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

Perhaps it is felt especially acutely by defense attorneys who formerly were employed by the Justice Department, but few experiences disappoint as sharply as those in which federal prosecutors behave unfairly or unjustly. The government, in this author’s opinion, should not only be held to the highest standard of behavior, but should relish that charge in its role as the proverbial striker of hard blows, but fair ones, to paraphrase Justice Sutherland’s famous construction.

Among other concrete demonstrations of their obligations to do justice, prosecutors should never try to squeeze unfair advantage out of proffer agreements. The last point is the takeaway from the recent case of United States v. Perry, 2011 WL 1900388 (8th Cir., May 20, 2011).

The position taken by the government in construing its proffer agreement with Perry could only be the result, one hopes, of a rogue or unsupervised AUSA, who lost sight of his or her higher responsibility. The standard proffer agreements in the U.S. Attorney’s Office in Des Moines, Iowa apparently prohibited use in the government’s case-in-chief of proffered statements, but also provided that if the witness either testified or otherwise presented a position in any legal proceeding which materially varied from his proffer, then the government could make impeachment or rebuttal use of the proffer. A general provision, which paralleled 18 U.S.C. § 3661, authorized full disclosure to the sentencing court of all proffered information, but there was no provision which addressed the specific use, or prohibition on use, of proffered information at sentencing,. (In the District of New Jersey, the current form of proffer agreement not only prohibits case-in-chief use, but generally disallows use “for purposes of sentencing.” The inclusion of that provision would have avoided all mischief in Perry, but proffer agreements vary widely among offices).

Prior to his drug trial, Perry agreed to proffer to the government in the hopes of cooperating against a co-conspirator. Under the auspices of the standard office agreement, he volunteered information supporting an earlier starting date to the conspiracy than was charged, and a greater quantity of drugs than was set forth in his indictment. Perry eventually went to trial and lost. The prosecutor sought to punish him at sentencing by arguing (contrary to the Presentence Report, in fact) and convincing the judge that a too-old sentence should be used to increase Perry’s criminal history score despite the limitations period allowing consideration only of sentences imposed within 10 years of the commencement of the current offense, because of the earlier start date to the conspiracy which Perry had supplied in his proffer. The prosecutor also persuaded the court that the base offense level should be increased to account for the extra quantity of drugs he admitted trafficking.

The Eighth Circuit was having none of it, and vacated the enhanced 130-month sentence which resulted from the sentencing court’s adoption of the prosecutor’s arguments. Under § 1B1.8 of the Sentencing Guidelines, a commitment by the government to a defendant who has agreed to cooperate not to use any of his proffered statements has the effect of preventing those statements from being used by the court in determining the sentencing range, unless otherwise provided in the agreement. The prosecution in Perry contended that the absence of any broad “no use at sentencing” provision rendered § 1B1.8 inapplicable altogether. But the Court of Appeals held that even a limited agreement by the prosecution not to make case-in-chief use of proffered statements triggered the presumptive prohibition of § 1B1.8 (citing cases from the 6th and 10th circuits similarly relying on limited prohibitory language to bring a proffer agreement under § 1B1.8).

The only remaining question was whether this proffer agreement otherwise carved out an exception which allowed sentencing use of the proffer. The appeals court rejected the claim that the provision allowing disclosure of all information to the sentencing court created an exception for sentencing use, saying that the government’s right to provide information was not the same as the court’s right to use that information. Then, the government argued that the bar against case-in-chief use implied by omission a right to use proffered statements for all other purposes, including sentencing; the appeals court rejected that argument too, pointing to the specific limitation on impeachment/rebuttal use as evidence of a carefully articulated and limited grant of proffer uses to the government. Finally, the government argued that since Perry had sat down for a proffer only to see if the government would potentially accept his cooperation, he had not yet formally agreed to cooperate, as required by § 1B1.8. This unworthy argument was rejected, appropriately by footnote, since the proffer’s requirement that Perry provide complete and truthful information concerning criminal activity adequately demonstrated his agreement to cooperate.

(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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There are a variety of circumstances under which investors may provide sensitive tax-related information to the Securities and Exchange Commission; they may be victims of securities fraud eager to assist the SEC in recovering lost monies or, under the SEC's newly-developed policy of encouraging and rewarding cooperation -- previously reported here -- they may be low-level participants in the fraud anxious to prove their bona fides.  No matter the scenario, the disclosing parties will desire protection against the further disclosure of their tax-related information to other arms of the government, such as the IRS.  The SEC may even, in the right circumstance, consent to a protective order to facilitate the disclosure.

But what assurance does the disclosing party have, even with a protective order in place, that the SEC will not turn around and re-disclose their information to a United States Attorney's Office or to the IRS for criminal prosecution?  Under a recent Tenth Circuit case, the answer is: "some."

In SEC v. Merrill Scott & Assocs., Ltd., 2010 WL 1039796 (10th Cir., Mar. 23, 2010), a victim-investor in the defendant entity turned over to the SEC confidential information pertaining to his income, and did so pursuant to two protective orders, the first for his deposition testimony, the second for his documents.  Both protective orders were explicit in regards to the subsequent use of the information -- the information could only be used for purposes of the SEC litigation and no other, and could only be disclosed to the United States Attorney's Office for the District of Utah as necessary to the SEC action.  Imagine the investor's surprise when, shortly after his disclosures to the SEC, agents of the IRS initiated a criminal investigation of him by dropping summonses at his banks, law firms, and brokerages.  The investor moved for an order directing the return of his information; the United States intervened to seek a modification of the protective orders to permit broad disclosure.  The district court not only refused to order the return of the investor's materials, but it modified the protective orders nunc pro tunc to support the broader disclosure sought by prosecutors.

The Court of Appeals reversed, directing the return of the information and negating the modification.  It held that the prosecutors were barred under the terms of the original orders from further disclosing the information received from the SEC or from using the information other than in the SEC action.  The court said that "[a]llowing the government to breach the promises made in the protective orders would encourage similar improper conduct in the future and would discourage future civil litigants from relying on the government's promises."  Id. at *6.  While there are sections within Title 15 which generally allow the SEC to disclose information to the Attorney General, they are permissive, not mandatory, and so did not override the protective orders.  Id. at *8.

There is precedent holding that grand jury subpoenas, at least rebuttably, overcome any civil protective orders. E.g.,, In re Grand Jury, 286 F.3d 153 (3d Cir. 2002).  The Tenth Circuit noted one such case from the Fourth Circuit, but distinguished it, since the IRS/prosecutors had in this instance been handed the protected information and had not compelled its disclosure through grand jury subpoena.  But it is clear in a number of Circuits, including the Third and Fourth, that the service by an AUSA of a grand jury subpoena upon the SEC would have compelled the production of this investor's data, protective orders or not.  In that light, the Merrill Scott case has limited utility.  Put another way, a protective order is better than nothing, but securing one for a client in jeopardy is no guarantee of a good night's sleep, for you or for the client.

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More than twenty years ago the Supreme Court decided the case of Braswell v. United States, 487 U.S. 99 (1988), in which the Court extended to even small, closely-held corporations the principle that corporate entities have no Fifth Amendment privilege to assert in opposition to a subpoena seeking corporate records.  In its famous, and tantalizing, footnote 11, however, the Court left open the possibility that a corporate records custodian could oppose a corporate documents subpoena if he/she could show that a jury would conclude inevitably, as with a one-person corporation, that this custodian personally produced the records.  The Court has never revisited this question, leaving the ambiguity hanging.

Defense attorneys have ever since assiduously sought to use footnote 11 when defending sole shareholder corporations to argue that records need not be produced, else the custodian/sole shareholder would be implicating himself/herself by production of incriminating records.  However, circuit courts of appeal and district courts have consistently resisted entering the wormhole of footnote 11, preferring to view the language as dictum, and falling back on the easily-applied principle that no corporate entity -- regardless of its size -- enjoys a Fifth Amendment privilege against production of documents.

The latest court of appeal to take the easy road through the Fifth Amendment jurisprudence is the Second Circuit in In re Grand Jury Subpoena, June 18, 2009 (Account Services Corp.), 593 F.3d 155 (2nd Cir. 2010).  There, the court affirmed a contempt order entered against two corporations, wholly owned by an individual named Rennick, who was under indictment, because they refused on Fifth Amendment grounds to produce records.  The court, calling Braswell's footnote 11 a "non-decision," id. at 158, aligned itself with numerous other courts in reaffirming the no-privilege principle as applied to corporations of any size.

But there is a staggering inconsistency in the resulting Fifth Amendment jurisprudence.  The Supreme Court has made quite clear that where a subpoena names as respondent not a corporation but a particular corporate officer or shareholder, that individual respondent enjoys a Fifth Amendment act-of-production privilege to decline to produce documents.  United States v. Hubbell, 530 U..S.  27 (2000).  It is difficult logically to distinguish between Scenario A, where Rennick's corporation or the "custodian of records"of the corporation is named as respondent in a grand jury records subpoena and cannot resist the subpoena, even though the world will conclude that since there is only Rennick, he must have possessed and produced the inculpatory documents; and Scenario B, where the subpoena clumsily names Rennick as respondent and he may interpose the privilege.  This is a classic distinction without a difference, and an elevation of form over substance.  And that is the state of Fifth Amendment jurisprudence today.

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Monte McFall, a local California lobbyist and ex-officio staffer for an elected official, was charged in a Hobbs Act conspiracy for allegedly coercing a state contractor into paying McFall a fee in exchange for McFall's assistance in securing funding. The co-conspirator, a lawyer and crony named Sawyer, had earlier testified at length in the grand jury, producing a 120-page transcript; in the testimony, Sawyer had exculpated McFall. After indictment, Sawyer pled guilty and cooperated. When the government decided not to call Sawyer at trial, and he invoked the Fifth Amendment when called by the defense, McFall sought to admit Sawyer's grand jury testimony under FRE 804(b)(1) (former testimony of unavailable witness). The district court excluded the transcript, and the Ninth Circuit reversed. United States v. McFall, 558 F.3d 951 (9th Cir. 2009).

Under FRE 804(b)(1), the earlier-taken testimony must be from a witness who is "unavailable" at trial. Clearly, the court of appeals held, a witness who has invoked the privilege is "unavailable." Id. at 961. The Rule further requires that the party against whom the testimony is now offered must have had an "opportunity and similar motive" to develop the testimony in the earlier proceeding. While the district court concluded that the government's motive in examining Sawyer in the grand jury was dissimilar from its hypothetical motivation in questioning him at trial, the Ninth Circuit disagreed.

The court of appeals noted that the Second Circuit, in United States v. DiNapoli, 8 F.3d 909 (2d Cir. 1993), had placed a gloss on the Rule requiring a showing that the opposing party had a substantially similar degree and intensity of interest in both proceedings, not merely that it was on the same side of the same general issue. Id. at 962. For example, the government might not be as motivated to explore details of testimony in the grand jury where defendants had already been indicted; where the grand jurors had expressed skepticism about the testimony's accuracy, vitiating the need for immediate impeachment of it; or where the prosecutors might not wish to risk disclosing other evidence which would be revealed by an impeachment line of questioning. Id. at 962-63 (citing DiNapoli, 8 F.3d at 915).

The Ninth Circuit, however, rejected this gloss on the Rule, which looked to the detailed, comparative intensity of motive in questioning in the two contexts, in favor of a comparison only of the government's fundamental and more general motives. Here, the government intended in the grand jury to elicit testimony from Sawyer to support its theory of a conspiracy with McFall, the same motive it would have at McFall's trial. Id. at 963 (citing with approval United States v. Miller, 904 F.2d 65 (D.C. Cir. 1990) for the general motive test). Thus, the Rule was satisfied, the trial court abused its discretion, and the conviction was reversed.
 

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Practitioners have long understood that there is some psychic, but little practical, value in securing from the government a letter attesting that the client is not, based on the information then known to the prosecutor, currently considered a target of a grand jury investigation.  Such letters are generally heavily caveated, making it clear that the client could readily find himself or herself in jeopardy upon the discovery of any new inculpatory fact or allegation.  A recent Eighth Circuit case underscores the ephemeral advantage gained by the possession of a non-target letter.

In Fresenius Medical Care v. United States, 526 F.3d 372 (8th Cir. 2008), plaintiff FMC, a hemodialysis provider, had entered into civil settlements concerning certain sales of a drug called Epogen. As part of a settlement with the U.S. Attorney's Office for the District of Massachusetts, FMC received a so-called "cold comfort letter" advising that DOJ had no open civil or criminal investigations of FMC, and that DOJ had no present intention, based on facts then known as of April 2002, to initiate any matters against FMC. Then, in 2005, the U.S. Attorney's Office for the Eastern District of Missouri issued administrative subpoenas to FMC relating to Epogen sales. The company moved to quash the subpoenas to the extent that they covered a time period including prior to April 2002, based on the "cold comfort" letter of April 2002. The district court denied the motion to quash and the Eighth Circuit affirmed.

The court of appeals rejected any argument that the 2002 letter immunized FMC from further Epogen investigations; the letter was "simply an assurance from the government that, based on the facts it then knew, it was not then planning any further investigation. The letter does not preclude the United States from investigating FMC based on new facts." In other words, never mind.
 

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Generally, the Supreme Court has approved the Government’s use in a criminal case of evidence gathered in a related civil proceeding, often by a civil agency of the Government. The leading authority in this area is United States v. Kordel, 397 U.S. 1 (1970). The Kordel Court, addressing the criminal use of evidence garnered by the FDA, required only that the Government show an absence of bad faith on the part of the civil agency. Id. at 12-13. A civil action brought solely to advance a criminal investigation is one brought in bad faith. Id.; United States v. Rand, 308 F. Supp. 1231 (N.D. Ohio 1970).

Of course, a prosecutor violates Fed. R. Crim. P. 6(e) if evidence collected by a grand jury is turned over to civil authorities, even within the same United States Attorney’s Office, absent the applicability of an exception to that Rule. E.g., 18 U.S.C. §  3322 (disclosure permitted in connection with civil forfeiture).

Recently, the Ninth Circuit reinstated indictments which had been dismissed by a district court based on the Kordel standard and in so doing breathed new life, and breadth, into the government's ability to manipulate civil proceedings to assist criminal prosecutions. In United States v. Stringer, 521 F. 3d 1189 (9^th Cir. 2008), the SEC first began investigating Stringer, the former CEO of a defense contractor, and others for fraud, then began holding coordination meetings with the U.S. Attorney’s Office. A criminal investigation into the same activities was then initiated.

In due course, access to the SEC’s files was granted to the prosecutors. The SEC was advised that targets of the investigation included Stringer and his former CFO, although apparently a grand jury had not been formally convened at that point in time.

The prosecutors stayed hidden to the targets, but coordinated with the SEC on how the latter should conduct witness interviews, and even suggested the venue for SEC depositions to facilitate criminal prosecution of false statements made in depositions in that district. Prior to the SEC depositions of Stringer and other persons who subsequently became defendants, the witnesses were given an advice of rights and a warning text explaining only that the SEC often makes its files available to federal prosecutors. Asked directly by Stringer’s attorney whether any, and if so which, U.S. Attorney’s Office was working with the SEC, however, the SEC attorney was less than candid and made no disclosure.

Following their indictment, Stringer and the other defendants moved to dismiss the indictment alleging a due process violation in the misuse of two parallel proceedings and moved to suppress their statements to the SEC. Defendants argued that their Fifth Amendment rights were violated by the SEC’s trickery and deceit.

The Ninth Circuit rejected the argument that defendants’ Fifth Amendment rights were not undermined by the quality of the notice given to them by the SEC; even though the notice only generally warned of the possibility of criminal prosecution and did not identify the prosecutors with whom the SEC was shaping strategy, the notice was not deemed to be deceitful. The court also naively found no Kordel violation because the SEC investigation began first, which "tends to negate any likelihood that the government began the civil investigation in bad faith as, for example, in order to obtain evidence for a criminal prosecution. Id. at 1197-99.

It remains to be seen how Stringer is received by other circuit courts of appeals. Unless checked, the Stringer analysis leaves criminal prosecutors absolutely free to orchestrate SEC or other agency investigations, choreographing the content and even location of depositions, and allows the SEC or other agency to act with no meaningful disclosure to deponents of the furious behind-the-scenes activity designed solely to collect evidence against those witnesses.

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It is often exceedingly difficult for a defense attorney to obtain access to the legal instruction given by the prosecutor to a grand jury. Under Fed. R. Crim. P. 6(e)(3)(E)(ii), discovery of grand jury proceedings may be granted where "a ground may exist to dismiss the indictment because of a matter that occurred before the grand jury." But absent disclosure by the government of the transcript containing the colloquy between prosecutor and grand jury, the only argument that an erroneous instruction was provided must be made inferentially from the words of the indictment and the failure of the indictment to make out the essential elements of the charged offense (hence, the argument goes, the prosecutor must have misinstructed the body in order to have obtained the true bill).

Even more frustrating, when the high hurdle to discovering the legal instructions can be surmounted, there is commonly no remedy. Courts routinely have held that dismissal is not a proper remedy for faulty grand jury instructions, although there are scattered district courts which have dismissed indictments on that ground. See, e.g., United States v. Buchanan, 767 F.2d 477 (10th Cir. 1986) (no dismissal available), cert. denied, 494 U.S. 1988 (1990). But see United States v. Peralta, 763 F. Supp. 14 (S.D.N.Y. 1991) (distinguishing Buchanan and dismissing indictment); United States v. Vetere, 663 F. Supp. 381 (S.D.N.Y. 1987) (dismissing indictment).

However, a recent New Jersey Supreme Court case offers hope that there is relief available where the prosecution errs. In State v. Lisa, 194 N.J. 409 (2008), a defendant was indicted for reckless manslaughter when a teenaged victim died from a drug overdose while a guest in Lisa’s home. The prosecutor charged the grand jury that Lisa could be held criminally accountable for the girl’s death based on a civil liability standard found in the Restatement (Second) of Torts, which obligates one to exercise a duty of care where he has voluntarily assumed the care of another and secluded person and that aid from others was unavailable.

The Supreme Court, agreeing with the intermediate appellate court, held that reliance on a civil standard for criminal liability was improper because the use of civil standards which had not migrated into substantive criminal law provided insufficient notice to an accused and violated due process principles. 

The Supreme Court rejected the argument that the evidence before the grand jury was insufficient to support a reckless manslaughter charge on some other theory, and the Court discussed the indictment. The State was free to re-present the case on some other theory of liability.

Achieving an indictment’s dismissal, particularly in a case which was brought with some notoriety, is a notable accomplishment and a setback for prosecutors, even if not the last word in a defendant’s fate. The Lisa case supports the vital principle that words – especially where delivered by a prosecutor in ex parte fashion to a grand jury – matter.

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