The Federal Criminal Appeals Blog

As the Supreme Court reminded us a few weeks ago, most criminal cases end in a plea. United States v. Saferstein, from the Third Circuit, is a stark reminder of how a plea can go sideways, and a lovely example of one feature of federal plea practice - appeal waivers.

GoInternet - They Made Money The New Fashioned Way

Mr. Saferstein was the CEO of GoInternet.

GoInternet may not have had the best business model.

Basically, the folks at GoInternet would cold-call small companies and offer internet services. They'd offer to send the companies a "Welcome packet" for $29.95. Then GoInternet would start charging $29.95 a month through the company's phone bill.

Companies often wouldn't see the charges, since the charges were on their phone bills.

Also, GoInternet wouldn't tell businesses it would charge them monthly, except in the welcome packet's disclosures, which were hard to find.

Also, apparently the welcome packet was designed to look like junk mail, so people would throw it out instead of opening it.

Finally, in my favorite twist, GoInternet didn't hire enough people to be able to process order cancelations. People who tried to cancel were often unable to.

It's like every time a person at GoInternet had an unpleasant call-center experience they thought: "Hey, I can monetize this!"

These sales practices did a great job at generating "customers." By 2003, GoInternet had more than 350,000 businesses signed up. It's annual revenue was more than $49 million.

The FTC Came Calling

The FTC came after GoInternet and Mr. Saferstein. The company and Mr. Safterstein agreed to change it's practices and send a postcard to every customer letting them know that they were being billed by GoInternet.

Mr. Saferstein apparently thought that agreeing to send the postcards was a good idea, because it would solve the problem with the FTC.

The problem with sending these postcards, though, was that then his customers would stop paying his company money for basically no reason.

Mr. Saferstein came up with a better idea. He would agree to send the postcards, then not send them - that way the FTC would go away, and he'd still collect the money from his customers.

He seems to have had a gift for a certain way of thinking.

Mr. Saferstein was charged with mail and wire fraud, conspiracy to commit perjury[FN1], and tax fraud.[FN2]

The Plea Agreement

He reached a plea agreement. He'd plead guilty to one fraud count and two tax counts.[FN3]

The plea agreement had an appeal waiver. In general, a person preserves his right to appeal unless he explicitly waives in it a provision of the plea agreement.

Here's how the Third Circuit described the appeal waiver:

[The plea agreement] contained an appellate waiver provision, which provided that Saferstein "voluntarily and expressly waive[d] all rights to appeal or collaterally attack" his conviction, subject to several exceptions. The waiver was "not intended to bar the assertion of constitutional claims that the relevant case law holds cannot be waived." Further, it provided an exception if the government were to appeal Saferstein's sentence and excepted a small number of enumerated claims that Saferstein would be permitted to raise on appeal: (1) that his sentence exceeded the statutory maximum for that count; (2) that the sentencing judge erroneously departed upward under the Guidelines; or (3) that the sentencing judge imposed an unreasonable sentence above the Guideline range.

At the plea hearing, though, the judge told Mr. Saferstein that the appeal waiver was a little different. Specifically, the district court said that,

the waiver "of course, is not intended to bar you [from] raising constitutional claims, and only the Court can decide whether they are constitutional claims or some other kind of claim."

This is a broader than what was written in the plea agreement.

Because of the massive loss in the case, the district court calculated Mr. Saferstein's offense level under the sentencing guidelines as a 43. With no criminal history, the advisory guidelines range was life.

The district court granted a downward variance though, to 23 years on each count, to run concurrent.

Mr. Saferstein appealed.

The Appeal

The question, of course, is whether he was allowed to appeal in light of the appeal waiver in the plea agreement.

Mr. Saferstein's appeal challenged whether the district court used the correct sentencing guidelines manual. The court used a manual from a date later than the date that Mr. Saferstein committed some of his crimes.

If a law changes to increase a penalty, it can't be used to punish a person for conduct that happened before the law was passed. If it does, that violates the ex post facto clause of the constitution.

Similarly, many circuits have held that using sentencing guidelines that were are more draconian and adopted after a person committed a crime violates the ex post facto clause.

So, based on that, if Mr. Saferstein has preserved his right to appeal constitutional issues, then he can win on appeal and be resentenced.

How Do You Construe An Appellate Waiver In A Plea Agreement?

Under the terms of the plea agreement, Mr. Saferstein had not preserved his right to appeal. As the district court construed the appellate waiver in the plea hearing though, he had a right to bring this appeal.

As the Third Circuit teed up the issue:

As a result [of the district court's statement], Saferstein argues that the agreement he entered into voluntarily and knowingly preserves his right to appeal constitutional claims. The Government contends that this statement is not controlling, since it misrepresents the plain language of the plea agreement, which states that the waiver was "not intended to bar the assertion of constitutional claims that the relevant case law holds cannot be waived." The district court's statement is clearly at odds with the otherwise plain and straightforward language of the agreement. That statement thus created a plausible and tangible ambiguity and seemingly expanded Saferstein's appellate rights.

So, which governs?

The Tenth Circuit has previously looked at this. In lovely language, it wrote that

[L]ogic indicates that if we may rely on the sentencing court‟s statements to eliminate ambiguity prior to accepting a waiver of appellate rights, we must also be prepared to recognize the power of such statements to achieve the opposite effect. If it is reasonable to rely upon the court‟s words for clarification, then we cannot expect a defendant to distinguish and disregard those statements of the court that deviate from the language of a particular provision in a lengthy plea agreement. United States v. Wilken, 498 F.3d 1160, 1168 (10th Cir. 2007).

The government's argument was that a plea agreement is a contract. Normally, parol evidence of a contract - that is evidence outside of the contract itself - can't be used to interpret the contract.

But, a plea agreement, unlike a contract, requires a plea hearing under Rule 11 of the Federal Rules of Criminal Procedure.

Based on that, the court of appeals held,

[P]lea agreements must be construed to protect the defendant as the weaker bargaining party [therefore] we must find that a statement made by the sentencing court during the colloquy can create ambiguity where none exists in the plain text of the plea agreement.

Because there was ambiguity, the Third Circuit construed that ambiguity against the government, and allowed Mr. Saferstein to go forward with his appeal.

So, because of the ex post facto problem, Mr. Saferstein is going back for resentencing.

[FN1] - Mr. Saferstein asked his employees to lie in a court hearing about sending postcards.

[FN2] - Did I forget to mention that Mr. Saferstein didn't report all his income on his tax returns?

[FN3] - If there's an IRS agent assigned, and there's a plea, the government almost always wants the person to plead to a tax count. It's annoying.

Former Congressman William Jefferson, a son of New Orleans, will perhaps be best known for having been found with cash - cold, hard, cash - in his freezer.

He was convicted in the United States District Court for the Eastern District of Virginia of eleven charges in connection with a bribery scheme involving his role as a member of Congress and officials in Africa. In a major coup for his lawyer, he was not convicted of the offense involving the cash found in his freezer.

He was convicted, alas. And, the Fourth Circuit affirmed 10 of his 11 counts of conviction in United States v. Jefferson.

The one count they reversed on, though, is exceptionally interesting (to me).

Count 10 - Wire Fraud

Count ten of the indictment against Mr. Jefferson alleged that he violated the federal wire fraud statute, 18 U.S.C. § 1343.

This count was based on a telephone call from Africa to Kentucky on July 6, 2005. The government alleged that the call was in furtherance of a scheme that was hatched, in part, in the Eastern District of Virginia.

His lawyers challenged whether there was venue for such a call in the Eastern District of Virginia. After all, the call was started in Africa and accepted in Kentucky. That doesn't look like it affects the folks who live near the federal courthouse in Alexandria.

The district court rejected the venue challenge.

A Bit Of Background on Venue in a Criminal Case

In a criminal case, a person's right to proper venue is Constitutional - it's in article III, section 2, clause 3; "The Trial of all Crimes . . . shall be held in the State where the said Crimes shall have been committed." It's also contained in Federal Rule of Criminal Procedure 18.

For many federal criminal statutes, Congress has expressly said where venue lies. Money laundering, under 18 U.S.C. § 1956 is a good example. Congress has said that a money laundering prosecution can go forward in any jurisdiction where the money laundering transaction happened, or where the illegal act that requires money to be laundered was done (assuming the person accused did the laundering).

But, for many federal statutes, there's no explicit venue provision. Wire fraud, as it happens, is one of those statutes.

In that case, the Supreme Court has said that a person can be prosecuted in the jurisdiction where the conduct that is prohibited by the statute took place.

Venue in a Wire Fraud Case

Simple enough. What's the conduct in wire fraud?

Mr. Jefferson's lawyers argued that the conduct for wire fraud is the making or receiving of the wire. That's what "wire fraud" is about - using a wire.

The government, on the other hand, said that the elements of wire fraud are (1) the use of a wire that is (2) in furtherance of a scheme to defraud. Either one of those elements is an act necessary to complete the offense, argued the government. As a result, the government said that if either happened in the Eastern District of Virginia, the prosecution was proper there.

In fairness to the government, the Seventh Circuit has said basically the same thing in United States v. Pearson, 340 F.3d 459 (7th Cir. 2003).

Thinking Up A Fraud Scheme Is Not Conduct

The Fourth Circuit sided with Mr. Jefferson. It held that,

The scheme to defraud is clearly an essential element, but not an essential conduct element, of wire (or mail) fraud.

Picking up the phone and making a call is an act. Similarly, for mail fraud, putting a letter in a mailbox is an act. But planning a fraud scheme, not so much. Quoting a Second Circuit case, United States v. Ramirez, 420 F.3d 134, 144-45 (2005), the court of appeals held that,

devising a scheme to defraud is not itself conduct at all (although it may be made manifest by conduct), but is simply a plan, intention or state of mind, insufficient in itself to give rise to any kind of criminal sanctions.

Because Mr. Jefferson only had a state of mind in the Eastern District of Virginia, and didn't use the phone there - Count 10 was dismissed for improper venue.

The moral of the story is that you can think about fraud where ever you'd like. Just only answer the phone where you want to face a jury.

A Joke:

What's the difference between a white-collar investigation and a blue-collar investigation?

In a blue-collar case, the government knows what the person has done, they just don't know who done it.

In a white-collar case, the government knows who done it, they just don't know what they've done.

[insert the sound of a rim shot]

This joke shows two things. First, the bar for lawyer humor is incredibly low. Second, in a white-collar case, once the government has indentified you as a target, they are likely to keep investigating until they find something to charge you with.

United States v. Fenzl makes the same point (the second one, about the tenacity of the Department of Justice - not the one about how bad legal jokes are).

Steven Fenzl's Case

The government targeted Steven Fenzl, and his colleague Douglass Ritter. The two men ran Urban Services of America, Inc. The company bid on a contract to refurbish the garbage cans of the City of Chicago, Illinois. The company's bid was the lowest bid.

Unfortunately, the contract that the company bid on was never awarded. The folks at Urban thought that perhaps it was because there were too few bids submitted in response to the proposal. Though they weren't sure.

A bit after the company failed to win the bid, the Chicago Tribune announced that Urban was under investigation for improprieties in checks that had been issued to other contractors. Though the investigation never yielded a finding of wrongful conduct, no one told the folks at Urban that the investigation was over until months had passed.

Eventually, the City of Chicago again sought bids on a contract to refurbish their garbage cans. Urban had yet to learn that it was no longer under investigation. It was also worried that not enough other bids would come in.

Urban Services of America Organizes Other Bids

The company then started organizing other companies to also provide bids. The arrangements were, in essence, that the other companies would subcontract the work to Urban if it won, then tack on a profit margin for itself.

Not surprisingly, this did not result in these companies underbidding Urban. Since the other companies didn't really do the kind of work they were bidding on anyway - and would have had to subcontract to Urban - this was not a surprising result.

In the end, Urban bid on the contract, as did three companies that Urban encouraged to bid. Three other companies, that had nothing to do with Urban, also submitted proposals.

Urban was the lowest bid of all seven and won the contract.

The Antitrust Division Gets Interested

The United States Department of Justice's Antitrust Division has a criminal section. The prosecutors in that office launched an investigation of Urban.

Bid rigging, generally, is illegal. As the Seventh Circuit said, "bid rigging [is] a form of price fixing in which bidders agree, usually by rotating bids, to eliminate competition among the bidders."

Yet, here, this bid rigging wasn't done to eliminate competition, rather, it was to encourage the city to take the bids seriously, again, the Seventh Circuit:

at some point [the Department of Justice] realized it didn't have an antitrust case. Urban had been the low bidder and its aim in "colluding" with other potential bidders had not been to prevent them from underbidding it but merely to buy insurance against its bid's being rejected because of false accusations against Ritter and Urban; if Urban lost the bid, at least it would be able to obtain some refurbishing work as a subcontractor of the winning bidder. The bidders invited by Urban were almost certain to submit higher bids because Urban would be doing the actual work and charging for it and the bidders would be repricing Urban's work in their bids.

This is, sort of, pro-competitive bid rigging.

The Department of Justice is Not Deterred

The Department of Justice had their man (or company), so the lack of a crime wasn't going to be an obstacle to prosecution.

So the prosecutors decided to charge fraud rather than an antitrust violation. [T]he theory behind the charge of fraud for misleading the City by inflating the number of bids was never made clear at trial. No evidence was presented that the more bidders there were, the more likely Urban's bid was to be accepted and that this would result in a higher price to the City for getting its garbage carts spruced up. Had there been four bidders rather than seven, Urban would still have been the low bidder, and there is no indication that the City would have cancelled the auction on the ground that there were too few bidders.

The Seventh Circuit's later skepticism notwithstanding, the government charged the Urban principals with fraud. Mr. Ritter pled guilty. Mr. Fenzl went to trial and was convicted. He was sentenced to 16 months in prison, a fine of $40,000, and restitution of $35,302.18.

The Seventh Circuit

Judge Posner, who knows a thing or two about antitrust law, wrote for the Seventh Circuit. He was not a fan of this prosecution (Judge Posner is not getting invited to any Department of Justice parties after this opinion, or this one).

As the learned jurist wrote,

It's difficult to see what's wrongful about such a "scheme." Suppose in despair of ever doing work for the City again Urban had sold its assets to another company and told it, "You go bid on the refurbishing contract." Would anyone think such conduct improper? How different is that from what Urban planned to do in case it was denied the contract even if it was the low bidder? Misconduct in bidding involves trying to reduce rather than increase the competition among bidders.

In addition to criticizing the theory undergirding the prosecution, Judge Posner noted that the government proved it's case using the wrong witness.

A government investigator testified - not as an expert witness - that the City would have disqualified Urban's bid if it knew that it had put the other bidders up to their bids. The basis for this knowledge was opaque to Judge Posner.

Without the testimony of City employees,

it is a matter of conjecture whether the relevant employees in the Department would have awarded the contract--at a loss to the City--to a higher bidder, in order to punish Urban (for what exactly?). But instead of asking them what they would have done had they known what Urban was up to, the prosecutors asked an investigator what he thought they would have done. What the government dignifies by the term "personal knowledge"--for a lay witness is permitted to base his testimony on his personal knowledge (and on nothing else)--is the investigator's conjectures based on seven years of "training and experience," an impermissible basis for lay opinion testimony.

Mr. Fenzl was charged under two separate fraud theories in separate fraud charges. On one he was acquitted. On the other, the court of appeals remanded for a new trial.

One wonders what Mr. Ritter - who pled guilty early - thinks of this opinion.

Today, of course, is Valentine's Day. And, so, today's post is a story of marriage, love (presumably), and bankruptcy fraud.

Scott and Debra Spurlin

Scott and Debra Spurlin had a number of assets and bank accounts.

They owned Golden Athletics LLC, which, in turn, owned their three cars. They owned Golden Choice Financial, which owned the house they lived in. They owned International Oil, Gas, and Mineral Management, Inc., which owned an account from which Mr. Spurlin wrote checks to Mrs. Spurlin.

They also had a number of bank accounts.

When it came time to file for bankruptcy, however, the Spurlins said that they had one bank account - with $157 in it; that their assets were only $3,364; and that they owned only one company, Spurlin and Associates. Spurlin and Associates filed for bankruptcy the day after the Spurlins did. The Spurlins did not disclose the other companies that the owned, which, in turn, owned their house and cars.

During the course of the bankruptcy, they also answered a form about Mrs. Spurlin's father. More on that below.

The Spurlins Are Charged With Bankruptcy Fraud

The Spurlins were indicted for bankruptcy fraud under 18 U.S.C. §152(1) for not disclosing their other assets, and for making a false statement in a bankruptcy proceeding under 18 U.S.C. 152(3). Mr. Spurlin was also indicted under, 18 U.S.C. §157(1), for filing for bankruptcy to hid a separate fraud scheme.

After trial, the Spurlins were convicted on all counts. In United States v. Spurlin, the Fifth Circuit reversed Mr. Spurlin's conviction for making a false statement in bankruptcy.

The rest of their convictions stand, however.

The Form

The Spurlins' conviction for making a false statement was based on three questions on a form that the bankruptcy trustee created.

They were asked:

4. Are your parents living? Father _______ Mother _______ Are your spouses' parents living? Father _______ Mother ____

5. If not, was any property left by your parent(s) at the time of death? _________

6. Do you understand that should you inherit anything during the next 6 months it will be necessary for you to advise me (your Trustee) in writing within 10 days? ______

The Spurlins answered that Mrs. Spurlin's father had died, and answered "no" to question 5 - indicating that he did not die with any property.

In fact, Mrs. Spurlin's father did have property when he died. He just didn't leave any property to the Spurlins.

The government argued that they filed out line 5 incorrectly - and thereby made a false statement in bankruptcy. The jury agreed, apparently.[FN1]

Making A False Statement In Bankruptcy

As the Fifth Circuit explained, to prove a violation of 18 U.S.C. 152(3) the government must prove:

(1) there was a bankruptcy proceeding;

(2) defendant made a declaration or statement under penalty of perjury in relation to the proceeding;

(3) the declaration concerned a material fact;

(4) the declaration was false; and

(5) defendant made the declaration knowingly and fraudulently.

Here, there was no question that elements (1), (2), and (3) were met. There was a bankruptcy proceeding and the form indicated clearly that it was filled out under penalty of perjury. The standard for materiality is very weak - as the Fifth Circuit said, quoting the district court,

The court described a material fact as one that "has a natural tendency to influence or is capable of influencing the decision of the decision maker to whom it was addressed." The assets available in bankruptcy will influence how the trustee handles the bankruptcy, because bankruptcy is about distributing the available assets.

What Did The Form Ask?

The Spurlins and the government disagree, however, about whether the statement was false.

The Spurlins argued that that, given the context in which it was asked, question 5 really means "Did the deceased parent leave any property to you?" not just whether they left any property at all.

The Fifth Circuit agreed. Very few people die without any property of any kind - if you adopted the government's reading of the question it wouldn't get any useful information. Moreover, the whole point of the question is to find out about assets of the people in bankruptcy - why would the Trustee care about other assets that people's parents left?

And, so, Mr. Spurlin's conviction on this count was reversed for insufficient evidence - because the statement wasn't clearly false, there was not enough evidence for a jury to convict him.

Mrs. Spurlin's Testimony

Mrs. Spurlin, however, did not fare as well.

Mrs. Spurlin testified at trial. On cross, the government asked her how she interpreted question 5 of the form that she filled out.

Here's the exchange:

Q. And the question did not ask whether or not you owned any property following your parents' death, did it?

A. No.

Q. It simply asked: Was there any property left by your parents at the time of death?

A. Correct.

Q. And the answer given here is no?

A. Correct.

Q. And that wasn't accurate, was it?

A. No. I did not fill this out, ma'am.

The Fifth Circuit found this concession to be fatal. Because she admitted that the answer to question 5 was false, the court of appeals determined that the jury had enough evidence to decide that the answer was false, as to her.[FN2]

This strikes me as odd. If the answer is false, it's false, and if the answer is true it's true. I could see Mrs. Spurlin's answer being relevant to whether she intentionally made a false statement, but that's not what's up for debate.

I think, rather, that this is simply an example of why it's very bad for a person to admit to an element of a crime - it gets very hard to undo that later.

[FN1] - Though, frankly, there's so much going on in the rest of this case I think there's reason to doubt how much the jury actually thought about how to interpret this question.

[FN2] - Mrs. Spurlin's defense was that she didn't fill out the form. The Fifth Circuit rejected that as a defense, since she still said everything was accurate under penalty of perjury. In other words, it isn't an element of making a false statement in bankruptcy that you fill out the form yourself.

One of the most disturbing trends in federal law enforcement, is the way the criminal law is being used to regulate business practices.

If someone commits a substantial fraud - that's an appropriate basis for a prosecution. But we shouldn't put people in prison just because something bad happens in business.[FN1]

The Sixth Circuit's opinion in United States v. Parkes is a good example of why prosecution shouldn't be the best option for a bad business decision (as opposed to, say, regulatory enforcement action, or a civil suit).

Remington Industries

Timothy Parkes and Mark Mourier had a vision. They wanted to start a company that would manufacture and distribute floor mats for automobiles.

They started the company in Canada, but soon moved it to Benton, Tennessee. It grew to become one of the largest employers in Benton.

Of course, any business needs a relationship with a bank. Mr. Parkes and Mr. Mourier developed a relationship with the President of Benton Bank - Jim Goddard.

At one point, Parkes and Mourier had an idea - a fantastically bad idea. They would change their manufacturing process, and make floor mats using untested chemicals. It required them to redesign and upgrade their manufacturing process - a massively expensive proposition.

The end result of the upgrade was that Remington made floor mats that would melt in the summer heat.

This change cost the company more than $1.5 million from 2000 through 2002. They retooled their company, and shut down the new manufacturing line. They started buying floor mats made in China - converting from being a manufacturer to a distributor. This transition was going well, but they needed money to keep going.

As a result, the company had to go to Mr. Goddard to borrow more money from Benton Bank.

Benton Bank

Benton Bank was a small bank, with less than $10,000,000 in capital. The FDIC wouldn't let Benton Bank lend more than 25% of its capital to any one customer.

Remington's loans exceeded these limits. As a result, Mr. Goddard asked Remington to borrow money from someone else.

Remington did. They borrowed from a private equity firm, and repaid Benton Bank. As a part of the deal, Benton Bank had to agree to issue an irrevocable line of credit to Remington.[FN2]

Remington then defaulted on the private equity firm's loan, and the private equity firm forced Benton Bank to honor its line of credit.

Things were a little hairy at that point. Benton Bank honored its line of credit, but was then in violation of the FDIC's requirements. Then, Mr. Goddard had a very clever idea.

Mr. Goddard

Mr. Goddard was, as it happens, already embezzling sums of money from Benton Bank. He was a man who knew his way around the fraudulent booking of a loan.

Faced with a need to make the FDIC think that his bank's position was not in violation of their regulations, he simply booked ten small loans to non-existent entities, then took the total of those loans and gave the money to Remington.

Problem solved. Sort of.

Mr. Goddard Gets In Trouble

As the court of appeals noted, "[e]ventually Goddard's years of wrongdoing unraveled and he left the Bank."

After he left, and as things were starting to move to federal law enforcement's attention, someone found a fax in Mr. Goddard's office, which was a printed email to the lawyer for Remington. The email that was faxed was from Mr. Parkes, and copied Mr. Mourier, and listed ten new companies that Mr. Parkes sought to have the lawyer create.

The ten company names were the same companies that Mr. Goddard used to create the fake accounts on Benton Bank's books.

Mr. Parkes and Mr. Mourier Get Into Trouble

This was enough for the FBI. Mr. Parkes and Mr. Mourier were indicted for bank fraud.

Though Mr. Goddard was a government cooperator, he was not called by the government as a witness. Instead, the government relied heavily on the fax as evidence that Mr. Parkes and Mr. Mourier knew what Mr. Goddard was doing.

This was enough for the jury. Or, at least it was as to Mr. Parkes. After trial, Mr. Parkes was convicted of ten counts of bank fraud. Mr. Mourier was acquitted.

The Sixth Circuit

This evidence, however, was not enough for the Sixth Circuit. Its not often to see a court of appeals reverse a conviction for sufficiency of the evidence, but they did. In a lovely turn of phrase, the court concluded that,

Even viewing the record in the light most favorable to the government, there was insufficient evidence to connect Parkes to Goddard's fraud, much less to prove beyond a reasonable doubt that Parkes intended that fraud. Surprisingly, the government offered no testimony from Goddard to establish that Parkes cooperated in, or even knew of, the scheme, even though Goddard had already pleaded guilty with an agreement requiring him to testify "completely and truthfully . . . if called upon by the United States to do so." While that failure does not directly impact the sufficiency of the evidence, it does leave the evidentiary cupboard nearly bare.

Not content to stop there, the court of appeals then went on to criticize the district court for not allowing the defense to introduce evidence of Mr. Goddard's prior embezzlement, and to criticize the prosecutor for an inappropriate argument in closing.

The inappropriate argument was particularly bad. The prosecutor told the jury that an acquittal would let Parkes and Mourier keep $4 million dollars. But the prosecutor already knew that the money had been paid back to the bank. Indeed, the prosecutor had argued - successfully - not to let that evidence get to the jury.

This is a fantastic case - it's a lovely rebuke to the government for assuming that everyone who deals with a bad apple is, herself, bad.

[FN1] - Relatedly, the idea that any time there's a recession someone on Wall Street should go to prison radically misunderstands the proper function of a system of criminal justice. Sure, if you want to form an angry mob and attack the people who caused something bad, sending executives to prison for bad decisions makes sense. But a more enlightened view is that the government ought to first prove that a person did something that she knew was a crime before she is sent to prison, not just that she worked on Wall Street shortly before the economy took a nosedive.

Medicare is a huge federal program. It's also a huge source of criminal liability for doctors and other health care providers, as they try to comply with the byzantine regulations for billing issued by the Centers for Medicare and Medicaid Services.

Take United States v. Jones as an example.

Statewide Physical Medical Group

Telandra Jones and Theddis Pearson started a health care company with a few other people. It was called Statewide Physical Medical Group. The state that it was wide was Mississippi.

Mr. Pearson was the CEO. Ms. Jones handled the billing remotely, from Dallas, Texas.

Statewide's patients were first evaluated by a doctor to see if they needed therapeutic exercise. If they did, and the doctor ordered it, Statewide would send a person to the patient's home.

The people who were sent were kinesiotherapists. These therapists provided care at the patient's home without a doctor present.

Medicare's Rules for Physician Supervision

The rub is that Medicare's billing regulations require that a doctor supervise a kinesiotherapists' work. And, for Medicare billing, while, "supervise" doesn't mean that the doctor is in the same room, it generally means that the doctor is in the same building and can come in and help if need be.

If that's the definition, then Statewide's kinesiotherapists were not supervised by physicians.

So, it looks like the therapeutic work that Statewide submitted bills for did not comply with the Medicare billing regulations. Which is a pleasant way of saying that Statewide's bills may have been fraudulent.

There was one saving possibility for Statewide's billing practices - there is an exception to the direct supervision rule for people in certain kinds of underserved areas and for home treatments with other kinds of home health benefits under Medicare had been exhausted. If this exception applied, then there was an exception to the physician supervision requirement. If there was an exception to the physician supervision requirement, then there was no Medicare fraud!

Ms. Jones and Mr. Pearson relied on this provision.

At trial, the government presented evidence that the Statewide's interpretation was untenable, in the form of an expert about Medicare billing.

It looked like maybe Statewide has an argument there. The trouble, however, was that Statewide billed more for the task than for the amount of time it spent.

The government's Medicare billing expert explained to the jury that Statewide's billing practices caused treatments that took an hour to be billed as taking ten hours.

That's never going to look good to a jury.

Who Knew What When

The question then, turned on whether Ms. Jones and Mr. Pearson knew that they were submitting fraudulent bills. The process for sending bills in was a little complicated. First a secretary in an office - there were seven - would collect the therapists' treatment records and enter that data into a billing sheet.

The therapists did not keep records of how much time they spent, just what treatments they performed.

These billing sheets were then sent to Ms. Jones in Dallas, who turned them into bills to Medicare, based on the part of the body that was treated, instead of the amount of time that the treatment took.

Mr. Pearson was the CEO and generally managed the day-to-day affairs of the company, including its billing systems.

The Medicare Fraud Indictment

Mr. Pearson and Ms. Jones were charged with conspiracy to commit Medicare Fraud, Medicare Fraud, theft of government funds, health care false statements, and money laundering.

The jury convicted Ms. Jones because she was the one who submitted these bills to Medicare. There was evidence that Mr. Pearson was in the weeds with the business - he was convicted for also having the requisite knowledge.

Mr. Pearson was convicted of making false statements relating to health care. Both Mr. Pearson and Ms. Jones were convicted of theft of government property and health care fraud.

The Jury Verdict Form

To make a false statement in violation of 18 U.S.C. § 1035, a person has to make the false statement knowingly and willfully." It isn't enough if the person makes a mistake and submits false information - the statement has to be a lie.

So, we don't send people who make math errors to prison. It's only if the math errors are made on purpose - so they aren't really math errors, as such - that the person makes the willfully false statement.

In Mr. Pearson's case, the jury verdict form did not use the legal standard for what the person charged with the crime had to know from section 1035. Rather, the jury was told that they could convict if they found that Mr. Pearson

"knew, or should have known, that the services billed by [Statewide], were not provided by a physician or under the direct supervision of a physician, as required by Medicare."

This jury instruction is much weaker than what the statute requires. If a person "should have known" that 2+2=4, but puts 5 when adding 2 twice, she meets this standard. And that's not what section 1035 allows.

As a result, Mr. Pearson's conviction was reversed and sent back for a new trial.

Related Posts:

• The Eighth Circuit Holds that Health Care Kickbacks Are Different Than Fraud


• How Not To Respond To A Grand Jury Subpoena

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

What's the point of prosecuting crime? What's the point of putting people in prison?

Surely, in any well-functioning society - let alone any well-functioning democracy - there are a number of good reasons for prosecuting crime. There are also some that are not as obviously good.

Prosecuting crime prevents the people who commit crimes from being in a position to commit further crimes. Specific deterrence - deterring the specific person - makes sense as a function of sentencing.

Prosecuting people lets other people who are considering committing a crime know that if they are caught they will go to prison. If people fear prison, they may act in a way to avoid it, which means there may be less crime.

Prosecuting crime provides a sense to victims of a crime that what happened to them is recognized as wrong. There's likely some value to society to having moral evaluations have force.

At the same time, each prosecution and conviction also creates a stat for the law enforcement agents, law enforcement agencies, and prosecutors involved. They can collect these stats and show them to their bosses, or to Congress. The IRS's criminal agents had X number of convictions per agent against the FBI's Y per agent - perhaps the IRS is a more effective law enforcement agency.

Stat based evaluations do, however, make it awfully hard to walk away from a case once labor has been invested in it.

Convictions also let prosecutors put out press releases, telling our good citizens that work is being done (and who is doing the work). Especially if the press release doesn't reveal any reasons not to bring a case - like that it fails to serve many of the other ends of prosecution - the community will celebrate the prosecutor('s efforts).

I invite you to think about these reasons for prosecuting crime when you think about the Seventh Circuit's recent case of United States v. Robertson.

Meet The Robertsons

Henry and Elizabeth Robertson were like many other couples. She worked as a pediatric nurse. He worked as a cable installer.

Many couples have hobbies that they enjoy for a time, then stop. I recall my wife and I went through a period where we played Mancala relentlessly. It lasted perhaps two years. Then we set the game aside.

The Robertsons didn't have Mancala - instead, for a period of time in the 1990's, they had a real estate company in Chicago. Using that company, the Robertsons defrauded a number of lenders out of $700,000. Eventually, the company collapsed, the Robertsons went bankrupt, and life moved on.

The weren't charged with a crime at that point. Elizabeth continued working as a pediatric nurse. Henry kept installing cable television. The coached their kids soccer teams. Henry was elected block president to help keep their neighborhood crime free. Two of their kids went to college. One went into the military.

The Skies Darken

One day before the ten-year statute of limitations on bank fraud ran, the Robertsons were charged with bank and wire fraud for the real estate fraud.

They pled guilty.

The Sentencing Hearing

The Robertsons argued that the district court should consider and give more weight to the Robertsons conduct after the mortgage scam ended. They had disavowed their prior way of life. They gave back to others and to their community. They were, in many meaningful ways, very different people than when they had originally been sentenced.

The government even generously acknowledged that,

"over a 'relatively significant amount of time,' the Robertsons had 'demonstrate[d] to the Court, to society, that they can stay out of trouble.'

The sentencing judge didn't find this conversation interesting, apparently. He talked about the Robertsons' lack of criminal history, then he sentenced Henry Robertson to 63 months in prison - just over 5 years. He sentenced Elizabeth Robertson to 41 months - or three and a half years.

The Seventh Circuit Reverses

The Seventh Circuit did not approve of how the district court approached the Robertsons' rehabilitation.

First, the court of appeals noted that how a person lives his life after a crime is committed is incredibly important to what kind of sentence he should receive, particularly under Gall and Pepper, recent Supreme Court decisions:

The power of evidence of self-rehabilitation was evident in Gall, where the Supreme Court noted that it was reasonable for the district court to attach "great weight" to a defendant's decision to change his life and withdraw from a drug distribution conspiracy: "Compared to a case where the offender's rehabilitation occurred after he was charged with a crime, the District Court here had greater justification for believing [the defendant's] turnaround was genuine, as distinct from a transparent attempt to build a mitigation case." 552 U.S. at 57. Such self-motivated rehabilitation "lends strong support to the conclusion that imprisonment [is] not necessary to deter [a defendant] from engaging in future criminal conduct or to protect the public from his future criminal acts." Id. at 59.

The court of appeals faulted the district court for not meaningfully discussing these rehabilitative efforts. As the court held,

Substantial and reliable evidence of genuine rehabilitation presents a non-frivolous argument for imposing a sentence below the Guideline range. See Pepper, 131 S. Ct. at 1235; Gall, 552 U.S. at 57. Such arguments must be properly addressed and weighed by the sentencing court. A sentencing court's consideration of a defendant's non-frivolous arguments in favor of mitigation certainly may be brief, but it must also be meaningful. As we explained in Cunningham: "Whenever a district judge is required to make a discretionary ruling that is subject to appellate review, we have to satisfy ourselves, before we can conclude that the judge did not abuse his discretion, that he exercised his discretion, that is, that he considered the factors relevant to that exercise." 429 F.3d at 679. Here, we cannot determine whether the sentencing judge abused his discretion by, for example, overemphasizing the seriousness of the Robertsons' offense or Henry's criminal history or underemphasizing their rehabilitation in balancing the § 3553(a) factors, because it is not apparent from the sentencing transcript that such a balancing took place. Accordingly, we vacate and remand for resentencing.

It's good that this case is going back for resentencing. I wonder, though, why the case was brought in the first place.

It's good to be king.

The government, in a criminal investigation, can issue a grand jury subpoena to collect evidence and put witnesses under oath. It can execute search warrants to go into a home or business and take documents. It can cut deals with people it thinks are involved in a criminal enterprise, so that they'll spend less time - or no time - in prison if they turn in someone else.

Someone fending off a government investigated can't do any of this.

Normally, if a person has information that would make someone who hears it think the person is guilty of a crime, that person has a right to refuse to talk about it. It's a part of the Fifth Amendment. The government has a fix for that problem too - if a witness won't talk, and won't play ball by cooperating, the government can ask a court to grant the person immunity. The statute that lets a court grant immunity is at 18 U.S.C. § 6003.

If a court grants a person immunity, that person cannot be prosecuted based on the information he provides. That's in 18 U.S.C. § 6002. There's an exception if the person lies or does something similar when immunized, but, beyond that, a person with immunity cannot be prosecuted for what they talk about.

Getting immunity can be a very good deal.

What about defense witnesses though? Surely, there are times when a person who is accused of a crime identifies a witness who he needs for his defense, yet the witness may get himself charged with a crime if he provides information.

For example, imagine that a witness knows a person accused of a crime didn't commit it, because the witness and the accused were across town counterfeiting money together at the time of the alleged crime. The witness refuses to testify and invokes his Fifth Amendment right not to - he doesn't want the government to put him in prison for the counterfeiting.

Can the defense ask the court to give immunity to the witness?* If so, when?

That was exactly the situation that the district court dealt with in United States v. Wilkes. The Ninth Circuit issued an opinion on this very question.

Mr. Wilkes was accused of bribing Congressman Duke Cunningham.** The government alleged that Mr. Wilkes made inappropriate gifts to the Congressman - including a trip to Hawaii where they enjoyed the beach, scuba diving, and prostitutes.

In exchange, Mr. Wilkes' company was alleged to have sold inferior products to the United States government.

A number of people testified against Mr. Wilkes. They worked for his company and the government had asked the district court to grant them immunity. The district court did. They testified against Wilkes.

One of Mr. Wilkes other employees would have told a different story. The district court listened to what Mr. Wilkes lawyer said the witness would say. The court concluded,

I have to tell you the proffer I have as to what this fellow can offer strikes me as material and relevant evidence that the defense would want to present to counter some of what's been presented by the United States through immunized witnesses.

So, naturally, the trial court ruled that

The court, having fully heard all counsel, denies the motion to convey use immunity.

The district court believed that it could only grant immunity if the prosecutors had intentionally engaged in misconduct. As the court saw things,

unless it's somehow tethered to the suggestion of prosecutorial misconduct, I don't think it's appropriate for the court to make determinations of who gets immunity and who doesn't. In the first instance, under our system of Government, that's a prosecutorial decision. And unless I can find that the way in which discretion was exercised was unfair so as to deny the defendant a due process right, then it's not appropriate for me to substitute my judgment for that of the prosecutor. I do have a concern about the effect of not granting immunity in this case, but I would have the same concern if it was a different privilege implicated over which I'd have no authority to pierce the privilege and order a witness to testify, any number of other privileges. So it's an effect that the criminal justice system lives with and accommodates.

One can imagine that the court's regret about this "effect" was not very comforting to Mr. Wilkes.

Happily, after Mr. Wilkes trial, the Ninth Circuit decided United States v. Straub. (click for Ninth Circuit blog commentary)

Straub held that a district court should order immunity when the testimony would be relevant and the prosecutor gave immunity to one witness, but not to another who would have contradicted the one the prosecutor choose, and that choice by the prosecutor

the effect of so distorting the fact-finding process that the defendant was denied his due process right to a fundamentally fair trial

(Keep in mind, friends who aren't from the left coast, the rule in your part of the country may be different.)

Based on this standard, the court of appeals remanded for a hearing on whether the district court should have immunized the witness under Straub. The appellate court did note, though, that "[t]he district court also repeatedly expressed its concern that not granting Williams immunity would have the effect of distorting the fact-finding process." So perhaps the court of appeals thought it knew how this would turn out.

The rest of the opinion in Wilkes is a bit bleak. I wouldn't read it unless you're a prosecutor or looking to be saddened.

* This is assuming the defense is willing to swallow a conviction on the counterfeiting. There's probably a better hypothetical out there.
** The opinion says that the total list of charges were "one count of conspiracy
(18 U.S.C. § 371), ten counts of honest services wire fraud (18 U.S.C. §§ 1343 and 1346), one count of bribery of a public official (18 U.S.C. § 201), and one count of money laundering (18 U.S.C. § 1956(a)(1)(B)(i))."

Much in the same way that phrenology was an effort to catalog every mental deficit that humans can possess, the federal sentencing guidelines are an effort to catalog precisely how bad every kind of federal crime that can be committed is.

The comprehensiveness of the sentencing guidelines can be stunning. Section 2N3.1 sets out how bad odometer law violations are (not all that bad). Section 2T3.1 deals with customs taxes (as opposed to tobacco taxes in 2T2.1). Offenses involving fish, wildlife and plants are discussed, in detail, in section 2Q2.1. Willful violations of the Migrant and Seasonal Agricultural Worker Protection Act have their own section, 2H4.2.

You get the idea.

This makes the Ninth Circuit's opinion in United States v. McEnry kind of an anomaly.

Mr. McEnry flew a plane without a license. This is a federal crime, prohibited by 49 U.S.C. § 46306(b)(7).

There is no guidelines section that deals directly with how bad it is to fly a plane without a license. (As a reflection on society, this is probably a good thing.)

Here are the basic facts, from the opinion:

On January 5, 2009, McEnry landed a Cessna 210F aircraft at the Eastern Sierra Regional Airport in Bishop, California. The circumstances of his landing were unusual: he did not communicate with the airport by radio during his approach and landing, and he touched down significantly farther along the runway than would be the case on a normal landing. When the plane did land, it overran the runway. McEnry's behavior on getting out of the plane was also unusual. He tied the plane down at its two wings, but neglected to tie down the tail, as one would normally do. He did not walk purposefully toward the terminal, but wandered about before approaching it. On arriving at the terminal, he asked where he was and claimed that he had flown through military airspace, during which time military aircraft flew alongside him and fired flares. Someone at the airport called the police, reporting that McEnry might have been under the influence while flying.

The things that were not relevant to this opinion, but were noted any way, are many. For example,

The cause of McEnry's erratic behavior is disputed. The district court ultimately ruled that, regardless of the cause, McEnry was in a condition in which he should not have been flying, and neither party contends that the issue has any bearing on the selection of the guideline under which McEnry should have been sentenced.

Or,

There is some evidence that, subsequent to his arrest in this case, McEnry made false statements in his application for a pilot's license. As with the cause of McEnry's behavior, this evidence has no bearing on the question before the panel.

Or,

At sentencing, the government presented a variety of evidence suggesting that McEnry was involved in drug trafficking. Neither party argues that this evidence was relevant to the determination of the correct guideline. The district court determined that the drug trafficking-related evidence is "not any evidence" which "simply doesn't approach preponderance, doesn't even approach the sufficiency to draw an inference," and concluded that it "d[id]n't find any basis in fact or law to enhance the sentence based on the evidence that's been received." The government does not contest this finding. Accordingly, this evidence is not relevant to McEnry's appeal.

In any event, the district court sentenced Mr. McEnry as though he had interfered with a flight crew in a commercial flight, thinking that this was the closest thing to the harms that Mr. McEnry caused in this case. The district court applied § 2A5.2(a)(2)(A).

Mr. McEnry, on the other hand, argued that this was closer to a fraud offense (something like by flying he was representing that he was licensed to fly when he was not - a performative utterance, or something along those lines), and that § 2B1.1 should be the relevant guideline.

The district court sentenced Mr. McEnry to 21 months in prison based on the interfering with a flight crew guideline.*

The Ninth Circuit reversed. The court of appeals held that in those rare cases where there's no applicable sentencing guideline, a district court should apply the guideline closest to the elements of the offense. That's not what the appellate court concluded the district court did,

In concluding that § 2A5.2 was the appropriate guideline to apply to McEnry's offense, the district court remarked that § 2A5.2 "isn't directly applicable for the offense, which is operating without the airman's certificate." Explaining its choice, it noted that § 2A5.2 "does, if you will, raise or track some of the kinds of risks that are raised." Thus, the district court based its choice not on the elements of the offense or the facts alleged in the indictment, but on the defendant's particular relevant conduct and the risk it created.

The Ninth Circuit determined that Mr. McEnry's offense is really closest to a fraud crime, and his case was sent back for resentencing.

* This makes me think that it isn't entirely credible that the sentencing court ignored all the facts that it was supposed to.

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.

It's money laundering week here at the Federal Criminal Appeals Blog. Yesterday, I wrote about Walter Blair, the lawyer who was convicted for performing extra-legal services.

Today, the Third Circuit issued a happier decision (though not for the government) in United States v. Richardson.

The Dream of Home Ownership

Asya Richardson was the fiancé of Alton Coles, a known drug dealer in Philadelphia. Mr. Coles was also something of a renaissance man, promoting a series of nightclub events and running a record label, Take Down Records. The nightclub generated revenue and broke even. Take Down Records was not financially successful.

Ms. Richardson and Mr. Coles wanted to realize the American dream of home ownership. This presented a problem. Ms. Richardson only made $22,800 a year as a customer service representative at Bank of America. Mr. Coles asserted that he made $100,000 a year as the CEO of Take Down Records. Unfortunately, Mr. Coles, like many entrepreneurs, had bad credit.

The solution? Mortgage fraud. The couple decided to put the house in Ms. Richardson's name, and they said in their paperwork that she made more than $110,000 per year.

This allowed the couple to purchase the house together, but place it in Ms. Richardson's name.

Closing Costs

They still needed money for the down payment though. Here's how the court of appeals describes how they funded part of the money they brought to settlement.

The day of settlement was marked by a flurry of banking activity. At 12:08 p.m., a $9,800 cash deposit was made into Coles' and Richardson's joint checking account at PNC Bank. This deposit took place at a PNC branch located in Philadelphia. At 1:12 p.m., Coles made a $9,140 cash deposit into Take Down Records' business account. The funds were later transferred to Coles' personal checking account and used towards the down payment. Half an hour later, at the same bank branch, Coles deposited $9,200 in cash directly into his personal checking account. At 3:33 p.m., Richardson made a $9,200 cash deposit into the couple's joint checking account. This deposit was made at a PNC branch located in Stratford, New Jersey, which was near the location of the settlement. Finally, at 4:00 p.m., Coles made a $6,160 cash deposit into a Wachovia checking account belonging to his son. This deposit, too, occurred at a branch located in Stratford.

The settlement went smoothly and the couple became happy homeowners.

Trouble Brews

Sadly,

shortly after the couple had moved into the new home, a federal grand jury returned an indictment charging Coles with a single count of possession of a firearm by a convicted felon. Three superseding indictments followed charging Coles and others with various drug trafficking and firearms crimes. On March 22, 2006, a fourth superseding indictment was filed charging Coles and Richardson with money laundering, 18 U.S.C. § 1956(a)(1)(B)(i), conspiracy to commit money laundering, 18 U.S.C. § 1956(h), and wire fraud, 18 U.S.C. § 1343.

The couple went to trial, along with others. Mr. Coles was convicted of the drug distribution charges, as well as the money laundering. Ms. Richardson was convicted of money laundering. Both were acquitted of wire fraud.

Ms. Richardson was sentenced to twenty-four months in prison.

The Appeal

On appeal, Ms. Richardson argued that there was not enough evidence to support her conviction for money laundering.

As the Third Circuit explained, to find someone guilty of money laundering, the government has to prove:

1. an actual or attempted financial transaction;


2. involving the proceeds of a specified unlawful activity;


3. knowledge that the transaction involves the proceeds of some unlawful activity; and


4. knowledge that the transaction was designed in whole or in part to conceal the nature, location, source, ownership, or control of the proceeds of a specified unlawful activity.(internal textual modifications omitted)

Ms. Richardson argued that there was not enough evidence that she knew that the transaction was being used to launder drug money to convict.*

The government countered that the intricate set of deposits on the day of settlement strongly indicated that something was afoot. All the deposits were under $10,000, giving a strong argument that they were made to defeat the reporting requirement that is triggered by a $10,000 deposit.

This, by the way, is itself a crime, prohibited by 31 U.S.C. § 5324, and known as smurfing.**

However, as the court noted, there was precious little showing that Ms. Richardson herself was aware of the pattern of deposits.

The government argued that not having Mr. Coles name on the loan was suspicious. And, the government pointed out, that Ms. Coles lied about her income to get the loan - surely that's suspicious.

In a passage sure to warm the hearts of mortgage brokers everywhere, the court noted,

These circumstances show that Richardson lied about her income and had the property titled in her name, not to hide Coles' involvement (which by then was perfectly obvious), but to get around Coles' bad credit and purchase the house as planned. No jury could have reasonably reached a different conclusion.

(internal citation omitted)

This wasn't money laundering - it was mortgage fraud. With a little more than a year left on her sentence, Ms. Coles conviction was vacated.

 

* She also argued, based on United States v. Santos, that the money laundering statute only applies to profits from drug dealing, not gross receipts, and that the money here involved gross receipts. The court of appeals rejected that argument.

** And, yes, that's my second Smurf reference in a money laundering post this week. Here's an odd article on how "smurf" is used that doesn't include this NSFW varation.

White-collar criminal cases present unique challenges. White-collar cases often involve vast amounts of information - in addition to a subject matter that's complicated and all the difficulties of a general federal criminal case.

For example, I had a case that had close to 60 gigabytes of evidence produced by the government, not counting the information that I collected through my own investigation.

The information deluge is a problem in figuring out a case. It's also a problem in figuring out how to present a case to a jury.

Yet the way this information is conveyed to the jury in a white-collar case is the same as in any trial - it is primarily explained through witnesses or other demonstrative evidence. No trial lawyer sends the jury back with 80 boxes of documents and tells them that if they examine it all, they'll reach the right verdict.

The government often handles this challenge by using summary evidence. Basically, the Federal Rules of Evidence lets a party introduce evidence that summarizes other evidence in a case. So, the government will frequently make a chart that summarizes what other documents in the case revealed, or what other witnesses said. The summary is admitted as evidence - it gets shown to the jury during trial and it goes back to the jury room during deliberations.*

Of course, summary evidence is often not a friend to the defense. By cherry picking the worst parts of the documents, the government can create an impression for the jury that's unhelpful in the quest for an acquittal.

The Tenth Circuit, in a mortgage fraud case, recently reversed (one count of) a conviction because the district court admitted a summary chart that was clearly inadmissible. The case is United States v. Irvin.

The core of the mortgage fraud case was that the people on trial - Mr. Vanatta and Mr. Miller - had provided false information on behalf of home buyers so that they could get mortgages. Mr. Sparks helped and was charged. He preferred his chances with the United States Attorney's Office's 5K1.1 committee, and testified for the government.

As the Tenth Circuit explained the allegations,

In order to ensure that otherwise unqualified buyers could obtain financing, Sparks and Vanatta enhanced such buyers' apparent creditworthiness by, among other things, overstating the buyers' income, altering bank statements to add deposits, and drafting false letters of employment. The mortgage lenders were further induced to extend financing through Miller's use of inflated home appraisals, overvaluing the relevant properties and thereby enhancing the lenders' perceived loan-to-collateral ratio.

If you've been reading the news lately, or purchased a home between 2003 and 2008, these kinds of allegations are probably not new to you.

The summary evidence in United States v. Irvin summarized a large number of loan documents.

The underlying loan documents, though, were not admitted into evidence. In fact, they were inadmissible as hearsay, because they contained thousands of statements of facts.

Hearsay, for the uninitiated, includes statements in documents that someone wants to get in front of a jury - it isn't limited to someone repeating what another person said from the witness stand.

So, if you have an email from Larry, and Larry describes something that happened, Larry's email is hearsay.

Hearsay can be a part of a trial, but there has to be an exception that applies to allow it to be admissible. There are many hearsay exceptions.**

One hearsay exception is for business records. If, for example, a mortgage company keeps certain records for it's business, and you can meet certain criteria, and have someone from the mortgage company testify that those criteria are met, then you can introduce the loan documents.

Though in Irvin, the government didn't do that. It had no witness from the company to show that the hearsay exception applied, so it wasn't able to admit them.

Since the documents that made up the summary document were inadmissible, the summary document itself was inadmissible.

* This is not the same, as a matter of legal doctrine, as a summary witness. The government really likes to use those too. When the government uses a summary witness, an agent will get on the stand and basically narrate what she can about what happened in the case - it's like the government gets to provide another opening statement. As the D.C. Circuit has observed, there are some problems with summary witnesses too.

** Here's a cute video on hearsay exceptions that may not make any sense if you haven't been to law school.

(Why do lawyers think it's funny to see legal terms used in a song?)

So often the difference between doing something normal and committing a crime is what's in someone's mind. White collar crimes turn on intent - mail fraud, wire fraud, securities fraud, and bank fraud all look to what was in the mind of the person accused of the crime.

Yet, intent is also a hard bit of evidence to secure. Unless there's a smoking gun document - which is ever more likely in this age of email - there is no direct evidence of intent in most cases.

And, ultimately, what a person accused of a crime intended is a question for the jury. As an NACDL article on the topic notes, we know that Martha Stewart was thinking because a jury says we did.

The way a jury decides intent, therefore, is crucial. Which makes the Third Circuit's decision in United States v. Waller so very interesting.

There, the Third Circuit reversed and remanded for a new trial because of the intent instruction used by the district court.

The trial court instructed the jury that:

Intent ordinarily may not be proved directly because there is not a way of fathoming or scrutinizing the operation of the human mind. However, you may infer a defendant's intent from all of the surrounding circumstances. . . . You may also consider any statements made or omitted by the defendant, as well as all other facts and circumstances in evidence which demonstrate the defendant's state of mind.

The jury heard this instruction, then found that the defendant had the requisite intent - Mr. Waller was found guilty.

The Third Circuit found that this instruction violated Mr. Waller's constitutional rights.

The instruction contained the phrase "You may also consider any statements made or omitted by the defendant" - Mr. Waller's counsel argued that this violated Mr. Waller's right to remain silent.*

The Supreme Court has already held that a prosecutor can't argue that someone is guilty because he invoked Miranda (much the same way the Fourth Circuit has held that a refusal to consent to search does not give a police officer permission to search).

The Third Circuit just extended that holding to a trial court's instructions.

Because the trial court's instruction let the jury infer intent merely from Mr. Waller invoking his constitutional right not to talk when he was arrested, or not to speak in his own defense at trial, the instruction violated his rights.

 

* Doctrinally, there are a few distinct rights to remain silent. One is a Sixth Amendment right to counsel, which undergirds the requirement that a person be given Miranda warnings. The other right is a Fifth Amendment right to refuse to self-incriminate. There is also a Due Process right not to speak.

Sometimes it's hard to know what's been stolen, even after it's gone.

Suppose I go swimming with David Lat. While we're in the pool, Tom steals our wallets. If Lat and I both have $10 in our wallet, we know what Tom took - he took $20.

What if Lat and I both have credit cards? Suppose Lat has an Amex Black card with a $100,000 limit and I've got a Capitol One card with a $1500 limit. Tom charges a $40 annual subscription to the Green Bag to each card (one for him and one for his mom - and worth every penny, by the way). What is the value of what Tom has tolen?

 

Perhaps he's stolen $80, the value of the things he charged on the credit cards?

Perhaps he's stolen $101,500, the credit limit of the two credit cards?

Perhaps he's stolen something in between - the foreseeable amount that he'd be able to charge on each card, maybe capped by the actual amount on the cards? So, if on assumes that the average credit limit is $10,000, he stole $10,000 from Lat and $1,500 from me.

Under the federal sentencing guidelines, much of a person's sentence is riding on how you calculate the loss from an economic crime.

It was just this question that the Tenth Circuit answered this week in United States v. Manatau.

There, the court of appeals held that the guidelines are clear - loss means intended loss. It has to be the amount that the person intended to take, not the amount that the person could have taken, or the amount that a person in general would think that he would have been able to take.

The government argued that the loss amount should be the full amount that the person could have taken - to use my example, the loss would have been $101,500. The court found no support for this view, noting that the guidelines incorporate a mens rea requirement - that is, the guidelines only punish a person for what he, himself, thought he was taking.

Should a person who steals a credit card be punished more severely for stealing in Georgetown than in Columbia Heights?

Maybe. What this opinion makes clear, I think, is that if a thief is in Georgetown to steal a credit card thinking it will let him charge, for example, a Chanel sequined tweed coat for $9,010, then the loss amount would be higher than that of a thief looking to charge a pair of Keens at REI.

So the thief gets a more stringent punishment only if he's planning on using the higher credit limit to get access to fancier stuff.

And, as Professor Berman has already pointed out, this opinion is going to have meaningful and interesting implications in many other cases involving economic crimes.

And, as Scott Greenfield has noted, the person charged with the crime is likely to get hosed anyway.