At the outset of his opinion affirming the grant of Charles Keating's petition for a writ of habeas corpus from his state court conviction, Judge Reinhardt observed that "most readers of this opinion will be well acquainted with the activities of Charles Keating." Keating v. Hood, 191 F.3d 1053, 1055 (9th Cir. 1999), cert. denied, 121 S.Ct. 69 (2000). Perhaps it would be more accurate to say that readers were likely to be well acquainted with the press reports of those activities. That, undoubtedly, was the first major obstacle that Keating's lawyers had to overcome to win their client's freedom. While public fervor may fade over time, Judge Reinhardt was probably correct in assuming that most contemporary readers were familiar with Keating's name and his connection to the failed Lincoln Savings & Loan Association; few, however, were probably familiar with Keating's activities.
In the late 1980's and early 1990's, following congressional deregulation of the Savings and Loan industry, many thrift institutions throughout the United States weakened and/or failed. The collapse of Lincoln Savings became, in the public mind, a symbol of the problems that pervaded the thrift industry. Charlie Keating became the poster boy for the Savings and Loan debacle.
Most people probably knew that a large number of individuals, including a significant number of elderly and retired people, purchased high interest corporate bonds sold through Lincoln Savings, that Lincoln Savings failed, the bonds became worthless, the investors lost their money, and that Lincoln Savings was owned by Keating. Since Lincoln Savings subsequently failed, in retrospect it appeared that those who invested in Lincoln Savings must not have appreciated the risk of purchasing the bonds. Their alleged naivete, in turn, was presumed to be based on inadequate or inaccurate information about the solvency of the corporate bond issuer.
In the political climate of that era, these bare facts inspired state and federal agencies to conclude that Keating should be prosecuted. Keating believed that the losses were caused by the government takeover of Lincoln Savings and the forced sale of its assets at severely depressed prices. He contended that, but for the government interference, the bond holders would have continued to receive a high rate of return on the bonds and the real estate investments would have been profitable. Subsequent developments in the real estate industry may well support Keating's theory. At the time, however, the prosecutors were unmoved.
The California state courts were comfortable allowing Keating to remain in prison for his state securities fraud convictions even though the jurors may have doubted that Keating intended to defraud anyone. However, Stephen Neal, of Cooley Godward and a team of dedicated lawyers, including Scott Devereaux, also of Cooley Godward, and Jeffrey Powell and Andrew McGaan, both of Kirkland & Ellis, persuaded the federal courts that Keating had been unjustly imprisoned since the state court jury had not been required to find that he knowingly made any false representation with the intent to defraud.
Prior to reversal of the state convictions, Steve Neal had already successfully won Keating's release on related federal charges. By interviewing the jurors after the federal convictions, Keating's defense team learned that half of the jurors knew that Keating had previously been convicted on state charges and one of the jurors acknowledged lying about his knowledge of the prior conviction in a pre-trial questionnaire. In fact, several of the jurors actually discussed Keating's state convictions during their deliberations on the federal charges even though information about the convictions had been excluded from evidence. United States v. Keating, 147 F.3d 895, 898 (9th Cir. 1998); see RICO Report, The Champion (Nov. 1998); RICO Report, The Champion (July 1999). This blatant jury misconduct eventually prompted the federal district judge who presided over the trial to grant a new trial, a ruling that was unanimously affirmed by the Ninth Circuit. United States v. Keating, 147 F.3d at 900-04. After remand, pursuant to a plea agreement, Keating pled guilty to several federal charges and was sentenced to time served. Keating v. Hood, 191 F.3d at 1055.
In attacking the state convictions, Keating's lawyers had to overcome state appellate decisions declaring that state law securities fraud had no scienter requirement, a recent United States Supreme Court decision permitting appellate judges to make factual findings on the elements of a crime when the jury failed to do so, and the complex body of law that allows appellate courts to occasionally ratify jury verdicts even if based on invalid grounds.
The Lincoln Savings bonds were sold between 1986 and February 1989. Shortly after Lincoln Savings ceased operations, in September 1989, the first state court of appeal to address the issue concluded that criminal liability could be imposed for making a statement believed to be true at the time it was made, but subsequently found to be false. The state securities fraud statute, according to the state appellate court, "does not require the prosecution to prove the defendant's specific intent or knowledge at the time [the] representation is made. The defendant need not have fraudulently induced the victim to part with his money." People v. Johnson, 213 Cal.App.3d 1369, 1375 (1989), overruled, People v. Simon, 9 Cal.4th 493, 508-09 (1995).
Even though acknowledging that the state statute was patterned after federal securities fraud statutes, 15 U.S.C. 77l, 78j, and even though recognizing that federal courts universally affirmed that scienter was a necessary element of federal securities fraud, and even though acknowledging that cases interpreting the federal statute should influence the interpretation of the parallel state statute, the California Court of Appeal did not hesitate to conclude the state securities fraud statute "does not require proof of defendant's scienter." People v. Johnson, 213 Cal.App.3d at 1371, citing Cal. Corp. Code 25401. Less than a year later, another state court of appeal chimed in with a similar holding. People v. Baumgart, 218 Cal.App.3d 1207, 1219-20 (1990).
Although these decisions were binding on the superior court at trial, Auto Equity Sales, Inc. v. Superior Court, 57 Cal.2d 450, 455-56 (1962), Steve Neal presciently insisted that the trial judge instruct the jurors that scienter was an element of the state securities fraud statute.
The trial judge, Judge Lance Ito, who later went on to achieve worldwide notoriety as the O.J. Simpson trial judge, refused the instruction. But not, as one might expect, under the authority of Johnson and Baumgart. Rather, Judge Ito decided that the instruction was unnecessary because, in his view, there was insufficient evidence that Keating was directly involved in any of the fraudulent sales and, therefore, he could only be convicted as an aider and abettor. Strangely, however, Judge Ito then delivered instructions enabling the jurors to return a conviction on either ground, i.e., as a direct seller or as an aider and abettor, and refused Steve Neal's request to instruct the jurors that Keating could be convicted only as an aider and abettor.
Ignoring the Supreme Court's observation more than a decade earlier that "a properly instructed jury may occasionally convict even when it can be said that no rational trier of fact could find guilt beyond a reasonable doubt," Jackson v. Virginia, 443 U.S. 307, 317 (1979), Judge Ito refused to expressly prevent the jurors from convicting on a direct perpetrator theory because "the evidence is clear that Mr. Keating never actually had any face-to-face contact with any of the bond purchasers. So clearly, his only liability can be as an aider and abettor. I think that's abundantly clear." Keating v. Hood, 191 F.3d at 1056-57. An objective observer might ask . . . then why not tell the jury that Keating could not be convicted as a principal?
The case was submitted to the jury and, on December 4, 1991, the jury returned general verdicts finding Keating guilty of a number of the charges. He was ultimately sentenced to 10 years in prison and fined $250,000 even though it was never determined whether the jurors believed that Keating was simply an overenthusiastic booster of his own business ventures with a genuine, but mistaken, belief in the value of the investments or, in other words, that Keating and others made innocent misrepresentations that they later learned to be untrue.
In the California Court of Appeal, Keating renewed his contentions that the trial judge erroneously refused to preclude a conviction on a direct perpetrator theory and that the direct perpetrator instructions were erroneous since a criminal violation of the state securities law required the jurors to find scienter. The court of appeal deftly ignored the prosecutor's numerous and repeated explanations as to how the evidence could be interpreted to justify a finding that Keating had been a direct seller of the securities. Disclaiming any need for an instruction clarifying that criminal liability could be based only on an aider and abettor theory, they proclaimed that "this instruction would be stating the obvious." The court of appeal also refused to interpret the statute as requiring proof of scienter, offering, in lieu of statutory analysis, that "it is up to the Legislature to determine whether a public welfare offense is a general intent crime or a specific intent crime."
After his shabby treatment by the California Court of Appeal, Keating's quest for justice began to seem more hopeful. On September 30, 1993, the California Supreme Court granted his petition for review. People v. Keating, 23 Cal.Rptr.2d 593, 859 P.2d 673 (1993).
Yet, a funny thing happened on the way to oral argument. The scienter issue was also being litigated in another case that was pending in the lower courts. On the other defendant's motion, acting under California Rule of Court 27.5, even before the other case had been decided by the intermediate appellate court, the California Supreme Court transferred review of that case from the court of appeal directly to its own docket. People v. Simon, 9 Cal.4th 493, 496 n.2 (1995). As in Keating's case, the issue was whether a state securities fraud conviction required a finding of scienter. People v. Simon, 9 Cal.4th at 497. Although Keating's case had already been fully briefed on the merits, rather than set it for argument and defer Simon pending disposition of Keating, Cal. R. Court 29.2, the state court accelerated the briefing in Simon.
In January 1995, the California Supreme Court offered Keating some hope. The Simon case overruled the court of appeal decisions in Johnson and Baumgart and held that "unless an issuer is aware or should have been aware at the time of the sale that a material representation is untrue . . . he has not sold the security by means of an untrue statement of a material fact." People v. Simon, 9 Cal.4th at 523. The state court held that the trial court had "erred . . . in instructing that only a general criminal intent need be shown in the crime of willfully offering or selling a security by means of a material misrepresentation." People v. Simon, 9 Cal.4th at 522-23.
Justice, it appeared, was right around the corner. While Simon appeared to be an auspicious sign for the court's resolution in Keating's case, the state court had other plans in mind. The California Supreme Court did not, as it might have, remand Keating's case back to the court of appeal for reconsideration in light of Simon. Cal. R. Court 29.4(e). Nor did the court undertake to resolve the case on its own which, of course, is what it said it would do when it granted the petition for review. Cal. R. Court 29.4(a), (b). The court took a less predictable path. On March 23, 1995, the California Supreme Court dismissed Keating's petition "as improvidently granted." People v. Keating, 39 Cal.Rptr.2d 410, 890 P.2d 1119 (1995), citing Cal. R. Court 29.4(c).
Justice, as it turned out, really was right around the corner. In August 1995, Steve Neal filed a federal petition for writ of habeas corpus in the United States District Court. The case was assigned to District Judge John G. Davies, a Republican appointee nominated by President Reagan and well-known as conservative on criminal law matters. Despite his ideological inclinations, after procedural wrangling over minutiae relating to exhaustion of state remedies, Judge Davies ultimately granted the petition.
In a thorough and well-reasoned opinion, Judge Davies held, as was inescapable, that the absence of a scienter instruction, as Simon had already declared was necessary, rendered the direct perpetrator instructions deficient and deprived Keating of his Sixth Amendment right to have a jury determination, beyond a reasonable doubt, on each element of the offense for which he was convicted. Moreover, Judge Davies held, the aiding and abetting instructions were also infirm. By misdefining the underlying target crime (i.e., by enabling a jury to convict Keating as an aider and abettor even if a principal had not committed an intentional fraudulent misrepresentation), the instructions permitted the jurors to convict Keating for aiding and abetting an innocent act. Keating v. Hood, 922 F.Supp. 1482, 1485-88, 1492-94 (C.D.Cal. 1996).
On the first trip to the circuit, the panel evaded review of the unconstitutionality of Keating's incarceration. Rather than reach the merits of Keating's contentions, the circuit endorsed a hyper-technical understanding of the exhaustion doctrine - "Keating argued . . . that the [aiding and abetting] jury instructions did not include a mens rea requirement, but did not argue that this omission violated the U.S. Constitution." - and ordered the petition dismissed without prejudice. Keating v. Hood, 133 F.3d 1240, 1241-42 (9th Cir. 1998).
Rather than return to the state courts - who had been ever so charitable toward him in the past - Keating withdrew his unexhausted challenge to the aiding and abetting instructions (risking that the claims might be forever barred from federal habeas review) and returned to district court proceeding only on the exhausted claims. The tactical decision was successful. The case was again assigned to Judge Davies and, again, he granted the writ.
When the case returned to the Ninth Circuit Court of Appeals once again, although it was assigned to a different panel, Keating's lawyers had another obstacle to overcome. After Judge Davies's initial order granting relief, the Supreme Court had ruled that a conviction could be sustained even if the jury did not find that the defendant had committed each element of the offense. California v. Roy, 519 U.S. 2 (1996).
Although the circuit court in Roy held that an instruction omitting necessary elements of the offense could be found harmless if the record otherwise established that the jury clearly had found the omitted element, the Supreme Court reversed on the ground that the circuit court had not applied the appropriate harmless error test. In a per curiam opinion, the Supreme Court held that the error was not prejudicial per se and that the court had to evaluate the prejudice caused by the absence of the missing element "under the Kotteakos standard," California v. Roy, 519 U.S. at 6, that is, whether the error "had substantial and injurious effect or influence in determining the jury's verdict." Brecht v. Abrahamson, 507 U.S. 619, 637 (1993), quoting Kotteakos v. United States, 328 U.S. 750, 776 (1946).
Furthermore, after Keating's case was fully briefed and argued to the circuit, the Supreme Court expound upon Roy. In a 5-4 opinion authored by Chief Justice Rehnquist, the Supreme Court created another obstacle for Keating 's lawyers by embracing a startlingly new approach to the Sixth Amendment right to trial by jury. Neder v. United States, 119 S.Ct. 1827 (1999). After concluding that the absence of a jury finding on each element of the offense is subject to harmless-error analysis, the Court rejected a common-sense approach that focuses on the integrity of the verdict and endorsed a subjective standard empowering reviewing courts in effect to decide the question of guilt.
The Court erected a formidable barrier to relief by faulting the defense lawyer for not introducing evidence to controvert the omitted element, faulting the defense lawyer for not urging the jury to make a finding on the omitted element, and then encouraging appellate courts to evaluate the evidence and make findings on the omitted elements. Cf. United States v. Cabrera, 208 F.3d 309, 315 (1st Cir. 2000) (to be admissible, evidence must be relevant to an issue to be decided); Fed. R. Evid. 402 (same); United States v. Remini, 967 F.2d 754, 757-59 (2d Cir. 1992) (defense may not argue contentions that are not relevant to issues); Sullivan v. Louisiana, 508 U.S. 275, 281 (1993) (when appellate court substitutes its findings for jury's, "the wrong entity judges the defendant guilty.") Based on these findings, the Court found no prejudice. Neder v. United States, 119 S.Ct. at 1837-38. For all its patent inadequacies, perhaps the most disheartening aspect of the Neder opinion is Justice Breyer's critical fifth vote, reminding us once again of his general willingness to compromise the important constitutional role of juries. See e.g., Apprendi v. New Jersey, 120 S.Ct. 2348, 2396-2400 (2000) (Breyer, J., dissenting).
Keating was able to overcome the potentially devastating impact of Roy and Neder. First, Neder was decided after argument to the circuit and, although Roy had been decided earlier, "the state did not raise the Roy question on appeal." Keating v. Hood, 191 F.3d at 1064 n.17. Nonetheless, the circuit court did consider the relevance of these two decisions. Id., at 1062, 1064 n.17.
Here, Keating was saved by Steve Neal's vigorous defense at trial. Although Judge Ito refused to instruct the jurors that scienter was a necessary element of securities fraud, the defense strenuously argued that Keating had no knowledge of the false or misleading nature of the information relayed to the bond purchasers, i.e., that Keating lacked any fraudulent intent. Keating's position was undoubtedly aided by the fact that the state did not attempt to force the circuit court to make a factual finding to supplement the jury's verdict. As the circuit court noted, "the state had conceded that the error was not harmless if Keating was convicted as a direct perpetrator." Keating v. Hood, 191 F.3d at 1062 (emphasis original).
Instead, rather than rely on Roy, even though the prosecutor persistently argued there was sufficient evidence of Keating's direct participation in the sale of securities, and even though Judge Ito's instructions permitted the jurors to find Keating guilty of a direct violation of the state statute, the State sought to convince the jurists that the failure to require the jury to find scienter "was harmless because the jury convicted Keating as an aider and abettor rather than as a direct perpetrator, and thus did not rely on the legally erroneous theory." Keating v. Hood, 191 F.3d at 1062. This brought Keating's lawyers to their final hurdle - how to obtain relief from the entire conviction when they could demonstrate only error in the direct perpetrator theory and had been prevented, by a nearly compulsive application of the exhaustion rule, from challenging the aiding and abetting theory.
Nearly a decade earlier, the Supreme Court reaffirmed, without dissent, the general presumption that "a general jury verdict was valid so long as it was legally supportable on one of the submitted grounds - even though that gave no assurance that a valid ground, rather than an invalid one, was actually the basis for the jury's action." Griffin v. United States, 502 U.S. 46, 49 (1991). In order to reconcile its holding with cases that had set aside convictions when only one of several grounds were invalid, see id., at 51-55, the Court drew a distinction between instances where one of the prosecution theories was legally invalid and where one of the theories was simply unsupported by the evidence. Id., at 58-60.
As described in Griffin, the Court continued to embrace the line of cases beginning with Stromberg v. California, 283 U.S. 359 (1931), holding that "where a provision of the Constitution forbids conviction on a particular ground, the constitutional guarantee is violated by a general verdict that may have rested on that ground." Griffin v. United States, 502 U.S. at 53. With some reticence, the Court was also willing to continue following Yates v. United States, 354 U.S. 298 (1957), which, according to the Court, "was the first and only case of ours to apply Stromberg to a general verdict in which one of the bases of conviction did not violate any provision of the Constitution but was simply legally inadequate." Griffin v. United States, 502 U.S. at 55.
The Court, however, adopted a different approach where the verdict's alleged invalidity was predicated on an insufficiency of proof. For those instances, the Court reiterated "the prevailing rule: `when a jury returns a guilty verdict on an indictment charging several acts in the conjunctive . . . the verdict stands if the evidence is sufficient with respect to any one of the acts charged.'" Griffin v. United States, 502 U.S. at 56-57, quoting Turner v. United States, 396 U.S. 398, 420 (1970).
The Supreme Court correctly recognized that, "when . . . jurors have been left the option of relying upon a legally inadequate theory, there is no reason to think that their own intelligence and expertise will save them from that error." Griffin v. United States, 502 U.S. at 59. However, disregarding one of the premises on which it justified federal habeas review of the sufficiency of the evidence claims, the Supreme Court hypothesized that "the opposite is true . . . when they have been left the option of relying upon a factually inadequate theory, since jurors are well equipped to analyze the evidence." Id., (emphasis original). But see Jackson v. Virginia, 443 U.S. at 317 ("a properly instructed jury may occasionally convict even when it can be said that no rational trier of fact could find guilt beyond a reasonable doubt"). Curiously, the Supreme Court congratulated itself for drawing "a line that makes good sense." Griffin v. United States, 502 U.S. at 59.
Prior to Griffin, federal courts had struggled in attempting to apply Stromberg and its progeny to RICO cases where a reviewing court invalidated a conviction for an offense that served as one or more of the predicate acts. McCulloch v. United States, 484 U.S. 947 (1987) (White, J., dissenting from denial of certiorari). The Second, Third, Fourth, and Sixth Circuits had, without explicitly focusing on whether the invalidity was legal error or an insufficiency of evidence, required reversal of a RICO conviction if the jury may have imposed RICO liability based on a predicate act that was subsequently found invalid. United States v. Ruggiero, 726 F.2d 913, 921 (2d Cir. 1984); United States v. Brown, 583 F.2d 659, 669-70 (3d Cir. 1978); United States v. Mandel, 862 F.2d 1067, 1073-74 (4th Cir. 1988); United States v. Joseph, 781 F.2d 549, 554 (6th Cir. 1986).
The Tenth and Eleventh Circuits routinely affirmed RICO convictions, even after vacating convictions that were alleged as predicate acts, so long as at least two valid predicate act convictions remained. United States v. Cardall, 885 F.2d 656, 682-83 (10th Cir. 1989); United States v. Alexander, 850 F.2d 1500, 1506 (11th Cir. 1988). The Fifth Circuit was more erratic, reversing RICO counts in some cases, but not in others without making any effort to harmonize the divergent holdings. Compare United States v. Marcello, 876 F.2d 1147, 1153 (5th Cir. 1989) (reversing RICO convictions), with United States v. Erwin, 793 F.2d 656, 670 n.21 (5th Cir. 1986) (upholding RICO convictions).
Although Stromberg, Yates, and Griffin clearly require more searching review before upholding a RICO count that may be based on a legally invalid predicate act finding, the federal appellate courts have continued their inconsistent treatment of RICO charges premised on invalid predicate acts. For example, after vacating all five predicate act findings as legally erroneous, while acknowledging the validity of two convictions that were not charged as predicate acts, relying on Griffin, the Second Circuit correctly refused to sustain a RICO conviction because doing so would require speculation as to how jury would have resolved the issue. United States v. Delano, 55 F.3d 720, 729-30 (2d Cir. 1995).
Applying the other side of Griffin, the Third Circuit noted in dicta that a defendant's RICO conviction would still be valid even if he established the evidentiary insufficiency of some of the money laundering charges alleged as predicate acts. United States v. Morelli, 169 F.3d 798, 802-03 (3d Cir. 1999). Another Third Circuit case, however, engaged in extraordinary legal gymnastics to uphold a RICO conviction when the jury acquitted the defendant on three of four predicate acts and the court itself had reversed other convictions that might have served as predicate acts. United States v. Vastola, 989 F.2d 1318, 1328-31 (3d Cir. 1993).
Continuing a disturbing trend, the D.C. Circuit completely ignored Griffin and upheld RICO counts even though predicate act findings were infected with legal error since two other predicate act findings still remained. United States v. Thomas, 114 F.3d 228, 250-51 (D.C. Cir. 1997). And, in dicta, both the Eleventh Circuit and yet another Third Circuit case endorsed this same casual approach. United States v. Pelullo, 83 F.3d 578, 580-81 (3d Cir. 1994) (dicta); United States v. Gonzalez, 21 F.3d 1045, 1047 n.21 (11th Cir. 1994) (dicta).
Keating's contention, of course, was not simply that the evidence was insufficient to convict him as a seller or offeror of the bonds. Although there was no evidence that Keating had personally offered or sold the disputed bonds, the jury was not instructed that direct personal involvement was necessary to establish liability as a principal. Unaware that Keating did not legally qualify as a principal, the jury was left to speculate as to why they were instructed on the elements of a principal 's liability unless, of course, it was a legitimate foundation for finding guilt. Moreover, Steve Neal emphasized that, since Judge Ito had insisted on defining a direct seller's liability (thereby possibly enabling the jurors to return an erroneous verdict), he erroneously failed to confirm that the jury could not find criminal misconduct without a finding of scienter.
Ito's error was prejudicial, Neal argued, since the jury could misinterpret the liability of a principal as encompassing Keating's acts and might enable them to return a guilty verdict without finding, beyond a reasonable doubt, that Keating had a specific intent to defraud. Although the theory of prejudice was couched in terms of instructional error, it was interrelated with the evidentiary insufficiency. And, moreover, evidentiary insufficiency was the basis for the State's theory as to why the erroneous direct perpetrator instructions were not prejudicial.
Keating's lawyers did a spectacular job of maintaining the court's focus on the legal deficiencies in the instructions. Neither Judge Reinhardt's majority opinion, nor even Judge Rymer's dissenting opinion, gave any consideration to the possibility that the conviction might have been sustained under Griffin. The case was analyzed in the context of legally erroneous instructions and the convictions were set aside on that basis.
The state's petition for writ of certiorari to the Supreme Court was denied, Hood v. Keating, 121 S.Ct. 69 (2000) (mem.), and, on remand, Steve Neal eventually persuaded the district attorney to dismiss the state charges against Keating. Throughout this long ordeal, Neal and Keating were aided by the commitment of a number of lawyers, including Scott Devereaux, Jeffrey Powell, and Andrew McGaan, who ardently worked on the case from the beginning in 1990 including both the state and federal trials, appeals, and the labyrinthine federal habeas litigation. Because of the extraordinary efforts of his lawyers, Charlie Keating was finally released.
This result should be an inspiration to all lawyers committed to the defense of the citizen/accused. Dedication and good lawyering do make a difference. If Charlie Keating, who had been so demonized by the media, could force the criminal justice system to do justice, how difficult can it be to obtain a just result in the cases tried every day in our courts.
"Queasy" Ninth Circuit Applies Bright-Line Rule
Restricting Right to Counsel
The November 2000 RICO Report discussed the Ninth Circuit's deplorable opinion in United States v. Hayes, 190 F.3d 939 (9th Cir. 1999). See, "Sixth and Ninth Circuits Apply Bright-Line Rule Rejecting Pre-Indictment Right to Counsel," Champion, November 2000. In Hayes, a panel majority held that the defendant's Sixth Amendment right to counsel was not triggered when, prior to the return of the indictment, the government invoked Rule 15 of the Federal Rules of Criminal Procedure to take court ordered, videotaped depositions of material witnesses for use at his later trial. Accordingly, the panel ruled the government did not violate Massiah v. United States, 377 U.S. 201 (1964), when it directed a cooperating co-conspirator to meet with Hayes outside the presence of the lawyer appointed to represent him at the depositions, elicit incriminating admissions and record the conversation.
We condemned the panel's decision for its formalistic approach to Sixth Amendment protection and its willingness to embrace a bright-line rule rejecting any right to counsel prior to a "formal charge, preliminary hearing, indictment, information, or arraignment," regardless of the manifestly unjust result in Hayes's case. The article concluded on a hopeful note, however, observing that the Ninth Circuit had ordered an en banc hearing. United States v. Hayes, 201 F.3d 1255 (9th Cir. 2000). Well, as Dandy Don Meredith used to say on Monday Night Football, "Turn out the lights, the party's over." On November 8, 2000, the en banc court issued an opinion affirming the panel's holding on the scope of Sixth Amendment protection. United States v. Hayes, 231 F.3d 663 (9th Cir. 2000).
Writing for a 7-4 majority, Judge Pamela Ann Rymer (who also authored the panel opinion) found in the Supreme Court's Sixth Amendment decisions a "clean and clear rule" rejecting any right to counsel prior to a formal charge, preliminary hearing, indictment, information, or arraignment. Id. at 675, citing United States v. Gouveia, 467 U.S. 180 (1984); United States v. Ash, 413 U.S. 300 (1973); Kirby v. Illinois, 406 U.S. 682 (1972). In spite of the troubling factual situation, the majority pronounced itself "loath to engraft some new, pre-indictment proceeding onto the rule, thereby making it no longer clean and clear -- and outside the clear boundaries the Supreme Court has established." Id.
Judge Rymer admitted that the majority remained "somewhat queasy" over the result, "because it looks like the government is trying to have its cake and eat it too -- on the one hand seeking the court's authority to take depositions that the Federal Rules of Criminal Procedure contemplate are available only after formal charges have been brought, but on the other hand, setting out to tape a target's incriminating statements which it can only do if formal charges have not been brought." Id. However, this queasiness was overcome by the majority's facile but unpersuasive conclusions that the deposition process was not the "functional equivalent of the initiation of formal charges," and that at the time the depositions were ordered, "the government remained an investigator rather than a prosecutor and Hayes was a target, not `the accused.'" Id. at 673.
In a dissenting opinion, Judge Stephen Reinhardt joined by three other members of the en banc court, persuasively demonstrated that the judicial authorization of videotaped depositions of potential prosecution witnesses "constituted the commencement of `adversary judicial proceedings' in any meaningful sense of those words," and that "Hayes's right to counsel had attached by the time the government dispatched its undercover agent to extract his recorded confessions . . . ." United States v. Hayes, 231 F.3d at 676.
Judge Reinhardt pointed out that while adversary proceedings typically commence by way of formal charge, preliminary hearings, indictment, information, or arraignment, this was not the typical case because "the government took the extraordinary step of initiating adversary judicial proceedings -- in the form of judicially authorized videotaped depositions preserved for use as substantive evidence at Hayes's trial -- prior to Hayes's formal indictment." Id.
He emphasized the trial-like procedures required by Rule 15 and noted the government 's concession that the Rule, with its repeated references to the "defendant" and the "case," "plainly contemplates a post-indictment occurrence at which the defendant's right to counsel has indisputably attached . . . ." Id. at 677 In Judge Reinhardt 's view, the fact that the depositions were taken prior to indictment, "at the government's request and for the government 's convenience," did not change the reality that adversary proceedings had begun. Id. at. Rejecting the majority's conclusion that at the time of the depositions, "the government remained an investigator rather than a prosecutor," the dissent explained that "unlike civil depositions, Rule 15 depositions are not taken for discovery or investigatory purposes but `for the unabashed purpose of preserving testimony for use against [a defendant] at trial'" (quoting Judge Silverman's dissent from the panel opinion), and that "nothing prevents the government from obtaining a conviction on the basis of Rule 15 depositions alone." Id.
Judge Reinhardt recognized that the "bright-line rule" which the majority gleaned from the Supreme Court's Sixth Amendment jurisprudence should not control the resolution of Hayes's case, because the Rule 15 deposition process is unlike any of the pre-indictment events that the Supreme Court had previously considered. Id. at 678. Moreover, he noted, the principal factors the Court has considered in deciding which pretrial events constitute the commencement of adversary judicial proceedings -- the need "to protect the accused during trial-type confrontations with the prosecutor," United States v. Gouveia, 467 U.S. at 190, and to ensure that he has "aid in coping with legal problems or assistance in meeting his adversary," United States v. Ash, 413 U.S. at 313 -- support the conclusion that Hayes's right to counsel attached at the time the depositions were ordered. Id.
In a forceful concluding paragraph, the dissent rejected the majority's "mechanical and formalistic approach" to the right to counsel, deeming it "simply inadequate to evaluate, let alone preserve, the constitutional values at stake." Id. at 680. While acknowledging that the majority's bright-line rule "will vindicate defendants' Sixth Amendment rights in ordinary cases," Judge Reinhardt returned to the point that Hayes's situation was not the ordinary case: "Here, because the government took the highly unusual step of setting in motion Hayes's trial before bothering to indict him, the majority's rule, with its inflexible barrier to the invocation of Sixth Amendment rights, falls short of what the Constitution demands." Id.
The Colombian Black Market Peso Exchange -
Are U.S. Businesses Innocent Dupes or Money Launderers?
Recently, there have been a number of instances where the government has traced drug money into the bank accounts of legitimate U.S. businesses involved in the sale of merchandise ranging from computers to helicopters. The government's allegation is that the money was wire transferred into the accounts by Colombian customers, in payment for goods sold to Colombia, through the Colombian Black Market Peso Exchange. The black-market peso exchange is a complex money trading system which has allegedly become increasingly important to Colombian drug trade.
An October 10, 2000 article in the New York Times, U.S. Companies Tangled in Web of Drug Dollars, by Lowell Bergman described how the system works and how the government's efforts to seize drug money has put it on a collision course with American corporations who claim they are victims with no way of knowing that they and their distributors are being paid with drug money.
One increasingly popular method of money-laundering occurs after a Colombian trafficker sells drugs in the United States. A black-market peso currency broker is then contacted. These brokers exist because of restrictions in Colombia involving the exchange of pesos and dollars. The broker negotiates to sell the trafficker Colombian pesos at an exchange-rate below market value. After the dollars are delivered to the broker, he deposits them in United States bank accounts.
The broker negotiates with business people in Colombia who want cheap dollars to buy American goods. That exchange rate is usually below market. The pesos are transferred to the traffickers' accounts, with the broker keeping the 10 to 20 percent difference in exchange rates. Finally, on the businessman's instructions, the dollars in the American banks are sent to U.S. companies to pay for American goods.
U.S. companies routinely accept the wire transfer and ship the goods, claiming they have no idea that the transaction was paid for with drug money, and believing the recipient to be a legitimate businessman. Federal officials claim that about $5 billion a year in Colombian drug money is used to buy American goods, and as much as 45 percent of Colombia's imported consumer goods are bought with laundered money.
With the intensifying federal crackdown on money laundering, agents have been tracing drug money into the accounts of large American corporations, such as Philip Morris and Bell Helicopter Textron and their distributors and dealers. Philip Morris products have a major presence in Colombia - Marlboro cigarettes are available at prices that the government claims indicate they were bought with "cheap dollars." Bell Helicopter is challenging the seizure of $300,000 from its accounts.
Prosecutors have stepped up efforts to seize money allegedly laundered in this way. In fact, some companies, such as General Electric, have instituted policies to assist their dealers in identifying laundered money. Since its policy has been in effect, the company claims sales of its appliances to Latin America have been cut by 23,000 units or over 20 percent.
Routinely, along with criminal forfeiture allegations being brought against the alleged individual money launderers, the government also seizes the funds from the American corporation's bank account, where the money eventually ends up. Once seized, the prosecution takes the position that it is up to the third-party claimant - the company that sold its goods and received a wire transfer in payment - to prove that it is an "innocent owner" of the funds.
However, pursuant to 21 U.S.C. 853(n) the account holder does not have any right to challenge the seizure until after criminal proceedings are concluded. At that time, if and only if the jury returns a verdict of forfeiture against the defendant, the account holders may file their claims at ancillary proceedings. When dealing with large amounts of money, any delay can obviously have a serious impact on a business that has had its bank accounts frozen.
Ira Loewy, of Bierman, Shohat, Loewy & Klein in Miami, was involved in just such a forfeiture case in Puerto Rico where the judge recently ordered the return of all seized assets based upon due process concerns. See United States v. Paris Lopez, 111 F. Supp. 2d 100 (D.P.R. 2000). The case began in December of 1998 with the filing of an indictment charging a number of individuals, including an alleged Colombian money launderer named Roberto Ferrario Pozzi, with various drug and money laundering offenses. The final count of the superseding indictment was a forfeiture count brought pursuant to 18 U.S.C. 982(a)(1) in which the prosecution sought to forfeit bank accounts into which Ferrario Pozzi wire transferred funds, presumably on the instructions from Colombian money launderers who were paid in pesos in Colombia for the dollars being transferred.
All accounts into which money had been wire transferred were seized, without regard to whether or not these accounts were being used by money launderers or were the property of legitimate businesses. When the indictment was filed, Judge Laffitte, at the prosecution's request and pursuant to 21 U.S.C. 853(e)(1)(A) entered a restraining order against the contents of the bank accounts named in the indictment, restraining the owners of the accounts from withdrawing funds equal to the amount of tainted money that the government claims it traced into the accounts.
Loewy's firm represented five companies whose accounts were frozen as a result of selling and shipping computer hardware, peripherals and/or software to legitimate customers in Latin America who received the goods. Two of the companies, Sumidata, Inc. and Micro Informatica, Inc. posted bonds to secure the release of their bank accounts. The amount of the bond posted by Sumidata, Inc. was $364,000 and was posted in the form of a cashier's check. The amount of the bond posted by Micro Informatica, Inc. was $365,000, which was posted in the form of an irrevocable letter of credit.
Fortuity International, Inc. also posted a bond in the form of a promissory note payable to the United States in the amount of $290,000, partially secured by an irrevocable letter of credit in favor of the United States in the amount of $60,000. The other two companies, Advance International Systems, Inc. d/b/a Compumax and DOS International, Inc. did not post bonds and their accounts remained subject to the restraining order.
Problematically, for Loewy's clients, the lead money-laundering defendant, Ferrario Pozzi, remains a fugitive in Colombia. Although it appears he was arrested in Colombia for extradition to the United States, those extradition proceedings stalled. His trial and the resulting forfeitures remained in limbo. The prosecution was in no position to say when, if ever, he would be extradited to the United States by the Colombian authorities.
Under these circumstances, it appeared that the trial of Ferrario Pozzi, initially set for October 15, 1999 and which must take place before the court can entertain ancillary proceedings pursuant to 21 U.S.C. 853(n) would be continued indefinitely. The unfortunate consequence is that as long as the lead money laundering defendant in the case remained a fugitive, the American companies had no means whereby to litigate their innocent owner claims.
In September of 1999, Loewy's five clients filed a motion requesting a hearing to determine whether their bank accounts should continue to be subject to the court's restraining order, pointing out that to allow the government to restrain property indefinitely without giving the lawful owners of that property any meaningful opportunity to be heard violates the Due Process Clause of the Fifth Amendment. The claimants argued that the delays were causing them to suffer severe hardships and unless the prosecution could provide concrete assurances that Ferrario Pozzi would go to trial within the foreseeable future, allowing them to litigate their claims at ancillary hearings, the court should either vacate or modify the Restraining Order initially entered in the case, or schedule a hearing at which they would be able to show that they were innocent owners of the funds and that the accounts should be released.
All of the five claimants were involved in the purchase of computer parts and electronic equipment in the United States and the sale of this merchandise in South America. The companies range in size from the family run Fortuity International, Inc., to Micro Informatica, which is a subsidiary of CHS, a large publically held corporation whose stock is traded on the New York Stock Exchange. Each of the companies sold goods to reputable clients in South America and received payment in the form of wire transfers made directly into the corporate bank accounts for the benefit of their customers.
The prosecution's theory in the case is that the claimants' South American customers purchased the wire transfers through the black market peso exchange and that the wire transfers in question were sent from the bank account set up in Puerto Rico by defendant Ferrario Pozzi as part of the money laundering conspiracy alleged in the superseding indictment.
The claimant's assert that regardless of whether or not the monies which were deposited into the Puerto Rican bank account were the product of unlawful activity by individuals who had no connection to the claimants, the funds were sent in payment for goods sold to legitimate businesses in South America and that the claimants are innocent owners of the funds which were sent to their accounts. Significantly, the superseding indictment did not allege, nor did the prosecution assert, that any of the claimants were involved in any of the alleged unlawful activities. To the contrary, it was undisputed that each claimant is a legitimate United States company involved in the sale and export of goods, specifically computer-related software or hardware, to companies and individuals in Latin America, including the country of Colombia, who import and sell these goods.
Each of the claimants suffered hardships as a result of the restraining orders tying up their funds indefinitely. The inability of the businesses to utilize their money to pay their receivables, secure lines of credit and order new goods caused severe cash flow problems for all the claimants, and severe hardships for some. At least one of the claimants, Fortuity International, Inc., ceased doing business as a result of its inability to fully pay all of its creditors.
Both Sumidata, Inc. and Compumax also suffered as a result of the restraints on their accounts. Indeed, Compumax did not even have sufficient cash or credit to secure the surety bond which the United States was requiring in exchange for the release of the account pursuant to their stipulation. Compumax was forced to let a number of its employees go, and eventually also effectively went out of business. In order to post its bond, Sumidata, Inc. had to borrow $364,000, with interest payments of $5,460 per month.
The prosecution's position was that the claimant's can only challenge the restraining order if it was clearly improper at the time of its original issuance. Moreover, the prosecution argued that due process was indeed afforded to claimants as they were granted the opportunity to put up security, such as a bond or a letter of credit, to insure the availability of the seized funds. The prosecutions' only settlement offer to the claimants was the release of 10 percent of the seized assets, upon agreement to forfeit the other 90 percent without recourse. Significantly, the prosecution failed to come forward with any evidence or proffer to rebut claimant's allegations that an inordinate delay had ensued.
After a May 2, 2000 hearing on claimants' requests for the return of the frozen assets, United States Magistrate Judge Jesús A. Castellanos entered a Report and Recommendation ("R&R") recommending that the court return 75% of the frozen assets to claimants. Dkt. No. 871. The May 16, 2000 R&R was based on the due process concerns presented by the fact that the prosecution was unable to say with any certainty when Ferrario Pozzi will be tried. See United States v. Paris Lopez, 111 F. Supp. 2d at 101. Therefore, the prosecution was also unable to say when claimants would have the opportunity for a hearing to adjudicate the forfeiture of their seized assets.
Subsequently, on August 15, 2000, Judge Laffitte granted Loewy's motion and ordered the return of all seized property, finding that the pre-trial seizure of funds with no foreseeable opportunity for adjudication violates the principle of due process of law under the Fifth Amendment. United States v. Paris Lopez, 111 F. Supp. 2d at 101. Judge Laffitte based his analysis on a four-part test that was relied on by the Supreme Court in United States v. Eight Thousand Eight Hundred & Fifty Dollars, 461 U.S. 555 (1983). In that case, the Supreme Court constructed a framework for determining whether the passage of time between seizure of property and final adjudication of the propriety of the seizure violates the Due Process Clause. Although the facts of the case involved a seizure followed by a separate civil action for forfeiture, Judge Laffitte determined that the analysis applied equally to a seizure and yet-to-be commenced criminal forfeiture proceeding. United States v. Paris Lopez, 111 F. Supp. 2d at 101.
The four-part test requires the court to consider: (1) the length of the delay between seizure and adjudication; (2) the reason for the delay; (3) whether the defendant, or here, claimant, has asserted his right; and (4) the prejudice to the defendant/claimant that the delay has caused. Id. at 102. This four-part test was adapted to the asset-seizure situation from the test used in determining whether the government's post-indictment delay in bringing a defendant to trial violates the defendant's Sixth Amendment right to a speedy trial. See Barker v. Wingo, 407 U.S. 514 (1972).
In applying the first factor, Judge Laffitte found that the length of the delay between the seizure and the adjudication of the claimants' rights to the seized property - standing at 20 months and threatening to grow indefinitely - is "undoubtedly a significant burden" on claimants. Id. citing United States v. $8,850, 461 U.S. at 565 (finding an 18-month delay to be a "significant burden"). According to the Supreme Court, the length of the delay is "the overarching factor" in the balancing test, even though "little can be said on when a delay becomes presumptively improper, for the determination necessarily depends on the facts of the particular case." United States v. $8,850, 461 U.S. at 565. Judge Laffitte found that the most salient aspect of the delay in Paris Lopez was not its 20-month length, but rather the fact that it had no ascertainable terminus. United States v. Paris Lopez, 111 F. Supp. 2d at 102. The open-ended nature of the delay causes this factor to weigh heavily in the due process balance. Id.
Judge Laffitte found that the second factor weighs against a finding of a due process violation because the time of Ferrario Pozzi's trial is out of the hands of the prosecution. Id. Rather, it is the Colombian authorities' ability to find, and willingness to extradite, Ferrario Pozzi that is the driving force behind the delay. Id. The third factor, however, also weighed in claimants' favor, since claimants' had filed numerous motions for return of some or all of the seized assets, thus Judge Laffitte found that the claimants had more than done their part to assert their rights. Id. at 103.
The fourth element in the analysis is whether claimants have "been prejudiced by the delay." In this inquiry, the court may consider the financial burden placed on claimants as a result of the seizure. United States v. Paris Lopez, 111 F. Supp. 2d at 103, citing United States v. Sharp, 655 F. Supp. 1348, 1352 (W.D. Mo. 1987) (holding that "prejudice . . . can be presumed where [claimants are] deprived of the use of [their] property by the government without justifiable cause for a period of twenty-three months"); Jones v. Takaki, 38 F.3d 321, 323 (7th Cir. 1994) (pointing out that the nature of the prejudice suffered by a claimant differs in every case).
In this case, claimants had been deprived of large sums of money for 20 months, and their deprivation will continue for the foreseeable future. Some claimants were even forced to stop doing business as a result of the seizure of their assets. Judge Laffitte found great prejudice to claimants as a result of the seizure in this case. Id.
The balance of factors demonstrated that the due process rights of claimants had been violated by the seizure of their assets. United States v. Paris Lopez, 111 F. Supp. 2d at 103. The court accepted the argument advanced by Loewy that although the length of the un-adjudicated seizure is not the fault of the prosecution, it is too great to remain within the bounds of due process. Id. The claimants suffered great prejudice and vigorously asserted their rights. Accordingly, Judge Laffitte ordered that claimants' seized property immediately be returned to them until such time as post-conviction ancillary proceedings are held. Id.
Judge Laffitte's decision is important for a number of reasons. While the civil forfeiture statutes were recently changed to include strict time limits for the government to send out notices of forfeiture and then institute civil forfeiture proceedings once a claim has been filed, there are no corresponding provisions in the criminal forfeiture statute. See 18 U.S.C. 983. Routinely, the government seizes assets and the owner of those assets has no recourse until after the criminal proceedings are concluded, a period that can last for months or even years. In many instances, the continued restraint of assets causes such a severe hardship that the case is settled on unfavorable terms in the belief that it is better to get back some assets immediately than to wait an indefinite period for the opportunity to hold a hearing to determine whether you should get back your own money. The Paris Lopez case reaffirms an important limit on the government's power, by saying, in essence, that the time must come when it has to "fish or cut bait."
This article has been reprinted with permission from The Champion, April 2001.