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Thursday
Apr192012

Former Natural Gas Worker Pleads Guilty to Damaging Marcellus Shale Pipeline 

On April 4, 2012 in the United States District Court for the Middle District of Pennsylvania, Henry Benton, a former employee of a company engaged in the construction of a portion of the Marcellus Shale pipeline, pleaded guilty to a one count felony Information charging him with knowingly engaging in an excavation activity resulting in damage to a natural gas pipeline exceeding $50,000.00 under 49 U.S.C. § 60123(d).

According to the Information, Mr. Benton was a former employee of a construction and engineering company that was engaged to construct a natural gas pipeline, known as the Emig Line, in Cogan House Township, Lycoming County, Pennsylvania. The pipeline was to be used to transport natural gas from Marcellus Shale wells to other pipelines for storage, transmission and distribution throughout the United States.

According to the Information, Mr. Benton disregarded the location information and markings established by the operator of the pipeline facility, and used a track hoe excavator to excavate and then damage, dent and open holes in a section of the Emig Line. The claimed cost to replace the damaged section of the pipeline is $208,233.08. Following the incident, Mr. Benton was terminated from his employment after only five weeks on the job.

Under the terms of the plea agreement, Mr. Benton will be incarcerated for at least twelve months, but not more than eighteen months, followed by three years supervised release. The maximum penalty for the offense is five years incarceration. Additionally, Mr. Benton will pay restitution in an amount to be determined by the court of more than $50,000.00, but no more than the cost to replace the damaged section of the pipeline. Under the plea agreement, if the court imposes a sentence different from that agreed to by the parties, then both Mr. Benton and the Government have the right to withdraw from the agreement.

United States District Judge John E. Jones, III, who is presiding over the matter, has scheduled a pre-sentencing conference for July 30, 2012. A sentencing date has not been scheduled.

The prosecution of Mr. Benton is another example of federal and state law enforcement agencies increasing their focus on Marcellus Shale in recent months. In March 2011, the Pennsylvania Attorney General's Environmental Crimes Section filed criminal charges against the owner of a waste hauler service and his company for allegedly dumping wastewater from natural gas drilling at various locations in Southern Pennsylvania. In addition to improper waste handling and disposal, federal and state authorities are focused on individuals and corporations that release contaminates into the environment, fail to truthfully and timely report violations and endanger natural resources and wildlife as result of the Marcellus Shale drilling. As the number of Marcellus Shale wells being drilled increases over the coming years, so will the attention of federal and state law enforcement. Accordingly, we will no doubt see an increase in the number of criminal investigations and prosecutions of those involved with the Marcellus Shale pipeline.

Reference: United States v. Benton, 4:11-CR-00208 (M.D. Pa.)

Wednesday
Mar282012

U.S. Supreme Court Finds Defense Counsel Ineffective for Advice on Plea Bargains 

On March 21, 2012, the U.S. Supreme Court issued opinions in two cases, Missouri v. Frye, 566 U.S. ___ (2012); and Lafler v. Cooper, 566 U.S. ___ (2012), affirming the principle that the Sixth Amendment's right to effective assistance of counsel applies to the consideration of plea offers.

In Frye, the defense counsel failed to inform the defendant of two plea offers proposed by the prosecutor. The more attractive of the plea offers, proposed reducing Frye's felony charge to a misdemeanor with a recommended 90-day sentence. After both offers lapsed, Frye ultimately pleaded guilty to a felony and was sentenced to three years in jail. Frye filed for post-conviction relief arguing that he would have pleaded guilty to a misdemeanor if he had known about the offer.

In Lafler, the defendant rejected a plea offer based on incorrect advice of counsel. The plea bargain involved the dismissal of two charges and a recommended 51 to 85 month sentence. After being convicted at the subsequent trial, the defendant received a mandatory minimum 185 to 360 month sentence.

Recognizing the disposition of most criminal cases today, the Supreme Court dismissed the assertion that a fair trial would "wipe clean" any deficient performance by defense counsel during the plea bargain process. To the contrary, at least in Lafler, the trial did not cure the error, "it caused the injury from the error." Justice Kennedy commented that "it is insufficient simply to point to the guarantee of a fair trial as a backstop that inoculates any errors in the pretrial process." Such a position "ignores the reality that criminal justice today is for the most part a system of pleas, not a system of trials." As a result, the right to adequate assistance of counsel cannot be defined or enforced without taking account of the central role plea bargaining plays in securing convictions and determining sentences.

With that rationale as a foundation, the Supreme Court held that "as a general rule, defense counsel has the duty to communicate formal offers from the prosecution to accept a plea on terms and conditions that may be favorable to the accused." In circumstances where the defense counsel has failed to meet this standard, "counsel did not render the effective assistance the Constitution requires" but the defendant must nevertheless demonstrate prejudice to be entitled to relief. The defendant must show a reasonable probability that (1) she or he would have accepted the earlier plea offer, and (2) the plea would have been entered without the prosecution canceling it or the trial court refusing to accept it.

Where prejudice has resulted, the Supreme Court recognized that the remedy must be specifically tailored to the injury suffered sufficient to "'neutralize the taint' of a constitutional violation" without providing "a windfall to the defendant." Where trial judges find that a defendant declined a plea offer due to ineffective counsel and subsequently received a greater sentence, the defendant may be resentenced to the terms offered in the plea agreement. Trial judges are also empowered to direct prosecutors to reoffer the plea proposal in circumstances where it contemplated a plea to less serious counts that those on which the defendant was convicted at trial.

References:

Lafler v. Cooper, 566 U.S. _ (2012)

Missouri v. Frye, 566 U.S. _ (2012)

Tuesday
Feb282012

Government Abandons First Large-Scale FCPA Sting Prosecution 

After two trials resulted in acquittals for three defendants, hung juries as to seven others and no convictions, the United States has given up on what it had originally touted as "the largest single investigation and prosecution against individuals in the history of DOJ's enforcement of the Foreign Corrupt Practices Act (FCPA)." On February 21, 2012, the government filed a motion to dismiss, with prejudice, the indictments of all remaining defendants (including those not yet brought to trial and those who had been granted a mistrial) in United States v. Goncalves, et al. , D.D.C., Criminal No. 09-335. Judge Richard J. Leon granted the government's motion.

In its three paragraph motion, the government indicated that its request to dismiss all remaining charges was based on three primary factors: (1) the unfavorable outcomes of the first two trials; (2) the impact of the court's ruling on certain evidentiary matters in the first two trials, including rulings relating to Rule 404(b) and other "knowledge and intent" evidence; and (3) the substantial resources that would be expended to proceed with four or more additional trials.

Although Judge Leon granted the government's motion from the bench, he did not do so without comment. According to the Washington Post, Judge Leon was critical of the government, indicating that, in his opinion, the case was a "long and sad chapter in the annals of white collar criminal enforcement." The Post further reported that the Judge specifically criticized how prosecutors handled evidence, managed their key informant and pushed an "aggressive" interpretation of conspiracy charges.

The original indictment charged twenty two executives and employees of companies in the military and law enforcement products industry for an alleged scheme to bribe foreign government officials to obtain and retain business. Specifically, the defendants were charged with engaging in a scheme to pay bribes to the Minister of Defense for the African nation of Gabon. In fact, the scheme was part of an undercover operation, with no involvement from any official from Gabon or any other nation. As part of the sting, the defendants allegedly agreed to pay a 20% "commission" to a sales agent that the defendants believed represented the Minister of Defense for Gabon in order to win a portion of the $15 million contract to outfit the country's presidential guard.

Underlying the government's decision to move to dismiss all of the remaining charges in this case were problems relating primarily to the credibility of the government's witnesses and the difficulty in proving the elements of willfulness and intent with respect to each of the defendants. It is likely that among the important considerations in the government's decision to dismiss was a blog post on the "FCPA Professor" website (www.fcpaprofessor.com), where the foreman of the jury in the second trial posted a detailed discussion of the jury deliberations. The foreman indicated that the jurors were nearly unanimous in finding the prosecution witnesses to be evasive and combative. In addition, many of the jurors had a problem finding that the alleged payment of a "commission," as described by government witnesses was equivalent to a "bribe." Lastly, it appears that the jurors had substantial problems with the government's star witness, Richard Bistrong, who had previously been convicted of violating the FCPA and accepting $1.3 million in kickbacks, before participating in the undercover sting.

This is the second time in less than three months that the DOJ has suffered the dismissal of a high profile FCPA case. In December, Judge Howard Matz, in the U.S. District Court for the Central District of California, granted a motion to dismiss the Lindsey Manufacturing FCPA case. U.S. v. Enrique Faustino Aguilar Noriega, et al., C.D. Cal., No. CR 10-01031, slip op. (December 1, 2011). By granting dismissal in that case, Judge Matz vacated the convictions of Lindsey Manufacturing Co., its CEO, Keith E. Lindsey and CFO, Steve K. Lee. Judge Matz found that there was prosecutorial misconduct throughout the course of the prosecution, including falsehoods made in search and seizure warrant affidavits, unauthorized and warrantless searches, false or misleading testimony by government witnesses in the grand jury, failure to produce questioned grand jury testimony and misconduct in the delivery of closing argument. Id. slip op. at 8-24.

FCPA enforcement has been, and will likely continue to be, one of DOJ's top priorities. The Department set records in 2010 and 2011 for the number of cases resolved, and for the length of prison sentences achieved in criminal prosecutions under the Act. In 2011, however, there was a rise in the number of FCPA matters taken to trial, a trend that is expected to continue. It is yet to be determined how the results in the prominent cases above will impact the DOJ's FCPA enforcement priorities and tactics.

Tuesday
Feb282012

Clinton Fundraiser's 24-Year Sentence Upheld 

On February 17, 2012, a panel of the United States Court of Appeals for the Second Circuit affirmed the conviction and 24-year sentence of former prominent Democratic fundraiser, Norman Hsu. United States v. Hsu, No. 09-4152-CR slip op (2d Circuit 2/17/12). Hsu raised funds for former Sen. Hillary Clinton and other marquee Democrats, and became what is known as a "bundler" on behalf of political candidates.

According to the Court, Hsu ran a 10-year Ponzi scheme through which he stole more than $50 million from investors. After obtaining funds from investors by promising high returns, Hsu would provide investors with post-dated checks in the amount of the investor's principal, plus a "guaranteed" return on that investment, usually, on an annualized basis, of 60%. While on certain occasions, investors would immediately cash the checks when they became due, more often they would "roll over" their investment, thereby investing the original principal plus accumulated gains in anticipation of further returns that would accrue during the next cycle. Instead of investing the money he collected, Hsu spent it on himself or made charitable contributions to burnish his public image.

Mr. Hsu also used his political connections created by campaign fundraising to create an appearance of legitimacy useful in recruiting victims to his investment scam, and used the illusions of successful investments to recruit his investors as campaign "donors."

On the eve of trial, Hsu pled guilty to the Ponzi scheme counts (mail fraud and wire fraud), and then had a jury trial with respect to the campaign finance charges. The jury returned a verdict of guilty on all four campaign finance fraud charges.

At sentencing, Mr. Hsu argued that the proper estimate of loss to be used in calculating his sentence was the amount of restitution that Hsu owed his victims. The government asserted that the losses associated with Mr. Hsu's scheme were between $50 million and $100 million, a figure arrived at by adding the total amounts reflected on the faces of all outstanding checks held by Hsu investors, then subtracting from the total return the final round of the checks. With respect to that loss calculation, the district court agreed, finding that the "very method by which Mr. Hsu was able to perpetuate his fraudulent scheme" depended on his ability to inflate the perceived earnings year after year, "as part of a malicious effort to maintain their confidence and lure other victims." Mr. Hsu was eventually sentenced on all of the counts of conviction with an aggregated period of incarceration of 24 years, 4 months.

On appeal, the Second Circuit was faced with determining whether the sentencing court in a Ponzi scheme can include as part of its "intended loss" determination, those earnings that victims reinvested in a Ponzi scheme, even though those "earnings" were invented as part of the scheme itself. The Second Circuit agreed with the district court that it certainly can use those "earnings" as part of the intended loss calculation. The court distinguished the Hsu case from the case where an investor puts money into a fraudster's hands, and ultimately receives nothing of value in return. In such a case, the loss is measured by the amount of principal invested, not by the principal amount plus the promised interest or rate of return that was never received. It pointed out that with Hsu's scheme, the situation was different, in that the investor is not only told that the investment will grow, but is actually told that the investment has grown and that the original investment and the accrued interest or other gain is now available to be withdrawn or reinvested in the scheme.

The Court did acknowledge that there can be more than one way to measure losses in a Ponzi scheme case. It affirmed the principle that the district court is required only to make "a reasonable estimate of loss," citing by way of example, United States v. Rigas , 583 F.3d 108, 120 (2d. Cir. 2009). In Hsu's case, however, the court found that the task was quite straight forward, indicating that Hsu's victims frequently returned post-dated checks to him for reinvestment, thereby relinquishing the opportunity to cash those checks and withdraw from the scheme. When this occurred, the reinvested checks - including the previously promised returns - became part of their principal investment, and therefore, constitute the very losses that Hsu intended to inflict upon his victims.

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