Category: Criminal Law

Self-Reporting: A Wise Strategy or Chasing Unicorns?

As we noted in an earlier post, Department of Justice (DOJ) representatives have been emphasizing this spring the financial benefits of cooperation. They did so again last week at the Practicing Law Institute’s Enforcement 2015: Perspectives from Government Agencies, during which enforcement officials from the DOJ, SEC, CFTC, FINRA and Consumer Financial Protection Bureau (CFPB) all pushed back last week against complaints that the benefits of self-reporting are illusory and the costs far too high.

Director of the SEC’s Division of Enforcement Andrew Ceresney claimed that significant benefits of self-reporting are evidenced by three FCPA settlements earlier this year: a disgorgement-only settlement with Goodyear, a deferred prosecution agreement with PBSJ Corporation and a settlement with FLIR Systems, Inc. which entailed only a “minimal penalty” of $1 million. William Stellmach, Principal Deputy Chief of the Fraud Section at the U.S. Department of Justice, noted that the Alstom S.A. settlement in which Alstom paid a $772,290,000 criminal penalty to settle an FCPA prosecution “gives you 772 million reasons to self-disclose.” Among the factors cited for such a high fine was the company’s failure to self-report.

Stellmach claimed that – despite the perception of many practitioners that regulators almost always require some form of “public shaming” for even those companies that self-report – decisions not to prosecute are “not unicorns.” The difficulty, he explained, is that such decisions not to prosecute cannot be publicized without risking the adverse publicity companies want to avoid. As a result, he noted, there has been some discussion internally at DOJ about how it might anonymize such resolutions so that they could be publicized in order to provide the defense bar and their clients with evidence as to the benefits of self-reporting. The CFPB did exactly that, according to Deputy Enforcement Director Jeffrey Ehrlich, in a recent action filed against two financial institutions for alleged RESPA violations. A third institution (referred to in the complaint only as “Unnamed Financial Institution”) that engaged in the same conduct escaped being either named or fined by discovering the violation, reporting it and terminating the individual at issue.

The calculus regarding whether to self-report is also changing, according to the SEC’s Ceresney, as a result of the increase in whistleblowers. If a company’s management decides not to reach out to regulators, someone else may very well do it for them in today’s environment of substantial whistleblower awards.

For companies which have made the decision to self-report, the next decision is to which regulator should they report. The Director of the CFTC’s Division of Enforcement Aitan Goelman suggested that, if the company and/or the conduct is within the jurisdiction of multiple regulators, the company should advise all the relevant regulators, as opposed to relying on one regulator to pass the information along to the others.

The regulators also made clear that self-reporting is not, by itself, enough to get significant credit; sincere efforts and cooperation in uncovering the full scope of the problem is required. Ceresney and Stellmach, however, rejected criticism that regulator demands as to the scope of such investigations result in undue costs, sometimes in the hundreds of millions of dollars. Rather than micromanaging the companies’ investigation, the SEC and DOJ only expect a risk based investigation. For example, if an employee was paying bribes in one country, the investigation might cover only the countries in which the employee worked. Absent evidence of a more widespread problem, there would be no need to “boil the ocean” with an investigation that covered all operations around the globe.

Stellmach and others cautioned, however, that in order to receive the most significant credit for cooperation, a company must be willing to identify culpable employees and assist in the gathering of evidence in order to prosecute those individuals. As FINRA’s Executive Vice President of Enforcement J. Bradley Bennett noted, this is the area in which it is most difficult for FINRA to get cooperation. Too often, he indicated, the individuals identified by the company are dead, retired, now employed by a competitor or outside FINRA’s jurisdiction.

© 2015 BARNES & THORNBURG LLP  Authored by:  Anne N. DePrez

“Hello, Newman” Government Continues to Litigate Reversed Insider Trading Convictions

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The U.S. Attorney for the Southern District of New York, Preet Bharara, has decided not to go down without a fight. Following a Second Circuit panel’s reversal of Bharara’s signature achievement, the insider-trading convictions of former hedge fund managers Todd Newman and Anthony Chiasson, the U.S. Attorney’s office has petitioned the court for rehearing and rehearing en banc. The Securities and Exchange Commission has also weighed in on the U.S. Attorney’s side, arguing in an amicus brief that the panel seriously erred in its decision. Meanwhile, in other cases, particularly outside the Second Circuit, the Justice Department, and the SEC have argued strenuously that the Second Circuit’s panel decision should not be followed.

In the Second Circuit, the battle lines are being drawn. Bharara’s office has asked both the panel and the full Second Circuit to rehear the case. The US Attorney’s office has argued that the panel erred by imposing two requirements that are purportedly contrary to law– first, that a tipper act for a “personal benefit” of financial consideration, or something at least akin to monetary gain; and second, that the tippee know that the tipper supplying the inside information acted for such a benefit. The SEC has concurred with this assessment, elaborating on Newman’s conclusion that evidence of friendship between tipper and tippee is insufficient to prove the “personal benefit” necessary for tipping liability. The Commission contends that this contradicts Dirks v. SEC, the Supreme Court’s seminal insider trading decision. Both the U.S. Attorney and the SEC contend that, if Newmanremains the law, it will seriously threaten the integrity of the securities markets, and government regulators will be dramatically limited in their ability to prosecute “some of the most common, culpable, and market-threatening forms of insider trading.”

In opposition, Newman and Chiasson, along with various law professors, the criminal defense bar, and even Marc Cuban, have argued that the Second Circuit panel got it right when it imposed an important, objective outer bound to an otherwise amorphous illegal activity. The defendants even engaged in ad hominem criticism of Bharara, analogizing him to a “Chicken Little” complaining that the sky is falling, or more precisely, a “petulant rooster whose dominion has been disturbed.” Those supporting the opinion assert that any perceived difficulty created by the decision can, and should, be rectified by Congress.

Even as the Newman case continues forward, its repercussions are being felt within the Second Circuit and beyond. In the Southern District alone, at least a dozen defendants, who were convicted or pleaded guilty underpre-Newman law, have argued that their cases need to be revisited in light of Newman. No court yet has agreed with that argument, but most of these motions remain pending.

Outside the Second Circuit, the Government is looking to ring-fence the Newman decision and limit its applicability elsewhere. Federal prosecutors, for example in North Carolina, have argued that Newman is not the law in the Fourth Circuit and therefore should not be followed. Meanwhile, defendants in other jurisdictions are invokingNewman in pending, and even resolved, insider trading matters, both civil and criminal.

Defendants are even arguing Newman’s applicability within the SEC’s administrative courts – with success. In In re Peixoto, an SEC administrative proceeding related to Herbalife, the Commission voluntarily dropped its case against Peixoto after Newman. Other cases in the agency’s courts (including against SAC founder Steven Cohen) remain on holding pending final resolution of Newman. And in In re Ruggieri, the administrative law judge said that he would require the SEC to demonstrate the Newman standard of “personal benefit.”

Clearly, the Newman saga has not reached its conclusion, but the fall-out already demonstrates what a momentous decision the Second Circuit panel made.

ARTICLE BY

Brian E. Casey
OF
Barnes & Thornburg LLP

“Hello, Newman" Government Continues to Litigate Reversed Insider Trading Convictions

Barnes & Thornburg LLP Law Firm

The U.S. Attorney for the Southern District of New York, Preet Bharara, has decided not to go down without a fight. Following a Second Circuit panel’s reversal of Bharara’s signature achievement, the insider-trading convictions of former hedge fund managers Todd Newman and Anthony Chiasson, the U.S. Attorney’s office has petitioned the court for rehearing and rehearing en banc. The Securities and Exchange Commission has also weighed in on the U.S. Attorney’s side, arguing in an amicus brief that the panel seriously erred in its decision. Meanwhile, in other cases, particularly outside the Second Circuit, the Justice Department, and the SEC have argued strenuously that the Second Circuit’s panel decision should not be followed.

In the Second Circuit, the battle lines are being drawn. Bharara’s office has asked both the panel and the full Second Circuit to rehear the case. The US Attorney’s office has argued that the panel erred by imposing two requirements that are purportedly contrary to law– first, that a tipper act for a “personal benefit” of financial consideration, or something at least akin to monetary gain; and second, that the tippee know that the tipper supplying the inside information acted for such a benefit. The SEC has concurred with this assessment, elaborating on Newman’s conclusion that evidence of friendship between tipper and tippee is insufficient to prove the “personal benefit” necessary for tipping liability. The Commission contends that this contradicts Dirks v. SEC, the Supreme Court’s seminal insider trading decision. Both the U.S. Attorney and the SEC contend that, if Newmanremains the law, it will seriously threaten the integrity of the securities markets, and government regulators will be dramatically limited in their ability to prosecute “some of the most common, culpable, and market-threatening forms of insider trading.”

In opposition, Newman and Chiasson, along with various law professors, the criminal defense bar, and even Marc Cuban, have argued that the Second Circuit panel got it right when it imposed an important, objective outer bound to an otherwise amorphous illegal activity. The defendants even engaged in ad hominem criticism of Bharara, analogizing him to a “Chicken Little” complaining that the sky is falling, or more precisely, a “petulant rooster whose dominion has been disturbed.” Those supporting the opinion assert that any perceived difficulty created by the decision can, and should, be rectified by Congress.

Even as the Newman case continues forward, its repercussions are being felt within the Second Circuit and beyond. In the Southern District alone, at least a dozen defendants, who were convicted or pleaded guilty underpre-Newman law, have argued that their cases need to be revisited in light of Newman. No court yet has agreed with that argument, but most of these motions remain pending.

Outside the Second Circuit, the Government is looking to ring-fence the Newman decision and limit its applicability elsewhere. Federal prosecutors, for example in North Carolina, have argued that Newman is not the law in the Fourth Circuit and therefore should not be followed. Meanwhile, defendants in other jurisdictions are invokingNewman in pending, and even resolved, insider trading matters, both civil and criminal.

Defendants are even arguing Newman’s applicability within the SEC’s administrative courts – with success. In In re Peixoto, an SEC administrative proceeding related to Herbalife, the Commission voluntarily dropped its case against Peixoto after Newman. Other cases in the agency’s courts (including against SAC founder Steven Cohen) remain on holding pending final resolution of Newman. And in In re Ruggieri, the administrative law judge said that he would require the SEC to demonstrate the Newman standard of “personal benefit.”

Clearly, the Newman saga has not reached its conclusion, but the fall-out already demonstrates what a momentous decision the Second Circuit panel made.

ARTICLE BY

Brian E. Casey
OF
Barnes & Thornburg LLP

From Federal Prosecutor to Law Firm Life: A Conversation with Grant Fondo on Business Development Strategies when transitioning from Public Service to Private Practice

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The National Law Review recently had to the opportunity to attend Thomson Reuter’s Legal Executive Institute’s 22nd Annual Marketing Partner Forum in Rancho Palos Verdes, California where Grant Fondo, Partner at Goodwin Procter, LLP participated on the panel event: Coaching for Success: Collaboration between Marketing & Professional Development to Deliver Training that Drives Revenue. This Panel focused on the intersection between business and professional development, exploring the potential impact partnership efforts can have on business growth.

On this panel, Grant spoke from his experience concerning his transition from Federal Prosecutor and former Assistant US Attorney of the Northern District of California to his work at Goodwin Procter.

Post-conference, Grant was kind enough to answer our questions concerning his career trajectory and gave us some insight from his unique experiences in the legal world.  Below are his answers to the questions posed by NLR.

1.  What were the considerations you took into account when choosing a law firm to join?

I was looking for a firm that was a market leader in the technology and white collar practice areas, a firm that I thought was on an upward trajectory, a firm that understood Silicon Valley, and that was collegial and believed in a collaborative work place.  I have been fortunate to work in collaborative places before, and that type of environment is the best fit for me.

2.  What role, if any, has your firm’s business development and marketing staff had in helping you grow a book of business?

I started from ground zero, so I needed help. I still need help, as this is a long-term process and I am still working toward my goals.  The staff has had an important role from day one, both in the context of internal and external marketing.  They helped me quickly integrate with many of my partners nationwide in my practice group, as well as outside of it, and helped me feel like part of the firm.  Externally, they worked with me to train me to be better at marketing, focus on the marketing efforts I enjoyed, and presented me with opportunities.  They also acted as a sounding board for different marketing events, provided guidance to improve my ideas, and helped me execute on those ideas.

3. What role, if any, has speaking engagements and / or thought leadership, played in helping you stay front of mind with existing or potential clients?

It has helped, but it is time consuming.  You have to be thoughtful about what events you speak at, in that not all speaking opportunities and topics are created equal.  When I returned to private practice, I wanted to focus on marketing I enjoyed, and pass on areas I disliked and was not good at.  Thought leadership is an area that lends itself to that type of philosophy.  My experience as a former federal prosecutor helps in certain areas of the law that intersect well with Silicon Valley clients. For example, there is a lot of concern here with privacy and government intrusion into and demands for company and customer data. This past year we teamed up with clients to file an amicus brief in the landmark smart-phone privacy and 4th Amendment case of Riley v. California.   I enjoy spending time on areas that also hit home for clients.  It also permits you to reach out to a client to let them know about the latest development, or after a meeting is over discuss a topic that is important to them but not necessarily the focus of today’s meeting.  Sometimes they call back a few days later with something new or interesting.

4. How did you form and maintain relationships with potential and current clients?

My partners have been good about introducing me to clients that need my expertise, and letting me further develop those relationships.  When you connect with a client, you want to foster that relationship in a way that is not intrusive or pandering.  I am fortunate in that Goodwin has a really interesting client base doing pretty amazing things, so there is always something to talk about or learn from your client.  Building relationships is also about focusing on what your client wants and trying to understand their perspective–if they want three quick bullet points on a topic so they are armed for their meeting with the CEO, you don’t give them a three page memo five minutes before that meeting.  I also like to develop the relationship on a more personal level.  I love to go fly fishing, and I have a client or two that share that passion.  Simply swapping photos and stories once in a while is a lot of fun, and hopefully has the added benefit of keeping me top of mind.

5. Did you take any affirmative action to meet attorneys from other practice groups within the firm?  Has this been an effective in generating referrals or helping you transition to private law practice?

I believe this is probably the most important thing a new partner can do.  During my first year I took advantage of every opportunity to fly back to Goodwin’s East Coast offices to meet my partners from all practice groups, and I still try to do it.  I also made similar efforts in California.  Getting to know my partners and associates has helped me in a number of contexts.  First, it made me feel more a part of the firm on a professional and social level.  I want to enjoy going to work — I certainly spend a lot of time there, and this helps.  Second, as my partners got to know me, it made me more top of mind if an issue came up. Goodwin genuinely strives to be collaborative, so by making the effort to get to know my other partners, it has paid dividends in getting phone calls about new matters or interesting cases.  Third, it allowed me to respond to client inquiries when I was not the right person.  Recently a client called me, and I was able to immediately direct him to my partner in another office with the needed expertise, because I had had gotten to know him during one of my trips back East.

6. Is there anything different you wish you had done earlier in your legal career to help you with practice today?

I wish I had become a federal prosecutor earlier.  It was an honor doing public service; I learned so much about being a lawyer, particularly a trial lawyer, and working as a team for a common goal.  I was fortunate in that I worked with a lot of really good prosecutors that were willing to share their time and knowledge.  I also wished I had focused my marketing efforts, rather than haphazardly engaged in marketing activities. I look back and realize I wasted a lot of time doing things that I did not enjoy and were ineffective.  I also wish I had made a better effort to keep in touch with people whom I genuinely enjoyed working with over the years.

7.  What are the advantages / disadvantages of working in a prosecutor role vs. in a private practice defense attorney role?

When I was a federal prosecutor, people immediately returned my calls.  There is no shortage of criminals, so I always knew I would have a new case next month.  Another benefit is you have the luxury of spending as much time as you want on a case, without worrying about bills.  In private practice, you are always thinking about your next case, and constantly balancing quality legal work with efficiency.  Also, when you represent a company or individual, government inquiries and prosecutions are immensely personal and unsettling, so there is more of a human element that factors into your representation.  I do think it helps to have been a prosecutor, because you can provide your client insight into how the process works, and the likely viewpoint of the prosecutor or regulator.  One disadvantage is the level of interest in what I do.  When I was a prosecutor, my friends and colleagues always asked what type of case I was working on, and what the criminals were up to—Ponzi schemes and drug cases are inherently interesting to most people.  Similarly, my kids thought I was pretty cool because I worked with federal agents with guns, met the President, and put bad guys away.  Now, my friends and kids rarely ask me what type of case I am working on.

ARTICLE BY

Eilene Spear
OF
The National Law Review / The National Law Forum LLC

President Obama Seeks to Strengthen and Clarify Cybercrime Law Enforcement

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On Tuesday, President Obama introduced a legislative proposal on privacy and data security that seeks to strengthen and clarify law enforcement’s ability to investigate and prosecute cybercrimes.

The first section of the proposed legislation would expand the definition of “racketeering activity” under the Racketeering Influenced and Corrupt Organizations (“RICO”) Act to include felony offenses under the Computer Fraud and Abuse Act (“CFAA”)—the federal anti-hacking statute.  The second section would amend existing law to deter “the development and sale of computer and cell phone spying devices.”  The third section proposes substantial changes intended to modernize the CFAA.  Finally, the proposal’s fourth section is aimed at strengthening the government’s ability to disrupt and shut down botnets—networks of computers often deployed to commit crimes, such as spreading malware.

Although much of the proposal is modeled off a similar proposal advanced by the White House in 2011, there are key differences, including making clear that it is a crime to access a computer in breach of a use restriction, while at the same time limiting the scope of liability for such access to cases that the Administration believes are serious enough to warrant prosecution under the CFAA.

Updating and Expanding the RICO Act to Include CFAA Offenses

The White House proposal would include felony violations of the CFAA in the definition of “racketeering activity” under the RICO Act.  This would provide for increased penalties for cybercrimes and afford prosecutors the ability to more easily charge certain members of organized criminal groups engaged in computer network attacks and related cybercrimes.

Deterring the Development and Sale of Computer and Cell Phone Spying Devices

The White House proposal seeks to deter the development and sale of computer and cell phone spying devices by instituting two changes.  First, the legislative proposal would amend 18 U.S.C. § 1956 to “enabl[e] appropriate charges for defendants who engage in money laundering to conceal profits from the sale of surreptitious interception devices.”  Second, it would amend 18 U.S.C. § 2513 “to allow for the criminal and civil forfeiture proceeds from the sale of surreptitious interception devices and property used to facilitate the crime.”  This would expand the scope of section 2513, which currently provides for the forfeiture of only the surreptitious devices themselves.

Modernizing the CFAA

According to the White House, the goal of the proposal’s third section is to “enhance [the CFAA’s] effectiveness against attackers on computers and computer networks, including those by insiders.”  The proposed legislation contains several key amendments to various CFAA provisions:

First, the proposal would make access in violation of certain use restrictions an illegal act under the CFAA by amending the definition of “exceeds authorized access” to include instances in which a user accesses a computer with authorization to obtain or alter information “for the purpose that the accessor knows is not authorized by the computer owner.”  Language of this sort would address, at least in part, an existing circuit split on the meaning of the language “exceeds authorized access,” as used in the CFAA.  Some commentators, however, have questioned whether the proposed language will resolve the current ambiguity over the CFAA’s reach.  For example, if an employee accessed a computer for a non-work-related purpose, it would be obvious that the employee would be violating the CFAA (as amended by the White House’s proposed language) if there were a written policy that states “company computers can be accessed only for work-related purposes.”  However, if a non-employee accessed the computer, there may not be a clear violation of the CFAA because the non-employee is not bound by—and thus would not be breaching—the employer’s policy.  As a result, the courts may still have disagreements about the scope of the phrase “exceeds authorized access” even with the new language.

The White House’s proposal would also add a new provision to the CFAA by amending 18 U.S.C. § 1030(a)—the subsection of the CFAA that lists the punishable offenses under the statute.  The added provision would provide new threshold requirements for criminal offenses resulting from users exceeding their authorized access.  The proposal would punish a user who “intentionally exceeds authorized access to a protected computer, and thereby obtains information from such computer” if one of three conditions are met: “(i) the value of the information obtained exceeds $5,000; (ii) the offense was committed in furtherance of any felony violation of the laws of the United States or of any State, unless such violation would be based solely on obtaining the information without authorization or in excess of authorization; or (iii) the protected computer is owned or operated by or on behalf of a governmental entity.”  While courts must still interpret the meaning of these conditions, they provide a clearer framework for prosecution of offenses under the statute and, in theory, would constrain the government’s ability to prosecute individuals under the CFAA for minor offenses.

Additionally, the White House proposal would amend the CFAA “to enable the prosecution of the sale of a ‘means of access’ such as a botnet.”  Further, instead of requiring the government to prove “intent to defraud” under this subsection (the intent standard applicable to violations motived by financial gain), the legislation would require prosecutors only to establish “willfulness,” so as to criminalize unlawful trafficking of access to “other types of wrongdoing perpetrated using botnets” and not just password and similar information.

The proposal would also enhance CFAA penalties and enforcement mechanisms by raising penalties for circumventing technological barriers to access a computer (e.g., hacking into or breaking into a computer), and by making such violations felonies  carrying a prison term of up to ten years.  This is a significant change from the current law, which allows for either a misdemeanor or a felony carrying a maximum prison term of only five years.  The proposal would also create civil forfeiture procedures, “clarify that the ‘proceeds’ forfeitable [under the CFAA] are gross proceeds, as opposed to net proceeds,” and in appropriate circumstances, allow for the forfeiture of real property used to facilitate offenses under the statute.  And the proposal would clarify “that both conspiracy and attempt to commit a computer hacking offense are subject to the same penalties as completed, substantive offenses.”

Shutting Down Botnets

Finally, the legislative proposal would add to existing civil remedies by explicitly providing courts with the authority to issue injunctions aimed at disrupting or shutting down botnets.  Under the proposal, the Attorney General would be authorized to seek injunctive relief under 18 U.S.C. § 1345 if the government can show that the criminal conduct alleged would affect 100 or more protected computers during a one-year period.  Criminal conduct under the proposal would include “denying access to or operation of the computers [denial of services attacks], installing unwanted software on the computers [malware], using the computers without authorization, or obtaining information from the computers without authorization.”  The legislation would also protect from liability individuals or entities that comply with courts orders and would allow courts to order the government to reimburse those individuals or entities for costs directly incurred in complying with such orders.

This post was written with contributions from Jim Garland.

ARTICLE BY

Privacy and Data Security Practice Group
OF
Covington & Burling LLP

Court-Appointed Experts: The Future of Litigation?

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After black-market dealing for approximately two years in relative anonymity, the secretive Silk Road drug-dispensing site was targeted by U.S. federal authorities and was subsequently shut down. Its alleged owner and operator was arrested.

However, one lawyer and technology expert is claiming that the FBI is lying about how it found the Silk Road server that allowed authorities to seize the site as well as millions of dollars in cyber coinage. It is a complicated question of computer evidence, one which the courts may not be capable of fully understanding.

As the worlds of cybercrime, criminal law, economics, and evidence continue to collide, the technological war between law enforcement and crypto-criminals is requiring prosecutors to enter a new realm of trial advocacy and courtroom tactics – one in which tech experts and computer specialists are vital for judicial clarity and jury instructions.

At a time when iron bars and jailhouse walls can do little to stop crimes and communications from taking place over the intangible and worldwide web connections, stopping cybercrime is one thing, but explaining it to a judge or jury is a much different task.

From Drug Money to Bonafied Bitcoins

Earlier this month, after Silk Road 2.0’s alleged owner and operator, Blake “Defcon” Benthall, was arrested by the FBI, the defendant reportedly began tweeting, just hours after his arrest, from jail and requesting bitcoin donations. Many law enforcement officials didn’t even know what this meant or what the defendant was soliciting.

Bitcoin is a form of cryptocurrency that has garnered international recognition in the last couple of years after it was revealed to be the form of monetary tender used to purchase drugs from the original Silk Road website.

However, the currency also opened the eyes of legitimate businessmen, economists, and financial experts as well – some of whom believe that bitcoin and other cryptocurrencies could become the money form of the future. Our BullsEye blog examined the world of bitcoins in a March 2014 article entitled “What The #!$% Is Bitcoin?”

Three months after that article’s publication, the U.S. Marshal’s Service held an online auction and sold nearly 30,000 of the bitcoins it had seized from Silk Road. At the time, the value was approximately $18 million. They were purchased by American venture capitalist Tim Draper, who has just brought in former SEC Chairman Arthur Levitt as an advisor for his new bitcoin-investor platform rebranded as “Mirror.”

The FBI, however, claims that the auctioned bitcoins that Draper purchased represent less than a quarter of those seized from Silk Road and its alleged mastermind Ross William Ulbricht. Thirty-year-old Ulbricht, of Austin, Texas, is alleged to be the original Silk Road founder, who called himself “Dread Pirate Roberts,” named after the sword-wielding character in the movie The Princess Bride.

In a September 2013 interview with Forbes magazine, the libertarian-minded Dread Pirate Roberts is quoted as saying, “We’ve won the State’s War on Drugs because of Bitcoin.”

Ulbricht was arrested in San Francisco just days after the article was published. He was charged with money laundering, computer hacking, conspiracy to traffic narcotics, and attempted murder of witnesses. His federal trial is expected to begin in January in Manhattan.

The FBI said that it is holding on to the 144,342 bitcoins seized from Ulbricht’s computer until after the resolution of the criminal trial. Presumably, if Ulbricht is convicted and the seizure is deemed valid, the bitcoins will be auctioned off to the public. The approximate value of that cache of bitcoins is over $56 million today.

Cybercrime Confusing Courts

Expert witness and attorney Joshua J. Horowitz, however, claims in court documents released last month that the FBI is lying about how it accessed the Silk Road back-end server. In an 18-page declaration filed with the U.S. District Court for the Southern District of New York, Horowitz writes about “Nginx access logs,” “tarball mtimes” and “phpmyadmin virtual host site configurations,” claiming that he can show that the FBI could not have infiltrated Silk Road via the manner that it claims in the indictment and other court documents.

“[B]ased on the Silk Road Server’s configuration files provided in discovery, former Special Agent [Christopher] Tarbell’s explanation of how the FBI discovered the server’s IP address is implausible,” Horowitz states.

However, much of Horowitz’s technologically sophisticated declaration is unreadable and incomprehensible to an average attorney or jurist. With many of these issues being evidentiary in nature, the question of whether certain physical evidence is admitted at trial will be left up to one judge.

How will a federal judge – many of whom were middle-aged well before Steve Jobs and Steve Wozniak began tinkering away inside a garage in 1976 – be capable of ruling on these evidentiary issues based on court documents and legal arguments that are communicated in a specialized, seemingly foreign, language?

“The critical configuration lines from the live-ssl file are: ‘allow 127.0.0.1; allow 62.75.246.20; deny all;.’ These lines tell the web server to allow access from IP addresses 127.0.0.1 and 65.75.246.20, and to deny all other IP addresses from connecting to the web server.… Based on this configuration, it would have been impossible for Special Agent Tarbell to access the portion of the .49 server containing the Silk Road market data, including a portion of the login page, simply by entering the IP address of the server in his browser,” Horowitz writes, seemingly in an attempt to “dumb down” the explanation of the process.

While the Kentucky-born, Yale-educated U.S. District Judge J. Paul Oetken is very young compared to his life-appointed colleagues, to assume that the 49-year-old jurist (or even his law clerk) can understand even the basics of Horowitz’s argument is unlikely. In order for him to rule on these evidentiary issues properly, one would assume that technology experts will need to be hired by the courts to examine the specific allegations and pretrial disputes.

Unlike the decision to admit or deny expert witnesses in federal court, during which the judge must determine whether the witness is qualified enough to proffer evidence to the jury, the decision to entirely admit or deny the actual physical evidence that was searched and seized is solely up to the judge. In the case of the Ulbricht prosecution, one would assume that allowing the FBI’s evidence gathered from the Silk Road site to be admissible at trial would be far more critical than any other issues presented before the jury once the evidence is deemed admissible.

This will not be an easy decision for the judge.

“The active phpmyadmin configuration file contained in Item 1 of discovery contains the following lines: ‘listen 80; root /usr/share/phpmyadmin; allow 127.0.0.1;.’ These lines direct the phpmyadmin virtual host to listen on port 80, which is the standard port for web traffic, and also tells Nginx to serve files from the phpmyadmin folder. The absence of ‘deny all’ means that it would be possible for an IP address outside the Tor network to connect to the .49 server. However, an IP address outside the Tor network would have been able to access only the login page for phpmyadmin and the files contained in the phpmyadmin folder, not any part of the Silk Road market or even the login screen, as claimed in the Tarbell Declaration,” Horowitz explains further.

If Judge Oetken thinks this is confusing, just wait until the experts start explaining what a bitcoin is.

When it comes to complicated technological issues that are procedural in nature and that are therefore not intended for the jury, will courts now need to hire experts to explain and inform judges? Or do today’s judges really have no business making these highly specialized decisions on evidence?

ARTICLE BY

Ryan Thompson, Esq.
OF
IMS ExpertServices

The DOJ Increases Scrutiny of Whistleblower False Claims Act Suits

McBrayer NEW logo 1-10-13The Criminal Division of the Department of Justice (“DOJ”) recently announced that it will review all complaints filed under the qui tam provisions of the federal False Claims Act (“FCA”) to determine if a parallel criminal investigation is appropriate. This announcement came during a September 17, 2014 speech by the recently-confirmed Assistant Attorney General for the Criminal Division of the DOJ, Leslie Caldwell, at the Taxpayers Against Fraud Education Fund Conference in Washington D.C. This DOJ announcement signals a departure from prior policy, which allowed, but did not require, the Criminal Division to investigate Civil Division claims. In the past, the decision to open a criminal investigation was left to the discretion of each U.S. Attorney’s Office.

FraudNow, the Civil Division of the DOJ will share all new qui tam complaints with the Criminal Division as soon as they are filed. This change in procedure will likely be detrimental for defendants in future qui tam cases. With the Criminal Division more involved in False Claims cases, settlements with the government may become more difficult due to the need for approval from both the Civil and Criminal Divisions. Defendants may also face increased pressure to accept settlement offers from the government to avoid high-risk criminal penalties.

In 2009, Attorney General Eric Holder and Department of Health and Human Services Secretary Kathleen Sebelius announced the creation of an interagency task force, the Health Care Fraud Prevention and Enforcement Action Team (“HEAT”), to increase coordination and optimize criminal and civil enforcement.  This coordination yielded momentous results: the Department recovered $12.1 billion dollars under the False Claims Act from January 2009 through the end of the 2013 fiscal year.  Most of these recoveries relate to fraud against Medicare and Medicaid Programs. In fiscal year 2013 alone, the DOJ recovered $2.6 billion dollars for health care fraud violations and brought health care fraud-related prosecutions against 345 individuals.

Thus, providers seeking reimbursement from federal programs should be aware that non-compliance risks have never been greater. Providers or entities faced with a civil qui tam suit should immediately evaluate their exposure to possible criminal charges. Because an ounce of prevention is worth a pound of cure, companies should closely review their compliance programs and pay special attention to the protocols in place to prevent and detect potential false claims or billing violations.

ARTICLE BY

Emily M. Hord
OF
McBrayer, McGinnis, Leslie and Kirkland, PLLC

Criminal Defendant Required to Provide Smartphone Fingerprint, but Not Passcode

Covington BUrling Law Firm

A Virginia state judge ruled last week that law enforcement may require a criminal defendant to provide his fingerprint — but not his passcode — to unlock a smartphone that might contain evidence that would be used against him at trial.

In Commonwealth v. Baust, the police sought access to the smartphone of David Charles Baust, who was indicted in connection an alleged assault. The victim alleged that a video of the assault was stored on Baust’s phone.

Police officers obtained a warrant for the phone and other evidence from Baust’s home. Because the officers were unable to unlock Baust’s phone, the government filed a motion to compel Baust to produce either his passcode or fingerprint to unlock the phone.

Because the government had obtained a lawfully executed search warrant, Baust could not challenge the government’s request on Fourth Amendment grounds. Instead, Baust argued that the request violates the Fifth Amendment, which provides that no person “shall be compelled in any criminal case to be a witness against himself.” Courts have long held that this privilege protects a criminal defendant from being forced to provide the government with “evidence of a testimonial or communicative nature.”

Virginia Circuit Court Judge Steven C. Frucci rejected the government’s request to compel Baust to provide his passcode, holding that providing his passcode would be testimonial because it would force Baust to “disclose the contents of his own mind.” This conclusion is in line with a 2010 ruling by a Michigan federal court that forcing the defendant to produce a passcode is “the extortion of information from the accused.”

But Judge Frucci allowed the government to compel Baust to provide his fingerprint. He concluded that the fingerprint, “like a key . . . does not require Defendant to communicate any knowledge at all.”

Think Tanks Ask Supreme Court to Clarify Definition of “Foreign Official” in FCPA (Foreign Corrupt Practices Act)

Katten Muchin Law Firm

Two think tanks, the Washington Legal Foundation and the Independence Institute, have filed anamicus brief in the Supreme Court on behalf of petitioners Joel Esquenazi and Carlos Rodriguez, who were recently convicted of violating the Foreign Corrupt Practices Act (FCPA). The amiciseek clarity of the definition of “foreign official” in the FCPA.  The FCPA prohibits certain persons or entities, including US businesses, from paying a “foreign official” for the purpose of obtaining or retaining business. The FCPA defines “foreign official” to include “any officer or employee of a foreign government or any department, agency, or instrumentality thereof.”

Esquenazi and Rodriguez were executives of Terra Telecommunications Corp., a Florida company that purchased phone time from foreign vendors and resold the time to US customers. Terra conducted business with Haiti-owned vendor Telecommunications D’Haiti S.A. (Haiti Teleco). Prosecutors argued that Esquenazi and Rodriguez made payments to Haiti Teleco officers to obtain lower rates. To determine whether Haiti Teleco was an “instrumentality” under the FCPA, the trial court instructed the jury to consider whether the company “provided services to the citizens and inhabitants of Haiti,” and whether it was majority owned by the Haitian government. Defendants were convicted, and Esquenazi was sentenced to 15 years’ imprisonment and Rodriguez received seven years’ imprisonment. The US Court of Appeals for the Eleventh Circuit affirmed, finding that an “instrumentality” is “an entity controlled by the government of a foreign country that performs a function the controlling government treats as its own,” and setting forth a list of factors.

Amici contend that the business community needs concrete guidance in this undeveloped area. They argue that the Eleventh Circuit’s definition is overly broad because (1) Haiti Teleco was never designated a government entity; (2) Haiti Teleco issues common stock, and the government was not an initial stockholder; and (3) Haiti Teleco, as a telephone service provider, does not perform a traditional government function.

Brief for Esquenazi and Rodriguez as Amici Curiae Supporting Petitioners, Esquenazi, et al. v. U.S., Sup. Ct. No. 14-189 (Aug. 14, 2014).

ARTICLE BY

Bruce M. Sabados
Margaret J. McQuade
OF
Katten Muchin Rosenman LLP

Kickback-Tainted Medicare/Medicaid Claims for Reimbursement Actionable Under FCA, New York Federal Judge Holds

tz logo 2

The U.S. District Court for the Southern District of New York (“SDNY”) recently issued an opinion making clear that liability now arises under theFalse Claims Act (“FCA”) whenever claims for reimbursement of prescription drugs are submitted under Medicare Part B, Medicare Part D, or state Medicaid programs in connection with which a provider has received a kickback (referred to herein as a kickback-tainted claim).  The SDNY’s decision was based on an interpretation of an amendment to the Anti-Kickback Statute made by the Patient Protection and Affordable Care Act (“PPACA”) in 2010, which implicates claims arising under the False Claims Act (“FCA”).

The FCA allows a private citizen whistleblower (referred to as a relator) with knowledge of fraud against the federal government to file a qui tam lawsuit on behalf of himself and the United States.  Because the FCA provides for treble damages and significant civil penalties, as well as attorneys’ fees and costs, recoveries are often in the multi millions of dollars, providing a strong deterrent to companies and individuals against committing fraud on the government.  In addition, whistleblowers are entitled to an award of between 15% and 30% of any amount recovered, providing an equally strong incentive for those with knowledge of such fraud to come forward.  Health care fraud is particularly rampant, having given rise to over 70 percent of all FCA recoveries over the past decade.

U.S. ex rel. Kester v. Novartis, involved a common form of health care fraud involving kickbacks, where monetary payments or other financial incentives are unlawfully provided to doctors, hospitals, or pharmacies in exchange for referrals or for the prescription of pharmaceutical drugs or supplies.  Specifically, in this case, the government alleged that Novartis had paid kickbacks to certain pharmacies for promoting two Novartis pharmaceuticals (Myfortic and Exjade) in violation of the Anti-Kickback Statute (“AKS”), which prohibits pharmacies from accepting kickbacks in exchange for purchasing or recommending a drug covered by a federal health care program, such as Medicare and Medicaid.

In 2010, the PPACA amended the AKS with the intention of assigning liability under the FCA for violations of the kickback statute.  The FCA prohibits making a fraudulent claim for payment to the Government or submitting false information material to such a claim.  The AKS amendment expressly provided that a “claim that includes items or services resulting from a violation of [the AKS] constitutes a false or fraudulent claim for purposes of [the FCA].”  42 U.S.C. § 1320a-7b(g).  Novartis argued, however, that the “resulting from” language in the amendment limited, rather than expanded, the reach of the FCA, asserting that liability could not be established without showing that the claims for reimbursement were actually caused by the receipt of a kickback―”i.e. where a pharmacy convinced a physician . . . to prescribe a drug that he would not have otherwise prescribed, or convinced a patient . . . to order a refill that he would not otherwise have ordered.”  Such a strict “but-for” causation requirement not only would have made it difficult to show liability, it would have significantly reduced any recovery to only those situations where “the decision to provide medical treatment is caused by a kickback scheme.”

The SDNY rejected this unduly narrow interpretation, relying on the legislative history of the PPACA, which it reasoned was aimed at expanding the reach of the FCA, and the Second Circuit’s framework for analyzing false claims set forth in Mikes v. Straus, 274 F.3d 687 (2d Cir. 2001).  In Mikes, the Second Circuit held that a party violates the FCA when it falsely certifies compliance with a statute, regulation, or contract that is a precondition to payment.  Mikes also held that false certifications did not need to take the form of express statements certifying compliance, but rather could be implied when the underlying statute or regulation expressly requires a party to comply in order to be paid.  Under such circumstances, knowingly submitting a noncompliant claim for payment will constitute a violation of the FCA.  To this end, the SDNY held in Novartis that the PPACA expressly made compliance with the AKS a precondition to payment under Federal health care programs.  Consequently, any kickback-tainted claim for reimbursement submitted to the government is a violation of the FCA under this reasoning.  Thus, whereas previously, a whistleblower had to have evidence of an express certification of compliance with the law, now, in order to establish an FCA violation involving kickbacks, a whistleblower need only show that a claim for reimbursement was submitted to the Government in connection with which kickbacks were received.

ARTICLE BY

Anna C. Haac
 
OF 
Tycko & Zavareei LLP