Manafort and Cohen: Trump’s Terrible, Horrible, No Good, Very Bad Day

August 21, 2018 was a watershed in the investigations surrounding president Trump. A jury in Virginia found his former campaign chairman, Paul Manafort, guilty on eight felony counts. Almost simultaneously, in New York, Trump’s former personal attorney Michael Cohen pleaded guilty to eight felony counts of tax evasion, bank fraud, and orchestrating illegal campaign contributions for Trump’s 2016 campaign.

It was a remarkable day for a president who campaigned promising to surround himself with “only the best people.” Although both cases are linked to Trump, they have different implications for the president, the Mueller investigation, and for what might be coming next from federal prosecutors.

Paul Manafort was convicted on eight felony charges.

Paul Manafort

The Manafort Conviction 

Paul Manafort was the first defendant to be convicted at trial by the special counsel’s office. After about a three-week trial and four days of deliberations, a jury in the Eastern District of Virginia found him guilty on eight counts of tax evasion, bank fraud, and failure to report a foreign bank account. The jury could not reach a verdict on ten more counts, and the judge declared a mistrial as to those.

There was a lot of drama during the trial concerning whether the judge was being too hard on the prosecutors and whether the jury should have been sequestered to avoid hearing publicity about the case or learning about Trump’s Tweets. These were mostly distractions; it’s not that unusual for a judge to be tough on prosecutors (although Judge Ellis may have taken it to an extreme at times) and juries are very rarely sequestered these days. In the end it appears the jury was able to look past the noise and do its job carefully, sorting through the different issues involved in the different counts — even though they were ultimately unable to agree on about half of them.

It’s hard to know why the jury was hung on some of the charges – and we don’t know whether there was a single holdout or whether they were more evenly divided.(Update: Shortly after this post was published, one juror went public and said there was a single holdout on the ten counts where the jury hung – the other eleven jurors wanted to convict on all counts.) They found Manafort guilty on all the tax charges, clearly finding that whatever other financial shenanigans were going on, he wasn’t reporting his income to the IRS. They rejected all but one of the counts based on failure to report ownership of a foreign bank account; that may have had something to do with doubt about the details of the legal requirements for establishing when a defendant has sufficient control over such an account. And they convicted on some bank fraud theories and not on others, which may have been based on disputes over whether particular representations to some banks were actually material.

But in the end, none of that really matters. Manafort’s defense team was dealt a pretty tough hand and did a good job raising a reasonable doubt as to at least some issues in the minds of some of the jurors. But conviction on eight felony counts still exposes Manafort, who is nearly seventy years old, to essentially life in prison. There’s no way to spin this as anything other than a big win for the prosecutors and a huge blow to Manafort – although some will undoubtedly try:

Prosecutors have the option to re-try Manafort on the counts on which the jury could not agree, but it seems very unlikely they will do so. The eight felony convictions encompass all areas of Manafort’s misconduct and are more than sufficient to hold him accountable at sentencing. In addition, Manafort is still facing a second major trial in the District of Columbia next month on charges of money laundering and bank fraud. Re-trying the counts on which this jury hung seems completely unnecessary.

Manafort also has the right to appeal the convictions. That appeal would be heard by the U.S.. Court of Appeals for the Fourth Circuit, and the process would probably take six months to a year to complete.

The really interesting question now is whether Manafort will finally decide to cooperate in the Mueller investigation. It’s been hard to understand why he hasn’t cut a deal already. Maybe he really is counting on a pardon — although if Trump granted a pardon in exchange for Manafort’s silence, that could be a separate crime of bribery. Or maybe Manafort is afraid what might happen to him if he testifies against certain Russian individuals, who have been known to assassinate their rivals.

There seems little doubt Manafort knows a great deal that would be valuable to Robert Mueller’s investigation. He was at the center of key events, including the frequent contacts between the campaign and various Russians and the change of the Republican party platform at the convention to make it less favorable to Ukraine. And Manafort was also part of the infamous June 2016 meeting at Trump Tower between campaign officials and Russians offering dirt on Hillary Clinton.

We should know soon whether Manafort will join others who have “flipped” and cooperated, or whether he will continue to remain silent. If he does decide to come on board with the prosecution, that has the potential to be a real turning point in the special counsel investigation.

Michael Cohen pleaded guilty to eight felonies.

Michael Cohen

The Cohen Guilty Plea 

At almost the same time the jury was returning its verdict in the Manafort trial, former Trump attorney Michael Cohen entered a guilty plea to eight felony counts in federal court in New York. Cohen pleaded guilty to five counts of tax evasion, one count of bank fraud, and two campaign finance violations. The tax crimes stem primarily from his failure to report several million dollars in income from his taxi medallion business, and really have nothing to do with Trump or the campaign.

The campaign finance violations strike closest to the Trump presidency. They involve Cohen’s role in arranging hush-money payoffs to adult film star Stormy Daniels and former Playboy model Karen McDougal – both to keep them quiet about alleged affairs with Trump during the closing weeks of the campaign. The payment to McDougal was made by a corporation — reported to be American Media Inc., which owns the National Enquirer — which bought the rights to her story so it could then kill it. The payoff to Daniels was the widely-reported $130,000 payment made by Cohen himself just days before the election. Cohen admitted that he took part in these payoffs in order to influence and benefit the Trump campaign.

The most startling thing about Cohen’s plea was his direct implication of Trump in a crime. His plea agreement says only that he arranged the hush money payoffs in “cooperation, consultation, and concert with, and at the request and suggestion of one or more members of the campaign.” But during his plea proceeding, Cohen said the payments were made at the direction of the candidate – Trump himself.

The campaign contributions were unreported and exceeded legal limits, and one was paid by a corporation. These are crimes if done knowingly and willfully, which is what Cohen admitted during his plea. But if the president directed him to commit those crimes, the president himself is also criminally responsible. The law of aiding and abetting, 18 U.S.C. 2, provides: “whoever commits an offense against the United States or aids, abets, counsels, commands, induces or procures its commission, is punishable as a principal.”

In other words, if Trump truly did direct Cohen to arrange the illegal contributions, then Trump himself is liable for the same campaign finance violations to which Cohen just pleaded guilty. The same is potentially true for other members of the campaign who were involved, as well as the individuals at American Media. The president and others could also be implicated in a charge of conspiracy to violate the federal campaign finance laws.

Because Trump and others are potentially implicated, the question is where does the case go from here? The Southern District of New York could bring charges against other individuals involved in the campaign finance violations. But the SDNY is not going to charge the president – particularly in light of the longstanding DOJ opinion that a sitting president cannot be indicted. And the SDNY is not set up to investigate presidential misconduct and make a report to the Attorney General as a special counsel would do. The allegations against Trump also seem to fall outside the mandate of special counsel Robert Mueller, who is charged with investigating Russian interference with the election. (That’s why Mueller referred the allegations against Cohen to the Southern District of New York in the first place.)

That may mean the appropriate course is to call for a new special counsel to investigate the potential campaign finance violations by the president and senior members of his campaign – or to expand of Mueller’s mandate to include those allegations. The latter may make more sense, considering the substantial overlap of the allegations and people involved. Because Attorney General Sessions remains recused from any investigations involving the campaign, such a decision presumably would be made once again by Deputy Attorney General Rod Rosenstein.

DOJ may already be considering appointing a new special counsel or expanding Mueller’s mandate – we don’t know what referrals may have already been made. But now that there are direct allegations of criminal misconduct by the president himself, presumably some kind of process must be put in place to investigate those allegations.

What Happens Next?

Developments in the coming days and weeks should be fascinating. Will Manafort finally decide to flip? Will there be a new special counsel to investigate the campaign violations, or will Mueller’s role be expanded? After all the allegations about Russian meddling and collusion, will it be campaign finance violations having nothing to do with Russia that end up bringing down the president? What about Cohen – how much will he be working with prosecutors?  Although his plea agreement did not spell out any cooperation requirements, it seems likely that he would cooperate as required to help himself out in his own case.

President Trump’s own Tweets in the aftermath of these events may provide a clue as to where he thinks he has the most to fear. He was trashing Cohen:

While bucking up Manafort and perhaps encouraging him to stay strong:

Even though it’s Cohen who now has actually implicated Trump in a crime, Trump may believe the information Manafort could provide would be even more damaging and that he needs to try to keep Manafort in the fold. That may turn out to be a miscalculation; Trump may end up regretting his decision to publicly kick Cohen to the curb. Campaign finance violations, for which Cohen could provide the key evidence, may end up being to Trump was tax evasion was to Al Capone. We shall see.

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*Title credit to Judith Viorst, author of “Alexander and the Terrible, Horrible, No Good, Very Bad Day” (1972), a book I read to my kids some twenty-odd years ago.

When Is Fraud Involving a Bank Not Bank Fraud? Shaw v. United States

Update 12/12/16: Today the Supreme Court unanimously ruled against Shaw and held that Section 1 of the bank fraud statute applies to a scheme to obtain deposits held by the bank even if the bank suffers no financial loss. The Court also affirmed that a bank does have a property interest in deposits that it holds, as both sides had basically ended up agreeing during oral argument. The Court sent the case back to the Ninth Circuit to consider the adequacy of the jury instructions, whether that issue was properly preserved, and whether any error in the instructions may have been harmless. See discussion below.

On the first day of arguments this term, the Supreme Court considered the scope of the federal bank fraud statute. The case, Shaw v. United States, involves complex questions concerning the definition of fraud and the nature of property rights. It’s a classic, nerdy white collar battle over statutory interpretation — and it was all completely unnecessary.

The federal bank fraud statute, 18 U.S.C. § 1344, makes it a crime to execute or attempt to execute a scheme or artifice:

1) to defraud a financial institution; or

2) to obtain any of the moneys, funds, credits, assets, securities, or other property owned by, or under the custody or control of, a financial institution, by means of false or fraudulent pretenses, representations, or promises.

Shaw involves the proper interpretation of clause 1 and what it means to defraud a financial institution. In particular, the issue is whether the defendant must intend to obtain property owned by the bank itself and cause the bank financial injury, or whether it is sufficient to show merely that the defendant intended to obtain property being held by the bank, such as customer deposits.

The defendant, Lawrence Shaw, was convicted for executing an elaborate scheme to steal money from a Bank of America checking account held by Stanley Hsu. After wrongfully obtaining Hsu’s bank statements and personal information, Shaw was able to open a PayPal account in Hsu’s name. He then repeatedly transferred money from Hsu’s checking account into the PayPal account and ultimately into other bank accounts that Shaw controlled. Shaw was able to siphon more than $300,000 out of Hsu’s account before Hsu, who was living in Taiwan, detected the losses.

Due to the operation of banking laws, Bank of America actually ended up suffering no financial loss as a result of the scheme. PayPal, which had allowed the phony account to be opened, ended up on the hook for about $100,000 of the loss. Hsu, who had failed to notify Bank of America about the fraud in a timely manner, personally lost nearly $200,000.

2000px-paypal_logo-svg

PayPal was left holding the bag

Shaw was indicted on multiple counts of executing a scheme to defraud a financial institution under clause 1 of the bank fraud statute. At trial and on appeal, Shaw did not deny his culpability. His defense was basically that the government had charged him under the wrong section of the statute. Clause 1, he argued, requires the government to prove that Shaw was targeting property owned by the bank itself and intended to expose the bank to a financial loss. Shaw maintained that his goal all along was simply to get Hsu’s money. He never had any intent to harm the bank, and the bank in fact did not suffer a loss. Accordingly, Shaw argued, his conduct, although fraudulent, did not constitute a scheme to defraud the bank within the meaning of the statute.

Shaw maintained that his scam should have been charged under clause 2, which covers schemes to obtain property of others in the custody of the bank – in this case, Hsu’s deposits. (This, of course, is not a very sexy or sympathetic defense; Shaw isn’t saying,“I didn’t do it,” he’s saying “Yeah, I did it, but you charged me the wrong way.” But sexy or not, if he prevails his convictions will be reversed. As I’m sure some famous football coach said once, an ugly win is still a win.)

The trial court ruled against Shaw and held the government was not required to prove that Shaw intended the bank to suffer any financial harm or to lose its own property. The judge instructed the jury that a scheme to defraud a financial institution required only proof that the defendant intended to deceive or cheat the bank somehow, but did not require proof that the defendant intended the bank to suffer any loss. The jury convicted Shaw on fourteen counts of bank fraud.

The U.S. Court of Appeals for the Ninth Circuit upheld Shaw’s convictions. The court of appeals reasoned that Congress could not have intended liability for bank fraud to turn on arcane banking rules and regulations about who will bear the loss. Requiring proof of intent to harm the bank itself, the court said, would make prosecuting bank fraud unreasonably difficult. Because the goal of the statute is to protect the integrity of the banking system, any scheme that deceives a bank will suffice, regardless of who ultimately is harmed. The court therefore agreed with the trial judge that clause 1 requires only proof that the defendant intended to deceive the bank, not that he intended to expose the bank itself to any financial loss.

Supreme Court

SCOTUS Agrees to Weigh In

The Supreme Court agreed to hear Shaw’s appeal, and the case was argued this past Tuesday. The courts of appeal are divided on the question presented in Shaw. The Ninth Circuit is in the minority; most courts agree with Shaw’s argument that clause 1 of the bank fraud statute requires the government to prove the defendant intended to expose the bank itself to a risk of financial loss.

As I discussed in my last post, to defraud someone usually means to deprive him of money or property through some kind of deception. The law generally draws a distinction between defrauding someone and merely deceiving them; a scheme to defraud typically requires not only a deception but also an intent to injure the victim by depriving them of their property.

Based on this understanding of fraud, the plain wording of the statute supports Shaw’s argument that the scheme must target the bank’s own property. The language “scheme to defraud a financial institution” suggests that the financial institution itself would be the victim of the fraud. This in turn would mean that the scheme to defraud would be designed to deprive the bank of money or property.

But then the question becomes what qualifies as “property.” Although (as the Justices somewhat testily pointed out) the government’s brief was not entirely clear on this point, during oral argument the government confirmed that it agreed a scheme to defraud a bank requires intent to deprive the bank of property and that merely deceiving the bank is not enough. The government disagreed with Shaw, however, about the nature of the property interests protected by the statute, and about whether depriving the bank of a property interest necessarily requires exposing the bank to financial harm.

The government agreed that the Supreme Court has consistently held that a scheme to defraud means a scheme to deprive a victim of money or property, but noted that the Court has always interpreted the term “property” very broadly. Fraud, the government argued, protects both tangible and intangible property, and protects property that is merely in one’s possession as well as property that one owns.

Under this broad definition of property, a scheme to obtain customer deposits is in fact a scheme to deprive the bank of its possessory property interest in those deposits. The same would be true of a scheme to steal other assets being held by a bank, such as customer valuables in a safe deposit box. There is no requirement that the bank actually own the property or suffer a financial loss; the law of fraud requires only that the scheme contemplated depriving the bank of its possessory property right in the assets it holds.

During oral arguments, Shaw’s attorney ultimately agreed with the government that the bank’s possessory interest in customer deposits could qualify as a property interest for purposes of fraud. A line of questions from Justice Kagan honed in on the fact that both sides now seemed to agree about the definition of “property.” Shaw’s attorney maintained, however, that the ordinary understanding of a scheme to defraud meant that to deprive the bank of that property interest required proof of intent that the bank would bear the ultimate financial loss. The Justices seemed more skeptical on this point, with Justice Alito in particular arguing that you could deprive someone of a possessory interest in property without necessarily causing them a personal loss.

But even if the Court ends up agreeing with the government that Shaw’s scheme deprived Bank of America of a property interest in Hsu’s deposits, Shaw may still prevail – because that’s not what the jury instructions said. During oral argument, several of the Justices suggested that the key issue in the case is really the jury instructions. Under questioning from Justice Sotomayor, Shaw’s attorney argued that even if Shaw loses on the interpretation of the bank fraud statute, his convictions must be reversed because the jury instructions were flawed. When the Assistant to the Solicitor General began his argument, the Justices immediately started peppering him with questions about the jury instructions and whether they adequately conveyed the requirements of fraud.

The jury instructions could be read to say that depriving the bank of property was not required, and that it was enough if Shaw merely intended to deceive the bank. The instructions thus arguably failed to distinguish between defrauding and merely deceiving a victim, which is usually critical to the law of fraud. At oral argument, Chief Justice Roberts pointed out that the Ninth Circuit’s opinion also said the bank only needed to be deceived – which seems to endorse the incorrect standard. There was some additional back and forth about the grammatical structure of the instructions, how the jury would have interpreted them, and whether the issue was properly preserved, so how the Court will come out on that question is unclear. But it’s very possible the government could win the legal fight over the definition of bank fraud and still lose the appeal based on flawed jury instructions.

The Implications of Shaw

Although Shaw has implications for banking law and the definition of fraud – and certainly has significant implications for Mr. Shaw — it does not really implicate broader interests about federalism or overcriminalization that are present in many white collar cases. There is no real universe of cases that will no longer be subject to federal prosecution if Shaw wins; Shaw himself admits he could have been prosecuted under clause 2 of the bank fraud statute.

The National Association of Criminal Defense Lawyers filed an amicus brief supporting Shaw on federalism grounds. It argued the bank fraud statute should be construed narrowly in order to limit the scope of federal prosecutions and allow the states to pursue such cases. But this argument doesn’t really hold water. Regardless of the outcome here, cases like Shaw’s will still be subject to federal prosecution, whether through other provisions of the bank fraud statute or through other laws such as mail and wire fraud. There are more than enough arrows in the federal prosecutor’s quiver.

But however it ultimately comes out, Shaw will be instructive in one more area: the importance of sound prosecutorial charging decisions. Clause 2 of the bank fraud law seems clearly to cover Shaw’s conduct. If prosecutors had simply charged Shaw under clause 2 in the first place, this entire issue could have been avoided. Prosecutors would have saved themselves a lot of headaches, time and money that had to be devoted to defending the convictions.

This isn’t a case of over-charging of the type that has caused the Court concern in recent years. There’s no question that Shaw’s conduct was criminal and deserved to be prosecuted. But by charging the case the way they did, prosecutors handed Shaw an issue for appeal that may well be successful. It’s what that football coach would call an unforced error.

Shaw should bring some clarity to the law of bank fraud. But the real lesson of Shaw for prosecutors should be a reminder of the importance of careful charging decisions and selecting the proper statutes when crafting indictments.

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