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Alain Leibman writes:

In a recent case, United States v. Smith, 133 S. Ct. 714 (2013), the Supreme Court had occasion to examine the conspiracy withdrawal defense and to reconsider whether it is the defendant or the government that carries the burden of proof of that defense when the withdrawal arguably occurs at a point in time outside the statute of limitations for a conspiracy charge. Normally, the government bears the burden of proving to the jury beyond a reasonable doubt that the offense it alleges did in fact take place within the limitations period.

In Smith, defendant raised the defense of withdrawal from a drug distribution organization, arguing that he had taken the necessary steps to separate himself from the alleged co-conspirators and had done so more than five years prior to the indictment, making his prosecution untimely under the generally applicable five-year statute of limitations, 18 U.S.C. §3282. A pretrial motion to dismiss the indictment on statute of limitations grounds was denied, and the case went to trial. The jury was charged on the withdrawal defense but was instructed that it was the defendant’s burden to prove his withdrawal outside the five-year period. Smith was convicted.

Writing for a unanimous Supreme Court, Justice Scalia wrote that the common law rule is that affirmative defenses, such as withdrawal from conspiracy, that do not negate elements of the offense are matters for the defendant to prove by a preponderance of evidence. This allocation of the burden of persuasion was fair, he wrote, because it would be "nearly impossible" for the government to prove that a withdrawal had not actually occurred, given that the pertinent facts were in the defendant’s knowledge and control. The appellant argued that his situation was different, because the date of his withdrawal implicated a statute of limitations defense and so reverted the burden of proof to the government, which typically is obliged to prove beyond a reasonable doubt the timing of an offense when they limitations defense is raised. But the government had met its burden by showing that the charged conspiracy continued past a point five years prior to indictment. Smith's argument was not that the government had failed to prove a timely-occurring conspiracy, only that he had successfully withdrawn from that conspiracy, and so leaving the burden of proof on Smith was in accord with the common law understanding.
 

(Alain Leibman, Esq., the author of this entry and a co-author of this blog, is a partner with Fox Rothschild LLP, based in our Princeton, NJ office.  A former decorated federal prosecutor, he practices both criminal defense and commercial litigation in federal and state courts)

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Alain Leibman writes:

As discussed here previously, prosecutors always look to introduce evidence of pleadings or orders entered in related civil litigation to achieve a variety of purposes in the present criminal case. Ostensibly, the civil matters are offered to establish an element of the offense, usually going to intent or knowledge, but quite often the evidence is sought simply to show that the defendant has a propensity for behaving badly and that he/she did so on other occasions. As a result, the offer of such evidence usually precipitates a vigorous argument under Federal Rule of Evidence 403, but only after the government first successfully hurdles the admissibility question.

A case in point is the recent decision in United States v. Dupree, 2013 WL 309983 (2nd Cir., January 28, 2013), a bank fraud prosecution against the CEO of the borrower. Based on evidence that the borrower entity had inflated its assets in order to obtain a term loan and line of credit worth $21,000,000, the Amalgamated Bank obtained a state court restraining order enjoining the entity and its CEO from removing any assets maintained at the bank; this order was obtained on the same date that the CEO, Dupree, and others were arrested in connection with an alleged scheme to defraud the bank through the same means. According to subsequent indictment, Dupree then also took various steps following the entry of the state court order to gain access to frozen funds, and so was additionally charged specifically for his post-freeze activity.

The government moved in limine in the trial court to allow it to admit the restraining order as evidence that Dupree had knowledge of his and his company's obligations under the agreements with the bank and that his post-freeze order actions were intended to evade those obligations. The District Court declined to admit the evidence, and the government thought it important enough to seek, and obtain, interlocutory appeal. The Second Circuit reversed the trial court decision. The appeals court rejected the holding below that the state court order was inadmissible hearsay, holding instead that its offer fell under Federal Rule of Evidence 801(c), which defines hearsay as including only those statements offered to prove the truth of the matter asserted. The relevance of the court order, the appeals court held, was not in the legal effect of its directives to the affected parties, but in Dupree's knowledge of the order and the notice which it gave him of the pertinent loan agreement terms which were referenced in the order and which he allegedly evaded improperly in accessing funds.

As for the Rule 403 considerations, the Second Circuit acknowledged the concerns expressed by the trial court that the jury might place undue emphasis on the freeze order and thus on its violation by the defendant. However, the appeals court noted, as they often do under such circumstances, that the danger of unfair prejudice could be cured by appropriate limiting instructions.

(Alain Leibman, Esq., the author of this entry and a co-author of this blog, is a partner with Fox Rothschild LLP, based in our Princeton, NJ office.  A former decorated federal prosecutor, he practices both criminal defense and commercial litigation in federal and state courts) 
 

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Michael J. Kline writes:

This blog series has often used Forms 990 and Forms 990-PF filed with the Internal Revenue Service (“IRS”) by public charities and private foundations, respectively, which have been victims in the Ponzi schemes of Bernard L. Madoff (“Madoff”) and others, to highlight areas where improvement in compliance may be undertaken. For example, a previous blog entry pointed out that there is evidence that some charities may be exercising greater caution in their gift acceptance policies as a result of having suffered from involvement with Ponzi schemes.  

This posting will address the question of what officer should sign the Form 990 in light of the requirements of the IRS contained in the Form 990 itself and the IRS Instructions for Form 990 (the “IRS Instructions”). The Form 990 Signature Block at the bottom of the first page states the following, which is substantially the same language as is present in income tax returns for individuals and business corporations:

Under penalties of perjury, I declare that I have examined this return, including accompanying schedules and statements, and to the best of my knowledge and belief, it is true, correct and complete.

The IRS Instructions add the following further requirements as to the Signature Block: 

The return must be signed by the current president, vice president, treasurer, assistant treasurer, chief accounting officer, or other corporate officer (such as tax officer) who is authorized to sign as of the date this return is filed [Emphasis supplied] . . . . The definition of "officer" for purposes of Part II is different from the definition of officer (see Glossary) used to determine which officers to report elsewhere on the form and schedules, and from the definition of principal officer for purposes of the Form 990 Heading (see Glossary).

This is a very serious standard and a high bar for the officer executing the Form 990 to achieve. As early as February 2010, this blog series recognized the diverse and somewhat perplexing nature of the individuals who signed Forms 990 on behalf of two charities that were victims of Madoff: Yeshiva University and Hadassah.   In the case of Yeshiva University, its Vice President and CFO, who was a compensated full-time employee, executed the Form 990. On the other hand, the National Treasurer of Hadassah, who sign its Form 990 contemporaneously with the Yeshiva filing, appeared to be an uncompensated volunteer and reflected less than 10 hours per week of time for Hadassah. 

Query: should a volunteer officer who devotes relatively little time to the charity be undertaking the responsibility to sign for a charity of the international scope of Hadassah? Would not the CFO or other full-time compensated officer of Hadassah be more appropriate for the task? (While the uncompensated National Treasurer of Hadassah again signed its 2011 Form 990, such Form 990 does indicate that she devotes 34.00 hours per week to Hadassah.)

Below are some concepts that charities and their officers should consider in determining who should sign their 2012 Forms 990. Subject to the size and human and financial resources available to a charity, the officer who executes the Form 990 should be one who

1. can demonstrate active input and involvement in the Form 990 and financial statement preparation process;

2. has the skill and experience to evaluate personally the quality of the preparation process for both the financial statements and the governance, management, policies and disclosure portions of the Form 990;

3.  holds such a position that his/her input will be meaningfully received by the other internal and external preparers of the Form 990;

4. understands and is comfortable with the seriousness of signing the Form 990 on the basis that it is true, correct and complete and executed under penalty of perjury; and

5.  is authorized to sign. 

While I believe that item 5 has been rarely done on a formal basis by charities, the formal granting of authority to sign the Form 990 will assist the governing body and the executing officer in comprehending the gravity of the Form 990, its filing with the IRS and universal availability on the Internet.

(Michael J. Kline, the author of this entry and a co-author of this blog, is a partner with Fox Rothschild LLP, based in our Princeton, NJ office, and is a past Chair of the firm's Corporate Department. He concentrates his practice in the areas of corporate, securities, and health law, and frequently writes and speaks on topics such as corporate compliance, governance and business and nonprofit law and ethics.)

[To be continued in Installment 89]

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Alain Leibman writes:

We have previously written about the varying sentencing treatment accorded untaken deductions --some courts of appeal have upheld the reduction of tax loss by application of deductions not originally taken on the taxpayer's filed return (thereby reducing sentencing exposure) (see here), while others have rejected the practice (see here). 

An excellent recent post on this subject appears in Jack Townsend''s blog, Federal Tax Crimes.  In it, Mr. Townsend discusses a recent article by Steven Toscher and Dennis Perez in the Journal of Tax Practice and Procedure, concerning a proposed Sentencing Guidelines amendment intended to allow the consideration of previously unclaimed deductions. Defense counsel who represent taxpayers would be well advised both to familiarize themselves with the proposed change and to frequently review Mr. Townsend's blog for the latest developments in the field.

(Alain Leibman, Esq., the author of this entry and a co-author of this blog, is a partner with Fox Rothschild LLP, based in our Princeton, NJ office. A former decorated federal prosecutor, he practices both criminal defense and commercial litigation in federal and state courts)

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Alain Leibman writes:

Generally, the 6-year statute of limitations prescribed by 26 U.S.C. § 6531(2) for tax evasion offenses under 26 U.S.C. § 7201 runs in cases involving a filed, but false, return -- one that underreports income -- from the date the return was filed with the IRS. But the tax evasion statute comprises two types of evasion offenses: evasion of the determination of the correct tax due and evasion of the payment of taxes. In the former case, which goes to the IRS’s assessment function, the filing date of the false return triggers the statute of limitations.

But what of an evasion of payment case, where the allegations focus on steps taken by a taxpayer to evade paying the IRS that which is acknowledged to be owed, and which implicates the IRS’s collection activity? Recently, in United States v. Irby, 703 F.3d 280 (5th Cir. 2012), the Fifth Circuit joined every other court of appeal in holding that in such cases the statute of limitations runs from the later of two event: either the return’s filing date or the date of the last act of evasion. Well after Irby filed the subject return, he was alleged to have used nominee accounts to hide assets from the IRS. The court held that the later use of the nominee accounts delayed the start of the 6-year limitations period, and made his prosecution timely.
 

(Alain Leibman, Esq., the author of this entry and a co-author of this blog, is a partner with Fox Rothschild LLP, based in our Princeton, NJ office. A former decorated federal prosecutor, he practices both criminal defense and commercial litigation in federal and state courts)

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Alain Leibman writes:

Prosecutors love using summary witnesses, usually their case agents, at trial. As the closing, wrap-up witness, an agent can testify about summary charts which he/she prepared, nicely aligning the counts and charges with key documentary exhibits or with trial testimony, or can put into evidence the inculpatory statements made by the defendant. Put on the stand as an opening witness, an agent can trace the course of his or her investigation, describe the execution of a search, or carefully establishing the reasons that the government focused its attention on the individual now sitting at the defense table. In cases involving complex organizations, such as gang or organized crime prosecutions, an agent may judiciously describe enterprise structures and, based on the agent’s investigative experience, the roles typically played by certain sorts of individuals in those entities.

But when the agent-witness testifies first, and goes further to anticipate and summarize evidence which has not yet been admitted, then the government is on very thin ice, as the First Circuit recently emphasized in United States v. Rodriguez-Adorno, 695 F.3d 32 (1st Cir. 2012). This was a carjacking case, and the case agent from the FBI led off the government’s presentation. Unfortunately, the agent went beyond a description of his investigative efforts -- he identified the defendant as the individual depicted on surveillance tapes of the deadly episode and also testified that seven or eight witnesses would testify that the defendant was involved in the crime.

The court of appeals reiterated its concerns with overview testimony from the government early in a trial, warning that such witnesses must take care not to describe the theory of prosecution based on hearsay statements made to the agent and must not implicate the defendant in the charged offense. In this case for example, the agent repeatedly referred to the episode as a “carjacking” and a “murder” of the driver, statements which assumed the offense had been proven, and which were admitted in error. It was also error (i) to admit the agent’s testimony about the witnesses who would implicate the defendant, which was hearsay, and (ii) to have allowed the agent to identify the defendant on the video, which was an impermissible lay opinion under FRE 701, since the jury was as well-suited to identify the individual on the video, rendering the agent’s opinion unhelpful to the trier of fact.

In the end, the First Circuit deemed the errors harmless, of course, and affirmed the conviction, but the lessons are clear and the path to a well-taken objection or in limine motion illuminated.
 

(Alain Leibman, Esq., the author of this entry and a co-author of this blog, is a partner with Fox Rothschild LLP, based in our Princeton, NJ office. A former decorated federal prosecutor, he practices both criminal defense and commercial litigation in federal and state courts)

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Jana C. Volante writes:

Criminal defendants facing onerous restitution obligations as part of their sentence might contemplate a bankruptcy filing, in the hope of staving off the restitution obligation. In a case of first impression, the Second Circuit recently considered whether the Bankruptcy Code’s automatic stay provision halts a defendant’s obligation to pay restitution and firmly closed the door on that potential gambit.

Defendant Philip Colasuonno was convicted in the S.D.N.Y. of conspiracy and substantive bank fraud charges, as well as tax offenses, stemming from a conviction at trial and a separate plea of guilty to an additional Information. Colasuonno faced an advisory Sentencing Guidelines range of 46 to 57 months’ imprisonment, but the sentencing judge departed downwards due to the defendant’s health problems; he was sentencing to one day in jail, followed by various terms of supervised release or probation on several charges. The court imposed as a special condition the payment of restitution to the IRS in the amount of $781,467, the amount by which Colasuonno had underpaid payroll taxes.

For a year after sentencing in 2007, Colasuonno ignored his restitution obligation. Hauled back to court on a violation of probation petition, he finally began to make small payments in 2009. Then, in July 2009, Colasuonno and his wife filed a Chapter 7 bankruptcy petition in the United States Bankruptcy Court, without notice to either the District Court or the Probation Department. After a few additional small payments, Colasuonno stopped paying restitution altogether on the ground that the automatic stay effected by the filing of the bankruptcy petition forestalled any payment obligation. He was again brought before the court on a violation of probation action.

Finding that Colasuonno had violated his original sentence of probation by failing to pay the court-ordered restitution, the District Court resentenced him to four months’ imprisonment and again ordered him to pay restitution.

Colasuonno then appealed his amended sentence to the Second Circuit, claiming that the automatic stay provision of the United States Bankruptcy Code, 11 U.S.C. § 362(a), temporarily halted his obligation to pay restitution and barred the District Court from revoking his probation for nonpayment. The Second Circuit was unpersuaded by the automatic stay argument. In United States v. Colasuonno, 697 F.3d 164 (2d Cir. 2012), the appeals court concluded that court-ordered conditions of a criminal sentence, such as restitution imposed as a condition of probation, and proceedings related to those court-ordered conditions, constitute a continuation of a criminal action. Therefore, these court-ordered conditions and the related proceedings fall within an express exception to the automatic stay imposed in bankruptcy, and the automatic stay does not provide temporary relief for criminal defendants from the operation of those proceedings.

Under 11 U.S.C. § 362(a), the filing of a bankruptcy petition automatically operates as a stay of the commencement or continuation of a judicial, administrative, or other action or proceeding against the debtor, of the enforcement of a judgment obtained before the commencement of the bankruptcy case, and of any act to collect a claim against the debtor that arose before the commencement of the case. However, the reach of the automatic stay established under 11 U.S.C. § 362(a) is restricted by 11 U.S.C. § 362(b), which provides that the filing of a bankruptcy petition does not operate as a stay of the commencement or continuation of a criminal action or proceeding against the debtor.

The Second Circuit concluded that, for purposes of 11 U.S.C. § 362(b)(1), the criminal action against Colasuonno did not end when the judgment of conviction became final. Rather, the proceedings to enforce the conditions of his probationary sentence constituted the continuation of a criminal action or proceeding against the debtor and thus fell within the specific exception to the automatic stay codified in 11 U.S.C. § 362(b)(1).

Relying on the legislative history of 11 U.S.C. § 362(b)(1), the Second Circuit held that “bankruptcy laws are not a haven for criminal offenders, but are designed to give relief from financial over-extension.” The court indicated that, in accordance with this legislative history, its holding was necessary to prevent criminal defendants from using the bankruptcy laws to shield themselves from punishment. The Second Circuit warned: “A failure to recognize enforcement of the conditions of a probationary sentence or proceedings to address violations of probation as a ‘continuation’ of the criminal action that resulted in such a sentence would allow the bankruptcy laws to become a haven for criminal offenders, allowing them to interrupt, if not completely frustrate, their criminal punishment.”
 

(Jana C. Volante, Esq., the author of this entry, is an associate with Fox Rothschild LLP, based in our Pittsburgh, PA office. Her practice concerns white collar criminal defense and commercial litigation)

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Jana C. Volante writes:

A constructive amendment occurs where the permissible bases for conviction are broadened beyond those presented to the grand jury and beyond those found in the indictment; in other words, a constructive amendment occurs if the proof at trial goes beyond the parameters of the indictment by establishing offenses different from or in addition to those charged by the grand jury. Reversal of a criminal conviction may be required when the conviction is outside the scope of the indictment because the indictment narrows the Government’s theory of the defendant’s criminal liability.

Generally, though, reversal is not required if the amendment is harmless. An appellant must show that the outcome of his trial would have been different if the constructive amendment had not occurred. The burden which this formulation places on a defendant, and the wide sway it affords the government, is illustrated in the recent case of United States v. Natour, 700 F.3d 962 (7th Cir. 2012).

Sami Natour was indicted on five counts of transporting telephones “knowing the same to have been stolen and converted,” in violation of 18 U.S.C. § 2314. Although one of the counts was dismissed, Natour was convicted of all of the other four counts of interstate transportation of stolen property. He appealed his conviction on the basis that the evidence introduced at trial and the jury instructions given at trial impermissibly broadened the indictment in violation of his rights under the Fifth Amendment’s Grand Jury Clause by constructively amending the indictment to include additional conduct beyond the language of the indictment. The Fifth Amendment states in part: “No person shall be held to answer for a capital, or otherwise infamous crime, unless on a presentment or indictment of a Grand Jury[.]” Natour, in essence, claimed that he had been prosecuted for conduct for which he had not been indicted.

To constitute interstate transportation of stolen property under 18 U.S.C. § 2314, goods must be transported across state lines with the knowledge that they have been “stolen, converted or taken by fraud”. The Natour indictment used the word “stolen”, but did not explicitly allege that the cell phones were “taken by fraud”. Therefore, Natour argued that the Government had necessarily limited its theory of the case by indicting him on narrower grounds than the statute would have permitted and that the Government then constructively amended his indictment by introducing evidence of fraud during his trial. Natour also alleged that the indictment was constructively amended when the trial court used a pattern jury instruction, which defined “stolen” as taking which may be “accomplished through the use of false pretenses, trickery, or misrepresentation” – a definition which Natour claimed implied the use of fraud.

However, his conviction was affirmed. The Seventh Circuit held that the term “stolen” is broad enough to encompass taking by fraudulent means. Thus, the Seventh Circuit held that the terms within the indictment were broad enough to encompass goods “taken by fraud”, and, as a result, the proof introduced at trial in Natour’s case and the jury instructions used did not constructively amend the indictment.

Clearly, a defendant bears a heavy burden to prove that there was a constructive amendment of his indictment and to secure a reversal as a result. Notwithstanding the seeming variance between allegation and trial proof, a “constructive amendment” argument is by no means a “slam dunk” argument for a defendant on appeal.
 

(Jana C. Volante, Esq., the author of this entry, is an associate with Fox Rothschild LLP, based in our Pittsburgh, PA office. Her practice concerns white collar criminal defense and commercial litigation)

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Alain Leibman writes:

In bank fraud cases, sentencing courts are obliged under the advisory Sentencing Guidelines to fix the "loss" at the greater of actual or intended loss to the victim, and to resort to the (usually more defendant-friendly) lesser gain from the offense only if that loss "reasonably cannot be determined." U.S.S.G. § 2B1.1, cmt. n. 3(B). The difference is often dramatic and resort to a gain-based sentence almost always greatly benefits the defendant, frequently reducing or eliminating the potential for a jail sentence.

So, defense counsel is well-advised to make every effort to persuade the sentencing court that an actual/intended loss calculation is exceedingly difficult (as when many witnesses would have to testify), problematic (because of causation or intervening-event principles), or unproven by the government, pushing the judge toward a gain-based calculation. The recent case of United States v. Martinez, 690 F.3d 1083 (8th Cir. 2012), shows both how it is done and why it matters. Martinez was the CFO of a food distributor dependent on a large line of credit from its bank, secured by accounts receivable and inventory. To stave off the company's financial difficulties, Martinez inflated the value of the collateral for the line of credit, leaving the company's debt at $55 million when the bank discovered the fraud. That debt had dropped to $20 million by the time the company later filed for bankruptcy, and to $2.8 million after the sale of some collateral in bankruptcy. During the one-year period of the actual fraud, Martinez received $48,000 in salary.

At a sentencing hearing, the district court took testimony from a number of bank officials, trying to determine the value of any remaining collateral and the effect of future collection activity against that collateral, a complex endeavor, and to determine if the loss resulted from Martinez's actions. The court held that it could not reasonably determine the amount of actual loss (higher than the intended loss, because Martinez did not truly intend a loss at all), and so resorted to Martinez's meager gain to calculate the Guidelines range. The Eighth Circuit affirmed on the ground that the calculation of actual/intended loss could not reasonably be made; the government had failed to provide a basis for estimating the value of the remaining collateral and the bank’s testimony on this point was unhelpful.

As a further victory for the defense, the court of appeals also upheld the lower court's decision to award no restitution to the bank. The Mandatory Victims Restitution Act, 18 U.S.C. § 3663(A), while generally requiring restitution to be ordered in such property crimes, pegs the restitution amount to the provable loss to the victim. But if arriving at this calculation requires the court to determine complex issues of fact and threatens to so prolong the sentencing process as to raise the burden on that process over the need to provide restitution, then the court need not order restitution. Ibid. The Eighth Circuit read this provision, as has the Second Circuit, to reflect a Congressional intent to streamline sentencing processes to prevent courts from being entwined in intricate issues of proof.

Moreover, giving some credence to a causation argument made by the defense, the court of appeals noted that since the company was going out of business regardless of the fraud and since the lower court would have had to hear from numerous additional witnesses, it did not abuse its discretion in deciding to deny restitution.
 

(Alain Leibman, Esq., the author of this entry and a co-author of this blog, is a partner with Fox Rothschild LLP, based in our Princeton, NJ office. A former decorated federal prosecutor, he practices both criminal defense and commercial litigation in federal and state courts)

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Alain Leibman writes:

Under Fed. R. Evid. 404(b), the government often seeks to introduce evidence of prior conduct by a defendant, ostensibly because such conduct is probative of one of the Rule's permitted purposes for introducing extraneous evidence, such as showing that the presently-charged conduct was committed intentionally and not by accident or mistake.  Even when the prior act is nothing more than the previous assertion of allegations of misconduct by the defendant, the government argues that it should be admitted to show that the defendant was on notice that a course of conduct was improper, and so later engaged in that course of conduct knowingly and cognizant of his legal obligation to refrain from such conduct.

The Ninth Circuit recently made it harder for prosecutors to handily use prior allegations to show notice to the defendant of the illegality of a particular course of conduct.  In United States v. Bailey, 696 F.3d 794 (9th Cir. 2012), the court reversed the conviction of Bailey, a health-products company CEO, who had been convicted of violating the SEC's Rule S-8, which requires that public companies issue stock to consultants only for bona fide services performed, or otherwise make a rigorous set of disclosures about the stock issuance.  Bailey had allegedly issued stock in order secretly to raise capital from the third party transferee, who paid money for the stock.  The SEC had in 2003 filed a civil complaint against Bailey and others making the same allegation, and Bailey settled the SEC case without admission.  When he engaged in the same conduct thereafter, the indictment followed.

At the criminal trial, the government introduced the SEC complaint, arguing that its allegations had put Bailey on notice that the stock transfers were illegal, so when Bailey in 2004 engaged in similar conduct, he did so knowingly.  In closing, the prosecutor went even further, arguing that the previous SEC complaint showed that Bailey had broken the law twice.

In a 2-1 decision, the court of appeals held that the SEC complaint was erroneously introduced.  Under Huddleston v. United States, 485 U.S. 681, 685 (1988), a proponent of Rule 404(b) evidence is not only required to show a proper purpose for the evidence of a prior act (such as notice to a defendant), but must proffer evidence sufficient to support a finding that the prior act had been committed by the defendant, and here the government had failed to do so.  Bailey never admitted the allegations in the SEC complaint, and his settlement was held not to be probative of whether he had committed the alleged violations.  While "there is some logic" to the argument that the SEC complaint, even if denied, put Bailey on notice of the law's requirements, the naked complaint was not by itself sufficient evidence under Huddleston.  "All a complaint constitutes is knowledge of what a plaintiff claims.  It does not establish the truth of either the facts asserted in the complaint, or of the law asserted in the complaint." Without further evidence that Bailey had in 2003 engaged in the conduct alleged in the complaint, the SEC's mere assertion that he had was insufficient to meet a foundational element of the Rule.

To be sure, the majority's reasoning is hyper-technical.  The proof-of-commission element of Huddleston should have arguably not been applied to the underlying acts alleged in the SEC complaint, but to the mere filing of the complaint itself and its service upon Bailey whether the allegations were true or not.  The "prior act" of the filing and service upon Bailey of an adverse complaint was undisputed, and arguably should have been sufficient to support admission of the complaint with a limiting instruction if only to show that its recipient was immediately then aware that an agency of the United States considered such stock sales illegal. The opinion thus confuses the evidentiary utility of the making of an allegation (slight, but permissible under the Rule to show knowledge of the law's requirements) from that of the underlying activity.  Undoubtedly, the prosecution's heavy-handed and inaccurate use of the SEC complaint in summation, arguing as if the underlying allegations had been true, did not help the government's cause on appeal.  No matter, this Ninth Circuit opinion may be very helpful in frustrating the introduction of similar notice pleadings in other cases under the Rule.

(Alain Leibman, Esq., the author of this entry and a co-author of this blog, is a partner with Fox Rothschild LLP, based in our Princeton, NJ office. A former decorated federal prosecutor, he practices both criminal defense and commercial litigation in federal and state courts)

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Jana C. Volante writes:

Recently, in United States v. Anekwu, 695 F.3d 967 (9th Cir. 2012), the Ninth Circuit addressed a question left unaddressed by the Supreme Court and never previously tackled by the Ninth Circuit: are certificates of authentication and accompanying affidavits authenticating foreign public records and foreign business records testimonial? In other words, can foreign records be authenticated without in-person witness testimony, or would using certificates of authentication and affidavits to authenticate foreign records violate a defendant’s rights under the Confrontation Clause of the Sixth Amendment?

In the District Court, defendant Henry Anekwu was convicted of mail fraud, wire fraud, and telemarketing fraud against the elderly. The evidence showed that between 1998 and 2002, Anekwu owned and operated lottery companies in Canada, which targeted elderly victims in California. Anekwu directed the telemarketers working for his companies to call victims and to falsely represent to those victims that they had won lottery money. The victims were then obliged to pay certain taxes and costs to Anekwu and his companies in order to receive the non-existent lottery winnings, with the payments mailed to various commercial mailbox addresses in Vancouver, Canada. The defendant was extradited to the United States to stand trial, and the government sought to introduce foreign business and public records against him pursuant to 18 U.S.C. § 3505 and Federal Rules of Evidence 803 and 902. Among the alleged errors committed in his trial, Anekwu argued that the District Court committed plain error by admitting certificates of authentication for foreign public and business records by means of affidavit in violation of the Confrontation Clause.

The Ninth Circuit previously concluded in United States v. Weiland, 420 F.3d 1062 (9th Cir. 2005) that routine certifications of domestic public records are not testimonial, but neither the Supreme Court nor the Ninth Circuit had previously addressed whether certifications of foreign public records are testimonial. If certifications of foreign public records are testimonial, then the custodians who created the certificates of authentication are witnesses subject to a defendant’s Sixth Amendment right of confrontation and admitting certificates of authentication without in-person witness testimony violates a defendant’s Constitutional right to confront witnesses against him.

The Supreme Court had previously held that, to rank as testimonial, a statement must have a primary purpose of establishing or proving past events potentially relevant to later criminal prosecution. Bullcoming v. New Mexico, 131 S.Ct. 2705, 2714 n.6 (2011) (discussed previously in this space). Furthermore, as the Court held in Bullcoming and in Melendez-Diaz v. Massachusetts, 557 U.S. 305 (2009) (discussed previously in this space), a document created solely for an evidentiary purpose is testimonial. Building on this Supreme Court precedent, in Anekwu, the Ninth Circuit held that the certificates of authentication in question certify only that the documents are true copies and that the person so certifying is the custodian of the document. Because the certificates of authentication do not interpret the content of the related business and public records or certify their substance or effect, the appeals court held that the certificates do not create a record for the sole purpose of providing evidence against a defendant. Accordingly, since the purpose of the certificates was merely to authenticate the foreign public and business records, and not to establish or prove some fact at trial, the Ninth Circuit held that the admission of the certificates was not plain error.

As the marketplace becomes increasingly global, and cross-border criminal activity more prevalent, it is highly likely that more and more white-collar criminal schemes will generate the need for evidence from multiple countries, increasing the frequency of the government’s reliance on foreign certificates of authenticity, and heightening the importance of this Ninth Circuit ruling.
 

(Jana C. Volante, Esq., the author of this entry, is an associate with Fox Rothschild LLP, based in our Pittsburgh, PA office. Her practice concerns white collar criminal defense and commercial litigation)

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Michael J. Kline writes:

It is perplexing that Forms 990-PF for 2011 (“2011 Forms 990-PF”) filed with the Internal Revenue Service (“IRS”) by various Wilpon family private foundations (the “Schedule 1 Foundations”), which are now beginning to appear on GuideStar, provide no reference to the assignment to Madoff Trustee Irving Picard of allowed net equity claims. While only two of the six Schedule 1 Foundations have had their 2011 Forms 990-PF posted on GuideStar to date, each of them has chosen to omit any reference to encumbering their “Estimated SIPC Recovery – Madoff Theft Loss,” even though such 2011 Forms 990-PF were filed after the execution of the Settlement Agreement, dated April 13, 2012, between Picard and the Wilpons (the “Settlement Agreement”), that was approved by the Federal District Court on May 31, 2012.

This blog series, particularly Installments 75 and 76 and prior Installments referred to therein, has been monitoring the participation by the Schedule 1 Foundations in the global Settlement Agreement.   (Capitalized terms not otherwise defined herein shall have the meanings assigned to them in Installment 76.)   

The Schedule 1 Foundations for which 2011 Forms 990-PF have been posted to date on GuideStar are The Tepper Family Foundation (the “Tepper Foundation”) and the Valerie and Jeffrey S. Wilpon Foundation (the “JW Foundation” and, collectively with the Tepper Foundation, the “Posted Foundations”).  Notably, each of the Schedule 1 Foundations, including the Posted Foundations, has one or more Fiduciary Defendants who, in one capacity and/or another, was (i) a defendant in the Wilpon Litigation, (ii) listed on Schedule 2 to the Settlement Agreement as a recipient of transfers from Madoff in excess of principal invested and (iii) a signatory to the Settlement Agreement. 

Each of the Schedule 1 Foundation Claims, which would otherwise be receivables payable in cash to the respective Schedule 1 Foundation as part of distributions by the Trustee, has been assigned to the Trustee and will, to some extent, fund a portion of the monetary clawback exposure of its respective Fiduciary Defendants. (The form of “Assignment of Net Equity Claims” (the “Assignment”) is the final page attached to the Settlement Agreement.)  Installment 76 went into some detail as to the problematic aspects of the participation by the Schedule 1 Foundations in the Settlement Agreement process and the question of potential prohibited “private benefit and inurement” under IRS rules. 

A number of observations can be made as to the 2011 Forms 990-PF of the Posted Foundations:

1.         Each of the 2011 Forms 990-PF of the Posted Foundations reflects on line 15 of its Part II Balance Sheet as a substantial “other asset” an item that is explained in a later statement as “Estimated SIPC Recovery – Madoff Theft Loss.” For the Tepper Foundation, the amount reflected is $47,093, and for the JW Foundation, the amount reflected is $137,690. However, by April 13, 2012, and prior to the time of filing with the IRS of their respective 2011 Forms 990-PF (June 25, 2012 as to the Tepper Foundation and May 16, 2012 as to the JW Foundation (collectively, the “Forms 990-PF Filing Dates”)), the Settlement Agreement had already been signed, and each of the Posted Foundations had agreed on a fixed amount for the Schedule 1 Foundation Claim at a materially lower figure than that reflected on the respective Form 990-PF.  The amount reflected and its percentage of the original estimate is $30,895 (65.6%) as to the Tepper Foundation and $70,050 (50.8%) as to the JW Foundation. It would appear that an explanation of the difference or substitution of the known agreed-upon figure would be better disclosure than continuing the higher estimated amount that the Posted Foundations had carried in their Forms 990-PF for several years.

2.         Neither of the 2011 Forms 990-PF of the Posted Foundations reflects any offset, encumbrance or liability, either in the Part II Balance Sheet or an explanatory statement, as to its having assigned its Schedule 1 Foundation Claim to the Trustee pursuant to the Settlement Agreement and the Assignment, which were executed well before the Forms 990-PF Filing Dates. If the Posted Foundations reported the estimated Schedule 1 Foundation Claim as an asset on the accrual basis as discussed in item 1 above, it would appear that the Assignment should be reported as well, even if as a subsequent event statement.

3.         It is interesting that, while neither of the 2011 Forms 990-PF of the Posted Foundations evidences a “paid preparer” on page 13 (as is also the case for the 2010 Forms 990-PF of each of the Schedule 1 Foundations for that matter), each shares the same address, provides the identical reporting format for the Schedule 1 Foundation Claim and reflects no compensated employees. The IRS Instructions for Form 990-PF provide the following on page 30:   

Generally, anyone who is paid to prepare the organization’s tax return must sign the return and fill in the Paid Preparer Use Only area. An employee of the filing organization is not a paid preparer.

By implication, an employee of another entity who prepares the organization’s tax return may be a paid preparer. The Instructions do invite the organization to consult with the IRS as to whether a preparer is required to sign the return.

4.         In light of considerations such as those in items 1 through 3 above, an officer or trustee of a private foundation, such as the Presidents of the Posted Foundations, should be aware that he or she signs a Form 990-PF with the following affirmation:  

Under penalties of perjury, I declare that I have examined this return, including accompanying schedules and statements, and to the best of my knowledge and belief, it is true, correct and complete.

Preparation of Forms 990-PF can be complex, especially when concerns may be potentially present about imposition of excise taxes, duty of loyalty, possible conflicts of interest of fiduciaries and the IRS rules regarding private benefit and inurement. Because the Forms 990-PF are permanently and universally available on the Internet, private foundations and their fiduciaries are well-advised to seek competent guidance and counsel in their preparation and filing.

Now that the November 15, 2012 final IRS filing date (including permitted extensions) for 2011 Forms 990-PF by calendar year foundations has passed, the 2011 Forms 990-PF of the remaining Schedule 1 Foundations should be appearing on GuideStar within the next several months. 

(Michael J. Kline, Esq., the author of this entry and a co-author of this blog, is a partner with Fox Rothschild LLP, based in our Princeton, NJ office, and is a past Chair of the firm's Corporate Department. He concentrates his practice in the areas of corporate, securities, and health law, and frequently writes and speaks on topics such as corporate compliance, governance and business and nonprofit law and ethics.)

[To be continued in Installment 88]

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Michael J. Kline writes: 

On November 13, 2012, the U.S. Department of Labor (the “DOL”) issued a press release entitled “US Labor Department Recovers Nearly $220 Million for Madoff Victims.” On the same day New York Attorney General Eric T. Schneiderman (the “NYAG”) issued a press release entitled “A.G. Schneiderman Obtains $210 Million Settlement With Ivy Asset Management In Connection With Madoff Ponzi Scheme.”  Both the DOL and the NYAG are to be congratulated and each press release refers to the other regulatory authority. However, it is not immediately clear that the press releases are addressing a single $220 million settlement with Ivy Asset Management (“Ivy”) and other defendants of a number of consolidated lawsuits in which the DOL and NYAG are principal plaintiffs. The settlement is pending approval by the U.S. District Court for the Southern District of New York.

An interesting statement in the NYAG press release is the following:

When added to future amounts Madoff investors anticipate receiving from the Madoff bankruptcy proceeding, today's settlement is expected to return all or nearly all the original investment to those defrauded by the Ponzi scheme in this case.

This statement should provide some measure of holiday comfort and joy to all Madoff victims who hold claims that have been allowed by Trustee Irving Picard in the Madoff bankruptcy proceeding. It should be especially satisfying to the members of the Wilpon/Katz/Mets/Sterling (collectively, “Wilpons”) consortium. As pointed out in Installment 85 of this blog series and many earlier Installments, the Wilpons’ timely and foresighted settlement with Picard may virtually absolve them of any out-of-pocket payments as a group to Picard in the Madoff proceeding.

One final observation on the Ivy matter. This blog series discussed in Installments 34 and 38 certain issues respecting Ivy that had surfaced in the summer of 2010 about the time that the NYAG and the DOL filed suit against Ivy. The interest in Ivy by this blog series earlier in 2010 had been triggered by the identification of Ivy as an investment adviser that appeared to have involved Howard Hughes Medical Institute (“HHMI”), in investing with Madoff. There has been no public information readily available to date as to the extent of the investment by HHMI with Madoff. Moreover, as discussed in Installment 29, it was clear that HHMI does not intend to provide voluntarily any light on the subject. Installment 29 did raise a question as to whether HHMI was required to provide such information in its Form 990 filed with the Internal Revenue Service. 

Almost four years after Madoff was arrested, his massive Ponzi scheme still has unresolved and undisclosed issues.

(Michael J. Kline, Esq., the author of this entry and a co-author of this blog, is a partner with Fox Rothschild LLP, based in our Princeton, NJ office, and is a past Chair of the firm's Corporate Department. He concentrates his practice in the areas of corporate, securities, and health law, and frequently writes and speaks on topics such as corporate compliance, governance and business and nonprofit law and ethics.)

 [To be continued in Installment 87]

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Alain Leibman writes:

As we have previously examined in this space, here, here and here , the Supreme Court’s Confrontation Clause jurisprudence has when considering the admission of a prior statement by a witness most recently focused on whether or not the statement was “testimonial.” The Court tells us that a statement is testimonial if made under circumstances supporting the objective belief that the statement was either created or recorded for use at trial, the classic example being answers offered in response to deliberate police interrogation.

The recent opinion in United States v. DeLeon, 678 F.3d 317 (4th Cir. 2012) exemplified a “non-testimonial” statement made out of court, the admission of which passed constitutional muster. DeLeon was convicted of killing his stepson near an Air Force Base in Japan, where the child’s mother was stationed. With no eyewitness to the murderous blow inflicted upon the child, the prosecution built a circumstantial case dependent on evidence of prior physical abuse of the victim by the defendant. Most damning was the trial testimony of a civilian Air Force social worker who met with the family after a school referred the child for possible abuse some five months before his death. The child described to the social worker a pattern of minor physical abuse by his stepfather, no single act of which was apparently sufficiently serious to take the child out of the home or to go to criminal authorities.

DeLeon objected on Confrontation Clause grounds to the social worker’s recitation in court of the victim’s earlier statements, which had been admitted under Fed. R. Evid. 803(4), as a statement related to medical diagnosis. On appeal, the Fourth Circuit upheld the admission of the child’s previous statements as non-testimonial and thus upheld the conviction. While the child’s statements were not made to the social worker to allow her to respond to an on-going emergency -- the paradigm criterion which would render a victim’s statements non-testimonial, as in the gunshot victim case of Michigan v. Bryant, 131 S. Ct. 1143 (2011) -- there were other circumstances supporting the conclusion that the child’s statements were not procured as trial testimony: the social worker did not have a prosecutorial responsibility; she did not record the interview for use as evidence; she did not advise the child that his answers would be reported to the authorities; and the primary purpose of the meeting was to formulate a treatment plan.
 

(Alain Leibman, Esq., the author of this entry and a co-author of this blog, is a partner with Fox Rothschild LLP, based in our Princeton, NJ office. A former decorated federal prosecutor, he practices both criminal defense and commercial litigation in federal and state courts)

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