2nd Circuit Upholds Insider Trading Conviction of Ex-Goldman Sachs Director The panel’s decision represented the latest retreat from the appellate court’s holding in 2014’s “U.S. v. Newman,” which narrowed prosecutors’ ability to prove insider trading.


Gupta-m1114755-web2
Rajat Gupta, right, with his attorney Gary Naftalis, following his sentencing in 2012. Photo: Louis Lanzano/ Bloomberg
https://www.law.com/newyorklawjournal/2019/01/07/2nd-circuit-upholds-insider-trading-conviction-of-ex-goldman-sachs-director/
By Colby Hamilton | January 07, 2019 at 04:12 PM

For the second time in as many months the U.S. Court of Appeals for the Second Circuit has declined to reverse an insider trading secured by federal prosecutors before the circuit court’s ruling in United States v. Newman and the sequence of decisions it spawned.

On Monday, the panel, composed of Circuit Judges Amalya Kearse, Richard Wesley and Christopher Droney, denied former Goldman Sachs director Rajat Gupta’s second attempt to have his insider trading conviction overturned. The Second Circuit had previously in 2014 denied Gupta’s argument that the trial court erred in admitting some evidence, while excluding other evidence offered by the defense ahead of his 2012 conviction. He ultimately served 19 months in prison, and was released in 2016.

The current appeal came after U.S. District Judge Jed Rakoff of the Southern District of New York denied Gupta’s motion to vacate his conviction in the wake of the Second Circuit’s 2014 decision in Newman, which substantially narrowed the “personal benefit” requirements of an insider trading relationship. Gupta argued before Rakoff that the jury instructions in his case were legally invalid under Newman.

On appeal, the panel reviewed Gupta’s challenge based on a cause-and-prejudice standard. It agreed with Rakoff’s argument that nothing stopped Gupta from arguing that the jury instructions were faulty on direct appeal from his conviction, since they were made during trial.

The panel observed that its November 2018 decision in Whitman v. United States tracks closely with the dynamics of Gupta’s case, as jury instructions were objected to at trial but weren’t pursued on appeal. Other insider trading cases pursued the line on appeal before Newman, the panel noted, making the claims in Whitman—and therefore Gupta’s case—insufficient to show cause.

Defendants in other insider trading prosecutions were contending that juries should be given narrower definitions of the personal benefit needed to find culpable insider trading,” the panel wrote. “We conclude that [Gupta] presents no viable claim that the personal benefit challenge was unavailable to his counsel on appeal.”

While the panel, having found Gupta failing the cause standard, could arguably have ended its findings there, it proceeded to address the issue of prejudice, and, in doing so, waded directly back in to the circuit’s muddied law on insider trading.

The panel first found that Gupta failed to show the personal benefit instructions were so flawed as to deny him due process, noting that the actual language provided to the jury in question spoke of “maintaining a good relationship with a frequent business partner.”

That last clause proved critical for the panel, who argued it squared with requirements under precedent, but not the Second Circuit’s most recent double take in United States v. Martoma, which is mentioned briefly later. Instead, the panel opted to return to the insider trading Ur-precedent from the Supreme Court’s 1983 decision in Dirks v. SEC.

The Dirks court set out a “varying sets of circumstances…which would warrant a finding of the tipper’s illegal purpose,” the panel noted. Despite the fact the specific language required by Newman for a tangible or pecuniary benefit was not present in Gupta’s jury instructions, the language was satisfactory under Dirks’ seemingly broader “circumstances.”

In fact, the panel’s acknowledgment that Dirks highlighting the ability for a quid pro quo relationship despite “the lack of need for proof of the tipper’s financial or tangible gain” appeared to potentially undercut a portion of the court’s holding in Newman, continuing the erosion that began with the Supreme Court’s findings in Salman v. United States and continued through the two versions of the Second Circuit’s Martoma decision.

The fact that Newman‘s requirement for proof of a tipper’s pecuniary or other tangible gain has been rejected by the Supreme Court disposes of Gupta’s contention that Newman meant the trial court’s instruction that proof of pecuniary or tangible benefit was not necessary caused him to be convicted of a crime for ‘conduct that is not criminal,’” the panel said, quoting from Gupta’s brief on appeal.

A spokesman for the U.S. Attorney’s Office for the Southern District of New York, which secured Gupta’s original conviction and handled the appeal, declined to comment.

Kramer Levin Naftalis & Frankel name attorney Gary Naftalis handled Gupta’s appeal. He did not respond to a request for comment.

Related:

Iowa Supreme Court Rules Civil Forfeiture Laws Violate Fifth Amendment, Upholds Pleading The Fifth


May 30, 2018 @ 02:02 PM 23,367
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Iowa Supreme Court Rules Civil Forfeiture Laws Violate Fifth Amendment, Upholds Pleading The Fifth
https://www.forbes.com/sites/instituteforjustice/2018/05/30/iowa-supreme-court-rules-civil-forfeiture-laws-violate-fifth-amendment-upholds-pleading-the-fifth/#3d1978161655

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Nick Sibilla Nick Sibilla , Contributor

The Iowa Supreme Court struck a blow on Friday against the state’s civil forfeiture laws, which allow the government to permanently confiscate property without ever filing criminal charges. In a unanimous, 33-page ruling, the court strengthened the constitutional protection against self-incrimination for owners fighting civil forfeiture, revived a motion to suppress evidence, and rejected a tactic commonly used by prosecutors to prevent owners from being awarded thousands of dollars in attorney’s fees.

Iowa has been a surprising hot spot for civil forfeiture, ensnaring motorists, professional poker players, and an entrepreneur who ran a Mexican restaurant for almost four decades. The state even rewards the aggressive pursuit of forfeiture cases: Police and prosecutors can keep up to 100 percent of the proceeds from forfeited property. Little wonder then that forfeiture has become quite profitable for law enforcement. An investigation by the Des Moines Register revealed that Iowa law enforcement agencies had taken over $55 million in cash and more than 4,200 vehicles since 1985.

Spurred by these abuses, last year, Iowa legislators strengthened due process protections for innocent owners, and required a criminal conviction to forfeit property valued at under $5,000. Although Iowa’s conviction threshold is the lowest of the 15 states with a conviction requirement, in 2015, data analysis by the Institute for Justice found that only 14 percent of Iowa’s cash forfeitures topped $5,000. Friday’s ruling should further curtail civil forfeiture.

The case began when Jean Carlos Herrera was driving from New York City to Los Angeles in September 2015. While Herrera was passing through Pottawattamie County, Iowa on Interstate 80, he was pulled over by Sergeant Kevin Killpack for going four miles over the speed limit. During the stop, a drug dog alerted to the car. Without Herrera’s consent, Killpack searched the Expedition, but only found some tools, a cell phone, a hollowed-out ice cream machine, and a Pelican case that “contained drug paraphernalia and remnants of marijuana.” No other drugs were found.

Killpack cited Herrera for speeding but never charged him with a crime. Yet that didn’t stop the sergeant from seizing the car, a 1999 Ford Expedition registered to Herrera’s friend, Fernando Rodriguez, and all the equipment inside.

Less than a week after the Expedition was seized, Rodriguez hired an attorney, who promptly emailed Pottawattamie County that Rodriguez was fighting back as an “innocent owner.” Rodriguez’s attorney also noted that under Iowa law, the government must pay attorney’s fees to property owners who win their civil forfeiture cases. He also noted that “the fees are going to be greater than the vehicle value, so this might be one to let go.”

Soon after, Sergeant Killpack applied for a warrant to search possible hidden compartments within the vehicle, based on the fact that Rodriguez had hired an attorney. According to Killpack, “it does not make financial sense to spend a significant amount of money, in attorney fees, in an attempt to reclaim a vehicle worth $2,132,” which in his mind meant that “there is something much more valuable still inside the vehicle that has not been found by law enforcement in the initial search.”

A district court granted the warrant, though, as the Iowa Supreme Court noted on Friday, Killpack’s warrant application “failed to mention that Rodriguez had argued he was entitled to attorney fees from the State as an innocent owner.” On his second search, Killpack found and seized almost $45,000 in cash hidden inside a false compartment.

In October, prosecutors filed a complaint to forfeit the cash, the car, and the rest of the property taken during the traffic stop, claiming that the property was “drug proceeds” or “used in the transport of drugs.”

The two men (who were now represented by the same lawyer) filed an answer together that stated they had an interest in the seized properties and demanded their return. Herrera also invoked the Fifth Amendment and refused to completely comply with the state’s disclosure requirements.

Under state law, property owners who want to reclaim their seized property must fully disclose “the nature and extent” of their interest in the property, as well as “the date, the identity of the transferor, the circumstances of the claimant’s acquisition.” Refusing to comply can result in the property forfeited to the state. Yet those forced disclosures may reveal information that could incriminate the owner or trigger a perjury trap, which would violate the Fifth Amendment.

Writing for the majority, Justice Thomas Waterman noted that Iowa’s forfeiture laws burden owners with a “difficult choice between asserting [their] privilege against self-incrimination or foregoing [their] claim for return of the contested property.”

As Waterman recounted, Herrera omitting that information was “fatal to his claim:” The district court ruled that Herrera’s reply was not a proper answer and so he was not entitled to a forfeiture hearing.

But on appeal, the Iowa Supreme Court overturned that ruling, and held that “assertion of the Fifth Amendment privilege against self-incrimination excuses compliance” from Iowa’s disclosure requirements for civil forfeiture claims. “The court may not enforce the specific disclosure requirements…over the claimant’s Fifth Amendment objection,” Waterman ruled.

Friday’s ruling also revived Herrera’s motion to suppress evidence, which the district court had dismissed as well. Both the Iowa Supreme Court and U.S. Supreme Court have ruled that the “exclusionary rule,” which prohibits the government from using evidence that was not lawfully obtained, applies to criminal prosecutions and civil forfeiture proceedings.

In this case, Herrera claimed that the stop, search, and seizure of the car violated the Fourth Amendment and should be suppressed accordingly. Justice Waterman ruled that “the district court must first rule on motions to suppress evidence before resolving forfeiture claims,” since that ruling “determines what evidence the state can rely on during the forfeiture proceeding.”

The court’s ruling should strengthen safeguards for property owners facing civil forfeiture. According to Dean Stowers, who represented Herrera and Rodriguez, “this decision will require the state to establish the legality of the seizure” before the state can attempt “to forfeit property or to compel persons to answer questions about their property.”

A representative from the Iowa Attorney General’s Office said they were “still looking at the possible impact of the ruling” and declined to comment further.

“It appears that we followed the forfeiture rules as they existed at the time, and we argued that the claimants did not follow the rules,” said Pottawattamie County Attorney Matt Wilber. ”The District Court and Court of Appeals agreed with our position. The Iowa Supreme Court has now ordered that they are changing the rules, so we’ll all follow the new rules.”

As for Rodriguez, five months after the state filed its forfeiture complaint, prosecutors decided Rodriguez could get back his Ford Expedition. His attorney then filed to recover nearly $9,000 in attorney’s fees and expenses, which, under Iowa law, are owed to prevailing parties. But because the state dropped its forfeiture case just before a court hearing, the district court ruled that Rodriguez didn’t actually prevail because he didn’t technically win on the merits in court.

Justice Waterman rejected this argument wholesale:

“Rodriguez sought to prevent the State from taking permanent possession of his vehicle. He fulfilled his primary objective of getting his vehicle back after months of contested litigation against the State. On this record, we hold that Rodriguez is a prevailing party even though the district court did not expressly find that he was an ‘innocent owner.’”

Moreover, Waterman noted that fee awards “help level the playing field for persons contesting government seizures,” as they “incentivize attorneys to represent citizens seeking return of their property from the government.”

The Iowa Supreme Court’s ruling contrasts starkly with the U.S. Eighth Circuit Court of Appeals, which covers Iowa. In 2016, the Eighth Circuit considered the case of Carole Hinders, who ran Mrs. Lady’s, a cash-only Mexican restaurant in Arnolds Park, Iowa. Based simply on the way she deposited her cash, in spring 2013, the IRS raided Carole’s entire business checking account—almost $33,000. The IRS accused Carole of “structuring” her deposits, or deliberately keeping her deposits under $10,000 to circumvent a reporting requirement. She was never indicted.

Institute for Justice

Carole Hinders.

With help from the Institute for Justice, Carole fought back. In October 2014, The New York Times ran a front-page story on her case. That prompted the IRS to announce it would “no longer pursue the seizure and forfeiture of funds associated solely with ‘legal source’ structuring cases.” Less than two months after the Times article was published, federal prosecutors dropped the case against Carole’s cash.

Under the federal Civil Asset Forfeiture Reform Act, property owners who “substantially prevail” in their civil forfeiture cases are entitled to interest as well as attorney’s fees and costs. Considering that she recovered her cash and even sparked a policy shift at the IRS, Carole believed she had “substantially prevailed.” Unfortunately, in 2016, the Eighth Circuit ruled that she did not, and instead held that “a voluntary change on the part of a defendant, even if it resulted in the outcome sought by the plaintiff, ‘lack[ed] the necessary judicial imprimatur’ to authorize a fee award.” With this ruling, the Eighth Circuit upheld a loophole for the government to skip out on paying hefty attorney’s fees to innocent property owners.

But with the Iowa Supreme Court’s decision, owners fighting forfeiture in state court now have an easier time to be made whole than if their exact same case were in federal court. One Des Moines-based forfeiture attorney told the Des Moines Register that the new decision should deter the government from seizing property, since prosecutors “risk not only the return of the property but a significant attorney fee as well.”

“The Iowa Supreme Court’s ruling is another potent reminder that the best way to prevent abusive seizures is to end civil forfeiture once and for all,” said Institute for Justice Senior Legislative Counsel Lee McGrath. “Iowa legislators should follow the lead of counterparts in North Carolina, New Mexico and Nebraska and replace it with criminal forfeiture.”

This post has been updated to include comment from the Pottawattamie County Attorney.

“It Ain’t as Bad As You Think” . ? . It Is As Bad As I Think, and Probably Even Worse


I keep thinking about that.  Being told that it really isn’t as bad as I think.  Hell if it ain’t!

When I was a little girl, we walked to school.  We would get there in the morning, and there would be the morning prayer.  Right after that, we all said I Pledge Allegiance to the Flag, and they played the National Anthem.  I started to school when I was four (4).  By the time I was in fourth grade, it was like the second elementary school.  They did not say the morning prayer, or play the anthem, but by golly, the whole time I was in school, we Pledged Allegiance to the Flag.  We were proud to be Americans.

Now, you get suspended for wearing anything with a flag on it.  The Ten Commandments, Pledge of Allegiance, and anything having to do with our natural heritage is bad.  Christians are bad.  Americans are bad.  Christian Americans must be very, very bad.  And who the hell decided all that?  That is bullshit.  Plain and simple, bullshit.  Since when have other people gone to live in another country, and was allowed to claim they were offended by the customs of that country, and the country changed for the outsiders?  Someone tell me when.  That is bullshit!  Plain and simple bullshit.

Seems like it began several years ago… SuperTarget in our area, told the GoodWill people at Christmas, not to come there any more.  Of course, after that, we never went back to that store, and it closed shortly thereafter.  For some reason, outsiders that had moved to the United States, were offended by Christmas, Nativity scenes, and GoodWill ringing their little bells at Christmas.  Those dedicated, hardworking GoodWill employees, trying to make a difference to others at a very hard time of year.  They never asked anyone for anything.  Just stood, ringing the bell and smiling.  It was tradition.  Christmas trees, nativity scenes, GoodWill.

So, in order to not to offend those, who are not from here, America changed? Bullshit.  I say, if our traditions offends you, you came into this country, you know you can leave the same damned way!  Every time I turn around, someone is explaining that such and such offends them.  Screw it!  I am offended by what people do in other countries, but I don’t move there, then expect them to change their country for me.  That is bullshit.  Plain and simple bullshit.

Now, they tell us that our forefathers were terrorists.  Do what?  So what kind of History lessons are they giving kids now a days?  Speaking of kids.  Since when does the govt. have balls enough to tell parents what they are or not going to feed their kids for lunch during school?  The other thing about kids, is that they belong to the community, not their parents?  Bullshit!  Plain and simple bullshit!  And these idiots put up with that?  I sure as hell am glad that my Mama was who she was.  She would have not only told them what horse to get on, she would have had them direct that horse, on out of the country.  And my Daddy, lo and behold, I am glad that he is not here to see this shit.  Daddy was gung-ho Marine.  He is probably rolling in his grave right now.

And someone wants to tell me, that it ain’t as bad as I think it is?  Bullshit!  Plain and simple bullshit!!!

DeKalb Commissioners Are On A Criminal Roll!


Updated: 4:13 p.m. Tuesday, Aug. 26, 2014 | Posted: 10:11 a.m. Tuesday, Aug. 26, 2014

DeKalb Commissioner Boyer could serve prison time

By Johnny Edwards and Mark Niesse

http://www.ajc.com/news/news/local-govt-politics/criminal-charges-filed-against-former-dekalb-commi/ng82z/

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Elaine Boyer in federal court sketch photo
Richard Miller
082614 Atlanta: This is a photo copy of an artist rendition of the federal court appearance of DeKalb County Commissioner Elaine Boyer and her court appointed attorney Jeff Brickman into questionable use of taxpayer dollars on Tuesday, August 26, 2014, in Atlanta. By Courtroom artist Richard Miller
DeKalb commissioner resigns amid spending investigation gallery
 

The Atlanta Journal-Constitution

A day after resigning from office, DeKalb County Commissioner Elaine Boyer announced in court Tuesday she would plead guilty to federal charges accusing her of two schemes to pocket tens of thousands of dollars from taxpayers.

Boyer, appearing calm and collected, told a judge she understood what she was doing, but it’s unknown whether she’ll serve time in prison.

U.S. Attorney Sally Quillian Yates said she will seek a prison sentence for Boyer.

“This is a serious crime. She’s cooperating now after she was caught,” Yates said. Boyer’s guilty plea “doesn’t wipe the slate clean.”

Boyer’s attorney, Jeff Brickman, said he’ll ask a judge not to sentence Boyer to prison, although she doesn’t have a plea deal in place. She was to be released without supervision after being photographed and fingerprinted. She could be formally arraigned within 10 days.

A criminal filing earlier Tuesday said Boyer authorized more than $78,000 in county payments to an adviser who submitted false invoices for consulting work but did nothing.

The adviser then funneled about 75 percent of the money, more than $58,000, back into Boyer’s personal bank account, the document alleges. She faced a charge of mail fraud conspiracy for that scheme.

The court documents didn’t name the adviser and no charges apparently have been filed against that person, even though he apparently pocketed about $20,000 in taxpayer money. The documents say Boyer used her share for personal expenses, including purchases at hotels and high-end department stores.

The Atlanta Journal-Constitution was pressing Boyer to explain nearly $90,000 in checks to consultants before she resigned Monday and admitted she had betrayed taxpayers.

Federal prosecutors also accused Boyer of wire fraud for using her county purchasing card to pay for more than $15,000 in personal expenses. From October 2010 to February 2014, Boyer made more than 50 such purchases, prosecutors allege.

The AJC in March revealed that she had been tapping county funds to pay for airline tickets, a ski resort vacation, rental cars and personal cell phone expenses, triggering the federal investigation.

Boyer will have to forfeit any proceeds or property she obtained from the schemes, prosecutors wrote.

Jeff Barnes/Foreclosure Defense Nationwide “New Legal Issues”


NEW LEGAL ISSUES COMING UP IN TRIAL AND APPELLATE COURTS

DECEMBER 16, 2013

With the release of the US Bank admissions per our post of November 6, 2013; the issuance of the opinions from the Supreme Courts of Oregon and Montana holding that MERS is not the “beneficiary”; and recent opinions from various jurisdictions which are now, finally, holding that securitization-related issues are relevant in a foreclosure, a host of new legal issues are about to be litigated in the trial and appellate courts throughout the country. It has taken six (6) years and coast-to-coast work to get courts to realize that securitization of a mortgage loan raises issues as to standing, real party in interest, and the alleged authority to foreclose, and that the simplistic mantra of the “banks” and servicers of “we have the note, thus we win” is no longer to be blindly accepted.

One issue which we and others are litigating relates to mortgage loans originated by Option One, which changed its name to Sand Canyon Corporation and thereafter ceased all mortgage loan operations. Pursuant to the sworn testimony of the former President of Sand Canyon, it stopped owning mortgage loans as of 2008. However, even after this cessation of any involvement with servicing or ownership of mortgage loans, we see “Assignments” from Option One or Sand Canyon to a securitization trustee bank or other third party long after 2008.

The United States District Court for the District of New Hampshire concluded, with the admission of the President of Sand Canyon, that the homeowner’s challenge to the foreclosure based on a 2011 alleged transfer from Sand Canyon to Wells Fargo was not an “attack on the assignment” which certain jurisdictions have precluded on the alleged basis that the borrower is not a party to the assignment, but is a situation where no assignment occurred because it could not have as a matter of admitted fact, as Sand Canyon could not assign something it did not have. The case is Drouin v. American Home Mortgage Servicing, Inc. and Wells Fargo, etc., No. 11-cv-596-JL.

The Option One/Sand Canyon situation is not unique: there are many originating “lenders” which allegedly “assigned” mortgages or Deeds of Trust long after they went out of business or filed for Bankruptcy, with no evidence of post-closing assignment authority or that the Bankruptcy court having jurisdiction over a bankrupt lender ever granted permission for the alleged transfer of the loan (which is an asset of the Bankruptcy estate) out of the estate. Such a transfer without proof of authority to do so implicates bankruptcy fraud (which is a serious crime punishable under United States criminal statutes), and fraud on the court in a foreclosure case where such an alleged assignment is relied upon by the foreclosing party.

As we stated in our post of November 6, the admission of US Bank that a borrower is a party to any MBS transaction and that the loan is governed by the trust documents means that the borrower is, in fact, a party to any assignment of that borrower’s loan, and should thus be permitted to seek discovery as to any alleged assignment and all issues related to the securitization of the loan. We have put this issue out in many of our cases, and will be arguing this position at both the trial and appellate levels beginning early 2014.

Jeff Barnes, Esq., http://www.ForeclosureDefenseNationwide.com

Sentiments of US District Judge, Jed S. Rakoff – We Need More Judges Like This One!


I was reading some information about the financial crisis in this country (USA), and ran across a paper written by US District Court Judge Jed S. Rakoff.  If we had more Judges with the mind of this one, we would not be in nearly as bad a shape as we are in.  I have not yet figured out how the Judges justify allowing foreclosures, when they know for a fact that the Banks and their attorneys are creating fraudulent documents, committing perjury in their Courtrooms, and are breaking so many laws, that it has become the norm…  

Read what Honorable Judge Jed S. Rakoff says:  http://www.ft.com/cms/cb1e43f2-4be6-11e3-8203-00144feabdc0.pdf

11/12/13
Why Have No High Level Executives Been Prosecuted In Connection With The Financial Crisis?
by Jed S. Rakoff
(U.S. District Judge)

Five years have passed since the onset of what is sometimes called the Great Recession. While the economy has slowly improved, there are still millions of Americans leading lives of quiet desperation: without jobs, without resources, without hope.

Who was to blame? Was it simply a result of negligence, of the kind of inordinate risk-taking commonly called a “bubble,” of an imprudent but innocent failure to maintain adequate reserves for a rainy day? Or was it the result, at least in part, of fraudulent practices, of dubious mortgages portrayed as sound risks and packaged into ever-more-esoteric financial instruments, the fundamental weaknesses of which were intentionally obscured?

If it was the former – if the recession was due, at worst, to a lack of caution – then the criminal law has no role to play in the aftermath. For, in all but a few circumstances (not here relevant), the fierce and fiery weapon called criminal prosecution is directed at intentional misconduct, and nothing less. If the Great Recession was in no part the handiwork of intentionally fraudulent practices by high-level executives, then to prosecute such executives criminally would be “scapegoating” of the most shallow and despicable kind.

But if, by contrast, the Great Recession was in material part the product of intentional fraud, the failure to prosecute those responsible must be judged one of the more egregious failures of the criminal justice system in many years.Indeed, it would stand in striking contrast to the increased success that federal prosecutors have had over the past 50 years or so in bringing to justice even the highest level figures who orchestrated mammoth frauds. Thus, in the 1970’s, in the aftermath of the “junk bond” bubble that, in many ways, was a precursor of the more recent bubble in mortgage-backed securities, the progenitors of the fraud were all successfully prosecuted, right up to Michael Milken. Again, in the 1980’s, the so-called savings-and-loan crisis, which again had some eerie parallels to more recent events, resulted in the successful criminal prosecution of more than 800 individuals, right up to Charles Keating. And, again, the widespread accounting frauds of the 1990’s, most vividly represented by Enron and WorldCom, led directly to the successful prosecution of such previously respected C.E.O.’s as Jeffrey Skilling and Bernie Ebbers.

In striking contrast with these past prosecutions, not a single high level executive has been successfully prosecuted in  connection with the recent financial crisis, and given the fact that most of the relevant criminal provisions are governed by a five-year statute of limitations, it appears very likely that none will be. It may not be too soon, therefore, to ask why.

One possibility, already mentioned, is that no fraud was committed. This possibility should not be  discounted. Every case is different, and I, for one, have no opinion as to whether criminal fraud was committed in any given instance.

 But the stated opinion of those government entities asked to examine the financial crisis overall is not that no fraud was committed. Quite the contrary. For example, the Financial Crisis Inquiry Commission, in its final report, uses variants of the word “fraud” no fewer than 157 times in describing what led to the crisis, concluding that there was a “systemic breakdown,” not just in  accountability, but also in ethical behavior. As the Commission found, the signs of fraud were everywhere to be seen, with the number of reports of suspected mortgage fraud rising 20-fold between 1998 and 2005 and then doubling again in the next four years. As early as 2004, FBI Assistant Director Chris Swecker, was publicly warning of the “pervasive problem” of mortgage fraud, driven by the voracious demand for mortgagebacked securities. Similar warnings, many from within the financial community, were disregarded, not because they were  viewed as inaccurate, but because, as one high level banker put it, “A decision was made that ‘We’re going to have to hold our nose and start buying the product if we want to stay in business.’”

Without multiplying examples, the point is that, in the aftermath of the financial crisis, the prevailing view of many government officials (as well as others) was that the crisis was in material respects the product of intentional fraud. In a nutshell, the fraud, they argued, was a simple one. Subprime mortgages, i.e., mortgages of dubious creditworthiness, increasingly provided the sole collateral for highly-leveraged securities that were marketed as triple-A, i.e., of very low risk. How could this transformation of a sow’s ear into a silk purse be accomplished unless someone dissembled along the way?

While officials of the Department of Justice have been more circumspect in describing the roots of the financial crisis than have the various commissions of inquiry and other government agencies, I have seen nothing to indicate their disagreement with the widespread conclusion that fraud at every level permeated the bubble in mortgage-backed securities. Rather, their position has been to excuse their failure to prosecute high level individuals for fraud in connection with the financial crisis on one or more of three grounds:

First, they have argued that proving fraudulent intent on the part of the high level management of the banks and companies involved has proved difficult. It is undoubtedly true that the ranks of top management were several levels removed from those who were putting together the collateralized debt obligations and other securities offerings that were based on dubious mortgages; and the people generating the mortgages themselves were often at other companies and thus even further removed. And I want to stress again that I have no opinion as to whether any given top executive had knowledge of the dubious nature of the underlying mortgages, let alone fraudulent intent. But what I do find surprising is that the Department of Justice should view the proving of intent as so difficult in this context. Who, for example, were generating the so-called “suspicious activity” reports of mortgage fraud that, as mentioned, increased so hugely in the years leading up to the crisis? Why, the banks themselves. A top level banker, one might argue, confronted with increasing evidence from his own and other banks that mortgage fraud was increasing, might have inquired as to why his bank’s mortgage-based securities continued to receive triple-A ratings?  And if, despite these and other reports of suspicious activity, the executive failed to make such inquiries, might it be because he did not want to know what such inquiries would reveal?  

This, of course, is what is known in the law as “willful blindness” or “conscious disregard.” It is a well-established basis on which federal prosecutors have asked juries to infer intent, in cases involving complexities, such as accounting treatments, at least as esoteric as those involved in the events leading up to the financial crisis. And while some federal courts have occasionally expressed qualifications about the use of the willful blindness approach to prove intent, the Supreme Court has consistently approved it. As that Court stated most recently in Global-Tech Appliances, Inc. v. SEB S.A., 131 S.Ct. 2060, 2068 (2011), “The doctrine of willful blindness is well established in criminal law. Many criminal statutes require proof that a defendant acted knowingly or willfully, and courts applying the doctrine of willful blindness hold that defendants cannot escape the reach of these statutes by deliberately shielding themselves from clear evidence of critical facts that are strongly suggested by the circumstances.” Thus, the Department’s claim that proving intent in the financial crisis context is particularly difficult may strike some as doubtful.

Second, and even weaker, the Department of Justice has sometimes argued that, because the institutions to whom mortgagebacked securities were sold were themselves sophisticated investors, it might be difficult to prove reliance. Thus, in  defending the failure to prosecute high level executives for frauds arising from the sale of mortgage-backed securities, the then head of the Department of Justice’s Criminal Division, told PBS that “in a criminal case … I have to prove not only that you made a false statement but that you intended to commit a crime, and also that the other side of the transaction relied on what you were saying. And frankly, in many of the securitizations and the kinds of transactions we’re talking about, in reality you had very sophisticated counterparties on both sides. And so even though one side may have said something was dark blue when really we can say it was sky blue, the other side of the transaction, the other sophisticated party, wasn’t relying at all on the description of the color.”

Actually, given the fact that these securities were bought and sold at lightning speed, it is by no means obvious that even a sophisticated counterparty would have detected the problems with the arcane, convoluted mortgage-backed derivatives they were being asked to purchase. But there is a more fundamental problem with the above-quoted statement from the former head of the Criminal Division, which is that it totally misstates the law.  In actuality, in a criminal fraud case the Government is never required to prove reliance, ever. The reason, of course, is that would give a crooked seller a license to lie whenever he was  dealing with a sophisticated counterparty.  The law, however, says that society is harmed when a seller purposely lies about a material fact, even if the immediate purchaser does not rely on that particular fact, because such misrepresentations create problems for the market as a whole. And surely there never was a situation in which the sale of dubious mortgage-backed securities created more of a huge problem for the marketplace, and society as a whole, than in the recent financial crisis.

The third reason the Department has sometimes given for not bringing these prosecutions is that to do so would itself harm the economy. Thus, Attorney General Holder himself told Congress that “it does become difficult for us to prosecute them when we are hit with indications that if we do prosecute – if we do bring a criminal charge – it will have a negative impact on the national economy, perhaps even the world economy.” To a federal judge, who takes an oath to apply the law equally to rich and to poor, this excuse — sometimes labeled the “too big to jail” excuse – is disturbing, frankly, in what it says about the
Department’s apparent disregard for equality under the law.

In fairness, however, Mr. Holder was referring to the prosecution of financial institutions, rather than their
C.E.O.’s. But if we are talking about prosecuting individuals, the excuse becomes entirely irrelevant; for no one that I know of has ever contended that a big financial institution would collapse if one or more of its high level executives were prosecuted, as opposed to the institution itself.

Without multiplying examples further, my point is that the Department of Justice has never taken the position that all the top executives involved in the events leading up to the financial crisis were innocent, but rather has offered one or another excuse for not criminally prosecuting them – excuses that, on inspection, appear unconvincing. So, you might ask, what’s really going on here? I don’t claim to have any inside information about the real reasons why no such prosecutions have been brought, but I take the liberty of offering some speculations, for your consideration or amusement as the case may be.

At the outset, however, let me say that I totally discount the argument sometimes made that no such prosecutions have been brought because the top prosecutors were often people who previously represented the financial institutions in question and/or were people who expected to be representing such
institutions in the future: the so-called “revolving door.” In my experience, every federal prosecutor, at every level, is seeking to make a name for him-or-herself, and the best way to do that is by prosecuting some high level person. While companies that are indicted almost always settle, individual defendants whose careers are at stake will often go to trial. And if the Government wins such a trial, as it usually does, the prosecutor’s reputation is made.My point is that whatever small influence the “revolving door” may have in discouraging certain white-collar prosecutions is more than offset, at least in the case of prosecuting high-level individuals, by the career-making benefits such prosecutions confer on the successful prosecutor.  So, one asks again, why haven’t we seen such prosecutions growing out of the financial crisis? I offer, by way of speculation, three influences that I think, along with others, have had the effect of limiting such prosecutions.

First, the prosecutors had other priorities. Some of these were completely understandable. For example, prior to 2001, the FBI had more than 1,000 agents assigned to investigating financial frauds, but after 9/11 many of these agents were shifted to anti-terrorism work. Who can argue with that?  Eventually, it is true, new agents were hired for some of the vacated spots in fraud detection; but this is not a form of detection easily learned and recent budget limitations have only exacerbated the problem.

Of course, the FBI is not the primary investigator of fraud in the sale of mortgage-backed securities; that responsibility lies mostly with the S.E.C. But at the very time the financial crisis was breaking, the S.E.C. was trying to deflect criticism from its failure to detect the Madoff fraud, and this led it to concentrate on other Ponzi-like schemes, which for awhile were, along with accounting frauds, its chief focus. More recently, the S.E.C. has been hard hit by budget limitations, and this has not only made it more difficult to assign the kind of manpower the kinds of frauds we are talking about require, but also has led S.E.C. enforcement to focus on the smaller, easily resolved cases that will beef up their statistics when they go to Congress begging for money.

As for the Department of Justice proper, a decision was made around 2009 to spread the investigation of these financial fraud cases among numerous U.S. Attorney’s Offices, many of which had little or no prior experience in investigating and prosecuting sophisticated financial frauds. At the same time, the U.S. Attorney’s Office with the greatest expertise in these kinds of cases, the Southern District of New York, was just embarking on its prosecution of insider trading cases arising from the Rajaratnam tapes, which soon proved a gold mine of good cases that absorbed a huge amount of the attention of the securities fraud unit of that office. While I want to stress again that I have no inside information, as a former chief of that unit I would venture to guess that the cases involving the financial crisis were parceled out to Assistants who also had insider trading cases. Which do you think an Assistant would devote most of her attention to:  an insider trading case that was already nearly ready to go to indictment and that might lead to a highvisibility trial, or a financial crisis case that was just getting started, would take years to complete, and had no guarantee of even leading to an indictment? Of course, she would put her energy into the insider trading case, and if she was lucky, it would go to trial, she would win, and she would then take a job with a large law firm. And in the process, the financial fraud case would get lost in the shuffle.

Alternative priorities, in short, is, I submit, one of the reasons the financial fraud cases were not brought, especially cases against high level individuals that would take many years, many investigators, and a great deal of expertise to investigate.  But a second, and less salutary, reason for not bringing such cases is the Government’s own involvement in the underlying circumstances that led to the financial crisis.

On the one hand, the government, writ large, had a hand in creating the conditions that encouraged the approval of dubious mortgages. It was the government, in the form of Congress, that repealed Glass-Steagall, thus allowing certain banks that had previously viewed mortgages as a source of interest income to become instead deeply involved in securitizing pools of mortgages in order to obtain the much greater profits available from trading. It was the government, in the form of both the executive and the legislature, that encouraged deregulation, thus weakening the power and oversight not only of the S.E.C. but also of such diverse banking overseers as the O.T.S. and the O.C.C. It was the government, in the form of the Fed, that kept interest rates low in part to encourage mortgages. It was the government, in the form of the executive, that strongly encouraged banks to make loans to low-income persons who might have previously been regarded as too risky to warrant a mortgage. It was the government, in the form of the government-sponsored entities known as Fannie Mae and Freddie Mac, that helped create the fora-time insatiable market for mortgage-backed securities. And it was the government, pretty much across the board, that acquiesced in the ever greater tendency not to require meaningful documentation as a condition of obtaining a mortgage, often preempting in this regard state regulations designed to assure greater mortgage quality and a borrower’s ability to repay.

The result of all this was the mortgages that later became known as “liars’ loans.” They were increasingly risky; but what did the banks care, since they were making their money from the securitizations; and what did the government care, since they  were helping to boom the economy and helping voters to realize their dream of owning a home.

Moreover, the government was also deeply enmeshed in the aftermath of the financial crisis. It was the government that proposed the shotgun marriages of Bank of America with Merrill Lynch, of J.P. Morgan with Bear Stearns, etc. If, in the process, mistakes were made and liabilities not disclosed, was it not partly the government’s fault?

Please do not misunderstand me. I am not alleging that the Government knowingly participated in any of the fraudulent practices alleged by the Financial Inquiry Crisis Commission and others. But what I am suggesting is that the Government was deeply involved, from beginning to end, in helping create the conditions that could lead to such fraud, and that this would give a prudent prosecutor pause in deciding whether to indict a C.E.O. who might, with some justice, claim that he was only doing what he fairly believed the Government wanted him to do.

 The final factor I would mention is both the most subtle and the most systemic of the three, and arguably the most important, and it is the shift that has occurred over the past 30 years or more from focusing on prosecuting high-level individuals to focusing on prosecuting companies and other institutions. It is true that prosecutors have brought criminal charges against companies for well over a hundred years, but, until relatively recently, such prosecutions were the exception, and prosecutions of companies without simultaneous prosecutions of their managerial agents were even rarer. The reasons were obvious. Companies do not commit crimes; only their agents do. And while a company might get the benefit of some such crimes, prosecuting the company would inevitably punish, directly or indirectly, the many employees and shareholders who were totally innocent.   Moreover, under the law of most U.S. jurisdictions, a company cannot be criminally liable unless at least one managerial agent has committed the crime in question; so why not prosecute the agent who actually committed the crime?

 In recent decades, however, prosecutors have been increasingly attracted to prosecuting companies, often even without indicting a single individual. This shift has often been rationalized as part of an attempt to transform “corporate cultures,” so as to prevent future such crimes; and, as a result, it has taken the form of “deferred prosecution agreements” or even “non-prosecution agreements,” in which the company, under threat of criminal prosecution, agrees to take various prophylactic measures to prevent future wrongdoing. But in practice, I suggest, it has led to some lax and dubious behavior on the part of prosecutors, with deleterious results.    

If you are a prosecutor attempting to discover the individuals responsible for an apparent financial fraud, you go about your business in much the same way you go after mobsters or drug kingpins: you start at the bottom and, over many months or years, slowly work your way up. Specifically, you start by “flipping” some lower level participant in the fraud whom you can show was directly responsible for making one or more false material misrepresentations but who is willing to cooperate in order to reduce his sentence, and – aided by the substantial prison penalties now available in white collar cases – you go up the ladder. For a detailed example of how this works, I recommend Kurt Eichenwald’s well-known book The Informant, which describes how FBI agents, over a period of three years, uncovered the huge price-fixing conspiracy involving high-level executives at Archer Daniels, all of whom were successfully prosecuted.

But if your priority is prosecuting the company, a different scenario takes place. Early in the investigation, you invite in counsel to the company and explain to him or her why you suspect fraud. He or she responds by assuring you that the company wants to cooperate and do the right thing, and to that end the company has hired a former Assistant U.S. Attorney, now a partner at a respected law firm, to do an internal investigation. The company’s counsel asks you to defer your investigation until the company’s own internal investigation is completed, on the condition that the company will share its results with you. In order to save time and resources, you agree. Six months later the company’s counsel returns, with a detailed report showing that mistakes were made but that the company is now intent on correcting them. You and the company then agree that the company will enter into a deferred prosecution agreement that couples some immediate fines with the imposition of expensive but internal prophylactic measures. For all practical purposes the case is now over. You are happy because you believe that you have helped prevent future crimes; the company is happy because it has avoided a devastating indictment; and perhaps the happiest of all are the executives, or former executives, who actually committed the underlying misconduct, for they are left untouched. 

I suggest that this is not the best way to proceed. Although it is supposedly justified in terms of preventing future crimes, I suggest that the future deterrent value of successfully prosecuting individuals far outweighs the prophylactic benefits of imposing internal compliance measures that are often little more than window-dressing. Just going after the company is also both technically and morally suspect. It is technically suspect because, under the law, you should not indict or threaten to indict a company unless you can prove beyond a reasonable doubt  that some managerial agent of the company committed the alleged crime; and if you can prove that, why not indict the manager?  And from a moral standpoint, punishing a company and its many innocent employees and shareholders for the crimes committed by some unprosecuted individuals seems contrary to elementary notions of moral responsibility.

These criticisms take on special relevance, however, in the instance of investigations growing out of the financial crisis, because, as noted, the Department of Justice’s position, until at least very, very recently, is that going after the suspect institutions poses too great a risk to the nation’s economic recovery. So you don’t go after the companies, at least not criminally, because they are too big to jail; and you don’t go after the individuals, because that would involve the kind of years-long investigations that you no longer have the experience or the resources to pursue.

In conclusion, I want to stress again that I have no idea whether the financial crisis that is still causing so many of us so much pain and despondency was the product, in whole or in part, of fraudulent misconduct. But if it was — as various governmental authorities have asserted it was –- then, the failure of the government to bring to justice those responsible for such colossal fraud bespeaks weaknesses in our prosecutorial system that need to be addressed.

Jeff Barnes, Esq. On the Ball!


http://foreclosuredefensenationwide.com/?p=533

US BANK ADMITS, IN WRITING FROM THEIR CORPORATE OFFICE, THAT THE BORROWER IS A PARTY TO AN MBS TRANSACTION; THAT SECURITIZATION TRUSTEES ARE NOT INVOLVED IN THE FORECLOSURE PROCESS; HAVE NO ADVANCE KNOWLEDGE OF WHEN A LOAN HAS DEFAULTED; THAT THE “TRUE BENEFICIAL OWNERS” OF A SECURITIZED MORTGAGE ARE THE INVESTORS IN THE MBS; AND THAT THE GOAL OF A SERVICER IS TO “MAXIMIZE THE RETURN TO INVESTORS”                                                                                                                                                                                                 November 6, 2013

 We have been provided with a copy of U.S. Bank Global Corporate Trust Services’ “Role of the Corporate Trustee” brochure which makes certain incredible admissions, several of which squarely disprove and nullify the holdings of various courts around the country which have taken the position that the borrower “is not a party to” the securitization and is thus not entitled to discovery or challenges to the mortgage loan transfer process. The brochure accompanied a letter from US Bank to one of our clients which states: “Your account is governed by your loan documents and the Trust’s governing documents”, which admission clearly demonstrates that the borrower’s loan is directly related to documents governing whatever securitized mortgage loan trust the loan has allegedly been transferred to. This brochure proves that Courts which have held to the contrary are wrong on the facts. 

The first heading of the brochure is styled “Distinct Party Roles”. The first sentence of this heading states: “Parties involved in a MBS transaction include the borrower, the originator, the servicer and the trustee, each with their own distinct roles, responsibilities and limitations.” MBS is defined at the beginning of the brochure as the sale of “Mortgage Backed Securities in the capital markets”. The fourth page of the brochure also identifies the “Parties to a Mortgage Backed Securities Transaction”, with the first being the “Borrower”, followed by the Investment Bank/Sponsor, the Investor, the Originator, the Servicer, the Trust (referred to “generally as a special purpose entity, such as a Real Estate Mortgage Investment Conduit (REMIC)”), and the Trustee (stating that “the trustee does not have an economic or beneficial interest in the loans”). 

The second page sets forth that U.S. Bank, as Trustee, “does not have any discretion or authority in the foreclosure process.” If this is true, how can U.S. Bank as Trustee be the Plaintiff in judicial foreclosures or the foreclosing party in non-judicial foreclosures if it has “no authority in the foreclosure process”? 

The second page also states: “All trustees for MBS transactions, including U.S. Bank, have no advance knowledge of when a mortgage loan has defaulted.” Really? So when, for example, MERS assigns, in 2011, a loan to a 2004 Trust where the loan has been in default since 2008, no MBS “trustee” bank (and note that it says “All” trustees) do not know that a loan coming into the trust is in default? The trust just blindly accepts loans which may or may not be in default without any advanced due diligence? Right. Sure. Of course. LOL. 

However, that may be true, because the trustee banks do not want to know, for then they can take advantage of the numerous insurances, credit default swaps, reserve pools, etc. set up to pay the trust when loans are in default, as discussed below. 

The same page states that “Any action taken by the servicer must maximize the return on the investment made by the ‘beneficial owners of the trust’ — the investors.” The fourth page of the brochure states that the investors are “the true beneficial owners of the mortgages”, and the third page of the brochure states “Whether the servicer pursues a foreclosure or considers a modification of the loan, the goal is still to maximize the return to investors” (who, again, are the true beneficial owners of the mortgage loans). 

This is a critical admission in terms of what happens when a loan is securitized. The borrower initiated a mortgage loan with a regulated mortgage banking institution, which is subject to mortgage banking rules, regulations, and conditions, with the obligation evidenced by the loan documents being one of simple loaning of money and repayment, period. Once a loan is sold off into a securitization, the homeowner is no longer dealing with a regulated mortgage banking institution, but with an unregulated private equity investor which is under no obligation to act in the best interest to maintain the loan relationship, but to “maximize the return”. This, as we know, almost always involves foreclosure and denial of a loan mod, as a foreclosure (a) results in the acquisition of a tangible asset (the property); and (b) permits the trust to take advantage of reserve pools, credit default swaps, first loss reserves, and other insurances to reap even more monies in connection with the claimed “default” (with no right of setoff as to the value of the property against any such insurance claims), and in a situation where the same risk was permitted to be underwritten many times over, as there was no corresponding legislation or regulation which precluded a MBS insurer (such as AIG, MGIC, etc.) from writing a policy on the same risk more than once. 

As those of you know who have had Bloomberg reports done on securitized loans, the screens show loans which have been placed into many tranches (we saw one where the same loan was collateralized in 41 separate tranches, each of which corresponded to a different class of MBS), and with each class of MBS having its own insurance, the “trust” could make 41 separate insurance claims AND foreclose on the house as well! Talk about “maximizing return for the investor”! What has happened is that the securitization parties have unilaterally changed the entire nature of the mortgage loan contract without any prior notice to or approval from the borrower. 

There is no language in any Note or Mortgage document (DOT, Security Deed, or Mortgage) by which the borrower is put on notice that the entire nature of the mortgage loan contract and the other contracting party may be unilaterally changed from a loan with a regulated mortgage lender to an “investment” contract with a private equity investor. This, in our business, is called “fraud by omission” for purposes of inducing someone to sign a contract, with material nondisclosure of matters which the borrower had to have to make the proper decision as to whether to sign the contract or not. 

U.S. Bank has now confirmed, in writing from its own corporate offices in St. Paul, Minnesota, so much of what we have been arguing for years. This brochure should be filed in every securitization case for discovery purposes and opposing summary judgments or motions to dismiss where the securitized trustee “bank” takes the position that “the borrower is not part of the securitization and thus has no standing to question it.” U. S. Bank has confirmed that the borrower is in fact a party to an MBS transaction, period, and that the mortgage loan is in fact governed, in part, by “the Trust’s governing documents”, which are thus absolutely relevant for discovery purposes. 

Jeff Barnes, Esq.,

http://www.ForeclosureDefenseNationwide.com