Second Circuit Opinion on Derivative Liability (8/20/11)

I write today on a fascinating recent decision from the Second Circuit in a nontax case. United States v. Ferguson, 653 F.3d 61 (2d Cir. 2011). The opinion is here.  The opening paragraph introduces the case as follows:

This criminal appeal arose from a "finite reinsurance" transaction between American International Group, Inc. ("AIG") and General Reinsurance Corporation ("Gen Re"). That transaction (the "Loss Portfolio Transfer," or "LPT") reallocated risk in a way that shored up AIG's flagging loss reserves, which were feared to be dragging down its stock price. Finite reinsurance transactions, which entail some (usually low) risk, are acceptable accounting measures in the insurance industry, and have their uses; but in this instance it is charged that the transaction entailed no risk at all, and was a fraud. The defendants, four executives of Gen Re and one of AIG, appeal from judgments entered in 2008 and 2009 by the United States District Court for the District of Connecticut (Droney, J.), convicting them of conspiracy, mail fraud, securities fraud, and false statements made to the Securities and Exchange Commission ("SEC"). They were sentenced principally to prison terms ranging from one to four years, and are free on bail pending this appeal.

I write principally because of the Court's discussion of the theories of vicarious liability. I have previously discussed those theories in various blogs can be viewed by clicking on the key words that I assign to this page. (I am also currently returning soon to my draft article on this subject which I hope to wrap up soon and will post to a blog at some time.)

To remind readers, in the language of this decision, "The jurors were presented with four theories of liability: principal, aiding and abetting, willfully causing, and Pinkerton." As I have developed before, these "theories of liability" are different concepts and are separate and distinct theories of liability at least some of which should be mutually inconsistent. In other words, if the defendant is liable as a principal, he or she is not liable as an aider and abettor or as a causer and is not liable under Pinkerton attribution of the crime of a co-conspirator. Stated conversely, only if the defendant is not liable as a principal, could he or she be liable under the other theories. And, at least in a simple model case, if the defendant is liable as a causer under 18 USC Section 2(b), he or she is not liable as an aider and abettor under 18 USC Section 2(a). (I have to acknowledge that this formulation of the rules will not be intuitive to many federal criminal trial lawyers or judges, although in my earlier blogs, I extolled the intuition and learning of Judge Pauley in the Daugerdas case who got this proposition "dead on balls accurate" (in the flowery description that great criminal trial lawyer, Vincent LaGuardia Gambini ("My Cousin Vinny))." Judge Pauley got it right by refusing to instruct on anything except principal liability because that was the gravamen of the Government's case; as he correctly observed on the other theories would not have been helpful to the jury and would be wrong. This key concept escaped the trial judge in Ferguson, just as it escaped the trial judges in Larson and Coplan but not Judge Pauley in Daugerdas.

The principal derivative liability issue presented in Ferguson was whether, in presenting the four theories of liability, the jury had to be unanimous. The Second Circuit took the traditional view of these liabilities as being overlapping rather than distinct and not overlapping as I posit above. The Second Circuit thus said:

In dicta, we have suggested that a jury is unanimous even if some jurors convicted on a theory of principal liability and others on aiding and abetting. United States v. Peterson, 768 F.2d 64, 67 (2d Cir. 1985); accord, e.g., United States v. Garcia, 400 F.3d 816, 820 (9th Cir. 2005) ("It does not matter whether some jurors found that [the defendant] performed these acts himself, and others that he intended to help someone else who did, because either way, [his] liability is the same. . . ."). Just as there is "no general requirement that the jury reach agreement on the preliminary factual issues which underlie the verdict," neither must it agree on "alternative mental states." Schad v. Arizona, 501 U.S. 624, 631-32 (1991) (internal quotation marks omitted) (holding that specific unanimity not required for theories of Arizona first-degree murder--premeditated and felony murder).

Nothing limits the Peterson analysis to principal versus aiding-and-abetting liability. The four theories are compatible -- they are zones on a continuum of awareness, all of which support criminal liability.16 This view is consistent with case law maintaining distinctions among mental states where different mental states form elements of different offenses. Compare, e.g., Schad, 501 U.S. at 630- 31 ("[P]etitioner's real challenge is to Arizona's characterization of first-degree murder as a single crime" that encompasses "premeditated murder and felony murder"), with, e.g., People v. Gonzalez, 1 N.Y.3d 464, 467 (2004) (affirming the reversal of depraved indifference murder conviction for defendant acquitted of intentional murder count, because "only reasonable view of the evidence here was that defendant intentionally killed the victim").

n16 The defendants argue that Peterson cannot be extended because the four theories of liability have "clearly different elements that the jury must find." Garand Br. at 56 n.14. But even Pinkerton liability -- which requires the jury to find certain facts such as participation in the conspiracy -- is premised on a mental state. See Pinkerton, 328 U.S. at 647 ("The criminal intent to do the act is established by the formation of the conspiracy."); United States v. Thirion, 813 F.2d 146, 153 (8th Cir. 1987) ("In the Pinkerton analysis . . . . [t]he mens rea necessary to transform the act into a criminal offense is evidenced by the defendant's participation in the conspiracy."). All four theories are thus various mental states in which the same crime may be committed; they may differ in "brute facts" underlying the mental state element, but none requires proof of other "factual elements" of the crime (which must be found unanimously by the jury). Richardson v. United States, 526 U.S. 813, 817 (1999); cf. United States v. Sanchez, 917 F.2d 607, 612 (1st Cir. 1990) ("As with the 'aiding and abetting' theory, vicarious co-conspirator liability under Pinkerton is not in the nature of a separate offense.").

Even assuming that the jury had to agree on the theory of liability, the general unanimity instruction -- "it is necessary that each juror agrees to [the verdict]," Trial Tr. at 4788 -- was sufficient to remove any genuine danger that the jury would convict on disparate theories. The accounting and insurance concepts in the case may have been complicated, but they did not add significant complexity to the theories of liability. At the same time, the assurance of a just result would have been reinforced if the instruction were given.

Under my formulation where the theories are mutually distinct and inconsistent, then unanimity of theory of conviction would be required. Let's posit that six jurors found a defendant guilty as a principal but the other six could not find the defendant guilty as a principal but could find the defendant guilty as an aider and abettor. I would posit that unanimity would not be required if indeed those theories are mutually consistent and overlapping, but that unanimity would be required if they are indeed mutually inconsistent theories (as Judge Pauley determined in Daugerdas).

Now, perhaps it could be argued that the error could be harmless. Consider a situation where the law would permit the defendant to be directly guilty as a principal if the defendant caused the crime to be committed by another person (even an unwitting other person). Tax evasion is such a crime,so I assume the crime of tax evasion here and the defendant is not the taxpayer but an enabler of the crime (e.g., a tax shelter promoter). Then, assume that six members of the jury found the defendant guilty as a principal and six members of the jury found the defendant guilty as a causer under 18 USC Section 2(b). As I have posited above, the defendant in this situation could not be guilty under causer liability because all the acts that would make the defendant liable as a causer would make the defendant liable as a principal. Thus, in this example, perhaps it could be argued that the finding of causer liability is the equivalent of finding of principal liability even though those six members of the jury refused to find principal liability. Even this is tenuous, in my view, because those jury members' refusal to find principal liability evidences a fundamental misunderstanding -- certainly the jury did not think its finding of guilt for causer liability was equivalent to a finding of principal liability.  In other words, there is an inherent inconsistency in those jurors' finding of no liability as a principal but liability as a causer.  We can have no confidence in the jury verdict and it should be reversed.

The Ferguson court also noted that even the causer liability instruction given by the trial court was erroneous because, amazingly, the instruction omitted any requirement of causation. Amazing! But, the Second Circuit let the judge off lightly by say that "It appears the judge was led into error." (The devil made him do it, or some variation of it.)