The Emoluments Clause, Bribery, and President Trump

Like a previously unknown contestant on “The Apprentice,” the Emoluments Clause has been catapulted to stardom by Donald Trump. There has probably been more written about this obscure section of the Constitution in the past few weeks than in its entire previous 229-year history. Many people are saying that president-elect Trump’s foreign business holdings and relationships create a risk — or even a virtual certainty– that he will be embroiled in a constitutional crisis from day one of his presidency.

Some recent commentary has suggested the Emoluments Clause is basically an anti-bribery provision, but this is only partially correct. As a ban on public officials accepting gifts, the clause is indeed related to laws against bribery and conflicts of interest. But the Emoluments Clause differs from bribery in important ways, and those differences have significant implications for President Trump and his new administration.

I should note up front that everyone is sort of flying blind when it comes to the Emoluments Clause. There is basically no precedent concerning the clause and the Supreme Court has never interpreted it. We’ve also never had a president-elect with such extensive foreign business entanglements. For many questions about how the clause would apply to Trump, the most honest answer is, “we’re not entirely sure.” So with that caveat . . . .

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What Does the Emoluments Clause Prohibit?

The Emoluments Clause arose out of the framers’ fears about potential foreign influences on their fledgling country. Contained in Article I, Section 9, Clause 8 of the Constitution, it provides:

No Title of Nobility shall be granted by the United States; And no Person holding any Office of Profit or Trust under them, shall, without the Consent of Congress, accept of any present, Emolument, Office, or Title, of any kind whatsoever, from any King, Prince, or foreign State.

No one is concerned about Trump being granted an office or title from a foreign government, and no one is particularly worried about him receiving presents from Kings or Princes. The most relevant prohibitions are on the receipt of any “present” or “emolument” from a “foreign state.” An emolument is generally defined as a profit, fee, or compensation arising from an office or employment. “Present” presumably has its ordinary meaning of a gift, or something freely given without any strings attached.

Simply put, then, the clause prohibits government officials from accepting gifts or payments from a foreign government.

How Is the Emoluments Clause Related to Bribery?

The crime of bribery requires a quid pro quo. In exchange for something of value, a public official agrees to be influenced in the exercise of the powers of his or her office. Bribery is the quintessential corruption offense; the political process is corrupted because the public official acts not for the good of all but to benefit the person who is paying off the official.

In an op-ed in the New York Times, Professor Zephyr Teachout recently wrote that the Emoluments Clause is “essentially an anti-bribery rule.” Commentators at NPR and The New Republic have said the same thing. But this is not entirely accurate. When it comes to gifts from foreign states, the Emoluments Clause actually is far more sweeping than bribery because it does not require a quid pro quo. Even if the term “emolument” is read to imply compensation in exchange for a particular service (which is far from clear), the term “present” is far broader and contains no such implication.

Unlike bribery, the Emoluments Clause does not require that the public official agree to do anything in exchange for the gift. It doesn’t even require that the gift be linked to some particular official act, as does the federal gratuities statute. In this sense the Emoluments Clause is more akin to a simple gift ban, similar to those contained in most codes of ethics for government employees. It appears to guard against not only actual influence of public officials, as would occur with a bribe, but also the mere appearance of potential influence or divided loyalties that could be created by even a gift.

For a gift from a foreign government to constitute a bribe, President Trump would need to agree to perform some official act or be influenced in the exercise of his powers in exchange. But if a foreign government gave the President a present simply out of admiration, or out of hope that it might curry favor with the President, that would violate the Emoluments Clause even though it would not be a bribe.

In another sense, bribery is broader than the Emoluments Clause because it applies to private parties, not just to foreign states. So if a private foreign corporation or individual gave the President a gift in exchange for some exercise of his official power, that would be a bribe even though it would not violate the Emoluments Clause.

In short, there are many violations of the Emoluments Clause that would not be bribes, and many bribes that would not violate the Emoluments Clause.

Does the Emoluments Clause Apply to the President?

It’s not 100% clear – unlike some provisions of the Constitution, the clause does not specifically name the President and refers only to those holding an “office of profit or trust” under the United States. At least one commentator, Seth Tillman of Maynooth University in Ireland, argues that this and other historical clues suggest the clause was not intended to apply to the President.

But this appears to be a minority view. An “office of profit or trust” under the United States would logically seem to include the presidency. It would be quite strange if the framers did not intend the ban on potential foreign influence to extend to the highest office in the land, where such influences could potentially do the most damage.

Adam Liptak recently wrote in the New York Times about how a newly-elected President Obama sought legal advice from the Department of Justice concerning whether he could accept the Nobel Peace Prize without violating the Emoluments Clause. The DOJ Office of Legal Counsel, in its written opinion, considered it beyond debate that the presidency was “surely” an office of profit or trust under the United States. That seems correct.

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Does Bribery Apply to the President?

Yes. Trump made headlines last week when he told the New York Times that “the President can’t have a conflict of interest.” Federal criminal statutes related to conflicts of interest are contained in the 200-series of Title 18. It’s true that 18 U.S.C. § 202(c)  provides that a number of those laws – including the primary conflict of interest law, 18 U.S.C. § 208, prohibiting acts “affecting a personal financial interest” – do not apply to the President.

But this does not mean it is impossible for a President to have a conflict of interest. Hopefully Trump does not really believe he is free to pursue federal policies designed to benefit his personal financial interests. The universe of concerns about conflicts of interest is not encompassed by the federal criminal code; simply because something may not be a felony does not make it appropriate Presidential behavior. Indeed, the Emoluments Clause itself is plainly animated by a desire to avoid even a perception of potential conflicts of interest.

In any event, unlike the conflict of interest statutes, the President is not exempted from the federal bribery statute, 18 U.S.C. § 201. That law applies to any “officer or employee or person acting for or on behalf of the United States,” which certainly includes the President.

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How Could Trump Violate the Emoluments Clause?

Trump has numerous overseas business ventures and properties, as well as business relationships with many foreign entities. Once he is President, any business transaction with a foreign government that is anything less than completely arms-length could potentially violate the clause. If a foreign government gave him a sweetheart deal on a particular project, or purchased assets or paid rent at above-market rates, or pressured state-owned banks to give Trump favorable loan terms, those could be considered gifts or emoluments. A foreign government could also grant permits or approvals for Trump projects on more favorable terms or cancel investigations related to Trump deals, all of which could be considered financial benefits to Trump.

Some have suggested that even at fair market rates, any foreign government transaction with a Trump business — such as diplomats staying at the new Trump hotel in D.C. — would be payment for a service and therefore a prohibited emolument.

But there are a number of potential qualifications and loopholes. First, the clause only prohibits gifts from a “foreign state,” so gifts from a foreign private corporation would not violate the clause. Presumably a number of Trump’s overseas deals are with private companies and not with governments. (This is why President Obama ultimately was able to accept the Nobel Peace Prize money – the Department of Justice concluded that the prize was coming from a private organization, the Nobel Committee, that was sufficiently independent from the Norwegian government.)

A factual issue could arise concerning whether foreign corporations that are government owned or controlled would be treated as a foreign state for purposes of the clause. The answer should be yes if the clause is not to be completely undermined. (An analogous issue arises under laws such as the Foreign Corrupt Practices Act, where employees of state-controlled private corporations are often deemed to be “foreign officials.”) As Liptak reported, in the opinion for President Obama the Department of Justice noted it believes that corporations owned or controlled by a foreign government are presumptively foreign states for purposes of the Emoluments Clause. Whether this was true in any particular case would likely depend on the degree of state control.

Another issue could arise if a gift was given to the Trump Organization rather than to President Trump personally. Because corporations are generally considered distinct “persons” under the law, a gift to Trump’s corporation might not be considered a gift to the President. But because it is a privately-held corporation, arguably even a gift to the corporation should be deemed a gift to Trump. Some commentators recently argued that gifts to the Clinton Foundation should be considered gifts to Hillary Clinton for purposes of the Emoluments Clause – presumably the same analysis would apply to gifts to the Trump Organization.

A separate question could arise if the present was given to one of the Trump children, or one of their businesses. Assuming they are not holding an office in the new administration, such a gift would appear not to violate the clause. But particularly given the important role Trump’s family seems to play in his administration, the underlying concerns about outside influences and conflicts of interest would certainly still be present. This would seem to violate the spirit of the clause, if not the letter.

Finally, it appears that Congress could simply give Trump a pass on all of this. The Emoluments Clause provides that presents or emoluments may not be accepted “without the consent of Congress.” That suggests Congress could pass some kind of blanket permission for President Trump to pursue his businesses without worrying about the clause. How something like that would play politically would be another matter.

What Is the Remedy for a Violation of the Emoluments Clause?

There’s probably a reason there are no court cases interpreting the Emoluments Clause: most commentators think it is non-justiciable. In other words, no one would have standing to bring a lawsuit and a court would not be able to fashion a workable remedy. As Professor Jonathan Adler noted in the Volokh Conspiracy blog, if the clause is violated “the only remedies will be political.”

Political remedies could include an election, of course – if voters are upset by President Trump’s foreign entanglements they could toss him out of office in four years. Political remedies could also include hearings on Capitol Hill, with Congress issuing sternly-worded resolutions of disapproval that Trump could dismiss with a Tweet storm. Congress presumably could pass legislation that would impose some restrictions consistent with the clause, although enforcing it would again be problematic.

Or political remedies could include impeachment.

Is Violating the Emoluments Clause an Impeachable Offense?

The Impeachment Clause, Article II, Section 4 of the Constitution, provides:

The President, Vice President and all civil Officers of the United States, shall be removed from Office on Impeachment for, and Conviction of, Treason, Bribery, or other high Crimes and Misdemeanors.

Although it’s not a crime, a violation of the Emoluments Clause most likely is an impeachable offense. The phrase “high crimes and misdemeanors” is generally understood to refer not to criminal law but to political violations and misconduct related to public office. Impeachment is a political process, not a criminal one. As Hamilton wrote in The Federalist No. 65, impeachable offenses “proceed from the misconduct of public men . . . from the abuse or violation of some public trust.”

That being said, the meaning of the phrase “high crimes and misdemeanors” is not completely settled. There was a lot of debate about it during the impeachment of President Bill Clinton. Clinton’s lawyers argued that “high crimes and misdemeanors” meant misconduct related to the exercise of public office, and that Clinton’s behavior in his personal life did not meet that standard. Congress, of course, ultimately disagreed.

But a violation of the Emoluments Clause would be directly related to the exercise of Trump’s public office and his abuse of that trust, and as such should qualify as a “high crime or misdemeanor.” It would be strange indeed if the framers included the prohibition against emoluments but contemplated no possible enforcement mechanism or remedy for its violation. The most logical remedy is impeachment.

And in the end, as then-Congressman Gerald Ford famously remarked, “An impeachable offense is whatever a majority of the House of Representatives considers it to be at a given moment in history.” If Congress were to conclude that a violation of the Emoluments Clause was (or was not) an impeachable offense, there would be no real way to challenge that conclusion.

What Would Be the Remedy if Trump Committed Bribery?

If President Trump were to violate federal bribery law, the issue again would be the proper remedy. Whether or not a sitting President can be indicted is another question that was debated during the Bill Clinton investigation and has never been fully resolved. The Supreme Court did rule in the Paula Jones case, Clinton v. Jonesthat a President is not immune from civil litigation based on events that took place before he took office, but that is a different matter.

Indicting a sitting President raises far thornier issues. How would the President’s own Justice Department and Attorney General prosecute a criminal case against the President? Could the federal courts hear such a case without violating the separation of powers? What if a sitting President were convicted and sent to prison while still in office? And could a convicted President Trump pardon himself?

For all of these reasons, the better view is probably that a sitting President cannot be indicted for a crime. (This is also the official position of the Department of Justice.) The appropriate remedy for a President who commits criminal acts would once again be the impeachment process. In fact the Impeachment Clause (quoted above) specifically lists bribery as one of the grounds for impeachment.

If a President were impeached for bribery and removed from office, then presumably criminal bribery charges could be pursued against him or her as a private citizen. Article I, Section 3, Clause 7 of the Constitution provides that after removal by impeachment an official “shall nevertheless be liable and subject to Indictment, Trial, Judgment and Punishment, according to Law.” But again, we are in uncharted waters.

The Bottom Line

The Emoluments Clause is far more sweeping than the laws against bribery, at least when it comes to gifts from foreign governments. Almost any transaction involving Trump businesses and a foreign state or state-controlled entity is going to at least raise questions about whether any improper emolument was involved, even if Trump did not agree to do anything in return.

For any violation of either bribery law or the Emoluments Clause, the likely remedy is impeachment, not a lawsuit or criminal charges. And for those who believe a Republican Congress would never impeach a Republican President, bear in mind that if Trump were removed from office that would leave us with: President Pence.

That might be an outcome many Republicans would find very desirable.

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In Defense of the Grand Jury (Part 3): Disclosure of Exculpatory Information

During the course of a grand jury investigation, a federal prosecutor may learn information favorable to the defense, perhaps even suggesting that the target of the investigation is innocent of any crime. What is the prosecutor required to do with that information – and perhaps more important, what should the prosecutor do?

In my earlier posts on the federal grand jury (available here and here), I discussed how the grand jury, whose proceedings take place in secret, is a frequently misunderstood and sometimes controversial institution. One source of controversy is the one-sided nature of a grand jury presentation.

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The grand jury generally hears only from the government. The prosecutor presents the witnesses, documents and other evidence and ultimately asks the grand jury to return an indictment if the evidence establishes probable cause. The defense has no right to call witnesses or otherwise present its case. There is no defense attorney to object, cross-examine, or offer contrary evidence. The defendant himself has no right to testify.

This one-sided nature of the proceeding may seem to run counter to our most fundamental concepts of justice. How can the grand jury possibly make the right determination if it only hears one side of the story? But this argument misperceives the grand jury’s function.

The grand jury is merely accusatory, not adjudicatory. Its purpose is not to decide guilt or innocence or to weigh both sides of the case but to determine whether there is sufficient evidence to justify bringing the defendant into court to answer the charges. As such, part of its historic function is to serve as a shield against executive power. The government cannot simply run into court and file criminal charges on its own; it must first convince a panel of citizens in the same community that there is a basis for those charges.

In making that determination the grand jury needs to find only probable cause that the crimes took place, not the far higher standard of proof beyond a reasonable doubt that would be required for conviction at trial. And unlike a trial jury, a grand jury does not need to be unanimous; only twelve out of sixteen jurors need to find probable cause in order to return an indictment.

Many of the procedural protections we associate with a trial do not apply in the grand jury. If they did, grand jury proceedings could quickly become bogged down with endless hearings and disputes about the evidence being presented. A grand jury is simply making a threshold determination about whether there is a basis to proceed. It is not supposed to be “trial #1,” where we litigate every dispute and evidentiary issue, to be followed later by “trial #2” where we do it all over again with a higher standard of proof.

Accordingly, the defense generally is not able to challenge the evidence being presented to the grand jury or to present evidence of its own. With few exceptions, any such matters have to wait until pre-trial court proceedings or the trial itself, once the grand jury investigation is over and the case is indicted.

But this system must acknowledge a major caveat: an indictment alone can be devastating. It’s not much comfort to tell a wrongly indicted defendant, “It’s okay, now you can present your side of the case and be found not guilty at trial.” Trial may come only after two years of delay, a million dollars in legal fees, and severe damage to the defendant’s family, business, and reputation. That “not guilty” verdict at the end, even if it comes, is not going to feel like much of a victory. Simply being indicted can ruin someone’s life.

This fact, in turn, highlights the critical importance of the prosecutor’s obligations in the grand jury. Prosecutors, of course, must do everything they can to avoid indicting the wrong people. A fundamental part of the prosecutor’s role is to ensure that the innocent do not suffer. This requires recognition of the gravity of the decision to return an indictment and the potential impact on the person being indicted. The prosecutor’s duty is not to “win” by securing an indictment by any means necessary, but to ensure that justice is done. In the grand jury, the one-sided nature of the presentation makes that duty all the more critical.

Given these obligations and the nature of the grand jury, what should a prosecutor do when she comes across information favorable to the defense during a grand jury investigation?

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The Supreme Court’s Answer: United States v. Williams

The Supreme Court confronted this issue in 1992 in United States v. Williams. Williams was indicted for bank fraud for allegedly misrepresenting the nature of some of his assets when applying for a loan. After he was indicted, he argued the prosecutor should have disclosed to the grand jury information demonstrating that he had always treated those assets the same way for his tax and other accounting purposes. This information, Williams claimed, would have demonstrated he did not misrepresent his financial position and lacked any intent to defraud the bank.

After a hearing, the trial court agreed with Williams that the prosecutor’s failure to disclose the information rendered the grand jury’s decision to indict “gravely suspect.” The court dismissed the indictment without prejudice (which would have allowed the government to present the case to a new grand jury, this time including the allegedly exculpatory information). The court of appeals agreed and upheld the dismissal.

Given the nature and history of grand jury proceedings, Williams did not claim in the Supreme Court that the Constitution itself required the government to present exculpatory evidence to the grand jury. But he argued the Court should create such a rule on its own, as part of its general supervisory role over the justice system, in order to ensure the fairness of grand jury proceedings.

A divided Supreme Court disagreed. Writing for a 5-4 majority, Justice Scalia discussed the historical independence of the grand jury, which is mandated by the Bill of Rights but is not textually assigned to any one of the three branches of government. As such, it functions as a “constitutional fixture in its own right.” Given the grand jury’s independence, he concluded, the Court does not have a general supervisory power that would allow it to create rules for grand jury proceedings.

The Court also relied on the role of the grand jury, which is “not to determine guilt or innocence, but to assess whether there is adequate basis for bringing a criminal charge.” Williams’ proposed rule, the Court said, would effectively turn the grand jury into an adjudicatory body required to weigh both sides of the case. This would threaten to tie up grand jury proceedings in evidentiary hearings and disputes. It would also run counter to a long history of Court decisions refusing to scrutinize the adequacy of the evidence before the grand jury; such scrutiny would “run counter to the whole history of the grand jury institution.”

The Court concluded that if a rule requiring the disclosure of exculpatory information was good policy, Congress was free to enact a law requiring prosecutors to do so. The Court itself, however, declined to create such a rule on its own. Four dissenting Justices argued that a court should have the power to dismiss an indictment if the prosecutor withheld evidence that would “plainly preclude a finding of probable cause,” and that such a rule was necessary to limit potential prosecutorial misconduct.

Practical Challenges of Legally Mandating Disclosure

Congress has not taken the Williams Court up on the suggestion that it could pass a law requiring disclosure of exculpatory information. If Congress did so, enforcing such a requirement would raise a number of challenges. For example, what would happen when the defense and prosecution don’t agree over whether information is truly exculpatory? (Even the dissenting Justices in Williams agreed there was some doubt whether the proffered information really exculpated the defendant. If he treated the financial information the same way for tax and other purposes, might that not simply mean that he was a consistent crook?)

If the prosecutor didn’t agree that information proffered by the defense was exculpatory and declined to put it before the grand jury, what would be the remedy? Presumably the defense would file a motion with a judge and there would have to be a hearing. But reluctance to bog down grand jury proceedings with hearings and delays is precisely why the Court has consistently held that rules of evidence and procedure that apply during a trial do not apply in the grand jury. In a large, hard-fought white collar investigation, it would be easy to imagine the defense filing multiple motions concerning exculpatory information and potentially grinding the investigation to a halt.

In addition, it would be difficult to litigate such a motion while still preserving grand jury secrecy. How would the government demonstrate information was not truly exculpatory without being forced to reveal confidential information about the investigation? Even if the judge reviewed the papers in camera and did not disclose them to the defense, ruling on such a motion would require the judge to become enmeshed in the details and merits of the grand jury investigation to a degree completely contrary to the grand jury’s historically independent function.

Or suppose the prosecutor agrees that the information is potentially exculpatory, but it is contained in documents that are not self-explanatory. Does the defense then have the right to designate the witness who will explain the documents, to make sure they are properly understood? To write out the examination to make sure it is effective – or to conduct the examination itself? The same questions arise if the evidence consists of testimony from a witness: how does the defense ensure that the testimony is presented effectively without compromising grand jury secrecy? And if there are disputes about how to present the evidence, presumably a judge would again need to get involved.

In short, although creating a legal rule mandating the disclosure of exculpatory information may sound good in theory, it’s not difficult to see why the Court in Williams was reluctant to create such a rule, or why Congress has declined to do so.

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DOJ Policy and Prosecutor Best Practices

Simply because disclosure is not legally mandated does not mean it should not take place. The Department of Justice has recognized this in the U.S. Attorneys’ Manual, which provides that if the prosecutor is “personally aware of substantial evidence that directly negates the guilt” of the target, that evidence should be disclosed to the grand jury. USAM 9-11.233.

Of course, although policies in the U.S. Attorneys’ Manual provide important guidance to prosecutors, they do not create enforceable rights. The prosecutor may be subject to discipline for violating a rule, but a defendant cannot move to dismiss an indictment on that basis. Some might also argue that terms such as “substantial evidence” and “directly negates the guilt” leave a fair amount of wiggle room and that DOJ policy should require more fulsome disclosure.

But for the good prosecutor there are many sound reasons to disclose exculpatory information to the grand jury, whether or not the information is substantial enough to require disclosure under the DOJ policy.

The first reason is simply fairness: disclosing such information is the right thing to do. A good prosecutor has no interest in “hiding the ball,” misleading the grand jury, or giving even a perception that the grand jury process was unfair. The U.S. Attorneys’ Manual also provides that a prosecutor must be “scrupulously fair” in the grand jury and ensure that the grand jury is not misled. USAM 9-11.010. That may require disclosing even information that is only marginally or potentially exculpatory.

A prosecutor with a good case should have nothing to fear from disclosing potentially exculpatory information to the grand jury. After all, such evidence will undoubtedly come up at trial. If you as a prosecutor are so concerned about the information that you think it might result in the grand jury not finding probable cause, then how are you ever going to get a trial jury with the same information to find guilt beyond a reasonable doubt?

Indeed, if you’re a prosecutor and you have information you fear might cause the grand jury not to indict, then you shouldn’t be thinking merely about whether you should disclose that information to the grand jury. You should be thinking about whether you should pursue the case at all. Certainly if you have “substantial evidence” that “directly negates the guilt” of the defendant, you’d better stop and consider whether the investigation should proceed.

There also are sound tactical reasons to introduce exculpatory information in the grand jury. It allows the prosecutor to probe and explore the evidence completely, through examination of witnesses and possible additional investigation. A full review of the information may lead to additional evidence that further exonerates the defendant, or evidence that demonstrates the information is not truly exculpatory. It is better to explore those details in the grand jury than to wait and potentially be surprised at trial.

Presenting the evidence to the grand jury also allows the prosecutor to see how the grand jurors react to the evidence, to hear what questions they have, and to discuss the evidence with them. Again, all of that can be incredibly useful to guide further investigative efforts, prepare more fully for trial, or to decide that the case should not be indicted and the investigation should be closed.

It All Comes Down to the Prosecutor’s Responsibility

Critics of the grand jury may argue that we need a rule mandating the presentation of exculpatory evidence because most cases never make it to trial. An unscrupulous prosecutor could conceal substantial exculpatory information from the grand jury, thinking that he or she will be able to coerce a guilty plea once the case is indicted and the exculpatory information will never come to light.

There is no doubt, as I’ve noted in other posts in this series, that a prosecutor bent on misconduct can abuse the grand jury process, cause tremendous harm, and perhaps even indict a ham sandwich. But a legal rule that tries to regulate the type of evidence put before the grand jury is probably not the solution.  Good prosecutors are already going to consider themselves bound by DOJ policy and will want to disclose exculpatory information for the reasons I discussed above. Bad prosecutors who intend to abuse the process likely would find the rule easy to avoid. And the rule would raise all of the practical difficulties discussed above and fundamentally alter the nature of the grand jury.

Although concerns about prosecutorial misconduct in the grand jury are valid, the solutions need to focus primarily on the prosecutors themselves; on whom we hire to be prosecutors and how they are trained. Unless we do away with the grand jury entirely or fundamentally alter its centuries-old function, prosecutors in the grand jury are always going to have a great deal of autonomy and power. Given the one-sided nature of grand jury proceedings, it is particularly critical that prosecutors respect their obligations and recognize that with that great power comes great responsibility.

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Click here to read part one in this series, “The Guilty Ham Sandwich.”

Click here to read part two in this series, “Grand Jury Secrecy.”

One Angry Man: Supreme Court Confronts Racial Bias in Jury Deliberations

In the classic movie “Twelve Angry Men,” jurors file into a jury room to deliberate on the case of a young man charged with stabbing his father to death. Upon a preliminary vote, eleven of the twelve are in favor of a quick guilty verdict. The sole holdout, Juror #8 (played by Henry Fonda) insists they should not rush and that the young man’s fate deserves at least some of their time and consideration. As the deliberations proceed, every other juror eventually comes to agree with #8, as they discover different reasons to have a reasonable doubt. The film ends with the jurors heading back to the courtroom to return a “not guilty” verdict.

Sorry — maybe I should have led this post with, “Spoiler Alert.”

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The Jury Votes in “Twelve Angry Men”

Part of the appeal of “Twelve Angry Men” probably stems from the way it pulls back the curtain on a scene that most of us never see. Jury deliberations take place in secret. Although jurors generally are not prohibited from discussing the deliberations once the case is over, the public usually does not get much information about what goes on behind the jury room door.

The confidential nature of jury deliberations is reflected in a long-standing rule in federal court and in most states providing that information about what was discussed during jury deliberations cannot later be used to question the verdict. In federal court this rule is embodied in Federal Rule of Evidence 606(b), which provides that a juror’s testimony about things discussed or taking place during jury deliberations is not admissible in a later proceeding to challenge the jury’s decision.

Recently the U.S. Supreme Court heard arguments in a fascinating case, Peña- Rodriguez v. Colorado, that tests the limits of this rule when it collides with the compelling societal interest in not allowing racial bias to taint a criminal conviction.

Peña-Rodriguez v. Colorado

The defendant, Miguel Angel Peña-Rodriguez, was accused of groping two teenage girls at the Colorado racetrack where he worked. The girls were inside a restroom when a man they had seen at the racetrack earlier entered and asked them if they wanted to “drink or party.” When they said no, the man turned off the lights and tried to grab the girls. He touched one of them on the buttocks; the other girl felt his hand on her shoulder and moving towards her breast but she was able to push it away.

The girls escaped and ran to their father, who also worked at the racetrack, to tell him about the incident. Based on their description the father believed the man was Peña-Rodriguez, and he notified the authorities. Peña-Rodriguez was later stopped by the police and the girls identified him as their assailant.

The state of Colorado charged Peña-Rodriguez with one felony count of attempted sexual assault on a minor and three misdemeanors. The government’s evidence consisted primarily of the testimony and identifications from the victims. The defense presented alibi testimony from the defendant’s co-worker, who testified that the defendant was with him at the time of the offense. After what appears to have been a lengthy and difficult period of deliberations, the jury found Peña-Rodriguez guilty of the misdemeanors. They could not reach a verdict on the felony count, which was later dismissed.

After trial, two of the jurors spoke with defense counsel. They reported that one of the jurors – identified in the case only as “H.C.” — had expressed bias against the defendant during the jury deliberations. H.C., a former law enforcement officer, reportedly said the defendant was probably guilty because he was Mexican and Mexican men “ take whatever they want.” He said that Mexican men believe they can do whatever they want with women, and that when he was working on patrol, “nine times out of ten” Mexican men were guilty of being sexually aggressive towards women. He also said the defendant’s alibi witness could not be believed because he was “an illegal.” (This was not true; the witness testified that he was a legal resident.)

After obtaining affidavits from the two jurors the defense requested a new trial, arguing that racial animus had tainted the jury’s verdict. But Colorado, like most states, has a rule of evidence essentially identical to Federal Rule 606(b) that prohibits challenges to jury verdicts based on testimony about what happened during deliberations. Based on that rule, the trial court denied the motion. The Colorado Court of Appeals and Colorado Supreme Court affirmed this decision, and the Supreme Court agreed to hear the case.

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The Rule Against Impeachment of Jury Verdicts

All sides in the case agreed, of course, that H.C.’s comments were reprehensible and have no proper place in jury deliberations. But the issue is whether, once those comments are discovered, a defendant’s Sixth Amendment right to a fair trial requires an exception to the rule against impeaching a verdict based on evidence of what went on during jury deliberations.

The rule dates back more than two centuries and is based on several policy considerations. One concern is that allowing such evidence might inhibit full and frank discussions in the jury room, particularly about sensitive or controversial topics. Jurors should be free to speak their minds without fear that their statements may later become the subject of litigation challenging the verdict and potentially accusing them of misbehavior. The possibility of subsequent proceedings based on deliberations might also make jurors reluctant to return difficult or controversial verdicts.

Another concern is protecting jurors from harassment. If post-verdict litigation based on jury deliberations became routine, attorneys would have an incentive to track down jurors, even weeks or months after a case was concluded, to probe their recollections about deliberations and look for possible ways to get another bite at the apple. It’s true that jurors now sometimes voluntarily remain after a case is over to discuss deliberations informally with counsel – but that’s far different from being subpoenaed, put on the stand, and cross-examined about deliberations weeks or even months after the case is over.

But perhaps the paramount rationale for the rule is verdict finality: there is a public interest in having criminal judgments be final and respected and not subject to potentially endless rounds of challenges and rehearings. Public respect for and confidence in the jury system would be undermined if jury verdicts were routinely subject to attack and litigation long after a case is supposedly over.

There are other safeguards in the system that protect against juror bias. The most important is voir dire, the jury selection process, where attorneys and the judge may ask questions designed to ferret out any potential biases. A primary purpose of voir dire is to screen out at the front end any potential jurors who may be biased or otherwise unable to be impartial. In addition, jury panels are required to represent a fair cross-section of the community, and racial bias in jury selection is prohibited. If there are signs of juror bias during trial or deliberations but prior to a verdict, other jurors or court personnel may bring those matters to the judge’s attention. And the requirement of a unanimous verdict of guilt beyond a reasonable doubt dilutes the ability of any one prejudiced juror to influence the final outcome of the case.

(In this regard, it’s interesting to note that the defense at Peña-Rodriguez’s trial chose not to voir dire the potential jurors about any potential bias against Hispanics – a decision that apparently surprised the trial judge. And the two jurors who later raised concerns about H.C.’s comments did not bring those concerns to the judge’s attention during the jury deliberations, when the judge could have acted on them.)

Relying on these policy rationales and the presence of these other safeguards, the Supreme Court has upheld Rule 606(b) against Sixth Amendment challenges in cases involving significant juror misconduct. For example, in Tanner v. United States the Court refused to allow the defendant to present evidence that a majority of the jurors in his case had been drinking, using drugs, or sleeping during the proceedings. And in Warger v. Shauers, a car accident case, the Court refused to allow evidence that a juror had revealed during deliberations that her daughter had been involved in a very similar accident. Neither Tanner nor Warger, however, involved claims of racial bias.

Should There Be an Exception for Juror Bias Based on Race?

Although there are many sound arguments in favor of the rule against impeachment of verdicts, the public interest also demands that racial animus not be allowed to infect court proceedings. That’s what makes the Peña-Rodriguez case so intriguing. Once the information about Juror H.C.’s statements was discovered, can the criminal justice system allow that verdict to stand and still maintain its legitimacy?

(As an aside, strictly speaking this case is about bias based on ethnicity or national origin, not race. But both sides agreed that for purposes of the defendant’s right to a fair trial this was not a meaningful distinction and used the term “racial bias” throughout the case.)

I think it’s difficult for the justice system to tolerate an outcome that seems so infected by potential bias, and it may well be that the Court will rule in Peña-Rodriguez’s favor. But exactly how the Court resolves the issue will be extremely interesting. The case presents difficult line-drawing questions and raises fears of a number of proverbial slippery slopes.

The most obvious question concerns how to deal with other kinds of bias. At oral argument Peña-Rodriguez’s attorney wasn’t more than a minute into his presentation when Chief Justice Roberts started pressing him on whether a ruling in his favor would mean that future courts also would have to allow challenges to verdicts based on religious bias. Justice Ginsburg posed a hypothetical case involving a car accident where a juror says that all women are terrible drivers and so the woman is probably responsible – would that be subject to challenge as well?

Justices Kagan and Sotomayor in particular seemed willing to argue that “race is different.” They implied the Court could create an exception that encompassed only race and not other forms of bias, given our country’s long struggle against racial discrimination. But the Chief Justice and Justice Alito in particular seemed less inclined to believe that such a line could reasonably be drawn.

I tend to agree that drawing such a line is problematic. Could the justice system really tolerate a rule that said a defendant could challenge a verdict following expressions of racial bias but not a verdict based on a juror’s bias towards the defendant’s religion, gender, or sexual orientation? It’s arguable that allowing inquiry into only certain kinds of bias actually does more to undermine faith in the integrity of the justice system than a simple blanket prohibition against any such inquiries at all.

A rule that “race (or ethnicity) is different” could lead to some bizarre results. Suppose a defendant of Middle Eastern descent is on trial. Presumably, if during deliberations a juror said he believed the defendant was probably guilty because he was an Arab, that verdict could be challenged. But if a juror said that same defendant was probably guilty because he was a Muslim, that statement could not be used to impeach the verdict.

The more you start to think about how to draw the lines, the more you start to see the appeal of the current prophylactic rule that simply prohibits any such inquiries.

Much of the debate in this case also seems to underestimate the importance of the requirements of twelve jurors and a unanimous verdict. There’s a reason we have twelve jurors and require unanimity on proof beyond a reasonable doubt: the ability of any one juror to use improper arguments to sway an entire jury is greatly reduced.

Peña-Rodriguez’s attorneys argued in their brief that, “convicting someone of a crime because of his race tramples our most vital principles of liberty and equality.” No doubt that is true — but it’s not clear that’s what happened. We know that H.C. made racially biased statements, but that is not the same as saying the jury convicted the defendant because of his race. Are we to assume that the other eleven jurors were simply sheep, powerless to resist the influence of H.C.’s odious opinions? Or is it not just as likely that many of the jurors would consider the statements reprehensible and tend to “tune out” H.C. and discount anything further that he said about the merits of the case?

In “Twelve Angry Men” there is a scene where one of the jurors goes on an extended rant demonstrating bias against the defendant and arguing that “these people” are all animals with no morals. The other jurors, rather than being swayed by his arguments, one by one slowly get up, walk away from the juror and ignore him, until he finally falls silent. That’s only Hollywood, but it does effectively demonstrate the limited potential of a single biased juror to sway the unanimous verdict of all twelve. It also highlights the potential difficulty of evaluating the total dynamic of a jury’s deliberations based on a handful of statements taken in isolation.

Peña-Rodriguez’s attorneys would respond that they should at least have a chance to let a judge consider the statements in light of the overall case to determine whether they might have swayed the jury’s verdict. Of course a judge is not in the jury room during deliberations, so his or her ability to assess the impact of any statements may be somewhat limited. The Peña-Rodriguez  jury deliberated for twelve hours – how does the judge assess the impact of a handful of bigoted statements by one juror, short of having a full-blown hearing with all the other jurors testifying?

We could have a rule automatically throwing out any verdict where any discriminatory statements are made during deliberations, without trying to evaluate their impact. This would have the virtue of simplicity, but it’s a bit odd to allow relief only in those cases in which a juror is willing to vocalize his prejudices. Unfortunately, with our polarized society being what it is, it is probably safe to assume that inappropriate bias sometimes exists in jurors who do not admit it. Perhaps it is better simply to rely on the requirement of a unanimous verdict and other safeguards to prevent a biased juror from determining the final outcome, rather than having a rule that would grant one defendant relief over another simply because a juror in one defendant’s case was more blatant about his prejudices.

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In the end, I think it’s going to be hard for the Court to allow Peña-Rodriguez’s conviction to stand in light of what took place during deliberations. And in reality, cases where this kind of evidence surfaces will probably be very rare, so perhaps the concerns about opening the floodgates to potential challenges and juror harassment are misplaced. Maybe the holding can be limited to criminal cases, and only to cases involving claims of racial bias. But I don’t envy the Justices trying to craft a rule that will give defendants like Mr. Peña-Rodriguez a remedy without completely gutting the sound policy against impeaching jury verdicts that has existed since the country’s founding. And if that policy is gutted, the unintended consequences for the jury system could be severe.

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When Is Fraud Involving a Bank Not Bank Fraud? Shaw v. United States

On the first day of arguments this term, the Supreme Court considered the scope of the federal bank fraud statute. The case, Shaw v. United States, involves complex questions concerning the definition of fraud and the nature of property rights. It’s a classic, nerdy white collar battle over statutory interpretation — and it was all completely unnecessary.

The federal bank fraud statute, 18 U.S.C. § 1344, makes it a crime to execute or attempt to execute a scheme or artifice:

1) to defraud a financial institution; or

2) to obtain any of the moneys, funds, credits, assets, securities, or other property owned by, or under the custody or control of, a financial institution, by means of false or fraudulent pretenses, representations, or promises.

Shaw involves the proper interpretation of clause 1 and what it means to defraud a financial institution. In particular, the issue is whether the defendant must intend to obtain property owned by the bank itself and cause the bank financial injury, or whether it is sufficient to show merely that the defendant intended to obtain property being held by the bank, such as customer deposits.

The defendant, Lawrence Shaw, was convicted for executing an elaborate scheme to steal money from a Bank of America checking account held by Stanley Hsu. After wrongfully obtaining Hsu’s bank statements and personal information, Shaw was able to open a PayPal account in Hsu’s name. He then repeatedly transferred money from Hsu’s checking account into the PayPal account and ultimately into other bank accounts that Shaw controlled. Shaw was able to siphon more than $300,000 out of Hsu’s account before Hsu, who was living in Taiwan, detected the losses.

Due to the operation of banking laws, Bank of America actually ended up suffering no financial loss as a result of the scheme. PayPal, which had allowed the phony account to be opened, ended up on the hook for about $100,000 of the loss. Hsu, who had failed to notify Bank of America about the fraud in a timely manner, personally lost nearly $200,000.

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PayPal was left holding the bag

Shaw was indicted on multiple counts of executing a scheme to defraud a financial institution under clause 1 of the bank fraud statute. At trial and on appeal, Shaw did not deny his culpability. His defense was basically that the government had charged him under the wrong section of the statute. Clause 1, he argued, requires the government to prove that Shaw was targeting property owned by the bank itself and intended to expose the bank to a financial loss. Shaw maintained that his goal all along was simply to get Hsu’s money. He never had any intent to harm the bank, and the bank in fact did not suffer a loss. Accordingly, Shaw argued, his conduct, although fraudulent, did not constitute a scheme to defraud the bank within the meaning of the statute.

Shaw maintained that his scam should have been charged under clause 2, which covers schemes to obtain property of others in the custody of the bank – in this case, Hsu’s deposits. (This, of course, is not a very sexy or sympathetic defense; Shaw isn’t saying,“I didn’t do it,” he’s saying “Yeah, I did it, but you charged me the wrong way.” But sexy or not, if he prevails his convictions will be reversed. As I’m sure some famous football coach said once, an ugly win is still a win.)

The trial court ruled against Shaw and held the government was not required to prove that Shaw intended the bank to suffer any financial harm or to lose its own property. The judge instructed the jury that a scheme to defraud a financial institution required only proof that the defendant intended to deceive or cheat the bank somehow, but did not require proof that the defendant intended the bank to suffer any loss. The jury convicted Shaw on fourteen counts of bank fraud.

The U.S. Court of Appeals for the Ninth Circuit upheld Shaw’s convictions. The court of appeals reasoned that Congress could not have intended liability for bank fraud to turn on arcane banking rules and regulations about who will bear the loss. Requiring proof of intent to harm the bank itself, the court said, would make prosecuting bank fraud unreasonably difficult. Because the goal of the statute is to protect the integrity of the banking system, any scheme that deceives a bank will suffice, regardless of who ultimately is harmed. The court therefore agreed with the trial judge that clause 1 requires only proof that the defendant intended to deceive the bank, not that he intended to expose the bank itself to any financial loss.

Supreme Court

SCOTUS Agrees to Weigh In

The Supreme Court agreed to hear Shaw’s appeal, and the case was argued this past Tuesday. The courts of appeal are divided on the question presented in Shaw. The Ninth Circuit is in the minority; most courts agree with Shaw’s argument that clause 1 of the bank fraud statute requires the government to prove the defendant intended to expose the bank itself to a risk of financial loss.

As I discussed in my last post, to defraud someone usually means to deprive him of money or property through some kind of deception. The law generally draws a distinction between defrauding someone and merely deceiving them; a scheme to defraud typically requires not only a deception but also an intent to injure the victim by depriving them of their property.

Based on this understanding of fraud, the plain wording of the statute supports Shaw’s argument that the scheme must target the bank’s own property. The language “scheme to defraud a financial institution” suggests that the financial institution itself would be the victim of the fraud. This in turn would mean that the scheme to defraud would be designed to deprive the bank of money or property.

But then the question becomes what qualifies as “property.” Although (as the Justices somewhat testily pointed out) the government’s brief was not entirely clear on this point, during oral argument the government confirmed that it agreed a scheme to defraud a bank requires intent to deprive the bank of property and that merely deceiving the bank is not enough. The government disagreed with Shaw, however, about the nature of the property interests protected by the statute, and about whether depriving the bank of a property interest necessarily requires exposing the bank to financial harm.

The government agreed that the Supreme Court has consistently held that a scheme to defraud means a scheme to deprive a victim of money or property, but noted that the Court has always interpreted the term “property” very broadly. Fraud, the government argued, protects both tangible and intangible property, and protects property that is merely in one’s possession as well as property that one owns.

Under this broad definition of property, a scheme to obtain customer deposits is in fact a scheme to deprive the bank of its possessory property interest in those deposits. The same would be true of a scheme to steal other assets being held by a bank, such as customer valuables in a safe deposit box. There is no requirement that the bank actually own the property or suffer a financial loss; the law of fraud requires only that the scheme contemplated depriving the bank of its possessory property right in the assets it holds.

During oral arguments, Shaw’s attorney ultimately agreed with the government that the bank’s possessory interest in customer deposits could qualify as a property interest for purposes of fraud. A line of questions from Justice Kagan honed in on the fact that both sides now seemed to agree about the definition of “property.” Shaw’s attorney maintained, however, that the ordinary understanding of a scheme to defraud meant that to deprive the bank of that property interest required proof of intent that the bank would bear the ultimate financial loss. The Justices seemed more skeptical on this point, with Justice Alito in particular arguing that you could deprive someone of a possessory interest in property without necessarily causing them a personal loss.

But even if the Court ends up agreeing with the government that Shaw’s scheme deprived Bank of America of a property interest in Hsu’s deposits, Shaw may still prevail – because that’s not what the jury instructions said. During oral argument, several of the Justices suggested that the key issue in the case is really the jury instructions. Under questioning from Justice Sotomayor, Shaw’s attorney argued that even if Shaw loses on the interpretation of the bank fraud statute, his convictions must be reversed because the jury instructions were flawed. When the Assistant to the Solicitor General began his argument, the Justices immediately started peppering him with questions about the jury instructions and whether they adequately conveyed the requirements of fraud.

The jury instructions could be read to say that depriving the bank of property was not required, and that it was enough if Shaw merely intended to deceive the bank. The instructions thus arguably failed to distinguish between defrauding and merely deceiving a victim, which is usually critical to the law of fraud. At oral argument, Chief Justice Roberts pointed out that the Ninth Circuit’s opinion also said the bank only needed to be deceived – which seems to endorse the incorrect standard. There was some additional back and forth about the grammatical structure of the instructions, how the jury would have interpreted them, and whether the issue was properly preserved, so how the Court will come out on that question is unclear. But it’s very possible the government could win the legal fight over the definition of bank fraud and still lose the appeal based on flawed jury instructions.

The Implications of Shaw

Although Shaw has implications for banking law and the definition of fraud – and certainly has significant implications for Mr. Shaw — it does not really implicate broader interests about federalism or overcriminalization that are present in many white collar cases. There is no real universe of cases that will no longer be subject to federal prosecution if Shaw wins; Shaw himself admits he could have been prosecuted under clause 2 of the bank fraud statute.

The National Association of Criminal Defense Lawyers filed an amicus brief supporting Shaw on federalism grounds. It argued the bank fraud statute should be construed narrowly in order to limit the scope of federal prosecutions and allow the states to pursue such cases. But this argument doesn’t really hold water. Regardless of the outcome here, cases like Shaw’s will still be subject to federal prosecution, whether through other provisions of the bank fraud statute or through other laws such as mail and wire fraud. There are more than enough arrows in the federal prosecutor’s quiver.

But however it ultimately comes out, Shaw will be instructive in one more area: the importance of sound prosecutorial charging decisions. Clause 2 of the bank fraud law seems clearly to cover Shaw’s conduct. If prosecutors had simply charged Shaw under clause 2 in the first place, this entire issue could have been avoided. Prosecutors would have saved themselves a lot of headaches, time and money that had to be devoted to defending the convictions.

This isn’t a case of over-charging of the type that has caused the Court concern in recent years. There’s no question that Shaw’s conduct was criminal and deserved to be prosecuted. But by charging the case the way they did, prosecutors handed Shaw an issue for appeal that may well be successful. It’s what that football coach would call an unforced error.

Shaw should bring some clarity to the law of bank fraud. But the real lesson of Shaw for prosecutors should be a reminder of the importance of careful charging decisions and selecting the proper statutes when crafting indictments.

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The Definition of Fraud

Considering how important the offense of fraud is to white collar crime, you might expect its parameters to be pretty clear by now. But a recent interesting case out of the 11th Circuit highlights the ongoing occasional uncertainty about what constitutes criminal fraud. It also highlights the risks of going to a bar with a stranger – but I digress.

Fraud is at the heart of much of white collar criminal law. White collar crimes, by definition, typically involve taking a victim’s money or property through some kind of deception rather than by force or violence. That same concept – wrongfully obtaining property of another through a trick or scheme – is also the essence of fraud. Any litany of the most common white collar offenses will include many with “fraud” in their title: mail and wire fraud, health care fraud, insurance fraud, securities fraud, real estate fraud, bank fraud, credit card fraud, and so on.

But fraud itself is not defined anywhere in the criminal code. As one federal judge helpfully observed: “The law does not define fraud, it needs no definition. It is as old as falsehood and as versatile as human ingenuity.” But of course we do need a definition, because human ingenuity also cooks up a lot of schemes that may be shady but are not criminal. Criminal law requires us to draw lines between conduct that actually amounts to fraud and conduct that may be merely dishonest or unethical — and sometimes those lines can be quite blurry.

Crimes such as robbery or homicide generally have pretty straightforward parameters. There may be defenses or mitigating factors in any particular case, but the facts that will establish the elements of the offense are usually relatively clear. If someone sticks a gun in your face and takes your wallet, there’s not much doubt there has been a robbery. If you come home to find your front door broken and all your valuables missing, there has been a burglary. But as I discussed in my last post, white collar crimes frequently involve more gray areas. The ancient crime of fraud is no exception.

In the absence of a statutory definition, the parameters of criminal fraud have been explored over the years in judicial decisions, with courts suggesting various formulations. The Supreme Court has said that to defraud typically means to deprive someone of property “by dishonest methods or schemes,” and typically involves “the deprivation of something of value by trick, deceit, chicane, or overreaching.” Another common formulation characterizes fraud as conduct that violates the sense of “moral uprightness, of fundamental honesty, fair play and right dealing in the general and business life of members of society.”

The trick, of course, is that not everyone will always agree on what constitutes “fair play and right dealing,” and mere “dishonesty” is generally not a crime. As I frequently remind my students, there is a lot of sleazy, rotten, immoral stuff that goes on in the world that is not criminal. White collar criminal law frequently involves trying to figure out the distinction.

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Charles Ponzi

The Textbook Example: The Ponzi Scheme

The textbook example of a fraud is the Ponzi scheme, named for its most famous practitioner, Charles Ponzi. In the 1920s Ponzi came up with an scam involving purported trading in International Reply Coupons (IRCs). IRCs were certificates that could be purchased in one country, enclosed in an international letter, and then be redeemed by the recipient in another country for the postage necessary to send a reply. Ponzi claimed that he could double investors’ money in just a few months by buying and selling large quantities of IRCs and taking advantage of differences in international postage rates and currency exchange rates. Early investors received substantial “returns” on their investment; word quickly spread and the money poured in.

In truth, of course, Ponzi was not investing in IRCs at all and was simply keeping the money. If any investors wanted to withdraw some of their funds, he would pay them off using money he had taken in from other investors – a central characteristic of what we now call a Ponzi scheme. Most investors, seeing the impressive returns they were supposedly earning, were happy to keep their money with Ponzi and to send even more. People mortgaged their homes and sent Ponzi their life savings. He made millions within the space of a few months. But ultimately the scheme collapsed, the investors were wiped out, and Ponzi was indicted and sent to prison.

Nearly a century later, Bernard Madoff was convicted for the largest single investment fraud in history, costing his investors billions of dollars. His New York company, Bernard L. Madoff Investment Securities, LLC, was simply one giant Ponzi scheme that he ran for decades. The classics never grow old.

Examples like Ponzi and Madoff are easy; no one doubts that their actions constituted fraud. They stole money from their investors by lying to them, harming their victims through a “dishonest method or scheme.” But some other cases are not so clear.

Suppose you walk into my electronics store wearing a Donald Trump t-shirt and a red “Make America Great Again” baseball cap. While you are looking at television sets, I point out a yuuge, 110-inch flat screen and say, “Guess what? This is actually the same kind of TV set that Donald Trump has in his private suite at Trump Tower!” Although it’s a perfectly good television set at a fair price, I actually have no idea whether Trump really owns it. If you buy the TV based on my statement, have you been defrauded?

Or suppose I’m a real estate agent showing you houses, and I tell you, “The houses in this neighborhood really hold their value. They should turn out to be great investments for the people who buy here.” In reality, I know the housing prices in the neighborhood have been declining and people are bailing out. If you buy, relying in part on my statements, have I defrauded you, even though you end up with a perfectly good, habitable house?

Or suppose I set up a website offering to sell $50,000 tickets on a private space flight to go visit the aliens who abducted Elvis. I get a few takers among rabid Elvis fans living near Graceland. If I abscond with their money is that a criminal fraud, even if no reasonable person could have possibly believed the offer was real? Or should the law say the victims should have known better and can simply sue me in civil court to get their money back? Does the answer change if the tickets were only $500? $5?

Being Deceived vs. Being Defrauded

One well-known case exploring the parameters of criminal fraud is United States v. Regent Office Supply Co., decided by the U.S. Court of Appeals for the Second Circuit in New York in 1970. Regent sold office supplies through salesmen who solicited orders over the telephone. When they called a prospective customer, the salesmen would tell various lies about why they were calling; for example, they would falsely claim they had been referred by an officer of the customer, or that the salesmen had stationery they could offer at a good price because another customer had died. They used these false stories to “get their foot in the door;” to get past the receptionist who answered the phone and speak to someone who could actually place an order. Once talking to that person, however, there were no lies — the price and quality of the merchandise was honestly discussed, the products sold were perfectly good products at a fair price, and the products could be returned if the customer was not satisfied.

The government charged Regent with multiple counts of wire fraud, based on the phony stories told during the initial phone conversations. Prosecutors argued that the customers were deprived of the opportunity to bargain with all of the true facts before them. The agents deceived the customers about who they were and why they were calling, causing the customers to enter into the transactions under false pretenses. Were it not for the lies, the sales would not have taken place. The government argued that this amounted to a scheme to defraud. The trial judge agreed and found Regent guilty.

The Court of Appeals reversed the convictions. The court noted it did not condone the deceitful conduct, which it said was repugnant to “standards of business morality.” But simply because it was repugnant did not mean it was fraud. Although the customers may have been deceived, the court held, they were not defrauded.

The government’s position was that fraud could exist in a commercial transaction “even when the customer gets exactly what he expected and at the price he expected to pay.” The court was not willing to go so far. Fraud, the court said, requires that some actual injury to the victim be at least contemplated by the schemer, and that was missing here. The misrepresentations by the Regent salesmen did not go to the quality, adequacy, or price of the goods. When the deal was concluded the customers had gotten exactly what they expected.

To constitute fraud, the court held, it is not enough that there be some deception involved somewhere in the transaction. The deception must be coupled with a contemplated harm to the victim that relates to the very nature or heart of the bargain itself. Any intangible or psychological “injury” that may have resulted here from the customers being deceived about the reason for the sales call was not the kind of injury that would support a criminal fraud conviction. The sales tactics may have been sleazy and unethical, but they were not criminal.

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“Buy Me a Drink, Mister?”  United States v. Takhalov

This distinction between being defrauded and merely being deceived still rears its head in cases today. This past summer, the U.S. Court of Appeals for the 11th Circuit addressed it in United States v. Takhalov. The defendants in Takhalov were owners of several nightclubs in South Beach, Miami. The clubs hired Eastern European women to pose as tourists, locate visiting businessmen, and convince them to accompany the women into the bars owned by the defendants. The defendants did not deny this was taking place, nor did they deny that the women concealed their relationship with the clubs from the men – in fact, they argued this was a perfectly legitimate business model.

The parties differed about what happened once the men were inside the club. According to the defendants, the men simply purchased food and alcohol and had drinks with their female companions. The government, on the other hand, contended that once inside the club other misconduct took place, including concealing the true prices of drinks and food, forging the men’s signatures on credit card receipts, and secretly adding vodka to the men’s beer so they would get drunk faster. The defendants claimed that if any of that was going on, they knew nothing about it.

The legal issue in the case was right out of Regent Office Supply. The government argued the jury could have convicted the defendants of fraud based simply on the lies the women told the men to lure them into the bar in the first place, regardless of what happened after the men got there. Had the men known the women were actually club employees rather than simply friendly strangers, they would not have entered the club. Any business conducted in the bar, therefore, took place under false pretenses and amounted to fraud.

The defendants, on the other hand, argued that if all the government proved was that the men were tricked into entering the bar, then the men would have been deceived but not defrauded. Although the women might have concealed their relationship with the club, once inside the club the men ordered food and drinks off the menu and got exactly what they expected to get at the price they expected to pay.

The Eleventh Circuit agreed with the defendants. The Court noted that the wire fraud statute “forbids only schemes to defraud, not schemes to do other wicked things, e.g. schemes to lie, trick, or otherwise deceive. The difference, of course, is that deceiving does not always involve harming another person; defrauding does.” A scheme to defraud, the court said, must involve misrepresentations that go to the nature of the bargain itself – usually lies that go to either the value or the characteristics of the goods in question. But if the defendant lies about something else, such as the reason he is willing to enter into the bargain at all, those lies will not amount to fraud — even if the victim would not have entered into the transaction otherwise. The victim in such a case is not injured in a way the law of fraud will recognize.

Just as in Regent, therefore, even if the “customers” in Takhalov were misled about the reason for beginning the transaction (entering the bar), once there, according to the defense, the men got exactly what they expected – food and cocktails with attractive women — at the price they expected to pay. Any misrepresentations that took place when the women concealed their relationship with the bar did not go to the heart of the bargain with the bar itself. The defense was entitled to have the jury instructed that if this was all the defendants did, they were not guilty of fraud. Because the jury instructions failed to make this clear, the court reversed the convictions.

Other Upcoming Issues in the Law of Fraud

As Takhalov demonstrates, the exact parameters of the offense of fraud continue to be litigated. In fact, in its first week of arguments this term, the U.S. Supreme Court is going to consider two cases involving different aspects of fraud. Shaw v. United States involves the proof required to establish bank fraud, and Salman v. United States, a case I wrote about here, will examine the elements of insider trading, a particular variety of securities fraud. I’ll have more about those cases in future posts, as the law of fraud continues to evolve.

Stay tuned – and stay out of South Beach nightclubs.

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White Collar Crime, Prosecutorial Discretion, and the Supreme Court

Does the Supreme Court still believe in prosecutorial discretion? A string of cases over the past few years has to make you wonder.

Prosecutorial discretion – the power to decide whether to bring criminal charges, who to charge, what crimes to charge, and how ultimately to resolve the case – is a fundamental component of the criminal justice system. The legislature enacts the laws but the executive branch enforces them, which includes making judgments about when and how to bring a criminal case.

On the macro level, this means setting national and local law enforcement priorities and making decisions about the deployment of finite prosecutorial resources. Different administrations at different times have declared areas such as health care fraud, narcotics, illegal immigration, or terrorism to be top priorities and have allocated resources accordingly. Such decisions necessarily mean other areas will not receive as much attention; a dollar spent fighting terrorism is a dollar that can’t be spent investigating mortgage fraud.

On the micro level, prosecutorial discretion involves deciding whether to pursue criminal charges in a given case and what charges to pursue. Factors such as the nature of the offense, strength of the evidence, the nature and extent of any harm, adequacy of other potential remedies, any mitigating circumstances or remedial efforts by the accused, and prosecutorial resources and priorities all may come into play.

For federal prosecutors, policies governing how they should exercise this discretion are set forth in the U.S. Attorneys’ Manual, and in particular in the Principles of Federal Prosecution. The Principles contain detailed guidance concerning when to bring charges, what kind of charges to bring, and how to handle criminal cases, in order to “promote the reasoned exercise of prosecutorial discretion by attorneys for the government.” USAM 9-27.110.

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Prosecutorial Discretion and White Collar Crime

Prosecutorial discretion is particularly important in white collar crime. With non-white collar, or “street” crimes, the parameters of the offense tend to be more clearly defined and charging decisions often are more black and white. If there is a body on the street with nine bullets in it, you pretty clearly have a homicide. If authorities can identify who did it, that person will almost certainly be charged. The prosecutor is not likely to say, “Due to our limited resources and other priorities, we’ll take a pass on this one and let the victim’s family file a civil suit instead” – not if the prosecutor wants to keep her job, anyway.

But white collar crime is full of gray areas. White collar prosecutors deal with sometimes nebulous concepts such as “fraud” and “corruption,” and white collar statutes are written in notoriously broad and general terms. As a result, it often falls much more to the prosecutor to determine whether something is a crime at all and to decide what kind of conduct merits a prosecution.

For example, suppose a hedge fund goes belly-up, and the investors who lost their money claim they were misled about their investment. Was it fraud, or was it merely aggressive – maybe even sleazy – sales tactics followed by incompetence, mismanagement, or just bad luck? Unlike a homicide, robbery, or drug case, at the outset it may not be clear that a crime has been committed. A prosecutor might well conclude, “If I investigated this for two years, perhaps at the end I would have a provable criminal fraud case – but perhaps not. Given my resources and priorities, I’m going to focus on other cases and let the SEC and private plaintiffs pursue civil and administrative penalties in this one.”

Given these potential gray areas, what’s the best way to deter and prosecute white collar crime? Imagine two different regimes. In System #1, Congress drafts broad statutes that proscribe conduct such as fraud in general terms, in order to encompass as much potentially criminal conduct as possible. It is left to the Executive Branch, through prosecutors, to enforce those statutes and determine which cases to pursue – with that discretion tempered, of course, by the oversight of the courts.

In System #2, Congress tries to write very precise and detailed statutes that are as specific as possible in defining the prohibited conduct. Such white collar statutes would leave fewer gray areas and less room for prosecutorial discretion – in other words, they would be more like street crimes. The downside of such a system would be that it necessarily creates loopholes: the more precisely you define criminal concepts like fraud, the greater the opportunity for individuals engaged in what should be criminal conduct to skirt the law’s prohibitions.

Historically, white collar criminal law has been closer to System #1: broad statutes prohibit things like fraud or corruption, and prosecutors are entrusted to exercise their discretion to determine how to apply those laws. But in a series of decisions over the past few years, the Supreme Court has signaled it is becoming increasingly uncomfortable with such a system. These decisions have limited several significant white collar statutes, moving us closer to System #2 – although with laws narrowed by the Court rather than by Congress. In the process, the Court has removed discretion from the hands of prosecutors while also making it more difficult to prosecute some criminal conduct.

The Supreme Court Limits Prosecutorial Discretion

The first such case was Skilling v. United States in 2010. Skilling involved the proper interpretation of 18 U.S.C. § 1346, which prohibits schemes to deprive another of the “intangible right of honest services.” Honest services fraud, a species of mail and wire fraud, has been around for decades. Most cases of honest services fraud have involved relatively straightforward allegations of corruption such as bribery, kickbacks, and conflicts of interest.

But prosecutors in some cases stretched the boundaries of the theory, using honest services fraud to prosecute, for example, a university professor who helped students plagiarize work to obtain degrees to which they were not entitled; an IRS employee who improperly browsed through certain tax returns but did nothing with the information; state officials who awarded public sector jobs based on political patronage; and a state official who failed to disclose a potential conflict of interest when state law did not require disclosure. Some of these schemes seemed wrong or dishonest but were far from traditional criminal corruption. The confusion over what actually qualified as a deprivation of honest services led Justice Scalia to argue in 2009 that the law was in a state of “chaos.”

The Supreme Court finally attempted to bring some order out of this chaos in Skilling. The defendant, former Enron CEO Jeff Skilling, argued that the honest services statute should be struck down as unconstitutionally vague, but the Court disagreed. Instead, it limited the law to what it deemed the core of honest services fraud: cases involving bribery and kickbacks.

The holding in Skilling dramatically narrowed the scope of honest services fraud. This successfully removed prosecutors’ ability to use the theory in innovative ways to charge more unusual schemes. But the limitation also created safe harbors for certain conduct, such as self-dealing by elected officials, that is plainly corrupt but may no longer be charged as a violation of honest services.

In 2014, the Supreme Court decided Bond v. United States. (Although not really a white collar case, Bond is instructive as part of the same trend at the Court.) In Bond a jilted wife tried to injure her husband’s lover by sprinkling some caustic chemicals on her mailbox and doorknob. The chemicals caused only a slight skin irritation on the woman’s thumb that was easily treated with cold water. Federal prosecutors subsequently charged Bond using a felony statute that prohibits the use of chemical weapons and carries a penalty of “any term of years” in prison.

The Court ultimately held that the statute did not apply to Bond’s conduct. But an undercurrent of the case was the Court’s obvious concern over the government’s decision to apply a federal law aimed at preventing the horrors of chemical warfare to such a trivial incident. During oral argument, Justice Kennedy told the Solicitor General that it “seems unimaginable that you would bring this prosecution.” Justice Alito remarked, “If you told ordinary people that you were going to prosecute Ms. Bond for using a chemical weapon, they would be flabbergasted.”

This trend continued in 2015 with Yates v. United States. Yates was a commercial fisherman working in the Gulf of Mexico. A fish and wildlife officer boarded his boat to conduct a routine inspection and ended up citing him for having several dozen red grouper on board that were slightly smaller than the legal limit – a civil violation. The officer told Yates to keep the fish until he returned to port, where they would be seized and destroyed. Once the officer left his boat, however, Yates instructed a crew member to throw the undersized fish overboard and replace them with larger ones.

When this ultimately came to light, prosecutors charged Yates with three crimes including obstruction of justice under 18 U.S.C. § 1519, a twenty-year felony. That law prohibits the destruction of “tangible objects” in an effort to obstruct a federal investigation. Captain Yates argued before the Supreme Court that fish were not “tangible objects” within the meaning of this statute. The Court ultimately ruled in his favor, but only by adopting what I believe was an unnatural and strained interpretation of the law.

But Yates is actually more significant for what it revealed about the Court’s views on prosecutorial discretion and charging decisions. During oral argument, the Justices were clearly disturbed by the application of a twenty-year felony to this fish-dumping episode. Justice Scalia asked what kind of “mad prosecutor” would charge Yates with a twenty-year offense, and sarcastically suggested perhaps it was the same prosecutor who had charged Bond with a chemical weapons violation. Later in the oral argument Justice Kennedy remarked, “It seems to me that we should just not use the concept [prosecutorial discretion] or refer to the concept at all anymore.”

The Court’s skepticism about prosecutorial discretion surfaced again this past spring in McDonnell v. United States. In reversing the corruption convictions of the former Virginia governor, the Court adopted a narrow definition of “official act” for purposes of federal bribery law. At oral argument and in its opinion the Court imagined federal prosecutors targeting elected officials for simply attending a lunch where a supporter bought them a bottle of wine, or for attending a ballgame as the guest of homeowners who earlier had sought the official’s help.

The narrow definition of “official act,” the Court concluded, was necessary to prevent politically-motivated prosecutions and the criminalization of routine political courtesies. But critics of the Court’s decision – including me – argue that the result is to shield a great deal of corrupt conduct that is precisely what the law of bribery aims to prevent.

The Future of Prosecutorial Discretion

In these recent cases, when faced with the interpretation of white collar crimes such as bribery, honest services fraud, and obstruction of justice, the Court’s approach has been to interpret the statutes narrowly and consequently to remove charging discretion from federal prosecutors. A moment during the Yates oral argument is particularly illuminating. The Justices asked Assistant Solicitor General Roman Martinez what guidance prosecutors followed when deciding what kind of charges to bring, and that led to this exchange:

MR.MARTINEZ:  Your Honor, the ­. . . my understanding of the U.S. Attorney’s Manual is that the general guidance that’s given is that the prosecutor should charge ­­once the decision is made to bring a criminal prosecution, the prosecutor should charge the ­­the offense that’s the most severe under the law. That’s not a hard and fast rule, but that’s kind of the default principle.  In this case that was Section 1519.

JUSTICE SCALIA:  Well, if that’s going to be the Justice Department’s position, then we’re going to have to be much more careful about how extensive statutes are.  I mean, if you’re saying we’re always going to prosecute the most severe, I’m going to be very careful about how severe I make statutes.

MR. MARTINEZ:  Your Honor, that’s ­­. . .

JUSTICE SCALIA:  Or ­­how much coverage I give to severe statutes.

MR. MARTINEZ:  That’s ­­– that’s not what we were saying.  I think we’re not always going to prosecute every case, and obviously we’re going to exercise our discretion. . . .

As Martinez attempted to point out, the real-world exercise of prosecutorial discretion is far more nuanced than Justice Scalia suggested. It’s true that the Principles of Federal Prosecution provide as a general rule – as they have for decades – that once a decision to bring charges is made a prosecutor generally should charge “the most serious offense that is consistent with the nature of the defendant’s conduct, and that is likely to result in a sustainable conviction.” USAM 9-27.300. But the Principles also recognize the need for prosecutors to consider the nature and circumstances of a particular case, the purpose of criminal law, and law enforcement priorities. What charges are “consistent with the nature of the defendant’s conduct” is also a matter of judgment and discretion. And of course considerable discretion also is involved earlier in the process, when deciding whether to bring charges at all.

But this exchange suggests the Court may believe it needs to interpret criminal statutes more narrowly because it cannot always trust prosecutors to exercise sound judgment when enforcing broadly-written statutes. As Justice Kennedy suggested during the Yates argument, it may be that the Court no longer thinks of prosecutorial discretion as a viable concept.

Of course, some critics of federal prosecutors will welcome this development and suggest it is long overdue. And some will point out that, for prosecutors, this may be considered a self-inflicted wound. The charging decisions in cases like Yates and Bond in particular may be what led the Justices openly to question whether prosecutors should continue to be entrusted with the same degree of discretion.

But it would be unfortunate if the Justices truly come to believe they cannot rely on prosecutors to exercise sound judgment in charging decisions. One can always argue about the merits of particular cases, but overall our system of broadly-written statutes enforced by the sound exercise of prosecutorial discretion has worked pretty well. If the Court continues to chip away at those statutes due to concerns about controlling prosecutors, it will continue to create safe harbors for some conduct that is clearly criminal.

It’s particularly inappropriate for the Court to limit these statutes based on hypotheticals that have no basis in reality, as it did in McDonnell. When we start seeing widespread prosecutions of politicians for accepting legal campaign contributions and attending Rotary Club breakfasts, then maybe we can talk about the need to curb prosecutorial discretion. But simply because we can imagine a parade of horribles based on the broad terms of a white collar statute does not mean that prosecutors are actually marching in that parade.

At the McDonnell oral argument, Justice Breyer noted that narrowing the definition of bribery might mean that a certain amount of corrupt conduct will go unpunished. Unfortunately, for now that appears to be a risk the Court is willing to take.

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Update: Rod Blagojevich’s Original Sentence Unchanged at Resentencing

At a resentencing hearing today, U.S. District Judge James Zagel sentenced former Illinois Governor Rod Blagojevich to the same fourteen-year sentence the judge had originally imposed in 2011. Blagojevich (known as “Blago”) was convicted on eighteen felony counts of corruption based on various “pay to play” schemes involving his powers as governor, including a scheme where he tried to obtain money or a job in exchange for appointing the successor to former U.S. Senator from Illinois Barack Obama.

rod-blagojevich

Resentencing was necessary because five of Blagojevich’s convictions had been thrown out by the U.S. Court of Appeals for the Seventh Circuit. The court of appeals concluded that the charges based on Blago’s scheme related to filling the Senate seat may have rested on an improper legal theory. Those charges were based in part on evidence that Blago had tried to trade that appointment for a favorable government job for himself; in other words, he would appoint a successor favored by Obama in exchange for a seat in President Obama’s cabinet. (That deal never came to pass because the President and his staff refused to agree.) But the court of appeals concluded that this kind of transaction, trading one political appointment for another, was simply political “log rolling” that takes place all the time and could not form the basis of a corruption conviction. (I wrote in more detail about the Seventh Circuit opinion in this post.)

Blagojevich had also hoped the Supreme Court might hear his case, particularly in light of the Court’s recent decision to accept review of and then reverse the corruption convictions of former Virginia Governor Bob McDonnell. But those hopes were dashed when the high court declined to accept Blago’s appeal.

At the resentencing, Blago’s attorneys argued he should be released much earlier in light of the vacated convictions. But the government pointed out that even without those charges the sentencing guidelines would have called for the same sentence, based on the other corruption schemes for which he was convicted. In addition, although the court of appeals rejected one theory related to the attempted sale of the Senate seat, there had been plenty of evidence at trial concerning efforts by Blago to solicit other things of value in exchange for that appointment. Prosecutors argued that the fundamental picture concerning the nature of Blago’s misconduct had not changed. Judge Zagel apparently agreed.

So after four years of appeals, Blago is right back where he started: in prison until 2024.

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