Rudy and Bill, Back in the News

One hundred days into the Biden administration, two leading characters from the Trump years are making headlines again. Federal authorities executed search warrants at the home and office of Trump’s former attorney Rudy Giuliani, dramatically escalating the criminal investigation into his activities in Ukraine. And a federal judge harshly criticized former Attorney General William Barr and his Department of Justice for engaging in a cover-up concerning Barr’s handling of the Mueller report. The stories were an unwelcome reminder of the abuses that routinely took place during the Trump years, and highlighted that we still have a lot to learn about those abuses.

Rudy Giuliani

The Giuliani Investigation

We’ve known for some time that Rudy Giuliani is the subject of a criminal investigation by the U.S. Attorney’s Office for the Southern District of New York related to his dealings with Ukraine. Those activities are closely related to the events that led to Trump’s first impeachment, when Trump asked the president of Ukraine to “do us a favor” by providing dirt on Joe Biden’s son in exchange for U.S. assistance. In 2019 Giuliani was actively working in Ukraine to to dig up potentially damaging information concerning Biden, who was considered to be Trump’s most likely rival in the 2020 election.

Giuliani also was actively involved in the successful efforts to have Trump oust the U.S. ambassador to Ukraine, Marie Yovanovitch, who was notoriously tough on government corruption. Giuliani apparently saw Yovanovitch as an obstacle to his efforts. Her ouster was also a focus of Trump’s first impeachment, and Yovanovitch testified during the House impeachment hearings about Giuliani’s smear campaign against her that ultimately led to her removal.

Prosecutors apparently are exploring whether Giuliani was working not only for Trump but also on behalf of Ukrainian government officials or other Ukrainian individuals. Those Ukrainians may have been seeking favors from the Trump administration or may have wanted the ambassador removed for their own reasons.

The Search Warrants

On April 28th, federal agents executed search warrants at Giuliani’s home and office in New York City. They reportedly seized a number of phones and electronic devices looking for communications, perhaps on encrypted apps.

According to news reports, prosecutors in the Southern District sought to execute the search warrants as early as last summer. Top DOJ officials would have needed to sign off, given the sensitivity involved in searching the office of an attorney for the president. The Barr Justice Department refused to allow it. After Merrick Garland was sworn in as Attorney General, the Justice Department gave the go-ahead.

The most charitable explanation for the Barr DOJ’s refusal to approve the warrants would be DOJ’s unwritten policy to avoid investigative steps within sixty days of an election if they might influence the vote. But if approval was sought last summer, the election was much more than sixty days away. And that policy would not explain why the searches could not have been approved after the election and before Biden’s inauguration.

Last summer was also when Barr sought to remove the U.S. Attorney for the Southern District and replace him with a Trump loyalist. All of this raises suspicions that president Trump’s Justice Department sought to protect Giuliani by stifling the investigation into his Ukraine activities as long as possible – which also, of course, protected Trump himself.

Michael Cohen

Searching an Attorney’s Office

Giuliani and his lawyers responded with predictable outrage over the search warrants. Searching an attorney’s office does raise special concerns, due to the possibility that materials covered by the attorney-client privilege might be seized. But of course a law degree does not confer immunity from the criminal law, and in appropriate circumstances attorneys may be the subject of a search warrant just like anyone else. As with any search warrant, it requires a neutral judge or magistrate to find probable cause that a crime has been committed and that evidence may be located during the search. And the Justice Department has special procedures in place to review requests for such warrants and handle the screening of potentially privileged material.

The Trump years featured another prominent example of such a search: in April 2018 investigators executed search warrants at the home and office of Michael Cohen, president Trump’s former private attorney and “fixer.” Cohen ultimately was indicted on multiple charges, pleaded guilty, and was sent to prison.

As many criminals have learned the hard way, having an attorney involved in your activities does not necessarily mean that everything the attorney touches is privileged. The attorney-client privilege applies only to communications that involve providing legal advice. If an attorney is working as a business person or in some other non-legal capacity, their activities and communications will not be shielded by the privilege. The privilege also contains an exception for communications that are made in the furtherance of a crime or fraud.

After the Cohen search, a judge appointed a special master to review all of the seized materials and screen them for anything privileged before turning them over to investigators. Ultimately only a small amount of material was withheld. Recognizing the sensitivity of these searches and hoping to speed the process along, prosecutors have already asked the court to do the same for the Giuliani materials.

It will take some time for all of the seized materials to be reviewed and we shouldn’t expect anything to happen in the immediate future. But it’s an ominous sign for Giuliani. DOJ is unlikely to take the serious step of searching an attorney’s office without a compelling reason. That’s especially true when that attorney once represented the former president of the United States. Attorney General Garland would be extremely unlikely to sign off on such politically-charged warrants if this were a marginal case.

The Potential Criminal Charges

Much of the news coverage concerning potential criminal charges against Giuliani has focused on his possible violation of the Foreign Agents Registration Act, or FARA. At least one of the search warrants reportedly mentioned FARA as the potential crime under investigation. That law requires those engaged in political activities in the United States on behalf of a foreign principal to register with the Justice Department. Giuliani may have violated FARA by failing to disclose his work on behalf of various Ukrainian nationals.

Historically FARA was rarely enforced criminally. But the law has gained prominence in recent years, and during the Trump administration and Mueller investigation there were a number of high-profile FARA cases. Former National Security Advisor Michael Flynn was charged with violating FARA for failing to disclose that he was working for the government of Turkey (although he pleaded guilty to a different charge – before ultimately being pardoned). Former Trump campaign manager Paul Manafort also pleaded guilty to violating FARA for his undisclosed work on behalf of Ukraine.

But a search warrant does not need to name every crime under investigation, and other charges could be implicated as well. Financial crimes such as tax evasion or money laundering are always a possibility. Manafort, for example, also was convicted of tax evasion and money laundering based on his handling of the money he received from Ukrainians. If you’re keeping your work as a foreign agent a secret, you naturally have an incentive to hide payments for that work from the IRS and other authorities.

Another possibility is public corruption – taking part in a conspiracy to bribe president Trump. The first impeachment was essentially about bribery, although the articles of impeachment did not expressly cite that criminal law. The charge was that Trump offered to release military aid to Ukraine in exchange for that country’s help in digging up damaging information about Biden. This is an allegation of quid pro quo bribery: I will do an official act (release the aid) in exchange for something of value to me (the political dirt on my rival).

Giuliani was at the center of all these activities. He appears to have been working with a number of Ukrainians who were seeking something from president Trump — and may have been willing to offer something in return. Prosecutors could be investigating whether such conduct amounted to a conspiracy to commit bribery. A conspiracy charge would not require that the bribe was ever consummated or successful. Nor would it necessarily require charging Trump himself; Giuliani and others could be charged with simply trying to arrange the quid pro quo transaction.

Whether prosecutors are focusing on charges in addition to FARA is just speculation at this point. But it seems unlikely to me that DOJ would have taken the aggressive and politically explosive step of executing the Giuliani search warrants if they were looking only FARA, a relative technicality. That makes me suspect they are looking at something more substantial.

Would Rudy flip?

One tantalizing prospect that all of this raises is whether Giuliani would cooperate in an investigation of Trump in exchange for leniency. It’s hard to imagine Giuliani turning on the man to whom he has so slavishly linked his own image and reputation. But there are reports that their relationship is strained. Michael Cohen, for one, has opined that Giuliani would flip on Trump to save himself “in a heartbeat.”

There also have been reports that Giuliani is seeking Trump’s help in paying his legal fees and that he has not been paid for much of his legal work on Trump’s behalf. That raises some interesting prospects as well. If Giuliani feels like Trump has stiffed him, he may be more willing to cooperate against the former president. On the other hand, given all that Giuliani knows about Trump’s own potential misconduct, if Trump were to help Giuliani with his legal bills that could look like bribery of a witness, in violation of 18 U.S.C. 201: Trump paying Giuliani to keep his mouth shut.

Before this is over, Giuliani may end up wishing he had persuaded Trump to grant him a pardon before leaving office.

William Barr
Former Attorney General William Barr

The Barr Cover-Up

On March 22, 2019, special counsel Robert Mueller delivered his 400+ page report to Attorney General William Barr. Barr did not release the entire report, or the detailed summaries that Mueller prepared for that purpose. Instead, two days later he wrote a four-page letter to Congress purporting to summarize Mueller’s conclusions, and held a press conference. He noted that Mueller had declined to make a prosecutorial decision concerning whether Trump obstructed justice. Barr then announced his own conclusion that the evidence presented by Mueller did not establish that crime.

This extremely misleading letter and press conference set the public narrative for the still-secret Mueller report. It allowed Trump to claim he had been completely exonerated and that Mueller had concluded there was “no obstruction, no collusion.” Mueller himself objected to Barr’s characterization of the report which did, in fact, contain substantial evidence of obstruction of justice by the president. But by the time the full redacted report was released three weeks later, Barr’s “spin” had firmly taken hold.   

Barr testified before Congress that he had reached the conclusions in his letter after consultations with the DOJ Office of Legal Counsel and other Department attorneys. The public interest group CREW promptly filed a request under the Freedom of Information Act for documents related to those consultations. Barr’s DOJ withheld a number of documents, claiming attorney-client and deliberative process privileges. One withheld document in particular, a memo to Barr dated March 24, 2019 from Steven Engel in the Office of Legal Counsel and Ed O’Callaghan in the Deputy Attorney General’s Office, was the subject of a federal court ruling last week.

Federal Judge Amy Berman Jackson ruled on May 3 that the memo must be turned over. Much of her opinion deals with the somewhat dry procedural requirements of FOIA. But her conclusions about DOJ’s behavior are damning.

DOJ had claimed the memo was privileged because it involved DOJ attorneys giving legal advice to Barr concerning whether Trump had obstructed justice. Their story was that these attorneys had reviewed Mueller’s lengthy and detailed report on obstruction, formulated their advice to Barr, and written him a memo, which Barr then used to prepare his letter to Congress – all in the space of a couple of days.

Judge Jackson concluded that these claims were false. The memo itself and Barr’s infamous letter to Congress, she found, were all being drafted at the same time and by the same people. And all of those Trump DOJ officials agreed from the outset that Trump should not be charged with obstruction. The memo was not true legal advice to help Barr decide, but apparently was designed to provide legal cover for a decision that had already been made: “the review of the document reveals that the Attorney General was not then engaged in making a decision about whether the President should be charged with obstruction of justice; the fact that he would not be prosecuted was a given.”

Judge Jackson’s conclusion that the fix was in when it came to obstruction of justice doesn’t really come as a surprise to those who followed the Mueller investigation. Before he was named attorney general, Barr – then a lawyer in private practice – wrote a nineteen page memo to the DOJ about why he believed the president could not be charged with obstruction for anything done in his official capacity. Many considered this memo a sort of job application for the attorney general position. When Trump appointed Barr, he was putting in place a final backstop against any potential obstruction of justice charges. And that’s exactly what he got.

“Disingenuous” = “You’re Lying”

Judge Jackson repeatedly accused Barr’s DOJ of being “disingenuous” before the court in its description of the OLC memo. She held that the affidavits submitted by DOJ officials were “so inconsistent with evidence in the record, they are not worthy of credence.” This is essentially a polite way of accusing the department of lying to the court and engaging in a cover-up about the true reasons for Barr’s actions. 

As Judge Jackson noted in her opinion, she is not the first judge to question Barr’s handling of the Mueller report and the credibility of his statements in court. In an earlier case involving the redactions to the Mueller report, Judge Reggie Walton also expressed his “grave concerns” about Barr’s characterizations of the report, which he found were at odds with Mueller’s actual conclusions. He questioned whether Barr had tried to create a “one-sided narrative” about the report in order to benefit Trump.

Barr and the Trump DOJ desperately sought to prevent the truth about Barr’s shielding of the president from coming to light – so much so that they were willing to lie to more than one federal judge about it. It will be interesting to see now whether the Biden DOJ chooses to appeal Judge Jackson’s order that the memo be turned over. They presumably would like the truth about Barr’s actions to be revealed. But depending on their internal review concerning the merits of Judge Jackson’s conclusions, they may feel they need to appeal to try to protect the institutional privileges potentially at stake. Hopefully the full memo will soon see the light of day.

Barr’s effort to use the Department of Justice to protect the president and his cronies was one of the most disturbing aspects of the Trump years. We saw it with Roger Stone and Michael Flynn. And this episode also ties right back in to the Giuliani story, where the Barr DOJ refused to approve the search warrants that could have unearthed evidence implicating Trump.

It’s apparent that we have still more to learn about the corruption within Barr’s DOJ.

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The McAfee Cryptocurrency Fraud Case

Tech celebrity John McAfee and his former bodyguard and business associate Jimmy Watson, Jr. were indicted last week on fraud and money laundering charges. The indictment alleges that in 2018 the two engaged in a series of fraudulent schemes related to investments in cryptocurrencies, taking in more than $13 million. The charges highlight the ability of alleged fraudsters to adapt old-school techniques to new technologies. As the McAfee fraud case demonstrates, when it comes to fraudulent schemes, the classics never grow old.

John McAfee
John McAfee

The Defendants

John D. McAfee is a 75-year-old American citizen who was born in the U.K. He is best known for creating the computer antivirus software and company that still bear his name. Since selling his company, McAfee has been a popular figure at tech industry conferences and on various media platforms such as YouTube and CNBC. He has cultivated an image as an expert in cryptocurrency and cybersecurity. Of particular relevance to the criminal case, at the time of his alleged crimes his official McAfee Twitter account had more than 750,000 followers.   

The co-defendant Jimmy G. Watson Jr. is forty years old and a former Navy Seal. At the end of 2017 he began working for McAfee as a private security guard, and later became his “Executive Advisor.” McAfee had a team of people working for him on cryptocurrency investments, and Watson ultimately became a leading member of that team.

Cryptocurrency: Bitcoin and Beyond

Cryptocurrencies, or digital currencies, are electronic representations of value that operate like traditional coin or paper currencies. They can be used as a medium of exchange to make purchases or investments, and may be traded back and forth among individuals. The issuance and exchanges of cryptocurrencies are tracked in digital ledgers known as blockchains. Unlike more traditional currencies, cryptocurrencies are not issued by, or backed by, any government. Ultimately they depend for their value on the agreement and faith among those who use them.

The best-known cryptocurrency is bitcoin, which has been extremely volatile and, for many of its investors, extremely lucrative. It has undergone a number of boom and bust cycles, but the overall trend is hard to ignore: a single bitcoin that was worth less than a dime in 2010 is worth more than $54,000 at this writing (of course, by the time you read this, it could be worth twice that – or half).

Returns like that inevitably attract attention. Many companies and individuals have launched their own cryptocurrencies, with varying degrees of success, and several thousand are now available on the market. Cryptocurrencies other than bitcoin are often referred to as “altcoins.” Startup companies use an “initial coin offering” or “ICO” – similar to an initial public offering or IPO – to raise funds by issuing and selling the digital tokens in their new altcoins.

Returns like that also inevitably attract the interest of government regulators and law enforcement. The government alleges in the indictment that certain uses and aspects of digital currencies qualify them as commodities under federal law, making trading in them subject to regulation by the Commodity Futures Trading Commission. The indictment also alleges that in some cases cryptocurrencies qualify as securities subject to federal securities law and regulation by the Securities Exchange Commission. More broadly, just last October the Attorney General’s Cyber-Digital Task Force released a detailed report, “Cryptocurrency Enforcement Framework,” analyzing multiple law enforcement issues related to the rise of cryptocurrencies.

McAfee Indictment

The Fraud Schemes

The indictment charges that McAfee, with the help of Watson and other unnamed co-conspirators, engaged in two different types of fraud schemes involving altcoins. The first was what is known as a “pump and dump” or “scalping” scheme. McAfee would direct his team members to purchase large quantities of a particular altcoin, either in his name or on his behalf. After the purchases, McAfee would endorse that altcoin on his official Twitter account and encourage others to invest in it (the “pump”) without disclosing that he owned large amounts of it himself. When the price rose based on the interest and activity created by his endorsements, McAfee and his team members would sell their holdings (the “dump”). This often left those who invested based on his recommendations holding the bag, as the value of the altcoin would drop significantly over time once McAfee stopped endorsing it.

McAfee allegedly pumped and dumped a number of altcoins this way, using his Twitter account to promote a “coin of the day” or “coin of the week”. McAfee’s Tweets allegedly contained false and misleading statements about the investments and did not disclose his true reason for the endorsement: to run up the price so he could sell. He also allegedly repeatedly lied when asked on Twitter and elsewhere whether he was pursuing his personal financial interests, and denied owning the altcoins he was promoting.

The indictment charges that in December 2017 and January 2018, the defendants and other McAfee team members earned more than $2 million through pump and dump schemes involving twelve different publicly-traded altcoins.

The indictment also charges a second, more lucrative scheme, the “IPO touting scheme.” It alleges that over about a three-month period in late 2017 and early 2018 the defendants and other McAfee team members promoted at least seven ICOs on Twitter. As compensation for these promotions, the McAfee team received more than $11 million worth of bitcoin and other cryptocurrencies from the ICO offerors. In each case, McAfee allegedly failed to disclose to the ICO investors that a substantial portion of the funds raised by the ICO he was promoting would be paid to McAfee. The indictment also alleges that the defendants took active steps to conceal their compensation arrangements from the ICO investors.

Criminal Charges in the McAfee Fraud Case

The indictment uses several different theories to charge the two schemes:

  • Count 1: Conspiracy to commit commodities and securities fraud (pump and dump scheme)
  • Count 2: Conspiracy to commit wire fraud (pump and dump)
  • Count 3: Wire fraud (pump and dump)
  • Count 4: Conspiracy to commit securities fraud (touting scheme)
  • Count 5: Conspiracy to commit wire fraud (touting)
  • Count 6: Wire fraud (touting).

Finally, Count 7 charges conspiracy to commit money laundering under 18 U.S.C. § 1957. Unlike money laundering charges under the more commonly charged section 1956, section 1957 does not require proof of any intent to disguise or conceal the nature and source of the funds or any other specific purpose for the laundering transaction. It may be violated simply by taking criminal proceeds and depositing them in the bank, so long as the transaction exceeds $10,000. The indictment alleges that the defendants did this with the proceeds of the touting wire fraud alleged in Count 6.

Most of the criminal charges carry a maximum penalty of 20 years in prison. The conspiracy charges in counts 1 and 5 carry a maximum penalty of 5 years, and the money laundering count carries a maximum penalty of 10 years.

The indictment also seeks forfeiture of the money earned through the schemes or of any assets whose purchase can be traced to those proceeds.

Possible Defenses

As in many white collar cases, it appears the facts of the case will be largely undisputed. There will be a substantial paper trail to prove the investments that McAfee and his team made, their Twitter endorsements, what was and was not disclosed, what they earned, and what they did with the money. So any defense likely will be not “we didn’t do it” but rather “it wasn’t a crime.”

A key legal issue will be whether these transactions were in fact subject to federal securities or commodities regulation. Watson’s attorney hinted at this kind of defense when the indictment was announced, suggesting there would be a dispute over whether cryptocurrencies are securities, commodities, or something else. If the court determines they do not legally qualify as securities or commodities, the criminal charges would fail.

The cryptocurrency craze erupted relatively quickly over the past decade and there has been considerable uncertainty over the regulatory status. Cryptocurrency markets have had a “wild west” feel to them and the government has been slow to respond. SEC leaders have said in recent speeches that they do not consider bitcoin itself to be a security. But the SEC has not been reluctant to pursue civil actions related to ICOs in new cryptocurrencies under specific factual circumstances. Suffice it to say that the legal status of cryptocurrencies is still somewhat up in the air, and that status may depend a great deal on the facts of a particular offering or transaction.

The McAfee indictment is full of hedges in this regard. It says that “certain uses and aspects of digital currencies qualify them as commodities” and that “in certain circumstances, digital assets can also qualify as securities.” Although the indictment confidently asserts that these particular transactions were subject to federal jurisdiction, the language of the indictment itself appears to recognize this is a gray area. This case may lead to a judicial determination concerning the status of cryptocurrencies that could have much wider implications.

Twitter logo

Twitter Cryptocurrency Fraud: Old Wine in New Bottles

At the press conference announcing the indictment, FBI Assistant Director William F. Sweeney, Jr. said the case involved an “age old pump-and-dump scheme.” It’s true that, despite the glitzy new technologies involved, the alleged schemes in the McAfee fraud case involve old, tried-and-true fraud techniques. And there are several characteristics of the cryptocurrency markets that make them prime candidates for these kinds of classic schemes.

The first is the complex and confusing nature of the product. Many, if not most, people probably don’t have a clear understanding of what exactly a cryptocurrency is, how it works, or why it has any value at all. That makes the area ripe for fraud. One hundred years ago, when pioneering the type of fraud scheme that still bears his name, Charles Ponzi relied on obscure instruments known as postal reply coupons and claims about international variations in currency and postal rates – difficult things for the typical 1920s investor to understand or verify. If an investment is difficult to understand, it makes it easier for potential fraudsters to deceive people about that investment.

Related to the obscure nature of the investment is the ability of a celebrity or other well-known figure to attract investors – or in this case, victims. Many watching the frenzy in cryptocurrencies likely wanted to get in on the action but felt uncertain about which altcoins might be good investments. If a tech leader with McAfee’s stature throws his name behind a particular coin, that will attract many who feel unqualified to evaluate the investment for themselves. That, of course, is why some of the IPO issuers were willing to pay McAfee such huge sums of money for his endorsement.

Another “high tech” feature that makes this case interesting is the role of Twitter. Virtually all of McAfee’s promotions and endorsements in furtherance of the alleged schemes took place on Twitter. We’ve seen how that social media platform transformed political communications in the hands of former president Trump and other users with large numbers of followers. The same characteristics that make it so easy to spread “fake news” when it comes to politics also make it easier to tout fraudulent investments. Twitter has a massive reach but is largely unregulated, making it easy to spread phony information to millions.

Something like a pump-and-dump scheme operates much more efficiently in the age of Twitter. In the days before digital communications, those engaging in such a scheme might have to print a newsletter or other document touting the stock in question and deliver it by mail. That involves printing and postage expenses and takes much more time.  In the digital age a potential fraudster can reach hundreds of thousands of people in an instant. Technology makes everyone’s job easier – including criminals’.

The final characteristic of cryptocurrencies that McAfee apparently was able to exploit is the investment frenzy surrounding them. When people see the astounding returns in something like bitcoin they want to get in before they miss out – and that can cause people to let down their guard. Some have compared the frenzy surrounding bitcoin to the famous Dutch tulip mania in the 1700s, the first great investment bubble. If you read some of the online commentary about altcoins on sites like Reddit or Twitter, much of it has almost an evangelical tone. This is not only a warning sign of a potential bubble – it also creates an environment where criminals can prey on those caught up in the frenzy.

What to Watch

McAfee is currently in custody in Spain, awaiting extradition. He was arrested there several months ago on federal tax evasion charges filed in a separate case in Tennessee.  In the meantime, he continues to take to Twitter, now to defend his conduct and attack the government’s case.

McAfee Tweet

Watson has been arrested on the criminal charges. In addition to the criminal indictment, both men are also facing civil charges from the CFTC and SEC.

The McAfee fraud case should be a cautionary tale for investors eager to jump on the latest hot bandwagon based on celebrity endorsements. And it could be a sign of things to come as the federal government, under the Biden administration, seeks to flex its muscles when it comes to policing the cryptocurrency markets.

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