Wednesday, March 17, 2010

More on the Honest Services Supreme Court Cases and Tax Obstruction

I have previously blogged here the possibility that the pending cases before the Supreme Court on honest services fraud might portend some constriction of the scope of the Tax Obstruction Crimes. I found this discussion of the issue in the sentencing hearing transcript (pp. 49-59) in United States v. Coplan (SD NY No. (S1) 07 Cr. 453 (SHS) (the full transcript is here); the Judge is Sidney Stein and the attorney is Dennis Riordan of Riordan & Horgan who apparently will work on the appeal but handled the honest services issue connection to the conviction):
MR. RIORDAN: And Nat Lewin, who is going to be appellate counsel for Nissenbaum, are present in court today and we have been in intensive discussions for several months about this juncture that we are reaching here where we would present these questions to the court. I don't know -- and as a result of that we sort of have divided responsibility. So there are issues that I am prepared to address, but we will be cross-referencing each other's presentations and I don't know whether the court would prefer that at the end of the sentencings for Mr. Nissenbaum and Mr. Shapiro the three of us jointly address this question or whether you would like me to present some argument on the issues that I was prepared to address.

THE COURT: Well, I guess the answer to that question is, tell me what substantial question of law or fact is going to be raised on appeal that is likely to result in reversal or an order for a new trial. That's what I want to know. Tell me what your argument is.

MR. RIORDAN: Yes, your Honor. I will do that. There is going to be a major issue in this case, and I don't have the burden of asking the court to find any error on its own part because this issue did not exist at the beginning of this trial and did not really germinate fully until well after the convictions were returned, and that is that when this case is argued in the Supreme Court -- in the Second Circuit, the Second Circuit --

THE COURT: That is the next step, sir. The first step is the Second Circuit.

MR. RIORDAN: The Second Circuit.

The Second Circuit is going to be confronted, appears very likely that it is going to be confronting a completely different landscape in the notion of fraud under federal law, and that is because the United States Supreme Court on December 8 heard argument and strongly indicated, six or seven members, that they were about to declare Section 1346, the honest services fraud statute, unconstitutional as void for vagueness because it does not provide clear notice of what conduct it deals with.

What does that have to do with our case? And it is this, your Honor:

As this court has stated, the foundation of this prosecution is a Klein conspiracy under 371 which is a conspiracy not in common law terms to deprive of money or property, but, rather, a conspiracy as the court has stated to mislead the IRS, which is a non-profit theory.

Essentially, 371 and the mail and wire fraud statute for 50 years tracked a common path in the sense that 371 was extended beyond common law fraud to deal with offenses like bribery or corruption in the federal government, intangible rights theory, sort of honest services case. The mail and wire fraud statutes were extended to do the same thing on the state level by extending beyond the common law to reach bribery and kickback cases on the state level on the honest services theory.

In 1987 the Supreme Court in McNally said that all of the lower courts had been wrong to stretch mail and wire fraud beyond common law fraud because that was all that you could say that the Congress clearly intended to deal with.

There have been appellate opinions since then that have said logically under McNally if fraud under what mail and wire fraud could not reach beyond common law fraud, then the same thing logically would be true of 371 and the Klein conspiracy. The Supreme Court has never addressed the Klein conspiracy.

There is a footnote, Footnote 8 in McNally which is what the Klein conspiracies have survived on. That footnote says that mail and wire fraud were directed at individual property rights. 371 is directed in protecting the government so our previous statements that you can go beyond common law fraud under 371 holds even though we are striking anything beyond common law fraud under the mail and wire fraud statute.

Congress, as a result of that, then attempted to overrule McNally by passing 1346 and saying mail and wire fraud will now reach beyond common law fraud and they expressly said the reason we are doing it is to protect governmental interests. We want to get the bribery, we want to get corruption. In other words, 1346 became a parallel to 371. It was directed at protecting governmental interest.

What the Supreme Court did on December 8 in an extraordinary oral argument, they have taken several honest services cases saying we know we told Congress in McNally if they wanted to reach beyond common law fraud they had to make it that clear. They passed 1346 and the law is a mess, because no one can figure out what honest services is. All the cases are all across the board and six or seven justices said we probably can't save the statute, we have to declare it unconstitutional --

THE COURT: I read the reports on the questioning, but nobody knows what the Supreme Court is going to do and I'm still not quite sure the link you are drawing beyond the honest services statute and the Klein conspiracy.

MR. RIORDAN: If the Supreme Court says that even with 1346 and an enactment which attempts to reach the honest services fraud you still can't get beyond the fact that the only thing that is clear from the fraud statutes is common law fraud, then you turn to the question of why doesn't that apply to 371. 371 doesn't even have the gloss of an honest services fraud, it simply says a conspiracy to defraud.

Your Honor, I submit that we haven't seen the opinion yet. The court also has the Spelling case before it. But no one can doubt -- it is certainly true there is a substantial or debatable question about whether 1346 is constitutional, and that is going to permit the same sort of attack on a Klein conspiracy.

In this case, your Honor, Mr. Camp in closing, at several junctures, pointed to specific activity of the defendants which was in itself not in any way illegal.

For instance, he said these defendants told clients to keep trading in their accounts and he said that, in itself, is enough to convict of a conspiracy to defraud. They let the statements out of the economic model papers and he argued to the jury that is enough to convict of a conspiracy to defraud.

Whether after the pronouncements we are going to get in the 1346 case is that the fraud statute simply don't provide notice of what honest services reaches, we are going to have a substantial question about, A, whether 371 can reach common law fraud at all, but B, even if it can, whether it could reach to the extent that was posited in this case.

So I think that we are going to have -- that the entirety of Klein conspiracies are going to be re-examined in the wake of those opinions, your Honor.

And let me point out something about the verdicts in this case.

As the government can fairly say, well, wait a minute, the Klein conspiracy was only one prong of Count 1, there were two other prongs. That's true. But there were no special verdicts in this case, the government opposed them, I don't think anyone asked for them. But as a result of that, there is no way to say or to indicate that the jury did not return a conviction solely on the grounds of the Klein conspiracy which was defined by the court not to necessarily involve standard instructions under Klein conduct that was unlawful.

So Count 1 may rest on conduct which is not in itself unlawful and you can't read those arguments in the 1346 case without again and again coming to the justices saying how do we get from the term defraud to the kind of -- the breadth of activity that has been drawn within the 1346 statute. The same is true here. The circuits have split on what a Klein conspiracy is, they can't decide --

THE COURT: Sir, what do you do with Count 5, obstruction of the functions of the IRS?

MR. RIORDAN: Thank you.

THE COURT: We got him sending -- we got him lying to the IRS -- when I say "we" the evidence showed that he lied to the IRS specifically under oath. There were no written materials, he wasn't aware of any written materials, out-and-out lie.

Ernst & Young had nothing really to do with the operation of that partnership, out-and-out lie.

At least the jury, there was adequate evidence on which a jury could find that.

The early termination was not planned. Plenty of evidence that he was, he was off the reservation there, or maybe on the reservation from the standpoint of Ernst & Young, but he was lying under oath. That has nothing to do with your Klein conspiracy or honest services, that was Count 5, obstruction of the function of the IRS flat and simple.

What do you do with that?

MR. RIORDAN: Your Honor, we are now addressing the 1001 count.

THE COURT: What I am addressing is the likelihood of, substantial question of law or fact to result in a reversal, an for a new trial, a sentence that does not include a term of imprisonment or a reduced sentence of imprisonment.

MR. RIORDAN: Your Honor, the courts referred to Count 5, but I think that the references were to the false statement count, which is Count 7.

THE COURT: I'm sorry, I'm sorry. Go ahead.

Actually, it is both. It is 5 and it is 7.


THE COURT: It is the June 20, 2002 deposition to the IRS and the obstruction of the functions of IRS's -- for example, his e-mail, delete and purge co-broker material.

MR. RIORDAN: Can I address them separately?

THE COURT: Surely.

But my point is, even if you are right, and it is a somewhat attenuated argument because you need a decision from the Supreme Court before it comes down. I'm not prepared to see state what the Supreme Court is going to do without the basis of questions any more than the people in the courtroom should assume that what I am going to based on my questing. And then you have the leap of the honest services over the Klein conspiracy.

I'm saying even if you are right on all that, there is still some bedrock convictions here that don't depend on your argument.

MR. RIORDAN: Your Honor, I will turn to Count 7.

THE COURT: All right.

MR. RIORDAN: The key issue there is, the court has pointed to the statements and said these are false. But the court will remember that the principal, perhaps the principal prong of the defense on that case was on the issue of materiality, and there was an extensive Rule 29 motions saying that putting aside the question of truth or falsity those statements weren't material within the context of the deposition that was being taken.

THE COURT: I didn't give that much credence. I listened to it but it didn't go very far. MR. RIORDAN: Right. But, but the -- your Honor, I'm not going to rely on an insufficiency claim under Rule 29. The big legal issue that came up around that count was that the government wanted to only put in essentially the selected statements that they were arguing were false and the defense wanted to place into evidence the entire deposition. And two things are true:

One, that the government in its briefing relied -- said the rest of it can't come in because the rule of completeness does not let in and cannot let in otherwise inadmissible hearsay, and it cited United States Football League versus National Football League.

During the course of this trial, the Second Circuit issued an opinion in United States versus Koop, which is 563 Fed. 3d 141, in which they essentially changed positions from the authority United States Football League and offered -- accepted the position of most other circuits that 106 does apply as to the admission of other information even if it would otherwise be inadmissible hearsay.

But the other legal argument there, your Honor, is that the rule of completeness generally, the court did allow certain other statements under the theory of the rule of completeness that they related to the same things as the statements that the government wanted to admit.

But the whole point of the materiality argument was that the rest of the deposition didn't have anything to do with those statements. In other words, the rest of the deposition wouldn't come in under the rule of completeness, it would come in because the very fact that the rest of the deposition had nothing to do with the charged statement was a powerful proof and necessary proof of why the statements were not within, material within the context of the entire deposition.

(Continued on the next page)

MR. RIORDAN: I think it is a fairly debatable admissibility question on appeal, your Honor, on Count Seven.

Now, Count Five, which was the other question that the Court has raised.

Count Five dealt with the e-mail, the purged e-mail.


MR. RIORDAN: In instructing on that, the Court said that Mr. Coplan is charged with sending an e-mail knowing that -- with the intent to obstruct a particular audit, with the knowledge that that audit was going on. It described the charge as in the Indictment.

When it came to actually stating the elements of the offense, it stated that the two elements are that the defendant acted corruptly. To act corruptly means to act with the intent to secure an unfair advantage or benefit either for oneself or one another. Acting corruptly requires consciousness of wrongdoing.

And it said the second element is the government must prove that the defendant acted with the intent to impede or obstruct the enforcement of the federal tax laws. This simply means any effort to obstruct the administration of the Tax Code. And the Court also said that the statute is interpreted quite broadly.

Your Honor, I do think that, under those as stated elements, that if the jury found the crime of conspiracy to exist, it would have to and would naturally convict on Count Five without even addressing the question of whether the defendant knew a particular audit was going on at a particular time or had the intent to obstruct that particular audit.

So I do think that Count Five, that if it is a fairly debatable question, whether the crime of conspiracy as argued to the jury in this case will survive future decisions on fraud under the 1346. I think that it will be equally debatable that Count Five, the validity of Count Five, will rise and fall with the validity of the crime theory because the jury in this case could have convicted under these instructions by simply finding the existence of the crime of conspiracy.

THE COURT: All right. Thank you.

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