The Supreme Court, Salman, and Insider Trading: Why Stock Tips Make Bad Stocking Stuffers

Almost exactly two years ago, this blog posed the following question in a post about insider trading:

Suppose your brother-in-law has too much eggnog at Christmas dinner and starts blabbing about confidential inside information concerning the company where he works. If you trade the company’s stock based on that information, do you risk finding a subpoena from the SEC in your stocking?

Last week, in Salman v. United States, the Supreme Court provided some answers to this holiday conundrum. The bottom line: insider stock tips still make lousy holiday gifts.

Image of the bull on Wall St., home of insider trading

The Standards for Tippee Liability: Dirks v. SEC

Salman involves a subspecies of insider trading called “tippee” liability. Insider trading is defined as buying or selling securities based on material, non-public information, in violation of a duty of trust and confidence. Corporate insiders and others who acquire company secrets may not use that information to enrich themselves in violation of a duty owed to the source of the information.

But the ban on insider trading would be easily evaded if a corporate insider, forbidden to trade herself, could simply tip off an outside friend or family member and encourage them to trade instead. Accordingly, in some circumstances such tippees may themselves be charged with insider trading.

The Supreme Court first addressed tippee liability in Dirks v. SEC in 1983. Dirks held that a tippee who does not owe a direct duty to shareholders may nevertheless be liable for insider trading, but only if: 1) the tipper was violating a duty by providing the information; and 2) the tippee knew or should have known about that violation.

Whether the tipper was violating a duty, the Court said, turns on the purpose of the tip: “[T]he test is whether the insider personally will benefit, directly or indirectly, from his disclosure. Absent some personal gain, there has been no breach of duty to stockholders. And absent a breach by the insider, there is no derivative breach [by the tippee].”

The Court recognized that potential benefits to tippers are not limited to monetary gains and may include reputational benefits or other intangibles. In particular, a benefit could be inferred when an insider “makes a gift of confidential information to a trading relative or friend.”

An important aspect of the Dirks test, therefore, is determining whether the tipper received a personal benefit sufficient to find a breach of duty. The Court took the Salman case to shed some light on how courts should approach this question.

Teeing up Salman: The Second Circuit’s Newman Decision

To fully appreciate Salman one must first consider the U.S. Court of Appeals for the Second Circuit’s 2014 decision in United States v. Newman, the subject of my post two years ago. Corporate insiders in Newman had disclosed confidential information to several securities analysts who passed the information along to others, including the defendants.

After they were convicted for trading on that information, the defendants appealed and argued the government had failed to satisfy both prongs of the Dirks test: they claimed there was insufficient evidence the insiders had received a personal benefit in exchange for the tips and thus violated their duty, and even if they did, there was no evidence the defendants knew about that violation.

The Second Circuit agreed that the government’s evidence of personal benefit to the tippers was inadequate. The government had argued that one tipper received occasional career advice from an analyst to whom he leaked information, while the other tipper and another analyst were social friends who attended the same church.

The Court agreed that “personal benefit” could include intangible benefits, but this did not mean the government could simply establish that the tipper and tippee were friends. If that were sufficient this requirement would practically disappear, because at least a casual friendship between tipper and tippee probably exists in almost all such cases.

Accordingly, the court held, proof of a personal benefit requires evidence of a “meaningfully close relationship [between tipper and tippee] that generates an exchange that is objective, consequential, and represents at least a potential gain of a pecuniary or similarly valuable nature.”   The evidence in Newman did not meet that standard, and so the court reversed the convictions.

The Supreme Court turned down the government’s request to review Newman, but then just three months later it granted certiorari in Salman, a Ninth Circuit case that also raised the “personal benefit” issue. (I wrote about Salman at the time, in a post you can find here.)

Image of street sign for Wall Street, the home of insider trading

Salman: What Qualifies as a Benefit to the Tipper?

Salman represents the Supreme Court’s first foray into tippee liability since Dirks. Maher Kara, a Citigroup investment banker, repeatedly passed confidential information about upcoming mergers and acquisitions to his brother Michael, knowing that Michael would use it to trade. Michael, in turn, shared the information with Bassam Salman, a close friend whose sister was married to Maher. Salman made more than $1.5 million by trading on these tips before the scheme was discovered. He was convicted of insider trading and sentenced to 36 months in prison.

On appeal to the U.S. Court of Appeals for the Ninth Circuit, Salman urged that court to apply Newman to overturn his conviction. Salman argued that Maher, the tipper, was simply helping his brother out and did not receive anything of a “pecuniary or similarly valuable nature” in exchange. Under the Newman test, he claimed, that meant no violation of a duty by Maher and thus no tippee liability for Salman.

The Ninth Circuit rejected Salman’s arguments, finding that his case involved a straightforward application of Dirks and disagreeing with the analysis in Newman. That created a circuit split that likely led the Supreme Court to take Salman’s case. But when it came to convincing the high court to adopt Newman, Salman was swimming upstream.

In a unanimous opinion by Justice Alito, the Court agreed with the Ninth Circuit and held that Dirks “easily resolves the narrow issue presented here.” Dirks, the Court observed, held that a personal benefit may be inferred when an insider “makes a gift of confidential information to a trading relative or friend.” Maher passed information to his brother knowing he would trade on it, which falls squarely within this language. Game, set, match.

The Court noted that if Maher had traded on the information himself and given the proceeds to his brother, there is no question that would be insider trading. By passing the information to his brother knowing he would trade himself, Maher achieved exactly the same goal. “In such situations, the tipper benefits personally because giving a gift of trading information is the same thing as trading by the tipper followed by a gift of the proceeds.” Because he obtained this personal benefit, sharing the information was a violation of Maher’s duty of trust and confidence to his clients – a duty that Salman inherited and then violated when he traded on the information with full knowledge of its improper origins.

The Supreme Court expressly rejected the more stringent benefit test adopted by Newman: “To the extent that the Second Circuit [in Newman] held that the tipper must also receive something of a ‘pecuniary or similarly valuable nature’ in exchange for a gift to family or friends . . .we agree with the Ninth Circuit that this requirement is inconsistent with Dirks.”

The Court also rejected Salman’s claim that the benefit test was unconstitutionally vague. Although it agreed that determining whether a benefit occurred might be difficult in some cases, the Court said it did not need to confront that issue because “Salman’s conduct is in the heartland of Dirks’s rule concerning gifts.”

Image of Christmas Stockings - stock tips make bad holiday gifts

Issues Remaining after Salman: Moving Beyond Friends and Family

The most significant aspect of Salman is its rejection of Newman. Because the Second Circuit includes New York and Wall Street, Newman had caused quite a stir and was seen as a significant blow to the government. Prosecutors were forced to drop a number of insider trading cases in the wake of the decision. Salman thus should give a boost to both criminal and civil insider trading investigations.

The court of appeals in Newman had also considered what the government must prove concerning the tippee’s knowledge – the second part of the Dirks test. The government argued it had to prove the tippee knew the information was given in violation of the tipper’s duty but did not need to prove the tippee knew the tipper had received a benefit. The Second Circuit, however, held that the government must prove that the tippee knew both.

The knowledge issue was not before the Supreme Court in Salman, as the Court noted in a footnote. But the briefs, oral argument, and opinion all indicate the government now agrees it must prove the tippee knew both that the tipper violated a duty and that he received a benefit. Salman therefore provides some clarity on the knowledge prong of the Dirks test as well, and that portion of Newman appears to remain good law. And that means cases like Newman involving “remote tippees” – those several steps removed from the source of the information and thus less aware of the details of the tipper’s activities – may continue to be challenging for the government.

Some commentators have suggested Salman leaves unanswered how close a friendship must be before the tipper can be said to benefit from disclosure. Must there be a close, personal friendship, or would the standard apply to an occasional golfing buddy or even a casual Facebook friend? And who qualifies as a “relative”? In-laws? Second cousins twice removed?

I think future cases are unlikely to hinge on such questions. Basing criminal liability on determining, for example, whether a friendship was sufficiently “meaningfully close,” as the Second Circuit suggested in Newman, would likely be vague and unworkable.

The Court in Dirks listed a gift of information to a friend or relative merely as an example of an improper disclosure, not as the definition of one. It would be a mistake to believe that a court must now determine whether a tippee is truly a “friend” or “relative” and what exactly that means. The test should focus not on the nature of the relationship but on the purpose behind the tip.

Dirks held that whether disclosure is a breach of duty “depends in large part on the purpose of the disclosure,” and the Court in Salman reaffirmed this language. Much of the Salman oral argument also focused on the purpose of the gift, with the Justices (and the government) pointing out that Maher’s gift of inside information was done for a personal purpose and not a corporate one.

The government in Salman argued that the benefit requirement of Dirks is met any time an insider discloses information for a personal purpose rather than a corporate purpose. The Court did not need to go that far because Salman fell squarely within the language of Dirks about disclosure to a relative, and the Court simply took the narrowest path possible to decide the case at hand. But for future cases a test that hinges on the tipper’s purpose is the logical outgrowth of Dirks and Salman.

To borrow an analogy used during oral argument, suppose I see a sad person on the street and feel bad for them, so I give them inside information intending that they trade on it. If I traded on the information myself and give the stranger the money, that would be insider trading. That tip benefits me – it allows me to make the desired charitable gift without actually taking money out of my pocket. As the Court said in Dirks: “[t]he tip and trade resemble trading by the insider himself followed by a gift of the profits to the recipient.”

A test based on the tipper’s purpose does not make criminal liability rest upon something as nebulous as the closeness of the relationship between tipper and tippee. Instead it focuses on intent, with which criminal law is accustomed to dealing. An insider who tips to a family member, occasional golfing buddy, or stranger on the street does not act for any proper corporate purpose. All such disclosures violate the insider’s duty to refrain from using corporate information for some personal end.

Tippee liability based on gifts of information is unlikely to be limited to close friends and family. Anyone who believes Salman leaves them free to act on improper tips from casual acquaintances will likely find that prosecutors and courts disagree. The Supreme Court’s reaffirmation of Dirks and rejection of Newman signify that it remains very comfortable with a robust theory of insider trading liability.

And as for that errant brother-in-law, tell him you’d rather have a nice sweater or something — and ask him to pass the eggnog.

Note: This post is adapted from a commentary I published in the George Washington Law Review’s “On the Docket.”  You can find that commentary here.

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White Collar Crime, Prosecutorial Discretion, and the Supreme Court

Does the Supreme Court still believe in prosecutorial discretion? A string of cases over the past few years has to make you wonder.

Prosecutorial discretion – the power to decide whether to bring criminal charges, who to charge, what crimes to charge, and how ultimately to resolve the case – is a fundamental component of the criminal justice system. The legislature enacts the laws but the executive branch enforces them, which includes making judgments about when and how to bring a criminal case.

On the macro level, this means setting national and local law enforcement priorities and making decisions about the deployment of finite prosecutorial resources. Different administrations at different times have declared areas such as health care fraud, narcotics, illegal immigration, or terrorism to be top priorities and have allocated resources accordingly. Such decisions necessarily mean other areas will not receive as much attention; a dollar spent fighting terrorism is a dollar that can’t be spent investigating mortgage fraud.

On the micro level, prosecutorial discretion involves deciding whether to pursue criminal charges in a given case and what charges to pursue. Factors such as the nature of the offense, strength of the evidence, the nature and extent of any harm, adequacy of other potential remedies, any mitigating circumstances or remedial efforts by the accused, and prosecutorial resources and priorities all may come into play.

For federal prosecutors, policies governing how they should exercise this discretion are set forth in the U.S. Attorneys’ Manual, and in particular in the Principles of Federal Prosecution. The Principles contain detailed guidance concerning when to bring charges, what kind of charges to bring, and how to handle criminal cases, in order to “promote the reasoned exercise of prosecutorial discretion by attorneys for the government.” USAM 9-27.110.

doj seal

Prosecutorial Discretion and White Collar Crime

Prosecutorial discretion is particularly important in white collar crime. With non-white collar, or “street” crimes, the parameters of the offense tend to be more clearly defined and charging decisions often are more black and white. If there is a body on the street with nine bullets in it, you pretty clearly have a homicide. If authorities can identify who did it, that person will almost certainly be charged. The prosecutor is not likely to say, “Due to our limited resources and other priorities, we’ll take a pass on this one and let the victim’s family file a civil suit instead” – not if the prosecutor wants to keep her job, anyway.

But white collar crime is full of gray areas. White collar prosecutors deal with sometimes nebulous concepts such as “fraud” and “corruption,” and white collar statutes are written in notoriously broad and general terms. As a result, it often falls much more to the prosecutor to determine whether something is a crime at all and to decide what kind of conduct merits a prosecution.

For example, suppose a hedge fund goes belly-up, and the investors who lost their money claim they were misled about their investment. Was it fraud, or was it merely aggressive – maybe even sleazy – sales tactics followed by incompetence, mismanagement, or just bad luck? Unlike a homicide, robbery, or drug case, at the outset it may not be clear that a crime has been committed. A prosecutor might well conclude, “If I investigated this for two years, perhaps at the end I would have a provable criminal fraud case – but perhaps not. Given my resources and priorities, I’m going to focus on other cases and let the SEC and private plaintiffs pursue civil and administrative penalties in this one.”

Given these potential gray areas, what’s the best way to deter and prosecute white collar crime? Imagine two different regimes. In System #1, Congress drafts broad statutes that proscribe conduct such as fraud in general terms, in order to encompass as much potentially criminal conduct as possible. It is left to the Executive Branch, through prosecutors, to enforce those statutes and determine which cases to pursue – with that discretion tempered, of course, by the oversight of the courts.

In System #2, Congress tries to write very precise and detailed statutes that are as specific as possible in defining the prohibited conduct. Such white collar statutes would leave fewer gray areas and less room for prosecutorial discretion – in other words, they would be more like street crimes. The downside of such a system would be that it necessarily creates loopholes: the more precisely you define criminal concepts like fraud, the greater the opportunity for individuals engaged in what should be criminal conduct to skirt the law’s prohibitions.

Historically, white collar criminal law has been closer to System #1: broad statutes prohibit things like fraud or corruption, and prosecutors are entrusted to exercise their discretion to determine how to apply those laws. But in a series of decisions over the past few years, the Supreme Court has signaled it is becoming increasingly uncomfortable with such a system. These decisions have limited several significant white collar statutes, moving us closer to System #2 – although with laws narrowed by the Court rather than by Congress. In the process, the Court has removed discretion from the hands of prosecutors while also making it more difficult to prosecute some criminal conduct.

The Supreme Court Limits Prosecutorial Discretion

The first such case was Skilling v. United States in 2010. Skilling involved the proper interpretation of 18 U.S.C. § 1346, which prohibits schemes to deprive another of the “intangible right of honest services.” Honest services fraud, a species of mail and wire fraud, has been around for decades. Most cases of honest services fraud have involved relatively straightforward allegations of corruption such as bribery, kickbacks, and conflicts of interest.

But prosecutors in some cases stretched the boundaries of the theory, using honest services fraud to prosecute, for example, a university professor who helped students plagiarize work to obtain degrees to which they were not entitled; an IRS employee who improperly browsed through certain tax returns but did nothing with the information; state officials who awarded public sector jobs based on political patronage; and a state official who failed to disclose a potential conflict of interest when state law did not require disclosure. Some of these schemes seemed wrong or dishonest but were far from traditional criminal corruption. The confusion over what actually qualified as a deprivation of honest services led Justice Scalia to argue in 2009 that the law was in a state of “chaos.”

The Supreme Court finally attempted to bring some order out of this chaos in Skilling. The defendant, former Enron CEO Jeff Skilling, argued that the honest services statute should be struck down as unconstitutionally vague, but the Court disagreed. Instead, it limited the law to what it deemed the core of honest services fraud: cases involving bribery and kickbacks.

The holding in Skilling dramatically narrowed the scope of honest services fraud. This successfully removed prosecutors’ ability to use the theory in innovative ways to charge more unusual schemes. But the limitation also created safe harbors for certain conduct, such as self-dealing by elected officials, that is plainly corrupt but may no longer be charged as a violation of honest services.

In 2014, the Supreme Court decided Bond v. United States. (Although not really a white collar case, Bond is instructive as part of the same trend at the Court.) In Bond a jilted wife tried to injure her husband’s lover by sprinkling some caustic chemicals on her mailbox and doorknob. The chemicals caused only a slight skin irritation on the woman’s thumb that was easily treated with cold water. Federal prosecutors subsequently charged Bond using a felony statute that prohibits the use of chemical weapons and carries a penalty of “any term of years” in prison.

The Court ultimately held that the statute did not apply to Bond’s conduct. But an undercurrent of the case was the Court’s obvious concern over the government’s decision to apply a federal law aimed at preventing the horrors of chemical warfare to such a trivial incident. During oral argument, Justice Kennedy told the Solicitor General that it “seems unimaginable that you would bring this prosecution.” Justice Alito remarked, “If you told ordinary people that you were going to prosecute Ms. Bond for using a chemical weapon, they would be flabbergasted.”

This trend continued in 2015 with Yates v. United States. Yates was a commercial fisherman working in the Gulf of Mexico. A fish and wildlife officer boarded his boat to conduct a routine inspection and ended up citing him for having several dozen red grouper on board that were slightly smaller than the legal limit – a civil violation. The officer told Yates to keep the fish until he returned to port, where they would be seized and destroyed. Once the officer left his boat, however, Yates instructed a crew member to throw the undersized fish overboard and replace them with larger ones.

When this ultimately came to light, prosecutors charged Yates with three crimes including obstruction of justice under 18 U.S.C. § 1519, a twenty-year felony. That law prohibits the destruction of “tangible objects” in an effort to obstruct a federal investigation. Captain Yates argued before the Supreme Court that fish were not “tangible objects” within the meaning of this statute. The Court ultimately ruled in his favor, but only by adopting what I believe was an unnatural and strained interpretation of the law.

But Yates is actually more significant for what it revealed about the Court’s views on prosecutorial discretion and charging decisions. During oral argument, the Justices were clearly disturbed by the application of a twenty-year felony to this fish-dumping episode. Justice Scalia asked what kind of “mad prosecutor” would charge Yates with a twenty-year offense, and sarcastically suggested perhaps it was the same prosecutor who had charged Bond with a chemical weapons violation. Later in the oral argument Justice Kennedy remarked, “It seems to me that we should just not use the concept [prosecutorial discretion] or refer to the concept at all anymore.”

The Court’s skepticism about prosecutorial discretion surfaced again this past spring in McDonnell v. United States. In reversing the corruption convictions of the former Virginia governor, the Court adopted a narrow definition of “official act” for purposes of federal bribery law. At oral argument and in its opinion the Court imagined federal prosecutors targeting elected officials for simply attending a lunch where a supporter bought them a bottle of wine, or for attending a ballgame as the guest of homeowners who earlier had sought the official’s help.

The narrow definition of “official act,” the Court concluded, was necessary to prevent politically-motivated prosecutions and the criminalization of routine political courtesies. But critics of the Court’s decision – including me – argue that the result is to shield a great deal of corrupt conduct that is precisely what the law of bribery aims to prevent.

The Future of Prosecutorial Discretion

In these recent cases, when faced with the interpretation of white collar crimes such as bribery, honest services fraud, and obstruction of justice, the Court’s approach has been to interpret the statutes narrowly and consequently to remove charging discretion from federal prosecutors. A moment during the Yates oral argument is particularly illuminating. The Justices asked Assistant Solicitor General Roman Martinez what guidance prosecutors followed when deciding what kind of charges to bring, and that led to this exchange:

MR.MARTINEZ:  Your Honor, the ­. . . my understanding of the U.S. Attorney’s Manual is that the general guidance that’s given is that the prosecutor should charge ­­once the decision is made to bring a criminal prosecution, the prosecutor should charge the ­­the offense that’s the most severe under the law. That’s not a hard and fast rule, but that’s kind of the default principle.  In this case that was Section 1519.

JUSTICE SCALIA:  Well, if that’s going to be the Justice Department’s position, then we’re going to have to be much more careful about how extensive statutes are.  I mean, if you’re saying we’re always going to prosecute the most severe, I’m going to be very careful about how severe I make statutes.

MR. MARTINEZ:  Your Honor, that’s ­­. . .

JUSTICE SCALIA:  Or ­­how much coverage I give to severe statutes.

MR. MARTINEZ:  That’s ­­– that’s not what we were saying.  I think we’re not always going to prosecute every case, and obviously we’re going to exercise our discretion. . . .

As Martinez attempted to point out, the real-world exercise of prosecutorial discretion is far more nuanced than Justice Scalia suggested. It’s true that the Principles of Federal Prosecution provide as a general rule – as they have for decades – that once a decision to bring charges is made a prosecutor generally should charge “the most serious offense that is consistent with the nature of the defendant’s conduct, and that is likely to result in a sustainable conviction.” USAM 9-27.300. But the Principles also recognize the need for prosecutors to consider the nature and circumstances of a particular case, the purpose of criminal law, and law enforcement priorities. What charges are “consistent with the nature of the defendant’s conduct” is also a matter of judgment and discretion. And of course considerable discretion also is involved earlier in the process, when deciding whether to bring charges at all.

But this exchange suggests the Court may believe it needs to interpret criminal statutes more narrowly because it cannot always trust prosecutors to exercise sound judgment when enforcing broadly-written statutes. As Justice Kennedy suggested during the Yates argument, it may be that the Court no longer thinks of prosecutorial discretion as a viable concept.

Of course, some critics of federal prosecutors will welcome this development and suggest it is long overdue. And some will point out that, for prosecutors, this may be considered a self-inflicted wound. The charging decisions in cases like Yates and Bond in particular may be what led the Justices openly to question whether prosecutors should continue to be entrusted with the same degree of discretion.

But it would be unfortunate if the Justices truly come to believe they cannot rely on prosecutors to exercise sound judgment in charging decisions. One can always argue about the merits of particular cases, but overall our system of broadly-written statutes enforced by the sound exercise of prosecutorial discretion has worked pretty well. If the Court continues to chip away at those statutes due to concerns about controlling prosecutors, it will continue to create safe harbors for some conduct that is clearly criminal.

It’s particularly inappropriate for the Court to limit these statutes based on hypotheticals that have no basis in reality, as it did in McDonnell. When we start seeing widespread prosecutions of politicians for accepting legal campaign contributions and attending Rotary Club breakfasts, then maybe we can talk about the need to curb prosecutorial discretion. But simply because we can imagine a parade of horribles based on the broad terms of a white collar statute does not mean that prosecutors are actually marching in that parade.

At the McDonnell oral argument, Justice Breyer noted that narrowing the definition of bribery might mean that a certain amount of corrupt conduct will go unpunished. Unfortunately, for now that appears to be a risk the Court is willing to take.

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Update: Former Speaker Dennis Hastert Sentenced to 15 Months in Prison

Former Speaker of the House Dennis Hastert was sentenced today to fifteen months in prison, following a hearing in which the federal judge called Hastert a “serial child molester.” He was also ordered to pay a $250,000 fine and to undergo sex-offender treatments.

Hastert pleaded guilty last October to one count of illegally structuring his bank transactions in order to avoid questions about his large cash withdrawals. Hastert was withdrawing tens of thousands of dollars at a time to pay “hush money” to a man Hastert sexually abused decades ago when Hastert was a high school wrestling coach and the victim was a teenager. Evidence at the hearing revealed several additional instances of Hastert’s sexual abuse of teenage boys while he was a coach.

Hastert had lied to investigators when he was first approached about his large cash transactions, telling them he was being extorted.  Investigators soon determined that was not the case and that Hastert had been voluntarily paying the man in order to keep him from going public with the abuse allegations.

Hastert’s attorneys had asked that the 74-year-old be spared from prison based on his poor health – he appeared in court in a wheelchair – and on the fact that he had already been disgraced. But the judge concluded that the seriousness of the sexual abuse, coupled with Hastert’s initial lies to federal investigators, justified a serious punishment.  (The maximum sentence for the structuring charge was five years.)

You can read my earlier post about the details of the Hastert prosecution here.

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Corporate Crime, Prosecutorial Discretion, and Separation of Powers: U.S. v. Fokker Services

Many criminal investigations of corporations are resolved by a Deferred Prosecution Agreement (DPA) or its less frequently used cousin, a Non-Prosecution Agreement (NPA). These are essentially negotiated settlements between the Department of Justice and the defendant, in which the company agrees to certain sanctions and changes in behavior in exchange for avoiding criminal penalties.

Typically the terms and conditions of such agreements are set by the prosecutors. Decisions about whether to charge at all, what charges to bring, and the terms of any resolution are at the core of prosecutorial discretion. But in 2015, in an unprecedented decision, U.S. District Judge Richard J. Leon rejected a DPA between prosecutors and a company called Fokker Services because he thought the company had gotten too sweet a deal. The U.S. Court of Appeals for the District of Columbia Circuit recently reversed that decision, chiding the judge for overstepping his bounds.

As I wrote in this earlier post, I have concerns about the increased use of DPAs and the resulting effect on the criminal justice system. But regardless of how one feels about the merits of DPAs, the D.C. Circuit’s decision is a welcome reaffirmation of the importance of separation of powers and the proper role of the judiciary.

DPAs, NPAs, and Corporate Crime

The use of DPAs has been on the rise over the past decade ever since the Arthur Andersen debacle. The huge accounting company was driven out of business – and tens of thousands of people lost their jobs – as a result of a criminal prosecution that was later thrown out by the Supreme Court. To avoid such a potential “corporate death penalty,” companies have a tremendous incentive to enter into a DPA and avoid a criminal conviction.

In a DPA, the government files criminal charges but agrees to put the prosecution of those charges on hold. Under the agreement, the company generally admits to the charges and may agree to pay fines or restitution, undergo internal reforms, cooperate in the prosecution of individual employees, and take other remedial steps to atone for its misbehavior. In many DPAs the government requires the company to hire a monitor, at the company’s expense, to oversee its compliance with the agreement. The government agrees that when the DPA ends, usually in a few years, it will dismiss the criminal charges if the company has fully complied.

A NPA may contain the same kinds of terms as a DPA. The biggest difference is that in a NPA there are no charges filed with the court – it’s just a private agreement between the company and the prosecution. A NPA thus lacks the imprimatur of a court proceeding and the gravity of charges actually being filed. And because there is no public court filing, a NPA could potentially take place without the public even knowing about it.

Fokker Services logo

United States v. Fokker Services B.V.

Fokker Services is a Dutch aerospace services company. In 2010 Fokker self-reported to the government that it may have violated federal export control laws in its dealings with Burma, Sudan and Iran. Over the next four years, Fokker cooperated with the government in a wide-ranging investigation of this misconduct. The investigation uncovered more than 1,000 illegal transactions, from which Fokker earned about $21 million.

As part of its cooperation, Fokker instituted a number of internal reforms. It also fired its president and demoted or reassigned a number of other employees involved. The government described Fokker’s remedial efforts as “a model to be followed by other corporations.” In light of this cooperation, the government negotiated a DPA with Fokker under which the company would continue its compliance and remediation efforts for another 18 months and pay a $21 million fine.

Pursuant to the DPA, the government filed a one-count criminal information against Fokker on June 5, 2014. Once federal charges are filed, the Speedy Trial Act normally requires that trial begin within seventy days. But the Act excuses any period of delay “during which prosecution is deferred by the attorney for the Government pursuant to written agreement with the defendant, with the approval of the court, for the purpose of allowing the defendant to demonstrate his good conduct.” It’s that “approval of the court” language that led to the dispute in this case.

After the charging document and DPA were filed, Judge Leon indicated he might withhold his approval. That would have the effect of torpedoing the DPA, because the Speedy Trial Act clock would keep running and the government would be forced either to take the case to trial or dismiss it long before the eighteen-month term of the DPA had expired. At a series of hearings Judge Leon said he thought the DPA was “too good a deal for the defendant.” He expressed concern about why no individual employees had been charged and why the government had not required Fokker to hire a corporate monitor.

After months of consideration, on February 5, 2015 Judge Leon denied the motion to exclude time under the Speedy Trial Act. He wrote it was not in the interest of justice to approve the DPA when Fokker had engaged in such egregious conduct and was being punished only “anemically.” He concluded the DPA was “grossly disproportionate to the gravity of Fokker Services’ conduct in a post-9/11 world” and “[did] not constitute an appropriate exercise of prosecutorial discretion.”

This marked the first time a district judge had denied a motion to exclude time under the Speedy Trial Act due to the judge’s disagreement with the terms of a DPA. Both the United States and Fokker appealed the judge’s order.

The D.C. Circuit’s Decision

The D.C. Circuit reversed Judge Leon’s ruling in an unanimous opinion written by Judge Sri Srinivasan (who reportedly was on the very short list for President Obama’s most recent Supreme Court nomination). The Court went out of its way to note it was not agreeing or disagreeing with Judge Leon’s views about the merits of the DPA, and that it had no occasion to do so. The point was that a judge has no business making such a judgment.

As the Court of Appeals noted, it has long been settled that criminal charging decisions – including what kind of charges to bring, when to dismiss charges, and whether to bring charges at all — are almost exclusively an Executive Branch prerogative. These decisions involve many considerations including the strength of the evidence, deterrence value of a prosecution, allocation of scarce resources, and law enforcement priorities. The Judiciary is ill equipped to make these judgments, and absent some kind of abuse or a constitutional violation a court will almost never second- guess such decisions.

Judge Leon, however, rejected the Fokker DPA because he thought the government had not been tough enough on Fokker and its employees. The Court of Appeals made it clear that was not the judge’s call. Whether he personally agreed with the terms of the agreement was irrelevant; Judge Leon should not have “assume[d] the role of Attorney General” by questioning the prosecutors’ decisions.

The approval of the court under the Speedy Trial Act, the Court of Appeals held, should simply be to ensure that the proposed DPA is actually for the legitimate purpose of allowing the defendant to “demonstrate his good conduct.” If it is, the judge’s inquiry is at an end. In questioning the terms of the deal and the government’s charging decisions, the Court of Appeals held, Judge Leon “significantly overstepped [his] authority.”

Consequences of the Court’s Decision

The D.C. Circuit’s decision is a welcome reaffirmation of the importance of separation of powers. Although judicial scrutiny of DPAs might have some facial appeal, it would actually raise a host of problems. Not only do judges simply lack the necessary information to make such decisions, but judicial intervention would have a number of other negative consequences.

When criticizing the lack of a corporate monitor in the Fokker DPA, Judge Leon remarked, “One can only imagine how a company with such a long track record of deceit and illegal behavior ever convinced the Department of Justice to agree to that!” But that’s precisely the point – the judge can only imagine. He doesn’t have the information necessary to make an informed judgment about the terms of the deal or why the government might have made that decision.

There may be many explanations for a DPA that looks lenient to the outside world. The alternative to a deal is a trial, where the government must prove its case beyond a reasonable doubt. Prosecutors may have information about possible difficulties in meeting that burden — such as problems with particular witnesses or the admissibility of certain evidence – unavailable to those not involved in the investigation. These considerations will always influence the government when deciding what kind of a deal it should make, whether it’s a plea agreement or a DPA, but likely will be unknown to the judge.

The government also must make judgments about the allocation of prosecution resources, law enforcement priorities, and deterring other wrongdoing while incentivizing cooperation. As the Court of Appeals noted, these are core functions of the Executive Branch, charged with faithfully executing the laws. A judge generally lacks much of the information necessary to make such judgments, and even if the judge had some relevant information, it is not the court’s place to intervene.

Apart from the structural separations of powers concerns, judicial review of the terms of DPAs would also have a number of practical negative consequences. Uncertainty is never a plus for parties trying to negotiate a resolution. Defendants would rightly be more cautious and reluctant to cooperate if they knew that whatever the government is offering them is not really the last word and that a judge might second guess whatever agreement they make.

Another likely, and undesirable, consequence of judicial scrutiny of the terms of DPAs would be a shift to the use of NPAs instead. Non-prosecution agreements do not require any charges to be filed with the court, and so do not require any court approval. Judge Leon himself noted that, “this Court would have no role here if the Government had chosen not to charge Fokker Services with any criminal conduct – even if that decision was the result of a non-prosecution agreement.”

Prosecutors can require as part of a NPA that defendants waive the statute of limitations, so they could still preserve the right to file charges later if the defendant failed to live up to the agreement. And the other terms of the agreement may be largely the same, allowing the prosecution to achieve the same goals as a DPA.

The primary difference is that a DPA generally is filed with the court and made public. A NPA could remain entirely private if the parties so chose. If DPAs were routinely second-guessed by trial judges, the logical response would be for prosecutors and defendants to shift to NPAs in order to avoid any such judicial interference. This could result in more secret deals and in less information being available to the public about any resolutions. The irony, therefore, would be that by purporting to subject the terms of these agreements to greater scrutiny, judicial review likely would instead drive such agreements underground and out of public view entirely.

There are legitimate concerns about the increasing use of DPAs. Companies face tremendous pressure to resolve criminal investigations short of a trial, which gives prosecutors enormous leverage. DPAs risk transforming the criminal justice system into a sort of regulatory, administrative regime run by prosecutors relieved of their burden of proving criminal conduct beyond a reasonable doubt.

But having judges play Monday morning quarterback concerning prosecutors’ charging decisions is not the answer. It’s fortunate the D.C. Circuit agreed.

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DOJ Doubles Down on the FIFA Indictment

This past May the U.S. Department of Justice stunned the international sports world by unveiling a 161 page, 47 count federal indictment charging widespread corruption within the Federation Internationale de Football Association (FIFA), the global soccer organization. Last week, DOJ made it clear that the May indictment was merely the tip of the FIFA corruption iceberg.

The original indictment charged fourteen defendants: nine current and former FIFA officials, four sports marketing executives, and one intermediary. (I wrote about that indictment in a post you can find here.) Now a superseding indictment, unsealed last week, has added sixteen additional FIFA defendants and has nearly doubled the number of charges: the new indictment runs 236 pages and contains 92 felony counts. (The DOJ press release and a link to the superseding indictment can be found here.)

A superseding indictment, as the name implies, replaces the original indictment in a case that is already pending. It generally means the grand jury has continued to investigate and has voted to add additional charges, additional defendants, or — as in this case — both.

The fundamental nature of the case remains the same: senior FIFA officials and officials within FIFA’s constituent organizations are alleged to have accepted more than $200 million in bribes and kickbacks in exchange for being influenced in awarding lucrative sports marketing contracts, rigging FIFA elections, agreeing to participate in certain competitions, and awarding the right to host soccer’s premier event, the World Cup.

When the superseding indictment was unsealed, DOJ also announced that eight additional defendants have pleaded guilty since the first indictment, bringing the total number of known guilty pleas to fourteen. Three of the eight – Jeffrey Webb, a former senior FIFA official; Alejandro Burzaco, former manager of an Argentinian sports marketing company; and José Marguilies, who acted as an intermediary for bribe payments – were among the fourteen defendants charged in the original indictment. Due to their pleas, they are not charged in the superseding indictment. The remaining five new guilty pleas came from FIFA officials and sports executives who waived indictment and pleaded guilty under seal.

The sixteen new defendants thus join the eleven remaining original defendants in the superseding indictment. Although the basic nature of the allegations is unchanged, the superseding indictment against the (now) twenty-seven defendants dramatically expands the universe of charges, including not only charges against the new defendants but also additional charges against the original defendants.

The FIFA superseding indictment greatly expands the conspiracy case

The Structure of the FIFA Superseding Indictment

Despite its length, the superseding indictment, like the original, consists almost entirely of three types of charges:

  • The Racketeer Influenced and Corrupt Organizations Act (RICO)
  • Money laundering and money laundering conspiracy
  • Wire fraud and wire fraud conspiracy

A massive RICO conspiracy lasting for more than twenty years continues to be the heart of the indictment. RICO is the statutory glue that allows the many different corruption schemes and far-flung defendants to be joined together in a single prosecution.

RICO requires that the defendants conducted of the affairs of an “enterprise” through a pattern of racketeering activity. As in the original indictment, the government charges that FIFA, its six continental confederate organizations, and other soccer organizations and sports marketing companies together constitute a single RICO enterprise, bound together by the common purpose and goal of promoting soccer worldwide. Because FIFA soccer organizations are present in more than 200 countries and territories around the world, this RICO enterprise is undoubtedly one of the most sweeping ever charged.

The alleged enterprise includes all six of FIFA’s continental confederate organizations, including those governing soccer in Asia, Africa and Europe. Almost all of the alleged corruption, however, relates to officials and events in only two of those organizations: CONCACAF, the confederation covering North and Central America and the Caribbean; and CONMEBOL, the confederation covering South America. (The United States Soccer Federation is a member of CONCACAF.)

To establish the required “pattern of racketeering activity,” the indictment alleges a series of different corruption schemes involving various soccer tournaments, different sports marketing and media agreements, and events such as the selection of the host city for the World Cup. The original indictment charged twelve such schemes. The superseding indictment has expanded one of those schemes and added three new ones, for a total of fifteen.

The individual criminal schemes are charged using two principal statutes: wire fraud and money laundering. The essence of each scheme is a series of bribes and/or kickbacks involving FIFA officials or officials from FIFA member organizations, along with financial transactions designed to facilitate or disguise the payments. Most of the alleged bribes were paid by individuals (a number of whom have been indicted or have pleaded guilty) seeking lucrative contracts for soccer media and marketing rights or to have certain countries participate in tournaments they were promoting.

To charge bribery and kickbacks the indictment uses honest services wire fraud, charging that various officials violated the duty of honest services they owed to FIFA and its member organizations. (For a more detailed analysis of the use of honest services fraud to charge bribery, see my posts here and here.)

The money laundering charges stem from financial transactions, many of them international wire transfers, used to facilitate the bribe payments and/or to conceal those payments. The defendants are accused of using various intermediaries, secret bank accounts, shell companies, and other methods to disguise the nature, source and ownership of the funds involved in various bribery transactions. They are also charged with transmitting funds across the U.S. border in order to promote their criminal activity, a form of international money laundering.

Following the overarching RICO conspiracy charge that encompasses all defendants, the great bulk of the indictment consists of a series of wire fraud and money laundering charges related to each of the fifteen different schemes in turn. Each of these schemes involves a different set of corruption allegations and a different combination of defendants. There are also a handful of additional charges, including tax fraud and obstruction of justice, that apply to only a couple of the defendants.

soccer balls

What’s New in the Superseding Indictment

The most significant change in the superseding indictment is, of course, the addition of the sixteen new defendants. All of the new defendants are current or former FIFA or FIFA-affiliated officials, seven from CONCACAF and nine from CONMEBOL.

The superseding indictment answers a lot of questions that were raised by the original charges in May. That first indictment included many allegations that described the criminal acts of anonymous individuals identified only by number, as in “co-conspirator #1” and “co-conspirator #2.” The superseding indictment includes many of those same allegations, but with formerly anonymous co-conspirators now identified as among the new defendants. As a result, a fuller picture of many of the corruption allegations has started to emerge.

The other significant change is the addition of three entirely new corruption schemes and the expansion of a fourth. One new scheme, titled “CONMEBOL Copa Libertadores Scheme #2,” charges a number of CONMEBOL officials with accepting millions of dollars in bribes over more than a decade in connection with selling the broadcast rights to a popular South American soccer tournament. A second, titled the “UNCAF Region Friendlies Scheme,” alleges that FIFA officials in El Salvador, Guatemala, Costa Rica and elsewhere accepted bribes in exchange for agreeing to participate in various “friendlies” soccer matches organized by private promoters. (UNCAF is a regional federation within CONCACAF that includes the soccer organizations of countries in Central America.)

The third new scheme, the “CONCACAF Media and Marketing Rights Scheme,” charges that several CONCACAF officials accepted hundreds of thousands of dollars in bribes in connection with an unsuccessful attempt to influence the sale of the media marketing rights to CONCACAF tournaments. It also alleges that various conspirators — including current FIFA vice president and CONCACAF president Alfredo Hawit — obstructed justice in July 2015, following the first indictment, by creating phony contracts and other documents to attempt to conceal their participation in this scheme.

Finally, the superseding indictment greatly expands the allegations in a scheme contained the original indictment titled the “UNCAF Region World Cup Qualifiers Scheme.” The scheme alleges that soccer officials from nearly every country in Central America solicited and accepted hundreds of thousands of dollars in bribes in connection with the sale of the media rights to their country’s World Cup qualifying matches.

The Nature of the Case and What to Watch Going Forward

The superseding indictment seems to take great pains to describe the effect of the FIFA corruption scheme on the United States. As did the original indictment, it stresses that a number of financial transactions related to the bribe payments were routed through U.S. banks. A number of the new charges also emphasize how some soccer matches in tournaments that were the subject of various bribe schemes were played in the U.S., or how the U.S. media market made up a significant portion of some media rights that were the subject of bribes, or how some bribes were actually paid within the U.S. These details may help address questions that have been raised over whether the United States was really the appropriate place to prosecute a massive corruption scheme in which the overwhelming majority of criminal acts took place in other countries.

The heart of the case remains bribery, on a massive and worldwide scale. The “victims” in a bribery case often do not suffer any identifiable economic damages. For example, if a Congressman takes a bribe in exchange for awarding a defense contract, the money for the bribe comes not from the Congressman’s constituents but from the bribe payer. The constituents are harmed not by losing money but in a more intangible way: by losing their right to the fair, honest, and unbiased services of the person elected to represent them. The harm is more diffuse; the damage is the corruption of the system, not a direct monetary loss as in a fraud case.

Similarly, in the FIFA case, the principal harm is the deprivation of the right of various FIFA member organizations and individuals to the honest and impartial services of the FIFA defendants who were supposed to represent their interests, and the resultant corruption of the entire FIFA decision-making process. The indictment does suggest other types of harm as well; for example, the wire fraud allegations claim that the defendants deprived their victims not only of the intangible right to honest services (the bribery allegation) but also of tangible money or property. But how this deprivation of money or property allegedly took place is never spelled out, and it appears that honest services fraud is definitely the primary theory.

There is one very interesting paragraph in the superseding indictment that did not appear in the original. It appears in the description of the racketeering conspiracy and is titled “Embezzlement and Misappropriation.” It alleges that “The conspirators’ corruption of the enterprise extended beyond the payment and receipt of bribes and kickbacks,” and notes that FIFA maintained hundreds of millions of dollars in various programs intended to benefit its member organizations, including youth leagues. It further alleges that certain defendants, including former CONCACAF executives Jack Warner and Jeffrey Webb, embezzled or otherwise misappropriated some of these funds, “including funds intended for natural disaster relief.”  News reports suggest this last clause refers to alleged embezzlement of funds intended to aid the victims of the 2010 earthquake in Haiti.

But after unveiling this tantalizing new allegation, the indictment provides no further detail and no specific charges related to this embezzlement. The DOJ press release concerning the superseding indictment does not mention embezzlement at all. We will have to await further developments to learn more details about any such misappropriation of FIFA funds, whether related to natural disaster relief or otherwise. Webb has already pleaded guilty and may well be a key source of this information for the prosecution.

The defendants who have pleaded guilty have agreed to forfeit more than $40 million, and DOJ is seeking tens of millions more in forfeiture. Typically, forfeited proceeds would go to the U.S. treasury, but this case is a bit unusual because the U.S. and its citizens are not the primary victims of most of the alleged misconduct. The DOJ press release notes that all forfeited money is being held in reserve so it can be used to satisfy any future orders of restitution entered at sentencing, “for the benefit of any individuals or entities that qualify as victims of the defendants’ crimes under federal law.” This could mean that some of the forfeited money ends up being distributed to the soccer organizations outside the U.S. whose officials were involved in the corruption.

The eight additional guilty pleas that DOJ announced last week are significant. Most, if not all, of these defendants are likely cooperating in the ongoing investigation, providing DOJ with information and testimony that will allow it to pursue the corruption allegations even further.

But in terms of the future of the investigation, the most significant thing to note about the superseding indictment is that it contains references to another 24 still unnamed and unidentified co-conspirators. That means there are at least two dozen more potential defendants out there – some of whom likely have already pleaded guilty under seal and are cooperating as the grand jury investigation continues.

And that means when it comes to FIFA corruption, the Department of Justice is just getting warmed up.

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Cover-up Crimes

What do one of baseball’s greatest players, a former senior White House official, a domestic diva and Fortune 500 CEO, and a former Speaker of the House all have in common?

This is not the beginning of some bad joke about how they all walk into a bar. Barry Bonds, Scooter Libby, Martha Stewart, and Dennis Hastert all were investigated for possible criminal misconduct and ended up being charged not with that misconduct but with other crimes they committed to try to conceal their actions or thwart the investigation.

Barry Bonds was implicated in baseball’s steroids scandal. He ended up being indicted not for using illegal steroids but for perjury and obstruction of justice after allegedly lying in the grand jury about his steroid use. (He was found guilty of one count of obstruction, but that conviction was recently overturned on appeal.)

I. Lewis “Scooter” Libby, who was Chief of Staff to former Vice President Dick Cheney, was implicated in the potentially illegal leak of the identity of a covert CIA agent, Valerie Plame. He was ultimately not charged with the leak but was convicted of perjury, obstruction of justice, and false statements for lying to the grand jury and the FBI about his actions.

Martha Stewart was suspected in 2002 of insider trading after she dumped her stock in a company called Imclone the day before bad news from the FDA caused the stock’s price to plummet. She and her broker Peter Bacanovic ultimately were not indicted for insider trading, but were convicted of multiple counts of false statements, perjury, and obstruction of justice for concocting a phony story about why she sold the stock and then lying to the FBI and SEC.

And Dennis Hastert, the former U.S. Speaker of the House, allegedly had sexual contact with students decades ago while he was working as a high school teacher and coach. He was recently indicted not for any sexual misconduct but for lying to the FBI about his apparent hush-money payments to one of his victims and for structuring his bank transactions to conceal those payments. (Hastert recently pleaded guilty to one count of structuring bank transactions and is awaiting sentencing.)

It’s a legal maxim, particularly in the post-Watergate era, that often the cover-up is worse than the crime. But cover-up crimes are the Rodney Dangerfield of the white collar world: they don’t get any respect. You frequently hear them derided as “gotcha” crimes, or as something prosecutors charge only when they can’t “get” a defendant for anything else. There is a widespread perception that these crimes are somehow less serious than many other white collar offenses.

But the truth is that prosecution of cover-up crimes is vitally important to the proper functioning of the justice system. It’s time these crimes got the respect they deserve.

fingers crossed 2

The Leading Cover-up Crimes

Perjury – 18 U.S.C. §§ 1621, 1623:  Perjury, or lying under oath, is the classic cover-up crime. There are two principal federal statutes: 18 U.S.C. § 1623 applies only in federal judicial and grand jury proceedings, while 18 U.S.C. § 1621 applies in any proceeding where an oath is authorized by law, including Congressional hearings and investigations by agencies such as the SEC.

Perjury requires that the defendant was under oath, made a false statement about something material to the proceeding, and knew that it was false at the time. Mistakes or innocent failures of recollection are not perjury; it requires a knowing lie.

Perjury is the narrowest of the cover-up crimes because of the oath requirement, which sharply limits the types of proceedings in which it applies. It is also notoriously difficult to prosecute. Perjury requires strict proof that the defendant was deliberately lying and that there was no room for confusion, misunderstanding or ambiguity. Pinning down evasive witnesses is not easy. As a result, testimony that is unresponsive or even misleading may not be perjury because nothing is said that is provably false.

A well-known example of this occurred during the investigation of President Bill Clinton, when he denied under oath ever having “sexual relations” with Monica Lewinsky. It was later determined, of course, that the two did have a relationship that was sexual in nature. But the questioner’s convoluted definition of “sexual relations” coupled with a failure to pin Clinton down with follow-up questions resulted in sworn testimony that was potentially misleading but likely not perjury.

False Statements – 18 U.S.C. § 1001:  The false statements statute is perjury’s more sweeping cousin, and broadly criminalizes lying to the government. The statement must be knowingly false, must be in a matter within the jurisdiction of one of the three branches of the federal government, and must be material, or potentially important. Most notably, there is no requirement that the statement be under oath. False statements can also apply to defendants who do not actually lie, but who conceal material facts from the government through a trick, scheme or device when they were under a legal obligation to reveal those facts (such as a reporting requirement created by statute, for example).

Martha Stewart, Scooter Libby, and Dennis Hastert all were charged with false statements for lying to the FBI in unsworn interviews. Lies in government contracting documents, in reports to administrative agencies, in applications for government programs, and in any other communication with the federal government may potentially result in false statements charges.

Obstruction of Justice – 18 U.S.C. §§ 1503, 1505, 1512, 1519:  A number of different statutes apply to obstruction of justice; I’ve listed only the principal ones. They differ in the types of proceedings to which they apply and in some other particulars, but also overlap a great deal. In general, obstruction of justice means the defendant knowingly and wrongfully endeavored to impair, obstruct or impede the due administration of justice in some proceeding.

Obstruction of justice covers a wide variety of conduct, including tampering with witnesses, threatening or injuring judges or jurors, and destroying, altering or concealing evidence. It may also apply to lying to investigators or in official proceedings with the intent to obstruct, and to that extent can overlap with both perjury and false statements. In the cases of Scooter Libby and Martha Stewart, for example, the defendants were charged with false statements for lying to investigators and were also charged with obstruction of justice for an overall pattern of conduct during the investigation that included, among other things, telling those lies.

Decorative Scales of Justice in the library

Prosecution Priorities and Cover-up Crimes

Cases charging cover-up crimes are often met with a reaction that ranges from skepticism to outrage. When Barry Bonds was prosecuted for perjury and obstruction of justice, there was a lot of commentary suggesting that the case was just an attempt by the prosecutors to “get” Bonds for something trivial because they didn’t like him. When Hastert was recently indicted, some suggested the charges were not appropriate and that Hastert was being unfairly singled out. And even more than a decade after her trial, it’s not unusual to hear someone express outrage over the fact that Martha Stewart was prosecuted.

The sense that these are not serious crimes is widespread. I’ll never forget seeing a sitting U.S. Senator on cable news, when the Scooter Libby case was going on, saying something like, “If there are indictments, I hope it’s for a real crime, and that the prosecutors don’t just go after someone on some technicality like perjury.”

But prosecutors certainly don’t see cover-up crimes as mere technicalities or trivial offenses. These often-maligned charges play a number of important roles.

First, when included in a case with other charges, cover-up crimes may provide valuable evidence of criminal intent. In many white collar cases, proof of intent is the critical issue. It’s often pretty clear what happened and who did what; in a contracting fraud case, for example, the paper trail may easily establish that the defendant overbilled the government. The key issue is likely to be not what happened, but why: the defense will claim it was just a mistake or accounting oversight, not a fraud.

Cover-up crimes may provide powerful evidence of intent in such cases: people generally try to conceal their activities when they realize they’ve done something wrong. If the defendant in our contracting case shredded documents when they were subpoenaed, or tried to intimidate a witness, or lied to investigators, those cover-up crimes provide strong evidence of guilty knowledge. The argument is simple: if they thought they did nothing wrong, why did they try to cover it up?

In other cases, cover-up crimes may serve the interest of justice by ensuring that defendants who engaged in criminal conduct that cannot now be prosecuted are still punished. For example, a defendant may have committed crimes that are now outside the statute of limitations, a key witness may have died making prosecution impossible, or some other critical piece of evidence may be unavailable. If during an investigation of that other criminal activity the defendant engages in a cover-up crime, bringing those charges can ensure that the defendant does not entirely escape the criminal consequences of the earlier activity.

Charges in such a case do not unfairly circumvent the statute of limitations. The defendant is not being charged for the original misconduct. But the cover-up crime can be seen as part of an ongoing course of conduct that includes the earlier bad acts; without those acts, there would be nothing to cover up. It’s perfectly appropriate to hold the defendant accountable for the cover-up that arises from earlier misconduct that cannot now be punished — particularly when, as in the Hastert case, for example, that prior misconduct was particularly egregious.

But more fundamentally, even when such considerations are not in play, pursuing cover-up charges plays a crucial role in the criminal justice system. Prosecuting such crimes is important because these offenses strike at the very foundation of the justice system.

The justice system, of course, depends upon the ability of finders of fact to receive all relevant and appropriate information necessary to decide a particular case. Cover-up crimes undermine that ability.

If witnesses lie in the grand jury, lie on the witness stand, destroy evidence, tamper with witnesses, lie to investigators, or otherwise interfere with the due administration of justice, there must be consequences. If not, such behavior becomes the logical choice of anyone who has some reason to fear the truth.

Prosecution of cover-up crimes, by seeking to deter such behavior, preserves the fundamental operation of the justice system itself.   If these crimes took place with impunity it would become impossible to investigate or prosecute anything effectively, whether white collar crime, violent crime, or terrorism. The effective functioning of the justice system depends upon people telling the truth and complying with the system’s lawful demands — and knowing they will pay a price if they do otherwise.

You can bet that every CEO knows what happened to Martha Stewart when she tried to lie her way through an SEC and FBI inquiry. Every government official knows what happened to Scooter Libby when he tried to obstruct an FBI investigation at the highest levels of government and lied about it in the grand jury. Such prosecutions can have a tremendous deterrent effect, and for that reason are tremendously important.

These crimes are not mere technicalities; they seek to preserve those aspects of our justice system upon which all else rests. That’s why prosecutors, who make their living within the justice system and working to further its goals, take these crimes so seriously, even if others do not always agree. And that’s why prosecution of cover-up crimes deserves a little more respect.

dangerfield

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Will McAvoy Goes to Jail: Reporter’s Privilege and “The Newsroom”

I’ve enjoyed watching The Newsroom, Aaron Sorkin’s HBO series that will soon end its third and final season. If you’re not a fan, the show chronicles the behind-the-scenes action at a fictional cable news network, ACN, as the staff confronts the many thorny issues facing the modern media. Jeff Daniels stars as Will McAvoy, the anchor of ACN’s hourly news broadcast, “News Night.”

The last few episodes have featured a storyline in which McAvoy is jailed for contempt after refusing to reveal a confidential source’s identity to a federal grand jury. The source illegally leaked 37,000 classified documents to ACN. The documents detail a failed U.S. covert operation against a foreign government in which dozens of people were killed. The government believes the disclosure has compromised intelligence operations and endangered lives, and wants to prosecute the leaker.

The federal prosecutor investigating the leak subpoenas Will to testify in the grand jury and name the source. Will refuses, despite an order from a federal judge that he comply. Although Will is confident that he is “too big to jail” and the government would never seek to lock him up, that confidence turns out to be misplaced and he is jailed for contempt of court.

The story is no doubt inspired in part by the recent events involving James Risen, the reporter for the New York Times who has been subpoenaed to testify at the criminal trial of former CIA employee Jeffrey Sterling. The government believes Sterling illegally leaked classified information to Risen and wants Risen to confirm that fact. Risen has refused and has said he will go to jail rather than reveal his source. As of this writing, Sterling’s trial is set to begin soon and there is no reported resolution of the standoff between Risen and the government.

I’ve done a lot of work over the past decade on the issues surrounding the reporter’s privilege, and have written about the Risen case on this blog here and here. In brief, I think the privilege is a bad idea. There’s no evidence that confidential sources are deterred from coming forward by the lack of a privilege — after all, investigative journalism has thrived for more than 200 years without one. The privilege would effectively immunize leakers of classified material, making it almost impossible to protect even the most sensitive national security information. And in today’s digital world, any government effort to define who is a “real” journalist worthy of a special legal privilege presents huge First Amendment issues of its own. (Anyone interested in reading a more in-depth critique of the reporter’s privilege can find a law review article I wrote in 2008 here.)

old newsroom

Reporters Privilege and The Newsroom

It’s been interesting to watch The Newsroom’s dramatization of the reporter’s privilege issues. The show has done a good job of acknowledging that the Supreme Court’s 1972 decision in Branzburg v. Hayes holds there is no constitutional privilege for a reporter to refuse to identify a source in a grand jury investigation. Legally, Will doesn’t have much of a leg to stand on.

The show also highlights some of the anomalies surrounding leaks of classified information to reporters. For example, in one scene a producer is in a conference room with stacks of the leaked documents and his girlfriend – also a journalist – walks in. He says, “There’s classified documents in here, you can’t be in here,” and walks her out of the room. The irony, of course, is that the producer himself has no more legal right to be looking at classified materials than does his girlfriend.

Journalists often think of themselves as self-appointed monitors to review classified information, but some characters in The Newsroom rightly question this notion. How exactly are journalists, who have no formal training in national security or counter-espionage, qualified to make decisions about what is a “good” leak or a bad leak, whether government covert operatives have done a good job, or whether publishing certain information might damage our country’s interests? Journalists are unelected and unaccountable to the public, and work in an intensely competitive industry where professional accolades accrue to the first to reveal new information. It’s not at all clear why we should feel comfortable entrusting them with potential life and death decisions about national security.

Trusting journalists to protect information that truly needs to be kept secret also assumes that any leaks will be made to a “mainstream media” organization that will behave responsibly and listen to government concerns about disclosing the information. This is no longer necessarily true. At one point in The Newsroom the source, who feels the story is not being aired quickly enough by ACN, threatens simply to dump all the documents on the Internet.

This highlights another fact of life about leaking in the digital age. Sources no longer require the “mainstream media” in order to get their classified information out to the public – all they need is an Internet connection. If the information is compelling enough, they can depend on the mainstream media to pick up the story and publicize it widely. There’s no real need to leak information to a reporter anymore, and no guarantee that an established media organization will carefully vet the information before disclosing it.

Art Doesn’t Always Imitate Life

Of course, real life doesn’t always make for riveting TV drama, and you can’t quarrel with the need to take a little artistic license. But lest anyone think that McAvoy’s experience is an accurate depiction of what would happen in a real-world case, let’s examine just three points:

1) Get subpoenaed on Monday, go to jail on Friday – McAvoy and ACN have a great legal malpractice claim against their lawyer, Rebecca Halliday. In the show, McAvoy is subpoenaed, goes before the grand jury twice and refuses to reveal his source, appears before the judge twice, gets held in contempt, and gets hauled off to jail – all in the space of a week. Halliday pretty much just sits back and lets it all happen.

In real life, once McAvoy received a subpoena, Halliday would have filed a motion to quash the subpoena based on a claim of reporter’s privilege. (Although the Supreme Court in Branzburg made such a claim very difficult, a reporter is free to try to convince a court to recognize the privilege in their particular case.) If she lost before the district court judge, she could appeal to the U.S. Court of Appeals. If she lost again, she could petition to have the entire Court of Appeals rehear the case en banc, and if that was denied, she could file a petition for certiorari to the U.S. Supreme Court. Each of these stages would involve months of briefing by both sides, oral arguments, and waiting for the court’s decision.

All of this would likely consume at least 18 months to two years, during which the subpoena would be on hold. McAvoy would not have to appear before the grand jury and would not be held in contempt for refusing to testify. This is exactly what has happened in the Risen case, where these types of legal battles have delayed the trial of Jeffrey Sterling for more than two years while Risen has yet to face a single question under oath.

This is one very practical reason that a prosecutor will subpoena a reporter only as a last resort. If you do so, you are almost certainly wading into a huge legal battle against top-notch media lawyers that will delay your case for at least a couple of years. Delay is bad for the prosecution: memories fade, witnesses become unavailable, circumstances change, and the case generally gets more difficult to prove.

In The Newsroom, for example, McAvoy’s source ends up taking her own life about two months after he is held in contempt and the government drops the subpoena because it no longer needs his testimony. In real life, after only sixty days the briefing at the District Court level alone would probably not be complete. If Halliday had done her job properly, Will would never have seen the inside of a grand jury room, much less a prison cell.

2) Going for the reporter first – On The Newsroom it appears the government learns about the leak and goes straight to ACN and McAvoy to seek to compel them to reveal their source. There’s no indication that the prosecutors did any investigation within the government to see if they could independently identify the leaker without needing to talk to the press.

In real life, federal prosecutors are governed by strict Department of Justice guidelines concerning when they may seek to compel information from the press. Among many other things, those guidelines require prosecutors to demonstrate they have exhausted every other potential option and that they are seeking information from the press only as a last resort and only because it is absolutely necessary.

Before even thinking about going to the reporter, prosecutors would do an exhaustive investigation into the possible source of the leak. This could include examining government computer and phone records, interviewing any possible witnesses or sources, examining phone and other records of possible suspects, perhaps conducting lie detector tests or having witnesses swear out affidavits denying they were the source, and taking other investigative steps.

Both the Department of Justice guidelines and any judge reviewing a motion to quash a subpoena of a journalist would require the prosecution to demonstrate that it has exhausted every other possible investigative avenue and that it is coming to the journalist only as a last resort. Again, that could take months or years. Rule #1 in any leak investigation is that you can’t begin with the press – you have to try everything else first.

3) The raid on the newsroom – Here the show crosses over into real fantasy.  The FBI shows up at the ACN offices with a squad of agents and a warrant to seize not only documents but every computer hard drive in the room, to search for evidence of the leaker’s identity. Presumably they plan to comb through all the documents and computers looking for evidence, in the process examining every aspect of ACN’s First Amendment activities.

I’m not aware that something like this has ever happened, and I can’t imagine that it would. No Justice Department in its right mind would request such a sweeping warrant allowing the government to seize everything on every computer of a news organization, and no judge in his or her right mind would approve it.

This incident may be (very loosely) based on the case last year where the Department of Justice subpoenaed records for a number of phone lines from the Associated Press. Prosecutors were investigating a leak to the AP about a CIA operation to foil an al-Qaeda bomb plot in Yemen. The disclosure compromised an ongoing CIA terrorism investigation. After hundreds of interviews and the review of thousands of documents failed to identify the leaker (again, proving they had exhausted every other option), the Department of Justice subpoenaed the phone records.

The AP phone records were just lists of numbers that connected to a specific group of phones during a specific limited time period. They revealed nothing about the content of any conversation or even the identity of the parties to the conversation. That’s a very far cry from the sweeping seizure of computer hard drives and documents to comb through the contents. Nevertheless, there was such an outcry over even the more modest AP subpoena that the Department of Justice ultimately revised its guidelines on media subpoenas to make them even stricter.

Having the FBI swoop down on a news organization and seize everything in sight makes for good drama, but it has nothing to do with reality.

prison cell

 Will McAvoy Goes to Jail

There is one more feature of the story on The Newsroom that is very different from real life: McAvoy’s reaction to the subpoena. When the judge asks McAvoy what he thinks the court should do, he replies that he understands the government’s position and is sympathetic to it. He says he understands how much more damage leaks of classified information can do in the Internet age, and how rapidly. He recognizes that the government needs to try to protect certain secrets in the interest of national security and that the prosecutor is just doing his job.

McAvoy doesn’t go on a rant about how the subpoena proves that the current administration hates the press, or that the administration is the greatest threat to press freedom in a generation or is trying to punish him for his reporting. He doesn’t act as though his case means the end of the First Amendment as we know it. McAvoy would recognize such claims for the overwrought histrionics that they are and would mock them mercilessly. He acknowledges the legitimate government interests involved in seeking the information. But he believes that, as a journalist, he simply can’t comply with the subpoena.

I think Will makes the wrong decision, but you’ve got to respect the way he handles it.

Update 12/13/14:  News today is that Attorney General Holder has decided the Department of Justice will not seek to compel James Risen to identify his source in the Sterling trial.  Looks like Risen, unlike McAvoy, will avoid going to jail.

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