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Alain Leibman writes:

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

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

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argument was not that the government had failed to prove a timely-occurring conspiracy, only that he had successfully withdrawn from that conspiracy, and so leaving the burden of proof on Smith was in accord with the common law understanding.
 

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

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Jana C. Volante writes:

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

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

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

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

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

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

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

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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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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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An argument often made, and almost invariably lost, by defense counsel seeking to dismiss charges under the mail fraud statute, 18 U.S.C. § 1341, and analogous wire fraud statute, 18 U.S.C. § 1343, is that the mailing (which can be intrastate or interstate) or wiring (which must be interstate) was so attenuated from the underlying scheme that it could not be said to “further” the execution or attempted execution of the scheme, as is required. United States v. Maze, 414 U.S. 395, 400 (1974). For example, in an embezzlement from an employer by which manual T&E checks are obtained by the employee through his submission of hand-completed expense reimbursement requests, the prosecution would argue -- likely with success -- that the scheme was furthered by a foreseeable interstate wiring, because the employer’s reimbursement check is drawn on an account at a bank with offices in other states, or whose checks clear through a regional institution. So an offense whose every meaningful activity appears to lack any interstate wiring, or any wiring at all, would arguably fall under the wire fraud statute.

But the recent case of United States v. Fiorito, 640 F.3d 338 (8th Cir. 2011) may have set a particularly low bar for the government to hurdle in proving mail fraud. Fiorito was convicted at trial of defrauding homeowners, who were behind on their mortgages, by convincing them to refinance or sell their homes, and then cheating them out of their equity, reflected in the proceeds of a refi or sale. Fiorito persuaded one charged victim to sell her house at a below-market price, so that he could resell it for full value; he even caused the victim-seller to give him, without her knowledge, a second mortgage to finance the purchase. However, Fiorito’s effort to resell the home and realize its full value was thwarted by the second mortgage of record.

So, Fiorito brought a quiet title action against the victim of his scheme, maintaining that the second mortgage had been paid off, in order to clear his fraudulently-obtained title of that encumbrance. In the course of the quiet title action, Fiorito’s attorney served discovery requests by mail to the victim’s attorney. The mailing of the discovery requests in the quiet title action was charged as one count in a multi-count indictment, and Fiorito was convicted of that mail fraud.

On appeal, Fiorito argued that the routine mailing by his attorney of discovery requests was not “in furtherance” of the fraud, which had seemingly been completed earlier when the victim unwittingly gave him a second mortgage and a below-market price on her house. The Eighth Circuit upheld the conviction, holding that the discovery requests -- not described in the opinion, so assumed to be routine interrogatories or document requests -- were mailed in furtherance of the fraud. The quiet title action was necessary to eliminate the obstacle to his resale of the house and so was undertaken in furtherance of the fraud, the court defensibly held. However, it is difficult to understand the further holding that the routine mailing of discovery requests advanced the fraud perpetrated on the victim or was meaningfully incidental to the scheme’s execution. Presumably, then, Fiorito’s attorney writing to a judge regarding a status conference or mailing in a notice of appearance would have “furthered” the fraud to the same extent, no matter how counterintuitive that may seem. The reasoning of Fiorito draws all meaning out of the phrase “in furtherance” and renders it instead as “mailings of indifferent importance which occurred at some point during the continuation of the underlying scheme.” That verbal attenuation from the Supreme Court’s formulation seems highly doubtful and at odds with controlling precedent.
 

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A consultant assisting local schools in obtaining federally-distributed funds intended to facilitate Internet connectivity at the schools was charged with defrauding the program, even though the funding applications which she prepared did not violate any of the regulations of the program. The jury rejected this defense and so, on appeal, did the Ninth Circuit.  United States v. Green, 592 F.3d 1057 (9th Cir. 2010).

Judy Green, a long-time teacher, retired to form a consulting business to guide local schools in applying for, and obtaining, grants under a Federal Communications Commission program which distributed funds to wire schools for the Internet. The schools were obliged to bear a small portion of the cost themselves and to secure through other means the computers and fax machines to be connected thereby. Green aggressively approached interested contractors to secure their agreement both to absorb the schools’ portion of the cost and to provide “bonus” computers and equipment. Once an application -- which apparently was not required to disclose such side arrangements -- was approved, the projects were put out for bid and the schools were permitted to select the winning, but not necessarily the lowest, bidder. As a result of her energetic efforts, the government paid more than would have been the case if contractors had not bid up their quotes to account for the extras.

Convicted of various conspiracy, fraud, and bid-rigging charges, Green argued on appeal that the government’s failure to prove that her actions were explicitly prohibited meant that no fraud had been proven. The court of appeals was unable to locate any case in which actions not expressly violative of law nonetheless were sufficient to constitute a violation of the fraud statutes. However, drawing upon cases which had rejected the defense that actions in compliance with state law could not form the basis of a federal fraud conviction, the Ninth Circuit held that the government need only prove a scheme to defraud, not that the scheme or its components actually violated any federal regulation or rules.

To be sure, this case did not present the most appealing circumstances for a defense of technical compliance with regulations. With better facts, there may be a more compelling argument than Green could muster in light of her wheeling and dealing and the resulting overcharges to the government.

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Prior to the expansion in the last several years of the list of federal offenses for which forfeiture is available as a penalty upon conviction, now including health care offenses and telemarketing schemes for example, prosecutors frequently charged money laundering in order to wield the threat of forfeiture which followed conviction on those charges. Even now, money laundering charges remain a potent prosecutive tool, because they generally carry far more severe sentence exposure under the Sentencing Guidelines than do the underlying offenses which generated the proceeds allegedly laundered. Moreover, money laundering under Title 18, United States Code, Sections 1956 and 1957, is a broad, elastic concept, often proven through much the same evidence which serves to prove the underlying predicate offenses.

However, a recent opinion in the Sixth Circuit serves to remind prosecutors that elastic does not mean boundless. In United States v. Faulkenberry, 2010 WL 2925106 (6th Cir., July 28, 2010), the court of appeals reversed the defendant’s money laundering conviction because the government failed to prove a knowing purpose to conceal. Faulkenberry was an officer of a factor which purchased health care providers’ receivables at discount, principally using investor funds. Unfortunately, misrepresentations were made to investors and their funds were not secured as promised. Faulkenberry and others were charged with and convicted of conspiracy, securities fraud and wire fraud, the appeals court upheld those convictions.

But Faulkenberry was also charged with money laundering, under Section 1956(a)(1)(B)(i), so-called concealment money laundering, which proscribes conducting a financial transaction with proceeds known to derive from some unlawful activity if the defendant also knows that the transaction is designed in whole or in part to conceal the nature or source of those proceeds. There was no serious dispute that the transaction in question -- an advance of $22 million to a health care provider of investor funds obtained by wire fraud and securities fraud -- qualified as proceeds and that Faulkenberry knew the proceeds were derived from some unlawful activity. The issue on appeal centered on the concealment prong of the statute, that is, whether Faulkenberry was motivated by a purpose to conceal, not just whether the mechanics of the advance had the effect of concealing the origin of the monies, which had been transferred among accounts.

The Sixth Circuit held that it is not enough for the government to prove that a particular transaction had the effect of concealing the source of the proceeds, or even that it was structured to do so; the ultimate question is one of purpose, not structure, so the proof must establish that Faulkenberry’s animating purpose was to conceal. The record revealed no such evidence; documents which falsely represented that the funds were the factor’s and did not come from investors were insufficient, since they only showed a concealing structure, not this defendant’s driving purpose. The court memorably added, in a line sure to find its way into many a motion to dismiss: “Money in motion does not necessarily equal money laundering.”
 

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In a series of insider trading cases, the Second Circuit has appeared to hike the government’s burden of proof in showing the “willfulness” of conduct needed for conviction by requiring evidence that a defendant acted with the knowledge that he was violating the securities laws. This additional layer of proof, common to prosecutions of many regulatory offenses, helpfully requires a jury to find more than the usual mens rea standard of “knowing and intentional” conduct. Recently, a defendant sought to have the enhanced level of proof applied in a conventional securities fraud case, but the court declined to do so.

Mark Kaiser was a corporate officer of U.S. Food Service, a distributor of food products to restaurants, and he supervised the company’s purchasing department. He had received bonuses based on the amount of promotional allowances paid to USF by its vendors; those allowances increased as USF’s purchases from the vendors increased. Apparently not content with the ordinary course amount of the payments, Kaiser, according to the government, inflated the amount of payments USF appeared to receive, and his resulting bonuses, by having vendors pre-pay large bonuses based on purchasing targets not yet achieved. Kaiser then allegedly hid the scheme by causing false bookkeeping entries and by personally lying to outside auditors about the nature of various payments received by his company. He was convicted in the Southern District of New York of securities fraud and causing false filings to be made to the SEC.

Kaiser appealed on several grounds, including the claim that the jury instruction on the “willfulness” element under 15 U.S.C. § 78ff(a) (penalizing "[a]ny person who willfully violates any provision of this chapter ....") was erroneous because the trial judge failed to instruct that a defendant could only act “willfully” if he had knowledge that his actions were illegal. He succeeded in vacating his conviction and winning a new trial, but on other issues, including a flawed “conscious avoidance” charge; the Second Circuit flatly rejected his argument that “willfulness” in this context requires knowledge of illegality. United States v. Kaiser, 609 F.3d 556 (2nd Cir. 2010).

While noting recent its own precedent that endorsed a higher standard for willfulness in insider trading cases, the appeals court distinguished insider trading, which does not necessarily involve deception and, therefore, where an insider may be unaware that his conduct was illegal and therefore wrongful. The court explained that the same cannot be said of one who deliberately misleads investors about a security.

Although the appeals court held the district court erred in instructing the jury on “conscious avoidance”, the court upheld the district court’s instruction on willfulness. The Second Circuit disagreed with Kaiser’s argument that “willfulness” requires knowledge of illegality and held that Section 32(a) of the Exchange Act does not require proof that the defendant knew he was violating the law, only that which was charged in this case: knowingly false statements made with an intent to deceive, with an absence of good faith on the defendant’s part. Those requirements, the court noted, necessarily suffice to prove that Kaiser knew he was committing a wrongful act.
 

(With appreciation to Christine Soares, Esq., for contributing this entry)

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Defending a securities fraud prosecution brought under 15 U.S.C. § 78j and Rule 10b-5 on the theory of undisclosed material information can be enormously challenging because the standard for judging whether particular information would have been material to a reasonable investor is so elastic and unpredictable. Just how immaterial the supposedly “material” information may be was underscored recently by the Ninth Circuit.

The case of United States v. Laurienti, 2010 WL 2266986 (9th Cir., June 8, 2010), concerned the securities fraud prosecution of the owners, senior managers and brokers of a defunct broker-dealer called Hampton Porter. The indictment alleged that Hampton Porter made a practice of selling blocks of stock provided to it by issuers through a “pump and dump” scheme. Its brokers were incentivized to sell these house stocks through greatly enhanced commissions, and only retained those commissions if they could discourage clients from selling out of their positions in the house stocks. By stoking buying activity in these stocks, the shares’ prices rose artificially and dramatically, and then the broker-dealer and others would dump their shares of those stocks to realize the gains. Clients of the firm were not informed, of course, about the brokers’ increased commissions on the house stocks, as compared to their commissions on all other stocks. Naturally, former clients testified at trial that if they had known of the house stocks’ commission rates, they would not have purchased those stocks. There was also evidence at trial of high-pressure sales tactics and unauthorized transactions in certain accounts, but no evidence of any misrepresentations or undisclosed information about the issuing companies, their performance, or the intrinsic value of the stocks.

The owners and managers pled guilty, leaving several brokers to go to trial; they were convicted. On appeal, the brokers maintained that there was no legal obligation to disclose their commissions, so they could not have committed securities fraud by failing to make the disclosure, and there was no other evidence of fraudulent statements or omissions.

Initially, the court of appeals opinion suggested, with an almost imperceptible wistfulness, that if the government had proceeded solely on a conspiracy to commit securities fraud theory, then the appeal would have been more easily resolved in its favor. In that scenario, the evidence of undisclosed commissions, “even if not independently criminal conduct,” would have amounted to circumstantial evidence of the brokers’ agreement to join the conspiracy of the owners and managers, and the conspiracy proof would have been complete against the brokers with no evidence at all of their committing actual acts of fraud. However, the opinion notes almost ruefully, the government did offer the failure to disclose bonuses not just on the conspiracy charge “but also as an independent violation of Rule 10b-5,” leaving the court no alternative but to decide the precise question: is it illegal to fail to disclose increased commission rates?

Reaching first the existence of a duty to disclose, the court held that in the presence of a relationship of trust and confidence between broker and client, Rule 10b-5 imposes on the broker an obligation to disclose all facts material to the relationship, citing Chiarella v. United States, 445 U.S. 222 (1980) (which concerned subsections (a) and (c) of Rule 10b-5, involving respectively, employing a device or scheme to defraud and engaging in a practice which operates to defraud, and which required disclosure of material facts if there was a relationship of trust). In dictum, the Laurienti court extended the obligation to disclose to subsection (b) of Rule 10b-5 (omitting material facts necessary to render other statements not misleading), even when there is not a relationship of trust. Although the jury instructions here were errant in failing to require the essential element of a trust relationship, the Ninth Circuit held that the broker defendants had waived their objections to the error.

Turning to the issue of the materiality of the commissions, the appeals court rejected the argument that the enhanced commission rates were immaterial as a matter of law, since, it held, a reasonable investor would consider them important. However, the court hastened to add, not all compensation arrangements are material and de minimis variations among different commission rates would indeed be immaterial.

Finally, the brokers argued that even if enhanced commissions are now to be deemed material, they had no way of anticipating that holding and so had no warning of the bounds of the criminal law. The court had two curt responses: (a) its holding was not unforeseeable in light of Chiarella; and (b) the failure to disclose is not illegal unless accompanied by an intent to defraud. A perfectly appropriate defense counsel response to the second point would be to firmly grasp one’s head with both hands and shake slowly from side to side, since the court’s guidance hardly illuminates the path between criminal and non-criminal conduct and leaves that demarcation entirely to the government’s charging decisions.
 

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We have noted in these electronic pages the first stirrings of what may be a trend in the courts of appeal to limit the reach of 18 U.S.C. § 666 -- which prohibits theft and bribery in local government programs which receive federal funds – to true agents of state government. The Eleventh and Fifth Circuits have pulled back the reins on federal prosecutors, who have seized upon Section 666 as the charge of choice in going after state and local official on corruption charges.

Recently, the Eleventh Circuit passed up an opportunity to pull those reins back even harder. United States v. McNair, 2010 WL 1881884 (11th Cir., May 12, 2010). The court of appeals last month affirmed the bribery convictions of several Alabama sewerage authority officials in a case in which the officials received cash and home improvements from contractors doing work with the state agency. The officials defense was predicated on the notion that these gifts were from the heart and did not involve any specific commitment by them to favor the generous contractors in awarding state contracts. The Eleventh Circuit noted that Section 666 requires the recipient or donor of the benefit to have a corrupt intent, but does not employ language which prohibits things of value being received or given “in return for or in exchange for an official act,” but only “in connection with” any business or transaction. The statute sweeps more broadly than, say, 18 U.S.C. § 201, which prohibits federal officials from receiving things of value “because of” an official act (section 201(c) gratuity) or “to influence” an official act (section 201(b) bribe).

The Eleventh Circuit’s position in McNair that no quid pro quo need be proven under Section 666 puts it in conflict with the Fourth Circuit, but aligned with the Sixth and Seventh Circuits. This issue may be ripe, in the appropriate case, for Supreme Court review and resolution.

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We noted here recently the first signs of an effort among courts of appeal to temper the reach of 18 U.S.C. § 666, long a favorite tool of prosecutors seeking to federalize misdeeds by local and state officials. Now the Eleventh Circuit has joined in, acting to limit the scope of the statute by strictly holding the government to its allegation that a defendant was an "agent of the state" and finding that a state's payment of the defendant's salary and benefits failed to qualify him as its agent, and throwing out his conviction on that theory.

The defendant in United States v. Langston, 2009 WL 2907047 (11th Cir., Dec. 22, 2009), was the executive director of a state school which provided training to Alabama's firefighters and EMT's, called fittingly enough the Fire College. The school was run by the Fire Commission, an agency of the state. Although the Fire Commission employed Langston and paid his salary, the salary was fixed according to a state employee salary schedule and was paid with funds from the state treasury, and Langston's received state employee benefits. In a display of greed so striking that the Court of Appeals characterized the case as "an affront to every decent law-abiding citizen in the State of Alabama," Langston treated the Fire College as his own piggy bank, doling out monies to friends and family, and creating bogus jobs.

A jury convicted Langston of all counts, but the Eleventh Circuit vacated the conviction on each count which charged a Section 666 violation predicated on Langston solely being an agent of Alabama. All of the above indicia of Langston's apparent connections to the state failed to prove his agency; the monies he unlawfully dispensed were, in the court's broad analysis, property of the Fire College, not the state. The Court's ipse dixit reasoning is nicely captured in the spare simplicity of its holding: "Simply because it [the misused Fire College monies] passed through the state treasury to the state [Board of] Education Trust Fund [which funds the Fire College] does not make it state funds sufficient to demonstrate that Langston was an agent of the state." Consistent with this reasoning, other counts of conviction under Section 666 were affirmed because in them Langston was properly identified as an agent of a specific state agency, not of Alabama in general.

Although the absence of close reasoning in the opinion may hinder the ease with which Langston translates to other fact-patterns involving state and local officials, the result does represent one more expression at the appeals court level of the strict interpretation to be afforded Section 666.
 

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Long a favorite weapon of federal prosecutors, Section 666 of Title 18 makes it a crime for an agent of a state or local organization or agency to corruptly demand, offer, or accept anything of value of $5,000 or more in connection with any business or transaction of the organization or agency, where the organization or agency receives annual benefits in excess of $10,000 under a federal program. The statute has extended the reach of federal authorities to the lowest levels of municipal government, given the ubiquitousness of federal funding programs.

However, the Fifth Circuit has recently emphasized the limits of that reach. United States v. Whitfield, 2009 WL 4723467 (5th Cir., Dec. 11, 2009). In Whitfield, two Mississippi state judges had been convicted of § 666 violations for accepting bribes from a local attorney with cases pending in their courts. The government focused its proof on the receipt by the Mississippi administrative office of the courts of more than $10,000 in federal funding. Although the statutory element was contested below, the court of appeals further assumed that the two judges, Whitfield and Teel, were agents of that administrative office, since they hired chambers staff paid by that office. But the Fifth Circuit vacated the convictions on the ground that there was no proof that either judge had engaged in "business or transactions" of the administrative office when they ruled in their respective cases. In Mississippi the administrative office of the courts is by statute authorized only to assist in the "nonjudicial" activities of the court system. The appeals court held that their roles as judges presiding over the cases constituted the judicial activity of the Mississippi courts, and were unconnected to the business of the administrative office.

In other states, such as New Jersey, the administrative office of the courts seems more deeply engaged in the actual running of the court system, including the assignment and transfer of judges among courts; this circumstance could cause bribe-driven judicial rulings in such states to fall more comfortably within the reach of § 666, even under Whitfield. Nonetheless, the case helpfully refocuses attention on the statutory requirement that the activity in question must be proven to relate directly to the business of the federally-funded agency. With the Supreme Court possibly poised this term to pull back the extensive reach of the "honest services" mail and wire fraud statute, 18 U.S.C. § 1346, these developments may signal a judicial shift in favor of efforts to halt the relentless creep of federal criminal jurisdiction over purely local matters
 

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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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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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A public official who accepts a bribe from a developer, both cash and a plot of land, but does not explicitly reach agreement with the bribor on an official act to be performed by the recipient may still be convicted of violating the Hobbs Act, 18 U.S.C. § 1951 and 18 U.S.C. § 666, according to the Sixth Circuit. United States v. Abbey, 560 F.3d 513 (6th Cir. 2009).

Abbey, a Michigan city administrator, was found to have accepted cash and a subdivision lot from a developer. There was no evidence at trial that Abbey had, in return, agreed to perform a specific official act in exchange, that is, there was no quid pro quo. In a pretrial motion to dismiss, a Rule 29 motion, and on appeal Abbey contended that, absent a quid pro quo he could not be convicted for extorting the money and property "under color of official right." Only in the area of campaign contributions is the government required to prove a quid pro quo to ensure that an otherwise permissible activity is not criminalized unfairly (citing McCormick v. United States, 500 U.S. 257 (1991)). In all other Hobbs Act areas, the government need only show knowledge by the defendant-official that he/she was expected to exercise some influence in favor of the bribor as opportunities to do so arose.

Likewise, under § 666, there is no requirement of proof of linkage between the thing of value given to the official and a specific official act. A conviction will be sustained on proof that the official merely intended to generally use his/her influence to benefit the bribor.
 

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The Ninth Circuit recently reversed wire fraud convictions on the ground that the wire transfers upon which the 18 U.S.C. § 1343 charges were based occurred so long after the underlying activity was completed that the transfers could not be said to be "in furtherance" of a fraud. United States v. Lazarenko, No. 06-10592 (9th Cir., April 10, 2009).

In Lazarenko, the defendant, a Ukrainian official, had allegedly used his position to receive money and ownership interests in various entities, and allegedly had caused millions of dollars in such monies to be deposited into United States bank accounts. In 1993 and 1994, the evidence showed, Lazarenko had received some $14 million which ended up in this country. Years later, in 1997 and 1998 the defendant caused wire transfers of a portion of those funds to be made, and was charged with wire fraud, among other charges. But the Ninth Circuit held that the intervening three or four years, during which time the monies simply remained on deposit, was too long a period of time to conclude that the later transfers were "in furtherance" of the original scheme which led to the deposits:

"If the government's theory were correct, then it would be possible for an ordinary fraud to be converted into wire fraud simply by the perpetrator picking up the telephone three years later and asking a friend if he can store some fraudulently-obtained property in his garage before the police execute a search warrant or later taking the proceeds of fraud and transferring them to another bank." No rational trier of fact could conclude that the later transfers were "in furtherance" of the earlier fraud, and the convictions on those counts were reversed.
 

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