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    Pietragallo's White Collar Criminal Defense Group

    In today's environment, the government has never more aggressively regulated, investigated, pursued and prosecuted white collar crime. If you or your company becomes embroiled in any type of federal or state government investigation, you need experienced trial lawyers who have gone toe-to-toe with prosecutors and government agents.

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    SEC Makes First Whistleblower Award Since Passage of Dodd-Frank 

    On August 21, 2012, the Securities and Exchange Commission (SEC) announced that an individual who had provided documents and other significant information in the investigation of a multi-million dollar securities fraud scheme had been awarded nearly $50,000. This is the first pay-out from a new SEC program designed to reward people who provide evidence of securities fraud. The award represents 30% of the dollar amount collected in an SEC enforcement action against the perpetrators of the scheme. This (30%) is the maximum percentage pay-out allowed by the Whistleblower Law.

    The Whistleblower’s assistance led to a court ordering more than $1 million in sanctions, of which approximately $150,000 has been collected thus far. It is still possible that additional sanctions will be issued. Any such increase, will increase payments to the Whistleblower.

    Robert Khuzami, director of the SEC’s Division of Enforcement, stated, “this Whistleblower provided the exact kind of information and cooperation we were hoping the Whistleblower program would attract.” He indicated further that, “had this Whistleblower not helped to uncover the full dimensions of the scheme, it is very likely that many more investors would have been victimized.”

    The SEC did not approve a claim from a second individual seeking an award in this matter, because of the information provided that did not lead to or significantly contribute to the SEC’s enforcement action, as required for an award.

    The SEC indicates that the quality of tips that has been receiving is on the increase. It indicates that it has received about 8 tips per day since establishment of the program in August of 2011.


    Michigan Man Becomes 9th Individual to Plead Guilty in $13.8 Million Healthcare Fraud Scheme 

    On August 28, 2012, the DOJ announced that Jawad Ahmad, a Detroit area resident entered a plea of guilty for his role in managing a $13.8 million psychotherapy fraud scheme. He is scheduled to be sentenced on November 28, 2012, and faces a maximum potential penalty of 10 years in prison and a $250,000 fine.

    According to the government, the fraud scheme began in July of 2008 when Ahmad and two other co-conspirators acquired control over a home health care company known as Physicians’ Choice Home Healthcare LLC (Physicians’ Choice). Ahmad managed the operations of Physicians’ Choice from January 2009 to March of 2010, and in doing so managed numerous aspects of fraud at Physicians’ Choice, including the delivery of payment of kickbacks to beneficiary recruiters. The beneficiary recruiters would obtain Medicare beneficiaries’ information needed to bill Medicare for home health services that, in fact, were never rendered.

    Ahmad also provided information to employees of Physicians’Choice to check the billing eligibility of the Medicare beneficiaries before Physicians’ Choice began billing them. Physicians’ Choice co-opted the Medicare beneficiaries by providing kickbacks in exchange for pre-signed forms and visit sheets that were later falsified to indicate that they received home health services that they never received. Ahmad would deliver the pre-signed beneficiary paper work to various medical professionals to create and/or sign fictitious patient files to document purported home health services that were never rendered.

    From May of 2010 through September of 2011, Ahmad also managed Phoenix Visiting Physicians, PLLC. DOJ claimed that his co-conspirator, Dr. Dwight Smith, signed home health care referrals for beneficiaries he had not seen or treated. In addition, Phoenix employed individuals who held themselves out to be “doctors,” but who were not licensed in the State of Michigan to perform any medical services. The unlicensed “doctors” met and purported to examine non-home bound Medicare beneficiaries for home health care services.

    Ahmad also acknowledged that his co-conspirators acquired beneficial ownership and control of three other home health care companies, each of which billed Medicare and operated in a manner the same as or similar to Physicians’ Choice. Medicare also paid these companies more than $5 million for fraudulent health care claims submitted based on Dr. Smith’s fraudulent referrals.

    It is estimated that the four home health care companies at the center of the indictment received approximately $13.8 million from Medicare in the course of the conspiracy.


    Company that Compensated Victims of Employee's Bid Rigging Scheme has no Standing to Appeal Criminal Restitution Order

    On August 28, 2012, a panel of the Third Circuit Court of Appeals dismissed the appeal by Sevenson Environmental Services regarding the sentencing of its former employee, Norman Stoerr. United States v. Stoerr, No. 11-2787 (3rd Cir. August 28, 2012). The Court ruled that Sevenson, as a non-party, lacked standing to appeal Stoerr’s sentence.

    On July 23, 2008, Stoerr entered a plea of guilty to bid rigging (15 U.S.C. §1); conspiracy to provide kick-backs and to defraud the United States (18 U.S.C. §371); and assisting in the preparation of false tax returns (26 U.S.C. §7206(2)). The convictions stemmed from kick-backs that Stoerr solicited and accepted from subcontractors in connection with projects managed by Sevenson, his employer.

    Sevenson is an environment services company that had contracts with the United States to serve as a contractor at the Federal Creosote Superfund Site in Manville, New Jersey, and also had a contract with Tierra Solutions, Inc. to service the general contractor at the Diamond Alkali Superfund Site in Newark, New Jersey. The Environmental Protection Agency (EPA) paid Sevenson for its services at Federal Creosote, and Tierra was responsible for paying Sevenson for its services at Diamond Alkali. Sevenson hired contractors at both sites, and would ultimately seek reimbursement from the payer (EPA or Tierra) for the subcontractor charges.

    Stoerr, as part of his employment with Sevenson was responsible for soliciting vendors at Diamond Alkali and soliciting bids for subcontracts at Federal Creosote. In that capacity, he solicited and accepted kickbacks valued at $77,132 from several subcontracting companies in exchange for favorable treatment in awarding subcontracts for Federal Creosote and Diamond Alkali projects. Stoerr and his project manager, Gordon McDonald, passed the cost of the kickbacks onto Tierra and to the EPA by including the amounts of the kickbacks in the subcontractor’s invoice that they had submitted for reimbursement. The District Court determined that Tierra’s losses as a result of the scheme totaled $257,129.22.

    Once Sevenson learned of the kick-back scheme, it paid Tierra separate payments of $202,759.04 and $38,158.11, respectively, to compensate Tierra for its losses relating to the scheme. It also commenced a civil action against Stoerr in state court to recover its losses, but also sought restitution in connection with Stoerr’s sentencing under the Mandatory Victim’s Restitution Act (“MVRA”), 18 U.S.C. §3663(A) et seq. The MVRA provides that, “[i]n each order of restitution, the Court shall order restitution to each victim in the full amount of each victim’s losses as determined by the Court and without consideration of the economic circumstances of the defendant.” 18 U.S.C. §3664(f)(1)(A). The MVRA also provides that if, “[i]f a victim has received compensation from insurance or any other source with respect to a loss, the Court shall order the restitution be paid to the person who provided or is obligated to provide the compensation.” §3664(j)(1). Sevenson claimed that it was entitled to restitution because it reimbursed Tierra for its losses.

    At Stoerr’s sentencing, the district Court declined to grant restitution to Sevenson, determining that Tierra, rather than Sevenson was Stoerr’s victim. The district Court also noted that Sevenson had the opportunity to pursue a civil remedy against Stoerr. While the district Court initially ordered Stoerr to pay $250 per month in restitution, it later ordered Stoerr’s obligations to pay Tierra (which were initially $232,192.22) reduced to $29,370.18 based on the fact that Sevenson had paid Tierra $202,759.04 toward Stoerr’s restitution.

    The government moved to dismiss Sevenson’s appeal, arguing that Sevenson, as a non-party, was unable to appeal Stoerr’s sentence. The panel of the Third Circuit considered the motion and the appeal on the merits simultaneously.

    The Court noted that in order to have standing, “an appellant, must be aggrieved by the order of the district Court from which it seeks to appeal,” citing Ipsco Steel (Ala.), Inc., v. Blaine Constr. Corp., 371 F.3d 150, 154 (3rd Cir. 2004). Acknowledging that it was not a party to Stoerr’s criminal proceeding, Sevenson argued entitlement to restitution, not as a victim, but as one who has reimbursed losses incurred by a victim of its former employee. The Court addressed this argument by first noting that crime victims are not even considered to be parties to criminal proceedings, citing U.S. v. Aguirre-Gonzalez, 597 F.3d 46, 53 (1st Cir. 2010). It went on to conclude that if victims are non-parties to such proceedings, then Sevenson, who is a degree removed from the victim’s status was likewise a non-party.

    The Court also rejected Sevenson’s argument that the MVRA scheme contains an implicit right of appeal by non-parties. The Court indicated that while it appreciated that conferring non-party payers with appellate rights may encourage third-parties to compensate victims voluntarily, it could not conclude that the MVRA includes a right of appeal by non-parties. It noted first that the MVRA gives no indication that it disturbs the default rule that only the government and the defendant can appeal a defendant’s sentence. The Court further expressed hesitance to find an implied right of appeal by non-party payers under the MVRA, because Congress explicitly granted victims the right to petition the Court of Appeals for a Writ of Mandamus under the Federal Crime Victims’ Rights Act, 18 U.S.C. §3771 (“CVRA”), but did not grant such explicit rights in the MVRA.


    Mortgage Fraud Still a Priority for U.S. Department of Justice 

    The United States Department of Justice ("DOJ") continues its efforts to prosecute cases of mortgage fraud and related crimes in the wake of the residential mortgage backed securities ("RMBS") crisis that erupted in 2008. Recent examples of these efforts include cases where DOJ has either charged or obtained guilty pleas from one individual involved in a scheme to rig bids in public real estate transactions and three individuals involved in separate multi-million dollar mortgage fraud schemes.

    On July 23, 2012, David R. Bradley agreed to plead guilty to conspiracy and assist DOJ in its ongoing investigation of a real estate bid rigging scheme. According to court documents, Bradley conspired with others not to bid against one another at public real estate foreclosure auctions in Alabama. After a public auction, the conspirators would then hold a second secret auction to bid on the property above the public auction price.

    Bradford J. Rieger, a Connecticut attorney, pled guilty on July 12, 2012, to one count of conspiracy to commit wire fraud and bank fraud. Rieger, along with others, conspired to defraud mortgage lenders and financial institutions by obtaining millions of dollars in fraudulent mortgages for the purpose of purchasing dozens of multi-family properties in New Haven, Connecticut. Based on falsified HUD-1 forms, the mortgage lenders would issue mortgages based on an inflated sale price. In total, more than $10 million in fraudulent mortgages on more than forty properties were obtained through the conspiracy.

    On July 17, 2012, Mitchell Cohen and Erin Davis, the owner and sales manager of the Buy-A-Home Real Estate Brokerage firm, were indicted in the United States District Court for the Southern District of New York for participating in a $7.5 million mortgage fraud scheme involving FHA loans. According to the U.S. Attorney for the Southern District of New York, Preet Bharara, "As the indictment alleges, Mitchell Cohen and Erin Davis were engaged in 360 degrees of fraud - they lied to and exploited borrowers to induce them to buy homes beyond their means, they lied to banks about the borrowers' financial condition, and they lied to HUD so the loans would be FHA-insured. While Mr. Cohen and Ms. Davis enriched themselves, everyone else lost out as the homeowners went into foreclosure, the banks were stuck with bad loans, and HUD had to pay out insurance, as detailed in the indictment."

    In January 2012, DOJ announced the creation of the RMBS Working Group, a task force devoted to cracking down on fraud or other misconduct by market participants in the creation, packaging, and sale of mortgage-backed securities. On May 24, 2012, DOJ launched the RMBS Working Group website (, which will allow anyone with knowledge of RMBS-related fraud to report such misconduct directly to DOJ or the Securities and Exchange Commission ("SEC").

    The increase in resources within the RMBS Working Group comes in the wake of sharp criticism from Iowa Senator Chuck Grassley, regarding DOJ's efforts in prosecuting mortgage fraud cases. At a hearing of the Judiciary Committee on March 9, 2012, Senator Grassley stated that, "the [DOJ's] message is that crime does pay," referring to DOJ's failure to bring criminal charges against the former Countrywide CEO accused of lying about the risks of Countrywide's loans.

    In light of Senator Grassley's criticisms and the increase in resources dedicated to the RMBS Working Group, expect mortgage fraud prosecutions to continue to be a priority for DOJ.


    Supreme Court Extends Apprendi Rule to Criminal Fines: Requires Proof Beyond a Reasonable Doubt 

    On June 21, 2012, the U.S. Supreme Court issued an opinion in Southern Union Company v. United States, holding that the Apprendi rule applies to the imposition of criminal fines. The Apprendi rule holds that "[o]ther than the fact of the prior conviction, any fact that increases the penalty for a crime beyond the prescribed statutory maximum must be submitted to a jury, and proved beyond a reasonable doubt." Apprendi v. New Jersey, 530 U.S. 466, 490 (2000).

    In Southern Union, the Defendant, a natural gas distributor, stored liquid mercury at one of its facilities without a proper permit. The Defendant faced criminal charges after the facility was broken into and mercury was spread around the complex. In 2007, a grand jury indicted the Defendant on multiple counts, including a count which alleged that the company stored liquid mercury without a permit in violation of the Research Conservation and Recovery Act of 1976 ("RCRA"), "from on or about September 19, 2002 until on or about October 19, 2004." Following a trial, the jury convicted the Defendant on this count. The verdict form stated that the Defendant was guilty of unlawfully storing liquid mercury for an approximate time period, using the language "on or about," however, the jury was not asked to determine the precise duration of the violation. The trial court concluded that the jury had found a 762 day violation of the RCRA, which was punishable by inter alia "a Court fine of not more than $50,000 for each day of the violation." 42 U.S.C. §6928(d). The trial court thus determined that the maximum potential fine, which the Defendant faced, was $38.1 million. However, the Court imposed a fine of $6 million and a community service obligation of $12 million. The Defendant challenged, under Apprendi, the trial court's finding with respect to the maximum fine.

    On appeal, the Supreme Court sided with the Defendant and applied the Apprendi rule to the imposition of criminal fines. The Court held that the jury must find, beyond a reasonable doubt, all facts which determine a fine's maximum amount. In reaching this conclusion, the Court decided not to treat criminal fines differently than other punishment, such as incarceration. The Court stated that criminal fines, like other forms of punishment, are penalties inflicted for the commission of an offense. Substantial, and not petty, fines may engender a significant infringement of freedom, and most importantly trigger a Sixth Amendment right to a jury trial. Moreover, the amount of a fine (similar to a maximum term of imprisonment) is often calculated by reference to a particular set of facts. In Southern Union, for example, the duration of the statutory violation was a fact upon which the maximum fine was determined. The Court thus determined that the Apprendi rule should apply to criminal fines.

    While the vast majority of federal convictions result from guilty pleas and juries have few opportunities to address all facts that would determine a fine's maximum amount, we believe that Southern Union may impact the Government's practice with regard to indictments. It appears that any facts that tend to increase the amount of a fine must now be alleged in the indictment. Because the Government's knowledge of facts related to sentencing may be incomplete at the indictment stage, Southern Union may result in the Government foregoing greater fines.


    Will Zuckerberg "Friend" the SEC? 

    In one of the most anticipated IPOs in history, Facebook (NASDAQ: FB) shares hit the market on Friday, May 18, 2012. What first appeared to be sweet success for the multi-billion dollar company quickly turned sour, as the share price rose from $38 to $42.05, then fell to $28.84 at the close of the market on May 29, 2012. With Facebook shares having now lost more than 24% of their market value in less than two weeks of trading, government regulators have sat up and are taking notice.

    From the opening bell, Facebook's IPO suffered from a perfect storm of technical difficulties - a true irony for the social media giant. Investors who placed orders ahead of the market's opening on May 18th learned that their orders had not been processed due to a technical error. When trading began after 11 a.m., many were left to wonder whether their orders were processed and at what price. NASDAQ Chief Executive Bob Greifeld reminded shareholders that the this was NASDAQ's largest IPO, and the exchange processed over 570 million shares on May 18th alone. A suit filed on May 22, 2012 in Manhattan federal court seeks class action status for those investors who claim to have been damaged by the mishandling of Facebook stock orders.

    NASDAQ's technical difficulties could turn out to be the least of Facebook's problems. As Security and Exchange Commission Chairman Mary Schapiro exited a recent Senate Banking Committee hearing, she commented, "I think there is a lot of reason to have confidence in our markets and in the integrity of how they operate, but there are issues that we need to look at specifically with respect to Facebook." Similarly, Chairman and Chief Executive Officer of the Financial Industry Regulatory Authority, Richard Ketchum, expressed concern: "[This] is a matter of regulatory concern to us and I'm sure to the SEC. And without saying whether it's us or the SEC, we will definitely be focusing on it."

    The focus of Ketchum's comments is a report by Reuters that the lead underwriter for Facebook's IPO, Morgan Stanley, cut its revenue forecasts for Facebook in the days prior to the IPO. This information affected Facebook's value, and the information may not have reached many investors prior to the stock offering. Other underwriters on the IPO, JP Morgan Chase and Goldman Sachs, also revised their estimates prior to the sale. One serious concern is the level of information made available to different types of investors. Institutional investors allegedly received information about the public offering that retail investors did not.

    In the wake of the financial crisis dating back to 2008 and the resulting Dodd-Frank legislation, the SEC has become more proactive and vigilant on matters large and small alike. While news since the IPO has focused more prominently on Facebook CEO Mark Zuckerberg's recent nuptials and co-founder Eduardo Saverin's renunciation of his American citizenship, the focus will undoubtedly shift back to what is sure to be intense scrutiny by government watchdogs.


    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.)


    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.


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

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


    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 (, 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.


    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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