United States: White Collar Roundup - July 2015

Last Updated: July 6 2015
Article by Daniel E. Wenner

SEC Put to the Test on Administrative Hearings

In the wake of several rulings from the U.S. Court of Appeals for the Second Circuit that have narrowed the flexibility of the U.S. Securities and Exchange Commission (SEC) to enforce the securities laws in U.S. District Court, the SEC has increased its use of administrative proceedings. But the U.S. District Court for the Northern District of Georgia dealt a hearty blow to that process. Judge Leigh Martin May ruled that the manner in which the SEC's administrative law judges (ALJs) are appointed is unconstitutional. The plaintiff, Charles Hill, brought an action for a preliminary injunction to prevent the SEC from proceeding against him in an administrative hearing for violating various securities laws and regulations. Hill's contention was that the manner in which the SEC's ALJs are appointed violates the appointments clause of the U.S. Constitution. Judge May reasoned that "[i]nferior officers must be appointed by the President, department heads, or courts of law" pursuant to the appointments clause. And "[b]ecause SEC ALJs are inferior officers" who are not appointed by the SEC commissioners themselves, a preliminary injunction was warranted to prevent the ALJ from hearing Hill's case. The SEC will likely appeal. Click here for the order; click here to read an article about the case.

It's Like Déjà Vu All Over Again

Cybersecurity and cyberbreaches are all over the news these days. But who would have guessed that this hot topic would rear its head in relation to America's favorite pastime? According to various news reports, including this New York Times article, staff members for the St. Louis Cardinals might have hacked into the computer systems of the Houston Astros to steal proprietary information about players, strategy and the like. While these are simply allegations, the Federal Bureau of Investigation (FBI) is looking into them. Both clubs are cooperating with the investigation. It looks like Yogi Berra was right - "The future ain't what it used to be."

Medicare Part D Takedown

In what certainly was the largest healthcare-fraud takedown in history, 243 individuals charged with $712 million in allegedly false billings for Medicare services were arrested on June 18. The multiagency investigation spanned 17 federal districts from Florida to Alaska and involved more than 900 law enforcement personnel. Attorney General Loretta E. Lynch held a press conference to announce the action. Her remarks are here. Secretary Sylvia Mathews Burwell of the U.S. Department of Health and Human Services also issued a press release discussing the event. But one of the harshest warnings came from Florida Attorney General Pam Bondi, who said, "When you charge for a medical procedure you never performed, for something a patient never needed or asked for, and steal millions from our taxpayers, we are coming after you." That was in reaction to charges in the Southern District of Florida relating to 38 cases involving allegations of more than $262.5 million in false billings. Those charges accounted for almost a third of the defendants and more than a third of the alleged losses. As FBI Director James B. Comey said, "[O]ne dollar stolen from our health care programs is one dollar too many."

Helping Law Enforcement at One's Peril

Snyder & Associates Acquisitions LLC (Snyder) thought it was doing the right thing. Snyder is a licensed financial lender that provides refund anticipation loans (RALs) to taxpayers in advance of their anticipated tax refunds from the Internal Revenue Service (IRS), which are then paid to Snyder. During its work in 2010, Snyder discovered that several customers, whose returns had been prepared by an independent tax preparer (Nancy Hilton), had used false identities to obtain undeserved tax refunds. Snyder put a "stop payment" on the loan checks for Hilton's customers. Snyder confronted Hilton, who said she was acting in an undercover capacity at the request of the IRS. The IRS special agent confirmed this information and asked Snyder to lift the stop payment orders to allow the checks to clear, which would allow the IRS to develop its case against the perpetrators. The IRS special agent also gave "express assurances" that Snyder "would not suffer any losses as a result of the IRS's investigation." So, Snyder obliged and issued new checks to replace each of the stopped checks, to the tune of $2.6 million. Obviously, as this was a fraudulent scheme, the IRS did not pay the refunds, leaving Snyder without reimbursement for the RALs. Snyder then put in a claim to the IRS for $2.6 million, which the Department of the Treasury rejected. So Snyder sued under the Federal Tort Claims Act (FTCA). The IRS filed a motion to dismiss, which the court granted, for lack of subject matter jurisdiction. Through the FTCA, the U.S. government waived its sovereign immunity for most claims, but specifically did not waive it with respect to "[a]ny claim arising in respect of the assessment or collection of any tax."

Juror Misconduct in the Trial of the "Largest Tax Fraud in History"

The saga of what has been called the "largest tax fraud in history" just got a new chapter. David Parse, a former broker, appealed his 2011 conviction for his alleged role in the Jenkens Tax Fraud - a $7 billion tax-shelter scheme perpetrated by attorneys from now defunct Jenkens & Gilchrist, P.C. In United States v. Parse, the Second Circuit cited juror prejudice and misconduct and reversed the trial court's denial of a new trial for Parse. That juror is Catherine Conrad, whose "breathtaking" lies and bias against Parse and his co-defendants provided the impetus for the Second Circuit's decision. Conrad's misconduct was unearthed in 2013 when, prior to sentencing, she sent prosecutors "kudos" on their performance. An ensuing investigation revealed that during jury selection she had hidden that she was a suspended attorney with a criminal record and that she had pervasively lied to the court to, in her own words, make herself more "marketable" as a juror. She further admitted that she had aligned herself with the prosecution at the outset. Given the severity of these findings, all co-defendants, except Parse, were given a new trial. The trial judge ruled Parse had not been prejudiced by Conrad's misconduct on the basis that his lawyers had known of and done nothing about Conrad's lies. The Second Circuit disagreed and reversed on the grounds that any actions by Parse's lawyers did not waive the juror prejudice against Parse.

If the Defendant Knew, the Evidence Isn't New

In United States v. Forbes, the Second Circuit rejected Walter Forbes' bid for a new trial. After two trials resulted in hung juries, Forbes was eventually convicted of conspiracy to commit securities fraud and making a false statement in SEC filings for his role in an accounting-fraud scheme at Cendant Corp. He was sentenced to 12 ½ years in prison. One day shy of the three-year anniversary of his conviction, he filed a motion for a new trial based on allegedly newly discovered evidence. The district court denied the motion, and Forbes appealed. The Second Circuit affirmed. Forbes claimed that the testimony of Stuart Bell was newly discovered. Bell had invoked his Fifth Amendment right against self-incrimination when called as a defense witness at Forbes' third trial. Because the five-year statute of limitations had run out, Forbes claimed Bell could no longer stand on that privilege; thus, this evidence was newly discovered. The Second Circuit disagreed. Relying on precedent, it held that when a defendant knows about evidence during trial and there is a "legal basis" for that evidence's unavailability (such as invocation of the Fifth Amendment), the evidence is not "newly discovered" and cannot be a basis for a new trial.

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