85 Years for Fraud
The U.S. Court of Appeals for the Second Circuit upheld an 85-year
prison sentence in United States v. Stitsky over the
defendants' claim it constituted "cruel and unusual
punishment." The defendants had been convicted of fraud for
their role in the scheme, in which 352 victims lost more than $23
million. During the approximately three-year scheme, the defendants
allegedly misrepresented their firm's history and assets and
failed to mention prior criminal history. (Notably, one defendant
was in prison for a prior fraud conviction when he hatched this
scheme and was on supervised release when he engaged in it.) After
their hefty sentences were imposed, the defendants appealed,
claiming the length violated the Eighth Amendment's ban on
"cruel and unusual punishment." The Second Circuit
disagreed, noting, "While the district court's sentence is
severe, the facts it identified in support of its within-guidelines
sentence adequately bear the weight assigned to them."
Attorneys Can't Just Blow the Whistle
Attorneys cannot breach their ethical duties and become False
Claims Act (FCA) relators, according to the Second Circuit in Fair Laboratory Practices Assocs. v. Quest
Diagnostics Inc. In that case, Mark Bibi, former general
counsel of Quest's wholly owned subsidiary, Unilab Corp., along
with two former executives created Fair Laboratory Practices
Associates (FLPA) to bring an FCA claim against Quest and Unilab.
Bibi had been Unilab's only in-house lawyer from 1993 to 2000,
during the time of the alleged false claims. The defendants moved
to dismiss the FCA complaint, alleging Bibi had breached his
ethical duties by bringing the suit. The district court agreed and
dismissed the complaint. FLPA appealed. The Second Circuit held
that the FCA does not pre-empt state ethics rules and that Bibi had
violated N.Y. Rule 1.9(c) by disclosing protected client
confidences.
Millions Paid for Violating the False Claims
Act
The U.S. Department of Justice (DOJ) announced a settlement
with Boston Scientific Corp. to settle pending FCA litigation.
According to the DOJ press release, Boston Scientific agreed to pay
$30 million to settle allegations that between 2002 and 2005 its
subsidiaries "knowingly sold defective heart devices to health
care facilities that in turn implanted the devices into Medicare
patients." One of Boston Scientific's subsidiaries pleaded
guilty in February 2010 to criminal charges of "misleading the
[Food and Drug Administration (FDA)] and failing to submit a
labeling change to the FDA relating to the defective
devices."
And for a Hat Trick on the False Claims
Act...
The Eighth Circuit endorsed a fraud theory in FCA cases that
might expand the act's reach. In Simpson v. Bayer Healthcare, the
plaintiff-relator alleged Bayer Healthcare had fraudulently induced
the Department of Defense (DOD) to enter two contracts for the
purchase of its cholesterol-lowering drug, Baycol. The relator
claimed Bayer misrepresented the risks and efficacy of Baycol. She
alleged Bayer therefore fraudulently induced the DOD to contract to
use Baycol, but in her complaint she did not identify any
individual false claims paid under the contract. The district court
dismissed the complaint, and the relator appealed. The Eighth
Circuit (in a 2-1 decision) reversed, holding the relator had
adequately pleaded a claim under the FCA by using a
fraud-in-the-inducement theory, which the court said the U.S.
Supreme Court endorsed long ago in United States ex rel. Marcus v.
Hess, 317 U.S. 537 (1943). The dissenter in Simpson claimed the
majority in its opinion overlooked the pleading requirements for
fraud.
Acronym Soup: FinCEN, NBSC, AML,
MOU
The U.S. Treasury Department's Financial Crimes
Enforcement Network (FinCEN) has a new partner in its
anti-money-laundering (AML) efforts. FinCEN announced that it is entering into a memorandum
of understanding (MOU) with Mexico's National Banking and
Securities Commission. As noted in FinCEN director Jennifer Shasky
Calvery's statement about the first-of-its-kind MOU with
a foreign agency, the impact will be most acute in the efforts to
fight drug trafficking and terrorist financing. The amount of
information to be shared between the agencies about money-services
businesses, such as currency dealers and exchangers, check cashers,
and even the U.S. Postal Service, will certainly yield heightened
attention on AML efforts for such businesses.
Recording the Evidence of Insider
Trading
The Second Circuit, in the course of affirming the
insider-trading conviction in United States v. Jiau, took up the issue of
when recorded calls are inadmissible under the federal wiretap
statute. Winifred Jiau was prosecuted for providing material
nonpublic information to hedge fund managers at Tribeca Capital
Management, Barai Capital Management, Sonar Capital Management and
SAC Capital. Her conviction was based, in part, on the introduction
of recordings of conversations she had with one of the tippees in
her scheme, Samir Barai. The evidence indicated Barai was hard of
hearing and authorized his employees to record and transcribe all
calls. Jiau unsuccessfully argued in district court that the
recordings were inadmissible under the federal wiretap statute,
which prohibits the introduction of recordings obtained in
violation of the statute. The statute criminalizes the making of
recordings except in certain circumstances. One such circumstance
is when the recordings are made in the ordinary course of business.
Another exception applies when one party knowingly makes the
recordings, but not "if the communication is intercepted for
the purpose of committing any criminal or tortious act in violation
of [law]." Jiau claimed this exception to the exception
applied because the calls involved criminal conduct. The district
court denied her motion to suppress, and she was convicted. On
appeal, the Second Circuit affirmed, noting the focus of the
inquiry for the criminal-purpose exception was not on the content
of the conversation, but on the purpose of the recording. Because
the recording was made to help the tippee conduct his business and
not for the purpose of, for example, blackmailing one of the
conspirators to ensure he or she continued in the scheme, the
recordings were admissible.
Bank Fraud Can Yield Huge Forfeiture, Even Without
Much Profit
The "proceeds" of bank fraud for forfeiture
purposes include the gross receipts of the crime, not just the
profits, according to the Second Circuit in United States v. Peters. Peters was the owner
of two companies that had bank lines of credit that fluctuated
based on the borrowing base at the companies. The companies
manipulated their books to fraudulently increase that borrowing
base. Peters was convicted, sentenced to 108 months in prison and
ordered to forfeit more than $23 million, which included the gross
receipts involved in the scheme. On appeal, he argued the forfeiture statute only authorized an order
to forfeit the profits. The Second Circuit noted the forfeiture
statute is punitive and held the term "proceeds" in 18
U.S.C. 982(a)(2) is not limited to profits. Citing a Ninth Circuit opinion, the court noted,
"Congress sought to punish equally the thief who carefully
saves his stolen loot and the thief who spends the loot on
'wine, women, and song.'"
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