Articles Posted in White Collar Crime

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:

Last month, the Eleventh Circuit Court of Appeals, which hears appeals in federal cases here in Atlanta, Georgia, heard oral arguments in a habeas corpus case filed by Sholam Weiss. Weiss argues that the United States government has reneged on promises it made to the Austrian authorities to obtain extradition.

Ten years ago, Weiss was sentenced to 845 years in absentia after a jury found him guilty of RICO violations, money laundering, and other charges stemming from the white collar fraud that resulted in the downfall of the National Heritage Life Insurance Company. Just before jury deliberations began, Weiss fled the country. He was eventually arrested in Austria pursuant to an international arrest warrant. Austria initially refused to extradite Weiss, but later agreed after extensive negotiations and exchanges of information.

Weiss’s appellate lawyers argue that Austria would not have extradited Weiss had the U.S. not promised that Weiss would be given the opportunity to appeal his convictions and be resentenced. In his habeas corpus petition to the Middle District of Florida, Weiss argued that the extradition is invalid, so the United States has no personal jurisdiction over him and he should be released in Austria. The Eleventh Circuit is more likely to consider specific performance, requiring the U.S. to follow through on its promises to the Austrian authorities.

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 a jury found Georgia criminal defense attorney J. Mark Shelnutt not guilty on all counts. He was acquitted of money laundering, drug conspiracy, and attempted bribery.

Three weeks ago, the Eleventh Circuit Court of Appeals, which hears appeals from cases in Georgia, Florida, and Alabama, decided U.S. v. Velez in favor of the defendant. That case involved a money laundering charge against a criminal defense attorney under 18 U.S.C. § 1957. Shelnutt was prosecuted under 18 U.S.C. § 1956, which required federal prosecutors to attempt to prove that ill-gotten gains were used for certain prohibited purposes, including facilitating underlying criminal activity, tax evasion, or evading money laundering statutes. The prosecution was unable to prove its case.

More information in the Shelnutt case can be found here.

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.

Ed. Note: This week, the U.S. Sentencing Commission’s 2009 Amendments to the federal Sentencing Guidelines went into effect. Once a week this month, we will post an analysis of some of the more important changes to the Guidelines. The Sentencing Commission’s reader-friendly guide to the 2009 amendments is available here.

Identity Theft Amendments

Congress directed the Sentencing Commission to increase the penalties under several of the identity theft statutes in Title 18. In response to that directive, the Commission added a new enhancement and a new upward departure provision, as well as expanding the definition of “victim” and the factors to be considered in calculating the amount of loss.

In this post earlier this month, we discussed U.S. v. Velez, a federal criminal case in which an attorney, Ben Kuehne, was charged with money laundering based upon payments of legal fees. On Monday, the Eleventh Circuit affirmed the Southern District of Florida’s dismissal of the money laundering charges.

Fabio Ochoa-Vasquez was extradited to the U.S. in 2001 to faces charges for cocaine smuggling. His criminal defense team hired Kuehne to investigate the source of the money Ochoa would use to pay their legal fees and verify that it was not criminally derived property. Kuehne drafted six opinion letters advising that the funds were clean. The money to pay the legal fees were wired to his trust account, then he wired them, minus his retainer, to Ochoa’s defense team.

The government alleged that Kuehne and his co-defendants knew that the funds were tainted and supported the opinion letters with falsified documents. They were charged with money laundering in violation of 18 U.S.C. § 1957. However, § 1957(f)(1) excludes “any transaction necessary to preserve a person’s right to representation as guaranteed by the sixth amendment to the Constitution” from the scope of the money laundering statute.

Frank DiPascali, Bernie Madoff‘s top financial aide, pleaded guilty on Tuesday to ten criminal counts, including conspiracy, tax evasion, and securities fraud. He was taken into federal custody immediately after the hearing, at which he had waived indictment and admitted to helping Madoff falsify trading records for decades.

Although he faces up to 125 years in federal prison for his crimes, he may receive a lenient sentence due to his cooperation with the prosecution. Other than Madoff (who received a 150-year sentence) and DiPascali, only accountant David Friehling has been charged in connection with the massive Madoff fraud. DiPascali likely has a wealth of information on many potential targets of investigation and has been cooperating with the prosecution since January. Based upon his cooperation, the prosecution recommended a bail package pending sentencing in his case. Despite the recommendation, Judge Richard Sullivan denied bail, ordering DiPascali into custody immediately. Whether he will benefit from his cooperation at sentencing remains to be seen.

One of the prosecution’s most formidable tools in a criminal case is the bargaining power inherent in its prosecutorial discretion. The prosecution usually wields significant power at sentencing. In other accounting scandal cases, highly culpable defendants who have cooperated have received light sentences in comparison to their former co-workers. Scott Sullivan, for instance, former WorldCom CFO who testified against CEO Bernard Ebbers, has already returned to his home in Boca Raton, after serving four years of his five-year sentence. Ebbers, on the other hand, is scheduled for release in 2028. Jeffrey Skilling, former president of Enron, is also scheduled for release in 2028, whereas CFO Andy Fastow received only six years, due to his significant cooperation with the prosecution.

Last Monday, the Supreme Court granted certiorari in Weyhrauch v. United States, a federal criminal honest services fraud case. We are in Atlanta, Georgia, which is in the Eleventh Circuit. Because this case may impact Eleventh Circuit law, we will follow this case closely and provide any updates.

The question to be decided in Weyhrauch is “Whether, to convict a state official for depriving the public of its right to the defendant’s honest services through the non-disclosure of material information, in violation of the mail-fraud statute (18 U.S.C. Sec. 1341 and 1346), the government must prove that the defendant violated a disclosure duty imposed by state law.”

The defendant in this case is a lawyer and was a member of the Alaska House of Representatives. He is accused of honest services fraud due to conflicts of interest in conducting business with an oil field services company. The government wanted to introduce evidence of his concealment of the conflicts of interest to support the fraud charges, even though the state did not require disclosure.

In this post last year, we discussed Yeager v. United States, a white collar federal criminal case on appeal to the Supreme Court. The case involved the prosecution wanting to re-try a defendant who had been acquitted on some counts, but the jury had remained undecided on other counts. Because those other counts relied on facts that the jury must have resolved in the defendant’s favor to acquit, the defense argued (and we agreed) that the doctrine of collateral estoppel precluded the prosecution from retrying the issue. The Supreme Court issued its opinion last week, agreeing with us.

We reviewed the facts and legal issues in Yeager in our previous post. The Fifth Circuit Court of Appeals ruled that the acquitted counts meant that the jury found that Mr. Yeager did not have insider information. To prove the hung counts, the prosecution had to show that he had possessed insider information. The Fifth Circuit held that the inconsistency between the jury’s acquittals and hung counts justified a retrial. The Supreme Court declined to review the record to determine whether the Fifth Circuit’s ruling on the fact issue was correctly decided, permitting the Fifth Circuit to revisit the issue. Instead, the Court resolved only the narrower legal question.

Justice Stevens wrote the opinion for the court. He focused on the rule in Ashe v. Swenson, a 1970 case that held that the Double Jeopardy Clause precludes the government from relitigating any issue that was necessarily decided by a jury’s acquittal in a prior trial. The government argued, as the Fifth Circuit had held, that the inconsistency between the jury’s decision in acquitting and indecision in the hung counts justified retrial, but the Supreme Court held that courts should scrutinize juries’ decisions, not failures to decide, in identifying what they necessarily determined at trial.