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Friday
Oct262012

Pietragallo’s Jim Kraus Presents at DRI Annual Meeting: SOX to Dodd-Frank – 10 years of increased government enforcement and current trends

On October 25, 2012, Pietragallo’s Jim Kraus presented and moderated a panel discussion reviewing trends in government enforcement and prosecution in the ten years that have passed since the passage of the Sarbanes-Oxley Act (SOX) of 2002.  The panel, which also included Scott A. Coffina of Drinker Biddle & Reath, LLP and Jose P. Sierra of Fish and Richardson, PC, discussed the practical impact of the changing landscape of government enforcement, providing both historical perspective and analysis of current trends in the “policing” of corporate governance by both government regulators and DOJ.

The panel discussion was presented in conjunction with the Defense Research Institute’s Annual Meeting in New Orleans, October 24-27.  The backdrop of the discussion included historical perspective as demonstrated by the highly publicized fraud cases involving Enron, Tyco and Worldcom which gave rise to the legislative push that resulted in SOX, as well as the economic crisis of 2008, which spawned even more legislative and regulatory initiatives, notably the Dodd-Frank Act of 2010.

The panel discussed current application of DOJ’s Principles for Prosecutions of Business Organizations, recent regulatory actions against and prosecutions of corporate officers, and the impact of enhanced whistleblower provisions under both the False Claims Act and Dodd-Frank.

The panel also provided updates regarding trends in DOJ’s enforcement of the Foreign Corrupt Practices Act (FCPA) and recent developments in enforcement of the False Claims Act against pharmaceutical and medical device manufacturers for off-label marketing.

 

Friday
Oct262012

Assistant Attorney General Breuer Highlights Civil Forfeiture, DPAs and NPAs at IBC Legal Forum in London

Speaking at IBC Legal’s World Bribery & Corruption Forum in London on October 23, 2012, Lanny A. Breuer, Assistant Attorney General for the Criminal Division, reviewed DOJ’s anti-corruption efforts during his nearly 3½ year tenure in the Criminal Division.  He brought to light the Kleptocracy Asset Recovery Initiative wherein DOJ has brought civil actions against the proceeds of foreign officials who engage in corruption.  According to Breuer, “Our theory is simple:  even if we cannot pursue you criminally in the United States – because we lack criminal jurisdiction, for example – corrupt leaders should not be permitted to use the United States as a safe haven for the proceeds of their corrupt activities.”

As examples, he cited DOJ’s success in obtaining a restraining order against more than $3 million in corruption proceeds related to James Onanefe Ibori, the former governor of the oil producing Delta State in Nigeria, as well as restraints against an additional $4 million in Ibori assets, including the proceeds from the sale of a penthouse unit at the Ritz-Carlton in Washington, DC.  He took the opportunity to review both FCPA-related and non-FCPA-related enforcement efforts, discussing resolution of a case against Credit Suisse, which included a forfeiture of $536 million in connection with violations relating to transactions conducted by the bank on behalf of customers from Iran, Sudan and other sanctioned countries.

Breuer also revisited a theme that he has emphasized in prior speeches, outlining the benefits of non-prosecution agreements (“NPAs”) and deferred prosecution agreements (“DPAs”) as important components of criminal law enforcement.  He indicated that these enforcement options allow prosecutors to move beyond what 20 years ago may have been a stark choice; “either indict or walk away.”  Breuer explained that over the past 20 years, the government has moved beyond that stark choice by “agreeing to deferred prosecution against a corporation in exchange for an admission of wrongdoing; cooperation with the government’s investigation, including against individual employees; payment of monetary penalties; and concrete steps to improve the company’s behavior.”

As part of his discussion of NPAs, Breuer cited the recent example of the resolution of allegations of criminal wrongdoing against Barclays Bank over the bank’s role in manipulation of the London Interbank Offered Rate (LIBOR).  DOJ entered into an NPA with Barclays, which, in addition to a large payment, ended up including the replacement of top management at the bank.  He stated that Barclays’ cooperation with the investigation was “extraordinary,” something that undoubtedly allowed Barclays to avoid prosecution.

Breuer also cited an example of a company avoiding criminal enforcement entirely by citing the example of Garth Peterson, a former managing director with Morgan Stanley, who entered a plea of guilty to conspiring to evade the bank’s internal FCPA controls.  Breuer explained that because Morgan Stanley had disclosed Peterson’s misconduct, fully cooperated with DOJ’s investigation and demonstrated maintenance of a rigorous compliance program, DOJ declined to bring any enforcement action the institution.

Breuer indicated that DOJ will continue to attempt to strike an appropriate balance between vigorous and responsible enforcement.

Friday
Oct192012

Jail Time for Three Former Financial Services Executives

On October 18, 2012, three former financial services executives were sentenced in the U.S. District Court for the Southern District of New York for their involvement in conspiracies related to bidding for municipal finance contracts.  The three were convicted after a three week trial and have been ordered to serve sentences ranging from 36 to 48 months in prison. 

During the trial, the government presented evidence that the three defendants, who had been employed by affiliates of General Electric Company, participated in separate fraud conspiracies with various financial institutions and insurance companies from 1999 until 2006.  The financial institutions and insurance companies offered investment agreements to state, county, and local governments throughout the United States as a way to raise money for public works projects.  The government claimed that the defendants and their co-conspirators manipulated the bidding process for many investment agreements to increase the number and profitability of investment agreements awarded to their employers.  The conspiracy deprived state, county, and local governments from more competitive interest rates for the investments, which, in turn, is alleged to have cost the municipalities millions of dollars.  

Richard Weber, Chief of the IRS’s Criminal Investigation division, stated “The sentences handed down today send a clear message that crime motivated by outright greed will land you in jail.  Quite simply, the defendant stole money from taxpayers and conspired to manipulate the competitive bidding system to benefit themselves instead of the towns and cities that needed this money for important public works projects.  IRS Criminal Investigation is committed to working with our law enforcement partners to uncover this kind of abruption and secure justice for American taxpayers.”  In this investigation, twenty individuals have been charged, including the three defendants sentenced on October 18.

Wednesday
Oct172012

Federal Judge to Hold Electronic Discovery in Pay Pal Criminal Hacking Case

On October 11, 2012, U.S. District Court Judge Lowell Jensen of the U.S. District Court for the Northern District of California ordered the government to turn over to him hard-drives and other digital devices in the government’s possession related the prosecution of alleged hackers.  This case stems from a July 2011 indictment for fourteen defendants alleged to have participated in a coordinated attack on PayPal’s computer servers after PayPal severed ties with Wiki Leaks.  The defendants are charged with engaging in a conspiracy to commit intentional damage to a protected computer, aiding and abetting intentional damage to a protected computer, or both. 

Pursuant to search warrants predicated on affidavits stating that the government would retain only the files relevant to their prosecution, the government seized computer hard-drives and other digital devices containing millions of digital files.  However, the government did not retain only the relevant evidence but rather elected to retain all of the seized evidence despite two orders from a U.S. magistrate judge that extraneous material be purged. 

In response, Judge Jensen ordered that the government provide him with the hard-drives and digital devices seized by the government.  His ruling requires the government, if it needs to further examine the evidence, to petition the court and provide notice to the defense.  The court’s decision ensures that the evidence will be preserved for trial and the defense will be permitted to contest or limit the examination after the government requests access to the data.

This was reported extensively by Vanessa Blum of The Recorder at the following links:

http://www.law.com/jsp/lawtechnologynews/PubArticleFriendlyLTN.jsp?id=1349604855238

http://www.law.com/jsp/lawtechnologynews/PubArticleFriendlyLTN.jsp?id=1349661935658

Monday
Oct152012

Third Circuit: Sentencing Judges Not Required to Consider Federal-State Disparities

District judges do not need to consider disparities in punishment provided by analogous state and federal laws when sentencing criminal defendants, even when the federal offense uses state law to define some of its elements.  However, judges must address colorable arguments regarding sentencing disparities between related federal offenses, the Third Circuit ruled this week.

The decision in United States v. Begin, --- F.3d ---, No. 11-3896, 2012 WL 4784362 (3d Cir. Oct. 9, 2012), helps to clarify the Third Circuit's view of 18 U.S.C. § 3553(a)(6), a provision that requires sentencing judges to consider "the need to avoid unwarranted sentence disparities among defendants with similar records who have been found guilty of similar conduct."

Background

Michael Begin, 33, sent sexually suggestive messages to a 14-year-old girl.  The girl's mother alerted the FBI.  Then an agent, posing as the girl, set up a meeting with Begin at a local restaurant.  Begin showed up at the restaurant with a knife, handcuffs and a condom.  He was arrested and later indicted on two charges: using the internet and a cell phone to persuade a minor to engage in illegal sexual activity (in this case, statutory rape), in violation of 18 U.S.C. § 2422(b); and using a cell phone to send an obscene image to a minor, in violation of 18 U.S.C. § 1470.  He pleaded guilty to both charges. 

Under the Federal Sentencing Guidelines, Begin's imprisonment range was 168 to 210 months.  Begin argued for a sentence of 120 months, the statutory minimum for a violation of § 2422(b).  He pointed out that the Pennsylvania statutory rape law he would have violated if he had sex with the girl, 18 Pa. Cons. Stat. § 3122.1, at the time carried a maximum penalty of 10 years imprisonment (the maximum penalty is now 20 years).  He also noted that the federal statutory rape law, 18 U.S.C. § 2243(a), which applies in the maritime and territorial jurisdiction of the United States, carries a maximum 15 year sentence.  Begin contended that a sentence of more than 10 years would lead to an unwarranted disparity under § 3553(a)(6) because he would receive a greater punishment for attempting to induce an offense than for actually committing it.

The district judge sentenced Begin to 240 months and did not address Begin's arguments regarding state-federal and federal-federal disparities.   

The Third Court's Decision

On appeal, the Third Circuit concluded that Begin's state-federal argument lacked "colorable legal merit" and therefore required no response from the district judge.  Citing with approval cases from the Fourth, Seventh, Eighth, Tenth and Eleventh Circuits, the court wrote that § 3553(a)(6) was meant to address disparities only among federal defendants.  The court rejected Begin's argument that § 2422(b)'s incorporation of state law in defining its elements distinguished his case.  Given the absence of authority in his favor, the Third Circuit declined Begin's invitation to follow him "down a rabbit hole." 

The court found Begin's federal-federal argument more compelling because of the similarity between § 2422(b) and § 2243(a).  The court wrote, Begin's argument that the judge should consider disparities between sentences under the two statutes was at least colorable.  The court cautioned that "colorable legal merit is distinct from actual merit" and left open the possibility that the judge would reject the argument on remand.  Nonetheless, because the judge had failed to even consider the federal-federal argument, the court vacated Begin's sentence and remanded for further proceedings.

Bottom Line

State and federal law often provide wildly divergent penalties for similar conduct, but those disparities do not give rise to colorable arguments regarding disparate punishment under § 3553(a)(6).  On the other hand, disparities between federal statutes, even those aimed at somewhat different evils, may provide fertile ground for sentencing arguments.

Friday
Oct122012

Second Circuit Affirms District Court’s Authority Under All Writs Act to Restrain Funds in Anticipation of Sentencing

The U.S. Court of Appeals for the Second Circuit recently affirmed an order of restitution by the U.S. District Court for the Eastern District of New York, denying a request by the defendant (Roy Ageloff) to release some of the funds that had been held by the Court pending his resentencing.  U.S. v. Catoggio, No. 11-3474, slip op. (2nd Cir., October 10, 2012).

Ageloff and his partner, Robert Catoggio, engaged in a significant “pump-and-dump” securities fraud scheme from 1991 to 1998.  Eventually, Mr. Ageloff entered a plea of guilty to one count of racketeering and stipulated to a sentence enhancement of 18 levels for a fraud that amounted to losses exceeding $80 million.  His original sentence, which included $80 million in restitution under the Mandatory Victim’s Restitution Act (“MVRA”), 18 U.S.C. 3663(A), was reversed and remanded based on a finding that the order of restitution had been issued without first identifying the victims and their losses.  See, U.S. v. Catoggio, 326 F.3d 323, 324 (2nd Cir. 2003).

On remand, the government submitted a report prepared by the National Association of Securities Dealers (“NASD”) that documented an estimated $190 million in losses suffered by more than 9,000 victims.  Prior to the resentencing, Ageloff had requested access to portions of the $536,000 that he had deposited with the court prior to his initial sentencing so that he could secure counsel of his choice.  The district court denied this request.

Mr. Ageloff was not resentenced until 2011 due to a variety of factors, including a separate prosecution of Mr. Ageloff in Florida.  Ultimately, after reviewing Ageloff’s objections to the NASD report, the district court issued a new restitution order on resentencing, ordering Ageloff to pay just over $190 million.  On resentencing, the district court affirmed its rejection of Ageloff’s request for access to any of those previously deposited funds.

In affirming the district court’s restraint of Mr. Ageloff’s funds pending resentencing, the Second Circuit found authority for restraint of funds with the All Writs Act, 28 U.S.C. §1651(a), even though the district court had not cited the Act specifically as authority for its restraint of Mr. Ageloff’s funds.  The Court, while acknowledging that the Second Circuit had not previously addressed whether the All Writs Act enables a court to restrain a convicted defendant’s property in anticipation of ordering restitution, found that courts in the Second Circuit and beyond have uniformly found such authority.

The court concluded that the district court properly exercised its authority under the All Writs Act to restrain Ageloff’s assets in anticipation of resentencing.  It noted that he had previously entered a plea of guilty to committing a crime for which restitution is mandatory under the MVRA, and that Mr. Ageloff agreed to a sentencing enhancement for fraud for causing losses of $80 million or more.  Based on these factors, it was reasonable to conclude that the eventual restitution order was certain to exceed $536,000. 

The Court also found no merit in Ageloff’s argument that the refusal to release any of his money denied him the right to counsel of his choice in violation of the 6th Amendment.  It supported its conclusion in that regard by citing U.S. v. Monsanto, 491 U.S. 600, 616 (1989), where the U.S. Supreme Court established that a pre-trial restraining order freezing the defendant’s assets did “not ‘arbitrarily’ interfere with the defendant’s ‘fair opportunity’ to retain counsel.”

Thursday
Sep272012

9th Circuit Does Not Find Government's Chutzpah Appealing

In 1993, Ninth Circuit Judge Alex Kozinski co-authored an article for the Yale Law Journal, wherein the authors explained the term “Chutzpah.”  See Alex Kozinski and Eugene Volokh, Lawsuit Shmawsuit, 103 Yale L.J. 463 (1993).  Although the authors offered no formal definition for the term, as demonstrated in the opinion of a panel of the Ninth Circuit, one of the co-authors, knows it when he sees it.  In United States v. Leal-Del Carmen 2012 W.L. 4040253 (C.A. 9 Cal.), now Chief Judge Kozinski saw it clearly in the government’s deportation of a material witness favorable to the defendant. and he and the rest of the panel did not approve.

In Leal-Del Carmen, the Ninth Circuit reversed the conviction of Jonathan Leal-Del Carmen on charges of bringing in illegal aliens without presentation in violation of 8 U.S.C. §1324(a)(2)(B)(iii).  In doing so, the court ruled that the government had undermined the defendant’s opportunity to present a complete defense, in violation of the Fifth and Sixth Amendments, by deporting a witness that the government knew could give exculpatory evidence.  The court further found that the district court abused its discretion first by refusing to admit a video or transcript of the deported witness’ testimony, and denying a missing-witness instruction.

Jonathan Leal-Del Carmen was arrested by border patrol agents after a group of 12 illegal aliens had been detained along the United States-Mexico border.  Following his arrest, border patrol agents interviewed at least 4 of the aliens about Leal-Del Carmen and another individual who had been arrested.  One of those witnesses, Anna Maria Garcia-Garcia, identified Leal-Del Carmen in a photo spread.  When a border agent asked if Leal-Del Carmen gave orders to the rest of the group, she answered, “No, he didn’t give orders.”  After the officer said, “Pardon me?” she again stated, “He did not give orders.”  When the officer asked a third time, “No?,” she answered, “No.”

In similar interviews, three other detainees identified Leal-Del Carmen as a leader or someone with whom they made travel arrangements.  The government kept those three as material witnesses, but deported Garcia-Garcia and the 8 other aliens that had been apprehended.  Leal-Del Carmen had not yet been arraigned and thus was not represented by counsel when Garcia-Garcia was deported.

After several pre-trial discovery requests, the government finally turned over videotapes of the interviews of its material witnesses, which included the interview of Garcia-Garcia.  On discovering her statements, Leal-Del Carmen moved to dismiss the indictment on the ground that the government had deported an exculpatory witness.  The district court denied the motion.  Leal-Del Carmen then filed a motion in limine seeking to admit the videotape statement of Garcia-Garcia, which the district court denied.  At trial, the district court also declined to give Leal-Del Carmen a proposed missing-witness jury instruction.

In its review, the Ninth Circuit  cited its previously established two-part test in determining whether the government’s deportation of an alien-witness amounted to a constitutional violation under either the Sixth Amendment right to compulsory process or the Fifth Amendment right to due process.  The court indicated that (1) defendant must show that the government acted in bad faith and (2) that deportation of the witness prejudiced his case, citing United States v. Dring, 930 F.2d 687, 693 (9th Cir. 1991).  It explained that once the government is aware that an alien has potential exculpatory evidence, it must treat that person as a material witness and give defense counsel the opportunity to interview him and make a reasoned determination whether to seek his retention pending trial.  Based on the circumstances, the Court found that Leal-Del Carmen demonstrated prejudice because Garcia-Garcia’s testimony was material, favorable, and not cumulative.  The court explained that testimony that Leal-Del Carmen didn’t give orders was material to his alleged role as the expedition’s guide, reasoning that Leal-Del Carmen could have been found guilty only if the jury believed that he was leading the group, rather than himself being led by someone else.

The court rejected the government’s argument that Garcia-Garcia’s statements were merely cumulative to the testimony of available witnesses.  While acknowledging that under United States v. Lujan-Castro, 602 F.2d 877, 878-79 (9th Cir. 1979) (per curiam), the government may ask a criminal defendant to relinquish his rights to retain deportable witnesses, it stated that it can only do so if the waiver is knowing and intelligent.  It found that that the district court’s ruling that Leal-Del Carmen had waived his right to retain the witnesses was unsupported, given the failure of the government to produce a signed waiver.

The court also found that the district court had abused its discretion in denying Leal-Del Carmen’s motion in limine to have the video tape of the interview played at trial, along with a presentation of a transcript of the same. It wholly rejected the district court’s conclusion that Garcia-Garcia’s testimony was not material, indicating further that materiality was not even the standard that should have been applied to that motion.  Rather, the only standard on the motion in limine was that the evidence be relevant, and admissible hearsay.  Of course, the statements by Garcia-Garcia were relevant and the court found that the video was admissible under the forfeiture by wrongdoing hearsay exception, citing F.R.E. 804(b)(6).

The court further found that the district court abused its discretion in rejecting Leal-Del Carmen’s request for a missing-witness instruction, finding that Garcia-Garcia, as an individual lacking a lawful immigration status was subject to the federal government’s exclusive authority to parole her into the country to testify.  Chief Judge Kozinski, writing for the panel, having meticulously outlined rejections of all of the government’s arguments and disapproval of its actions in this matter, finally expressed exasperation when addressing the government’ argument that it wasn’t responsible for Garcia-Garcia’s absence because it no longer knew where to find her.  That argument, Chief Judge Kazinski wrote, “comes close to classic definition of Chutzpah.”  Not surprisingly, that argument was rejected, and the conviction was reversed.

Tuesday
Sep252012

TYCO Enters Into NPA and Subsidiary Pleads Guilty - $26 million Paid in FCPA Settlement

On September 24, 2012, DOJ announced the resolution of its prosecution of a subsidiary of TYCO International Ltd. (TYCO) under the Foreign Corrupt Practices Act (FCPA).  In accordance with the agreement, TYCO Valves & Controls Middle East, Inc. (TVC ME) entered a plea of guilty in the U.S. District Court for the Eastern District of Virginia to a one count criminal information charging conspiracy to violate the anti-bribery provisions of the FCPA in its sale and marketing of valves and other industrial equipment throughout the Middle East.  According to the criminal information, TVC ME paid bribes to officials employed by Saudi Aramco, an oil and gas company controlled and managed by the government of the Kingdom of Saudi Arabia, in order to obtain contracts with Saudi Aramco.  At the conclusion of the plea proceeding, the Court sentenced TVC ME to pay a $2.1 million fine.  The fine was part of a $13.68 million penalty paid by TYCO for falsifying books and records in connection with payments by its subsidiaries to government officials.  TYCO paid the fine as part of a non-prosecution agreement (NPA) that it entered into with DOJ.

As part of TVC ME’s plea agreement and TYCO’s NPA, the companies agreed to cooperate with DOJ and report periodically concerning the company’s compliance efforts, and to continue to implement an enhanced compliance program and internal controls designed to prevent and detect FCPA violations.  DOJ’s decision to allow a subsidiary to enter a plea of guilty and the parent company (TYCO) to enter into an NPA was apparently based on DOJ’s recognition of TYCO’s timely, voluntary and complete disclosure, which included a global internal investigation concerning bribery and related misconduct, as well as follow on remediation of the noted problems.  DOJ cited TYCO’s remediation efforts, which included the implementation of an enhanced compliance program, the termination of employees responsible for the improper payments and falsification of books and records, the severing of contracts with responsible third-party agents and closing of subsidiaries due to compliance failures.

TYCO also consented in parallel civil proceedings to a judgment in favor of the SEC, requiring the company to pay an additional $10,564,992 in disgorgement and $2,566,517 in pre-judgment interest.  The total of the fine to TVC ME, the agreed payment by TYCO under the NPA, and the SEC consent judgment is more than $26 million.  No individuals were prosecuted in the matter.

Monday
Sep242012

WSJ Article Shines Light on Guilty Pleas

The Wall Street Journal recently featured the story of Kenneth Kassab, an individual who, almost as an afterthought, withdrew his plea of guilty to federal explosives charges, and ended up being acquitted by a jury.  Gary Fields and John Emshwiller, Federal Guilty Pleas Soar as Bargains Trump Trial, Wall Street Journal, September 24, 2012, A1.  The article zeroed in on the real-world peril of overwhelming sentencing consequences that individuals charged with federal crimes face, highlighting the fact that even those who may believe in their innocence, plead guilty as a way of choosing the lesser of two evils.

Mr. Kassab was a handy man at a local hotel in Sault Ste. Marie in Michigan’s Upper Peninsula.  In the course of his duties, he was asked by the hotel owner, John Lechner, to move several dozen 50 pound bags that he believed were fertilizer.  The problem was that Mr. Lechner was under investigation for making statements about becoming a mercenary if the government ever failed.  The bags actually contained ammonium nitrate fuel (ANFO) , the same compound used in the bombing of the Alfred P. Murrah Building in Oklahoma City in 1995.

Mr. Kassab had maintained his innocence, believing he had done nothing wrong.  Nonetheless, after discussing the potential sentence that he was facing, the complicating factors that included a prior criminal history, as well as the fact that he would be tried alongside Lechner, he decided to enter a plea of guilty.  It was only after the Court held a bond revocation hearing for violation of the conditions of his pretrial release, that he, without prior planning or warning to his counsel, declined the magistrate judge’s request that he reaffirm his prior guilty plea.  After a jury trial, the defense of which had to be prepared hastily (the trial was four days away when he changed his plea), he was acquitted of all charges following 2 hours of deliberation.

The case highlights growing concern that 25 years of federal legislation aimed at getting tough on crime, and the accompanying evolution of the United States Sentencing Guidelines, has resulted in a charging regime that leaves most defendants with little choice but to plead guilty even in circumstances where they maintain their innocence.  Often prosecutors also use the threat of additional charges in a superseding indictment to obtain guilty pleas.  A companion article in the same issue of The Journal reported on a recent academic study, which results indicated that when faced with dire consequences, 55% of innocent people would be inclined to enter into an agreement to plead guilty.  John Emshwiller and Gary Fields, Study Shows Innocent Plead Guilty at a High Rate, Wall Street Journal, September 24, 2012, A20.  It reported other studies have resulted in rates of guilty pleas by innocent people in the range of 10% - 50%.

Both of these articles point to a growing problem and concern regarding our current system of justice.  There is no practical way that the government could try all of the cases that it charges.  At the same time, however, defense lawyers are faced with difficult tasks of mitigating the potential exposure to their individual clients while holding the government to its evidence.

Thursday
Sep202012

Third Circuit Denies Defendant Interest on Award of Excess Restitution

The U.S. Court of Appeals for the Third Circuit recently affirmed the denial of a criminal defendant’s claim for interest on an excess payment of restitution under the Civil Asset Forfeiture Reform Act (CAFRA), 28 U.S.C. §2465.  U.S. v. Craig, No. 11-1697, slip op. (3rd Cir., September 17, 2012).

Ryan James Craig was convicted on charges of wire fraud and failure to appear at trial in the U.S. District Court for the Middle District of Pennsylvania.  His sentence included an order to pay $12,411 in restitution and a $300.00 special assessment, which the government sought to satisfy from funds ($16,342) seized in the case.

While Craig acknowledged that the previously seized funds could be used for that purpose, he filed a motion for the return of the remaining $3,631.  He ultimately prevailed on the request when an earlier appeal the Third Circuit reversed the district’s order that the remaining fund be applied to an unsatisfied restitution order in the District of Rhode Island.  When the matter was then returned to the Middle District, Craig filed a motion requesting that he receive interest on the amount to be returned.

On appeal of the district court’s denial of his motion, Craig argued that the United States should be liable for interest under CAFRA because he prevailed in his challenge to the government’s attempt to divert the funds to satisfy the Rhode Island restitution order.  The Third Circuit rejected Craig’s argument reasoning that Craig had obtained neither a judgment on the merits, nor any relief specific to the forfeiture action.

The court noted that in order to prevail on his claim, Craig must have established that he substantially prevailed in a civil proceeding to forfeit property.  28 U.S.C. §2465(b)(1).  It found that the criminal restitution order issued by the district court at the government’s request did not qualify as a civil proceeding to forfeit property, reasoning that Craig’s argument could not be reconciled with the fact that an order of restitution is a component of a criminal sentence, citing U.S. v. Perez, 514 F.3d 296, 299 (3rd Cir. 2007).

The court also rejected Craig’s argument that equity requires the government to disgorge the interest, finding no authority to support that argument.  It noted that neither fairness considerations nor rules applicable to private disputes can alone provide grounds for abrogating sovereign immunity, citing Larson v. United States, 274 F.3d 643, 647 (1st Cir. 2001).

While finding that there appeared to be a split among the circuits regarding this issue, the panel found itself in the majority of its sister circuits, including the First, Tenth, Eighth and Second Circuits.  At the same time, it recognized that the Sixth, Ninth and Eleventh Circuits have approved of contrary approaches, finding that in such circumstances, the government must disgorge its earnings along with the property at the time the property is returned.  See, e.g. United States v. 1461 W 42nd St., 251 F.3d 1329, 1338 (11th Cir. 2001).  The court concluded, however, that the minority view articulated by those circuits was at odds with the exhortation by the United States Supreme Court in Library of Congress v. Shaw, 478 U.S. 310 (1986), that “courts lack the power to award interest against the United States on the basis of what they think is or is not sound policy.”  Id. 478 U.S. at 321.