New York Federal Criminal Practice Blog

Recently in the Pretrial Dismissal category:


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.

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.


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.  


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.


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).
Guest contributor Justin Sher writes:

In two recent cases involving former public officials – Joseph Bruno, the former majority leader of the New York State Senate, and Bernard Kerik, the former police commissioner of New York City – federal courts in New York declined to narrow the scope of the “honest services” theory of fraud.  In United States v. Bruno, the court reaffirmed the principle that a state official may commit the federal crime of honest services fraud even if his conduct is legal under state law.  In United States v. Kerik, the court ventured further by holding that a public official could commit the crime of honest services fraud by engaging in influence peddling even when the influence is directed at areas that are beyond the scope of the official’s authority.  Both decisions highlight the difficulty many courts have had applying this vague and controversial statute, which Justice Scalia has described as “nothing more than an invitation for federal courts to develop a common-law crime of unethical conduct.”  They also raise some of the same issues that are likely to be addressed by the Supreme Court this term in Weyhrauch v. United States.   

Background on Honest Services Fraud

The honest services theory of fraud is codified in 18 U.S.C. § 1346.  It provides that the federal statutes prohibiting mail and wire fraud extend to schemes that “deprive another of the intangible right of honest services.”  Congress enacted section 1346 in 1988 in response to McNally v. United States, in which the Supreme Court ruled that the scope of the mail and wire fraud statutes was limited to the deprivation of tangible property rights.  Since Congress’s abrogation of McNally through the adoption of section 1346, courts have struggled to define the honest services theory of fraud so that it applies to cases of clear corruption, such as those involving bribery and kickbacks, without applying to every instance of unethical or dishonest conduct.    

United States v. Bruno


Joseph Bruno, the former Majority Leader of the New York State Senate, was charged with honest services fraud for failing to disclose conflicts of interest.  The indictment alleged that Mr. Bruno had accepted employment that impaired his independent judgment, used his official position to secure unwarranted privileges and accepted unauthorized gifts.  Mr. Bruno sought to dismiss the indictment on the grounds that the honest services statute is unconstitutionally vague both on its face and as applied.  Mr. Bruno also argued that the charges violated principles of federalism because they served as a mechanism through which the federal government could regulate the ethical conduct of state officials.  As part of his federalism argument, Mr. Bruno maintained that, as in other circuits, the government should be required to allege and prove an underlying state violation in order to charge a state official with honest services fraud.  Finally, Mr. Bruno sought a stay pending the Supreme Court’s decision in Weyhrauch, where the Court is expected to address this very issue.

In a decision dated August 21, 2009, the court rejected all of Mr. Bruno’s arguments.  United States v. Bruno, 2009 WL 2601249, No. 09 Cr. 29 (N.D.N.Y. Aug. 21, 2009).  The court reaffirmed the pre-McNally rule announced in United States v. Margiotta, 688 F.2d 125 (2d Cir. 1982), that the government was not required to demonstrate a violation of a New York statute or a duty imposed by New York law in order to convict a state official of honest services fraud.  The Court also held that the statute was neither unconstitutionally vague on its face nor as applied.  Finally, noting that the law on these issues was “clear” in the Second Circuit and declining to speculate as to what the Supreme Court might do, the court refused to issue a stay.

Mr. Bruno’s trial is currently underway in the Northern District of New York.

United States v. Kerik


Bernard Kerik was charged with committing honest services fraud while he held the positions of Commissioner of the New York City Department of Corrections from 1998 through 2000 and New York City Police Commissioner from 2000 through 2002.  The omnibus indictment also included charges, which are not relevant here, of tax fraud, mortgage fraud and making false statements to the federal government in connection with his nomination for the position of Secretary of the Department of Homeland Security.

The government alleged that Mr. Kerik used his influence as Commissioner of Corrections and subsequently as Police Commissioner, to “vouch” for XYZ Company, a construction company with ties to organized crime, in order to influence regulators and other public officials who were considering whether XYZ should be permitted to do certain municipal-regulated business in New York City.  In return, Mr. Kerik received approximately $255,000 in renovations to his apartment in Riverdale.

Mr. Kerik moved to dismiss the honest services fraud on the ground that the alleged conduct – influence peddling where the public official was acting outside the context of his official duties – does not constitute honest services fraud.  Mr. Kerik’s attorneys attempted to draw a “sharp distinction between the use, or even misuse, of the influence of office in activities falling outside a defendant’s official duties – which cannot support a prosecution for federal honest services fraud – and corruption in connection with the performance of a defendant’s official duties – which can.”


In a decision in May 2009, Judge Stephen Robinson acknowledged that the honest services fraud crime is “nebulous” and that the court was not the first to struggle with its scope.  United States v. Kerik, 615 F. Supp. 2d 256, 263 (S.D.N.Y. 2009).  In fact, the court admitted that it “desire[d] to cabin the breadth of section 1346.”  Id. at 265.  Nonetheless, the court determined that the indictment alleged that Kerik had used his office to vouch for XYZ Company and would not have been able to do so but for his official status.  Quoting United States v. Bloom, a Seventh Circuit case, the court explained that, “misuse of office (more broadly, misuse of position) for private gain is the line that separates run of the mill violations of state-law fiduciary duty . . . from federal crime.”   Although the case “teeter[ed] on the boundaries of 18 U.S.C. § 1346,” the Court concluded that the indictment charged a colorable allegation of honest services fraud.
On November 5, 2009, Bernie Kerik pled guilty to eight felonies, including charges of tax fraud relating to his acceptance of $255,000 of renovations from XYZ Company.  As part of the plea agreement, the government dropped the charges that were based on honest services fraud.  Thus, while Kerik’s plea led to his release for the holidays, his case will not lead to any further clarification of the honest services fraud theory.

In both Bruno and Kerik, the courts declined to limit the reach of the honest services theory of fraud.  As the law currently stands in the Second Circuit, a state official may be convicted of depriving citizens of their intangible right of honest services even if the official is not acting within the scope of his or her duties and even if his or conduct is perfectly legal under state law.  It remains to be seen whether the Supreme Court will come out differently in Weyhrauch.
Illegal re-entry cases are amongst the hardest to defend.  After all, the presence of the defendant in the courtroom is Government Exhibit A.  One defense strategy is to move to dismiss the indictment by attacking the validity of the underlying deportation order, and now, EDNY Judge Ross has joined with other district courts to expand the grounds for such collateral attacks, holding in this terrific decision, United States v. Garcia, 08 cr 32 (ARR), 2008 WL 3890167 (EDNY August 19, 2008), that for purposes of a collateral attack on a deportation order, there is no meaningful distinction between access to a discretionary waiver of removal under former § 212(c) and access to discretionary voluntary departure under § 1229c.  No circuit court has yet addressed this issue.

Garcia claimed that his deportation proceeding violated his Fifth Amendment due process rights because neither the immigration judge who presided over the proceeding nor his attorney told him of his right under 8 U .S.C. § 1229c to depart the United States voluntarily at his own expense in lieu of being deported (a right that is available under some circumstances, and was available to Garcia).  Had they done so, and had he exercised that right, he would have avoided criminal penalties for illegally re-entering.   Finding that the deprivation of Garcia’s voluntary departure rights was fundamentally unfair, Judge Ross granted his motion to dismiss the indictment.  

Lawyers: Raymond Aab and Alberto Ebanks (for defendant); AUSA Matthew Amatruda.

White collar defendants often face parallel civil investigations, a situation full of traps for the unwary, as noted here and here.  In United States v. Stein, 05 CR 888 (LAK), 2008 WL 4212516 (S.D.N.Y. September 10, 2008), the four remaining defendants in the tax fraud prosecution arising out of certain KPMG tax shelter products (previously discussed here and here), moved to dismiss the indictment against them on the grounds that the government’s alleged deceitful procurement of KPMG’s confidential tax returns through a parallel civil tax fraud investigation by the DOJ was a violation of due process.  The defendants relied on three cases where district courts dismissed indictments or suppressed evidence “where the Government has brought a civil action solely to obtain evidence for its criminal prosecution, or has failed to advise the defendant in its civil proceeding that it contemplates his criminal prosecution.”  (Two of these cases were later reversed on appeal.)

Judge Kaplan rejected the motion, finding that neither circumstance applied here: “Defendants do not deny that there was a bona fide civil investigation, they complain merely that there was a criminal investigation as well.  And defendants, who were not the targets of the civil investigation, do not claim to have been deceived by the government.”  Interestingly, in a footnote, the court notes that the defendants relied in part on the fact that four of the now dismissed defendants had given deposition testimony while unaware of the criminal investigation.  Judge Kaplan adds that they “do not suggest that the government deceived these individuals,” suggesting perhaps that if the government had engaged in some deceptive conduct, the defendants’ motion might have had more traction. 

Which leads me to the obvious point that in a civil enforcement action, where there is potential for criminal liability, it may be worth directly asking the government representative if he/she knows of any parallel criminal proceeding – the answer to which may lead to a prudent exercise of the right to remain silent, or might set up a due process claim based on affirmative misrepresentation.

Fast Track Disparity

As explained by Judge Sweet in United States v. Paulino-Melende, 08 cr 176 (RWS), 2008 WL 4553148 (S.D.N.Y. October 8, 2008), fast-track disparity is created by the existence in some districts but not others of a “fast track program” whereby an individual charged with illegal re-entry agrees to quick removal, thus saving the Government resources, and in return receives a substantially lower sentence than would otherwise be dictated by the Guidelines.  Quoting SDNY Judge Kaplan, Judge Sweet points out “it is difficult to imagine a sentencing disparity less warranted than one which depends upon the accident of the judicial district in which the defendant happens to be arrested.”  Rejecting this unwarranted disparity (and relying in part on the Sentencing Commission’s own acknowledgement of the disparity, as well as a criminal history double-counting issue that occurs in illegal re-entry cases), he imposed a sentence that was approximately half of the low end of the applicable guideline range. 

Gun Possession

In United States v. Erwin, 07-CR-556 (LEK), 2008 WL 4534058 (N.D.N.Y. October 6, 2008), a defendant charged with various crimes relating to his purchase of a firearm while subject to an order of protection argued an “outright ban on the possession of a simple shotgun” by someone “only alleged to be the subject of an order of protection fails to pass constitutional muster” under the Supreme Court’s recent right-to-bear-arms holding in District of Columbia v. Heller, 128 S.Ct. 2783 (2008)].  Pointing out that in Heller, the Court held that “nothing in our opinion should be taken to cast doubt on . . . laws imposing conditions and qualifications on the commercial sale of arms,” Judge Kahn denied the motion to dismiss the indictment.  He pointed out that the provision at issue in Erwin’s case, 18 U.S.C. § 922(g)(8), “is not an outright ban on firearm possession like the situation in Heller,” but rather a temporary ban “as long as the underlying state court order is in effect.”  Moreover, the ban is “narrowly tailored” to the “compelling government interest” of “[r]educing domestic violence.”


The Second Circuit has affirmed SDNY Judge Kaplan’s stunning dismissal of an indictment against thirteen defendants in the largest tax fraud prosecution in history (discussed previously here) because of the government’s interference with their Sixth Amendment right to counsel through its efforts to cause KPMG to limit, cap and ultimately end their advancement of legal fees.  

United States v. Stein, 07-3042-cr, 2008 WL 3982104 (2d Cir. August 28, 2008), arose out of the notorious “Thompson Memorandum” which provided that advancing legal fees was a factor prosecutors could consider in assessing the extent of a corporation’s cooperation in an investigation of misconduct.  That memo has been superseded more than once, most recently by the Filip Memorandum, also issued on August 28, 2008, which now instructs U.S. Attorneys and line prosecutors not to treat the attorney-client and work product privileges or payment of corporate employees’ attorneys’ fees as obstructions of justice – thus effectively mooting the main thrust of the Stein decision.  

While the government is no doubt dismayed by the Court’s ruling, it can at least take comfort in the Court’s failure to rely on Judge Kaplan’s reasoning – that the government had behaved in conduct that “shocked the conscience.”

The case provides much food for thought on the right to counsel, the right to counsel of choice, and what represents counsel of quality.  As the White Collar Crime Blog notes,

The best line from the case - "But if it is in the government’s interest that every defendant receive the best possible representation, it cannot also be in the government’s interest to leave defendants naked to their enemies."


The holding of the case is summarized here and here.  Essentially, the Court held:

We hold that KPMG's adoption and enforcement of a policy under which it conditioned, capped and ultimately ceased advancing legal fees to defendants followed as a direct consequence of the government's overwhelming influence, and that KPMG's conduct therefore amounted to state action. We further hold that the government thus unjustifiably interfered with defendants' relationship with counsel and their ability to mount a defense, in violation of the Sixth Amendment, and that the government did not cure the violation. Because no other remedy will return defendants to the status quo ante, we affirm the dismissal of the indictment as to all thirteen defendants.


Yes – a great (if ultimately mooted) victory for the right to counsel.  

What I find most intriguing about this decision is the subtext – that quality representation in document-intensive white collar cases equates with expensive representation.  In some cases, that is true.  But one should not lose sight of the issue at the heart of criminal cases: what did the individual defendant know and when did he know it?  There may be twenty million documents in the KPMG prosecution, but the ones that matter for each defendant are the ones they wrote, or that mention them, or they received – a subset that the government can be easily required to provide, and are usually significantly less than the entirety of the government’s production.  Moreover, the key documents in this subset will be an even tinier subset – and an experienced lawyer can sift through many of the irrelevant ones very rapidly (or hire a smart law student at $30 an hour to do the same) -- leading to a final selection that might take a day or a week to review.  Even at $700 - $1,000 per hour, such a process takes significantly less than the millions in defense fees cited in Stein.  

The key in criminal prosecutions, including white collar prosecutions, is defense counsel who are experienced and intelligent, who offer advice grounded in experience, empathy and (that rare commodity) judgment – which an intransigent defendant is free to disregard, but which, one presumes, is ultimately what the defendant pays those big bucks for.  In the famed prosecution of Frank Quattrone – where the issue was his intent about a sole e-mail to staff regarding a document destruction policy – it was his testimony in the first trial that contributed to the hung jury rather than an acquittal, and it was the introduction of that testimony in his second trial that contributed to the conviction (ultimately reversed).  In other words, the critical advice in the case turned on whether or not to testify, and while that advice is of course based on a certain amount of document review, it also hinges on a gut, practical assessment of the defendant’s quality as a witness and the quality of the government’s case, something that stems from great genetic instinct and years of experience, but can hardly be reduced to immediate “lawyer time.”  And its value hinges on the defendant listening to it.  Similarly, in the prosecution of Martha Stewart, she lost her case when she voluntarily proffered to the government, and made statements that conflicted with a tiny number of key documents.  Again, the key to her salvation lay in judgment (her own and that of her lawyers) not expensive lawyer time.

As a former federal defender, who still believes that the best trial lawyers I have ever met are state and federal public defenders, I find it amusing and troubling that so many people think that in the context of criminal defense, you get what you pay for. 

See Archives for all posts since September 2007.