally, that 96 percent of these aliens allegedly did so in 1981, that 90 percent of the applications claimed travel outside the country between June and October 1987, and that 26 percent involved one or more fill-in-the-blank affidavits.

Based on these remarkable similarities, the government said that these applications simply had to be false.

The Second Circuit was unimpressed with this line of reasoning.

That information is interesting, but without a baseline as to what the national pool of I-687 applications (filed by, we must assume, honest lawyers) looked like to compare it to--and [the government expert] admitted he had no such baseline--the data tell us nothing about the truth or falsity of the applications. It is like saying that Dr. Jones's patients died, on average, a year after their initial visit with her: if most of her patients were healthy people coming for a check-up, this information suggests a finding that Dr. Jones is a terrible physician; if, on the other hand, Dr. Jones is an oncologist, all of whose patients had terminal cancer of a sort that had a national average life expectancy of two months, the same information makes her look very good indeed. Context is essential; but the government did not take the time and make the effort to provide any.

The Second Circuit vacated Mr. Archer's sentence and remanded.

 

* Two things about the Second Circuit that you may not care about. First, the court's RSS feed is annoying to work with - it doesn't automatically update in my Google Reader Feed for new published opinions for the Federal Circuit Courts (though, at least they aren't the 6th Circuit which doesn't even have an RSS feeder). Second, they issue their opinions in Goudy Old Style, a font I'm really enjoying, and which Matthew Butterick called "generally acceptable" in Typography for Lawyers.

Causation is tricky.

So often we infer what caused what from the order things happen in - the government fails to reach an agreement on the debt ceiling, and the stock market drops. We conclude that one causes the other.

What do we do when there are multiple causes of a movement in stock price? If Greece defaults at the same time new job numbers are released, can we say which causes the movement of a stock price?

If you're just chatting about the markets, it probably doesn't matter. You don't need to answer the question of what caused the market action - it can be overdetermined.

If, however, you're the United States government, and you are trying to show that a series of actions mattered to investors, you are going to want to show that they affected the stock price. But what to do about all the other things that affected the stock price?

This question was taken up by the Second Circuit in United States v. Ferguson.

There, executives at General Reinsurance and an executive at AIG were convicted of numerous charges - conspiracy, mail fraud, securities fraud, and making false statements to the Securities and Exchange Commission.

The basis of the charges was a reinsurance transaction between the two companies. Such a transaction is, apparently, normally done to mitigate risk. Here, there was, the government alleged, no risk to mitigate - the transaction was intended solely to create an accounting illusion about AIG's reserves so that its stock price would not suffer.

To prove fraud, the government has to prove that a false statement is material - that it matters to someone in some decision they have to make. In this case, the government wanted to prove that it mattered to investors; that the reinsurance transaction affected the stock price.

The problem, though, is that lots of things affect stock price. At the same time at issue in the case, AIG was being accused of "bid-rigging, improper self-dealing, earnings manipulations, and more." Each of these allegations also affected AIG's stock price.

So, for the folks on trial to challenge whether the reinsurance contract affected the stock price, they would have had to argue that it wasn't the allegedly fraudulent reinsurance contract, rather it was the allegedly unlawful bid-rigging.

It's kind of like arguing that you couldn't have killed Tom because you were busy robbing Mary across town. It doesn't sit well with a jury.

The defendants offered to just agree that the reinsurance contract affected the stock price, so it wouldn't have to be submitted to the jury. The government, though, wouldn't agree.

This likely seems odd. The government thinks something happened. Why can't the defendant just agree, then that would be one less thing that the jury needs to worry about? The answer is that the Supreme Court has held that a defendant can't prevent the government from putting on the salacious bit of its case just by stipulating to it. The case is called Old Chief. It's how we know jury nullification works both at least one ways.

So the government wouldn't stipulate that the stock price dropped. Instead, they introduced a chart showing that the stock price dropped. But everyone agreed that the chart was inaccurate, because it reflected a drop in the price that was caused by other allegations of misconduct other than those in the trial.

The Second Circuit held that this was soup. The government doesn't have to stipulate to an element of the offense, but they can't use that as a mechanism to introduce misleading evidence. Moreover, the government really played the falling stock price up to the jury, arguing that:

[B]ehind every share of [AIG] stock is a living and breathing person who plunked down his or her hard-earned money and bought a share of stock, maybe [to] put it in their retirement[] accounts, maybe to put it in their kids' college funds, or maybe to make a little extra money for the family.

As a result, the Second Circuit vacated the conviction and ordered a new trial.

As an aside, it's nice to see that Seth Waxman came into the case on the side of the lead defendant. I'm sure I'll bump into him at a National Association of Criminal Defense Lawyers meeting soon.

FYI, I'm late to the party. Everyone and their mother has written about this. See:

Related articles

• The AIG-General Re reversals (truthonthemarket.com)
• Two notable white-collar rulings from the Second Circuit (sentencing.typepad.com)
• Appeals Court Overturns 5 Gen Re and A.I.G. Convictions (dealbook.nytimes.com)
• Commentary on Second Circuit Opinion in AIG and General Re Execs Case (lawprofessors.typepad.com)
• Ex-General Re Officers Win Retrial After Convictions Tossed (businessweek.com)
• Appeals court tosses insurance fraud convictions (seattletimes.nwsource.com)

Recently, the Fourth Circuit held that the government cannot deny someone who pleads guilty the third level for acceptance of responsibility under 3E1.1. Here's my earlier post on the Fourth Circuit opinion (which describes the issue in much more detail).

Today, the Second Circuit joined the Fourth Circuit's celebration of giving full sentence-reduction credit to people who plead guilty.

In United States v. Lee, the defendant, Mr. Lee entered a guilty plea and did it soon enough that they knew they wouldn't have to prepare for trial. The government refused to move for a third level reduction in Mr. Lee's sentencing guidelines under 3E1.1, though, because Mr. Lee had the temerity to disagree with the government about what happened in the crime.

He entered a guilty plea, but, apparently, did not fully submit to the will of the United States government, and so they had to have a sentencing hearing. The Second Circuit's opinion is not crystal clear on the government's reasoning, but, apparently, the government wanted Mr. Lee to spend more time in prison because either (1) he disagreed with the government, or (2) he made them do extra work.

The Second Circuit held that the government's refusal to move for the third level was unlawful. The court said that the government cannot withhold the third level simply because they have to prepare for a sentencing hearing, relying heavily on the Fourth Circuit's decision in Divens.

Let that 3E1.1 law keep developing in a way that gives people credit for giving away their rights in a guilty plea.

Hat tip to Professor Berman.