Stop the Indictment; My Client Wants Off (1/31/13)

I was inspired initially to write this blog by a recent article in Champion.  Jon May, Stopping the Train Before It Leaves the Station: Convincing Prosecutors Not to Charge Your Client, 36 Champion 34 (2012), here (posted with permission).  I include pertinent quotes from the article in my discussion which deals with the topic in a tax crimes context.  Mr. May cites an article  by a prominent tax crimes defense attorney dealing with the same subject in a tax setting.  The article is Nathan J. Hochman, formerly AAG of DOJ Tax.  The title of the article is: Everything You Wanted to Know About How to Obtain a Prosecutorial Declination of a Federal Tax Case but Were Afraid to Ask, J. Tax Prac. & Proc. 31 (Dec 2009 - Jan 2010), here.  I will weave themes from  both of these articles into this blog entry.  I am sure that my select summary here probably does not do justice to these articles, so I do strongly recommend those articles for those having the interest or need.

Readers who are tax professionals will know that there are several opportunities to stop a federal tax indictment.  These are (following the general progression of from the IRS through indictment):  (1) if in a civil audit (often referred to as an eggshell audit), to avoid having the civil agent refer the case to CI; (2) if in a CI investigation, to convince the principal CI Special Agent not to recommend to his superiors that the case be referred to DOJ Tax CES; (3) then, in a meeting with CI Special Agent in Charge or his delegate and the CI Counsel, to convince them not to refer the case to DOJ Tax CES, (4) then at DOJ Tax CES, to convince the reviewing attorney not to authorize the indictment; and (5) then with the AUSA or DOJ Tax attorney who will actually present the case to the grand jury to convince him or her that the indictment should not be sought or pursued.  Others are involved in the process as well (DOJ Tax CES decision makers and the AUSA's boss in the local district), so all presentations should be made with them in mind.  But the foregoing principal steps are the ones where there is an opportunity to stop the indictment.

Mr. May's article starts with the truism that, if you wait until the indictment, you have probably already lost. Here is Mr. May's introduction to that truism (footnote omitted and emphasis supplied):

Most [criminal] cases in federal court are not defendable. This is the reason 97 percent of cases in federal court end up as pleas. Of the 3 percent that go to trial, probably 50 percent are not defendable either, but the client is a level 42 and has nothing to lose. Now we are down to 50 percent of the 3 percent. Those are the cases that can be won. So why would defense attorneys want to disclose their defense to the government and lose the opportunity for surprise?

That  97% plea rate is for federal crimes generally.  DOJ Tax has touted a tax crimes conviction rate -- convictions include pleas and trial verdicts -- of 97%.  So, since some tax criminal cases go to trial, necessarily the plea rate is less than 97%.  I have voiced some concerns about DOJ Tax's claimed conviction rate in the past, but my concerns are not relevant to this blog.  Whatever the actual conviction rate is in criminal tax cases, it is very high (I suspect over time it is closer to the 90-95% range).  So Mr. May's general point of a high conviction rate is true for federal tax crimes as well as federal crimes generally.

I share one hypothetical situation to illustrate the point.  Say you are a criminal tax defense attorney (or virtually the same thing, a white collar defense attorney) and a client comes to you for possible representation immediately after he or she has been indicted for a tax crime.  (Most such clients will have been represented earlier in the process, but assume that the client wants a more experienced litigator for the case.)  The client invariably asks the invariable question -- "based on your experience, what are my chances of conviction?"  At that point you know very little about the case, so the response is that, statistically, the probability is that the client is going down.  That is not a comforting response, but just on the bare statistics (whatever they really are), it is the truth.

Recognizing this truism, Mr. Hochman begins his article as follows:

Every year, the IRS and the U.S. Department of Justice publicly report on hundreds of taxpayers nationwide that have been prosecuted, convicted and sentenced. Buried in these statistics, however, are the relatively few cases that have worked their way through the system but have gotten declined by a prosecutor prior to criminal tax charges being filed. By the time such a case reaches a prosecutor, whether in the U.S. Department of Justice’s Tax Division and/or in a U.S. Attorney’s Office, that case has already survived multiple layers of scrutiny at the IRS, had hundreds of hours of investigative time committed to it and most probably features a five-, six- or seven-figure tax loss. How can a defense attorney stop the tremendous momentum behind such a case before his client sees his name after “United States of America vs.”? To accomplish this most difficult and daunting task, a defense attorney must not dwell on how the government chose to investigate his  client in the first place. Instead, the defense counsel must make himself fluent in the mechanics of the decision-making process, in the motivations of the key players, and in the relevant facts and applicable law of the case if he has any hope to succeed.

The System Imperatives - General

Indictment can upset the client's day, week, month or year or, ultimately, life.  Hence, a goal for the criminal defense attorney is not to just passively watch the pre-indictment process go by and treat it as just a learning experience for the eventual trial that may not ever come, but to be proactively involved in disincentivizing the players in the process from stepping toward indictment.

The considerations in the pre-indictment process are when and how to take steps to disincentivize prosecution.  Obviously, the defense attorney should be tracking the IRC CI investigation and the progress in the system toward indictment and should be looking for opportunities to sow the right seeds.  I will step through the process in very summary fashion, except to offer some of the cogent points and excerpts from the two articles.

Mr. Hochman's article introduces the imperatives in the criminal tax system that result in only a few -- the select few, one might say -- get prosecuted given the population of all persons who have done things that might fall within the elements of a federal tax crime.  Mr. Hochman offers the following:  "Out of the four million potential cases, approximately 4,000 IRS criminal investigations are initiated every year, with approximately 2,800 of those resulting in prosecution recommendations to the Department of Justice" .This select few illustrate the systemic priorities that require the limited prosecutions be best used to support compliance in the overall tax system; the Government has to prosecute in a way that sends a message to all taxpayers that they should avoid the behavior for which the select few are being sent to jail.  Mr. Hochman says:

Leveraging each case so that not only the defendant, his family and his friends are specifically deterred, but also the overall taxpaying community “gets the message” is among the prime missions of every tax prosecution.
This directive reverberates in the Tax Division’s Criminal Tax Manual, the U.S. Attorney’s Manual, the IRS Manual, and the U.S. Sentencing Guidelines. For instance, the Introductory Commentary to Part T—Offenses Involving Taxation of the Sentencing Guidelines states in pertinent part: “Because of the limited number of criminal tax prosecutions relative to the estimated incidence of such violations, deterring others from violating the tax laws is a primary consideration underlying theses guidelines.”

Given the few prosecution bullets it can fire, DOJ Tax CES has to "fire for maximum effect," as we used to say in the Army. DOJ Tax CES wants a maximum conviction rate -- well above 90%.  DOJ Tax CES authorizes prosecution in only the strongest cases designed to achieve that conviction rate.  So, at least systemically, the cases DOJ Tax CES approves must in the aggregate have a probability of conviction above 90%, otherwise systemically, DOJ Tax CES will not achieve the conviction rates that it needs.

Let's say the DOJ Tax CES approves prosecution of 2,500 per year and ultimately achieves convictions in 95% of the prosecutions, for convictions of 2,475 per year.  That sends one message -- the pungent one is that, if you are indicted, you go down (on a probability basis).  But, imagine that the DOJ Tax CES approves prosecution of 5,000 (adding significantly to limited systemic resources), and achieved a conviction rate of 95% (not likely because the marginal 2,500 cases are probably in the aggregate not as strong as the real 2,500 it now prosecutes), then it would achieve 4,500 convictions, doubling the number of tax cheats that face jail time.  But the deterrent message would not be significantly improved, so the allocation of the additional systemic resources is not cost justified.  And, if indeed its conviction rate with the larger number of prosecutions dropped to, say 85% because the marginal 2,500 prosecutions are not as strong, then there will be 4,250 convictions -- a major increase in convictions over only prosecuting 2,500 with 95% convictions, but the conviction rate has decreased by 10% and the deterrent message has been watered down.  And, if the conviction rate went even further down, it could further water down the message.

So, at least in theory, with  these  systemic imperatives of the need for well above a 90% probability of conviction in the cases DOJ Tax CES approves, then one possible attack is to convince someone along the way that the case at hand has a probability of conviction well below 90%.  Of course, probability assessments are difficult, but as an analytical framework, this analysis might offer some potential lines to disincentivize the ultimate prosecution.  (I should note  that the probability assessment necessarily implicates the substantial beyond a reasonable doubt burden of proof that the prosecutor is required to meet in a criminal case; I offer here some materials from the current draft of my Federal Tax Crimes Book on that burden of proof.)

And, another factor in the probability assessment is the high standard of mens rea the prosecutor must meet in tax cases -- willfulness, defined as intentional violation of a known legal duty.  Subjective ignorance of the law -- whether reasonable or not -- is a defense.  Mr. Hochman notes:

To demonstrate “litigation risk,” a defense counsel must appreciate the fairly unique and very difficult burdens a prosecutor faces in bringing criminal tax charges. Unlike in a civil case where the burden of proof is preponderance of the evidence or clear and convincing evidence, the burden of proof in a criminal tax case is the highest in our courts—beyond a reasonable doubt. The fact finder in almost all cases is not a judge, but a jury. In contrast to a civil jury which may be composed of six members, a criminal jury is composed of 12 members and their verdict must be unanimous. With respect to the mens rea or mental state required for a criminal tax charge, the prosecutor faces the highest standard in the law— willfulness—the intentional violation of a known  legal duty. In addition, the prosecutor must prove a negative, namely, that the taxpayer did not have a subjective good faith belief in the legitimacy of her tax position (“the Cheek defense”9), in order to obtain a conviction.

On a related point, Mr. Hochman notes that a  criminal tax prosecution potentially has to get into the weeds of the very complex tax laws.  Complexity -- meaning high  risk of jury acquittal if the jury has to deal with legal complexity -- can and should be exploited by the criminal defense attorney to disincentivize prosecution.  Ultimately, the prosecutor will not want to prosecute a legally complex case.

I have two anecdotes to share, one in the public domain and one personal.  First, In the notorious Enron prosecution, there was the potential for complex accounting issues to obscure the jury's view, but the prosecutor distilled the case into a simple theme:  "This is a simple case. It is not about accounting. It is about lies and choices." John C. Hueston, Behind the Scenes of the Enron Trial: Creating Decisive Moments, 44 Am. Crim. L. Rev. 197, 207 (2007). That phenomenon is true in criminal tax cases; if the jury has to get into the weeds of the tax law, the prosecutor's risk of acquittal increases material.  Complexity is a defendant's friend in a regime requiring that the prosecutor prove beyond a reasonable doubt that the defendant intended to violate a known legal duty.  Second, in another case in which I represented a witness, also a subject, in a complex financial accounting case of the Enron genre that morphed out of a complex tax shelter arrangement, the prosecutor told me that "Jack, you and I know that tax shelter was fraudulent, but I could never get a jury to understand it."  Complexity saved the day for potential targets in terms of criminal  tax prosecution, but there were still lies and choices surrounding the financial accounting claims, so convictions were achieved  (not including my client).

To play this theme of deterrence further, Mr. Hochman notes that the goal is not just conviction, but "Prosecutors view deterrence as a synonym for imprisonment."  Thus, focusing on deterrence, let's say that the 95% conviction rate can be achieved, and the judges sentenced 90% of the convicted persons are incarcerated for some period of time.  That is consistent with the strong deterrence message  DOJ Tax CES wants to make.  But, if the judges were to sentence only 50% of the convicted persons to incarceration, the message again would be watered down.  This offers an opportunity to argue against indictment even in those cases where the probability of conviction exceeds 90%.  Does the Government really want to fire one of its limited prosecution bullets where, based on the sentencing factors, the defendant is unlikely to get any incarceration?

As Mr. Hochman notes:\

[K]nowing that deterrence and incarceration lay at the heart of a prosecutor’s decision- making matrix provides a defense attorney with key ammunition in framing a declination argument.

The CI Stage

For example, if the agent appears to be developing a net worth method of proof (and the defense attorney should know that), the defense attorney needs to consider how and when he might suggest leads for possible untaxed income to the CI Special Agent or, as a matter of strategy, he might want to hold off until later in the process for maximum effect.  The defense attorney will just have to be sensitive to the process in making that judgment call.

The same is true for all potential defenses.  Of course, depending upon the possibilities or probabilities of stopping the indictment, the best strategy may be just to take the indictment and spring the defense at trial when the prosecutors' ability to rebut it may be limited.

DOJ Tax CES Stage

DOJ Tax CES is the Department of Justice Tax Division's Criminal Enforcement Section.  It is responsible for managing (from approval forward) all criminal tax prosecutions.  Hence, in the normal course of considering whether to prosecute, a CES attorney will be assigned to review the case and the recommendations (usually CI's in tax cases).  Upon request (and sometimes upon invitation), the CES attorney will meet with defense counsel for defense counsel to make any pitch he or she desires.  The pitch, of course, is to disincentivize the decision to indict.

The pitches that can be made there obviously include the innocence of the client.  In most cases, certainty as to the innocence of the client cannot be shown (otherwise it probably would have carried the day at CI).  So, the next pitch is, setting aside the certainty of the client's innocence, the Government cannot prove guilt beyond a reasonable doubt.  If the facts permit, you can play the factors to cast doubt on the probability of conviction that I discussed earlier in the blog.

Of course, as Mr. Hochman notes, a key strategic decision - a very difficult one -- is whether to lay out potential defenses that might mitigate the probability of conviction if sprung for the first time at trial.  The risk is that, if presented at the pre-indictment stage, the prosecutor can do the work necessary to mitigate the effect that the defenses might have one the conviction probability assessment.  Certainly, if the defense lawyer believes that the likelihood of disincentivizing the prosecution is low, he or she may not want to play that card until trial, when the prosecutor's may not be able to anticipate it or deal effectively with it.

Mr. Hochman then posits a Plan B approach.

If a complete declination is not in the cards, then a defense counsel must consider whether to go for “Plan B.” Plan B in this case constitutes a full disclosure of the defense with lesser objectives in mind, i.e., getting a different type of charge (i.e., a misdemeanor instead of a felony), a lower tax loss, a fewer number of counts, a declination against proceeding against others potentially involved in the case (e.g., relatives) and/or the most favorable sentencing recommendation possible. If the client cannot suffer any conviction at all, understands the harsh sentencing consequences if found guilty after trial and will not authorize Plan B, then the best course of action may be no action at all.

Local Level -- the Pitch to the Prosecutor and Proffers

Usually, tax crimes are prosecuted by a local AUSA and, if an investigating grand jury is used, will be locally investigated.  Sometimes, they are investigated or prosecuted by a DOJ Tax CES attorney. In either event the prosecuting attorney presents the case to the grand jury, obtains the indictment upon request (usually) and then prosecutes the indictment.  There will be an opportunity to convince that prosecutor that the case is not prosecution-worthy.  I have had cases that the local AUSA killed after a DOJ Tax CES approval of the prosecution.  (Technically, DOJ Tax CES could have sent someone out to try the case, but the local AUSA's assessments of how the case might play before local judges and juries will be important in making the decision whether to continue.)

Both articles discuss key strategic decisions.  Perhaps the key one is whether the defendant will make a formal proffer (actually, this opportunity might be presented at the DOJ Tax CES stage, and I have used it at that stage once, fortunately, very successfully).  Making a defendant proffer in any criminal case, particularly a white collar case, is very dangerous; if there is a general rule, it is not to do proffer.  Still, there are rare cases that a proffer is appropriate.  Calling on the experiences of well-known white collar defense attorneys, the May article offers some good insight into the considerations and strategies in considering whether to proffer and how to proffer.  Here are some useful excerpts:

4. Managing the Risks 

There is no question that making a proffer can, in the words of Jose Quinon, be "very treacherous." Both [Benedict] Kuehne and [Roy] Black warn that there is a danger in making a presentation directed solely at the weaknesses in the government's case. Black has represented individuals whose previous lawyer had informed the prosecutor of the problems with the government's theory, only to find the prosecutor retooling the government's case and making it much harder to defend. 

Edward Shohat cautions against the defense attorney tipping her hand completely. In addition, he prefaces any written proffer with a disclaimer pursuant to Rule 11 and Federal Rule of Evidence 410. [Evan] Jenness agrees. In some cases there may be no benefit to the defense attorney tipping her hand regarding potential defenses. For example, no benefit exists if the information would simply enable the government to avoid weak charges and focus its attention on more fruitful ground. If a client has solid defenses to some of the matters under investigation, but has greater exposure on others, disclosing the client's defenses may enable the government to focus its investigation where the client has the greatest exposure and therefore could damage the client's position. If the government is going to prosecute no matter what, Jenness does not want the government to strengthen its case on charges that may be indefensible. 

But every case has to be evaluated on its individual merits. When the allegations are narrow and the defense is clear-cut, waiting to spring the defense on the government at trial may not be in the client's interests. Jenness once represented a company that had been in a civil dispute with another company that alleged her client had misappropriated property leased to the client. There was no question that the client had sequestered the property in a remote location. The opposing company's principal got the ear of federal law enforcement, and a federal prosecutor targeted her client for misappropriating the property. What the government did not know was that Jenness' client had acted upon the advice of civil counsel, who had advised that the property be moved off site until the civil dispute was resolved. While Jenness did not immediately disclose the information, she did so when the government was not persuaded by a White Paper detailing other reasons why the investigation was unfounded. After considering the implications of waiving the attorney-client privilege that are attendant to a "reliance on the advice of counsel defense," Jenness disclosed counsel's email to an officer of her client advising the sequestration. The government appropriately terminated the investigation soon afterwards. 

[Edward] Shohat has faced similar situations in which he chose to lay out all his cards. As an example, Shohat recalls a recent matter in which a federal prosecutor accused his client and a business partner of being involved in an attempt to smuggle 1300 kilos of cocaine into the United States from Mexico by aircraft and of having "faked" the sale of the plane shortly before the attempt in an effort to cover their tracks. The plane crashed in Mexico on its way to the United States. In an effort to obtain a quick guilty plea, the prosecutor threatened imminent indictment because the five-year statute of limitations was about to run. Shohat and co-counsel convinced the AUSA to accept a 60-day, limited waiver of the statute in order to afford them an opportunity to investigate and rebut the allegations. The lawyers successfully conducted the investigation the government never bothered to conduct, demonstrating the fully arm's length sale of the aircraft and otherwise non-existent relationship between the clients and the new owner/smugglers. Although, as is its custom, the government listened politely but never actually acknowledged the force of the defense evidence, a request by the AUSA for an additional statute of limitations waiver was turned down and the statute ran out without charges being brought. This was one of those rare cases in which playing all of the defense cards pre-indictment paid off. Shohat believes that experience allows defense lawyers to develop a sense for such cases. 

When Carol Bruce has agreed to allow her client to be interviewed, she attempts to minimize the risks involved by stating at the beginning of any such interview that her client is not waiving his right to assert his Fifth Amendment privilege during the interview. Thus, if in the course of the interview she sees that the government is inquiring into an area that could be troublesome for her client, she will ask to take a break and discuss the issue privately with the client. If she decides to advise the client not to speak on the issue or to allow her to rule it off limits, she will then tell the government that she and her client will need to discuss this at greater length and her client will then turn to other matters. Often these issues involve collateral matters that, while incriminating, are not the focus of the government's investigation. Often the government is willing to ignore these issues in order to get the benefit of the client's information on more pertinent topics. 

Bruce also tries the minimize the risks by being careful to avoid or not to disclose anything that, on balance, could be more harmful than helpful to her client, unless she sees a greater benefit than harm for her client. She will address those facts that are helpful and will present those legal arguments that demonstrate the weaknesses in the government's case. It is her experience that the more people have to explain their conduct, the less credibility they have. This is true for the government as well. The more problems she can identify that the government will have to explain away, the harder it is for the government to justify going forward with the prosecution. 

Fort Worth attorney Michael Heiskell believes that the most important factor in minimizing risk is the investigation. Unless the defense attorney has thoroughly investigated the facts, she should not try to convince the prosecutor that the government has made a mistake. And investigating the facts means more than just a complete debriefing of the client. When going down this path, counsel will have to learn as much as possible about the allegations, including interviewing witnesses, examining documents, and employing experts if necessary. 

Ben Kuehne agrees that a lawyer cannot afford to present an actual innocence claim that is met with contradictory evidence. That ruins counsel's credibility. The lawyer must be able to anticipate what is likely to be within the government's arsenal so he or she can negate or otherwise deflect it and avoid surprise. This requires far more than just a general knowledge of the charges being leveled against the client.

The attorneys cited by Mr. May also prefer to avoid a "queen for a day" agreement which, in most cases, strips the defendant of protections he or she would otherwise have (FRCrP Rule 11(f), here, and FRE 410(a)(4), here).  I offer here some discussion of proffers and queen for a day agreements from my Federal Tax Crimes Book.

Mr. May also makes the point that, if possible, the potential defendant be humanized.  That may help at the margins because, in part, the prosecutor will be concerned by the effect such evidence might have on a jury.

Finally, Mr. May notes the importance of trust between the prosecutor and defense counsel.

This is where trust is so important. If a prosecutor agrees not to use anything the defense attorney discloses in discussions against the client, can the defense attorney depend upon the prosecutor to keep his or her word? Knowing the prosecutor and the office culture is critical to making that decision. It is heartening to report that in the experience of the lawyers interviewed, the vast majority of prosecutors they dealt with were honorable men and women who kept their promises. The system may not be perfect, but when it works, it can be lifesaving.