White Collar Defense and Compliance : New Jersey White Collar Defense Lawyer & Attorney : Fox Rothschild Law Firm : Criminal Defense, Insider Trading, RICO, Consumer Fraud : New Jersey, New York City

Previous Installments in this blog series, the most recent of which was Installment 64, have followed key rulings of Federal District Court Judge Jed S. Rakoff in the battle between Irving Picard, the Trustee in the Madoff bankruptcy proceeding, and the Wilpon Interests. (Capitalized terms used herein that are not defined herein shall have the meanings assigned to them in Installment 64.) In his latest Opinion and Order of January 17, 2012, Judge Rakoff denied the motion of Picard for an immediate interlocutory appeal to the Second Circuit Court of Appeals of Judge Rakoff’s earlier ruling on September 27, 2011 that greatly limited the amount that Picard could seek to recover from the Wilpon Interests. As a result Judge Rakoff’s “fixed and firm” trial date of March 19, 2012 remains unaffected.

As pointed out by Richard Sandomir in his New York Times article today entitled “Mets Owners Can Look Forward to Trial During Spring Training,”

The following picture, then, is a near certainty: a month into spring training, Wilpon and Katz, while fielding a team with a reduced payroll, minus its best player, Jose Reyes, and swimming in debt, will be under oath in Rakoff’s Manhattan courtroom. The trial could take at least four weeks.

Therefore, the Wilpon Interests will likely be consumed more with an ongoing trial than baseball on Thursday, April 5, the scheduled opening day of the Mets season at home against the Atlanta Braves, unless the parties can settle before then. (On a more positive note for the Wilpon Interests, March 19 itself appears to be an open date during spring training.)

The possibility of settlement, however, presently seems unlikely, since as Sandomir states, the Wilpon Interests view a trial as “a chance to formally rebut claims that they profited improperly from investing with Madoff and built their fortunes on his fraud.”

Pitchers, catchers and injured players can report as early as Valentine’s Day. Stay tuned for new developments in the ever-evolving case of Picard vs. the Wilpon Interests.

[To be continued in Installment 69]

(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.)

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Much has been written in the academic and scientific literature about the accuracy, or apparent inaccuracy, of eyewitness identification, particular cross-racial identification. Some have called for a Daubert-like gatekeeper role for trial judges. But the Supreme Court last week in Perry v. New Hampshire clarified the test for the admissibility of eyewitness identifications without requiring any general gate-keeping function. In an opinion by Justice Ginsburg, the Court held that the Due Process Clause, under most circumstances, does not require a trial judge to screen eyewitness identification evidence for reliability before allowing the jury to assess its creditworthiness. The Due Process Clause only requires a preliminary judicial inquiry into the reliability of an eyewitness identification when the identification was procured under unnecessarily suggestive circumstances arranged by law enforcement.

In Perry an eyewitness was asked at the scene for a more specific description of the man that she had seen breaking into her neighbor’s car, and pointed to the defendant while he was standing next to a police officer in the parking lot where the car was parked. The witness had identified the defendant in the equivalent of what, if arranged deliberately by the police, would have been an improper one-man line-up. But the eyewitness had voluntarily and spontaneously identified the defendant without being asked by the police to identify him. Because there was no improper police influence affecting the eyewitness’s identification in this case, the Court held that the identification procedure was not suggestive and unnecessary, and that the eyewitness testimony was, therefore, properly placed before the jury without a preliminary judicial assessment of its reliability.

The Court also held that, even when a suggestive and unnecessary identification procedure is used, suppression of the resulting identification is not automatic. Where there has been improper police conduct, the trial judge must screen the identification evidence for reliability before trial. After screening the evidence for reliability, the judge should only suppress the resulting identification if the “indicators of [a witness’] ability to make an accurate identification” are “outweighed by the corrupting effect of the improper police conduct.” In other words, the trial judge should only suppress the identification evidence if the improper police conduct created a “substantial likelihood of misidentification.” Otherwise, the identification evidence should be submitted to the jury. 

(Jana 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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Installments 66 and 65 in this blog series were earlier postings of aspects of the effects and aftermath, three years after disclosure, of Hadassah’s unfortunate decades-long involvement with Bernard Madoff (“Madoff”).

This posting will utilize recent publicly-available consolidated financial statements and Forms 990 of Hadassah, the Women’s Zionist Organization of America, Inc. and its related affiliated entities (collectively, “Hadassah”) to review the impact over the last several years of the Madoff scandal on the membership and dues and legal fees of Hadassah.

Membership and Dues

The following information on membership and dues is gleaned from the Hadassah Forms 990 for the respective indicated years:

The information above bears some further analysis. The short seven-month year ended 12/31/2008 resulted from a change in fiscal year by Hadassah to a calendar year. The disclosure of the Ponzi scheme of Madoff occurred December 11, 2008, so that almost all of the dues money had been received for 2008 by that time. Hadassah had a major increase in membership revenues in 2009 that perhaps was attributable, at least in part, to early sympathy that may have resulted from initial reports of millions of dollars in losses suffered by Hadassah in the Madoff scandal. Later in 2009 it surfaced that Hadassah had benefited in cashing out at least $77,000,000 in “fictitious profits” from Madoff.

Perhaps as a consequence of increased information about Hadassah’s involvement with Madoff made 2010 a relative disaster for Hadassah membership revenues as compared to the earlier years. It had such an impact that, as reported in at least one Hadassah publication in South Jersey to members in early 2012,

Hadassah had an amazing 2011 membership year with its “once in a lifetime” $100 deal for life memberships. Over 38,000 life memberships and associate enrollments were processed nationwide.

That membership drive may have yielded as much as $3,800,000 for 2011. However, it was clearly a one time event that was achieved by mortgaging potential future life and annual membership dues, as dues will no longer be generated from the 38,000 new life members. There may be an enduring positive benefit, however, of an increase in the total membership rolls and in volunteer enthusiasm through the 2011 life membership drive. The Hadassah web site quotes $212 as the cost of a life membership during 2012.

Finally, it is clear that Hadassah responded differently in the short fiscal year ended 12/31/2008 as compared to 2009 and 2010.

Legal fees

The following information on legal fees paid is reflected in the Hadassah Forms 990 for the respective indicated years:

Clearly, the costs of legal services for Hadassah were driven up substantially in 2009 and 2010 following the disclosure of the Madoff scandal. However, the legal fees had already started to subside in 2010, as Hadassah was moving toward its settlement with Picard that was completed in 2011.

In conclusion, the effects of the Madoff scandal on Hadassah and its mission have been materially adverse. It will take Hadassah some time for a complete recovery and reduce the effect to nothing more than a bad memory.

(Michael J. Kline, Esq., the author of this entry and author of an on-going analysis of the concerns of Madoff stakeholders. Mr. Kline 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 68)
 

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Every defendant has been entitled since Booker to have his or her sentencing judge consider the full array of Section 3553(a) factors in selecting an appropriate sentence which is sufficient, but no more than necessary, to implement the proper purposes of criminal sentencing. Also, any pre-sentencing cooperation which rendered value to the government is considered by that judge through the vehicle of a government-filed downward departure motion under Section 5K1.1 of the Sentencing Guidelines. Now, if that defendant should later provide post-sentencing cooperation to the government, an analogous and subsequent sentence-reduction motion may be filed by the government under Federal Rule of Criminal Procedure 35(b). But should there also be an analogous consideration of the Section 3553(a) factors in deciding in this second phase just how much of a sentence reduction to grant?

Until the recent Ninth Circuit decision in United States v. Tadio, 2011 WL 5839660 (9th Cir., Nov. 21, 2011), every court of appeals to have considered the question has held either that Section 3553(a) has no role at all to play in a subsequent sentence-reduction hearing or that the Section 3553(a) factors could only be considered to limit the extent of any reduction, a peculiar application of Booker and what Tadio called an improper ”one-way ratchet.”

The Tadio court instead held that once the government has filed a Rule 35(b) motion to reduce a defendant’s sentence for cooperation, and the sentencing floor is therefore open, the judge may consider all of the Section 3553(a) factors in deciding how much of a reduction to grant, allowing the ratchet to work in both directions symmetrically. The Tadio court rejected the contrary positions of the Sixth, Seventh, and Eleventh Circuits, and held that the sentencing judge, while not obliged to do so, could apply the Booker factors to support either a larger or a smaller reduction than that sought by the government's motion.

In effect, a Rule 35(b) motion would now set the stage for a second, plenary sentencing hearing. The government may well argue that the “rule of the case” or like doctrine restricts a judge’s ability to give greater weight to a Section 3553(a) factor at the second hearing than it did at the original sentencing. Still, the Tadio analysis at least gives counsel a full-throated opportunity to have a court reconsider its earlier views on particular sentencing criteria or to newly consider a factor inadequately weighted earlier. It is a welcomed door-opener and one which gives the fairest meaning to the mandate of Booker.
 

(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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For years, the Securities and Exchange Commission has settled cases using a standard disclaimer stating that the defendant neither admits nor denies wrongdoing. This standard disclaimer allowed the SEC to claim victory and the defendant to avoid the type of public admission of wrongdoing that could be used against the defendant by shareholders or other injured parties in subsequent private lawsuits seeking damages. Thus, under this policy, the defendant could admit certain criminal conduct when criminally prosecuted by the Department of Justice or could be criminally convicted of that conduct, but the defendant could simultaneously settle civil charges with the SEC without admitting or denying nearly identical allegations in the SEC’s complaint.

Late last year, federal judge Jed Rakoff, sitting in the Southern District of New York, refused to approve a nearly $300 million settlement in an SEC action brought against Citigroup because the bank -- which had not been charged criminally -- had not been obliged under the terms of the settlement to acknowledge any wrongdoing. Chastened, the SEC on January 9th announced that it would be modifying the long-standing policy criticized by Judge Rakoff. The SEC will no longer allow defendants to settle cases involving civil fraud or insider trading charges without the defendant admitting or denying wrongdoing in circumstances where the defendant has admitted such conduct in its resolution with the DOJ or another government agency. Now, any civil settlement that the defendant enters into with the SEC will cite the admission of conduct or the conviction in the corresponding criminal case.

However, the SEC will continue to use the “neither admits nor denies” language in the large majority of SEC settlements, since most settlements are accomplished with defendants who have neither been prosecuted nor admitted wrongdoing to another government agency. Since Citigroup was not criminally prosecuted, the new policy would have left intact the formulation of that much-criticized settlement. It remains to be seen, therefore, whether the policy change implemented by the SEC will stem the judicial criticism so pointedly directed to the agency.
 

(Jana 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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Installment 65 in this blog series was Part 1 of a review of the effects and aftermath, three years after disclosure, of Hadassah’s unfortunate decades-long involvement with Bernard Madoff (“Madoff”).

Several days after our posting of Part 1, ynetnews.com published a report from Calcalist (the “Calcalist Report”) about Hadassah Medical Organization (“HMO”), the Hadassah hospital in Israel that is supported and owned by Hadassah Medical Relief Association, Inc., which is the non-profit Hadassah affiliate that actually paid the $45,000,000 in cash settlement to Trustee Irving Picard in the Madoff bankruptcy, as reported in earlier Installments in this blog series. The Calcalist Report stated that

several of the [Hadassah] hospital's suppliers have been complaining that the center has yet to transfer payments worth tens and even hundreds of thousands of shekels, due weeks ago. Hadassah's debt to suppliers is said to amount to nearly NIS 10 million (about $2.65 million).

For its part, Hadassah was quoted by Calcalist as responding as follows:

[U]nlike other hospitals, Hadassah does not receive any budgeting from the government or the State health system. This is a temporary setback in a minor portion of the payments due to the fact that Hadassah has not received all of its due payments from various parties.

Those familiar with hospital finances in the United States and the delays in revenues from third party payers that can often exist, thereby causing adverse cash flow effects and the necessity to delay vendor payments, can appreciate the unfortunate plight of HMO. Nonetheless, the fact that HMO’s delay in payments is deemed newsworthy underscores the adversity that continues to beleaguer the Hadassah organization in the aftermath of Madoff. The Calcalist Report cannot serve to generate confidence among HMO patients, professionals, support staff, donors and vendors that Hadassah has successfully put the effects of the Madoff scandal to rest.
 

(Installment 67 will provide Part 3 of this Hadassah report.)

(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.)

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Federal prosecutors rely on 18 U.S.C. § 666 to prosecute cases involving the bribery of local officials, where for example local officials take bribes to award contracts or grant approvals. Section 666(a) requires that the bribe be paid corruptly to influence or reward an agent of a program which receives federal benefits in excess of $10,000, and that the bribe be offered in connection with any business, transaction, or series of transactions with a value of $5,000 or more. In the typical case of a municipal-level bribe, the prosecution has little difficulty in establishing that the town receives the requisite level of federal aid -- which may be unrelated to the activity in question -- and that the subject matter of the bribe -- a contract in the example above  -- has a value of $5,000 or more.

A more difficult case is presented when the subject matter of the bribe is not the affirmative and tangible award of a contract, permit, or approval related to commercial activity, but is instead the intangible cessation of local activity or supervision.  In the analogous area of mail fraud under 18 U.S.C. § 1346, where the object of the scheme or artifice is to cause the non-quantifiable loss of honest services, the courts of appeal were convulsed with disagreement as to the statute’s reach, until the Supreme Court decided Skilling v. United States, 130 S. Ct. 2896 (2010) and curbed that statute’s application in intangible loss situations.

One might argue that the courts of appeal are heading down a parallel path in applying Section 666 ever more broadly. In the latest example, United States v. Robinson, 2011 WL 5313831 (7th Cir., Nov. 3, 2011), the Seventh Circuit affirmed the conviction of a drug dealer who had bribed a Chicago police officer in order to have the police ignore illegal activity in a particular housing project. The $5,000 value of police inactivity was shown, alternatively, by the salaries of the police officers involved in the Robinson investigation; or the value of the bribe payments; or the profit Robinson would earn if police ignored his dealing.

The more interesting question was what, precisely, was the “business, transaction, or series of transactions” of the federally-funded organization to which the bribe was directed? The police were being paid to look away and do nothing, after all, not to affirmatively engage in any kind of commercially-related activity. Yet, the court of appeals held that “business” has more than a commercial connotation, and that the terms “business” and “transaction” include intangibles such as refraining from policing, since the “business” of government is not commonly commercial in nature.

Heeding the Skilling decision and cognizant that its decision including intangible policing objectives within the scope of Section 666 left some ambiguity in the statute’s breadth, the Robinson court indicated that it was not intent here on defining the “outer limits” of the Section 666 offense. However, now that the wall between tangible, commercial activity and intangible government services has been breached, it is inevitable that prosecutors will seek to exploit that breach. It remains to be seen if the resulting lack of clarity and the ever-expanding reach of Section 666 requires, like mail fraud, a corrective and limiting construction from the Supreme Court.
 

(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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The Department of Justice has, in response to a spate of cases involving its prosecutors behaving badly, recently routinized a set of procedures for handling discovery, in particular for identifying and disclosing Brady and Giglio material. Courts, however, have been slow to transform those voluntarily-assumed burdens into a broader mandate to compel disclosure from the government.

In January 2010, the DOJ provided a memorandum to Department prosecutors entitled “Guidance for Prosecutors Regarding Criminal Discovery” and now enshrined as Department policy in its Criminal Resource Manual.  The Guidance, among other things, now requires all witness interviews, other than those undertaken for trial preparation, to be memorialized by an agent (which typically leads to a typed memorandum of interview). Gone are the days when either no notes at all were created of witness proffers or only the AUSA in attendance created work product-protected notes. Moreover, the Guidance provides that “material variances” in a witness’s statements from interview to interview should be memorialized as discoverable material. All of these new requirements are part of the Department's enhanced policy regarding the disclosure of exculpatory and impeachment information, which “provides for broader disclosures than required by Brady and Giglio.”

The translation of policy to actual trial procedure will however take some time, as exemplified by United States v. Wilkes, 2011 WL 4953070 (9th Cir., Oct. 19, 2011). Wilkes was a prosecution of a government contractor who had obtained large numbers of contracts as a result of bribing Congressman Randall “Duke” Cunningham (R-CA). In obtaining a conviction, the government had relied on a cooperator named Combs, telling the trial court that their decision to immunize him was the result of having taken a number of proffers from Combs over a period of months. Wilkes had prior to his trial in 2007 sought the production of those proffer notes under Giglio to contrast them with Combs’ FBI-302 interview memoranda.

Perhaps Wilkes’ 2011 argument in the court of appeals failed to reference the new DOJ policy or perhaps the circuit court found the policies not binding upon the government; the resulting opinion simply makes no reference to them. In any event, his appeal on this point was rejected, the court noting that Wilkes had cited no authority, and the court had found none, requiring the government to disclose all proffers irrespective of whether they contained Brady or Giglio information. A sound argument for the proffers’ production, it seems, could be based on the expansive DOJ Guidance -- without having a clue as to the proffer notes’ contents, a reasonable surmise could be made that there would have to be some “material variances” in the months’ worth of handwritten notes when compared with the typed FBI memoranda of those interviews, making the notes discoverable prior to trial.
 

(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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Numerous Installments, including Installments 48 and 42, in this blog series about the Ponzi scheme of Bernard L. Madoff (“Madoff”) have discussed Hadassah, its unfortunate decades-long involvement with Madoff and the aftermath. The matters covered include Hadassah’s original potential “clawback” exposure of up to $77,000,000 or more; the payment in early 2011 by Hadassah of $45,000,000 (the “Payment”) in a final settlement (the “Settlement”) with Irving H. Picard, the Trustee in the Madoff bankruptcy, who thereby permitted Hadassah to keep $32,000,000 in “fictitious profits” from the Ponzi scheme; the limited public transparency by Hadassah of developments in the Madoff scandal, especially in its filings of Forms 990 with the Internal Revenue Service (“IRS”) and other matters.

With the recent passage of the third anniversary of the arrest of Bernard Madoff, it appears appropriate to review where Hadassah currently stands in light of the Settlement and the Payment, as reflected in publicly available documents. Last week we obtained from Hadassah copies of its Forms 990 for the fiscal year ended December 31, 2010 (the “2010 Forms 990”) that were recently filed with the IRS, as they are not yet available on GuideStar. Along with the 2010 Forms 990, we obtained from Hadassah its consolidated financial statements for 2010 as audited by KPMG (the “2010 Financial Statements”). Hadassah should be commended for its commitment to make available its annual audited consolidated financial statements upon request, as there is no legal obligation for it to do so.

The Settlement and Payment by Hadassah to Trustee Picard is reflected in the financial statements for 2010 in both the 2010 Forms 990 and the 2010 Financial Statements. The actual disbursement of the Payment was made by Hadassah Medical Relief Association, Inc., one of the affiliated Hadassah entities (“HMRA”) included in the 2010 Financial Statements, and did not occur until the first quarter of 2011. Nevertheless, in line with Hadassah’s history of minimal public reporting on the Madoff matter, which, to say the least, constituted a major watershed event in recent Hadassah history, Hadassah’s discussion of the Settlement and the Payment in the 2010 Financial Statements is terse and is even less descriptive in the 2010 Forms 990 filed with the IRS.

The following is “Footnote (14) - Subsequent Event” to the 2010 Financial Statements that describes the Settlement and the Payment:

In December 2008, Hadassah learned that it had been a victim of the fraudulent scheme perpetrated by Bernard L. Madoff Securities LLC (Madoff). Madoff has been placed in bankruptcy. The bankruptcy trustee (the Trustee) has informed creditors that substantially all amounts recorded in accounts with Madoff, like those of Hadassah’s, were worthless. The Trustee’s responsibilities include the recovery of Madoff’s assets from any available sources. Under certain circumstances, the Trustee may be able to recover amounts from account holders who, like Hadassah, received direct or indirect distributions from Madoff within the six-year period prior to the date of the commencement of the bankruptcy case. Hadassah has communicated with representatives of the Trustee concerning its accounts with Madoff. On February 16, 2011, Hadassah and the Trustee reached a final nonappealable settlement in the amount of $45,000,000, which is included in accounts payable and accrued expenses in the accompanying consolidated balance sheet as of December 31, 2010. The settlement payment was made to the Trustee in March 2011.

In contrast, the following is the disclosure of the Settlement and Payment in the 2010 Form 990 of HMRA (“Form 990 Disclosure”):

SETTLEMENT PAYMENT
FORM 990, PART IX, LINE 24A
PART IX, LINE 24 A "SETTLEMENT PAYMENT" IN THE AMOUNT OF $45,000,000 WAS A PAYMENT MADE TO TRUSTEE OF THE MADOFF BANKRUPTCY ESTATE TO SETTLE ALLEGED CLAIMS OF THE ESTATE AGAINST HADASSAH PURSUANT TO A SETTLEMENT AGREEMENT.

The Form 990 Disclosure does not give context or background to the $45,000,000 Payment as did Footnote (14) to the 2010 Financial Statements. The abbreviated Form 990 Disclosure does not seem to do justice to a sum which dwarfs the figures in the 2010 Financial Statements reflected for total 2010 Hadassah consolidated (i) program services expenses of $29,051,633 and (ii) fund-raising and management and general expenses of $25,956,921. The total shown in the 2010 Financial Statements for all Hadassah consolidated expenses for 2010, which excludes the Payment, was $55,008,554, only 22% higher than the Payment.

As discussed in Installment 42 of this series, the December 2008 Forms 990 of Hadassah (the “2008 Forms 990”), which reported a short-year seven-month period ended December 31, 2008 because of a fiscal year change to the calendar year, contained a detailed statement of the Madoff matter. The statement was similar to that contained in the 2008 audited consolidated financial statements. Ironically, however, the 2008 Forms 990 have never been posted on GuideStar to this point, although I have brought the fact to GuideStar’s attention in the past. While Hadassah is not responsible for the omission by GuideStar, the result is that none of the Forms 990 of Hadassah posted to date on GuideStar has any reference to the Madoff matter.

(Installment 66 will provide Part 2 of this Hadassah pulse report.)
 

(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.)

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This Installment addresses last week’s Memorandum Order on Thanksgiving Eve (the “Order”) by Judge Rakoff in the Wilpon Case that has been discussed in a number of recent blog entries in this blog series. (Capitalized terms used herein that are not defined herein shall have the meanings assigned to them in Installment 59.)  In the Order, Judge Rakoff granted the request of Irving Picard, the Trustee in the Madoff bankruptcy proceeding, for a jury trial on those of the Trustee’s claims that seek to avoid transfers from Madoff to the Wilpon Interests as fraudulent.

This posting will focus on discussions regarding the Order by Adam Rubin on ESPN.com in his article on November 23, 2011 and his follow-up on Thanksgiving and other considerations.

During my discussions with Mr. Rubin, we agreed that the past history for Picard with respect to Judge Rakoff’s rulings has not been very favorable to Picard. While Picard did win a procedural victory regarding his desire for a jury trial, even this Order by Judge Rakoff is fraught with uncertainty. As quoted by Mr. Rubin in his Thanksgiving article,

. . . not only is a jury totally unpredictable, this case is highly complex and has created significant controversy among legal experts. Understanding of material aspects by a lay jury may be difficult or even impossible. In such a case a jury may feel more comfortable in grasping hold of simpler or limited concepts to which it can relate and can comprehend. This can lead to unexpected results.

This concern that both the Trustee and the Wilpon Interests should have regarding a jury trial is presented in a November 29, 2011 Law360.com article by Kaitlin Ugolik entitled “The Downside To An Aggressive Defense.”  In the article Ms. Ugolik points out that some attorneys see attacking witness credibility as an integral part of defense strategy, but legal experts caution that tactics a jury may see as too harsh or aggressive can have the opposite of their desired effect, eliciting sympathy for the witness. In the Wilpon Case, it is not clear whether Picard or the Wilpon Interests, if either, will have a sympathy advantage with a jury. Moreover, the past history of open hostility between the two parties may well lead to the harsh or aggressive tactics about which Ms. Ugolik cautions, which could materially tilt the jury consensus.

On top of these factors, Judge Rakoff can still have the last word on the facts in a trial if he were to choose to take the case from the jury through a directed verdict or a judgment notwithstanding the jury verdict. As discussed in earlier blog postings there are potential material downside risks and uncertainties for both Picard and the Wilpon Interests if they cannot settle the claims in their current settlement discussions before the jury trial that Judge Rakoff has “firmly scheduled” for March 19, 2012.
 

[To be continued in Installment 65]

(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.)

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About a year ago, Installment 39 of this blog series, on the aftermath of the Madoff scandal, discussed an article by Harold Brubaker in The Philadelphia Inquirer. His article dealt with the fact that the Pennsylvania Department of Revenue had made it extraordinarily frustrating and difficult for victims of Ponzi schemes to recover state tax refunds for tax payments on income that turned out to be “fictitious profits” and illusory. Brubaker quoted a tax expert as saying that New Jersey did not even have a state tax refund process for such victims. The Brubaker article also pointed out that this approach was totally contrary to the “relatively simple process” for refunds established by the Internal Revenue Service.

Now New Jersey Tax Court Judge Gail Menyuk, in an unpublished memorandum opinion (Dalton v. Director, Division of Taxation, NJTC Docket No. 020540-2010), has disagreed with the position of the State of New Jersey to find that Madoff investors under the circumstances of the Dalton case can file amended tax returns for refunds applicable to open tax years. As discussed below, the decision has limited value as precedent for other cases. Nonetheless, Judge Menyuk provided a detailed analysis of the arguments of the parties, including the similarities and differences between federal and New Jersey income taxation principles and how they endeavor to treat losses from Ponzi schemes. In granting the plaintiff taxpayer’s motion for summary judgment and denying the Division of Taxation’s similar motion, Judge Menyuk said the following:

Because . . . [Madoff] generated no earnings and profits, the distributions reported on plaintiffs’ income tax returns could not and were not made out of earnings and profits. Moreover, the monies plaintiffs’ account was credited with receiving were not corporate distributions at all, since there were no securities in plaintiffs’ account with . . . [Madoff]. . . . The court cannot find a statutory reason why plaintiffs should not be permitted to amend and correct their returns to remove income that was never properly taxable under the GIT [New Jersey Gross Income Tax] Act and to recalculate the tax. . . .

Plaintiffs received no economic gain from the dividend and gains income reported
on their 2005, 2006, and 2007 GIT returns. They were nevertheless taxed on it. The court can find no statutory basis for prohibiting them from recovering the tax paid on that phantom income.

In a footnote to the opinion, Judge Menyuk differentiated between the case before her court and one in which the taxpayer received more in Madoff distributions than the actual principal such taxpayer invested with Madoff:

Where there was actual receipt of money in excess of capital investment, those monies could conceivably be characterized as “[i]ncome, gain or profit derived from acts or omissions defined as crimes or offenses under the laws of this State or any other jurisdiction.” N.J.S.A. 54A:5-1(o). That issue is not present in this case and the court does not decide it.

While the case is helpful guidance as to how Judge Menyuk may view the efforts of her state to retain “tax” revenues, it has very limited value as precedent for other cases, even in New Jersey. It is an unpublished memorandum opinion and can be appealed by the Division of Taxation to the New Jersey Appellate Division. Moreover, there may be other cases pending in the New Jersey Tax Court involving the same or similar facts that can be decided differently. As is true of so many issues generated by Madoff, more on this matter an be expected to unfold in the future.

[To be continued in Installment 64]
 

(With appreciation to Michael J. Kline, Esq., the author of this entry and author of an on-going analysis of the concerns of Madoff stakeholders. Mr. Kline 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.)

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Ever since the Supreme Court’s decision in Caplin & Drysdale [v. United States, 491 U.S. 617 (1989)], defense counsel have been on notice that the government may forfeit monies paid to counsel as attorney’s fees if derived from tainted funds, because the Sixth Amendment was held to offer no shield to statutory forfeiture of all criminal proceeds. The result has been to require, in many cases with forfeiture demands present in an indictment or the whiff of forfeiture possibilities in the air, a preliminary conversation with prosecutors before accepting an engagement, in order to gain the confidence of knowing that fees earned will be fees kept. These conversations are necessary but are often awkward, as prosecutors are reluctant to speak with counsel who do not yet actually represent the target or defendant, and counsel are reluctant to say too much about a prospective client’s finances and sources of funds.

No matter the forfeiture conversation, defense counsel at least had the apparent assurance offered by a statutory safe harbor provision that they would not themselves become defendants by accepting arguably tainted funds. At least in the Fourth Circuit, as the result of the decision in United States v. Blair, 2011 WL 4379370 (4th Cir., Sept. 21, 2011) that assurance no longer holds.

Counsel never had to fear facing a charge of concealment money laundering, under 18 U.S.C. § 1956, unless they actively engaged in concealing the nature, source or origin of criminal proceeds, an illegal act not accomplished by transparently accepting payment for legal fees. But simple money laundering under 18 U.S.C. § 1957 was another matter: that statute does not require an intent to conceal the source of monies, or even require knowledge of the monies’ criminal derivation, only an intent to engage in a monetary transaction with qualifying proceeds, as by depositing a fee check. Accordingly, Congress included a section (f) to exclude from the scope of qualifying “monetary transactions” any “transaction necessary to preserve a person’s right to representation as guaranteed by the sixth amendment to the Constitution.”

The Fourth Circuit held in Blair, which involved an attorney-defendant who actively attempted to launder known drug proceeds, that since Caplin & Drysdale employed broad language in stripping away a defendant’s right to use criminal proceeds to hire counsel -- albeit in the forfeiture setting -- the Sixth Amendment as interpreted by the Supreme Court left no defense under Section 1957(f) to an attorney charged with laundering in the form of directing fee payments to himself, as Blair had done to enrich himself from the proceeds in question. That this interpretation rendered Section 1957(f) meaningless was a matter for Congress to evaluate, according to the court of appeals. Perhaps understanding the alarm which its holding would promote, the court emphasized that its ruling did not open the way to criminal sanctions against the two attorneys retained by other defendants, although they were paid from the same tainted source as Blair (“We have never suggested that the attorneys hired for Saunders and Bernard should come in for sanction. The only question facing us today is whether Blair … is liable under § 1957”). But the court laid down no principled basis for distinguishing among the attorneys, once it ruled that the safe harbor provides no harbor for legal fees paid with drug proceeds.

The strong dissent by Chief Judge Traxler argued that Caplin & Drysdale did not control these circumstances, as it established only that Congress could constitutionally pass a law forfeiting drug proceeds needed to retain counsel because the Sixth Amendment did not prohibit such forfeiture. According to the dissent, the Sixth Amendment was not held by the Supreme Court to prohibit Congress from authorizing some use of forfeitable proceeds, and Section 1957(f) was just such a Congressional decision to explicitly provide for an exemption for attorney’s fees to secure necessary legal representation. The dissent cited to United States v. Velez, 586 F.3d 875 (11th Cir. 2009), in which the Eleventh Circuit correctly distinguished the Sixth Amendment-driven holding in Caplin & Drysdale from the different issue presented by the Congressional election in Section 1957(f), and held that the latter did provide a safe harbor to the acceptance of fees from tainted funds.

(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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The same willful conduct which violates civil and regulatory provisions, including securities laws, often also constitutes a crime, and ignites separate civil and criminal proceedings against a defendant. The government has a greater likelihood of success in a civil or administrative proceeding where it must prove its case only by a preponderance of the evidence, or something less than beyond a reasonable doubt. So, a defendant who overcomes a criminal investigation may still face harsh civil penalties for the same or related conduct. But why would the government continue to pursue a parallel civil proceeding after obtaining a criminal conviction and an order for enormous fines, forfeitures, and restitution? Why, for example, did the SEC pursue summary judgment in its parallel civil lawsuit against former Galleon Group (“Galleon”) founder and hedge fund manager, Raj Rajaratnam, after his conviction for insider trading? What then is left for the government to gain and for the defendant to lose?

Last week’s unprecedented civil penalty levied against Mr. Rajaratnam instructs that the answer may be “a lot.” Mr. Rajaratnam must pay a $92.8 million fine, less than a month after being sentenced to 11 years in prison and pay a $63.8 million criminal fine and forfeiture. While the scale and notoriety of Mr. Rajaratnam’s case have produced the longest prison sentence and largest civil penalty of any insider trading case (and may be an example of insider trading enforcement pushed to its limit), he also provides an object lesson that convicted defendants may not in parallel civil proceedings rest comfortably on the argument that additional civil penalties may be avoided as superfluous. The federal judge overseeing this civil case rejected this very argument and sternly explained that “SEC civil penalties, most especially in a case involving such lucrative misconduct as insider trading, are designed, most importantly, to make such unlawful trading a money-losing proposition not just for this defendant, but for all who would consider it, by showing that if you get caught . . . you are going to pay severely in monetary terms.” Criminal fines, on the other hand, reflect related, but different, values of blameworthiness, and criminal restitution.

Of further note, the SEC’s motion for summary judgment following Mr. Rajaratnam’s conviction also sought civil penalties against Galleon, which settled before prior to the decision. A parallel civil proceeding exposes to monetary liability co-defendants who lack, or at least cannot be convicted of having had, criminal intent. The targets of civil investigations should not underestimate the consequences that may befall them following a related criminal conviction, particularly when the government need only prove a civil and regulatory violation by a mere preponderance.
 

(Edward J. Mullins III, Esq., the author of this entry, is an associate with Fox Rothschild LLP, based in our Roseland, NJ office. His practice concerns litigation in the areas of financial services and corporate governance, including white collar defense and securities.)

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Installment 61 of this blog series on Madoff discussed the $5.2 million clawback lawsuit (the “JASA Lawsuit”) recently filed by Trustee Irving Picard against Jewish Association for Services for the Aged (“JASA”), reaffirming the perplexing and inconsistent manner, virtually to the point of arbitrariness and unfairness, with which Picard has handled charities that invested with Madoff.

This posting will focus on and discuss the disappointing lack of transparency evidenced by JASA in its failure to provide meaningful public disclosures of the magnitude of its investments with Madoff and its loss and exposure to risk, either in media releases or in filings of Forms 990 with the Internal Revenue Service (“IRS”). In response to the recent filing of the JASA Lawsuit, David Warren, President of the JASA Board of Trustees did post a statement on the JASA web site stating that “JASA will vigorously defend its position.” It would appear that no other prior postings were made on the JASA Web site regarding the impact of the Madoff scandal.

This blog series has previously examined the manner in which other charities, such as Hadassah, Yeshiva University, American Jewish Congress and the Lautenberg Foundation, have handled public disclosure in the aftermath of their investing with Madoff. The purpose of this post is to provide a similar analysis for JASA.

Virtually the only reference to the JASA investment with Madoff prior to the JASA Lawsuit that can be located on the Internet is on page 66 of the original 162-page alphabetical list of the thousands of Madoff customers that was first published in February 2009. Even in that listing the name of JASA was not that obvious, as it was not given in full but was truncated to “JEWISH ASSOCIATION FOR.”

The most perplexing area, however, where JASA has been silent on the effects of the Madoff scandal is with respect to its filings of Forms 990 with the IRS. Since the Madoff scandal came to light in December 2008, JASA has filed Forms 990 for three fiscal years that are available on GuideStar:

(1) the Form 990 for the fiscal year ended June 30, 2008, dated February 2, 2009 (the “2007 Form 990”);
(2) the Form 990 for the fiscal year ended June 30, 2009, dated August 25, 2009 (the “2008 Form 990”); and
(3) the Form 990 for the fiscal year ended June 30, 2010, dated February 15, 2011 (the “2009 Form 990”).

JASA has had three opportunities so far to provide meaningful explanatory disclosures in Forms 990 as to the effects of its investments with Madoff and has chosen not to do so. A review of material differences in the financial statements (the “Differences”) as reported in the 2007 Form 990 and the 2008 Form 990 as to the single fiscal year ended June 30, 2008 (“Fiscal 2008”) emphasizes the need for explanatory notes. Each of the unexplained Differences listed below would be consistent with write-downs by JASA, effective as of June 30, 2008, that related to losses incurred as a result of the Madoff scandal. (There were several reclassifications of items in the financial statements for Fiscal 2008, the interpretation of which would also be aided by explanatory notes.)

The Differences include the following:

1. The 2007 Form 990 reflects a net gain from investment transactions during Fiscal 2008 of $586,579, while the 2008 Form 990 reflects an investment loss for the same Fiscal 2008 of $491,559, for a total reduction of $1,078,138.

2. The 2007 Form 990 reflects “investments – publicly-traded securities” of $7,194,170 as of June 30, 2008, while the 2008 Form 990 reflects “investments – publicly-traded securities” of $3,209,730 as of June 30, 2008, for a total reduction of $3,984,440.

3. The 2007 Form 990 reflects total assets of $34,020,186 as of June 30, 2008, while the 2008 Form 990 reflects total assets of $30,013,294 as of June 30, 2008, for a total reduction of $4,006,892.

4. The 2007 Form 990 reflects net assets after liabilities of $16,564,650 as of June 30, 2008, while the 2008 Form 990 reflects net assets after liabilities of $12,557,758 as of June 30, 2008, for a total reduction of $4,006,892.

Additionally, the absence of any information in the 2008 Form 990 regarding losses by JASA with Madoff is surprising in light of the following question under “Government, Management and Disclosure” on Line 5 for an answer of “Yes” or “No” by the organization:

“Did the organization become aware during the year of a material diversion of the organization’s assets?”

In the 2008 Form 990, covering Fiscal 2008, Line 5 was answered “No” by JASA. A comprehensive discussion of the IRS instructions and related issues regarding the question on Line 5 is contained in Installment 29. In summary it is disappointing that JASA has not been more forthcoming and transparent with its donors in its public statements and IRS filings as to its involvement and losses in the Madoff scandal. As stated in earlier Installments respecting other charities, JASA would be far better served to make prompt, visible, clear and consistent disclosures and explanations to justify the faith of its supporters and regain the confidence of its donors who faithfully fund its historic mission.

[To be continued in Installment 63]
 

(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.)

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