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The Seventh Circuit recently held that, on a government motion under Rule 35(b) to reduce a sentence for new cooperation, the district court may not use the occasion to reopen sentencing to assess whether a reduction is justified under the 18 U.S.C. § 3553(a) factors.  Cooperation is the only basis for a post-sentencing reduction within the Rule. United States v. Shelby, 2009 WL 3335548 (7th Cir., Oct. 19, 2009).

Rarely, one might imagine, would sentencing judges so regret the severity of their initial sentence that they would relish a subsequent opportunity to broadly reexamine and reduce that sentence. However, one such instance occurred in the Northern District of Illinois when the trial court sentenced Gregory Shelby in 1996 to serve 285 months under then-mandatory Sentencing Guidelines for drug and firearms offenses. When the government moved 12 years later under Rule 35(b)(2) to reduce Shelby's sentence to 255 months on the strength of his post-sentencing cooperation, the same sentencing judge leapt at the opportunity to instead reduce the sentence to 180 months, basing his departure not only on Shelby's cooperation but on the § 3553(a) factors. The Seventh Circuit reversed.

Judge Posner wrote for the majority that Rule 35(b) -- which in subsection (2) concerns cooperation motions made more than one year after sentencing and limits the kinds of cooperation which qualify -- is not intended to create a kind of judicially-administered parole system which considers the defendant as a whole, and was created solely to assist law enforcement by encouraging cooperation. While a sentencing judge may look to § 3553(a) in determining the extent of a cooperation departure, and may exceed the government's recommended extent of departure in doing so, the judge may not consider those factors in determining the basis for a post-sentencing departure.
 

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The usual protocol when agents execute a search warrant at an office or home is to leave a copy of the warrant with the person in control of the premises, often but not necessarily the owner.  Rule 41(f)(1)(C) requires it.  But what kind of notice is required when agents execute a search warrant to seized stored emails from a subject's internet service provider (ISP), such as Google or Hotmail or Verizon?  Answer: none. to the subscriber.

A District of Oregon judge recently considered this question in a case involving a warrant served under the terms of the Stored Communications Act, 18 U.S.C. § 2703(a), which requires a search warrant -- as opposed to a mere subpoena -- if law enforcement officers wish to obtain e-mails stored for 180 days or less.  In re Application of United States for Search Warrant, 2009 WL 3416240 (D. Ore., June 23, 2009).  The magistrate judge presented with the government's application for a warrant granted the warrant but rejected the Government' s arguments that supplying the warrant to the ISP was sufficient notice under the SCA and that Rule 41's notice procedure was not applicable; the Government was initially ordered to provide notice of the seizure to the individual subscriber.

On an appeal by the Government, the district judge reversed.  While the opinion contains a useful summary of search procedures under the involved provisions of the SCA and the interplay of the SCA with Rule 41, the rationale of decision was rather straightforward.  The third party electronic context is no different than other third party contexts, such as when agents seize a package in the control of Federal Express.  In the latter instance, a copy of the search warrant is permissibly left only with Fed Ex and there is no need to inform the sender or recipient of the package of its seizure.  ISP's are analogous to Fed Ex, and notice to the individual subscriber to the ISP is unnecessary.

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This is the eighteenth in a series of installments on this blog that are discussing some issues arising in the aftermath of the long global Ponzi scheme of Bernard L. Madoff (“Madoff”). Installments 3 through 8, Installment 10 and Installments 14 through 17 of this series focused on the specific concerns of charities that were victims of Madoff and similar schemes. All potential stakeholders should consult professional advisors to have their positions evaluated.

On October 27, 2009, Irving Picard, the trustee in the Madoff liquidation proceeding under the Securities Investor Protection Act (the “Madoff Proceeding”), together with Securities Investor Protection Corporation (“SIPC”) President Stephen Harbeck, held a telephone briefing with reporters on progress to date of the Madoff Proceeding. During the course of his prepared remarks, Mr. Picard did not discuss efforts in the Madoff Proceeding to “clawback,” that is, recover assets from Madoff investors who received more in cash distributions than they invested with him.

During the course of the questioning by reporters, the “clawback” issue was raised and the following response was given by Mr. Picard:

At the moment, as I indicated of the accounts that were active at the end of last December, there were 2,568 accounts that received more than was deposited. . . . That’s an area that we are looking at. We’re not going to be suing people who don’t have money. We’re not going to be able to collect. We’re not going to sue people where we become familiar with the fact that they have hardships, medical problems, losing their homes and other things like that. No final decisions have been made; it’s a matter that again, over a period of the next six to eight or nine months, we’re going to be taking a very close look and, quite frankly, those will be looked at virtually on an individual basis before we make some final decisions. . . . if we determine that that’s a matter that we’re going to pursue, then we will pursue them for what we believe is the appropriate amount that we should be seeking from them.

It is noteworthy that Mr. Picard did not address in his response the widely-publicized “profits” from investing with Madoff that have been reported for charities like Hadassah, as discussed in Installment 14 of this series.  

Mr. Picard’s response may be compared to the report by Diana B. Henriques on May 28, 2009 in The New York Times that “[t]here is the widespread fear among some — unfounded, Mr. Picard says — that he will sue struggling charities or people of limited means for money they withdrew in the past but no longer have.”

Has Picard now evidenced by his silence a subtle shift from his earlier position with respect to not pursuing ‘struggling charities” that made profits from investing with Madoff? The October 29,2009 issue of The Chronicle of Philanthropy has disclosed that Hadassah suffered a decline of almost 50% in donations during 2008 to just over $85 million as compared to the 2007 level. Does that loss in revenues qualify Hadassah to be exonerated from clawback as a “struggling charity” under Mr. Picard’s earlier position? A significant portion of the decline in Hadassah donations may be due to the economy generally. However, ironically, some of the decline may be attributable to the adverse publicity for Hadassah from having invested with Madoff. Moreover, a number of its major donors may have incurred heavy losses with Madoff and could not maintain their contributions to Hadassah.

As the Madoff Proceeding continues to unfold, these issues should become clearer.

[To be continued in Installment 19]
 

(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 seventeenth in a series of installments on this blog that are discussing some of the issues arising in the aftermath of the long global Ponzi scheme of Bernard L. Madoff (“Madoff”). Installments 3 through 8, Installment 10 and Installments 14 through 16 of this series focused on the specific concerns of charities that were victims of Madoff and similar schemes. All potential stakeholders should consult professional advisors to have their positions evaluated.

On October 21, 2009, an article in The New York Times by Ken Belson and Richard Sandomir disclosed that a Madoff bankruptcy proceeding report had contradicted earlier information about large losses with Madoff purportedly suffered by the New York Mets and their owners, the Wilpon family. The article states that the report shows that

Mets LP, one of the team’s financial arms, withdrew $570.5 million from two accounts it held with Madoff’s company, $47.8 million more than it put in. The accounts were part of a list of more than 30 in which more money was withdrawn than was deposited with Bernard L. Madoff Investment Securities. As a result, Mets LP and the others were deemed “net winners” ineligible for compensation and potentially liable to being sued by Irving H. Picard, the court-appointed liquidator who is trying to recover money lost in Madoff’s $65 billion Ponzi scheme. A spokesman for Picard declined to comment.

Thus the Mets and the Wilpon family may become the subject of “clawback” by Mr. Picard and end up losers, especially if they have paid now-unrecoverable federal and state income taxes on the illusory Madoff “gains.” This situation can be contrasted to the position stated by Picard with respect to seeking recovery from charities. As reported in Installment 16 of this blog series http://whitecollarcrime.foxrothschild.com/, Diana B. Henriques wrote on May 28, 2009 in The New York Times that “[t]here is the widespread fear among some — unfounded, Mr. [Irving] Picard [the trustee in the Madoff bankruptcy proceeding] says — that he will sue struggling charities or people of limited means for money they withdrew in the past but no longer have.”

Installment 14 of this blog series discussed reports of large profits by Hadassah from its investments with Madoff. Will Picard choose to pursue the Mets and the Wilpon family while passing on Hadassah? All charities, especially those providing social services like Hadassah, are “struggling” with materially reduced contributions because of the economy, increased demands by individuals who are unemployed and suffering financially, losses in endowment funds from the substantial market declines and increased regulatory activity.

While the position earlier stated by Picard as to charities may be humanitarian and emotionally appealing, there is little basis in the law for the disparity in treatment between charities and for-profit entities. This inequality of approach will more likely than not lead to protracted litigation and uncertainty in the Madoff matter.

[To be continued in Installment 18]
 

(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 Ninth Circuit recently issued a much-awaited opinion on the application of the attorney-client privilege in the area of a corporate internal investigation conducted amidst an options backdating scandal. The anticipation was enhanced because the district court had controversially concluded that the outside counsel who conducted the investigation had likely committed multiple ethics violations and spectacularly suppressed a number of incriminating statements made by the company's CFO to those attorneys. However, in an anticlimax, the court of appeals, finding that the lower court had made both factual and legal errors, reversed, allowing use of the statements, and failed to address the issue of ethical violations at all.

William Ruehle, the CFO of Broadcom Corp., was at the center of the company's practice of backdating stock options for select employees, a practice which the court of appeals noted was not intrinsically fraudulent unless misreported in the corporate books. When a storm swirled in 2006 over the practices, Broadcom engaged outside counsel, Irell & Manella, to conduct an investigation. As part of that investigation, Irell attorneys interviewed Ruehle; in a finding of fact critical to the outcome, it was found that Ruehle understood that his statements would be disclosed to third parties, at least to the company's outside auditors. There was a factual dispute, however, over whether the Irell attorneys had properly given Ruehle an Upjohn warning at the outset of the interview; that admonition, always good practice on the part of outside counsel, is intended to inform the interviewee that the attorneys questioning him are not his personal attorneys but attorneys solely for the corporation and that the individual is free to consult with his own counsel before proceeding.

Eventually, Ruehle's statements were disclosed to civil authorities and to the U.S. Attorney's Office in Los Angeles, which obtained Ruehle's indictment. Thereafter, the district court held a three-day evidentiary hearing, concluding that the Irell attorneys had not conducted themselves ethically and that Ruehle, who was surprised to learn that his statements were later provided to criminal authorities, held a reasonable belief that his statements were made to lawyers he believed represented him, and holding that the statements were privileged because he intended them to be confidential. His statements were suppressed.

The Ninth Circuit reversed. United States v. Ruehle, 2009 U.S. App. LEXIS 21450 (9th Cir., Sept. 30, 2009). First, the district court had applied the incorrect legal standard, substituting the more liberal California state formulation of the privilege, with its presumption of confidentiality, in place of the more severe federal common law test, which places the burden of proof on the party claiming privilege. Second, the district court had erred in finding that Ruehle's statements were made in confidence, one element of the federal test, since he admitted knowing they would be disclosed to third parties; his later shock and surprise that those third parties included the FBI was immaterial.

The court of appeals noted, but chose not to decide, more interesting questions, such as the proper test to apply when there is colorably a dual representation of both corporation and corporate officer (addressed in In re Bevill, Bresler & Schulman Asset. Mgt. Corp., 805 F.2d 120 (3d Cir. 1986)) or the standard to be used in determining, whether in a dual representation context, the corporation can waive the privilege against the will of the corporate officer (see In re Grand Jury Subpoena (Newparent), 274 F.3d 563 (1st Cir. 2001)). The court also skirted the issue of the Irell attorneys' ethics, since it was not presented in the appeal, but noted parenthetically that evidence obtained even in violation of attorney ethics rules was admissible, as long as neither the constitution nor federal law was violated.

The Ninth Circuit created no new precedent and arguably avoided addressing the most noteworthy issues raised by the short-lived district court opinion. Nevertheless, the case stands as a stark reminder of the problems created when outside counsel fail in the course of conducting an internal investigation to clearly inform individual officers that company counsel are not also their counsel and to document that advice of rights in the event of later litigation or prosecution.

[Fox Rothschild's White Collar Compliance and Criminal Defense group has extensive experience in conducting thorough internal investigations for corporate and institutional clients in numerous industries]

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This is the sixteenth in a series of installments on this blog that are discussing some of the issues arising in the aftermath of the long global Ponzi scheme of Bernard L. Madoff (“Madoff”). Installments 3 through 8 and Installments 10, 14 and 15 of this series focused on the specific concerns of charities that were victims of Madoff and similar schemes. All potential stakeholders should consult professional advisors promptly to have their positions evaluated.

On September 22, 2009, the Associated Press reported that federal prosecutors had disclosed in New York that approximately 50% of the Madoff stakeholders had withdrawn more money than they invested with him and about 50% had invested more money than they had withdrawn. There have been many reports that among those stakeholders which received more in distributions from Madoff than they invested were charities. Installment 14 of this blog series reported on allegations that Hadassah received $40 million more in distributions from Madoff than they had invested with him.

Diana B. Henriques wrote an article on May 28, 2009 in The New York Times  entitled “It’s Thankless, but He Decides Madoff Claims,” in which Ms. Henriques reported that “[t]here is the widespread fear among some — unfounded, Mr. [Irving] Picard [the trustee in the Madoff bankruptcy proceeding] says — that he will sue struggling charities or people of limited means for money they withdrew in the past but no longer have.”

The May statement by Mr. Picard now presents him with a fascinating quantitative and qualitative dilemma and conundrum. All charities, especially those providing social services like Hadassah, are “struggling” with materially reduced contributions because of the economy, increased demands by individuals who are unemployed and suffering financially, losses in endowment funds from the substantial market declines and increased regulatory activity.

While some smaller charities have already gone out of business from the Madoff fiasco, others large organizations like Hadassah still have meaningful endowment funds, even if depleted. The criteria that Mr. Picard will use to separate “struggling” charities and “people of limited means” from whom he will seek funds and those from whom he will not raises fundamental questions of fairness, size relative value that will likely lead to much more controversy.

[To be continued in Installment 17]
 

(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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Lawyers know reflexively that, in order to convict, a criminal jury must be unanimous in agreeing that the government has proven all essential elements beyond a reasonable doubt.  They also know that the crime of conspiracy under Section 371 of Title 18 includes among its elements the requirement of proof of the commission of an overt act, as set forth in the statute.  So, it is also true that jury must unanimously agree on which overt act the defendant committed, whether or not set forth in the indictment, right?  Not so much.

Judge Posner, writing recently for the Seventh Circuit, held that unanimity is not required as to the identify of the particular overt act.  Proof of an overt act is a "statutory afterthought," wrote Posner in United States v. Griggs, 569 F.3d 341 (7th Cir. 2009), since common law conspiracy did not require proof of an overt act.  See also 21 U.S.C. § 846 (drug conspiracy; no overt act required).  It is "inconsequential" that jurors failed to agree on the identity of the overt act, since the act itself need not be criminal, as long as, presumably, they are unanimous that some step was taken by some conspiracy member to achieve the conspiratorial object.

Thus, the Seventh Circuit joined the only other circuit court of appeals to have considered the question in holding that, no matter how intuitive-seeming the proposition, unanimity as to the specific act is not required.  Accord United States v. Sutherland, 656 F.2d 1181 (5th Cir. 1981). 

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This is the fifteenth in a series of installments on this blog that are discussing some of the issues arising in the aftermath of the long global Ponzi scheme of Bernard L. Madoff (“Bernard”). Installments 3 through 8 and Installments 10 and 14 of this series focused on the specific concerns of charities that were victims of Madoff and similar schemes. All potential stakeholders should consult professional advisors promptly to have their positions evaluated.

A Cliffview Pilot report on September 15, 2009 by Jerry DeMarco reported that U.S. District Judge Stanley Chesler in Newark declined to dismiss a lawsuit brought by two children of, and the private charitable foundation (the “Foundation”) formed by, Senator Frank Lautenberg, who was its President. The claims in the lawsuit include allegations that Peter Madoff violated the Securities Exchange Act of 1934 by failing to disclose to investors that the company of his brother Bernard was engaged in a fraud. The plaintiffs are claiming losses aggregating almost $9 million.

Concerns about the profound financial and other impacts on charities, both public and private, from investments with Bernard were published soon after the Bernard scandal became public in December 2008. See, for example, “Charities Now Seek Bankruptcy Protection,” by Stephanie Strom in The New York Times on February 20, 2009.

The progress of the lawsuit brought by the Foundation raises several interesting points, some of which were discussed in previous Installments of this blog series.

First, it does appear that actions brought against other members of the Madoff family than Bernard may bear some fruit, separate and apart from the much-publicized Bernard bankruptcy proceedings in New York. Query whether the preliminary success of the Foundation will spur other stakeholders to sue members of the Madoff family, thereby exposing them to the potential for very large claims that could precipitate bankruptcy filings for them as well.

Second, as was discussed in an earlier Installment, private foundations such as the Foundation and their managers have potential liability for excise taxes that may be levied by the Internal Revenue Service (“IRS”) for improvident investing. Query whether success in the lawsuit would generate a compelling argument for the Foundation and its managers for avoidance of the excise taxes because of the alleged securities fraud. Alternatively, if the lawsuit is lost by the Foundation, does it increase the potential for success by the IRS in possibly imposing excise taxes on the Foundation and its managers?

Third, a check of the charity information website Guidestar indicates that the Form 990-PF of the Foundation for the 2007 calendar year was filed with the IRS on August 15, 2008. The Form 990-PF for the Foundation for 2008 has not yet been posted on Guidestar. The nature and extent of disclosures that will be made regarding the Foundation in its 2008 Form 990-PF should be illuminating about the litigation, financial status and contingencies respecting the Foundation.

[To be continued in Installment 16]
 

(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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Adding its voice to a split among the circuits, the D.C. Circuit recently joined the Third Circuit in holding that, as the result of an interplay between two sentencing statutes, the perceived need to rehabilitate a defendant is not a permissible basis upon which to impose a longer sentence.

Under 18 U.S.C. § 3553(a), courts are directed to consider a range of factors in imposing sentence.  Among them is the need to provide a defendant with educational or vocational training or other correctional treatment.  However, 18 U.S.C. § 3582 provides that in determining whether to impose imprisonment or, if imprisonment is imposed, the length of sentence, the sentencing court must recognize that imprisonment is not an appropriate means of promoting rehabilitation.  Several courts of appeal have held that the statutes taken together do not prohibit consideration of a rehabilitation need in selecting the length of a sentence, but only prohibit its consideration in deciding whether or not to incarcerate at all.  United States v. Duran, 37 F.3d 557 (9th Cir. 1994); United States v. Hawk Wing, 433 F.3d 622 (8th Cir. 2006); United States v. Giddings, 37 F.3d 1091 (5th Cir. 1994); United States v. Jackson, 70 F.3d 874 (6th Cir. 1995).

Recently, in In re Sealed Case, 573 F.3d 844 (D.C. Cir. 2009), the D.C. Circuit departed from the preceding courts to sensibly read the plain language of Section 3582 as barring any consideration of the need for rehabilitation in either imposing prison in the first instance or in deciding on the length of incarceration.  Accord United States v. Manzella, 475 F.3d 152 (3d Cir. 2007); United States v. Yehuda, 238 Fed. Appx. 712 (2nd Cir. 2007). 

The defendant in In re Sealed Case had distributed a small quantity of heroin, so his Criminal History category of VI yielded a range of only 24-30 months.  But he also qualified as a career offender under  § 4B1.1, resulting in an enhanced range of 151-188 months.  The trial court selected a sentence of 132 months, indicating that it had imposed a longer period that it might have otherwise because the defendant would benefit from BOP programs and training.  Based on its reading of Section 3582, the appeals court vacated the sentence and remanded.

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