RansomeOver the past few weeks, revelations of ransomware cyber-attacks on U.S. businesses have rocked the country’s infrastructure and have held hostage companies’ computer systems that are necessary to provide essential services to the nation.  In a typical ransomware attack, hackers exploit a security vulnerability to gain access to a company’s computer system.  After gaining access, the hacker will encrypt all or part of the system, rendering it inoperable or significantly crippled.  The hackers then demand a ransom payment in exchange for a decryption key that will unlock the computer system.  Recent ransomware attacks have focused on providers of essential products or public infrastructure, such as hospitals and medical providers, food distributors, energy companies, and public transit companies.

Prior to 2019, ransomware attackers mainly targeted data-rich companies, such as retailers or financial companies, relying on the potential loss or threatened exposure of customers’ personal data to incentivize companies to pay a ransom for the decryption key.  Over the last few years, ransomware attacks have become increasingly frequent for other types of businesses lacking in such personal data, including manufacturers or industrial companies.  In these attacks, the goal is to shut down a company’s operations, thereby forcing it to ransom the encryption key to get the business back up and running.

According to FBI Director Christopher Wray, reports of ransomware attacks have tripled over the past year.  The increased frequency and broader scope of ransomware attacks presents not only a business risk for a company, but legal and compliance risks as well.  In October 2020, the Treasury Department’s Office of Foreign Assets Control (“OFAC”) released an advisory statement that explained that many criminals responsible for ransomware appear on OFAC’s Specially Designated Nationals and Blocked Persons List (“SDN list”).  Under U.S. law, American companies and individuals are strictly prohibited from engaging in transactions with a sanctioned person or entity.    This means that if a company ransoms its data from a person who appears on OFAC’s SDN list, it may be held civilly liable under U.S. law, even if it was unaware that the ransomware hacker was identified on the SDN list.  Furthermore, criminal penalties of up to 20 years’ imprisonment are available where there is a reckless or willful violation of the sanctions laws.

Choosing whether or not to make a ransom payment can be a difficult one, but in order to minimize the risk of OFAC fines or penalties in connection with a payment, it is vital that a company have a risk-based compliance program in place that will operate to mitigate the risk that the company may take by making a ransom payment to a potentially sanctioned individual or entity.  An effective sanctions compliance program will include, among other things, a commitment from management, periodic risk assessment, effective internal controls, ongoing monitoring and testing, and training for employees.  Specifically, in circumstances involving ransomware, a compliance program must also assess and account for the risk that the payment may involve an embargoed nation or a person or entity appearing on the SDN list.

Although a company may not wish to publicize that it has been a victim of a ransomware attack, there is a strong incentive to promptly disclose a cyber-attack to law enforcement and to cooperate in any investigation:  OFAC views disclosure and cooperation as significant mitigating factors in the event that any ransom payment is later determined to have a sanctions nexus.  Further, companies that facilitate ransomware payments, including financial intermediaries, have their own anti-money laundering obligations under FinCEN regulations, including detecting, preventing, and filing suspicious activity reports for transactions that are indicative of illegal activity.

In addition to the OFAC and FinCEN rules that may apply to cyber-attacks, President Biden signed an executive order earlier this month designed to strengthen cybersecurity and prevent future ransomware attacks by, among other things, changing the manner in which federal agencies approach cybersecurity.  Although the executive order applies only to certain companies that do business with the federal government, cybersecurity experts have indicated that wide-scale adoption of the standards identified in the executive order would improve security performance and security standards across all industries.  Among other things, the executive order requires the adoption of multi-factor authentication, enhances encryption standards, and requires zero-trust architecture, which means that no device is considered “trusted,” even if it has been previously verified or connected to a managed corporate network.  Additionally, the executive order seeks to ease the current limitations on the sharing of information between federal agencies and directs federal agencies to create a response plan to any future cyber-attacks.

Ransomware attacks are designed to strike at the very core of a company’s operations, and a ransomware victim may be without the benefit of the company’s network while it tries to manage the attack.  As ransomware attacks become more widespread, it is critical that companies adopt and train on an action plan in the event of a cyberattack and have a fully developed sanctions compliance program in place to ensure that a ransomware attack does not balloon from a business and reputational risk to a civil or criminal mishap.

FraudA federal district court has rejected a novel attempt to impose False Claims Act (FCA) liability for Medicare billings based on a theory that the underlying purchase of the home healthcare agency submitting those billings was allegedly tainted by fraud.  The court’s decision delimits the scope of fraud that will support an FCA claim and reaffirms the important principle that the FCA “is not an all-purpose antifraud statute.”

In United States ex rel. Freedman v. Bayada Home Healthcare, et al., Chief District Judge Freda L. Wolfson of District of New Jersey, dismissed a private relator’s qui tam complaint that alleged the defendants fraudulently induced a state government health department to sell a home healthcare agency, concluding that the alleged fraud did not “touch or concern” the United States.

In his complaint, Relator alleged that defendants retained a lawyer on a contingency fee basis to lobby the health department to accept its bid for the healthcare agency.  This contingency fee arrangement not disclosed in the bidding process; rather, the defendants falsely certified to the contrary.  The defendants’ bid was accepted, despite not being the lowest bid, and they enrolled the healthcare agency in Medicare, submitting approximately $36 million in billing over a four-year period.

Relator’s qui tam action alleged violations of the FCA, its state counterpart, and various state law claims.  Relator claimed that defendants knowingly failed to disclose the illegal lobbying, which caused defendants’ Medicare submissions to be tainted with fraud.  Specifically, Relator advanced the theory that defendants defrauded the healthcare department when they purchased the healthcare agency, and that “but-for” this fraud, defendants would never had been able to bill Medicare and receive government payments.  Thus, according to Relator, FCA liability attached to every single payment defendants received.  Relator claimed to know of this fraud both as a former employee of defendants and as a participant in the undisclosed lobbying process.  The government declined to intervene, and the complaint was unsealed.

The court rejected Relator’s FCA claims and granted defendants’ motion to dismiss.  The court, accepting Relator’s allegations as true for the purposes of the motion, agreed that the facts were “concerning.”  But it rejected the idea that he could advance a fraudulent inducement theory under the FCA where the alleged fraud occurred in an antecedent transaction that did not involve Medicare or the federal government.  The court reaffirmed the proposition that fraudulent inducement in the contract bidding process must “touch or concern” the federal government – i.e., here, the federal government must have been fraudulently induced to enroll defendants in Medicare.  Because Relator’s allegations did not identify how the federal government was defrauded, the court dismissed this theory.

The court also rejected Relator’s theory of implied false certification in the billing process based on the same alleged underlying fraud in the acquisition of the healthcare agency. Relator’s theory, although poorly pled, appeared to be predicated on requirement that defendants had to certify the truthfulness and accuracy in their application to enroll in Medicare.  The court, however, distinguished the accuracy of the information submitted to Medicare from the accuracy of information submitted to the local health department in the bidding process, noting that the former encompasses the entire sequence of events leading up to the defendants’ enrollment in Medicare.”

Two footnotes in the court’s decision stand out:  First, the court noted that not only was Relator aware of the defendants’ fraud at the time it occurred – as is common for whistleblower relators – but it appeared Relator “facilitated” the fraud as well.  Although the court did not rely on this fact in its analysis, it explicitly noted that his role “calls into question his motives for bringing this suit.”  In other words, Relator’s own conduct may have led the court to view his FCA claims skeptically.

Second, in dismissing Relator’s FCA claims and declining to exercise supplemental jurisdiction over his remaining state law claims, the court nevertheless explained that “accepting the facts he has pled as true,” the defendants “seemingly violated both the RFP and state law by failing to disclose its contingency fee arrangement.”  The court then noted that others “who were potentially harmed by these undisclosed actions, may have viable causes of action in state court.”  Thus, the court made it clear that, even with Relator’s own potential involvement in the fraud, it did not view Relator’s allegations as meritless, but, instead, they did not support a claim for liability under the FCA.

Notwithstanding the clear holding in the Bayada case, and its reaffirmance of longstanding limits to the FCA, we should expect to continue to see relators – and their counsel – attempting to bring FCA cases with novel theories of liability in the hopes of setting new precedent and achieving favorable settlements.

 

Search WarrantOn April 28, 2021, federal agents executed search warrants at the home and office of Rudy Giuliani and seized cell phones and computers.  Mr. Giuliani is former President Trump’s personal lawyer, a former United States Attorney, and a former New York City mayor.  This high-profile search and seizure reportedly sought communications related to an ongoing criminal investigation into whether Mr. Giuliani’s activities on behalf of Ukrainian officials ran afoul of federal lobbying laws.

Mr. Giuliani’s prominent place in the political zeitgeist has resulted in lots of commentary and conjecture since news of the search broke, but relatively little of that commentary has focused on legal process.  The legal niceties of the investigation and execution of the search warrants may not be ratings fodder for cable news, but those niceties are critical safeguards of constitutional rights and the attorney-client relationship.  Executing search warrants on a lawyer’s home or office presents special problems because of the likelihood that some of the materials seized may be protected by the attorney-client privilege or the attorney work product doctrine.  Indeed, soon after the Giuliani search warrants were executed, his lawyer raised the privilege issue and said the seized devices were “replete with material covered by the attorney-client privilege and other constitutional privileges.”

DOJ Procedure for Obtaining and Executing Attorney Search Warrants

Mr. Giuliani is hardly the first lawyer to have his office or home searched.  Because of the special issues attending attorney searches, the Justice Manual, a compilation of publicly available Department of Justice (DOJ) policies and procedures, contains guidelines that federal prosecutors and investigators must follow when seeking, obtaining, and executing a search warrant of any attorney who is the subject or target of an investigation.[1]  The purpose of the guidelines is to ensure that experienced senior DOJ officials exercise “close control” over the search of an attorney’s potentially privileged materials. Justice Manual, at § 9-13.420.  That “close control” begins before a warrant application is even made to a court, and it includes policies and procedures governing the decision of whether to seek a search warrant, the search warrant application process, execution of the search warrant (including collection of documents and other materials), and review of seized materials.

Step 1 – Obtaining Internal DOJ Approval

Before applying for an attorney search warrant, a federal prosecutor must consider the employment of alternative investigative methods to obtain the sought-after materials (e.g., issuance of subpoenas to the attorney or third parties) unless those alternative methods would compromise the investigation, could result in the destruction or obstruction of evidence, or would be otherwise ineffective.  Even if those alternatives are not feasible, a federal prosecutor must obtain “the express approval of the United States Attorney or pertinent Assistant Attorney General” before applying to a court for a search warrant.  In addition, a federal prosecutor must consult with the Policy and Statutory Enforcement Unit (PSEU) of DOJ’s Criminal Division in Washington (Main Justice) and provide for internal review a copy of the proposed search warrant and supporting affidavit, as well as instructions to be provided to the agents conducting the search “to ensure that that the prosecution team is not ‘tainted’ by any privileged material inadvertently seized during the search.”  PSEU must in turn consult with the Deputy Attorney General, who is required to assign an attorney with “the requisite knowledge and experience to provide meaningful input to PSEU” and to keep the Deputy Attorney General apprised.  This additional input is required by a December 2020 memorandum from the then Acting Attorney General.  It is aimed at ensuring uniformity because “[i]n many cases – particularly those involving significant investigations and high-profile matters – proposed searches are separately reported in urgent reports to the Attorney General and the Deputy Attorney General.”

Step 2 – Obtaining the Warrant from a Federal Judge

If a federal prosecutor obtains approval from the U.S. Attorney and Main Justice, a search warrant application must be made to a federal judge, usually a magistrate. See Fed. R. Crim. P. 41.  To obtain a warrant, the government must establish probable cause that a crime has been committed and that evidence of that crime can be found where the search is to be conducted.  Although the probable cause standard usually is not difficult to meet as a matter of law, federal courts are sensitive to the protections afforded attorneys’ privileged and confidential materials, and the government can expect close judicial scrutiny of an attorney search warrant application before the warrant is issued.  In addition, federal courts sometimes include in the warrant itself limits and restrictions on the scope of the search in order to minimize the government’s intrusion into the attorney-client relationship.

Step 3 – Execution of the Warrant and the Role of Defense Counsel

Once a warrant is issued, investigators must follow certain procedures in its execution.  Investigators must comply with any limitations in the warrant itself, they must avoid searching or seizing privileged and confidential materials outside the scope of the search warrant, and they should consult with a prosecutor where they have questions as to what materials should or should not be viewed or seized while on site.  According to the Justice Manual, that prosecutor should be someone not involved in the investigation so that the investigative team is not exposed to otherwise privileged materials.

Counsel for the targeted attorney can play an important role in this process.  If counsel can get on site fast enough and communicate with the searching investigators and supervising prosecutor in real time, counsel may be able to protect from search and seizure the confidentiality of materials protected by the attorney-client privilege and attorney work product doctrine, which are clearly outside the scope of the warrant.  In addition, while the search is ongoing, counsel can ask the issuing magistrate to impose further limits or restrictions on what the investigators can look at and seize.

Step 4 – Reviewing Seized Materials for Privilege

Government “Taint” Teams

Following completion of the search, the Justice Manual cautions that federal prosecutors “must employ adequate precautions to ensure that the materials are reviewed for privilege claims and that any privileged documents are returned to the attorney from whom they were seized.”  The most common way to do this is for the prosecutor’s office to create a “taint” team consisting of agents and lawyers not involved in the underlying investigation.  Sometimes prosecutors propose the creation of a taint team as part of the search warrant application in order to obtain a judicial endorsement of the procedure.  That team is instructed with respect to procedures for ensuring privileged material is not disclosed to the investigative team.  The taint team may contact counsel for the target attorney, provide copies of potentially privileged seized materials if the investigation would not be impeded by doing so, and ask counsel to provide the team with assistance or specifics as to which documents and communications are claimed to be privileged.  Where the taint team agrees with a privilege claim, the subject materials are returned to the attorney and the investigative team is denied access to them.  If there is a dispute concerning any privilege claims, counsel for the targeted attorney can seek immediate judicial relief under Rule 41(g) of the Federal Rules of Criminal Procedure; there is no requirement that the targeted attorney await indictment months or years later and then make a motion to suppress.

Special Masters’ Review

Prosecutors’ preference for the creation of taint teams has not gone unchallenged.  In April 2018, investigators executed a search warrant at the office of Michael Cohen, another of President Trump’s attorneys.  The Government sought to employ a taint team in connection with the review of the seized materials, but Mr. Cohen instead asked the court to appoint a special master to conduct the review. In opposition to Mr. Cohen’s application, prosecutors asserted that review by their “taint” team would be fair and efficient.  Although the court did not question the prosecutors’ integrity, it nonetheless granted Mr. Cohen’s application and appointed a special master to promote the “perception of fairness, not fairness itself.” In re the Matter of Search Warrants Executed on April 9, 2018, No. 18 MJ 3161 (S.D.N.Y. Apr. 16, 2018).

The next year, the Fourth Circuit criticized a taint team review of materials seized from a law firm, holding that it was “improper for several reasons, including that, inter alia, the [taint team’s] creation inappropriately assigned judicial functions to the executive branch, the [taint team] was approved in ex parte proceedings prior to the search and seizures, and the use of the [taint team] contravenes foundational principles that protect attorney-client relationships.”  In re Search Warrant Issued June 13, 2019, 942 F.3d 159, 164 (4th Cir. 2019).

So it comes as no surprise that, with respect to Mr. Giuliani’s search and seizure, the same office which prosecuted Mr. Cohen and defended the use of taint teams has now asked the court to appoint a special master to conduct the privilege review and to rule on the merits of any privilege claims Mr. Giuliani may make.  The prosecutors said that the use of their own “filter team” would safeguard applicable privileges, but nonetheless called appointment of a special master appropriate because of the “unusually sensitive privilege issues” involved and the need to promote the perception of fairness.  It may be that, in the future, government requests for special masters’ appointments may replace its previously expressed preference for use of taint teams.

Suppression Is the Remedy for Privilege Violations

Predictably, Mr. Giuliani has cried foul about the searches and seizures: “What they’re doing to me as a lawyer is unconscionable.”  Nonetheless, it is unlikely that any privilege violations that occurred during the searches would invalidate the seizure of non-privileged materials or prevent their use as evidence against him should he be indicted.  This is so because, except in an extraordinary case, the remedy for violation of the attorney-client privilege is suppression of the seized privileged information.  See Nat’l City Trading Corp. v. United States, 635 F.2d 1020, 1026 (2d Cir. 1980) (“To the extent that the files obtained . . . were privileged, the remedy is suppression and return of the documents in question, not invalidation of the search.”), cited in United States v. Schulte, No. S-2 17 Cr. 548, 2019 U.S. Dist. LEXIS 180889, at *5-6 (S.D.N.Y. Oct. 18, 2019) (denying motion to suppress allegedly privileged documents).  In addition, apparently uniform authority—albeit no Supreme Court precedent—holds that suppression generally is not required for evidence obtained from leads derived from improperly viewed privileged materials because evidentiary privileges are not constitutional rights.  See, e.g., United States v. Warshak, 631 F.3d 266, 294-95 (6th Cir. 2010) (finding no authority for proposition that “derivative evidence obtained as a result of improper access to materials covered by” the attorney-client privilege “is subject to suppression” and holding that “evidence derived from a violation of the attorney-client privilege is not fruit of the poisonous tree”).

Conclusion

It is simply wrong to assume that a lawyer’s files, hard copy or electronic, are somehow immune from seizure in a federal criminal investigation.  Federal prosecutors who scrupulously comply with the safeguards and procedures described in the Justice Manual can, and often do, obtain significant probative evidence as the result of the execution of search warrants on attorneys’ offices and homes while simultaneously avoiding violations of the attorney-client privilege and attorney work product doctrine. Although there is no remedy – other than internal DOJ discipline – for violation of the Justice Manual instructions and guidance, federal courts can and will act to ensure that valid attorney-client privilege and attorney work product claims are sustained and that prosecutors are denied the use of such confidential materials in a criminal prosecution. There is no reason to think that the materials seized from Mr. Giuliani’s office and home will be treated any differently.

[1] There are also special procedures in the Justice Manual about search warrants for documents held by an attorney who is not a target but rather a “disinterested third party.” See Justice Manual, at § 9-19.221.

moneyThis blog’s masthead (Does Crime Pay?) has perhaps never asked so apt a question as it does of the latest clash between reality television stars and…actual reality.  On Tuesday, March 30, 2021, the U.S. Attorney for the Southern District of New York, in coordination with Homeland Security Investigations and the New York Police Department, announced the unsealing of a Superseding Indictment that charged Jennifer Shah and Stuart Smith with conspiracy to commit wire fraud and conspiracy to commit money laundering.  The charges stem from an alleged telemarketing scheme.

Casual observers of the pop culture landscape may not have noticed this announcement that came the same day Shah and Smith were arrested near Salt Lake City, Utah, but this move by state and federal law enforcement agencies sent shockwaves through a large but very specific group: fans of the exceedingly popular reality television franchise Real Housewives.  Jen Shah is none other than a central figure on the franchise’s latest city spotlight, Real Housewives of Salt Lake City, the first season of which aired from November 2020 through February 2021.  For the first time, fans were introduced to Shah, her “first assistant” Smith, and her outlandishly lavish (even by Real Housewives standards) lifestyle.

So, does crime pay?  Maybe – in increased reality television stardom.  The unsealed indictment, which came down as the series was already filming Season 2, alleges a wide-ranging telemarketing scheme through which Shah and Smith are alleged to have defrauded hundreds of victims between 2012 and March 2021.  Shah and Smith are alleged to have carried out the scheme, which targeted Americans over the age of 55, with the help of several participants whose fraudulent activities Shah and Smith controlled.

From the outside, Shah, whose pre-television background is in marketing and advertising algorithms, ran companies that offered online services purporting to make the management of victims’ businesses more efficient, such as website design and tax preparation services.  On the inside, however, Shah was allegedly orchestrating a network of telemarketing sales floors by trafficking in lists of marketing “leads” – the victims who had sought her online business services.  Shah and Smith allegedly generated and sold lists of the “leads” they identified to telemarketing sales floors across the country and received as profit a share of the fraudulent revenue they knew the operators of those sales floors would make.

The various phases of the alleged scheme were designed to extract money from the victims at every turn.  Once alleged victims purchased online business services from Shah or another participant in the scheme, their names were put on lists and sold to sales floors peddling fraudulent services or products. For example, the victims’ names were sold to a sales floor that would sell the victims “coaching” on how to use the services they thought they had purchased from Shah.  Shah also allegedly used “fulfillment” firms, operated by other participants, in the scheme.  These firms would provide documents and records to the victims purporting to demonstrate the validity of the purchased services.  Shah and Smith are alleged to have controlled each aspect, including determining which products or services the downstream sales floors could sell and setting how much they could charge.

Shah and Smith are alleged to have taken great strides to conceal their scheme, including incorporating their business entities under third parties’ names, using encrypted messaging applications to communicate with their alleged co-conspirators, sending shares of their fraudulent proceeds to offshore bank accounts, and making cash withdrawals designed to avoid currency transaction reporting requirements.  Shah is alleged to have amassed more than $5 million in criminal proceeds over the past several years.

The alleged scheme culminated in one count each for Shah and Smith of conspiracy to commit wire fraud in connection with telemarketing, which carries a maximum sentence of 30 years, and conspiracy to commit money laundering, which carries a maximum sentence of 20 years.  At her arraignment on April 2 (pushed from its original date of March 31 when too many public observers crashed the virtual feed), Shah pled not guilty and was released on a $1 million personal recognizance bond.

It would seem that Shah’s alleged crimes did, indeed, pay her enough to land a spot on one of the most coveted reality television platforms, known for its opulence and drama.  It certainly looks like Season 2 will have no shortage of either.

courthouseOn Monday, April 12, 2021, the Ninth Circuit Court of Appeals released its opinion in United States v. Ghanem, Case No. 19-50278. Ghanem, an international arms dealer, was convicted in the Central District of California for violation of a statute prohibiting dealing in surface-to-air missiles.

However, this was not the offense for which Ghanem was originally arrested. Instead, he was arrested by Greek authorities for related arms sales he made to undercover U.S. agents in Greece. After his extradition from Greece, Ghanem was brought to the United States.  The flight from Greece connected through JFK airport in New York and travelled on to the Central District of California. After he was physically present in California, the Government added the surface-to-air missile charge.

When an offense is committed outside the territory of the United States, 18 U.S.C. § 3238 provides that venue is proper in the district in which the defendant is arrested or first brought.  Despite that Ghanem was “first brought” to New York, where the plane transporting him landed, Ghanem failed to make a pre-trial objection to venue in the Central District of California.  Instead, Ghanem waited until negotiating the jury instructions to raise the venue issue. The district court judge overruled Ghanem’s objection because, in part, he waived the argument, and he was convicted.

Ghanem filed an appeal. In an admittedly unusual decision, the Ninth Circuit held that Ghanem did waive his objection to venue as a defense, but, despite his waiver, he was permitted to object to the venue jury instruction.  Because the district court gave an incorrect jury instruction for venue, the Ninth Circuit ruled, Ghanem’s conviction was vacated and he was remanded for trial.

The decision tests the tried and true doctrine of waiver – that failure to raise a procedural, pretrial issue waives the issue – and favors late objections to issues which should be resolved well in advance of trial. It is a backwards result, and its consequences could waste countless resources in this and subsequent cases.

The Investigation and Trial: Untimely Venue Arguments

The facts of this case are important and worthy of analysis.

Defendant Rami Ghanem is an international arms dealer. While living in Egypt, Ghanem operated a below-board military supply and logistics company, defrauded local officials, and illegally transported armaments across borders. Eventually, Ghanem’s activities attracted the attention of the United States Homeland Security Investigations team (“HSI”).  In August of 2015, undercover HSI agents contacted Ghanem and placed an order for various weapons, ammunition, and night vision devices, which were all sourced from within the Central District of California. On December 8, 2015, HSI agents led Ghanem to a warehouse in Greece to inspect the armament shipments where Greek authorities awaited him. He was arrested when he arrived at the warehouse.  Later the same month, the United States indicted Ghanem in the Central District of California. The indictment alleged Ghanem violated the Arms Export Control Act and smuggling and money laundering laws.

The United States subsequently extradited Ghanem from Greece to answer to the indictment. On April 25, 2016, United States Marshals met Ghanem at an airport in Greece and escorted him on a flight to JFK airport in New York. After a layover, the Marshals flew Ghanem to the Central District of California. Ghanem was detained there until trial.

On March 24, 2017, the government obtained a superseding indictment, adding three new counts for further violations of the Arms Export Control act and, most importantly to this case, violation of 18 U.S.C. 2332(g), which generally prohibits illicit dealings in surface-to-air missiles. During the pretrial process, Ghanem pled guilty to all counts except for the 2332(g) charge. Ghanem never moved to transfer venue or to dismiss for improper venue before trial.

Trial proceeded on Ghanem’s alleged violation of 18 U.S.C. 2332(g). The defense moved for a dismissal pursuant to Criminal Rule 29 at the close of the Government’s case in chief and argued for the first time that venue was improper. The Government responded that Ghanem waived the argument by failing to raise it before trial. The court denied the motion. As trial proceeded, the parties conferred on jury instructions. Ghanem objected to the proposed jury instruction concerning proof of venue, but the district court judge overruled his objection and instructed the jury that Ghanem’s foreign arrest was irrelevant.

The jury returned a guilty verdict. Ghanem moved for a new trial or to dismiss the indictment for, among other arguments, improper venue. The district court denied the motions and held that the venue argument was waived as untimely. Ghanem was sentenced to 360 months in prison.

The Appeal: Waiver Applies Only Until Negotiating Jury Instructions

Ghanem appealed the judgment, arguing that venue was improper. It was undisputed that Ghanem’s conduct fell within a special venue statute for foreign offenses. Proper venue for crimes committed outside of the United States lies within the district in which “the offender . . . is arrested or is first brought.” Ghanem argued he was “first brought” to the Eastern District of New York during his layover to California. The Government argued Ghanem waived an improper venue argument and the Ninth Circuit Court of Appeals agreed. The Ninth Circuit held that the venue issue was “apparent from the face of the indictment,” but Ghanem failed to raise the issue before trial.

But Ghanem’s appeal does not end there. Ghanem further argued that the jury instruction misstated the law with respect to his venue defense because it stated that his foreign arrest was irrelevant. The Government again argued the Ghanem waived venue and also posited substantive arguments. Ultimately, the Ninth Circuit sided with Ghanem. It held that a defendant, regardless of waiver of a procedural issue, is entitled to jury instructions which state the law correctly. The Ninth Circuit vacated Ghanem’s conviction and remanded him for trial.

Recognizing the “peculiarity of this result,” the Ninth Circuit offered additional “remarks.” Ghanem’s conviction was vacated – wiped clean as if it never occurred – but not dismissed, and he was remanded for trial. The Ninth Circuit explained its reasoning: “Mr. Ghanem waived his venue challenge because it was untimely, so he could not ask the district court to take the venue issue from the jury and determine it as a matter of law [under Criminal Rule 29]. But, . . . our precedent entitles a defendant, even one who has waived venue by untimeliness, to a correct jury instruction on the question.” Therefore, Ghanem must stand trial again for the same offense, but, this time, he will receive a proper jury instruction.

In sum, the Ninth Circuit held that, yes, Ghanem waived the venue challenge by his failure to raise the issue before trial, but, in the same breath, it held that the issue was not really waived, because he could raise the same issue during the jury instruction phase.

The Problem: Wacky Waiver Arguments Open New Doors

While venue is a constitutional consideration to ensure that a defendant is tried in a proper forum, it is ultimately procedural. Venue is not a substantive element of an offense that Ghanem or any other defendant is alleged to have committed. In fact, defendants, subjectively recognizing that the case is set in an improper forum, may waive venue if they prefer that improper forum.

After this decision, however, defendants in the Ninth Circuit may recognize an improper venue, strategically fail to raise the defense, and then demand a jury instruction that could result in an acquittal based on a non-substantive issue. That is not how venue was meant to work. Venue should be assessed before trial so that the defendant can move to transfer venue if appropriate. After that period for objection lapses, the venue question should be closed.

Under the Ninth Circuit’s holding, the district court should have given a “correct” jury instruction on venue (not the Government’s), and Ghanem – who a jury has decided is guilty beyond a reasonable doubt of the surface-to-air missile defense – would have been acquitted. In fact, the case likely deserved to be dismissed at the Rule 29 stage based on the Ninth Circuit’s analysis. Ghanem benefitted from a windfall in this case and his conviction was vacated, but the Ninth Circuit would have granted him an even larger windfall at trial—the ability to argue a waived defense to the jury and acquire an acquittal.

COVID-19Ohioans disenchanted with the past two years of public corruption cases (see our previous post on that subject here) may no longer have to tolerate the seemingly endless number of Ohio politicians being indicted for bribery. That’s because apparently now they’re being indicted for fraud.

Cincinnati activist and perennial political candidate Kelli Prather was indicted earlier this month on a number of federal charges stemming from allegations that she improperly filed six applications for loans from the Small Business Administration Paycheck Protection Program (PPP). Readers of Does Crime Pay? know that we have followed “COVID-19 Fraud” very closely since our inception last year. Unhappily for Prather, the facts outlined in the indictment against her provide us with the perfect opportunity to revisit the current state of play with government enforcement against COVID-19 Fraud.

The Prather Case

The following facts are taken from the affidavit in support of the criminal complaint filed against Prather and are merely unproven allegations. According to the affidavit, Prather applied for six different PPP loans from June 23, 2020 to August 4, 2020. Prather opened six business bank accounts immediately after filing those applications. While the bank did grant one of the six loan applications, it then discovered a number of other errors with Prather’s application that apparently raised the bank’s (and, eventually, the government’s) suspicions.

First, the bank flagged that Prather had used an inaccurate PIN number on her application. Then, the bank identified that the information input on the forms was for 2020, as opposed to 2019. Next, the bank identified that there were five other pending PPP applications submitted by Prather. The five other applications were for five different businesses, which claimed to employee 22 people in total.

When the FBI conducted its review of Prather’s loan applications, special agents identified several facts suggesting fraud:

  • Although Prather claimed large average monthly payrolls for some of her businesses in 2020, her 2019 filings indicated much smaller total annual income;
  • Prather’s applications listed residential addresses for multiple of her businesses;
  • None of the businesses maintained any web presence, marketing material, advertising, or other records tending to indicate that they could generate the revenues or support the number of employees claimed;
  • Prather’s bank transactions indicated money was either being pocketed by Prather or was funding personal expenses such as salon and restaurant purchases;
  • When interviewed, several individuals listed as “partners” on one of Prather’s applications indicated that while they had discussed a possible business, no business was ever consummated. Prather had provided their social security numbers as part of the application;
  • When interviewed, a former business and romantic partner indicated that he never knew Prather to have an operational, functional, or profitable business located at the address Prather listed for one of the businesses;
  • When interviewed, Prather admitted spending some funds on personal expenses.

Although Prather’s applications requested over $600,000 in PPP loans, she ultimately only collected $19,800. Regardless, Prather has been charged with bank fraud, aggravated identity theft, making false statements, making false statements in connection to credit or loan applications, and false representation of a social security number.

Government Enforcement Against COVID-19 Fraud

Prather’s case highlights precisely what not to do when it comes to PPP applications. As we noted in August and November of last year, the DOJ has demonstrated a commitment to prosecuting COVID-19 Fraud and there is no end in sight. In August we warned entities making applications must take great care to avoid making a false certification in any of the following categories:

  • Whether the individual or entity is a convicted felon;
  • Whether the entity has already received a PPP loan;
  • Reporting fictitious or inflated numbers of employees;
  • Using a fictitious business name to acquire PPP loans;
  • Using fraudulent or forged documents in connection with acquiring a PPP loan;
  • Creating a business after February of 2020 to acquire a PPP loan;
  • Purchasing unauthorized goods or services with PPP loan funds;
  • Funneling PPP loans to other organizations or entities; and
  • Perpetuating pre-existing fraud schemes.

In November, we argued that—similar to the allegations against Prather—“the vast majority of PPP fraud cases brought so far” involved misrepresentations like fabricating the business’s number of employees, or using the funds for personal purposes. Now, after over a year of enforcement actions, DOJ and U.S. Attorneys’ Offices around the country appear to have begun prosecuting smaller-scale offenders. For example, in a statement made to the media Acting U.S. Attorney Vipal J. Patel noted that Prather’s indictment, which came alongside three similar but separate indictments of others, is the fourth round of charges for similar fraud cases in the Southern District of Ohio. Similarly, a DOJ press release last month identified at least 120 defendants charged with PPP fraud, ranging from “individual business owners who have inflated their payroll expenses” to “organized criminal networks submitting identical loan applications and supporting documents under the names of different companies.”

Though we hope that COVID-19 is nearly behind us, it’s safe to say that we are not yet through with prosecutions and other enforcement against COVID-19 Fraud.

courthouse and moneyOn March 5, 2021, the U.S. Securities and Exchange Commission filed a civil enforcement action in the United States District Court for the Southern District of New York against AT&T, Inc. and three executives alleging a series of Regulation FD violations dating back to 2016.  We previously wrote about Regulation FD in connection with an SEC investigation of Eastman Kodak, Co.’s announcement that it would receive a $765 million loan from the U.S. International Development Finance Corp. to develop and manufacture generic drug ingredients. AT&T now faces allegations that it intentionally shared material non-public information with analysts in order to alter their earnings’ estimates.

Regulation FD is now a seldom-used enforcement tool but was once an SEC favorite in enforcement actions through the early 2000s. The rule prohibits issuers, or persons acting on their behalf, from disclosing material non-public information to certain third parties without disclosing that same information to the general public. The rule was adopted in response to SEC findings that issuers used selective disclosure of material non-public information to reveal earnings and other financial data that would hopefully impact analysts’ and other sell-side firms’ expectations, resulting in those recipients profiting by front-running corporate earnings announcements. The rule was designed to prevent this kind of selective disclosure, which the SEC found was often provided to larger institutional shareholders, and level the playing field between individual and institutional investors.[1]

According to the SEC’s complaint, AT&T suffered an unanticipated decline in its first quarter 2016 smartphone sales. In an effort to avoid missing analysts’ consensus revenue estimate, the SEC alleged that AT&T investor relations executives had a series of one-on-one phone calls with equity analysts from at least 20 different sell-side firms during which they disclosed the lackluster sales figures. According to the SEC, these calls were designed to alter analysts’ expectations such that AT&T would avoid missing the consensus estimate for a third consecutive quarter. The SEC alleges that the disclosures were material and not shared with the general public.

The filing of a civil enforcement action against a blue-chip issuer like AT&T is striking. Since 2010, the SEC has brought very few enforcement actions against issuers for Regulation FD violations and even fewer have been pursued in federal court. The most recent enforcement action before AT&T was a 2019 administrative proceeding against TherapeuticsMD, Inc. There, TherapeuticsMD agreed to pay a modest fine without admitting or denying the SEC’s findings.

Whether the enforcement action against AT&T, or the investigation of Kodak, is a signal that the SEC will be dusting off Regulation FD and taking a more active approach in the future remains to be seen. It was absent from the Division of Examinations’ 2021 Examination Priorities report,[2] but one can assume that Regulation FD compliance remains an important consideration for the SEC.

Issuers and investment professionals alike should take heed and re-visit their compliance programs and ensure they address Regulation FD. For issuers, this means implementing internal information controls to ensure that material non-public information is identified and appropriately disclosed to the general public consistent with the timing requirements of Regulation FD – either simultaneously for intentional selective disclosures or “promptly” if the selective disclosure was unintentional. The SEC’s complaint against AT&T alleges an intentional selective disclosure without any simultaneous public disclosure.

Issuers should also maintain external information controls. This is generally achieved by marking draft press releases or earnings announcements with “embargo” language that indicates it must not be shared or disseminated and anyone possessing it must not trade in the issuer’s securities. Issuers may also enter into non-disclosure agreements or agreements not to trade with investment professionals that generally preclude the investment professional from disclosing information or trading based on information it receives prior to the issuer’s public announcement. These types of agreements are vital to avoiding a Regulation FD violation, as the rule includes a safe harbor for issuers that obtain express agreements that selectively disclosed information will not be further disclosed or used to trade.

Investment professionals, including analysts, broker-dealers, and investment advisors, should be mindful of the information they receive from issuers, how they receive it, and what they do with it. If material non-public information is conveyed, it may expose the recipient to insider trading liability if they buy or sell securities or disclose the information to another party that buys or sells securities. Therefore, investment professionals should be trained to identify whether any information received is material non-public information and should take steps to independently assess any information received from issuers. Investment firm compliance officers should also maintain records of any restrictions on the disclosure or use of non-public information provided by issuers.

[1] Final Rule: Selective Disclosure and Insider Trading, Exchange Act Rel. No. 43154, 65 Fed. Reg. 51, 721 (Aug. 15, 2000) (https://www.sec.gov/rules/final/33-7881.htm).

[2] Securities and Exchange Commission – Division of Examinations, “2021 Examination Priorities” (Mar. 3, 2021) (https://www.sec.gov/files/2021-exam-priorities.pdf).

columnsCan you be prosecuted twice for the same crime?  The question seems simple and, given the plain language of the Fifth Amendment (no person shall “be subject for the same offence to be twice put in jeopardy of life or limb”), seems like the answer should be a simple “no.”   Indeed, recent news that charges brought by the New York County District Attorney against Paul Manafort, the former chairman of the Trump presidential campaign, were dismissed on double jeopardy grounds appears to buttress that simple answer.  The real answer, however, is far more complex.

The prohibition on double jeopardy is a cornerstone of the American criminal justice system, memorialized in the Bill of Rights and dating back even earlier to the common law.  According to the U.S. Supreme Court, “[t]he underlying idea, one that is deeply ingrained in at least the Anglo-American system of jurisprudence, is that the State with all its resources and power should not be allowed to make repeated attempts to convict an individual for an alleged offense, thereby subjecting him to embarrassment, expense and ordeal and compelling him to live in a continuing state of anxiety and insecurity, as well as enhancing the possibility that even though innocent he may be found guilty.”[1]

Although the rule is well-established, its application often raises complex questions about constitutional law and federalism.  One such complexity arises when a person is charged separately by state and federal prosecutors for the same criminal conduct.  The Fifth Amendment prohibits successive prosecutions for the same “offence,” but not necessarily for the same conduct.  An “offence” is defined by a law, and a law is defined by a sovereign.  If there are two sovereigns, there are two laws, and therefore two “offences.”  In other words, “a crime under one sovereign’s laws is not ‘the same offence’ as a crime under the laws of another sovereign.”  This is the “dual sovereignty” doctrine, which, as the U.S. Supreme Court reaffirmed most recently in Gamble v. United States (2019), allows “a State to prosecute a defendant under state law even if the Federal Government has prosecuted him for the same conduct under a federal statute.”

Given the continued vitality of the dual sovereignty doctrine reflected in Gamble, why were the charges against Paul Manafort in New York dismissed on double jeopardy grounds?  The answer lies in the structure of our federal system.  While the Fifth Amendment does not prohibit a state from prosecuting a person who already was convicted under federal law, it also does not require states to permit such prosecutions.  A state may provide greater protection than the federal Constitution; thus, a state can bar double jeopardy in cases where the Constitution would not.  New York is one state that affords broader double jeopardy protections than the Fifth Amendment guarantees.  As the trial court wrote at the outset of its double jeopardy analysis in the Manafort case, “this is not a case in which defendant’s constitutional rights are at issue.”

Under the relevant New York statute, “[a] person may not be twice prosecuted for the same offense,” which includes separate prosecutions “for the same act or criminal transaction.”  N.Y. C.P.L. § 40.20.  In other words, the New York statute prohibits successive prosecution for the same conduct, which is broader than the term “offence” in the Fifth Amendment, as interpreted by the U.S. Supreme Court.  Prosecutors in the Manafort case conceded that the federal charges against him were based on “the same act or criminal transaction” as the state charges, but they argued that a statutory exception applied because “[e]ach of the offenses as defined contains an element which is not an element of the other, and the statutory provisions defining such offenses are designed to prevent very different kinds of harm or evil.”  N.Y. C.P.L. § 40.20(2)(b).  Mr. Manafort had been prosecuted for federal bank fraud, and New York prosecutors pursued charges for residential mortgage fraud.  The New York trial court held that “the harm or evil the federal bank fraud and the state residential mortgage fraud statutes were aimed at combating are the same” (preventing fraud and promoting economic stability), or at least “not of a very different kind.”  Thus, the trial court dismissed the indictment.  The Appellate Division, First Department, affirmed the trial court’s order, observing that it was “undisputed that the federal charges of which defendant has already been convicted involve the same fraud, against the same victims, as is charged in his New York indictment.”  The New York Court of Appeals declined to hear the Manhattan DA’s appeal earlier this month.

Mr. Manafort is fortunate that the charges were brought against him in New York.  If he had been indicted in a different state without a double jeopardy prohibition as broad as New York’s, the Fifth Amendment would not have protected him.  So, in this instance, the answer to the simple question asked at the outset was far from simple, but it was still “no.”

Post-script:  In October 2019, New York Governor Andrew Cuomo signed a bill into law amending the double jeopardy statute to close what he called an “egregious loophole” by providing that “a separate or subsequent prosecution of an offense is not barred” if that person was granted a presidential pardon and had been employed on the president’s staff or campaign, related to the president, or the president was aided by the pardon or obtained a benefit from the conduct underlying the pardoned offense.  See N.Y. C.P.L. § 40.51.  This amendment was aimed at President Trump and his associates and family members, but it was passed too late to apply in Mr. Manafort’s case.

[1] Green v. United States, 355 U.S. 184 (1957).

GeorgiaWhile many of us were focused on the second impeachment of former President Trump, news broke that the Fulton County District Attorney has initiated a criminal investigation into the multiple contacts by Trump and others in the aftermath of the Georgia Presidential election.  This post is an update to our previous analysis of Donald Trump’s potential post-Presidential criminal consequences in Georgia.

On Wednesday, February 10, the New York Times reported that Fulton County District Attorney Fani Willis sent a letter to multiple Georgia state officials notifying them that Willis had “opened an investigation into attempts to influence the administration of the 2020 Georgia General Election”:

“This investigation includes, but is not limited to, potential violations of Georgia law prohibiting the solicitation of election fraud, the making of false statements to state and local governmental bodies, conspiracy, racketeering, violation of oath of office and any involvement in violence or threats related to the election’s administration.”

An anonymous Georgia official told the New York Times that the inquiry will encompass multiple contacts with the state, including Mr. Trump’s calls to Governor Kemp and Secretary of State Raffensperger, as well as “the events surrounding the abrupt resignation” of Byung J. Pak.

On Friday, February 12, the Washington Post reported that the investigation will also “scrutinize” Senator Lindsey Graham’s November 13 phone call to Raffensperger.

According to Willis’s letter, the District Attorney’s office anticipates that it will “begin requesting grand jury subpoenas as necessary” in March.

Recent Developments and Emerging Risks2020 was a unique year in the world of white-collar criminal investigations and prosecutions. In this two-session presentation, Thompson Hine’s compliance and white-collar team will review the enforcement risks created by the global pandemic and discuss what we expect to happen as the new administration begins to implement its enforcement priorities. We will also identify current compliance challenges and provide practical solutions for businesses that are in the process of adjusting to the enforcement realities of 2021.

Visit our events page to register.