New York Federal Criminal Practice Blog
My latest article, an analysis of the prosecution of Dominique Strauss-Kahn as a lens though which we can critique our criminal process, can be downloaded (without registration) here

The abstract is as follows:

People v. Strauss-Kahn
is an ideal lens through which to examine the operation of a criminal justice system that privileges the presumption of guilt, or, to use the words of the U.S. Supreme Court in the 2012 decisions Lafler v. Cooper and Missouri v. Frye, has become “a system of pleas, not a system of trials.”

Strauss-Kahn
is both an excellent example of a transparent and objective invocation of the criminal sanction, and a sharp counterpoint to the vast majority of cases where law enforcement conclusions are trusted and rarely second-guessed. Stage by stage, the Strauss-Kahn case illustrates how to counterbalance the presumption of guilt and give expression to the presumption of innocence in the pretrial period through vigilantly-invoked and enforced due process protections.

Drawing from this examination, the paper will then explore how to approach this model process in the more standard cases, which typically see a fraction of the judicial, law enforcement, and defense resources afforded Dominique Strauss-Kahn. The Strauss-Kahn prosecution offers several insights, three of which will be sketched at the paper’s conclusion: a requirement that prosecutorial decision-making be subject to a reasonable doubt standard; early enforcement of the prosecutor’s obligation to disclose information that is favorable to the accused; and finally, a requirement that a prosecutor explain in writing any decision to dismiss the felony charges in indicted felony cases, so that the factual, legal and policy bases of these decisions (numbering almost one quarter of New York’s superior court felony cases annually) can be aggregated, analyzed and publicized.

Thank you all for your continuing support as I navigate a professional role as a practitioner-academic!

The New York State Association of Criminal Defense Lawyers recently published its winter edition of Atticus, showcasing the two impressive honorees at the upcoming annual dinner of the NYSACDL Foundation, Chief Judge Jonathan Lippman and David Ruhnke, Esq.  In it, I also have an article addressing three recent Second Circuit decisions of note: United States v. Banki (reach of a regulatory crime narrowed under the rule of lenity); United States v. Lee (government abused its authority when it withheld a third “acceptance of responsibility” point because the defendant had challenged errors in his presentence report); and United States v. Rivera (ameliorating “shameful inequalities” of crack-cocaine disparity by applying the rule of lenity to an ambiguous sentencing guideline).  It is available here.

The NYSACDL Foundation’s annual dinner is this Thursday, January 26, at the Prince George Ballroom.  If last year’s elegantly fast-paced event is anything to go by, this will be a memorable celebration of two champions of criminal defendants’ rights and indigent defendants in particular, and the New York State criminal defense community in general.  Tickets (which are fast disappearing) are available here.

Finally, a belated Happy New Year to my loyal readers from snowy Minnesota, where I have assumed a position as Practitioner in Residence at the University of Minnesota Law School for the 2011-12 academic year.

The NYSACDL has published its latest edition of Atticus, downloadable here, featuring this author's column "Second Thoughts."  This quarter, I consider the Court's decisions in Curley (admissibility of prior-act evidence involving the defendant and others), Cedeno (right of defense to cross-examine a detective regarding a prior adverse credibility finding against him)) and Andino (scienter of drug type and quantity in drug conspiracy cases).  There is also a fascinating account by Steve Zissou of his experience on the Ghailani defense team.
The NYSACDL has published its latest edition of Atticus, focusing on the organization’s often unsung and unknown efforts to influence the legislative process.  It includes my article addressing three recent Second Circuit decisions, including Capers (setting up some serious hurdles to the admission of statements obtained through a “two-step”– question first, Mirandize later – interrogation procedure), Cossey (“a sentencing decision that relies on factual findings that were unsupported in the record . . . seriously affects the fairness, integrity, and public reputation of judicial proceedings”), and Brown (“when a claim of ineffective assistance of counsel is first raised in the district court prior to the judgment of conviction, the district court may, and at times should, consider the claim at that point in the proceeding.”) 
Guest blogger Valerie A. Gotlib of Sher LLP writes:

Buried in the impressive reversal of the fraud conviction of Mark Kaiser, an executive at U.S. Food Services (“USF”) in United States v. Kaiser, 609 F.3d 556 (2d. Cir. 2010), issued last summer, is a quotable acknowledgement that insider trading is a very different and unique kind of securities fraud, deserving of a heightened level of scienter.  As the Court notes, “[u]nlike securities fraud, insider trading does not necessarily involve deception, and it is easy to imagine an insider trader who receives a tip and is unaware that his conduct was illegal and therefore wrongful.  The same cannot be said of one who deliberately misleads investors about a security.”  

In addition to that notable dictum, the court held that the district court committed two independent errors.  First, the district court instructed the jury with respect to conscious avoidance without informing the jury that it could find that Kaiser had knowledge of the fraud if he was aware of a “high probability” of its existence unless he “actually believed” that it did not exist.  Second, the district court admitted double hearsay when it allowed a USF employee, Tim Lee, to testify that USF’s CEO had told Lee that USF’s general counsel wanted to go to the SEC to expose Kaiser’s improper accounting entries.  The Second Circuit found that both errors were grounds for reversal.

Facts

As one of the largest food distributors in the United States, USF was in the business of purchasing food products from manufacturers and selling them to restaurants.  Between 1994 and 2001, Kaiser managed the company’s dealings with its food vendors.  An important source of revenue for USF was derived from “promotional allowances,” or “PAs,” a type of rebate paid to USF by vendors upon satisfaction of certain purchasing targets.  Part of Mr. Kaiser’s job included negotiating PAs with vendors.  Early in 2001, Mr. Kaiser was named Chief Marketing Officer of USF, but he continued to be involved in negotiating PAs.

The indictment alleged that Mr. Kaiser fraudulently inflated USF’s PA income for the years 2001 and 2002, hid the inflated numbers from outside auditors, and made various misrepresentations to the auditors concerning the PA agreements with vendors.  The scheme included recording prepayments from vendors as income and, thereby, artificially inflating the amount of revenue earned from PA payments to ensure that USF met its earnings and other budgetary targets.  USF’s executives, including Mr. Kaiser, received bonuses only if USF met these targets.  

At trial, the government presented a case based primarily on the testimony of three alleged coconspirators, including Tim Lee, who cooperated with the government and testified pursuant to plea agreements.  Kaiser argued in his defense that he had been setup by the three USF employees and had been unaware of the fraud.  Kaiser was convicted of securities fraud, making false filings with the SEC, conspiracy to commit those crimes, and conspiracy to falsify books and records.  Kaiser appealed.

Conscious Avoidance Jury Instruction


On appeal, Kaiser argued that the district court’s jury instructions with respect to conscious avoidance omitted two necessary elements: “that knowledge of the existence of a particular fact is established 1) if a person is aware of a high probability of its existence, 2) unless he actually believes that it does not exist.” United States v. Schultz, 333 F.3d 393, 413 (2d Cir. 2003) (internal quotations marks omitted) (emphasis added). The court reviewed Kaiser’s conscious avoidance argument for plain error because he had failed to raise an objection to the instruction at trial.

The court held (and the government conceded) that the district court erred in instructing the jury on conscious avoidance because it “did not contain either the ‘high probability’ or the ‘actual belief’ language,” which the court had “long held is essential for an accurate conscious avoidance instruction.”  609 F.3d at 566.  The government argued nonetheless that there was no prejudice from the instruction in light of the overwhelming evidence that Kaiser had actual knowledge of the fraudulent scheme.  The court disagreed and found that there was a risk that the jury convicted Kaiser based on its conclusion that he was merely negligent and could have convicted him even if it found that Kaiser actually believed the PA numbers were correct.  Because there was ample evidence for the jury to question the credibility of the government’s witnesses, the court concluded that there was a reasonable probability that the jury convicted Kaiser based on a conscious avoidance theory and would not have done so but for the instructional error. The court further held that the error seriously affected the fairness, integrity or public reputation of judicial proceedings and thus met all of the requisite elements for a finding of plain error.
    
Admission of Hearsay Statement of USF’s General Counsel

Kaiser also argued on appeal that the district court erred in admitting certain testimony.  Lee testified that the CEO of USF told him that USF’s general counsel had discovered that Kaiser improperly had booked $18.5 million in prepayments as income and that the general counsel wanted to report this to the SEC.  Kaiser objected at trial on the ground that it was double hearsay.  The government countered that the testimony was admissible as a statement of an unindicted coconspirator under FRE 801(d)(2)(E) and that the statement was in furtherance of the conspiracy.  The district court held that the statement was admissible for the limited purpose of explaining why Lee and the CEO engaged in certain subsequent acts. 

On appeal, the Court held that the statement constituted hearsay and did not fall into any of the hearsay exceptions.  The court observed that even if the government could have overcome the hearsay objection, the statement would have been inadmissible under FRE 403 because its prejudicial effect outweighed its probative value.  Indeed, because of the highly prejudicial nature of the testimony and the risk that the jury could have given it more credence since it came from USF’s general counsel, who was not a co-conspirator, the court concluded that the error was not harmless.

Willfulness Instruction


The Court, however, rejected the defense challenge to the district court’s instruction on willfulness.  Acknowledging that insider trading is different (as noted earlier), the Court concluded that securities fraud charges like those at issue in Kaiser required merely that the defendant “had an awareness of the general wrongfulness of his conduct” and “do not require a showing that a defendant had awareness of the general unlawfulness of his conduct.”  Here, the jury was charged that they had to find that Kaiser knew the statements were “false and fraudulent” and that he made those statements “with intent to create a deception,” and the government had to prove “the contrary of the idea of mistake or good faith.”  If the jury found that Kaiser possessed such an intent, as it did, “it follows necessarily that it also concluded that there was “a realization on the defendant’s part that he was doing a wrongful act.”

Lawyers:
Alexandra Shapiro (Macht, Shapiro, Arato & Isseries, LLP) and Richard Morvillo, Andrew Frey, Peter White, Charles Rothfeld, Daniel Brown and Michael Passaportis (Mayer Brown LLP) for defendant; AUSAs Daniel Chung, Daniel Braun. 
 
Despite the Supreme Court’s view in United States v. O’Hagan, 521 U.S. 642 (1997), that the misappropriation theory of insider trading is not an “all-purpose breach of fiduciary duty ban,” it has become that and more – capturing relationships not typically viewed as fiduciary ones, and tippees multiple levels removed from the source of the information.  The theory holds that a person violates Section 10(b) of the Securities Exchange Act and its related Rule 10b-5 when s/he misappropriates material non-public information for trading purposes in breach of a fiduciary or fiduciary-like duty owed to the source of the information.  One problem, as Justice Scalia identified in United States v. Skilling, 130 S. Ct. 2896 (2010),  when addressing the similarly fraught concept of honest services, is not just determining whether a fiduciary relationship exists, but what obligations that fiduciary owes in light of case-law that remains “hopelessly undefined.”  The situation is amply illustrated in United States v. Corbin, 2010 WL 4236692 (S.D.N.Y. October 10, 2010), in which SDNY Judge Marrero – meticulously applying Second Circuit precedent – held that marriage can be the fiduciary relationship predicating a charge of insider trading.  Moreover, a tippee defendant like Corbin may face criminal insider trading charges despite the fact that he had no relationship either with the source of the information or the individual who owed a duty to the source.

Facts

Corbin was charged with securities fraud arising out of his alleged trading on material, nonpublic information he received from a separately-charged co-conspirator, Matthew Devlin.  Devlin, in turn, received the information from his wife, an employee at an international communications firm that provided services to companies engaged in mergers and acquisitions.  Policies in place at her firm required Devlin's wife to maintain the confidentiality of information she learned regarding the firm's clients.  Apparently unable to honor these policies at home, she had a "domestic confidentiality policy of sorts" with Devlin, requiring him not to use or share any confidential firm information she imparted to him.  Despite this, Devlin passed the information on to Corbin and another, who made substantial profits trading on the tips emanating from the woman they dubbed the "golden goose."  The government premised the insider trading charges against Corbin on the misappropriation theory, hypothesizing that Corbin had obtained the material, nonpublic information in violation of the duty of trust and confidence that existed between Devlin and his wife.  Corbin moved to dismiss under F.R.Crim.P. 12(b)(2) and 12(b)(3), arguing that the application of misappropriation theory to him was unconstitutional because the Devlins’ relationship was not a fiduciary relationship as a matter of law.  

Holding

The court rejected Corbin's constitutional challenge, finding that a duty of trust and confidence existed between the Devlins on three separate bases (all of which are set forth in the SEC's Rule 10b5-2(b)): an agreement between them that Devlin would maintain the information in confidence; a history of sharing confidences with an expectation that confidentiality would be maintained; and the spousal relationship itself.  The court noted that in addition to being codified in Rule 10b5-2, the Second Circuit has expressly adopted the duty Corbin was charged with violating in United States v. Chestman, 947 F.2d 551 (2d Cir. 1991) (holding that the dynamic in certain marital relationships can constitute a fiduciary-like relationship for insider trading liability).  The court also rejected the argument that Rule 10b5-2 was unconstitutional because the SEC exceeded its authority in promulgating it.

Comment

The Supreme Court approved the misappropriation theory in O’Hagan in the context of a lawyer who had traded on information he stole from his law firm’s client.  Thus, O’Hagan had breached an archetypical fiduciary duty that he himself owed to the source.  Corbin, by contrast, obtained the information from someone who owed an unusual duty to a conduit of the information.  The expansion of misappropriation theory to encompass such attenuated tippees and novel duties makes it ripe for a void-for-vagueness constitutional challenge.  While the court’s holding in Corbin is entirely consistent with Second Circuit precedent, that precedent may not survive Supreme Court scrutiny.  Like § 1346 and its elusive predicate “the intangible right to honest services,” we can expect that when the Supreme Court addresses misappropriation theory again, it will - at the very least - “pare [it] down” to “paramount applications” presenting no vagueness problem (Skilling, 130 S.Ct. at 2928).
One of the Second Circuit’s last published criminal decisions of 2010 is also one of the most notable sentencing decisions of the year.  In United States v. Preacely, 2010 WL 5156384 (2d Cir. December 21, 2010) – a case that generated separate opinions from each member of the panel, including a dissent from Judge Raggi – the Court vacated on procedural grounds the sentence imposed on a cooperating career offender because of the district court’s possible misapprehension of its power to depart from the career offender guideline.  The case is an important reaffirmation of a district court’s power – and in some cases, duty – to depart from or reject entirely the “remarkably severe” career offender guideline, and its obligation to give effect to post-offense rehabilitation.

Facts

Preacely pled guilty to crack distribution under a cooperation agreement and was released on bail.  Between arrest and sentencing, he underwent “exceptional rehabilitation,” overcoming a daily marijuana habit, participating in pro-active cooperation leading to “several successful criminal investigations,” completing two work training programs, and “dramatically transform[ing] his personal life” through marriage, parenting and becoming a youth advisor for the Nassau DA’s gang prevention program.  

Preacely’s presentence report determined that he was a “Career Offender” as defined under the Sentencing Guidelines, a category that resulted in a dramatic bump both of his offense level and criminal history category.  His applicable guideline was therefore 188-235 months in custody.  Rejecting defense counsel’s request for a sentence of time-served (about two years), EDNY Judge Platt noted repeatedly that he could not ignore the fact that he was dealing with a “Category VI” offender (the category to which career offenders are automatically assigned), and imposed a sentence of 94 months, exactly half of the low end of the recommended guideline range.

Holding

In a decision written by Ninth Circuit Judge Wallace (sitting by designation), the Court held that it was unclear from Judge Platt’s repeated emphasis of Preacely’s status as a Category VI career offender that he understood he was free to reject the career offender classification entirely.  Evidence of Preacely’s rehabilitation was “particularly relevant to determining whether the Career Offender Guideline was appropriate,” but Judge Platt’s statement that he was “dealing with a Category VI career offender, regardless of all of what you said,” “reinforce[d] [the Court’s] doubt that the district judge fully understood his authority to depart from Category VI if it significantly over-represented the seriousness of Preacely’s criminal history and/or the likelihood that he will commit further crimes.”  Accordingly, the Court remanded so that Judge Platt could consider that option.  

Judge Lynch’s Concurrence

Adding his “common-sense” explanation for the decision, Judge Lynch described the career offender guideline as “a simplistic three-strikes policy,” which in Preacely’s case was “distinctly inflated” and “remarkably severe.”  Premised on the likelihood that someone in that category “presents an extreme danger of committing more crimes,” it may not be the appropriate baseline for someone, like Preacely, who “had reformed, and no longer present[s] such a danger.”  While the district court was not required to accept Preacely’s claims of reform, “[it] was required to consider those claims” and not simply to assume that he was dangerous based on his classification as a Category VI offender.  Judge Lynch adds:

[I]t is extremely useful to give separate consideration to that aspect of the cooperation departure that operates as a pure reward to induce testimony, regardless of the defendant’s character, and the quite separate basis for mitigation that relates to a defendant’s potential reformation (which might be evidenced in part by his cooperation with the authorities).  

Judge Raggi’s Dissent


In a dissenting decision, Judge Raggi took issue with the majority’s conclusion that Judge Platt may have misunderstood his power to depart from the career offender guideline, pointing out that he acknowledged on the record that he could depart as far down as a non-custodial sentence.  Even if the majority was correct that there was some ambiguity on that score, she proposed that “the proper action would be to remand for clarification, not to vacate and order resentencing.”

Comment

As the authors point out in the excellent “Deconstructing the Career Offender Guideline” (and citing the Sentencing Commission’s own research), “[s]entences recommended by the career offender guideline are among the most severe and least likely to promote sentencing purposes in the United States Sentencing Guidelines Manual.”  Preacely places that harshness in a stark light – relatively minor convictions catapulted him into the category, while his stunning post-arrest transformation established that he clearly did not belong among the incorrigible offenders for whom the category was written.  Indeed, the subtext of the majority’s opinions in Preacely is that his sentence – cruelly returning a newly-productive individual back to prison for at least another five years – was substantively unreasonable.  Preacely is therefore an important case not just on the power to depart from the career offender guideline, but the duty to depart from it where the defendant has presented compelling evidence that it should not apply to him.  More generally, the case is an important precedent on a sentencing judge’s obligation to consider a defendant’s post-offense rehabilitation efforts, and, in cases involving cooperation, to give additional credit for that aspect of cooperation that reflects the defendant’s actual or potential reformation.

Lawyers: Yuanchung Lee (Federal Defenders of New York, Inc.); AUSA Thomas Sullivan and Susan Corkery

See Archives for all posts since September 2007.