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

The Supreme Court last week applied a newly-invigorated Confrontation Clause to deny the admission at trial of drug lab test certificates in an opinion which may unintentionally prove very useful to attorneys defending criminal tax cases.

In Melendez-Diaz v. Massachusetts, 2009 U.S. LEXIS 4734 (June, 25, 2009), the Court unremarkably extended the reach of Crawford v. Washington, 541 U.S. 36 (2004) to the test reports of crime laboratories, holding that the admission in a Massachusetts trial of a laboratory report showing that a seized substance was cocaine violated the defendant's Confrontation Clause rights; the State was obliged instead to produce witnesses in court to establish the drug's chain of custody and the testing conclusion. The dissent argued less forcefully that the majority's conclusion was unwarranted or surprising after Crawford, and more effectively that a practical consequence of the decision would be to strain the resources of crime labs everywhere.

But one legal argument posited by the four Justices in dissent was that the lab certificate of results was akin to a business records certificate offered under FRE 803(6), which, even after Crawford, may be admitted in the absence of a live witness. Justice Scalia, writing for the five-Justice majority, dismissed this comparison. First, the business of a crime lab is to produce evidence for use at trial and so it does not share the routineness and regularity of a true business, leaving the former's products -- drug test reports -- outside the scope of Rule 803(6). Second, true business records are neutrally created for the purpose of administering an entity, rendering them non-testimonial when offered in a criminal trial and thus outside the Confrontation Clause, while police lab reports are prepared specifically for use at such a trial and to inculpate a defendant, so are testimonial and subject to the Confrontation Clause. Id. at *31-33.

To further make its point, the majority contrasted non-testimonial clerks' certificates as to records located in a business or government office with "those cases in which the prosecution sought to admit into evidence a clerk's certificate attesting to the fact that the clerk had searched for a particular relevant record and failed to find it … the clerk's statement would serve as substantive evidence against the defendant whose guilt depended on the non-existence of the record for which the clerk searched. Although the clerk's certificate would qualify as an official record [in the sense of FRE 803(6) and 803(8)] the clerk was nonetheless subject to confrontation." Id. at *31.

In myriad criminal cases the government is required as an essential element to prove the absence of an official record in order to establish guilt, but perhaps this is most often true in tax prosecutions. Whether seeking to prove a misdemeanor failure to file returns, 26 U.S.C. § 7203, or a felony Spies tax evasion where an act in furtherance is the failure to file returns, 26 U.S.C. § 7201, the prosecutor typically relies on a certificate from the IRS records center that no return is on file for the given year(s). Defense attorneys can now use Melendez-Diaz to argue that any and all IRS personnel involved in the search for the missing filing must be called as live witnesses in court, since the IRS certificate of non-filing cannot be admitted without violating the defendant-taxpayer's constitutional right of confrontation.
 

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This is the eleventh in a series of installments on this blog that is discussing some of the issues that face the manifold stakeholders who have been materially affected by the long and worldwide Ponzi scheme scandal of Bernard L. Madoff. All potential stakeholders should consult professional advisors promptly to have their positions evaluated.

Installments 3 through 8 and Installment 10 of this series focused on the specific concerns of charities that were victims of Madoff and similar schemes. This Installment is continuing the discussion from Installment 9 on the concerns of an Indirect Individual Investor (“III”) who has been embroiled in the Madoff scandal, but not as a result of a direct investment with him.

Such IIIs may have invested with a fund, investment manager or other vehicle, such as a hedge fund that was a “feeder” for Madoff, or even a partnership of family and friends that was formed to aggregate funds sufficient to invest with him. Each of these types of entities will be defined in this series as a Direct Entity Investor (“DEI”), even though some DEIs may have invested their money with a feeder fund for Madoff that in turn invested directly or indirectly with him.

Those that are IIIs and were “fortunate” enough to have secured distributions from the DEI through indirect redemptions from Madoff in the past may believe that they were either lucky or brilliant to have withdrawn money before his arrest on December 11, 2009. However, such IIIs must be concerned about the extent to which the Madoff bankruptcy trustee or federal or state regulators may be intensifying efforts to recover money or seek criminal prosecutions from those who withdrew money from their Madoff investments. While the initial efforts by the trustee can be expected to be focused upon DEIs that received large distributions and were close to Madoff in making direct investments with him, the focus can be expected to go further down the line to IIIs as well.

The word most commonly used for such monetary recovery efforts in the Madoff morass is “clawback.” Distributions from a DEI to an III are potential targets for the bankruptcy trustee because they may be materially disproportionate to the withdrawals of the average investor (“Clawback Targets”). The word clawback actually covers a number of scenarios and theories for recovery by the bankruptcy trustee under the Federal Bankruptcy Code and various state laws that may have varying degrees of likely exposure for the III.

The basis of clawback is that all of the investors who were engaged in a single, unitary, integrated, failed Ponzi enterprise should have a relatively level playing field and that those that received disproportionate distributions should disgorge their excess receipts.

To a certain degree, the energy that will be undertaken by the bankruptcy trustee for Madoff to pursue an III will depend on (i) the absolute amount in dollars of the distribution to such III, especially in relation to the actual hard dollars invested (net of the nonexistent “returns” reported to the III by Madoff), (ii) how recently the redemption(s) took place and/or (iii) the individual factual circumstances that exist relative to the redemptions by the III. The “clawback” process may become highly complex and may be affected by state law, which may differ from state to state. Competent professional advice for IIIs is a necessity in this area.

[To be continued in Installment 12]
 

(With appreciation to Michael J. Kline, Esq., for contributing this entry and for his on-going analysis of the concerns of Madoff stakeholders)

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The rules of evidence to which most frequent resort is made in impeaching witnesses with evidence of misconduct are FRE 608(b) and FRE 609.  Rule 608(b) provides that specific instances of the witness's conduct to show untruthfulness, other than conviction of a crime under 609, may not be proved extrinsically; that is, the questioner must generally take the witness's answer.  Rule 609 admits extrinsic evidence of a criminal conviction under certain circumstances.

But what of cross-examining a witness about the details of the conduct underlying his criminal conviction?  The Ninth Circuit has recently held that, where misconduct led to a conviction, Rule 609 is the exclusive vehicle for the use of that conviction and the examiner is limited to admission of the conviction itself and may not inquire into the underlying details.  United States v. Osazuwa, 564 F.3d 1169 (9th Cir. 2009).  Osazuwa was originally convicted of bank fraud and his first, remarkably skilled attorney managed to win a sentence of one day in jail followed by supervised release, plus restitution.  However, Osazuwa could not stand his good fortune, and violated his supervised release by not paying his restitution, resulting in a 90 day sentence.  Exhibiting consistency, if not good sense, Osazuwa was days away from completing his new sentence when he allegedly assaulted a prison guard, resulting in the instant prosecution.

The key witnesses at trial were Osazuwa and the guard, a classic credibility contest.  On direct examination, Osazuwa's attorney brought out the prior conviction.  But In cross-examining Osazuwa, the prosecutor was allowed to probe the details of the bank fraud, asking the witness-defendant several times about how he lied in connection with misusing another's credit card.  The court of appeals reversed the resulting assault conviction, holding that the trial court had abused its discretion in allowing this impeachment.

The Ninth Circuit joined several other circuits in reading Rule 608(b) to exempt from its coverage entirely conduct that was the basis for a conviction, leaving convictions solely to the province of Rule 609.  United States v. Lightfoot, 483 F.3d 876 (8th Cir.), cert. den., 128 S. Ct. 682 (2007); United States v. Parker, 133 F.3d 322 (5th Cir.), cert. den., 523 U.S. 1142 (1998); Mason v. Texaco, Inc., 948 F.2d 1546 (10th Cir. 1991), cert. den., 504 U.S. 910 (1992).  

The bank fraud conviction could be proven extrinsically under Rule 609(a)(2) as a crime of dishonesty, to be sure, but the scope of inquiry into prior convictions is limited.  Collateral details may not be the subject of inquiry to a witness, unless the witness "opens the door" by minimizing his misconduct or otherwise testifying falsely.  Since Osazuwa admitted the conviction on direct, the entire cross-examination into its details was improper and warranted reversal.

For Third Circuit practitioners, the contrary case of Elcock v. Kmart Corp., 233 F.3d 734 (3d Cir. 2000) should be noted.  There, plaintiff's expert witness had a prior conviction under 18 U.S.C. § 641 for embezzling government funds, but the trial judge would not allow further impeachment with the underlying offense details.  While upholding the trial judge's decision to limit impeachment as an appropriate exercise of discretion, the court of appeals, in an opinion by Chief Judge Becker, expressed its disagreement with the limitation imposed. All parties agreed that the embezzlement conviction itself was properly admitted under Rule 609(a)(2), but the court of appeals did not view that Rule as the exclusive avenue for use of evidence of conviction, looking to Rule 608(b) to define the discretionary scope of the related, detailed impeachment.  The court observed that the amount of money stolen by the expert and the "exact way" in which it was done was "certainly relevant to prove the extent of [his] dishonesty."  Id. at 753.  "A jury could rationally conclude that one who embezzles a million dollars from the Government over a long period of time has a worse character for veracity than a person who steals five dollars once."  Ibid.  The Osazuwa court did not cite Elcock, which remains good law in the Third Circuit.

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The Supreme Court last week in Boyle v. United States, No. 07-1309 (June 8, 2009) declined to limit association in fact enterprises under RICO to those having the characteristics of "business-like" entities.  In so doing, the Court made it easier for the government to charge RICO against looser confederations of criminal groups, like drug and bank robbery gangs, which lack the formality of traditional organized crime families, and expanded the reach of civil RICO, as well.

The Boyle case involved a group of multi-state bank robbers who lacked a defined leader or individual, fixed roles, but who came together periodically over a period of years to plan and carry out heists.  Convicted of substantive RICO, 18 U.S.C. § 1962(c), and RICO conspiracy , 18 U.S.C. § 1962(d), the defendants appealed the trial judge's refusal to charge the jury that it was required to find that their association in fact had an ongoing organization, a core membership, and a hierarchical structure distinct from the predicate bank robbery acts.  The Second Circuit affirmed the judgments of conviction, and the Supreme Court affirmed.

The Court's 7-2 decision, in an opinion by Justice Alito, rejected the claim of the dissenters that a RICO enterprise was limited to "business-like entities" because the text of the statute imposed no such requirement.  The only structural requirement was that an association in fact have a purpose, a relationship among the members, and some longevity.  Justice Alito wrote that RICO does not require further that there be internally consistent or fixed roles or any formality to the association. "The group need not have a name, regular meetings, dues, established rules and regulations, disciplinary procedures, or induction or initiation ceremonies."  The majority's mocking tone could be said to be describing a condominium association, rather than a typical criminal gang, emphasizing the absence of any need for such proof on the government's part.  

The practical result of the decision in the criminal arena may be limited, given the increased use of money laundering charges to supply the forfeiture remedy and extended sentences once available to the government only through RICO.  Nevertheless, the decision lowers the barriers to plaintiffs seeking to use RICO civilly to enhance their leverage against defendants and force settlements.

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Typically, cross-examining a cooperator regarding the impact of the Sentencing Guidelines (e.g., its reduction of, say, a five-year exposure on each mail fraud charge in an Information to nothing more than 12-18 months in the aggregate even before a downward reduction) or the intricacies of a 5K1.1 variance motion can be dicey under the best of circumstances.  Intuitive-sounding strategies can backfire (e.g., showing a jury that a cooperator really faces only 12-18 months despite numerous charges may be intended to convey that he got a sweetheart deal, but it also educates a sharp jury to the relatively limited amount of jail time a defendant might receive, making it more palatable to convict him) and Booker/Gall/Kimbrough have diminished the importance of the 5K as the exclusive jail-cell key.

But the Seventh Circuit has made the cross-examination even harder, holding in a recent case that the Sixth Amendment right of confrontation means only that a defense attorney must be permitted to raise the subject of the Guidelines and their impact, but that the attorney need not be given a full opportunity to explore their consequences for truth-telling.

In United States v. Recendiz, 557 F.3d 511 (7th Cir. 2009), the attorney for one of the defendants had crossed a cooperator by having the witness acknowledge familiarity with the Guidelines and with his potential sentencing range, and then obtaining a concession that the witness could get a reduced sentence by testifying truthfully.  However, when counsel asked cooperator Herrera who would determine what was truthful and what "truth" really meant, the district court cut off questioning.  

On appeal, the Seventh Circuit affirmed.  While the Sixth Amendment guarantees an opportunity for effective cross-examination, the opportunity is not unlimited and the trial judge can impose reasonable restrictions.  When a core Sixth Amendment value is at stake, like the ability to expose a witness's motivation for testifying, his bias, or motive to lie, the review is de novo.  Here, the court explained, defense counsel was allowed to explore the witness's motive for testifying, so the constitutional right of confrontation was deemed not to be implicated.

Then, applying a lesser and non-constitutional abuse of discretion standard, the appeals court held that the trial judge sufficiently allowed defense counsel to explore the Sentencing Guidelines with the cooperator.  Questions about the "truth" and who determined its presence or absence were permissibly found by the trial judge to be confusing to the jury and questions of law beyond the witness's knowledge.  Although both of these rationales appear specious -- it could be said to be clarifying, not confusing, for the jury to know that the prosecutor is the sole decider of "truth" and the questions are not legal, but seek the witness's factual knowledge of the agreement he/she signed -- the Seventh Circuit found no abuse of discretion in the lower court's denial of the right to cross-examine the witness in these areas.

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This is the tenth in a series of installments on this blog that are discussing some of the issues that face the manifold stakeholders that have been materially affected by the long global Ponzi scheme of Bernard L. Madoff. All potential stakeholders should consult professional advisors promptly to have their positions evaluated.

Installments 3 through 8 of this series focused on the specific concerns of charities that were victims of Madoff and similar schemes. It generally advocated that every charity should respond pro-actively in the wake of the Madoff scandal and the current adverse economic climate, including a filing of its Form 990 for 2008 (the “2008 Form 990”) with the IRS as promptly as practicable, whether or not it was a Madoff victim itself. This Installment 10 is designed to extend the discussion in Installment 6 on calendar year filers of the 2008 Form 990 to the many 501(c)(3) entities that have fiscal years other than calendar years (“Fiscal Year Charities”).

This blog series has already pointed out that the 2008 Form 990 contains new questions that require “yes” or ‘no” answers about governance and business operations of 501(c)(3) entities. In some respects it emulates the passive regulatory schemes present in Canada and many European countries to “comply or explain why.” By requiring an explanation if an answer is in the negative, the regulator promotes the desired affirmative behavior.

As has been discussed previously, the 2008 Form 990 includes a series of questions, among others, as to whether the charity has (i) a conflicts of interest policy, (ii) a whistleblower policy, (iii) an audit committee and (iv) a document retention and destruction policy. The 2008 Form 990 also asks whether the audit committee and governing board has reviewed the 2008 Form 990 before it was filed and information about executive compensation and transactions with insiders.

If the charity answers “yes” to a question, it can go on to the next question. If the answer is “no,” the charity must explain why. Obviously the universal availability of the 2008 Form 990 makes it desirable to answer all or almost all of the questions “yes.” Otherwise potential donors and other stakeholders may have questions and draw conclusions of their own about the operating practices of the charity and whether it is worthy of a contribution.

It is further interesting to note that the many Fiscal Year Charities have even longer than May 15, 2009 as their initial due date for filing their 2008 Forms 990 for 2008. Numerous nonprofit colleges and universities, for example, are on fiscal years that begin on June 1 or July 1 of each year.

As an illustration, a Fiscal Year Charity for which its current fiscal year commenced on July 1, 2008, would end such fiscal year on June 30, 2009. Its 2008 Form 990 for the current fiscal year will not be initially due until November 15, 2009. If it were to extend the due date for the 2008 Form 990 by the theoretical maximum of six additional months discussed earlier in Installments 6 and 7, the due date would be May 15, 2010.

A Fiscal Year Charity will have an ample opportunity to acquire samples from the internet of examples of 2008 Forms 990 filed earlier by calendar-year-end charities. Moreover, it has additional time to do what it deems necessary and appropriate to implement “best practices” in order to respond “yes” to the questions and answers posed in the 2008 Form 990. A charity will be well-served to file its 2008 Form 990 as promptly as possible as was recommended in Installment 7 of this blog series.

[To be continued in Installment 11]
 

(With appreciation to Michael J. Kline, Esq., for contributing this entry and for his on-going analysis of the concerns of Madoff stakeholders)

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This is the ninth in a series of installments on this blog that is discussing some of the issues that face the manifold stakeholders that have been materially affected by the long global Ponzi scheme of Bernard L. Madoff. All potential stakeholders should consult professional advisors promptly to have their positions evaluated.

Installments 3 through 8 of this series focused on the specific concerns of charities that were victims of Madoff and similar schemes and advocated that every charity should respond pro-actively in the wake of the Madoff scandal and the current adverse economic climate, whether or not it was a Madoff victim itself.

We will now undertake a discussion of the concerns of an Indirect Individual Investor (“III”) who has been embroiled in the Madoff scandal not as a result of a direct investment with him The III may have invested in an entity that was either (i) a fund, investment manager or other vehicle, such as one of the well-publicized hedge funds that were “feeders” for Madoff, or (ii) an investment vehicle, such as a partnership or limited liability company, that was formed for the express purpose of aggregating sufficient funds from multiple investors to meet the minimum investment thresholds established by Madoff from time to time. There can be other permutations or combinations of these types of entities. Each of these types of entities will be defined in this series as a Direct Entity Investor (“DEI”).

This series will not address in detail the potential tax issues facing the III, as there has been extensive discussion in numerous other publications and internet postings on the tax consequences flowing from losses on investments with Madoff.

As is true of the Direct Individual Investor (“DII”) with Madoff who was discussed in early installments of this blog series, the III should be doing or have already done a number of things. However, the effort by the III must be on two levels: his or her investment in the DEI and the DEI’s investment in turn with Madoff

The III should collect every scrap of hard copy, digital or electronic information and communication that can be located relative to the investment in the DEI and the DEI’s investment with Madoff (collectively, “III Investment”), including statements, financial or otherwise, from the DEI or Madoff, tax statements such as Forms 1099 from the DEI, annual reports, press releases or other media statements by the DEI or Madoff as to the nature of the investments and returns, etc. Such information will prove to be valuable in identifying the scope of the loss by the III and the sequence of events that gave rise to the loss.

The III has many more complex issues, however, that the DII, who only has to deal with the records relating to a direct investment with Madoff. The III must seek out all formation documents filed with state agencies relative to the DEI and any agreements, such as partnership agreements and operating agreements, DEI tax returns, brokerage reports, DEI tax returns, copies of checks or other records of all payments respecting the III to and from the DEI, requests for distributions by the III, records of the DEI regarding its investments with Madoff and distributions from Madoff, if any. The DEI partnership, operating or similar agreement with its IIIs as to the provision of information and other rights of the IIIs and their III interests is of paramount importance.

To the extent that the DEI is not fully forthcoming with information requested by III or is unable to locate records regarding the III Investment, the III should contact the managers of the DEI in writing or by other means that will evidence the communication to the DEI and its date. Should the III not receive a meaningful response, he or she should contact an attorney or other competent professional to advise on the matter.

[To be continued in Installment 10]
 

(With appreciation to Michael J. Kline, Esq., for contributing this entry and for his on-going analysis of the concerns of Madoff stakeholders)

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The Supreme Court has long held that police may without a warrant seize a container for which there is probable cause to believe holds contraband or evidence of a crime, if there are exigent circumstances, and then later obtain a warrant for the search of its contents. United States v. Place, 462 U.S. 696 (1983). A warrantless seizure based on probable cause may extend for a far longer period than a so-called Terry stop based only on reasonable suspicion. Compare United States v. Lewis, 902 F.2d 1176 (5th Cir. 1990) (seizure of package overnight based on probable cause does not violate Fourth Amendment); United States v. Jodoin, 672 F.2d 232 (1st Cir. 1982) (three day delay supported by probable cause) with Terry v. Ohio, 392 U.S. 1 (1968) (ninety minute detention of traveler's luggage based only on reasonable suspicion was improper).

But even exigent seizures grounded on probable cause must be reasonable and the police must act with alacrity in obtaining a follow-on search warrant or the seizures will be held to violate the Fourth Amendment. An example is provided by United State v. Mitchell, 2009 U.S. App. LEXIS 8258 (11th Cir., April 22, 2009). Federal agents had interviewed Mitchell in his home in connection with a child pornography investigation. Once Mitchell confessed to subscribing to child pornography websites and storing images on his computers, agents requested his consent to search a desktop computer, which Mitchell declined. However, since Mitchell had admitted that the computer in question held contraband materials, agents opened the central processing unit and removed its hard drive, where the images were believed to be stored.

The lead agent then left for a training program, and it was not until 21 days later that a search warrant was obtained to examine the contents of the hard drive. Illegal images were found, and Mitchell pled guilty to their receipt, subject to appealing the denial of his suppression motion in the district court. Mitchell prevailed as the court of appeals reversed the district court. While the exigent seizure of the hard drive, analogous to the container in the above cases, was not impermissible, a delay of three weeks in securing a search warrant was unreasonable and unjustified. The delay rendered the seizure illegal and the evidence was thrown out.
 

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Conditions of probation or supervised release sometimes include special conditions by which the defendant consents to warrantless searches of his residence by his/her probation officer. (In the District of New Jersey, standard probation conditions provide only for consent to "visits" by a probation officer and the corresponding consent to the confiscation of contraband in the plain view of that officer). Even in the absence of such conditions, the Eleventh Circuit recently held, a probation officer can conduct a warrantless search of the probationer's residence based only on "reasonable suspicion." The justification for the seeming Fourth Amendment violation: a probationer by virtue of his/her status simply enjoys a lower expectation of privacy than does the average citizen.

In United States v. Carter, 2009 U.S. App. LEXIS 8838 (11th Cir., April 27, 2009), the district court had denied Carter's motion to suppress guns and drugs found in his home in the course of a warrantless search conducted by his probation officer and state drug agents. No prior Eleventh Circuit case had approved of the warrantless search of a probationer's residence simply because of his status. The Supreme Court had previously endorsed in United States v. Knights, 534 U.S. 112 (2001), such a warrantless search only where the defendant had given prior consent as a condition of probation.

But the court of appeals nonetheless affirmed the district court, holding that Carter's status as probationer alone meant that he enjoyed a reduced expectation of privacy. When combined with the substantial government interest in "monitoring" him because of his prior drug and violent crime background, the lowered expectation of privacy justified the use of warrantless searches of Carter's home based only on a reasonable suspicion standard.

It is unclear if the Carter rationale would extend to probationers who had committed fraud crimes, resulting one might argue in a presumably lesser government interest in their being "monitored." Of course, the government could argue that, depending on the scope and effects of the prior white collar crime, such probationers are even more worthy of "monitoring." Practitioners may need to warn their clients on probation or supervised release that their status alone may justify a raid of their homes conducted solely on the basis of a belief, held by an officer of the court not trained in law enforcement and untested by judicial review, that there might be evidence of a federal crime in the home.
 

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