Oklahoma Criminal Defense Blog

Very commonly in cases prosecuted by the federal government, the authorities pressure people to “cooperate” with the government.  This is a euphemism.  The pejorative term for this is “snitch.”  People do it because they believe it will give them a better deal, a lower sentence or no sentence, depending on their own case.  Federal cases so often charge multiple people and charge conspiracies that as investigations sweep up individuals, those individuals become part of the government’s case as it increases in number of individuals and breadth.

Ephraim Karpel was one of those.  He worked on Wall Street and was never charged with a crime.  But federal authorities had a talk with him in 2008, and he agreed to cooperate in their investigation.  The feds had some leverage on Karpel, so he agreed to cooperate for his own perceived self-interest.

Two F.B.I. agents approached him outside a restaurant, went inside with him, and told him they had evidence he was involved in insider trading.  What they had was a recorded telephone conversation between Karpel and Zvi Goffer, whose phone they had tapped.  In that call, Karpel had told Goffer that Walgreens, the drugstore company, had made an offer to buy Matria Healthcare.  Karpel told Goffer his source was a banker.

The Walgreens buy never happened.  But that call was one of 20 plus recorded calls played by the prosecution during the jury trial of Goffer, nicknamed Octopussy because his arms reached into so many sources of information.  Goffer was convicted of insider trading last month with two accused co-conspirators, his brother Emanuel, and Michael Kimelman, formerly of the well-regarded Wall Street law firm of Sullivan & Cromwell.

With that conviction, the government continued its string of convictions in its campaign against insider trading at hedge funds.   Of the 49 people charged, 43 have either pled guilty or been convicted at trial.  Wiretaps played a crucial role in the evidence in Goffer’s case, just as it had in the recent conviction of high-profile trader, Raj Rajaratnam, of the Galleon Group.    Goffer had sat in on some of Rajaratnam’s jury trial, but it apparently did not help enough.

Karpel had a lot of Wall Street connections.  He had worked for 18 years at Mutual Shares, an investment firm run by Michael Price.   Karpel rose to the be head trader there, and then left to work as an analyst.   He worked at P. Schoenfeld Asset Management and then at Tigris Financial Group, a commodities firm.  He was a specialist in metals and mining stocks.

For 3 years, Karpel was a cooperating witness.  At first, he secretly taped his conversations with fellow traders.   The government investigation changed Karpel’s life.  It terrified him and his wife, and working for the government against his friends was a great conflict to him.  Even after the F.B.I. stopped asking Karpel for help after a year, the pressure continued, because about that time, his employer, Tigris, learned of his involvement in the investigation and dismissed him.   He continued to work for the company but as a consultant but was depressed after losing his job there.  Finally, last month, he hanged himself in his office.

Given the scope of the financial meltdown of 2008 and the suspicions of some wrongdoing to explain it, everyone has been expecting some big time prosecutions.  Not much so far.  Lee Farkas may be the biggest thing so far, and he isn’t all that big.

Farkas was a mortgage industry executive, chairman of the firm of Taylor & Whitaker in Florida.    He was accused of carrying out one of the largest bank fraud schemes in history.  He caused the failure of Colonial Bank, resulting in the loss of billions for investors and the federal government.  However, his firm was not a large one, and his deeds began long before the financial crisis, so it really had nothing to do with the meltdown.

There was a prosecution in 2009 against some Bear Sterns hedge fund managers that resulted in an acquittal.  Recently federal prosecutors dropped an investigation into Angelo Mozilo, the former head of subprime lending giant Countrywide Financial.  He’s the one who testified to Congress that his performance at Countrywide was better than Warren Buffet’s performance at Berkshire Hathaway was for the same period.   The statement was correct, but it omitted the period immediately after that period when Countrywide’s performance dropped off a cliff, so the statement was grossly misleading.   He would have been a wonderful fish for the feds to fry.

U.S. District Judge Leonie Brinkema sentenced Farkas to 30 years.  There is no parole in the federal system.   The government asked the judge to impose the maximum sentence of 385 years, or, in the alternative, a sentence of at least 50 years so Farkas would spend the rest of his life in prison.    The criminal defense attorneys for Farkas asked for a 15-year sentence, so they certainly acknowledged the prospect of a significant sentence.  In addition to the 30 years in the sentence, the judge ordered Farkas to disgorge about $38.5 million.

Former fellow executives of Farkas decided to cooperate with the government to improve their chances at a sentence.  The former chief executive and treasurer of Taylor, Bean pled guilty and agreed to testify against Farkas.  Their sentences ranged from 3 months to 8 years.

Farkas did not plead guilty.  After 10 days of trial, the jury found him guilty on all 14 counts of securities, bank and wire fraud and conspiracy to commit fraud.   The government’s case was that Taylor, Bean was facing losses, and they schemed to hide the losses.  In 2002, a they began to secretly overdraw Taylor, Bean’s accounts at Colonial Bank and sold Colonial $1.5 billion of worthless and fake mortgages.  The U.S. Government guaranteed the worthless loans.

As things bled, Farkas persuaded Colonial Bank to seek $570 million in taxpayer bailout funds to staunch the flow.  After initially approving this payment, the U.S. Treasury canceled the order.   Colonial then filed bankruptcy in 2009, the 6th largest bank failure in U.S. history.   Farkas was busy spending $40 million from Taylor, Bean and Colonial to fund his fancy lifestyle for usual things: private jet, vacation homes, a collection of classic cars.

At sentencing, the judge did not think Farkas was remorseful but just regretted getting caught.  That’s never good to have the sentencing judge to believe that about you, but federal judges are sophisticated about human nature and the fine art of sentencing, so such things are just part of the mix to them.  Sentencing is an art that has generated lots of literature, lots of theories and opinions and speculation, some science, but requires a strong will to wield.

Bernard Madoff swindled billions of dollars from his investors for years, but once caught, he promptly pled guilty to the criminal complaint filed against him in federal court.  He did not plea bargain with the government.  He just took his medicine.  Well, maybe.  That way, just pleading to the Complaint as Madoff did, he did not have to give an interview with the prosecution and answer all those detailed questions about where the money went and to whom.

Madoff admitted his guilt to the 11 counts filed against him, including counts alleging fraud, money laundering, and perjury.  Madoff then returned 3 months later, on June 29, 2009, to the courtroom to find out what sentence he would receive.  Considerable motions and memoranda were filed in preparation for the sentencing hearing.  Madoff’s criminal defense lawyers had asked United States District Judge Denny Chin for a 12-year sentence.  The presentence report from the probation department recommended a 50-year sentence, and the United States Attorney asked for a 150-year sentence, the maximum sentence under the advisory guidelines, achievable only by running the maximum sentence for every count consecutive to the other counts.

As the judge pondered an appropriate sentence, a just sentence, he considered what the judge described as the unprecedented scale of Madoff’s crime, its duration over 2 decades, and the thousands of victims it harmed.   Originally, it was believed that Madoff had caused losses in the neighborhood of $65 billion, but the court-appointed received after investigation estimated investors’ losses at about $10 billion.  The judge reflected also that none of the counts to which Madoff carried a life sentence, but any sentence that totaled over 15 or so years would probably be an effective life sentence in light of Madoff’s age.

Of course, Madoff’s lawyers urged the lower sentence in order to give Madoff some sliver of hope he might get out before he died.  They also argued Madoff should be given credit for pleading guilty without bargaining with the government, but, as noted above, Madoff could have had his own selfish motive for taking that path.

Madoff personally addressed the court in his allocution, expressed regret and apologized to the public, the court and the victims of his Ponzi scheme, some of whom were present in person.   The judge had already read a number of letters from victims of Madoff’s scheme.   He found many had lost their life savings, many had lost their trust in the financial system, faith in humanity, suffered loss of dignity.

The judged was struck by one man who had invested his life savings with Madoff and died 2 weeks later.  The man’s widow then met Madoff, who told her not to worry and that her money was safe.  Trusting Madoff, the widow then invested her own 401(k) with him.   That is the kind of damning story that might have gotten lost in the numbers.  But it wasn’t, to Madoff’s detriment.  And, midst all the letters written by these victims of Madoff, the judge received not one letter written on behalf of Madoff.

Judge Chin sentenced Madoff to 150 years in prison.   He explained that Madoff did not deserve a lower sentence, that the punishment should be in proportion to the blameworthiness, and Madoff’s conduct was  “extraordinarily evil.”  The judge thought the 150 year was, among other things, symbolic, and that it should be symbolic given the enormity of Madoff’s crimes.  The judge also doubted Madoff was genuinely remorseful, although that probably would not have changed the sentence rendered.

Speculation continues about why Madoff did it.  He had to know he would get caught.  All Ponzi schemers know they will get caught.  Was it just for the fun of it?   Psychopaths lie, manipulate, and deceive in sometimes similar ways.  People always wonder why someone would do something like this, but there is never a good answer.

The federal Bureau of Prisons projects Madoff’s release date for the year 2039, but it is considered academic given Madoff’s age.   He is serving his time at the medium security Federal Correctional Facility at Butner, North Carolina.  Medium security is not a country club. Meanwhile, Judge Chin was nominated to the U.S. Court of Appeals for the Second Circuit, where he now serves.

The Attorney General in the State of New York has limits to his criminal jurisdiction that are surprising, given the high profile prosecutions the office has pursued in recent years.  Last summer, candidates for the attorney general post asked the governor to give the new attorney general enhanced powers under New York’s Executive Law, giving permission to inquire into “matters concerning the public peace, public safety and public justice,” including the power to subpoena records and compel testimony.

Now the state comptroller, Thomas DiNapoli, has joined with the new attorney general, Eric Schneiderman, in an agreement to work together to prosecute criminally what they believe is corruption involving taxpayer’s money.  They call it a joint task force on public integrity, and they will focus on legislative earmarks, state pensions and government contracts.   DiNapoli has also agreed to refer any findings from their joint investigation to Schneiderman for criminal prosecution.

There are still matters the attorney general cannot prosecute.  He cannot investigate or prosecute violations of election laws or the legislature for any offenses unrelated to expenditures of public money, such as failure to disclose outside income.    These are areas Governor Cuomo wants to pursue in an ethics proposal to the legislature.  If that fails, the governor can appoint an investigative commission under the Moreland Act, but such commission would be unable to prosecute criminally any violations it uncovered.

What the attorney general’s agreement with the state auditor does enable him to do is look into a number of issues that have plagued the state for some years: fraud in the public authorities, padding of pensions, no-show jobs, and abuse of legislative earmarks.

State law prohibits the attorney general from investigating on his own public officials for violation of campaign finance laws, violations of ethics laws or even taking bribes.  For that reason, major investigations of state officials have been undertaken by district attorneys or federal prosecutors.  But the attorney general has sometimes been able to pursue corruption cases.  When now-Governor Andrew Cuomo was attorney general and using laws empowering him to investigate securities and charities, investigated the state pension fund and Bronx state senator, Pedro Espada, Jr.

Schneiderman is wasting no time in pursuing his new agreement.  He has already subpoenaed a development corporation and its prime contractor in regard to a $224 million upgrade performed on Monroe County’s emergency communications system.  The subpoenaes were served with notices from the state auditor’s office, giving notice to the officials of the auditor’s intent to conduct an audit.

State Auditor DiNapoli’s agreement with an attorney general never would have happened with Schneiderman’s predecessor, Andrew Cuomo.  Cuomo investigated DiNapoli for four years in an investigation into “pay-to-play.”  The investigation resulted in the conviction of DiNapoli’s predecessor, Alan Hevesi, Cuomo publicly cleared DiNapoli of wrong-doing only days before DiNapoli’s election.   Cuomo did not endorse the fellow Democrat for reelection, and the two squabbled over pension abuse cases and their competing proposals to control influence-peddling at the State Pension Fund, which is the responsibility of the auditor.   And DiNapoli, also a former state senator as is Schneiderman, has introduced legislation to allow his office to inspect wage records to determine when retired public employees are collecting full pensions while working at public jobs, i.e., “double-dipping.”

Raj Rajaratnam, founder of the hedge fund Galleon Group, has been found guilty by a jury after 7 weeks of testimony and 12 days of deliberation on all 14 of the counts on which he was tried.  He was convicted of nine counts of securities fraud and five counts of conspiracy.  The government’s case presented Rajaratnam as collecting insider information from his friends to use it to gain an advantage in the stock market.  Mr. Rajaratnam, 53, was convicted of making more than $50 million in gains – or avoided losses – by trading on the information furnished by a senior partner at McKinsey & Co., a senior vice president of IBM, a former Goldman Sachs director and others.

This is considered a significant prosecution among other reasons because of the unusually aggressive techniques used by the United States Attorney in a white collar crime.  The evidence at trial came principally from wiretap recordings of the defendant’s telephone conversations, along with the live testimony of some his alleged co-conspirators, who testified to cooperate their way out of prison.  Some observers believe the use of wiretaps in white collar crimes is a game changer.

Over three dozen tape recordings, some from wiretaps, were played to the jury.  The government claimed Raj based his trading on the tips he got from his inside sources, and the jury was persuaded of just that.   One of them was Anil Kumar, a former classmate at the University of Pennsylvania’s Wharton School, who gave Raj information about confidential negotiations between ATI Technologies and Advanced Miucro Devices before the deal was announced publicly.  Raj made $20 million from that deal according to the government’s evidence, and Raj promised to pay Kumar a $1million kick back, Kumar testified.

Since the verdict, juror Leila Gorman has discussed how she and other jurors viewed the evidence, and she said wiretaps were only part of the picture.   She said the jury looked at evidence of e-mails, matched conversations and graphs to make their own timelines of Raj’s stock trades.  The jury believed the timing of Raj’s trades just could not have been coincidental, she said.  Often they were made just minutes after conversations he had, discussing the stock then traded.  Ultimately for the jury, she said, there were too many conversations and things from the testimonies that pointed toward guilt, too many sticky facts.

Wiretaps have long been used by the federal government to prosecute organized crime and drug sales, as any criminal defense lawyer will tell you, but they are rare in white-collar crimes.  Some observers of the trial who concede white collar crimes may deserve more attention from prosecutors wonder why this focus on insider-trading in hedge funds, rather than the Wall Street meltdown of 2008-2009, whose costs are vastly greater.  Some wonder why no high executive has been prosecuted from any of the financial firms that failed so abjectly and required a massive infusion of tax-payer money.  Given that the explosion of hardly-regulated hedge funds generated more than two dozen billionaires, all the money ill-gotten from all the hedge funds does not approach the money lost in the Wall Street crash of late 2008, from which the American economy has not yet recovered.

Charles Ferguson, who made the movie about the financial crisis entitled, “Inside Job,”  which was awarded the 2011 Academy Award for a documentary film, while conceding insider trading is a serious crime urges the government should be giving a closer look at the people and firms that caused the financial melt-down.

Last year, the F.B.I. conducted simultaneous raids on three Wall Street hedge funds.  Two of those funds have since closed down.  Wall Street is certainly talking about it.  The U.S. Attorney for the Southern District of New York (i.e., Manhattan), Preet Bharara, has filed a civil lawsuit against giant Deutsch Bank, alleging it lied about the quality of mortgages in its portfolio under a government program.  When he filed the petition, Bhara said the government did not have evidence sufficient to merit a criminal prosecution.  The jury’s verdict marks the 35th conviction for Bharara.  Over the last 18 months, his office has brought criminal insider trading charges against 47 individuals.

The Securities Exchange Commission can bring only civil cases, and turns over criminal matters to the U.S. Department of Justice.  The SEC lacks wiretap authority, the muscle that federal prosecutors can use to meet the higher burden of persuasion for criminal cases, beyond a reasonable doubt.

Insider trading involves material information — something that would cause an investor to change his or her view of a publicly traded security — as well as nonpublic information. Cases can be brought against those who trade on inside information as well as those who provide it. The definition of what constitutes material, nonpublic information is not as clear as many believe, and the current run of cases is changing perceptions about how that line should be drawn.

University of Chicago law professor M. Todd Harrison gave the example of an investor looking for an earnings forecast for a company. The investor could get nonpublic information from a company’s chief financial officer, which he said would be illegal. Or the investor could develop his or her own forecast by piecing together small bits of information from company suppliers, former employees and other sources. Prosecution of Mr. Rajaratnam and others is giving hedge funds pause about their information-gathering techniques.

Questions about what constitutes insider trading are nothing new. The SEC’s view of what’s against the law has frequently been overturned in court.  In 1983, the U.S. Supreme Court overturned an insider trading case against Raymond Dirks, who advised institutional investors on insurance stocks. Mr. Dirks told clients to sell shares of Equity Funding of America based on information about fraud that he had received from a former officer and others inside the company.

The Supreme Court threw out the SEC’s claim of insider trading, ruling that people who provided the information wanted to expose the fraud, received no benefit from disclosing the nonpublic information and did not breach their duty to shareholders.  Courts have routinely disagreed with the SEC, but the U.S. Attorney’s success has caused concern in the financial world.

Raj Rajaratnam was a Wall Street hedge fund manger, co-founder of Galleon Group, managing billions of dollars.  He bragged about taking risks and how it made his adrenaline pump.  Now is on trial in New York defending himself of insider-trading charges, specifically with securities fraud and conspiracy charges.  He is facing up to 20 years in a federal prison.   And, if he is sentenced to 20 years or close to it, he will serve his time in a prison, not a country club low security facility.

The trial is expected to go on for 6 to 8 weeks.  Observers make the usual dire predictions of the defendant’s chances of winning, based on government statistics that the Department of Justice wins 90 % of its jury trials.  Of course, the prosecution claims it has overwhelming evidence against Rajaratnam.

The United States Attorney in Manhattan has described its case to the trial judge as proving Rajaratnam traded illegally in 35 stocks.  They claim they have 173 secretly recorded telephone conversations between defendant and his associates, some of whom are charged as co-conspirators.  It will use wire-tapped conversations with well known stars in the investment world, including that of Lloyd C.  Blankfein, chief executive of Goldman Sachs, and the testimony of confidential informants, so often used in the prosecution of organized crime and drug cases.

From this government sweep, 19 traders have already pled guilty.   Some of them are cooperating with the government and will likely testify at trial.

Rajaratnam is from Sri Lanka.  He is well known for his philanthropy for South Asian charities.  His friends say he will never plead guilty, that his reputation is at stake and also the reputation of the South Asian immigrant community and the people of Sri Lanka.  They suggest he would rather be found guilty than ever plead guilty. Besides, as criminal defense lawyers who practice in federal court well know, a guilty plea this late, 17 months after his arrest, would not bring a significantly different sentence than a sentence he would receive from a guilty verdict at trial.

Rajaratnam came to the United States as a student at the University of Pennsylvania’s Wharton School.  He began at Needham & Company as a stock picker and was known for having a vast network of sources in the technology industry.  Indeed, his defense at trial will be his theory of investing called the mosaic theory.  His method was to pick stocks based upon his constant collection of pieces of information about the companies to compose a “mosaic.”  He dug as deeply and as broadly as he could to collect as much data in as much detail as he could.  He claimed this portrait of companies gave him an advantage over his competitors.  His lawyers claim he used meticulous research into all the details of a company’s fundamentals, and this made him an exceptional analyst.  His lawyers also say, importantly, that Rajaratnam did not know he was trading on confidential information about the companies he analyzed, that he gathered from company executives and other sources who revealed this information in violation of their duties by revealing it but didn’t tell him it was confidential.

His company managed about $7 billion at its zenith. Rajaratnam co-founded it in 1997.   It paid among the highest commissions on Wall Street.   He was known as “Raj,” which means “king” in Hindi.

Raj’s legal bills already exceed $20 million, and they will go up dramatically during the trial.  His net worth was $1.5 billion in 2009, according to Forbes magazine.  His alleged co-conspirators have not had such resources to pay their lawyers, so they did not have the option of fighting the government.   Defense of such white-collar accusations are seriously expensive.

The United States Attorney has, Preet Bharara, has charged 46 people with insider trading since August,2009, when he took office.  Of those, 29 have pleaded guilty.  He believes insider trading is rampant.  Just like in the 1980s, when Rudolph Giuliani as United States Attorney in this Manhattan office, prosecuted high profile insider trading cases, including Michael Milken and Ivan Boesky.    Raj’s prosecution has not reached nearly the level of public consciousness as Milken and Boesky, but the trial is just beginning.

Bharara’s pursuit of insider trading surprised many who thought he would go after the top executives in the large banks in the financial meltdown.   The scuttlebutt is that the evidence  available would have been difficult to prove guilt in those cases.  Since such bank cases weren’t pursued before the meltdown, there would be no evidence of taped telephone conversations to corroborate the testimony of government witnesses.

The wiretaps are critical in the case against Raj.  Last November, Judge Richard Howell, the trial judge, denied a defense request to prohibit the government from introducing the conversations at trial.  Those wire taps had resulted from a federal judge’s approval in 2008 to tap Raj’s phone.  The application for that order claimed the-then two year investigation had stalled with all other investigation techniques, so a wire tap was needed.   Such predicate is required to obtain permission for the wire tap order.  With that order in hand, and extensions of it, the government then recorded more than 2,400 telephone conversations over nine months in 2008.

Suzanne Wooten was sworn in as judge of the Texas 380th District Court in January, 2009. She defeated Charles Sandoval in the 2008 Republican primary. Sandoval had held the judgeship for the 12 previous years and had never previously had an opponent.  The 380th District Court is in McKinney, Texas, in Collin County, the county immediately north of Dallas County.

Collin County District Attorney John Roach has been investigating now-Judge Wooten, apparently for election fraud.  This investigation has been going on for a year, and Peter Schulte, a lawyer representing Judge Wooten says that is too long to keep her under a cloud of suspicion.  Roach’s office has presented evidence to several grand juries, but has never asked the grand jury for an indictment.

In Texas, as in United States District Court, all criminal charges must come for the indictment of a grand jury.  Oklahoma law permits, in addition to proceeding by indictment, the signing of an Information by the prosecuting attorney to initiate such charges.  Without an indictment, there are no criminal charges. Grand juries are in session for only so long, to be replaced by a grand jury with different members.  The grand jury that hears the evidence must act on that evidence to decide whether to indict.

Now Judge Wooten, through her lawyers, has filed an objection to this continuing saga in a 12-page document.  She claims Roach is seeking her resignation, saying this latest grand jury, possibly the fifth grand jury to be used to invade her private, personal and professional life for purely political, harassment and/or intimidation purposes.  She claims the judge she defeated, Charles Sandoval, met with district attorney supervisors the day after the election and said Sandoval believed the only reason he lost was that Wooten “must have cheated.”  She offered to talk to prosecutors several times but was not accommodated.  According to Peter Shulte, Assistant District Attorney Chris Milner, chief of the special crimes unit, mentioned election fraud but refused to give any specific allegations that were being investigated.  Milner allegedly encouraged Wooten to resign, and Schulte claimed, even urged Wooten to resign immediately before authorities took “her law license, her family, her home, her liberty and her reputation.”  If those words were indeed used, that is the most gross of threats. It is so strong, it sounds like a bluff.

Roach asked the Texas attorney general’s office a year ago to assign a prosecutor to the investigation.  Assistant Attorney General Harry White wanted Judge Wooten to appear before the grand jury a week ago, but a judge ruled that the grand jury’s term ended and evidence would have to be presented to a future grand jury.  District Attorney Roach says he is not directing White’s investigation.  Another grand jury begins this month.

Now three former prosecutors who served under District Attorney John Roach have criticized the lingering investigation.  Sharon Curtis, Mitch Nolte, and Hunter Biederman, have spoken out publicly against the length of time it has taken to investigate without bringing charges. One said even the most complex of cases should not take more than two or three months to go to the grand jury.

Roach’s response is to essentially a stone-wall and to criticize his criticizers.  He responded that the case against Wooten is taking so long because it is complicated but would not elaborate.   He said Wooten could have ended things if she had agreed to appear before the grand jury last week.  Wooten’s lawyer, Peter Shulte, however, said Wooten said she received only 48 hours notice after a year-long wait.  He said a sitting district judge was entitled to more notice than that.

Roach has been district attorney since 2002 and has not filed for re-election in this year’s Republican primary.  His term of office will end December 31st.

Federal prosecutors have been using a shortcut for years to get convictions in white collar crimes.  The shortcut is prosecution for what is called “intangible right to honest services” under the United States Code, Title 18, §1346, which provides that “the term ‘scheme or artifice to defraud’ includes a scheme or artifice to deprive another of the intangible right of honest services.”

In Skilling v. United States, the U.S. Supreme Court put a crimp in the federal government’s routine prosecution of white collar crimes by its calling everything a depravation of honest services.  The decision this week involved Jeffrey Skilling, the former chief executive for Enron, the Houston corporation that famously crashed, eliminating many pensions and savings accounts in the process.  According to the Supreme Court, evidence that an executive had a conflict of interest or acted against the best interests of the company or its shareholders is no longer sufficient, of itself, to establish a case of mail or wire fraud.

Federal prosecutors have been prosecuting under this statute since 1988, and, as so often happens, have become more and more aggressive, that is to say, more creative, claiming a theory of undisclosed breach of fiduciary duties by public and private officials as the basis for fraud.  Even a conflict of interest in which the defendant did not benefit personally has become enough for a conviction, on the theory that the harm suffered by the company or the public was sufficient violation of the statute. .

The government argued that Skilling was guilty under the honest services theory as part of a conspiracy with Ken Lay, Enron’s chairman to mislead investors about Enron’s true financial condition.  Lay, now deceased, was himself convicted under this theory, for inflating artificially the company’s stock price.  The evidence in Skilling’s trial was that Skilling did not benefit directly from the misrepresentations, notwithstanding the shareholders suffered extremely and the company itself undeniably suffered annihilation.

The Supreme Court in the Skilling ruling narrowed use of the statute to a more limited range of activities.  Honest-services fraud “does not encompass conduct more wide-ranging than the paradigmatic cases of bribes and kickbacks,” the Court stated.  From now on, defendants accused of violating §1346 of Title 18 of the U.S. Code must have received some benefit from his or her conduct, regardless some harm was in fact inflicted as a result of that breach of duty.

The government argued to the Supreme Court that “undisclosed self-dealing by a public official or private employee.”  The Supreme Court was unpersuaded and said that, even if Congress really did intend to criminalize such conflict of interest without proving a bribe or kickback, composing such a statute would be difficult without being so vague as to be unconstitutional.

But the Supreme Court did not define exactly what constitutes a bribe or a kickback, although it said honest services fraud usually involved payments from a third party who is not a deceived party.  With common fraud, the victim is deceived into paying money or delivering property; honest services fraud, however, does not require the victim to receive any benefit, the victim being a company or the public, so long as the defendant obtained the benefit, a bribe or kickback.

Although the Supreme Court found error in Jeffrey Skilling’s conviction and remanded the case back to the Fifth Circuit Court of Appeals for reconsideration of a new trial, the Court did not find §1346 unconstitutional.  That would have been a serious problem for the government, considering the number of convictions obtained over the years under this statute.    Instead of invalidating the statute, the Supreme Court construed the statute as capable of narrower application and therefore salvageable.

The biggest impact on this limitation of §1346 will more likely be in the prosecution of corporate executives for conduct that harms their companies.  From now on, §1346 will not apply to simply deceiving a company or keeping one’s position or the value of one’s stock options because there is no type of bribe or kickback.   Misleading investors or inflating a company’s stock would not support a mail or wire fraud prosecution unless there were some proof the defendant received financial benefits that were undeserved.

The impact on the prosecution of public corruption cases likely will not be as great, since most such cases usually involve a defendant receiving some financial benefit to which he is not entitled.  Such cases will stay within the tighter kickback parameters of an honest services fraud prosecution as required by the Skilling decision.

The scorecard in this opinion was extremely complicated.  The Skilling opinion was written by Justice Goldberg, Part I of which was joined by Chief Justice Roberts, Justices Stevens, Scalia, Kennedy, Thomas, and Alito; Part II of which was joined by Chief Justice Roberts, Justices Scalia, Kennedy and Thomas; Part III of which was joined by Chief Justice Roberts, Justices Roberts, Justices Stevens, Breyer, Alito, and Sotomayer.  Justice Scalia filed a separate opinion concurring in part and concurring in the judgment, joined by Justice Thomas and Justice Kennedy joined except as to Part III; Justice Alito filed an opinion concurring in part and concurring in the judgment; Justice Sotomayer filed an opinion concurring in part and dissenting in part, in which Justices Stevens and Breyer joined.

Much of the opinion dealt with impartial jury and voir dire issues due to widespread negative publicity of the Enron matter, but the Court found no error in the district court’s handling of those issues.  The district court had incorporated many of the defense’s suggestions for question into a 14-page questionnaire sent to all potential jurors and then conducted individual voir dire of the panel before the 4-month jury trial.

Former Illinois Governor Rod Blagojevich’s trial has begun.  Recently,  the first day of jury selection (voir dire) for the federal corruption trial took place.  The Pepperdine University law graduate is accused in 24 counts of trying to sell the U.S. Senate seat vacated by President Oboma when he resigned his Senate seat.  U.S. District Judge James Zagel began screening a pool of almost 100 potential jurors.  The judge got through 29 potential jurors.   Their identities are not public.  They are addressed by number.

Blagojevich was in celebrity mode-or maybe running-for-office-mode.  Smiling broadly, he waved and shook hands with supporters when he arrived at the courthouse.  He posed for cell phone camera photos for some on request, as his wife, Patti, tugged on his arm to get into the courthouse.   “The truth shall set you free,” he said to reporters.   He kissed one supporter who held up a sign supporting him.  He hugged one man who said, “God bless you, Governor. I’m praying for you.”

Inside the courthouse, Patti stepped up to reporters and television cameras and told everyone of Blagojevich’s innocence.  She thanked everyone who has supported her husband since his impeachment and said she was glad to get the trial underway.

The ex-governor’s older brother, Robert, of Nashville, Tennessee, also accused, arrived and entered the courthouse outside the roped-off area reserved for the ex-governor, and sat at a separate table in the courtroom.  He left for lunch while the ex-governor and his wife ate sandwiches in the courtroom.

The judge spent considerable time inquiring about the jurors’ exposure to publicity about the case.  Most had seen or heard something, but they said they could nevertheless be fair.  This selection process is expected to continue for several days.

Jury selection is a critical portion of any trial.  Likely defense lawyers will be looking for jurors, probably blue collar, who would identify with their client’s background from humble roots.  It is common belief that most jurors buy into the prosecution’s view from the beginning in the belief that a defendant must be guilty if he is accused.  It is that bias that criminal defense lawyers fight from the first minute to the last minute of any trial.  Defense lawyers focus on the requirement for unanimity for a verdict, and one of Blagojevich’s attorneys, Sam Adams, Jr., is known to focus on persuading just a certain few members of the jury during a trial.

Judge Zagel questioned an algebra teacher, a legal assistant, a computer lab technician, a retired customer service representative, and an insurance actuary.  When the customer service representative said she had trouble remembering words and names.  “Welcome to the club,” the judge retorted.  He asked another, who worked for his wife, if his wife was a difficult employer.   Another potential juror was a former precinct captain who said she would ask for guidance from her heavenly father to help her decide guilt or innocence.

Flashbacks on jury selection recall Blagojevich’s predecessor, Governor George Ryan, who was convicted of corruption in a federal trial.  Ryan’s trial almost resulted in a mistrial when several of the seated 12 jurors had to be replaced by alternate jurors during the trial, including two of them during actual deliberations after the close of all evidence.  That required deliberations to begin all over with the new members.  The judge decided to make replacements after it was discovered some of the jurors had concealed arrest records during voir dire.

Prosecutors claim they have 500 hours of secret recordings of the ex-governor.  Of course, the F.B.I. leaked the tapes.  Blagojevich claims the tapes, when listened to in their entirety, prove his innocence.  He is facing a maximum of 450 years in prison and $8 million in fines.

Raj Rajaratnam is charged in U.S. District Court for the Eastern District of New York with insider trading on the stock market.  A billionaire hedge fund manager, he is facing evidence of 2,400 telephone recordings of his own voice.  The government placed a tap on his telephone in 2008.

Not surprisingly, Rajaratnam’s lawyers are attacking this evidence.  A federal statute, United States Code, Title 18, Section 2516 identifies a list of crimes for which the government is authorized to record telephone conversations.  Securities fraud is not listed, but money laundering and mail fraud are listed, and these crimes are commonly charged along with securities fraud.

The government had to file an application for a judge to issue an order allowing the wire tap.  In that application, the government recited it needed the wire tap order because it was investigating violations of wire fraud and money laundering.  But the charges filed did not include those charges, so Rajaratnam’s attorneys  are attacking the application as disengenuous, as intended to find only evidence of securities fraud, which is not a valid basis for a wiretap order.  But the U.S. Attorney did specifically give notice it was seeking the wiretap for insider trading as the principal crime it was investigating.  If the defendant’s lawyers can prove the wiretap order would not have been granted if the whole truth were not told, the order could be invalidated and the recorded conversations suppressed.

It is true that the Wiretap Act does not mention securities fraud, but it is not certain that Congress intended to exclude wiretaps from the investigation of securities fraud.  Inferring the omission of something in a legislative enactment to be an affirmative declaration calls for an interpretation.  It is a rule of statutory construction in latin and therefore incontestible:  “Expressio unius est exclusio alterius,” which in English can be translated, “The expression of one thing implies the exclusion of what is not expressed.”
Ck spelling of latin phrase

Another avenue of attack on the application is focusing on the cooperating witness quoted in the application.  The F.B.I. agent’s affidavit quotes a woman named Roomy Khan extensively.  Rajaratnam’s lawyers claim the affidavit does not give a clear picture of her criminal past, the character of her conversations with the defendant, or the changing versions of her recitals.

The application described Ms. Khan as not having been charged with any other crime and had been cooperating with the government since 2007.   But the defendant’s lawyers claim she was charged with wire fraud in 2001 and agreed to cooperate with the government at that time.  Of course, the government will reply they were referring only to the present investigation.

The defendant also attacks what the wiretap application’s affidavit describes as Rajaratnam’s statements to Ms. Khan as conveying insider information, when if fact the information was based on publicly available information.

The final avenue of attack on the government’s affidavit is the constancy of Ms. Khan’s statements.  These are presented in the government’s affidavit as being straightforward.  But the defendant’s lawyers received, as they routinely do in discovery, copies of the F.B.I. interviews, known as 302’s.  These interviews viewed over time show changing stories from Mr. Khan, and government investigators were aware of this when they presented the affidavit for the wiretap to the judge.  But the affidavit softens the changing versions.  It omits any reference to her obstruction of the investigation although, by her initial concealing of facts, this is arguably what she did.  Instead, the affidavit describes her as having been proven to be reliable.

Wiretaps are granted only after other investigative methods have been tried unsuccessfully or would be unsuccessful if tried.  The affidavit does not detail other investigative methods but states that other investigative attempts have failed.  In fact, Rajaratnam and his hedge fund, Galleon Group, were responding to a series of discovery demands, subpoenas and inquiries, and Rajaratnam’s lawyers claim they were cooperating with the government.  Obviously, the government did not agree, else the government would not have sought the wiretap.  The government was on the trail of unusual transactions, and it wasn’t getting the explanations with the methods they had tried.