Articles Posted in Fraud

Ellen Podgor over at the White Collar Crime Prof Blog recently pointed out a significant decision out of the Ninth Circuit involving the federal mail fraud statute which could be helpful to those of us that handle white collar cases in federal court. Specifically, in United States v. Phillips, Judge Rackoff, writing for the panel and sitting by designation as a visiting judge, reversed the defendant’s mail fraud conviction, concluding that the Government failed to prove that the mail system was used for the purpose of executing the scheme at issue.

The facts in Phillips were relatively unremarkable. In essence, Phillips executed a scheme in which he improperly used company funds to purchase a $10,000 watch for himself. After he paid for the watch, the jeweler mailed the watch to Phillips. In prosecuting him for mail fraud, the Government attempted to use the mailing of the watch to Phillips to satisfy the mailing requirement of the federal mail fraud statute. After he was convicted at trial, Phillips appealed and argued that the mailing of the watch was not in furtherance of the fraudulent scheme to defraud his company, and that he was instead simply using the money he obtained from his company to purchase a watch.
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Lawyers that specialize in defending federal criminal cases may be interested to know that the federal sentencing commission recently released a document entitled: “Selected Post-Booker and Guideline Application Decisions for the Eleventh Circuit”. According to the Commission, “[t]he document is not a substitute for reading and interpreting the actual Guidelines Manual or researching specific sentencing issues.” However, those of you that practice federal criminal law in Georgia, Alabama and Florida will find the document useful, because it does contain helpful “annotations to certain Eleventh Circuit judicial opinions that involve issues related to the federal sentencing guidelines.”

I reviewed the document this morning and it is a fairly comprehensive. It not only includes case annotations dealing with many of the more common guideline provisions (including fraud, internet, and immigration offenses), but it also includes several sections that involve general principles of federal sentencing law, such as burden of proof issues, the requirements for sentencing on acquitted conduct, and departures and variances.

The document can be found here and for those of you that practice in other federal circuits, links to similar documents for those other circuits can be found here.

Last week, the Eleventh Circuit Court of Appeals affirmed the convictions of Larry Langford, the former mayor of Birmingham, Alabama who was convicted last year on various federal white collar offenses, including mail and wire fraud, bribery, money laundering, and federal tax offenses.

To me, the most interesting aspect of the opinion is the way in which the Court of Appeals discussed the honest services portion of the federal mail and wire fraud charges. As we discussed in this previous post, last summer, the Supreme Court issued its opinion in United States v. Skilling, a case which, in essence, limited the honest services provision of the federal fraud statutes to bribery and kickback schemes.

Before Skilling was decided, many (if not all) federal circuits made a distinction between honest services prosecutions that involved public officials, as opposed to those working in the private sector. At the risk of simplifying the issue too much, it was far easier for the government to prove an honest services violation against a public official. Skilling itself, however, did not distinguish between public officials and private actors, leading some to believe that after Skilling, the prosecution of both public and private officials would be governed by the same standards.

Bruce Karatz, former CEO of KB Homes, was sentenced last Wednesday for fraud and false statements in connection with underlying stock-options backdating charges (of which he was acquitted.) He received eight months of house arrest, five years probation, $1 million in fines, and 2,000 hours of community service, the sentence recommended in the probation office’s presentence investigation report (PSR). Judge Otis D. Wright II admonished the prosecutors for their “mean-spirited” sentencing memorandum.

This New York Times article explains the backdating scandal and its results, quoting one professor who analogized it to a “corporate crime lottery.” Although backdating was a widespread practice, relatively few corporate executives have been prosecuted, and then with mixed results. The longest prison sentence given to a backdating defendant has been 2 years.

In this case, the government requested 6 years incarceration and $7.5 million in fines. In their sentencing memorandum, prosecutors argued that sentencing Mr. Karatz to home detention in his “24-room Bel-Air mansion” would suggest “a two-tiered criminal justice system, one for the affluent … and a second for ordinary citizens.” “To promote respect for the law, the public must be assured that a wealthy, well-connected individual, regardless of his station, array of prominent friends and associates, history of private success or acts of public largess, will be subject to the same standard of criminal justice as those less fortunate,” prosecutors wrote.

Last week the Eleventh Circuit Court of Appeals issued its decision in United States v. Mateos, a Medicare fraud case in which the Court held that exclusion of an exculpatory videotape was harmless error. This case is an important reminder to all trial lawyers to remain as well-versed as possible in the law of evidence to best represent our clients.

The defendants were employees of a clinic that purported to treat HIV patients. The clinic’s two doctors saw 70 patients per week, each of which was paid to complain about bleeding disorders. Every patient received either saline or a diluted dose of an expensive and medically unnecessary drug, and then the clinic billed Medicare for full treatments. The clinic received more than $8 million from Medicare during the five months that it was open.

Doctor Alvarez’s defense at trial was that she had not known about the fraud. She tried to introduce a video in which a member of the conspiracy assured her that the clinic was not involved in fraud to show that she had not been aware, but the video was excluded as inadmissible hearsay. The Eleventh Circuit held that the video was not hearsay because it was offered for a purpose other than the truth of the matter asserted. However, the Court held that the error was harmless because the defense had elicited the exculpatory content of the video through testimony.

In this post last week, we announced the Supreme Court’s decision in Skilling v. U.S. The Court held that 18 U.S.C. § 1346, the honest services law that the government has been using to prosecute nearly everything as a federal crime, applies only to bribery and kickback schemes.

The honest services fraud statute simply defines “scheme or artifice to defraud” as used in the mail- and wire fraud statutes to “include a scheme or artifice to deprive another of the intangible right of honest services.” Congress enacted this statute quickly after the Supreme Court, in McNally, held that the fraud statutes were “limited in scope to the protection of property rights.” Congress intended to incorporate pre-McNally case law that had recognized fiduciary duties as intangible rights to honest services and a breach of those duties as fraud.

The majority’s rationale for limiting the honest services fraud statute to only bribes and kickbacks was that such cases constituted the “core” of pre-McNally honest services fraud cases and that statutes should be construed, where possible, rather than invalidated. Because, the Court said, circuit conflicts and disagreements regarding honest services fraud cases were primarily outside the bribery and kickback scheme cases, limiting the application of the statute to those cases would avoid vagueness troubles.

Last week, the Department of Justice announced a new nationwide mortgage fraud initiative named “Operation Stolen Dreams.” Sally Quillian Yates, U.S. Attorney for the Northern District of Georgia here in Atlanta, issued an immediate press release to show local federal law enforcement’s commitment to investigating and prosecuting mortgage fraud.

So far, the U.S. Attorney’s Office in this district has brought the following types of criminal charges in mortgage fraud cases:

In relation to the collapse of banks:

This morning, the United States Supreme Court issued its opinions in three honest services fraud cases: Skilling, Black, and Weyhrauch. We have previously discussed these cases here (discussion of cases and background of honest services fraud,) here (Skilling,) here (Black), and here (Weyhrauch.) In Skilling, the Court limited the federal criminal honest services fraud statute to only bribery and kickback schemes. Based upon that opinion, the Court reversed in Black and Weyhruach. The Court also held that Jeffrey Skilling of Enron fame was not denied a fair trial due to publicity and community prejudice.

We will provide analysis of these opinions next week. In the meantime, the opinion in Skilling is available here; the opinion in Black is available here; and the single-sentence per curium opinion in Weyhrauch is available here.

The United States Court of Appeals for the Eleventh Circuit has issued a ruling that deals with whether one victim of an economic crime gets to climb to the top of the heap and get more recovery out of the fraudster than the remaining victims. The Court ruled that even when such a victim can trace his money directly into a bank account used by the criminal, such a victim cannot get the money back. Instead, the money goes into the pot, so to speak, and is divided among all victims pro rata.

The case involves two common themes nowadays: Ponzi schemes and forfeiture proceedings that are part of federal criminal prosecutions. As is well known, in a Ponzi scheme, the fraudster takes money from recent investors to pay off those who invested earlier, until the whole thing collapses. Forfeiture is the process by which the government takes from a criminal defendant any money that comes from, is traceable to, or is a substitute for property that is part of the crime itself.

Altogether the defendant had defrauded about $20 million from over 90 people. Just before the defendant’s scheme was discovered, he got one final investor to put in about $2 million. Almost immediately thereafter, the authorities arrested the defendant and seized his bank accounts. The final investor’s $2 million was sitting in the defendant’s bank account. The federal authorities wanted to forfeit the $2 million in the bank account, along with other assets, in order to give the proceeds back to all 90 victims.

Yesterday, the Eleventh Circuit Court of Appeals issued its fourth opinion regarding the federal sentencing of Kenneth Livesay, former chief information officer for HealthSouth Corporation. The Court has insisted that Livesay must serve time in prison for his role in the accounting fraud at HealthSouth. We are disappointed in the Court’s decision, because in our view, the sentence was supported by the Supreme Court’s decision in Gall v. United States.

Prior to 1999, Livesay was an assistant controller for HealthSouth who played a direct role in the accounting fraud that came to light following Sarbanes-Oxley in 2003. In 1999, however, Livesay decided that he could no longer stomach the fraud, so he transferred to the IT department, where he became CIO. Before the fraud was discovered, he was asked repeatedly to return to the accounting department, but he refused.

In 2004, Livesay pleaded guilty to conspiracy to commit wire fraud, securities fraud, and falsifying records; falsely certifying financial information filed with the SEC; and a forfeiture court. Pursuant to his plea agreement, the government agreed to recommend a reduction in his offense level for acceptance of responsibility, a sentence at the low end of the guidelines, and a downward departure in exchange for Livesay’s cooperation with the government.