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June 1999 RICO Report By Barry Tarlow
The author wishes to thank Blair Berk and Shereen Charlick, members of his firm, for their invaluable assistance in the preparation of this column. Federal Prosecutors No Longer Subject to Thornburgh Memorandum It entered Congress with little notice or fanfare, but its signing appears to have created a firestorm. It was thought that the legislation, known as the “McDade Provision,” sponsored by U.S. Congressman Joseph M. McDade, Republican of Pennsylvania (recently retired from the House after 18 years), would signal the final death knell for the infamous “Thornburgh Memorandum” policy by prohibiting federal prosecutors from ignoring state and local federal court ethics rules. Readers will recall that now-former Congressman McDade was the target of an eight-year federal investigation into bogus allegations that he illegally accepted $100,000 in gifts and other items from defense contractors and lobbyists. After being acquitted in 1998, McDade let it be known that he had experienced a civil liberties epiphany of sorts, after being the subject of an intimidating and reckless federal criminal investigation and prosecution run amuck. Unfortunately for prosecutors, this Republican had the power to make law, and thereafter sponsored Section 801 of the Omnibus Spending Bill, which explicitly negated the 1994 Justice Department regulations exempting DOJ lawyers from the rules of ethics applicable to all attorneys. Strongly supported by both parties, including Speaker of the House Dennis Hastert (R-IL), Majority Whip Tom Delay (R-TX), Republican Chris Cox of California, and House Judiciary Committee Chairman Henry Hyde (R-IL), McDade’s bill was passed overwhelmingly in the 105th Congress, and was signed into law by the president late last year. However, based on hysterical and desperate pleas from the U.S. Department of Justice, the statute’s effective date was delayed for six months (until April 19, 1999) for the stated purpose of allowing DOJ to amend its rules to comply with the new law. However, top officials in the Justice Department immediately made it known that they intended to use or “abuse” this time to lobby Congress to repeal the new law. As frequently reported in this column, the 1994 Department of Justice regulation that improperly allowed federal prosecutors to secretly contact parties represented by counsel (as enunciated in the infamous “Thornburgh Memoran-dum”) remains at the heart of this controversy. See, RICO Report, The Champion (Jan./Feb. 1990; Nov. 1990; Sept./Oct. 1993; May 1997; Sept./Oct. 1997; May 1998). For almost a decade, the U.S. Department of Justice has claimed that government lawyers should be allowed to work outside state bar ethics rules in their capacity as federal prosecutors. Following overwhelming approval for McDade’s bill and its passage by the House and Senate, the Justice Department recruited Senate Judiciary Committee Chairman Orrin Hatch (R-UT), to propose new legislation which would effectively repeal McDade’s bill. On January 19, 1999, Hatch introduced Senate Bill 250, which would explicitly grant the Department of Justice an exemption from the state and local federal court rules of ethics whenever the Department of Justice decides that the rule of ethical conduct would conflict with its own “policies.” As NACDL has noted, Hatch’s bill “would put a congressional imprimatur on the Department’s roundly condemned self-authorizing regulations purporting to allow it to self-exempt its own attorneys and agents from the fundamental State Supreme Court Rules of Ethics.” Hatch’s bill would also waste our tax dollars by creating a commission on federal prosecutorial conduct, made up of federal judges appointed by the Chief Justice of the Supreme Court “to review and report on the interrelationship between the duties of federal prosecutors and regulation of their conduct by state bars and the disciplinary procedure utilized by the Attorney General.” The language of the McDade law under Section 801 of HR 4328, signed into law October 21, 1998 and which took effect April 19, 1999, explicitly requires government prosecutors to be subject to state laws and rules. See, Section 530b. As stated, in relevant part: “(a) an attorney for the government shall be subject to state laws and rules, and local federal court rules, governing attorneys in each state where such attorney engages in that attorney’s duties, to the same extent and in the same manner as other attorneys in that state.” In response, Hatch’s bill would expressly exempt federal prosecutors from complying with the state and local federal court ethics provisions, and instead pay only lip service to reigning in prosecutors by specifying narrow categories of “punishable conduct” for employees of the U.S. Department of Justice who engage in misconduct. Ironically called the “Federal Prosecutor Ethics Act,” Hatch’s bill would effectively leave it up the Justice Department to decide which ethics rules in their “particular criminal cases” deserved to be ignored. Importantly, the American Corporate Counsel Association, as well as the U.S. Chamber of Commerce and the American Bar Association (ABA) were firmly aligned against Hatch and the United States Justice Department on this issue. Past Chairman of the ABA’s Ethics Committee Lawrence J. Fox has been quoted as saying that Justice Department officials have “engaged in gross hyperbole,” and that the regulation of lawyers should continue to be done on a state-by-state basis: “Even if you work for the Justice Department or God, you’re still obliged to follow those rules.” Since 1908, standards of professional conduct recommended by the American Bar Association have become the national professional model, adopted by states almost universally. In 1983, the ABA adopted a third revised standard of its “Statement of Professional Standards,” ABA Model Rules of Professional Conduct, which nearly all states have followed. The willingness of institutions as powerful as the American Bar Association, as well as members of Congress, to take on the Department of Justice and Senator Orrin Hatch over the ethical regulation of federal prosecutors is significant, and may signal a defeat for Hatch’s efforts to repeal the Ethical Standards for Federal Prosecutors Act. Speaking recently in Los Angeles, ABA President Phillip S. Anderson announced he intends to meet with Attorney General Janet Reno regarding the issue, and expressed that: “We’ve had experience with overaggressive prosecutors, and it’s simply unacceptable to have the lead prosecutor be in charge of the ethics of the prosecutors.” Although the importance of ensuring that federal prosecutors abide by the same rules as everyone else is self-evident to most, it remains to be seen how this hotly charged political, constitutional and fundamentally ethical issue will play out. A Few Small Fish Escape RICO Net In yet another newsworthy development in United States v. Luong, et al., No. 96-0094 MHP, a case which this column has addressed before regarding other issues, see The Champion, RICO Report, December 1998, Judge Marilyn Hall Patel dismissed RICO charges against four “crewmembers” of an organization supposedly involved in computer chip robberies and heroin distribution. According to the judge, the indictment failed to allege sufficient facts demonstrating that these individuals “conducted” or “participated” in the “enterprise” as prevailing law defines those terms. Luong and 18 “associates” are charged in a 49-page superseding indictment with various crimes, including violations of 18 U.S.C. § 1962(c), the Racketeer Influenced and Corrupt Organization Act (“RICO”), a RICO conspiracy in violation of 18 U.S.C. § 1962(d), several other conspiracies, including conspiring to distribute heroin and interfering with commerce by threats or violence, as well as various substantive offenses. The indictment alleges in general that “various of the defendants would directly participate in and supervise the execution of the armed robberies of computer chip companies and the felonious distribution of heroin,” and it specified the roles of each defendant. Indictment in United States v. Luong, et al., No. 96-00094 MHP at p.5-7 (“Indictment”). However, with respect to these “crewmembers,” the indictment recited only that their responsibilities “included, but were not limited to, the execution of armed robberies of computer chip companies on behalf of the enterprise, holding hostage employees of the computer chip companies while the robbery was in progress and transporting the merchandise stolen from the computer chip companies from the site of the robbery back to the bosses.” Id. at 7. In two orders, dated August 17, 1998 and October 14, 1998, Judge Patel found that “[a]t most, the indictment alleges that [the three defendants] were a part of a Hobbs Act conspiracy”— “there are no facts alleged to show that they did any more than conspire with people who operated or managed the enterprise” and “[t]here are no facts that allege they were aware of the enterprise other than the efforts of themselves and others to commit the offenses which constitute predicate acts.” October 14, 1998 Order at p. 6-7. Since the indictment neither “establish[es] each of these defendant’s agreement to participate in the operation or management of the enterprise via the predicate offenses” nor “does [it] allege that they were in any way involved in the direction of the enterprise’s affairs,” the RICO conspiracy and substantive RICO charges were dismissed against the four “crewmember” defendants. August 17, 1998 Order at p. 7, 10; October 14, 1998 Order at p. 6. Three of the dismissed defendants were labeled “crewmembers,” while the role of the fourth individual was not specified; however, “crewmember” seems to best suit his participation or the lack thereof. See October 14, 1998 Order at p. 7 (“he drove to PKI, Inc. to commit an armed robbery. There are no facts alleged . . . that defendant Huynh even agreed that some member of the conspiracy commit at least two predicate acts in furtherance of the enterprise.”). Two of these defendants were ably represented by Bay Area lawyers George Lazarus and Paul Wolf, while the other two remain fugitives. Judge Patel dismissed the substantive RICO charge against the three crewmember defendants, stating that while “participating” in or “conducting” the affairs of a racketeering enterprise is precluded by law, 18 U.S.C. § 1962(c), these terms “participating” and “conducting” have specific definitions. See August 17, 1998 Order at p. 7. She relied upon the Supreme Court’s decision in a civil RICO case, Reves v. Ernst & Young, 507 U.S. 170, 178 (1993), for the definition of both “conducting” and “participating” in the enterprise’s affairs. According to the Supreme Court, the “conduct” of affairs clearly “indicates some degree of direction,” Reves, 507 U.S. at 178, and participation was defined as “hav[ing] some part in directing [the enterprise’s] affairs” though that need not be in any “formal position” in the enterprise. Id. at 1790. RICO liability is not limited to “those with primary responsibility for the enterprise’s affairs.” Id. at 179. In accordance with Reves, Judge Patel clearly recognized that “[a]n enterprise is ‘operated’ not just by upper management but also by lower-rung participants in the enterprise who are under the direction of lower management,” August 17, 1998 Order at p. 7, 10 (quoting Reves, 507 U.S. at 184 & n.9). Nevertheless, she found that “the indictment does not allege that [the crewmembers] were in any way involved in the direction of the enterprise’s affairs;” hence, she dismissed Count One, the RICO substantive charge as to these three defendants. August 17, 1998 Order at p. 10. Applying the Reves principles to Count One’s substantive RICO charge against the “crewmembers,” the judge concluded that the indictment failed to sufficiently allege any actions to indicate that these defendants either “conducted” or “participated” in the affairs of the enterprise. Judge Patel had requested supplemental briefing regarding application of the Reves “operation and management” test, to Count Two, the RICO conspiracy charge. On October 14, she decided that the Reves principles required dismissal of the RICO conspiracy charges against the “crewmembers.” The judge applied this “operation and management” test from the Supreme Court’s decision in Reves, a civil RICO suit to this criminal conspiracy case. October 14, 1998 Order at p. 3. She further held that there must be some allegations that these “crewmember” defendants were involved, by agreement and/or actions in “directing the affairs of the enterprise.” Id. at p. 6.; see also Reves, 507 U.S. at 179 (“we understand the word ‘conduct’ to require some degree of direction and the word ‘participate’ to require some part in that direction . . . . In order to ‘participate, directly or indirectly, in the conduct of such enterprise’s affairs,’ one much have some part in directing those affairs”). It is noteworthy that Reves questioned “whether low-level employees could be considered to have participated in the conduct of an enterprise’s affairs, “ but did not decide “how far § 1962(c) extends down the ladder of operation.” Reves, 507 U.S. at 184, n.9. Of course, there was controversy with respect to Judge Patel’s ruling, particularly regarding the application of Reves to the RICO conspiracy count. Predictably, the prosecution urged Judge Patel to disregard the “operation and management” test, claiming that the Ninth Circuit case mandating its application, Neibel v. Trans World Assurance Co., 108 F.3d 1123 (1997), now conflicted with the Supreme Court’s more recent case, Salinas v. United States, 118 S. Ct. 469 (1997). Salinas had resolved a circuit split, holding that a defendant need not personally agree to commit two or more predicate acts, provided that he or she agreed that some member of the conspiracy would commit at least two such acts. Id. at 477; see also, The Champion, RICO Report, April 1998 (discussing the Salinas decision in greater detail). Judge Patel found that there was no conflict between the Ninth Circuit’s decision in Neibel, and Salinas. According to Neibel, “a RICO conspiracy requires a two-part agreement: an agreement to participate in the enterprise and an agreement that two predicate acts be committed by someone in the conspiracy,” while Salinas similarly requires that “some member of the conspiracy would commit at least two racketeering acts in furtherance of the RICO enterprise.” October 14, 1998 Order at p. 4. It is certainly not surprising that civil RICO principles, adopted by the Supreme Court in Reves to protect a major accounting firm, have not been universally embraced in the criminal arena. However, Judge Patel noted the circuit split regarding application of Reves “operation and management” test to RICO conspiracy charges, with the Eleventh, Second and Seventh Circuits refusing to apply the test, see United States v. Castro, 89 F.3d 1443, 1452 (11th Cir. 1996); United States v. Viola, 35 F.3d 37, 42-3 (2d Cir. 1994); MCM Partners, Inc. v. Andres-Bartlett & Assoc., Inc., 62 F.3d 967, 979 (7th Cir. 1995). She chose to follow the Ninth Circuit (and the Third Circuit) precedent which concluded that Reves “does apply to conspiracy charges under § 1962(d).” October 14, 1998 Order at p. 3 (citing Neibel v. TransWorld Assurance Co., 108 F.3d 1123, 1128 (9th Cir. 1997) and United States v. Antar, 53 F.3d 568, 581 (3d Cir. 1995)). Since Judge Patel’s decision, the Fifth Circuit has refused to apply Reves principles to criminal RICO conspiracies. See United States v. Posada-Rios, 158 F.3d 832 (5th Circuit 1998). It is not surprising that the prosecution is appealing Judge Patel’s well-reasoned order. Since everyone does not always have a federal judge scholarly enough to properly apply the complicated body of RICO law and principled enough to resist the prosecution’s arguments, an accused can take some comfort from the fact that at least in some cases with “loosely” connected enterprises, juries have refused to convict low-level defendants of RICO conspiracy. See The Champion, RICO Report, August 1998 (discussing the multiple acquittals in large scale RICO indictment of 12 poor black youths in the “Tourist Robbery Case,” United States v. Harrell, et. al., Case No. 96-22 Cr-LCN (S.D. Fla. 1998); United States v. Moran, et. al., Case No. 93-470 Cr-WMH (S.D. Fla. 1998) (jury acquittals for low-level “employees” of “enterprise” after 5 month trial). Perhaps it is naive, but we can still hope that at some point prosecutors will tire of the lengthy and unproductive trials that such overcharging decisions bring about. Pre-Trial Restraint of Defendant’s Assets — How Much ‘Process’ Is ‘Due?’ We have often addressed the issue of the prosecution’s ability to restrain an accused’s assets pre-trial ostensibly to “preserve” them for criminal forfeiture. When the United States Attorney’s Office attempts to use the statutory criminal forfeiture provisions in 21 U.S.C. §§ 853 and 982, two key issues emerge: (1) were the defendants entitled to a post-indictment, pre-trial hearing to determine whether the government could continue to restrain their assets, and if so (2) what was to be decided at this hearing —just whether the property was traceable to the crimes or could the alleged criminal conduct itself be challenged? Today, these issues, for the most part, remain undecided. While the majority of the circuits hold that the Due Process Clause entitles a defendant to some type of hearing, the specifics of what the hearing entails, and when it can be obtained, is the subject of divergent rulings. See RICO Report, The Champion (May 1991) (“in light of the split in the Circuits regarding significant issues, the Supreme Court “may definitively determine whether due process requires a pretrial hearing on the merits after an ex parte restraining order is placed upon assets that are necessary for attorneys’ fees”). A recent decision has further polarized the still-existing circuit split with the Tenth Circuit addressing these matters in United States v. Jones, 161 F.3d 641, 643 (10th Cir. 1998) (court considered “whether due process requires a district court to conduct a post-restraint, pretrial adversarial hearing before continuing to freeze assets that a defendant allegedly needs for legal and living expenses.”) While concluding that due process does require such a hearing, the Jones court took a contrary position from many other courts, limiting the scope of the hearing and imposing certain requirements upon defendants seeking such a hearing. These issues arise in the context of one particular criminal forfeiture statute, 21 U.S.C. § 853, which provides that anyone convicted of a violation of the drug laws, punishable by imprisonment for greater than one year, shall forfeit to the United States, irrespective of any state laws, all property constituting or derived from any proceeds obtained directly or indirectly, as a result of the violation. 21 U.S.C. § 853(1). This forfeiture provision is cross-referenced in other provisions of the criminal law, rendering it applicable, for example, to money laundering, smuggling, and specified fraud offenses. See 18 U.S.C. § 982(b)(1)(A), (B); se also 18 U.S.C. §1963 (virtually identical forfeiture provisions for RICO offenses). Ever mindful of the fact that in criminal forfeiture proceedings, the subject property is not actually forfeited unless a defendant is convicted of the underlying offense, see United States v. Monsanto, 491 U.S. 606, 612 (1989); United States v. Virgil Dean St. Pierre, 950 F. Supp. 334 (M.D. Fla. 1996), prosecutors utilize the advantageous provisions of § 853 which permits them to seize assets prior to the ultimate forfeiture determination. 21 U.S.C. § 853(e)(1)(A). Tying § 853 to these other violations permits the government to utilize this and other provisions contained in § 853 permitting post-indictment, pretrial restraint on assets and even pre-indictment seizure of assets. See 21 U.S.C. § 853; United States v. Kirschenbaum, 156 F.3d 784, 788-89 (7th Cir. 1998). In Caplin & Drysdale v. United States, 491 U.S. 617 (1989), the Supreme Court held that assets that may be forfeitable cannot be used by a defendant even for legal fees, but in United States v. Monsanto, 491 U.S. 600, 615, n.10 (1989), the Court left open the question of whether or not the prosecution can seek pretrial restraint of assets, even assets earmarked for attorneys’ fees, without affording some type of due process to defendants. Id. (“[w]e do not consider today, however, whether the Due Process Clause requires a hearing before a pretrial restraining order can be imposed”); see also RICO Report, The Champion (Sept./Oct. 1989; May 1991). The majority of the courts addressing the question left open in Monsanto take the position that where the government seeks or has sought a post-indictment, pre-trial restraint of assets, the defendant, pursuant to both the Fifth and Sixth Amendments, is entitled to an adversarial hearing — at least where the question of attorney’s fees is implicated. United States v. Moya-Gomez, 860 F.2d 706, 731 (7th Cir. 1988) (defendant whose assets are restrained preventing him from obtaining counsel of choice has due process right to adversarial, probable cause hearing); United States v. Thier, 801 F.2d 1463, 1466-70 (5th Cir. 1986); United States v. Crozier (II), 777 F.2d 1376, 1383-84 (9th Cir. 1985) (due process requires a hearing pursuant to Fed. R. Civ. P. 65) United States v. Spilotro, 680 F.2d 612 (9th Cir. 1982); United States v. Lewis, 759 F.2d 1316, 1324-25 (8th Cir. 1985); United States v. Long, 654 F.2d 911, 915-16 (3d Cir. 1981); United States v. Noriega, 745 F. Supp. 1541, 1545 (S.D. Fla. 1990); as to whether or not probable cause exists that (1) the defendant committed the crimes giving rise to the forfeiture and (2) the properties specified in the indictment are properly forfeitable. This is so in spite of the indictment. See also United States v. Michelle’s Lounge, 39 F.3d 684, 699 (7th Cir. 1994) (applying Monsanto “probable cause” hearing to civil forfeiture actions as well as criminal proceedings). United States v. All Funds On Deposit, 767 F. Supp. 36,39 ((E.D.N.Y. 1991) (same). The Tenth Circuit employed a balancing test in the Jones decision to ultimately reach the same result, concluding that due process required some form of hearing. In Jones, both a corporation and individual defendants, including, Shirley Jones, were indicted for submitting false claims for Medicaid reimbursement in violation of health care fraud statute, 18 U.S.C. § 1347. In addition to convictions, the government also sought, by way of a separate count in the indictment, forfeiture of real and personal properties, claiming that it “constitut[ed] or h[ad] been derived from gross proceeds traceable to the health care fraud offense.” This statutory provision requires courts, in imposing sentence upon those convicted of federal health care offenses to “order the person to forfeit property , real or personal, that constitutes, or is derived, directly or indirectly, from gross proceeds traceable to the commission of the offense.” 18 U.S.C. § 982(a)(6). After indicting the defendants, the prosecutor moved ex parte to freeze $1.5 million of the forfeitable assets pending trial. Not surprisingly, the district court acceded to the government’s request. As noted, title 21, United States Code § 853(e)(1)(A) permits the prosecution to apply and the courts to impose a restraining order or injunctive measure to “preserve the availability” the property which the government plans to forfeit. The defendants attempted to obtain a pre-trial hearing, pursuant to United States v. Monsanto, 924 F.2d 1186 (2d Cir. 1991), to determine the validity of the continuing restraint of their assets. The case which the Jones defendants sought to rely upon: United States v. Monsanto, 924 F.2d 1186 (2d Cir. 1991), aka “Monsanto IV,” (due to its numerous trips back-and-forth between the district court, court of appeals and even the Supreme Court), is likely considered the seminal § 853 case. It stands for the proposition that pre-trial restraint of a defendant’s assets is a “deprivation of property” and the defendant is entitled to some measure of due process. Id. at 1192. Monsanto reasoned that the Fifth Amendment’s Due Process Clause generally requires “‘notice and an opportunity to be heard prior to the deprivation of a property interest.’” Id. (citations omitted). Thus, in the context of a § 853 pre-trial restraint, due process meant that the government must demonstrate two things: probable cause that (1) the defendant committed the underlying crimes and (2) that the assets were forfeitable. Id. at 1203.; see also RICO Report, The Champion (May 1991). Relying upon the Second Circuit’s sound reasoning, the Jones defendants requested a hearing, contending that the Fifth Amendment’s Due Process Clause required that the prosecution establish probable cause to believe the defendants: (1) committed these crimes; and (2) that the restrained assets were “traceable to the offense.” See Jones, 160 F.3d at 644. Notwithstanding the great weight of authorities holding to the contrary, the prosecution contended that the grand jury’s ex parte determination of probable cause and the subsequent trial on the merits constituted “all the process” that the defendants could and should obtain. See Jones, 160 F.3d at 644-645. When the district court agreed and refused to grant the request for a hearing, the defendants obtained a stay of the proceedings and appealed. In reviewing this issue under the collateral order doctrine, the Tenth Circuit first considered whether §853(e)(1)(A) could be construed to permit the type of hearing due process requires. The plain language of § 853 neither provided for nor prohibited a hearing. Jones, 160 F.3d at 644. The legislative history reveals that while the statute conferred the ability to hold such a hearing, the type of hearing permitted by the drafters was not that envisioned and requested by these defendants. See S.Rep. No. 98-225 at 203, 213 (1984), reprinted in U.S.C.C.A.N. 3182, 3386, 3396. Section 853’s legislative history does not exclude the authority to hold a hearing subsequent to the initial entry of the restraining order, and it gives specific examples as to when such a hearing should be held, for instance where information presented at the hearing shows that the property restrained was not among the properties named in the indictment. However, it also specifically states that the court is not to entertain challenges to the validity of the indictment, and that with respect to restraining these assets, the indictment is determinative of any issue regarding the merits of the government’s case on which the forfeiture is based. S.Rep. No. 98-225 at 203, 213 (1984), reprinted in U.S.C.C.A.N. 3182, 3386, 3396. Thus, while the panel concluded that the statute permits some very limited review of this asset seizure, the issues of “underlying guilt and forfeitability of assets” were unreviewable under the statute. Though not provided for by the statute, Jones concluded that due process, required such a hearing. See id. at 645, 647. It arrived at this result by employing a balancing test from Mathews v. Eldridge, 424 U.S. 319, 335 (1976), considering the risk of erroneously depriving one of a private property interest and the value of such an adversarial hearing, as opposed to the government’s asserted interests, in preserving the assets, avoiding disclosing its case at that stage and the “administrative burden” that an adversarial hearing would impose. Jones, 160 F.3d at 645. Applying this balancing test, the court first gauged the significance of the “private interests” in the seized property. There, the Jones defendants sought to use the funds to pay for counsel and for living expenses — both very important interests, according to Jones. Id. at 646. While finding that the government’s interest in “preserving forfeitable assets” was significant, its other asserted interests in “avoiding premature disclosure of its case and preservation of prosecutorial resources” “add little to tip the balance against a pre-trial hearing.” see Jones, 160 F.3d at 647 (“[w]orries of premature disclosure ring hollow in a system where the government is permitted few surprises” and “the government’s failure to explicate the costs it expects to incur at a hearing . . . drains much of this argument’s strength”). Thus, the “proper balance,” the Tenth Circuit found, requires a post-restraint, pre-trial hearing. However, the court qualified this holding by imposing the additional requirement that such a hearing would only be available “upon a properly supported motion by a defendant.” Jones, 160 F.3d at 647. In its motion, a defendant must make the following preliminary two-part showing: (1) the defendant must demonstrate dire financial need and hardship unless the restraint is lifted, see Jones, 160 F.3d at 647 (“a defendant must demonstrate to the court’s satisfaction that she has no assets, other than those restrained, with which to retain private counsel and provide for herself and her family”); and, (2) the defendant also make a “prima facie showing of a bona fide reason to believe the grand jury erred in” making its forfeiture decision. Id. According to Jones, property can be seized without conferring an automatic right to a hearing under all circumstances. Even though it is the defendant’s property which is seized and even though the government bears the burden of demonstrating probable cause to forfeit, no hearing is required, unless and until, according to Jones, the defendant makes the requisite showing. This preliminary showing, while not articulated so boldly in prior decisions, did factor into other courts’ analyses. See, e.g., Monsanto, 924 F.2d at 1189 (Monsanto’s challenge to pre-trial restraining order predicated on interference with Sixth Amendment rights as intended to use restrained assets for legal fees. In Monsanto, that court found that, taken in combination, Fifth and Sixth Amendment rights’ required notice and a pre-trial adversary hearing where the defendant’s ability to pay for counsel of choice is implicated. Id. at 1191. While the Jones court did not so specify, presumably, this preliminary showing can and should (depending upon one’s defense) be made ex parte, in camera, when it may reveal any defense evidence and/or strategy. Imagine, for example, the type of examination that would occur if a prosecutor questioned a defendant whose charges included net worth or specific item tax violations. In many cases, permitting the prosecution to conduct a wide ranging fishing expedition and examine a defendant or even defense witnesses about financial assets that a defendant may have or has received in the past and their present whereabouts, or past usage, could amount to inappropriate prosecution discovery and deprive the defendant of his ability to present some aspect of his defense. See Fed. R. Crim. P. 104(d) (provides some protection for accused as he “does not, by testifying upon a preliminary matter, become subject to cross-examination as to other issues in the case”). With respect to future use by the prosecution of the defendant’s testimony at this hearing, the Supreme Court decided long ago that it is “intolerable” to force defendants to “surrender” one constitutional right in order to subsequently assert another one. See Simmons v. United States, 390 U.S. 377, 394 (1968). By analogy, a defendant’s testimony presented to establish this “preliminary showing” pursuant to his due process rights, should not be introduced against him at trial. See id. There remains, however, the risk, at least in some jurisdictions, that such testimony could be used to impeach a defendant who subsequently testifies at trial. See United States v. Jaswal, 47 F.3d 539, 543 (2d Cir. 1995) (permitting impeachment with suppression hearing testimony at trial); United States v. Beltran-Gutierrez, 19 F.3d 1287, 1291 (9th Cir. 1994) (same). Once the two-part preliminary showing is made, the defendant is entitled to a hearing. At this hearing, the court can consider “evidence and testimony “that would be inadmissible under the Federal Rules of Evidence.” 21 U.S.C. § 853(3); See Jones, 160 F.3d at 648. In Jones, although the defendants were entitled to a hearing, they were only entitled to challenge the probable cause that the property could be forfeited. Rejecting the defendants’ position that the government must establish probable cause that the defendants were guilty of the underlying crimes, the court noted that “[t]his additional burden would add nothing to protect defendants’ interests and does more damage than necessary to § 853(e)(1)(A) and the role of the grand jury.” Jones, 160 F.3d at 148. Going even further, it noted that, even if the government “describe[]s and explain[s] the underlying charge,” this “simply bears no burden of persuasion on the issue.” Id. However, there are a fair number of courts which have disagreed with Jones regarding what the hearing should entail. In fact, Monsanto held that at this hearing, the government would bear the burden of demonstrating not only the forfeitability of these assets but also the “existence of probable cause as to [] the commission of the [] offense . . . .” Monsanto 924 F.2d at 1197. In United States v. Rogers, 602 F. Supp. 1332 (D.Colo. 1985), that court held that while probable cause may support the entry of a temporary restraining order, “due process requires that the government present evidence of the strength of its case in addition to the indictment in order for the court to continue to restrain the assets pre-trial.” Id. at 1343, 1345 (emphasis supplied); see also United States v. Spilotro, 680 F.2d at 618 (emphasis in original) (prosecution need only demonstrate the probability that, the jury will convict the defendant and find the properties subject to forfeiture by producing evidence other than the indictment “sufficient . . . to permit the district court to independently assess whether the burden has been met”); Thier, 801 F.2d at 1471 (while the existence of the indictment is a “strong showing[] for injunctive relief, [it is] not irrebuttable . . . . Congress did not require that forfeiture take place upon the issuance of an indictment”); United States v. Long, 654 F.2d at 915 (“government must demonstrate . . . two things: one that the defendant is guilty of violating the . . . statute, and two, that the profits or properties . . . are subject to forfeiture” and it “cannot rely on indictments alone.”). The Eleventh Circuit has previously taken the same position as Jones, holding in United States v. Bissell, 866 F.2d 1343, 1355 (11th Cir. 1989), that probable cause to restrain a defendant’s assets under § 853 may be based solely upon the grand jury’s return of the indictment. However, as we have previously noted, its decision lacked substantial reasoning and, “displayed little sensitivity to the realities of trial practice” as it failed to consider that there is a meaningful difference between adequately funded counsel and appointed underfunded counsel in complex RICO and CCE matters. See RICO Report, The Champion (May 1991). For additional discussion of prosecutors’ perceptions of attorneys’ fees forfeiture, see RICO Report, The Champion (February 1992) The problem with Jones’ analysis, at least with respect to “limiting the scope of the post-restraint inquiry to the traceability of the assets,” see Jones, 160 F.3d at 648, is that it ignores logic as well as the realities of today’s criminal practice. The only reason that the property is even subject to forfeiture in the first instance is due to the allegations of underlying criminal violations. In many instances, the weak link will not be whether or not the subject properties can be traced to criminal activity – it will be whether or not the defendant can be traced to such activity. This analysis permits the government to indict people on flimsy evidence and/or questionable theories of criminal liability, seize a significant sum, if not their entire net worth, restrain it pre-trial and force a defendant into a position where the government will agree to return part of their assets in exchange for a guilty plea. Even more significantly, pre-trial restraint permits the prosecution to dictate choice of defense counsel, and sometimes to preclude entirely, the ability to finance any meaningful defense When assets are restrained pre-trial, it not only interferes with the defendant’s right to counsel but it also deprives the accused of significant assets which could be used for extensive investigation or essential expert witness assistance. This is so notwithstanding the prosecution’s argument that even in complicated financial cases, the defendant can proceed to trial with overworked, underpaid and underfunded appointed counsel. Pre-trial restraint virtually assures that the accused will be denied funds for essential expert witnesses and investigation. Of course, if he is acquitted, he can then have his funds returned. As preposterous as this rationale may be, it is often advocated by federal prosecutors. The prosecution’s position, accepted by the Tenth Circuit in Jones, is that the existence of an ex parte indictment predetermines the existence of probable cause that the defendant committed the underlying crimes. However, notwithstanding the fact that this same indictment contains forfeiture charges, Jones still holds that due process requirs a hearing to determine whether or not there was probable cause that the properties subject to the restraint were, in fact, forfeitable. Jones’ reasoning is seriously flawed. Otherwise, how can an indictment be determinative on one of these issues but not on the other? At least, thus far, this issue once again is open for ultimate resolution. Whether or not the Supreme Court will decide to espouse any of these approaches remains to be seen. In the meantime, the likelihood of a successful pre-trial restraint of assets will depend upon geography – for now, at least, the arbitrary fortuity of where, in what circuit, one is prosecuted will determine the amount of “process” that is “due.” The Public Speaks: Banks Should Not ‘Know’ You and Your Customers Federal regulators had drafted a new banking proposal requiring banks to “know their customers.” This would have included ascertaining the “true” identity of a customer, determining where the customer’s money comes from and what their customer’s “normal and expected” banking practices are, so that banks can promptly report any abnormality as a “suspicious transaction” to law enforcement. Thankfully, it was withdrawn on March 29, 1999, but the risks it presented for lawyers in general are worth noting. If issued, this proposed “Know Your Customer” regulation would have not only invaded the privacy of every bank customer, required bankers to double as law enforcement assistants, raised banking costs for all customers, but also carried with it the chilling potential for subjecting criminal defense lawyers and their clients, to government investigation, over nothing more than receiving a larger-than-usual fee from a client. The proposed regulation provided that its primary purpose was to protect banks’ reputations, to facilitate compliance with the law and to prevent banks from “becoming a vehicle for, or a victim of, illegal activities perpetrated by its customers.” 63 Fed. Reg. 67529-67536 (to be codified at 12 C.F.R. § 326) (proposed December 7, 1998). In subsequent discussion, the Federal Deposit Insurance Corporation (FDIC) also noted that it sought to increase banks’ detection and reporting of suspicious customer activities and to deter financial crimes. Apparently troubled by the fact that “[u]nder current law, financial institutions are required to report suspicious activities to law enforcement authorities, but are not required to specifically search for suspicious activities,” see id. at 67534, the FDIC wished to draft its bankers as soldiers in the War Against Crime. Pursuant to those objectives, the FDIC promulgated a 5-step plan requiring banks to: (1) determine the identity of the customer (customer is defined as: “any person or entity who has an account involving the receipt or disbursal of funds with [a] . . . bank . . . and any person or entity for whom the account is opened” — banks will be required to inquire whether or not an account is opened by “on behalf of a third party,” and that “third party” will be considered a “customer” along with the named account holder. Id. at 67534. (2) determine the source of the funds; (3) determine the “normal and expected” transactions (4) monitor the bank accounts (5) report “suspicious transactions” in accordance with the existing suspicious activity reporting regulations.” This proposed regulation was problematic for many reasons but there were several concerns particularly germane to criminal law specifically and to the legal profession generally, involving attorney-client privacy interests threatened by this proposed regulation. Such “new and improved” bank record keeping would have only exacerbated investigatory problems for both lawyer and client, especially in this era where some prosecutors and investigators view cases as a two-for-one prosecution – first convict the client, then go after his lawyer. Finally, the proposed regulation, left far too much discretion in the hands of bank officials without sufficiently specific standardized measures for what is truly a “suspicious transaction” and especially, when they should and should not report them for law enforcement review. In the first instance, the necessity for these new, additional “information-gathering tools” should be viewed in context. Federal law already requires that customers declare and banks report currency transactions in excess of $10,000. 31 U.S.C. § 5311, et. seq.; 31 U.S.C. § 5324; 31 C.F.R. § 103.22. It is also unlawful for anyone to attempt to “structure” a transaction in such a manner as to avoid this reporting requirement. See 31 U.S.C. § 5324(3). Individuals in businesses or trades must also report receipt of cash payments in excess of $10,000 using Form 8300. These forms have a box where the individual can indicate that this payment was “suspicious,” meaning there may have been an effort to avoid filing the 8300 or where there is some indication of illegal activity. Department of the Treasury, IRS Form 8300 (revised August 1994). It is not as if banks need these new and onerous reporting requirements or any additional authority to report what they view as criminal activity. Banks are already required to report any “suspicious transaction relevant to a possible violation of law or regulation,” 31 U.S.C. § 5318(g)(1); 31 C.F.R. § 103.21(a)(1) (“[e]very bank shall file . . . to the extent . . . required by this §, a report of any suspicious transaction relevant to a possible violation of law or regulation.”). “Suspicious transactions” are transactions conducted or attempted by, at, or through the bank, involving at least $5000 in funds or other assets and where the bank suspects that: (1) the transaction involves funds from illegal activities and is part of a money-laundering effort; (2) that it is designed to avoid the reporting requirements or (3) that the transaction has no business or apparent lawful purpose or is not the sort in which the particular customer would normally be expected to engage and the bank knows of no reasonable explanation for the transaction after examining the available facts, including the background and possible purpose of the transaction. The purpose behind mandating reporting of “suspicious transactions” was to deter and detect money laundering, particularly, international money laundering. See 31 U.S.C. § 5318(g) (titled the “Annunzio-Wylie Anti-Money Laundering Act”); 137 Cong. Rec. 9374 at S9380 (express recommendation of the joint task force that banks must “report suspicious transactions possibly indicative of money laundering and to create anti-money laundering programs . . . . ”). The FDIC “Know Your Customer” proposal, a supposed outgrowth of these anti-money laundering measures, certainly strayed far afield from its origins. There was nothing in the new proposal directing banks to focus their efforts on detecting transactions indicative of money laundering. As it was proposed the new regulations basically authorized a large-scale fishing expedition where banks look for what they subjectively determine are “inconsistent” or “unusual” transactions, report them to law enforcement and let an investigation into any sort of activity begin. Although the FDIC claims to recognizes the “privacy issues” at stake — it stated that this newly-acquired information, “if misused, could result in an invasion of a customer’s privacy. However, its only solution was to issue a prophylactic statement that it will “obtain only that information necessary to comply with the [broad] regulation and will limit the use of this information to complying with the regulation.” 63 Fed. Reg. 67529-67536. As for existing criminal-defense-lawyer bank customers, the proposed regulation purported not to require banks to begin a large-scale information-gathering expedition for existing bank customers, but nothing prohibited implementing such a process across-the-board at a bank — in fact, it was encouraged. See 63 Fed. Reg. at 67534 (“depending upon the nature of the risk associated with some customers and their transactions . . . it may be necessary to fulfill all of the requirements of this regulation as if they were new customers.”). Under the “Know Your Customer,” proposal, banks would have been required to monitor existing customers “normal and expected transactions”on a historical basis using bank account data. This monitoring was for the express purpose of ferreting out and reporting “suspicious activities.” Id. With respect to new customers, the specified process, including the customer-interrogation, was to be completed in full. See id. Thus, if the new proposal had been implemented, banks would have had to inquire of its criminal defense lawyer customers regarding the source of any fee received. Though the proposed regulation did not specify how banks were to accomplish this, it appears that they would have been required to ferret out the source from which the funds were obtained by the client. Likewise, there was no directive regarding whether or not any customer could properly refuse to provide such information and what, when faced with such a refusal, banks were supposed to do about it. Thus under this proposed regulation, the lawyer must disclose the “source” of the payment and the manner by which individual banks would implement this directive had yet to be seen. This had the potential to cause enormous problems in terms of maintaining client confidentiality with the risk of both lawyer and client being reported and/or investigated. Client confidentiality could have been compromised in a more roundabout fashion as well — if a client’s fee payment, made by way of check, was deemed an “unusual” transaction, it could be reported. Presumably, in collecting its information about the lawyer-customer, the bank will also have in its records, its customer’s occupation — that the customer is an attorney. Thus, if this transaction was reported, it would not take a rocket scientist-federal agent to figure out that writer of the check or someone close to him has paid for, and must be in need of, criminal defense services. Since clients at times retain criminal defense counsel prior to any law enforcement involvement, there is a real concern that law enforcement and/or others will begin investigating the client solely because of his fee payment to his lawyer. Assuming, for example, Mr. Big, a well-known Wall Street trader, is under superficial scrutiny and he hires a prominent criminal lawyer who is an expert on the defense of insider trading, this will certainly cause increased scrutiny. As an aside, bank officials could have even reported customers who have made payments to substance abuse treatment centers or psychiatrists. Though that may seem farfetched, there was nothing in this regulation to prohibit it – it would have been up to the individual bank employees to make these decisions. Now, we could have hoped that banks, in implementing their own specific procedures to determine the “source of the “customer’s funds” would be satisfied upon hearing the explanation that the customer is an attorney and the fee is payment from or on behalf of a client, whose identity is privileged. However, respect for the need for confidentiality and the attorney-client privilege was nowhere to be found in the proposed “Know Your Customer” regulation. Bank records are too easily and frequently subpoenaed either for grand jury investigations or in federal court where non-law enforcement parties can subpoena bank records with nothing more than a court-ordered subpoena, which in some jurisdictions, is not that difficult to obtain. Also, FDIC representatives will have the ability to inspect these records at will and if this regulation is any indication, protecting privacy is not their top priority. Thus, the odds of these records falling into the wrong hands is not only a possibility, but should be expected. The extraordinarily wide latitude that this regulation purported to give to bank employees to decide when and whether a transaction is “suspicious” and, if it should be reported, should give pause to any person who values individual privacy. Suspicious transactions are defined in extremely broad terms where any transaction which is “inconsistent with normal and expected transactions” is labeled “suspicious” to be reported. In order to be “reportable,” this “inconsistency” can even be a small-scale “inconsistent” transaction. Although the proposal does state that banks are not required to conclude that every unusual transaction should be reported, all of these decisions: what is inconsistent, what is suspicious and what should be reported, are within an individual bank employee’s unchecked discretion. Additionally, bank officials have virtual carte blanche to report whatever transaction they desire since § 5318(g)(3) immunizes them from civil liability for disclosing these “suspicious transactions.” 31 U.S.C. § 5318(g)(3); Lopez v. First Union National Bank, 129 F.3d 1186, 1192-93 (11th Cir. 1997) ((interpreting § 5318(g)(3) to confer broad grants of immunity upon bank officials or agents for disclosure of “any possible violation of law” and refers to this provision as a “safe harbor” for disclosure). Once reported, banks “may not notify any person involved in the transaction that the transaction has been reported.” 31 U.S.C. § 5318(g)(2) (Supp. 1998). Thus, the decision makers who determine what is a suspicious transaction and what should be reported, are the same individuals afforded, for all practical purposes, absolute immunity, for their conclusions. This proposal states that this discretion, on the part of bank officials is necessary, because banks need to construct the specifics of their own “Know Your Customer” plan in accordance with local practices. It is also significant that these regulators, who expressed such confidence in bank employees’ ability to make these critical decisions regarding what and when to report its customers to law enforcement with no civil consequences to speak of, could not say with any level of confidence that the same bank employees could be trusted, to implement the “Know Your Customer” absent a legislative mandate. The FDIC remarked that it could not simply recommend that banks implement “Know Your Customer” type programs because there would exist the likelihood that some banks “would not adhere to or establish such programs,” see id. at 6. There was no explanation regarding why the FDIC was content to let these same banks, who would fail to listen to directives and recommendations, write their own customer questionnaires and make their own decisions regarding when to report “suspicious transactions.” See 63 Fed. Reg. 67529-67536 (to be codified at 12 C.F.R. § 326) (proposed December 7, 1998). Imbuing bank employees, who are given immunity, with responsibility for these critical decisions, has enormous potential for abuse, discrimination, and arbitrary and inconsistent results. In addition to its now failed call to arms for bank employees, the FDIC made an additional unpersuasive effort to justify this intrusive regulation by claiming that this proposed regulation is just like the monitoring which banks already do, for example “to ensure that cash transactions exceeding $10,000 are reported . . . to ensure that customers do not overdraw their accounts, and to ensure that loan payments are accurate and timely.” Id. at 67534. Their reasoning was so specious that it likely needed no reply – the existing decisions require not one whit of discretion – either a loan payment arrives or it does not, an account balances on the bank’s books or it lacks sufficient funds and a customer who is not on the exempt list, arrives with more than $10,000, or not, hence the transaction is reported. These are decisions based upon objective indicia, i.e., money (or in the reporting example, a certain amount of money) which is either presented to the bank or not. No game of 20 questions with the customer need be played and no one need ponder whether or not a particular customer is up to no good. Pretending that the proposed regulation is similar to these other non-discretionary requirements is insulting as well as insincere. Though it is unlikely that the criminal defense community’s discontent swayed regulators, at least segments of the banking community, whose opinions likely carry more weight, vigorously opposed this regulation. The opposition was due, at least in part, to the increased workload that the “Know Your Customer” program will impose upon banks. According to the proposal, banks were required to not only dream up their own methods of implementing the “Know Your Customer” program but, according to the FDIC proposal, they also had to implement additional programs to provide for and document a system of internal controls, including providing for and documenting independent testing for compliance to be conducted on a regular basis, designing an individual responsible for coordinating and monitoring day-to-day compliance, and providing for training for all personnel on at least an annual basis. Id. at 67536. To its credit, the banking industry was also concerned because of its own perception that they are keepers of their customers’ confidences. Unfortunately, this position has been long rejected by the courts. See United States v. Miller, 425 U.S. 438, 440 (1976) (bank records are not considered an individual’s “private papers” under the law as they are the “business records of the bank”). The FDIC began reviewing comments regarding this proposed regulation on March 8, 1999. The comments received from individuals, banks, associations, bank holding companies, law firms, legislators and state regulators, as of early February 1999, revealed across-the-board dissatisfaction with the proposal. The FDIC received 254,394 comments from individuals, associations, banks and law firms, which almost uniformly expressed concerns about the regulation’s impact upon privacy interests, with the second greatest concern being the assumption of this additional authority by the banks. Some other comments made expressed the views that this proposed regulations constitutes an “abuse of power, criminalizes citizens” and creates an undue burden in terms of paperwork. Out of the 254,394 comments, only 105 were positive. See FDIC Withdrawal of Notice of Proposed Rulemaking. Belatedly, the FDIC withdrew the proposed regulation “in light of the over whelming objections raised by the public.” Hopefully, this negative response will impede similar future efforts at provacy invasion under the guise of law enforcement. Readers are a vital source of information without which this column could not be supplied with current information on RICO developments. Information regarding developments in pending cases, decisions and interesting briefs and motions should be sent to: RICO Report Barry Tarlow 9119 Sunset Boulevard Los Angeles CA 90069 Phone (310) 278-2111 Fax (310) 550-7055 | |||||||||
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National Association of Criminal Defense Lawyers (NACDL) 1660 L St., NW, 12th Floor, Washington, DC 20036 (202) 872-8600 • Fax (202) 872-8690 • assist@nacdl.org | |||||||||
