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December 7, 2016
  United States v. Rand -- Fourth Circuit
To Quash or Not to Quash: Fourth Circuit Establishes Standard for Third-Party Subpoenas

Areas of Law: Sixth Amendment, Criminal Procedure

Issue Presented: Whether evidentiary requirements imposed on prosecutors seeking subpoenas also apply to third parties.

Brief Summary: In a published decision written by Chief Judge Gregory, the United States Court of Appeals for the Fourth Circuit wrote, in an issue of first impression, that the district court for the Western District of North Carolina properly used the Nixon test (established in United States v. Nixon, 418 U.S. 683, 689-99 (1974)) when it determined that the appellant's request for a subpoena should be quashed. The appellant claimed: that the Nixon test applied only to prosecutors seeking subpoenas and that the standard embodied in Rule 17(c) of the Federal Rules of Criminal Procedure was the correct standard and thus, his third-party subpoena should not have been quashed because it did not meet the Rule 17(c) standard. The Fourth Circuit disagreed, declined to adopt a lower standard for third-party subpoenas, and wrote that the Nixon standard is not at odds with its interpretation of the Rule 17(c) standard. The Fourth Circuit found that the district court's use of the Nixon standard was correct and for this reason, as well as others established in the opinion, affirmed all of the challenged aspects of the appellant's convictions and sentence.

Extended Summary: This case involved Michael Rand, chief accounting officer of Beazer Homes USA, Inc. (Beazer). Rand was under federal investigation because the government believed he was misrepresenting the company's reported quarterly earnings. There was evidence indicating that Rand engaged in "cookie jar" accounting - the process by which money reserved for a business' future expenditures is taken from or added to the reserve in order to misstate the business' earnings. The government also believed that Rand failed to properly account for transactions involving sale-lease back agreements. These agreements required Rand to sell model homes to investors on behalf of Beazer. Rand would then rent the homes back from those investors until the homes could be sold to third parties. This allowed Beazer to share in the appreciation of the homes even after they were sold.

In March 2007, the FBI began its investigation of Beazer for mortgage fraud. A federal grand jury subpoena was issued to the company on March 23, 2007. The subpoena required the company to keep all emails and documents pertaining to mortgages and sales. On March 28, the company created an email "dumpster." This device saves all deleted emails from employees' trash folders without the employees' knowledge, thereby preventing permanent deletion. By March 30, Beazer's in-house counsel had instructed all employees to not destroy any records, and told Rand directly that he was required to keep everything. That day, and the day before, Rand deleted almost 6,000 emails. In June, Beazer brought in an auditing firm to conduct an internal investigation of its employees. By July 2008, the FBI had interviewed Rand multiple times. During these interviews, Rand admitted 1) to manipulating Beazer's earnings, 2) to the improper sale-lease back agreements, 3) to his mass deleting of emails, and 4) that he knew his conduct was illegal.

Rand was charged with several counts of conspiracy, securities fraud, mismanagement, improper accounting transactions, and obstruction of justice. A jury convicted Rand of seven counts and acquitted him of four. However, Rand was given a new trial due to juror misconduct. The government proceeded on two counts of conspiracy (including wire fraud conspiracy) and three counts of obstruction of justice. Rand was convicted of all five counts. Using the government expert's method of loss calculation to determine Rand's sentence, the district court found a loss of $135 million. This equated with an offense level of 51, resulting in an adjusted offense level of 43 and an advisory guideline sentence of life in prison. The district court ultimately sentenced Rand to 120 months in prison.

Rand appealed to the United States Court of Appeals for the Fourth Circuit. He claimed that the district court made several improper evidentiary rulings. First, Rand argued that the district court abused its discretion when it quashed his subpoena to Beazer, pursuant to Federal Rule of Criminal Procedure 17(c). This presented an issue of first impression for the Fourth Circuit.

Rule 17(c) permits a district court to quash a subpoena if compliance with the subpoena would be unreasonable or oppressive. In 1974, in United States v. Nixon, the Supreme Court instituted a four-part test, establishing the burden that is placed on the subpoena-requesting party. The test requires:(1) that the documents are evidentiary and relevant; (2) that they are not otherwise procurable reasonably in advance of trial by exercise of due diligence; (3) that the party cannot properly prepare for trial without such production and inspection in advance of trial and that the failure to obtain such inspection may tend unreasonably to delay the trial; and (4) that the application is made in good faith and is not intended as a general "fishing expedition." The Nixon Court refined the test into three requirements: relevance, admissibility and specificity.

Rand argued that the Nixon test was only applicable to the prosecution's subpoenas, not to subpoenas issued to third parties - and that the "unreasonable or oppressive" standard, explained in Rule 17(c) was the correct standard. However, the Nixon Court did not decide whether a standard lower than "unreasonable or oppressive" exists because the district court in that case properly quashed the subpoena. The Fourth Circuit has applied the Nixon test to third parties in previous cases, but has also not considered how the Rule 17(c) evidentiary requirement - "unreasonable or oppressive" - should apply to third party subpoenas. Additionally, no federal circuit has applied the Rule 17(c) standard without also employing the Nixon standard in tandem. The Fourth Circuit found that Rand's argument that the Nixon standard was a higher standard that was inconsistent with both Rule 17(c) and his Sixth Amendment right to secure evidence in his favor was flawed. Consequently, the court declined to adopt a lower standard for third party subpoenas and found that the district court's use of the Nixon standard was proper. The Fourth Circuit added that the Nixon standard was not in conflict with the court's interpretation of Rule 17. Therefore, Rand's requests to subpoena Beazer for financial reports over an eight-year period was a "fishing expedition" that the district court rightfully prohibited under Nixon.

The Fourth Circuit also rejected Rand's claims regarding the limitation on certain testimony by a defense expert, the admission of certain lay opinion testimony by government witnesses, and improper comments by the prosecutor during closing. Finally, the court rejected Rand's complaint that his 120-month sentence was procedurally unreasonable.

To read the full opinion, click here.

Panel: Chief Judge Gregory, Judges Niemeyer and Harris

Argument Date: 05/12/2016

Date of Issued Opinion: 08/26/2016

Docket Number: No. 15-4322

Decided: Affirmed by published opinion

Case Alert Author: Vanessa Destime, Univ. of Maryland Carey School of Law

Counsel: ARGUED: Seth Paul Waxman, WILMER CUTLER PICKERING HALE AND DORR LLP, Washington, D.C., for Appellant. Amy Elizabeth Ray, OFFICE OF THE UNITED STATES ATTORNEY, Asheville, North Carolina, for Appellee. ON BRIEF: Stephen D. Councill, ROGERS & HARDIN LLP, Atlanta, Georgia; Claire J. Rauscher, WOMBLE CARLYLE SANDRIDGE AND RICE LLP, Charlotte, North Carolina; Brent J. Gurney, Jeannie S. Rhee, Kelly P. Dunbar, Matthew Guarnieri, WILMER CUTLER PICKERING HALE AND DORR LLP, Washington, D.C., for Appellant. Jill Westmoreland Rose, United States Attorney, Maria K. Vento, Assistant United States Attorney, OFFICE OF THE UNITED STATES ATTORNEY, Charlotte, North Carolina, for Appellee.

Author of Opinion: Chief Judge Gregory

Case Alert Supervisor: Professor Renée Hutchins

    Posted By: Renee Hutchins @ 12/07/2016 11:38 AM     4th Circuit  

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